UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20172021
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)
Virginia13-3435103
(State or other jurisdiction of

incorporation or organization)
(I.R.S. Employer

Identification No.)
120 Park Avenue New York, New York10017
New York
New York10017
(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                    Trading Symbol(s)Name of each exchange on which registered
Common Stock, no par valuePMNew York Stock Exchange
5.650%2.375% Notes due 20182022PM22BNew York Stock Exchange
1.875%2.500% Notes due 20192022PM22New York Stock Exchange
1.625%2.500% Notes due 20192022PM22CNew York Stock Exchange
1.375%2.625% Notes due 20192023PM23New York Stock Exchange
1.875%2.125% Notes due 20192023PM23BNew York Stock Exchange
2.125%3.600% Notes due 20192023PM23ANew York Stock Exchange
2.000%2.875% Notes due 20202024PM24New York Stock Exchange
Floating2.875% Notes due 20202024PM24CNew York Stock Exchange
1.750%0.625% Notes due 20202024PM24BNew York Stock Exchange
4.500%3.250% Notes due 20202024PM24ANew York Stock Exchange
1.875%2.750% Notes due 20212025PM25New York Stock Exchange
1.875%3.375% Notes due 20212025PM25ANew York Stock Exchange
4.125% Notes due 2021New York Stock Exchange
2.900% Notes due 2021New York Stock Exchange
2.625% Notes due 2022New York Stock Exchange
2.375% Notes due 2022New York Stock Exchange
2.500% Notes due 2022New York Stock Exchange
2.500% Notes due 2022New York Stock Exchange
2.625% Notes due 2023New York Stock Exchange
2.125% Notes due 2023New York Stock Exchange
3.600% Notes due 2023New York Stock Exchange



Title of each class                    Trading Symbol(s)Name of each exchange on which registered
2.875%2.750% Notes due 20242026PM26ANew York Stock Exchange
0.625%2.875% Notes due 20242026PM26New York Stock Exchange
3.250%0.125% Notes due 20242026PM26BNew York Stock Exchange
2.750%3.125% Notes due 20252027PM27New York Stock Exchange
3.375%3.125% Notes due 20252028PM28New York Stock Exchange
2.750%2.875% Notes due 20262029PM29New York Stock Exchange
2.875%3.375% Notes due 20262029PM29ANew York Stock Exchange
3.125%0.800% Notes due 20272031PM31New York Stock Exchange
3.125% Notes due 20282033PM33New York Stock Exchange
2.875%2.000% Notes due 20292036PM36New York Stock Exchange
3.125%1.875% Notes due 20332037PM37ANew York Stock Exchange
2.000%6.375% Notes due 20362038PM38New York Stock Exchange
1.875%1.450% Notes due 20372039PM39New York Stock Exchange
6.375%4.375% Notes due 20382041PM41New York Stock Exchange
4.375%4.500% Notes due 20412042PM42New York Stock Exchange
4.500%3.875% Notes due 2042PM42ANew York Stock Exchange
3.875%4.125% Notes due 20422043PM43New York Stock Exchange
4.125%4.875% Notes due 2043PM43ANew York Stock Exchange
4.875%4.250% Notes due 20432044PM44New York Stock Exchange
4.250% Notes due 2044New York Stock Exchange


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.Yesþ☑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¨☐Noþ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ☑No¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.      þ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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    ☑Accelerated filer            ☐
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
Smaller reporting company ¨
Emerging growth company ¨
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes¨☐Noþ☑


As of June 30, 2017,2021, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $182$154 billion based on the closing sale price of the common stock as reported on the New York Stock Exchange.





 
        Class                                Outstanding at
January 31, 20182022
Common Stock,

no par value
1,553,229,8981,549,827,817 
shares
 
DOCUMENTS INCORPORATED BY REFERENCE
DocumentParts Into Which Incorporated
Portions of the registrant’s definitive proxy statement for use in connection with its annual meeting of shareholders to be held on May 9, 2018,4, 2022, to be filed with the Securities and Exchange Commission (“SEC”) on or about March 29, 2018.24, 2022.Part III





TABLE OF CONTENTS
 
Page
PART I
Item 1.Business
1
Item 1A.Risk Factors
6
Item 1B.Unresolved Staff Comments
15
Item 2.Properties
15
Item 3.Legal Proceedings
15
Item 4.Mine Safety Disclosures
15
PART IIPage
PART I
Item 1.
Business
1
Item 1A.
Risk Factors
6
Item 1B.
Unresolved Staff Comments
11
Item 2.
Properties
11
Item 3.
Legal Proceedings
12
Item 4.
Mine Safety Disclosures
12
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
1216
Item 6.
1519
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
1619
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
6864
Item 8.
Financial Statements and Supplementary Data
6965
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
122127
Item 9A.
Controls and Procedures
122127
Item 9B.Other Information
Other Information127
122
Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
127
PART III
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
123127
Item 11.Executive Compensation
Executive Compensation130
123
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
124130
Item 13.
Certain Relationships and Related Transactions, and Director Independence
124130
Item 14.
Principal Accounting Fees and Services
124130
PART IV
Item 15.
Exhibits and Financial Statement Schedules
124131
Signatures
130136
 
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.
Item 1.Business.
 
(a) General Development of Business
 
General
 
Philip Morris International Inc. is a Virginia holding company incorporated in 1987. We are a leading international tobacco company working to deliver a smoke-free future and evolving our portfolio for the long-term to include products outside of the tobacco and nicotine sector. Our subsidiaries and affiliates and their licensees are engaged in the manufacture and salecurrent product portfolio primarily consists of cigarettes and other nicotine-containingreduced-risk products, including heat-not-burn, vapor and oral nicotine products, which are sold in markets outside the United States. Since 2008, we have invested more than $9 billion to develop, scientifically substantiate and commercialize innovative smoke-free products for adults who would otherwise continue to smoke, with the goal of completely ending the sale of cigarettes. This includes the building of world-class scientific assessment capabilities, notably in the areas of pre-clinical systems toxicology, clinical and behavioral research, as well as post-market studies. The U.S. Food and Drug Administration ("FDA") has authorized the marketing of a version of PMI’s IQOS Platform 1 device and consumables as a Modified Risk Tobacco Product ("MRTP"), finding that an exposure modification order for these products is appropriate to promote the public health. We describe the MRTP order in more detail in the "Business Environment" section of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. With a strong foundation and significant expertise in life-sciences, in February 2021, we announced our ambition to expand into wellness and healthcare areas and deliver innovative products and solutions that aim to address unmet patient and consumer needs.

In March 2008, we became a U.S. public company listed on the New York Stock Exchange and subject to the rules of the United StatesSecurities and Exchange Commission (the "SEC").

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 America.harm to smokers who switch to these products versus continuing to smoke. We have a range of RRPs in various stages of development, scientific assessment and commercialization. Our RRPs are building our future on smoke-free products that arecontain and/or generate far lower quantities of harmful and potentially harmful constituents than found in cigarette smoke.

Our IQOS smoke-freeproduct brand portfolio includes heated tobacco and nicotine-containing vapor products.  Our leading smoke-free platform ("Platform 1") is a much better consumer choice than continuingprecisely controlled heating device into which a specially designed and proprietary tobacco unit is inserted and heated to smoke cigarettes.  Through multidisciplinary capabilitiesgenerate an aerosol. Heated tobacco units ("HTU") is the term we use to refer to heated tobacco consumables, which include our HEETS, HEETS Creations, HEETS Dimensions, HEETS Marlboro and HEETS FROM MARLBORO (defined collectively as "HEETS"), Marlboro Dimensions, MarlboroHeatSticks, Parliament HeatSticks and TEREA, as well as the KT&G-licensed brands, Fiit and Miix (outside of South Korea). Platform 1was first introduced in product development, state-of-the-art facilities and scientific substantiation, we aim to ensure thatNagoya, Japan, in 2014. As of December 31, 2021, our smoke-free products meet adult consumer preferences and rigorous regulatory requirements. Our vision is that these products ultimately replace cigarettes to the benefit of adult smokers, society, our company and our shareholders.are available for sale in 71 markets in key cities or nationwide.


Our cigarettes are sold in more thanapproximately 180 markets, and in many of these markets they hold the number one or number two market share position. We have a wide range of premium, mid-price and low-price brands. Our portfolio comprises both international and local brands and is led by Marlboro, the world’s best-selling international cigarette, which accounted for approximately 35%38% of our total 20172021 cigarette shipment volume. Marlborois complemented in the premium-price category by Parliament. Our other leading international cigarette brands are Bond Street, Chesterfield, L&M,Lark and Philip Morris. Theseseven international cigarette brands contributed approximately 75%79% of our cigarette shipment volume in 2017.2021. We also own a number of important local cigarette brands, such as Dji Sam Soe, SampoernaAand SampoernaU A in Indonesia; Indonesia, and Fortune andJackpotin the Philippines; Belmont and Canadian ClassicsPhilippines.

During 2021, we laid the foundation for our long-term growth ambitions beyond nicotine in Canada;wellness and Delicados in Mexico. While there are a numberhealthcare, including the milestone acquisitions of markets where local brands remain important, international brands are expanding their share in numerous markets.Vectura Group PLC and Fertin Pharma A/S, which provide essential capabilities for future product development.


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

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


Source of Funds — Dividends
 
We are a legal entity separate and distinct from our direct and indirect subsidiaries. Accordingly, our right, and thus the right of our creditors and stockholders, to participate in any distribution of the assets or earnings of any subsidiary is subject to the prior rights of creditors of such subsidiary, except to the extent that claims of our company itself as a creditor may be recognized. As a holding company, our principal sources of funds, including funds to make payment on our debt securities, are from the receipt of dividends and repayment of debt from our subsidiaries. Our principal wholly-ownedwholly owned and majority-owned subsidiaries currently are not limited by
1

long-term debt or other agreements in their ability to pay cash dividends or to make other distributions that are otherwise compliant with respect to their common stock.law.

(b) Financial Information About Segments
 
For all periods presented in this report, we divided our markets into four geographic regions, which constitute our segments for financial reporting purposes:Description of Business
 
The European Union (“EU”) Region is headquartered in Lausanne, Switzerland, and covers all the EU countries and also comprises Switzerland, Norway and Iceland, which are linked to the EU through trade agreements;
The Eastern Europe, Middle East & Africa (“EEMA”) Region is also headquartered in Lausanne and includes Eastern Europe, certain Balkan countries, Turkey, the Middle East and Africa and our international duty free business;
The Asia Region is headquartered in Hong Kong and covers all other Asian markets as well as Australia, New Zealand and the Pacific Islands; and

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

Net revenues and operating companies income* (together with a reconciliation to operating income) attributable to each segment for each of the last three years are set forth in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K ("Item 8") in Note 12. Segment Reporting to the consolidated financial statements. See Item 7 of this Annual Report on Form 10-K for a discussion of our operating results by business segment.
The relative percentages of operating companies income attributable to each reportable segment were as follows:
 2017 2016 2015
European Union32.0% 35.8% 32.6%
Eastern Europe, Middle East & Africa24.4
 27.1
 31.2
Asia35.1
 28.7
 26.3
Latin America & Canada8.5
 8.4
 9.9
 100.0% 100.0% 100.0%

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


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

Our marketing, administration and research costs include the costs of marketing and selling our products, other costs generally not related to the manufacture of our products (including general corporate expenses), and costs incurred to develop new products. The most significant components of our marketing, administration and research costs are marketing and sales expenses and general and administrative expenses.
To provide a greater focus on both parts of our business -- combustible and reduced-risk products -- and to support our transformation toward a smoke-free future, effective January 1, 2018, we began managingcurrently manage our business in six reportablegeographical segments as follows:and an Other category:


•The European Union Region (“EU”) is headquartered in Lausanne, Switzerland, and covers all the European Union countries and also Switzerland, Norway, Iceland and Iceland, which are linked to the European Union through trade agreements;United Kingdom;
•The Eastern Europe Region (“EE”) is also headquartered in Lausanne and includes Southeast Europe, Central Asia, Ukraine, Israel and Russia;
•The Middle East & Africa Region (“ME&A”) is also headquartered in Lausanne and covers the African continent, the Middle East, Turkey and our international duty free business;
•The South & Southeast Asia Region (“S&SA”) is headquartered in Hong Kong and includes Indonesia, the Philippines and other markets in this region;
•The East Asia & Australia Region (“EA&A”) is also headquartered in Hong Kong and includes Australia, Japan, South Korea, the People's Republic of China and other markets in this region, as well as Malaysia and Singapore; and
•The Latin America & CanadaAmericas Region (“AMCS”) is headquartered in New York and covers the South American continent, Central America, Mexico, the Caribbean and Canada.



(c) Narrative Description AMCS also includes transactions under license with Altria Group, Inc., for the distribution of Business
Our total shipments, including cigarettes and heated tobacco units, decreased by 2.7%our Platform 1 product in 2017 to 798.2 billion units. We estimate that international industry volumes, including cigarettes and heated tobacco units, were approximately 5.2 trillion units in 2017, a 1.3% decrease over 2016. Excluding the People’s Republic of China (“PRC”), we estimate that the international cigarette and heated tobacco unit volume was 2.8 trillion units in 2017, a 2.8% decrease over 2016. We estimate that our reported share of the international market (which is defined as worldwide cigarette and heated tobacco unit volume, excluding the United StatesStates; and
•Other, which includes our third quarter 2021 acquisitions of America)Fertin Pharma A/S, Vectura Group plc. and OtiTopic, Inc. For further details, see Item 8, Note 6. Acquisitions and Item 8, Note 12. Segment Reporting.

In the third quarter of 2021, our former Latin America & Canada segment was approximately 15.2% in 2017, 15.5% in 2016 and 15.6% in 2015. Excludingrenamed as the PRC,Americas segment.

In the fourth quarter of 2021, we estimateannounced that we will be relocating our reported sharePMI corporate headquarters, including our AMCS headquarters, from New York, New York, to Stamford, Connecticut. This move is expected to be completed by the third quarter of 2022.

As of March 22, 2019, we deconsolidated the international market was approximately 28.0%, 28.1%, and 28.6% in 2017, 2016 and 2015, respectively.
Shipmentsfinancial results of our principal cigarette brand, MarlboroCanadian subsidiary, Rothmans, Benson & Hedges Inc. ("RBH"), decreased by 4.0% in 2017from our financial statements. For further details, see Item 8, Financial Statements and represented approximately 9.7%Supplementary Data of this Annual Report on Form 10-K (“Item 8”) Note 20. Deconsolidation of RBH.

Since the international cigarette market, excludingdeconsolidation of our Canadian subsidiary, we have continued to report the PRC, in 2017, 9.6% in 2016 and 9.6% in 2015.
We have a market share of at least 15% and, in a number of instances, substantially more than 15%, in approximately 100 markets, including Algeria, Argentina, Australia, Austria, Belgium, Brazil, Canada, the Czech Republic, Egypt, France, Germany, Hong Kong, Indonesia, Israel, Italy, Japan, Korea, Kuwait, Mexico, the Netherlands, Norway, the Philippines, Poland, Portugal, Russia, Saudi Arabia, Spain, Singapore, Switzerland, Turkey and Ukraine.
Heated tobacco units is the term we use to refer to heated tobacco consumables, which include our HEETS, HEETS Marlboro and HEETS FROM MARLBORO, defined collectively as HEETS, as well as MarlboroHeatSticks and Parliament HeatSticks. Total shipment volume of heated tobacco units reached 36.2 billion units in 2017, up from 7.4 billion units in 2016.brands sold by RBH for which other PMI subsidiaries are the trademark owners. These include HEETS, Next, Philip Morris and Rooftop.


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.sources and may, in defined instances, exclude the People's Republic of China and/or our duty free business. Unless otherwise stated, references to total industry, total market, our shipment volume and our market share performance reflect cigarettes and heated tobacco units.


2020 and 2021 estimates for total industry volume and market share in certain geographies reflect limitations on the availability and accuracy of industry data during pandemic-related restrictions.

Our total shipments, including cigarettes and heated tobacco units, increased by 2.2% in 2021 to 719.9 billion units. We estimate that international industry volumes, including cigarettes and heated tobacco units, were approximately 5.0 trillion units in 2021, a 1.3% increase from 2020. Excluding the People’s Republic of China (“PRC”), we estimate that international cigarette and heated tobacco unit volume was 2.6 trillion units in 2021, a 2.4% increase from 2020. We estimate that our reported share of the international market (which is defined as worldwide cigarette and heated tobacco unit volume, excluding the United States of America) was approximately 14.3% in 2021, 14.3% in 2020 and 15.1% in 2019. Excluding the PRC, we estimate that our reported share of the international market was approximately 27.3%, 27.7%, and 28.4% in 2021, 2020 and 2019, respectively.
2

Shipments of our principal cigarette brand, Marlboro, increased by 2.9% in 2021, and represented approximately 9.5% of the international cigarette market, excluding the PRC, in 2021, 9.5% in 2020, and 10.0% in 2019.
Total shipment volume of heated tobacco units reached 95.0 billion units in 2021, up from 76.1 billion units in 2020.

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

Distribution & Sales


Our main types of distribution and sales 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);retailers;
•Distribution through independent distributors that often distribute other fast-moving consumer goods and are responsible for distribution in a particular market;
•Exclusive zonified distribution, where the distributors are dedicated to us in tobaccomulticategory products distribution and assigned to exclusive territories within a market;
•Distribution through national or regional wholesalers that then supply the retail trade;
•Our own e-commerce infrastructure for product sales to trade partners and to consumers; and
•Our own brand retail and e-commerce infrastructuresinfrastructure for our RRP products and accessories.accessories for sales to consumers.
 


Competition
 
We are subject to highly competitive conditions in all aspects of our business. We compete primarily on the basis of product quality, brand recognition, brand loyalty, taste, R&D, innovation, packaging, customer service, marketing, advertising and retail price and, increasingly, adult smoker willingness to convert to our RRPs. Our competitorsIn the combustible product category, we predominantly sell American blend cigarette brands, such as Marlboro, L&M, Parliament, Philip Morris and Chesterfield, which are the most popular across many of our markets. In the RRP product category, we predominantly sell 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 premium-price 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 price categories, 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 in our industry include three large international tobacco companies, andnew 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 increaseCertain new market entrants in competitive pressures. Some competitors have different profit and volume objectives, and some international competitors are susceptible to changes in currency exchange rates. In the combustiblenon-combustible product category we predominantly sell American blend cigarette brands, such as Marlboro, L&M, Parliament, Philip Morrismay alienate consumers from innovative products through inappropriate marketing campaigns, messaging and Chesterfield,inferior product satisfaction, while not relying on scientific substantiation based on appropriate R&D protocols and standards. The growing use of digital media could increase the speed and extent of the dissemination of inaccurate and misleading information about our RRPs, all of which are the most popular across manycould have a mutual adverse effect on our profitability and results of our markets. In the RRP product category, we predominantly sell IQOS devices and heated tobacco units. We seek to compete in all profitable retail price categories, although our brand portfolio is weighted towards the premium-price category.operations.



Procurement and Raw Materials    
 
We purchase tobacco leaf of various types, grades and styles throughout the world, mostly through independent tobacco suppliers. WeIn 2021, we also contractcontracted directly with farmers in several countries, including Argentina, Brazil, Colombia, Ecuador, Italy, Kazakhstan, Pakistan the Philippines and Poland. In 2017,2021, direct sourcing from farmers represented approximately 22%25% of PMI’s global leaf requirements. The largest supplies of tobacco leaf are sourced from Argentina, Brazil, China, India,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.


3

In addition to tobacco leaf, we purchase a wide variety of direct materials from a total of approximately 450360 suppliers. In 2017,2021, our top ten suppliers of direct materials combined represented approximately 50%60% of our total direct materials purchases. The three most significant direct materials that we purchase are printed paper board used in packaging, acetate tow used in filter making and fine paper used in the manufacturing of cigarettes and heated tobacco units. In addition, the adequate supply and procurement of cloves are of particular importance to our Indonesian business.


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

Our IQOS devices are subject to product warranties, which are described in more detail in Item 8. Note 5. Product Warranty to our consolidated financial statements. We discuss our RRP products7. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K (“Item 7”) in more detail in Item 7. Business Environment—Reduced RiskReduced-Risk Products.




Business Environment


Information called for by this Item is hereby incorporated by reference to the paragraphs in Item 7, Business Environment. to this Annual Report on Form 10-K.
 


Other Matters
 
Customers
 
NoneAs described in more detail in “Distribution & Sales” above, in many of our markets we sell our products to distributors. In 2021, sales to a distributor in the European 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 loss of which would have a material adverse effect on our consolidated results of operations.  In some of our markets, particularly in the European Union, Eastern Europe and in the East Asia & Australia Regions, a loss of a distributor may result in a temporary market disruption.
 
Employees
Our Workforce.At December 31, 2017,2021, we employed approximately 80,60069,600 people worldwide of 133 different nationalities, including full time,full-time, temporary and part-time staff. Our businesses are subject to a number of laws and regulations relating to our relationship with our employees. Generally, these laws and regulations are specific to the location of each business. We engage with legally recognized employee representative bodies and we have collective bargaining agreements in many of the countries in which we operate. 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 ourwe maintain good relations with our employees and their representative organizationsorganizations.

Our Internal Transformation. To be successful in our transformation to a smoke-free future, we must continue transforming our culture and ways of working, align our talent with our business needs and innovate to become a truly consumer-centric business. To achieve our strategic goals, we need to attract, retain and motivate the best global talent with the right degree of diversity, experience, competencies and skills. Therefore, we strive to ensure the development of our existing talent while increasingly recruiting those with the expertise in areas that are excellent.new to us such as digital and technical solutions. We set the levels of our compensation and benefit programs that we believe are necessary to achieve these goals and remain competitive with other consumer product companies.

Executive OfficersOversight and Management. Our Board of Directors (the "Board") provides oversight of various matters pertaining to our workforce, and the Compensation and Leadership Development Committee of the Registrant    Board is responsible for executive compensation matters and oversight of the risks and programs related to talent management. Our Code of Conduct, also known at PMI as the Guidebook for Success, highlights our commitment to ethical business conduct and honesty, respect, fairness in our ways of working.


The disclosure regarding executive officersInclusion & Diversity. At PMI, we believe that a diverse workforce and an inclusive culture are strategic priorities which help fuel innovation and business success. As part of our commitment to workplace diversity in 2020, our Board appointed a Chief Diversity Officer. Improving gender balance especially in management positions continues to be one of our priorities:

•We set a target of 40% female representation in management positions by the end of 2022;
•We launched a Women in Leadership program to support our female talents; and
•We were the first multinational company to receive a global EQUAL-SALARY certification from the EQUAL-SALARY     Foundation. This achievement is set forth under the heading “Executive Officers as of February 9, 2018” in Item 10. Directors, Executive Officers and Corporate Governance of this Annual Report on Form 10-K ("Item 10").


Research and Development
Our product development is basedan important building block on the eliminationroad to creating a more inclusive gender-balanced workplace and continuing our reputation as a top employer.

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In recognition of combustion via tobacco heatingour efforts, we were added to the 2021 Bloomberg Gender-Equality Index for transparency in gender reporting and other innovative systemsadvancing women’s equity (among the 380 companies and 11 sectors who scored at or above the global threshold established by Bloomberg).

Creation of employee resource groups ("ERGs") was another important milestone to further inclusion at PMI. We believe these groups are an important platform for aerosol generation,building an enhanced sense of belonging, visibility, and greater understanding of different experiences and dimensions of diversity in our company. Currently, we have established ERGs on race and ethnicity, LGBTQ+ inclusions, gender and disability. Each ERG is sponsored by a member of the PMI Senior Leadership Team, to illustrate our strong commitment to Inclusion & Diversity comes from the top.

Our Initiatives in Response to COVID-19. Since the outbreak of the global COVID-19 pandemic, we have focused on business continuity, health and safety of our employees, and have rapidly adapted our ways of working to a new environment. We have implemented additional safety measures for essential employees in our facilities and offices, and continue to pay salaries to those employees who are unable to work due to government restrictions. We have enhanced remote work arrangements and digital collaboration, and related risk management, and to date, a large majority of our employees continues to work remotely.

Government Regulation

As a company with global operations in a heavily regulated industry, we are subject to multiple laws and regulations of jurisdictions in which we believe is the most promising path to providing a better consumer choice for those who would otherwise continue to smoke.operate. We recognize that no single product will appeal to all adult smokers. Therefore, we are developing a portfolio of products intended to appeal to a variety of distinct preferences. Four RRP platforms are in various stages of development and commercialization readiness. We describe each of them in more detaildiscuss our regulatory environment in Item 7, Business Environment—Reduced-Risk Products.Environment.

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

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


Intellectual Property

Our trademarks are valuable assets, and their protection and reputation are essential to us. We own the trademark rights to all of our principal brands, including Marlboro, or have the right to use them in all countries where we use them.
In addition, we have more than 7,800 granted patents worldwide and approximately 7,700 pending patent applications. Our patent portfolio, as a whole, is material to our business. However, no one patent, or group of related patents, is material to us. We also have registered industrial designs, as well as unregistered proprietary trade secrets, technology, know-how, processes and other unregistered intellectual property rights.
Effective January 1, 2008, PMI entered into an Intellectual Property Agreement with Philip Morris USA Inc. (“PM USA”). The Intellectual Property Agreement governs the ownership of intellectual property between PMI and PM USA. Ownership of the jointly funded intellectual property has been allocated as follows:
PMI owns all rights to the jointly funded intellectual property outside the United States, its territories and possessions; and
PM USA owns all rights to the jointly funded intellectual property in the United States, its territories and possessions.

Ownership of intellectual property related to patent applications and resulting patents based solely on the jointly funded intellectual property, regardless of when filed or issued, will be exclusive to PM USA in the United States, its territories and possessions and exclusive to PMI everywhere else.
The Intellectual Property Agreement contains provisions concerning intellectual property that is independently developed by us or PM USA following March 28, 2008, the date of the spin-off from Altria Group, Inc. For ten years following that date, independently developed intellectual property may be subject to rights under certain circumstances that would allow either us or PM USA a priority position to obtain the rights to the new intellectual property from the other party, with the price and other commercial terms to be negotiated.

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

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

Environmental Regulation    

We are subject to international, national and local environmental laws and regulations in the countries in which we do business. We have specific programs across our business units designed to meet applicable environmental compliance requirements and reduce our carbon footprint, and wastage, as well as water and energy consumption. We report externally about our climate change mitigation strategy, together with associated targets and results in reducing our carbon footprint, through CDP (formerly known as 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. We have developed and implemented a consistentOur environmental and occupational health and safety and security management system ("EHSS"), which involvesprogram 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 our EHSSthis management systemprogram at our manufacturing centers around the world, in accordance with internationally recognized standards for safety and environmental management. The environmental performance data we report externally is also verified by a qualified third party. Our subsidiaries expect to continue to make investments in order to drive improved performance and maintain compliance with environmental laws and regulations. We assess and report to our management the compliance status of all our legal entities on a regular basis. Based on current regulations, the management and controls we have in place and our review of climate change risks (both physical and regulatory), environmental expenditures have not had, and are not expected to have, a material adverse effect on our consolidated results of operations, capital expenditures, financial position, earnings or competitive position.


(d) Financial Information About Geographic AreasBased on current regulations, compliance with government regulations, including environmental regulations, has not had, and is not expected to have a material adverse effect on our results of operations, capital expenditures, financial position, earnings, or competitive position.

As discussed in more detail in Item 1A. Risk Factors, our financial results could be significantly affected by regulatory initiatives that could result in a significant decrease in demand for our brands. More specifically, any regulatory requirements that 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 of complying with new regulatory requirements could have a material adverse effect on our financial results.
 
Information About Our Executive Officers    

The amountsdisclosure regarding executive officers is hereby incorporated by reference to the discussion under the heading “Information about our Executive Officers as of net revenuesFebruary 10, 2022” in Part III, Item 10. Directors, Executive Officers and long-livedCorporate Governance of this Annual Report on Form 10-K (“Item 10”).

Intellectual Property

Our trademarks are valuable assets, attributableand their protection and reputation are essential to eachus. We own the trademark rights to all of our geographicprincipal brands, including Marlboro, HEETS and IQOS, or have the right to use them in all countries in which these brands are advertised or sold.
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
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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., a wholly owned subsidiary of Altria Group, Inc. (“PM USA”). 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
•PM USA owns all rights to jointly funded intellectual property in the United States, its territories and possessions.

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 for each ofare not significantly affected by seasonality, although in certain markets cigarette consumption may be lower during the last three fiscal years are set forth in Item 8, Note 12. Segment Reportingwinter months due to the consolidated financial statements.cold weather and may rise during the summer months due to outdoor use, longer daylight, and tourism.
 
(e) 
Available Information    
 
We are required to file with the SEC annual, quarterly and current reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Investors may read and copy any document that we file, including this Annual Report on Form 10-K, at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, theThe 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 Report on Form 10-K. Any of the following risks could materially adversely affect our business, our operating results, our financial condition and the actual outcome of matters as to which forward-looking statements are made in this Annual Report on Form 10-K.


Forward-Looking and Cautionary Statements
We may from time to time make written or oral forward-looking statements, including statements contained in this Annual Report on Form 10-K and other filings with the SEC, in reports to stockholders and in press releases and investor webcasts. You can identify these forward-looking statements by use of words such as "strategy," "expects," "continues," "plans," "anticipates," "believes," "will," "aspires," "estimates," "intends," "projects," "aims," "goals," "targets""targets," "forecasts" and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. 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 and whether to invest in or remain invested in our securities. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results and
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outcomes to differ materially from those contained in any forward-looking statements made by us; any such statement is qualified by reference to the following cautionary statements. We elaborate on these and other risks we face throughout this document, particularly in Item 7, Business Environment. You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties. We do not undertake to update any forward-looking statement that we may make from time to time, except in the normal course of our public disclosure obligations.



Overall Business Risks
Risks Related
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 information and claims.
Our Businesskey strategic priorities are to: (i) develop and Industrycommercialize products that present less risk of harm to adult smokers who switch to those products versus continued smoking; and (ii) convince and educate 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 adult smokers find acceptable alternatives to smoking;
•conduct rigorous scientific studies to substantiate that they reduce exposure to harmful and potentially harmful constituents in smoke and, ultimately, that these products present, are likely to present, or have the potential to present less risk of harm to adult smokers who switch to them versus continued smoking; and
•effectively advocate for a timely development of science-based regulatory frameworks for the development and commercialization of RRPs, including communication of scientifically substantiated information to enable adult smokers to make better consumer choices.

We might not succeed in our efforts. If we do not succeed, but others do, or if heat-not-burn products are inequitably regulated compared to other 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 use of certain e-vapor products, may unfavorably impact public opinion and/or mischaracterize all e-vapor products or other RRPs to consumers, regulators and policy makers 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 information and claims. Such restrictions could limit the success of our RRPs.

The WHO study group on tobacco product regulation ("TobReg") published their eighth report on the scientific basis of tobacco product regulation in May 2021. The report is based on a review of scientific evidence related to novel and emerging nicotine and tobacco products, such as electronic nicotine delivery systems ("ENDS"), electronic non-nicotine delivery systems ("ENNDS") and heated tobacco products ("HTPs") on a number of scientific topics. The report concludes by making a number of policy recommendations on HTPs and ENDS that, if implemented, could restrict both the availability of these products, and the access to accurate information about them. In August 2021, the WHO FCTC Secretariat published two reports to the ninth session of the Conference of the Parties ("CoP") of the FCTC, which are not materially different from the WHO study group report.

Prior to CoP 9 that took place in November 2021, the WHO and the WHO FCTC Secretariat published two reports on novel and emerging tobacco products. The reports were noted by CoP 9 and related substantive discussions and decisions were deferred to CoP 10, currently scheduled for 2023. It is not possible to predict whether or to what extent measures recommended by the WHO's reports will be implemented as the reports are not binding to the WHO Member States.

Additionally, any claims, regardless of merit, challenging our research and clinical data available to date, may impact the development of science-based regulatory frameworks for the commercialization of the RRP category and the commercialization of the RRP category in general.

Our RRPs and commercial activities for these products are designed for, and directed toward, current adult smokers and users of nicotine-containing products, and not for non-smokers or youth. We put significant effort in place to restrict access of our products to non-smokers or youth. Nevertheless, technological, regulatory and/or commercial setbacks might prevent us from delivering necessary infrastructure required to fulfill our commitment of having 100% of our RRP device portfolio equipped with “Age Verification”-technology and device activation features by 2023.

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If nonetheless there is a significant usage of our products or competitive products among youth or non-smokers, even in situations over which we have no control, our credibility may suffer, and our efforts to advocate for the development of science-based regulatory frameworks for the commercialization of RRPs may be significantly impacted.

Moreover, the FDA’s premarket tobacco product and modified risk tobacco product authorizations of a version of our Platform 1 product are subject to strict marketing, reporting and other requirements. Although we have received these product authorizations from the FDA, there is no guarantee that the product will remain authorized for sale in the U.S., particularly if there is a significant uptake in youth or non-smoker initiation.

The financial and business performance of our reduced-risk products is less predictable than our cigarette business.
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 and cultural environment, and other factors in a specific market. There may be periods of accelerated growth and periods of slower growth for these products, the timing 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, during the COVID-19 pandemic and as a result of unpredictability due to shortage of key components in our supply chain.

We may be unsuccessful in our efforts to differentiate reduced-risk products and cigarettes with respect to taxation.
To date, we have been largely successful in demonstrating to regulators that our RRPs are not cigarettes due to the absence of combustion, 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. Nevertheless, we are unable to predict whether regulators will be issuing new regulations where RRP will be equally taxed in line with other tobacco products such as ordinary cigarettes. However, if we cease to be successful in these efforts, RRP unit margins may be materially adversely affected.

Consumption of tax-paid cigarettes continues to decline in many of our markets.
This decline is due to multiple factors, including increased taxes and pricing, governmental actions, the diminishing social acceptance of smoking and health concerns, competition, 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. A continuous decline in the consumption of cigarettes could have a material adverse effect on our revenue and profitability.


Cigarettes are subject to substantial taxes. Significant increases in cigarette-related taxes have been proposed or enacted and are likely to continue to be proposed or enacted in numerous jurisdictions. These tax increases may disproportionately affect our profitability and make us less competitive versus certain of our competitors.
Tax regimes, including excise taxes, sales taxes and import duties, can disproportionately affect the retail price of cigarettes versus other combustible tobacco products, or disproportionately affect the relative retail price of our cigarette brands versus cigarette brands manufactured by certain of our competitors. Because our portfolio is weighted toward the premium-price cigarette category, tax regimes based on sales price can place us at a competitive disadvantage in certain markets. As a result,Furthermore, our volume and profitability may be adversely affected in these markets.
Increases
In addition, 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 volumevolumes for our products in many of our markets, and we expect that such factors will continue to reduce consumption levels and will increase down-trading and the risk of counterfeiting, contraband, "illicit whites" and legal cross-border purchases. Significant regulatory developments will 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”(the "FCTC"). The FCTC isSince it came into force in 2005, the first international public health treaty on tobacco, and its objective is to establish a global agenda for tobacco regulation. The FCTC has led to increased efforts by tobacco control advocates and public health organizations to promote increasingly restrictive regulatory measures on the marketing and sale of tobacco products to adult smokers. Regulatory initiatives that have been proposed, introduced or enacted by governmental authorities in various jurisdictions include:


•restrictions on or licensing of outlets permitted to sell cigarettes;
•the levying of substantial and increasing tax and duty charges;
restrictions or bans on advertising, marketing and sponsorship;
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the display of larger health warnings, graphic health warnings and other labeling requirements;
•restrictions or bans on advertising, marketing and sponsorship;
restrictions on packaging design, including the use of colors, and plain packaging;
•the display of larger health warnings, graphic health warnings and other labeling requirements;
•restrictions on packaging design, including the use of colors, and mandating plain packaging;
•restrictions on packaging and cigarette formats and dimensions;
•restrictions or bans on the display of tobacco product packaging at the point of sale and restrictions or bans on vending machines;
•requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents;
•disclosure, restrictions, or bans of tobacco product ingredients, including bans on the flavors of certain tobacco products;
•increased restrictions on smoking and use of tobacco and nicotine-containing products in public and work places and, in some instances, in private places and outdoors;
•restrictions or prohibitions of novel tobacco or nicotine-containing products;
•elimination of duty free sales and duty free allowances for travelers;
restrictions or bans on the display of tobacco product packaging at the point of sale and restrictions or bans on cigarette vending machines;
•encouraging litigation against tobacco companies; and
requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents;
•excluding tobacco companies from transparent public dialogue regarding public health and other policy matters.
disclosure, restrictions, or bans of tobacco product ingredients;
increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors;

restrictions on the sale of novel tobacco or nicotine-containing products;
elimination of duty free sales and duty free allowances for travelers; and
encouraging litigation against tobacco companies.
Our operating incomefinancial results could be significantlymaterially affected by regulatory initiatives resulting in a significant decrease in demand for our brands, in particularbrands. More specifically, requirements that 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 of complying with new regulatory requirements.

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

There is litigation related to tobacco products pending in certain jurisdictions. Damages claimed in some tobacco-related litigation are significant and, in certain cases in Brazil, Canada and Nigeria, range into the billions of U.S. dollars. We anticipate that new cases will continue to be filed. The FCTC encourages litigation against tobacco product manufacturers. It is possible that our consolidated results of operations, cash flows or financial position could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. See Item 8, Note 18. Contingencies (“Note 18. Contingencies”) for a discussion of pending litigation.

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

Because we have operations in numerous countries, our results may be influenced by economic, regulatory and political developments, natural disasters or conflicts.
Some of the countries in which we operate face the threat of civil unrest and can be subject to regime changes. In others, nationalization, terrorism, conflict and the threat of war may have a significant impact on the business environment. Economic, political, regulatory or other developments or natural disasters could disrupt our supply chain, manufacturing capabilities or distribution capabilities. In addition, such developments could lead to loss of property or equipment that are critical to our business in certain markets and difficulty in staffing and managing our operations, which could reduce our volumes, revenues and net earnings.
In certain markets, we are dependent on governmental approvals of various actions such as price changes, and failure to obtain such approvals could impair growth of our profitability.
In addition, despite our high ethical standards and rigorous control and compliance procedures aimed at preventing and detecting unlawful conduct, given the breadth and scope of our international operations, we may not be able to detect all potential improper or unlawful conduct by our employees and partners.


We may be unable to anticipate changes in consumer preferences or to respond to consumer behavior influenced by economic downturns.
Our business is subject to changes in adult consumer preferences, which may be influenced by local economic conditions. To be successful, we must:

promote brand equity successfully;
anticipate and respond to new adult consumer trends;
develop new products and markets and broaden brand portfolios;
improve productivity;
convince adult smokers to convert to our RRPs;
ensure adequate production capacity to meet demand for our products; and
be able to protect or enhance margins through price increases.
In periods of economic uncertainty, adult consumers may tend to purchase lower-price brands, and the volume of our premium-price and mid-price brands and our profitability could suffer accordingly. Such down-trading trends may be reinforced by regulation that limits branding, communication and product differentiation.

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

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

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

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

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

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


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

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

We are subject to income tax laws in the United States and numerous foreign jurisdictions. The Tax Cutsnew administration resulting from the 2020 U.S. presidential and Jobs Act that was signed into lawcongressional elections could lead to changes in December 2017 constitutes a major change to the U.S. tax system. Our estimatedsystem, including significant increases in the U.S. corporate income tax rate and the minimum tax rate on certain earnings of foreign subsidiaries. If ultimately enacted into law, such changes could have a material adverse impact of the Tax Cuts and Jobs Act is based on management’s current interpretations, and our analysis is ongoing.  Our final tax liability may be materially different from current estimates due to developments such as implementing regulations and clarifications. In future periods, our effective tax rate thereby reducing our net earnings. Further changes in the tax laws of foreign jurisdictions could arise as a result of the base erosion and profit shifting project undertaken by the Organisation for Economic Co-operation and Development, which recommended changes to numerous long-standing tax principles. If implemented, such changes, as well as changes in taxing jurisdictions’ administrative interpretations, decisions, policies, or positions, could also have a material adverse impact on our effective tax rate thereby reducing our net earnings. In future periods, our ability to recover deferred tax assets could be subject to additional uncertainty as a result of such developments. Furthermore, changes in the earnings mix or applicable foreign tax laws may result in significant variability in our effective tax rates.

Because we are a U.S. holding company, our most significant source of funds is distributions from our non-U.S. subsidiaries. Certain countries in which we operate have adopted or could institute currency exchange controls and other regulations that limit or prohibit our local subsidiaries' ability to convert local currency into U.S. dollars or to make payments outside the country. This could subject us to the risks of local currency devaluation and business disruption.


Our abilityRisks Related to grow profitabilitySourcing of Materials, Products and Services

Use of third-party resources may negatively impact quality and availability of our products and services, and we may be limited byrequired to replace third-party contract manufacturers or service providers with our inabilityown resources.
We increasingly rely on third-party resources and their subcontractors/suppliers to introduce newmanufacture some of our products enter new marketsand product parts (particularly, the electronic devices and accessories), and to provide services, including to support our finance, commercialization and information technology processes. While many of these arrangements improve efficiencies and decrease our operating costs, they also diminish our direct control. Such diminished control may have a material adverse effect on the quality and availability of products or improveservices, our margins through higher pricingsupply chain, and improvementsthe speed and flexibility in our brandresponse to changing market conditions and geographic mix.
Our profit growthadult consumer preferences, all of which may suffer ifplace us at a competitive disadvantage. In addition, we are unable to introduce new products or enter new markets successfully, to raise prices or to improve the proportion of our sales of higher margin products and in higher margin geographies.

We may be unable to expandrenew these agreements on satisfactory terms for numerous reasons, including government regulations, and our brand portfolio through successful acquisitions or the development of strategic business relationships.costs may increase significantly if we must replace such third parties with our own resources.
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.

9

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 the impacts of natural disasters and pandemics such as COVID-19. Furthermore, crop quality canmay be influenced by variations in weather patterns, including those caused by climate change. Tobacco production in certain countries is subject to a variety of controls, including government mandated prices and production control programs. Changes in the patterns of demand for agricultural products could cause farmers to produce less tobacco or cloves. Any significant change in tobacco leaf and clove prices, quality and quantity could affect our profitability and our business.


Risks Related to our International Operations

Because we have operations in numerous countries, our results may be adversely impacted 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 the threats of war or acts of war may have a significant impact on the business environment. Natural disasters, pandemics, economic, political, regulatory, acts of war or threats of war, or other developments could disrupt our supply chain, manufacturing capabilities or distribution capabilities, and our business continuity plans and other safeguards might not always be effective to fully mitigate their impact. In addition, such developments could increase costs of our materials and operations and lead to loss of property or equipment that are critical to our business in certain markets and difficulty in staffing and managing our operations, all of which could have a material adverse effect on our operations, volumes, revenue, net earnings and profitability. We discuss risks associated with the COVID-19 pandemic below.

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

In addition, despite our high ethical standards and rigorous controls and compliance procedures aimed at preventing and detecting unlawful conduct, given the breadth and scope of our international operations, we may not be able to detect all potential improper or unlawful conduct by our employees and partners. Such improper or unlawful conduct (actual or alleged) could lead to litigation and regulatory action, cause damage to our reputation and that of our brands, and result in substantial costs.

Our reported results could be adversely affected by unfavorable currency exchange rates, and currency fluctuations could impair our competitiveness.
We conduct our business primarily in local currency and, for purposes of financial reporting, the local currency results are translated into U.S. dollars based on average exchange rates prevailing during a reporting period. Foreign currencies may fluctuate significantly against the U.S. dollar reducing our net revenues, operating income and EPS. Our primary local currency cost bases may be different from our primary currency revenue markets, and U.S. dollar fluctuations against various currencies may have disproportionate negative impact on net revenues as compared to our gross profit and operating income margins.


Risks Related to Legal Challenges and Investigations

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 in which we operate. 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 adversely affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. We face various administrative and legal challenges related to certain RRP activities, including allegations concerning product classification, 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 performance in one or more markets. Also see Item 8, Note 17. Contingencies to our condensed consolidated financial statements for a discussion of pending litigation.

From time to time, we are subject to governmental investigations on a range of matters.
Investigations include allegations of contraband shipments of cigarettes, allegations of unlawful pricing activities within certain markets, allegations of underpayment of income taxes, customs duties and/or excise taxes, allegations of false and misleading usage of
10

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 adversely affected by an unfavorable outcome of pending or future investigations. See Item 8, Note 17. Contingencies—Other Litigation and “Management's Discussion and Analysis of Financial Condition and Results of Operations—Operating Results by Business Segment—Business Environment—Governmental Investigations” for a description of certain governmental investigations to which we are subject.

We may be unable to adequately protect our intellectual property rights, and disputes relating to intellectual property rights could harm our business.
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, trade secrets and other intellectual property rights, are inadequate, or if others infringe or misappropriate our intellectual property rights, notwithstanding legal protection, our business could be adversely impacted. Moreover, failing to manage our existing and/or future intellectual property may place us at a competitive disadvantage. Intellectual property rights of third parties may limit our ability to commercialize our products or improve product quality in one or more markets. Competitors or other third parties may claim that we infringe their intellectual property rights. Any such claims, regardless of merit, could divert management’s attention, be costly, disruptive, time-consuming and unpredictable and expose us to significant litigation costs and damages, and impede our ability to manufacture, commercialize and improve our products, and thus have a material adverse effect on our revenue and our profitability. In addition, if, as a result, we are unable 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. See Item 8, Note 17. Contingencies—Other Litigation to our condensed consolidated financial statements for a description of certain intellectual property proceedings.

Risks Related to our Competitive Environment

We face intense competition, and our failure to compete effectively could have a material adverse effect on our profitability and results of operations.
We are subject to highly competitive conditions in all aspects of our business. We compete primarily on the basis of product quality, brand recognition, brand loyalty, taste, R&D, innovation, packaging, customer service, marketing, advertising and retail price and, increasingly, adult smoker willingness to convert to our RRPs. 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 non-misleading information about our RRPs. Competitors in our industry 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. Some competitors have different profit, volume and regulatory objectives, and some international competitors are susceptible to changes in different currency exchange rates. Certain new market entrants in the non-combustible product category may alienate consumers from innovative products through inappropriate marketing campaigns, messaging and inferior product satisfaction, while not relying on scientific substantiation based on appropriate R&D protocols and standards. The growing use of digital media could increase the speed and extent of the dissemination of inaccurate and misleading information about our RRPs, all of which could have a mutual adverse effect on our profitability and results of operations.

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, accessibility to our products and availability of accurate information related to our products.

11

To be successful, we must:

•promote brand equity successfully;
•anticipate and respond to new adult consumer trends;
•ensure that our products meet our quality standards;
•develop new products and markets and broaden brand portfolios;
•improve productivity;
•educate and convince adult smokers to convert to our RRPs;
•ensure effective adult consumer engagement, including communication about product characteristics and usage of RRPs;
•provide excellent customer care;
•ensure adequate production capacity to meet demand for our products; and
•be able to protect or enhance margins through price increases.

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

Our ability to implementgrow profitability may be limited by our inability to introduce new products, enter new markets or improve our margins through higher pricing and improvements in our brand and geographic mix.
Our profit growth may be materially adversely impacted if we are unable to introduce new products or enter new markets successfully, to raise prices or to improve the proportion of our sales of higher margin products and in higher margin geographies.

We may be unable to expand our brand portfolio through successful acquisitions or the development of strategic business relationships, and the intended benefits from our investments may not materialize.
One element of our growth strategy is to expand our brand portfolio and market positions through selective acquisitions and the development of attractingstrategic business relationships. Acquisition and retainingstrategic business development opportunities are limited and present risks of failing to achieve efficient and effective integration, strategic objectives and/or anticipated revenue improvements and cost savings. There is no assurance that we will be able to acquire attractive businesses or enter into strategic business relationships on favorable terms ahead of our competitors, or that such acquisitions or strategic business development relationships will be accretive to earnings or improve our competitive position. In addition, we may not have a controlling position in certain strategic investments or relationships, which could impact the extent to which the intended financial growth and other benefits from these investments or relationships may ultimately materialize.

Our ability to achieve our strategic goals may be impaired if we fail to attract, motivate and retain the best global talent mayand effectively align our organizational design with the goals of our transformation.
To be impaired by the decreasing social acceptancesuccessful, we must continue transforming our culture and ways of cigarette smoking.

The tobacco industry competesworking, align our talent and organizational design with our increasingly complex business needs, and innovate and transform to a consumer-centric business. We compete for talent, including in areas that are new to us, such as digital, information technology, life sciences, with companies in the consumer products, technology, pharmaceutical and other companiessectors that enjoy greater societal acceptance. As a result, we may be unable to attract, motivate and retain the best global talent.talent with the right degree of diversity, experience and skills to achieve our strategic goals.



12

Risks Related to the Impact of COVID-19 on our Business

Our business, results of operations, cash flows and financial position may be adversely impacted during the continuation of the COVID-19 pandemic.
The ongoing COVID-19 pandemic has created significant societal and economic disruption, and resulted in closures of stores, factories and offices, and restrictions on manufacturing, distribution and travel, all of which have and will continue to adversely impact our business, results of operations, cash flows and financial position. Our business continuity plans and other safeguards may not be effective to mitigate the impact of the pandemic.

An adequate supply chain for our RRP portfolio, including the supply of electronic devices, is important to our business. We work with four electronics manufacturing service providers for the supply of our Platform 1 and Platform 4 devices, and a small number of other providers for other products in our RRP portfolio and related accessories. Due to the COVID-19 pandemic, the operations of our two main electronic manufacturing service providers were temporarily suspended at different times. Even though these suspensions did not materially affect our operations, if one or more of these service providers were significantly constrained at the same time, the supply of the devices could be disrupted. Although we work closely with these service providers on monitoring their production capability and financial health, we cannot guarantee that they will remain capable of meeting their commitments, particularly during the COVID-19 pandemic; if they will not, the commercialization of our RRPs could be adversely affected. The production of our RRP portfolio requires various metals, and we believe that there is an adequate supply of such metals in the world markets to satisfy our current and anticipated production requirements. However, some components and materials necessary for the production of our RRPs, including those for the electronic devices, are obtained from single or limited sources, and can be subject to industry-wide shortages and price fluctuations. While we were successful in maintaining adequate supply of such components and materials so far, we may not be able to secure such supply going forward, particularly during the COVID-19 pandemic; this could negatively impact the commercialization of our RRPs.

Significant risks to our business during the ongoing COVID-19 pandemic also include our diminished ability to convert adult smokers to our RRPs, significant volume declines in our duty-free business and certain other key markets, disruptions or delays in our manufacturing and supply chain, including delays and increased costs in the shipment of parts to manufacture our products or for the products themselves, increased currency volatility, and delays in certain cost saving, transformation and restructuring initiatives. Our business could also be adversely impacted if key personnel or a significant number of employees or business partners become unavailable due to the COVID-19 outbreak. The significant adverse impact of COVID-19 on the economic or political conditions in markets in which we operate could result in changes to the preferences of our adult consumers and lower demand for our products, particularly for our mid-price or premium-price brands.

Continuation of the pandemic could disrupt our access to the credit markets or increase our borrowing costs. Governments may temporarily be unable to focus on the development of science-based regulatory frameworks for the development and commercialization of RRPs or on the enforcement or implementation of regulations that are significant to our business. In addition, messaging about the potential negative impacts of the use of our products on COVID-19 risks may lead to increasingly restrictive regulatory measures on the sale and use of our products, negatively impact demand for our products and the willingness of adult consumers to switch to our RRPs, and adversely impact our efforts to advocate for the development of science-based regulatory frameworks for the development and commercialization of RRPs. All of the aforementioned impacts of the ongoing COVID-19 pandemic could have a material adverse effect on our business, operations, results of operations, revenues, cash flow and profitability.

The impact of these risks also depends on factors beyond our knowledge or control, including the duration and severity of the COVID-19 pandemic in general and specifically in the jurisdictions in which we operate, its recurrence in our key markets, actions taken to contain its spread and to mitigate its public health effects, and the ultimate economic consequences thereof.


Risks Related to Illicit Trade

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 cigarette brand, although we cannot quantify the revenues we lose as a result of this activity. In addition, our revenues are reduced by contraband, legal cross-border purchases, "illicit whites" and non-tax-paid volume produced by local manufacturers. Our revenues and consumer satisfaction with our Platform 1 device and heated tobacco units may be adversely affected by counterfeit products that do not meet our product quality standards and scientific validation procedures.
13

Risks Related to Cybersecurity and Data Governance

The failure of our information systems and systems owned and operated by our business partners to function as intended, or their penetration by outside parties with the intent to corrupt them, or our and our business partners failure to adhere to strict data governance and cybersecurity protocols, and to comply with privacy laws and regulations, could result in business disruption, loss of reputation, litigation and regulatory action, and loss of revenue, assets or personal or other confidential data.
We as well as our business partners use information systems to help manage business processes, collect and interpret business 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 andare continuously evolving our approach to business continuity plansplanning and backups to provide appropriate business resilience, particularly in place, and we take care to protect our systems and data from unauthorized access.light of the increasing cyber threat landscape. Nevertheless, failure of ourthese systems to function as intended, or penetration of these systems and systems owned and operated by our systemsbusiness partners by outside parties intent on extracting or corrupting information or otherwise disrupting business processes, could place us at a competitive disadvantage, result in a loss of revenue, assets, orincluding our intellectual property, personal or other sensitive data, result in litigation and regulatory action, cause damage to our reputation and that of our brands and result in significant remediation and other costs. Failure to protect personal data, and respect the rights of data subjects, and adhere to strict data governance and 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, and as privacy laws in the jurisdictions in which we do business are introduced or become more stringent, the magnitude of these risks is likely to increase.


We may be requiredRisks Related to replace third-party contract manufacturers or service providers with our own resources.the Acquisitions of OtiTopic, Inc. ("OtiTopic"), Fertin Pharma and Vectura Group Plc (now known as Vectura Group Ltd.)


In certain instances,As previously disclosed in this Form 10-K, we contract with third partieshave acquired Fertin Pharma A/G ("Fertin Pharma") and Vectura Group Ltd. ("Vectura") (with the Fertin Pharma acquisition and the Vectura acquisition being collectively referred to manufacture some of our products or product parts or to provide other services. in these Risk Factors as the “Acquisitions”).


We may be unable to renewsuccessfully integrate and realize the expected benefits from the Acquisitions.
The successful integration of the acquired businesses and their operations into those of our own and our ability to realize the benefits of the Acquisitions, are subject to a number of risks and uncertainties, many of which are not in our control.The risks and uncertainties relating to integrating the businesses acquired include, among other things: (i) the challenge of integrating complex organizations, systems, operating procedures, industry specific compliance programs, technology, networks and other assets of the businesses that we acquire, and the costs related to such integration efforts; (ii) the possibility that we are unable to gain access to differentiated proprietary technology and pharmaceutical development expertise as anticipated by these agreements on satisfactory terms for numerous reasons, including government regulations. Accordingly,Acquisitions, and thus fail to realize our costs may increase significantlydesired entry into additional smoke-free and wellness and healthcare platforms; (iii) the challenge of integrating the cultures and business practices of each of Fertin Pharma and Vectura to our culture and business practices, which if not managed correctly, could lead to difficulties in retaining key management and other key employees; and (iv) the challenge of achieving a successful integration as a result of our affiliation to our combustible product portfolio. In addition, even if we must replaceare able to successfully integrate, the anticipated benefits of the Acquisitions may not be realized fully, or at all, or may take longer to realize than expected. Furthermore, the success of the Acquisition also depends on the success of the research and development efforts of Fertin Pharma and Vectura, including the ability to obtain regulatory approval for new products, and the ability to commercialize or license these new products developed by them. Moreover, our affiliation to its combustible product portfolio may stand in the way of introducing and growing new product categories, and may prevent us in being successful in developing a long-term sustainable ecosystem of products in the wellness and healthcare categories.

The businesses that we acquire in the Acquisitions may have liabilities that are not known to us.
The businesses that we have acquired in the Acquisitions may have liabilities that we were unable to identify, or were unable to discover, in the course of performing our due diligence investigations during the Acquisitions thereof. We cannot assure you that the indemnification available to us under the respective acquisition agreements that we have negotiated, will be sufficient in amount, scope or duration to fully offset the possible liabilities associated with the respective business or property that we will assume upon consummation of each acquisition. Any such third partiesliabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operations.

Accounting adjustments related to the Acquisitions could adversely affect our financial results.
We have accounted for the completion of the Acquisitions using the acquisition method of accounting. Differences between preliminary estimates and the final acquisition accounting may occur, and these differences could have a material impact on the consolidated financial statements and our future results of operations and financial position in combination with the businesses acquired.Furthermore, given the nature of the assets being acquired in the Acquisitions, we may not be able to avoid future impairments of those assets, which may also have a material impact on our own resources.future results of operation and financial position.



14

PMI, Fertin Pharma and Vectura may be subject to uncertainties that could adversely affect our respective businesses, and adversely affect the financial results of our combined businesses.
Item 1B.Unresolved Staff Comments.
Our success following these Acquisitions will depend in part upon our ability, and the ability of Fertin Pharma and Vectura, respectively, to maintain respective business relationships. Uncertainty about the effect of the Fertin Pharma Acquisition and the Vectura acquisition on customers, suppliers, employees and other constituencies of each of Fertin Pharma and Vectura, may have a material adverse effect on us and/or the businesses that we have acquired with the proposed Acquisitions. Customers, suppliers and others who do business with Fertin Pharma or Vectura may delay or defer business decisions, decide to terminate, modify or renegotiate their relationships, or take other actions as a result of our acquisitions of Fertin Pharma and Vectura, respectively, which could negatively affect the revenues, earnings and cash flows of our company or the businesses that we have acquired with these Acquisitions. If we are unable to maintain the business and operational relationships of Fertin Pharma and/or Vectura, our financial position, results of operations or cash flows upon combining with these companies could be adversely affected.


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.

At December 31, 2017,2021, we operated and owned 46a total of 39 manufacturing facilities across our six geographical segments and maintained contract manufacturing relationships with 25 third-party manufacturers across 23 markets. In addition, we work with 38 third-party operators in Indonesia who manufacture our hand-rolled cigarettes.
PMI-Owned Manufacturing Facilities
 
EU (1)
 EEMA Asia 
Latin
America
&
Canada
 TOTAL
Fully integrated7
 8
 9
 7
 31
Make-pack3
 —
 1
 2
 6
Other3
 1
 3
 2
 9
Total13
 9
 13
 11
 46
(1) Includes facilities thatother category. Among them, 7 factories produced heated tobacco units in 2017.units.


In 2017, 23 of our2021, certain facilities each manufactured over 10 billion cigarettes, of which eight facilities each produced over 30 billion units. Ourunits (cigarettes and heated tobacco units combined). The largest factoriesmanufacturing facilities, in terms of volume, are located in KarawangRussia (EE), Indonesia (S&SA), Turkey (ME&A), Poland (EU), the Philippines (S&SA), Italy (EU), Lithuania (EU) and Sukorejo (Indonesia), Izmir (Turkey), Krakow (Poland), St. PetersburgPortugal (EU). As part of our global 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 Krasnodar (Russia), Batangas and Marikina (Philippines), Berlin (Germany), Kharkiv (Ukraine), and Kutna Hora (Czech Republic). Our smallest factorieswe are mostly in Latin America and Asia, where dueprogressing with our plans to tariff andbuild manufacturing capacity for our other constraints we have established small manufacturing units in individual markets.RRP platforms. We will continue to optimize our manufacturing base, taking into considerationinfrastructure.

We believe the evolution of trade blocks.
The plants and properties owned or leased and operated by our subsidiaries are maintained in good condition and are believed to be suitable and adequate for our present needs.


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



Item 3.Legal Proceedings.
Item 3.Legal Proceedings.

The information called for by this Item is incorporated herein by reference to Item 8.8, Note 18. 17. Contingencies.


Item 4.
Mine Safety Disclosures.
Item 4.Mine Safety Disclosures.
 
Not applicable.










15


PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
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.Exchange (ticker symbol "PM"). At January 31, 2018,2022, there were approximately 57,30045,700 holders of record of our common stock.
 





16


Performance Graph


The graph below compares the cumulative total shareholder return on PMI's common stock with the cumulative total return for the same period of PMI's Peer Group and the S&P 500 Index. The graph assumes the investment of $100 as of December 31, 2012,2016, 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.


pm-20211231_g1.jpg
DatePMI
PMI Peer Group (1)
S&P 500 Index
December 31, 2016$100.00$100.00$100.00
December 31, 2017$119.90$117.40$119.40
December 31, 2018$80.00$105.50$112.00
December 31, 2019$108.00$130.70$144.30
December 31, 2020$112.20$140.00$167.80
December 31, 2021$135.50$162.00$212.90
Date PMI  
PMI Peer Group (1)
 S&P 500 Index
December 31, 2012 $100.00  $100.00 $100.00
December 31, 2013 $108.50  $122.80 $132.40
December 31, 2014 $106.20  $132.50 $150.50
December 31, 2015 $120.40  $143.50 $152.60
December 31, 2016 $130.80  $145.60 $170.80
December 31, 2017 $156.80  $172.70 $208.10


(1) The PMI Peer Group presented in this graph is the same as that used in the prior year, except Reynolds American Inc. was removed following the completion of its acquisition by British American Tobacco p.l.c. on July 25, 2017.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, and Unilever NV and PLC.

Note: Figures are rounded to the nearest $0.10.

17





Issuer Purchases of Equity Securities During the Quarter Ended December 31, 20172021


Our share repurchase activity for each of the three months in the quarter ended December 31, 2017,2021, was as follows:
 
Period 
Total
Number of
Shares
Repurchased
 
Average
Price Paid
per Share
 
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
 
Approximate
Dollar Value
of Shares that
May Yet be
Purchased
Under the Plans
or Programs
October 1, 2017 –
October 31, 2017 (1)		 —
 $—
 —
 $—
November 1, 2017 –
November 30, 2017 (1)		 —
 $—
 —
 $—
December 1, 2017 –
December 31, 2017 (1)		 —
 $—
 —
 $—
Pursuant to Publicly Announced
Plans or Programs		 —
 $—
    
October 1, 2017 –
October 31, 2017 (2)		 672
 $112.68
    
November 1, 2017 –
November 30, 2017 (2)		 271
 $104.73
    
December 1, 2017 –
December 31, 2017 (2)		 497
 $102.99
    
For the Quarter Ended
December 31, 2017		 1,440
 $107.84
    
(1)During this reporting period, we did not have an authorized share repurchase program.
(2)Shares repurchased represent shares tendered to us by employees who vested in restricted share unit awards and used shares to pay all, or a portion of, the related taxes.

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


Item 6.     Selected Financial Data

(in millions of dollars, except per share data)

 2017 2016 2015 2014 2013
Summary of Operations:         
Net revenues$78,098
 $74,953
 $73,908
 $80,106
 $80,029
Cost of sales10,432
 9,391
 9,365
 10,436
 10,410
Excise taxes on products49,350
 48,268
 47,114
 50,339
 48,812
Gross profit18,316
 17,294
 17,429
 19,331
 20,807
Operating income11,503
 10,815
 10,623
 11,702
 13,515
Interest expense, net914
 891
 1,008
 1,052
 973
Earnings before income taxes10,589
 9,924
 9,615
 10,650
 12,542
Pre-tax profit margin13.6% 13.2% 13.0% 13.3% 15.7%
Provision for income taxes4,307
 2,768
 2,688
 3,097
 3,670
Net earnings6,341
 7,250
 7,032
 7,658
 8,850
Net earnings attributable to noncontrolling interests306
 283
 159
 165
 274
Net earnings attributable to PMI6,035
 6,967
 6,873
 7,493
 8,576
Basic earnings per share3.88
 4.48
 4.42
 4.76
 5.26
Diluted earnings per share3.88
 4.48
 4.42
 4.76
 5.26
Dividends declared per share4.22
 4.12
 4.04
 3.88
 3.58
Capital expenditures1,548
 1,172
 960
 1,153
 1,200
Depreciation and amortization875
 743
 754
 889
 882
Property, plant and equipment, net7,271
 6,064
 5,721
 6,071
 6,755
Inventories8,806
 9,017
 8,473
 8,592
 9,846
Total assets42,968
 36,851
 33,956
 35,187
 38,168
Long-term debt31,334
 25,851
 25,250
 26,929
 24,023
Total debt34,339
 29,067
 28,480
 29,455
 27,678
Stockholders' deficit(10,230) (10,900) (11,476) (11,203) (6,274)
Common dividends declared as a % of Diluted EPS108.8% 92.0% 91.4% 81.5% 68.1%
Market price per common share — high/low123.55-89.97
 104.20-84.46
 90.27-75.27
 91.63-75.28
 96.73-82.86
Closing price of common share at year end105.65
 91.49
 87.91
 81.45
 87.13
Price/earnings ratio at year end — Diluted27
 20
 20
 17
 17
Number of common shares outstanding at year end (millions)1,553
 1,551
 1,549
 1,547
 1,589
Number of employees80,600
 79,500
 80,200
 82,500
 91,100
PeriodTotal
Number of
Shares
Repurchased		Average
Price Paid
per Share		Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs		Approximate
Dollar Value
of Shares that
May Yet be
Purchased
Under the Plans
or Programs
October 1, 2021 –
October 31, 2021 (1)		892,728 $96.13 1,842,587 $6,820,151,548 
November 1, 2021 –
November 30, 2021 (1)		— $— 1,842,587 $6,820,151,548 
December 1, 2021 –
December 31, 2021 (1)		6,672,042 $90.64 8,514,629 $6,215,395,934 
Pursuant to Publicly Announced
   Plans or Programs
7,564,770 $91.29   
October 1, 2021 –
October 31, 2021 (2)		5,368 $96.66   
November 1, 2021 –
November 30, 2021 (2)		4,521 $95.19   
December 1, 2021 –
December 31, 2021 (2)		1,497 $86.98   
For the Quarter Ended
   December 31, 2021		7,576,156 $91.29   
 
This Selected(1)On June 11, 2021, our Board of Directors authorized a new share repurchase program of up to $7 billion, with target spending of $5 billion to $7 billion over a three-year period that commenced in July 2021. These share repurchases have been made pursuant to the $7 billion program.
(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, or a portion of, the related taxes.



18


Item 6.     [Reserved].



Item 7.Management’s Discussion and Analysis of Financial Data should be read in conjunction with Item 7Condition and Item 8.Results of Operations.




Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the other sections of this Annual Report on Form 10-K, including the consolidated financial statements and related notes contained in Item 8, and the discussion of risks and cautionary factors that may affect future results in Item 1A. Risk Factors.

Description of Our Company


We are a leading international tobacco company engaged inworking to deliver a smoke-free future and evolving our portfolio for the manufacturelong-term to include products outside of the tobacco and salenicotine sector. Our current product portfolio primarily consists of cigarettes and other nicotine-containingreduced-risk products, including heat-not-burn, vapor and oral nicotine products, which are sold in markets outside the United States of America. We are building our future onStates. Since 2008, we have invested more than $9 billion to develop, scientifically substantiate and commercialize innovative smoke-free products that are a much better consumer choice than continuingfor adults who would otherwise continue to smoke, with the goal of completely ending the sale of cigarettes. Through multidisciplinaryThis includes the building of world-class scientific assessment capabilities, notably in product development, state-of-the-art facilitiesthe areas of pre-clinical systems toxicology, clinical and scientific substantiation,behavioral research, as well as post-market studies. The U.S. Food and Drug Administration ("FDA") has authorized the marketing of a version of PMI’s IQOS Platform 1 device and consumables as a Modified Risk Tobacco Product (MRTP), finding that an exposure modification order for these products is appropriate to promote the public health. We describe the MRTP order in more detail in the "Business Environment" section of this Item 7. With a strong foundation and significant expertise in life sciences, in February 2021, we announced our ambition to expand into wellness and healthcare areas and deliver innovative products and solutions that aim to ensure thataddress unmet patient and consumer needs.

In the third quarter of 2021, our smoke-free products meet adult consumer preferencesformer Latin America & Canada segment was renamed as the Americas segment.

We currently manage our business in six geographical segments and rigorous regulatory requirements. Our vision is that these products ultimately replace cigarettes to the benefitan Other category:
•European Union ("EU");
•Eastern Europe ("EE");
•Middle East & Africa ("ME&A"), which includes our international duty free business;
•South & Southeast Asia ("S&SA");
•East Asia & Australia ("EA&A");
•Americas ("AMCS"); and
•Other, which includes our third quarter 2021 acquisitions of adult smokers, society, our companyFertin Pharma A/S, Vectura Group plc. (also known as Vectura Group Ltd.) and our shareholders.OtiTopic, Inc. For further details, see Item 8, Note 6. Acquisitions, andItem 8, Note 12. Segment Reporting.


Our cigarettes are sold in more thanapproximately 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. Ourportfolio comprises both international and local brands.

In addition to the manufacture and sale of cigarettes, we are engaged in the development and commercialization of reduced-risk products ("RRPs"). RRPs is the term we use to refer to products that present, are likely to present, or have the potential to present less risk of harm to smokers who switch to these products versus continuedcontinuing smoking.  We have a rangeIQOS is the leading brand in our smoke-free product portfolio. As of RRPsDecember 31, 2021, our smoke-free products are available for sale in various stages of development, scientific assessment and commercialization.  Because our RRPs do not burn tobacco, they produce an aerosol that contains far lower quantities of harmful and potentially harmful constituents than found in cigarette smoke.

For all periods presented in this report, we managed our business in four segments:
European Union;
Eastern Europe, Middle East & Africa (“EEMA”);
Asia; and
Latin America & Canada.

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

European Union - Covers all the European Union countries and also Switzerland, Norway and Iceland, which are linked to the European Union through trade agreements;
Eastern Europe - Includes Southeast Europe, Central Asia, Ukraine, Israel and Russia;
Middle East & Africa - Covers the African continent, the Middle East, Turkey and PMI Duty Free;
South & Southeast Asia - Includes Indonesia, the Philippines and other71 markets in this region;key cities or nationwide.
East Asia & Australia - Includes Australia, Japan, South Korea,
During 2021, we laid the People's Republicfoundation for our long-term growth ambitions beyond nicotine in wellness and healthcare, including the milestone acquisitions of ChinaVectura Group plc and other markets in this region, as well as Malaysia and Singapore; andFertin Pharma A/S which provide essential capabilities for future product development.
Latin America & Canada - Covers the South American continent, Central America, Mexico, the Caribbean and Canada.

We use the term net revenues to refer to our operating revenues from the sale of our products, including shipping and handling charges billed to customers, net of sales and promotion incentives.incentives, and excise taxes. Our net revenues and operating income are
19

affected by various factors, including the volume of products we sell, the price of our products, changes in currency exchange rates and the mix of products we sell. Mix is a term used to refer to the proportionate value of premium-price brands to mid-price or low-price brands in any given market (product mix). Mix can also refer to the proportion of shipment volume in more profitable markets versus shipment volume in less profitable markets (geographic mix). We often collect excise taxes from our customers and then remit them to governments, and, in those circumstances, we include the excise taxes in our net revenues and in excise taxes on products.

Our cost of sales consists principally ofof: tobacco leaf, non-tobacco raw materials, labor and manufacturing costs, as well ascosts; shipping and handling costs; and the cost of the IQOS devices produced by third-party electronics manufacturing service providers. Estimated costs associated with device 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 our creditors and stockholders, to participate in any distribution of the assets or earnings of any subsidiary is subject to the prior rights of creditors of such subsidiary, except to the extent that claims of our company itself as a creditor may be recognized. As a holding company, our principal sources of funds, including funds to make payment on our debt securities, are from the receipt of dividends and repayment of debt from our subsidiaries. Our principal wholly-ownedwholly 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 that are otherwise compliant with respect to their common stock.law.



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Executive Summary


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


Consolidated Operating Results


•Net Revenues and– Net Revenues, Excluding Excise Taxes on Products– The changes in our net revenues and net revenues, excluding excise taxes,of $31.4 billion for the year ended December 31, 2017,2021, increased by $2.7 billion, or 9.4%, from the comparable 2016 amounts,2020 amount, and were as follows:
impacted by the effects of the COVID-19 pandemic, particular in 2020. The change in our net revenues from the comparable 2020 amount was driven by the following (variances not to scale):

pm-20211231_g2.jpg

 For the Years Ended December 31, Variance Variance due to
(in millions)20172016 $% CurrencyVolume/MixPricing
Net revenues$78,098
$74,953
 $3,145
4.2 % $(2,355)$(439)$5,939
Excise taxes on products(49,350)(48,268) (1,082)(2.2)% 1,918
1,553
(4,553)
Net revenues, excluding excise taxes on products$28,748
$26,685
 $2,063
7.7 % $(437)$1,114
$1,386

Net revenues, include $3.8 billionexcluding currency and acquisitions, increased by 6.7%, mainly reflecting: favorable volume/mix, primarily driven by higher heated tobacco unit volume (notably in 2017the EU, particularly Germany, Hungary, Italy and $739Poland, as well as Japan, Russia and Ukraine), and higher device volume (notably in the EU, primarily Italy, and Japan, partly offset by South Korea), partially offset by lower cigarette volume (mainly in the EU Region, notably the Czech Republic, France and Germany, as well as the GCC, North Africa, the Philippines, Russia and Ukraine, partly offset by India, Indonesia, PMI Duty Free and Turkey) and unfavorable cigarette mix (primarily in Germany, Japan and Russia, partially offset by Indonesia and PMI Duty Free); and a favorable pricing variance (notably driven by the Czech Republic, Germany, Japan, Kazakhstan, the Philippines, Russia and Turkey, partly offset by Australia, Indonesia, Poland and Ukraine); partially offset by the unfavorable impact of the Saudi Arabia customs assessments of $246 million, included in 2016 related"Other" and further described in the following "Diluted Earnings Per Share" discussion.

This net revenue growth reflects the continued strength of IQOS, and the recovery of the combustible business in many markets from the low base in 2020 due to the impact of COVID-19.

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Net revenues by product category for the years ended December 31, 2021 and 2020, are shown below:

pm-20211231_g3.jpgpm-20211231_g4.jpg

Net revenues in the Other category primarily consist of operating revenues generated from the sale of RRPs, mainly driven by Japan. These net revenue amounts include excise taxes billed to customers, where we collectinhaled therapeutics, and remitoral and intra-oral delivery systems resulting from the excise tax. Excluding excise taxes, net revenues for RRPs were $3.6 billion in 2017third quarter 2021 acquisitions of Fertin Pharma A/S, Vectura Group plc. and $733 million in 2016.In some jurisdictions, including Japan, we are not responsible for collecting excise taxes.OtiTopic, Inc.


•Diluted Earnings Per Share– The changes in our reported diluted earnings per share (“diluted EPS”) for the year ended December 31, 2017,2021, from the comparable 20162020 amounts, were as follows:
Diluted EPS% Growth
For the year ended December 31, 2020$5.16 
2020 Asset impairment and exit costs0.08 
2020 Brazil indirect tax credit(0.05)
2020 Fair value adjustment for equity security investments0.04 
2020 Tax items(0.06)
       Subtotal of 2020 items0.01 
2021 Asset impairment and exit costs(0.12)
2021 Saudi Arabia customs assessments(0.14)
2021 Asset acquisition cost(0.03)
2021 Equity investee ownership dilution0.04 
2021 Tax items— 
       Subtotal of 2021 items(0.25)
Currency0.12 
Interest— 
Change in tax rate0.08 
Operations0.71 
For the year ended December 31, 2021$5.83 13.0 %
 Diluted EPS% Growth
For the year ended December 31, 2016$4.48
 
   
2016 Asset impairment and exit costs—
 
2016 Tax items—
 
       Subtotal of 2016 items—
 
   
2017 Asset impairment and exit costs—
 
2017 Tax items(0.84) 
       Subtotal of 2017 items(0.84) 
   
Currency(0.21) 
Interest0.01
 
Change in tax rate(0.03) 
Operations0.47
 
For the year ended December 31, 2017$3.88
(13.4)%


Income TaxesAsset impairment and exit costs – Our effective During 2020, we recorded pre-tax asset impairment and exit costs of $149 million, representing $124 million net of income tax rateand a diluted EPS charge of $0.08 per share, related to the organizational design optimization plan,
22

primarily in Switzerland. During 2021, we recorded pre-tax asset impairment and exit costs of $216 million, representing $181 million net of income tax and a diluted EPS charge of $0.12 per share, related to the organizational design optimization plan, primarily in Switzerland, and the product distribution restructuring in South Korea. The total pre-tax charges in 2020 and 2021 were included in marketing, administration and research costs on the consolidated statements of earnings. For further details, see Item 8, Note 19. Asset Impairment and Exit Costs.

Brazil indirect tax credit - Following a final and enforceable decision by the highest court in Brazil in October 2020, we recorded a gain of $119 million for 2017 increased by 12.8 percentage pointstax credits in 2020 ($79 million net of income tax and $0.05 per share increase in diluted EPS) representing overpayments of indirect taxes for the period from March 2012 through December 2019; these tax credits were applied to 40.7%tax liabilities in Brazil during 2021. This amount was included as a reduction in marketing, administration and research costs in the consolidated statements of earnings for the year ended December 31, 2020, and was included in the operating income of the Americas segment. An additional amount of overpaid indirect taxes of approximately $90 million is dependent on a potential tax authority challenge.

Fair Value adjustment for equity security investments – During 2020, we recorded an unfavorable fair value adjustment for our equity security investments of $60 million after tax (or $0.04 per share decrease in diluted EPS).  The 2017 taxfair value adjustment for our equity security investments was included in equity investments and securities (income)/loss, net ($76 million loss) and provision for income taxes ($16 million benefit) on the consolidated statements of earnings in 2020. For further details, see Item 8, Note 4. Related Parties - Equity Investments and Other.

Income taxes – The 2020 Tax items that decreasedincreased our 2020 diluted EPS by $0.84$0.06 per share in the table above were primarily due to final U.S. tax regulations under the impactGlobal Intangible Low-Taxed Income ("GILTI") provisions of the Tax CutsInternal Revenue Code for years 2018 and Jobs Act, which was signed into law in December 2017.2019 ($93 million).


The principal elements of the Tax Cuts and Jobs Act relevant to our consolidated financial statements for the year ended December 31, 2017, were:
•A reduction of the U.S. federal corporate tax rate from 35% to 21%; and
The requirement to pay a one-time transition tax on accumulated foreign earnings, including 2017 earnings ("transition tax").
In connection with these elements of the Tax Cuts and Jobs Act, we recognized a provisional expense of $1.6 billion, which was included as a component of income tax expense as follows:
A provisional charge of $1.4 billion, which represents the transition tax of $2.2 billion, net of a reversal of $0.7 billion of previously recorded deferred tax liabilities on part of the accumulated foreign earnings, and other items of $0.1 billion.
Re-measurement of U.S. deferred tax assets and liabilities using a rate of 21%, which, under the Tax Cuts and Jobs Act, is expected to be in place when such deferred assets and liabilities reverse in the future. In connection with this re-measurement, we recorded a provisional charge of $0.2 billion.
While the impacts of the Tax Cuts and Jobs Act reduced net earnings by $1.6 billion, there was no net impact on operating cash flows for the year, as the changes in deferred taxes and income taxes payable offset the net earnings impact. At December 31, 2017, we recorded an income tax payable of $1.7 billion representing the transition tax of $2.2 billion, partially offset by foreign tax credits related to foreign withholding taxes previously paid of $0.5 billion. The income tax payable is due over an 8-year period beginning in 2018. For further details, see Item 8, Note 11. Income Taxes to our consolidated financial statements.

The change in the effective tax rate that decreasedincreased our diluted EPS by $0.03$0.08 per share in the table above was primarily due to the corporate income tax rate reduction in the Philippines (enacted in the first quarter of 2021), as well as changes in earnings mix by taxing jurisdiction. For further details, see Item 8, Note 11. Income Taxes.


CurrencySaudi Arabia customs assessments – In June 2021, the Customs Appeal Committee in Riyadh notified our distributors in Saudi Arabia of its decisions to largely reject their challenges of the Saudi Arabia Customs General Authority assessments as described in Item 8, Note 17. Contingencies. On the basis of these decisions and in line with arrangements with the distributors, we recorded a pre-tax charge of $246 million in the second quarter of 2021 (representing $215 million net of income tax and a diluted EPS charge of $0.14 per share). The unfavorable currencypre-tax charge was recorded as a reduction of net revenues on the consolidated statement of earnings for the year ended December 31, 2021, and was included in the Middle East & Africa segment results.

Asset acquisition cost – In August 2021, we acquired 100% of OtiTopic, Inc., a U.S. respiratory drug development company with a late-stage dry powder inhalation aspirin treatment for acute myocardial infarction. We accounted for this transaction as an asset acquisition since the acquired in-process research and development ("IPR&D") of the dry powder inhalation aspirin treatment represented substantially all of the fair value of the gross assets acquired. At the date of acquisition, we determined that the acquired IPR&D had no alternative future use. As a result, we recorded a pre-tax charge of $51 million (representing a $0.03 per share charge to diluted EPS) to research and development costs within marketing, administration and research costs in the consolidated statements of earnings for the year ended December 31, 2021. For further details, see Item 8, Note 6. Acquisitions.

Equity investee ownership dilution – In 2021, our equity method investee, Medicago Inc, initiated additional rounds of equity funding in which we did not participate. As a result, our share of holdings in Medicago Inc. was reduced from approximately 32% to approximately 23% as of December 31, 2021. The ownership dilution resulted in a $0.04 per share favorable impact to diluted EPS and income of $55 million to Equity investments and securities (income)/loss, net in the consolidated statements of earnings for the year ended December 31, 2021. For further details, see Item 8, Note 17. Contingencies - Third Party Guarantees.

Currency – The favorable impact of $0.12 per share during 2017the reporting period primarily results from the fluctuations of the U.S. dollar, especially against the Brazilian real, Egyptian pound, Euro, Japanese yen and Turkish lira, partially offset by the Russian ruble.Euro. This unfavorablefavorable currency movement has impacted our profitability across our primary revenue markets and local currency cost bases.


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

Operations – The increase in diluted EPS of $0.47$0.71 per share from our operations in the table above was due primarily to the following segments:


Asia:•European Union: Favorable volume/mix, lower manufacturing costs and favorable pricing, partially offset by higher marketing, administration and research costs;
•Middle East & Africa: Favorable pricing, favorable volume/mix and lower manufacturing costs, partially offset by lower
23

fees for certain distribution rights and higher marketing, administration and research costs;
•Eastern Europe: Favorable volume/mix, lower manufacturing costs, favorable pricing and lower marketing, administration and research costs;
•East Asia & Australia: Favorable pricing and lower manufacturing costs, partially offset by higher marketing, administration and research costs; and
Latin America & Canada: Higher•Americas: Favorable pricing partially offset by unfavorable volume/mix;
partially offset by
EEMA: Unfavorable volume/mix and higherlower marketing, administration and research costs, partially offset by higher pricing; andmanufacturing costs;
European Union:partially offset by
•South & Southeast Asia: Unfavorable pricing, unfavorable volume/mix and higher marketing, administration and research costs, partially offset by higher pricing.costs.


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


2018 Forecasted Results –IQOS Device Supply
The current global semiconductor shortage has resulted in a tightness in IQOS device supply in the second half of 2021. In the fourth quarter of 2021, the IQOS device supply situation eased, resulting in an improved IQOS user growth versus the third quarter. We expect an improving IQOS device supply situation, with a gradual return to an unconstrained IQOS user quarterly growth progression. However, we still do not have full visibility over the full year 2022.

IQOS in the United States
On February 8, 2018, we announced our forecastNovember 29, 2021, an importation ban and cease-and-desist orders imposed by the U.S. International Trade Commission ("ITC") relating to IQOS Platform 1 products (including consumables and infringing components) went into effect. As a result, IQOS is not currently available for 2018 full-year reported diluted EPSsale in the U.S. We have appealed the patent and statutory issues related to the ITC's Final Determination, and also have contingency plans underway, including domestic production. We hope to be able to resume U.S. supply in a rangethe first half of $5.202023. For more details on the ITC case and related legal matters, please refer to $5.35, representing a projected increase of approximately 34% to 38% at prevailing exchange rates, versus $3.88 in 2017. Excluding a favorable currency impact, at then-prevailing exchange rates, of approximately $0.16 per share forItem 8, Note 17.Contingencies.

The ITC decision has no bearing outside the full-year 2018, the forecast range represents a projected increase of approximately 7% to 10% versus adjusted diluted earnings per share of $4.72 in 2017.


This forecast assumes:

Net revenue growth, excluding excise taxes, of over 8.0%, excluding currency;
Operating cash flow of over $9.0 billion;
Capital expenditures of approximately $1.7 billion; and
No share repurchases.

Following the enactment of the Tax Cuts and Jobs Act, our 2018 full-year diluted earnings per share forecast --U.S.; competitor lawsuits based on the current interpretation ofsame patent families have repeatedly and universally failed in European courts and the legislation -- assumes a full-year effective tax rate of approximately 28%, subject to future regulatory developments and earnings mix by taxing jurisdiction. The difference betweenEuropean Patent Office.


Acquisitions

During 2021, PMI acquired the 21% statutory rate under the new law and our effective rate reflects the fact that we operate in markets outside the United States and is driven by three main factors: foreign tax rate differences, non-deductibility of interest expense and a partial disallowance of foreign tax credits related to the application of the rules for global intangible low-taxed income.following companies:


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

Adjusted diluted EPS is not a measure under accounting principles generally acceptedinhaled therapeutics company based in the United StatesKingdom;
•Fertin Pharma A/S, a Danish company that is a leading developer and manufacturer of America ("innovative pharmaceutical and well-being products based on oral and intra-oral delivery systems;
•OtiTopic, Inc., a U.S. GAAP"). We define adjusted diluted EPS as reported diluted EPS adjustedrespiratory drug development company with a late-stage dry powder inhalation aspirin treatment for asset impairmentacute myocardial infarction; and exit costs, tax items
•AG Snus Aktieselskab, a Danish company, and unusual items. We believe it is appropriate to disclose this measure as it represents core earnings, improves comparabilityits Swedish subsidiary, Tobacco House of Sweden AB, fully owned by AG Snus, which operates in the oral tobacco and helps investors analyze business performance and trends. Adjusted diluted EPS should be considered neither in isolation nor as a substitute for reported diluted EPS prepared in accordance with U.S. GAAP.modern oral product categories.


This 2018 guidance excludes the impact of any futureFor further details on these acquisitions, unanticipated asset impairment and exit cost charges, future changes in currency exchange rates, further developments related to the Tax Cuts and Jobs Act, and any unusual events. The factors described insee Item 1A. Risk Factors represent continuing risks to these projections.8, Note 6. Acquisitions.
24



DiscussionConsolidated Operating Results

•Net Revenues – Net revenues of $31.4 billion for the year ended December 31, 2021, increased by $2.7 billion, or 9.4%, from the comparable 2020 amount, and Analysiswere impacted by the effects of the COVID-19 pandemic, particular in 2020. The change in our net revenues from the comparable 2020 amount was driven by the following (variances not to scale):

pm-20211231_g2.jpg
Critical Accounting Estimates

Net revenues, excluding currency and acquisitions, increased by 6.7%, mainly reflecting: favorable volume/mix, primarily driven by higher heated tobacco unit volume (notably in the EU, particularly Germany, Hungary, Italy and Poland, as well as Japan, Russia and Ukraine), and higher device volume (notably in the EU, primarily Italy, and Japan, partly offset by South Korea), partially offset by lower cigarette volume (mainly in the EU Region, notably the Czech Republic, France and Germany, as well as the GCC, North Africa, the Philippines, Russia and Ukraine, partly offset by India, Indonesia, PMI Duty Free and Turkey) and unfavorable cigarette mix (primarily in Germany, Japan and Russia, partially offset by Indonesia and PMI Duty Free); and a favorable pricing variance (notably driven by the Czech Republic, Germany, Japan, Kazakhstan, the Philippines, Russia and Turkey, partly offset by Australia, Indonesia, Poland and Ukraine); partially offset by the unfavorable impact of the Saudi Arabia customs assessments of $246 million, included in "Other" and further described in the following "Diluted Earnings Per Share" discussion.

This net revenue growth reflects the continued strength of IQOS, and the recovery of the combustible business in many markets from the low base in 2020 due to the impact of COVID-19.

21

Net revenues by product category for the years ended December 31, 2021 and 2020, are shown below:

pm-20211231_g3.jpgpm-20211231_g4.jpg

Net revenues in the Other category primarily consist of operating revenues generated from the sale of inhaled therapeutics, and oral and intra-oral delivery systems resulting from the third quarter 2021 acquisitions of Fertin Pharma A/S, Vectura Group plc. and OtiTopic, Inc.

•Diluted Earnings Per Share– The changes in our reported diluted earnings per share (“diluted EPS”) for the year ended December 31, 2021, from the comparable 2020 amounts, were as follows:
Diluted EPS% Growth
For the year ended December 31, 2020$5.16 
2020 Asset impairment and exit costs0.08 
2020 Brazil indirect tax credit(0.05)
2020 Fair value adjustment for equity security investments0.04 
2020 Tax items(0.06)
       Subtotal of 2020 items0.01 
2021 Asset impairment and exit costs(0.12)
2021 Saudi Arabia customs assessments(0.14)
2021 Asset acquisition cost(0.03)
2021 Equity investee ownership dilution0.04 
2021 Tax items— 
       Subtotal of 2021 items(0.25)
Currency0.12 
Interest— 
Change in tax rate0.08 
Operations0.71 
For the year ended December 31, 2021$5.83 13.0 %

Asset impairment and exit costs – During 2020, we recorded pre-tax asset impairment and exit costs of $149 million, representing $124 million net of income tax and a diluted EPS charge of $0.08 per share, related to the organizational design optimization plan,
22

primarily in Switzerland. During 2021, we recorded pre-tax asset impairment and exit costs of $216 million, representing $181 million net of income tax and a diluted EPS charge of $0.12 per share, related to the organizational design optimization plan, primarily in Switzerland, and the product distribution restructuring in South Korea. The total pre-tax charges in 2020 and 2021 were included in marketing, administration and research costs on the consolidated statements of earnings. For further details, see Item 8, Note 2. Summary19. Asset Impairment and Exit Costs.

Brazil indirect tax credit - Following a final and enforceable decision by the highest court in Brazil in October 2020, we recorded a gain of Significant Accounting Policies$119 million for tax credits in 2020 ($79 million net of income tax and $0.05 per share increase in diluted EPS) representing overpayments of indirect taxes for the period from March 2012 through December 2019; these tax credits were applied to ourtax liabilities in Brazil during 2021. This amount was included as a reduction in marketing, administration and research costs in the consolidated financial statements includes a summaryof earnings for the year ended December 31, 2020, and was included in the operating income of the significant accounting policiesAmericas segment. An additional amount of overpaid indirect taxes of approximately $90 million is dependent on a potential tax authority challenge.

Fair Value adjustment for equity security investments – During 2020, we recorded an unfavorable fair value adjustment for our equity security investments of $60 million after tax (or $0.04 per share decrease in diluted EPS).  The fair value adjustment for our equity security investments was included in equity investments and methods usedsecurities (income)/loss, net ($76 million loss) and provision for income taxes ($16 million benefit) on the consolidated statements of earnings in 2020. For further details, see Item 8, Note 4. Related Parties - Equity Investments and Other.

Income taxes – The 2020 Tax items that increased our 2020 diluted EPS by $0.06 per share in the preparationtable above were due to final U.S. tax regulations under the Global Intangible Low-Taxed Income ("GILTI") provisions of the Internal Revenue Code for years 2018 and 2019 ($93 million).

The change in the tax rate that increased our consolidated financial statements. In most instances, we must use a particular accounting policy or method because it isdiluted EPS by $0.08 per share in the only one that is permitted under U.S. GAAP.

The preparationtable above was primarily due to the corporate income tax rate reduction in the Philippines (enacted in the first quarter of financial statements requires that we use estimates and assumptions that affect the reported amounts of our assets, liabilities, net revenues and expenses,2021), as well as our disclosure of contingencies. If actual amounts differ from previous estimates, we include the revisions in our consolidated results of operations in the period during which we know the actual amounts. Historically, aggregate differences, if any, between our estimates and actual amounts in any year have not had a significant impact on our consolidated financial statements.

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

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

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

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

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

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

Weighted-average discount rate assumptions for pensions and postretirement plans are as follows:
 20172016
Pension plans1.51%1.52%
Postretirement plans3.79%3.68%

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

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


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

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

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

jurisdiction. For further details, see Item 8, Note 11. Income Taxes.

Saudi Arabia customs assessments – In June 2021, the Customs Appeal Committee in Riyadh notified our distributors in Saudi Arabia of its decisions to our consolidated financial statements.

Hedging - As discussed belowlargely reject their challenges of the Saudi Arabia Customs General Authority assessments as described in “Market Risk,”Item 8, Note 17. Contingencies. On the basis of these decisions and in line with arrangements with the distributors, we use derivative financial instruments principally to reduce exposures to market risks resulting from fluctuationsrecorded a pre-tax charge of $246 million in foreign currency exchangethe second quarter of 2021 (representing $215 million net of income tax and interest rates by creating offsetting exposures. For derivatives to which we have elected to apply hedge accounting, gains and lossesa diluted EPS charge of $0.14 per share). The pre-tax charge was recorded as a reduction of net revenues on these derivatives are initially deferred in accumulated other comprehensive losses on the consolidated balance sheet and recognized in the consolidated statement of earnings for the year ended December 31, 2021, and was included in the periods whenMiddle East & Africa segment results.

Asset acquisition cost – In August 2021, we acquired 100% of OtiTopic, Inc., a U.S. respiratory drug development company with a late-stage dry powder inhalation aspirin treatment for acute myocardial infarction. We accounted for this transaction as an asset acquisition since the related hedged transactions are also recognizedacquired in-process research and development ("IPR&D") of the dry powder inhalation aspirin treatment represented substantially all of the fair value of the gross assets acquired. At the date of acquisition, we determined that the acquired IPR&D had no alternative future use. As a result, we recorded a pre-tax charge of $51 million (representing a $0.03 per share charge to diluted EPS) to research and development costs within marketing, administration and research costs 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 netconsolidated statements of earnings for these derivatives.

Contingencies - Asdiscussed inthe year ended December 31, 2021. For further details, see Item 8, Note 18. Contingencies6. Acquisitions.

Equity investee ownership dilution – In 2021, our equity method investee, Medicago Inc, initiated additional rounds of equity funding in which we did not participate. As a result, our share of holdings in Medicago Inc. was reduced from approximately 32% to our consolidated financial statements, legal proceedings coveringapproximately 23% as of December 31, 2021. The ownership dilution resulted in a wide range$0.04 per share favorable impact to diluted EPS and income of matters are pending or threatened against us, and/or our subsidiaries, and/or our indemnitees in various jurisdictions. We$55 million to Equity investments and our subsidiaries record provisionssecurities (income)/loss, net in the consolidated financial statements of earnings for pending litigation whenthe year ended December 31, 2021. For further details, see Item 8, Note 17. Contingencies - Third Party Guarantees.

Currency – The favorable impact of $0.12 per share during the reporting period primarily results from the fluctuations of the U.S. dollar, especially against the Euro. This favorable currency movement has impacted our profitability across our primary revenue markets and local currency cost bases.

Operations – The increase in diluted EPS of $0.71 per share from our operations in the table above was due primarily to the following segments:

•European Union: Favorable volume/mix, lower manufacturing costs and favorable pricing, partially offset by higher marketing, administration and research costs;
•Middle East & Africa: Favorable pricing, favorable volume/mix and lower manufacturing costs, partially offset by lower
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fees for certain distribution rights and higher marketing, administration and research costs;
•Eastern Europe: Favorable volume/mix, lower manufacturing costs, favorable pricing and lower marketing, administration and research costs;
•East Asia & Australia: Favorable pricing and lower manufacturing costs, partially offset by higher marketing, administration and research costs; and
•Americas: Favorable pricing and lower marketing, administration and research costs, partially offset by higher manufacturing costs;
partially offset by
•South & Southeast Asia: Unfavorable pricing, unfavorable volume/mix and higher marketing, administration and research costs.

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

IQOS Device Supply
The current global semiconductor shortage has resulted in a tightness in IQOS device supply in the second half of 2021. In the fourth quarter of 2021, the IQOS device supply situation eased, resulting in an improved IQOS user growth versus the third quarter. We expect an improving IQOS device supply situation, with a gradual return to an unconstrained IQOS user quarterly growth progression. However, we determine thatstill do not have full visibility over the full year 2022.

IQOS in the United States
On November 29, 2021, an unfavorable outcomeimportation ban and cease-and-desist orders imposed by the U.S. International Trade Commission ("ITC") relating to IQOS Platform 1 products (including consumables and infringing components) went into effect. As a result, IQOS is probablenot currently available for sale in the U.S. We have appealed the patent and statutory issues related to the ITC's Final Determination, and also have contingency plans underway, including domestic production. We hope to be able to resume U.S. supply in the first half of 2023. For more details on the ITC case and related legal matters, please refer to Item 8, Note 17.Contingencies.

The ITC decision has no bearing outside the U.S.; competitor lawsuits based on the same patent families have repeatedly and universally failed in European courts and the amount ofEuropean Patent Office.


Acquisitions

During 2021, PMI acquired the loss can be reasonably estimated. The variability in pleadings in multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. Much of the pending tobacco-related litigation is in its early stages, and litigation is subject to uncertainty. At the present time, while it is reasonably possible thatfollowing companies:

•Vectura Group plc, an unfavorable outcome in a case may occur, after assessing the information available to it: (i) management has not concluded that it is probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss for any of the pending tobacco-related cases; and (iii) accordingly, no estimated loss has been accruedinhaled therapeutics company based in the consolidated financial statementsUnited Kingdom;
•Fertin Pharma A/S, a Danish company that is a leading developer and manufacturer of innovative pharmaceutical and well-being products based on oral and intra-oral delivery systems;
•OtiTopic, Inc., a U.S. respiratory drug development company with a late-stage dry powder inhalation aspirin treatment for unfavorable outcomesacute myocardial infarction; and
•AG Snus Aktieselskab, a Danish company, and its Swedish subsidiary, Tobacco House of Sweden AB, fully owned by AG Snus, which operates in the oral tobacco and modern oral product categories.

For further details on these cases, if any. Legal defense costs are expensed as incurred.acquisitions, see Item 8, Note 6. Acquisitions.

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Consolidated Operating Results


•Net Revenues – Net revenues of $31.4 billion for the year ended December 31, 2021, increased by $2.7 billion, or 9.4%, from the comparable 2020 amount, and were impacted by the effects of the COVID-19 pandemic, particular in 2020. The change in our net revenues from the comparable 2020 amount was driven by the following (variances not to scale):
pm-20211231_g2.jpg

Net revenues, excluding currency and acquisitions, increased by 6.7%, mainly reflecting: favorable volume/mix, primarily driven by higher heated tobacco unit volume (notably in the EU, particularly Germany, Hungary, Italy and Poland, as well as Japan, Russia and Ukraine), and higher device volume (notably in the EU, primarily Italy, and Japan, partly offset by South Korea), partially offset by lower cigarette volume (mainly in the EU Region, notably the Czech Republic, France and Germany, as well as the GCC, North Africa, the Philippines, Russia and Ukraine, partly offset by India, Indonesia, PMI Duty Free and Turkey) and unfavorable cigarette mix (primarily in Germany, Japan and Russia, partially offset by Indonesia and PMI Duty Free); and a favorable pricing variance (notably driven by the Czech Republic, Germany, Japan, Kazakhstan, the Philippines, Russia and Turkey, partly offset by Australia, Indonesia, Poland and Ukraine); partially offset by the unfavorable impact of the Saudi Arabia customs assessments of $246 million, included in "Other" and further described in the following "Diluted Earnings Per Share" discussion.

This net revenue growth reflects the continued strength of IQOS, and the recovery of the combustible business in many markets from the low base in 2020 due to the impact of COVID-19.

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Net revenues by product category for the years ended December 31, 2021 and 2020, are shown below:

pm-20211231_g3.jpgpm-20211231_g4.jpg

Net revenues in the Other category primarily consist of operating revenues generated from the sale of inhaled therapeutics, and oral and intra-oral delivery systems resulting from the third quarter 2021 acquisitions of Fertin Pharma A/S, Vectura Group plc. and OtiTopic, Inc.

•Diluted Earnings Per Share– The changes in our reported diluted earnings per share (“diluted EPS”) for the year ended December 31, 2021, from the comparable 2020 amounts, were as follows:
Diluted EPS% Growth
For the year ended December 31, 2020$5.16 
2020 Asset impairment and exit costs0.08 
2020 Brazil indirect tax credit(0.05)
2020 Fair value adjustment for equity security investments0.04 
2020 Tax items(0.06)
       Subtotal of 2020 items0.01 
2021 Asset impairment and exit costs(0.12)
2021 Saudi Arabia customs assessments(0.14)
2021 Asset acquisition cost(0.03)
2021 Equity investee ownership dilution0.04 
2021 Tax items— 
       Subtotal of 2021 items(0.25)
Currency0.12 
Interest— 
Change in tax rate0.08 
Operations0.71 
For the year ended December 31, 2021$5.83 13.0 %

Asset impairment and exit costs – During 2020, we recorded pre-tax asset impairment and exit costs of $149 million, representing $124 million net of income tax and a diluted EPS charge of $0.08 per share, related to the organizational design optimization plan,
22

primarily in Switzerland. During 2021, we recorded pre-tax asset impairment and exit costs of $216 million, representing $181 million net of income tax and a diluted EPS charge of $0.12 per share, related to the organizational design optimization plan, primarily in Switzerland, and the product distribution restructuring in South Korea. The total pre-tax charges in 2020 and 2021 were included in marketing, administration and research costs on the consolidated statements of earnings. For further details, see Item 8, Note 19. Asset Impairment and Exit Costs.

Brazil indirect tax credit - Following a final and enforceable decision by the highest court in Brazil in October 2020, we recorded a gain of $119 million for tax credits in 2020 ($79 million net of income tax and $0.05 per share increase in diluted EPS) representing overpayments of indirect taxes for the period from March 2012 through December 2019; these tax credits were applied to tax liabilities in Brazil during 2021. This amount was included as a reduction in marketing, administration and research costs in the consolidated statements of earnings for the year ended December 31, 2020, and was included in the operating income of the Americas segment. An additional amount of overpaid indirect taxes of approximately $90 million is dependent on a potential tax authority challenge.

Fair Value adjustment for equity security investments – During 2020, we recorded an unfavorable fair value adjustment for our equity security investments of $60 million after tax (or $0.04 per share decrease in diluted EPS).  The fair value adjustment for our equity security investments was included in equity investments and securities (income)/loss, net ($76 million loss) and provision for income taxes ($16 million benefit) on the consolidated statements of earnings in 2020. For further details, see Item 8, Note 4. Related Parties - Equity Investments and Other.

Income taxes – The 2020 Tax items that increased our 2020 diluted EPS by $0.06 per share in the table above were due to final U.S. tax regulations under the Global Intangible Low-Taxed Income ("GILTI") provisions of the Internal Revenue Code for years 2018 and 2019 ($93 million).

The change in the tax rate that increased our diluted EPS by $0.08 per share in the table above was primarily due to the corporate income tax rate reduction in the Philippines (enacted in the first quarter of 2021), as well as changes in earnings mix by taxing jurisdiction. For further details, see Item 8, Note 11. Income Taxes.

Saudi Arabia customs assessments – In June 2021, the Customs Appeal Committee in Riyadh notified our distributors in Saudi Arabia of its decisions to largely reject their challenges of the Saudi Arabia Customs General Authority assessments as described in Item 8, Note 17. Contingencies. On the basis of these decisions and in line with arrangements with the distributors, we recorded a pre-tax charge of $246 million in the second quarter of 2021 (representing $215 million net of income tax and a diluted EPS charge of $0.14 per share). The pre-tax charge was recorded as a reduction of net revenues on the consolidated statement of earnings for the year ended December 31, 2021, and was included in the Middle East & Africa segment results.

Asset acquisition cost – In August 2021, we acquired 100% of OtiTopic, Inc., a U.S. respiratory drug development company with a late-stage dry powder inhalation aspirin treatment for acute myocardial infarction. We accounted for this transaction as an asset acquisition since the acquired in-process research and development ("IPR&D") of the dry powder inhalation aspirin treatment represented substantially all of the fair value of the gross assets acquired. At the date of acquisition, we determined that the acquired IPR&D had no alternative future use. As a result, we recorded a pre-tax charge of $51 million (representing a $0.03 per share charge to diluted EPS) to research and development costs within marketing, administration and research costs in the consolidated statements of earnings for the year ended December 31, 2021. For further details, see Item 8, Note 6. Acquisitions.

Equity investee ownership dilution – In 2021, our equity method investee, Medicago Inc, initiated additional rounds of equity funding in which we did not participate. As a result, our share of holdings in Medicago Inc. was reduced from approximately 32% to approximately 23% as of December 31, 2021. The ownership dilution resulted in a $0.04 per share favorable impact to diluted EPS and income of $55 million to Equity investments and securities (income)/loss, net in the consolidated statements of earnings for the year ended December 31, 2021. For further details, see Item 8, Note 17. Contingencies - Third Party Guarantees.

Currency – The favorable impact of $0.12 per share during the reporting period primarily results from the fluctuations of the U.S. dollar, especially against the Euro. This favorable currency movement has impacted our profitability across our primary revenue markets and local currency cost bases.

Operations – The increase in diluted EPS of $0.71 per share from our operations in the table above was due primarily to the following segments:

•European Union: Favorable volume/mix, lower manufacturing costs and favorable pricing, partially offset by higher marketing, administration and research costs;
•Middle East & Africa: Favorable pricing, favorable volume/mix and lower manufacturing costs, partially offset by lower
23

fees for certain distribution rights and higher marketing, administration and research costs;
•Eastern Europe: Favorable volume/mix, lower manufacturing costs, favorable pricing and lower marketing, administration and research costs;
•East Asia & Australia: Favorable pricing and lower manufacturing costs, partially offset by higher marketing, administration and research costs; and
•Americas: Favorable pricing and lower marketing, administration and research costs, partially offset by higher manufacturing costs;
partially offset by
•South & Southeast Asia: Unfavorable pricing, unfavorable volume/mix and higher marketing, administration and research costs.

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

IQOS Device Supply
The current global semiconductor shortage has resulted in a tightness in IQOS device supply in the second half of 2021. In the fourth quarter of 2021, the IQOS device supply situation eased, resulting in an improved IQOS user growth versus the third quarter. We expect an improving IQOS device supply situation, with a gradual return to an unconstrained IQOS user quarterly growth progression. However, we still do not have full visibility over the full year 2022.

IQOS in the United States
On November 29, 2021, an importation ban and cease-and-desist orders imposed by the U.S. International Trade Commission ("ITC") relating to IQOS Platform 1 products (including consumables and infringing components) went into effect. As a result, IQOS is not currently available for sale in the U.S. We have appealed the patent and statutory issues related to the ITC's Final Determination, and also have contingency plans underway, including domestic production. We hope to be able to resume U.S. supply in the first half of 2023. For more details on the ITC case and related legal matters, please refer to Item 8, Note 17.Contingencies.

The ITC decision has no bearing outside the U.S.; competitor lawsuits based on the same patent families have repeatedly and universally failed in European courts and the European Patent Office.


Acquisitions

During 2021, PMI acquired the following companies:

•Vectura Group plc, an inhaled therapeutics company based in the United Kingdom;
•Fertin Pharma A/S, a Danish company that is a leading developer and manufacturer of innovative pharmaceutical and well-being products based on oral and intra-oral delivery systems;
•OtiTopic, Inc., a U.S. respiratory drug development company with a late-stage dry powder inhalation aspirin treatment for acute myocardial infarction; and
•AG Snus Aktieselskab, a Danish company, and its Swedish subsidiary, Tobacco House of Sweden AB, fully owned by AG Snus, which operates in the oral tobacco and modern oral product categories.

For further details on these acquisitions, see Item 8, Note 6. Acquisitions.
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Discussion and Analysis

Critical Accounting Estimates

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

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

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

Revenue Recognition - We recognize revenue as performance obligations are satisfied. Our primary performance obligation is the distribution and sales of cigarettes and reduced-risk products, including heat-not-burn, vapor and oral nicotine 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 with warranty programs for IQOS devices are generally provided for in cost of sales in the period the related revenues are recognized, based on a number of factors, including historical experience, product failure rates and warranty policies. The transaction price is typically based on the amount billed to the customer and includes 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 purchase commitments 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 that inventory 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 non-amortizable intangible assets to determine if it is more likely than not that an impairment exists, the company elects to perform the quantitative assessment for our annual impairment analysis. The impairment analysis involves comparing the fair value of each reporting unit or non-amortizable intangible asset to the carrying value. If the carrying value exceeds the fair value, goodwill or a non-amortizable intangible asset is considered impaired. To determine the fair value of goodwill, we primarily use the market approach using earnings multiples of comparable global companies within the tobacco industry, supported by a discounted cash flow model. At December 31, 2021, the carrying value of our goodwill was $6.7 billion, which is related to ten geographical reporting units, each of which consists of a group of markets with similar operating and economic characteristics and our 2021 acquisitions. The Fertin Pharma A/S, Vectura Group plc. and OtiTopic, Inc. acquisitions in 2021 are considered separate operating segments and are accounted for within the Other category. For additional information see Item 8, Note 6. Acquisitions. The estimated fair value of each of our ten reporting units and additional businesses acquired in 2021 exceeded the carrying value as of December 31, 2021. To determine the fair value of non-amortizable intangible assets, we primarily use a discounted cash flow model applying the relief-from-royalty method. We concluded that the fair value of our non-amortizable intangible assets exceeded the carrying value.These discounted cash flow models include management assumptions relevant for forecasting operating cash flows, which are subject to changes in business conditions, such as volumes and prices, costs to produce, discount rates and estimated capital needs. Management considers historical experience and all available information at the time the fair values are estimated, and we believe these assumptions are consistent with the assumptions a hypothetical marketplace participant would use. Since the March 28, 2008, spin-off from Altria Group, Inc., we have not recorded a charge to earnings for an impairment of goodwill or non-amortizable intangible assets.

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

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

Weighted-average discount rate assumptions for pension and postretirement plan obligations at December 31, 2021 and 2020 are as follows:
20212020
Pension plans0.86%0.56%
Postretirement plans3.08%2.84%

We anticipate that assumption changes will decrease 2022 pre-tax pension and postretirement expense to approximately $152 million as compared with approximately $300 million in 2021, excluding amounts related to employee severance and early retirement programs. The anticipated decrease is primarily due to lower amortization of unrecognized actuarial gains/losses of $123 million, coupled with lower service cost of $45 million and other movements of $9 million, partially offset by higher interest cost of $29 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 2022 pension and postretirement expense by approximately $70 million, and a fifty-basis-point increase in our discount rate would decrease our 2022 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 2022 pension expense by approximately $43 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 from federal, state, and international tax audits. In accordance with the authoritative guidance for income taxes, we evaluate potential tax exposures and record tax liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes will be due. We adjust these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary.

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 need for and amount of valuation allowances for deferred tax assets including estimates of future taxable income in the applicable jurisdictions and the feasibility of on-going tax planning strategies, as applicable. 

26

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

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

Hedging - As discussed below in “Market Risk,” we use derivative financial instruments principally to reduce exposures to market risks resulting from fluctuations in foreign currency exchange and interest rates by creating offsetting exposures. For derivative contracts that are designated and qualify as fair value hedges the gain or loss on the derivative, as well as the offsetting gain or loss on the hedged items attributable to the hedged risk, is recognized in the consolidated statement of earnings. For our other 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 are also recognized in operating results. If we had elected not to use the hedge accounting provisions, gains (losses) deferred in stockholders’ (deficit) equity would have been recorded in our net earnings for these derivatives.

Fair value of non-marketable equity securities - For further details, see Item 8, Note 20. Deconsolidation of RBH.

Contingencies - Asdiscussed in Item 8, Note 17. Contingencies to our consolidated financial statements, legal proceedings covering a wide range of matters are pending or threatened against us, and/or our subsidiaries, and/or our indemnitees in various jurisdictions. We and our subsidiaries record provisions in the consolidated financial statements for pending litigation when we determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. The variability in pleadings in multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. Much of the tobacco-related litigation is in its early stages, and litigation is subject to uncertainty. At the present time, except as stated otherwise in Item 8, Note 17. Contingencies, while it is reasonably possible that an unfavorable outcome in a case may occur, after assessing the information available to it: (i) management has not concluded that it is probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss for any of the pending tobacco-related cases; and (iii) accordingly, no estimated loss has been accrued in the consolidated financial statements for unfavorable outcomes in these cases, if any. Legal defense costs are expensed as incurred.


27

Consolidated Operating Results
Our net revenues excise taxes on products and operating companies income by segment were as follows:
(in millions)202120202019
Net Revenues
European Union$12,275 $10,702 $9,817 
Eastern Europe3,544 3,378 3,282 
Middle East & Africa3,293 3,088 4,042 
South & Southeast Asia4,396 4,396 5,094 
East Asia & Australia5,953 5,429 5,364 
Americas (1)
1,843 1,701 2,206 
Other101 — — 
Net revenues$31,405 $28,694 $29,805 
Operating Income (Loss)
European Union$6,119 $5,098 $3,970 
Eastern Europe1,213 871 547 
Middle East & Africa1,146 1,026 1,684 
South & Southeast Asia1,506 1,709 2,163 
East Asia & Australia2,556 2,400 1,932 
Americas (1)
487 564 235 
Other(52)— — 
Operating income$12,975 $11,668 $10,531 
(in millions)201720162015
Net Revenues   
European Union$27,580
$27,129
$26,563
Eastern Europe, Middle East & Africa18,045
18,286
18,328
Asia22,635
20,531
19,469
Latin America & Canada9,838
9,007
9,548
Net Revenues$78,098
$74,953
$73,908
 


(in millions)201720162015
Excise Taxes on Products   
European Union$19,262
$18,967
$18,495
Eastern Europe, Middle East & Africa11,346
11,286
10,964
Asia11,845
11,850
11,266
Latin America & Canada6,897
6,165
6,389
Excise Taxes on Products$49,350
$48,268
$47,114
(in millions)201720162015
Operating Income   
Operating companies income:   
European Union$3,775
$3,994
$3,576
Eastern Europe, Middle East & Africa2,888
3,016
3,425
Asia4,149
3,196
2,886
Latin America & Canada1,002
938
1,085
Amortization of intangibles(88)(74)(82)
General corporate expenses(164)(161)(162)
Less:   
Equity (income)/loss in unconsolidated subsidiaries, net(59)(94)(105)
Operating Income$11,503
$10,815
$10,623

(1) As discussed inof 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 Item 8, Note 12. Segment Reporting to our consolidated financial statements, we evaluate segment performance and allocate resources based on operating companies income, which we define as operating income, excluding general corporate expenses and amortization20. Deconsolidation of intangibles, plus equity (income)/loss in unconsolidated subsidiaries, net. We believe it is appropriate to disclose this measure to help investors analyzeRBH.

Items affecting the business performance and trendscomparability of our various business segments.


Our shipment volume by segment for cigarettes and heated tobacco units wasresults from operations were as follows:

PMI Shipment Volume (Million Units)
 201720162015
Cigarettes   
European Union187,293
193,586
194,589
Eastern Europe, Middle East & Africa256,157
271,393
279,411
Asia234,253
260,029
281,350
Latin America & Canada84,223
87,938
91,920
Total Cigarettes761,926
812,946
847,270
Heated Tobacco Units   
European Union1,889
224
24
Eastern Europe, Middle East & Africa1,581
100
2
Asia32,729
7,070
370
Latin America & Canada27
—
—
Total Heated Tobacco Units36,226
7,394
396
Cigarettes and Heated Tobacco Units   
European Union189,182
193,810
194,613
Eastern Europe, Middle East & Africa257,738
271,493
279,413
Asia266,982
267,099
281,720
Latin America & Canada84,250
87,938
91,920
Total Cigarettes and Heated Tobacco Units798,152
820,340
847,666

Heated tobacco units is•Asset impairment and exit costs - See Item 8, Note 19. Asset Impairment and Exit Costs for details of the term we use to refer to heated tobacco consumables, which include our HEETS, HEETS Marlboro $216 million, $149 million and HEETS FROM MARLBORO, defined collectively as HEETS,$422 million pre-tax charges for the years ended December 31, 2021, 2020 and 2019, respectively, as well as MarlboroHeatSticks and Parliament HeatSticks.a breakdown of these costs by segment.

•Saudi Arabia customs assessments– See Item 8, Note 17. Contingencies for the details of the $246 million reduction in net revenues of combustible products included in the Middle East & Africa segment for the year ended December 31, 2021.
•Asset acquisition cost - See Item 8, Note 6. Acquisitions for the details of the $51 million pre-tax charge associated with the asset acquisition of OtiTopic, Inc. included in Other within the operating income table above for the year ended December 31, 2021.
•Russia excise and VAT audit charge - See Item 8, Note 17. Contingencies for details of the $374 million pre-tax charge included in the Eastern Europe segment for the year ended December 31, 2019.
•Canadian tobacco litigation-related expense - See Item 8, Note 17. Contingencies and Note 20. Deconsolidation of RBH for details of the $194 million pre-tax charge included in the Americas segment for the year ended December 31, 2019.
•Loss on deconsolidation of RBH - See Item 8, Note 20. Deconsolidation of RBH for details of the $239 million loss included in the Americas segment for the year ended December 31, 2019.

•Brazil indirect tax credit - Following a final and enforceable decision by the highest court in Brazil in October 2020, PMI recorded a gain of $119 million for tax credits representing overpayments of indirect taxes for the period from March 2012 through December 2019; these tax credits were applied to tax liabilities in Brazil during 2021. This amount was included as a reduction in marketing, administration and research costs in the consolidated statements of earnings for the year ended December 31, 2020, and was included in the operating income of the Americas segment. An additional amount of overpaid indirect taxes of approximately $90 million is dependent on a potential tax authority challenge.
28


Our net revenues by product category which include excise taxes billed to customers, were as follows:
PMI Net Revenues by Product CategoryPMI Net Revenues by Product CategoryPMI Net Revenues by Product Category
 
(in millions)201720162015(in millions)202120202019
Combustible Products Combustible Products
European Union$27,261
$27,067
$26,533
European Union$8,211 $8,053 $8,093 
Eastern Europe, Middle East & Africa17,886
18,276
18,328
Asia19,325
19,865
19,434
Latin America & Canada9,833
9,006
9,547
Eastern EuropeEastern Europe2,240 2,250 2,438 
Middle East & AfricaMiddle East & Africa3,148 3,031 3,721 
South & Southeast AsiaSouth & Southeast Asia4,385 4,395 5,094 
East Asia & AustraliaEast Asia & Australia2,414 2,468 2,693 
AmericasAmericas1,790 1,670 2,179 
Total Combustible Products$74,305
$74,214
$73,842
Total Combustible Products$22,190 $21,867 $24,218 
Reduced-Risk Products Reduced-Risk Products
European Union$320
$62
$30
European Union$4,064 $2,649 $1,724 
Eastern Europe, Middle East & Africa158
9
—
Asia3,310
666
35
Latin America & Canada5
2
1
Eastern EuropeEastern Europe1,304 1,128 844 
Middle East & AfricaMiddle East & Africa145 57 321 
South & Southeast AsiaSouth & Southeast Asia11 1 — 
East Asia & AustraliaEast Asia & Australia3,539 2,961 2,671 
AmericasAmericas53 31 27 
Total Reduced-Risk Products$3,793
$739
$66
Total Reduced-Risk Products$9,115 $6,827 $5,587 
 
OtherOther
OtherOther$101 $— $— 
Total PMI Net Revenues$78,098
$74,953
$73,908
Total PMI Net Revenues$31,405 $28,694 $29,805 
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.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.incentives, and excise taxes. These net revenue amounts consist of the sale of our heated tobacco units, IQOSheat-not-burn devices and related accessories, and other nicotine-containing products, which primarily include our e-vapor and oral nicotine products.


Net revenues in the Other category primarily consist of operating revenues generated from the sale of inhaled therapeutics, and oral and intra-oral delivery systems resulting from the third quarter 2021 acquisitions of Fertin Pharma A/S, Vectura Group plc. and OtiTopic, Inc.

PMI's heat-not-burn products include licensed KT&G heat-not-burn products.

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 Americas segment.

References to "Cost/Other" in the Consolidated Financial Summary table of total PMI and the six geographical 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); and amortization of intangibles. “Cost/Other” also includes the currency-neutral net revenue variance, unrelated to volume/mix and price components, attributable to: fees for certain distribution rights billed to customers in certain markets in the ME&A Region, and the Saudi Arabia customs assessment net revenue adjustment.

29


Our shipment volume by segment for cigarettes and heated tobacco units was as follows:
PMI Shipment Volume (Million Units)
202120202019
Cigarettes
European Union157,843 163,420174,319
Eastern Europe88,698 93,462100,644
Middle East & Africa127,911 117,999134,568
South & Southeast Asia141,923 144,788174,934
East Asia & Australia43,913 45,10049,951
Americas64,587 63,74972,293
Total Cigarettes624,875 628,518706,709
Heated Tobacco Units
European Union28,208 19,842 12,569 
Eastern Europe25,650 20,898 13,453 
Middle East & Africa2,140 1,022 2,654 
South & Southeast Asia240 36 — 
East Asia & Australia38,162 33,862 30,677 
Americas576 451 299 
Total Heated Tobacco Units94,976 76,111 59,652 
Cigarettes and Heated Tobacco Units
European Union186,051 183,262 186,888 
Eastern Europe114,348 114,360 114,097 
Middle East & Africa130,051 119,021 137,222 
South & Southeast Asia142,163 144,824 174,934 
East Asia & Australia82,075 78,962 80,628 
Americas65,163 64,200 72,592 
Total Cigarettes and Heated Tobacco Units719,851 704,629 766,361 

Following the deconsolidation of our Canadian subsidiary, we continue to report the volume of brands sold by RBH for which other PMI subsidiaries are the trademark owners. These include HEETS, Next, Philip Morris and Rooftop.

Heated tobacco units ("HTU") is the term we use to refer to heated tobacco consumables, which include our HEETS, HEETS Creations, HEETS Dimensions, HEETS Marlboro and HEETS FROM MARLBORO (defined collectively as HEETS), MarlboroDimensions, MarlboroHeatSticks, Parliament HeatSticks and TEREA, as well as the KT&G-licensed brands, Fiit and Miix (outside of South Korea).

Market share for HTUs is defined as the total sales volume for HTUs as a percentage of the total estimated sales volume for cigarettes and HTUs.

Shipment volume of heated tobacco units to the United States is included in the heated tobacco unit shipment volume of the Americas 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 internal and external sources.sources and may, in defined instances, exclude the People's Republic of China and/or our duty free business.


2017
30

2020 and 2021 estimates for total industry volume and market share in certain geographies reflect limitations on the availability and accuracy of industry data during pandemic-related restrictions.

In-market sales ("IMS") is defined as sales to the retail channel, depending on the market and distribution model.

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).

Southeast Europe is defined as Albania, Bosnia & Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia.

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

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 market-specific 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 estimated total industry/market volumes in such circumstances on a basis that excludes the impact of distributor and/or estimated trade inventory movements improves the comparability of performance and trends for these measures over different reporting periods.


2021 compared with 20162020


The following discussion compares our consolidated operating results for the year ended December 31, 2017,2021, with the year ended December 31, 2016.2020.


Estimated international industry cigarette and heated tobacco unit volume, excluding China and the United States,U.S., of 2.82.6 trillion, was downincreased by 2.8%.2.4%, driven by the EU, Middle East & Africa, South & Southeast Asia and Americas Regions, partly offset by the Eastern Europe and East Asia & Australia Regions, as described in the Regional sections.


Our total shipment volume decreasedincreased by 2.7%2.2%, principally due to:driven by:


European Union,•the EU, reflecting higher heated tobacco unit shipment volume across the Region, particularly in Germany, Hungary, Italy and Poland, partly offset by lower cigarette shipment volume, notably in the Czech Republic, France and Germany;
•Middle East & Africa, reflecting higher cigarette shipment volume (primarily in PMI Duty Free and Turkey, partly offset by the GCC and North Africa), as well as higher heated tobacco unit shipment volume across the Region;
•East Asia & Australia, reflecting higher heated tobacco unit shipment volume driven by Japan, partly offset by lower cigarette shipment volume, predominantly in South Korea; and
•Americas, mainly reflecting higher cigarette shipment volume, primarily in Brazil and Mexico, partially offset by Argentina;
partly offset by
•South & Southeast Asia, primarily reflecting lower cigarette shipment volume, mainly in Greece, Italy and Spain, partlythe Philippines, partially offset by higher heated tobacco unitIndonesia and Pakistan.

Total shipment volume;
EEMA, notablyvolume in Eastern Europe was essentially flat, reflecting lower cigarette shipment volume, mainly in Russia Saudi Arabia - where our cigarette shipment volume declined by 35.8%, impacted by the new excise tax implemented in June 2017 that resulted in the doubling of retail prices - and Ukraine; partly offset by higher cigarette shipment volume in North Africa, notably Algeria, and higher heated tobacco unit shipment volume;
Asia, notably reflecting lower cigarette shipment volume in Indonesia, Japan, Korea, Pakistan - impacted by excise tax-driven price increases and an increase in the prevalence of illicit trade - and the Philippines;Ukraine, almost fully offset by higher heated tobacco unit shipment volume, mainlyprimarily in JapanRussia and Korea; andUkraine.
Latin America & Canada, notably reflecting lower cigarette shipment volume in Argentina, Brazil, Canada, Colombia and Mexico.

31

Impact of Inventory Movements

Excluding the net favorable net impact of estimated cigarette and heated tobacco unitdistributor inventory movements of approximately 3.38.4 billion units, our total shipment volume decreasedin-market sales increased by 3.1%. The favorable inventory movements were1.0%, driven primarily by approximately 8.5 billion units net in Japan reflecting: the increasing demand for HeatSticks, anticipated to furthera 21.1% increase in the first quarter of 2018 following a planned lifting of the restriction on IQOS device sales; the establishment of appropriate distributor inventory levels of heated tobacco units, given the current high dependence on a single manufacturing center; and the transition from air freight to sea freight of heated tobacco units, largely completed in the fourth quarter of 2017. These favorable inventory movements were partly offset by a reduction1.5% decrease in cigarettes.
The net favorable impact of combustible product inventory levels,approximately 8.4 billion units reflected:
•A net favorable impact of 5.6 billion cigarettes, mainly in:driven by 2020 movements in Japan, PMI Duty Free and Russia; and
•A net favorable impact of 2.7 billion heated tobacco units, primarily reflecting the European Union, notablygrowing category and driven by Japan, Italy, PMI Duty Free and Spain; EEMA, notably North Africa, Russia and Saudi Arabia.Russia.



Our total heated tobacco unit in-market sales volume in the year was 92.5 billion units.

Our cigarette shipment volume by brand and heated tobacco unit shipment volume are shownwas as follows:
PMI Shipment Volume by Brand (Million Units)
20212020Change
Cigarettes
Marlboro239,905 233,158 2.9 %
L&M84,342 91,098 (7.4)%
Chesterfield58,800 52,139 12.8 %
Philip Morris42,395 45,645 (7.1)%
Parliament41,621 34,737 19.8 %
Sampoerna A37,815 32,862 15.1 %
Dji Sam Soe22,627 24,754 (8.6)%
Lark15,487 15,489 — %
Bond Street14,175 24,113 (41.2)%
Next8,849 8,980 (1.5)%
Others58,859 65,543 (10.2)%
Total Cigarettes624,875 628,518 (0.6)%
Heated Tobacco Units94,976 76,111 24.8 %
Total Cigarettes and Heated Tobacco Units719,851 704,629 2.2 %
Note: Lark includes Lark Harmony; Next includes Next Dubliss; Philip Morris includes Philip Morris/Dubliss; and Sampoerna A includes Sampoerna.

The increase in the table below:
PMI Shipment Volume by Brand (Million Units)
 Full-Year
 2017
2016
Change
Cigarettes
   
Marlboro270,366
281,720
(4.0)%
L&M90,817
96,770
(6.2)%
Chesterfield55,075
46,291
19.0 %
Philip Morris48,522
35,914
35.1 %
Parliament43,965
45,671
(3.7)%
Bond Street37,987
44,567
(14.8)%
Lark24,373
27,571
(11.6)%
Others190,821
234,442
(18.6)%
Total Cigarettes761,926
812,946
(6.3)%
Heated Tobacco Units36,226
7,394
+100.0%
Total Cigarettes and Heated Tobacco Units798,152
820,340
(2.7)%

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


CigaretteOur cigarette shipment volume of the following brands decreased: L&Mincreased:
•Marlboro, mainly driven by Mexico, PMI Duty Free, Russia and Turkey, partly offset by France, Japan and the Philippines;
•Chesterfield, primarily driven by Brazil, the Philippines and Russia, partly offset by Saudi Arabia;
•Parliament, mainly due todriven by Russia, Saudi Arabia and Turkey, partly offset by Algeria, Argentina, ColombiaSouth Korea; and Kazakhstan; Parliament
•Sampoerna A in Indonesia, primarily driven by premium A Mild.

Our cigarette shipment volume of the following brands decreased:
•L&M, mainly due to Japan,Egypt, Germany, Poland, Russia and Saudi Arabia,Turkey;
•Philip Morris, primarily due to Indonesia, Italy and Russia, partly offset by Kazakhstan; Japan;
•Dji Sam Soe in Indonesia, mainly due to Dji Sam Soe Magnum Mild;
32

•Bond Street, mainlyprimarily due to Kazakhstan, Russia and Ukraine;Lark
•Next, principallyprimarily due to Japan;Canada and "Others,Ukraine, partly offset by Russia; and
•"Others," notably due to: mid-price Fortune (Philippines) and Sampoerna U (Indonesia); and low-price Jackpot (Philippines) and More (Philippines); partly offset by mid-price Sampoerna Hijau (Indonesia) and low-price Morven (Pakistan).

PMI's cigarette shipment volume for Lark was flat.

2021 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 total industry cigarette and heated tobacco unit sales volume, decreased by 0.4 points to 27.3%, reflecting:
•Total international market share for cigarettes of 23.8%, down by 0.9 points; and
•Total international market share for heated tobacco units of 3.5%, up by 0.5 points.
Our total international cigarette sales volume as a percentage of total industry cigarette sales volume was down by 0.8 points to 24.9%, mainly duereflecting lower cigarette market share and/or an unfavorable geographic mix impact, notably in Japan, the Philippines and Russia, partly offset by Indonesia and Turkey.

In 2021, we owned five of the world's top 15 international cigarette brands, with international cigarette market shares as follows: Marlboro, 9.5%; L&M, 3.4%; Chesterfield, 2.3%; Philip Morris, 1.7%; and Parliament, 1.7%.

33

Key Market Data

Key market data regarding total market size, our shipments and market share were as follows:
PMI Shipments (billion units)
PMI Market Share (%)(1)
MarketTotal Market
(billion units)		TotalCigaretteHeated Tobacco UnitTotalHeated Tobacco Unit
202120202021202020212020202120202021202020212020
Total2,613.22,551.1719.9704.6624.9628.595.076.127.327.73.53.0
European Union
France34.336.615.216.315.016.10.20.243.944.90.70.5
Germany74.174.628.629.126.327.42.31.638.639.03.12.2
Italy70.467.438.634.629.729.08.95.653.052.211.58.1
Poland49.345.618.417.815.315.43.12.437.339.06.35.2
Spain42.741.813.213.212.612.80.50.431.131.41.21.0
Eastern Europe
Russia216.8219.168.869.252.555.616.313.631.732.37.46.3
Middle East & Africa
Saudi Arabia21.121.78.99.18.79.00.20.141.639.01.00.3
Turkey124.2114.855.747.555.747.5——44.841.3——
South & Southeast Asia
Indonesia296.2276.282.879.582.879.5——28.028.8——
Philippines55.462.134.441.734.241.70.2—62.067.20.30.1
East Asia & Australia
Australia9.711.03.13.33.13.3——32.329.9——
Japan139.5142.955.251.122.122.233.128.938.537.122.920.4
South Korea71.771.614.114.89.410.24.74.619.720.76.56.5
Americas
Argentina36.133.619.920.519.920.5——55.161.0——
Mexico32.030.720.519.520.419.50.10.164.063.70.30.2
(1) Market share estimates are calculated using IMS data
Note: % change for Total Market and PMI shipments is computed based on millions of units. "-" indicates volume below 50 million units and market share below 0.1%

34



Financial Summary
Financial Summary -
Years Ended December 31,		Change
Fav./(Unfav.)		Variance
Fav./(Unfav.)
20212020TotalExcl.
Curr. & Acquis.		TotalCur-
rency		Acqui-sitionsPriceVol/
Mix		Cost/Other
(in millions)
Net Revenues (1)
$ 31,405 $ 28,694 9.4 %6.7 %$2,711 $678 $109 $667 $1,538 $(281)
Cost of Sales(10,030)(9,569)(4.8)%(1.2)%(461)(266)(82)— (530)417 
Marketing, Administration and Research Costs (2)
(8,304)(7,384)(12.5)%(10.4)%(920)(143)(8)— — (769)
Amortization of Intangibles(96)(73)(31.5)%(5.5)%(23)(1)(18)— — (4)
Operating Income$ 12,975 $ 11,668 11.2 %8.9 %$1,307 $268 $1 $667 $1,008 $(637)
(1) Cost/Other variance includes a $246 million reduction in net revenues in 2021 related to low-price brandsthe Saudi Arabia customs assessments. For more details, see Item 8, Note 17. Contingencies.
(2) Cost/Other variance includes charges in Indonesia, Pakistan,2021 and 2020 of $216 million and $149 million, respectively, for asset impairment and exit costs. Cost/Other variance also includes in 2021 the pre-tax charge of $51 million associated with the asset acquisition cost of OtiTopic, Inc., and in 2020 the Brazil indirect tax credit of $119 million. For more details, see Item 8, Note 6. Acquisitions, Item 8, Note 12. Segment Reporting and Item 8, Note 19. Asset Impairment and Exit Costs.

Net revenues, excluding currency and acquisitions, increased by 6.7%, mainly reflecting: favorable volume/mix, primarily driven by higher heated tobacco unit volume (notably in the EU, particularly Germany, Hungary, Italy and Poland, as well as Japan, Russia and Ukraine) and higher device volume (notably in the EU, primarily Italy, and Japan, partly offset by South Korea), partially offset by lower cigarette volume (mainly in the EU Region, notably the Czech Republic, France and Germany, as well as the GCC, North Africa, the Philippines, Russia and Ukraine.

Cigarette shipment volume of the following brands increased: Chesterfield, notably driven by Argentina, Brazil, Colombia, Saudi Arabia, Turkey and Venezuela,Ukraine, partly offset by ItalyIndia, Indonesia, PMI Duty Free and Russia;Turkey) and Philip Morris, mainlyunfavorable cigarette mix (primarily in Germany, Japan and Russia, partially offset by Indonesia and PMI Duty Free); and a favorable pricing variance (notably driven by the Czech Republic, Germany, Japan, Kazakhstan, the Philippines, Russia and Ukraine, notably reflecting successful portfolio consolidation of local, low-price brands in "Others,"Turkey, partly offset by ArgentinaAustralia, Indonesia, Poland and Italy.

Our net revenues and excise taxes on products were as follows:
  For the Years Ended December 31, Variance
(in millions) 2017 2016 $ %
Net revenues $78,098
 $74,953
 $3,145
 4.2%
Excise taxes on products 49,350
 48,268
 1,082
 2.2%
Net revenues, excluding excise taxes on products $28,748
 $26,685
 $2,063
 7.7%

Net revenues, which include excise taxes billed to customers, increasedUkraine); partially offset by $3.1 billion.the unfavorable impact of the Saudi Arabia customs assessments of $246 million, shown in "Cost/Other". Excluding excise taxes,the unfavorable impact of the Saudi Arabia customs assessments of $246 million, net revenues increased by $2.1 billion, due to:10.3%, or 7.6% excluding favorable currency of $678 million and acquisitions of $109 million.

price increases ($1.4 billion) and
favorable volume/mix ($1.1 billion), partly offset by
unfavorable currency ($437 million).


The unfavorablefavorable currency in net revenues was due primarily to the Argentine peso, Egyptian pound, Japanese yen, PhilippineAustralian dollar, Czech krona, Euro, Indonesian rupiah, Mexican peso and Turkish lira,Philippine peso, partially offset by the Russian ruble.ruble and Turkish lira.


Net revenues include $3.8$9.1 billion in 20172021 and $739 million$6.8 billion in 20162020 related to the sale of RRPs,RRPs. For the year ended December 31, 2021, IQOS devices accounted for over 6% of RRP net revenues, with a step-up in the second half of 2021 reflecting the IQOS ILUMA launch; outweighing the effect of supply constraints on other IQOS versions.

Operating income, excluding currency and acquisitions, increased by 8.9%, primarily reflecting: favorable volume/mix, mainly driven by Japan. These net revenue amounts include excise taxes billed to customers. Excluding excise taxes,higher heated tobacco unit volume, partly offset by lower cigarette volume and unfavorable cigarette mix (each mainly reflecting the same geographies as for net revenues for RRPs were $3.6 billion in 2017noted above); a favorable pricing variance; and $733 million in 2016.In some jurisdictions, including Japan, we are not responsible for collecting excise taxes. In 2017, approximately $0.9 billion of our $3.6 billion in RRP net revenues, excluding excise taxes, were from IQOS deviceslower manufacturing costs (driven by significant productivity gains related to reduced-risk and accessories.

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

higher excise taxes resulting from changes in retail prices and tax rates ($4.6 billion), partially offset by
favorable currency ($1.9 billion) and
lower excise taxes resulting from volume/mix ($1.6 billion).
Our cost of sales; marketing, administration and research costs; and operating income were as follows:
  For the Years Ended December 31, Variance
(in millions) 2017 2016 $ %
Cost of sales $10,432
 $9,391
 $1,041
 11.1%
Marketing, administration and research costs 6,725
 6,405
 320
 5.0%
Operating income 11,503
 10,815
 688
 6.4%

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

higher cost of sales resulting from volume/mix ($1.1 billion),combustible products); partly offset by
lower manufacturing costs ($36 million) and
favorable currency ($30 million).

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

higher expenses ($570 million, largely reflecting increased investment behind reduced-risk products, predominately in the European Union and Asia), partly offset by
favorable currency ($250 million).

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

price increases ($1.4 billion), partly offset by
higher marketing, administration and research costs, ($570 million)including an unfavorable comparison related to the Brazil indirect tax credit in 2020, higher asset impairment and
exit costs (mainly related to organizational design optimization, as well as product distribution restructuring in South Korea) and asset acquisition costs related to OtiTopic; and the unfavorable currency ($157 million)impact of the Saudi Arabia customs assessments (as noted above for net revenues).


Interest expense, net, of $914$628 million increased by $23$10 million due primarily to unfavorably currency and higher average debt levels, partly offset by higher interest income.(1.6%).


Our effective tax rate increased by 12.80.1 percentage pointspoint to 40.7%21.8%. The 2017We estimate that our 2022 effective tax rate was unfavorably impacted by $1.6 billion due to the Tax Cuts and Jobs Act.will be around 22%, excluding discrete tax events. For further details, see Item 8, Note 11. Income Taxes to our consolidated financial statements. We are continuing to evaluate the impact that the Tax Cuts and Jobs Act will have on our tax liability. Based upon our current interpretation of the Tax Cuts and Jobs Act, we estimate that our 2018 effective tax rate will be approximately 28%, subject to future regulatory developments and earnings mix by taxing jurisdiction..


We are regularly examined by tax authorities around the world, and we are currently under examination in a number of jurisdictions. It is reasonably possible that within the next 12 months certain tax examinations will close, which could result in a change in unrecognized tax benefits along with related interest and penalties. An estimate of any possible change cannot be made at this time.
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Net earnings attributable to PMI of $6.0 billion decreased by $932 million (13.4%). This decrease was due primarily to a higher effective tax rate as discussed above, partly offset by higher operating income. Diluted and basic EPS of $3.88 decreased by 13.4%. Excluding

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

2016 compared with 2015

The following discussion compares our consolidated operating results for the year ended December 31, 2016, with the year ended December 31, 2015.
Our cigarette shipment volume decreased by 4.1%, or by 4.7% excluding net estimated inventory movements, due to:

European Union, principally Italy, Germany and Greece, partly offset by Poland and Spain;
EEMA, mainly North Africa, primarily Algeria, and Russia, partly offset by Saudi Arabia and Ukraine;
Asia, principally Indonesia, Pakistan, the Philippines and Thailand, partly offset by Korea; and
Latin America & Canada, predominantly Argentina, partly offset by Mexico.

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

Our cigarette shipment volume by brand is shown in the table below:
PMI Cigarette Shipment Volume by Brand (Million Units)
 Full-Year
 2016
2015
Change
Marlboro281,720
285,583
(1.4)%
L&M96,770
97,884
(1.1)%
Chesterfield46,291
41,397
11.8 %
Parliament45,671
44,879
1.8 %
Bond Street44,567
43,608
2.2 %
Philip Morris35,914
35,815
0.3 %
Lark27,571
28,828
(4.4)%
Others234,442
269,276
(12.9)%
Total PMI812,946
847,270
(4.1)%

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

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

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

Our net revenues and excise taxes on products were as follows:
  For the Years Ended December 31, Variance
(in millions) 2016 2015 $ %
Net revenues $74,953
 $73,908
 $1,045
 1.4 %
Excise taxes on products 48,268
 47,114
 1,154
 2.4 %
Net revenues, excluding excise taxes on products $26,685
 $26,794
 $(109) (0.4)%

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

unfavorable currency ($1.3 billion) and
unfavorable volume/mix ($450 million), partly offset by
price increases ($1.6 billion).
The unfavorable currency was due primarily to the Argentine peso, Canadian dollar, Egyptian pound, Euro, Kazakh tenge, Mexican peso, Philippine peso, Russian ruble and Turkish lira, partially offset by the Japanese yen.
Net revenues include $739 million in 2016 related to sale of RRPs, mainly driven by Japan. This amount includes excise taxes billed to customers. Excluding excise taxes, net revenues for RRPs were $733 million in 2016.In some jurisdictions, including Japan, we are not responsible for collecting excise taxes. Approximately 22% of our $733 million in 2016 RRP net revenues, excluding excise taxes, were from IQOS devices.

Excise taxes on products increased by $1.2 billion, due to:

higher excise taxes resulting from changes in retail prices and tax rates ($5.3 billion), partly offset by
favorable currency ($3.9 billion) and
lower excise taxes resulting from volume/mix ($236 million).
Our cost of sales; marketing, administration and research costs; and operating income were as follows:
  For the Years Ended December 31, Variance
(in millions) 2016 2015 $ %
Cost of sales $9,391
 $9,365
 $26
 0.3 %
Marketing, administration and research costs 6,405
 6,656 (251) (3.8)%
Operating income 10,815
 10,623
 192
 1.8 %

Cost of sales increased by $26 million, due to:

higher cost of sales resulting from volume/mix ($242 million), partly offset by
favorable currency ($216 million).


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

lower expenses ($210 million, driven by a favorable comparison to 2015, notably related to cigarette brand building and business optimization initiatives, partly offset by increased support behind Reduced-Risk Products) and
favorable currency ($41 million).

Operating income increased by $192 million, due primarily to:

price increases ($1.6 billion),
lower marketing, administration and research costs ($210 million) and
the non-recurrence of the 2015 pre-tax charges for asset impairment and exit costs ($68 million), partly offset by
unfavorable currency ($1.0 billion) and
unfavorable volume/mix ($692 million).

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

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

Net earnings attributable to PMI of $7.0$9.1 billion increased by $94 million (1.4%)$1.1 billion or 13.1%. This increase was due primarily to higher operating income as discussed above, partially offset by a higher effective tax rate. Basic and lower interest expense, net. Diluted and basicdiluted EPS of $4.48$5.83 increased by 1.4%13.0%. Excluding an unfavorablea favorable currency impact of $0.46,$0.12, diluted EPS increased by 11.8%10.7%.


2020 compared with 2019


For a discussion comparing our consolidated operating results for the year ended December 31, 2020, with the year ended December 31, 2019, 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, 2020, which was filed with the U.S. Securities and Exchange Commission on February 9, 2021.


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 businesscompany 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 and nicotine-containing 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. 17. Contingencies; and
•governmental investigations.


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

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



Much of the regulation that shapes the business environment in which we operate is driven by the World Health Organization's (“WHO”) Framework Convention on Tobacco Control (“FCTC”(the “FCTC”) of the World Health Organization (the "WHO"), which entered into force in 2005. The FCTC is the first international public health treaty and has as its main objective to establish a global agenda for tobacco regulation, with the purpose of reducing tobacco use. To date, 180182 countries and the European Union are Parties to the FCTC. The treaty requires Parties to have in place various tobacco control measures and recommends others. The FCTC governing body, the Conference of the Parties (“CoP”), has also adopted non-binding guidelines and policy recommendations related to certain articles of the FCTC that go beyond the text of the treaty. In October 2018, the CoP recognized the need for more scientific 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.


We have opposed certain measuresPrior to CoP 9 that took place in November 2021, the WHO and continuethe WHO FCTC Secretariat published two reports on novel and emerging tobacco products. The reports were noted by CoP 9 and related substantive discussions and decisions were deferred to engage in a dialogue with regulators with respect to those measures that we do not believe would protect public health and, if implemented, could disrupt competition, severely limit our ability to market and sell our products to adult smokers, or increase illicit trade. Certain measures are discussed in more detail below.CoP 10, currently scheduled for 2023. It is not possible to predict whether or to what extent measures recommended by the WHO's reports will be implemented as the reports are not binding to the WHO Member States.

We believe that when better alternatives to cigarettes exist, the discussion should not be whether these alternatives should be made available to the more than one billion people who smoke today, but how fast, and within what regulatory framework to maximize their adoption while minimizing unintended use. Therefore, we advocate for regulatory frameworks that recognize a significant difference on a risk continuum between combustible tobacco on the one hand and non-combustible tobacco and other nicotine-containing products on the other. Regulation should include measures that will accelerate switching to non-combustible products, for example, by allowing adult consumers who would not otherwise quit to receive truthful and non-misleading information about such products to
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enable them to make informed decisions and by applying uniform product standards to enable manufacturers to demonstrate the safety of these products as well as the absence of combustion. Regulation should also include specific rules for 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. Importantly, regulation must include measures designed to prevent initiation by youth and non-smokers. We support mandated health warnings, minimum age laws, restrictions on advertising, and public place smoking restrictions. We also support regulatory measures that help reduce illicit trade.

Certain measures are discussed in more detail below and in the FCTC guidelines will be implemented.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 to turn to illicit trade, and ultimately undercut government revenue objectives, disrupt the competitive environment, and encourage criminal activity. Other jurisdictions have imposed, or are seeking to impose, levies or other taxes specifically on tobacco companies, such as taxes on revenues and/or profits.


World Customs Organization Developments: In 2020, the World Customs Organization (the “WCO”) amended the harmonized system nomenclature to introduce dedicated custom codes for novel tobacco and nicotine products, including heated tobacco products, e-cigarettes and other nicotine-containing products. The amendments became effective as of January 1, 2022. These amendments require WCO member states to transfer products from customs codes in the current nomenclature to the new one. These amendments are not expected to significantly impact current customs duty rates.

EU Tobacco Products Directive: In April 2014, the EU adopted the text of a significantly revised EU Tobacco Products Directive (TPD)(the "TPD"), which entered into force in May 2016. All 28 Member States and Norwaymember 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 Statesmember 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 expiringthat expired in May 2020;
•security features and tracking and tracing measures that will becomebecame effective onin May 20, 2019,2019; and will increase operational expenses; and
•a framework for the regulation of novel tobacco products and e-cigarettes, including requirements for health warnings and information leaflets, a prohibition on product packaging text related to reduced risk, and the introduction of notification requirements or authorization procedures in advance of commercialization.


In May 2021, the European Commission published its first report on the application of the TPD. The report identifies significant progress made due to the implementation of the TPD and where there is still room for improvement. Most notably, it finds that the EU legislation has enhanced tobacco control, contributed to protecting the health of EU citizens by providing Member States with strong rules to address the use of tobacco products in the EU. The TPD reportedly achieved the 2% reduction target of the impact assessment with decreased smoking prevalence among youth. The report also concludes that there is scope for improvement in certain areas, such as enforcement at national level, assessment of ingredients, and a better consideration for novel and emerging products.

In November 2021, the European Commission published the implementation roadmap to Europe's Beating Cancer Plan (the "Plan"). According to the Plan, a revision of the TPD is planned for 2024.

EU Tobacco Excise Directive: The EU Commission is preparing a legislative proposal for the revision of the 2011 EU Tobacco Excise Directive that may include definitions and tax treatment for novel tobacco and nicotine-containing products, including heated tobacco products and e-cigarettes. The proposal is expected to be finalized and adopted by the EU Council in 2023. The adoption of the final proposal by the EU Council will require unanimous agreement by all EU member states.

Plain Packaging and Other Packaging Restrictions: Plain packaging legislation bans the use of branding, logos and colors on packaging other than the brand name and variant that may be printed only in specified locations and in a uniform font. To date, plain packaging laws have been adopted in certain markets in all of our operating segments, including the key markets of Australia, France, Georgia, Hungary, Ireland,Saudi Arabia and Turkey. Some countries, such as Canada, Denmark, Israel and New Zealand Norway, Slovenia and the U.K. have adopted plain packaging laws, which are in various degrees of implementation.

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

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


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


Restrictions and Bans on the Use of Ingredients: The WHO and others in the public health community have recommended restrictions or total bans on the use of some or all ingredients in tobacco products, including menthol. Broad restrictions and ingredient bans would require us to reformulate our American blend tobacco products and could reduce our ability to differentiate these products in the market in the long term. MentholIn many countries, menthol bans would eliminate the entire category of mentholated tobacco products. The European Union has banned flavoredcigarettes and roll-your-own tobacco products subjectwith characterizing flavors. Other tobacco products, including heated tobacco products, are exempted from this flavor ban. The EU Commission is required to anwithdraw this exemption until May 2020 for menthol.a particular product category if it determines that there is a substantial change of circumstances, such as a significant increase of EU-wide sales volumes in such product category. 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 CanadaBrazil and Brazil. While the Canadian ingredient ban initially exempted menthol, amendments to the federal Tobacco Act banned menthol in cigarettes as of October 2017. In addition, the Canadian parliament is considering further amendments to the Act that would extend the menthol ban to all tobacco products. The majority of Canadian provinces have also adopted or are in the process of adopting menthol bans. The Brazil ingredientsCanada.

ban, which would prohibit the use of virtually all ingredients with flavoring or aromatic properties, is not in force due to a legal challenge by a tobacco industry union, of which our Brazilian subsidiary is a member. Other lawsuits are also pending against the Brazil ingredients ban. It is not possible to predict the outcome of these legal proceedings.
Bans on Display of Tobacco Products at Retail: In a number of our markets, including, but not limited to, Australia Canada, Norway,and Russia, and Singapore, governments have banned the display of tobacco products at the point of sale. Other countries are also considering similar bans.


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


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


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


Other Regulatory Issues: Some regulators are considering, or in some cases have adopted, regulatory measures designed to reduce the supply of tobacco products. These include regulations intended to reduce the number of retailers selling tobacco products by, for example, reducing the overall number of tobacco retail licenses available or banning the sale of tobacco products within arbitraryspecified distances of certain public facilities. In addition, South Africa banned the sale of tobacco products, e-cigarettes, and electronic devices that heat tobacco for several months during the COVID-19 pandemic. The ban, which was lifted on August 17, 2020, resulted in a significant increase of illicit trade of tobacco products.


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 product filters, under Extended Producer Responsibility ("EPR") schemes, entered into force on July 2, 2019. To date, some member states transposed the Directive into national legislation. We expect remaining member states to transpose the EU Single-Use Plastics Directive into national legislation including EPR schemes by January 2023. While we cannot predict the impact of this initiative on our business at this time, we are monitoring developments in this area.

Illicit Trade: The illicit Illicit tobacco trade creates a cheap and unregulated supply of tobacco products, undermines efforts to reduce smoking prevalence, especially among youth, damages legitimate businesses and intellectual property rights, stimulates organized crime, increases corruption and reduces government tax revenue. IllicitWe generally estimate that, excluding China and the U.S., illicit trade may account for as much as 10%12% of global cigarette consumption; this includes counterfeit, contraband and the growingpersistent 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. WeCurrently, we estimate that illicit trade in the European Union accounted for slightly less than 10%approximately 8% of total cigarette consumption in 2016.2021.


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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 of these control measures in free trade zones, controls on duty free and Internet saleschannels and the implementation of tracking and tracing technologies. To date, 54 Parties have signed the Protocol, and 3563 Parties, including the European Union, have ratified it. The Protocol will comecame into force once the fortieth Party ratifies it, after which countriesin September 2018. Parties must implementstart implementing its measures viaprovisions in their national legislation. In November 2021, the second Meeting of the Parties to the Protocol decided, among others, to focus on the implementation of a framework for global information sharing to combat illicit tobacco trade and enable the parties to exchange products' tracking and tracing information in a secure manner. We expect,welcome this decision and welcome,expect that other Parties will ratify the Protocol.


As discussedWe devote substantial resources to help prevent illicit trade in the EU Tobacco Products Directive section above, the EU regulations that mandatecombustible 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 ofregulations for cigarettes and roll-your-own products manufactured or destined for the EU will becomebecame effective on May 20, 2019. The effective date for other tobacco-containing products, including some of our RRPs such as the heated tobacco units, used with IQOS, is May 20, 2024. While we expect that this regulation 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 million in funding over a 20-year period to address issues such as combating the illegal cigarette trade and increasing the quality and quantity of locally-grown tobacco.


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

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


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

Reduced-Risk Products (RRPs)


Our Approach to RRPs:We recognize that smoking cigarettes causes serious diseases and that the best way to avoid the harms of smoking is never to start or to quit. Nevertheless, it is predicted that over the next decadeby 2025, the number of smokers will remain largely unchanged from the current estimate of 1.1 billion, despite the considerable efforts to discourage smoking.


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


For adult 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:are to: (i) to develop and commercialize products that present less risk of harm to adult smokers who switch to those products versus continued smoking; and to(ii) educate and convince convince current adult smokers who would otherwise continue to smoke to switch to those products.


We recognize that this transformation from cigarettes to RRPs will take time and that the speed of transformation will depend in part upon factors beyond our control, such as the willingness of governments, regulators and other policy groups to embrace RRPs as a desired alternative to continued cigarette smoking. We also recognize that our part in this transformation must be funded from our existing cigarette business. For as long as a significant number of adult smokers continues to smoke, itresponsible leadership of the category is critical thatcritical. We aim to maintain our competitive position in the industry be led by responsible and ethical manufacturers. Therefore, during the transformation, we intend to remaincigarette market through selective investment. As a leading international cigarette manufacturer.manufacturer, we will continue to accelerate this transformation by using our regulatory and commercial expertise and extensive commercial and distribution infrastructure as an effective platform for the commercialization of our RRPs and communication with adult smokers and trade partners about the benefits of switching to our RRPs.


While seeking to remain competitive in the cigarette market, we are judiciously reallocating resources from cigarettes to RRPs and are streamlining our cigarette portfolio.

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
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present, are likely to present, or have the potential to present less risk of harm to adult smokers who switch to them versus continued smoking. We draw upon a team of expert scientists and engineers from a broad spectrum of scientific disciplines and our extensive learnings of adult consumer preferences to develop and assess our RRPs. Our efforts are guided by the following key objectives:


•to develop RRPs that adult smokers who would otherwise continue to smoke find to be satisfying alternatives to smoking;
•for those adult smokers, our goal is to offer RRPs with a scientifically substantiated risk-reduction profile that approaches as closely as possible that associated with smoking cessation;
•to substantiate the reduction of risk for the individual adult smoker and the reduction of harm to the population as a whole, based on scientific evidence of the highest standard that is made available for scrutiny and review by external independent scientists and relevant regulatory bodies; and
•to advocate for the development of science-based regulatory frameworks for the development and commercialization of RRPs, including the communication of scientifically substantiated information to enable adult smokers to make better consumer choices.


Our RRP Platforms:Our product development is based on the elimination of combustion via tobacco heating and other innovative systems, for aerosol generation, which we believe isare 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.


FourFive PMI-developed or improved RRP platforms are in various stages of development and commercialization readiness:


Platform 1 uses a precisely controlled heating device that we are commercializing under the incorporating our IQOS brand name, 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. As anticipated,We completed a 6+6-month exposure response study and shared the results ofwith the FDA in April 2020. The study showed that for the group that switched to our Platform 1 product, the eight clinical risk endpoints that were tested as co-primary endpoints in the first six-month term moved in the same direction as observed for smoking cessation after 12 months of the 6+6 month exposure responseuse of this product. In addition, we completed an 18-month combined chronic toxicity and carcinogenicity study were receivedin mice, which was on-going at the

end time of 2017, andour FDA submission. We shared the related report is under preparation. We expect to submit the final report for these results towith the FDA in MayAugust 2018. In addition to the original version of 2018.Platform 1 which relies on a heating technology using a blade, a new version of Platform 1 is now available using induction. All studies referenced above were conducted with the blade version of Platform 1. We expect to receivebelieve that there is full comparability between the results ofversions, therefore the second six-month term of the study for analysis in the second quarter of 2018.data from these studies remain valid.


Platform 2 uses a pressed carbon heat source which, when ignited, generates ana nicotine-containing aerosol by heating tobacco. The results of our pharmacokinetic study (that measured the nicotine pharmacokinetic profile andas well as subjective effects) and of our five-day reduced exposure study with Platform 2 indicate that this platform could be an acceptable substitute for adult smokers who seek an alternative to cigarettes. Furthermore, theThe reduced exposure study results showed a substantial reduction in relevant biomarkers of exposure to the measured HPHCs in those who switched to Platform 2compared to those who continued to smoke cigarettes over a five-day period. The sustainability of this reduction as well as changes in clinical risk markers were assessed in a 3-monththree-month reduced exposure study. As anticipated, the resultsstudy, which was completed in 2018. We conducted a consumer test of this study were received at the end of 2017, and the related report is under preparation. We expect the report to be finalizedour Platform 2 design in the secondlast quarter of 2018. Subsequently, in accordance with standard scientific practices, we intend to share2021. As a result of the conclusions in scientific forums and to submit themfeedback from this consumer test, the design of our current Platform 2 technology has been discontinued. We are assessing alternative designs for inclusion in peer-reviewed publications.this consumer segment.


Platform 3 provides an aerosol of nicotine salt formed by the chemical reaction of nicotine with a weak organic acid.salt. We have explored two routes for this platform, one with electronics and one without, and have initiated a newconducted nicotine pharmacokinetic study.studies with both versions. The results of our pharmacokinetic study related to the version without electronics indicate this product's potential as an acceptable alternative to continued cigarette smoking in terms of product satisfaction. In February 2020, we completed a one-month product use and adaptation study in adult smokers for the product variant without electronics. The results of the study indicated that while during the study period, the adult smokers did not fully switch from smoking cigarettes to this Platform 3 product, on average, they used this product on a daily basis and significantly reduced their daily consumption of cigarettes. We expectare working on product modifications to receive the resultsenable switching by those adult smokers who are looking for analysis in the second quarter of 2018.better alternatives to cigarettes.


Platform 4 covers e-vapor products, which are battery-powered devices that produce an aerosol by vaporizing a nicotine-containing liquid solution. OurIn 2020, our e-vapor products comprisecomprised devices using current generationwith the “coil and wick” technology and we areas well advanced in the development and commercialization ofas our new e-vapor mesh technology that addresses certain challenges presented by some e-vapor products currently on the market. Our MESH products are designed to ensure the consistency and quality of the generated aerosol.aerosol compared to the products with the “coil and wick” technology. Recently, we discontinued the commercialization of devices with the “coil and wick” technology. We have initiatedconducted a nicotine pharmacokinetic study with respect to products with our e-vapor mesh technology in 2017. The results of this
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study indicate that these products are an effective means of nicotine delivery while being a satisfying alternative for e-cigarette 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 cardiovascular disease 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. Recently, we designed a new consumable for our e-vapor mesh technology to deliver real tobacco taste satisfaction in an E-Vapor product liquid-using patented technology, where flavors and nicotine are extracted directly from the tobacco leaves and captured in a liquid solution, without having to add flavoring ingredients. This consumable has been commercialized in one market in December 2021.

Platform 5 covers Modern Oral Nicotine Pouches, which consist of white pre-portioned pouches containing nicotine derived from tobacco. Users place a pouch between the upper lip and gum and leave it there while the nicotine and taste are being released. At the end of the use, the user can dispose of the pouch. Nicotine pouches are inherently smoke-free as they are consumed orally, and no combustion process occurs during use. Our nicotine pouches do not contain tobacco. Instead, they contain primarily nicotine, flavors, and a cellulose substrate. The nicotine used in the pouches is of pharmaceutical-grade like the nicotine used in medicinal products, such as gums and inhalers, while the flavors are approved for use in food in accordance with the product quality standards for nicotine pouches developed by the Swedish Institute for Standards. In 2021, PMI acquired AG Snus as well as Fertin Pharma, two companies manufacturing and/or marketing nicotine pouches.

We aim to expand our brand portfolio and market positions with additional RRPs. In addition, we expectare continuing to use our expertise, technology and capabilities to explore new growth opportunities beyond our current business, including products that do not contain nicotine or tobacco.

After we receive the results of our scientific studies, including those mentioned above, in accordance with standard scientific practices, we share the conclusions in scientific forums and submit them for analysisinclusion in peer-reviewed publications.

The research and development expense for our smoke-free portfolio accounted for 99%, 99% and 98% of our total research and development expense for the second quarter of 2018;years ended December 31, 2021, 2020 and 2019, respectively.  The research and development expense for the results of this study are expectedyears ended December 31, 2021, 2020 and 2019, is set forth in Item 8, Note 14. Additional Information to contribute to further developments of Platform 4 products.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 asand increasingly, digital communication programs.programs and e-commerce.  In order to accelerate switching to IQOS,our Platform 1 products, our initial market introductions typically entail one-on-oneone-to-one consumer engagement (in person or by digital means) and introductory device discounts.  These initial commercialization efforts require substantial investment.investment, which we believe will moderate over time and further benefit from the increased use of digital engagement capabilities. During the COVID-19 pandemic, we accelerated our investments in, and pivot to, digital consumer engagement.


As of December 31, 2021, PMI's smoke-free products are available for sale in 71 markets in key cities or nationwide.

In 2014, we introduced the IQOS systemour Platform 1 product in pilot city launches in Nagoya, Japan, and in Milan, Italy. Since then, we have continuously expanded our commercialization activities to include all of Japan, as well as multiple cities in Italy. To date, IQOS is available for sale in key cities in 37 markets and nationwide in Japan.activities.


On the basis of our experience in Japan and Italy, we estimateWe believe that only a very small percentage of adult smokers who convert to IQOSour Platform 1 product switch back to cigarettes.


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


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

TheAn adequate supply chain for our RRP portfolio, including the supply of electronic devices, is important to our business. We work with twofour electronics manufacturing service providers for the supply of our IQOSPlatform 1 and Platform 4 devices, and a small number of other providers for other products in our RRP portfolio and related accessories. Due to the COVID-19 pandemic, the operations of our two main electronic manufacturing service providers were temporarily suspended at different times. Even though these suspensions did not materially affect our operations, if one or more of these service providers were significantly constrained at the same time, the supply of the devices could be disrupted. Although we work closely with these service providers on monitoring their production capability and financial health, we cannot guarantee that they will remain capable of meeting their commitments, particularly during the COVID-19 pandemic; if they will not, the commercialization of our RRPs could be adversely affected if they are unable to meet their commitments.affected. 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
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current and anticipated production requirements. However, some components and materials necessary for the production of our RRPs, including those for the electronic devices, are obtained from single or limited sources, and can be subject to industry-wide shortages and price fluctuations. Our inability to secure anWhile we were successful in maintaining adequate supply of such components and materials so far, we may not be able to secure such supply going forward, particularly during the COVID-19 pandemic; this could negatively impact the commercialization of our RRPs.


Our IQOS devicesIn addition, we are subjectalso exposed to standard product warranties generallya world-wide shortage of semiconductors, which continues to put constraints on our device supplies for a periodRRPs. We believe, however, that the overall impact of 12 months fromthis shortage remains manageable, and we have adjusted our device assortments to limit the dateeffect on consumer availability of purchase or such other periods as required by law. our RRPs.

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 warranty policies anddevice version mix, product failure rates, logistics and service delivery costs, and warranty policies, and may increase with the number of devices sold.


To further improve theProduct quality may affect consumer experience, we introduced a new versionacceptance of the IQOS device in the first quarter of 2017 and continue to develop product improvements.our RRPs.


We are also progressing with ourOur near-term planned commercialization efforts for the other platforms:PMI-developed RRP platforms are as follows:


•We started commercializing an improved version of our IQOS MESH product in Canada, Corsica, Croatia, the Czech Republic, Finland, Italy, Ukraine and New Zealand under the IQOS VEEV or VEEV brand names. We currently market our e-vapor products in several markets, including Ireland, Israel, Spain and the U.K. A city test of MESH, one of our Platform 4 products, is ongoing in Birmingham, U.K., and we expectplan to initiate a pilot launch of a next-generation version of this product in 2018.
additional markets.


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

In 2018, we planfinalized our improvements to conductthis product and conducted a consumer test in the last quarter of 2021. As a result of the feedback from this consumer test, the design of our current Platform 2 technology has been discontinued. We are assessing alternative designs for this consumer segment.

•Following the consumer test conducted in 2020, and the results of the product use and adaptation study described above, we are incorporating our learnings into our plans to improve our Platform 3 product.


•We launched a Platform 5 product in Sweden in January 2022, that is a reformulated version of the already commercialized nicotine pouches bearing the Shiro brand by our newly acquired affiliate AG Snus.


Due to the COVID-19 pandemic, certain of these commercialization efforts could be delayed.

RRP Regulation and Taxation: RRPs contain nicotine and are not risk-free. We thereforeAs we describe in more detail above, we support science-based regulation and taxation of RRPs. RegulationRRPs, and believe that regulation and taxation should differentiate between cigarettes and products that present, are likely to present, or have the potential to present less risk of harm to adult smokers who switch to these products versus continued smoking. Regulation should provide minimum standards for RRPs and specific rules for product assessment methodologies, ingredients, labelling and consumer communication,smoking and should ensure that the public is informed about the health risksrecognize a continuum of all combustiblerisk for tobacco and non-combustible tobacco andother nicotine-containing products. Regulation, as well as tobacco industry activities,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. RRPs and communication of truthful and non-misleading information about such products.

These regulations might foreclose or unreasonably restrict adult consumer access even to products that might be shown to be a better consumer choice than continuing to smoke. During the COVID-19 pandemic, some governments have been and may continue to be temporarily unable to focus on the development of science-based regulatory frameworks for the development and commercialization of RRPs or on the enforcement or implementation of regulations that are significant to our business.

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 the jurisdiction of the FDA. We submitted to the FDA a Modified Risk Tobacco Product Application (“MRTPA”) for IQOSour Platform 1 product in December 2016, and a Premarket Tobacco Product Application (“PMTA”) for IQOSour Platform 1 product in March 2017.

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On April 30, 2019, the FDA determined that a version of our Platform 1 product, namely, IQOS 2.4 and three related consumables, 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. On December 7, 2020, the FDA reached the same determination for the IQOS3 device and authorized that version of our Platform 1 product for sale in the United States.

On July 7, 2020, the FDA determined that the available scientific evidence demonstrates that the issuance of an exposure modification order would be appropriate for the promotion of public health and authorized the marketing of a version of our Platform 1 product, namely IQOS 2.4 and three related consumables, as a "modified risk tobacco product." The FDA authorized the marketing of this product in the U.S. with the following information:

"AVAILABLE EVIDENCE TO DATE:

•the IQOS system heats tobacco but does not burn it.
•this significantly reduces the production of harmful and potentially harmful chemicals.
•scientific studies have shown that switching completely from conventional cigarettes to the IQOS system significantly reduces your body’s exposure to harmful or potentially harmful chemicals."

We must request and receive authorization from the FDA in order to continue marketing this product with the same modified exposure information after the present order expires in four years from the date of the orders.

On March 18, 2021, we submitted to the FDA a supplemental MRTPA ("sMRTPA") for IQOS 3 requesting authorization to market this version of the device as a Modified Risk Tobacco Product with reduced exposure information like IQOS 2.4. In May 2017,June 2021, the FDA formally accepted and filed our MRTPAsMRTPA for substantive scientific review and, already in June 2017,May 2021, the FDA opened the period for the public to provide comments on our application. InThe public comment period, which was initially scheduled to be closed on August 2017,2, 2021, was extended on July 20, 2021 to provide time for the public to review application materials that were not previously posted by FDA. The FDA closed the comment period for IQOS 3's sMRTPA on December 10, 2021.

There are two types of MRTP orders the FDA completedmay issue: a preliminary“risk modification” order or an “exposure modification” order. We had requested both types of orders for IQOS 2.4 and an initial selection of 3 consumables' variants. After review, the FDA determined that the evidence did not support issuing a "risk modification" order at this time but that it did support issuing an "exposure modification" order for the product. This determination included a finding that issuance of ourthe exposure modification order is expected to benefit the health of the population as a whole.

We look forward to working with the FDA to provide any additional information they may require in order to market this product with reduced risk claims.

The FDA’s PMTA and acceptedMRTP orders do not mean that the agency “approved” our application for substantive review.Platform 1 product. These authorizations are subject to strict marketing, reporting and other requirements, and are not a guarantee that the product will remain authorized, particularly if there is a significant uptake in youth or non-smoker initiation.  The FDA referredwill monitor the marketing of the product.

Some states and municipalities in the U.S. have introduced severe restrictions for the sale of certain e-cigarettes and tobacco products, including those authorized by the FDA. We believe that such restrictions on FDA-authorized products will not advance public health and will unreasonably limit adult consumer access to products that are shown to be a better alternative to continued smoking.

In March 2020, we requested a clarification from the FDA regarding the applicability of its new health warning requirements to our MRTPAheated tobacco units sold in the United States. In June 2021, the FDA responded to our letter and requested additional information regarding the applicability of the cigarette health warnings rule to the Tobacco Product Scientific Advisory Committee (“TPSAC”)IQOS System and HeatSticks. TPSAC heldPhilip Morris Products S.A. is committed to providing adult consumers of tobacco products with complete, accurate and non-misleading information regarding the health risks associated with the use of the IQOS System and HeatSticks. We shared our views with the FDA on the applicability of new health warnings to our products in our submission on December 2, 2021.

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. Manufacturers of all non-authorized products currently on the market were required to file a meetingPMTA with the FDA by September 9, 2020. The FDA announced on September 9, 2020 that it will prioritize enforcement against any tobacco and nicotine-containing product sold without a PMTA. On October 5, 2021, FDA published its final PMTA rule in the Federal Register, which is effective November 4, 2021.All future applications will have to comply with the requirements in the PMTA rule, which is substantially similar to the version of the final PMTA rule which was posted on Advanced Federal Register on January 24 and January 25, 2018 on our MRTPA. The recommendations and votes of TPSAC are not binding on the FDA. By regulation, the FDA’s decision on our MRTPA will take into account, in addition to the views of TPSAC, scientific evidence as well as comments, data and information submitted by interested persons.19, 2021.

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

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


On September 29, 2021, the International Trade Commission ("ITC") issued its Final Determination ("FD"), Limited Exclusion Order ("LEO") and Cease and Desist Order ("CDO"). The ITC upheld the finding of infringement in the ID and found a subsequent violation. The ITC issued a LEO prohibiting the importation of infringing tobacco heating articles and components thereof and cease and desist orders against Philip Morris USA, Inc. and Altria Client Services, LLC, which went into effect at the end of the 60-day Presidential review period on November 28, 2021. We have appealed the patent issues. Furthermore, lawsuits based on the same patent families have been repeatedly and universally rejected in European courts and the European Patent Office. The decision has no bearing outside the United States.

Until recently, there were no countries with specific product standards for heat-not-burn products. Currently, national standards setting minimum quality and safety requirements for such products have been adopted in several countries with technical heat-not-burn specifications and/or methods for demonstrating the absence of combustion. They are mandatory in Egypt, Jordan, Saudi Arabia, Tunisia, the UAE, Uzbekistan and Bahrain, and voluntary in Armenia, Costa Rica, Indonesia, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, Vietnam, the U.K. and Ukraine. In theJapan, a voluntary standard sets minimum safety requirements for tobacco heating devices. We expect other governments to consider similar product standards and encourage making them mandatory.

All EU all EU Member States and Norwaymember 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 Statesmember states require a notification submitted six months before the intended placing on the market of a novel tobacco product,such products, while some require pre-market authorizations for the introduction of such products. To date, we have filed a comprehensive dossier summarizing our scientific assessment of IQOSour Platform 1 product in 22 Member States.over 20 member states.


In addition, in Italy, in April 2018, we submitted an application for HEETS, used with the IQOS device, requesting regulatory recognition of 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 filings. We are confident that our evidence supports our application.

On October 31, 2019, our Australian subsidiary, Philip Morris Limited (“PML”), submitted an application to the Scheduling Committee of the Therapeutic Goods Administration of Australia (“TGA”) seeking to exempt heated tobacco products from being prohibited in Australia. In August 2020, the TGA issued its decision denying the application and stating that it did not present compelling evidence to establish a public health benefit from greater access to nicotine in heated tobacco products.

To date, several governmental agencies have published their scientific findings that analyze the harm-reduction potential of certain RRPs versus continuing smoking, including:

In December 12, 2017, at the request of the U.K. Department of Health and Public Health England, the U.K. Committee on Toxicity published its assessment of the risk of heated tobaccoheat-not-burn products relative to cigarette smoking. This assessment included analysis of scientific data for two heated tobaccoheat-not-burn products, one of which was IQOS.our Platform 1 product. The assessment concluded that, while still harmful to health, compared with the known risks from cigarettes, heated tobaccoheat-not-burn products are probably less harmful. Subsequently, onin February 6, 2018, Public Health England published a report stating that the available evidence suggests that heated tobaccoheat-not-burn products may be considerably less harmful than cigarettes and more harmful than e-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 the levels 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 burn tobacco, focusing on our Platform 1 product. RIVM analyzed the aerosol generated by our Platform 1 product and concluded that the use of this product, while still harmful to health, is probably less harmful than continued smoking.

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In June 2018, the Korean Food and Drug Administration (“KFDA”) issued a statement on products that heat rather than burn tobacco. The KFDA tested three heat-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 subsidiary filed a request with a local court seeking information underlying KFDA’s analysis, conclusions and public statements. In May 2020, the court ordered KFDA to produce certain records.

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-burn products. The report concluded that e-cigarettes are significantly less harmful to health than smoking tobacco. The report also observed that for those smokers who do not accept e-cigarettes, heat-not-burn products may offer a public health benefit despite their relative risk. The report called for a risk-proportionate regulatory environment 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-not-burn 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.

In November 2018, the Eurasian Economic Commission (regulatory body of the Eurasian Union consisting of Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia) 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 a harm/risk reduction for smokers in the same proportion.

In 2020, the Superior Health Council of Belgium (“SHC”) published results of its inquiry into heat-not-burn products. The SHC concluded that heat-not-burn products, while not safe, have a more favorable toxicity profile than cigarettes. However, in light of the uncertainty of such products’ short and long-term impacts, the toxic effects of the dual use with cigarettes, and the existence of approved smoking cessation tools, the SHC recommended that current regulations for cigarettes should apply to heat-not-burn products.

The foregoing scientific findings of government agencies may not be indicative of the measures that the relevant government authorities could take in regulating our products.

We make our scientific findings publicly available for scrutiny and peer review through several channels, including our websites. From time to time, adult consumers, competitors, members of the scientific community, and others inquire into our scientific methodologies, challenge our scientific conclusions or request further study of certain aspects of our RRPs and their health effects. We are committed to a robust and open scientific debate butand 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 scientifically unsubstantiated information or studies with a strong confirmation bias by third parties may cause confusion among adult smokers and affect their decision to switch to better alternatives to continued smoking, such as our RRPs.


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


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


Legal Challenges to RRPs: We face various administrative and legal challenges related to certain RRP activities, including allegations concerning product classification, 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
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outcomes of these matters may affect our RRP commercialization and public communication activities and performance in one or more markets.

Our RRP Business Development Initiatives:In December 2013, we established a strategic framework with Altria Group, Inc. (“Altria”) under which Altria will make available itssetting out terms on how the parties would collaborate to develop and commercialize e-vapor products exclusively to us for commercialization outside the United States, and we will make availablecommercialize two of our RRPs exclusively to Altria for commercialization in the United States.U.S. In March 2015, we launched Solarislate 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. In September 2019, Altria's subsidiary, Philip Morris USA Inc. (“PM USA”), began commercialization of a version of our Platform 4 e-vapor1 product licensed from Altria, in Spain. In December 2015, we introduced Solaris in Israel.

In July 2015, we extended the strategic framework with AltriaU.S. Under the agreement, PM USA must achieve certain milestones to include a Joint Research, Developmentmaintain its exclusive distribution right and Technology Sharing Agreement. The additional milestones to extend the agreement providesafter the framework under whichinitial 5-year term. PMI and Altria will collaborate to developare currently discussing these milestones, the next generationcontractual obligations, and the impact of e-vapor products for commercialization in the United States by AltriaInternational Trade Commission (“ITC”) Orders (For more details please refer to Item 8, Note 17.Contingencies).

In January 2020, we announced an agreement with KT&G, a leading tobacco and nicotine company in markets outside the United States by PMI. The collaboration between PMI and Altria in this endeavor is enabled by exclusive technology cross licenses and technical information sharing. The agreements also provide for cooperation on the scientific assessment of, andSouth Korea, for the sharingcommercialization of improvements to, the existing generationKT&G’s smoke-free products outside of licensed products.South Korea on an exclusive basis. For more information, see Acquisitions and Other Business Arrangements below.


Other Developments: On In September 12, 2017, we announced our support of the Foundation for a Smoke-Free World. In September 2020, our pledge agreement with the Foundation was amended. We agreedcontributed $45 million in 2020, $40 million in 2021, and expect to contribute $80$35 million per year over the next 12 years,annually from 2022 through 2029, as specified in the amended pledge agreement. We made an initial contributionTo date, we contributed a total of $4.5 million in 2017 and the first annual contribution of $80 million in the beginning of 2018.$249.5 million. 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.matters, including tax, customs, antitrust, advertising, and labor practices. We describe certain matters pending in ThailandRussia, South Korea and South KoreaThailand in Item 8, Note 18. 17. Contingencies.


In November 2010, a WTOWorld Trade Organization ("WTO") panel issued its decision in a dispute relating to facts that arose from August 2006, between the Philippines and Thailand, concerning a series of Thai customs and tax measures affecting cigarettes imported by PM Thailand into Thailand (see Item 8, Note 18. 17. Contingenciesfor additional information). The WTO panel decision, which was upheld by the WTO Appellate Body, concluded that Thailand had no basis to find that PM Thailand's declared customs values and taxes paid were too low, as alleged by the DSIDepartment of Special Investigations of the government of Thailand (“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.decision and commenced challenges at the WTO Appellate Body. The Philippines has repeatedly expressed concerns with ongoing investigationsWTO Appellate Body is not operational, and the appeals by Thailand are suspended indefinitely. In December 2020, the Philippines and Thailand agreed to pursue facilitator-assisted discussions aimed at progressing and resolving outstanding issues. It is not possible to predict any future developments in these proceedings or the outcome of these discussions.

The Public Prosecutor’s office of Rome, Italy, notified our Italian subsidiary, Philip Morris Italia S.r.l. (“PM Italia”), as well as three former or current employees and a former external consultant of PM Thailand, including thoseItalia in July 2020 and March 2020, respectively, that ledit concluded a preliminary investigation against them for alleged contravention of anti-corruption laws and related disruption of trade freedom. The Public Prosecutor alleges that the individuals involved promised certain personal favors to government officials from January to July of 2018 in exchange for favorable treatment for PM Italia, and that PM Italia lacked appropriate organizational controls to prevent the criminalalleged actions by the individuals. At the first trial hearing held on September 22, 2021, BAT filed a civil claim against PM Italia claiming vicarious liability for any wrongdoing of its former or current employees. BAT claims EUR 50 million in damages. The court admitted the claim as a matter of course and issued summons for PM Italia to appear as civil party in the case. The next trial hearing is scheduled for April 8, 2022. PM Italia believes the charges describedbrought against it by the Public Prosecutor are without merit and will defend them vigorously.

Asset Impairment and Exit Costs

We discuss asset impairment and exit costs in Item 8, Note 18. Contingencies,19. Asset Impairment and has commenced two formal proceedings at the WTOExit Costs to challenge criminal charges against PM Thailand arguing that the criminal charges appear to be based on grounds not supported by WTO customs valuation rules and inconsistent with several decisions already taken by Thai Customs and other Thai governmental agencies.our consolidated financial statements.


46

Acquisitions and Other Business Arrangements


We discuss our 2021 acquisitions and other business arrangements in Item 8, Note 6. Acquisitions and Other Business Arrangementsto our consolidated financial statements.



Turkey
Investments
On January 5, 2022, we acquired the remaining 25% stake of our holding in Unconsolidated SubsidiariesPhilsa Philip Morris Sabancı Sigara ve Tütüncülük Sanayi ve Ticaret A.Ş. ("PHILSA") and 24.75% stake in Philip Morris SA, Philip Morris Sabancı Pazarlama ve Satış A.Ş. ("PMSA") from our Turkish partners, Sabanci Holding for an acquisition price of $205 million (TRY 2,747 million). This amount was paid on January 5th 2022, but the final acquisition price remains subject to certain predetermined adjustments based on the audited financial results of PHILSA and PMSA for fiscal years 2021 and 2022. As a result of this acquisition, PMI now owns 100% of these Turkish subsidiaries.



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 product brand 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 are 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 to confirm the absence of combustion and significant reductions of emissions of harmful chemicals compared to cigarettes. 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.

Since the third quarter of 2020, we have launched commercial initiatives for licensed KT&G products in select markets.

Equity Investments

We discuss our equity investments in unconsolidated subsidiaries in Item 8, Note 4. Related Parties - Equity Investments in Unconsolidated Subsidiariesand Other to our consolidated financial statements.


Trade Policy


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


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


ToFrom time to time, 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 to Trade Sanctions, and are de minimis in volume and value, present a material risk to our knowledge, noneshareholders, our reputation or the value of our commercial arrangements resultsshares. We have no employees, operations or assets in the governments of any country identified by the U.S. government as a state sponsor of terrorism, nor entities controlled by those governments, receiving cash or acting as intermediaries in violation of U.S. laws.Sudan.


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


In January 2018, we commenced sales ofWe sell cigarettes in Cuba asunder a distribution agreement. These sales are permitted by law.U.S. law under a License Exception for Agricultural Commodities, issued by the United States Department of Commerce (Bureau of Industry and Security), granted to our

47

distributor.

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. Because we do business in certain of these countries, these state pension funds may have divested of our stock or may not invest in our stock. We do not believe such legislation has had a material effect on the price of our shares.


PMI is also subject to various Trade Sanctions imposed by the EU and other jurisdictions ("Trade Sanctions"). We comply fully with these Trade Sanctions.
2017
The EU imposed new sanctions regarding the Republic of Belarus ("Belarus") on June 21, 2021, including the designation of additional EU sanctions targets (individuals and legal entities) in Belarus. On June 24, 2021, the EU council introduced additional sectoral economic sanctions aimed at specific sectors of the Belarus economy, including restrictions on the trade of goods used for the production or manufacture of tobacco products. Subsequently, six non-EU countries (Norway, Iceland, Liechtenstein, North Macedonia, Montenegro, and Albania) announced that they “aligned themselves” with the EU sanctions of June 21. On July 6, 2021, Switzerland imposed sanctions on Belarusian individuals and legal entities effective July 7, 2021. The Swiss sanctions are similar in scope to the EU sanctions of June 21, 2021.

Further, on August 9, 2021, the U.K. introduced sectoral economic sanctions similar in scope to the EU sectoral sanctions of June 24, 2021. Also on August 9, 2021, the U.S. imposed blocking sanctions on certain individuals and entities pursuant to an Executive Order adding them to the list of Specially Designated Nationals and Blocked Persons (the "SDN List") issued by the U.S. Department of Treasury's Office of Foreign Asset Control ("OFAC"). The Executive Order expanded the bases for the imposition of sanctions, including, among others, by authorizing the imposition by OFAC of blocking sanctions on persons operating in the tobacco sector of the Belarus economy, as well as for providing material support or assistance to any SDN. In December 2021, the U.S., the EU, the U.K. and Canada amended their respective sanctions lists by including additional Belarusian individuals, entities, and aircraft.

PMI complies with all applicable laws and regulations, including sanctions, in the markets where it operates. We have taken appropriate actions in response to the latest sanctions to ensure full compliance with the relevant restrictions.



2021 compared with 20162020


The following discussion compares operating results within each of our reportablegeographical segments and Other category for 20172021 with 2016.2020.


Unless otherwise stated, references to total industry, total market, our shipment volume and our market share performance reflect cigarettes and heated tobacco units. Estimates for total industry volume and market share in certain geographies reflect limitations on the availability and accuracy of industry data.


European Union:
Financial Summary -
Years Ended December 31,		Change
Fav./(Unfav.)		Variance
Fav./(Unfav.)
20212020TotalExcl.
Curr. & Acquis.		TotalCur-
rency		Acqui-sitionsPriceVol/
Mix		Cost/
Other
(in millions)
Net Revenues$ 12,275 $ 10,702 14.7 %8.8 %$1,573 $618 $8 $69 $878 $— 
Operating Income$ 6,119 $ 5,098 20.0 %12.5 %$1,021 $384 $2 $69 $728 $(162)
European Union For the Years Ended December 31, Variance
(in millions) 2017 2016 $ %
Net revenues $27,580
 $27,129
 $451
 1.7 %
Excise taxes on products 19,262
 18,967
 295
 1.6 %
Net revenues, excluding excise taxes on products 8,318
 8,162
 156
 1.9 %
Operating companies income 3,775
 3,994
 (219) (5.5)%


Net revenues, excluding currency and acquisitions, increased by $451 million. Excluding excise taxes, net revenues increased8.8%, reflecting: favorable volume/mix, mainly driven by $156 million, due to:

price increases ($156 million)higher heated tobacco unit volume (notably in Germany, Hungary, Italy and
Poland), as well as higher device volume and favorable currency ($45 million)device mix (notably in Italy), partly offset by lower cigarette volume (notably in the Czech Republic, France and Germany) and unfavorable cigarette mix (primarily in Germany); and a favorable pricing variance, driven by higher combustible pricing (mainly in Germany and Portugal, partly offset by France and Poland) and higher heated tobacco unit pricing (notably in the Czech Republic and Germany, partially offset by Poland), partly offset by lower device pricing (notably in Germany and Italy).
unfavorable
48

Operating income, excluding currency and acquisitions, increased by 12.5%, primarily reflecting: favorable volume/mix, ($45 million).

Themainly driven by higher heated tobacco unit volume and favorable device mix, partly offset by lower cigarette volume and unfavorable cigarette mix (each primarily reflecting the same geographies as for net revenues of the European Union segment include $320 million in 2017noted above); lower manufacturing costs (driven by combustible and $62 million in 2016 related to the sale of RRPs. Excluding excise taxes, net revenues for RRPs were $269 million in 2017reduced-risk products); and $57 million in 2016.
Operating companies income decreaseda favorable pricing variance; partly offset by $219 million during 2017. This decrease was due primarily to:


higher marketing, administration and research costs ($223 million, primarily related(due to increased investment behind reduced-riskedcombustible and reduced-risk products),
.
unfavorable volume/mix ($119 million) and
unfavorable currency ($43 million), partly offset by
price increases ($156 million) and
lower manufacturing costs ($14 million).


European Union - Total Market, PMI Shipment &Volume and Market Share Commentaries


Total market and market share performance are shown in the table below:
European Union Key DataFull-Year
Change
20212020% / pp
Total Market (billion units)478.2473.41.0 %
PMI Market Share
Marlboro16.6 %17.5 %(0.9)
L&M5.6 %6.2 %(0.6)
Chesterfield5.4 %5.5 %(0.1)
Philip Morris2.2 %2.4 %(0.2)
Heated Tobacco Units5.7 %4.2 %1.5 
Others3.1 %3.0 %0.1 
Total European Union38.6 %38.8 %(0.2)
The estimated total market in the European Union decreasedEU increased by 1.9%1.0% to 492.1478.2 billion units. units, primarily driven by:
•Italy, up by 4.4%, mainly reflecting the impact on adult smoker average daily consumption of the easing of pandemic-related measures; and
•Poland, up by 8.1%, primarily reflecting the impact on adult smoker average daily consumption and border sales of the easing of pandemic-related measures, as well as a lower prevalence of illicit trade;
partly offset by
•Czech Republic, down by 7.3%, mainly reflecting the impact of excise tax-driven price increases; and
•France, down by 6.2%, primarily reflecting the impact of excise tax-driven price increases and higher cross-border (non-domestic) purchases due to the easing of pandemic-related measures.

Our Regional market share was flat at 38.3%decreased by 0.2 points to 38.6%, with declines in the Czech Republic, France and Germany, partly offset by gains in France, GermanyGreece and Poland offset by declines in Italy and Spain.


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

Italy.
49

European Union Shipment Volume by Brand (Million Units)

 Full-Year
 2017
2016
Change
Cigarettes   
Marlboro93,088
96,245
(3.3)%
L&M34,261
34,691
(1.2)%
Chesterfield29,087
30,140
(3.5)%
Philip Morris15,158
16,290
(6.9)%
Others15,699
16,220
(3.2)%
Total Cigarettes187,293
193,586
(3.3)%
Heated Tobacco Units1,889
224
+100.0%
Total European Union189,182
193,810
(2.4)%


pm-20211231_g5.jpg

European Union Market Shares by Brand
 Full-Year
   Change
 2017
2016
p.p.
Marlboro18.8%19.0%(0.2)
L&M6.9%6.9%—
Chesterfield6.0%5.9%0.1
Philip Morris3.1%3.2%(0.1)
HEETS0.3%—%0.3
Others3.2%3.3%(0.1)
Total European Union38.3%38.3%—


Our total shipment volume decreasedincreased by 2.4%1.5% to 189.2186.1 billion units, primarily driven by:
•Italy, up by 11.5%, or by 1.9%6.1% excluding the net favorable impact of estimated netdistributor inventory movements, notably in Italymainly reflecting the higher total market and Spain. The decrease in cigarette shipment volume of Marlboro was mainlya higher market share driven by heated tobacco units; and
•Poland, up by 3.7%, primarily reflecting the higher total market, partially offset by a lower market share due to Greece, Italycigarettes;
partly offset by
•Czech Republic, down by 9.7%, mainly reflecting the lower total market and Spain. The decrease in cigarette shipment volume of L&M was mainlya lower market share due to Germany, Romaniacigarettes; and Spain,
•France, down by 6.6%, primarily reflecting the lower total market and a lower market share due to cigarettes.

Eastern Europe:

Financial Summary -
Years Ended December 31,		Change
Fav./(Unfav.)		Variance
Fav./(Unfav.)
20212020TotalExcl.
Curr. & Acquis.		TotalCur-
rency		Acqui-sitionsPriceVol/
Mix		Cost/
Other
(in millions)
Net Revenues$ 3,544 $ 3,378 4.9 %5.9 %$166 $(32)$— $68 $130 $— 
Operating Income$ 1,213 $ 871 39.3 %38.5 %$342 $7 $— $68 $139 $128 

Net revenues, excluding currency and acquisitions, increased by 5.9%, reflecting: favorable volume/mix, driven by higher heated tobacco unit volume (mainly in Russia and Ukraine), partly offset by France. The decreaselower cigarette volume (primarily in Russia and Ukraine), as well as unfavorable cigarette shipment volume of Chesterfield was mainly due to Italy, Portugalmix (mainly in Russia); and Spain,a favorable pricing variance, primarily driven by higher combustible pricing (mainly in Kazakhstan, Russia and Ukraine), partially offset by lower device pricing (primarily in Russia and Ukraine) and lower heated tobacco unit pricing (mainly in Ukraine, partly offset by Poland. The decrease in cigarette shipment volume of Philip Morris wasRussia).

Operating income, excluding currency and acquisitions, increased by 38.5%, primarily reflecting: favorable volume/mix, mainly due to Italy. The decrease in cigarette shipment volume of "Others" was due notably to Muratti in Italy.



European Union - Key Market Commentaries

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

 Full-Year
   Change
 2017
2016
% / p.p.
Total Market (billion units)44.4
44.9
(1.2)%
    
PMI Shipments (million units)19,264
19,247
0.1 %
    
PMI Market Share   
Marlboro27.1%26.4%0.7
Philip Morris10.3%10.2%0.1
Chesterfield3.0%3.1%(0.1)
Others*2.8%2.7%0.1
Total43.2%42.4%0.8
*Includes heated tobacco units.

The estimated total market decreased by 1.2%. The increase in our shipment volume was driven by higher market share, notably of Marlboro,heated tobacco unit volume, partly offset by lower cigarette volume and unfavorable cigarette mix (all primarily reflecting the growth of both Marlboro Redsame geographies as for net revenues noted above); lower manufacturing costs (mainly related to reduced-risk products, primarily in Russia); a favorable pricing variance; and Gold in 30s packs launched in March 2017.

In Germany, estimated industry size, our shipment volumelower marketing, administration and market share performance, shown in the table below, include cigarettes and our heated tobacco units.research costs.
50

 Germany Key Market Data
 Full-Year
   Change
 2017
2016
% / p.p.
Total Market (billion units)76.9
78.1
(1.6)%
    
PMI Shipments (million units)28,575
28,958
(1.3)%
    
PMI Market Share   
Marlboro22.7%22.5%0.2
L&M11.5%11.6%(0.1)
Chesterfield1.5%1.6%(0.1)
Others*1.5%1.4%0.1
Total37.2%37.1%0.1

*Includes heated tobacco units.Eastern Europe - Total Market, PMI Shipment Volume and Market Share Commentaries


The estimated total market in Eastern Europe decreased by 1.6%1.8% to 373.3 billion units, mainly due to:
•Russia, down by 1.0%, or by 2.7% excluding the net favorable impact of estimated trade inventory movements, primarily reflecting the impact of excise tax-driven price increases and a higher prevalence of illicit trade, partly offset by the impact on adult smoker average daily consumption of the easing of pandemic-related measures; and
•Ukraine, down by 9.8%, mainly reflecting the impact of excise tax-driven price increases in March 2017. The decrease in ourand a higher prevalence of illicit trade.

Our Regional market share increased by 0.1 point to 30.6%.
pm-20211231_g6.jpg
Our total shipment volume was flat at 114.3 billion units, notably reflecting:
•Southeast Europe, up by 6.9%, primarily reflecting a higher total market and a higher market share (driven by heated tobacco units);
partly offset by
•Belarus, down by 43.9%, mainly reflecting the halt of shipments as of the third quarter due to international sanctions;
•Russia, down by 0.5%, or by 3.0% excluding the net favorable impact of estimated distributor inventory movements, mainly reflecting a lower market share (due to cigarettes, partly offset by heated tobacco units) and the lower total market; and
•Ukraine, down by 3.3%, mainly reflecting the lower total market, partly offset by higher market share.





In Italy, estimated industry size, our shipment volume and market share performance, shown in the table below, include cigarettes and our heated tobacco units.
 Italy Key Market Data
 Full-Year
   Change
 2017
2016
% / p.p.
Total Market (billion units)69.8
72.1
(3.2)%
    
PMI Shipments (million units)36,767
38,744
(5.1)%
    
PMI Market Share   
Marlboro23.9%24.3%(0.4)
Chesterfield11.3%11.5%(0.2)
Philip Morris7.7%8.5%(0.8)
HEETS0.7%0.1%0.6
Others8.6%8.1%0.5
Total52.2%52.5%(0.3)

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

In Poland, estimated industry size, our shipment volume and market share performance, shown in the table below, include cigarettes and our heated tobacco units.
 Poland Key Market Data
 Full-Year
   Change
 2017
2016
% / p.p.
Total Market (billion units)41.7
41.3
0.9%
    
PMI Shipments (million units)17,784
17,485
1.7%
    
PMI Market Share   
Marlboro10.7%11.6%(0.9)
L&M18.4%18.5%(0.1)
Chesterfield10.4%9.1%1.3
HEETS0.2%—%0.2
Others3.0%3.1%(0.1)
Total42.7%42.3%0.4

The estimated total market increased by 0.9%. The increase in our shipment volume was primarily driven by the higher total market anda higher market share driven by Chesterfieldheated tobacco units.

Excluding the net favorable impact of estimated distributor inventory movements, our total in-market sales volume decreased by 1.3%.

51


Middle East & Africa:

Financial Summary -
Years Ended December 31,		Change
Fav./(Unfav.)		Variance
Fav./(Unfav.)
20212020TotalExcl.
Curr. & Acquis.		TotalCur-
rency		Acqui-sitionsPriceVol/
Mix		Cost/
Other
(in millions)
Net Revenues$ 3,293 $ 3,088 6.6 %10.4 %$205 $(115)$— $287 $320 $(287)
Operating Income$ 1,146 $ 1,026 11.7 %23.8 %$120 $(124)$— $287 $237 $(280)

Net revenues, excluding currency and acquisitions, increased by 10.4%, benefiting from brand support,despite the unfavorable impact of the Saudi Arabia customs assessments of $246 million, shown in "Cost/Other". Excluding the unfavorable impact of the Saudi Arabia customs assessments, unfavorable currency and acquisitions, net revenues increased by 18.3%, reflecting: favorable volume/mix, primarily driven by higher cigarette volume (predominantly in PMI Duty Free and Turkey, partly offset by Marlborothe GCC and North Africa), reflecting pressure from competitive brandshigher heated tobacco unit volume (mainly in Egypt, Jordan and PMI Duty Free) and favorable cigarette mix (mainly in the below premium segment.





In Spain, estimated industry size, our shipment volumeGCC, PMI Duty Free and market share performance,Turkey); and a favorable pricing variance, mainly driven by combustible pricing (primarily in Egypt and Turkey); partially offset by lower fees for certain distribution rights billed to customers in certain markets, shown in "Cost/Other".

Operating income, excluding currency and acquisitions, increased by 23.8%, mainly reflecting: a favorable pricing variance; favorable volume/mix, driven by the table below, include cigarettessame factors and our heated tobacco units.
 Spain Key Market Data
 Full-Year
   Change
 2017
2016
% / p.p.
Total Market (billion units)45.0
46.7
(3.5)%
    
PMI Shipments (million units)14,456
16,374
(11.7)%
    
PMI Market Share   
Marlboro16.5%18.0%(1.5)
L&M5.3%5.4%(0.1)
Chesterfield8.6%8.6%—
Others*1.9%1.9%—
Total32.3%33.9%(1.6)
*Includes heated tobacco units.

The estimated total market decreasedgeographies as for net revenues noted above; and lower manufacturing costs (primarily related to combustible products); partly offset by 3.5%, or by 2.5% excluding the netunfavorable impact of estimated trade inventory movements. The decline of our shipment volume, down by 8.0% excluding the Saudi Arabia customs assessments, as noted above for net impact of distributor inventory movements, mainly reflected the lower total market, and lower market share, due to Marlboro, reflecting the impact of price increases, particularly above the round €5.00 per pack price point in the vending channel, as well as a challenging comparison with 2016 in which the market share of Marlboro grew by 1.0 point.


Eastern Europe, Middle East & Africa:
Eastern Europe, Middle East & Africa For the Years Ended December 31, Variance
(in millions) 2017 2016 $ %
Net revenues $18,045
 $18,286
 $(241) (1.3)%
Excise taxes on products 11,346
 11,286
 60
 0.5 %
Net revenues, excluding excise taxes on products 6,699
 7,000
 (301) (4.3)%
Operating companies income 2,888
 3,016
 (128) (4.2)%

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

unfavorable volume/mix ($374 million) and
unfavorable currency ($291 million), partly offset by
price increases ($364 million).

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


Operating companies income decreased by $128 million during 2017. This decrease was due primarily to:

unfavorable volume/mix ($344 million) and
revenues; higher marketing, administration and research costs ($201 million), partly offset by
costs; and lower fees for certain distribution rights, as noted above for net revenues.
price increases ($364 million) and
favorable currency ($81 million).

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

EEMA PMI Shipment Volume by Brand (Million Units)

 Full-Year
 2017
2016
Change
Cigarettes   
Marlboro70,122
73,818
(5.0)%
L&M46,923
52,183
(10.1)%
Bond Street36,336
42,553
(14.6)%
Parliament33,299
33,940
(1.9)%
Philip Morris19,086
2,058
+100.0%
Others50,391
66,841
(24.6)%
Total Cigarettes256,157
271,393
(5.6)%
Heated Tobacco Units1,581
100
+100.0%
Total EEMA257,738
271,493
(5.1)%


The estimated total market in EEMA decreasedthe Middle East & Africa increased by 2.8%2.9% to 1.0 trillion units. Our Regional market share decreased by 0.3 points to 24.9%.

Our total shipment volume decreased by 5.1% to 257.7560.5 billion units, mainly reflecting: lower cigarette shipment volumedriven by:
•Algeria, up by 6.2%, primarily reflecting the impact on adult smoker average daily consumption of the easing of pandemic-related measures, partly offset by the impact of price increases;
•Egypt, up by 8.8%, mainly reflecting a favorable comparison due to pandemic-related supply chain shortages for competitors' products in Russia, Saudi Arabia - where our cigarette shipment volume declined2020, as well as the favorable impact of adult smoker in-switching to cigarettes (mainly in the low-tax tier) from other combustible tobacco products;
•South Africa, up by 35.8%13.2%, primarily reflecting a favorable comparison versus the second and third quarters of 2020, in which the total market was impacted by the new excise tax implemented in June 2017 that resulted in the doubling of retail prices - and Ukraine;pandemic-related ban on all tobacco sales from March 27th through August 17th, partly offset by a higher cigarette shipment volume in North Africa, notably Algeria,estimated prevalence of illicit trade stemming from the ban; and
•Turkey, up by 8.2%, mainly reflecting the impact on adult smoker average daily consumption of the easing of pandemic-related measures, coupled with increased in-bound tourism (particularly by Turkish expatriates), partially offset by a higher heated tobacco unit shipment volume. The decrease in cigarette shipment volumeestimated prevalence of Marlboro was predominantly due to Saudi Arabia,illicit trade;
partly offset by
•International Duty Free, down by 10.6%, primarily reflecting the impact of government travel restrictions and reduced passenger traffic since the excise tax that resulted in the doublingstart of the brand's retail price from SAR 12 to SAR 24 per pack, partly offsetpandemic in March 2020; and
•Tunisia, down by North Africa, mainly Algeria and Egypt, and Turkey. The decrease in cigarette shipment volume of L&M was mainly due to Russia, Saudi Arabia and Turkey, partly offset by Algeria and Kazakhstan. The decrease in cigarette shipment volume of Bond Street was mainly due to Kazakhstan, Russia and Ukraine. The decrease in cigarette shipment volume of Parliament was mainly due to Russia and Saudi Arabia, partly offset by Kazakhstan. The increase in cigarette shipment volume of Philip Morris was driven mainly by Russia and Ukraine, largely reflecting successful portfolio consolidation of local, low-price brands in "Others."




Eastern Europe, Middle East & Africa - Key Market Commentaries

In North Africa (defined as Algeria, Egypt, Libya, Morocco and Tunisia), estimated cigarette industry size, our cigarette shipment volume and cigarette market share performance are shown in the table below.
 North Africa Key Market Data
 Full-Year
   Change
 2017
2016
% / p.p.
Total Cigarette Market (billion units)144.9
142.3
1.9%
    
PMI Cigarette Shipments (million units)35,085
34,035
3.1%
    
PMI Cigarette Market Share   
Marlboro9.3%8.3%1.0
L&M11.8%12.2%(0.4)
Others2.9%2.7%0.2
Total24.0%23.2%0.8

The estimated total cigarette market increased by 1.9%15.6%, mainly driven by Egypt, partially offset by Tunisia. The increase in our cigarette shipment volume was mainly driven by thereflecting higher cigarette market, as well as higher cigarette market share, notably of Marlboro in Algeria, partly offset by L&M in Egypt.

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

 Full-Year
   Change
 2017
2016
% / p.p.
Total Market (billion units)260.0
280.0
(7.2)%
    
PMI Shipments (million units)72,417
79,706
(9.1)%
    
PMI Cigarette Market Share   
Marlboro1.5%1.4%0.1
Parliament3.5%3.8%(0.3)
Bond Street8.6%8.4%0.2
Philip Morris4.3%0.2%4.1
Others9.2%13.4%(4.2)
Total27.1%27.2%(0.1)

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




In Turkey, estimated cigarette industry size, our cigarette shipment volumedisruptions impacting product availability and cigarette market share performance, as measured by Nielsen, are shown in the table below.
 
Turkey Key Market Data

 Full-Year
   Change
 2017
2016
% / p.p.
Total Cigarette Market (billion units)106.2
105.5
0.7%
    
PMI Cigarette Shipments (million units)49,649
49,624
0.1%
    
PMI Cigarette Market Share   
Marlboro10.2%10.2%—
Parliament11.5%11.7%(0.2)
Lark6.9%7.4%(0.5)
Others14.7%15.0%(0.3)
Total43.3%44.3%(1.0)

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

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

 Full-Year
   Change
 2017
2016
% / p.p.
Total Market (billion units)67.1
73.1
(8.2)%
    
PMI Shipments (million units)19,356
22,022
(12.1)%
    
PMI Cigarette Market Share   
Marlboro3.0%3.1%(0.1)
Parliament3.2%2.9%0.3
Bond Street8.4%10.0%(1.6)
Philip Morris3.1%—%3.1
Others9.6%13.2%(3.6)
Total27.3%29.2%(1.9)

The estimated total market decreased by 8.2%, mainly due to the impact of price increases and an increase in the prevalence of illicit trade. The decrease in ourJuly 2021).

Our Regional market share increased by 1.1 points to 23.1%.
52

pm-20211231_g7.jpg
Our total shipment volume was primarilyincreased by 9.3% to 130.1 billion units, notably driven by:
���PMI Duty Free, up by 56.9%. Excluding the net favorable impact of estimated distributor inventory movements (principally due to cigarettes), PMI in-market sales volume was up by 4.1%, primarily reflecting a higher market share driven by Marlboro, partly offset by the lower total market, as well as lower cigarettemarket; and
•Turkey, up by 17.2%, mainly reflecting a higher market share as measureddriven by Nielsen, notably of low-price Bond Streetadult smoker up-trading (mainly benefiting Marlboro and Parliament) and the higher total market;
partly offset by
•Egypt, down by 5.2%, mainly reflecting competitive pressure from lower-priced alternatives,a lower market share (due primarily to adult smoker down-trading to products in the low-tax tier), partly offset by Parliamentthe higher total market; andPhilip Morris
•Kuwait, down by 23.4%, followingor by 12.3% excluding the successful portfolio consolidationnet unfavorable impact of estimated distributor inventory movements, primarily reflecting a local, low-price brand in "Others."lower total market.





South & Southeast Asia:



Financial Summary -
Years Ended December 31,		Change
Fav./(Unfav.)		Variance
Fav./(Unfav.)
20212020TotalExcl.
Curr. & Acquis.		TotalCur-
rency		Acqui-sitionsPriceVol/
Mix		Cost/
Other
(in millions)
Net Revenues$ 4,396 $ 4,396 — %(2.3)%$— $99 $— $(93)$(6)$— 
Operating Income$ 1,506 $ 1,709 (11.9)%(14.0)%$(203)$36 $— $(93)$(90)$(56)

Asia:
Asia For the Years Ended December 31, Variance
(in millions) 2017 2016 $ %
Net revenues $22,635
 $20,531
 $2,104
 10.2 %
Excise taxes on products 11,845
 11,850
 (5) — %
Net revenues, excluding excise taxes on products 10,790
 8,681
 2,109
 24.3 %
Operating companies income 4,149
 3,196
 953
 29.8 %


Net revenues, increasedexcluding currency and acquisitions, decreased by $2.1 billion. Excluding excise taxes, net revenues increased by $2.1 billion,2.3%, primarily reflecting: an unfavorable pricing variance, mainly due to:

favorable volume/mix ($1.7 billion) and
price increases ($559 million),to lower pricing for combustible products (primarily in Indonesia, partly offset by
the Philippines). Volume/mix was slightly unfavorable, currency ($137 million).

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

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

favorable volume/mix ($622 million),
price increases ($559 million) and
lower manufacturing costs ($40 million),Philippines, partly offset by India and Indonesia), largely offset by favorable cigarette mix (mainly in Indonesia and the Philippines).

53

Operating income, excluding currency and acquisitions, decreased by 14.0%, primarily reflecting: an unfavorable pricing variance; unfavorable volume/mix, mainly due to lower cigarette volume (primarily in the Philippines, partly offset by India and Indonesia), partially offset by favorable cigarette mix (mainly in Indonesia and the Philippines); and higher marketing, administration and research costs ($141 million, principally related to increased investment behind reduced-risk products)(mainly in Indonesia and
unfavorable currency ($123 million) the Philippines).


South & Southeast Asia - Total Market, PMI Shipment & Market Share Commentaries
Asia PMI Shipment Volume by Brand (Million Units)
 Full-Year
 2017
2016
Change
Cigarettes   
Marlboro73,446
76,463
(3.9)%
Lark14,474
17,600
(17.8)%
Parliament9,224
10,142
(9.1)%
Others137,109
155,824
(12.0)%
Total Cigarettes234,253
260,029
(9.9)%
Heated Tobacco Units32,729
7,070
+100.0%
Total Asia266,982
267,099
— %

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

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

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

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

Asia - Key Market Commentaries
In Indonesia, estimated cigarette industry size, our cigarette shipment volume, cigarette market share and segmentation performance are shown in the tables below.
 Indonesia Key Market Data
 Full-Year
   Change
 2017
2016
% / p.p.
Total Cigarette Market (billion units)307.4
315.6
(2.6)%
    
PMI Cigarette Shipments (million units)101,324
105,524
(4.0)%
    
PMI Cigarette Market Share   
Sampoerna A13.8%14.0%(0.2)
Dji Sam Soe7.4%6.5%0.9
Sampoerna U4.1%5.2%(1.1)
Others7.7%7.7%—
Total33.0%33.4%(0.4)
 
Indonesia Segmentation Data

 Full-Year
   Change
 2017
2016
p.p.
Segment % of Total Market   
Hand-Rolled Kretek (SKT)17.6%18.2%(0.6)
Machine-Made Kretek (SKM)77.2%75.8%1.4
Whites (SPM)5.2%6.0%(0.8)
Total100.0%100.0%—
    
PMI % Share of Segment   
Hand-Rolled Kretek (SKT)37.5%37.3%0.2
Machine-Made Kretek (SKM)29.4%28.9%0.5
Whites (SPM)70.2%79.5%(9.3)

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

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

 Full-Year
   Change
 2017
2016
% / p.p.
Total Market (billion units)171.5
179.0
(4.2)%
    
PMI Shipments (million units)   
Cigarettes34,853
43,915
(20.6)%
Heated Tobacco Units31,291
7,069
+100%
Total66,144
50,985
29.7 %
    
PMI Market Share   
Marlboro9.3%10.6%(1.3)
HeatSticks10.8%2.9%7.9
Parliament2.1%2.3%(0.2)
Lark8.6%9.6%(1.0)
Others1.3%1.7%(0.4)
Total32.1%27.1%5.0

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

In Korea, our shipments reflect cigarette and heated tobacco unit volume.  The estimated total market and our market share reflect total industry cigarette and heated tobacco unit volume.
 Korea Key Market Data
 Full-Year
   Change
 2017
2016
% / p.p.
Total Market (billion units)70.6
73.6
(4.1)%
    
PMI Shipments (million units)   
Cigarettes13,499
15,490
(12.9)%
Heated Tobacco Units1,438
—
— %
Total14,937
15,490
(3.6)%
    
PMI Market Share   
Marlboro8.7%9.6%(0.9)
Parliament8.0%7.9%0.1
HEETS2.0%—%2.0
Virginia S.2.0%3.0%(1.0)
Others0.5%0.5%—
Total21.2%21.0%0.2

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

In the Philippines, estimated cigarette industry size, our cigarette shipment volume and cigarette market share performance are shown in the table below.
 Philippines Key Market Data
 Full-Year
   Change
 2017
2016
% / p.p.
Total Cigarette Market (billion units)74.9
79.3
(5.6)%
    
PMI Cigarette Shipments (million units)50,618
56,611
(10.6)%
    
PMI Cigarette Market Share   
Marlboro33.0%28.4%4.6
Fortune18.0%23.4%(5.4)
Jackpot6.1%7.9%(1.8)
Others10.5%11.6%(1.1)
Total67.6%71.3%(3.7)

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


Latin America & Canada:
Latin America & Canada For the Years Ended December 31, Variance
(in millions) 2017 2016 $ %
Net revenues $9,838
 $9,007
 $831
 9.2%
Excise taxes on products 6,897
 6,165
 732
 11.9%
Net revenues, excluding excise taxes on products 2,941
 2,842
 99
 3.5%
Operating companies income 1,002
 938
 64
 6.8%

Net revenues increased by $831 million. Excluding excise taxes, net revenues increased by $99 million, due to:
price increases ($307 million), partly offset by
unfavorable volume/mix ($154 million) and
unfavorable currency ($54 million).

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


Operating companies income increased by $64 million during 2017. This increase was due primarily to:

price increases ($307 million), partly offset by
unfavorable volume/mix ($152 million),
unfavorable currency ($70 million) and
higher manufacturing costs ($17 million).

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

Latin America & Canada PMI Shipment Volume by Brand (Million Units)
 Full-Year
 2017
2016
Change
Cigarettes   
Marlboro33,711
35,194
(4.2)%
Philip Morris13,320
16,463
(19.1)%
Chesterfield9,852
2,626
+100.0%
Others27,340
33,655
(18.8)%
Total Cigarettes84,223
87,938
(4.2)%
Heated Tobacco Units27
—
— %
Total Latin America & Canada84,250
87,938
(4.2)%

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

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




Latin America & Canada - Key Market Commentaries

In Argentina, estimated cigarette industry size, our cigarette shipment volume and cigarette market share performance are shown in the table below.
 Argentina Key Market Data
 Full-Year
   Change
 2017
2016
% / p.p.
Total Cigarette Market (billion units)36.2
36.1
0.2 %
    
PMI Cigarette Shipments (million units)27,002
27,512
(1.9)%
    
PMI Cigarette Market Share   
Marlboro20.0%22.4%(2.4)
Chesterfield15.9%5.5%10.4
Philip Morris33.0%41.6%(8.6)
Others5.8%6.8%(1.0)
Total74.7%76.3%(1.6)

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

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

 Full-Year
   Change
 2017
2016
% / p.p.
Total Market (billion units)24.6
26.3
(6.3)%
    
PMI Shipments (million units)9,259
10,049
(7.9)%
    
PMI Market Share   
Belmont4.1%3.7%0.4
Canadian Classics9.5%10.2%(0.7)
Next11.5%11.3%0.2
Others*12.2%13.2%(1.0)
Total37.3%38.4%(1.1)
*Includes heated tobacco units

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




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

 Full-Year
   Change
 2017
2016
% / p.p.
Total Cigarette Market (billion units)35.8
36.2
(1.1)%
    
PMI Cigarette Shipments (million units)24,351
25,080
(2.9)%
    
PMI Cigarette Market Share   
Marlboro49.4%49.0%0.4
Delicados8.3%9.7%(1.4)
Benson & Hedges5.0%4.7%0.3
Others5.4%5.9%(0.5)
Total68.1%69.3%(1.2)

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

2016 compared with 2015

The following discussion compares operating results within each of our reportable segments for 2016 with 2015.

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

European Union:
European Union For the Years Ended December 31, Variance
(in millions) 2016 2015 $ %
Net revenues $27,129
 $26,563
 $566
 2.1%
Excise taxes on products 18,967
 18,495
 472
 2.6%
Net revenues, excluding excise taxes on products 8,162
 8,068
 94
 1.2%
Operating companies income 3,994
 3,576
 418
 11.7%

Net revenues increased by $566 million. Excluding excise taxes, net revenues increased by $94 million, due to:

price increases ($390 million), partly offset by
unfavorable volume/mix ($149 million) and
unfavorable currency ($147 million).

Operating companies income increased by $418 million during 2016. This increase was due primarily to:

price increases ($390 million),
the non-recurrence of the 2015 pre-tax charges for asset impairment and exit costs ($68 million),
lower manufacturing costs ($49 million),

lower marketing, administration and research costs ($47 million) and
favorable currency ($34 million), partly offset by
unfavorable volume/mix ($168 million).

European Union - Industry Volume

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

European Union - PMI Shipment Volume and Market Share Commentaries


Cigarette shipment volume and market share performance by brand are shown in the tables below:
European Union Cigarette Shipment Volume by Brand (Million Units)
 Full-Year
 2016
2015
Change
Marlboro96,245
95,588
0.7 %
L&M34,691
35,010
(0.9)%
Chesterfield30,140
28,278
6.6 %
Philip Morris16,290
14,205
14.7 %
Others16,220
21,508
(24.6)%
Total European Union193,586
194,589
(0.5)%

European Union Cigarette Market Shares by Brand
 Full-Year
   Change
 2016
2015
p.p.
Marlboro19.0%18.8%0.2
L&M6.9%6.9%—
Chesterfield5.9%5.6%0.3
Philip Morris3.2%3.2%—
Others3.3%3.8%(0.5)
Total European Union38.3%38.3%—

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


European Union - Key Market Commentaries

In France, estimated industry size, our cigarette shipment volume and market share performance are shown in the table below.
 France Key Market Data
 Full-Year
   Change
 2016
2015
% / p.p.
Total Cigarette Market (billion units)44.9
45.5
(1.2)%
    
PMI Cigarette Shipments (million units)19,243
18,943
1.6 %
    
PMI Cigarette Market Share   
Marlboro26.4%25.9%0.5
Philip Morris10.2%9.5%0.7
Chesterfield3.1%3.3%(0.2)
Others2.7%2.9%(0.2)
Total42.4%41.6%0.8

The estimated total cigarette market decreased moderatelyin South & Southeast Asia increased by 1.2%7.2% to 722.6 billion units, notably driven by:
•Bangladesh, up by 12.9%, partlyprimarily reflecting a favorable comparison versus the prior year, during which pandemic-related restrictions impacted tobacco product availability;
•India, up by 13.6%, mainly reflecting a favorable comparison versus the prior year, during which pandemic-related restrictions impacted the movement of certain products, including tobacco;
•Indonesia, up by 7.2%, primarily reflecting the growth of the tax-advantaged 'below tier one' segment and the impact on adult smoker consumption of the easing of pandemic-related measures;
•Pakistan, up by 17.3%, notably reflecting a lower prevalence of illicit trade (partly due to pandemic-related supply disruptions for illicit products); and e-vapor products. The increase in our cigarette shipment volume
•Vietnam, up by 10.0%, mainly reflected market share growth, drivenreflecting a lower prevalence of illicit trade due to pandemic-related supply disruptions for illicit products;
partly offset by:
•the Philippines, down by Marlboro, as well as the launch of certain Philip Morris variants in January 2016.

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

 Full-Year
   Change
 2016
2015
% / p.p.
Total Cigarette Market (billion units)78.1
80.0
(2.4)%
    
PMI Cigarette Shipments (million units)28,950
29,778
(2.8)%
    
PMI Cigarette Market Share   
Marlboro22.5%22.1%0.4
L&M11.6%11.9%(0.3)
Chesterfield1.6%1.5%0.1
Others1.4%1.7%(0.3)
Total37.1%37.2%(0.1)

The estimated total cigarette market decreased by 2.4%10.7%, primarily reflecting the impact of industry-wide price increases. The decreaseincreases in our cigarettethe fourth quarter of 2020.

Our Regional market share decreased by 1.7 points to 19.7%.
pm-20211231_g8.jpg
Our total shipment volume decreased by 1.8% to 142.2 billion units, primarily reflecteddue to:
•the Philippines, down by 17.6%, mainly reflecting the lower total market.market and a lower market share (predominantly due to mid-price Fortune, reflecting the impact of price increases in the fourth quarter of 2020, partly offset by Marlboro); and

•Thailand, down by 4.7%, primarily reflecting a lower total market, partly offset by a higher market share driven by L&M 7.1;

partly offset by
In Italy
54

•India, up by 43.2%, estimated industry size, our cigarette shipmentmainly reflecting a higher market share (driven by Marlboro) and the higher total market;
•Indonesia, up by 4.3%, primarily reflecting the higher total market, partly offset by a lower market share (mainly due to adult smoker down-trading to the 'below tier one' segment as a result of significantly lower retail prices, partly offset by share growth for PMI's premium and hand-rolled portfolio); and
•Pakistan, up by 10.1%, mainly reflecting the higher total market, partly offset by a lower market share.


East Asia & Australia:

Financial Summary -
Years Ended December 31,		Change
Fav./(Unfav.)		Variance
Fav./(Unfav.)
20212020TotalExcl.
Curr. & Acquis.		TotalCur-
rency		Acqui-sitionsPriceVol/
Mix		Cost/
Other
(in millions)
Net Revenues$ 5,953 $ 5,429 9.7 %8.5 %$524 $62 $— $291 $171 $— 
Operating Income$ 2,556 $ 2,400 6.5 %8.7 %$156 $(53)$— $291 $(2)$(80)

Net revenues, excluding currency and acquisitions, increased by 8.5%, reflecting: a favorable pricing variance, primarily driven by higher heated tobacco, combustible and device net pricing in Japan, partly offset by lower combustible pricing in Australia; and favorable volume/mix, mainly driven by higher heated tobacco unit volume and market share performance are shownfavorable device volume/mix in Japan (driven by the table below.launch of IQOS ILUMA), partly offset by unfavorable cigarette mix (mainly in Australia and Japan), lower cigarette volume (primarily in Australia, Japan and South Korea) and unfavorable heated tobacco unit mix in Japan

 
Italy Key Market Data

 Full-Year
   Change
 2016
2015
% / p.p.
Total Cigarette Market (billion units)72.1
73.8
(2.4)%
    
PMI Cigarette Shipments (million units)38,624
39,717
(2.8)%
    
PMI Cigarette Market Share   
Marlboro24.3%24.7%(0.4)
Chesterfield11.5%11.0%0.5
Philip Morris8.5%9.2%(0.7)
Others8.1%8.8%(0.7)
Total52.4%53.7%(1.3)
Operating income, excluding currency acquisitions, increased by 8.7%, mainly reflecting: a favorable pricing variance; and lower manufacturing costs (primarily related to reduced-risk products in Japan and South Korea); partly offset by higher marketing, administration and research costs (notably due to the launch of IQOS ILUMA in Japan and higher asset impairment and exit costs, mainly related to product distribution restructuring in South Korea). Volume/mix was slightly unfavorable, primarily reflecting unfavorable cigarette mix (mainly in Australia and Japan), lower cigarette volume (primarily in Australia, Japan and South Korea), as well as unfavorable heated tobacco unit mix and device mix in Japan, largely offset by higher heated tobacco unit volume in Japan.


East Asia & Australia - Total Market, PMI Shipment Volume and Market Share Commentaries

The estimated total cigarette market in East Asia & Australia, excluding China, decreased by 2.4%1.4% to 284.7 billion units, mainly due to:
•Australia, down by 11.3%, primarily reflecting the impact of price increases. The declinethe ending of our cigarette shipments,the pandemic-related wage subsidy by the government, coupled with the impact of pandemic-related restrictions; and
•Japan, down by 4.8% excluding2.4%, mainly reflecting the net impact of distributor inventory movements, reflected the lower total market,October 2020 and lower cigarette2021 excise tax-driven price increases.

Our Regional market share, notably due to Marlboro as a result of its price increase in the second quarter of 2016, and low-price Philip Morris, impacted by the growth of the super-low price segment, partly offset by super-low price Chesterfield.

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

 Full-Year
   Change
 2016
2015
% / p.p.
Total Cigarette Market (billion units)41.3
41.1
0.5%
    
PMI Cigarette Shipments (million units)17,485
16,763
4.3%
    
PMI Cigarette Market Share   
Marlboro11.6%11.4%0.2
L&M18.5%18.1%0.4
Chesterfield9.1%8.6%0.5
Others3.1%2.7%0.4
Total42.3%40.8%1.5

The estimated total cigarette marketexcluding China, increased by 0.5%, primarily reflecting a lower prevalence of non-duty paid products. The increase in our cigarette shipment volume was mainly driven by higher cigarette market share, principally L&M, reflecting the positive impact of brand support, Chesterfield, benefiting from its 100s and super-slims variants, and RGD in "Others," up by 0.40.3 points to 2.6%27.5%.


In Spain, estimated industry size, our cigarette shipment volume and market share performance are shown in the table below.
55

 Spain Key Market Data
 Full-Year
   Change
 2016
2015
% / p.p.
Total Cigarette Market (billion units)46.7
46.7
(0.1)%
    
PMI Cigarette Shipments (million units)16,365
15,435
6.0 %
    
PMI Cigarette Market Share   
Marlboro18.0%17.0%1.0
Chesterfield8.6%9.1%(0.5)
L&M5.4%5.8%(0.4)
Others1.9%1.5%0.4
Total33.9%33.4%0.5
pm-20211231_g9.jpg

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


Eastern Europe, Middle East & Africa:
Eastern Europe, Middle East & Africa For the Years Ended December 31, Variance
(in millions) 2016 2015 $ %
Net revenues $18,286
 $18,328
 $(42) (0.2)%
Excise taxes on products 11,286
 10,964
 322
 2.9 %
Net revenues, excluding excise taxes on products 7,000
 7,364
 (364) (4.9)%
Operating companies income 3,016
 3,425
 (409) (11.9)%

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

unfavorable currency ($600 million) and
unfavorable volume/mix ($348 million), partly offset by
price increases ($584 million).

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

unfavorable currency ($839 million) and
unfavorable volume/mix ($333 million), partly offset by
price increases ($584 million) and
lower marketing, administration and research costs ($170 million).

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

Our cigarette shipment volume decreased by 2.9%3.9% to 271.482.1 billion units, mainly due to North Africa, primarily Algeria, and Russia, partially offsetdriven by:
•Japan, up by Saudi Arabia and Ukraine. Cigarette shipment volume of Marlboro decreased8.0%, or by 8.5% to 73.8 billion units, principally due to Algeria and Egypt, partly offset by Saudi Arabia. Cigarette shipment volume of Parliament increased by 1.0% to 33.9 billion

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

Eastern Europe, Middle East & Africa - Key Market Commentaries

In North Africa, estimated industry size, our cigarette shipment volume and market share performance are shown in1.3% excluding the table below.
 North Africa Key Market Data
 Full-Year
   Change
 2016
2015
% / p.p.
Total Cigarette Market (billion units)142.3
139.7
1.9 %
    
PMI Cigarette Shipments (million units)34,035
38,111
(10.7)%
    
PMI Cigarette Market Share   
Marlboro8.3%13.6%(5.3)
L&M12.2%11.8%0.4
Others2.7%2.2%0.5
Total23.2%27.6%(4.4)

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

In Russia, estimated industry size, our cigarette shipment volume and market share performance, as measured by Nielsen, are shown in the table below.
 Russia Key Market Data
 Full-Year
   Change
 2016
2015
% / p.p.
Total Cigarette Market (billion units)280.0
294.1
(4.8)%
    
PMI Cigarette Shipments (million units)

79,651
84,422
(5.7)%
    
PMI Cigarette Market Share   
Marlboro1.4%1.4%—
Parliament3.8%3.9%(0.1)
Bond Street8.4%8.4%—
Others13.6%14.7%(1.1)
Total27.2%28.4%(1.2)

The estimated total cigarette market decreased by 4.8%, mainly due to the impact of excise tax-driven price increases. The decrease in our cigarette shipment volume, down by 8.3% excluding thenet favorable impact of estimated distributor inventory movements, mainly reflectedprimarily reflecting a higher market share (driven by heated tobacco units), partly offset by the lower total market;
partly offset by
•South Korea, down by 4.7%, mainly reflecting a lower market share due mainly to Parliament.

Excluding the net favorable impact of estimated distributor inventory movements, our total in-market sales volume declined by 0.4%.


Americas:
Financial Summary -
Years Ended December 31,		Change
Fav./(Unfav.)		Variance
Fav./(Unfav.)
20212020TotalExcl.
Curr. & Acquis.		TotalCur-
rency		Acqui-sitionsPriceVol/
Mix		Cost/
Other
(in millions)
Net Revenues$ 1,843 $ 1,701 8.3 %5.6 %$142 $46 $— $45 $45 $6 
Operating Income$ 487 $ 564 (13.7)%(16.8)%$(77)$18 $— $45 $(4)$(136)

Net revenues, excluding currency and acquisitions, increased by 5.6%, mainly reflecting: a favorable pricing variance, driven by higher combustible pricing (mainly in Argentina and Colombia); and favorable volume/mix, primarily driven by higher cigarette volume (mainly in Brazil and Mexico, partly offset by Argentina) and higher device volume, partially offset by unfavorable cigarette mix (primarily in Brazil).

Operating income, excluding currency and acquisitions, decreased by 16.8%, mainly reflecting an unfavorable comparison related to the Brazil indirect tax credit of $119 million in 2020 and higher manufacturing costs (due to reduced-risk and combustible products), partly offset by a favorable pricing variance and lower marketing, administration and research costs. Volume/mix was slightly unfavorable, mainly reflecting unfavorable cigarette market share primarily due to a declinemix (notably in "Others" of mid-price L&MBrazil), largely offset by higher cigarette volume (primarily in Brazil and Chesterfield and super-low Optima,resulting from the timing of retail price increases compared to competitionMexico, partly offset by Argentina).





In Turkey, estimated industry size, our cigarette shipment volume and market share performance, as measured by Nielsen, are shown in the table below.
56

 Turkey Key Market Data
 Full-Year
   Change
 2016
2015
% / p.p.
Total Cigarette Market (billion units)105.5
103.2
2.2%
    
PMI Cigarette Shipments (million units)

49,624
49,014
1.2%
    
PMI Cigarette Market Share   
Marlboro10.2%9.5%0.7
Parliament11.7%11.6%0.1
Lark7.4%7.6%(0.2)
Others15.0%15.1%(0.1)
Total44.3%43.8%0.5
Americas - Total Market, PMI Shipment Volume and Market Share Commentaries


The estimated total cigarette market in Americas, excluding the U.S., increased by 2.2% to 193.9 billion units, mainly driven by:
•Argentina, up by 7.4%, primarily reflecting a lower estimated prevalence of illicit trade. The increasetrade and a favorable comparison related to retail out-of-stock in our cigarette shipment volume was mainly driven by the higher total market. Our higher market share, led by Marlboro, primarily reflectingsecond quarter of 2020 (due to temporary factory shutdowns related to the growth of its slimmer Touch variant, and Chesterfieldpandemic), partly offset by L&M in "Others."

In Ukraine, estimated industry size, our cigarette shipment volume and market share performance, as measured by Nielsen, are shown in the table below.
 Ukraine Key Market Data
 Full-Year
   Change
 2016
2015
% / p.p.
Total Cigarette Market (billion units)73.1
70.6
3.5%
    
PMI Cigarette Shipments (million units)

22,014
19,195
14.7%
    
PMI Cigarette Market Share   
Marlboro3.1%3.8%(0.7)
Parliament2.9%2.8%0.1
Bond Street10.0%8.2%1.8
Others13.2%14.9%(1.7)
Total29.2%29.7%(0.5)

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



Asia:
Asia For the Years Ended December 31, Variance
(in millions) 2016 2015 $ %
Net revenues $20,531
 $19,469
 $1,062
 5.5%
Excise taxes on products 11,850
 11,266
 584
 5.2%
Net revenues, excluding excise taxes on products 8,681
 8,203
 478
 5.8%
Operating companies income 3,196
 2,886
 310
 10.7%

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

price increases ($335 million) and
favorable volume/mix ($151 million).

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

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

price increases ($335 million),
favorable currency ($52 million) and
lower marketing, administration and research costs ($28 million), partly offset by
unfavorable volume/mix ($106 million).

Asia - PMI Cigarette Shipment Volume Commentaries

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

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


















Asia - Key Market Commentaries

In Indonesia, estimated industry size, our cigarette shipment volume, market share and segmentation performance are shown in the tables below.
 Indonesia Key Market Data
 Full-Year
   Change
 2016
2015
% / p.p.
Total Cigarette Market (billion units)315.6
320.0
(1.4)%
    
PMI Cigarette Shipments (million units)

105,524
109,840
(3.9)%
    
PMI Cigarette Market Share   
Sampoerna A14.0%14.6%(0.6)
Dji Sam Soe6.5%6.9%(0.4)
U Mild4.2%4.7%(0.5)
Others8.7%8.1%0.6
Total33.4%34.3%(0.9)
 Indonesia Segmentation Data
 Full-Year
   Change
 2016
2015
p.p.
Segment % of Total Market   
Hand-Rolled Kretek (SKT)18.2%19.1%(0.9)
Machine-Made Kretek (SKM)75.8%74.7%1.1
Whites (SPM)6.0%6.2%(0.2)
Total100.0%100.0%—
    
PMI % Share of Segment   
Hand-Rolled Kretek (SKT)37.3%37.7%(0.4)
Machine-Made Kretek (SKM)28.9%29.7%(0.8)
Whites (SPM)79.5%80.3%(0.8)

The estimated total cigarette market decreased by 1.4%3.1%, mainly reflecting a soft economic environment and the impactlower estimated prevalence of excise tax-driven price increases. The decrease in our cigarette shipments was mainlyillicit trade due to lower market share, reflecting the soft performance of our SKM portfolio, due to competitors' discounted product offerings, and our SKT portfolio, broadly in linereduced price gaps with industry trends, as well as a lower estimated total market.


In Japan, estimated industry size, our cigarette shipment volume and market share performance are shown in the table below.
 Japan Key Market Data
 Full-Year
   Change
 2016
2015
% / p.p.
Total Cigarette Market (billion units)173.8
182.3
(4.6)%
    
PMI Cigarette Shipments (million units)

43,915
45,690
(3.9)%
    
PMI Cigarette Market Share   
Marlboro10.9%11.3%(0.4)
Parliament2.4%2.3%0.1
Lark9.9%9.9%—
Others1.7%1.8%(0.1)
Total24.9%25.3%(0.4)

The estimated total cigarette market decreased by 4.6%, reflecting the continued underlying cigarette consumption decline, the growth of reduced-risklegal products and the impact of social incentives provided by the April price increasesgovernment to mitigate the effects of certain brandsthe pandemic; and
•Mexico, up by 4.2%, primarily reflecting the impact on adult smoker average daily consumption of our key competitor. Excluding the neteasing of pandemic-related measures coupled with the impact of distributor inventory movements, our cigarette shipment volume decreasedincreased in-bound tourism;
partly offset by 6.5%. The decline was mainly due to a lower total cigarette market, as well as lower cigarette market share,
•Canada, down by 9.3%, notably reflecting the impact of competitors' retail pricing, competitors' differentiated menthol taste product offeringsprice increases and in-switchingout-switching from our cigarette brandscigarettes to heated tobacco units.e-vapor products.


The estimated nationalOur Regional market share, of heated tobaccoexcluding the U.S., decreased by 0.4 points to 33.4%.

pm-20211231_g10.jpg
Our total shipment volume increased by 1.5% to 65.2 billion units, was 2.9%primarily driven by:
•Brazil, up by 5.2%, bringing ourmainly reflecting the higher total combined nationalmarket and a higher market share to 27.1%,driven by Chesterfield; and
•Mexico, up by 1.7 points. We calculate national market share for heated tobacco units in Japan as the total sales volume for heated tobacco units as a percentage of the total estimated sales volume for cigarettes and heated tobacco units.

In Korea4.7%, estimated industry size, our cigarette shipment volume and market share performance are shown in the table below.
 Korea Key Market Data
 Full-Year
   Change
 2016
2015
% / p.p.
Total Cigarette Market (billion units)73.6
67.3
9.4%
    
PMI Cigarette Shipments (million units)

15,490
14,201
9.1%
    
PMI Cigarette Market Share   
Marlboro9.6%9.6%—
Parliament7.9%7.2%0.7
Virginia S.3.0%3.8%(0.8)
Others0.5%0.6%(0.1)
Total21.0%21.2%(0.2)

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


In the Philippines, estimated industry size, our cigarette shipment volume and market share performance are shown in the table below.
 Philippines Key Market Data
 Full-Year
   Change
 2016
2015
% / p.p.
Total Cigarette Market (billion units)79.3
90.2
(12.0)%
    
PMI Cigarette Shipments (million units)56,611
66,236
(14.5)%
    
PMI Cigarette Market Share   
Marlboro28.4%20.0%8.4
Fortune23.4%29.2%(5.8)
Jackpot7.9%12.4%(4.5)
Others11.6%11.8%(0.2)
Total71.3%73.4%(2.1)

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


Latin America & Canada:
Latin America & Canada For the Years Ended December 31, Variance
(in millions) 2016 2015 $ %
Net revenues $9,007
 $9,548
 $(541) (5.7)%
Excise taxes on products 6,165
 6,389
 (224) (3.5)%
Net revenues, excluding excise taxes on products 2,842
 3,159
 (317) (10.0)%
Operating companies income 938
 1,085
 (147) (13.5)%


Net revenues decreased by $541 million. Excluding excise taxes, net revenues decreased by $317 million, due to:
unfavorable currency ($525 million) and
unfavorable volume/mix ($104 million), partly offset by
price increases ($312 million)•Argentina, down by 2.9%, mainly reflecting a lower market share (primarily due to adult smoker down-trading to ultra-low-price brands produced by local manufacturers).


Operating companies income decreased by $147
57

Other:

Following the acquisitions of Fertin Pharma A/S, Vectura Group plc. and OtiTopic, Inc., we added the "Other" category in the third quarter of 2021. Business operations for the Other category are managed and evaluated separately from the geographical segments.

Financial Summary -
Years Ended December 31,		Change
Fav./(Unfav.)		Variance
Fav./(Unfav.)
20212020TotalExcl.
Curr. & Acquis.		TotalCur-
rency		Acqui-sitionsPriceVol/
Mix		Cost/
Other
(in millions)
Net Revenues$ 101 $ — — %— %$101 $— $101 $— $— $— 
Operating Income / (Loss)$ (52)$ — — %— %$(52)$— $(1)$— $— $(51)

We recorded net revenues of $101 million during 2016. This decreasein the Other category, with approximately 39% of the total coming from Fertin Pharma's nicotine replacement therapy and nicotine-containing oral products businesses.

The operating loss of $52 million primarily reflected a pre-tax charge of $51 million in the third quarter of 2021 related to the OtiTopic, Inc. transaction. The charge was due to:
unfavorable currency ($282 million),
unfavorable volume/mix ($85 million),
higher manufacturingrecorded to research and development costs ($57 million) and
higher(within marketing, administration and research costs ($35 million), partly offset by
price increases ($312 million).

Latin America & Canada - PMI Cigarette Shipment Volume Commentaries

Our cigarette shipment volume decreasedby 4.3% to 87.9 billion units, mainly due to Argentina, partly offset by Mexico. While cigarette shipment volume of Marlboro decreased by 1.8% to 35.2 billion units, its market share increased by 0.6 points tocosts) and reflected PMI's accounting for the OtiTopic transaction as an estimated 15.8%,

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

Latin America & Canada - Key Market Commentaries

In Argentina, estimated industry size, our cigarette shipment volume and market share performance are shown in the table below.
 Argentina Key Market Data
 Full-Year
   Change
 2016
2015
% / p.p.
Total Cigarette Market (billion units)36.1
40.8
(11.6)%
    
PMI Cigarette Shipments (million units)

27,512
31,910
(13.8)%
    
PMI Cigarette Market Share   
Marlboro22.4%24.3%(1.9)
Parliament1.9%2.1%(0.2)
Philip Morris41.6%44.7%(3.1)
Others10.4%7.1%3.3
Total76.3%78.2%(1.9)

The declinedevelopment of the estimated total cigarette market of 11.6% mainly reflected a soft economic environment and the impactdry powder inhalation aspirin treatment represented substantially all of the May 2016 excise tax increase that drovefair value of the gross assets acquired and had no alternative future use. For further details, see Item 8, Note 6. Acquisitions and Item 8, Note 12. Segment Reporting.


2020 compared with 2019

For a more than 50% increase in average industry retail prices. The decreasediscussion comparing our consolidated operating results within each of our geographical segments for the year ended December 31, 2020, with the year ended December 31, 2019, 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 cigarette shipment volumeAnnual Report on Form 10-K for the year ended December 31, 2020, which was principally due tofiled with the lower total market. Our lower cigarette market share primarily reflected growth in competitors' super-low priced products benefiting from down-trading, partly offset by low-price Chesterfield in "Others." The capsule segment was up by 1.0 point to 17.4% of the total market; our share of the segment increased by 0.4 points to 73.9%.U.S. Securities and Exchange Commission on February 9, 2021.

In Canada, estimated industry size, our cigarette shipment volume and market share performance are shown in the table below.
58

 Canada Key Market Data
 Full-Year
   Change
 2016
2015
% / p.p.
Total Cigarette Market (billion units)26.3
26.7
(1.6)%
    
PMI Cigarette Shipments (million units)

10,049
9,926
1.2 %
    
PMI Cigarette Market Share   
Belmont3.7%3.3%0.4
Canadian Classics10.2%10.3%(0.1)
Next11.3%10.6%0.7
Others13.2%13.1%0.1
Total38.4%37.3%1.1


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


In Mexico, estimated industry size, our cigarette shipment volume and market share performance are shown in the table below.
 Mexico Key Market Data
 Full-Year
   Change
 2016
2015
% / p.p.
Total Cigarette Market (billion units)36.2
33.8
7.0%
    
PMI Cigarette Shipments (million units)

25,080
23,246
7.9%
    
PMI Cigarette Market Share   
Marlboro49.0%47.8%1.2
Delicados9.7%10.7%(1.0)
Benson & Hedges4.7%4.5%0.2
Others5.9%5.8%0.1
Total69.3%68.8%0.5

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

Financial Review


Ÿ

pm-20211231_g11.jpgpm-20211231_g12.jpgpm-20211231_g13.jpg

For the Years Ended December 31,
(in millions)202120202019
Net cash provided by operating activities$11,967 $9,812 $10,090 
Net cash used in investing activities(2,358)(1,154)(1,811)
Net cash used in financing activities(11,977)(8,496)(8,061)

2021 compared with 2020

•Net Cash Provided by Operating Activities


Net cash provided by operating activities for the year ended December 31, 2021 increased by $2.2 billion compared with 2020. Excluding favorable currency movements of $8.9$0.8 billion, net cash provided by operating activities increased by $1.4 billion, due primarily to higher net earnings and lower working capital requirements of $0.5 billion, partially offset by higher pension plan contributions.

The lower working capital requirements in 2021 as compared with 2020 were primarily due to more cash provided by the net impact of both inventories and accrued liabilities and other current assets mainly reflecting COVID-19 pandemic related build-up of inventory levels in our supply chain in 2020, and the timing of excise tax-paid inventory movements and excise tax payments, as well as higher cash provided by accounts payable primarily reflecting higher IQOS device purchases in 2021. More cash used in accounts receivable was mainly due to the lower usage of our factoring arrangements to sell trade receivable, partially offset by the Brazil indirect tax credit recovered in 2021. For further details on our factoring arrangements to sell trade receivables and our Brazil indirect tax credit recovered in 2021, see Item 8, Note 18. Sale of Accounts Receivable and Item 8, Note 12. Segment Reporting, respectively.

•Net Cash Used in Investing Activities

Net cash used in investing activities of $2.4 billion for the year ended December 31, 2017,2021, increased by $0.8$1.2 billion from the comparable 20162020 period. While the impactsThis increase was primarily due to $2.1 billion of the Tax Cuts and Jobs Act reducedcash used in 2021 for our acquisitions, net earnings by $1.6 billion, there was no net impact on operatingof acquired cash, flows for the year, as the changes in deferred taxes and income taxes payable offset the net earnings impact. Excluding the impact of the Tax Cuts and Jobs Act as well as favorable currency movements of $0.4 billion, the increase in cash flows provided by operating activities can be attributed to higher net earnings offset by working capital and other movements.

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

Net cash provided by operating activities of $8.1 billion for the year ended December 31, 2016, increased by $212 million from the comparable 2015 period. Excluding unfavorable currencyfavorable movements of $409 million, the change was due primarily to net earnings growth and lower cash payments related to exit costs, partly offset by higher working capital requirements and 2016 installment payments of security into a court trust pertaining to the Létourneau and Blais cases as well as a 2016 payment to the South Korean tax authorities (see Item 8, Note 18. Contingencies for additional information).
Excluding currency, the unfavorable variance$1.0 billion in working capital was due primarily to the following:
more cash used for accounts receivable, primarily due to the timing of sales and cash collections (including unfavorable comparisons to the cash flows provided for accounts receivable in 2015 following the expansion of arrangements to sell accounts receivable to unaffiliated financial institutions as disclosed in Item 8, Note 20. Sale of Accounts Receivable), partly offset by
more cash provided by accrued liabilities and other current assets, primarily due to the timing of payments for excise taxes.


Ÿ Net Cash Used in Investing Activities

Net cash used in investing activities of $3.0 billion for the year ended December 31, 2017, increased by $2.0 billion from the comparable 2016 period. This increase in net cash used of $2.0 billion was due principally to cash collateral postedexchanged with financial institutions to secure derivatives designated as net investment hedges of Euro assets following the strengthening ofprincipally related to changes in exchange rates between the Euro versus and
59

the U.S. dollar, and higher capital expenditures.dollar. For further detailsdetail on our 2021 acquisitions and derivatives designated as net investment hedges, see Item 8, Note 6. Acquisitions and Item 8, Note 15.Financial Instruments.Instruments.

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


Our capital expenditures were $1.5$0.7 billion in 2017, $1.22021 and $0.6 billion in 2016 and $1.0 billion in 2015.2020. The 20172021 expenditures were primarily related to our ongoing investments in RRPs to support capacity expansion (notably for heated tobacco units).RRPs. We expect total capital expenditures in 20182022 of approximately $1.7$1.0 billion (including additional capital expenditures related to our ongoing investment in RRPs to support capacity expansion)RRPs), to be funded by operating cash flows.


Ÿ •Net Cash Used in Financing Activities


During 2017, net cash used in financing activities was $2.8 billion, compared with netNet cash used in financing activities of $5.4$12.0 billion during 2016 and $4.7for the year ended December 31, 2021, increased by $3.5 billion in 2015.

from the comparable 2020 period. The 2017 change was primarily due primarily to higherthe proceeds we received in 2020 from long-term U.S. dollar debt issuances (primarily($3.7 billion), share purchases in 2021 under the $6.9 billion proceeds in 2017 from our U.S. dollarnew share repurchase program and Euro debt issuances versus the $3.5 billion proceeds in 2016 from our U.S. dollar and Euro debt issuances).

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


Dividends paid in 2017, 20162021 and 20152020 were $6.5 billion, $6.4$7.6 billion and $6.3$7.4 billion, respectively.


Ÿ 2020 compared with 2019

For a discussion comparing our net cash activities (operating, investing and financing) for the year ended December 31, 2020, with the year ended December 31, 2019, 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, 2020, which was filed with the U.S. Securities and Exchange Commission on February 9, 2021.


Debt and Liquidity


We define cash and cash equivalents as short-term, highly liquid investments, readily convertible to known amounts of cash that mature within a maximum of three months and have an insignificant risk of change in value due to interest rate or credit risk changes. As a policy, we do not hold any investments in structured or equity-linked products. Our cash and cash equivalents are predominantly held in demand deposits with institutions that have investment-grade long-term credit rating. As part of our cash management strategy and in order to manage counterparty exposure, we also enter into reverse repurchase agreements. Such agreements are collateralized with government or corporate securities held by a custodial bank and, at maturity, cash is paid back to PMI, and the collateral is returned to the bank. WhileFor 2021 and 2020, the activities for such reverse repurchase agreements were not material.

In August 2021, we published a business transformation-linked financing framework (“Framework”), which integrates the company’s smoke-free transformation into its financing strategy.The Framework outlines the guidelines that we will follow in issuing business transformation-linked financing instruments in the debt capital and loan markets, which may include public notes offerings, private placements, loans, and other relevant financing instruments.

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 10, 2022, our credit ratings and outlook by major credit rating agencies were as follows:
Short-termLong-termOutlook
Moody’sP-1A2Stable
Standard & Poor’sA-1AStable
FitchF1AStable

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Credit Facilities –On January 28, 2022, we entered into these agreements duringan agreement to amend and extend the periodsterm of our $1.8 billion 364-day revolving credit facility from February 1, 2022, to January 31, 2023.
At February 10, 2022, our committed credit facilities were as follows:
(in billions)


Type
Committed
Credit
Facilities
364-day revolving credit, expiring January 31, 2023$1.8
Multi-year revolving credit, expiring February 10, 2026(1)
2.0
Multi-year revolving credit, expiring September 29, 2026(2)
2.5
Total facilities$6.3
(1) On January 28, 2022, we entered into an agreement, effective February 10, 2022, to amend and hadextend the term of our $2.0 billion multi-year revolving credit facility, for an average balance during 2017additional year covering the period February 11, 2026 to February 10, 2027, in the amount of $1.9 billion.
(2) Includes business transformation-linked pricing adjustments that may result in the reduction or increase in both the interest rate and 2016commitment fee under the credit agreement if PMI achieves, or fails to achieve, certain specified targets based on its business transformation goals.

At February 10, 2022, there were no borrowings under the committed credit facilities, and the entire committed amounts were available for borrowing. Subject to market conditions, PMI currently expects to request a further extension of $0.9 the terms of its $2.5billion multi-year revolving credit facility for an additional one-year period, in accordance with and $0.2subject to the terms andconditionsof therelevantrevolvingcreditfacility agreement.

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.

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.

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 $2.3 billion respectively, we had a zero balance both at December 31, 20172021 and approximately $2.7 billion at December 31, 2020, are for the sole use of our subsidiaries. Borrowings under these arrangements and other bank loans amounted to $225 million at December 31, 2021, and $244 million at December 31, 2020.

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, 2021, and December 31, 2016.2020, we had no commercial paper outstanding. The average commercial paper balance outstanding during 2021 and 2020was $1.1 billion and $1.2 billion, respectively.

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

Our operating cash flows were positively impacted by the amount of the trade receivables sold and derecognized from the consolidated balance sheets, which remained outstanding with the unaffiliated financial institutions. The trade receivables sold that remained outstanding under these arrangements as of December 31, 2021, 2020 and 2019, were $0.9 billion, $1.2 billion and $0.9 billion, respectively. The net proceeds received are included in cash provided by operating activities in the consolidated statements of cash flows.

For further details, see Item 8, Note 18. Sale of Accounts Receivable to our consolidated financial statements.

Debt – Our total debt was $27.8 billion at December 31, 2021, and $31.5 billion at December 31, 2020. Our total debt is primarily fixed rate in nature. The weighted-average all-in financing cost of our total debt was 2.4% in 2021 and 2020. For further details,
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including the fair value of our debt, see Item 8, Note 7. Indebtedness. The amount of debt that we can issue is subject to approval by our Board of Directors.

On February 11, 2020, 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 2021, we had no public debt issuances.
The weighted-average time to maturity of our long-term debt was approximately 10 years at the end of 2021 and 2020.

Cash Requirements – At December 31, 2021, our material short-term and long-term cash requirements for various contractual obligations and commitments primarily consisted of the following:
•principal payments related to long-term debt and the associated interest payments. For further details, see Item 8, Note 7. Indebtedness to our consolidated financial statements;
•accounts payable and accrued liabilities on our consolidated balance sheet (primarily short-term in nature);
•purchase obligations for inventory and production costs to be utilized in the normal course of business such as raw materials, electronic devices, indirect materials and supplies, packaging, co-manufacturing arrangements, storage and distribution, as well as capital expenditures. These purchase obligations are expected to be approximately $2.7 billion in 2022 and approximately $1.6 billion for years beyond;
•operating lease liabilities, on an undiscounted basis, which were included in our consolidated balance sheets. For further details, see Item 8, Note 21. Leases to our consolidated financial statements; and
•other long-term liabilities mainly related to transition tax. For further details, see Item 8, Note 11. Income Taxes to our consolidated financial statements.

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


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

Short-termLong-termOutlook
Moody’sP-1A2Stable
Standard & Poor’sA-1ANegative
FitchF1ANegative

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

extend the term of our $3.5 billion multi-year revolving credit facility, for an additional year covering the period October 1, 2021 to October 1, 2022.
At February 9, 2018, our committed credit facilities were as follows:
(in billions)  


Type
 
Committed
Credit
Facilities
364-day revolving credit, expiring February 5, 2019 $2.0
Multi-year revolving credit, expiring February 28, 2021 2.5
Multi-year revolving credit, expiring October 1, 2022 3.5
Total facilities $8.0

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

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

Each of these facilities requires us to maintain a ratio of consolidated earnings before interest, taxes, depreciation and amortization (“consolidated EBITDA”) to consolidated interest expense of not less than 3.5 to 1.0 on a rolling four-quarter basis. At December 31, 2017, our ratio calculated in accordance with the agreements was 10.6 to 1.0. These facilities do not include any credit rating triggers, material adverse change clauses or any provisions that could require us to post collateral. We expect to continue to meet our covenants. The terms “consolidated EBITDA” and “consolidated interest expense,” both of which include certain adjustments, are defined in the facility agreements previously filed with the U.S. Securities and Exchange Commission.
In addition to the committed credit facilities discussed above, certain of our subsidiaries maintain short-term credit arrangements to meet their respective working capital needs. These credit arrangements, which amounted to approximately $2.8 billion at December 31, 2017 and $2.9 billion at December 31, 2016, are for the sole use of our subsidiaries. Borrowings under these arrangements amounted to $499 million at December 31, 2017, and $643 million at December 31, 2016.

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

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

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

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

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

On February 14, 2017, we filed a shelf registration statement with the U.S. Securities and Exchange Commission, under which we may from time to time sell debt securities and/or warrants to purchase debt securities over a three-year period.
Our debt issuances in 2017 were as follows:
(in millions)        
Type Face Value Interest Rate Issuance Maturity
         
U.S. dollar notes
(a) 
$700 1.625% February 2017 February 2019
U.S. dollar notes
(b) 
$300 Floating February 2017 February 2020
U.S. dollar notes
(a) 
$1,000 2.000% February 2017 February 2020
U.S. dollar notes
(a) 
$500 2.625% February 2017 February 2022
U.S. dollar notes
(c) 
$750 2.375% August 2017 August 2022
U.S. dollar notes
(c) 
$500 3.125% August 2017 August 2027
U.S. dollar notes
(d) 
$750 1.875% November 2017 November 2019
U.S. dollar notes
(d) 
$750 2.500% November 2017 November 2022
U.S. dollar notes
(e) 
$500 3.125% November 2017 March 2028
EURO notes
(f) 
€500 (approximately $582) 0.625% November 2017 November 2024
EURO notes
(f) 
€500 (approximately $582) 1.875% November 2017 November 2037
         
(a) Interest on these notes is payable semi-annually in arrears beginning in August 2017.
(b) Interest on these notes is payable quarterly in arrears beginning in May 2017.
(c) Interest on these notes is payable semi-annually in arrears beginning in February 2018.
(d) Interest on these notes is payable semi-annually in arrears beginning May 2018.
(e) Interest on these notes is payable semi-annually in arrears beginning March 2018.
(f) Interest on these notes is payable annually in arrears beginning November 2018.

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

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

•Off-Balance Sheet Arrangements and Aggregate Contractual Obligations


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


Guarantees – At December 31, 2017,2021, we were contingently liable for $0.9 billion ofhave guarantees of our own performance, which wereare primarily related to excise taxes on the shipment of our products. There is no liability in the consolidated financial statements associated with these guarantees. At December 31, 2017, our third-partyThese guarantees were insignificant.

Aggregate Contractual Obligations – The following table summarizes our contractual obligations at December 31, 2017:
  Payments Due
(in millions)Total20182019-20202021-20222023 and
Thereafter
Long-term debt (1)

$34,120

$2,506

$8,221

$5,811

$17,582
Interest on borrowings (2)
11,131
981
1,656
1,372
7,122
Operating leases (3)
849
179
219
95
356
Purchase obligations (4):
     
Inventory and production costs5,040
2,696
1,255
687
402
Other2,230
1,437
588
194
11
 7,270
4,133
1,843
881
413
Other long-term liabilities (5)
468
58
60
42
308
 
$53,838

$7,857

$11,999

$8,201

$25,781

(1) Amounts represent thehave not had, and are not expected cash payments of our long-term debt and capital lease obligations.
(2) Amounts represent the expected cash payments of our interest expenseto have, a significant impact on our long-term debt, including the current portion of long-term debt. Interest on our fixed-rate debt is presented using the stated interest rate. Interest on our variable debt is estimated using the rate in effect at December 31, 2017. Amounts exclude the amortization of debt discounts, the amortization of loan fees and feesPMI’s liquidity. In October 2020, we guaranteed an obligation for lines of credit that would be included in interest expense in the consolidated statements of earnings.
(3) Amounts represent the minimum rental commitments under non-cancelable operating leases.
(4) Purchase obligations for inventory and production costs (such as raw materials, indirect materials and supplies, packaging, co-manufacturing arrangements, storage and distribution) are commitments for projected needs to be utilized in the normal course of business. Other purchase obligations include commitments for marketing, advertising, capital expenditures, information technology and professional services. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Amounts represent the minimum commitments under non-cancelable contracts. Any amounts reflected on the consolidated balance sheet as accounts payable and accrued liabilities are excluded from the table above.
(5) Other long-term liabilities consist primarily of postretirement health care costs and accruals established for employment costs. The following long-term liabilities included on the consolidated balance sheet are excluded from the table above: accrued pension and postemployment costs, tax contingencies, insurance accruals and other accruals. We are unable to estimate the timing of payments (or contributions in the case of accrued pension costs) for these items. Currently, we anticipate making pension contributions of approximately $53 million in 2018, based on current tax and benefit laws (as discussed inan equity method investee. For further details, see Item 8, Note 13. Benefit Plans17. Contingencies to our consolidated financial statements).statements.


Ÿ Equity and Dividends


We discuss our stock awards as of December 31, 2017,2021, in Item 8, Note 9. Stock Plans to our consolidated financial statements.


During 2017, 20162020 and 2015,the first six months of 2021, we did not repurchase any shares under a share repurchase program. On June 11, 2021, our Board of Directors authorized a new share repurchase program andof up to $7 billion, with target spending of $5 billion to $7 billion over a three-year period. On July 22, 2021, we do not presently intend tobegan repurchasing shares under this new share repurchase program. From July 22, 2021 through December 31, 2021, we repurchased 8.5 million shares of our common stock in 2018.at a cost of $785 million.


Dividends paid in 20172021 were $6.5$7.6 billion. During the third quarter of 2017,2021, our Board of Directors approved a 2.9%4.2% increase in the quarterly dividend to $1.07$1.25 per common share. As a result, the present annualized dividend rate is $4.28$5.00 per common share.


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Market Risk


Ÿ Counterparty Risk -We predominantly work with financial institutions with strong short- and long-term credit ratings as assigned by Standard & Poor’s and Moody’s. These banks are also part of a defined group of relationship banks. Non-investment grade institutions are only used in certain emerging markets to the extent required by local business needs. We have a conservative approach when it comes to choosing financial counterparties and financial instruments. As such we do not invest or hold investments in any structured or equity-linked products. The majority of our cash and cash equivalents is currently invested in demand deposits maturing withinwith maturities of 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.,United States of America, with manufacturing and sales facilities in various locations throughout the world. Consequently, we use certain financial instruments to manage our foreign currency and interest rate exposure. We use derivative financial instruments principally to reduce our exposure to market risks resulting from fluctuations in foreign

exchange 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 Offsettingto our consolidated financial statements for further details on our derivative financial instruments and the related collateral arrangements.


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


The computation estimates were made assuming normal market conditions, using a 95% confidence interval. We useinterval and a “variance/co-variance” modelone-day holding period using a "parametric delta-gamma" approximation technique to determine the observed interrelationships between movements in interest rates and various currencies.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, 20172021 and 2016,2020, and primarily over each of the four preceding quarters for the calculation of average, high and low value at risk amounts during each year. The values of foreign currency options do not change on a one-to-one basis with the underlying currency and were valued accordingly in the computation.

Fair Value Impact  
(in millions) At
December 31, 2021		Average  High  Low  
Instruments sensitive to:
    Foreign currency rates$24$36$45$24
Interest rates$217$200$217$179
Fair Value Impact  
(in millions) At
December 31, 2020		Average  High  Low  
Instruments sensitive to:
    Foreign currency rates$59$78$136$54
Interest rates$180$445$1,146$180

The estimated potential one-day losssignificant year-over-year decrease in fair value of our interest-rate-sensitive instruments, primarily debt, under normal market conditions"average" and the estimated potential one-day loss in pre-tax earnings from foreign currency instruments under normal market conditions, as calculated in"high" impact on the value at risk model, were as follows:computation above was primarily due to an increase in interest rate and foreign currency volatility during the first quarter of 2020 resulting from the impact of the COVID-19 pandemic.
 Pre-Tax Earnings Impact  
(in millions) At
12/31/17		 Average   High   Low  
Instruments sensitive to:       
    Foreign currency rates$27 $49 $58 $27
  
 Fair Value Impact
(in millions) At
12/31/17		 Average High Low
Instruments sensitive to:       
Interest rates$118 $150 $173 $118
        
 Pre-Tax Earnings Impact  
(in millions) At
12/31/16		 Average   High   Low  
Instruments sensitive to:       
    Foreign currency rates$63 $58 $87 $34
        
 Fair Value Impact
(in millions) At
12/31/16		 Average High Low
Instruments sensitive to:       
Interest rates$143 $147 $217 $112



The value at risk computation is a risk analysis tool designed to statistically estimate the maximum probable daily loss from adverse movements in interest and foreign currency rates under normal market conditions. The computation does not purport to represent actual losses in fair value or earnings to be incurred by us, nor does it consider the effect of favorable changes in market rates. We
63

cannot predict actual future movements in such market rates and do not present these results to be indicative of future movements in market rates or to be representative of any actual impact that future changes in market rates may have on our future results of operations or financial position.



Contingencies


See Item 3 and Item 8, Note 18. 17. 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 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," "aspires," "estimates," "intends," "projects," "aims," "goals," "targets""targets," "forecasts" and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. 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 and whether to invest in or remain invested in our securities. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results and outcomes to differ materially from those contained in any forward-looking statements made by us; any such statement is qualified by reference to the following cautionary statements. We elaborate on these and other risks we face throughout this document, particularly in Item 1A. Risk Factors and Business Environment of this section. You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider the following to be a completethis discussion of all potential risks or uncertainties.uncertainties to be complete. We do not undertake to update any forward-looking statement that we may make from time to time, except in the normal course of our public disclosure obligations.


Item 7A.Quantitative and Qualitative Disclosures About Market Risk.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk.
 
The information called for by this Item is included in Item 7, Market Risk.
 

Item 8.Financial Statements and Supplementary Data.


Consolidated Balance Sheets
(in millions of dollars, except share data)
64
at December 31,2017 2016
Assets   
Cash and cash equivalents$8,447
 $4,239
Receivables (less allowances of $30 in 2017 and $42 in 2016)3,738
 3,499
Inventories:   
Leaf tobacco2,606
 2,498
Other raw materials1,563
 1,569
Finished product4,637
 4,950
 8,806
 9,017
Other current assets603
 853
Total current assets21,594
 17,608
Property, plant and equipment, at cost:   
Land and land improvements639
 590
Buildings and building equipment3,989
 3,474
Machinery and equipment8,976
 7,366
Construction in progress962
 930
 14,566
 12,360
Less: accumulated depreciation7,295
 6,296
 7,271
 6,064
Goodwill (Note 3)7,666
 7,324
Other intangible assets, net (Note 3)2,432
 2,470
Investments in unconsolidated subsidiaries (Note 4)1,074
 1,011
Deferred income taxes1,007
 859
Other assets1,924
 1,515
Total Assets$42,968
 $36,851










See notes to consolidated financial statements.


at December 31,2017 2016
Liabilities   
Short-term borrowings (Note 7)$499
 $643
Current portion of long-term debt (Note 7)2,506
 2,573
Accounts payable2,242
 1,666
Accrued liabilities:   
Marketing and selling708
 575
Taxes, except income taxes5,324
 6,204
Employment costs856
 800
Dividends payable1,669
 1,621
Other1,346
 1,553
Income taxes (Note 11)812
 832
Total current liabilities15,962
 16,467
Long-term debt (Note 7)31,334
 25,851
Deferred income taxes799
 1,897
Employment costs2,271
 2,800
Income taxes and other liabilities (Note 11)2,832
 736
Total liabilities53,198
 47,751

Contingencies (Note 18)

 

Stockholders’ (Deficit) Equity
   
Common stock, no par value (2,109,316,331 shares issued in 2017 and 2016)—
 —
Additional paid-in capital1,972
 1,964
Earnings reinvested in the business29,859
 30,397
Accumulated other comprehensive losses(8,535) (9,559)
 23,296
 22,802
Less: cost of repurchased stock (556,098,569 and 557,930,784 shares in 2017 and 2016, respectively)35,382
 35,490
Total PMI stockholders’ deficit(12,086) (12,688)
Noncontrolling interests1,856
 1,788
Total stockholders’ deficit(10,230) (10,900)
Total Liabilities and Stockholders’ (Deficit) Equity$42,968
 $36,851
Item 8.Financial Statements and Supplementary Data.










See notes to consolidated financial statements.

Consolidated Statements of Earnings
(in millions of dollars, except per share data)
for the years ended December 31,202120202019
Revenues including excise taxes$82,223 $76,047 $77,921 
Excise taxes on products50,818 47,353 48,116 
Net revenues31,405 28,694 29,805 
Cost of sales10,030 9,569 10,513 
Gross profit21,375 19,125 19,292 
Marketing, administration and research costs (Notes 6, 12, 17, 19 & 20)8,304 7,384 8,695 
Amortization of intangibles96 73 66 
Operating income12,975 11,668 10,531 
Interest expense, net (Note 14)628 618 570 
Pension and other employee benefit costs (Note 13)115 97 89 
Earnings before income taxes12,232 10,953 9,872 
Provision for income taxes (Note 11)2,671 2,377 2,293 
Equity investments and securities (income)/loss, net(149)(16)(149)
Net earnings9,710 8,592 7,728 
Net earnings attributable to noncontrolling interests601 536 543 
Net earnings attributable to PMI$9,109 $8,056 $7,185 
Per share data (Note 10):
Basic earnings per share$5.83 $5.16 $4.61 
Diluted earnings per share$5.83 $5.16 $4.61 
for the years ended December 31,2017 2016 2015
Net revenues$78,098
 $74,953
 $73,908
Cost of sales10,432
 9,391
 9,365
Excise taxes on products49,350
 48,268
 47,114
Gross profit18,316
 17,294
 17,429
Marketing, administration and research costs6,725
 6,405
 6,656
Asset impairment and exit costs—
 —
 68
Amortization of intangibles88
 74
 82
Operating income11,503
 10,815
 10,623
Interest expense, net (Note 14)914
 891
 1,008
Earnings before income taxes10,589
 9,924
 9,615
Provision for income taxes (Note 11)4,307
 2,768
 2,688
Equity (income)/loss in unconsolidated subsidiaries, net(59) (94) (105)
Net earnings6,341
 7,250
 7,032
Net earnings attributable to noncontrolling interests306
 283
 159
Net earnings attributable to PMI$6,035
 $6,967
 $6,873
Per share data (Note 10):     
Basic earnings per share$3.88
 $4.48
 $4.42
Diluted earnings per share$3.88
 $4.48
 $4.42







































See notes to consolidated financial statements.

65

Consolidated Statements of Comprehensive Earnings
(in millions of dollars)
for the years ended December 31,202120202019
Net earnings$9,710 $8,592 $7,728 
Other comprehensive earnings (losses), net of income taxes:
Change in currency translation adjustments:
Unrealized gains (losses), net of income taxes of $(58) in 2021, $94 in 2020 and $(161) in 201958 (1,265)505 
(Gains)/losses transferred to earnings - deconsolidation of RBH, net of income taxes of $0 in 2021, 2020 and 2019 (Note 20)— — 502 
Change in net loss and prior service cost:
Net gains (losses) and prior service costs, net of income taxes of $(210) in 2021, $139 in 2020 and $247 in 20191,055 (726)(454)
Amortization of net losses, prior service costs and net transition costs, net of income taxes of $(72) in 2021, $(67) in 2020
and $(69) in 2019
323 299 243 
(Gains)/losses transferred to earnings - deconsolidation of RBH, net of income taxes of $0 in 2021, $0 in 2020 and
$(15) in 2019 (Note 20)
— — 27 
Change in fair value of derivatives accounted for as hedges:
Gains (losses) recognized, net of income taxes of $(20) in 2021,
$13 in 2020 and $2 in 2019
124 (68)(18)
(Gains) losses transferred to earnings, net of income taxes of
$7 in 2021, $0 in 2020 and $3 in 2019
(35)(20)(14)
Total other comprehensive earnings (losses)1,525 (1,780)791 
Total comprehensive earnings11,235 6,812 8,519 
Less comprehensive earnings attributable to:
Noncontrolling interests522 574 586 
Comprehensive earnings attributable to PMI$10,713 $6,238 $7,933 
for the years ended December 31,2017 2016 2015
Net earnings$6,341
 $7,250
 $7,032
Other comprehensive earnings (losses), net of income taxes:     
Change in currency translation adjustments:     
Unrealized gains (losses), net of income taxes of $620 in 2017, ($101) in 2016 and ($143) in 2015330
 (14) (2,248)
(Gains)/losses transferred to earnings, net of income taxes of $- in 2017, 2016 and 2015(2) 5
 (1)
Change in net loss and prior service cost:     
Net gains (losses) and prior service costs, net of income taxes of ($17) in 2017, $78 in 2016 and $17 in 2015523
 (460) (536)
Amortization of net losses, prior service costs and net transition costs, net of income taxes of ($31) in 2017, ($43) in 2016 and ($48) in 2015228
 224
 227
Change in fair value of derivatives accounted for as hedges:     
Gains (losses) recognized, net of income taxes of $8 in 2017, ($4) in 2016 and ($5) in 2015(44) 8
 38
(Gains) losses transferred to earnings, net of income taxes of $2 in 2017, ($3) in 2016 and $14 in 2015(11) 30
 (102)
Total other comprehensive earnings (losses)1,024
 (207) (2,622)
Total comprehensive earnings7,365
 7,043
 4,410
Less comprehensive earnings attributable to:     
Noncontrolling interests306
 233
 113
Comprehensive earnings attributable to PMI$7,059
 $6,810
 $4,297




















See notes to consolidated financial statements.

66

Consolidated Balance Sheets
(in millions of dollars, except share data)
at December 31,20212020
Assets
Cash and cash equivalents$4,496 $7,280 
 Trade receivables (less allowances of $70 in 2021 and $23 in 2020)3,123 2,905 
Other receivables (less allowances of $36 in 2021 and $38 in 2020)817 856 
Inventories:
Leaf tobacco1,642 2,063 
Other raw materials1,652 1,712 
Finished product5,426 5,816 
8,720 9,591 
Other current assets561 860 
Total current assets17,717 21,492 
Property, plant and equipment, at cost:
Land and land improvements565 590 
Buildings and building equipment4,293 4,410 
Machinery and equipment9,275 9,460 
Construction in progress599 449 
14,732 14,909 
Less: accumulated depreciation8,564 8,544 
6,168 6,365 
Goodwill (Note 3)6,680 5,964 
Other intangible assets, net (Note 3)2,818 2,019 
Equity investments (Note 4)4,463 4,798 
Deferred income taxes895 1,410 
Other assets (less allowances of $21 in 2021 and $22 in 2020)2,549 2,767 
Total Assets$41,290 $44,815 










See notes to consolidated financial statements.
67

at December 31,20212020
Liabilities
Short-term borrowings (Note 7)$225 $244 
Current portion of long-term debt (Note 7)2,798 3,124 
Accounts payable3,331 2,780 
Accrued liabilities:
Marketing and selling811 782 
Taxes, except income taxes6,324 6,403 
Employment costs1,146 1,189 
Dividends payable1,958 1,880 
Other1,637 2,122 
Income taxes (Note 11)1,025 1,091 
Total current liabilities19,255 19,615 
Long-term debt (Note 7)24,783 28,168 
Deferred income taxes726 684 
Employment costs2,968 4,470 
Income taxes and other liabilities (Note 11)1,766 2,509 
Total liabilities49,498 55,446 

Contingencies (Note 17)
00

Stockholders’ (Deficit) Equity
Common stock, no par value (2,109,316,331 shares issued in 2021 and 2020)— — 
Additional paid-in capital2,225 2,105 
Earnings reinvested in the business33,082 31,638 
Accumulated other comprehensive losses(9,577)(11,181)
25,730 22,562 
Less: cost of repurchased stock (559,146,338 and 551,942,600 shares in 2021 and 2020, respectively)35,836 35,129 
Total PMI stockholders’ deficit(10,106)(12,567)
Noncontrolling interests1,898 1,936 
Total stockholders’ deficit(8,208)(10,631)
Total Liabilities and Stockholders’ (Deficit) Equity$41,290 $44,815 










See notes to consolidated financial statements.
68

Consolidated Statements of Cash Flows
(in millions of dollars)
for the years ended December 31,202120202019
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
   Net earnings$9,710 $8,592 $7,728 
   Adjustments to reconcile net earnings to operating cash flows:
Depreciation and amortization998 981 964 
Deferred income tax (benefit) provision(17)(143)(141)
Asset impairment and exit costs, net of cash paid (Note 19)(22)(14)371 
Cash effects of changes, net of the effects from acquired companies:
Receivables, net(198)26 (331)
Inventories549 (165)(548)
Accounts payable653 406 451 
Accrued liabilities and other current assets623 121 1,108 
Income taxes(260)(260)75 
Pension plan contributions(269)(102)(200)
Other200 370 613 (1)
Net cash provided by operating activities11,967 9,812 10,090 
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Capital expenditures(748)(602)(852)
Acquisitions, net of acquired cash (Note 6)(2,111)— — 
Equity investments(34)(47)(31)
 Deconsolidation of RBH (Note 20)— — (1,346)(2)
Net investment hedges466 (551)386 
Other69 46 32 
Net cash used in investing activities(2,358)(1,154)(1,811)









See notes to consolidated financial statements.
69

for the years ended December 31,202120202019
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Short-term borrowing activity by original maturity:
Net issuances (repayments) - maturities of 90 days or less$— $(70)$(364)
Issuances - maturities longer than 90 days— 45 989 
Repayments - maturities longer than 90 days— (45)(989)
Long-term debt proceeds— 3,713 3,819 
Long-term debt repaid(3,042)(3,999)(3,998)
Repurchases of common stock(775)— — 
Dividends paid(7,580)(7,364)(7,161)
Payments to noncontrolling interests and Other(580)(776)(357)
Net cash used in financing activities(11,977)(8,496)(8,061)
Effect of exchange rate changes on cash, cash equivalents and restricted cash(417)258 27 

Cash, cash equivalents and restricted cash(3):
Increase (Decrease)(2,785)420 245 
Balance at beginning of year7,285 6,865 6,620 
Balance at end of year$4,500 $7,285 $6,865 
Cash Paid:
             ��     Interest$716 $728 $800 
                   Income taxes$2,936 $2,785 $2,430 

(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 20. 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, cash equivalents and restricted cash shown above include restricted cash of $4 million, $5 million and $4 million as of December 31, 2021, 2020 and 2019, respectively, which were included in other current assets in the consolidated balance sheets.











See notes to consolidated financial statements.
70

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

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 earnings7,185 543 7,728 
Other comprehensive earnings (losses), net of income taxes219 43 262 
Issuance of stock awards79 81 160 
Dividends declared ($4.62 per share)(7,212)(7,212)
Payments to noncontrolling interests(378)(378)
Deconsolidation of RBH (Note 20)529529 
Other1 50 51 
Balances, December 31, 2019— 2,019 30,987 (9,363)(35,220)1,978 (9,599)
Net earnings8,056 536 8,592 
Other comprehensive earnings (losses), net of income taxes(1,818)38 (1,780)
Issuance of stock awards69 91 160 
Dividends declared ($4.74 per share)(7,405)(7,405)
Payments to noncontrolling interests(602)(602)
Other17 (14)3 
Balances, December 31, 2020— 2,105 31,638 (11,181)(35,129)1,936 (10,631)
Net earnings9,109 601 9,710 
Other comprehensive earnings (losses), net of income taxes1,604 (79)1,525 
Issuance of stock awards119 78 197 
Dividends declared ($4.90 per share)(7,665)(7,665)
Payments to noncontrolling interests(560)(560)
Common stock repurchased(785)(785)
Other1 1 
Balances, December 31, 2021$— $2,225 $33,082 $(9,577)$(35,836)$1,898 $(8,208)

 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, 2015$—
 $710
 $29,249
 $(6,826) $(35,762) $1,426
 $(11,203)
Net earnings    6,873
     159
 7,032
Other comprehensive earnings (losses), net of income taxes      (2,576)   (46) (2,622)
Issuance of stock awards  (3)     149
   146
Dividends declared ($4.04 per share)    (6,280)       (6,280)
Payments to noncontrolling interests          (171) (171)
Sale (purchase) of subsidiary shares to/(from) noncontrolling interests (Note 6)

  1,222
       400
 1,622
Balances, December 31, 2015—
 1,929
 29,842
 (9,402) (35,613) 1,768
 (11,476)
Net earnings    6,967
     283
 7,250
Other comprehensive earnings (losses), net of income taxes      (157)   (50) (207)
Issuance of stock awards  37
     123
   160
Dividends declared ($4.12 per share)    (6,412)       (6,412)
Payments to noncontrolling interests          (219) (219)
Other  (2)       6
 4
Balances, December 31, 2016—
 1,964
 30,397
 (9,559) (35,490) 1,788
 (10,900)
Net earnings    6,035
     306
 6,341
Other comprehensive earnings (losses), net of income taxes      1,024
   —
 1,024
Issuance of stock awards  20
     108
   128
Dividends declared ($4.22 per share)    (6,573)       (6,573)
Payments to noncontrolling interests          (255) (255)
Other  (12)       17
 5
Balances, December 31, 2017$—
 $1,972
 $29,859
 $(8,535) $(35,382) $1,856
 $(10,230)




































See notes to consolidated financial statements.

Consolidated Statements of Cash Flows
(in millions of dollars)
71
for the years ended December 31,2017 2016 2015
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES     
   Net earnings$6,341
 $7,250
 $7,032
   Adjustments to reconcile net earnings to operating cash flows:     
Depreciation and amortization875
 743
 754
Deferred income tax (benefit) provision(501) 182
 (18)
Asset impairment and exit costs, net of cash paid(10) (31) (164)
Cash effects of changes in:     
Receivables, net(92) (1,009) 647
Inventories730
 (695) (841)
Accounts payable425
 373
 310
Accrued liabilities and other current assets(554) 1,477
 (8)
Income taxes1,370
 (209) (42)
Pension plan contributions(66) (191) (154)
Other394
 187
 349
Net cash provided by operating activities8,912
 8,077
 7,865
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES     
Capital expenditures(1,548) (1,172) (960)
Investments in unconsolidated subsidiaries(111) (41) (55)
Net investment hedges(1,527) 295
 239
Other172
 (50) 68
Net cash used in investing activities(3,014) (968) (708)














See notes to consolidated financial statements.


for the years ended December 31,2017 2016 2015
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES     
Short-term borrowing activity by original maturity:     
    Net repayments - maturities of 90 days or less$(127) $(12) $(266)
    Issuances - maturities longer than 90 days1,634
 —
 —
    Repayments - maturities longer than 90 days(1,634) —
 —
Long-term debt proceeds6,850
 3,536
 1,539
Long-term debt repaid(2,551) (2,393) (1,229)
Repurchases of common stock—
 —
 (48)
Dividends paid(6,520) (6,378) (6,250)
Sale (purchase) of subsidiary shares to/(from) noncontrolling interests (Note 6)5
 7
 1,622
Other(426) (173) (104)
Net cash used in financing activities(2,769) (5,413) (4,736)
Effect of exchange rate changes on cash and cash equivalents1,079
 (874) (686)

Cash and cash equivalents:
     
Increase4,208
 822
 1,735
Balance at beginning of year4,239
 3,417
 1,682
Balance at end of year$8,447
 $4,239
 $3,417
      
Cash Paid:     
                   Interest$1,050
 $1,052
 $1,045
                   Income taxes$3,403
 $2,829
 $2,771



















See notes to consolidated financial statements.

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. (also referred to herein as the U.S., the United States or the United States of America), whose subsidiaries and affiliates and their licensees are primarily engaged in the manufacture and sale of cigarettes and other nicotine-containingreduced-risk products including reduced-riskheat-not-burn, vapor and oral nicotine products, in markets outside of the United States of America. In addition, during 2021, 2020 and 2019, PMI shipped versions of its Platform 1device 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. For further developments related to the sale of these products in the U.S., see Note 17. Contingencies. 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 continuedcontinuing 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 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 the financial statements and the reported amounts of net revenues and expenses during the reporting periods. Significant estimates and assumptions include, among other things: pension and benefit plan assumptions; useful lives and valuation assumptions of goodwill and other intangible assets; valuation assumptions for non-marketable 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-ownedwholly owned and majority-owned subsidiaries. Investments in which PMI exercises significant influence (generally 20%-50% ownership interest) are accounted for under the equity method of accounting. Investments in which PMI has an ownership interest of less than 20%, or does not exercise significant influence, are accounted for under the costequity method of accounting.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.


In the third quarter of 2021, the former Latin America & Canada segment was renamed as the Americas segment. Additionally, due to the acquisitions of Fertin Pharma A/S, Vectura Group plc. and OtiTopic, Inc. in the third quarter of 2021, PMI added an Other category. For further details, see Note 6. Acquisitions and Note 12. Segment Reporting.

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 20. Deconsolidation of RBH.

Certain prior years' amounts have been reclassified to conform with the current year's presentation, due primarily to the aggregationpresentation. The changes did not have a material impact on PMI's consolidated financial position, results of operations or cash flows in any of the U.S. and non-U.S. pension plans in Note 13. Benefit Plans.periods presented.











72

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.


Depreciation


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



Employee benefit plans


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


Fair value measurements

PMI follows ASC 820, Fair Value Measurements and Disclosures with respect to assets and liabilities that are measured at fair value. The 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. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Foreign currency translation


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


Goodwill and non-amortizable intangible assets valuation


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


73

Hedging instruments


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


Impairment of long-lived assets


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


Impairment of investmentsinvestment in unconsolidated subsidiariesnon-marketable equity securities


Investments in unconsolidated subsidiariesNon-marketable equity securities are subject to periodic impairment reviews during which PMI considers both qualitative and quantitative factors that may have a significant 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 20. Deconsolidation of RBH.

Impairment of equity method investments

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


Income taxes


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

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


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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 for consideration. Operating lease expense is recognized on a straight-line basis over the lease term. Finance lease expense is amortized based on production activity or the lease term. Lease expense is recorded in cost of sales or marketing, administration and research costs depending on the nature of the leased item. At lease commencement, PMI recognizes lease liabilities and the corresponding right-of-use assets (at the present value of future payments) for predominately all of its leases. The recognition of the right-of-use asset and lease liability includes renewal options when it is reasonably certain that they will be exercised. Certain of PMI’s leases include payments that are based on changes to an index or on actual usage. These lease payments are adjusted periodically and are included within variable lease costs. PMI accounts for lease and nonlease components as a single-lease component with the exception of its vehicle leases, of which PMI accounts for the lease components separately from the nonlease 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, in-store display incentives, e-commerce, mobile and other digital platforms, adult consumer activation and promotion activities, as well as costs associated with adult consumer experience outlets and other adult consumer touchpoints and volume-based incentives. Advertising, as well as certain consumer engagement and trade activities costs, are expensed as incurred. Trade promotions are recorded as a reduction of revenues based on amounts estimated as being due to customers at the end of a period, based principally on historical utilization. For interim reporting purposes, advertising and certain consumer engagement expenses are charged to earnings based on estimated sales and related expenses for the full year.


Revenue recognition


PMI recognizes revenue primarily through the manufacture and sale of cigarettes and reduced-risk products, including heat-not-burn, vapor and oral nicotine products. The majority of PMI revenues net ofare generated by sales incentivesthrough direct and including shippingindirect distribution networks with short-term payment conditions and handling charges billedwhere control is typically transferred to customers,the customer either upon shipment or delivery of goods whengoods. 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 riskthe customer’s ability to direct the use of loss passthose 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 customers. Excise taxes billed bythe customer. PMI has elected to customers are reported in net revenues. Shippingrecord all shipping and handling activities as costs to fulfill a contract. The shipping and handling costs that have not been incurred at the time revenue is recognized are classifiedaccrued.  The transaction price is typically based on the amount billed to the customer and includes 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 partthe business and product categories evolve. PMI has elected to exclude excise taxes collected from customers from the measurement of costthe transaction price, thereby presenting revenues net of sales.excise taxes. Estimated costs associated with warranty programs are generally provided for in cost of sales in the period the related revenues are recognized.

On May 28, 2014,Research and Development and Acquired In-Process Research and Development("IPR&D")

Research and development costs are expensed as incurred.

In a business combination, the Financial Accounting Standards Board issued Accounting Standards Update ASU 2014-09, "Revenue from Contracts with Customers." For further details, see Note 21. New Accounting Standards.fair value of IPR&D acquired is initially capitalized and accounted for as indefinite-lived intangible assets until completion or abandonment of the projects. Upon completion, a determination as to the useful life is performed and the intangible asset is accounted for as a definite-lived intangible asset. Both the indefinite and definite-lived intangible assets are subject to impairment testing annually or more frequently if indicators exist. In an asset acquisition, the initial cost to acquire the IPR&D is expensed in the consolidated statements of earnings when the project has no alternative future use. PMI records these costs within marketing, administration and research costs in its consolidated statements of earnings.


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Stock-based compensation


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


Note 3.


Goodwill and Other Intangible Assets, net:
Goodwill and other intangible assets, net, by segment were as follows:
 Goodwill 
Other Intangible Assets, net
(in millions)December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016
European Union$1,419
 $1,238
 $458
 $479
Eastern Europe, Middle East & Africa423
 372
 194
 200
Asia3,577
 3,596
 1,048
 1,074
Latin America & Canada2,247
 2,118
 732
 717
Total$7,666
 $7,324
 $2,432
 $2,470


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


The movements in goodwill were as follows:
(in millions)European UnionEastern EuropeMiddle East & AfricaSouth & Southeast AsiaEast Asia & AustraliaAmericasOtherTotal
Balances at January 1, 2020$1,338 $300 $89 $2,898 $551 $682 $— $5,858 
Changes due to:
Currency96 17 (3)17 8 (29)— 106 
Balances, December 31, 20201,434 317 86 2,915 559 653 — 5,964 
Changes due to:
Acquisitions30 — — — — — 968 998 
Currency(91)(22)(7)(87)(20)(42)(13)(282)
Balances, December 31, 2021$1,373 $295 $79 $2,828 $539 $611 $955 $6,680 
(in millions) European
Union		 
Eastern Europe,
Middle East
&
Africa
 Asia Latin
America &
Canada		 Total
Balance at January 1, 2016 $1,310
 $374
 $3,581
 $2,150
 $7,415
Changes due to:          
Currency (72) (2) 15
 (32) (91)
Balance at December 31, 2016 1,238
 372
 3,596
 2,118
 7,324
Changes due to:          
Currency 181
 51
 (19) 129
 342
Balance at December 31, 2017 $1,419
 $423
 $3,577
 $2,247
 $7,666


The increase in goodwill in 2021 was due primarily to the preliminary purchase price allocation of PMI's business combinations. For further details on these business combinations, see Note 6. Acquisitions.

Additional detailsAt December 31, 2021, goodwill primarily reflects PMI’s business combinations in Colombia, Greece, Indonesia, Mexico, Pakistan, the Philippines and Serbia, as well as the preliminary purchase price allocation of Fertin Pharma A/S and Vectura Group plc., which were acquired in September 2021.

Details of other intangible assets were as follows:
December 31, 2021December 31, 2020
(in millions)Weighted-Average Remaining Useful LifeGross Carrying AmountAccumulated AmortizationNetGross Carrying AmountAccumulated AmortizationNet
Non-amortizable intangible assets$1,312 $1,312 $1,289 $1,289 
Amortizable intangible assets:
Trademarks12 years1,201 $639 562 1,233 $594 639 
Developed technology, including patents12 years859 63 796 93 41 52 
Other(1)
12 years238 90 148 126 87 39 
Total other intangible assets$3,610 $792 $2,818 $2,741 $722 $2,019 
 December 31, 2017 December 31, 2016
(in millions)Gross
Carrying
Amount
 Accumulated
Amortization
 Gross
Carrying
Amount
 Accumulated
Amortization
Non-amortizable intangible assets$1,323
   $1,455
  
Amortizable intangible assets1,798
 $689
 1,598
 $583
Total other intangible assets$3,121
 $689
 $3,053
 $583
(1) Primarily includes distribution networks and customer relationships.


Non-amortizable intangible assets substantially consist of trademarks from PMI’s acquisitions in Indonesia in 2005 and Mexico in 2007. Amortizable intangible assets primarily consist of certain trademarks and distribution networksMexico. The increase since December 31, 2020, was due to the preliminary purchase price allocation associated with PMI's business combinations. Duringcombinations in 2021
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(primarily in-process research and development ("IPR&D")) in the first quarteramount of 2017, PMI reclassified three trademarks with a$53 million, partially offset by currency movements of ($30 million). For further details, see Note 6. Acquisitions.

The increase in the gross carrying amount of $153 million from non-amortizable intangible assets to amortizable intangible assets. The gross carrying amount, the range of useful lives as well as the weighted-average remaining useful life of amortizable intangible assets at from December 31, 2017, were as follows:2020, was due to the preliminary purchase price allocation associated with PMI's business combinations in 2021 (primarily developed technology and customer relationships) in the amount of $917 million, partially offset by currency movements of ($71 million).

Description (dollars in millions)Gross
Carrying
Amount		Initial Estimated
Useful Lives		    Weighted-Average
Remaining Useful Life
Trademarks$1,559
2 - 40 years    19 years
Distribution networks152
5 - 30 years    9 years
Other (including farmer contracts and intellectual property rights)87
4 - 17 years    9 years
 $1,798
   

Pre-taxThe change in the accumulated amortization expense for intangible assets during the years ended from December 31, 2017, 2016 and 2015,2020 was $88mainly due to the 2021 amortization of $96 million,, $74 million and $82 million, respectively. partially offset by currency movements of ($26 million).

Amortization expense for each of the next five years (including PMI's 2021 acquisitions of Fertin Pharma A/S and Vectura Group plc.) is estimated to be $84$152 million or less, assuming no additional transactions occur that require the amortization of intangible assets.

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


During the second quarter of 2017,2021, PMI completed its annual review of goodwill and non-amortizable intangible assets for potential impairment, and no impairment charges were required as a result of this review. Additionally, PMI elected to early adopt Accounting


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

Note 4.


Related Parties - Equity Investments in Unconsolidated Subsidiaries:and Other:


Equity Method Investments:

At December 31, 20172021 and 2016,2020, PMI had total equity method investments in unconsolidated subsidiaries of $1,074$879 million and $1,011$966 million, respectively, which were accounted for under the equity method of accounting.respectively. Equity method investments are initially recorded at cost. Under the equity method of accounting, the investment is adjusted for PMI's proportionate share of earnings or losses, dividends, capital contributions, changes in ownership interests and movements in currency translation adjustments. The carrying value of our equity method investments at December 31, 20172021 and 20162020, exceeded our share of the unconsolidated subsidiaries'investees' book value by $927$764 million and $867$773 million, respectively. The difference between the investment carrying value and the amount of underlying equity in net assets, excluding $873$728 million and $810$745 million attributable to goodwill as of December 31, 20172021 and 2016,2020, respectively, which consists primarily of definite-lived intangible assets is being amortized on a straight-line basis over the underlying assets' estimated useful lives of 10 to 20 years.basis. At December 31, 20172021 and 2016,2020, PMI received year-to-date dividends from unconsolidated subsidiariesequity method investees of $120$176 million and $117$79 million, respectively.


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

PMI holds a 49% equity interest in United Arab Emirates-based Emirati Investors-TA (FZC) (“EITA”). PMI holds an approximate 25% economic interest in Société des Tabacs Algéro-Emiratie (“STAEM”), an Algerian joint venture that is 51% owned by EITA and 49% by the Algerian state-owned enterprise Société NationaleManagement et Développement des TabacsActifs et Allumettes SpA. STAEMdes Ressources Holding ("MADAR Holding"), which manufactures and distributes under license some of PMI’s brands.brands (Middle East & Africa segment).

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


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


Equity securities:

Following the deconsolidation of RBH on March 22, 2019, PMI recorded the continuing investment in RBH, PMI's wholly owned subsidiary in Canada, at fair value of $3,280 million at the date of deconsolidation, within equity investments. For further details, see Note 20. 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.

The fair value of PMI’s other equity securities, which have been classified within Level 1, was $283 million and $256 million for the years ending December 31, 2021 and 2020, respectively. Unrealized pre-tax gains (losses) of $19 million and $(76) million ($15 million and $(60) million net of tax) on these equity securities were recorded in the consolidated statements of earnings for the years ended December 31, 2021 and 2020, respectively. For a description of the fair value hierarchy and the three levels of inputs used to measure fair values, see Note 2. Summary of Significant Accounting Policies.

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Other related parties:

United Arab Emirates-based Trans-Emirates Trading and Investments (FZC) ("TTI") holds a 33% non-controlling interest in Philip Morris Misr LLC ("PMM"), an entity incorporated in Egypt which is consolidated in PMI’s financial statements in the Middle East & Africa segment. PMM sells, under license, PMI brands in Egypt through an exclusive distribution agreement with a local entity that is also controlled by TTI. 

Godfrey Phillips India Ltd ("GPI") is one of the non-controlling interest holders in IPM India, which is a 56.3% owned PMI consolidated subsidiary in the South & Southeast Asia segment. GPI also acts as contract manufacturer and distributor for IPM India. Amounts in the tables below include transactions between these related parties.

Financial activity with the above related parties:

PMI’s earnings activity from unconsolidated subsidiaries wasnet revenues and expenses with the above related parties were as follows:
For the Years Ended December 31,
(in millions)202120202019
Net revenues
Megapolis Group$2,207 $2,174 $2,236 
Other1,123 1,059 1,015 
Net revenues (a)
$3,330 $3,233 $3,251 
Expenses:
Other$69 $51 $63 
Expenses$69 $51 $63 
  For the Years Ended December 31,
(in millions) 20172016
Net revenues $4,425
$3,985
(a) Net revenues exclude excise taxes and VAT billed to customers.


PMI’s balance sheet activity with the above related to unconsolidated subsidiariesparties was as follows:
At December 31,
(in millions)20212020
Receivables:
Megapolis Group$319 $209 
Other199 156 
Receivables$518 $365 
Payables:
Other$25 $13 
Payables$25 $13 
  At December 31,
(in millions) 20172016
Receivables $293
$289
The activity primarilyactivities with the above related to agreements with PMI’s unconsolidated subsidiaries within the Eastern Europe, Middle East & Africa segment. These agreements, whichparties are in the ordinary course of business, and are primarily for distribution, service fees, contract manufacturing and licenses.license agreements. PMI eliminated its respective share of all significant intercompany transactions with the equity method investees.


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Note 5.


Product Warranty:


PMI's IQOS heat-not-burn devices and e-vapor products are subject to standard product warranties generally for a period of 12 months from the date of purchase or such other periods as required by law. Estimated costs associated with warranty programs arePMI generally provided forprovides in cost of sales for the estimated cost of warranty in the period the related revenue is recognized, and during 2017, PMI recorded $168 million associated with these product warranty programs.recognized. PMI assesses the adequacy of its accrued warranty liabilitiesproduct warranties and adjusts the amounts as necessary based on actual experience and changes in future estimates. Factors that affect warranty obligationsproduct warranties may vary across markets but typically include device version mix, product failure rates, logistics and service delivery costs, and warranty policies. At December 31, 2017, $71 million was accrued related to these warranty obligationsPMI accounts for its product warranties within other accrued liabilities. At December 31, 2021 and December 31, 2020, these amounts were as follows:


At December 31,
(in millions)20212020
Balance at beginning of period$137 $140 
Changes due to:
   Warranties issued154 242 
    Settlements(177)(254)
    Currency/Other(1)9 
Balance at end of period$113 $137 

Note 6.


Acquisitions and Other Acquisitions:

Business Arrangements:Combinations


As announced in June 2015, PMI’s subsidiary PT HM Sampoerna Tbk. (“Sampoerna”AG Snus - On May 6, 2021, PMI acquired 100% of AG Snus Aktieselskab ("AG Snus"), a company based in Denmark, and its Swedish subsidiary Tobacco House of Sweden AB fully owned by AG Snus, which operates in the oral tobacco (i.e. snus) and modern oral (i.e. nicotine pouches) product categories. The purchase price was $28 million in cash, net of cash acquired, with additional contingent payments of up to $10 million, primarily relating to product development and performance targets over a less than two-year period. The operating results of AG Snus are included in the European Union segment, and were not material.

Fertin Pharma – On September 15, 2021, PMI heldacquired 100% of Fertin Pharma A/S (“Fertin Pharma”), a 98.18% interest,company based in Denmark. Fertin Pharma is a developer and manufacturer of pharmaceutical and well-being products based on oral and intra-oral delivery systems. The acquisition was required to complyfunded with existing cash. The total consideration of $821 million (DKK 5.2 billion) included cash of $580 million and the January 30, 2014, Indonesian Stock Exchange (“IDX”) regulation requiring all listed public companies to have at least a 7.5% public shareholding by January 30, 2016. In order to comply with this requirement, Sampoerna conducted a rights issue (the “Rights Issue”). The exercise price for the rights was set at Rp. 77,000 per share, a 1.349% premiumpayment of $241 million related to the closingsettlement of Fertin Pharma’s indebtedness. The purchase price onof $821 million was preliminarily allocated to cash ($24 million), current assets including receivables and inventories ($69 million), non-current assets including property, plant and equipment ($228 million), goodwill ($378 million), and other intangible assets ($245 million, which primarily consisted of customer relationships, developed technology, and in-process research and development ("IPR&D")), partially offset by current liabilities ($44 million, which primarily consisted of accrued liabilities and accounts payable) and non-current liabilities ($79 million, primarily deferred income tax). Goodwill is primarily attributable to future growth opportunities provided by acquired R&D capabilities and any intangibles that did not qualify for separate recognition. The amortizable intangible assets are being amortized over their estimated useful lives of 8 to 19 years. Subsequent to the IDX as of September 30, 2015. In connection withacquisition date, PMI made certain measurement period adjustments to the Rights Issue, PT Philip Morris Indonesia (“PMID”), a fully consolidated subsidiary of PMI, sold 264,209,711 of the rights to third-party investors. Delivery of the rights sold took place on October 26, 2015. The total net proceeds from the Rights Issue were $1.5 billion at prevailing exchange rates on the closing date. The sale of the rightspreliminary purchase price allocation, which resulted in an increase to goodwill of $41 million. The increase was primarily due to a decrease in other intangible assets ($82 million), partially offset by a decrease in deferred income tax liabilities ($21 million), and an increase in property, plant and equipment ($19 million). The purchase price allocation is preliminary and continues to be subject to refinement. PMI is evaluating the deductibility of goodwill for income tax purposes. Fertin Pharma's results of operations from the acquisition date through December 31, 2021 were included in PMI's consolidated statements of earnings, and were not material.

Vectura – During the third quarter and up to September 15, 2021, PMI acquired a controlling interest of 74.77% of the total issued shares in Vectura Group plc (“Vectura”), an inhaled therapeutics company based in the United Kingdom. The shares were acquired through a series of open market purchases and acceptances of the tender offer at a price of 165 pence per share. As a result of additional paid-in capitalacceptances of $1.1 billion.the offer and the exercise of the right to acquire compulsorily the Vectura shares, in accordance with the applicable English law, PMI completed the acquisition of 100% of Vectura in the fourth quarter of 2021. The acquisition was funded with existing cash from a designated account operated solely for the purpose of funding this acquisition.


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The total purchase price of $1,384 million (GBP 1.0 billion) for 100% of the Vectura shares was preliminarily allocated to cash ($136 million), current assets including receivables and inventories ($89 million), non-current assets including property, plant and equipment ($67 million), goodwill ($590 million), and other intangible assets ($719 million, which primarily consisted of developed technology, and IPR&D), partially offset by current liabilities ($100 million, primarily accrued liabilities), and non-current liabilities ($117 million, primarily deferred income tax). Goodwill is primarily attributable to future growth opportunities provided by acquired R&D capabilities and any intangibles that did not qualify for separate recognition. The amortizable intangible assets are being amortized over their estimated useful lives of 3 to 15 years. Subsequent to the acquisition date, PMI made certain measurement period adjustments to the preliminary purchase price allocation, which resulted in a decrease to goodwill of $115 million. The decrease was primarily due to increase in other intangible assets ($73 million),and a decrease in deferred income tax liabilities ($22 million). The purchase price allocation is preliminary and continues to be subject to refinement. PMI is evaluating the deductibility of goodwill for income tax purposes. Vectura's results of operations from September 15, 2021 through December 31, 2021 were included in PMI's consolidated statements of earnings, and were not material.

Pro forma results of operations for the above business combinations have not been presented as the aggregate impact is not material to PMI's consolidated statements of earnings.

PMI elected to early adopt ASU No. 2021-08 “Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which did not have a material impact on PMI’s consolidated operating results, statement of financial position or cash flows.

Asset Acquisition

On August 9, 2021, PMI acquired 100% of OtiTopic, Inc., a U.S. respiratory drug development company with a late-stage dry powder inhalation aspirin treatment for acute myocardial infarction. The transaction price was $38 million in cash, plus transaction costs, with additional contingent payment of $13 million, primarily related to certain key milestones that PMI deemed probable. Additionally, PMI may owe up to $25 million in future additional contingent payments dependent upon the achievement of certain milestones. PMI accounted for this transaction as an asset acquisition since the IPR&D of the dry powder inhalation aspirin treatment represented substantially all of the fair value of the gross assets acquired. At the date of acquisition, PMI determined that the acquired IPR&D had no alternative future use. As a result, PMI recorded a charge of $51 million to research and development costs within marketing, administration and research costs in the consolidated statements of earnings for the year ended December 31, 2021.

While PMI builds and organizes its future capabilities in wellness and healthcare, Fertin Pharma, Vectura and OtiTopic are considered separate operating segments with their operating results included in the Other category. For additional information see Note 12. Segment Reporting.


Note 7.


Indebtedness:


Short-Term Borrowings


At December 31, 20172021 and 2016,2020, PMI’s short-term borrowings and related average interest rates consisted of the following:

December 31, 2017 December 31, 2016December 31, 2021December 31, 2020
(in millions)Amount Outstanding
 Average Year-End Rate
 Amount Outstanding
 Average Year-End Rate
(in millions)Amount OutstandingAverage Year-End RateAmount OutstandingAverage Year-End Rate
Commercial paper$—
 —% $—
 —%Commercial paper$— — %$— — %
Bank loans499
 5.7
 643
 5.0
Bank loans225 12.0 244 5.3 
$499
   $643
  $225 $244 
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, 20172021 and 2016,2020, based upon current market interest rates, approximate the amounts disclosed above.


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Long-Term Debt


At December 31, 20172021 and 2016,2020, PMI’s long-term debt consisted of the following:
December 31,
(in millions)20212020
U.S. dollar notes, 0.875% to 6.375% (average interest rate 3.245%), due through 2044$19,397 $21,221 
Foreign currency obligations:
Euro notes, 0.125% to 3.125% (average interest rate 1.995%), due through 20397,687 9,253 
Swiss franc notes, 1.625%, due 2024273 622 
Other (average interest rate 3.329%), due through 2029 (a)
224 196 
Carrying value of long-term debt27,581 31,292 
Less current portion of long-term debt2,798 3,124 
$24,783 $28,168 
 December 31,
(in millions)2017 2016
U.S. dollar notes, 1.375% to 6.375% (average interest rate 3.560%), due through 2044$23,291
 $19,857
Foreign currency obligations:   
Euro notes, 0.625% to 3.125% (average interest rate 2.250%), due through 20378,997
 6,828
Swiss franc notes, 0.750% to 2.000% (average interest rate 1.269%), due through 20241,376
 1,312
Other (average interest rate 3.421%), due through 2024176
 427
 33,840
 28,424
Less current portion of long-term debt2,506
 2,573
 $31,334
 $25,851

Other debt:
Other foreign currency debt above includes(a) Includes mortgage debt in Switzerland as well as $71 million and capital lease obligations$37 million in finance leases at December 31, 20172021 and 2020, respectively.

The fair value of PMI’s outstanding long-term 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. At December 31, 2016. Other foreign currency2021 and 2020 the fair value of PMI's outstanding long-term debt, above also includesexcluding the aforementioned finance leases, was as follows:

December 31,
(in millions)20212020
Level 1$29,597 $35,227 
Level 2165 177 

For a bank loan indescription of the Philippines at December 31, 2016.fair value hierarchy and the three levels of inputs used to measure fair values, see Note 2. Summary of Significant Accounting Policies.


Debt Issuances Outstanding:

PMI’s debt issuances outstanding at December 31, 2017,2021, were as follows:
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(in millions) (in millions)
Type Face Value Interest
Rate		 Issuance MaturityTypeFace ValueInterest
Rate		IssuanceMaturity
U.S. dollar notes $2,500 5.650% May 2008 May 2018
U.S. dollar notes $750 1.875% November 2013 January 2019
U.S. dollar notes $700 1.625% February 2017 February 2019
U.S. dollar notes $500 1.375% February 2016 February 2019
U.S. dollar notes $750 1.875% November 2017 November 2019U.S. dollar notes$5002.625%February 2017February 2022
U.S. dollar notes $300 Floating February 2017 February 2020U.S. dollar notes$7502.375%August 2017August 2022
U.S. dollar notes $1,000 2.000% February 2017 February 2020U.S. dollar notes$7502.500%August 2012August 2022
U.S. dollar notes $1,000 4.500% March 2010 March 2020U.S. dollar notes$7502.500%November 2017November 2022
U.S. dollar notes $750 1.875% February 2016 February 2021U.S. dollar notes$6002.625%March 2013March 2023
U.S. dollar notes $350 4.125% May 2011 May 2021U.S. dollar notes$5002.125%May 2016May 2023
U.S. dollar notes $750 2.900% November 2011 November 2021U.S. dollar notes$7501.125%May 2020May 2023
U.S. dollar notes $500 2.625% February 2017 February 2022U.S. dollar notes$5003.600%November 2013November 2023
U.S. dollar notes $750 2.375% August 2017 August 2022U.S. dollar notes$9002.875%May 2019May 2024
U.S. dollar notes $750 2.500% August 2012 August 2022U.S. dollar notes$7503.250%November 2014November 2024
U.S. dollar notes $750 2.500% November 2017 November 2022U.S. dollar notes$7501.500%May 2020May 2025
U.S. dollar notes $600 2.625% March 2013 March 2023U.S. dollar notes$7503.375%August 2015August 2025
U.S. dollar notes $500 2.125% May 2016 May 2023U.S. dollar notes$7502.750%February 2016February 2026
U.S. dollar notes $500 3.600% November 2013 November 2023U.S. dollar notes$7500.875%November 2020May 2026
U.S. dollar notes $750 3.250% November 2014 November 2024U.S. dollar notes$5003.125%August 2017August 2027
U.S. dollar notes $750 3.375% August 2015 August 2025U.S. dollar notes$5003.125%November 2017March 2028
U.S. dollar notes $750 2.750% February 2016 February 2026U.S. dollar notes$7503.375%May 2019August 2029
U.S. dollar notes $500 3.125% August 2017 August 2027U.S. dollar notes$7502.100%May 2020May 2030
U.S. dollar notes $500 3.125% November 2017 March 2028U.S. dollar notes$7501.750%November 2020November 2030
U.S. dollar notes $1,500 6.375% May 2008 May 2038U.S. dollar notes$1,5006.375%May 2008May 2038
U.S. dollar notes $750 4.375% November 2011 November 2041U.S. dollar notes$7504.375%November 2011November 2041
U.S. dollar notes $700 4.500% March 2012 March 2042U.S. dollar notes$7004.500%March 2012March 2042
U.S. dollar notes $750 3.875% August 2012 August 2042U.S. dollar notes$7503.875%August 2012August 2042
U.S. dollar notes $850 4.125% March 2013 March 2043U.S. dollar notes$8504.125%March 2013March 2043
U.S. dollar notes $750 4.875% November 2013 November 2043U.S. dollar notes$7504.875%November 2013November 2043
U.S. dollar notes $750 4.250% November 2014 November 2044U.S. dollar notes$7504.250%November 2014November 2044
U.S. dollar notes
(a) 
$500 4.250% May 2016 November 2044U.S. dollar notes(a)$5004.250%May 2016November 2044
EURO notes
(b) 
€750 (approximately $951) 2.125% May 2012 May 2019EURO notes(b)€600 (approximately $761)2.875%May 2012May 2024
EURO notes
(b) 
€1,250 (approximately $1,621) 1.750% March 2013 March 2020EURO notes(b)€500 (approximately $582)0.625%November 2017November 2024
EURO notes
(b) 
€750 (approximately $1,029) 1.875% March 2014 March 2021EURO notes(b)€750 (approximately $972)2.750%March 2013March 2025
EURO notes
(b) 
€600 (approximately $761) 2.875% May 2012 May 2024EURO notes(b)€1,000 (approximately $1,372)2.875%March 2014March 2026
EURO notes
(b) 
€500 (approximately $582) 0.625% November 2017 November 2024EURO notes(b)€500 (approximately $557)0.125%August 2019August 2026
EURO notes
(b) 
€750 (approximately $972) 2.750% March 2013 March 2025EURO notes(b)€500 (approximately $697)2.875%May 2014May 2029
EURO notes
(b) 
€1,000 (approximately $1,372) 2.875% March 2014 March 2026EURO notes(b)€750 (approximately $835)0.800%August 2019August 2031
EURO notes
(b) 
€500 (approximately $697) 2.875% May 2014 May 2029EURO notes(b)€500 (approximately $648)3.125%June 2013June 2033
EURO notesEURO notes(b)€500 (approximately $578)2.000%May 2016May 2036
EURO notesEURO notes(b)€500 (approximately $582)1.875%November 2017November 2037
EURO notesEURO notes(b)€750 (approximately $835)1.450%August 2019August 2039
Swiss franc notesSwiss franc notes(b)CHF250 (approximately $283)1.625%May 2014May 2024

(in millions)
TypeFace ValueInterest
Rate		IssuanceMaturity
EURO notes
(b)
€500 (approximately $648)3.125%June 2013June 2033
EURO notes
(b)
€500 (approximately $578)2.000%May 2016May 2036
EURO notes
(b)
€500 (approximately $582)1.875%November 2017November 2037
Swiss franc notes
(b)
CHF200 (approximately $217)0.875%March 2013March 2019
Swiss franc notes
(b)
CHF275 (approximately $311)0.750%May 2014December 2019
Swiss franc notes
(b)
CHF325 (approximately $334)1.000%September 2012September 2020
Swiss franc notes
(b)
CHF300 (approximately $335)2.000%December 2011December 2021
Swiss franc notes
(b)
CHF250 (approximately $283)1.625%May 2014May 2024

(a) These notes are a further issuance of the 4.250% notes issued by PMI in November 2014.
(b) USD equivalents for foreign currency notes were calculated based on exchange rates on the date of issuance.


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


82

On January 18, 2022, PMI redeemed all of its outstanding 2.625% U.S. dollar notes due February 18, 2022. As of December 31, 2021, $500 million aggregate principal amount of the U.S. dollar notes were outstanding. The pre-tax loss related to this debt extinguishment, which was not material, will be included in Interest expense, net on PMI’s condensed consolidated statements of earnings for the three months ended March 31, 2022.


Aggregate maturities:
Aggregate maturities of long-term debt are as follows:

(in millions)
2022$2,798 
20232,371 
20243,318 
20252,351 
20263,199 
2027-20314,666 
2032-20361,132 
Thereafter7,965 
27,800 
Debt discounts(219)
Total long-term debt$27,581 

(in millions) 
2018$2,506
20194,091
20204,130
20213,056
20222,755
2023-20278,144
2028-20321,097
Thereafter8,341
 34,120
Debt discounts(280)
Total long-term debt$33,840

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


Credit Facilities

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



At December 31, 2017,2021, PMI’s total committed credit facilities and commercial paper outstanding were as follows:
Type
(in billions)		Committed
Credit
Facilities
364-day revolving credit, expiring February 1, 2022$1.8
Multi-year revolving credit, expiring February 10, 20262.0
Multi-year revolving credit, expiring September 29, 2026(1)
2.5
Total facilities$6.3
Type
(in billions of dollars)
Committed
Credit
Facilities		 Commercial
Paper
364-day revolving credit, expiring February 6, 2018$2.0
  
Multi-year revolving credit, expiring February 28, 20212.5
  
Multi-year revolving credit, expiring October 1, 20223.5
  
Total facilities$8.0
  
Commercial paper outstanding  $—
(1) Includes pricing adjustments that may result in the reduction or increase in both the interest rate and commitment fee under the credit agreement if PMI achieves, or fails to achieve, certain specified targets.


At December 31, 2017,2021, there were no borrowings under these committed credit facilities, and the entire committed amounts were available for borrowing.


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

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

On January 28, 2022, PMI entered into an agreement to amend and “consolidated interest expense,” bothextend the term of which include certain adjustments, are definedits $1.8 billion 364-day revolving credit facility from February 1, 2022, to January 31, 2023. On January 28, 2022, PMI also entered into an agreement, effective February 10, 2022, to amend and extend the term of its $2.0 billion multi-year revolving credit facility, for an additional year covering the period February 11, 2026 to February 10, 2027, in the facility agreements previously filed with the Securities and Exchange Commission.amount of $1.9 billion.


In addition to the committed credit facilities discussed above, certain subsidiaries maintain short-term credit arrangements to meet their respective working capital needs. These credit arrangements, which amounted to approximately $2.8$2.3 billion at December 31,
83

2021, and approximately $2.7 billion at December 31, 2017 and $2.9 billion at December 31, 2016,2020, are for the sole use of the subsidiaries. Borrowings under these arrangements and other bank loans amounted to $499$225 million at December 31, 2017,2021, and $643$244 million at December 31, 2016.2020.


Note 8.


Capital Stock:


Shares of authorized common stock are 6.0 billion; issued, repurchased and outstanding shares were as follows:
Shares IssuedShares
Repurchased		Shares
Outstanding
Balances, January 1, 20192,109,316,331 (554,736,610)1,554,579,721 
Issuance of stock awards1,314,942 1,314,942 
Balances, December 31, 20192,109,316,331 (553,421,668)1,555,894,663 
Issuance of stock awards1,479,068 1,479,068 
Balances, December 31, 20202,109,316,331 (551,942,600)1,557,373,731 
Repurchase of shares(8,514,629)(8,514,629)
Issuance of stock awards1,310,891 1,310,891 
Balances, December 31, 20212,109,316,331 (559,146,338)1,550,169,993 
 Shares Issued Shares
Repurchased		 Shares
Outstanding
Balances, January 1, 20152,109,316,331
 (562,416,635) 1,546,899,696
Issuance of stock awards  2,444,373
 2,444,373
Balances, December 31, 20152,109,316,331
 (559,972,262) 1,549,344,069
Issuance of stock awards  2,041,478
 2,041,478
Balances, December 31, 20162,109,316,331
 (557,930,784) 1,551,385,547
Issuance of stock awards  1,832,215
 1,832,215
Balances, December 31, 20172,109,316,331
 (556,098,569) 1,553,217,762


On June 11, 2021, PMI's Board of Directors authorized a new share repurchase program of up to $7 billion, with target spending of $5 billion to $7 billion over a three-year period. On July 22, 2021, PMI began repurchasing shares under this new share repurchase program. From July 22, 2021 through December 31, 2021, PMI repurchased 8.5 million shares of its common stock at a cost of $785 million.

At December 31, 2017, 31,246,3102021, 23,461,358 shares of common stock were reserved for stock awards under PMI’s stock plans, and 250 million shares of preferred stock, without par value, were authorized but unissued. PMI currently has no plans to issue any shares of preferred stock.



Note 9.


Stock Plans:


In May 2017, PMI’s shareholders approved the Philip Morris International Inc. 2017 Performance Incentive Plan (the “2017 Plan”). The 2017 Plan replaced the 2012 Performance Incentive Plan, and there will be no additional grants under the replaced plan. Under the 2017 Plan, PMI may grant to eligible employees restricted shares and restricted share units, performance-based cash incentive awards and performance-based equity awards. Up to 25 million shares of PMI’s common stock may be issued under the 2017 Plan. At December 31, 2017,2021, shares available for grant under the 2017 Plan were 24,991,850.14,832,141.


In May 2017, PMI’s shareholders also approved the Philip Morris International Inc. 2017 Stock Compensation Plan for Non-Employee Directors (the “2017 Non-Employee Directors Plan”). The 2017 Non-Employee Directors Plan replaced the 2008 Stock Compensation Plan for Non-Employee Directors, and there will be no additional grants under the replaced plan. A non-employee director is defined as a member of the PMI Board of Directors who is not a full-time employee of PMI or of any corporation in which PMI owns, directly or indirectly, stock possessing at least 50% of the total combined voting power of all classes of stock entitled to vote in the election of directors in such corporation. Up to 1 million shares of PMI common stock may be awarded under the 2017 Non-Employee Directors Plan. As ofAt December 31, 2017,2021, shares available for grant under the plan were 1,000,000.914,413.


Restricted share unit (RSU) awards


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


84

During 2017,2021, the activity for RSU awards was as follows:
Number of
Shares		Weighted-
Average Grant
Date Fair Value
Per Share
Balance at January 1, 20214,098,240 $86.21 
Granted2,020,860 82.17 
Vested(1,256,441)96.01 
Forfeited(221,895)82.97 
Balance at December 31, 20214,640,764 $81.96 
 Number of
Shares		Weighted-
Average Grant
Date Fair Value
Per Share
Balance at January 1, 20174,500,990
$82.08
Granted1,210,210
98.59
Vested(2,022,856)78.19
Forfeited(75,944)88.82
Balance at December 31, 20173,612,400
$89.65


During the years ended December 31, 2017, 20162021, 2020 and 2015,2019, the weighted-average grant date fair value of the RSU awards granted to PMI employees and the recorded compensation expense related to RSU awards were as follows:

(in millions, except per RSU award granted)Total Grant Date Fair Value of RSU Awards GrantedWeighted-Average Grant Date Fair Value Per RSU Award GrantedCompensation Expense related to RSU Awards
2021$166 $82.17 $139 
2020$148 $85.79 $129 
2019$133 $77.28 $118 
(in millions, except per RSU award granted)Total Weighted-Average Grant Date Fair Value of RSU Awards Granted Weighted-Average Grant Date Fair Value Per RSU Award GrantedCompensation Expense related to RSU Awards
2017$119
 $98.59
$111
2016$108
 $89.03
$126
2015$126
 $82.28
$166


The fair value of the RSU awards at the date of grant is amortized to expense over the restriction period, typically three years after the date of the award, or upon death, disability or reaching the age of 58. As of December 31, 2017,2021, PMI had $108$144 million of total unrecognized compensation costs related to non-vested RSU awards. These costs are expected to be recognized over a weighted-average period of two years,approximately seventeen months, or upon death, disability or reaching the age of 58.



During the years ended December 31, 2017, 20162021, 2020 and 2015,2019, share and fair value information for PMI RSU awards that vested were as follows:
(dollars in millions)Shares of RSU Awards that VestedGrant Date Fair Value of Vested Shares of RSU AwardsTotal Fair Value of RSU Awards that Vested
20211,256,441 $121 $111 
20201,206,871 $117 $102 
20191,126,057 $101 $95 

85
(dollars in millions)Shares of RSU Awards that Vested Grant Date Fair Value of Vested Shares of RSU AwardsTotal Fair Value of RSU Awards that Vested
20172,022,856
 $158
$208
20162,302,525
 $202
$210
20152,711,974
 $217
$224


Performance share unit (PSU) awards


PMI may grant PSU awards to certain executives; recipients may not sell, assign, pledge or otherwise encumber such awards. The PSU awards require the achievement of certain performance factors, which are predetermined at the time of grant, typically over a three-year performance cycle. PMI’sThe performance metrics consistfor such PSU's granted during 2021 and 2020 consisted of PMI’sPMI's Total Shareholder Return (TSR)("TSR") relative to a predetermined peer group and on an absolute basis (40% weight), PMI’s currency-neutral compound annual adjusted operating companies incomediluted earnings per share growth rate excluding acquisitions,(30% weight), and PMI’s performance against specific measures of PMI’s transformation, defined as net revenues from PMI's innovationRRPs and transformation. 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 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 three3 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 one1 share of common stock. An aggregate weighted PSU performance factor of 100 will result in the targeted number of PSUs being vested. At the end of the performance cycle, participants are entitled to an amount equivalent to the accumulated dividends paid on common stock during the performance cycle for the number of shares earned. PSU awards do not carry voting rights.


During 2017,2021, the activity for PSU awards was as follows:
Number of
Shares		Grant Date 
Fair Value Subject to Other Performance Factors		Grant Date 
Fair Value Subject to TSR Performance Factor
(Per Share)(Per Share)
Balance at January 1, 20211,472,800 $86.76 $90.48 
Granted574,410 81.86 106.93 
Vested(189,839)100.69 118.98 
Forfeited(320,351)97.76 72.55 
Balance at December 31, 20211,537,020 $82.14 $96.25 
 Number of
Shares		 
Grant Date 
Fair Value Subject to TSR Performance Factor Per Share(a)
Grant Date 
Fair Value Subject to Other Performance Factors Per Share(b)
Balance at January 1, 2017427,570
 $104.60
$89.02
Granted393,460
 128.72
98.29
Vested—
 —
—
Forfeited—
 —
—
Balance at December 31, 2017821,030
 $116.16
$93.46


(a) TheDuring the years ended December 31, 2021, 2020 and 2019, the grant date fair value of the PSU market based awards subjectgranted to PMI employees and the TSR performance factor was determined by using the Monte Carlo simulation model.recorded compensation expense related to PSU awards were as follows:
(b)
(in millions, except per PSU award granted)PSU Grant Date Fair Value Subject to Other Performance FactorsPSU Grant Date Fair Value Subject to TSR Performance FactorCompensation Expense related to PSU Awards
TotalPer PSU AwardTotalPer PSU AwardTotal
2021$28 $81.86 $25 $106.93 $71 
2020$28 $86.04 $28 $80.36 $38 
2019$30 $77.23 $21 $83.59 $54 

The grant date fair value of the PSU awards subject to the other performance factors was determined by using the average of the high and low market price of PMI’s stock at the date of grant.

During the years ended December 31, 2017 and 2016, the grant date fair value of the PSU awards granted to PMI employees and the recorded compensation expense related to PSU awards were as follows:
(in millions, except per PSU award granted)
PSU Grant Date Fair Value Subject to TSR Performance Factor(a)
 
PSU Grant Date Fair Value Subject to Other Performance Factors(b)
 Compensation Expense related to PSU Awards
 TotalPer PSU Award TotalPer PSU Award Total
2017$25
$128.72
 $19
$98.29
 $37
2016$22
$104.60
 $19
$89.02
 $27

(a)grant. The grant date fair value of the PSU market basedmarket-based awards subject to the TSR performance factor was determined by using the Monte Carlo simulation model.
(b) The following assumptions were used to determine the grant date fair value of the PSU awards subject to the otherTSR performance factors was determined byfactor for the years ended December 31, 2021, 2020 and 2019:
For the Years Ended December 31,
202120202019
Risk-free interest rate (a)
0.2 %1.4 %2.4 %
Expected volatility (b)
31.7 %23.5 %21.4 %

86

(a) Based on the U.S. Treasury yield curve.
(b) Determined using the average of the high and low market price of PMI’s stock at the date of grant.observed historical volatility.


The fair value of the PSU award at the date of grant is amortized to expense over the performance period, which is typically three years after the date of the award, or upon death, disability or reaching the age of 58. As of December 31, 2017,2021, PMI had $34$48 million of total unrecognized compensation cost related to non-vested PSU awards. This cost is recognized over a weighted-average performance cycle period of two years,approximately seventeen months, or upon death, disability or reaching the age of 58.

During the years ended December 31, 2017,2021, 2020 and 2016, there were no2019, share and fair value information for PMI PSU awards that vested. PMI did not grant any PSU awards during 2015.vested were as follows:

(dollars in millions)Shares of PSU Awards that VestedGrant Date Fair Value of Vested Shares of PSU AwardsTotal Fair Value of PSU Awards that Vested
2021189,839 $21 $16 
2020343,806 $35 $30 
2019330,616 $32 $28 

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 are included in PMI’s earnings per share calculation pursuant to the two-class method.


Basic and diluted earnings per share (“EPS”) were calculated using the following:
For the Years Ended December 31,
(in millions)202120202019
Net earnings attributable to PMI$9,109 $8,056 $7,185 
Less distributed and undistributed earnings attributable to share-based payment awards26 20 17 
Net earnings for basic and diluted EPS$9,083 $8,036 $7,168 
Weighted-average shares for basic EPS1,558 1,557 1,555 
Plus contingently issuable performance stock units (PSUs)1 1 1 
Weighted-average shares for diluted EPS1,559 1,558 1,556 
 For the Years Ended December 31,
(in millions)2017 2016 2015
Net earnings attributable to PMI$6,035
 $6,967
 $6,873
Less distributed and undistributed earnings attributable to share-based payment awards14
 19
 24
Net earnings for basic and diluted EPS$6,021
 $6,948
 $6,849
Weighted-average shares for basic EPS1,552
 1,551
 1,549
Plus contingently issuable performance stock units (PSUs)
1
 —
 —
Weighted-average shares for diluted EPS1,553
 1,551
 1,549


For the 2017, 20162021, 2020 and 20152019 computations, there were no antidilutive stock options.awards.



87

Note 11.


Income Taxes:


Earnings before income taxes and provision for income taxes consisted of the following for the years ended December 31, 2017, 20162021, 2020 and 2015:2019:

(in millions)202120202019
Earnings before income taxes$12,232 $10,953 $9,872 
Provision for income taxes:
United States federal and state:
Current$73 $(80)$17 
Deferred27 53 24 
Total United States100 (27)41 
Outside United States:
Current2,616 2,600 2,417 
Deferred(45)(196)(165)
Total outside United States2,571 2,404 2,252 
Total provision for income taxes$2,671 $2,377 $2,293 

(in millions)2017 2016 2015
Earnings before income taxes$10,589
 $9,924
 $9,615
Provision for income taxes:     
United States federal and state:     
Current$1,662
 $(39) $(56)
Deferred(384) 293
 117
Total United States1,278
 254
 61
Outside United States:     
Current3,146
 2,625
 2,762
Deferred(117) (111) (135)
Total outside United States3,029
 2,514
 2,627
Total provision for income taxes$4,307
 $2,768
 $2,688

United States income tax is primarily attributable to repatriation costs.

In December 2017,On March 11, 2021, the Tax Cuts and JobsAmerican Rescue Plan Act of 2021 ("the Act") was signed into law. The principal elementslaw in the U.S. to provide certain relief as a result of the Tax CutsCOVID-19 pandemic. As of December 31, 2021, PMI has determined that the Act had no significant impact on PMI's effective tax rate.

On July 20, 2020, the U.S. Department of the Treasury and Jobs Act relevant to PMI’sthe Internal Revenue Service released final and proposed regulations under the Global Intangible Low-Taxed Income (“GILTI”) and other provisions of the Internal Revenue Code. PMI has analyzed these elective regulations and recorded the impact in its consolidated financial statements, foras described below.

On March 27, 2020, the year endedCoronavirus Aid, Relief, and Economic Security Act and, on December 31, 2017, were:

A reduction27, 2020, the Consolidated Appropriations Act, 2021 (“U.S. COVID-19 Acts”) were signed into law in the U.S. to provide certain relief as a result of the COVID-19 pandemic. In addition, governments around the world have enacted or implemented various forms of tax relief measures in response to the economic conditions in the wake of COVID-19. PMI has determined that neither the U.S. federal corporate tax rate from 35%COVID-19 Acts nor changes to 21%; and
The requirement to pay a one-time transition tax on accumulated foreign earnings, including 2017 earnings ("transition tax").

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

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

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

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

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

PMI will complete the remaining elements of its analysis during 2018, and any adjustments to the provisional charges will be included in2020 corporate income tax expense or benefitrate reduction in the appropriate period, in accordance with guidance provided by Staff Accounting Bulletin No. 118 (SAB 118).Indonesia.

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


At December 31, 2017, PMI recorded a one-time transition tax liability on its accumulated foreign earnings, which is payable over an incomeeight-year period beginning in 2018. At December 31, 2021 and December 31, 2020, $0.9 billion and $1.1 billion of PMI's remaining long-term portion of transition tax payable of $1.7 billion attributable to the Tax Cuts and Jobs Act, of which $1.6 billionliability, respectively, 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 bysheets.

At December 31, 2021 and 2020, U.S. federal and foreign tax credits related to foreign withholding taxes previously paid of $0.5 billion. The income tax payable is due over an 8-year period beginning in 2018.

A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:
(in millions)2017 2016 2015
Balance at January 1,$79
 $88
 $123
Additions based on tax positions related to the current year71
 13
 17
Additions for tax positions of previous years5
 1
 6
Reductions for tax positions of prior years—
 (7) (42)
Reductions due to lapse of statute of limitations(7) (14) (7)
Settlements(4) (2) (1)
Other1
 —
 (8)
Balance at December 31,$145
 $79
 $88

Unrecognized tax benefits and PMI’s liability for contingentdeferred income taxes interest and penalties were as follows:
(in millions)December 31, 2017
 December 31, 2016
 December 31, 2015
Unrecognized tax benefits$145
 $79
 $88
Accrued interest and penalties23
 15
 28
Tax credits and other indirect benefits(35) (31) (40)
Liability for tax contingencies$133
 $63
 $76

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

For the years ended December 31, 2017, 2016 and 2015, PMI recognized income (expense) in its consolidated statements ofhave been provided on all accumulated earnings of $(11) million, $13 million and $3 million, respectively, related to interest and penalties.PMI's foreign subsidiaries.


PMI is regularly examined by tax authorities around the world and is currently under examination in a number of jurisdictions. The U.S. federal statute of limitations remains open for the years 20132017 and onward.onward. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from three to five years. Years still open to examination by foreign tax authorities in major jurisdictions include Germany (2015 onward), Indonesia (2014 onward), Russia (2015(2019 onward) and Switzerland (2017 onward).


In October 2021, a subsidiary of PMI in Indonesia, PT Hanjaya Mandala Sampoerna Tbk ("HMS"), received a tax assessment in the amount of 3.8 trillion Indonesian rupiah (approximately $260 million) primarily relating to corporate income taxes on domestic and other intercompany transactions for the years 2017 to 2019. HMS paid the assessment in the fourth quarter of 2021 in order to avoid potential penalties and filed an objection letter with the tax office in January 2022. The amount paid was included in other assets in PMI’s consolidated balance sheets at December 31, 2021 and negatively impacted net cash provided by operating activities in the consolidated statements of cash flows in the period of payment.

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It is reasonably possible that within the next 12 months certain tax examinations will close, which could result in a change in unrecognized tax benefits, along with related interest and penalties. An estimate of any possible change cannot be made at this time.


A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:
(in millions)202120202019
Balance at January 1,$72 $63 $56 
Additions based on tax positions related to the current year12 11 10 
Additions for tax positions of previous years15 1 1 
Reductions for tax positions of prior years(1)(4)(2)
Reductions due to lapse of statute of limitations(3)(1)(1)
Settlements— — — 
Other(6)2 (1)
Balance at December 31,$89 $72 $63 

Unrecognized tax benefits and PMI’s liability for contingent income taxes, interest and penalties were as follows:
(in millions)December 31, 2021December 31, 2020December 31, 2019
Unrecognized tax benefits$89 $72 $63 
Accrued interest and penalties18 17 16 
Tax credits and other indirect benefits(7)(9)(12)
Liability for tax contingencies$100 $80 $67 

The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $82 million at December 31, 2021. The remainder, if recognized, would principally affect deferred taxes.

For the years ended December 31, 2021, 2020 and 2019, PMI recognized income (expense) in its consolidated statements of earnings of $(3) million, $(1) million and $(4) million, respectively, related to interest and penalties associated with uncertain tax positions.

The effective income tax rate on pre-tax earnings differed from the U.S. federal statutory rate for the following reasons for the years ended December 31, 2017, 20162021, 2020 and 2015:2019:

202120202019
U.S. federal statutory rate21.0 %21.0 %21.0 %
Increase (decrease) resulting from:
Foreign rate differences(0.3)0.6 1.8 
Dividend repatriation cost0.6 0.4 (0.5)
Global intangible low-taxed income0.8 0.1 1.4 
U.S. state taxes0.2 0.2 0.7 
Foreign derived intangible income(0.7)(0.6)(1.2)
Other0.2 — — 
Effective tax rate21.8 %21.7 %23.2 %
 2017 2016 2015
U.S. federal statutory rate35.0 % 35.0 % 35.0 %
Increase (decrease) resulting from:     
Foreign rate differences(12.2) (12.6) (12.3)
Dividend repatriation cost16.4
 5.8
 5.7
Other1.5
 (0.3) (0.4)
Effective tax rate40.7 % 27.9 % 28.0 %



The 20172021 effective tax rate increased 12.80.1 percentage pointspoint to 40.7%21.8%. The change in the effective tax rate for 2017,2021, as compared to 2016,2020, was primarily dueunfavorably impacted by repatriation cost differences and foreign tax credit limitations related to GILTI, partially offset by the Tax Cuts and Jobs Act. In addition to the transitioncorporate income tax which resulted in a net tax charge of $1.4 billion, the Tax Cuts and Jobs Act also included arate reduction in the U.S. income tax rate from 35% to 21%, asPhilippines (enacted in the first quarter of January 1, 2018. This change2021) and changes in income tax rate required a re-measurement of PMI's U.S. deferred tax assets and liabilities at December 31, 2017, resulting in a tax charge of $0.2 billion.earnings mix by taxing jurisdiction.


The 20162020 effective tax rate decreased 0.11.5 percentage pointpoints to 27.9%21.7%. The change in the effective tax rate for 2016,2020, as compared to 2015,2019, was primarily due tofavorably impacted by changes in earnings mix by taxing jurisdiction, a reduction of U.S. state tax expense, a reduction of estimated U.S. income tax liabilities for years 2018 and 2019 due to the GILTI regulations mentioned above ($93 million) and the
89

corporate income tax rate reduction in Indonesia, partially offset by a decrease in deductions related to foreign-derived intangible income for the years 2018 and 2019 and repatriation cost differences.

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


The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of the following:
At December 31,
(in millions)20212020
Deferred income tax assets:
Accrued postretirement and postemployment benefits$234 $225 
Accrued pension costs392 720 
Inventory(1)
177 232 
Accrued liabilities168 182 
Net operating loss carryforwards and tax credits408 351 
Foreign exchange— 27 
Other112 124 
Total deferred income tax assets1,491 1,861 
Less: valuation allowance(239)(250)
Deferred income tax assets, net of valuation allowance1,252 1,611 
Deferred income tax liabilities:
Trade names(591)(374)
Property, plant and equipment(140)(200)
Unremitted earnings(206)(311)
Foreign exchange(146)— 
Total deferred income tax liabilities(1,083)(885)
Net deferred income tax assets$169 $726 
 At December 31,
(in millions)2017 2016
Deferred income tax assets:   
Accrued postretirement and postemployment benefits$239
 $287
Accrued pension costs334
 256
Inventory131
 241
Accrued liabilities117
 137
Foreign exchange91
 —
Other114
 173
Total deferred income tax assets1,026
 1,094
Deferred income tax liabilities:   
Trade names(546) (554)
Property, plant and equipment(223) (217)
Unremitted earnings(49) (636)
Foreign exchange—
 (725)
Total deferred income tax liabilities(818) (2,132)
Net deferred income tax assets (liabilities)$208
 $(1,038)
(1)Includes deferred tax charges of $153 million and $209 million in 2021 and 2020, respectively, related to intercompany transactions.


At December 31, 2021, PMI recorded deferred tax assets for net operating loss carryforwards and tax credits of $408 million, with varying dates of expiration, primarily after 2026, including $183 million with an unlimited carryforward period. At December 31, 2021, PMI has recorded a valuation allowance of $239 million against deferred tax assets that do not meet the more-likely-than not recognition threshold.

At December 31, 2020, PMI recorded deferred tax assets for net operating loss carryforwards of $351 million, with varying dates of expiration, primarily after 2025, including $79 million with an unlimited carryforward period. At December 31, 2020, PMI has recorded a valuation allowance of $250 million against deferred tax assets that do not meet the more-likely-than-not recognition threshold.

Note 12.


Segment Reporting:


PMI’s subsidiaries and affiliates are primarily engaged in the manufacture and sale of cigarettes and other nicotine-containingRRPs, including heat-not-burn, vapor and oral nicotine products, including RRPs, in markets outside of the United States of America. ReportablePMI's segments for PMI are generally organized by geographic region and managed by segment managers who are responsible for the operating and financial results of the regions inclusive of allcombustible and reduced-risk product categories sold in the region. PMI’s reportable segments arePMI currently has 6 geographical segments: the European Union; Eastern Europe,Europe; Middle East & Africa; South & Southeast Asia; East Asia & Australia; and Latin America & Canada for all periods presented inAmericas; as well as an Other category. Other consists of the 2021 acquisitions of Fertin Pharma A/S, Vectura Group plc. and OtiTopic, Inc. For further details on these financial statements.acquisitions, see Note 6. Acquisitions. PMI records net revenues and operating companies income to its geographical 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 Americas segment.


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

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

Segment dataPMI disaggregates its net revenue from contracts with customers by both geographic location and product category for each of PMI's 6 geographical segments. For the 2021 acquisitions discussed above, net revenues from contracts with customers are included in the Other category. 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 geographic segment and Other category were as follows:
For the Years Ended December 31,
(in millions)202120202019
Net revenues:
European Union$12,275 $10,702 $9,817 
Eastern Europe3,544 3,378 3,282 
Middle East & Africa3,293 3,088 4,042 
South & Southeast Asia4,396 4,396 5,094 
East Asia & Australia5,953 5,429 5,364 
Americas1,843 1,701 2,206 
Other101 — — 
Net revenues$31,405 $28,694 $29,805 
 For the Years Ended December 31,
(in millions)2017 2016 2015
Net revenues:     
European Union$27,580
 $27,129
 $26,563
Eastern Europe, Middle East & Africa18,045
 18,286
 18,328
Asia22,635
 20,531
 19,469
Latin America & Canada9,838
 9,007
 9,548
Net revenues(1)
$78,098
 $74,953
 $73,908


(1)Total net revenues attributable to customers located in Indonesia, PMI’sJapan, PMI's largest market in terms of net revenues, were $8.0$4.6 billion, $7.7$4.1 billion and $7.1$3.9 billion in 2021, 2020 and 2019, respectively. PMI had one customer in the East Asia & Australia segment that accounted for 15%, 14% and 13% of PMI’s consolidated net revenues, and one customer in the European Union segment that accounted for 13%, 11% and 10% of PMI’s consolidated net revenues in 2021, 2020 and 2019, respectively.
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PMI's net revenues by product category were as follows:
For the Years Ended December 31,
(in millions)202120202019
Combustible products:
European Union$8,211 $8,053 $8,093 
Eastern Europe2,240 2,250 2,438 
Middle East & Africa3,148 3,031 3,721 
South & Southeast Asia4,385 4,395 5,094 
East Asia & Australia2,414 2,468 2,693 
Americas1,790 1,670 2,179 
Total combustible products$22,190 $21,867 $24,218 
Reduced-risk products:
European Union$4,064 $2,649 $1,724 
Eastern Europe1,304 1,128 844 
Middle East & Africa145 57 321 
South & Southeast Asia11 1 — 
East Asia & Australia3,539 2,961 2,671 
Americas53 31 27 
Total reduced-risk products$9,115 $6,827 $5,587 
Other:
Other$101 $— $— 
Total PMI net revenues$31,405 $28,694 $29,805 
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, heat-not-burn devices and related accessories, and other nicotine-containing products, which primarily include PMI's e-vapor and oral nicotine products.

Net revenues in the Other category primarily consist of operating revenues generated from the sale of inhaled therapeutics, and oral and intra-oral delivery systems resulting from the third quarter 2021 acquisitions of Fertin Pharma A/S, Vectura Group plc. and OtiTopic, Inc.

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Operating income (loss) by geographic segment and Other category were as follows:
For the Years Ended December 31,
(in millions)202120202019
Operating income (loss):
European Union$6,119 $5,098 $3,970 
Eastern Europe1,213 871 547 
Middle East & Africa1,146 1,026 1,684 
South & Southeast Asia1,506 1,709 2,163 
East Asia & Australia2,556 2,400 1,932 
Americas487 564 235 
Other(52)— — 
Operating income$12,975 $11,668 $10,531 


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

•Asset impairment and exit costs - See Note 19. Asset Impairment and Exit Costs for details of the $216 million, $149 million and $422 million pre-tax charges for the yearsyear ended December 31, 2017, 20162021, 2020 and 2015, respectively. Total2019, respectively, as well as a breakdown of these costs by segment.
•Saudi Arabia customs assessments - See Note 17. Contingencies for the details of the $246 million reduction in net revenues attributable to customers locatedof combustible products included in Germany were $7.2 billion, $7.1 billion and $7.2 billionthe Middle East & Africa segment for the yearsyear ended December 31, 2017, 20162021.
•Asset acquisition cost - See Note 6. Acquisitions for the details of the $51 million pre-tax charge associated with the asset acquisition of OtiTopic, Inc. included in Other within the operating income table above for the year ended December 31, 2021.
•Russia excise and 2015, respectively.VAT audit charge - See Note 17. Contingencies for details of the $374 million pre-tax charge included in the Eastern Europe segment for the year ended December 31, 2019.

•Canadian tobacco litigation-related expense - See Note 17. Contingencies and Note 20. Deconsolidation of RBH for details of the $194 million pre-tax charge included in the Americas segment for the year ended December 31, 2019.
•Loss on deconsolidation of RBH - See Note 20. Deconsolidation of RBH for details of the $239 million loss included in the Americas segment for the year ended December 31, 2019.
•Brazil indirect tax credit - Following a final and enforceable decision by the highest court in Brazil in October 2020, PMI recorded a gain of $119 million for tax credits representing overpayments of indirect taxes for the period from March 2012 through December 2019; these tax credits were applied to tax liabilities in Brazil during 2021. This amount was included as a reduction in marketing, administration and research costs in the consolidated statements of earnings for the year ended December 31, 2020 and was included in the operating income of the Americas segment. An additional amount of overpaid indirect taxes of approximately $90 million is dependent on a potential tax authority challenge.


Other segment data were as follows:
For the Years Ended December 31,
(in millions)202120202019
Depreciation expense:
European Union$307 $266 $254 
Eastern Europe131 173 147 
Middle East & Africa89 75 90 
South & Southeast Asia143 137 142 
East Asia & Australia154 188 185 
Americas62 69 80 
Other16 — — 
Total depreciation expense$902 $908 $898 
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 For the Years Ended December 31,
(in millions)2017 2016 2015
Earnings before income taxes:     
Operating companies income:     
European Union$3,775
 $3,994
 $3,576
Eastern Europe, Middle East & Africa2,888
 3,016
 3,425
Asia4,149
 3,196
 2,886
Latin America & Canada1,002
 938
 1,085
Amortization of intangibles(88) (74) (82)
General corporate expenses(164) (161) (162)
Less:     
Equity (income)/loss in unconsolidated subsidiaries, net(59) (94) (105)
Operating income11,503
 10,815
 10,623
Interest expense, net(914) (891) (1,008)
Earnings before income taxes$10,589
 $9,924
 $9,615
For the Years Ended December 31,
(in millions)202120202019
Capital expenditures:
European Union$470 $384 $466 
Eastern Europe71 88 132 
Middle East & Africa37 22 35 
South & Southeast Asia52 57 100 
East Asia & Australia36 13 67 
Americas54 38 52 
Other28 — — 
Total capital expenditures$748 $602 $852 


At December 31,
(in millions)202120202019
Long-lived assets:
European Union$4,504 $4,500 $4,275 
Eastern Europe635 668 774 
Middle East & Africa289 375 369 
South & Southeast Asia1,386 1,348 1,361 
East Asia & Australia740 807 829 
Americas661 784 680 
Other292 — — 
Total long-lived assets8,507 8,482 8,288 
Financial instruments210 650 314 
Total property, plant and equipment, net and Other assets$8,717 $9,132 $8,602 
 For the Years Ended December 31,
(in millions)2017 2016 2015
Depreciation expense:     
European Union$213
 $184
 $184
Eastern Europe, Middle East & Africa164
 150
 163
Asia313
 247
 230
Latin America & Canada85
 79
 85
 775
 660
 662
Other12
 9
 10
Total depreciation expense$787
 $669
 $672



 For the Years Ended December 31,
(in millions)2017 2016 2015
Capital expenditures:     
European Union$956
 $665
 $497
Eastern Europe, Middle East & Africa182
 223
 147
Asia227
 180
 185
Latin America & Canada175
 103
 130
 1,540
 1,171
 959
Other8
 1
 1
Total capital expenditures$1,548
 $1,172
 $960

 At December 31,
(in millions)2017 2016 2015
Long-lived assets:     
European Union$4,130
 $3,282
 $3,129
Eastern Europe, Middle East & Africa976
 866
 743
Asia2,078
 1,916
 1,743
Latin America & Canada885
 765
 605
Total long-lived assets8,069
 6,829
 6,220
Other1,126
 750
 644
Total property, plant and equipment, net and Other assets$9,195
 $7,579
 $6,864

Long-lived assets consist of non-current assets other than goodwill; other intangible assets, net; deferred tax assets, equity investments, in unconsolidated subsidiaries, and financial instruments. PMI's largest markets in terms of long-lived assets are Switzerland, Italy Switzerland and Indonesia. Total long-lived assets located in Switzerland, which is reflected in the European Union segment above, were $1.3 billion, $1.3 billion and $1.1 billion at December 31, 2021, 2020 and 2019, respectively. Total long-lived assets located in Italy, which is reflected in the European Union segment above, were $1.2$0.9 billion, $0.7$1.1 billion and $0.4$1.1 billion at December 31, 2017, 20162021, 2020 and 2015, respectively. Total long-lived assets located in Switzerland, which is reflected in the European Union segment above, were $0.9 billion, $0.9 billion and $0.9 billion at December 31, 2017, 2016 and 2015,2019, respectively. Total long-lived assets located in Indonesia, which is reflected in the South & Southeast Asia segment above, were $0.8$0.9 billion, $0.8$0.7 billion and $0.7$0.8 billion at December 31, 2017, 20162021, 2020 and 2015,2019, 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 plans outside of the U.S., which are governed by local statutory requirements, and to a lesser extent U.S. plans that are closed to new participants.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, 2021, 2020 and 2019:

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(in millions)202120202019
Net pension costs (income)$(1)$(14)$(18)
Net postemployment costs108 103 100 
Net postretirement costs8 8 7 
Total pension and other employee benefit costs$115 $97 $89 


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, 20172021 and 2016,2020, were as follows:
Pension(1)
 Postretirement
Pension(1)
Postretirement
(in millions)2017 2016 2017 2016(in millions)2021202020212020
Benefit obligation at January 1,$8,387
 $8,086
 $227
 $211
Benefit obligation at January 1Benefit obligation at January 1$12,243 $10,612 $198 $190 
Service cost208
 207
 4
 3
Service cost291 268 2 2 
Interest cost108
 146
 8
 9
Interest cost50 68 5 6 
Benefits paid(226) (240) (10) (10)Benefits paid(417)(356)(8)(7)
Settlement and curtailment—
 (1) —
 —
Employee contributions Employee contributions145 130 — — 
Settlement, curtailment and plan amendment Settlement, curtailment and plan amendment(194)(117)00
Actuarial losses (gains)(93) 427
 12
 15
Actuarial losses (gains)(559)653 5 5 
Currency621
 (329) 7
 (2)Currency(587)992 (4)3 
Other23
 91
 —
 1
Other26 (7)— (1)
Benefit obligation at December 31,9,028
 8,387
 248
 227
Benefit obligation at December 31,10,998 12,243 198 198 
Fair value of plan assets at January 1,6,457
 6,404
    Fair value of plan assets at January 1,8,746 7,928 
Actual return on plan assets742
 322
    Actual return on plan assets1,054 206 
Employer contributions66
 191
    Employer contributions269 102 
Employee contributions40
 39
    Employee contributions145 130 
Benefits paid(226) (240)    Benefits paid(417)(356)
Settlement and curtailment—
 —
    
Settlement Settlement(37)(16)
Currency519
 (259)    Currency(444)752 
OtherOther21 — 
Fair value of plan assets at December 31,7,598
 6,457
    Fair value of plan assets at December 31,9,337 8,746 
Net pension and postretirement liability recognized at December 31,$(1,430) $(1,930) $(248) $(227)Net pension and postretirement liability recognized at December 31,$(1,661)$(3,497)$(198)$(198)
(1) Primarily non-U.S. based defined benefit retirement plans.


At December 31, 20172021, actuarial losses (gains) consisted primarily of gains for assumption changes related to higher discount rates year-over-year for Swiss, German and 2016,Dutch plans. At December 31, 2020, actuarial losses (gains) consisted primarily of losses for assumption changes related to lower discount rates year-over-year for Swiss, German and Dutch plans.

At December 31, 2021 and 2020, the Swiss pension plan represented 57%65% and 57%63% of the benefit obligation, respectively, and approximately 57% of the fair value of plan assets for each of the years. At December 31, 201760% and 2016, the U.S. pension plan represented 5% and 5% of the benefit obligation, respectively, and approximately 4% and 5%59% of the fair value of plan assets at December 31, 20172021 and 2016,2020, respectively. At December 31, 2021 and 2020, the U.S. pension plan represented 4% and 4% of the benefit obligation, respectively, and approximately 3% and 4% of the fair value of plan assets at December 31, 2021 and 2020, respectively.


95

At December 31, 20172021 and 2016,2020, the amounts recognized on PMI's consolidated balance sheets for the pension and postretirement plans were as follows:

PensionPostretirement
(in millions)2021202020212020
Other assets$323 $43 
Accrued liabilities — employment costs(24)(26)$(9)$(8)
Long-term employment costs(1,960)(3,514)(189)(190)
$(1,661)$(3,497)$(198)$(198)
 Pension Postretirement
(in millions)2017 2016 2017 2016
Other assets$47
 $33
    
Accrued liabilities — employment costs(26) (23) $(10) $(10)
Long-term employment costs(1,451) (1,940) (238) (217)
 $(1,430) $(1,930) $(248) $(227)


The accumulated benefit obligation, which represents benefits earned to date, for the pension plans was $8,496 million$10.4 billion and $7,931 million$11.5 billion at December 31, 20172021 and 2016,2020, respectively.



For pension plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $7,287 million, $6,953 million$7.5 billion and $5,835 million,$5.9 billion, respectively, as of December 31, 2017.2021. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $6,934 million, $6,622 million$10.5 billion and $5,009 million,$7.7 billion, respectively, as of December 31, 2016.2020.


For pension plans with projected benefit obligations in excess of plan assets, the projected benefit obligation and fair value of plan assets were $8.6 billion and $6.7 billion, respectively, as of December 31, 2021. The projected benefit obligation and fair value of plan assets were $12.1 billion and $8.6 billion, respectively, as of December 31, 2020.

The following weighted-average assumptions were used to determine PMI’s pension and postretirement benefit obligations at December 31:
PensionPostretirement
2021202020212020
Discount rate0.86 %0.56 %3.08 %2.84 %
Rate of compensation increase1.77 1.79 
Interest crediting rate3.15 3.20 
Health care cost trend rate assumed for next year6.27 6.21 
Ultimate trend rate4.80 4.73 
Year that rate reaches the ultimate trend rate20292029
 Pension Postretirement
 2017 2016 2017 2016
Discount rate1.51% 1.52% 3.79% 3.68%
Rate of compensation increase1.65
 1.68
    
Health care cost trend rate assumed for next year    6.17
 7.15
Ultimate trend rate    4.62
 5.08
Year that rate reaches the ultimate trend rate    2029 2029


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.


96

Components of Net Periodic Benefit Cost


Net periodic pension and postretirement health care costs consisted of the following for the years ended December 31, 2017, 20162021, 2020 and 2015:2019:
PensionPostretirement
(in millions)202120202019202120202019
Service cost$291 $268 $214 $2 $2 $2 
Interest cost50 68 118 5 6 7 
Expected return on plan assets(371)(353)(328)— — — 
Amortization:
Net losses314 265 189 3 2 — 
Prior service cost1 1 (1)— — — 
Net transition obligation— 1 — — — — 
Settlement and curtailment5 4 4 — — — 
Net periodic pension and postretirement costs$290 $254 $196 $10 $10 $9 
 Pension Postretirement
(in millions)2017 2016 2015 2017 2016 2015
Service cost$208
 $207
 $205
 $4
 $3
 $4
Interest cost108
 146
 156
 8
 9
 9
Expected return on plan assets(326) (346) (340) —
 —
 —
Amortization:           
Net losses186
 186
 194
 5
 2
 4
Prior service cost6
 4
 4
 —
 —
 —
Settlement and curtailment6
 4
 3
 —
 —
 —
Net periodic pension and postretirement costs$188
 $201
 $222
 $17
 $14
 $17

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


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


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


The following weighted-average assumptions were used to determine PMI’s net pension and postretirement health care costs:
PensionPostretirement
202120202019202120202019
Discount rate - service cost0.72 %1.25 %2.14 %2.84 %3.28 %3.97 %
Discount rate - interest cost0.44 0.67 1.35 2.84 3.28 3.97 
Expected rate of return on plan assets4.43 4.59 4.70 
Rate of compensation increase1.79 1.82 1.86 
Interest crediting rate3.20 3.20 3.40 
Health care cost trend rate6.21 6.21 6.17 
 Pension Postretirement
 2017 2016 2015 2017 2016 2015
Discount rate - service cost1.68% 1.81% 2.04% 3.68% 4.45% 4.20%
Discount rate - interest cost1.27
 1.81
 2.04
 3.68
 4.45
 4.20
Expected rate of return on plan assets4.80
 5.36
 5.38
      
Rate of compensation increase1.68
 2.03
 2.12
      
Health care cost trend rate      7.15
 6.23
 6.62


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


PMI and certain of its subsidiaries sponsor defined contribution plans. Amounts charged to expense for defined contribution plans totaled $58$71 million, $56$66 million and $52$63 million for the years ended December 31, 2017, 20162021, 2020 and 2015,2019, respectively.

Plan Assets


PMI’s investment strategy for pension plans is based on an expectation that equity securities will outperform debt securities over the long term. Accordingly, the target allocation of PMI’s plan assets is broadly characterized as approximately a 60%/40% split between55% in equity securities and approximately 45% in debt securities.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.


97

The fair value of PMI’s pension plan assets at December 31, 20172021 and 2016,2020, by asset category was as follows:
Asset Category
(in millions)		At December 31, 2021
Quoted Prices
In Active
Markets for
Identical
Assets/Liabilities
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Cash and cash equivalents$355 $355 00
Equity securities:
U.S. securities193 193 00
International securities658 658 00
Investment funds(a)
7,317 5,592 $1,725 0
International government bonds210 139 71 0
Corporate bonds278 278 00
Other4 3 1 0
Total assets in the fair value hierarchy$9,015 $7,218 $1,797 $— 
Investment funds measured at net asset value(b)
322 
Total assets$9,337 
Asset Category
(in millions)
At December 31, 2017 
Quoted Prices 
In Active 
Markets for 
Identical
Assets/Liabilities
(Level 1)
 Significant
Other
Observable
Inputs
(Level 2)		 
Significant
Unobservable
Inputs
(Level 3)
Cash and cash equivalents$17
 $17
 

 

Equity securities:       
U.S. securities146
 146
 

 

International securities518
 518
 

 

Investment funds(a)
6,219
 4,191
 $2,028
 

International government bonds119
 119
 

 

Corporate bonds247
 247
 

 

Other22
 22
 

 

Total assets in the fair value hierarchy$7,288
 $5,260
 $2,028
 $—
Investment funds measured at net asset value(b)
310
      
Total assets$7,598
      


(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.JP Morgan EMBI for bonds), primarily consist of mutual funds, common trust funds and commingled funds. Of these funds, 60%59% are invested in U.S. and international equities; 20%15% are invested in U.S. and international government bonds; 10%14% are invested in corporate bonds and 12% are invested in real estate and other money markets, and 10% are invested in corporate bonds.estate.


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

Asset Category
(in millions)		At December 31, 2020
Quoted Prices
In Active
Markets for
Identical
Assets/Liabilities
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Cash and cash equivalents$324 $324 00
Equity securities:
U.S. securities175 175 00
International securities605 605 00
Investment funds(a)
6,811 5,206 $1,605 0
International government bonds225 149 76 0
Corporate bonds292 292 00
Other7 7 00
Total assets in the fair value hierarchy$8,439 $6,758 $1,681 $— 
Investment funds measured at net asset value(b)
307 
Total assets$8,746 

Asset Category
(in millions)
At December 31, 2016 
Quoted Prices 
In Active 
Markets for 
Identical
Assets/Liabilities
(Level 1)
 Significant
Other
Observable
Inputs
(Level 2)		 Significant
Unobservable
Inputs
(Level 3)
Cash and cash equivalents$8
 $8
 

 

Equity securities:       
U.S. securities131
 131
 

 

International securities432
 432
 

 

Investment funds(a)
5,270
 3,530
 $1,740
 

International government bonds309
 309
 

 

Other10
 10
 

 

Total assets in the fair value hierarchy$6,160
 $4,420
 $1,740
 $—
Investment funds measured at net asset value(b)
297
      
Total assets$6,457
      

(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.JP Morgan EMBI for bonds), primarily consist of mutual funds, common trust funds and commingled funds. Of these funds, 60%63% were invested in U.S. and international equities; 19%16% were invested in U.S. and international government bonds; 11%12% were invested in real estate, and other money markets, and 10%9% were invested in corporate bonds.


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

98

See Note 16. Fair Value Measurements for
For a discussiondescription of the fair value hierarchy and the three levels of pension plan assets.inputs used to measure fair values, see Note 2. Summary of Significant Accounting Policies.


PMI makes, and plans to make, contributions to the extent that they are tax deductible and to meet specific funding requirements of its funded pension plans. Currently, PMI anticipates making contributions of approximately $53$108 million in 20182022 to its pension plans, based on current tax and benefit laws. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on pension assets, or changes in interest and currency rates.


The estimated future benefit payments from PMI pension plans at December 31, 2017,2021, are as follows:
(in millions) 
2018$295
2019290
2020309
2021318
2022330
2023 - 20271,879
(in millions)
2022$407 
2023421 
2024386 
2025382 
2026400 
2027 - 20312,193 
PMI's expected future annual benefit payments for its postretirement health care plans are estimated to be not material through 2027.


Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care trend rates would have the following effects as of December 31, 2017:
 One-Percentage-Point Increase
 One-Percentage-Point Decrease
Effect on total service and interest cost21.7% (16.7)%
Effect on postretirement benefit obligation16.3
 (13.0)
2031.
Postemployment Benefit Plans


PMI and certain of its subsidiaries sponsor postemployment benefit plans covering substantially all salaried and certain hourly employees. The cost of these plans is charged to expense over the working life of the covered employees. Net postemployment costs were $144$228 million, $166$208 million and $187$171 million for the years ended December 31, 2017, 20162021, 2020 and 2015,2019, respectively.

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


The amounts recognized in accrued postemployment costs net of plan assets on PMI's consolidated balance sheets at December 31, 20172021 and 2016,2020, were $671$925 million and $727$923 million, respectively.


The accrued postemployment costs were determined using a weighted-average discount rate of 3.1% and 3.0% in 2021 and 2.8% in 2017 and 2016,2020, respectively; an assumed ultimate annual weighted-average turnover rate of 2.6%2.9% and 2.8%3.0% in 20172021 and 2016,2020, respectively; assumed compensation cost increases of 2.3%2.1% in 20172021 and 2.6%2.1% in 2016,2020, and assumed benefits as defined in the respective plans. In accordance with local regulations, certain postemployment plans are funded. As a result, the accrued postemployment costs disclosed above are presented net of the related assets of $33$46 million and $25$46 million at December 31, 20172021 and 2016,2020, respectively. Postemployment costs arising from actions that offer employees benefits in excess of those specified in the respective plans are charged to expense when incurred.


Comprehensive Earnings (Losses)


The amounts recorded in accumulated other comprehensive losses at December 31, 2017,2021, consisted of the following:

(in millions)PensionPost-
retirement		Post-
employment		Total
Net losses$(2,495)$(64)$(884)$(3,443)
Prior service cost71 1 (22)50 
Net transition obligation(3)— — (3)
Deferred income taxes278 24 214 516 
Losses to be amortized$(2,149)$(39)$(692)$(2,880)

99
(in millions)Pension Post-
retirement		 Post-
employment		 Total
Net losses$(2,624) $(80) $(617) $(3,321)
Prior service cost(35) 4
 —
 (31)
Net transition obligation(5) —
 —
 (5)
Deferred income taxes327
 28
 186
 541
Losses to be amortized$(2,337) $(48) $(431) $(2,816)


The amounts recorded in accumulated other comprehensive losses at December 31, 2016,2020, consisted of the following:

(in millions)PensionPost-
retirement		Post-
employment		Total
Net losses$(4,147)$(64)$(839)$(5,050)
Prior service cost22 2 (22)2 
Net transition obligation(3)— — (3)
Deferred income taxes570 24 204 798 
Losses to be amortized$(3,558)$(38)$(657)$(4,253)

(in millions)Pension Post-
retirement		 Post-
employment		 Total
Net losses$(3,314) $(73) $(713) $(4,100)
Prior service cost(53) 4
 —
 (49)
Net transition obligation(5) —
 —
 (5)
Deferred income taxes350
 24
 215
 589
Losses to be amortized$(3,022) $(45) $(498) $(3,565)

The amounts recorded in accumulated other comprehensive losses at December 31, 2015,2019, consisted of the following:

(in millions)PensionPost-
retirement		Post-
employment		Total
Net losses$(3,718)$(63)$(775)$(4,556)
Prior service cost3 2 — 5 
Net transition obligation(4)— — (4)
Deferred income taxes520 24 182 726 
Losses to be amortized$(3,199)$(37)$(593)$(3,829)
(in millions)Pension Post-
retirement		 Post-
employment		 Total
Net losses$(3,074) $(61) $(710) $(3,845)
Prior service cost(40) 5
 —
 (35)
Net transition obligation(5) —
 —
 (5)
Deferred income taxes320
 20
 213
 553
Losses to be amortized$(2,799) $(36) $(497) $(3,332)

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

(in millions)Pension Post-
retirement		 Post-
employment		 Total
Amounts transferred to earnings as components of net periodic benefit cost:       
Amortization:       
Net losses$175
 $5
 $68
 $248
Prior service cost5
 —
 —
 5
Other income/expense:       
Net losses6
 —
 —
 6
    Prior service cost—
 —
 —
 —
Deferred income taxes(10) (1) (20) (31)
 176
 4
 48
 228
Other movements during the year:       
Net losses509
 (12) 28
 525
Prior service cost13
 —
 —
 13
Deferred income taxes(13) 5
 (9) (17)
 509
 (7) 19
 521
Total movements in other comprehensive earnings (losses)$685
 $(3) $67
 $749


The movements in other comprehensive earnings (losses) during the year ended December 31, 2016, were as follows:
(in millions)Pension Post-
retirement		 Post-
employment		 Total
Amounts transferred to earnings as components of net periodic benefit cost:       
Amortization:       
Net losses$193
 $2
 $62
 $257
Prior service cost6
 —
 —
 6
Other income/expense:       
Net losses4
 —
 —
 4
Prior service cost—
 —
 —
 —
Deferred income taxes(26) —
 (17) (43)
 177
 2
 45
 224
Other movements during the year:       
Net losses(437) (15) (65) (517)
Prior service cost(18) —
 —
 (18)
Deferred income taxes55
 4
 19
 78
 (400) (11) (46) (457)
Total movements in other comprehensive earnings (losses)$(223) $(9) $(1) $(233)


The movements in other comprehensive earnings (losses) during the year ended December 31, 2015,2021, were as follows:
(in millions)PensionPost-
retirement		Post-
employment		Total
Amounts transferred to earnings:
Amortization:
Net losses$294 $4 $85 $383 
Prior service cost7 (1)— 6 
Net transition obligation— — — — 
Other income/expense:
Net losses5 1 — 6 
    Prior service cost— — — — 
Deferred income taxes(51)(1)(20)(72)
255 3 65 323 
Other movements during the year:
Net losses1,353 (5)(130)1,218 
Prior service cost42 — — 42 
Deferred income taxes(241)1 30 (210)
1,154 (4)(100)1,050 
Total movements in other comprehensive earnings (losses)$1,409 $(1)$(35)$1,373 

100

(in millions)Pension Post-
retirement		 Post-
employment		 Total
Amounts transferred to earnings as components of net periodic benefit cost:       
Amortization:       
Net losses$194
 $4
 $69
 $267
Prior service cost4
 —
 —
 4
Other income/expense:       
Net losses3
 —
 —
 3
Prior service cost1
 —
 —
 1
Deferred income taxes(26) (2) (20) (48)
 176
 2
 49
 227
Other movements during the year:       
Net losses(510) 12
 (58) (556)
Deferred income taxes4
 (4) 17
 17
 (506) 8
 (41) (539)
Total movements in other comprehensive earnings (losses)$(330) $10
 $8
 $(312)
The movements in other comprehensive earnings (losses) during the year ended December 31, 2020, were as follows:

(in millions)PensionPost-
retirement		Post-
employment		Total
Amounts transferred to earnings:
Amortization:
Net losses$250 $3 $78 $331 
Prior service cost29 — — 29 
Net transition obligation1 — — 1 
Other income/expense:
Net losses3 — — 3 
Prior service cost2 — — 2 
Deferred income taxes(49)(1)(17)(67)
236 2 61 299 
Other movements during the year:
Net losses(682)(4)(142)(828)
Prior service cost(12)— (22)(34)
Deferred income taxes99 1 39 139 
(595)(3)(125)(723)
Total movements in other comprehensive earnings (losses)$(359)$(1)$(64)$(424)



The movements in other comprehensive earnings (losses) during the year ended December 31, 2019, were as follows:
(in millions)PensionPost-
retirement		Post-
employment		Total
Amounts transferred to earnings:
Amortization:
Net losses$198 $3 $77 $278 
Prior service cost32 (1)— 31 
Other income/expense:
Net losses3 — — 3 
Deferred income taxes(51)(1)(17)(69)
182 1 60 243 
Other movements during the year:
Net losses(521)(27)(150)(698)
Prior service cost(2)— — (2)
Deconsolidation of RBH (net of deferred income taxes)26 1 — 27 
Deferred income taxes206 6 35 247 
(291)(20)(115)(426)
Total movements in other comprehensive earnings (losses)$(109)$(19)$(55)$(183)

101

Note 14.


Additional Information:
For the Years Ended December 31,
(in millions)202120202019
Research and development expense$617 $495 $465 
Advertising expense$807 $637 $730 
Foreign currency net transaction (gains)/losses$45 $90 $(95)
Interest expense$737 $728 $796 
Interest income(109)(110)(226)
Interest expense, net$628 $618 $570 
 For the Years Ended December 31,
(in millions)2017 2016 2015
Research and development expense$453
 $429
 $423
Advertising expense$830
 $405
 $448
Foreign currency net transaction losses$49
 $272
 $102
Interest expense$1,096
 $1,069
 $1,132
Interest income(182) (178) (124)
Interest expense, net$914
 $891
 $1,008
Rent expense$313
 $284
 $286



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

(in millions) 
2018$179
2019125
202094
202158
202237
Thereafter356
 $849

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.exposures. 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. Substantially all of PMI's derivative financial instruments are subject to master netting arrangements, whereby the right to offset occurs in the event of default by a participating party. While these contracts contain the enforceable right to offset through close-out netting rights, PMI elects to present them on a gross basis in the consolidated balance sheets. Collateral associated with these arrangements is in the form of cash and is unrestricted. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. PMI formally documents the nature and relationships between the hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of the forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss would be recognized in earnings. PMI reports its net transaction gains or losses in marketing, administration and research costs on the consolidated statements of earnings.


PMI uses deliverable and non-deliverable forward foreign exchange contracts, foreign currency swaps and foreign currency options, collectively referred to as foreign exchange contracts ("foreign exchange contracts"), and interest rate contracts to mitigate its exposure to changes in exchange and interest rates from third-party and intercompany actual and forecasted transactions. 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 Australian dollar, Canadian dollar, Euro, Indonesian rupiah, Japanese yen, Mexican peso, Philippine peso, Russian ruble and Swiss franc and Turkish lira.franc. At December 31, 20172021 and 2016,2020, PMI had contracts with aggregate notional amounts of $26.1$20.7 billion and $29.2$26.5 billion, respectively. Of the $26.1$20.7 billion aggregate notional amount at December 31, 2017, $3.42021, $3.8 billion related to cash flow hedges, $11.3$6.2 billion related to hedges of net investments in foreign operations, $0.4 billion related to fair value hedges and $11.4$10.3 billion related to other derivatives that primarily offset currency exposures on intercompany financing. Of the $29.2$26.5 billion aggregate notional amount at December 31, 2016,2020, $5.0 billion related to cash flow hedges, $10.6$8.9 billion related to hedges of net investments in foreign operations and $13.6$12.6 billion related to other derivatives that primarily offset currency exposures on intercompany financing.


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The fair value of PMI’s derivative contracts included in the consolidated balance sheets as of December 31, 2021 and 2020, were as follows:
Derivative AssetsDerivative Liabilities
Fair Value
Fair Value
(in millions)
Balance Sheet
 Classification
20212020
Balance Sheet 
Classification
20212020
Derivative contracts designated as hedging instrumentsOther current assets$173 $130 Other accrued liabilities$34 $241 
Other assets22 6 Income taxes and other liabilities190 605 
Derivative contracts not designated as hedging instruments
Other current assets 
37 46 Other accrued liabilities75 207 
Other assets— — Income taxes and other liabilities— 57 
Total gross amount derivatives contracts presented in the consolidated balance sheets$232 $182 $299 $1,110 
Gross amounts not offset in the consolidated balance sheets
Financial instruments(126)(156)(126)(156)
Cash collateral received/pledged(93)(23)(151)(892)
Net amount$13 $3 $22 $62 

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, included inforeign currency swaps and interest rate contracts is determined by using the consolidated balance sheet asprevailing 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 contracts have been classified within Level 2 at December 31, 20172021 and 2016, were as follows:2020.

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 Asset Derivatives Liability Derivatives
   
Fair Value
   
Fair Value
(in millions)Balance Sheet Classification 2017 2016 Balance Sheet Classification 2017 2016
Foreign exchange contracts designated as hedging instruments
Other current
  assets
 $84
 $207
 
Other accrued 
  liabilities
 $197
 $66
 Other assets 34
 436
 Other liabilities 880
 36
Foreign exchange contracts not designated as hedging instruments
Other current
  assets
 22
 161
 
Other accrued
  liabilities
 37
 61
            
 Other assets —
 9
 Other liabilities 14
 —
Total derivatives  $140
 $813
   $1,128
 $163


For the years ended December 31, 2017, 20162021, 2020 and 2015,2019, PMI's cash flow and net investment hedging instrumentsderivative contracts impacted the consolidated statements of earnings and comprehensive earnings as follows:


(pre-tax, in millions)For the Years Ended December 31,
Amount of Gain/(Loss) Recognized in Other Comprehensive Earnings/(Losses) on DerivativesStatement of Earnings
Classification of Gain/(Loss)
on Derivatives		Amount of Gain/(Loss) Reclassified from Other Comprehensive Earnings/(Losses) into EarningsAmount of Gain/(Loss) Recognized in Earnings
202120202019202120202019202120202019
Derivative contracts designated as hedging instruments:
Cash flow hedges$144 $(81)$(20)
Net revenues$59 $(3)$22 
Cost of sales— 7 1 
Marketing, administration and research costs(10)27 2 
Interest expense, net(7)(11)(8)
Fair value hedgesInterest expense, net$1 $— $— 
Net investment hedges (a)
484 (514)369 
Interest expense, net (b)
150 194 230 
Derivative contracts not designated as hedging instrumentsInterest expense, net55 7194
Marketing, administration and research costs (c)
215 (368)(115)
Total$628 $(595)$349 $42 $20 $17 $421 $(103)$209 
(a) Amount of gains (losses) on hedges of net investments principally related to changes in exchange and interest rates between the Euro and U.S. dollar
(b) Represent the gains for amounts excluded from the effectiveness testing
(c) The gains (losses) from these contracts attributable to changes in foreign currency exchange rates substantially offset the (losses) and gains generated by the underlying intercompany and third-party loans being hedged

104

(pre-tax, millions)For the Year Ended December 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
 2017 2016 2015   2017 20162015 
Derivatives in Cash Flow Hedging Relationship             
Foreign exchange contracts$(52) $12
 $43
        
       Net revenues $60
 $(38)$149
 
       Cost of sales 1
 46
(3) 
       Marketing, administration and research costs (7) (11)1
 
       Interest expense, net (41) (30)(31) 
Derivatives in Net Investment Hedging Relationship             
Foreign exchange contracts(1,644) 296
 253
        
Total$(1,696) $308
 $296
   $13
 $(33)$116
 



Cash Flow Hedges


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

of December 31, 2017,2021, PMI has hedged forecasted transactions for periods not exceeding the next twelve months, with the exception of one foreign exchangederivative contract that expires in May 2024. The impact of these hedges is primarily included in operating cash flows on PMI’s consolidated statements of cash flows.

Fair Value Hedges

PMI has entered into fixed-to-floating interest rate contracts, designated as fair value hedges to minimize exposure to changes in the fair value of fixed rate U.S. dollar-denominated debt that results from fluctuations in benchmark interest rates. For derivative contracts that are designated and qualify as fair value hedges the gain or loss on the derivative, as well as the offsetting gain or loss on the hedged items attributable to the hedged risk, is recognized in current earnings. The carrying amount of the debt hedged, which includes the cumulative adjustment for fair value gains/losses, as of December 31, 2021 was $398 million, and is recorded in long-term debt in the consolidated balance sheets.

Hedges of Net Investments in Foreign Operations


PMI designates derivative contracts and certain foreign currency denominated debt and foreign exchange contractsinstruments as net investment hedges, primarily of its Euro net assets. For the years ended December 31, 2017, 2016 and 2015, these hedgesThe amount of net investments resulted in gains/(losses), net of income taxes, of $(1,725) million, $430 million and $761 million, respectively, principallypre-tax gain/(loss) related to changes in the exchange rates between the Euro and U.S. dollar. These gains/(losses) werethese debt instruments, that was reported as a component of accumulated other comprehensive losses within currency translation adjustments,adjustment, was $278 million, $(465) million and were substantially offset by the losses and gains generated on the underlying assets. For$234 million, for the years ended December 31, 2017, 20162021, 2020 and 2015, ineffectiveness related to net investment hedges was not material.2019, respectively. The premiums paid for, and settlements of, net investment hedges are included in investing cash flows on PMI’s consolidated statements of cash flows.


Other Derivatives


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

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

(pre-tax, in millions)
Derivatives not Designated as
Hedging Instruments
 
Statement of Earnings
Classification of Gain/(Loss)
Amount of Gain/(Loss)
Recognized in Earnings
   2017 2016 2015
Foreign exchange contracts       
  Interest expense, net$(60) $(24) $(1)
Total  $(60) $(24) $(1)


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:

For the Years Ended December 31,
(in millions)202120202019
Gain/(loss) as of January 1,$(85)$3 $35 
Derivative (gains)/losses transferred to earnings(35)(20)(14)
Change in fair value124 (68)(18)
Gain/(loss) as of December 31,$4 $(85)$3 
 For the Years Ended December 31,
(in millions)2017 2016 2015
Gain as of January 1,$97
 $59
 $123
Derivative (gains)/losses transferred to earnings(11) 30
 (102)
Change in fair value(44) 8
 38
Gain as of December 31,$42
 $97
 $59


At December 31, 2017,2021, PMI expects $36$27 million of derivative gains that are included in accumulated other comprehensive losses to be reclassified to the consolidated statement of earnings within the next 12 months. These gains are expected to be substantially offset by the statement of earnings impact of the respective hedged transactions.



Contingent Features


PMI’s derivative instruments do not contain contingent features.


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Credit Exposure and Credit Risk


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


Fair Value

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

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—Quoted prices in active markets for identical assets or liabilities;
Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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

PMI assesses the fair value of its foreign exchange contracts and interest rate contracts using standard valuation models that use, as their basis, readily observable market inputs. The fair value of PMI’s foreign exchange forward contracts is determined by using the prevailing foreign exchange spot rates and interest rate differentials, and the respective maturity dates of the instruments. The fair value of PMI’s currency options is determined by using a Black-Scholes methodology based on foreign exchange spot rates and interest rate differentials, currency volatilities and maturity dates. PMI’s derivative financial instruments have been classified within Level 2 at December 31, 2017 and 2016. See Note 15. Financial Instruments for additional discussion of derivative financial instruments.

Pension Plan Assets

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

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

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

The aggregate fair values of PMI’s derivative financial instruments, pension plan assets and debt as of December 31, 2017 and 2016, were as follows:
(in millions)
Fair Value At 
December 31, 2017
 
Quoted Prices in Active Markets for 
Identical Assets/Liabilities 
(Level 1)
 Significant Other
Observable Inputs
(Level 2)		 
Significant
Unobservable Inputs 
(Level 3)
Assets:       
Foreign exchange contracts$140
 $—
 $140
 $—
Pension plan assets7,288
 5,260
 2,028
 —
Total assets in fair value hierarchy$7,428
 $5,260
 $2,168
 $—
Pension plan assets measured at net asset value(a)
310
      
Total assets$7,738
      
Liabilities:       
Debt$35,856
 $35,685
 $171
 $—
Foreign exchange contracts1,128
 —
 1,128
 —
Total liabilities$36,984
 $35,685
 $1,299
 $—
(in millions)
Fair Value At 
December 31, 2016
 Quoted Prices in Active Markets for
Identical Assets/Liabilities
(Level 1)		 Significant Other
Observable Inputs
(Level 2)		 
Significant
Unobservable Inputs 
(Level 3)
Assets:       
Foreign exchange contracts$813
 $—
 $813
 $—
Pension plan assets6,160
 4,420
 1,740
 —
Total assets in fair value hierarchy$6,973
 $4,420
 $2,553
 $—
Pension plan assets measured at net asset value(a)
297
      
Total assets$7,270
      
Liabilities:       
Debt$30,192
 $29,756
 $436
 $—
Foreign exchange contracts163
 —
 163
 —
Total liabilities$30,355
 $29,756
 $599
 $—

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


Note 17.


Accumulated Other Comprehensive Losses:


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

(Losses) EarningsAt December 31,
(in millions)202120202019
Currency translation adjustments$(6,701)$(6,843)$(5,537)
Pension and other benefits(2,880)(4,253)(3,829)
Derivatives accounted for as hedges4 (85)3 
Total accumulated other comprehensive losses$(9,577)$(11,181)$(9,363)
(Losses) EarningsAt December 31,
(in millions)2017 2016 2015
Currency translation adjustments$(5,761) $(6,091) $(6,129)
Pension and other benefits(2,816) (3,565) (3,332)
Derivatives accounted for as hedges42
 97
 59
Total accumulated other comprehensive losses$(8,535) $(9,559) $(9,402)


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, 2017, 2016,2021, 2020, and 2015. For the years ended December 31, 2017, 2016, and 2015, $2 million, $(5) million and $1 million of net currency translation adjustment gains/(losses) were transferred from other comprehensive earnings to marketing, administration and research costs in the consolidated statements of earnings, respectively, upon liquidation of subsidiaries.2019. For additional information, see Note 13. Benefit Plans and Note 15. Financial Instruments for disclosures related to PMI's pension and other benefits, andNote 15. Financial Instruments for disclosures related to derivative financial instruments.instruments and Note 20. Deconsolidation of RBH for disclosures related to the deconsolidation of RBH.


Note 18.17.


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 tobacco-related litigation could encourage the commencement of additional litigation.


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


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We and our subsidiaries record provisions in the consolidated financial statements for pending litigation when we determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. At the present time, except as stated otherwise in this Note 17. Contingencies, while it is reasonably possible that an unfavorable outcome in a case may occur, after assessing the information available to it (i) management has not concluded that it is probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss for any of the pending tobacco-related cases; and (iii) accordingly, no estimated loss has been accrued in the consolidated financial statements for unfavorable outcomes in these cases, if any. Legal defense costs are expensed as incurred.



It is possible that our consolidated results of operations, cash flows or financial position could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Nevertheless, although litigation is subject to uncertainty, we and each of our subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that we have valid defenses to the litigation pending against us, as well as valid bases for appeal of adverse verdicts. All such cases are, and will continue to be, vigorously defended. However, we and our subsidiaries may enter into settlement discussions in particular cases if we believe it is in our best interests to do so.

CCAA Proceedings and Stay of Tobacco-Related Cases Pending in Canada
As a result of the Court of Appeal of Quebec’s decision in both the Létourneau and Blais cases described below, our subsidiary, Rothmans, Benson & Hedges Inc. (“RBH”), and the other defendants, JTI Macdonald Corp., and Imperial Tobacco Canada Limited, sought protection in the Ontario Superior Court of Justice under the Companies’ Creditors Arrangement Act (“CCAA”) on March 22, March 8, and March 12, 2019 respectively. CCAA is a Canadian federal law that permits a Canadian business to restructure its affairs while carrying on its business in the ordinary course. The initial CCAA order made by the Ontario Superior Court on March 22, 2019 authorizes RBH to pay all expenses incurred in carrying on its business in the ordinary course after the CCAA filing, including obligations to employees, vendors, and suppliers. As further described in Note 20. Deconsolidation of RBH, RBH's financial results have been deconsolidated from our consolidated financial statements since March 22, 2019. As part of the CCAA proceedings, there is currently a comprehensive stay up to and including March 31, 2022 of all tobacco-related litigation pending in Canada against RBH and the other defendants, including PMI and our indemnitees (PM USA and Altria), namely, the smoking and health class actions filed in various Canadian provinces and health care cost recovery actions. These proceedings are presented below under the caption “Stayed Litigation — Canada.” Ernst & Young Inc. has been appointed as monitor of RBH in the CCAA proceedings. In accordance with the CCAA process, as the parties work towards a plan of arrangement or compromise in a confidential mediation, it is anticipated that the court will set additional hearings and further extend the stay of proceedings. On April 17, 2019, the Ontario Superior Court ruled that RBH and the other defendants will not be allowed to file an application to the Supreme Court of Canada for leave to appeal the Court of Appeal’s decision in the Létourneau and the Blais cases so long as the comprehensive stay of all tobacco-related litigation in Canada remains in effect and that the time period to file the application would be extended by the stay period. While RBH believes that the findings of liability and damages in both Létourneau and the Blais cases were incorrect, the CCAA proceedings will provide a forum for RBH to seek resolution through a plan of arrangement or compromise of all tobacco-related litigation pending in Canada. It is not possible to predict the resolution of the underlying legal proceedings or the length of the CCAA process.

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 cigarette 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 suffers allegedly 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 2 other Canadian manufacturers liable and found that the class members’ compensatory damages totaled approximately CAD 15.5 billion, including pre-judgment interest (approximately $12.1 billion). The trial court awarded compensatory damages on a joint and several liability basis, allocating 20% to our subsidiary (approximately CAD 3.1 billion, including pre-judgment interest (approximately $2.4 billion)). In addition, the trial court awarded CAD 90,000 (approximately $70,500) in punitive damages, allocating CAD 30,000 (approximately $23,500) to RBH. The trial court estimated the disease class at 99,957 members. RBH appealed to the Court of Appeal of Quebec. In October 2015, the Court of Appeal ordered RBH to furnish security totaling CAD 226 million (approximately $177 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 $594 million) in installments through June 2017. JTI Macdonald Corp. was not required to furnish security in accordance with plaintiffs’ motion. The Court of Appeal ordered that the security is payable upon a final judgment of the Court of Appeal affirming the trial court’s judgment or upon further order of the Court of Appeal.
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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 $10.6 billion) due to the trial court’s error in the calculation of interest. The compensatory damages award is on a joint and several basis with an allocation of 20% to RBH (approximately CAD 2.7 billion, including pre-judgment interest (approximately $2.1 billion)). The Court of Appeal upheld the trial court’s findings that defendants violated the Civil Code of Quebec, the Quebec Charter of Human Rights and Freedoms, and the Quebec Consumer Protection Act by failing to warn adequately of the dangers of smoking and by conspiring to prevent consumers from learning of the dangers of smoking. The Court of Appeal further held that the plaintiffs either need not prove, or had adequately proven, that these faults were a cause of the class members’ injuries. In accordance with the judgment, defendants were 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 $862 million), into trust accounts within 60 days. RBH’s share of the deposit was approximately CAD 257 million (approximately $194 million). PMI recorded a pre-tax charge of $194 million in its consolidated results, representing $142 million net of tax, as tobacco litigation-related expense, in the first quarter of 2019. The charge reflects PMI’s assessment of the portion of the judgment that represents probable and estimable loss prior to the deconsolidation of RBH and corresponds to the trust account deposit required by the judgment.

In the second class action pending in Canada, Cecilia Létourneau v. Imperial Tobacco Ltd., Rothmans, Benson & Hedges Inc. and JTI-Macdonald Corp., Quebec Superior Court, Canada, filed in September 1998, RBH and other Canadian cigarette 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 2 other Canadian manufacturers liable and awarded a total of CAD 131 million (approximately $103 million) in punitive damages, allocating CAD 46 million (approximately $36 million) to RBH. The trial court estimated the size of the addiction class at 918,000 members but declined to award compensatory damages to the addiction class because the evidence did not establish the claims with sufficient accuracy. The trial court found that a claims process to allocate the awarded punitive damages to individual class members would be too expensive and difficult to administer. On March 1, 2019, the Court of Appeal issued a decision largely affirming the trial court’s findings of liability and the total amount of punitive damages awarded allocating CAD 57 million including interest (approximately $45 million) to RBH. See the Blais description above and Note 20. Deconsolidation of RBH below for further detail concerning the security order pertaining to both Létourneau and Blais cases and the impact of the decision on PMI’s financial statements.

RBH and PMI believe the findings of liability and damages in both Létourneau and the Blais cases were incorrect and in contravention of applicable law on several grounds including the following: (i) defendants had no obligation to warn class members who knew, or should have known, of the risks of smoking; (ii) defendants cannot be liable to class members who would have smoked regardless of what warnings were given; and (iii) defendants cannot be liable to all class members given the individual differences between class members.
In the third class action pending in Canada, Kunta v. Canadian Tobacco Manufacturers' Council, et al., The Queen's Bench, Winnipeg, Canada, filed June 12, 2009, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and chronic obstructive pulmonary disease (“COPD”), severe asthma, and mild reversible lung disease resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers, their estates, dependents and family members, as well as restitution of profits, and reimbursement of government health care costs allegedly caused by tobacco products.
In the fourth class action pending in Canada, Adams v. Canadian Tobacco Manufacturers' Council, et al.,The Queen's Bench, Saskatchewan, Canada, filed July 10, 2009, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and COPD resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who have smoked a minimum of 25,000 cigarettes and have allegedly suffered, or suffer, from COPD, emphysema, heart disease, or cancer, as well as restitution of profits.
In the fifth class action pending in Canada, Semple v. Canadian Tobacco Manufacturers' Council, et al.,The Supreme Court (trial court), Nova Scotia, Canada, filed June 18, 2009, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges his own addiction to tobacco products and COPD resulting from the use of tobacco products. He is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers, their estates, dependents and family members, as well as restitution of profits, and reimbursement of government health care costs allegedly caused by tobacco products.
In the sixth class action pending in Canada, Dorion v. Canadian Tobacco Manufacturers' Council, et al., The Queen's Bench, Alberta, Canada, filed June 15, 2009, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and chronic bronchitis and severe sinus infections resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class
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comprised of all smokers, their estates, dependents and family members, restitution of profits, and reimbursement of government health care costs allegedly caused by tobacco products. To date, no tobacco-related case haswe, our subsidiaries, and our indemnitees have not been finally resolvedproperly served with the complaint.
In the seventh class action pending in favorCanada, McDermid v. Imperial Tobacco Canada Limited, et al.,Supreme Court, British Columbia, Canada, filed June 25, 2010, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges his own addiction to tobacco products and heart disease resulting from the use of tobacco products. He is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who were alive on June 12, 2007, and who suffered from heart disease allegedly caused by smoking, their estates, dependents and family members, plus disgorgement of revenues earned by the defendants from January 1, 1954, to the date the claim was filed.

In the eighth class action pending in Canada, Bourassa v. Imperial Tobacco Canada Limited, et al.,Supreme Court, British Columbia, Canada, filed June 25, 2010, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, the heir to a deceased smoker, alleges that the decedent was addicted to tobacco products and suffered from emphysema resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who were alive on June 12, 2007, and who suffered from chronic respiratory diseases allegedly caused by smoking, their estates, dependents and family members, plus disgorgement of revenues earned by the defendants from January 1, 1954, to the date the claim was filed. In December 2014, plaintiff filed an amended statement of claim.

In the ninth class action pending in Canada, Suzanne Jacklin v. Canadian Tobacco Manufacturers' Council, et al., Ontario Superior Court of Justice, filed June 20, 2012, we, RBH, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and COPD resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who have smoked a minimum of 25,000 cigarettes and have allegedly suffered, or suffer, from COPD, heart disease, or cancer, as well as restitution of profits.

Health Care Cost Recovery Litigation — Canada
In the first health care cost recovery case pending in Canada, Her Majesty the Queen in Right of British Columbia v. Imperial Tobacco Limited, et al., Supreme Court, British Columbia, Vancouver Registry, Canada, filed January 24, 2001, we, RBH, our indemnitee (PM USA), and other members of the industry are defendants. The plaintiff, the government of the province of British Columbia, brought a claim based upon legislation enacted by the province authorizing the government to file a direct action against us,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 subsidiaries or indemnitees.indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of New Brunswick based on legislation enacted in the province. This legislation is similar to the law introduced in British Columbia that authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”


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

In the tenth health care cost recovery case filed in Canada, Her Majesty the Queen in Right of the Province of Nova Scotia v. Rothmans, Benson & Hedges Inc., et al., Supreme Court of Nova Scotia, Canada, filed January 2, 2015, we, RBH, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Nova Scotia based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.”
__________
The table below lists the number of tobacco-related cases pertaining to combustible products pending against us and/or our subsidiaries or indemnitees as of February 9, 2018, December 31, 20162021, December 31, 2020 and December 31, 2015:2019:¹

Type of CaseNumber of Cases Pending as of December 31, 2021Number of Cases Pending as of December 31, 2020Number of Cases Pending as of December 31, 2019
Individual Smoking and Health Cases404350
Smoking and Health Class Actions9910
Health Care Cost Recovery Actions171717
Label-Related Class Actions———
Individual Label-Related Cases355
Public Civil Actions122
Type of Case Number of Cases Pending as of February 9, 2018 Number of Cases Pending as of December 31, 2016 Number of Cases Pending as of December 31, 2015
Individual Smoking and Health Cases 57
 64
 68
Smoking and Health Class Actions 11
 11
 11
Health Care Cost Recovery Actions 16
 16
 16
Label-Related Class Actions 1
 —
 —
Individual Label-Related Cases 1
 3
 3
Public Civil Actions 2
 2
 3


Since 1995, when the first tobacco-related litigation was filed against a PMI entity, 476523 Smoking and Health, Label-Related, Health Care Cost Recovery, and Public Civil Actions in which we and/or one of our subsidiaries and/or indemnitees were a defendant have been terminated in our favor. ThirteenNaN cases have had decisions in favor of plaintiffs. NineNaN of these cases have subsequently reached final resolution in our favor and four4 remain on appeal.



______
¹ Includes cases pending in Canada.



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The table below lists the verdict and significant post-trial developments in the four4 pending cases where a verdict was returned in favor of the plaintiff:

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

DateLocation of
Court/Name of
Plaintiff		Type of
Case		VerdictPost-Trial
Developments
May 27, 2015Canada/Conseil Québécois Sur Le Tabac Et La Santé and Jean-Yves Blais
Class Action
Canada/Cecilia Létourneau

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



DateLocation of
Court/Name of
Plaintiff		Type of
Case		VerdictPost-Trial
Developments
May 27, 2015
Canada/Conseil Québécois Sur Le Tabac Et La Santé and Jean-Yves Blais

Class Action
On May 27, 2015, the Superior Court of the District of Montreal, Province of Quebec ruled in favor of the Blais class on liability and found the class members’ compensatory damages totaled approximately CAD 15.5 billion (approximately $12.3$12.1 billion), including pre-judgment interest. The trial court awarded compensatory damages on a joint and several liability basis, allocating 20% to our subsidiary (approximately CAD 3.1 billion including pre-judgment interest (approximately $2.5$2.4 billion)). The trial court awarded CAD 90,000 (approximately $71,500)$70,500) in punitive damages, allocating CAD 30,000 (approximately $23,900)$23,500) to our subsidiary. The trial court ordered defendants to pay CAD 1 billion (approximately $795$783 million) of the compensatory damage award, CAD 200 million (approximately $159$157 million) of which is our subsidiary’s portion, into a trust within 60 days.
In June 2015, our subsidiaryRBH commenced the appellate process with the Court of Appeal of Quebec. Our subsidiary also filed a motion to cancel the trial court’s order for payment into a trust notwithstanding appeal. In July 2015,On March 1, 2019, the Court of Appeal granted the motion to cancel and overturnedissued a decision largely affirming the trial court’s ruling that our subsidiary make the payment into a trust. In August 2015, plaintiffs filed a motion for security with the Court of Appeal. In October 2015, the Court of Appeal granted the motion and ordered our subsidiary to furnish security totaling, together with the Létourneau case, CAD 226 million (approximately $180 million). The hearing for the merits appeal took place in November 2016.court's decision. (See below“Stayed Litigation — Canada” for further detail.)

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DateLocation of

Court/Name of

Plaintiff		Type of

Case		VerdictPost-Trial

Developments
May 27, 2015Canada/Cecilia Létourneau
Class Action
On May 27, 2015, the Superior Court of the District of Montreal, Province of Quebec ruled in favor of the Létourneau class on liability and awarded a total of CAD 131 million (approximately $103 million) in punitive damages, allocating CAD 46 million (approximately $36 million) to RBH. The trial court ordered defendants to pay the full punitive damage award into a trust within 60 days. The court did not order the payment of compensatory damages.
In June 2015, RBH commenced the appellate process with the Court of Appeal of Quebec. On March 1, 2019, the Court of Appeal issued a decision largely affirming the trial court's decision. (See “Stayed Litigation — Canada” for further detail.)
DateLocation of
Court/Name of
Plaintiff		Type of
Case		VerdictPost-Trial
Developments
August 5, 2016Argentina/Hugo LespadaIndividual ActionOn August 5, 2016, the Civil Court No. 14 - Mar del Plata, issued a verdict in favor of plaintiff, an individual smoker, and awarded him ARS 110,000 (approximately $5,558)$1,044), plus interest, in compensatory and moral damages.
The trial court found that our subsidiary failed to warn plaintiff of the risk of becoming addicted to cigarettes.		On August 23, 2016, our subsidiary filed its notice of appeal. On October 31, 2017, the Civil and Commercial Court of Appeals of Mar del Plata ruled that plaintiff's claim was barred by the statute of limitations and it reversed the trial court's decision. On November 28, 2017,May 17, 2021 plaintiff filed ana federal extraordinary appeal of the reversal of the trial court's decision toappeal. On November 1, 2021, the Supreme Court of the Province of Buenos Aires.Aires dismissed plaintiff's federal extraordinary appeal. On November 10, 2021, plaintiff filed a direct appeal before the Federal Supreme Court.




112

DateLocation of
Court/Name of
Plaintiff		Type of
Case		VerdictPost-Trial
Developments
June 17, 2021Argentina/Claudia MilanoIndividual ActionOn June 17, 2021, the Civil Court No. 9 - Mar del Plata, issued a verdict in favor of plaintiff, an individual smoker, and awarded her smoking cessation treatments, ARS 150,000 (approximately $1,423), in compensatory and moral damages, and ARS 4,000,000 (approximately $37,958) in punitive damages, plus interest and costs. The trial court found that our subsidiary failed to warn plaintiff of the risk of becoming addicted to cigarettes.
On July 2, 2021, our subsidiary filed its notice of appeal. In addition, plaintiff filed an appeal challenging the dismissal of the claim for psychological damages.As required by local law, our subsidiary deposited the damages awarded, plus interest and costs, in total ARS 6,114,428 (approximately $58,024), into a court escrow account. Our subsidiary challenged the amount determined by the court. The Mar del Plata Court of Appeals granted our subsidiary's challenge to the escrow amount determined by the trial court. As a result, on December 16, 2021, ARS 893,428 (approximately $8,478) was returned to our subsidiary. If our subsidiary ultimately prevails on appeal, the remaining deposited amounts will be returned to our subsidiary.

Pending claims related to tobacco products generally fall within the following categories:

Smoking and Health Litigation: These cases primarily allege personal injury and are brought by individual plaintiffs or on behalf of a class or purported class of individual plaintiffs. Plaintiffs' allegations of liability in these cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of express and implied warranties, violations of deceptive trade practice laws and consumer protection statutes. Plaintiffs in these cases seek various forms of relief, including compensatory and other damages, and injunctive and equitable relief. Defenses raised in these cases include licit activity, failure to state a claim, lack of defect, lack of proximate cause, assumption of the risk, contributory negligence, and statute of limitations.


As of February 9, 2018,December 31, 2021, there were a number of smoking and health cases pending against us, our subsidiaries or indemnitees, as follows:


57•40 cases brought by individual plaintiffs in Argentina (30)(31), Brazil (10)(2), Canada (4)(2), Chile (5(1), Costa Rica (1), Italy (3), the Philippines (1), Russia (1), Turkey (1) and Scotland (1)(1), as well as 1 case brought by an individual plaintiff in the United States District Court for the District of Oregon in May 2021. The provisions of the 2008 Share Distribution Agreement between PMI and Altria provide for indemnities to PMI for certain liabilities concerning tobacco products as described above under the caption "Tobacco-Related Litigation,"compared with 6443 such cases on December 31, 2016,2020, and 6850 cases on December 31, 2015;2019; and
11•9 cases brought on behalf of classes of individual plaintiffs, in Brazil (2) and Canada (9), compared with 119 such cases on December 31, 2016,2020 and 1110 such cases on December 31, 2015.
2019.


In the firstThe class action pending in Brazil, The Smoker Health Defense Association (ADESF) v. Souza Cruz, S.A. and Philip Morris Marketing, S.A., Nineteenth Lower Civil Court of the Central Courts of the Judiciary District of São Paulo, Brazil, filed July 25, 1995, our subsidiary and another member of the industry are defendants. The plaintiff, a consumer organization, is seeking damages for all addicted smokers and former smokers, and injunctive relief. In 2004, the trial court found defendants liable without hearing evidence and awarded “moral damages” of R$1,000 (approximately $305) per smoker per full year of smoking plus interest at the rate of 1% per month, as of the date of the ruling. The court did not award actual damages, which were to be assessed in the second phase of the case. The size of the class was not estimated. Defendants appealed to the São Paulo Court of Appeals, which annulled the ruling in November 2008, finding that the trial court had inappropriately ruled without hearing evidence and returned the case to the trial court for further proceedings. In May 2011, the trial court dismissed the claim. In February 2015, the appellate court unanimously dismissed plaintiff's appeal. In September 2015, plaintiff appealed to the Superior Court of Justice. In February 2017, the Chief Justice of the Supreme Court of Justice denied plaintiff's appeal. In March 2017, plaintiff filed an en banc appeal to the Supreme Court of Justice. In addition, the defendants filed a constitutional appeal to the Federal Supreme Tribunal on the basis that plaintiff did not have standing to bring the lawsuit. Both appeals are still pending.

In the second class action pending in Brazil, Public Prosecutor of São Paulo v. Philip Morris Brasil Industria e Comercio Ltda., Civil Court of the City of São Paulo, Brazil, filed August 6, 2007, our subsidiary is a defendant. The plaintiff, the Public Prosecutor of the State of São Paulo, is seeking (i) damages on behalf of all smokers nationwide, former smokers, and their relatives; (ii) damages on behalf of people exposed to environmental tobacco smoke nationwide, and their relatives; and (iii) reimbursement of the health care costs allegedly incurred for the treatment of tobacco-related diseases by all Brazilian States and Municipalities, and the Federal District. In an interim ruling issued in December 2007, the trial court limited the scope of this claim to the State of São Paulo only. In December 2008, the Seventh Civil Court of São Paulo issued a decision declaring that it lacked jurisdiction because the case involved issues similar to the ADESF case discussed above and should be transferred to the Nineteenth Lower Civil Court in São Paulo where the ADESF case is pending. The court further stated that these cases should be consolidated for the purposes of judgment. In April 2010, the São Paulo Court of Appeals reversed the Seventh Civil Court's decision that consolidated the cases, finding that they are based on different legal claims and are progressing at different stages of proceedings. This case was returned to the Seventh Civil Court of São Paulo, and our subsidiary filed its closing arguments in December 2010. In March 2012, the trial court dismissed the case on the merits. In January 2014, the São Paulo Court of Appeals rejected plaintiff’s appeal and affirmed the trial court decision. In July 2014, plaintiff appealed to the Superior Court of Justice.

In the first class actionactions pending in Canada Cecilia Létourneau v. Imperial Tobacco Ltd., Rothmans, Benson & Hedges Inc.are described above under the caption “Smoking and JTI Macdonald Corp., Quebec Superior Court, Canada, filed in September 1998, our subsidiary and other Canadian manufacturers (Imperial Tobacco Canada Ltd. and JTI-MacDonald Corp.) are defendants.  The plaintiff, an individual smoker, sought compensatory and punitive damages for each member of the class who is deemed addicted to smoking. The class was certified in 2005.  Trial began in March 2012 and concluded in December 2014. The trial court issued its judgment on May 27, 2015. The trial court found our subsidiary and two other Canadian manufacturers liable and awarded a total of CAD 131 million (approximately $104 million) in punitive damages, allocating CAD 46 million (approximately $37 million) to our subsidiary. The trial court found that defendants violated the Civil Code of Quebec, the Quebec Charter of Human Rights and Freedoms, and the Quebec Consumer Protection Act by failing to warn adequately of the dangers of smoking. The trial court also found that defendants conspired to prevent consumers from learning the dangers of smoking. The trial court further held that these civil faults were a cause of the class members’ addiction. The trial court rejected other grounds ofHealth Litigation — Canada.”


fault advanced by the class, holding that: (i) the evidence was insufficient to show that defendants marketed to youth, (ii) defendants’ advertising did not convey false information about the characteristics of cigarettes, and (iii) defendants did not commit a fault by using the descriptors light or mild for cigarettes with a lower tar delivery. The trial court estimated the size of the addiction class at 918,000 members but declined to award compensatory damages to the addiction class because the evidence did not establish the claims with sufficient accuracy. The trial court ordered defendants to pay the full punitive damage award into a trust within 60 days and found that a claims process to allocate the awarded damages to individual class members would be too expensive and difficult to administer. The trial court ordered a briefing on the proposed process for the distribution of sums remaining from the punitive damage award after payment of attorneys’ fees and legal costs. In June 2015, our subsidiary commenced the appellate process by filing its inscription of appeal of the trial court’s judgment with the Court of Appeal of Quebec. Our subsidiary also filed a motion to cancel the trial court’s order for payment into a trust within 60 days notwithstanding appeal. In July 2015, the Court of Appeal granted the motion to cancel and overturned the trial court’s ruling that our subsidiary make the payment into a trust within 60 days. In August 2015, plaintiffs filed a motion with the Court of Appeal seeking security in both the Létourneau case and the Blais case described below. In October 2015, the Court of Appeal granted the motion and ordered our subsidiary to furnish security totaling CAD 226 million (approximately $180 million), in the form of cash into a court trust or letters of credit, in six equal consecutive quarterly installments of approximately CAD 37.6 million (approximately $29.9 million) beginning in December 2015 through March 2017. See the Blais description for further detail concerning the security order. The Court of Appeal heard oral arguments on the merits appeal in November 2016. Our subsidiary and PMI believe that the findings of liability and damages were incorrect and should ultimately be set aside on any one of many grounds, including the following: (i) holding that defendants violated Quebec law by failing to warn class members of the risks of smoking even after the court found that class members knew, or should have known, of the risks, (ii) finding that plaintiffs were not required to prove that defendants’ alleged misconduct caused injury to each class member in direct contravention of binding precedent, (iii) creating a factual presumption, without any evidence from class members or otherwise, that defendants’ alleged misconduct caused all smoking by all class members, (iv) holding that the addiction class members’ claims for punitive damages were not time-barred even though the case was filed more than three years after a prominent addiction warning appeared on all packages, and (v) awarding punitive damages to punish defendants without proper consideration as to whether punitive damages were necessary to deter future misconduct.

In the second class action pending in Canada, Conseil Québécois Sur Le Tabac Et La Santé and Jean-Yves Blais v. Imperial Tobacco Ltd.,Rothmans, Benson & Hedges Inc. and JTI Macdonald Corp., Quebec Superior Court, Canada, filed in November 1998, our subsidiary and other Canadian manufacturers (Imperial Tobacco Canada Ltd. and JTI-MacDonald Corp.) are defendants. The plaintiffs, an anti-smoking organization and an individual smoker, sought compensatory and punitive damages for each member of the class who allegedly suffers from certain smoking-related diseases. The class was certified in 2005. Trial began in March 2012 and concluded in December 2014. The trial court issued its judgment on May 27, 2015. The trial court found our subsidiary and two other Canadian manufacturers liable and found that the class members’ compensatory damages totaled approximately CAD 15.5 billion, including pre-judgment interest (approximately $12.3 billion). The trial court awarded compensatory damages on a joint and several liability basis, allocating 20% to our subsidiary (approximately CAD 3.1 billion, including pre-judgment interest (approximately $2.5 billion)). In addition, the trial court awarded CAD 90,000 (approximately $71,500) in punitive damages, allocating CAD 30,000 (approximately $23,900) to our subsidiary and found that defendants violated the Civil Code of Quebec, the Quebec Charter of Human Rights and Freedoms, and the Quebec Consumer Protection Act by failing to warn adequately of the dangers of smoking. The trial court also found that defendants conspired to prevent consumers from learning the dangers of smoking. The trial court further held that these civil faults were a cause of the class members’ diseases. The trial court rejected other grounds of fault advanced by the class, holding that: (i) the evidence was insufficient to show that defendants marketed to youth, (ii) defendants’ advertising did not convey false information about the characteristics of cigarettes, and (iii) defendants did not commit a fault by using the descriptors light or mild for cigarettes with a lower tar delivery. The trial court estimated the disease class at 99,957 members. The trial court ordered defendants to pay CAD 1 billion (approximately $795 million) of the compensatory damage award into a trust within 60 days, CAD 200 million (approximately $159 million) of which is our subsidiary’s portion and ordered briefing on a proposed claims process for the distribution of damages to individual class members and for payment of attorneys’ fees and legal costs. In June 2015, our subsidiary commenced the appellate process by filing its inscription of appeal of the trial court’s judgment with the Court of Appeal of Quebec. Our subsidiary also filed a motion to cancel the trial court’s order for payment into a trust within 60 days notwithstanding appeal. In July 2015, the Court of Appeal granted the motion to cancel and overturned the trial court’s ruling that our subsidiary make an initial payment within 60 days. In August 2015, plaintiffs filed a motion with the Court of Appeal seeking an order that defendants place irrevocable letters of credit totaling CAD 5 billion (approximately $3.97 billion) into trust, to secure the judgments in both the Létourneau and Blais cases. Plaintiffs subsequently withdrew their motion for security against JTI-MacDonald Corp. and proceeded only against our subsidiary and Imperial Tobacco Canada Ltd. In October 2015, the Court of Appeal granted the motion and ordered our subsidiary to furnish security totaling CAD 226 million (approximately $180 million) to cover both the Létourneau and Blais cases. Such security may take the form of cash into a court trust or letters of credit, in six equal consecutive quarterly installments of approximately CAD 37.6 million (approximately $29.9 million) beginning in December 2015 through March 2017. The Court of Appeal ordered Imperial Tobacco Canada Ltd. to furnish security totaling CAD 758 million (approximately $603 million) in seven equal consecutive quarterly installments of approximately CAD 108 million (approximately $85.9 million) beginning in December 2015 through June 2017. In March 2017, our subsidiary made its sixth and final quarterly installment of security for approximately CAD 37.6 million (approximately $29.9 million) into a court trust. This payment is included in other assets on the consolidated balance sheets and in cash used in operating activities in the consolidated statements of cash flows. The Court of Appeal ordered that the security is payable upon a final judgment of the Court of Appeal affirming the trial court’s judgment or upon

further order of the Court of Appeal. The Court of Appeal heard oral arguments on the merits appeal in November 2016. Our subsidiary and PMI believe that the findings of liability and damages were incorrect and should ultimately be set aside on any one of many grounds, including the following: (i) holding that defendants violated Quebec law by failing to warn class members of the risks of smoking even after the court found that class members knew, or should have known, of the risks, (ii) finding that plaintiffs were not required to prove that defendants’ alleged misconduct caused injury to each class member in direct contravention of binding precedent, (iii) creating a factual presumption, without any evidence from class members or otherwise, that defendants’ alleged misconduct caused all smoking by all class members, (iv) relying on epidemiological evidence that did not meet recognized scientific standards, and (v) awarding punitive damages to punish defendants without proper consideration as to whether punitive damages were necessary to deter future misconduct.

In the third class action pending in Canada, Kunta v. Canadian Tobacco Manufacturers' Council, et al., The Queen's Bench, Winnipeg, Canada, filed June 12, 2009, we, our subsidiaries, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and chronic obstructive pulmonary disease (“COPD”), severe asthma, and mild reversible lung disease resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers, their estates, dependents and family members, as well as restitution of profits, and reimbursement of government health care costs allegedly caused by tobacco products. In September 2009, plaintiff's counsel informed defendants that he did not anticipate taking any action in this case while he pursues the class action filed in Saskatchewan (see description of Adams, below).

In the fourth class action pending in Canada, Adams v. Canadian Tobacco Manufacturers' Council, et al.,The Queen's Bench, Saskatchewan, Canada, filed July 10, 2009, we, our subsidiaries, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and COPD resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who have smoked a minimum of 25,000 cigarettes and have allegedly suffered, or suffer, from COPD, emphysema, heart disease, or cancer, as well as restitution of profits. Preliminary motions are pending.

In the fifth class action pending in Canada, Semple v. Canadian Tobacco Manufacturers' Council, et al.,The Supreme Court (trial court), Nova Scotia, Canada, filed June 18, 2009, we, our subsidiaries, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges his own addiction to tobacco products and COPD resulting from the use of tobacco products. He is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers, their estates, dependents and family members, as well as restitution of profits, and reimbursement of government health care costs allegedly caused by tobacco products. No activity in this case is anticipated while plaintiff's counsel pursues the class action filed in Saskatchewan (see description of Adams, above).

In the sixth class action pending in Canada, Dorion v. Canadian Tobacco Manufacturers' Council, et al., The Queen's Bench, Alberta, Canada, filed June 15, 2009, we, our subsidiaries, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and chronic bronchitis and severe sinus infections resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers, their estates, dependents and family members, restitution of profits, and reimbursement of government health care costs allegedly caused by tobacco products. To date, we, our subsidiaries, and our indemnitees have not been properly served with the complaint. No activity in this case is anticipated while plaintiff's counsel pursues the class action filed in Saskatchewan (see description of Adams, above).

In the seventh class action pending in Canada, McDermid v. Imperial Tobacco Canada Limited, et al.,Supreme Court, British Columbia, Canada, filed June 25, 2010, we, our subsidiaries, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges his own addiction to tobacco products and heart disease resulting from the use of tobacco products. He is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who were alive on June 12, 2007, and who suffered from heart disease allegedly caused by smoking, their estates, dependents and family members, plus disgorgement of revenues earned by the defendants from January 1, 1954, to the date the claim was filed.
In the eighth class action pending in Canada, Bourassa v. Imperial Tobacco Canada Limited, et al.,Supreme Court, British Columbia, Canada, filed June 25, 2010, we, our subsidiaries, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, the heir to a deceased smoker, alleges that the decedent was addicted to tobacco products and suffered from emphysema resulting from the use of tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who were alive on June 12, 2007, and who suffered from chronic respiratory diseases allegedly caused by smoking, their estates, dependents and family members, plus disgorgement of revenues earned by the defendants from January 1, 1954, to the date the claim was filed. In December 2014, plaintiff filed an amended statement of claim.

In the ninth class action pending in Canada, Suzanne Jacklin v. Canadian Tobacco Manufacturers' Council, et al., Ontario Superior Court of Justice, filed June 20, 2012, we, our subsidiaries, and our indemnitees (PM USA and Altria), and other members of the industry are defendants. The plaintiff, an individual smoker, alleges her own addiction to tobacco products and COPD resulting from the use of

tobacco products. She is seeking compensatory and punitive damages on behalf of a proposed class comprised of all smokers who have smoked a minimum of 25,000 cigarettes and have allegedly suffered, or suffer, from COPD, heart disease, or cancer, as well as restitution of profits. Plaintiff's counsel has indicated that he does not intend to take any action in this case in the near future.

Health Care Cost Recovery Litigation: These cases, brought by governmental and non-governmental plaintiffs, seek reimbursement of health care cost expenditures allegedly caused by tobacco products. Plaintiffs' allegations of liability in these cases are based on various theories of recovery including unjust enrichment, negligence, negligent design, strict liability, breach of express and implied warranties, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, defective product, failure to warn, sale of cigarettes to minors, and claims under statutes governing competition and deceptive trade practices. Plaintiffs in these cases seek various forms of relief including compensatory and other damages, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, remoteness of injury, failure to state a claim, adequate remedy at law, “unclean hands” (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), and statute of limitations.

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As of February 9, 2018,December 31, 2021, there were 1617 health care cost recovery cases pending against us, our subsidiaries or indemnitees in Brazil (1), Canada (10), Korea (1) and Nigeria (5), compared with 1617 such cases on December 31, 20162020 and 1617 such cases on December 31, 2015.2019.


The health care cost recovery actions pending in Canada are described above under the caption “Health Care Cost Recovery Litigation — Canada.”
In the first health care cost recovery case pending in Canada, Her Majesty the Queen in RightBrazil, The Attorney General of British ColumbiaBrazil v. Imperial Tobacco Limited,Souza Cruz Ltda., et al., SupremeFederal Trial Court, British Columbia, Vancouver Registry, Canada,Porto Alegre, Rio Grande do Sul, Brazil, filed January 24, 2001,May 21, 2019, we, our subsidiaries, our indemnitee (PM USA), and other members of the industry are defendants. The plaintiff,Plaintiff seeks reimbursement for the governmentcost of the provincetreating alleged smoking-related diseases in certain prior years, payment of British Columbia, brought a claim based upon legislation enacted by the province authorizing the government to file a direct action against cigarette manufacturers to recover the health careanticipated costs it has incurred,of treating future alleged smoking-related diseases, and will incur, resulting from a “tobacco related wrong.” The Supreme Court of Canada has held that the statute is constitutional. We and certain other non-Canadian defendants challenged the jurisdiction of the court. The court rejected the jurisdictional challenge. Pre-trial discovery is ongoing.

In the second health care cost recovery casemoral damages. Defendants filed in Canada, Her Majesty the Queen in Right of New Brunswick v. Rothmans Inc., et al., Court of Queen's Bench of New Brunswick, Trial Court, New Brunswick, Fredericton, Canada, filed March 13, 2008, we, our subsidiaries, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of New Brunswick based on legislation enacted in the province. This legislation is similaranswers to the law introducedcomplaint in British Columbia that authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.” Pre-trial discovery is ongoing. In June 2017, the trial court set a trial date for November 4, 2019.May 2020.

In the third health care cost recovery case filed in Canada, Her Majesty the Queen in Right of Ontario v. Rothmans Inc., et al., Ontario Superior Court of Justice, Toronto, Canada, filed September 29, 2009, we, our subsidiaries, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Ontario based on legislation enacted in the province. This legislation is similar to the laws introduced in British Columbia and New Brunswick that authorize the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.” Pre-trial discovery is ongoing.

In the fourth health care cost recovery case filed in Canada, Attorney General of Newfoundland and Labrador v. Rothmans Inc., et al., Supreme Court of Newfoundland and Labrador, St. Johns, Canada, filed February 8, 2011, we, our subsidiaries, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Newfoundland and Labrador based on legislation enacted in the province that is similar to the laws introduced in British Columbia, New Brunswick and Ontario. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.” Pre-trial discovery is ongoing.

In the fifth health care cost recovery case filed in Canada, Attorney General of Quebec v. Imperial Tobacco Limited, et al., Superior Court of Quebec, Canada, filed June 8, 2012, we, our subsidiary, our indemnitee (PM USA), and other members of the industry are defendants. The claim was filed by the government of the province of Quebec based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.” Pre-trial discovery is ongoing.

In the sixth health care cost recovery case filed in Canada, Her Majesty in Right of Alberta v. Altria Group, Inc., et al., Supreme Court of Queen's Bench Alberta, Canada, filed June 8, 2012, we, our subsidiaries, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Alberta based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.” Pre-trial discovery is ongoing.


In the seventh health care cost recovery case filed in Canada, Her Majesty the Queen in Right of the Province of Manitoba v. Rothmans, Benson & Hedges, Inc., et al., The Queen's Bench, Winnipeg Judicial Centre, Canada, filed May 31, 2012, we, our subsidiaries, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Manitoba based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.” Defendants filed their defenses in September 2014. Pre-trial discovery is ongoing.

In the eighth health care cost recovery case filed in Canada, The Government of Saskatchewan v. Rothmans, Benson & Hedges Inc., et al., Queen's Bench, Judicial Centre of Saskatchewan, Canada, filed June 8, 2012, we, our subsidiaries, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Saskatchewan based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.” Defendants filed their defenses in February 2015. While discovery initially was scheduled to begin in 2017 by agreement of the parties, to date, the discovery process has not started.

In the ninth health care cost recovery case filed in Canada, Her Majesty the Queen in Right of the Province of Prince Edward Island v. Rothmans, Benson & Hedges Inc., et al., Supreme Court of Prince Edward Island (General Section), Canada, filed September 10, 2012, we, our subsidiaries, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Prince Edward Island based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.” Defendants filed their defenses in February 2015. While discovery initially was scheduled to begin in 2017 by agreement of the parties, to date, the discovery process has not started.

In the tenth health care cost recovery case filed in Canada, Her Majesty the Queen in Right of the Province of Nova Scotia v. Rothmans, Benson & Hedges Inc., et al., Supreme Court of Nova Scotia, Canada, filed January 2, 2015, we, our subsidiaries, our indemnitees (PM USA and Altria), and other members of the industry are defendants. The claim was filed by the government of the province of Nova Scotia based on legislation enacted in the province that is similar to the laws enacted in several other Canadian provinces. The legislation authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.” Defendants filed their defenses in July 2015. While discovery initially was scheduled to begin in 2017 by agreement of the parties, to date, the discovery process has not started.

In the first health care cost recovery case in Nigeria, The Attorney General of Lagos State v. British American Tobacco (Nigeria) Limited, et al., High Court of Lagos State, Lagos, Nigeria, filed March 13, 2008, we and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. We are in the process of making challenges to service and the court's jurisdiction. Currently, the case is stayed in the trial court pending the appeals of certain co-defendants relating to service objections.

In the second health care cost recovery case in Nigeria, The Attorney General of Kano State v. British American Tobacco (Nigeria) Limited, et al., High Court of Kano State, Kano, Nigeria, filed May 9, 2007, we and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. We are in the process of making challenges to service andchallenging the court's jurisdiction. Currently, the case is stayed in the trial court pending the appeals of certain co-defendants relating to service objections.

In the third health care cost recovery case in Nigeria, The Attorney General of Gombe State v. British American Tobacco (Nigeria) Limited, et al., High Court of Gombe State, Gombe, Nigeria, filed October 17, 2008, we and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. In February 2011, the court ruled that the plaintiff had not complied with the procedural steps necessary to serve us. As a result of this ruling, plaintiff must re-serve its claim. We have not yet been re-served.

In the fourth health care cost recovery case in Nigeria, The Attorney General of Oyo State, et al., v. British American Tobacco (Nigeria) Limited, et al., High Court of Oyo State, Ibadan, Nigeria, filed May 25, 2007, we and other members of the industry are defendants. Plaintiffs seek reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. We challenged service as improper. In June 2010, the court ruled that plaintiffs did not have leave to serve the writ of summons on the defendants and that they must re-serve the writ. We have not yet been re-served.

In the fifth health care cost recovery case in Nigeria, The Attorney General of Ogun State v. British American Tobacco (Nigeria) Limited, et al., High Court of Ogun State, Abeokuta, Nigeria, filed February 26, 2008, we and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. In May 2010, the trial court rejected our service objections.objections to the court's jurisdiction. We have appealed. Currently, the case is stayed in the trial court pending the appeals of certain co-defendants relating to service objections.

In the health care cost recovery case in Korea, the National Health Insurance Service v. KT&G, et. al., filed April 14, 2014, our subsidiary and other Korean manufacturers are defendants. Plaintiff alleges that defendants concealed the health hazards of smoking, marketed to youth, added ingredients to make their products more harmful and addictive, and misled consumers into believing that Lights cigarettes are safer than regular cigarettes. The National Health Insurance Service seeks to recover approximately $53.7 milliondamages 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 trial court dismissed the case is now in the evidentiary phase.its entirety on November 20, 2020. Plaintiff appealed.


Label-Related Cases:These cases, now brought only by individual plaintiffs, or on behalf of a class or purported class of individual plaintiffs, allege that the use of the descriptor “Lights” or other alleged misrepresentations or omissions of labeling information constitute fraudulent and misleading conduct. Plaintiffs' allegations of liability in these cases are based on various theories of recovery including misrepresentation, deception, and breach of consumer protection laws. Plaintiffs seek various forms of relief including restitution, injunctive relief, and compensatory and other damages. Defenses raised include lack of causation, lack of reliance, assumption of the risk, and statute of limitations.


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As of February 9, 2018,December 31, 2021, there was 1 casewere 3 label-related cases brought by an individual plaintiffplaintiffs in Italy (1) and Chile (2) pending against our subsidiaries, compared with 35 such cases on December 31, 2016,2020, and 35 such cases on December 31, 2015, and one purported class action in Israel (1).2019.


An individual plaintiff filed the purported class action, Aharon Ringer v. Philip Morris Ltd. and Globrands Ltd., on July 18, 2017, in the Central District Court of Israel. Our Israeli affiliate and an Israeli importer and distributor for other multinational tobacco companies are defendants. Plaintiff seeks to represent a class of smokers in Israel who have purchased cigarettes imported by defendants since July 18, 2010. Plaintiff estimates the class size to be 7,000,000 smokers. Plaintiff alleges that defendants misled consumers by not disclosing sufficient information about carbon monoxide, tar, and nicotine yields of, and tobacco contained in, the imported cigarettes. Plaintiff seeks various forms of relief, including an order for defendants to label cigarette packs in accordance with plaintiff’s demands, and damages for misleading consumers, breach of autonomy and unjust enrichment.

Public Civil Actions: Claims have been filed either by an individual, or a public or private entity, seeking to protect collective or individual rights, such as the right to health, the right to information or the right to safety. Plaintiffs' allegations of liability in these cases are based on various theories of recovery including product defect, concealment, and misrepresentation. Plaintiffs in these cases seek various forms of relief including injunctive relief such as banning cigarettes, descriptors, smoking in certain places and advertising, as well as implementing communication campaigns and reimbursement of medical expenses incurred by public or private institutions.


As of February 9, 2018,December 31, 2021, there were 2was 1 public civil actionsaction pending against our subsidiariessubsidiary in Argentina (1) and Venezuela (1), compared with 2 such cases on December 31, 2016,2020, and 32 such cases on December 31, 2015.2019.


In the public civil action in Argentina, Asociación Argentina de Derecho de Danos v. Massalin Particulares S.A., et al., Civil Court of Buenos Aires, Argentina, filed February 26, 2007, our subsidiary and another member of the industry are defendants. The plaintiff, a consumer association, seeks the establishment of a relief fund for reimbursement of medical costs associated with diseases allegedly caused by smoking. Our subsidiary filed its answer in September 2007. In March 2010, the case file was transferred to the Federal Court on Administrative Matters after the Civil Court granted plaintiff's request to add the national government as a co-plaintiff in the case. The case is currently in the evidentiary stage.

In the public civil action in Venezuela, Federation of Consumers and Users Associations (“FEVACU”), et al. v. National Assembly of Venezuela and the Venezuelan Ministry of Health, Constitutional Chamber of the Venezuelan Supreme Court, filed April 29, 2008, we were not named as a defendant, but the plaintiffs published a notice pursuant to court order, notifying all interested parties to appear in the case. In January 2009, our subsidiary appeared in the case in response to this notice. The plaintiffs purport to represent the right to health of the citizens of Venezuela and claim that the government failed to protect adequately its citizens' right to health. The claim asks the court to order the government to enact stricter regulations on the manufacture and sale of tobacco products. In addition, the plaintiffs ask the court to order companies involved in the tobacco industry to allocate a percentage of their “sales or benefits” to establish a fund to pay for the health care costs of treating smoking-related diseases. In October 2008, the court ruled that plaintiffs have standing to file the claim and that the claim meets the threshold admissibility requirements. In December 2012, the court admitted our subsidiary and BAT's subsidiary as interested third parties. In February 2013, our subsidiary answered the complaint.



Reduced-Risk Products

In Colombia, an individual filed a purported class action, Ana Ferrero Rebolledo v. Philip Morris Colombia S.A., et al., in April 2019 against our subsidiaries with the Civil Court of Bogota related to the marketing of our Platform 1 product. Plaintiff alleged that our subsidiaries advertise the product in contravention of law and in a manner that misleads consumers by portraying the product in a positive light, and further asserts that the Platform 1 vapor contains many toxic compounds, creates a high level of dependence, and has damaging second-hand effects. Plaintiff sought injunctive relief and damages on her behalf and on a behalf of two classes (class 1 - all Platform 1 consumers in Colombia who seek damages for the purchase price of the product and personal injuries related to the alleged addiction, and class 2 - all residents of the neighborhood where the advertising allegedly took place who seek damages for exposure to the alleged illegal advertising). Our subsidiaries answered the complaint in January 2020, and in February 2020, plaintiff filed an amended complaint. The amended complaint modifies the relief sought on behalf of the named plaintiff and on behalf of a single class (all consumers of Platform 1 products in Colombia who seek damages for the product purchase price and personal injuries related to the use of an allegedly harmful product). In June 2021, our subsidiaries answered the amended complaint.

Other Litigation


The Department of Special Investigations of the government of Thailand ("DSI") conducted an investigation into alleged underpayment by our subsidiary, Philip Morris (Thailand) Limited ("PM Thailand"), of customs duties and excise taxes relating to imports from the Philippines covering the period 2003-2007. On January 18, 2016, the Public Prosecutor filed charges against our subsidiary and seven former and current employeesin theBangkok Criminal Court alleging that PM Thailand and the individual defendants jointly and with the intention to defraud the Thai government, under-declared import prices of cigarettes to avoid full payment of taxes and duties in connection with import entries of cigarettes from the Philippines during the period of July 2003 to June 2006. The government is seeking a fine of approximately THB 80.8 billion (approximately $2.54$2.4 billion). In May 2017, the King of Thailand signedenacted a new customs act. The new act, which took effect in November 2017, substantially limits the amount of fines that Thailand could seek in these proceedings. Trial in the case began in November 2017 and is presently expected to conclude in April 2018. PM Thailand believes that its declared import prices are in compliance with the Customs Valuation Agreement of the World Trade Organization and Thai law and that the allegations of the Public Prosecutor are inconsistent with several decisions already taken by Thai Customs and other Thai governmental agencies. 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 $36 million). The trial court dismissed all charges against the individual defendants. In December 2019, as required by the Thai law, our subsidiary paid the fine. This payment is included in other assets on the consolidated balance sheets and negatively impacted net cash provided by operating activities in the consolidated statements of cash flows in the period of payment. Our subsidiary filed an appeal of the trial court's decision. In addition, the Public Prosecutor filed an appeal of the trial court's decision challenging the dismissal of charges against the individual defendants and the amount of the fine imposed. If our subsidiary ultimately prevails on appeal, then Thailand will be required to return this payment to our subsidiary. The appellate court is scheduled to issue its decision on the appeals on June 1, 2022.

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The DSI also conducted an investigation into alleged underpayment by PM Thailand of customs duties and excise taxes relating to imports from Indonesia covering the period 2000-2003. On January 26, 2017, the Public Prosecutor filed charges against PM Thailand and its former Thai employee in the Bangkok Criminal Court alleging that PM Thailand and its former employee jointly and with the intention to defraud the Thai government under-declared import prices of cigarettes to avoid full payment of taxes and duties in connection with import entries during the period from January 2002 to July 2003. The government is seeking a fine of approximately THB 19.8 billion (approximately $621$599 million). In May 2017, Thailand enacted  a new customs act. The case isnew act, which took effect in pre-trialNovember 2017, substantially limits the amount of fines that Thailand could seek in these proceedings. The trial is scheduled to begin in the last quarter of 2018. PM Thailand believes that its declared import prices are in compliance with the Customs Valuation Agreement of the World Trade Organization and Thai law, and that the allegations of the Public Prosecutor are inconsistent with several decisions already taken by Thai Customs and a Thai court. In May 2017,Trial in the King of Thailand signed a new customs act. The new act, which took effectcase began in November 2017, substantially limits2018 and concluded in December 2019. In March 2020, the trial court found our subsidiary guilty of under-declaration of the prices and imposed a fine of approximately THB 130 million (approximately $4 million). The trial court dismissed all charges against the individual defendant. In April 2020, as required by Thai law, our subsidiary paid the fine. This payment is included in other assets on the condensed consolidated balance sheets and negatively impacted net cash provided by operating activities in the condensed consolidated statements of cash flows in the period of payment. Our subsidiary filed an appeal of the trial court's decision. In addition, the Public Prosecutor filed an appeal of the trial court's decision challenging the dismissal of charges against the individual defendant and the amount of fines that Thailand could seek in these proceedings. On November 29, 2017, PM Thailand received notices of assessment in the aggregate amount of approximately THB 25.6 billion (approximately $803 million) from the Thai Customs Department alleging that PM Thailand under-declared customs values for the imports from Indonesia covering the period 2001-2003. The notices include the Indonesian import entries subject to the proceedings discussed above and are in addition to the fine sought by the government in the criminal proceedings. PMimposed. If our subsidiary ultimately prevails on appeal, then Thailand filed its appeal against the notices in December 2017. We believe that all of the notices of assessment are barred by the applicable statutes of limitations and are otherwise without merit.will be required to return this payment to our subsidiary.


The South Korean Board of Audit and Inspection (“BAI”) conducted an audit of certain Korean government agencies and the tobacco industry into whether inventory movements ahead of the January 1, 2015 increase of cigarette-related taxes by tobacco companies, including Philip Morris Korea Inc. ("PM Korea"), our South Korean affiliate,subsidiary, were in compliance with South Korean tax laws.  In November 2016, the tax authorities completed their audit and assessed allegedly underpaid taxes and penalties.  In order to avoid nonpayment financial costs, PM Korea paid approximately KRW 272 billion (approximately $249$227 million), of which KRW 100 billion (approximately $92$83 million) was paid in 2016 and KRW 172 billion (approximately $157$143 million) was paid in the first quarter of 2017.  These paid amounts are included in other assets in the consolidated balance sheets and innegatively impacted net cash used inprovided by operating activities in the consolidated statements of cash flows.flows in the period of payment.  PM Korea is appealingappealed the assessments. In January 2020, a trial court ruled that PM Korea did not underpay taxes in the amount of approximately KRW 218 billion (approximately $182 million). The tax authorities appealed this decision to the appellate court. In September 2020, the appellate court upheld the trial court's decision. The tax authorities have also referred the matterappealed to the Public Prosecutor, who will further investigate and decide whether to file criminal charges againstSupreme Court of South Korea. In June 2020, another trial court ruled that PM Korea and/or otherdid not underpay approximately KRW 54 billion (approximately $45 million) of alleged co-offenders.underpayments. The government agencies appealed this decision. In January 2021, the appellate court upheld the trial court's decision. The government agencies appealed to the Supreme Court of South Korea. If the Public Prosecutor decidestax authorities and government agencies ultimately lose, then they would be required to prosecute, it may seek upreturn the paid amounts to three timesPM Korea.

The Moscow Tax Inspectorate for Major Taxpayers (“MTI”) conducted an audit of AO Philip Morris Izhora (“PM Izhora”), our Russian subsidiary, for the underpaid2015-2017 financial years. On July 26, 2019, MTI issued its initial assessment, claiming that intercompany sales of cigarettes between PM Izhora and another Russian subsidiary prior to excise tax increases and submission by PM Izhora of the maximum retail sales price notifications for company criminalcigarettes to the tax authorities were improper under Russian tax laws and resulted in underpayment of excise taxes and VAT. In August 2019, PM Izhora submitted its objections disagreeing with MTI’s allegations set forth in the initial assessment and MTI’s methodology for calculating the alleged underpayments. MTI accepted some of PM Izhora’s arguments, and in September 2019, issued the final tax assessment claiming an underpayment of RUB $24.3 billion (approximately $374 million), including penalties and upinterest. 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 subsidiaries. In the third quarter of 2019, PMI recorded a pre-tax charge of $374 million, in marketing, administration and research costs in the condensed consolidated statements of earnings, representing $315 million net of an associated income tax benefit of $59 million.

The Saudi Arabia Customs General Authority issued its assessments requiring our distributors to five timespay additional customs duties in the underpaid taxamount of approximately 1.5 billion Saudi Riyal, or approximately $396 million, in relation to the fees paid by these distributors under their agreements with our subsidiary for individual criminal penalties. PM Koreaexclusive rights to distribute our products in Saudi Arabia. In order to challenge these assessments, the distributors posted bank guarantees. To enable the distributors' challenge, our subsidiary agreed with the banks to bear a portion of the amount the authority may draw on the bank guarantees. In September and October 2020, respectively, the distributors lost their challenges of the assessments. Both distributors appealed, and in June 2021, the Customs Appeal Committee in Riyadh notified the distributors of its decisions to largely reject their appeals. On the basis of the above-mentioned decisions, in June 2021, PMI recorded a pre-tax charge of $246 million in relation to the period of 2014 through 2020 in line with existing and contemplated arrangements with the distributors. The estimated amounts for 2021 are immaterial. In accordance with U.S. GAAP, the charge was recorded as a reduction in net revenues on the consolidated statements of earnings for the three months and six months ended June 30, 2021. Despite the unfavorable decisions, our subsidiary believes that it hascustoms duties paid cigarette-related taxesin Saudi Arabia were in compliance with the South Korean tax laws. applicable law and the WTO Customs Valuation Agreement.
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A putative shareholder class action lawsuit, In addition,re Philip Morris International Inc. Securities Litigation, is pending in the South Korean MinistryUnited States District Court for the Southern District of StrategyNew York, purportedly on behalf of purchasers of Philip Morris International Inc. stock between July 26, 2016 and Finance (“MOSF”April 18, 2018.  The lawsuit names Philip Morris International Inc. and certain officers and employees as defendants and includes allegations that the defendants made false and/or misleading statements and/or failed to disclose information about PMI’s business, operations, financial condition, and prospects, related to product sales of, and alleged irregularities in clinical studies of, PMI’s Platform 1 product.  The lawsuit seeks various forms of relief, including damages. In November 2018, the court consolidated three putative shareholder class action lawsuits with similar allegations previously filed in the Southern District of New York (namely, City of Westland Police and Fire Retirement System v. Philip Morris International Inc., et al., Greater Pennsylvania Carpenters’ Pension Fund v. Philip Morris International Inc., et al., and Gilchrist v. Philip Morris International Inc., et al.) into these proceedings. A putative shareholder class action lawsuit, Rubenstahl v. Philip Morris International Inc., et al., that had been previously filed in December 2017 in the United States District Court for the District of New Jersey, was voluntarily dismissed by the plaintiff due to similar allegations in these proceedings. On February 4, 2020, the court granted defendants’ motion in its entirety, dismissing all but one of the plaintiffs’ claims with prejudice.  The court noted that one of plaintiffs’ claims (allegations relating to four non-clinical studies of PMI’s Platform 1 product) did not state a viable claim but allowed plaintiffs to replead that claim by March 3, 2020.  On February 18, 2020, the plaintiffs filed a criminalmotion for reconsideration of the court's February 4th decision; this motion was denied on September 21, 2020. On September 28, 2020, plaintiffs filed an amended complaint seeking to replead allegations relating to four non-clinical studies of PMI's Platform 1 product. On September 10, 2021, the court granted defendant's motion to dismiss plaintiffs' amended complaint in its entirety. On October 8, 2021, the plaintiffs filed a Notice of Appeal to the U.S. Court of Appeal for the Second Circuit. We believe that this lawsuit is without merit and will continue to defend it vigorously.

In April 2020, affiliates of British American Tobacco plc (“BAT”) commenced patent infringement proceedings, RAI Strategic Holdings, Inc., et al. v. Altria Client Services LLC, et al.,  in the federal court in the Eastern District of Virginia, where PMI's subsidiary, Philip Morris Products S.A., as well as Altria Group, Inc.'s subsidiaries, are defendants. Plaintiffs seek damages and injunctive relief against the commercialization of the Platform 1 products in the United States.  In April 2020, BAT affiliates filed a complaint against PMI, Philip Morris Products S.A., Altria Group, Inc., and its subsidiaries before the International Trade Commission ("ITC"). Plaintiffs seek an order to prevent the importation of Platform 1 products into the United States. The ITC evidentiary hearing closed on February 1, 2021. On May 14, 2021, the administrative law judge issued an Initial and Recommended Determination ("ID/RD") finding that the Platform 1 product infringes two of the three patents asserted by Plaintiffs, recommending that the ITC issue a Limited Exclusion order against infringing products, and recommending against a cease-and-desist, as well as recommending against a bond pending Presidential review of the ITC's Final Determination ("FD"). Defendants and Plaintiffs filed separate Petitions for Review with the Public Prosecutor ITC of the ID on May 28, 2021; on July 27, 2021, the ITC granted each of the petitions in part, deciding to review certain issues in the ID. Plaintiffs and Defendants also submitted brief statements of the public interest factors in issue to the ITC on June 15, 2021. On September 29, 2021, the ITC issued its FD finding a violation of section 337 of the U.S. Tariff Act and issued (a) a limited exclusion order against Philip Morris Products S.A., prohibiting, inter alia, the importation of Platform 1 product and infringing components; and (b) a cease-and-desist order against Altria Client Services, LLC and its affiliate prohibiting, inter alia, sales of imported Platform 1 products. The ITC predicated the orders on its finding that Platform 1 products infringe two patents owned by a BAT affiliate. The ITC also found that Platform 1 products do not infringe a third patent owned by a BAT affiliate. The ITC further held that there were insufficient concerns over public interest to prevent the issuance of remedial orders. Following the Presidential Review period, the orders became effective and Defendants filed a petition for review of the FD with the U.S. Court of Appeals for the Federal Circuit. Defendants also filed motions in the ITC and Federal Circuit for a stay of the orders pending disposition of the appeal; the ITC denied the motion on January 20, 2022 and the Federal Circuit denied the motion on January 25, 2022. We estimate that an adverse ruling is probable due to our inability to import the products and components impacted by the ITC's FD with immaterial financial impact. In the Eastern District of Virginia case, the defendants also counterclaimed that BAT infringed their patents relating to certain e-vapor products, seeking damages for, and injunctive relief against, the commercialization of these products by BAT; defendants' claims against BAT are set for trial beginning the week of June 6, 2022. Upon petition of Philip Morris Products S.A., the Patent Trial and Appeal Board ("PTAB") of the United States Patent and Trademark Office has instituted review of certain claims pertaining to four of the six patents asserted by BAT affiliates in both proceedings. On January 11, 2022, PTAB issued its final decision on one of the two patents underlying the ITC's FD, invalidating all challenged claims of BAT's patent. We expect PTAB's final decision on the second of the two BAT patents underlying the ITC's FD to arrive on or before April 2, 2022; the parties may appeal PTAB results to the U.S. Court of Appeals for the Federal Circuit.

In April 2020, BAT’s affiliate commenced patent infringement proceedings, Nicoventures Trading Limited v. PM GmbH, et al., against PMI’s German subsidiary, Philip Morris GmbH, and Philip Morris Products S.A., in the Regional Court in Munich, Germany. Plaintiffs seek damages and injunctive relief against the commercialization of the Platform 1 products in Germany. In June 2021, the court stayed the proceeding in respect of one of the two patents asserted by BAT’s Affiliate.

In September 2020, BAT’s affiliates commenced patent infringement and unfair competition proceedings, RAI Strategic Holdings, Inc., et al. v. Philip Morris Products S.A., et al., against Philip Morris Products S.A. and PMI’s Italian subsidiaries, Philip Morris Manufacturing & Technology Bologna S.p.A. and Philip Morris Italia S.r.l., in the Court of Milan, Italy. Plaintiffs seek damages, as well as injunctive relief against the manufacture in Italy of the Platform 1 heated tobacco units allegedly infringing the asserted patents and the commercialization of the Platform 1 products in Italy. As part of this proceeding, in October 2020, BAT’s affiliates filed a
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request based on one of the two asserted patents seeking preliminary injunctive relief against the manufacture and commercialization of the Platform 1 products in Italy.

In October 2020, BAT’s affiliates commenced patent infringement proceedings, RAI Strategic Holdings, Inc., et al. v. Philip Morris Japan, Limited, et al., against PMI’s Japanese subsidiary, Philip Morris Japan Limited, and a third-party distributor in the Tokyo District Court. Plaintiffs seek damages and injunctive relief against the commercialization of the Platform 1 products in Japan.

In November 2020, BAT’s affiliates commenced patent infringement proceedings, RAI Strategic Holdings, Inc., et al. v. Philip Morris Romania SRL, et al., against PMI’s Romanian subsidiaries, Philip Morris Romania S.R.L. and Philip Morris Trading S.R.L., and a third-party distributor in the Court of Law of Bucharest, Civil Registry. Plaintiffs seek damages and preliminary and permanent injunctive relief against the manufacture and commercialization of the Platform 1 products in Romania. In February 2021, the court dismissed plaintiffs’ request for a preliminary injunction. In April 2021, the appellate court denied plaintiffs' appeal, confirming the dismissal of plaintiffs' request for preliminary injunction. Plaintiffs' proceeding requesting damages and a permanent injunction remains pending before the Court of Law of Bucharest, Civil Registry. In an October 14, 2021 hearing, the court stayed the proceeding.

In March 2021, BAT’s affiliates commenced patent infringement proceedings, RAI Strategic Holdings, Inc., et al. v. Philip Morris Korea, Co., Ltd., against PM Korea in the Seoul Central District Court. Plaintiffs seek damages and its managing director. In its criminal complaint,injunctive relief against the MOSF alleged that PM Korea exceededcommercialization of the monthly product withdrawal limitsPlatform 1 heated tobacco units in South Korea.

Other patent challenges by both parties are pending in various jurisdictions.

We believe that the MOSF had set in its notice. The Public Prosecutorforegoing proceedings by the affiliates of BAT are without merit and will investigate the MOSF’s criminal complaint and decide whether to prosecute.  PM Korea disagrees with the MOSF’s allegations.defend them vigorously.


We are also involved in additional litigation arising in the ordinary course of our business. While the outcomes of these proceedings are uncertain, management does not expect that the ultimate outcomes of other litigation, including any reasonably possible losses in excess of current accruals, will have a material adverse effect on our consolidated results of operations, cash flows or financial position.



Third-Party Guarantees

On October 17, 2020, Medicago Inc., an equity method investee of Philip Morris Investments B.V. (“PMIBV”), a PMI subsidiary, entered into a contribution agreement with the Canadian government (the “Contribution Agreement”) whereby the Canadian government agreed to contribute up to CAD 173 million (approximately $131 million on the date of signing) to Medicago Inc., to support its on-going COVID-19 vaccine development and clinical trials, and for the construction of its Quebec City manufacturing facility (the “Project”). PMIBV and the majority shareholder of Medicago Inc. are also parties to the Contribution Agreement as guarantors of Medicago Inc.’s obligations thereunder on a joint and several basis (“Co-Guarantors”). The Co-Guarantors agreed to repay amounts contributed by the Canadian government plus interest, if Medicago Inc. fails to do so, and could be responsible for the costs of other Medicago’s obligations (such as the achievement of specific milestones of the Project). The maximum amount of these obligations is currently non-estimable. As of December 31, 2021, PMI has determined that these guarantees did not have a material impact on its consolidated financial statements.

In connection with the Contribution Agreement, PMIBV and the majority shareholder of Medicago Inc. entered into a guarantors’ agreement that apportions Co-Guarantors’ obligations and limits those of PMIBV to its share of holdings in Medicago Inc. During 2021, Medicago Inc. initiated additional rounds of equity funding in which PMIBV did not participate. As a result, PMIBV’s share of holdings in Medicago Inc. was reduced from approximately 32% to approximately 23% as of December 31, 2021. The guarantees are in effect through March 31, 2026.


Note 19.18.

Balance Sheet Offsetting:

Derivative Financial Instruments

PMI uses foreign exchange contracts and interest rate contracts to mitigate its exposure to changes in exchange and interest rates from third-party and intercompany actual and forecasted transactions. Substantially all of PMI's derivative financial instruments are subject to master netting arrangements, whereby the right to offset occurs in the event of default by a participating party. While these contracts contain the enforceable right to offset through close-out netting rights, PMI elects to present them on a gross basis in the consolidated balance sheets. Collateral associated with these arrangements is in the form of cash and is unrestricted. See Note 15. Financial Instruments for disclosures related to PMI's derivative financial instruments.

The effects of these derivative financial instrument assets and liabilities on PMI's consolidated balance sheets were as follows:
 (in millions)Gross Amounts RecognizedGross Amount Offset in the Consolidated Balance SheetNet Amounts Presented in the Consolidated Balance Sheet
Gross Amounts Not Offset in the
Consolidated
Balance Sheet
Net Amount
 Financial InstrumentsCash Collateral Received/Pledged
 
        
 At December 31, 2017      
 Assets      
 Foreign exchange contracts$140
$—
$140
$(50)$(78)$12
 Liabilities      
 Foreign exchange contracts$1,128
$—
$1,128
$(50)$(1,004)$74
 At December 31, 2016      
 Assets      
 Foreign exchange contracts$813
$—
$813
$(126)$(607)$80
 Liabilities      
 Foreign exchange contracts$163
$—
$163
$(126)$(31)$6

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 to sell, on an ongoing basis, certain trade receivables without recourse. The trade receivables sold are generally short-term in nature and are removed from the consolidated balance sheets. PMI sells trade receivables under two types of arrangements, servicing and non-servicing. For servicing arrangements, PMI continues to service the sold trade receivables on an administrative basis and does not act on behalf of the unaffiliated financial institutions. When applicable, a servicing liability is recorded for the estimated fair value of the servicing. The amounts associated with the servicing liability were not material for the
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years ended December 31, 20172021 and 2016.2020. Under the non-servicing arrangements, PMI does not provide any administrative support or servicing after the trade receivables have been sold to the unaffiliated financial institutions.


Cumulative trade receivables sold, including excise taxes, for the years ended December 31, 20172021 and 2016,2020, were $10,003 million$11.8 billion and $9,447 million,$11.5 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 of December 31, 2017, 20162021, 2020 and 2015,2019, were $1,092 million, $729 million$0.9 billion, $1.2 billion and $888 million,$0.9 billion, respectively. The net proceeds received are included in cash provided by operating activities in the consolidated statements of cash flows. The difference between the carrying amount of the trade receivables sold and the sum of the cash received is recorded as a loss on sale of trade receivables within marketing, administration and research costs in the consolidated statements of earnings. For the years ended December 31, 2017, 20162021, 2020 and 20152019 the loss on sale of trade receivables was immaterial.


Note 21.

New Accounting Standards:

On February 25, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ASU 2016-02, “Leases” (“ASU 2016-02”). ASU 2016-02 requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Additionally, ASU 2016-02 modifies current guidance for lessors' accounting. ASU 2016-02 is effective for interim and annual reporting periods beginning on or after January 1, 2019, with early adoption permitted. PMI has identified its lease management system and is in the process of identifying and evaluating the applicable leases. PMI is currently assessing the impact that the adoption of ASU 2016-02 will have on its financial position and results of operations.

On January 5, 2016, the FASB issued Accounting Standard Update ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2016-01 will require equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. Additionally, ASU 2016-01 also changes certain disclosure requirements and other aspects of current U.S. GAAP. ASU 2016-01 is effective for interim and annual reporting periods beginning on or after January 1, 2018. PMI has identified certain cost investments which are applicable to ASU 2016-01. At January 1, 2018, the cumulative effect of this change to PMI’s Earnings Reinvested in the Business is an increase of $238 million, which is net of $63 million in taxes.

On May 28, 2014, the FASB issued Accounting Standards Update ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). ASU 2014-09 contains principles that an entity will need to apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

ASU 2014-09 is effective for interim and annual reporting periods beginning on or after January 1, 2017. In July 2015, the FASB approved a proposal which allows for a deferral of the implementation until January 1, 2018, and permits early application, but not before the original effective date of January 1, 2017. In addition to the guidance in ASU 2014-09, PMI has evaluated ASU 2016-12, which was issued in May 2016 and provides some practical expedients to the original standard. As a result of this evaluation, PMI made an accounting policy election to exclude excise taxes collected from customers from the measurement of the transaction price, thereby presenting revenues, net of excise taxes. PMI has adopted ASU 2014-09 on January 1, 2018 retrospectively to each prior period presented. PMI has elected this transition method solely to reflect the change in excise tax presentation in all prior periods. Based on PMI’s assessment to date, the underlying principles of the new standard, relating to the measurement of revenue and the timing of recognition, are closely aligned with PMI’s current business model and practices. As a result, other than excise tax presentation, the adoption of ASU 2014-09 will not have any other material impact on the consolidated financial position or results of operations.


Note 22.19.


Quarterly Financial Data (Unaudited):Asset Impairment and Exit Costs:

 2017 Quarters
(in millions, except per share data)1st 2nd 3rd 4th
Net revenues$16,556
 $19,319
 $20,638
 $21,585
Gross profit$3,887
 $4,398
 $4,738
 $5,293
Net earnings attributable to PMI$1,590
 $1,781
 $1,970
 $694
Per share data:       
Basic EPS$1.02
 $1.14
 $1.27
 $0.44
Diluted EPS$1.02
 $1.14
 $1.27
 $0.44
Dividends declared$1.04
 $1.04
 $1.07
 $1.07
Market price:       
— High$114.65
 $123.55
 $121.69
 $115.28
— Low$89.97
 $108.56
 $109.31
 $101.58
  
 2016 Quarters
(in millions, except per share data)1st 2nd 3rd 4th
Net revenues$16,788
 $19,041
 $19,935
 $19,189
Gross profit$3,987
 $4,285
 $4,550
 $4,472
Net earnings attributable to PMI$1,530
 $1,788
 $1,938
 $1,711
Per share data:       
Basic EPS$0.98
 $1.15
 $1.25
 $1.10
Diluted EPS$0.98
 $1.15
 $1.25
 $1.10
Dividends declared$1.02
 $1.02
 $1.04
 $1.04
Market price:       
— High$99.53
 $102.55
 $104.20
 $98.21
— Low$84.46
 $95.91
 $96.95
 $86.78
        
For the years ended December 31, 2021, 2020 and 2019, PMI recorded total pre-tax asset impairment and exit costs of $216 million, $149 million and $422 million, respectively. The total pre-tax asset impairment and exit costs were included in marketing, administration and research costs on the consolidated statements of earnings.
Basic
South Korea

In the first quarter of 2021, PM Korea commenced the implementation of a new business operating model, which requires the restructuring of its current distribution agreements. As a result, PMI recorded exit costs of $57 million in the year ended December 31, 2021, related to contract terminations and diluted EPS are computed independentlyrestructuring with certain distributors.

Organizational Design Optimization

As part of PMI’s transformation to a smoke-free future, PMI seeks to optimize its organizational design, which includes the elimination, relocation and outsourcing of certain operations center and centralized activities. In January 2020, PMI commenced a multi-phase restructuring project in Switzerland. PMI initiated the employee consultation procedures, as required under Swiss law, for eachthe impacted employees. The consultation procedures for the first two phases were completed in 2020 with the final phases initiated and completed in 2021. Additionally, since the commencement of this multi-phase restructuring project in 2020, PMI launched a voluntary separation program in Switzerland for certain eligible employees and announced the periods presented. Accordingly,outsourcing of certain activities in Argentina, Indonesia, Poland and the sumUnited States. This multi-phase restructuring project was completed in the fourth quarter of 2021.

For the quarterly EPS amounts may not agreeyears ended December 31, 2021 and 2020, PMI recorded pre-tax charges of $159 million and $149 million, respectively, related to the organizational design optimization. Since inception of this multi-phase restructuring project in January 2020 through December 31, 2021, approximately 1,020 positions in total were impacted, resulting in cumulative pre-tax charges of $308 million related to the organizational design optimization program. Of this cumulative pre-tax amount, $300 million related to separation program charges and $8 million related to asset impairment charges.


Global Manufacturing Infrastructure Optimization

In light of declining PMI cigarette volumes resulting from lower total industry volumes and the shift to smoke-free alternatives, PMI continues to optimize its global manufacturing infrastructure. During 2019, PMI recorded asset impairment and exit costs related to plant closures in Argentina, Colombia, Germany and Pakistan as part of its global manufacturing infrastructure optimization.

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 a result 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 are paid in cash, and asset impairment costs of $91 million, primarily related to machinery and equipment, which were non-cash charges.
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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 cigarette plant closures in Argentina ($15 million), Colombia ($45 million) and Pakistan ($20 million). The charges were reflected in the Americas segment (Argentina and Colombia) and the South & Southeast Asia segment (Pakistan).

Asset Impairment and Exit Costs by Segment

During 2021, 2020 and 2019, PMI recorded the following pre-tax asset impairment and exit costs by segment:

 (in millions)
202120202019
Separation programs: (1)
European Union$68$53$251 
Eastern Europe1414—
Middle East & Africa1718—
South & Southeast Asia21223
East Asia & Australia3125—
Americas8949 
Total separation programs159 141 303 
Contract termination charges:
East Asia & Australia57 ——
Total contract termination charges57 ——
Asset impairment charges (1)
European Union—491
Eastern Europe—1—
Middle East & Africa—1—
South & Southeast Asia—117
East Asia & Australia—1—
Americas——11
Total asset impairment charges— 8119
Asset impairment and exit costs$216 149422
(1) Organizational design optimization pre-tax charges in 2021 and 2020 were allocated across all geographical segments.

Movement in Exit Cost Liabilities

The movement in exit cost liabilities for the year.year ended December 31, 2021 was as follows:
(in millions)
Liability balance, January 1, 2021$180 
Charges, net216 
Cash spent(238)
Currency/other(16)
Liability balance, December 31, 2021$142 

Future cash payments for exit costs incurred to date are anticipated to be substantially paid by the end of 2023.

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Note 20.



Deconsolidation of RBH:

As discussed in Note 17. Contingencies, following the March 1, 2019, judgment of the Court of Appeal of Québec in 2 class action lawsuits against PMI's Canadian subsidiary, Rothmans, Benson & Hedges Inc. ("RBH"), PMI recorded in its consolidated results a pre-tax charge of $194 million, representing $142 million net of tax, in the first quarter of 2019. This pre-tax Canadian tobacco litigation-related expense was included in marketing, administration and research costs on PMI's 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 with minimal disruption to its customers, suppliers and employees.

The administration of the CCAA process, principally relating to the powers provided to the court and the court appointed monitor, removes certain elements of control of the business from both PMI and RBH. As a result, PMI has determined that it no longer has a controlling financial interest over RBH as defined in ASC 810 (Consolidation), and PMI deconsolidated RBH as of the date of the CCAA filing. PMI has also determined that it does not exert "significant influence" over RBH as that term is defined in ASC 323 (Investments-Equity Method and Joint Ventures). Therefore, as of March 22, 2019, PMI accounted for its continuing investment in RBH in accordance with ASC 321 (Investments-Equity Securities) as an equity security, without readily determinable fair value.

Following the deconsolidation, the carrying value of assets and liabilities of RBH was removed from the consolidated balance sheet of PMI, and the continuing investment in RBH was recorded at fair value at the date of deconsolidation. The total amount deconsolidated from PMI’s balance sheet was $3,519 million, including $1,323 million of cash, $1,463 million of goodwill, $529 million of accumulated other comprehensive earnings, primarily related to historical currency translation and $204 million of other assets and liabilities, net. While PMI is accounting for its investment in RBH as an equity security, PMI would recognize dividends as income upon receipt. However, while it remains under creditor protection, RBH does not anticipate paying dividends.

The fair value of PMI’s continuing investment in RBH of $3,280 million was determined at the date of deconsolidation, recorded within equity investments and is assessed for impairment on an ongoing basis. The estimated fair value of the underlying business was determined based on an income approach using a discounted cash flow analysis, as well as a market approach for certain contingent liabilities. The information used in the estimate includes observable inputs, primarily a discount rate of 8%, a terminal growth rate of 2.5% and information about total tobacco market size in Canada and RBH’s share of the market, as well as unobservable inputs such as operating budgets and strategic plans, various inflation scenarios, estimated shipment volumes, and expected product pricing and projected margins.

The difference between the carrying value of the assets and liabilities of RBH that were deconsolidated and the fair value of the continuing investment, as determined at the date of deconsolidation, was $239 million, before tax, and this loss on deconsolidation is reflected within marketing, administration and research costs on PMI’s consolidated statement of earnings for the year ended December 31, 2019. PMI also recorded a tax benefit of $49 million within the provision for income 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 the CCAA filing, these transactions were eliminated on consolidation and had no impact on PMI’s consolidated statement of earnings. After deconsolidating RBH, these transactions are treated as third-party transactions in PMI’s financial statements. The amount of these related-party transactions is included within Note 4. Related Parties - Equity investments 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 17. Contingencies, could result in a material change in the fair value of PMI’s continuing investment in RBH.

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Note 21.

Leases:

PMI has operating and finance leases that are principally for real estate (office space, warehouses and retail store space), machinery and equipment, and vehicles. Lease terms range from 1 year to 72 years, some of 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 a lease renewal or termination option is at PMI’s discretion.

PMI’s operating and finance leases at December 31, 2021 and 2020, were as follows:
At December 31,
(in millions)20212020
Operating LeasesFinance LeasesOperating LeasesFinance Leases
Assets:
Machinery and equipment$— $108 $— $12 
Other assets526 — 697 64 
Total lease assets$526 $108 $697 $76 
Liabilities:
Current
Current portion of long-term debt$— $48 $— $13 
Accrued liabilities - Other192 — 190 — 
Noncurrent
Long-term debt— 23 — 24 
Income taxes and other liabilities344 — 517 — 
Total lease liabilities$536 $71 $707 $37 

The components of PMI’s lease cost were as follows for the years ended December 31, 2021, 2020 and 2019:
For the Years Ended December 31,
(in millions)202120202019
Operating lease cost$259 $237 $242 
Finance lease cost:
Amortization of right-of-use assets54 31 18 
Interest on lease liabilities1 1 1 
Short-term lease cost55 49 61 
Variable lease cost25 31 29 
Total lease cost$394 $349 $351 

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Maturity of PMI’s lease liabilities, on an undiscounted basis, as of December 31, 2021, were as follows:
(in millions)Operating LeasesFinance Leases
2022$215 $49 
2023131 18 
202484 2 
202554 1 
202624 1 
Thereafter140 1 
Total lease payments648 72 
Less: Interest112 1 
Present value of lease liabilities$536 $71 

Other information related to PMI’s leases was as follows for the year ended December 31, 2021, 2020 and 2019:
December 31,
(in millions)202120202019
Operating LeasesFinance LeasesOperating LeasesFinance LeasesOperating LeasesFinance Leases
Cash paid for amounts included in the measurement of lease liabilities in operating cash flows (1)
$259 $— $238 $— $240 $— 
Cash paid for amounts included in the measurement of lease liabilities in financing cash flows$— $26 $— $19 $— $15 
Leased assets obtained in exchange for new lease liabilities$64 $89 $149 $32 $221 $38 
Weighted-average remaining lease term (years)8.31.710.11.69.62.4
Weighted-average discount rate(2) (3)
3.6 %5.3 %4.3 %6.7 %4.4 %7.1 %
(1) Cash paid included in the operating cash flows of finance leases is not material.
(2) PMI’s weighted-average discount rate for operating leases is based on its estimated pre-tax cost of debt adjusted for country-specific risk.
(3) PMI’s weighted-average discount rate for finance leases, excluding embedded leases, is based on its estimated pre-tax cost of debt adjusted for country-specific risk and where applicable the interest rate explicit to lease contracts.
123

Report of Independent Registered Public Accounting Firm


To the Board of Directors and Stockholders of
Philip Morris International Inc. and Subsidiaries::




Opinions on the Financial Statements and Internal Control over Financial Reporting


We have audited the accompanying consolidated balance sheets of Philip Morris International Inc. and its subsidiaries (PMI)(the “Company”) as of December 31, 20172021 and 2016,2020, and the related consolidated statements of earnings, comprehensive earnings, stockholders’ (deficit) equity and of cash flows for each of the three years in the periodsperiod ended December 31, 2017,2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2017,2021, 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 PMIthe Company as of December 31, 20172021 and 2016,2020, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 20172021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, PMIthe Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2021, based on criteria established in Internal Control —Integrated- Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).COSO.



Basis for Opinions


PMI’sThe 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 over Financial Reporting. Our responsibility is to express opinions on PMI’sthe Company’s consolidated financial statements and on PMI’sthe Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.


We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.


Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.



Definition and Limitations of Internal Control over Financial Reporting


A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.



124


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.




PricewaterhouseCoopers SACritical Audit Matters


The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates 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 consolidatedfinancial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Tobacco-Related Litigation for Smoking and Health Class Actions and Health Care Cost Recovery Actions

As described in Note 17 to the consolidated financial statements, the Company has 9 smoking and health class actions and 17 health care cost recovery actions pending. The Company records provisions in the consolidated financial statements for pending litigation when management determines that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. Except as stated otherwise in Note 17, 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 class actions and health care cost recovery cases; (ii) management is unable to estimate the possible loss or range of loss for any of the pending smoking and health class actions and health care cost recovery 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 tobacco-related litigation for smoking and health class actions and health care cost recovery actions 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 the amount or range of the potential loss for each case, which in turn led to a high degree of auditor subjectivity, judgment and effort in evaluating management’s assessment related to the loss contingencies associated with smoking and health class actions and health care cost recovery actions 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 class actions and health care cost recovery actions, including controls over determining the probability and range of loss as well as controls over financial statement disclosures. These procedures also included, among others, obtaining and evaluating the letters of audit inquiry with external and internal legal counsel, evaluating the reasonableness of management’s assessment regarding whether an unfavorable outcome is reasonably possible or probable and reasonably estimable, and evaluating the sufficiency of the Company’s smoking and health class actions and health care cost recovery actions contingencies disclosures.



/S/ PRICEWATERHOUSECOOPERS SA
PricewaterhouseCoopers SA
/S/    BARRY J. MISTHAL/S/    DR. MICHAEL ABRESCH
Barry J. MisthalDr. Michael Abresch
Lausanne, Switzerland
Lausanne, Switzerland
February 13, 201811, 2022


PricewaterhouseCoopers SA hasWe have served as the Company’s auditor since 2008.









125

Report of Management on Internal Control Over Financial Reporting
Management of Philip Morris International Inc. (“PMI”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. PMI’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those written policies and procedures that:
 
•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of PMI;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America;
•provide reasonable assurance that receipts and expenditures of PMI are being made only in accordance with the authorization of management and directors of PMI; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.
 
Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions taken to correct deficiencies as identified.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of PMI’s internal control over financial reporting as of December 31, 2017.2021. Management based this assessment on criteria for effective internal control over financial reporting described in Internal Control — Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of PMI’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.
Based on this assessment, management determined that, as of December 31, 2017,2021, PMI maintained effective internal control over financial reporting.
PricewaterhouseCoopers SA, an independent registered public accounting firm, who audited and reported on the consolidated financial statements of PMI included in this report, has audited the effectiveness of PMI’s internal control over financial reporting as of December 31, 2017,2021, as stated in their report herein.
February 13, 201811, 2022



126
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
 
None.


Item 9A.Controls and Procedures.
Item 9A.Controls and Procedures.
 
PMI carried out an evaluation, with the participation of PMI’s management, including PMI’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of PMI’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, PMI’s Chief Executive Officer and Chief Financial Officer concluded that PMI’s disclosure controls and procedures are effective. There have been no changes in PMI’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, PMI’s internal control over financial reporting.
 
The Report of Management on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm are included in Item 8.
 


Item 9B.Other Information.
Item 9B.Other Information.
 
None.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Not applicable.

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, the information called for by Items 10-14 is hereby incorporated by reference to PMI’s definitive proxy statement for use in connection with its annual meeting of stockholders to be held on May 9, 2018,4, 2022, that will be filed with the SEC on or about March 29, 201824, 2022 (the “proxy statement”), and, except as indicated therein, made a part hereof.
 



Item 10.
Directors, Executive Officers and Corporate Governance.
Item 10.Directors, Executive Officers and Corporate Governance.
 
Information About Our Executive Officers as of February 9, 2018:
10, 2022:
NameOfficeAge
André CalantzopoulosJacek OlczakChief Executive Officer6057 
Massimo AndolinaSenior Vice President, Operations49
Drago AzinovicPresident, Middle East & Africa Region and PMI Duty Free5559 
Werner BarthEmmanuel BabeauSenior Vice President, CommercialChief Financial Officer5354 
Charles BendottiWerner BarthSenior Vice President People and CultureCombustibles Category & Global Combustibles Marketing4557 
Patrick BrunelChief Information Officer52
Frank de RooijVice President, Treasury and Corporate Finance52
Frederic de WildePresident, European Union Region5054 
Marc S. FirestoneReginaldo DobrowolskiVice President External Affairsand Controller47 
Suzanne Rich FolsomSenior Vice President and General Counsel5860 
Paul JanelleVice President, Corporate Planning and Business Development52
Stacey KennedyPresident, South and Southeast Asia Region4549 
Martin G. KingChief Financial Officer53
Andreas KuraliVice President and Controller52
Marco MariottiPresident, Eastern Europe Region5357 
Jacek OlczakDeepak MishraChief Operating OfficerPresident. Americas Region5350 
Jeanne PollèsPresident, Latin America & Canada Region52
Paul RileyPresident, East Asia and Australia Region5256 
Jaime SuarezStefano VolpettiPresident Smoke-Free Products Category & Chief DigitalConsumer Officer4450 
Jerry E. WhitsonDeputy General Counsel and Corporate Secretary62
Miroslaw ZielinskiPresident, Science and Innovation56


AllJacek Olczak – Age 57

Mr. Olczak was appointed as our Chief Executive Officer in May 2021. From January 2018 until May 2021, Mr. Olczak has served as our Chief Operating Officer, and from August 2012 until January 2018, he served as our Chief Financial Officer. He joined the
127

Company’s Polish affiliate in 1993 and progressed through various roles in finance and general management positions across Europe, including as Managing Director of PMI’s markets in Poland and Germany and as President of the above-mentioned officers have been employed by usEuropean Union Region, before being appointed Chief Financial Officer. Prior to joining PMI, Mr. Olczak worked for BDO, an international network of public accounting, tax, consulting and business advisory firms.

Drago Azinovic – Age 59

Mr. Azinovic was appointed as our President, Middle East & Africa Region and PMI Duty Free in January 2018. From July 2015 until January 2018, Mr. Azinovic was our President Eastern Europe, Middle East and Africa and Global Duty Free. Mr. Azinovic also served as our President of the European Union Region, a position he held from August 2012 to July 2015, as well as the President of Philip Morris Japan, from July 2011 to August 2012. Prior to joining Philip Morris Asia Limited in March 2009 as Vice President of Marketing and Sales for Philip Morris International’s Asia Region, Mr. Azinovic held a variety of positions at The Procter & Gamble Company ("Procter & Gamble"), a multinational consumer goods company, and Altadis, a tobacco company, and, after the acquisition of Altadis in 2008, at Imperial Tobacco, a tobacco company.

Emmanuel Babeau – Age 54

Mr. Babeau was appointed as our Chief Financial Officer in May 2020. Prior to joining PMI in May 2020, Mr Babeau served as the Deputy Chief Executive Officer of Schneider Electric, an energy and automation digital solutions company. In this position he was in charge of Finance and Legal Affairs. Mr. Babeau joined Schneider Electric in 2009 as Executive Vice President Finance and a member of the Management Board. Mr. Babeau also served on the board of Sanofi S.A., a French multinational healthcare company, from 2018 to 2020. Mr. Babeau started his career in 1990 at Arthur Andersen and from 1993 to 2009 he progressed through various positions at Pernod Ricard, a beverage company, the latest being Chief Financial Officer and Group Deputy Managing Director. Mr. Babeau also served as a non-executive director at Sodexo, a French food services and facilities management company, from January 2016 until December 2021.

Werner Barth – Age 57

Mr. Barth was appointed as our President Combustibles Category & Global Combustibles Marketing in November 2021. Mr. Barth joined PMI in 1990 as Marketing Trainee at Philip Morris Germany and throughout his career he progressed through various roles at PMI in marketing, product management, brand supervision and general management. Prior to his current position, from 2015 Mr. Barth held the role of Senior Vice President, Marketing & Sales, and from 2018, he held the role of Senior Vice President, Commercial.

Frederic de Wilde – Age 54

Mr. de Wilde was appointed as our President, European Union Region in July 2015. Mr. de Wilde joined PMI in 1992 as Brand Manager L&M at Philip Morris Belgium and throughout his career he progressed through various roles at PMI in marketing, sales and general management. Prior to his current position, from July 2011 until July 2015, Mr. de Wilde held the role of Senior Vice President, Marketing & Sales.

Reginaldo Dobrowolski – Age 47

Mr. Dobrowolski was appointed as our Vice President & Controller in August 2021. From May 2019 until August 2021, Mr. Dobrowolski was our Vice President Corporate Financial Planning, Data & Reporting. Prior to that, Mr. Dobrowolski held various roles in our Finance department, including Director Corporate Financial Planning & Reporting from October 2014 until May 2019.

Suzanne Rich Folsom - Age 60

Ms. Folsom was appointed as our Senior Vice President and General Counsel in July 2020. She is responsible for all legal, compliance and governance matters at PMI. From March 2019 until July 2020, Ms. Folsom was a Partner and Co-Chair of the Investigations, Compliance and Strategic Response Group at Manatt, Phelps & Phillips, LLP, a law firm. From 2014 to 2018, Ms. Folsom served as the General Counsel, Chief Compliance Officer and Senior Vice President, Government Affairs and Global Public Policy at United States Steel Corporation, an American integrated steel producer. Ms. Folsom is an accomplished C-suite executive and attorney with deep experience advising management and boards of directors.



128


Stacey Kennedy – Age 49

Ms. Kennedy was appointed as our President, South and Southeast Asia Region in January 2018. From 2015 until her current appointment, Ms. Kennedy served as Managing Director for Germany, Austria, Croatia, and Slovenia. Ms. Kennedy began her career with Philip Morris USA in 1995 as a Territory Sales Manager. Throughout her career she held a number of positions of increasing responsibility in sales and general management.

Marco Mariotti – Age 57

Mr. Mariotti was appointed as our President, Eastern Europe Region in January 2018. From 2015 until his current appointment, Mr. Mariotti served as Senior Vice President, Corporate Affairs. Since joining PMI in 1997, Mr. Mariotti has held numerous leadership roles in Argentina and across Europe, such as President, Russia & Belarus, Managing Director Italy and Managing Director Argentina.

Deepak Mishra - Age 50

Mr. Mishra was appointed as our President, Americas Region in July 2021. Mr. Mishra joined PMI in September 2018, as Senior Vice President and Chief Strategy Officer. From 2014 until September 2018, he was Managing Director, Portfolio Operations at Centerbridge Partners, a private equity firm, where he led commercial, operational, and digital transformation in various capacities duringbusiness sectors. Prior to Centerbridge Partners, Mr. Mishra was a Partner at McKinsey & Co., a management consulting firm in London, and part of their Consumer Goods, Retail and Operations leadership teams from 2001 to 2014, supporting clients in the past five years.FMCG, retail and private equity industries on commercial and operational transformations.



Paul Riley – Age 56

Mr. Riley was appointed as our President, East Asia and Australia Region in January 2018. From 2015 until his current appointment, Mr. Riley served as President of Philip Morris Japan. Mr. Riley joined Philip Morris Australia in 1988. Over the following two decades, he held a number of positions in Australia, Hong Kong, and Japan, before being named Managing Director, Serbia & Montenegro in 2010. Mr. Riley returned to the Asian Region in 2013, when he became President of Philip Morris Fortune Tobacco Corporation in the Philippines.

Stefano Volpetti – Age 50

Mr. Volpetti was appointed as our President Smoke-Free Products Category & Chief Consumer Officer in November 2021. Mr. Volpetti joined PMI in June 2019 as Chief Consumer Officer. From February 2016 until May 2019, Mr. Volpetti served as the Vice President & Brand Franchise Leader of a multi-functional, global business unit at Procter & Gamble, a multinational consumer goods company. Mr. Volpetti spent 22 years at Procter & Gamble, progressing through various roles with increasing responsibility locally in Italy and Mexico, and on a regional level for the European market. Mr. Volpetti also served as Chief Marketing Officer at Luxottica Group S.p.A, an Italian eyewear conglomerate, in 2015.


Codes of Conduct and Corporate Governance
 
We have adopted a code of conduct, which we call the Philip Morris International Code of Conduct, whichGuidebook for Success. The Guidebook for Success complies with requirements set forth in Item 406 of Regulation S-K. This Code of ConductS-K, applies to all of our employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. We have also adopted a code of business conduct and ethics that applies to the members of our Board of Directors. These documents are available free of charge on our website at www.pmi.com.
 
In addition, we have adopted corporate governance guidelines and charters for our Audit, Finance, Compensation and Leadership Development, Product Innovation and Regulatory Affairs, Consumer Relationships and Regulation, and Nominating and Corporate Governance committees of the Board of Directors. All of these documents are available free of charge on our website at www.pmi.com. Any waiver granted by Philip Morris International Inc. to its principal executive officer, principal financial officer or controller, or any person performing similar functions under the Code of Conduct,Guidebook for Success, or certain amendments to the Code of Conduct,Guidebook for Success, 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.
129

Also refer to Board Operations and Governance - Governance—Committees of the Board, Election of Directors -Directors—Process for Nominating Directors and Election of Directors - Directors—Director Nomineesand Stock Ownership Information—Delinquent Section 16(a) Beneficial Ownership Reporting Compliance Reports sections of the proxy statement.


Item 11.Executive Compensation.
Item 11.Executive Compensation.
 
Refer to Compensation Discussion and Analysis, and Compensation of Directors,and Pay Ratio sections of the proxy statement.
 



Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
 
The number of shares to be issued upon exercise or vesting and the number of shares remaining available for future issuance under PMI’s equity compensation plans at December 31, 2017,2021, were as follows:
 
Number of Securities
to be Issued upon
Exercise of Outstanding
Options and Vesting of RSUs and PSUs
(a)
Weighted Average
Exercise Price of
Outstanding Options
(b)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(excluding Securities
reflected in column (a))
(c)
Equity compensation plans
   approved by stockholders
5,254,460(1)
$—
25,991,850
Number of Securities
to be Issued upon
Exercise of Outstanding
Options and Vesting of RSUs and PSUs
(a)
Weighted Average
Exercise Price of
Outstanding Options
(b)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(excluding Securities
reflected in column (a))
(c)
Equity compensation plans
   approved by stockholders		7,714,804 1$— 15,746,554 
 


(1) 1 Represents 3,612,4004,640,764 shares of common stock that may be issued upon vesting of the restricted share units and 1,642,0603,074,040 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 sectionof the proxy statement.
Item 13.Certain Relationships and Related Transactions, and Director Independence.


Item 13. Certain Relationships and Related Transactions, and Director Independence.
 
Refer to Related Person Transactions and Code of Conduct and Election of Directors - Directors—Independence of Nominees sections of the proxy statement.
 


Item 14.
Principal Accounting Fees and Services.
Item 14.Principal Accounting Fees and Services.
 
Refer to Audit Committee Matters section of the proxy statement.


130

PART IV


Item 15.
Exhibits and Financial Statement Schedules.
Item 15.Exhibits and Financial Statement Schedules.
 
(a) Index to Consolidated Financial Statements and Schedules
 
Page
Page
Consolidated Balance Sheets at December 31, 2017 and 201669 - 70
Consolidated Statements of Earnings for the years ended December 31, 2017, 20162021, 2020 and 201520197165
Consolidated Statements of Comprehensive Earnings for the years ended December 31,
   2017, 2016
   2021, 2020 and 2015
2019		7266
Consolidated Statements of Stockholders’ (Deficit) Equity for the years ended
Balance Sheets at December 31, 2017, 20162021 and 2015
2020		7367 - 68
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016
2021, 2020
   and 2015
2019		7469 - 7570
Consolidated Statements of Stockholders’ (Deficit) Equity for the years ended
   December 31, 2021, 2020 and 2019		71
Notes to Consolidated Financial Statements7672 - 118123
Report of Independent Registered Public Accounting Firm (PCAOB ID 1358)119124 - 120125
Report of Management on Internal Control Over Financial Reporting121126
 
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—
3.12.2—
3.1—
3.2—
4.1—
4.2—
4.3—
4.4—
4.6—
4.6—The Registrant agrees to furnish copies of any instruments defining the rights of holders of long-term debt of the Registrant 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.
10.1—
10.2—
131

10.3—__
10.4
__

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 by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2012).

10.5__
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 Royal Bank of Scotland plc), as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed February 15, 2013).
10.610.4__
10.710.5__
__

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).


10.8
__

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 by reference to Exhibit 10.1 to the Current Report on Form 8-K filed March 3, 2014).

10.910.6__
10.1010.7__
10.11
__

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).

10.1210.8—
10.1310.9—
—

Amendment No. 2, effective as of February 9, 2016, to the Credit Agreement dated as of February 12, 2013, with the lenders 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).


10.1410.10—
—

Extension Agreement, effective 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).

10.15
—

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,Facility Agent, and Citibank, N.A., as swingline agentSwingline Agent (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed August 31, 2016).
10.1610.11—
10.1710.12—
10.1810.13—
10.14—
132

10.15—
10.16—
10.17—
10.18—
10.19—
10.20—
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).*

10.20—
10.21—
10.2210.21—
10.2310.22—
10.23—
10.24—
10.2410.25—
10.2510.26—
10.26—
Philip Morris International Inc. 2017 Stock Compensation Plan for Non-Employee Directors (as amended and restated as of 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).*
10.27—
10.28—
10.29—
10.30—
10.31—
10.32—
10.33—
133

10.34—
10.3010.35—
10.31—
Supplemental Letter to the Employment Agreement (as amended) with Jacek Olczak (incorporated by reference to Exhibit 10.1 to the CurrentQuarterly Report on Form 8-K/A filed December 12, 2017).10-Q for the quarter ended June 30, 2019.The Employment Agreement was previously filed as Exhibit 10.4 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, and is incorporated by reference to this Exhibit 10.31.10.35. The Amendments to the Employment Agreement were previously filed as Exhibit 10.33 to the Annual Report on Form 10-K for the year ended December 31, 2013 and as Exhibit 10.7 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 and are incorporated by reference to this Exhibit 10.31.*
10.3210.36—
10.3310.37—

10.38—
10.34—
10.39—
10.40—
10.41—
10.3510.42—
10.43—
10.44—
10.45—
10.46—
10.47—
10.3610.48—
10.49—
10.50—
10.3710.51—
10.38—
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 10.3610.35 to the Annual Report on Form 10-K for the year ended December 31, 2014)2020).**
10.3910.52—
10.4010.53—
10.41—
Supplemental Equalization Plan, amended and restated as of June 29, 2015 (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).*
10.42—
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).*
134

10.4310.54—
10.4410.55—
10.4510.56—
10.57—
10.4610.58—
10.59—
10.4710.60—
10.4810.61—
10.4910.62—
10.50
—

Form of Restricted Stock Unit Agreement (2017 Grants) (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed February 7, 2017).*

10.51
—

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).*

10.52—
Philip Morris International Inc. 2008 Stock Compensation Plan for Non-Employee Directors (amended and restated as of January 1, 2015) (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed December 15, 2014).*
21—
12—
21—
Subsidiaries of Philip Morris International Inc.
23—
2431.1—
31.1—
Certification of the Registrant’s Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2—
32.1—
32.2—
101.INS—XBRL Instance Document.Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH—XBRL Taxonomy Extension Schema.
101.CAL—XBRL Taxonomy Extension Calculation Linkbase.
101.DEF—XBRL Taxonomy Extension Definition Linkbase.
101.LAB—XBRL Taxonomy Extension Label Linkbase.
101.PRE—XBRL Taxonomy Extension Presentation Linkbase.
104—Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
 * Denotes management contract or compensatory plan or arrangement in which directors or executive officers are eligible to participate.
*Denotes management contract or compensatory plan or arrangement in which directors or executive officers are eligible to participate.

135


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.
PHILIP MORRIS INTERNATIONAL INC.
By:
/s/    ANDRÉ CALANTZOPOULOS   JACEK OLCZAK
(André Calantzopoulos
Jacek Olczak
Chief Executive Officer)
 
Date: February 13, 201811, 2022
 

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jacek Olczak, Emmanuel Babeau, and Darlene Quashie Henry and each of them, acting individually, as his or her true and lawful attorney-in-fact, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K for the year ended December 31, 2021, and other documents in connection herewith and therewith, and to file the same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection herewith and therewith and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated:


SignatureTitleDate
SignatureTitleDate
/s/    ANDRÉ CALANTZOPOULOS   JACEK OLCZAK   Chief Executive Officer and DirectorFebruary 13, 201811, 2022
(André Calantzopoulos)Jacek Olczak)
/s/    MARTIN G. KING  EMMANUEL BABEAU  Chief Financial OfficerFebruary 13, 201811, 2022
(Martin G. King)Emmanuel Babeau)
/s/    ANDREAS KURALIREGINALDO DOBROWOLSKIVice President and ControllerFebruary 13, 201811, 2022
(Reginaldo Dobrowolski)
/s/ ANDRÉ CALANTZOPOULOSExecutive ChairmanFebruary 11, 2022
(André Calantzopoulos)
/s/ BONIN BOUGHDirectorFebruary 11, 2022
(Bonin Bough)
/s/ MICHEL COMBESDirectorFebruary 11, 2022
(Michel Combes)
/s/ DR. JUAN JOSÉ DABOUBDirectorFebruary 11, 2022
(Andreas Kurali)
*HAROLD BROWN,
LOUIS C. CAMILLERI,
MASSIMO FERRAGAMO,
WERNER GEISSLER,
JENNIFER LI,
JUN MAKIHARA,
SERGIO MARCHIONNE,
KALPANA MORPARIA,
LUCIO A. NOTO,
FREDERIK PAULSEN,
ROBERT B. POLET,
STEPHEN M. WOLF
DirectorsJuan José Daboub)

136

*By:/s/ WERNER GEISSLERDirectorFebruary 11, 2022
(Werner Geissler)
/s/ ANDRÉ CALANTZOPOULOS        LISA A. HOOKDirectorFebruary 13, 201811, 2022
(Lisa A. Hook)
/s/ JUN MAKIHARA
(André Calantzopoulos
Attorney-in-fact)
Director		February 11, 2022
(Jun Makihara)
/s/ KALPANA MORPARIADirectorFebruary 11, 2022
(Kalpana Morparia)
/s/ LUCIO A. NOTODirectorFebruary 11, 2022
(Lucio A. Noto)
/s/ FREDERIK PAULSENDirectorFebruary 11, 2022
(Frederik Paulsen)
/s/ ROBERT B. POLETDirectorFebruary 11, 2022
(Robert B. Polet)
/s/ DESSISLAVA TEMPERLEYDirectorFebruary 11, 2022
(Dessislava Temperley)
/s/ SHLOMO YANAIDirectorFebruary 11, 2022
(Shlomo Yanai)




130
137