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PM > SEC Filings for PM > Form 10-Q on 3-May-2013All Recent SEC Filings

Show all filings for PHILIP MORRIS INTERNATIONAL INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for PHILIP MORRIS INTERNATIONAL INC.


3-May-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Description of Our Company
We are a holding company whose subsidiaries and affiliates, and their licensees, are engaged in the manufacture and sale of cigarettes and other tobacco products in markets outside the United States of America. We manage our business in four segments:

European Union;

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

Asia; and

Latin America & Canada.

Our products are sold in more than 180 markets and, in many of these markets, they hold the number one or number two market share position. We have a wide range of premium, mid-price and low-price brands. Our portfolio comprises both international and local brands.
We use the term net revenues to refer to our operating revenues from the sale of our products, net of sales and promotion incentives. Our net revenues and operating income are affected by various factors, including the volume of products we sell, the price of our products, changes in currency exchange rates and the mix of products we sell. Mix is a term used to refer to the proportionate value of premium-price brands to mid-price or low-price brands in any given market (product mix). Mix can also refer to the proportion of shipment volume in more profitable markets versus shipment volume in less profitable markets (geographic mix). We often collect excise taxes from our customers and then remit them to governments, and, in those circumstances, we include the excise taxes in our net revenues and in excise taxes on products. Our cost of sales consists principally of tobacco leaf, non-tobacco raw materials, labor and manufacturing costs.
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 our direct and indirect subsidiaries. Accordingly, our right, and thus the right of our creditors and stockholders, to participate in any distribution of the assets or earnings of any subsidiary is subject to the prior rights of creditors of such subsidiary, except to the extent that claims of our company itself as a creditor may be recognized. As a holding company, our principal sources of funds, including funds to make payment on our debt securities, are from the receipt of dividends and repayment of debt from our subsidiaries. Our principal wholly owned and majority-owned subsidiaries currently are not limited by long-term debt or other agreements in their ability to pay cash dividends or to make other distributions with respect to their common stock.

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

Consolidated Operating Results for the Three Months Ended March 31, 2013 - The
changes in our reported diluted earnings per share ("diluted EPS") for the three
months ended March 31, 2013, from the comparable 2012 amounts, were as follows:

                                                               Diluted EPS     % Growth
For the three months ended March 31, 2012                     $      1.25
2012 Asset impairment and exit costs                                    -
2012 Tax items                                                          -
    Subtotal of 2012 items                                              -
2013 Asset impairment and exit costs                                    -
2013 Tax items                                                      (0.01 )
    Subtotal of 2013 items                                          (0.01 )
Currency                                                            (0.07 )
Interest                                                            (0.01 )
Change in tax rate                                                   0.01
Impact of lower shares outstanding and share-based payments          0.05
Operations                                                           0.06
For the three months ended March 31, 2013                     $      1.28           2.4 %

Asset Impairment and Exit Costs - During the three months ended March 31, 2013, we recorded pre-tax asset impairment and exit costs of $3 million (less than one cent impact on diluted EPS) related to the termination of distribution agreements in Asia. During the three months ended March 31, 2012, we recorded pre-tax asset impairment and exit costs of $8 million (less than one cent impact on diluted EPS) related to severance costs for a factory restructuring in Latin America & Canada.
Income Taxes - Our effective income tax rate for the three months ended March 31, 2013 decreased by 0.4 percentage points to 29.6%. The effective tax rate for the three months ended March 31, 2013, was unfavorably impacted by the additional expense associated with the enactment of the American Taxpayer Relief Act of 2012 ($17 million). This special tax item decreased our diluted EPS by $0.01 per share in 2013. Excluding the impact of this special tax item, the change in tax rate that increased our diluted EPS by $0.01 per share in 2013 was primarily due to earnings mix and repatriation cost differences.
Currency - The unfavorable currency impact during the reporting period was due primarily to the Argentine peso, Indonesian rupiah and Japanese yen, partially offset by the Brazilian real and Swiss franc.

Interest - The unfavorable impact of interest was due primarily to higher average debt levels, partially offset by lower average interest rates on debt. Lower Shares Outstanding and Share-Based Payments - The favorable diluted EPS impact was due to the repurchase of our common stock pursuant to our share repurchase programs.

Operations - The increase in diluted EPS of $0.06 from our operations was due primarily to the following segments:

EEMA: Higher pricing, partially offset by higher marketing, administration and research costs; and

Asia: Higher pricing, partially offset by higher manufacturing costs, unfavorable volume/mix and higher marketing, administration and research costs; partially offset by

European Union: Unfavorable volume/mix, partially offset by higher pricing.

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For further details, see the "Consolidated Operating Results" and "Operating Results by Business Segment" sections of the following "Discussion and Analysis."
2013 Forecasted Results - On April 18, 2013, we revised, for prevailing exchange rates only, our 2013 full-year reported diluted EPS forecast to be in a range of $5.55 to $5.65, versus $5.17 in 2012. Excluding an unfavorable currency impact, at then prevailing exchange rates, of approximately $0.19 for the full-year 2013, reported diluted earnings per share are projected to increase by approximately 10% to 12% versus adjusted diluted earnings per share of $5.22 in 2012, unchanged from the constant-currency earnings per share forecast disclosed on February 20, 2013. The $0.19 in unfavorable currency for the full-year 2013, based on then prevailing exchange rates, represents an increase of $0.13 compared to the $0.06 of full-year unfavorable currency impact previously disclosed on February 20, 2013. This forecast includes a one-year gross productivity and cost savings target for 2013 of approximately $300 million and a share repurchase target for 2013 of $6.0 billion. The bulk of our earnings per share growth is expected to occur in the latter part of the year, and we anticipate a particularly strong fourth quarter. We calculated 2012 adjusted diluted EPS as reported diluted EPS of $5.17, plus the $0.02 per share charge related to discrete tax items and the $0.03 per share charge related to asset impairment and exit costs.
This 2013 guidance excludes the impact of potential future acquisitions, unanticipated asset impairment and exit cost charges, changes in currency exchange rates and any unusual events. The factors described in the "Cautionary Factors That May Affect Future Results" section of the following "Discussion and Analysis" represent continuing risks to these projections.
Adjusted diluted EPS is not a U.S. GAAP measure. We define adjusted diluted EPS as reported diluted EPS adjusted for asset impairment and exit costs, discrete tax items and unusual items. We believe it is appropriate to disclose this measure as it represents core earnings, improves comparability and helps investors analyze business performance and trends. Adjusted diluted EPS should be considered neither in isolation nor as a substitute for reported diluted EPS prepared in accordance with U.S. GAAP.

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Discussion and Analysis
Consolidated Operating Results
See pages 55-59 for a discussion of our "Cautionary Factors That May Affect
Future Results." Our cigarette volume, net revenues, excise taxes on products
and operating companies income by segment were as follows:

                                           For the Three Months Ended March 31,
(in millions)                                  2013                     2012
Cigarette volume:
European Union                                    42,967                    47,789
Eastern Europe, Middle East & Africa              66,834                    65,928
Asia                                              72,619                    81,030
Latin America & Canada                            22,527                    24,343
Total cigarette volume                           204,947                   219,090
Net revenues:
European Union                         $           6,523         $           6,470
Eastern Europe, Middle East & Africa               4,423                     4,069
Asia                                               5,251                     5,177
Latin America & Canada                             2,330                     2,306
Net revenues                           $          18,527         $          18,022
Excise taxes on products:
European Union                         $           4,553         $           4,417
Eastern Europe, Middle East & Africa               2,380                     2,234
Asia                                               2,461                     2,400
Latin America & Canada                             1,549                     1,523
Excise taxes on products               $          10,943         $          10,574
Operating income:
Operating companies income:
European Union                         $             938         $           1,030
Eastern Europe, Middle East & Africa                 935                       810
Asia                                               1,342                     1,407
Latin America & Canada                               254                       237
Amortization of intangibles                          (24 )                     (24 )
General corporate expenses                           (58 )                     (57 )
Operating income                       $           3,387         $           3,403

As discussed in Note 9. Segment Reporting to our condensed consolidated financial statements, we evaluate segment performance and allocate resources based on operating companies income, which we define as operating income before general corporate expenses and amortization of intangibles. We believe it is appropriate to disclose this measure to help investors analyze the business performance and trends of our various business segments.
References to total international cigarette market, total cigarette market, total market and market shares throughout this "Discussion and Analysis" reflect our best estimates based on a number of internal and external sources.

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Consolidated Operating Results for the Three Months Ended March 31, 2013 The following discussion compares our consolidated operating results for the three months ended March 31, 2013, with the three months ended March 31, 2012. Our cigarette shipment volume of 204.9 billion units decreased by 14.1 billion units (6.5%), reflecting a challenging comparison to the first quarter of 2012 in which cigarette shipment volume grew by 5.3%, excluding acquisitions. The first quarter of 2012 benefited from the favorable impact of the leap year. Conversely, the first quarter of 2013 was adversely impacted by the reversal in the quarter of trade inventories built up in the fourth quarter of 2012 ahead of excise tax increases in 2013, notably in Turkey; the unfavorable impact of excise tax-driven price increases, the weak economic and employment environment, the growth of the other tobacco products ("OTP") category, and the increased prevalence of illicit trade in the European Union; and the unfavorable impact of the disruptive January 2013 excise tax increase in the Philippines, which reduced our shipment volume by approximately 10.0 billion units or 42.5%. Excluding the Philippines, our cigarette shipment volume was down by 2.1%, or by 1.7% including OTP in cigarette equivalent units.
In the European Union, our cigarette shipment volume of 43.0 billion units decreased by 10.1%, predominantly due to the aforementioned factors, notably in southern Europe, which accounted for approximately 60% of the total decline. In EEMA, our cigarette shipment volume of 66.8 billion units grew by 1.4%, driven notably by the Middle East, North Africa, Russia and Ukraine, partly offset by Turkey. In Asia, our cigarette shipment volume of 72.6 billion units decreased by 10.4%, largely reflecting the unfavorable excise tax impact in the Philippines, partially offset by Indonesia and Japan. Excluding the Philippines, our total cigarette shipment volume in Asia grew by 2.8%. In Latin America & Canada, our cigarette shipment volume of 22.5 billion units decreased by 7.5%, due primarily to a lower total market in Argentina, Brazil and Mexico. Our market share grew in a number of key markets, including Algeria, Brazil, Canada, Colombia, Egypt, France, Germany, Hong Kong, Indonesia, Italy, Kazakhstan, the Netherlands, Poland, Saudi Arabia, Spain, Thailand, Turkey, Ukraine and the United Kingdom.
Total cigarette shipments of Marlboro of 68.7 billion units were down by 4.8%, due primarily to declines in: the European Union, notably France and Spain, partly offset by Germany; EEMA, primarily Russia, Turkey and Ukraine, partly offset by Egypt; Asia, largely the Philippines, partly offset by Japan; and Latin America & Canada, mainly Argentina, Brazil and Mexico. Excluding the Philippines, total cigarette shipments of Marlboro declined by 2.2%. Total cigarette shipments of L&M of 22.2 billion units were up by 4.3%, driven notably by Egypt, Russia and Saudi Arabia, partly offset by Germany and Turkey. Total cigarette shipments of Bond Street of 9.9 billion units decreased by 0.7%. Total cigarette shipments of Parliament of 9.8 billion units were up by 5.4%, fueled by Kazakhstan and Russia. Total cigarette shipments of Philip Morris of 8.5 billion units decreased by 11.4%, due primarily to Italy and the Philippines. Total cigarette shipments of Chesterfield of 7.7 billion units were down by 6.0%, due primarily to Italy, Russia, Spain and Ukraine, partly offset by Germany. Total cigarette shipments of Lark of 6.8 billion units decreased by 8.3%, due predominantly to Turkey, partly offset by Japan. Our OTP consist mainly of tobacco for roll-your-own and make-your-own cigarettes, pipe tobacco, cigars and cigarillos. Total shipment volume of OTP, in cigarette equivalent units, grew by 8.8% to 8.1 billion cigarette equivalent units, notably in Belgium, France, and Spain.
Total shipment volume for cigarettes and OTP combined was down by 6.0%. Our net revenues and excise taxes on products were as follows:

                                       For the Three Months Ended
                                                March 31,
(in millions)                              2013            2012         Variance           %
Net revenues                          $     18,527     $   18,022     $       505           2.8 %
Excise taxes on products                    10,943         10,574             369           3.5 %
Net revenues, excluding excise
taxes on products                     $      7,584     $    7,448     $       136           1.8 %

Currency movements decreased net revenues by $106 million and net revenues, excluding excise taxes on products, by $103 million. The $103 million decrease was due primarily to the Argentine peso, Brazilian real, Indonesian rupiah and Japanese yen, partially offset by the Euro, Korean won, Mexican peso, Philippine peso, Polish zloty, Russian ruble and Turkish lira.

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Net revenues shown in the table above include $450 million in 2013 and $404 million in 2012 related to sales of OTP. These net revenue amounts include excise taxes billed to customers. Excluding excises taxes, net revenues for OTP were $179 million in 2013 and $156 million in 2012.

Net revenues, which include excise taxes billed to customers, increased by $505 million (2.8%). Excluding excise taxes, net revenues increased by $136 million (1.8%) to $7.6 billion. This increase was due to:

price increases ($531 million), partly offset by

unfavorable volume/mix ($292 million) and

unfavorable currency ($103 million).

Excise taxes on products increased by $369 million (3.5%), due primarily to:

higher excise taxes resulting from changes in retail prices and tax rates ($1,062 million), partly offset by

volume/mix ($690 million).

Governments have consistently increased excise taxes in most of the markets in which we operate. As discussed under the caption "Business Environment," we expect excise taxes to continue to increase.
Our cost of sales; marketing, administration and research costs; and operating income were as follows:

                                       For the Three Months Ended
                                                March 31,
(in millions)                              2013            2012          Variance           %
Cost of sales                         $      2,489     $    2,442     $        47            1.9  %
Marketing, administration and
research costs                               1,681          1,571             110            7.0  %

Operating income 3,387 3,403 (16 ) (0.5 )%

Cost of sales increased by $47 million (1.9%), due primarily to:

higher manufacturing costs ($110 million, principally in Indonesia), partly offset by

volume/mix ($61 million).

With regard to tobacco leaf prices, we continue to expect modest increases going forward, broadly in line with sourcing country inflation, as the market has now stabilized. We however anticipate some cost pressure in 2013, driven in large measure by historical leaf tobacco price changes that will continue to affect our product costs in the current year, higher prices for cloves and higher prices for a number of other direct materials we use in the production of our brands.
Marketing, administration and research costs increased by $110 million (7.0%), due to:

higher expenses ($89 million, principally related to increased investments behind new brand launches in Japan, and the annualization of business infrastructure investments in Russia) and

unfavorable currency ($21 million).

Operating income decreased by $16 million (0.5%). This decrease was due primarily to:

unfavorable volume/mix ($231 million),

unfavorable currency ($122 million),

higher manufacturing costs ($110 million) and

higher marketing, administration and research costs ($89 million), partly offset by

price increases ($531 million).

Interest expense, net, of $236 million increased $23 million, due primarily to higher average debt levels, partially offset by lower average interest rates on debt.

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Our effective tax rate decreased by 0.4 percentage points to 29.6%. The effective tax rate for the three months ended March 31, 2013, was unfavorably impacted by the additional expense associated with the enactment of the American Taxpayer Relief Act of 2012 ($17 million). The effective tax rate is based on our full-year geographic earnings mix and cash repatriation plans. Changes in our cash repatriation plans could have an impact on the effective tax rate, which we monitor each quarter. Significant judgment is required in determining income tax provisions and in evaluating tax positions.

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 twelve 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 charge cannot be made at this time.

Net earnings attributable to PMI of $2.1 billion decreased $36 million (1.7%). This decrease was due primarily to an unfavorable currency impact on operating income and higher interest expense, net, partially offset by a lower effective tax rate. Diluted and basic EPS of $1.28 increased by 2.4%. Excluding an unfavorable currency impact of $0.07, diluted EPS increased by 8.0%.

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 faces 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:
actual and proposed tobacco legislation and regulation;

actual and proposed excise tax increases, as well as changes in excise tax structures and retail selling price regulations;

price gaps and changes in price gaps between premium and mid-price and low-price brands and between cigarettes and other tobacco products;

increased efforts by tobacco control advocates and governments to "denormalize" smoking and impose extreme regulatory requirements impacting our ability to communicate with adult consumers and differentiate our products from competitors' products, including legislation to mandate plain (generic) packaging resulting in the expropriation of our brands and trademarks;

actual and proposed extreme regulatory requirements related to the ingredients in tobacco products, including restrictions and complete bans;

other actual and proposed restrictions affecting tobacco manufacturing, testing and performance standards and requirements, packaging, marketing, advertising, product display and sales;

governmental and private bans and restrictions on smoking;

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

actual and proposed restrictions on imports in certain jurisdictions;

pending and threatened litigation as discussed in Note 10. Contingencies; and

governmental investigations.

In the ordinary course of business, many factors can affect the timing of sales to customers, including the timing of holidays and other annual or special events, the timing of promotions, customer incentive programs and customer inventory programs, as well as the actual or speculated timing of pricing actions and tax-driven price increases.

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Framework Convention on Tobacco Control: The World Health Organization's ("WHO") Framework Convention on Tobacco Control ("FCTC") entered into force in February 2005. As of May 2013, 175 countries, as well as the European Community, have become Parties to the FCTC. The FCTC is the first international public health treaty, and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. The treaty recommends (and, in certain instances, requires) Parties to have in place or enact legislation that would:
establish specific actions to prevent youth smoking;

restrict and/or eliminate all tobacco product advertising, marketing, promotions and sponsorships;

initiate public education campaigns to inform the public about the health consequences of smoking and the benefits of quitting;

implement regulations imposing tobacco product testing, disclosure and performance standards;

impose health warning requirements on tobacco product packaging;

adopt measures aimed at eliminating illicit trade in tobacco products;

restrict smoking in public places;

implement public health-based fiscal policies (tax and price measures);

adopt and implement measures that ensure that packaging and labeling, including descriptive terms, do not create the false impression that one brand of tobacco products is safer than another;

phase out or restrict duty free tobacco sales; and

encourage litigation against tobacco product manufacturers.

In many respects, the areas of regulation we support mirror provisions of the FCTC. For example, we have long advocated for laws that strictly prohibit the sale of tobacco products to minors, limit public smoking, mandate the placement of health warnings on tobacco product packaging, and regulate product content to ensure that changes to the product do not increase the adverse health effects of smoking and to establish a regulatory framework for future reduced risk products. We also strongly support the use of tax and price policies to achieve public health objectives, provided that they do not result in increased illicit trade. We do not, however, agree with the current views of the WHO and others who are pursuing policies that have gone far beyond the original text of the FCTC treaty.

For example, following the entry into force of the FCTC, the Conference of the Parties ("CoP"), the governing body of the FCTC, has adopted several guidelines proposed by tobacco control advocates and supported by WHO that provide non-binding recommendations which purport to supplement specific articles of the treaty. The recommendations include measures that we strongly oppose, such as point-of-sale display bans, plain packaging, a ban on all forms of communications to adult smokers, measures to prohibit or restrict ingredients that may increase the palatability or attractiveness of tobacco products, bans on charitable contributions, measures to prevent the use of journalistic expression or political commentary "for the promotion of tobacco use," bans on . . .

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