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PM > SEC Filings for PM > Form 10-Q on 31-Jul-2014All Recent SEC Filings

Show all filings for PHILIP MORRIS INTERNATIONAL INC.

Form 10-Q for PHILIP MORRIS INTERNATIONAL INC.


31-Jul-2014

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 Six Months Ended June 30, 2014 - The
changes in our reported diluted earnings per share ("diluted EPS") for the six
months ended June 30, 2014, from the comparable 2013 amounts, were as follows:

                                                               Diluted EPS      % Growth
For the six months ended June 30, 2013                        $      2.58
2013 Asset impairment and exit costs                                    -
2013 Tax items                                                       0.01
    Subtotal of 2013 items                                           0.01
2014 Asset impairment and exit costs                                (0.25 )
2014 Tax items                                                          -
    Subtotal of 2014 items                                          (0.25 )
Currency                                                            (0.31 )
Interest                                                            (0.02 )
Change in tax rate                                                   0.03
Impact of lower shares outstanding and share-based payments          0.09
Operations                                                           0.22
For the six months ended June 30, 2014                        $      2.35          (8.9 )%

Asset Impairment and Exit Costs - During the six months ended June 30, 2014, we recorded pre-tax asset impairment and exit costs of $512 million ($400 million after tax or $0.25 per share) related to the factory closures in the Netherlands and Australia. During the six months ended June 30, 2013, we recorded pre-tax asset impairment and exit costs of $8 million (less than one cent impact on diluted EPS) related to the termination of distribution agreements in Asia. On April 4, 2014, we announced the initiation by our affiliate, Philip Morris Holland B.V. ("PMH"), of consultations with employee representatives on a proposal to discontinue cigarette production at its factory located in Bergen op Zoom, the Netherlands. PMH has reached an agreement with the trade unions and their members on a social plan, and plans to cease cigarette production by September 1, 2014. PMI expects to incur a total pre-tax charge of approximately $560 million for the total program, of which $488 million has been recorded as asset impairment and exit costs for the six months ended June 30, 2014. For further details, see the "Asset Impairment and Exit Costs" section of the following "Discussion and Analysis."
Income Taxes - Our effective income tax rate for the six months ended June 30, 2014 decreased by 0.4 percentage points to 28.8%. The effective tax rate for the six months ended June 30, 2013 was unfavorably impacted by the additional expense associated with the enactment of the American Taxpayer Relief Act of 2012 ($17 million). The special tax item discussed in this paragraph decreased our diluted EPS by $0.01 in 2013. Excluding the impact of this special tax item, the change in tax rate that increased our diluted EPS by $0.03 per share in 2014 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, Australian dollar, Indonesian rupiah, Japanese yen, Russian ruble, Swiss franc, Turkish lira and the Ukraine hryvnia.

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 program.
Operations - The increase in diluted EPS of $0.22 from our operations in the table above was due to the following segments:

EEMA: Higher pricing and higher equity income in unconsolidated subsidiaries, partially offset by unfavorable volume/mix and higher manufacturing costs;

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

European Union: Higher pricing, partially offset by unfavorable volume/mix;

partially offset by:
Asia: Unfavorable volume/mix and higher manufacturing costs, partially offset by higher pricing and lower marketing, administration and research costs.

Consolidated Operating Results for the Three Months Ended June 30, 2014 - The changes in our reported diluted EPS for the three months ended June 30, 2014, from the comparable 2013 amounts, were as follows:

                                                               Diluted EPS     % Growth
For the three months ended June 30, 2013                      $      1.30
2013 Asset impairment and exit costs                                    -
2013 Tax items                                                          -
    Subtotal of 2013 items                                              -
2014 Asset impairment and exit costs                                (0.24 )
2014 Tax items                                                          -
    Subtotal of 2014 items                                          (0.24 )
Currency                                                            (0.15 )
Interest                                                                -
Change in tax rate                                                   0.03
Impact of lower shares outstanding and share-based payments          0.03
Operations                                                           0.20
For the three months ended June 30, 2014                      $      1.17         (10.0 )%

Asset Impairment and Exit Costs - During the second quarter of 2014, we recorded pre-tax asset impairment and exit costs of $489 million ($384 million after tax or $0.24 per share) related to factory closures in the Netherlands and Australia. During the three months ended June 30, 2013, we recorded pre-tax asset impairment and exit costs of $5 million (less than one cent impact on diluted EPS) related to the termination of distribution agreements in Asia. As previously discussed, on April 4, 2014, we announced the initiation by our affiliate, PMH, of consultations with employee representatives on a proposal to discontinue cigarette production at its factory located in Bergen op Zoom, the Netherlands. PMH has reached an agreement with the trade unions and their members on a social plan, and plans to cease cigarette production by September 1, 2014. PMI expects to incur a total pre-tax charge of approximately $560 million for the total program, of which $488 million has been recorded as asset impairment and exit costs for the three months ended June 30, 2014. For further details, see the "Asset Impairment and Exit Costs" section of the following "Discussion and Analysis."
Income Taxes - Our effective income tax rate for the three months ended June 30, 2014 decreased by 0.2 percentage points to 28.7%. The change in tax rate that increased our diluted EPS by $0.03 per share in 2014 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, Australian dollar, Indonesian rupiah, Japanese yen, Russian ruble, Swiss franc, Turkish lira and the Ukraine hryvnia. 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 program.

Operations - The increase in diluted EPS of $0.20 from our operations in the table above was due primarily to the following segments:

EEMA: Higher pricing and higher equity income in unconsolidated subsidiaries, partially offset by unfavorable volume/mix and higher manufacturing costs;

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

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

partially offset by:
Asia: Unfavorable volume/mix and higher manufacturing costs, partially offset by higher pricing and lower 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."

2014 Forecasted Results - On July 17, 2014, we reaffirmed our 2014 full-year reported diluted EPS forecast to be in a range of $4.87 to $4.97 versus $5.26 in 2013, as previously announced on June 26, 2014.
On an adjusted basis, diluted EPS are projected to increase in the range of 6% to 8% versus adjusted diluted EPS of $5.40 in 2013. This adjustment reflects:

a $0.01 per share after-tax charge recorded as asset impairment and exit costs in the first quarter of 2014 relating to the decision to cease cigarette production in Australia by the end of 2014;

a pre-tax charge, related to the decision to discontinue cigarette production in the Netherlands in 2014, of $488 million, or an after-tax charge of $0.24 per share, recorded as asset impairment and exit costs in the second quarter of 2014; and

an unfavorable currency impact, at prevailing exchange rates, of approximately $0.61 for the full-year 2014.

This forecast includes a productivity and cost savings target of $300 million and a share repurchase target of $4.0 billion. Down-trading and heavy price discounting at the low end of the market in Australia, in combination with the impact of plain packaging, could place us at the lower end of our forecast for currency-neutral adjusted diluted EPS growth of 6% to 8% for the full year. We calculated 2013 adjusted diluted EPS as reported diluted EPS of $5.26, plus the $0.02 per share charge related to discrete tax items, and the $0.12 per share charge related to asset impairment and exit costs.
Adjusted diluted EPS is not a measure under the accounting principles generally accepted in the United States of America ("U.S. GAAP"). 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.
This 2014 guidance excludes the impact of any future acquisitions, unanticipated asset impairment and exit cost charges, future 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 this forecast.

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Discussion and Analysis
Consolidated Operating Results
See pages 68-72 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 Six Months Ended June 30,           For the Three Months Ended June 30,
(in millions)                                  2014                 2013                  2014                     2013
Cigarette volume:
European Union                                   91,618                91,690                49,913                    48,723
Eastern Europe, Middle East & Africa            136,176               143,132                74,170                    76,298
Asia                                            146,454               153,207                75,653                    80,588
Latin America & Canada                           44,514                45,817                23,065                    23,290
Total cigarette volume                          418,762               433,846               222,801                   228,899
Net revenues:
European Union                          $        14,448       $        13,768     $           7,829         $           7,245
Eastern Europe, Middle East & Africa             10,236                 9,800                 5,674                     5,377
Asia                                              9,572                10,632                 5,097                     5,381
Latin America & Canada                            4,574                 4,810                 2,451                     2,480
Net revenues                            $        38,830       $        39,010     $          21,051         $          20,483
Excise taxes on products:
European Union                          $        10,042       $         9,592     $           5,436         $           5,039
Eastern Europe, Middle East & Africa              5,944                 5,576                 3,391                     3,196
Asia                                              5,079                 5,150                 2,786                     2,689
Latin America & Canada                            3,051                 3,191                 1,641                     1,642
Excise taxes on products                $        24,116       $        23,509     $          13,254         $          12,566
Operating income:
Operating companies income:
European Union                          $         1,689       $         2,020     $             711         $           1,082
Eastern Europe, Middle East & Africa              2,014                 1,880                 1,087                       945
Asia                                              1,815                 2,470                   900                     1,128
Latin America & Canada                              467                   509                   265                       255
Amortization of intangibles                         (44 )                 (48 )                 (22 )                     (24 )
General corporate expenses                          (80 )                (112 )                 (40 )                     (54 )
Less:
Equity (income)/loss in
unconsolidated subsidiaries, net                    (36 )                   9                   (27 )                       5
Operating income                        $         5,825       $         6,728     $           2,874         $           3,337

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, excluding general corporate expenses and amortization of intangibles, plus equity (income)/loss in unconsolidated subsidiaries, net. 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 Six Months Ended June 30, 2014 The following discussion compares our consolidated operating results for the six months ended June 30, 2014, with the six months ended June 30, 2013. Our cigarette shipment volume of 418.8 billion units decreased by 15.1 billion units (3.5%), due principally to:
the European Union, reflecting lower total markets, partially offset by market share growth;

EEMA, due mainly to a lower total market in Russia, and lower market share in Egypt, Serbia and Ukraine, partially offset by a higher total market and share of market in Algeria and a higher total market in Turkey;

Asia, mainly reflecting a lower total market and share and unfavorable estimated inventory movements in Japan, and lower market share in Pakistan and Indonesia, partially offset by a higher market share in the Philippines; and

Latin America & Canada, principally due to a lower total market in Mexico, driven by estimated trade inventory movements.

Our market share increased in a number of key markets including Algeria, Argentina, Austria, Brazil, Canada, France, Germany, Greece, Italy, Korea, the Netherlands, the Philippines, Poland, Portugal, Russia, Saudi Arabia, Spain, Thailand and the United Kingdom.

Total cigarette shipments of Marlboro of 139.0 billion units decreased by 1.5%, due primarily to Latin America & Canada, notably Mexico; the European Union, primarily France and Poland; and EEMA, mainly Russia and Ukraine; partially offset by Asia, driven primarily by Indonesia and the Philippines. Total cigarette shipments of L&M of 45.2 billion units were down by 4.6%, due notably to Egypt, Poland, Saudi Arabia and Turkey, partially offset by Germany. Total cigarette shipments of Bond Street of 20.4 billion units decreased by 5.1%, due predominantly to Hungary, Kazakhstan and Serbia, partially offset by Australia. Total cigarette shipments of Parliament of 22.3 billion units were up by 4.7%, driven mainly by Turkey, partially offset by Kazakhstan, Russia and Ukraine. Total cigarette shipments of Philip Morris of 15.8 billion units decreased by 8.3%, due primarily to the morphing to Lark in Japan, partially offset by Argentina. Total cigarette shipments of Chesterfield of 20.6 billion units were up by 24.4%, due primarily to Italy, Poland and Turkey, partially offset by Russia and Ukraine. Total cigarette shipments of Lark of 13.7 billion units decreased by 7.1%, due primarily to Japan and Turkey.
Our other tobacco products ("OTP") primarily include tobacco for roll-your-own and make-your-own cigarettes, pipe tobacco, cigars and cigarillos. Total shipment volume of OTP, in cigarette equivalent units, increased by 1.5% to 16.4 billion cigarette equivalent units, mainly due to growth in the fine cut category, principally in Belgium, Czech Republic and Hungary, partially offset by declines in France and Spain.
Total shipment volume for cigarettes and OTP, in cigarette equivalent units, was down by 3.3%.
Our net revenues and excise taxes on products were as follows:

                                      For the Six Months Ended June
                                                   30,
(in millions)                              2014            2013         Variance           %
Net revenues                          $     38,830     $   39,010     $      (180 )        (0.5 )%
Excise taxes on products                    24,116         23,509             607           2.6  %
Net revenues, excluding excise
taxes on products                     $     14,714     $   15,501     $      (787 )        (5.1 )%

Currency movements decreased net revenues by $2.5 billion and net revenues, excluding excise taxes on products by $1.0 billion. The $1.0 billion decrease was due primarily to the Argentine peso, Australian dollar, Indonesian rupiah, Japanese yen, Russian ruble, Turkish lira and the Ukraine hryvnia, partially offset by the Euro.

Net revenues shown in the table above include $991 million in 2014 and $922 million in 2013 related to sales of OTP. These net revenue amounts include excise taxes billed to customers. Excluding excises taxes, net revenues for OTP were $368 million in 2014 and $363 million in 2013.

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Net revenues, which include excise taxes billed to customers, decreased by $180 million (0.5%). Excluding excise taxes, net revenues decreased by $787 million (5.1%) to $14.7 billion. This decrease was due to:

unfavorable currency ($1.0 billion) and

unfavorable volume/mix ($670 million), partly offset by

price increases ($900 million).

Excise taxes on products increased by $607 million (2.6%), due to:

higher excise taxes resulting from changes in retail prices and tax rates ($2.4 billion), partly offset by

favorable currency ($1.5 billion) and

volume/mix ($302 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 Six Months Ended June 30,
(in millions)                                2014               2013         Variance           %
Cost of sales                         $           5,070     $    5,190     $      (120 )        (2.3 )%
Marketing, administration and
research costs                                    3,263          3,527            (264 )        (7.5 )%
Operating income                                  5,825          6,728            (903 )       (13.4 )%

Cost of sales decreased $120 million (2.3%), due to:

favorable currency ($181 million) and

volume/mix ($123 million), partly offset by

higher manufacturing costs ($184 million, principally in Egypt due to the impact of the change in our new business structure). For further details on our change in business structure in Egypt, see the "Acquisitions and Other Business Arrangements" section of this "Discussion and Analysis."

With regard to tobacco leaf prices, we continue to expect modest increases going forward as the market has now stabilized. However, we anticipate some manufacturing cost increases in 2014, 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 decreased by $264 million (7.5%), due to:

favorable currency ($230 million) and

lower expenses ($34 million, primarily lower corporate expenses).

Operating income decreased by $903 million (13.4%). This decrease was due primarily to:

unfavorable currency ($604 million),

unfavorable volume/mix ($547 million),

higher pre-tax charges for asset impairment and exit costs ($504 million, primarily related to the decision to discontinue cigarette production in the Netherlands), and

higher manufacturing costs ($184 million), partly offset by

price increases ($900 million) and

lower marketing, administration and research costs ($34 million).

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Interest expense, net, of $522 million increased $40 million, due primarily to higher average debt levels, partially offset by lower average interest rates on debt.

Our effective tax rate decreased by 0.4 percentage points to 28.8%. The effective tax rate for the six months ended June 30, 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 . . .

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