Published
# Philip Morris International Inc. (PM) — Business, Risks and Management's Discussion
Sources: the Annual Report on Form 10-K for the year ended December 31, 2025 (accession
0001628280-26-005939, filed February 6, 2026) and the Quarterly Report on Form 10-Q for the
quarter ended June 30, 2026 (accession 0001628280-26-049493, filed July 24, 2026), with
supplemental recast segment information furnished on Form 8-K (accession 0001628280-26-017497)
and the second-quarter results release furnished on Form 8-K (accession 0001628280-26-049107,
Exhibit 99.1).
---
## Business
*From Item 1 of the FY2025 Form 10-K (accession 0001628280-26-005939), with the current segment
structure and market counts from the Form 10-Q for the quarter ended June 30, 2026 (accession
0001628280-26-049493).*
Philip Morris International Inc. is a Virginia holding company incorporated in 1987 that became a
separately listed U.S. public company on the New York Stock Exchange in March 2008. It is an
international consumer goods company whose portfolio consists of cigarettes and smoke-free
products — heat-not-burn, nicotine pouch and e-vapor — with a stated goal of completely ending the
sale of cigarettes. As a holding company, its principal sources of funds are dividends and debt
repayments from its subsidiaries; the right of its creditors and stockholders to subsidiary assets
is subordinated to the claims of those subsidiaries' own creditors. At December 31, 2025 the
Company employed approximately 84,900 people and had sold products in approximately 170 markets,
operating 50 owned manufacturing facilities, of which 11 produced heated tobacco units and 10
produced oral nicotine products.
**Combustibles.** Cigarettes are sold in approximately 170 markets and hold the number one or
number two share position in many of them. *Marlboro* — the world's best-selling international
cigarette — accounted for approximately 43% of 2025 cigarette shipment volume; together with
*Parliament*, *Chesterfield*, *L&M* and *Philip Morris*, the five international brands contributed
81% of cigarette shipment volume. Local brands include *Dji Sam Soe* and *Sampoerna A* in Indonesia
and *Fortune*. The Company holds at least 15% share in approximately 100 markets.
**Smoke-free.** Since 2008 PMI has invested over $16 billion to develop, scientifically
substantiate and commercialize smoke-free products. The November 2022 acquisition of Swedish Match
AB added a leading oral nicotine position, including *ZYN*, the leading smoke-free brand in the U.S.
market. Effective April 30, 2024 PMI holds the full rights to commercialize *IQOS* in the United
States following the 2022 agreement ending its U.S. commercial relationship with Altria Group. The
lead smoke-free brands are *IQOS* (heat-not-burn, with *HEETS*, *TEREA*, *SENTIA*, *DELIA*,
*BLENDS* and the KT&G-licensed *Fiit* and *Miix* consumables, plus zero-tobacco *LEVIA*), *ZYN*
(modern oral pouches) and *VEEV* (e-vapor). A January 2020 agreement with KT&G, extended in
January 2023 for fifteen years to January 2038 and re-based in November 2025 with revised volume
commitments for 2026–2028, gives PMI exclusive worldwide rights (excluding South Korea) to KT&G's
smoke-free devices and consumables. The wellness unit, Aspeya, is developing primarily oral
consumer wellness offerings including non-recreational cannabinoid products; management expects
cannabinoid revenue to be negligible in the near to medium term.
Market presence expanded over the period covered: smoke-free products were available in 106 markets
at December 31, 2025 and 109 markets at June 30, 2026; modern oral pouches in 56 markets rising to
61; *VEEV* in 47 markets rising to 51; and *BONDS by IQOS* in 5 markets rising to 8.
**Volume and share (FY2025).** Total shipment volume was 786.5 billion equivalent units, up 1.4%,
comprising 607.4 billion cigarettes (down 1.5%) and 179.1 billion smoke-free equivalent units (up
12.8%) — 155.1 billion heated tobacco units (up 11.0%), 20.7 billion oral smoke-free (up 18.5%) and
3.3 billion e-vapor (more than doubled). The total international market (cigarettes and heated
tobacco units, excluding China and the U.S.) was 2,587 billion units. PMI's total international
market share was 29.2% in 2025 versus 29.0% in 2024, with cigarette share of 23.4% (down from
23.7%) offset by heated tobacco unit share of 5.8% (up from 5.3%). *Marlboro*'s share of the
cigarette market was 10.7%, up from 10.2%.
**Segments.** Effective January 1, 2026 PMI reorganized around two business units, International
and U.S., and replaced its four geographic segments with three reportable segments:
- **International Smoke-Free**
- **International Combustibles**
- **U.S.**, which includes the Aspeya wellness unit
The chief operating decision maker is the Chief Executive Officer, and the primary profitability
measure changed from regional operating income to **segment gross profit**. Marketing,
administration and research costs (including restructuring charges), interest expense, income taxes
and a new "Corporate expenses and other" caption are not allocated to segments. "Corporate expenses
and other" carries foreign currency gains and losses and compensation expense on restricted share
units and performance share units, reclassified out of cost of sales and marketing, administration
and research costs. Segment assets and capital expenditures are not reported to the chief operating
decision maker and are not disclosed. Prior-period segment amounts were reclassified to conform to
the new structure; the reclassification did not change consolidated financial position, results of
operations or cash flows in any period presented, and goodwill was reallocated across the affected
reporting units using a relative fair value approach with no impairment resulting from the
reorganization review.
For scale on the current basis, the segment-recast 8-K (accession 0001628280-26-017497) furnished recast
full-year 2025 net revenues on the three-segment basis — unaudited supplemental information, not a
restatement — of International Smoke-Free $13,996 million, International Combustibles $23,436
million and U.S. $3,216 million, against total PMI net revenues of $40,648 million.
Under the four-segment structure in force through 2025 (Europe; South and Southeast Asia,
Commonwealth of Independent States, Middle East and Africa; East Asia, Australia and PMI Global
Travel Retail; and Americas), FY2025 net revenues were $17,111 million, $12,051 million, $6,632
million and $4,854 million respectively, and operating income $7,165 million, $4,096 million,
$3,126 million and $505 million, totaling $14,892 million.
**Distribution, customers and supply.** Sales channels are tailored per market and used
simultaneously: direct sales to retailers, independent distributors, exclusive zonified
distribution, national and regional wholesalers, PMI's own e-commerce infrastructure, and its own
brand retail infrastructure for smoke-free products and accessories. In 2025, sales to one
distributor in the Europe Region and one in the EA, AU & PMI GTR Region each accounted for 10% or
more of consolidated net revenues; management does not consider any segment dependent on a single
customer, though loss of a distributor can cause temporary market disruption. Tobacco leaf is
bought mostly through independent international suppliers, with direct contracting with farmers
representing approximately 23% of global leaf requirements in 2025. Direct materials came from
approximately 350 suppliers, the top ten representing approximately 60% of direct-material
purchases; the four most significant are printed paper board, acetate tow, fine paper and
susceptors. Electronic devices are made by third-party electronic manufacturing services providers.
The largest cigarette and heated-tobacco-unit plants are in Turkey, Russia, Poland, Indonesia,
Italy, the Czech Republic, Lithuania and Portugal; the largest nicotine pouch plant is in the United
States.
**Competition.** PMI competes on product quality, brand recognition and loyalty, taste, research
and development, innovation, packaging, customer service, marketing, advertising and retail price.
Named competitors are Altria Group, British American Tobacco, Japan Tobacco and Imperial Brands,
alongside new entrants in innovative products, regional and local manufacturers, and state-owned
enterprises principally in Algeria, Egypt, China, Taiwan, Thailand and Vietnam.
**Intellectual property.** PMI owns or has rights to its principal brands, including *Marlboro*
(outside the U.S.), *HEETS*, *IQOS*, *IQOS ILUMA*, *TEREA*, *VEEV* and *ZYN*. A 2008 Intellectual
Property Agreement with Philip Morris USA allocates jointly funded intellectual property — PMI
outside the United States, PM USA inside it. On February 1, 2024 a PMI subsidiary and a British
American Tobacco subsidiary entered an eight-year settlement agreement dismissing pending
proceedings with prejudice, rescinding the September 2021 International Trade Commission limited
exclusion and cease-and-desist orders that had barred importation of certain heat-not-burn products
into the United States, and providing mutual covenants not to sue on royalty-free or royalty-bearing
terms.
**Seasonality.** The segments are not significantly affected by seasonality, though cigarette
consumption can be lower in winter and higher in summer, and smoke-free user growth is typically
higher in the first half of each year.
---
## Risk factors
*Condensed from Item 1A of the FY2025 Form 10-K (accession 0001628280-26-005939). The Form 10-Q for
the quarter ended June 30, 2026 incorporates these risk factors by reference and adds no new ones.*
**The smoke-free transition may fail, or be blocked by regulators.** PMI's strategic priority is
the continued introduction, commercialization and growth of smoke-free products. If those efforts
fail in key markets or systematically, financial results and growth prospects may be materially
harmed. The Company may be disadvantaged if competitors execute better or if the categories in
which it holds an advantage are inequitably regulated relative to cigarettes or other smoke-free
categories. Third-party conduct — such as inappropriate marketing of e-vapor to youth — and claims
challenging PMI's research and clinical data can shift public opinion and regulatory posture
irrespective of the totality of scientific evidence. Actual or perceived youth or non-nicotine-user
uptake would damage credibility and invite more restrictive regulation.
**Cigarette consumption continues to decline.** Tax-paid cigarette consumption is falling in many
markets on higher taxes and prices, governmental action, diminishing social acceptance, health
concerns, competition, economic and geopolitical uncertainty and illicit trade. The decline may
materially reduce revenues, cash flows and profitability — and with them, the Company's ability to
fund the smoke-free transformation.
**Regulation.** Governmental action, combined with private restrictions on smoking, has already
reduced combustible industry volumes and is expected to keep doing so, increasing down-trading and
the risk of counterfeiting, contraband, illicit trade and cross-border purchases. Several
jurisdictions have restricted or prohibited smoke-free categories outright. World Health
Organization and Framework Convention on Tobacco Control reports and proposals, though non-binding,
could lead to restrictions on availability of, or accurate information about, smoke-free products.
The contemplated or enacted measures the Company enumerates run across four fronts. Fiscal and
trade: substantial and increasing excise and duty charges; elimination of duty-free sales and
allowances; and import/export restrictions affecting logistics. Commercial access: retail licensing
restrictions; advertising, marketing and sponsorship bans; point-of-sale display and vending bans;
generation sales bans; and expanded public and private use bans. Product and packaging: larger and
graphic health warnings; plain packaging and packaging-design restrictions; format and dimension
restrictions; testing, disclosure and performance standards for smoke and product constituents;
ingredient and flavor bans; device-feature restrictions; and outright prohibitions on novel tobacco
or nicotine products and devices. Institutional: encouragement of litigation against tobacco
companies; and exclusion of tobacco companies from public health policy dialogue.
**United States regulatory dependence.** Federal, state or local action — including FDA inaction —
may materially affect U.S. commercialization. The FDA's premarket and modified-risk authorizations
for two versions of *IQOS*, and its premarket authorizations for 20 varieties of *ZYN* nicotine
pouches, carry strict marketing, reporting and other requirements; there is no guarantee the
products remain authorized or that new versions receive authorization, particularly if youth or
non-nicotine-user initiation rises.
**Competition, consumer preferences and predictability.** Competitive position can be materially
influenced by weak economies, eroded consumer confidence, competitors' lower-priced or innovative
products, willingness of adult smokers to convert, higher taxes and price gaps, unfair competition,
and product regulation that limits differentiation. Some competitors have different profit, volume
and regulatory objectives, some are less exposed to currency movements, and some sell in
circumvention of applicable regulations. Separately, PMI may misjudge consumer trends, and the
financial and business performance of smoke-free products is inherently less predictable than the
mature cigarette business, with periods of accelerated and slower growth whose timing is harder to
forecast. Growth may also be limited by inability to introduce products, enter markets, add
capacity or improve margins through price and mix. Management's key business metrics — market
share, in-market sales, adjusted in-market sales, smoke-free user counts — rest on assumptions and
estimates and may not capture all aspects of an evolving business.
**Talent and organizational design.** PMI competes for talent against consumer products,
technology and pharmaceutical companies that enjoy greater societal acceptance and may be unable to
attract, motivate and retain the people needed for its transformation.
**Taxation and finance.** Cigarettes bear substantial excise, sales and import taxes; because the
portfolio is weighted to premium-price cigarettes, sales-price-based regimes can put PMI at a
competitive disadvantage. Increases drive lower consumption, shifts to other combustibles and to
mid- and low-price categories where PMI may be under-represented, cross-border purchases and
illicit products. PMI has largely persuaded regulators that smoke-free products are not cigarettes
and should be taxed separately, but some jurisdictions have adopted rates approaching or equal to
cigarettes; a loss of differentiation would materially hurt smoke-free unit margins. Effective tax
rates may vary significantly with earnings mix and tax-law changes, including OECD base erosion and
profit shifting work and the Pillar Two global minimum tax, and punitive tax legislation aimed at
companies operating in Russia has been proposed in certain jurisdictions including the U.S. As a
U.S. holding company dependent on distributions from non-U.S. subsidiaries, PMI is exposed to
currency exchange controls and payment restrictions. Disrupted credit markets, limits on borrowing,
slower-than-anticipated deleveraging or a ratings downgrade would raise borrowing costs. PMI may
also be required to write down long-lived assets, reporting units, intangibles or equity
investments.
**War in Ukraine.** In 2025 Russia accounted for around 9% of total cigarette and heated tobacco
unit shipment volume and around 6% of total net revenues; Ukraine accounted for around 2% and
around 1% respectively. The Company cannot predict Russian government action against it, including
legal action, deprivation of rights in or access to Russian assets, or nationalization — any of
which could cause material impairment and could cause deconsolidation of the Russian business.
Divestment is constrained by complex local approval conditions and international restrictions, and
in a divestment PMI's ability to realize full value would likely be subject to material impairment.
In Ukraine, the extent to which operations, workforce, facilities and inventory can be normalized
is unknown.
**Sourcing, distribution and product quality.** Growing reliance on third parties and their
subcontractors — sometimes geographically concentrated — for distribution, manufacture of products
and parts (particularly electronic devices) and for finance, commercialization and IT services
diminishes direct control over quality, availability and responsiveness. Natural-environment risks
(droughts, floods, heatwaves) and environmental regulation, including carbon taxation and
disclosure regimes, may disrupt supply and raise costs; authorities and stakeholders are
increasingly bringing actions alleging that sustainability statements are misleading. Tobacco leaf
and clove prices and quality are exposed to supply-demand imbalances, government mandated prices
and production control programs, and farmer exit. A prolonged disruption at a production facility
is called out specifically for the *ZYN* plant in Kentucky, which currently supplies substantially
all U.S. *ZYN* capacity. PMI could also decide or be required to recall products.
**International operations, currency and inflation.** Civil unrest, regime change,
nationalization, terrorism, conflict, natural disasters, pandemics and geopolitical instability
affecting international trade can disrupt supply, manufacturing, distribution and utilities. While
PMI does not currently expect recent and anticipated tariffs to materially affect it, the tariff
environment is volatile and further developments could raise production costs, limit market access,
degrade supplier finances and reduce consumer demand — with potential for significant volume
declines in Global Travel Retail and other key markets. Local-currency results translated into U.S.
dollars are exposed to currency movements, and cost bases sit in different currencies from revenue
markets, so dollar moves can hit cash flows and net revenues disproportionately relative to gross
profit and operating income margins. Capital controls and currency constraints affect settlement of
imports and payment of dividends and royalties. Sustained elevated inflation would raise direct
material, wage, energy, transport and financing costs and could reduce consumer purchasing power.
**Legal challenges and investigations.** Tobacco- and nicotine-related litigation is pending in
certain jurisdictions, with damages claimed in some cases ranging into the billions of U.S.
dollars, and the Framework Convention on Tobacco Control encourages such litigation. An unfavorable
outcome or settlement could materially affect results, cash flows or financial position in a
particular quarter or year. Beginning in March 2024 PMI has faced litigation over its oral nicotine
products in U.S. courts and anticipates new cases. Administrative and legal challenges to
smoke-free activities concern product classification, advertising and distribution restrictions,
corporate communications, product coach activities, scientific substantiation, product liability,
antitrust and unfair competition. Governmental investigations recur across contraband allegations,
pricing, income taxes, customs and excise, descriptors, advertising and distribution, product
safety and labor practices. Intellectual property protection is uneven across jurisdictions, and
third-party rights or infringement claims could impede development or commercialization of
smoke-free products in one or more markets. The Wellness business's cannabinoid research carries
legal, regulatory and reputational risk, with potential criminal, civil or tax liability for
non-compliance.
**Illicit trade.** Large quantities of counterfeit cigarettes are sold internationally, and PMI
believes *Marlboro* is the most heavily counterfeited international cigarette brand, though it
cannot quantify lost revenue. Counterfeit smoke-free products bypass PMI's scientific validation
and quality standards and may damage the reputation of the category. Contraband, cross-border
purchases and non-tax-paid volume from local manufacturers compound the effect.
**Cybersecurity, data governance and artificial intelligence.** PMI depends heavily on its own and
third-party IT networks, some developed or managed by providers that create supply-chain attack
exposure. The Company states that cyberattacks, security incidents and vulnerabilities have
impacted it, its business partners and its providers and are expected to continue to; immaterial
third-party information security breaches have occurred frequently within the last three years,
none material to business, financial condition or results. Non-compliance with privacy, data, AI
and information security laws could bring substantial fines; cyber liability insurance may be
insufficient. Increasing use of AI-based solutions introduces accuracy, reliability, IP,
confidentiality and new attack-surface risks. As of the date of the Form 10-K, PMI was not aware of
cybersecurity risks that had materially affected or were reasonably likely to materially affect it.
**Acquisitions and divestitures.** Transactions may divert management attention, prove difficult to
integrate, damage customer and supplier relationships, create disputes and contingent liabilities,
require competition-authority approvals PMI may not obtain, and — on the divestiture side —
require recognition of impairment charges.
---
## Management's discussion — fiscal year 2025
*From Item 7 of the FY2025 Form 10-K (accession 0001628280-26-005939).*
**Consolidated results.** Net revenues were $40.6 billion, up $2.8 billion or 7.3%, and up 6.5%
excluding currency and acquisitions/divestitures — driven by favorable pricing on combustible
tobacco and favorable volume/mix from higher smoke-free volume, notwithstanding unfavorable mix and
lower cigarette volumes. Smoke-free products contributed $16.9 billion of net revenues in 2025
against $14.7 billion in 2024. Cost of sales was $13,366 million and marketing, administration and
research costs $12,349 million. Operating income of $14,892 million rose 11.1%, and 9.3% excluding
currency and acquisitions/divestitures. Interest expense, net, of $966 million fell $177 million or
15.5% on lower market rates on variable-rate debt and favorable derivative effects. The effective
tax rate fell 5.0 percentage points to 19.7%. Net earnings attributable to PMI of $11.3 billion
rose $4.3 billion or 60.8%; basic EPS of $7.27 rose 60.5% and diluted EPS of $7.26 rose 60.6%
(59.7% excluding a $0.04 favorable currency impact).
The scale of that earnings increase is dominated by a prior-year charge rather than by 2025
operations: **the FY2024 results carried a $2,316 million non-cash impairment of PMI's equity
investment in Rothmans, Benson & Hedges Inc. (RBH)** — a $1.49 per diluted share charge — recorded
in the consolidated statement of earnings for the year ended December 31, 2024 as a recognized
subsequent event. The trigger was the October 17, 2024 filing by the court-appointed mediator and
monitor in the Canadian Companies' Creditors Arrangement Act ("CCAA") proceedings of a proposed
plan of compromise and arrangement under which RBH, Imperial Tobacco Canada and JTI Macdonald would
pay an aggregate global settlement of CAD 32.5 billion (approximately $23.7 billion as of December
31, 2025); RBH's January 24, 2025 objection and related filings narrowed the range of possible
outcomes on how that amount would be allocated among the three, which PMI treated as an impairment
indicator. Excluding currency, the balance of the diluted EPS increase was $0.85 per share from
operations.
**Items affecting comparability, 2025.** Pre-tax restructuring charges of $241 million ($222
million after tax) related to the end of combustible tobacco production at two German factories,
against $180 million in 2024 (U.S. *IQOS* sourcing restructuring and cessation of Venezuelan
operations) and $109 million in 2023. A $41 million goodwill impairment in the Europe segment
followed the annual review in the second quarter. A $176 million Germany excise tax classification
charge ($150 million after tax) was booked after PM Germany withdrew, on September 17, 2025, its
court challenge to the German customs authority's classification of *TEREA* consumables as
cigarettes for excise purposes (EUR 151 million assessed for February 2023 through August 2024,
paid in April 2025). A $94 million pre-tax loss arose on the fourth-quarter sale of one business
and held-for-sale classification of other consumer accessories businesses acquired with Swedish
Match. A $146 million after-tax non-cash charge in the third quarter reflected an other-than-
temporary impairment of a Wellness equity method investment after amendment of investment
agreements. Amortization of intangibles rose to $1,003 million ($780 million after tax, $0.50 per
share) from $835 million, reflecting the reacquired *IQOS* U.S. commercialization rights. Fair
value adjustments on equity security investments in India and Sri Lanka produced a $289 million
after-tax gain, versus $418 million in 2024. Following the RBH Plan's effectiveness on August 29,
2025, PMI recorded $156 million of after-tax income in the third quarter — $303 million of dividend
income net of the corresponding reduction in the RBH carrying value, $19 million of other income
and a $166 million tax charge. Prior-year 2024 items also included a $199 million pre-tax loss on
the December 31, 2024 sale of Vectura Group to Molex Asia Holdings, a $45 million Egypt sales tax
charge and a $77 million tax charge on the forced localization of PMI's Russian distributor
holding structure.
**Segment drivers (2025, on the four-segment basis then in effect).** Europe net revenues rose
9.1% (6.8% organic) on combustible pricing and smoke-free volume; operating income rose 9.4% (3.4%
organic), held back by the Germany excise charge, the consumer accessories loss and restructuring.
SSEA, CIS & MEA net revenues rose 7.0% (6.4% organic) on combustible pricing, with unfavorable
cigarette mix from an Indonesian commercial model change largely offset by volume; operating income
rose 19.5% (20.3% organic). EA, AU & PMI GTR net revenues rose 3.7% (4.6% organic) on smoke-free
volume and combustible pricing, with operating income up 8.6% (11.7% organic). Americas net
revenues rose 7.1% (8.8% organic) on smoke-free volume but operating income fell 7.8% (0.9%
organic) on unfavorable U.S. pricing — increased promotional activity, including retailer
incentives taken in net revenues, as *ZYN* returned to full availability — plus higher amortization
and investment in U.S. capabilities.
**Business environment.** Excessive excise increases and discriminatory tax structures remain the
central fiscal risk. The German supplemental excise surcharge on heated tobacco products, upheld by
the Court of Justice of the European Union in March 2024 and by the Fiscal Court in Dusseldorf in
May 2024, is under appeal to the Federal Fiscal Court; PMI paid EUR 721 million (approximately $751
million) in January 2025 to stop interest accruing while accounting for the surcharge as a
reduction of net revenues. Japan adopted a multi-year plan in March 2025 harmonizing heated tobacco
excise with cigarettes in two steps in 2026, with predictability on rates through April 2029. In
July 2025 the European Commission proposed revising the Tobacco Excise Directive to expand its
scope to heated tobacco, e-cigarettes and nicotine pouches with differentiated treatment,
contemplating a January 1, 2028 implementation date subject to unanimous member-state approval. The
EU characterizing flavor ban was extended to heated tobacco products across all member states as of
October 2023; PMI reports short-term disruption, most notably in Italy, but no expected meaningful
long-term change to category growth. Significant markets prohibiting or severely restricting one or
more smoke-free categories include Argentina, Brazil, Canada, France, India, Mexico, Turkey,
Australia, Thailand and Vietnam. In the U.S., the FDA has authorized *IQOS* 2.4 and *IQOS* 3.0 with
exposure modification orders, authorized all 20 marketed *ZYN* nicotine pouch varieties in January
2025, and renewed *General* snus modified risk orders in November 2024 through November 2032;
bundled applications for *IQOS ILUMA* were accepted for review in March 2024. PMI estimates illicit
trade at as much as 15% of global cigarette consumption excluding China and the U.S., and
approximately 9% of EU consumption in 2024. Highly inflationary accounting applies to Argentina,
Egypt, Turkey and Lebanon, producing $(26) million of remeasurement losses in 2025. Russian
operations held approximately $4.8 billion of total assets excluding intercompany balances, of
which approximately $2.3 billion was cash held mostly in rubles; Ukrainian operations held
approximately $0.7 billion. Inflation and new tariffs were each stated to be immaterial to the 2025
consolidated financial statements. Research and development expense on the smoke-free portfolio
accounted for approximately 100% of total R&D expense in 2025 and 2024.
**Cash flow, liquidity and capital structure.** Net cash provided by operating activities was $12.2
billion, essentially flat against 2024; excluding favorable currency, the $0.5 billion unfavorable
variance came from $2.4 billion of higher working capital requirements — chiefly excise tax-paid
inventory timing, including the approximately $0.8 billion German heated-tobacco surcharge paid in
January 2025, and a larger final U.S. Tax Cuts and Jobs Act transition tax installment — partly
offset by higher currency-neutral earnings and greater use of receivables factoring. Operating cash
flow included $0.5 billion of dividend income from the deconsolidated Canadian affiliate. Net cash
used in investing was $4.0 billion versus $1.1 billion, mainly derivative cash collateral movements
and higher capital expenditures of $1.6 billion (2024: $1.4 billion). Net cash used in financing was
$8.1 billion versus $9.5 billion. Dividends paid were $8.6 billion; the Board approved an 8.9%
increase in the quarterly dividend to $1.47 per share in the third quarter of 2025, an annualized
rate of $5.88. Cash and cash equivalents were $4.9 billion at year end, the majority held by foreign
subsidiaries including $2.3 billion in Russia. Commercial paper capacity across U.S. and European
programs is $8.0 billion, with none outstanding at year-end 2025 and an average balance of $3.0
billion during the year. Committed revolving credit facilities were $6.3 billion, entirely
undrawn, with no rating triggers, material adverse change clauses or collateral provisions.
Approximately EUR 2.5 billion (approximately $2.9 billion) remained outstanding under the five-year
tranche of the Swedish Match acquisition term loan facility. PMI guarantees certain Swedish Match
notes following a 2023 consent solicitation, and has no off-balance-sheet arrangements other than
guarantees, which relate primarily to excise taxes on shipments. Purchase obligations were expected
to be approximately $3.4 billion in 2026 and approximately $2.8 billion thereafter. PMI operates
with a stockholders' deficit, which stood at $(8,028) million in total (and $(9,994) million
attributable to PMI) at December 31, 2025.
**Critical estimates.** Goodwill carrying value was $17.3 billion at December 31, 2025, and the
estimated fair value of each of the eleven reporting units, excluding held-for-sale businesses, and
of the non-amortizable intangibles, exceeded carrying value. Assumption changes were expected to
reduce 2026 pre-tax pension and postretirement expense to approximately $71 million from
approximately $172 million in 2025. Management had not concluded that a loss was probable in any
pending tobacco-related case and could not estimate a possible loss or range of loss, so no loss
was accrued for those cases.
---
## Current period — second quarter and first half of 2026
*From the Form 10-Q for the quarter ended June 30, 2026 (accession 0001628280-26-049493), with
volume and market detail from the results release furnished on Form 8-K (accession
0001628280-26-049107, Exhibit 99.1).*
**Consolidated.** Second-quarter net revenues were $11,192 million, up 10.4% (7.6% excluding
currency and acquisitions/divestitures) on combustibles-led pricing supported by international
smoke-free volume/mix. Cost of sales was $3,533 million and gross profit $7,659 million, up 11.5%
(8.7% organic). Operating income rose 22.0% (20.0% organic), helped by materially lower
restructuring charges. Interest expense, net, of $243 million fell 12.3% on higher interest income
on investments. The effective tax rate rose 3.3 percentage points to 22.3%. Net earnings
attributable to PMI of $2.8 billion fell 7.3%, and basic and diluted EPS of $1.80 each fell 7.7% —
a decline driven by lower income from equity security investments, the RBH impairment discussed
below and the higher tax rate, partly offset by higher operating income and lower net interest.
For the six months, net revenues were $21,338 million, up 9.8% (5.3% organic); cost of sales
$6,774 million; gross profit $14,564 million, up 10.9% (6.4% organic); operating income up 16.1%
(10.4% organic); net interest expense $480 million, down 7.3%; effective tax rate 20.5%, up 1.0
percentage point. Net earnings attributable to PMI of $5.3 billion fell 8.3% and basic and diluted
EPS of $3.36 fell 8.4% (down 14.4% excluding a $0.22 favorable currency impact).
**Segment gross profit** (the primary segment measure), in millions:
| | Q2 2026 | Q2 2025 | H1 2026 | H1 2025 |
|---|---|---|---|---|
| International Smoke-Free — net revenues | 3,877 | 3,395 | 7,713 | 6,471 |
| International Smoke-Free — gross profit | 2,716 | 2,319 | 5,400 | 4,405 |
| International Combustibles — net revenues | 6,459 | 5,883 | 12,147 | 11,209 |
| International Combustibles — gross profit | 4,388 | 3,936 | 8,229 | 7,435 |
| U.S. — net revenues | 856 | 862 | 1,478 | 1,762 |
| U.S. — gross profit | 555 | 611 | 935 | 1,296 |
| Total net revenues | 11,192 | 10,140 | 21,338 | 19,441 |
| Total gross profit | 7,659 | 6,866 | 14,564 | 13,136 |
By product category, second-quarter net revenues split $4,645 million smoke-free and $6,547
million combustible tobacco. Smoke-free revenue spans both the International Smoke-Free segment
($3,877 million in the quarter) and the smoke-free part of the U.S. segment ($768 million, of
which $56 million Wellness), so it is larger than the International Smoke-Free segment alone. For
the six months the split was $9,024 million smoke-free (of which $118 million Wellness) and
$12,314 million combustible tobacco.
**International Smoke-Free.** Second-quarter net revenues rose 14.2% (11.8% organic) on higher
heated tobacco unit and e-vapor volumes and favorable heated-tobacco pricing; gross profit rose
17.1% (14.6% organic). Segment shipment volume rose 8.0% to 44.7 billion equivalent units, with
broad-based growth notably in Taiwan, Romania and Greece. *IQOS* shipments rose 7.6% and heated
tobacco unit adjusted in-market sales rose 5.1%, absorbing expected pantry de-loading and consumer
adjustment after the April 1 excise-driven price increase in Japan and the characterizing flavor
ban in Poland; excluding Japan and Poland, adjusted in-market sales grew about 10%. Modern oral
volume grew 14.7% (26.3% excluding the Nordics) to 0.6 billion pouches but was more than offset by
continued decline in the legacy Nordic snus business, leaving total oral smoke-free volume down
7.0%. *VEEV* shipments grew 55.1% and the brand holds the number one closed-pod position in Europe.
Six-month segment volume rose 9.9% to 88.8 billion equivalent units, with *IQOS* up 9.4%, modern
oral up 17.0% to 1.1 billion pouches and *VEEV* up 72.0%.
**International Combustibles.** Second-quarter net revenues rose 9.8% (6.4% organic) on pricing,
partly offset by unfavorable mix as growth in developing economies outweighed European declines;
gross profit rose 11.5% (8.0% organic). Cigarette shipment volume rose 1.1% to 156.9 billion units
on Turkey, Indonesia and Egypt. Cigarette category volume share was 25.3%, flat year on year
despite adverse market mix, while *Marlboro* gained 0.3 percentage points to match its record
category share of 11.0%. For the six months, cigarette shipment volume fell 1.9% to 294.2 billion
units, with notable declines in Russia, Mexico and Germany, and net revenues rose 8.4% (3.8%
organic).
**U.S.** Second-quarter net revenues fell 0.7% (0.9% organic) on broadly stable *ZYN* revenues,
declines in the cigar business and unfavorable phasing in Wellness; gross profit fell 9.2% (9.0%
organic), also reflecting higher manufacturing costs from expansion of the U.S. footprint. U.S.
smoke-free shipment volume rose 1.8%, with *ZYN* shipments up 1.8% to 2.9 billion pouches against
an inventory tailwind in the prior-year quarter; *ZYN* offtake volumes were flat to slightly
growing in a growing category, which management attributes largely to an uneven competitive
landscape. In June the Company shipped *ZYN ULTRA* (9mg and 11mg moist variants at a lower
price-per-pouch) and added flavors to the *ZYN* dry lineup, and stated it intends to accelerate U.S.
investment in the second half to support the expanded portfolio and prepare for a future *IQOS
ILUMA* launch. For the six months, U.S. net revenues fell 16.1% (16.5% organic) and gross profit
fell 27.9%, reflecting first-quarter distributor and trade inventory movements and an unfavorable
price comparison; U.S. smoke-free volume fell 10.0%, with *ZYN* shipments down 11.2% to 5.2 billion
pouches.
**Items affecting comparability, first half 2026.** Pre-tax restructuring charges were $30 million
($24 million after tax, $0.01 per share) for a series of U.S. footprint optimization initiatives,
against $243 million in the prior-year period for the German factory closures. Amortization of
intangibles was $503 million ($392 million after tax, $0.25 per share). Fair value adjustments on
the India and Sri Lanka equity security investments swung to a $240 million after-tax loss ($0.16
per share) from a $410 million gain; the fair value of these Level 1 securities was $983 million at
June 30, 2026 against $1,291 million at December 31, 2025. An Egypt sales tax settlement adjustment
added $18 million net of tax ($0.01 per share) after a May 2026 court approval of the 2016-year
settlement under Egypt's December 2024 tax amnesty legislation, partially reversing the $45 million
charge taken in 2024. Deferred tax on unrealized currency movements on Swedish Match acquisition
financing intercompany loans reduced first-half diluted EPS by $0.06 (a $97 million expense),
against a $373 million benefit in the prior-year period.
**Completed divestiture.** In the second quarter of 2026 PMI completed the sale of the last of the
held-for-sale businesses — primarily the consumer accessories businesses acquired with Swedish Match — for
total consideration of $121 million, of which $87 million of cash proceeds were received at closing
and $34 million was deferred consideration recorded in other receivables and other assets. On
completion, $3 million of currency translation losses was reclassified out of other comprehensive
losses in the quarter; the pre-tax loss on the disposal group was recorded in 2025.
**The 2026 RBH impairment, and how it differs from the 2024 charge.** In May 2026, as required
under the court-approved Plan that became effective August 29, 2025, RBH delivered an annual
business plan to its Plan Administrator containing updated five-year financial projections
reflecting current industry dynamics. On that basis PMI concluded the estimated fair value of its
RBH investment was below carrying value and recorded a **non-cash impairment charge of $511
million** ($0.33 per diluted share) in the second quarter of 2026. This is a different trigger from
the $2,316 million charge taken at December 31, 2024, which arose from uncertainty over how the CAD
32.5 billion aggregate CCAA settlement would be allocated among RBH and the two other Canadian
manufacturers before that plan was approved; the 2026 charge instead reflects RBH's own updated
operating projections under a plan that is already in force. RBH's carrying value was $51 million at
June 30, 2026, down from $569 million at December 31, 2025, and cumulative impairments and downward
adjustments reached $3,060 million (from $2,549 million). RBH remains deconsolidated — PMI
concluded that powers held by the Plan Administrator and Claimants continue to remove elements of
control — and is accounted for as an equity security without a readily determinable fair value
until the global settlement amount is paid and the operating covenants governing RBH's business are
lifted.
**Other equity investments.** Total equity method investments were $1,008 million at June 30, 2026.
PMI holds 23% of JSC TK Megapolis, its Russian distributor, with a book value of $0.8 billion;
approximately 25% of Algerian joint venture STAEM, with a book value of $0.7 billion; and 14.7% of
Egypt's Eastern Company, in connection with which PMI guarantees credit facilities and bank loan
repayment up to a maximum of $385 million running to 2034. The Megapolis and STAEM book values are
stated gross of the cumulative foreign currency translation losses reflected in accumulated other
comprehensive losses — $0.5 billion and $0.3 billion respectively — while the amounts included in
the $1,008 million total above are net of those translation losses, which is why the individual
book values do not sum to the total. Related-party net revenues, principally to the Megapolis
group, were $2,440 million for the six months.
**Cash flow.** Net cash provided by operating activities was $5.1 billion for the six months,
against $3.1 billion a year earlier. Excluding favorable currency, the $1.9 billion improvement
came from $1.5 billion lower working capital requirements — the prior-year period carried the
approximately $0.8 billion German heated-tobacco surcharge payment and the final Tax Cuts and Jobs
Act transition tax installment — plus higher currency-neutral earnings. Investing activities
provided $23 million, against $2,750 million used a year earlier, mainly on derivative cash
collateral movements as the euro and Swiss franc weakened against the dollar and on debt securities
investments. Financing activities used $3.9 billion, against $0.9 billion, on lower long-term debt
issuance, higher repayments and higher dividends, partly offset by higher net short-term borrowings.
Dividends paid in the first half were $4.6 billion at the annualized rate of $5.88 per share.
Cumulative trade receivables sold were $5.3 billion for the six months (prior year: $5.6 billion),
and amounts due to suppliers in the voluntary supply chain financing program were $1.0 billion at
June 30, 2026.
**Capital structure and liquidity.** Total debt was $49.1 billion at June 30, 2026 against $48.8
billion at December 31, 2025. Long-term debt carrying value was $45,772 million — $37,371 million
of U.S. dollar notes (average rate 4.719%, due through 2044), $6,563 million of euro notes (average
rate 2.039%, due through 2039), $1,711 million of the euro Swedish Match acquisition credit facility
borrowing at 2.859% due 2027, a $28 million Swedish krona note and $99 million of finance leases —
of which $3,406 million is current. Short-term borrowings were $3,341 million, comprising $2,652
million of commercial paper at an average 3.7% (none was outstanding at December 31, 2025; the
average balance during the first half was $4.7 billion) and $689 million of bank loans. Committed
revolving credit facilities totaled $6.2 billion, entirely undrawn and available, plus
approximately $4.2 billion of uncommitted short-term credit arrangements. EUR 1.5 billion
(approximately $1.7 billion) remains outstanding under the five-year tranche of the Swedish Match
term loan facility, expiring June 23, 2027. Cash and cash equivalents were $6.0 billion, the
majority held by foreign subsidiaries including $2.8 billion in Russia. The majority of $52.2
billion gross notional of derivative instruments and foreign-currency-denominated debt is exposed
to exchange-rate movements, which the Company notes could affect debt levels and the pace of
anticipated deleveraging. Moody's revised its outlook from Stable to Positive on April 14, 2026;
at June 30, 2026 Moody's and Standard & Poor's carried a Positive outlook and Fitch a Stable
outlook. Total stockholders' deficit narrowed to $(6,657) million from $(8,028) million at December
31, 2025 (PMI's own deficit $(8,583) million from $(9,994) million), with total assets of $68,271
million against total liabilities of $74,928 million. No shares were repurchased under publicly
announced programs during the quarter; 19,352 shares were acquired, primarily shares tendered by
employees to settle taxes on vesting equity awards.
**Outlook stated in the quarterly report.** For full-year 2026 PMI expects broadly stable to
slightly growing total cigarette and smoke-free shipment volume (previously broadly stable), with
high-single-digit smoke-free volume growth and a cigarette volume decline of 2% to 3% (previously
around 3%); an effective tax rate of around 21.5% excluding discrete tax events; and capital
expenditures of $1.4 billion to $1.6 billion, predominantly supporting the smoke-free business.
**Regulatory developments in the period.** On April 17, 2026 the FDA renewed the exposure
modification orders for the *IQOS* 2.4 device with three related consumables and the *IQOS* 3.0
device, with a stated expiration in April 2031. In June 2026 the FDA concluded that the requested
modified risk claim is scientifically accurate for each of the 20 *ZYN* nicotine pouch products
that had received premarket authorization, that consumers understand it, and that marketing with it
would benefit the population as a whole — making these the only nicotine pouch products on the U.S.
market authorized as modified risk tobacco products. On May 8, 2026 the FDA issued final guidance
stating it does not intend to prioritize enforcement against certain unauthorized ENDS and nicotine
pouch products that have demonstrated meaningful progress toward authorization; PMI notes that
competitors have marketed or stated an intention to market products without marketing granted
orders, and that it has commercialized and may commercialize products without such orders where it
believes enforcement would be inconsistent with FDA public guidance and present practice. On April
29, 2026 the UK government adopted a bill banning the sale of tobacco products, including heated
tobacco products, herbal smoking products and cigarette papers, to those born on or after January 1,
2009, and enabling a ban on cigarette filters; it does not apply to e-vapor products or nicotine
pouches. The European Commission launched a stakeholder consultation on revising the Tobacco
Products Directive in May 2026, with a potential legislative proposal expected by the end of 2026.
Japan's first heated-tobacco excise harmonization step took effect April 1, 2026, with the second
scheduled for October 1, 2026. PMI raised its illicit trade estimate to as much as 16% of global
cigarette consumption excluding China and the U.S., and to more than 10% of EU consumption in 2025,
mainly counterfeit. Russian operations held approximately $5.6 billion of total assets excluding
intercompany balances at June 30, 2026, of which approximately $2.8 billion was cash held mostly in
rubles; Ukrainian operations held approximately $0.6 billion. The Middle East conflict was stated
to have had an immaterial impact in the first half. Tariffs and inflation were again stated to be
immaterial to the condensed consolidated financial statements.
**Contingencies.** Since 1995 more than 600 combustible tobacco product-related cases have been
filed against a PMI entity; all resolved by final, non-appealable liability judgment have been
terminated in PMI's favor and only a small number remain. As of June 30, 2026 there were seven
health care cost recovery cases pending — Brazil (1), Korea (1) and Nigeria (5) — down from 17 a
year earlier, principally because nine proposed class actions and ten health care cost recovery
cases were released under the Canadian CCAA Plan and have been or will be dismissed. One public
civil action remains pending in Venezuela. Two individual cases decided for plaintiffs remain on
appeal; final resolution at the verdict amounts would not be material. In the Korean National
Health Insurance Service case the appellate court dismissed the plaintiff's claims and appeal on
January 15, 2026, and the plaintiff appealed to the Supreme Court of Korea on February 4, 2026.
Nicotine pouch litigation continues: in the lead putative class action (Kelly, now proceeding as to
plaintiff Maultsby, in the Southern District of Florida) discovery closed June 26, 2026, the
plaintiff moved on April 6, 2026 to certify a Florida purchaser class and an under-21 subclass,
defendants filed their opposition and moved for summary judgment on all claims on June 15, 2026,
and trial is scheduled to begin December 7, 2026; three further putative class actions
(Bates-Ferreira, Norris and Siegert) are stayed pending the class certification ruling, and the
Mayor and City Council of Baltimore's consumer protection ordinance case remains subject to a
stayed remand motion. No estimated loss has been accrued for these proceedings. Brazilian tax
authorities have assessed a PMI affiliate for alleged indirect tax underpayments of approximately
BRL 137 million (approximately $27 million) for 2020, BRL 211 million (approximately $42 million)
for 2021 and BRL 369 million (approximately $74 million) for 2022 and 2023, with further
assessments considered probable; PMI disagrees and will defend. In Japan, Future Technology K.K.
has brought a series of patent infringement actions and customs applications against Philip Morris
Japan's importer and distributor over *TEREA* and *SENTIA* consumables, which PMI is obligated to
indemnify; three Tokyo District Court rulings have rejected the claims, eight actions have been
withdrawn and the remainder are at various stages. Indonesian subsidiaries, principally PT Hanjaya
Mandala Sampoerna, carry income tax receivables of 3.6 trillion Indonesian rupiah (approximately
$200 million) relating to assessments paid to avoid penalties for 2017 to 2023, which are being
challenged in court. Separately, new Indonesia Stock Exchange free float rules issued March 31,
2026 require listed companies with at least IDR 5 trillion of market capitalization and free float
below 12.5% to reach 12.5% by March 31, 2027 and 15% by March 31, 2028; as of June 30, 2026, 7.5%
of PT Hanjaya Mandala Sampoerna's equity, with a listed value of IDR 5.8 trillion (approximately
$351 million), qualified as public free float, and the subsidiary is assessing the implications.
---
## Subsequent events
*The Form 10-Q for the quarter ended June 30, 2026 (accession 0001628280-26-049493) does not
present a separate subsequent-events note. The material events after June 30, 2026 disclosed in
that report and in the results release furnished on Form 8-K (accession 0001628280-26-049107,
Exhibit 99.1) are set out below.*
- **Italian criminal proceeding resolved in PMI's favor (July 3, 2026).** The trial court in Rome
orally announced its decision in the proceeding arising from the Public Prosecutor's 2020
indictment over alleged contravention of anti-corruption laws and related disruption of trade
freedom. All charges against Philip Morris Italia S.r.l. were dismissed and the company was
acquitted in full. The civil claim brought against PM Italia by British American Tobacco Italia
S.p.A., which sought EUR 50 million (approximately $57 million) in damages on a theory of
vicarious liability, was dismissed. The court acquitted one former PM Italia employee, convicted
two other employees, and convicted the three government officials charged in the case. The court's
detailed written reasoning is expected by the end of September 2026, after which the parties have
45 days to appeal.
- **Egypt ceases to be accounted for as a highly inflationary economy (effective July 1, 2026).**
From that date PMI no longer applies highly inflationary accounting to its Egyptian subsidiaries
and has stopped using the U.S. dollar as their functional currency. The change is not expected to
have a material impact on the consolidated financial statements. Argentina, Turkey and Lebanon
continue to be accounted for as highly inflationary.
- **Planned U.S. portfolio and investment actions.** PMI stated it plans to extend the *ZYN* lineup
with 1.5mg and 8mg dry variants in the third quarter of 2026, and to accelerate U.S. investment in
the second half of the year to support the expanded *ZYN* portfolio and to prepare for a future
launch of *IQOS ILUMA*, which remains pending FDA authorization.
No acquisition, divestiture or financing transaction completed after June 30, 2026 was disclosed in
the quarterly report.