Financial Instruments:

12 Months Ended

Dec. 31, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Overview

PMI operates globally with manufacturing and sales facilities in various locations around the world and is exposed to risks such as changes in foreign currency exchange rates and interest rates. As a result, PMI uses deliverable and non-deliverable forward foreign exchange contracts, foreign currency swaps and foreign currency options, (collectively referred to as "foreign exchange contracts"), and interest rate contracts to mitigate its exposure to changes in foreign currency exchange and interest rates related to net investments in foreign operations, third-party and intercompany actual and forecasted transactions. The primary currencies to which PMI is exposed include the Euro, Egyptian pound, Indonesian rupiah, Japanese yen, Mexican peso, Philippine peso, Polish zloty, Russian ruble and Swiss franc.

Additionally, certain materials that PMI uses in the manufacturing of its products are exposed to market price risks. PMI uses commodity derivative contracts (“commodity contracts") to manage its exposure to the market price volatility of certain commodity components of these materials.

These foreign exchange contracts, interest rate contracts and commodity contracts are collectively referred to as "derivative contracts". PMI is not a party to leveraged derivatives and, by policy, does not use derivative financial instruments for speculative purposes. Substantially all of PMI's derivative financial instruments are subject to master netting arrangements, whereby the right to offset occurs in the event of default by a participating party. While these contracts contain the enforceable right to offset through close-out netting rights, PMI elects to present them on a gross basis in the consolidated balance sheets. Collateral associated with these arrangements is in the form of cash and is unrestricted. Changes in collateral posted are included in cash flows from investing activities and changes in collateral received are included in cash flows from financing activities. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. PMI formally documents the nature and relationships between the hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of the forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss would be recognized in earnings.

The gross notional amounts for outstanding derivatives as of December 31, 2024 and 2023, were as follows:


(in millions)	2024		2023
Derivative contracts designated as hedging instruments:
Foreign exchange contracts	$	25,149	$	21,987
Interest rate contracts	3,000		3,600
Commodity contracts	9		20

Derivative contracts not designated as hedging instruments:
Foreign exchange contracts	15,942		17,658
Total	$	44,100	$	43,265

The fair value of PMI’s derivative contracts included in the consolidated balance sheets as of December 31, 2024 and 2023, were as follows:


	Derivative Assets					Derivative Liabilities
		Fair Value					Fair Value
(in millions)	Balance Sheet Classification	2024		2023		Balance Sheet Classification	2024		2023
Derivative contracts designated as hedging instruments:
Foreign exchange contracts	Other current assets	$	772	$	345	Other accrued liabilities	$	7	$	249
	Other assets	299		153		Income taxes and other liabilities	60		449
Interest rate contracts	Other current assets	—		1		Other accrued liabilities	50		78
	Other assets	4		—		Income taxes and other liabilities	3		18
Commodity contracts	Other current assets	—		—		Other accrued liabilities	—		5
	Other assets	—		—		Income taxes and other liabilities	—		1
Derivative contracts not designated as hedging instruments:
Foreign exchange contracts	Other current assets	331		85		Other accrued liabilities	69		425
	Other assets	12		—		Income taxes and other liabilities	58		143
Total gross amount derivatives contracts presented in the consolidated balance sheets		$	1,418	$	584		$	247	$	1,368
Gross amounts not offset in the consolidated balance sheets
Financial instruments		(218)		(374)			(218)		(374)
Cash collateral received/pledged		(863)		(109)			(18)		(551)
Net amount		$	337	$	101		$	11	$	443

PMI assesses the fair value of its derivative contracts using standard valuation models that use, as their basis, readily observable market inputs. The fair value of PMI’s foreign exchange forward contracts, foreign currency swaps and interest rate contracts is determined by using the prevailing foreign exchange spot rates and interest rate differentials, and the respective maturity dates of the instruments. The fair value of PMI’s currency options is determined by using a Black-Scholes methodology based on foreign

exchange spot rates and interest rate differentials, currency volatilities and maturity dates. The fair value of PMI’s commodity contracts is determined by using the prevailing market spot and futures prices and the respective maturity dates of the instruments. PMI’s derivative contracts have been classified within Level 2 at December 31, 2024 and 2023.

For the years ended December 31, 2024, 2023 and 2022, PMI's derivative contracts impacted the consolidated statements of earnings and comprehensive earnings as follows:


(pre-tax, in millions)	For the Years Ended December 31,
	Amount of Gain/(Loss) Recognized in Other Comprehensive Earnings/(Losses) on Derivatives						Statement of Earnings Classification of Gain/(Loss) on Derivatives	Amount of Gain/(Loss) Reclassified from Other Comprehensive Earnings/(Losses) into Earnings						Amount of Gain/(Loss) Recognized in Earnings
	2024		2023		2022			2024		2023		2022		2024		2023		2022
Derivative contracts designated as hedging instruments:
Cash flow hedges:
Foreign exchange contracts	$	433	$	195	$	288
							Net revenues	$	186	$	194	$	233
							Cost of sales	—		—		—
							Marketing, administration and research costs	20		27		30
							Interest expense, net	2		(15)		(7)
Interest rate contracts	95		37		292		Interest expense, net	51		46		(2)
Commodity contracts	(1)		(7)		—		Cost of sales	(1)		—		—
Fair value hedges:
Interest rate contracts							Interest expense, net (a)							$	(32)	$	(14)	$	(83)
Net investment hedges (b):
Foreign exchange contracts	867		(788)		300		Interest expense, net (c)							293		268		181
							Marketing, administration and research costs	35		—		—
Derivative contracts not designated as hedging instruments:
Foreign exchange contracts							Interest expense, net							219		301		112
							Marketing, administration and research costs (d)							523		(575)		(169)
Total	$	1,394	$	(563)	$	880		$	293	$	252	$	254	$	1,003	$	(20)	$	41

(a) The gains (losses) from these contracts are offset by the changes in the fair value of the hedged item

(b) Amount of gains (losses) on hedges of net investments principally related to changes in foreign currency exchange and interest rates between the Euro and U.S. dollar

(d) The gains (losses) from these contracts attributable to changes in foreign currency exchange rates are partially offset by the (losses) and gains generated by the underlying intercompany and third-party loans being hedged

Cash Flow Hedges

PMI has entered into derivative contracts to hedge the foreign currency exchange, interest rate and commodity price risks related to certain forecasted transactions. Gains and losses associated with qualifying cash flow hedge contracts are deferred as components of accumulated other comprehensive losses until the underlying hedged transactions are reported in PMI’s consolidated statements of earnings. As of December 31, 2024, PMI has hedged forecasted transactions with derivative contracts expiring at various dates through May 2028. Premiums paid for, and settlements of, the derivative contracts designated as cash flow hedges are included primarily in cash flows from operating activities on PMI’s consolidated statements of cash flows.

Fair Value Hedges

PMI has entered into fixed-to-floating interest rate contracts, designated as fair value hedges to minimize exposure to changes in the fair value of fixed rate U.S. dollar-denominated debt that results from fluctuations in benchmark interest rates. For derivative contracts that are designated and qualify as fair value hedges the gain or loss on the derivative, as well as the offsetting gain or loss on the hedged items attributable to the hedged risk, is recognized in current earnings. The carrying amount of the debt hedged, which includes the cumulative adjustment for fair value gains/losses, as of December 31, 2024 was $2,941 million, of which $346 million was recorded in current portion of long-term debt and $2,595 million was recorded in long-term debt in the consolidated balance sheets. The cumulative amount of fair value gains/(losses) included in the carrying amount of the debt hedged was $42 million as of December 31, 2024.

Hedges of Net Investments in Foreign Operations

PMI designates derivative contracts and certain foreign currency denominated debt and other financial instruments as net investment hedges, primarily of its Euro net assets. The amount of pre-tax gain/(loss) related to the non-derivative financial instruments, that was reported as a component of accumulated other comprehensive losses within currency translation adjustments, was $99 million, $48 million and $521 million, for the years ended December 31, 2024, 2023 and 2022, respectively. Settlements of the derivative contracts designated as net investment hedges are included in cash flows from investing activities on PMI’s consolidated statements of cash flows.

Other Derivatives

PMI has entered into derivative contracts to hedge the foreign currency exchange and interest rate risks related to intercompany loans between certain subsidiaries, and third-party loans. While effective as economic hedges, no hedge accounting is applied for these contracts; therefore, the gains (losses) relating to these contracts are reported in PMI’s consolidated statements of earnings. Settlements of other derivative contracts are included primarily in cash flows from investing activities on PMI's consolidated statements of cash flows.

Qualifying Hedging Activities Reported in Accumulated Other Comprehensive Losses

Derivative gains or losses reported in accumulated other comprehensive losses are a result of qualifying hedging activity. Transfers of these gains or losses to earnings are offset by the corresponding gains or losses on the underlying hedged item. Hedging activity affected accumulated other comprehensive losses, net of income taxes, as follows:


	For the Years Ended December 31,
(in millions)	2024		2023		2022
Gain/(loss) as of January 1,	$	241	$	266	$	4
Derivative (gains)/losses transferred to earnings	(213)		(220)		(219)
Change in fair value	439		195		481
Gain/(loss) as of December 31,	$	467	$	241	$	266

At December 31, 2024, PMI expects $260 million of derivative gains that are included in accumulated other comprehensive losses to be reclassified to the consolidated statement of earnings within the next 12 months. These gains are expected to be substantially offset by the statement of earnings impact of the respective hedged transactions.

Contingent Features

PMI’s derivative instruments do not contain contingent features.

Credit Exposure and Credit Risk

PMI is exposed to credit loss in the event of non-performance by counterparties. While PMI does not anticipate non-performance, its risk is limited to the fair value of the financial instruments less any cash collateral received or pledged. PMI actively monitors its exposure to credit risk through the use of credit approvals and credit limits and by selecting and continuously monitoring a diverse group of major international banks and financial institutions as counterparties.

Other Investments

Certain PMI investments, which are comprised of held-to-maturity U.S. dollar denominated bonds in Argentina, have been classified within Level 1 and had a fair value of $125 million at December 31, 2024. For the year ended December 31, 2024, the gross unrecognized holding losses on these investments were $7 million.