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Item 2. Management’s Discussion and Analysis

2022-04-28 compared with 2021-10-27 · 576 added, 869 removed, 868 unchanged (62% of the section changed)

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Description of Our Company

We are leading a transformation in the tobacco industry to create a smoke-free future and ultimately replace cigarettes with smoke-free products to the benefit of adults who would otherwise continue to smoke, society, the company, its shareholders and its other stakeholders.

We are a leading international tobacco company engaged in the manufacture and sale of cigarettes, as well as smoke-free products, associated electronic devices and accessories, and other nicotine-containing products in markets outside the United States.

In addition, versions of our Platform 1 device and consumables have received marketing authorizations from the U.S.

Food and Drug Administration ("FDA") under the premarket tobacco product application ("PMTA") pathway;

the FDA has also authorized the marketing of a version of our Platform 1 device and its consumables as a Modified Risk Tobacco Product ("MRTP"), finding that an exposure modification order for these products is appropriate to promote the public health.

We are building a future on a new category of smoke-free products that, while not risk-free, are a much better choice than continuing to smoke.

We describe the PMTA and MRTP orders in more detail in the "Business Environment" section of this Item 2.

Through multidisciplinary capabilities in product development, state-of-the-art facilities and scientific substantiation, we aim to ensure that our smoke-free products meet adult consumer preferences and rigorous regulatory requirements.

Our smoke-free product portfolio includes heat-not-burn products, nicotine-containing vapor products and oral nicotine products.

In the third quarter of 2021, our former Latin America & Canada segment was renamed as the Americas segment.

We are a leading international tobacco company working to deliver a smoke-free future and evolving our portfolio for the long-term to include products outside of the tobacco and nicotine sector.

Our current product portfolio primarily consists of cigarettes and reduced-risk products, including heat-not-burn, vapor and oral nicotine products, which are sold in markets outside the United States.

Since 2008, we have invested more than $9 billion to develop, scientifically substantiate and commercialize innovative smoke-free products for adults who would otherwise continue to smoke, with the goal of completely ending the sale of cigarettes.

This includes the building of world-class scientific assessment capabilities, notably in the areas of pre-clinical systems toxicology, clinical and behavioral research, as well as post-market studies.

Food and Drug Administration ("FDA") has authorized the marketing of versions of our IQOS Platform 1 devices and consumables as Modified Risk Tobacco Products (MRTPs), finding that exposure modification orders for these products are appropriate to promote the public health.

We describe the MRTP orders in more detail in the "Business Environment" section of this Item 2.

With a strong foundation and significant expertise in life sciences, in February 2021, we announced our ambition to expand into wellness and healthcare areas and deliver innovative products and solutions that aim to address unmet consumer and patient needs.

We currently manage our business in six geographical segments and an Other category:

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• Americas ("AMCS");

• Other, which includes our third quarter 2021 acquisitions of Fertin Pharma A/S, Vectura Group plc.

and OtiTopic, Inc.

• Other, which includes the operating results of our new Wellness and Healthcare business.

In the third quarter of 2021, we acquired Fertin Pharma A/S, Vectura Group plc.

(also known as Vectura Group Ltd.) and OtiTopic, Inc.

On March 31, 2022, we launched a new Wellness and Healthcare business consolidating these entities, Vectura Fertin Pharma.

The operating results of this new business is reported in this Other category.

For further details, see Note 7.

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Acquisitions .

Our cigarettes are sold in more than 175 markets, and in many of these markets they hold the number one or number two market share position.

Our cigarettes are sold in approximately 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.

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IQOS is the leading brand in our smoke-free product portfolio.

As of September 30, 2021, our smoke-free products are available for sale in 70 markets in key cities or nationwide.

As of March 31, 2022, our smoke-free products were available for sale in 71 markets in key cities or nationwide.

During 2021, we laid the foundation for our long-term growth ambitions beyond nicotine in wellness and healthcare, including the milestone acquisitions of Vectura Group plc and Fertin Pharma A/S, as noted above, which provide essential capabilities for future product development.

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

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

Consolidated Operating Results for the Nine Months Ended September 30, 2021

• Net Revenues - Net revenues of $23.3 billion for the nine months ended September 30, 2021 increased by $2.1 billion, or 9.7%, from the comparable 2020 amount.

The change in our net revenues from the comparable 2020 amount was driven by the following (variances not to scale with year-to-date results):

For the nine months ended September 30, 2021, net revenues, excluding favorable currency, increased by 6.1%, mainly reflecting:

favorable volume/mix, primarily driven by higher heated tobacco unit volume (notably in the EU, particularly Germany, Hungary, Italy and Poland, as well as Japan and Russia), partly offset by lower cigarette volume (mainly in the EU Region, notably the Czech Republic, France and Germany, as well as Japan, Kuwait, North Africa, the Philippines, Russia and Ukraine, partially offset by Indonesia, PMI Duty Free, and Turkey);

and a favorable pricing variance (notably driven by the Czech Republic, Germany, Japan, Kazakhstan, North Africa, the Philippines, Russia and Turkey, partly offset by Indonesia, Poland and Ukraine);

partially offset by the unfavorable impact of the Saudi Arabia customs assessments of $246 million, included in "Other" and further described in the following " Diluted Earnings Per Share " discussion.

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

Net revenues by product category for the nine months ended September 30, 2021 and 2020 are shown below:

• Diluted Earnings Per Share - The changes in our reported diluted earnings per share (“diluted EPS”) for the nine months ended September 30, 2021, from the comparable 2020 amounts, were as follows:

Diluted EPS % Growth

For the nine months ended September 30, 2020 $ 3.90

2020 Asset impairment and exit costs 0.04

2020 Fair value adjustment for equity security investments 0.04

2020 Tax items (0.06)

Subtotal of 2020 items 0.02

2021 Asset impairment and exit costs (0.09)

2021 Saudi Arabia customs assessments (0.14)

2021 Asset acquisition cost (0.03)

2021 Equity investee ownership dilution 0.02

2021 Tax items —

Subtotal of 2021 items (0.24)

Currency 0.18

Interest (0.01)

Change in tax rate 0.07

Operations 0.56

For the nine months ended September 30, 2021 $ 4.48 14.9 %

Asset impairment and exit costs – During the nine months ended September 30, 2021, we recorded pre-tax asset impairment and exit costs of $170 million, representing $143 million net of income tax and a diluted EPS charge of $0.09 per share, related to the organizational design optimization plan, primarily in Switzerland, and the product distribution restructuring in South Korea.

During the nine months ended September 30, 2020, we recorded pre-tax asset impairment and exit costs of $71 million, representing $57 million net of income tax and a diluted EPS charge of $0.04, related to the organizational design optimization plan, primarily in Switzerland.

The total pre-tax charges were included in marketing, administration and research costs on the condensed consolidated statements of earnings.

For further details, see Note 16.

Asset Impairment and Exit Costs .

Fair Value adjustment for equity security investments – During the nine months ended September 30, 2020, we recorded an unfavorable fair value adjustment for our equity security investments of $62 million after tax (or $0.04 per share decrease in diluted EPS).

The fair value adjustment for our equity security investments was included in equity investments and securities

(income)/loss, net ($78 million loss) and provision for income taxes ($16 million benefit) on the condensed consolidated statements of earnings.

Income taxes – The 2020 Tax items that increased our 2020 diluted EPS by $0.06 per share in the table above were due to final U.S.

tax regulations under the Global Intangible Low-Taxed Income ("GILTI") provisions of the Internal Revenue Code for years 2018 and 2019 ($93 million).

The change in the tax rate that increased our diluted EPS by $0.07 per share in the table above was primarily due to the corporate income tax rate reduction in the Philippines (enacted in the first quarter of 2021), as well as changes in earnings mix by taxing jurisdiction.

Saudi Arabia customs assessment s – In June 2021, the Customs Appeal Committee in Riyadh notified our distributors in Saudi Arabia of its decisions to largely reject their challenges of the Saudi Arabia Customs General Authority assessments as described in Note 8.

Contingencies .

On the basis of these decisions and in line with arrangements with the distributors, we recorded a pre-tax charge of $246 million in the second quarter of 2021 (representing $215 million net of income tax and a diluted EPS charge of $0.14 per share) .

The pre-tax charge was recorded as a reduction of net revenues on the condensed consolidated statement of earnings for the nine months ended September 30, 2021 and was included in the Middle East & Africa segment results.

Asset acquisition cost – In August 2021, we acquired 100% of OtiTopic, Inc., a U.S.

respiratory drug development company with a late-stage dry powder inhalation aspirin treatment for acute myocardial infarction.

We accounted for this transaction as an asset acquisition since the acquired in-process research and development ("IPR&D") of the dry powder inhalation aspirin treatment represented substantially all of the fair value of the gross assets acquired.

At the date of acquisition, we determined that the acquired IPR&D had no alternative future use.

As a result, we recorded a pre-tax charge of $51 million (representing a $0.03 charge to diluted EPS) to research and development costs within marketing, administration and research costs in the condensed consolidated statements of earnings for the nine months ended September 30, 2021.

For further details, see Note 17.

Acquisitions .

Equity investee ownership dilution – In July 2021, our equity method investee, Medicago Inc, initiated an additional round of equity funding in which we did not participate.

As a result, our share of holdings in Medicago Inc.

was reduced to approximately 25% as of September 30, 2021.

The ownership dilution resulted in a $0.02 favorable impact to diluted EPS and income of $38 million to Equity investments and securities (income)/loss, net in the condensed consolidated statements of earnings for the nine months ended September 30, 2021.

War in Ukraine

Since the onset of the war in Ukraine, our main priority has been the safety and security of our more than 1,300 employees and their families in the country.

We have taken action to achieve three critical missions:

(i) helping to evacuate more than 1,000 people from Ukraine and relocate over 2,700 others from conflict zones to locations in the country away from the heaviest fighting;

(ii) providing critical aid to employees who cannot leave or who decide to remain in Ukraine;

and (iii) providing those who have left the country with logistical, medical, financial, and other practical support in neighboring countries.

We are continuing to pay salaries to all our Ukrainian employees and are also providing substantial in-kind support to them and their families.

In addition, we have already contributed around $10 million in funds and donated essential items across the country, directly to humanitarian organizations and through our own employee-led initiative, Projects With a Heart.

On February 25, 2022, we announced the temporary suspension of our operations in Ukraine, including at our factory in Kharkiv.

While activities in the east of Ukraine remain the most heavily impacted, we have seen some resumption of retail activities where safety allows, as we seek to provide product availability and service to adult consumers, using existing finished goods inventories on hand.

We are also working on future supply from other production centers, although this may involve higher costs.

We are applying increased security and safety measures for personnel.

In 2021, Ukraine accounted for around 2% of our total cigarette and heated tobacco unit shipment volume and under 2% of our total net revenues.

As of March 31, 2022, our Ukrainian operations had approximately $0.4 billion in total assets, excluding intercompany balances.

On March 24, 2022, we announced concrete steps we had taken to suspend planned investments and scale down our manufacturing operations in Russia.

This included:

• the discontinuation of a number of cigarette products offered in the market (representing approximately one-quarter of the company's domestic cigarette SKUs, including Marlboro and Parliament SKUs) and the reduction of our manufacturing activities accordingly;

• the suspension of our marketing activities in the country;

• the cancellation of all product launches planned for 2022 in the market, including the launch of its flagship heated tobacco product IQOS ILUMA , originally planned for March 2022;

• the cancellation of our plans to manufacture TEREA heated tobacco units for IQOS ILUMA in Russia (with an eventual annualized capacity of more than 20 billion units) and the related ongoing investment of $150 million.

Further, we announced that our Board of Directors and senior executives are working on options to exit the Russian market in an orderly manner, in the context of an increasingly complex and rapidly changing regulatory and operating environment.

We employ more than 3,200 people in Russia and will continue to support our employees there, including paying their salaries, while continuing to fulfill our legal obligations.

We will continue to make decisions with their safety and security as a priority.

In 2021, Russia made up almost 10% of total shipment volumes and around 6% of our total net revenues.

As of March 31, 2022, our Russian operations had approximately $1.4 billion in total assets, excluding intercompany balances.

These developments above have and will continue to have a material adverse impact on our business, results of operations, cash flows and financial position, and may result in impairment charges.

For further details, see Note 18.

Contingencies .

Currency – The favorable impact of $0.18 per share during the reporting period primarily results from the fluctuations of the U.S.

dollar, especially against the Euro.

This favorable currency movement has impacted our profitability across our primary revenue markets and local currency cost bases.

Operations – The increase in diluted EPS of $0.56 from our operations in the table above was due primarily to the following segments:

• European Union:

Favorable volume/mix, lower manufacturing costs and favorable pricing, partially offset by higher marketing, administration and research costs;

• East Asia & Australia:

Favorable pricing, lower manufacturing costs and favorable volume/mix, partially offset by higher marketing, administration and research costs;

• Eastern Europe:

Favorable volume/mix, lower manufacturing costs, and favorable pricing;

• Middle East & Africa:

Favorable pricing, favorable volume/mix and lower manufacturing costs, partially offset by lower fees for certain distribution rights and higher marketing, administration and research costs;

Favorable pricing and lower marketing, administration and research costs, partially offset by higher manufacturing costs;

partially offset by

• South & Southeast Asia:

Unfavorable volume/mix and higher marketing, administration and research costs.

Consolidated Operating Results for the Three Months Ended September 30, 2021

• Net Revenues - Net revenues of $8.1 billion for the three months ended September 30, 2021 increased by $0.7 billion, or 9.1%, from the comparable 2020 amount.

War in Ukraine to our condensed consolidated financial statements and the " Cautionary Factors That May Affect Future Results" section of this MD&A.

Consolidated Operating Results for the Three Months Ended March 31, 2022

• Net Revenues - Net revenues of $7.7 billion for the three months ended March 31, 2022 increased by $161 million, or 2.1%, from the comparable 2021 amount.

The change in our net revenues from the comparable 2021 amount was driven by the following (variances not to scale with quarterly results):

During the quarter, net revenues, excluding favorable currency, increased by 7.6%, mainly reflecting:

favorable volume/mix, primarily driven by higher heated tobacco unit volume (notably in the EU, particularly Germany, Italy and Poland, as well as Japan, PMI Duty Free and Russia) and higher device volume (primarily in Japan, driven by the launch of IQOS ILUMA ), partly offset by lower cigarette volume (mainly in Australia, France, Germany, Italy and the Philippines, partly offset by Indonesia, Japan, PMI Duty Free and Turkey) and unfavorable cigarette mix (mainly in Germany, Japan and Russia);

and a favorable pricing variance (notably driven by Japan, the Philippines, Russia and Turkey, partly offset by Indonesia, Poland and Ukraine).

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

Net revenues by product category for the three months ended September 30, 2021 and 2020, are shown below:

• Diluted Earnings Per Share - The changes in our reported diluted EPS for the three months ended September 30, 2021, from the comparable 2020 amounts, were as follows:

Diluted EPS % Growth

For the three months ended September 30, 2020 $ 1.48

During the quarter, net revenues, excluding currency and acquisitions, increased by 9.0%, mainly reflecting:

favorable volume/mix, primarily driven by higher heated tobacco unit volume (predominantly in the EU, particularly Germany, Italy and Poland), higher cigarette volume (mainly in Indonesia, PMI Duty Free and the Philippines, partly offset by Germany and Russia) and higher device volume (driven by the EU and Japan), partially offset by unfavorable cigarette mix (mainly in Japan);

and a favorable pricing variance (notably driven by Germany, Russia and Turkey, partly offset by Indonesia and the Philippines).

During the quarter, Russia and Ukraine accounted for around 6% of PMI's total net revenues.

Net revenues by product category for the three months ended March 31, 2022 and 2021, are shown below:

• Diluted Earnings Per Share - The changes in our reported diluted earnings per share ("diluted EPS") for the three months ended March 31, 2022, from the comparable 2021 amounts, were as follows:

Diluted EPS % Change

For the three months ended March 31, 2021 $ 1.55

2021 Asset impairment and exit costs 0.02

2020 Fair value adjustment for equity security investments —

2021 Tax items —

Subtotal of 2021 items 0.02

2021 Asset impairment and exit costs (0.02)

2021 Asset acquisition cost (0.03)

2021 Equity investee ownership dilution 0.02

2022 Charges related to the war in Ukraine

2022 Fair value adjustment for equity security investments (0.03)

2022 Tax items —

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Operations 0.18

For the three months ended September 30, 2021 $ 1.55 4.7 %

Income Taxes – The 2020 Tax items that increased our 2020 diluted EPS by $0.06 per share in the table above were due to final U.S.

tax regulations under the GILTI provisions of the Internal Revenue Code for years 2018 and 2019 ($93 million).

The change in the tax rate that increased our diluted EPS by $0.04 per share in the table above was primarily due to the corporate income tax rate reduction in the Philippines (enacted in the first quarter of 2021), as well as changes in earnings mix by taxing jurisdiction.

Asset impairment and exit costs – In the third quarter of 2021, we recorded pre-tax asset impairment and exit costs of $43 million, representing $38 million net of income tax and a diluted EPS charge of $0.02 per share, related to the organizational design optimization plan, primarily in Switzerland, and the product distribution restructuring in South Korea.

For the three months ended March 31, 2022 $ 1.50 (3.2) %

Asset impairment and exit costs – In the first quarter of 2021, we recorded pre-tax asset impairment and exit costs of $48 million, representing $38 million net of income tax and a diluted EPS charge of $0.02 per share, related to product distribution restructuring in South Korea and the organizational design optimization plan, primarily in Switzerland.

The total pre-tax charge was included in marketing, administration and research costs on the condensed consolidated statements of earnings.

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Asset Impairment and Exit Costs .

Asset acquisition cost – In August 2021, we acquired 100% of OtiTopic, Inc., a U.S.

respiratory drug development company with a late-stage dry powder inhalation aspirin treatment for acute myocardial infarction.

At the date of acquisition, we determined that the acquired IPR&D had no alternative future use.

Charges related to the war in Ukraine – In the first quarter of 2022, we recorded a pre-tax charge of $42 million, representing $39 million net of income tax and a diluted EPS charge of $0.03 per share, related to circumstances driven by the conflict, including inventory write downs, additional allowances for receivables and the cost of PMI’s humanitarian efforts.

Of this total pre-tax charge, $26 million was recorded in cost of sales and $16 million was recorded in marketing, administration and research costs.

For further details, see Note 18.

Acquisitions .

Equity investee ownership dilution – In July 2021, our equity method investee, Medicago Inc, initiated an additional round of equity funding in which we did not participate.

As a result, our share of holdings in Medicago Inc.

was reduced to approximately 25% as of September 30, 2021.

War in Ukraine .

Fair value adjustment for equity security investments – In the first quarter of 2022, we recorded an unfavorable fair value adjustment for our equity security investments in India and Sri Lanka of $47 million after tax (or $0.03 per share decrease in diluted EPS).

The fair value adjustment for our equity security investments was included in equity investments and securities (income)/loss, net ($60 million loss) and provision for income taxes ($13 million benefit) on the condensed consolidated statements of earnings for the three months ended March 31, 2022.

For further details, see Note 12.

Contingencies .

Currency – The favorable impact of $0.04 per share during the reporting period primarily results from the fluctuations of the U.S.

dollar, especially against the Euro.

This favorable currency movement has impacted our profitability across our primary revenue markets and local currency cost bases.

Related Parties - Equity Investments and Other .

Income Taxes – The change in the tax rate that increased our diluted EPS by $0.03 per share in the table above was primarily due to changes in earnings mix by taxing jurisdiction.

Currency – The unfavorable impact of $0.23 per share during the reporting period primarily results from the fluctuations of the U.S.

dollar, especially against the Euro, Japanese yen and Turkish lira.

This unfavorable currency movement has impacted our profitability across our primary revenue markets and local currency cost bases.

Operations – The increase in diluted EPS of $0.18 from our operations in the table above was due primarily to the following segments:

• Middle East & Africa:

Favorable volume/mix, favorable pricing and lower manufacturing costs, partially offset by lower fees for certain distribution rights and higher marketing, administration and research costs;

• Eastern Europe:

Favorable volume/mix, favorable pricing and lower manufacturing costs;

• East Asia & Australia:

Favorable pricing, favorable volume/mix and lower manufacturing costs, partially offset by higher marketing, administration and research costs;

Favorable pricing, favorable volume/mix and lower marketing, administration and research costs, partially offset by higher manufacturing costs;

• European Union:

Favorable volume/mix and lower manufacturing costs, partially offset by higher marketing, administration and research costs;

Favorable pricing, partially offset by higher manufacturing costs and higher marketing, administration and research costs;

Favorable volume/mix, partially offset by higher manufacturing costs;

partially offset by

• East Asia & Australia:

Unfavorable volume/mix and higher manufacturing costs, partially offset by lower marketing, administration and research costs and favorable pricing;

• South & Southeast Asia:

Unfavorable volume/mix and higher manufacturing costs, partially offset by favorable pricing.

Unfavorable pricing, partially offset by favorable volume/mix;

• Eastern Europe:

Unfavorable volume/mix and higher marketing, administration and research costs, partially offset by favorable pricing;

Higher manufacturing costs and unfavorable volume/mix, partially offset by favorable pricing;

Primarily reflecting the amortization of intangibles related to the acquisitions, investments in research and development, and expenses related to employee retention programs.

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

IQOS Device Supply

The current global semiconductor shortage is resulting in a tightness in IQOS device supply.

This is affecting the availability and assortment of IQOS devices in certain markets, which is hampering the company’s ability to operate at full commercial and competitive capacity to fully meet demand.

This has been reflected in lower IQOS user growth rates in the third quarter of 2021.

At this stage, supply forecasting remains volatile.

PMI therefore assumes that the tight supply situation will persist into the first half of 2022 and, where necessary, the company will prioritize device replacements for existing IQOS users over device sales targeting user acquisition.

PMI is also adjusting its launch timeline for IQOS ILUMA outside Japan, with additional major launches now assumed for the second half of 2022.

PMI views this as a temporary phenomenon and expects IQOS user growth to re-accelerate once shortages ease, as consumer demand remains.

During the third quarter of 2021, PMI acquired the following companies:

• Fertin Pharma A/S, a Danish company that is a leading developer and manufacturer of innovative pharmaceutical and well-being products based on oral and intra-oral delivery systems;

• Vectura Group plc, an inhaled therapeutics company based in the United Kingdom;

• OtiTopic, Inc., a U.S.

respiratory drug development company with a late-stage dry powder inhalation aspirin treatment for acute myocardial infarction.

For further details on these acquisitions, see Note 17.

Acquisitions .

Discussion and Analysis

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See pages 82 - 92 for a discussion of our " Cautionary Factors That May Affect Future Results ." Our net revenues and operating income by segment are shown in the table below:

(in millions) For the Nine Months Ended September 30, For the Three Months Ended September 30,

2021 2020 2021 2020

(in millions) For the Three Months Ended March 31,

2022 2021 Change

Net revenues:

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Americas 424 434 (2.3) %

Other 66 — — %

Net revenues $ 7,746 $ 7,585 2.1 %

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Americas 121 134 (9.7) %

10,079 8,763 3,506 3,243

Other (31) — — %

Operating income $ 3,298 $ 3,444 (4.2) %

Items affecting the comparability of results from operations were as follows:

• Asset impairment and exit costs – See Note 16.

Asset Impairment and Exit Costs for details of the $48 million pre-tax charge and a breakdown of these costs by segment for the three months ended March 31, 2021.

• Charges related to the war in Ukraine – See Note 18.

War in Ukraine for details of the $42 million pre-tax charges in the Eastern Europe segment for the three months ended March 31, 2022.

Our net revenues by product category are shown in the table below:

PMI Net Revenues by Product Category

(in millions) For the Nine Months Ended September 30, For the Three Months Ended September 30,

2021 2020 Change 2021 2020 Change

(in millions) For the Three Months Ended March 31,

2022 2021 Change

Combustible Products

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Total Reduced-Risk Products $ 2,350 $ 2,122 10.7 %

Other 66 — — %

Total PMI Net Revenues $ 7,746 $ 7,585 2.1 %

Sum of product categories or Regions might not foot to total PMI due to roundings.

Items affecting the comparability of results from operations were as follows:

• Asset impairment and exit costs – See Note 16.

Asset Impairment and Exit Costs for a breakdown of these costs by segment for the nine months and three months ended September 30, 2021 and 2020.

• Saudi Arabia customs assessments – See Note 8.

Contingencies for the details of the $246 million reduction in net revenues of combustible products included in the Middle East & Africa segment for the nine months ended September 30, 2021.

• Asset acquisition cost - See Note 17.

Acquisitions for the details of the $51 million pre-tax charge associated with the asset acquisition of OtiTopic, Inc.

included in Other within the operating income table above for the nine months and three months ended September 30, 2021.

Net revenues related to combustible products refer to the operating revenues generated from the sale of these products, including shipping and handling charges billed to customers, net of sales and promotion incentives, and excise taxes.

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These net revenue amounts consist of the sale of our heated tobacco units, heat-not-burn devices and related accessories, and other nicotine-containing products, which primarily include our e-vapor and oral nicotine products.

Net revenues in the Other category primarily consist of operating revenues generated from the sale of inhaled therapeutics, and oral and intra-oral delivery systems that are included in the operating results of our new Wellness and Healthcare business, Vectura Fertin Pharma.

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

Revenues from shipments of Platform 1 devices, heated tobacco units and accessories to Altria Group, Inc., commencing in the third quarter of 2019, for sale under license in the United States, are included in Net Revenues of the Americas segment.

References to "Cost/Other" in the Consolidated Financial Summary table of total PMI and the six geographical segments throughout this "Discussion and Analysis" reflects the currency-neutral variances of:

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“Cost/Other” also includes the currency-neutral net revenue variance, unrelated to volume/mix and price components, attributable to:

fees for certain distribution rights billed to customers in certain markets in the ME&A Region and the Saudi Arabia customs assessment net revenue adjustment.

fees for certain distribution rights billed to customers in certain markets in the ME&A Region.

Our shipment volume by segment for cigarettes and heated tobacco units is shown in the table below:

PMI Shipment Volume (Million Units)

For the Nine Months Ended September 30, For the Three Months Ended September 30,

2021 2020 Change 2021 2020 Change

For the Three Months Ended March 31,

2022 2021 Change

European Union 36,444 36,769 (0.9) %

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

Shipment volume of heated tobacco units to the United States is included in the heated tobacco unit shipment volume of the Americas segment.

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

As of the first quarter of 2022, total industry volume, PMI in-market sales volume and PMI market share for the following geographies include the cigarillo category in Japan:

the total international market, East Asia & Australia Region, and Japanese domestic market.

References to total international market, defined as worldwide cigarette and heated tobacco unit volume excluding the United States, total industry, total market and market shares throughout this "Discussion and Analysis" are our estimates for tax-paid products based on the latest available data from a number of internal and external sources and may, in defined instances, exclude the People's Republic of China and/or our duty free business.

2021 and 2022 estimates for total industry volume and market share in certain geographies reflect limitations on the availability and accuracy of industry data during pandemic-related restrictions.

First-quarter 2022 estimates for total industry volume and market share in the Philippines reflect limitations on the availability and accuracy of industry data.

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

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

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

From time to time, PMI’s shipment volumes are subject to the impact of distributor inventory movements, and estimated total industry/market volumes are subject to the impact of inventory movements in various trade channels that include estimated trade inventory movements of PMI’s competitors arising from market-specific factors that significantly distort reported volume disclosures.

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Key market data regarding total market size, our shipments and market share are shown in the tables below:

For the Nine Months Ended September 30,

For the Three Months Ended March 31,

PMI Shipments (billion units) PMI Market Share (%) (2)

Market Total Market

(billion units) Total Cigarette Heated Tobacco Unit Total Heated Tobacco Unit

Market Total Market (billion units) Total Cigarette Heated Tobacco Unit Total Heated Tobacco Unit

2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021

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Eastern Europe

Russia 163.7 163.4 52.0 51.6 40.4 42.3 11.7 9.3 31.5 32.3 7.2 6.1

Russia n/a 49.1 14.1 15.7 10.8 12.1 3.4 3.6 n/a 31.0 n/a 7.7

Middle East & Africa

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Australia 2.2 2.4 0.8 0.8 0.8 0.8 — — 33.9 32.7 — —

Japan 107.3 111.4 41.6 38.8 16.8 17.7 24.7 21.1 38.6 36.7 23.0 20.0

South Korea 54.1 54.8 10.7 11.3 7.2 7.8 3.5 3.5 19.7 20.7 6.4 6.4

Argentina 26.1 24.3 14.6 14.9 14.6 14.9 — — 55.8 61.5 — —

Mexico 22.6 21.9 14.1 13.6 14.1 13.6 0.1 — 62.5 62.0 0.3 0.2

(1) Market share estimates are calculated using IMS data

% change for Total Market and PMI shipments is computed based on millions of units.

"-" indicates volume below 50 million units and market share below 0.1%

For the Three Months Ended September 30,

PMI Shipments (billion units) PMI Market Share (%) (1)

Market Total Market

(billion units) Total Cigarette Heated Tobacco Unit Total Heated Tobacco Unit

34.4 35.6 14.2 13.8 6.1 5.9 8.1 7.9 37.2 36.1 22.9 21.5

Total 679.6 674.3 188.3 184.4 164.8 165.5 23.5 19.0 28.0 28.0 3.6 3.0

European Union

France 9.0 9.8 3.7 4.2 3.6 4.1 0.1 — 44.0 45.3 0.6 0.5

Germany 20.5 20.4 7.3 7.4 6.8 7.0 0.6 0.4 35.8 36.4 2.8 1.9

Italy 19.2 18.8 9.4 9.7 7.3 8.2 2.1 1.5 52.9 52.1 10.8 7.8

Poland 14.0 13.5 5.3 5.1 4.5 4.5 0.8 0.6 38.0 37.8 6.0 4.7

Spain 12.1 11.7 3.4 3.7 3.2 3.6 0.1 0.1 32.1 32.2 1.1 0.9

Eastern Europe

Russia 59.3 59.8 18.8 18.6 15.0 15.5 3.8 3.1 32.0 31.8 6.9 5.8

Middle East & Africa

Saudi Arabia 5.4 5.5 2.3 2.4 2.3 2.4 — — 40.8 36.9 1.1 0.4

Turkey 36.1 32.1 16.0 13.5 16.0 13.5 — — 44.2 42.0 — —

South & Southeast Asia

Indonesia 74.3 70.1 20.8 19.8 20.8 19.8 — — 28.0 28.2 — —

Philippines 14.4 17.5 8.9 11.7 8.9 11.7 — — 61.9 66.8 0.3 —

East Asia & Australia

Australia 2.3 3.2 0.8 1.0 0.8 1.0 — — 33.7 29.8 — —

Japan 39.7 40.8 13.6 11.9 5.4 4.6 8.2 7.3 38.3 36.9 22.9 20.4

South Korea 16.8 16.8 3.3 3.4 2.2 2.2 1.1 1.1 19.6 20.1 6.5 6.8

1 unchanged sentence

Mexico 6.5 6.8 4.1 4.0 4.0 4.0 — — 62.5 59.6 0.4 0.3

(1) Total market and market share estimates exclude Russia & Ukraine

(2) Market share estimates are calculated using IMS data

% change for Total Market and PMI shipments is computed based on millions of units.

"-" indicates volume below 50 million units and market share below 0.1%

Consolidated Operating Results for the Nine Months Ended September 30, 2021

The following discussion compares our consolidated operating results for the nine months ended September 30, 2021, with the nine months ended September 30, 2020.

Our total shipment volume increased by 1.5%, driven by:

• the EU, reflecting higher heated tobacco unit shipment volume across the Region, particularly in Germany, Hungary, Italy and Poland, partly offset by lower cigarette shipment volume, notably in the Czech Republic, France, Germany and Hungary;

• Eastern Europe, reflecting higher heated tobacco unit shipment volume, primarily in Russia and Ukraine, partly offset by lower cigarette shipment volume, mainly in Russia and Ukraine;

• Middle East & Africa, reflecting higher cigarette shipment volume (primarily in PMI Duty Free and Turkey, partly offset by North Africa), as well as higher heated tobacco unit shipment volume across the Region;

• East Asia & Australia, reflecting higher heated tobacco unit shipment volume driven by Japan, partly offset by lower cigarette shipment volume, predominantly in Japan and South Korea;

• Americas, mainly reflecting higher cigarette shipment volume, primarily in Brazil and Mexico, partially offset by Argentina;

(3) Total market and market share estimates include cigarillos

Consolidated Operating Results for the Three Months Ended March 31, 2022

The following discussion compares our consolidated operating results for the three months ended March 31, 2022, with the three months ended March 31, 2021.

During the first quarter, our total shipment volume increased by 3.5%, driven by:

• the EU, reflecting higher heated tobacco unit shipment volume across the Region (primarily in Germany, Italy and Poland), partly offset by lower cigarette shipment volume (mainly in Germany and Italy, partially offset by Poland and Spain);

• Middle East & Africa, mainly reflecting higher cigarette shipment volume, primarily in Egypt and PMI Duty Free, partly offset by Algeria;

• South & Southeast Asia, primarily reflecting higher cigarette shipment volume, mainly in Indonesia and the Philippines;

• East Asia & Australia, reflecting higher cigarette and heated tobacco unit shipment volume, primarily in Japan;

partly offset by

• South & Southeast Asia, primarily reflecting lower cigarette shipment volume, mainly in the Philippines, partially offset by Indonesia and Pakistan.

Impact of Inventory Movements

Excluding the net favorable impact of estimated distributor inventory movements of approximately 5.0 billion units, our total in-market sales increased by 0.5%, driven by a 23.3% increase in heated tobacco units, partly offset by a 2.1% decrease in cigarettes.

• Eastern Europe, reflecting lower cigarette shipment volume, primarily in Russia, partly offset by higher heated tobacco unit shipment volume, mainly in Ukraine and Southeast Europe, partially offset by Russia;

• Americas, primarily reflecting lower cigarette shipment volume, mainly in Argentina, partly offset by Brazil.

Excluding Russia and Ukraine, our total shipment volume increased by 4.9%, reflecting an increase of 4.5% in the Eastern Europe Region.

First-Quarter Impact of Inventory Movements

Excluding the net favorable impact of estimated distributor inventory movements of approximately 1.7 billion units, our total in-market sales increased by 2.5%, driven by a 16.7% increase in heated tobacco units and a 0.4% increase in cigarettes.

The net favorable impact of approximately 1.7 billion units reflected:

• A net favorable impact of 2.8 billion cigarettes, mainly driven by 2020 movements in Japan, PMI Duty Free and Russia;

• A net favorable impact of 2.2 billion heated tobacco units, primarily driven by 2020 movements in Japan.

Our total heated tobacco unit in-market sales volume in the nine months year-to-date was 68.8 billion units.

Our cigarette shipment volume by brand and heated tobacco units shipment volume are shown in the table below:

PMI Shipment Volume by Brand (Million Units)

Nine Months Year-to-Date

2021 2020 Change

Marlboro 177,287 175,638 0.9 %

L&M 64,028 69,215 (7.5) %

Chesterfield 43,021 39,274 9.5 %

Philip Morris 31,881 34,823 (8.4) %

Parliament 30,535 25,575 19.4 %

Sampoerna A 27,601 23,801 16.0 %

Dji Sam Soe 16,644 18,344 (9.3) %

Bond Street 12,200 18,481 (34.0) %

Lark 11,851 12,059 (1.7) %

Next 6,556 6,703 (2.2) %

Others 44,889 49,928 (10.1) %

Total Cigarettes 466,493 473,841 (1.6) %

Heated Tobacco Units 69,579 54,402 27.9 %

Total Cigarettes and Heated Tobacco Units 536,072 528,243 1.5 %

Lark includes Lark Harmony ;

Next includes Next Dubliss ;

Philip Morris includes Philip Morris/Dubliss ;

and Sampoerna A includes Sampoerna .

The increase in our heated tobacco unit shipment volume was mainly driven by the EU (notably Italy), Eastern Europe (notably Russia and Ukraine) and Japan.

Our cigarette shipment volume of the following brands increased:

• Marlboro, mainly driven by Mexico, PMI Duty Free, Russia and Turkey, partly offset by France, the GCC, Japan and the Philippines;

• Chesterfield , primarily driven by Brazil, the Philippines and Russia, partly offset by Saudi Arabia;

• Parliament , mainly driven by Russia, Saudi Arabia and Turkey, partly offset by Japan and South Korea;

• Sampoerna A in Indonesia, primarily driven by premium A Mild .

Our cigarette shipment volume of the following brands decreased:

• L&M , mainly due to Egypt, Germany, Poland, Russia and Turkey;

• Philip Morris , primarily due to Indonesia, Italy and Russia, partly offset by Japan;

• Dji Sam Soe in Indonesia, mainly due to Dji Sam Soe Magnum Mild ;

• Bond Street , primarily due to Kazakhstan, Russia and Ukraine;

• Lark , mainly due to Japan;

• Next , primarily due to Canada and Ukraine, partly offset by Russia;

• "Others," notably due to:

mid-price Fortune (Philippines) and Sampoerna U (Indonesia);

and low-price Jackpot (Philippines) and More (Philippines);

partly offset by mid-price Sampoerna Hijau (Indonesia) and low-price Morven (Pakistan).

International Share of Market (excluding China and the United States)

Our total international market share (excluding China and the United States), defined as our cigarette and heated tobacco unit sales volume as a percentage of total industry cigarette and heated tobacco unit sales volume, decreased by 0.6 points to 27.3%, reflecting:

• Total international market share for cigarettes of 23.8%, down by 1.1 points;

• Total international market share for heated tobacco units of 3.5%, up by 0.6 points.

Our total international cigarette sales volume as a percentage of total industry cigarette sales volume was down by 0.9 points to 24.9%, mainly reflecting lower cigarette market share and/or an unfavorable geographic mix impact, notably in Japan, the Philippines, Russia and Ukraine, partly offset by Indonesia and Turkey.

Financial Summary

Financial Summary -

Nine Months Ended September 30, Change

Fav./(Unfav.) Variance

Fav./(Unfav.)

2021 2020 Total Excl.

rency Acqui-sitions Price Vol/

(in millions)

Net Revenues (1)

$ 23,301 $ 21,250 9.7 % 6.1 % $ 2,051 $ 752 $ 2 $ 590 $ 983 $ (276)

Cost of Sales (7,223) (6,997) (3.2) % 0.5 % (226) (260) (1) — (329) 364

Marketing, Administration and Research Costs (2)

(5,995) (5,435) (10.3) % (8.2) % (560) (112) (1) — — (447)

Amortization of Intangibles (55) (55) — % 1.8 % — (1) — — — 1

Operating Income $ 10,028 $ 8,763 14.4 % 10.1 % $ 1,265 $ 379 $ — $ 590 $ 654 $ (358)

(1) Cost/Other variance includes a $246 million reduction in net revenues in 2021 related to the Saudi Arabia customs assessments.

For more details, see Note 8.

Contingencies .

(2) Cost/Other variance includes charges in 2021 and 2020 of $170 million and $71 million, respectively, for asset impairment and exit costs.

Cost/Other variance in 2021 also includes the pre-tax charge of $51 million associated with the asset acquisition cost of OtiTopic, Inc.

For more details, see Note 16.

Asset Impairment and Exit Costs and Note 17.

Acquisitions .

For the nine months ended September 30, 2021, net revenues, excluding favorable currency, increased by 6.1%, mainly reflecting:

and a favorable pricing variance (notably driven by the

Czech Republic, Germany, Japan, Kazakhstan, North Africa, the Philippines, Russia and Turkey, partly offset by Indonesia, Poland and Ukraine);

partially offset by the unfavorable impact of the Saudi Arabia customs assessments of $246 million, shown in "Cost/Other".

Excluding the unfavorable impact of the Saudi Arabia customs assessments of $246 million, net revenues increased by 10.8%, or 7.3% excluding favorable currency of $752 million.

The favorable currency in net revenues was due primarily to the Euro, Indonesian rupiah, Japanese yen, Mexican peso and Philippine peso, partially offset by the Russian ruble and Turkish lira.

Net revenues include $6.7 billion in 2021 and $4.9 billion in 2020 related to the sale of RRPs.

For the nine months ended September 30, 2021, IQOS devices accounted for over 6% of RRP net revenues, with a step-up in the third quarter reflecting the IQOS ILUMA launch.

Operating income, excluding favorable currency, increased by 10.1%, primarily reflecting:

favorable volume/mix, mainly driven by the same factors as for net revenues noted above;

a favorable pricing variance;

and lower manufacturing costs (driven by productivity gains related to reduced-risk and combustible products);

partly offset by the unfavorable impact of the Saudi Arabia customs assessments (as noted above for net revenues);

and higher marketing, administration and research costs, including higher asset impairment and exit costs (mainly related to organizational design optimization, as well as product distribution restructuring in South Korea) and asset acquisition costs related to OtiTopic, Inc.

Interest expense, net, of $482 million increased by $28 million (6.2%).

Our effective tax rate increased by 0.6 percentage points to 22.0%.

We estimate that our full-year 2021 effective tax rate will be around 22%, excluding discrete tax events.

For further details, see Note 9.

Income Taxes .

Net earnings attributable to PMI of $7.0 billion increased by $936 million or 15.4%.

This increase was due primarily to higher operating income as discussed above, partially offset by a higher effective income tax rate.

Basic EPS of $4.49 increased by 15.1%.

Diluted EPS of $4.48 increased by 14.9%.

Excluding a favorable currency impact of $0.18, diluted EPS increased by 10.3%.

Consolidated Operating Results for the Three Months Ended September 30, 2021

The following discussion compares our consolidated operating results for the three months ended September 30, 2021, with the three months ended September 30, 2020.

Our total shipment volume increased by 2.1%, driven by:

• Eastern Europe, reflecting higher heated tobacco unit shipment volume across the Region, primarily in Russia and Ukraine, partly offset by lower cigarette shipment volume, mainly in Russia and Ukraine;

• Middle East & Africa, mainly reflecting higher cigarette shipment volume, primarily in PMI Duty Free and Turkey, partly offset by North Africa (particularly Egypt);

• East Asia & Australia, reflecting higher heated tobacco unit shipment volume, primarily in Japan, and higher cigarette shipment volume, mainly in Japan, partly offset by Australia and South Korea;

• Americas, mainly reflecting higher cigarette shipment volume, notably in Mexico;

• A net favorable impact of 2.1 billion cigarettes, mainly driven by Japan, PMI Duty Free and Spain;

partly offset by

• the EU, reflecting lower cigarette shipment volume, mainly in France, Italy and Spain, partly offset by higher heated tobacco unit shipment volume across the Region, notably in Italy;

• South & Southeast Asia, primarily reflecting lower cigarette shipment volume, mainly in the Philippines, partly offset by Indonesia.

Impact of Inventory Movements

Excluding the net favorable impact of estimated distributor inventory movements of approximately 2.8 billion units, our total in-market sales increased by 0.6%, driven by a 20.2% increase in heated tobacco units, partly offset by a 1.8% decrease in cigarettes.

The net favorable impact of approximately 2.8 billion units reflected:

• A net favorable impact of 2.4 billion cigarettes, mainly driven by 2020 movements in Japan and PMI Duty Free;

• A net favorable impact of 0.4 billion heated tobacco units, notably reflecting 2020 movements in PMI Duty Free.

Our total heated tobacco unit in-market sales volume in the quarter was 24.6 billion units, reflecting sequential growth of 7.2% compared to the second quarter of 2021.

• A net unfavorable impact of 0.5 billion heated tobacco units, primarily due to Russia.

Excluding Russia and Ukraine, our total in-market sales increased by 3.8%.

Our total heated tobacco unit in-market sales volume in the quarter was 24.8 billion units, or 19.5 billion units excluding Russia and Ukraine, representing growth of 16.7% and 19.5%, respectively.

Our cigarette shipment volume by brand and heated tobacco units shipment volume are shown in the table below:

PMI Shipment Volume by Brand (Million Units)

Third-Quarter

First-Quarter

2022 2021 Change

3 unchanged sentences

Philip Morris 9,753 10,184 (4.2) %

Parliament 11,556 9,540 21.1 %

Sampoerna A 9,718 8,698 11.7 %

Parliament 9,152 8,957 2.2 %

Dji Sam Soe 5,772 5,704 1.2 %

Bond Street 3,042 6,441 (52.8) %

Lark 3,452 3,899 (11.5) %

Next 2,388 2,327 2.7 %

Others 17,323 21,263 (18.5) %

3 unchanged sentences

Lark includes Lark Harmony ;

Next includes Next Dubliss ;

Philip Morris includes Philip Morris/Dubliss ;

and Sampoerna A includes Sampoerna .

The increase in our heated tobacco unit shipment volume was mainly driven by the EU (notably Italy), Eastern Europe (notably Russia) and Japan.

The increase in our heated tobacco unit shipment volume was mainly driven by the EU (notably Germany, Italy and Poland), Japan and the Middle East & Africa (notably Egypt).

Excluding Russia and Ukraine, our heated tobacco unit shipment volume increased by 18.4%.

Our cigarette shipment volume of the following brands increased:

• Marlboro, mainly driven by PMI Duty Free, Russia and Turkey, partly offset by Italy and the Philippines;

• Chesterfield , primarily driven by Russia;

• Parliament , mainly driven by Saudi Arabia and Turkey;

• Marlboro, mainly driven by PMI Duty Free, the Philippines, Russia, Spain and Turkey, partly offset by Algeria and Italy;

• Chesterfield , primarily driven by the Philippines and Russia;

• Sampoerna A in Indonesia, primarily driven by premium A Mild ;

• Lark , mainly driven by Japan;

• Next , primarily driven by Russia.

• Parliament , mainly driven by Turkey, partly offset by Saudi Arabia;

• Dji Sam Soe in Indonesia, primarily driven by Dji Sam Soe Magnum Mild .

Our cigarette shipment volume of the following brands decreased:

• L&M , primarily due to Egypt, Poland, Russia, Spain, Thailand and Turkey;

• L&M , primarily due to Germany and Turkey, partly offset by Egypt and the GCC;

• Philip Morris , mainly due to Russia, partly offset by Japan;

• Dji Sam Soe in Indonesia, primarily due to Dji Sam Soe Magnum Mild ;

• Bond Street , mainly due to Russia;

• "Others," primarily due to:

mid-price Fortune (Philippines) and Sampoerna U (Indonesia).

International Share of Market (excluding China and the United States)

Our total international market share (excluding China and the United States) was flat at 28.0%, reflecting:

• Total international market share for heated tobacco units of 3.6%, up by 0.6 points;

• Total international market share for cigarettes of 24.4%, down by 0.6 points.

Our total international cigarette sales volume as a percentage of total industry cigarette sales volume was down by 0.4 points to 25.6%, mainly reflecting lower cigarette market share and/or an unfavorable geographic mix impact, notably in Egypt, France, Japan, the Philippines, Russia and Ukraine, partly offset by Indonesia, PMI Duty-Free and Turkey.

• Lark , primarily due to Japan and Turkey;

• "Others," mainly due to:

mid-price Fortune (Philippines), Sampoerna Hijau (Indonesia) and Sampoerna U (Indonesia);

and low-price Bond Street (primarily due to Russia).

Excluding Russia and Ukraine, our cigarette shipment volume increased by:

5.1% for Marlboro , 0.1% for L&M , 10.8% for Chesterfield , 13.3% for Philip Morris and 4.9% for Parliament .

First-Quarter International Share of Market

Our total international market share (excluding China and the United States, as well as Russia and Ukraine), defined as our cigarette and heated tobacco unit sales volume as a percentage of total industry cigarette and heated tobacco unit sales volume, increased by 0.7 points to 26.7%, reflecting:

• Market share for heated tobacco units of 3.5%, up by 0.6 points;

• Market share for cigarettes of 23.3%, up by 0.2 points.

Excluding China and the United States, as well as Russia and Ukraine, our total international cigarette sales volume as a percentage of total industry cigarette sales volume increased by 0.4 points to 24.4%, mainly reflecting higher cigarette market share and/or a favorable geographic mix impact, notably in Indonesia, PMI Duty Free and the Philippines, partly offset by Algeria and Germany.

Financial Summary

Financial Summary -

Quarters Ended September 30, Change

Quarters Ended

March 31, Change

Fav./(Unfav.) Variance

5 unchanged sentences

Cost of Sales (1)

(2,608) (2,274) (14.7) % (18.3) % (334) 125 (42) — (298) (119)

Marketing, Administration and Research Costs (2)

2 unchanged sentences

Operating Income $ 3,298 $ 3,444 (4.2) % 8.6 % $ (146) $ (415) $ (26) $ 108 $ 264 $ (77)

(1) Cost/Other variance includes charges in 2021 of $43 million for asset impairment and exit costs.

Cost/Other variance in 2021 also includes the pre-tax charge of $51 million associated with the asset acquisition cost of OtiTopic, Inc.

(1) Cost/Other variance includes charges in 2022 of $26 million related to the war in Ukraine.

For more details, see Note 18.

War in Ukraine .

(2) Cost/Other variance includes charges in 2022 of $16 million related to the war in Ukraine and charges in 2021 of $48 million related to asset impairment and exit costs.

For more details, see Note 16.

Asset Impairment and Exit Costs and Note 18.

Acquisitions .

During the quarter, net revenues, excluding favorable currency, increased by 7.6%, mainly reflecting:

and a favorable pricing variance (notably driven by Japan, the Philippines, Russia and Turkey, partly offset by Indonesia, Poland and Ukraine).

The favorable currency in net revenues was due primarily to the Euro and Mexican pesos, partially offset by the Japanese yen and Turkish lira.

War in Ukraine.

During the quarter, net revenues, excluding currency and acquisitions, increased by 9.0%, mainly reflecting:

and a favorable pricing variance (notably driven by Germany, Russia and Turkey, partly offset by Indonesia and the Philippines).

During the quarter, Russia and Ukraine accounted for around 6% of PMI's total net revenues.

The unfavorable currency in net revenues was due primarily to the Euro, Japanese yen, Russian ruble and Turkish lira.

Net revenues include $2.3 billion in 2022 and $2.1 billion in 2021 related to the sale of RRPs.

Operating income, excluding favorable currency, increased by 4.5%, primarily reflecting:

favorable volume/mix, primarily driven by higher heated tobacco unit volume, partly offset by lower cigarette volume and unfavorable cigarette mix (each mainly reflecting the same geographies as for net revenues noted above);

a favorable pricing variance;

and lower manufacturing costs (driven by productivity gains related to reduced-risk products);

partly offset by higher marketing, administration and research costs (due mainly to investments behind reduced-risk products, asset acquisition costs related to OtiTopic, Inc.

and higher asset impairment and exit costs due to organizational design optimization and product distribution restructuring in South Korea).

IQOS devices accounted for approximately 5% of RRP net revenues in the first quarter of 2022, reflecting higher year-over year device volumes as supply constraints ease and ILUMA 's positive performance.

Operating income, excluding currency and acquisitions, increased by 8.6%, primarily reflecting:

favorable volume/mix, mainly driven by higher heated tobacco unit volume and higher cigarette volume (each mainly reflecting the same geographies as for net revenues noted above), partly offset by unfavorable cigarette mix (primarily in the EU and Japan) and device mix (predominantly in Japan);

and a favorable pricing variance;

partly offset by higher manufacturing costs (primarily due to higher logistics costs and other inflationary impacts, partially offset by productivity).

Interest expense, net, of $154 million decreased by $13 million (7.8)%.

Our effective tax rate increased by 1.5 percentage points to 22.4%.

The effective tax rate for the three months ended September 30, 2020 was favorably impacted by a reduction of estimated U.S.

federal and state income tax liabilities for years 2018 and 2019 mostly due to final regulations under the GILTI provisions of the Internal Revenue Code ($93 million), partially offset by

a decrease in deductions related to foreign-derived intangible income for the years 2018 and 2019.

Our effective tax rate decreased by 1.8 percentage points to 19.7%.

We estimate that our full-year 2022 effective tax rate will be 21% to 22%, excluding discrete tax events.

For further details, see Note 9.

Income Taxes .

Net earnings attributable to PMI of $2.4 billion increased by $119 million or 5.2%.

This increase was due primarily to higher operating income as discussed above, partially offset by a higher effective tax rate.

Diluted and basic EPS of $1.55 increased by 4.7%.

Excluding a favorable currency impact of $0.04, diluted EPS increased by 2.0%.

Net earnings attributable to PMI of $2.3 billion decreased by $87 million or 3.6%.

This decrease was due primarily to lower operating income as discussed above, partially offset by a lower effective tax rate.

Diluted and basic EPS of $1.50 decreased by 3.2%.

Excluding an unfavorable currency impact of $0.23, diluted EPS increased by 11.6%.

Operating Results by Business Segment

13 unchanged sentences

The well-known risks of smoking have led regulators to impose significant restrictions and high excise taxes on cigarettes.

Much of the regulation that shapes the business environment in which we operate is driven by the World Health Organization's (the “WHO”) Framework Convention on Tobacco Control (the “FCTC”), which entered into force in 2005.

Much of the regulation that shapes the business environment in which we operate is driven by the Framework Convention on Tobacco Control (the “FCTC”) of the World Health Organization (the “WHO”), which entered into force in 2005.

The FCTC has as its main objective to establish a global agenda for tobacco regulation, with the purpose of reducing tobacco use.

4 unchanged sentences

Similar to its previous policy recommendations on e-cigarettes, the CoP invited countries to regulate, restrict or prohibit heated tobacco products, as appropriate under their national laws.

In May 2021, the WHO study group on tobacco product regulation issued its Eighth Report addressing novel and emerging nicotine and tobacco products, such as electronic nicotine delivery systems ("ENDS"), electronic non-nicotine delivery systems ("ENNDS") and heated tobacco products ("HTPs").

Although the Report presents some industry and independent research showing that heated tobacco products have the potential to reduce harm for smokers, WHO’s overall assessment is that these products are not risk-free and should be regulated in the same manner as tobacco products and in line with the FCTC provisions.

The Report also recommends governments both to rely on independent research and data on the public health impact of use of heated tobacco products, and to analyze tobacco industry funded data.

In August 2021, the WHO FCTC Secretariat published two reports on novel and emerging tobacco products to the ninth session of the CoP of the FCTC, one on the research and evidence on novel and emerging tobacco products, and the other on their recommended classification.

According to the provisional agenda, these reports should be presented for information and that related substantive discussions should be deferred to COP10, in 2023.

Prior to CoP 9 that took place in November 2021, the WHO and the WHO FCTC Secretariat published two reports on novel and emerging tobacco products.

The reports were noted by CoP 9 and related substantive discussions and decisions were deferred to CoP 10, currently scheduled for 2023.

It is not possible to predict whether or to what extent measures recommended by the WHO's reports will be implemented as the reports are not binding to the WHO Member States.

14 unchanged sentences

In 2020, the World Customs Organization (the “WCO”) amended the harmonized system nomenclature to introduce dedicated custom codes for novel tobacco and nicotine products, including heated tobacco products, e-cigarettes and other nicotine-containing products.

The amendments will be effective as of January 1, 2022.

The amendments became effective as of January 1, 2022.

These amendments require WCO member states to transfer products from customs codes in the current nomenclature to the new one.

13 unchanged sentences

The report also concludes that there is scope for improvement in certain areas, such as enforcement at national level, assessment of ingredients, and a better consideration for novel and emerging products.

EU Tobacco Excise Directive:

In November 2021, the European Commission published the implementation roadmap to Europe's Beating Cancer Plan (the "Plan").

According to the Plan, a revision of the TPD is planned for 2024.

EU Tobacco Excise Directive ("TED"):

The EU Commission is preparing a legislative proposal for the revision of the 2011 EU Tobacco Excise Directive that may include definitions and tax treatment for novel tobacco and nicotine-containing products, including heated tobacco products and e-cigarettes.

The proposal is expected to be finalized by the end of 2021.

The adoption of the proposal will require unanimous agreement by all EU member states.

The proposal is expected to be published in the course of 2022 and adopted by the EU Council in 2023.

Any final amendments to TED require unanimous agreement by all EU member states, followed by transposition of TED into national legislation.

The potential effective date for any changes to TED, after the transposition period, is early 2024.

Plain Packaging and Other Packaging Restrictions:

1 unchanged sentence

To date, plain packaging laws have been adopted in certain markets in all of our operating segments, including the key markets of Australia, France, Saudi Arabia and Turkey.

Some countries, such as Canada, Denmark, Israel and New Zealand, adopted plain packaging regulations that apply to all tobacco products, including RRPs.

Some countries, such as Canada, Denmark and Israel adopted plain packaging regulations that apply to all tobacco products, including RRPs.

Other countries are also considering plain packaging legislation.

6 unchanged sentences

The European Union banned cigarettes and roll-your-own tobacco products with characterizing flavors.

Other tobacco products, including heated tobacco products, are exempted from this flavor ban.

The EU Commission is required to withdraw this exemption for a particular product category if it determines that there is a substantial change of circumstances, such as a significant increase of EU-wide sales volumes in such product category.

Other countries may follow the EU’s approach.

Other tobacco products, including heated tobacco products, are currently exempted from this characterizing flavor ban.

However, the European Union Commission has issued a draft delegated directive that would end this exemption.

While the timing and final form of the directive is not yet known, if adopted it would likely ban the use of characterizing flavors from heated tobacco products in the European Union, impacting a significant proportion of our RRP products currently sold in the European Union.

Other countries may follow the EU’s approach toward tobacco product ingredients.

Turkey banned menthol as of May 2020.

33 unchanged sentences

Parties must start implementing its provisions in their national legislation.

In October 2018, the first Meeting of the Parties to the Protocol decided to produce a comprehensive report on good practices for the implementation of tracking and tracing systems and to prepare a conceptual framework for global information sharing to combat illicit tobacco trade.

In November 2021, the second Meeting of the Parties to the Protocol decided, among others, to focus on the implementation of a framework for global information sharing to combat illicit tobacco trade and enable the parties to exchange products' tracking and tracing information in a secure manner.

We welcome this decision and expect that other Parties will ratify the Protocol.

8 unchanged sentences

The centerpiece of PMI IMPACT is a council of external independent experts in the fields of law, anti-corruption and law enforcement.

The experts are responsible for evaluating and approving funding proposals for PMI IMPACT grants.

The experts are

responsible for evaluating and approving funding proposals for PMI IMPACT grants.

PMI has pledged $100 million to fund projects within PMI IMPACT over three funding rounds.

7 unchanged sentences

For adult smokers who would otherwise continue to smoke, we believe that RRPs, while not risk-free, offer a much better consumer choice.

Accordingly, our key strategic priorities are:

to develop and commercialize products that present less risk of harm to adult smokers who switch to those products versus continued smoking;

and to convince current adult smokers who would otherwise continue to smoke to switch to those products.

Accordingly, our key strategic priorities are to:

(i) to develop and commercialize products that present less risk of harm to adult smokers who switch to those products versus continued smoking;

and (ii) educate and convince current adult smokers who would otherwise continue to smoke to switch to those products.

We recognize that this transformation from cigarettes to RRPs will take time and that the speed of transformation will depend in part upon factors beyond our control, such as the willingness of governments, regulators and other policy groups to embrace RRPs as a desired alternative to continued cigarette smoking.

1 unchanged sentence

We aim to maintain our competitive position in the cigarette market through selective investment.

As a leading international cigarette manufacturer, we will continue to accelerate this

transformation by using our regulatory and commercial expertise and extensive commercial and distribution infrastructure as an effective platform for the commercialization of our RRPs and communication with adult smokers and trade partners about the benefits of switching to our RRPs.

As a leading international cigarette manufacturer, we will continue to accelerate this transformation by using our regulatory and commercial expertise and extensive commercial and distribution infrastructure as an effective platform for the commercialization of our RRPs and communication with adult smokers and trade partners about the benefits of switching to our RRPs.

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

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Therefore, we are developing a portfolio of products intended to appeal to a variety of distinct adult consumer preferences.

Four PMI-developed RRP platforms are in various stages of development and commercialization readiness:

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

Platform 1 uses a precisely controlled heating device incorporating our IQOS HeatControl technology, into which a specially designed and proprietary tobacco unit is inserted and heated to generate an aerosol.

We have conducted a series of clinical studies for this platform, the results of which were included in our submission to the U.S.

We have conducted a series of

clinical studies for this platform, the results of which were included in our submission to the U.S.

Food and Drug Administration (“FDA”) described below.

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All studies referenced above were conducted with the blade version of Platform 1.

There is full comparability between the versions, therefore the data from these studies remain valid.

Platform 2 uses a pressed carbon heat source which, when ignited, generates a nicotine-containing aerosol by heating tobacco.

The results of our pharmacokinetic study (that measured the nicotine pharmacokinetic profile as well as subjective effects) and of our five-day reduced exposure study indicate that this platform could be an acceptable substitute for adult smokers who seek an alternative to cigarettes.

The reduced exposure study results showed a substantial reduction in relevant biomarkers of exposure to the measured HPHCs in those who switched to Platform 2 compared to those who continued to smoke cigarettes over a five-day period.

The sustainability of this reduction as well as changes in clinical risk markers were assessed in a three-month reduced exposure study, which was completed in 2018.

We believe that there is full comparability between the versions, therefore the data from these studies remain valid.

Platform 2 used a pressed carbon heat source which, when ignited, generates a nicotine-containing aerosol by heating tobacco.

As a result of consumer testing feedback, the design of our current Platform 2 technology has been discontinued.

We are assessing alternative designs for this consumer segment.

Platform 3 provides an aerosol of nicotine salt.

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In February 2020, we completed a one-month product use and adaptation study in adult smokers for the product variant without electronics.

The results of the study indicated that while during the study period,

the adult smokers did not fully switch from smoking cigarettes to this Platform 3 product, on average, they used this product on a daily basis and significantly reduced their daily consumption of cigarettes.

The results of the study indicated that while during the study period, the adult smokers did not fully switch from smoking cigarettes to this Platform 3 product, on average, they used this product on a daily basis and significantly reduced their daily consumption of cigarettes.

We are working on product modifications to enable switching by those adult smokers who are looking for better alternatives to cigarettes.

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The study demonstrated that e-cigarette vapors induce significantly lower biological responses associated with cardiovascular and pulmonary diseases compared with cigarette smoke.

Recently, we designed a new consumable for our e-vapor mesh technology to deliver real tobacco taste satisfaction in an E-Vapor product liquid-using patented technology, where flavors and nicotine are extracted directly from the tobacco leaves and captured in a liquid solution, without having to add flavoring ingredients.

Platform 5 covers Modern Oral Nicotine Pouches, which consist of white pre-portioned pouches containing nicotine derived from tobacco.

Users place a pouch between the upper lip and gum and leave it there while the nicotine and taste are being released.

At the end of the use, the user can dispose of the pouch.

Nicotine pouches are inherently smoke-free as they are consumed orally, and no combustion process occurs during use.

Our nicotine pouches do not contain tobacco.

Instead, they contain primarily nicotine, flavors, and a cellulose substrate.

The nicotine used in the pouches is of pharmaceutical-grade like the nicotine used in medicinal products, such as gums and inhalers, while the flavors are approved for use in food in accordance with the product quality standards for nicotine pouches developed by the Swedish Institute for Standards.

In 2021, PMI acquired AG Snus as well as Fertin Pharma, two companies manufacturing and/or marketing nicotine pouches.

We aim to expand our brand portfolio and market positions with additional RRPs.

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In order to accelerate switching to our Platform 1 products, our initial market introductions typically entail one-to-one consumer engagement (in person or by digital means) and device discounts.

These initial commercialization efforts require substantial investment, which we believe will moderate over time and further benefit from the increased use of digital engagement capabilities.

These initial commercialization efforts require substantial investment, which we believe

will moderate over time and further benefit from the increased use of digital engagement capabilities.

During the COVID-19 pandemic, we accelerated our investments in, and pivot to, digital consumer engagement.

As of September 30, 2021, PMI's smoke-free products are available for sale in 70 markets in key cities or nationwide.

As of March 31, 2022, PMI's smoke-free products are available for sale in 71 markets in key cities or nationwide.

In 2014, we introduced our Platform 1 product in pilot city launches in Nagoya, Japan, and in Milan, Italy.

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Even though these suspensions did not materially affect our operations, if one or more of these service providers were significantly constrained at the same time, the supply of the devices could be disrupted.

Although we work closely with these service providers on monitoring their production capability and financial health, we cannot guarantee that they will remain capable of meeting their commitments, particularly during the COVID-19 pandemic;

if they will not, the commercialization of our RRPs could be adversely affected.

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this could negatively impact the commercialization of our RRPs.

For details on the impact of COVID-19 on our production and supply chain, see the " Executive Summary " section of this MD&A.

In addition, we are also exposed to a world-wide shortage of semiconductors, which continues to put constraints on our device supplies for RRPs.

The overall impact of this shortage remains manageable, and we have adjusted our device assortments to limit the effect on consumer availability of our RRPs.

We believe, however, that the overall impact of this shortage remains manageable, and we have adjusted our device assortments to limit the effect on consumer availability of our RRPs.

We discuss product warranties in more detail in Note 14.

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Product quality may affect consumer acceptance of our RRPs.

Our commercialization efforts for the other PMI-developed RRP platforms are as follows:

• We started commercializing an improved version of our IQOS MESH product in New Zealand, Italy, Finland, the Czech Republic, Croatia and Canada under the IQOS VEEV or VEEV brand names.

Our near-term planned commercialization efforts for the other PMI-developed RRP platforms are as follows:

• We started commercializing an improved version of our IQOS MESH product in Canada, Croatia, the Czech Republic, Finland, Italy, Ukraine and New Zealand under the IQOS VEEV or VEEV brand names.

We currently plan to launch this product in additional markets.

• With respect to TEEPS , our Platform 2 product, we finalized our improvements to this product and will conduct a consumer test in the last quarter of 2021.

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

Due to the COVID-19 pandemic, these plans may be delayed.

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

Due to the COVID-19 pandemic and the armed conflict between Russia and Ukraine, certain of these commercialization efforts could be delayed.

RRP Regulation and Taxation:

RRPs contain nicotine and are not risk-free.

As we describe in more detail above, we support science-based regulation and taxation of RRPs and believe that regulation and taxation should differentiate between cigarettes and products that present, are likely to present, or have the potential to present less risk of harm to adult smokers who switch to these products versus continued smoking and should recognize a continuum of risk for tobacco and other nicotine-containing products.

As we describe in more detail above, we support science-based regulation and taxation of RRPs, and believe that regulation and taxation should differentiate between cigarettes and products that present, are likely to present, or have the potential to present less risk of harm to adult smokers who switch to

these products versus continued smoking and should recognize a continuum of risk for tobacco and other nicotine-containing products.

Regulation, as well as industry practices, should reflect the fact that youth should not consume nicotine in any form.

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The public comment period, which was initially scheduled to be closed on August 2, 2021, was extended on July 20, 2021 to provide time for the public to review application materials that were not previously posted by FDA.

At this time there is no deadline for public comments.

The FDA closed the comment period for IQOS 3's sMRTPA on December 10, 2021.

On March 11, 2022, the FDA authorized our sMRTPA for IQOS 3 by issuing a Modified Risk Granted Order – Exposure Modification.

There are two types of MRTP orders the FDA may issue:

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This determination included a finding that issuance of the exposure modification order is expected to benefit the health of the population as a whole.

We requested (and received) an exposure modification order for IQOS 3.

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

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is committed to providing adult consumers of tobacco products with complete, accurate and non-misleading information regarding the health risks associated with the use of the IQOS System and HeatSticks .

We are currently working on a submission to share our views on the applicability of new health warnings to our products.

We shared our views with the FDA on the applicability of new health warnings to our products in our submission on December 2, 2021.

In the U.S., tobacco and nicotine-containing products that were not commercially marketed as of February 15, 2007, are subject to review and authorization by the FDA.

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The ITC issued a LEO prohibiting the importation of infringing tobacco heating articles and components thereof and cease and desist orders against Philip Morris USA, Inc.

and Altria Client Services, LLC.

The case now moves to a 60-day Presidential review period.

We will appeal the patent issues at the appropriate time.

Furthermore, lawsuits based on the

same patent families have been repeatedly and universally rejected in European courts and the European Patent Office.

and Altria Client Services, LLC, which went into effect at the end of the 60-day Presidential review period on November 28, 2021.

We have appealed the patent issues.

Furthermore, lawsuits based on the same patent families have been repeatedly and universally rejected in European courts and the European Patent Office.

The decision has no bearing outside the United States.

On March 15, 2022, the Consolidated Appropriations Act, 2022 amended the definition of “tobacco product” contained in the Federal Food, Drug and Cosmetic Act ("FD&C Act") to “any product made or derived from tobacco, or containing nicotine from any source, that is intended for human consumption.” Under this definition, products containing synthetic nicotine, e.g., e-cigarettes, are subject to the FDA’s tobacco regulatory authority.

According to this new provision, effective April 14, 2022, manufacturers of tobacco products containing nicotine not derived from tobacco will be required to submit a PMTA to the FDA and obtain authorization from the Agency to market their product under the FD&C Act or they will be subject to FDA enforcement actions.

This new provision does not have any impact on tobacco products developed by PMI and intended for commercialization in the U.S.

Until recently, there were no countries with specific product standards for heat-not-burn products.

Currently, national standards setting minimum quality and safety requirements for such products have been adopted in several countries with technical heat-not-burn specifications and/or methods for demonstrating the absence of combustion.

They are mandatory in Egypt, Jordan, Saudi Arabia, Tunisia, the UAE and Uzbekistan, and voluntary in the Armenia, Costa Rica, Indonesia, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, Vietnam, the U.K.

They are mandatory in Egypt, Jordan, Saudi Arabia, Tunisia, the UAE, Uzbekistan and Bahrain, and voluntary in Armenia, Costa Rica, Indonesia, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, Vietnam, the U.K.

In Japan, a voluntary standard sets minimum safety requirements for tobacco heating devices.

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In January 2019, scientific media published the results of the study of the China National Tobacco Quality Supervision and Test Centre (“CNTQST”) comparing the aerosol generated by our Platform 1 product with cigarette smoke.

The CNTQST found that the former contained fewer, and lower levels of, harmful constituents than the latter and concluded that the lower temperature of heating tobacco in our Platform 1 product contributed to the difference.

The CNTQST found that the former contained fewer, and lower levels of, harmful constituents than the latter and concluded that the lower

temperature of heating tobacco in our Platform 1 product contributed to the difference.

The CNTQST stated that the reduction in emissions of harmful constituents cannot be interpreted as a harm/risk reduction for smokers in the same proportion.

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(“Altria”) setting out terms on how the parties would collaborate to develop and commercialize e-vapor products and commercialize two of our RRPs in the U.S.

In late 2018, Altria announced that it will participate in the e-vapor category only

through another e-vapor company in which Altria acquired a minority interest.

In late 2018, Altria announced that it will participate in the e-vapor category only through another e-vapor company in which Altria acquired a minority interest.

In September 2019, Altria's subsidiary, Philip Morris USA Inc.

(“PM USA”), began commercialization of a version of our Platform 1 product in the U.S.

PM USA is responsible for the marketing of this product in the U.S.

and communication of the reduced exposure information authorized by the FDA in its MRTP marketing order described above.

Under the agreement, PM USA must achieve certain milestones to maintain its exclusive distribution right and additional milestones to extend the agreement after the initial 5-year term.

PMI and Altria are currently discussing these milestones, the contractual obligations, and the impact of the United States International Trade Commission (“ITC”) Orders (For more details please refer to Note 8 .

Contingencies ).

In January 2020, we announced an agreement with KT&G, a leading tobacco and nicotine company in South Korea, for the commercialization of KT&G’s smoke-free products outside of South Korea on an exclusive basis.

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The Foundation is an independent body and is governed by its independent Board of Directors.

The Foundation’s role, as set out in its corporate charter, includes funding research in the field of tobacco harm reduction, encouraging measures that reduce the harm caused by smoking, and assessing the effect of reduced cigarette consumption on the industry value chain.

The Foundation’s role, as set out in its corporate charter, includes funding research in the field of tobacco harm

reduction, encouraging measures that reduce the harm caused by smoking, and assessing the effect of reduced cigarette consumption on the industry value chain.

Governmental Investigations

From time to time, we are subject to governmental investigations on a range of matters, including tax, customs, antitrust, advertising, and labor practices.

We describe certain matters pending in South Korea and Thailand in Note 8.

We describe certain matters pending in Russia, South Korea and Thailand in Note 8.

Contingencies .

In November 2010, a WTO panel issued its decision in a dispute relating to facts that arose from August 2006 between the Philippines and Thailand concerning a series of Thai customs and tax measures affecting cigarettes imported by PM Thailand into Thailand (see Note 8.

In November 2010, a World Trade Organization ("WTO") panel issued its decision in a dispute relating to facts that arose from August 2006, between the Philippines and Thailand, concerning a series of Thai customs and tax measures affecting cigarettes imported by PM Thailand into Thailand (see Note 8.

Contingencies for additional information).

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The court admitted the claim as a matter of course and issued summons for PM Italia to appear as civil party in the case.

The next trial hearing is scheduled for December 15, 2021.

The next trial hearing is scheduled for June 1, 2022.

PM Italia believes the charges brought against it by the Public Prosecutor are without merit and will defend them vigorously.

Vectura Fertin Pharma

Subsequent to the end of the first quarter, on April 5, 2022, the European Commission issued a proposal for a regulation on fluorinated greenhouse gases.

If accepted, the proposal also establishes quantitative limits on usage of certain propellant gases which are components of certain products sold by our Vectura Fertin Pharma business.

This may impact the related products development and market strategies , may have an adverse impact on the value of technology and goodwill acquired in PMI’s 2021 purchase of Vectura Group plc, and may result in impairment charges.

Asset Impairment and Exit Costs

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Asset Impairment and Exit Costs to our condensed consolidated financial statements.

GAAP Treatment of Turkey as a Highly Inflationary Economy

Following the categorization of Turkey by the International Practices Task Force of the Center for Audit Quality as a country with a three-year cumulative inflation rate greater than 100%, the country is considered highly inflationary in accordance with U.S.

Consequently, PMI has begun to account for the operations of its Turkish affiliates as highly inflationary, and treat the U.S.

dollar as the functional currency of the affiliates, effective April 1, 2022.

Acquisitions and Other Business Arrangements

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Acquisitions to our condensed consolidated financial statements.

Global Collaboration Agreement with KT&G

In January 2020, PMI announced a global collaboration agreement with the leading tobacco and nicotine company in South Korea, KT&G, to commercialize KT&G’s smoke-free products outside of the country.

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There are no current plans to commercialize KT&G products in the United States.

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

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

Equity Investments

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Related Parties - Equity Investments and Other to our condensed consolidated financial statements.

We are subject to various trade restrictions imposed by the United States of America and countries in which we do business (“Trade Sanctions”), including the trade and economic sanctions administered by the U.S.

We are subject to various trade restrictions imposed by the U.S.

and countries in which we do business (“Trade Sanctions”), including the trade and economic sanctions administered by the U.S.

Department of the Treasury's Office of Foreign Assets Control and the U.S.

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From time to time we make sales in countries subject to Trade Sanctions, either where such sanctions do not apply to our business or pursuant to exemptions or licenses.

On March 11, 2022, the U.S.

introduced a ban on export, re-export, sale, or supply, directly or indirectly, from the U.S., or by a U.S.

person, wherever located, of certain tobacco and manufactured tobacco substitutes to Russia and Belarus.

From time to time, a subsidiary sells products to distributors that, in turn, sell those products to duty free customers that supply U.N.

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PMI is also subject to various Trade Sanctions imposed by the EU and other jurisdictions ("Trade Sanctions").

fully with these Trade Sanctions.

The EU imposed new sanctions regarding the Republic of Belarus ("Belarus") on June 21, 2021, including the designation of additional EU sanctions targets (individuals and legal entities) in Belarus.

On June 24, 2021, the EU council introduced additional sectoral economic sanctions aimed at specific sectors of the Belarus economy, including restrictions on the trade of goods used for the production or manufacture of tobacco products.

Subsequently, six non-EU countries (Norway, Iceland, Liechtenstein, North Macedonia, Montenegro, and Albania) announced that they “aligned themselves” with the EU sanctions of June 21.

On July 6, 2021, Switzerland imposed sanctions on Belarusian individuals and legal entities effective July 7, 2021.

The Swiss sanctions are similar in scope to the EU sanctions of June 21, 2021.

Further, on August 9, 2021, the U.K.

introduced sectoral economic sanctions similar in scope to the EU sectoral sanctions of June 24, 2021.

Also on August 9, 2021, the U.S.

imposed blocking sanctions on certain individuals and entities pursuant to an Executive Order adding them to OFAC’s List of Specially Designated Nationals and Blocked Persons (the "SDN List").

The Executive Order expanded the bases for the imposition of sanctions, including, among others, by authorizing the imposition by OFAC of blocking sanctions on persons operating in the tobacco sector of the Belarus economy, as well as for providing material support or assistance to any SDN.

We comply fully with these Trade Sanctions.

On June 24, 2021, the EU introduced sanctions regarding the Republic of Belarus ("Belarus") aimed at specific sectors of the Belarus economy, including the tobacco sector.

Subsequently, seven non-EU countries (Norway, Iceland, Liechtenstein, North Macedonia, Bosnia and Herzegovina, Montenegro, and Albania) announced that they “aligned themselves” with the majority of the EU sanctions.

Switzerland and the UK have also imposed sanctions similar in scope to the EU sanctions.

On August 9, 2021, the U.S.

imposed blocking sanctions on certain Belarusian individuals and entities pursuant to an Executive Order, which expanded the bases for the imposition of sanctions, including, among others, by authorizing the imposition by OFAC of blocking sanctions on persons operating in the tobacco sector of the Belarus economy.

In 2021, the U.S., the EU, the U.K., Switzerland and several other jurisdictions supplemented their respective sanctions lists by including additional Belarusian sanctions targets.

Following the start of the conflict in Ukraine on February 24, 2022, the U.S., the EU, the UK, Switzerland, Canada, Australia, New Zealand, Singapore, South Korea, Japan and other countries introduced extensive economic sanctions and export controls against Russia.

While the introduced sanctions slightly vary from jurisdiction to jurisdiction, they are largely aligned.

The restrictions are primarily targeted at the Russian financial, banking, oil, military, aviation and marine sectors.

Among sanctions targets are Russian political figures and military personnel, certain oligarchs and journalists, and companies operating in the above-mentioned sectors.

Export to Russia of certain luxury goods, and goods and technology which might contribute to Russia’s technological enhancement was banned.

Seven non-EU countries (Norway, Iceland, Liechtenstein, North Macedonia, Bosnia and Herzegovina, Montenegro, and Albania) announced that they “aligned themselves” with the majority of the EU sanctions.

Ukraine imposed its own sanctions against Russia, and certain targeted Russian entities and individuals.

Russia introduced certain countermeasures aimed at reducing the effect of Western sanctions.

Countermeasures include the ban on export of certain goods from Russia, including tobacco-related production equipment, restrictions on lending to foreign borrowers and transactions with securities and real estate involving companies from “hostile” countries (i.e., those which introduced sanctions regarding Russia).

PMI complies with all applicable laws and regulations, including sanctions, in the markets where it operates.

We have taken appropriate actions in response to the latest sanctions to ensure full compliance with the relevant restrictions.

Operating Results – Three Months and Nine Months Ended September 30, 2021

The following discussion compares operating results within each of our geographical segments and Other category for the three months and nine months ended September 30, 2021, with the three months and nine months ended September 30, 2020.

Operating Results – Three Months Ended March 31, 2022

The following discussion compares operating results within each of our geographical segments and Other category for the three months ended March 31, 2022, with the three months ended March 31, 2021.

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

Estimates for total industry volume and market share in certain geographies reflect limitations on the availability and accuracy of industry data.

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

European Union:

Financial Summary -

Quarters Ended September 30, Change

Fav./(Unfav.) Variance

Fav./(Unfav.)

2021 2020 Total Excl.

rency Acqui-sitions Price Vol/

(in millions)

Net Revenues $ 3,192 $ 2,950 8.2 % 3.9 % $ 242 $ 128 $ 2 $ (5) $ 117 $ —

Operating Income $ 1,680 $ 1,588 5.8 % 0.8 % $ 92 $ 79 $ — $ (5) $ 102 $ (84)

For the three months ended September 30, 2021, net revenues, excluding favorable currency, increased by 3.9%, reflecting:

favorable volume/mix, mainly driven by higher heated tobacco unit volume (notably in Germany, Hungary, Italy and Poland), partly offset by lower cigarette volume (notably in France, Germany and Italy) and unfavorable cigarette mix (primarily in Germany).

Pricing variance was slightly unfavorable, reflecting lower pricing for reduced-risk products (notably for heated tobacco units in Poland and devices in Germany and Italy), partly offset by higher combustible pricing (notably in Germany, partially offset by Poland).

Operating income, excluding favorable currency, increased by 0.8%, primarily reflecting:

favorable volume/mix, driven by the same factors as for net revenues noted above;

and lower manufacturing costs;

partly offset by higher marketing, administration and research costs.

Financial Summary -

Nine Months Ended September 30, Change

Quarters Ended

March 31, Change

Fav./(Unfav.) Variance

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Operating Income $ 1,527 $ 1,490 2.5 % 12.3 % $ 37 $ (145) $ (2) $ 5 $ 208 $ (29)

For the nine months ended September 30, 2021, net revenues, excluding favorable currency, increased by 8.0%, reflecting:

favorable volume/mix, mainly driven by higher heated tobacco unit volume (notably in Germany, Hungary, Italy and Poland), partly offset by lower cigarette volume (notably in the Czech Republic, France and Germany) and unfavorable cigarette mix (primarily in Germany and Poland);

and a favorable pricing variance, driven by higher combustible pricing (mainly in Germany and Portugal, partly offset by France and Poland) and higher heated tobacco unit pricing (notably in the Czech Republic, partially offset by Poland), partly offset by lower device pricing (notably in Germany and Italy).

Operating income, excluding favorable currency, increased by 12.1%, primarily reflecting:

favorable volume/mix, driven by the same factors as for net revenues noted above;

lower manufacturing costs (driven by combustible and reduced-risk products);

and a favorable pricing variance;

partly offset by higher marketing, administration and research costs (including higher asset impairment and exit costs, mainly related to organizational design optimization).

During the quarter, net revenues, excluding currency and acquisitions, increased by 10.5%, reflecting:

favorable volume/mix, mainly driven by higher heated tobacco unit volume (notably in Germany, Italy and Poland) and higher device volume (notably in Italy), partly offset by lower cigarette volume (mainly in Germany, partly offset by Spain).

Pricing variance was slightly

favorable, primarily reflecting higher combustible pricing (driven by Germany), largely offset by lower pricing for devices (notably in Italy).

Operating income, excluding currency and acquisitions, increased by 12.3%, primarily reflecting:

favorable volume/mix, mainly driven by higher heated tobacco unit volume (primarily reflecting the same geographies as for net revenues noted above), partly offset by lower cigarette volume (mainly in Germany);

partially offset by higher manufacturing costs (primarily due to inflationary impacts).

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

Total market and market share performance are shown in the table below:

European Union Key Data Third-Quarter Nine Months Year-to-Date

Change Change

2021 2020 % / pp 2021 2020 % / pp

European Union Key Data First-Quarter

2022 2021 % / pp

Total Market (billion units) 109.6 106.4 3.0 %

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Philip Morris 2.2 % 2.2 % —

HEETS 5.3 % 3.9 % 1.4 5.5 % 3.9 % 1.6

Heated Tobacco Units 7.6 % 5.6 % 2.0

Others 3.0 % 3.2 % (0.2)

Total European Union 40.1 % 39.3 % 0.8

HEETS includes HEETS Dimensions .

In the third quarter, the estimated total market in the EU decreased by 0.1% to 132.4 billion units, mainly due to:

• Czech Republic, down by 9.0%, primarily reflecting the impact of excise tax-driven price increases;

• France, down by 8.0%, mainly reflecting the impact of excise tax-driven price increases and higher cross-border (non-domestic) purchases due to the easing of pandemic-related measures;

partly offset by

• Poland, up by 3.4%, primarily reflecting the impact on adult smoker average daily consumption and border sales of the easing of pandemic-related measures;

• Romania, up by 7.1%, mainly reflecting the impact on adult smoker average daily consumption of the easing of pandemic-related measures, as well as increased in-bound travel.

For the nine months year-to-date, the estimated total market in the EU increased by 0.7% to 360.5 billion units, primarily driven by:

• Italy, up by 4.2%, notably reflecting the impact on adult smoker average daily consumption of the easing of pandemic-related measures;

• Poland, up by 6.4%, primarily reflecting the impact on adult smoker average daily consumption and border sales of the easing of pandemic-related measures, as well as a lower prevalence of illicit trade;

partly offset by

• Czech Republic, down by 10.1%, mainly reflecting the impact of excise tax-driven price increases and the impact, in the first quarter of 2021, of lower border sales due to pandemic-related lockdown measures;

• France, down by 6.1%, primarily reflecting the same factors as in the quarter.

In the third quarter, our total shipment volume decreased by 2.7% to 49.0 billion units, primarily due to:

• Czech Republic, down by 9.5%, mainly reflecting the lower total market;

• France, down by 10.8%, primarily reflecting the lower total market and a lower market share of cigarettes;

• Italy, down by 3.1%.

Excluding the net unfavorable impact of estimated distributor inventory movements, total in-market sales volume increased by 3.6%, reflecting a higher total market and a higher market share driven by heated tobacco units;

• Spain, down by 9.1%.

Excluding the net unfavorable impact of estimated distributor inventory movements, total in-market sales volume increased by 3.0%, mainly reflecting a higher total market;

partly offset by

• Poland, up by 3.8%, mainly reflecting the higher total market.

Excluding the net unfavorable impact of estimated distributor inventory movements, our total in-market sales volume decreased by 0.5%.

For the nine months year-to-date, our total shipment volume increased by 0.3% to 140.6 billion units, primarily driven by:

• Italy, up by 8.1%, mainly reflecting the higher total market and a higher market share driven by heated tobacco units;

In the quarter, the estimated total market in the EU increased by 3.0% to 109.6 billion units, primarily driven by:

• Italy, up by 5.3%, mainly reflecting the impact on adult smoker average daily consumption of the easing of pandemic-related measures;

• Poland, up by 18.7%, primarily reflecting a lower estimated prevalence of illicit trade and higher border sales due to the easing of pandemic-related measures;

partly offset by

• Czech Republic, down by 12.2%, mainly reflecting the same factor as in the quarter;

• France, down by 8.3%, mainly reflecting the same factors as in the quarter.

Excluding the net favorable impact of estimated distributor inventory movements, our total in-market sales volume was essentially stable.

• Germany, down by 7.5%, primarily reflecting the impact of excise tax-driven price increases and higher cross-border (non-domestic) purchases due to the easing of pandemic-related measures.

Our total shipment volume increased by 4.2% to 45.0 billion units, mainly driven by:

• Poland, up by 20.7%, mainly reflecting the higher total market, as well as a higher market share driven by heated tobacco units;

• Spain, up by 23.1%, or by 1.7% excluding the net favorable impact of estimated distributor inventory movements, reflecting a higher total market, partly offset by a lower market share due to cigarettes.

Excluding the net unfavorable impact of estimated distributor inventory movements (notably in Italy, partly offset by Spain), our total in-market sales volume increased by 5.2%.

Eastern Europe:

Financial Summary -

Quarters Ended September 30, Change

Fav./(Unfav.) Variance

Fav./(Unfav.)

2021 2020 Total Excl.

rency Acqui-sitions Price Vol/

(in millions)

Net Revenues $ 941 $ 899 4.7 % 6.1 % $ 42 $ (13) $ — $ 22 $ 33 $ —

Operating Income $ 338 $ 245 38.0 % 25.7 % $ 93 $ 30 $ — $ 22 $ 27 $ 14

For the three months ended September 30, 2021, net revenues, excluding unfavorable currency, increased by 6.1%, reflecting:

favorable volume/mix, driven by higher heated tobacco unit volume (primarily in Russia and Ukraine), partly offset by unfavorable cigarette volume/mix (primarily in Russia);

and a favorable pricing variance, mainly driven by higher combustible pricing (notably in Russia), partly offset by lower heated tobacco unit pricing (primarily in Ukraine, partly offset by Russia).

Operating income, excluding favorable currency, increased by 25.7%, primarily reflecting:

favorable volume/mix, driven by the same factors as for net revenues noted above;

a favorable pricing variance;

and lower manufacturing costs (primarily related to reduced-risk products, mainly in Russia).

Financial Summary -

Nine Months Ended September 30, Change

Quarters Ended March 31, Change

Fav./(Unfav.) Variance

5 unchanged sentences

Operating Income $ 144 $ 261 (44.8) % (21.8) % $ (117) $ (60) $ — $ 36 $ (26) $ (67)

For the nine months ended September 30, 2021, net revenues, excluding unfavorable currency, increased by 9.6%, reflecting:

favorable volume/mix, driven by higher heated tobacco unit volume (mainly in Russia and Ukraine), partly offset by unfavorable cigarette volume (primarily in Russia and Ukraine) and unfavorable cigarette mix (mainly in Russia);

and a favorable pricing variance, mainly driven by higher combustible pricing (primarily in Kazakhstan, Russia and Ukraine), partially offset by lower device pricing (mainly in Russia) and lower heated tobacco unit pricing (primarily in Ukraine, partly offset by Russia).

Operating income, excluding unfavorable currency, increased by 50.0%, primarily reflecting:

favorable volume/mix, driven by the same factors as for net revenues noted above;

lower manufacturing costs (mainly related to reduced-risk products, primarily in Russia);

and a favorable pricing variance.

During the quarter, net revenues, excluding currency and acquisitions, increased by 0.3%, reflecting:

a favorable pricing variance, mainly driven by higher combustible pricing (primarily in Russia);

largely offset by unfavorable volume/mix, mainly due to unfavorable cigarette volume (mainly in Russia).

During the quarter, Russia and Ukraine accounted for around 65% of PMI's total net revenues in the Region.

Operating income, excluding currency and acquisitions, decreased by 21.8%, notably reflecting pre-tax charges in the first quarter of 2022 related to the war in Ukraine ($42 million), as well as unfavorable volume/mix, mainly due to unfavorable cigarette volume/mix (primarily in Russia);

and higher marketing, administration and research costs;

partly offset by a favorable pricing variance.

Eastern Europe - Total Market, PMI Shipment Volume and Market Share Commentaries

In the third quarter, the estimated total market in Eastern Europe decreased, mainly due to:

• Russia, down by 0.9%, or by 2.5% excluding the net favorable impact of estimated trade inventory movements, primarily reflecting the impact of excise tax-driven price increases and a higher prevalence of illicit trade;

• Ukraine, down by 9.6%, mainly reflecting the impact of excise tax-driven price increases and a higher prevalence of illicit trade.

For the nine months year-to-date, the estimated total market in Eastern Europe decreased, primarily due to:

• Ukraine, down by 9.6%, mainly reflecting the impact of excise tax-driven price increases and a higher prevalence of illicit trade.

In the third quarter, our total shipment volume increased by 2.0% to 31.1 billion units, notably driven by:

• Russia, up by 0.7%.

Excluding the net favorable impact of estimated distributor inventory movements, our in-market sales decreased by 0.3%, reflecting the lower total market, partly offset by a higher market share driven by heated tobacco units;

• Southeast Europe, up by 15.5%, primarily reflecting a higher total market and a higher market share, driven by heated tobacco units and cigarettes,

partly offset by

• Ukraine, down by 3.2%, mainly reflecting the lower total market, partly offset by a higher market share driven by heated tobacco units.

For the nine months year-to-date, our total shipment volume increased by 1.5% to 86.4 billion units, notably driven by:

• Russia, up by 0.9%.

Excluding the net favorable impact of estimated distributor inventory movements, PMI’s total in-market sales volume was down by 2.1%, mainly reflecting a lower market share (due to cigarettes, partly offset by heated tobacco units);

• Southeast Europe, up by 8.0%, primarily reflecting a higher market share (driven by heated tobacco units and cigarettes) and a higher total market;

partly offset by

• Ukraine, down by 2.0%, mainly reflecting the lower total market, partly offset by a higher market share driven by heated tobacco units.

Excluding the net favorable impact of estimated distributor inventory movements, our total in-market sales volume decreased by 0.5%.

Given the company's intention to exit the Russian market and the impact of the war in Ukraine on business operations in the country, PMI is providing a total market estimate for the Eastern Europe Region excluding Russia and Ukraine.

In the quarter, the estimated total market in Eastern Europe, excluding Russia and Ukraine, increased, mainly driven by:

• Kazakhstan, up by 6.2%, primarily reflecting a favorable comparison versus the prior year period due to the temporary supply chain impact of the introduction, in January 2021, of certain mandatory requirements related to the sale of tobacco products;

• Southeast Europe, up by 10.0%, mainly reflecting increased in-bound travel and the impact on adult smoker average daily consumption of the easing of pandemic-related measures.

The company's reported shipment volume, presented below, includes Russia and Ukraine.

Our total shipment volume decreased by 4.8% to 24.4 billion units, primarily due to:

• Russia, down by 9.9%.

During the quarter, Russia and Ukraine accounted for around 73% of PMI's total shipment volume in the Region.

Excluding Russia and Ukraine, total shipment volume increased by 4.5%.

Middle East & Africa:

Financial Summary -

Quarters Ended September 30, Change

Quarters Ended

March 31, Change

Fav./(Unfav.) Variance

5 unchanged sentences

Operating Income $ 521 $ 335 55.5 % 89.9 % $ 186 $ (115) $ — $ 163 $ 125 $ 13

For the three months ended September 30, 2021, net revenues, excluding unfavorable currency, increased by 26.6%, primarily reflecting:

favorable volume/mix, mainly driven by higher cigarette volume (primarily in PMI Duty Free and Turkey, partly offset by North Africa), higher heated tobacco unit volume (mainly in PMI Duty Free) and favorable cigarette mix (notably in PMI Duty Free);

During the quarter, net revenues, excluding currency and acquisitions, increased by 42.3%, primarily reflecting:

favorable volume/mix, mainly driven by higher cigarette volume (primarily in Kuwait and PMI Duty Free, partly offset by Algeria) and higher heated tobacco unit volume (notably in Egypt);

and a favorable pricing variance, driven by combustible pricing (mainly in Turkey).

partly offset by lower fees for certain distribution rights billed to customers in certain markets, shown in "Cost/Other".

Operating income, excluding unfavorable currency, increased by 59.8%, mainly reflecting:

favorable volume/mix, mainly driven by the same factors as for net revenues noted above;

a favorable pricing variance;

and lower manufacturing costs;

partly offset by lower fees for certain distribution rights, as noted above for net revenues;

and higher marketing, administration and research costs.

Financial Summary -

Nine Months Ended September 30, Change

Fav./(Unfav.) Variance

Fav./(Unfav.)

2021 2020 Total Excl.

rency Acqui-sitions Price Vol/

(in millions)

Net Revenues $ 2,306 $ 2,348 (1.8) % 1.0 % $ (42) $ (66) $ — $ 191 $ 110 $ (277)

Operating Income $ 739 $ 819 (9.8) % (0.7) % $ (80) $ (74) $ — $ 191 $ 70 $ (267)

For the nine months ended September 30, 2021, net revenues, excluding unfavorable currency, increased by 1.0%, despite the unfavorable impact of the Saudi Arabia customs assessments of $246 million, shown in "Cost/Other".

Excluding the unfavorable impact of the Saudi Arabia customs assessments and unfavorable currency, net revenues increased by 11.5%, primarily reflecting:

a favorable pricing variance, mainly driven by combustible pricing (mainly in Egypt and Turkey);

and favorable volume/mix, primarily driven by favorable cigarette mix (mainly in PMI Duty Free, Saudi Arabia and Turkey), higher heated tobacco unit volume (mainly in Egypt, Jordan and PMI Duty Free) and higher cigarette volume (primarily in PMI Duty Free and Turkey, partly offset by Kuwait and North Africa);

partially offset by lower fees for certain distribution rights billed to customers in certain markets, shown in "Cost/Other".

Operating income, excluding unfavorable currency, decreased by 0.7%, predominantly due to the unfavorable impact of the Saudi Arabia customs assessments, as noted above for net revenues.

Excluding the unfavorable impact of the Saudi Arabia customs assessments and unfavorable currency, operating income increased by 29.5%, mainly reflecting:

Operating income, excluding currency and acquisitions, increased by 89.9%, mainly reflecting:

a favorable pricing variance;

favorable volume/mix, driven by the same factors as for net revenues noted above;

and lower manufacturing costs (primarily related to combustible products);

partly offset by lower fees for certain distribution rights, as noted above for net revenues;

and higher marketing, administration and research costs.

favorable volume/mix, mainly driven by the same factors and geographies as for net revenues noted above;

and lower marketing, administration and research costs;

partly offset by higher manufacturing costs (primarily due to inflationary impacts).

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

In the third quarter, the estimated total market in the Middle East & Africa increased, mainly driven by:

• International Duty Free, up by 15.4%, reflecting the impact of reduced government travel restrictions and increased passenger traffic in certain geographies;

• Turkey, up by 12.5%, mainly reflecting the impact on adult smoker average daily consumption of the easing of pandemic-related measures, coupled with increased in-bound tourism (particularly by Turkish expatriates);

partly offset by

• Tunisia, down by 30.1%, primarily reflecting an increased estimated prevalence of illicit trade (mainly due to market disruptions impacting product availability and the impact of price increases in July 2021).

For the nine months year-to-date, the estimated total market in the Middle East & Africa increased, mainly driven by:

• Egypt, up by 14.3%, primarily reflecting a favorable comparison due to pandemic-related supply chain shortages for competitors' products in 2020, as well as the favorable impact of adult smoker in-switching to cigarettes (mainly in the low-tax tier) from other combustible tobacco products;

• South Africa, up by 26.9%, mainly reflecting a favorable comparison versus the second and third quarters of 2020, in which the total market was impacted by the pandemic-related ban on all tobacco sales from March 27th through August 17th, partly offset by a higher estimated prevalence of illicit trade stemming from the ban;

• Turkey, up by 6.6%, primarily reflecting the same factors as for the quarter, partly offset by a higher estimated prevalence of illicit trade;

In the quarter, the estimated total market in the Middle East & Africa decreased, mainly due to:

• Algeria, down by 37.5%, or by 8.2% excluding the net unfavorable impact of estimated trade inventory movements, primarily reflecting industry supply chain disruptions;

• Turkey, down by 6.8%, mainly reflecting a higher estimated prevalence of illicit trade, partly offset by the impact on adult smoker average daily consumption of the easing of pandemic-related measures, coupled with increased in-bound tourism;

partly offset by

• International Duty Free, down by 17.2%, primarily reflecting the impact of government travel restrictions and reduced passenger traffic since the start of the pandemic in March 2020.

In the third quarter, our total shipment volume increased by 15.0% to 35.7 billion units, notably driven by:

• PMI Duty Free, up by +100%, or by 43.8% excluding the net favorable impact of estimated distributor inventory movements, reflecting a higher market share and the higher total market;

• Turkey, up by 18.4%, primarily reflecting the higher total market and a higher market share, driven by adult smoker up-trading (mainly benefiting Marlboro and Parliament) ;

• International Duty Free, up by 40.2%, reflecting the impact of reduced government travel restrictions and increased passenger traffic in certain geographies.

Our total shipment volume increased by 8.3% to 30.4 billion units, notably driven by:

• PMI Duty Free, up by +100%, or by 50.8% excluding the net favorable impact of estimated distributor inventory movements, reflecting the higher total market and a higher market share;

• Egypt, up by 10.7%, primarily reflecting a higher market share, driven by cigarettes and heated tobacco units;

partly offset by

• Egypt, down by 12.4%, primarily reflecting a lower market share mainly due to adult smoker down-trading to products in the low-tax tier.

• Algeria, down by 27.5%, mainly reflecting the lower total market, partly offset by a higher market share driven by cigarettes.

Excluding the net favorable impact of estimated distributor inventory movements, our total in-market sales volume increased by 4.3%.

For the nine months year-to-date, our total shipment volume increased by 6.4% to 94.6 billion units, notably driven by:

• PMI Duty Free, up by 25.1%.

Excluding the net favorable impact of estimated distributor inventory movements (principally due to cigarettes), our in-market sales volume was down by 3.6%, primarily reflecting the lower total market, partly offset by a higher market share driven by Marlboro ;

• Turkey, up by 14.6%, mainly reflecting the same factors as in the quarter;

partly offset by

• Egypt, down by 6.5%, mainly reflecting a lower market share (due primarily to the same factor as in the quarter), partly offset by the higher total market.

South & Southeast Asia:

Financial Summary -

Quarters Ended September 30, Change

Fav./(Unfav.) Variance

Fav./(Unfav.)

2021 2020 Total Excl.

rency Acqui-sitions Price Vol/

(in millions)

Net Revenues $ 1,065 $ 1,071 (0.6) % (1.1) % $ (6) $ 6 $ — $ 14 $ (26) $ —

Operating Income $ 348 $ 402 (13.4) % (14.4) % $ (54) $ 4 $ — $ 14 $ (42) $ (30)

For the three months ended September 30, 2021, net revenues, excluding favorable currency, decreased by 1.1%, reflecting:

unfavorable volume/mix, due to lower cigarette volume (primarily in the Philippines, partly offset by Indonesia);

partially offset by a favorable pricing variance, driven by combustible pricing (mainly in the Philippines, partly offset by Indonesia).

Operating income, excluding favorable currency, decreased by 14.4%, primarily reflecting:

unfavorable volume/mix, due to the same factors as for net revenues noted above;

and higher manufacturing costs;

partly offset by a favorable pricing variance.

Financial Summary -

Nine Months Ended September 30, Change

Quarters Ended

March 31, Change

Fav./(Unfav.) Variance

5 unchanged sentences

Operating Income $ 445 $ 529 (15.9) % (11.2) % $ (84) $ (25) $ — $ (145) $ 87 $ (1)

For the nine months ended September 30, 2021, net revenues, excluding favorable currency, decreased by 0.9%, reflecting:

unfavorable volume/mix, mainly due to lower cigarette volume (primarily the Philippines, partly offset by India and Indonesia), partially offset by favorable cigarette mix (mainly in Indonesia and the Philippines).

Pricing variance was slightly unfavorable, reflecting lower pricing for combustible products (notably in Indonesia, largely offset by the Philippines).

Operating income, excluding favorable currency, decreased by 9.1%, primarily reflecting:

unfavorable volume/mix, due to the same factors as for net revenues noted above;

and higher marketing, administration and research costs.

During the quarter, net revenues, excluding currency and acquisitions, decreased by 0.5%, reflecting:

an unfavorable pricing variance, due to combustible pricing (mainly in Indonesia and the Philippines);

largely offset by favorable volume/mix, primarily driven by higher cigarette volume (mainly in Indonesia and the Philippines) and favorable cigarette mix (primarily in Indonesia, partly offset by the Philippines).

Operating income, excluding currency and acquisitions, decreased by 11.2%, primarily reflecting:

an unfavorable pricing variance;

partly offset by favorable volume/mix, mainly driven by higher cigarette volume (primarily in Indonesia and the Philippines).

South & Southeast Asia - Total Market, PMI Shipment Volume and Market Share Commentaries

In the third quarter, the estimated total market in South & Southeast Asia increased, mainly driven by:

• Bangladesh, up by 29.9%, primarily reflecting a favorable comparison versus the third quarter of 2020, during which pandemic-related restrictions impacted tobacco product availability;

• India, up by 8.3%, mainly reflecting a favorable comparison versus the third quarter of 2020, during which pandemic-related restrictions impacted the movement of certain products, including tobacco;

• Indonesia, up by 6.0%, primarily reflecting the growth of the tax-advantaged 'below tier one' segment and the impact on adult smoker consumption of the easing of pandemic-related measures compared to the prior year period;

• Pakistan, up by 29.3%, or by 14.1% excluding the net favorable impact of estimated trade inventory movements, notably reflecting a lower prevalence of illicit trade (partly due to pandemic-related supply disruptions for illicit products);

partly offset by:

• the Philippines, down by 17.7%, or by 8.7% excluding the net unfavorable impact of estimated trade inventory movements, primarily reflecting the impact of industry-wide price increases in the fourth quarter of 2020.

For the nine months year-to-date, the estimated total market in South & Southeast Asia increased, mainly driven by:

• Bangladesh, up by 13.6%, primarily reflecting the same factor as in the quarter;

• India, up by 13.8%, mainly reflecting the same factor as in the quarter;

• Indonesia, up by 7.9%, primarily reflecting the same factors as in the quarter;

• Pakistan, up by 18.9%, notably reflecting the same factor as in the quarter;

• Vietnam, up by 7.2%, mainly reflecting a lower prevalence of illicit trade due to pandemic-related supply disruptions for illicit products;

partly offset by:

• the Philippines, down by 12.3%, primarily reflecting the same factor as in the quarter.

In the third quarter, our total shipment volume decreased by 4.3% to 35.7 billion units, mainly due to:

• the Philippines, down by 23.8%, primarily reflecting the lower total market and a lower market share (mainly due to mid-price Fortune, reflecting the impact of price increases in the fourth quarter of 2020, partly offset by Marlboro );

partly offset by:

• Indonesia, up by 5.1%, primarily reflecting the higher total market.

For the nine months year-to-date, our total shipment volume decreased by 2.1% to 105.9 billion units, notably due to:

• the Philippines, down by 20.3%, mainly reflecting the same factors as in the quarter;

In the quarter, the estimated total market in South & Southeast Asia increased, mainly due to:

• India, up by 7.2%, primarily reflecting a favorable comparison versus the prior year period, during which pandemic-related restrictions impacted the movement of certain products, including tobacco;

• Indonesia, up by 5.8%, mainly reflecting impact on adult smoker consumption of the easing of pandemic-related measures, which drove growth in the tax-advantaged 'below tier one' segment;

• the Philippines, up by 19.2%, primarily reflecting the net favorable impact of estimated trade inventory movements related to first-quarter 2022 price increases;

partly offset by

• Indonesia, up by 4.3%, primarily reflecting the higher total market, partly offset by a lower market share (mainly due to adult smoker down-trading to the 'below tier one' segment as a result of significantly lower retail prices, partly offset by share growth for PMI's premium and hand-rolled portfolio);

• Pakistan, up by 14.2%, mainly reflecting the higher total market, partly offset by a lower market share.

• Bangladesh, down by 12.9%, mainly reflecting the impact of pandemic-related restrictions on mobility during February 2022;

• Thailand, down by 13.3%, primarily reflecting the impact of excise tax-driven price increases.

Our total shipment volume increased by 7.5% to 37.6 billion units, mainly driven by:

• Indonesia, up by 5.2%, primarily reflecting the higher total market, partly offset by a lower market share (mainly due to adult smoker down-trading to the 'below tier one' segment as a result of significantly lower retail prices, partly offset by share growth for our premium and hand-rolled portfolio);

• the Philippines, up by 18.4%, primarily reflecting the higher total market.

East Asia & Australia:

Financial Summary -

Quarters Ended September 30, Change

Quarters Ended

March 31, Change

Fav./(Unfav.) Variance

5 unchanged sentences

Operating Income $ 571 $ 695 (17.8) % (8.1) % $ (124) $ (68) $ — $ 30 $ (121) $ 35

For the three months ended September 30, 2021, net revenues, excluding unfavorable currency, increased by 12.7%, reflecting:

favorable volume/mix, mainly driven by higher heated tobacco unit volume and favorable device volume/mix (predominantly in Japan, driven by the launch of IQOS ILUMA ), partly offset by unfavorable cigarette mix (primarily in Japan) and lower cigarette volume (particularly in Australia, partly offset by Japan);

and a favorable pricing variance, primarily driven by higher heated tobacco, combustible and device pricing in Japan.

Operating income, excluding unfavorable currency, increased by 2.7%, mainly reflecting:

a favorable pricing variance;

and lower manufacturing costs (primarily related to reduced-risk products in Japan);

partly offset by higher marketing, administration and research costs (notably due to the launch of IQOS ILUMA in Japan and higher asset impairment and exit costs, mainly related to product distribution restructuring in South Korea).

Volume/mix was slightly favorable, notably reflecting higher heated tobacco unit and cigarette volume in Japan, largely offset by lower cigarette volume in Australia and unfavorable cigarette mix in Japan.

During the quarter, net revenues, excluding currency and acquisitions, increased by 2.6%, reflecting:

a favorable pricing variance, primarily driven by higher combustible pricing (predominantly in Japan).

Volume/mix was slightly favorable, mainly reflecting higher device and heated tobacco unit volume in Japan, largely offset by unfavorable cigarette mix (primarily in Japan) and unfavorable device mix in Japan.

Operating income, excluding currency and acquisitions, decreased by 8.1%, mainly reflecting:

unfavorable volume/mix, primarily due to unfavorable mix for cigarettes and devices in Japan;

and higher manufacturing costs (mainly due to higher logistics costs);

partly offset by lower marketing, administration and research costs (notably driven by a favorable comparison related to 2021 asset impairment and exit costs of $31 million);

and a favorable pricing variance.

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

In the quarter, the estimated total market in East Asia & Australia, excluding China, decreased, mainly due to:

• Japan, down by 3.2%, primarily reflecting the impact of the October 2021 excise tax-driven price increase.

Our total shipment volume increased by 1.7% to 20.8 billion units, mainly driven by:

• Japan, up by 3.2%.

Excluding the net favorable impact of estimated distributor inventory movements, total in-market sales volume was essentially stable.

Excluding the net favorable impact of estimated distributor inventory movements, our total in-market sales volume decreased by 1.0%.

Financial Summary -

Nine Months Ended September 30, Change

Quarters Ended

March 31, Change

Fav./(Unfav.) Variance

5 unchanged sentences

Operating Income $ 121 $ 134 (9.7) % (8.2) % $ (13) $ (2) $ — $ 19 $ (9) $ (21)

For the nine months ended September 30, 2021, net revenues, excluding favorable currency, increased by 9.0%, mainly reflecting:

a favorable pricing variance, primarily driven by higher heated tobacco and combustible pricing in Japan, partly offset by lower combustible pricing in Australia;

and favorable volume/mix, mainly driven by higher heated tobacco unit volume and favorable device volume/mix in Japan (driven by the launch of IQOS ILUMA ), partly offset by lower cigarette volume (primarily in Australia, Japan and South Korea) and unfavorable cigarette mix (mainly in Australia and Japan).

Operating income, excluding unfavorable currency, increased by 14.2%, mainly reflecting:

a favorable pricing variance;

lower manufacturing costs (primarily related to reduced-risk products in Japan);

and favorable volume/mix, driven by higher heated tobacco unit volume in Japan, partly offset by lower cigarette volume (primarily in Australia, Japan and South Korea), unfavorable cigarette mix (mainly in Australia and Japan) and unfavorable heated tobacco unit mix in Japan;

partially offset by higher marketing, administration and research costs (notably reflecting the same factors as in the quarter).

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

In the third quarter, the estimated total market in East Asia & Australia, excluding China, decreased, primarily due to:

• Australia, down by 28.0%, or by 18.3% excluding the net unfavorable impact of estimated trade inventory movements, mainly reflecting the impact of the ending of the pandemic-related wage subsidy by the government, coupled with the impact of pandemic-related restrictions in the quarter;

• Japan, down by 2.8%, primarily reflecting the impact of the October 2020 excise tax-driven price increases;

• South Korea, down by 5.2%, or by 0.9% excluding the net unfavorable impact of estimated trade inventory movements, mainly reflecting the structural market trend;

• Taiwan, down by 10.8%, primarily reflecting impact of pandemic-related restrictions in the quarter.

For the nine months year-to-date, the estimated total market in East Asia & Australia, excluding China, decreased, mainly due to:

• Australia, down by 14.5%, primarily reflecting the same factors as in the quarter;

• Japan, down by 3.7%, mainly reflecting the same factor as in the quarter;

• South Korea, down by 1.4%, primarily reflecting the same factor as in the quarter, partly offset by the impact of pandemic-related subsidies on adult smoker average daily consumption.

In the third quarter, our total shipment volume increased by 6.0% to 20.6 billion units, mainly driven by:

• Japan, up by 14.6%, or by 1.0% excluding the net favorable impact of estimated distributor inventory movements, primarily reflecting a higher market share (driven by heated tobacco units), partly offset by the lower total market;

During the quarter, net revenues, excluding currency and acquisitions, increased by 0.7%, reflecting:

a favorable pricing variance, driven by combustible products (mainly in Argentina, Brazil and Mexico);

partly offset by unfavorable volume/mix, mainly due to lower cigarette volume (primarily in Argentina) and unfavorable cigarette mix (primarily in Brazil).

Operating income, excluding currency and acquisitions, decreased by 8.2%, mainly reflecting:

higher manufacturing costs (primarily due to inflationary impacts);

and unfavorable volume/mix (mainly due to the same factors and geographies as for net revenues noted above);

partly offset by a favorable pricing variance.

Americas - Total Market, PMI Shipment Volume and Market Share Commentaries

In the quarter, the estimated total market in Americas, excluding the U.S., decreased, primarily due to:

• Canada, down by 14.3%, notably reflecting the impact of price increases and out-switching from cigarettes to e-vapor products;

• Mexico, down by 3.8%.

Excluding the net unfavorable impact of estimated trade inventory movements, the total market increased by 1.4%, mainly driven by the impact on adult smoker average daily consumption of the easing of pandemic-related measures, coupled with the impact of increased in-bound tourism;

partly offset by

• South Korea, down by 5.9%, mainly reflecting the lower total market and a lower market share (due to cigarettes).

Excluding the net favorable impact of estimated distributor inventory movements, our total in-market sales volume declined by 1.7%.

For the nine months year-to-date, our total shipment volume increased by 3.3% to 61.9 billion units, mainly driven by:

• Japan, up by 7.2%, or by 1.3% excluding the net favorable impact of estimated distributor inventory movements, primarily reflecting the same factors as in the quarter;

• Brazil, up by 4.1%, primarily reflecting a lower estimated prevalence of illicit trade.

Our total shipment volume decreased by 0.6% to 14.9 billion units, mainly due to:

• Argentina, down by 7.1%, primarily reflecting a lower market share due to adult smoker down-trading to ultra-low-price brands produced by local manufacturers;

partly offset by

• South Korea, down by 5.3%, mainly reflecting the same factors as in the quarter.

Excluding the net favorable impact of estimated distributor inventory movements, our total in-market sales volume declined by 0.6%.

Financial Summary -

Quarters Ended September 30, Change

Fav./(Unfav.) Variance

Fav./(Unfav.)

2021 2020 Total Excl.

rency Acqui-sitions Price Vol/

(in millions)

Net Revenues $ 456 $ 400 14.0 % 9.0 % $ 56 $ 20 $ — $ 16 $ 21 $ (1)

Operating Income $ 121 $ 110 10.0 % 6.4 % $ 11 $ 4 $ — $ 16 $ 3 $ (12)

For the three months ended September 30, 2021, net revenues, excluding favorable currency, increased by 9.0%, reflecting:

favorable volume/mix, mainly driven by higher cigarette volume (primarily in Colombia and Mexico) and higher device volume (notably in Canada);

and a favorable pricing variance driven by combustible products (notably in Argentina and Mexico).

Operating income, excluding favorable currency, increased by 6.4%, primarily reflecting:

a favorable pricing variance;

partly offset by higher manufacturing costs;

and higher marketing, administration and research costs.

• Brazil, up by 5.4%, mainly reflecting the higher total market and a higher market share driven by Chesterfield .

In the third quarter of 2021, we acquired Fertin Pharma A/S, Vectura Group plc.

and OtiTopic, Inc.

On March 31, 2022, we launched a new Wellness and Healthcare business consolidating these entities, Vectura Fertin Pharma.

The operating results of this new business are reported in the Other category.

The business operations of our Wellness and Healthcare business are managed and evaluated separately from the geographical segments.

Financial Summary -

Nine Months Ended September 30, Change

Quarters Ended

March 31, Change

Fav./(Unfav.) Variance

4 unchanged sentences

Net Revenues $ 66 $ — — % — % $ 66 $ — $ 66 $ — $ — $ —

Operating Income $ 367 $ 328 11.9 % 8.2 % $ 39 $ 12 $ — $ 28 $ (3) $ 2

For the nine months ended September 30, 2021, net revenues, excluding favorable currency, increased by 5.4%, mainly reflecting:

favorable volume/mix, primarily driven by higher cigarette volume (mainly in Brazil and Mexico) and higher device volume (notably in Canada);

and a favorable pricing variance, driven by higher combustible pricing (notably in Argentina and Colombia).

Operating income, excluding favorable currency, increased by 8.2%, primarily reflecting:

a favorable pricing variance;

and lower marketing, administration and research costs;

partly offset by higher manufacturing costs.

Americas - Total Market, PMI Shipment Volume and Market Share Commentaries

In the third quarter, the estimated total market in Americas decreased, notably due to:

• Argentina, down by 2.1%, primarily reflecting the impact of price increases;

• Canada, down by 12.7%, notably reflecting the impact of price increases and out-switching from cigarettes to e-vapor products;

partly offset by

• Colombia, up by 13.4%, primarily reflecting the impact on adult smoker average daily consumption of the easing of pandemic-related measures.

For the nine months year-to-date, the estimated total market in Americas increased, notably driven by:

• Argentina, up by 7.5%, primarily reflecting a lower estimated prevalence of illicit trade and a favorable comparison related to retail out-of-stock in the second quarter of 2020 (due to temporary factory shutdowns related to the pandemic), partly offset by the impact of price increases;

• Brazil, up by 5.4%, mainly reflecting a lower estimated prevalence of illicit trade due to:

reduced price gaps with legal products and the impact of border restrictions imposed as a result of the pandemic;

• Mexico, up by 3.0%, primarily reflecting the impact on adult smoker average daily consumption of the easing of pandemic-related measures coupled with the impact of increased in-bound tourism;

partly offset by

• Canada, down by 8.5%, mainly reflecting the same factors as in the quarter.

In the third quarter, our total shipment volume increased by 2.5% to 16.2 billion units, notably driven by:

• Colombia, up by 11.0%, primarily reflecting the higher total market;

• Mexico, up by 3.9%, mainly reflecting a higher market share driven by Marlboro .

partly offset by

• Argentina, down by 2.5%, primarily reflecting the lower total market.

For the nine months year-to-date, our total shipment volume increased by 1.5% to 46.6 billion units, primarily driven by:

• Brazil, up by 6.4%, mainly reflecting the higher total market and a higher market share driven by Chesterfield ;

• Mexico, up by 3.9%, primarily reflecting the higher total market and a higher market share driven by Marlboro ;

partly offset by

• Argentina, down by 2.4%, mainly reflecting a lower market share (primarily due to adult smoker down-trading to ultra-low-price brands produced by local manufacturers).

As previously discussed in the Description of Our Company section of this MD&A, Other includes our third quarter 2021 acquisitions of Fertin Pharma A/S, Vectura Group plc.

and OtiTopic, Inc.

Business operations for the Other category are evaluated separately from the geographical segments.

Due to the timing of the Fertin Pharma and Vectura acquisitions, we did not record the immaterial results of operations from these two acquisitions in our condensed consolidated statements of earnings from the acquisition date through September 30, 2021.

For the three months and nine months ended September 30, 2021, we accounted for the OtiTopic, Inc.

transaction as an asset acquisition.

As a result, PMI recorded a pre-tax charge of $51 million to research and development costs within marketing, administration and research costs of the Other category.

For further details, see Note 7.

Segment Reporting and Note 17.

Acquisitions .

Operating Income / (Loss) $ (31) $ — — % — % $ (31) $ — $ (24) $ — $ — $ (7)

During the quarter, we recorded net revenues of $66 million, as well as an operating loss of $31 million, primarily reflecting the amortization of intangibles related to the acquisitions, investments in research and development, and expenses related to employee retention programs.

Financial Review

Cash Flow Highlights

For the Nine Months Ended September 30,

For the Three Months Ended March 31,

(in millions) 2022 2021

Net cash provided by operating activities $ 1,118 $ 435

Net cash used in investing activities (2,018) (568)

Net cash provided by (used in) investing activities (196) 55

Net cash used in financing activities (701) (3,649)

Net Cash Provided by Operating Activities

During the first nine months of 2021, net cash provided by operating activities increased by $1.3 billion compared with the first nine months of 2020.

Excluding favorable currency movements of $0.8 billion, net cash provided by operating activities increased by $0.5 billion, due primarily to higher net earnings, partially offset by higher working capital requirements of $0.2 billion and higher pension plan contributions.

The higher working capital requirements in the first nine months of 2021 as compared with the first nine months of 2020 were primarily due to the timing of excise tax-paid inventory movements and excise tax payments, as well as lower usage of our factoring arrangements to sell trade receivables, partially offset by more cash provided by inventories primarily due to COVID-19 pandemic related build-up of inventory levels across our supply chain in 2020.

For further details on our factoring arrangements to sell trade receivables, see Note 13.

Sale of Accounts Receivable .

Net Cash Used in Investing Activities

During the first nine months of 2021, net cash used in investing activities increased by $1.5 billion as compared to the first nine months of 2020.

This increase was due to $1.9 billion of cash used in 2021 for our acquisitions, net of acquired cash, partially offset by favorable movements of $0.4 billion in cash collateral exchanged with financial institutions to secure derivatives designated as net investment hedges of Euro assets principally related to changes in exchange rates between the Euro and the U.S.

For further detail on our 2021 acquisitions and derivatives designated as net investment hedges, see Note 17.

Acquisitions and Note 5.

During the first quarter of 2022, net cash provided by operating activities increased by $0.7 billion compared with the first quarter of 2021.

Excluding unfavorable currency movements of $0.4 billion, net cash provided by operating activities increased by $1.1 billion, due primarily to higher currency-neutral net earnings and lower working capital requirements of $0.7 billion.

The lower working capital requirements in the first quarter of 2022 as compared with the first quarter of 2021 were primarily due to the timing of excise tax-paid inventory movements and excise tax payments, including the 2021 settlement of excise tax liabilities driven by the COVID-19 pandemic-related build-up of inventory.

Net Cash Provided by (Used in) Investing Activities

During the first quarter of 2022, net cash used in investing activities was $196 million as compared to $55 million of net cash provided by investing activities in the first quarter of 2021.

This change was due primarily to unfavorable movements of $78 million in cash collateral exchanged with financial institutions to secure derivatives designated as net investment hedges of Euro assets principally related to changes in exchange rates between the Euro and the U.S.

dollar, higher capital expenditures and other investments.

For further detail on our derivatives designated as net investment hedges and other investments, see Note 5.

Financial Instruments.

Capital expenditures of $0.5 billion during the first nine months of 2021 were essentially flat as compared with the first nine months of 2020.

Capital expenditures of $229 million during the first quarter of 2022 increased slightly as compared with the first quarter of 2021.

The 2022 capital expenditures were primarily related to our ongoing investments in RRPs.

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Net Cash Used in Financing Activities

During the first nine months of 2021, net cash used in financing activities increased by $0.1 billion compared to the first nine months of 2020.

Higher cash usage primarily reflected a dividend increase in the third quarter of 2020, share purchases under the new share repurchase program and net movements in debt, partially offset by other items.

During the first quarter of 2022, net cash used in financing activities decreased by $2.9 billion compared to the first quarter of 2021.

The lower cash usage primarily reflected proceeds from short-term borrowings in 2022 (primarily commercial paper of $2.2 billion) and lower long-term debt repayments ($0.5 billion in 2022 compared with 1.6 billion in 2021), partially offset by share repurchases in the first quarter of 2022 under our share repurchase program and the purchase of the remaining stakes in our Turkish affiliates in the first quarter of 2022.

For further details on the purchase of the remaining stakes in our Turkish affiliates, see Note 17.

Acquisitions .

Debt and Liquidity

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Such agreements are collateralized with government or corporate securities held by a custodial bank and, at maturity, cash is paid back to PMI, and the collateral is returned to the bank.

For the nine months ended September 30, 2021 and the full-year 2020, the activities for such reverse repurchase agreements were not material.

For the three months ended March 31, 2022 and the full-year 2021, the activities for such reverse repurchase agreements were not material.

We utilize long-term and short-term debt financing, including a commercial paper program that is regularly used to finance ongoing liquidity requirements, as part of our overall cash management strategy.

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Credit Ratings – The cost and terms of our financing arrangements as well as our access to commercial paper markets may be affected by applicable credit ratings.

At September 30, 2021, our credit ratings and outlook by major credit rating agencies were as follows:

At March 31, 2022, our credit ratings and outlook by major credit rating agencies were as follows:

Short-term Long-term Outlook

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Fitch F1 A Stable

Credit Facilities – On January 29, 2021, we entered into an agreement to amend and extend the term of our 364-day revolving credit facility from February 2, 2021, to February 1, 2022 in the amount of $1.8 billion.

On January 29, 2021, we entered into an agreement, effective February 10, 2021, to amend and extend the term of its $2.0 billion multi-year revolving credit facility, for an additional year covering the period February 11, 2025 to February 10, 2026.

On September 29, 2021, we entered into a new $2.5 billion multi-year revolving credit facility, expiring on September 29, 2026.

This credit facility is our first financing instrument following the issuance of our Framework, and contains business transformation-linked pricing adjustments that may result in the reduction or increase in both the interest rate and commitment fee under the credit agreement if PMI achieves, or fails to achieve, certain specified targets based on its business transformation goals.

The new credit facility replaced the $3.5 billion multi-year revolving credit facility, which was terminated effective September 29, 2021.

We had no borrowings outstanding under the terminated facility, which was due to expire on October 1, 2022.

At September 30, 2021, our committed credit facilities were as follows:

Credit Facilities

At March 31, 2022, our committed credit facilities were as follows:

(in billions)

Type Committed

364-day revolving credit, expiring February 1, 2022

364-day revolving credit, expiring January 31, 2023

Multi-year revolving credit, expiring February 10, 2026 (1)

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Total facilities

At September 30, 2021, there were no borrowings under the committed credit facilities, and the entire committed amounts were available for borrowing.

Subject to market conditions, PMI currently expects to request a further extension of the terms of its 364-day revolving credit facility and its $2.0 billion multi-year revolving credit facility for an additional one-year period, in accordance with and subject to the terms and conditions of the relevant revolving credit facility agreement.

(1) On January 28, 2022, we entered into an agreement, effective February 10, 2022, to amend and extend the term of our $2.0 billion multi-year revolving credit facility, for an additional year covering the period February 11, 2026 to February 10, 2027, in the amount of $1.9 billion.

(2) Includes business transformation-linked pricing adjustments that may result in the reduction or increase in both the interest rate and commitment fee under the credit agreement if PMI achieves, or fails to achieve, certain specified targets based on its business transformation goals.

At March 31, 2022, there were no borrowings under the committed credit facilities, and the entire committed amounts were available for borrowing.

Subject to market conditions, we currently expect to request an extension of the terms of our $2.5 billion multi-year revolving credit facility for an additional one-year period, in accordance with and subject to the terms and conditions of the relevant revolving credit facility agreement.

All banks participating in our committed credit facilities have an investment-grade long-term credit rating from the credit rating agencies.

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In addition to the committed credit facilities discussed above, certain of our subsidiaries maintain short-term credit arrangements to meet their respective working capital needs.

These credit arrangements, which amounted to approximately $2.4 billion at September 30, 2021 and $2.7 billion at December 31, 2020, are for the sole use of our subsidiaries.

Borrowings under these arrangements and other bank loans amounted to $223 million at September 30, 2021, and $244 million at December 31, 2020.

These credit arrangements, which amounted to approximately $2.3 billion at March 31, 2022 and December 31, 2021, are for the sole use of our subsidiaries.

Borrowings under these arrangements and other bank loans amounted to $208 million at March 31, 2022, and $225 million at December 31, 2021.

Commercial Paper Program – We continue to have access to liquidity in the commercial paper market through programs in place in the U.S.

and in Europe having an aggregate issuance capacity of $8.0 billion.

At September 30, 2021 and December 31, 2020, we had no commercial paper outstanding.

The average commercial paper balance outstanding during the first nine months of 2021 was $1.1 billion.

At March 31, 2022, we had $2.2 billion of commercial paper outstanding.

At December 31, 2021, we had no commercial paper outstanding.

The average commercial paper balance outstanding during the first three months of 2022 was $3.7 billion.

The average commercial paper balance outstanding during 2021 was $1.1 billion.

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Our operating cash flows were positively impacted by the amount of the trade receivables sold and derecognized from the condensed consolidated balance sheets, which remained outstanding with the unaffiliated financial institutions.

The trade receivables sold that remained outstanding under these arrangements as of September 30, 2021, and September 30, 2020 were $0.7 billion and $0.6 billion, respectively.

The trade receivables sold that remained outstanding under these arrangements as of March 31, 2022, and March 31, 2021 were $598 million and $625 million, respectively.

The net proceeds received are included in cash provided by operating activities in the condensed consolidated statements of cash flows.

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Sale of Accounts Receivable to our condensed consolidated financial statements.

Debt – Our total debt was $29.1 billion at September 30, 2021 and $31.5 billion at December 31, 2020.

Debt – Our total debt was $29.4 billion at March 31, 2022 and $27.8 billion at December 31, 2021.

On February 11, 2020, we filed a shelf registration statement with the U.S.

Securities and Exchange Commission, under which we may from time to time sell debt securities and/or warrants to purchase debt securities over a three-year period.

Guarantees – At September 30, 2021, we have guarantees of our own performance, which are primarily related to excise taxes on the shipment of our products.

Guarantees – At March 31, 2022, we have guarantees of our own performance, which are primarily related to excise taxes on the shipment of our products.

There is no liability in the condensed consolidated financial statements associated with these guarantees.

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Equity and Dividends

We discuss our stock awards as of September 30, 2021 in Note 2.

We discuss our stock awards as of March 31, 2022 in Note 2.

Stock Plans to our condensed consolidated financial statements.

During 2020 and the first six months of 2021, we did not repurchase any shares under a share repurchase program.

On June 11, 2021, our Board of Directors authorized a new share repurchase program of up to $7 billion, with target spending of $5 billion to $7 billion over a three-year period.

On July 22, 2021, we began repurchasing shares under this new share repurchase program.

From July 22, 2021 through September 30, 2021, we repurchased 0.9 million shares of our common stock at a cost of $94 million.

Dividends paid in the first nine months of 2021 were $5.6 billion.

From July 22, 2021 through March 31, 2022, we repurchased 10.5 million shares of our common stock at a cost of approximately $1.0 billion.

During the first quarter of 2022, we repurchased 2.0 million shares of our common stock at a cost of $199 million.

Dividends paid in the first quarter of 2022 were $2.0 billion.

During the third quarter of 2021, our Board of Directors approved a 4.2% increase in the quarterly dividend to $1.25 per common share.

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Overall Business Risks

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

Our key strategic priorities are to:

(i) develop and commercialize products that present less risk of harm to adult smokers who switch to those products versus continued smoking;

and (ii) convince and educate current adult smokers who would otherwise continue to smoke to switch to those RRPs.

For our efforts to be successful, we must:

• develop RRPs that adult smokers find acceptable alternatives to smoking;

• conduct rigorous scientific studies to substantiate that they reduce exposure to harmful and potentially harmful constituents in smoke and, ultimately, that these products present, are likely to present, or have the potential to present less risk of harm to adult smokers who switch to them versus continued smoking;

• effectively advocate for a timely development of science-based regulatory frameworks for the development and commercialization of RRPs, including communication of scientifically substantiated information to enable adult smokers to make better consumer choices.

We might not succeed in our efforts.

If we do not succeed, but others do, or if heat-not-burn products are inequitably regulated compared to other RRP categories without regard to the totality of the scientific evidence available for such products, we may be at a competitive disadvantage.

In addition, actions of some market entrants, such as the inappropriate marketing of e-vapor products to youth, as well as alleged health consequences associated with the use of certain e-vapor products, may unfavorably impact public opinion and/or mischaracterize all e-vapor products or other RRPs to consumers, regulators and policy makers without regard to the totality of scientific evidence available for specific products.

This may impede our efforts to advocate for the development of science-based regulatory frameworks for the development and commercialization of RRPs.

We cannot predict whether regulators will permit the sale and/or marketing of RRPs with scientifically substantiated information and claims.

Such restrictions could limit the success of our RRPs.

The WHO study group on tobacco product regulation ("TobReg") published their eighth report on the scientific basis of tobacco product regulation in May 2021.

The report is based on a review of scientific evidence related to novel and emerging nicotine and tobacco products, such as electronic nicotine delivery systems ("ENDS"), electronic non-nicotine delivery systems ("ENNDS") and heated tobacco products ("HTPs") on a number of scientific topics.

The report concludes by making a number of policy recommendations on HTPs and ENDS that, if implemented, could restrict both the availability of these products, and the access to accurate information about them.

In August 2021, the WHO FCTC Secretariat published two reports to the ninth session of the Conference of the Parties ("CoP") of the FCTC, which are not materially different from the WHO study group report.

Prior to CoP 9 that took place in November 2021, the WHO and the WHO FCTC Secretariat published two reports on novel and emerging tobacco products.

The reports were noted by CoP 9 and related substantive discussions and decisions were deferred to CoP 10, currently scheduled for 2023.

It is not possible to predict whether or to what extent measures recommended by the WHO's reports will be implemented as the reports are not binding to the WHO Member States.

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

Our RRPs and commercial activities for these products are designed for, and directed toward, current adult smokers and users of nicotine-containing products, and not for non-smokers or youth.

We put significant effort in place to restrict access of our products to non-smokers or youth.

Nevertheless, technological, operational, regulatory and/or commercial setbacks might prevent us from delivering necessary infrastructure required to fulfill our commitment of having 100% of our RRP device portfolio equipped with “Age Verification”-technology and device activation features by 2023.

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

Moreover, the FDA’s premarket tobacco product and modified risk tobacco product authorizations of two versions of our Platform 1 product are subject to strict marketing, reporting and other requirements.

Although we have received these products' authorizations from the FDA, there is no guarantee that the product will remain authorized for sale in the U.S., particularly if there is a significant uptake in youth or non-smoker initiation.

The financial and business performance of our reduced-risk products is less predictable than our cigarette business.

Our RRPs are novel products in a new category, and the pace at which adult smokers adopt them may vary, depending on the competitive, regulatory, fiscal and cultural environment, and other factors in a specific market.

There may be periods of accelerated growth and periods of slower growth for these products, the timing and drivers of which may be more difficult for us to predict versus our mature cigarette business.

The impact of this lower predictability on our projected results for a specific period may be significant, particularly during the early stages of this new product category, during the COVID-19 pandemic as a result of unpredictability due to shortage of key components in our supply chain or due to geopolitical or macroeconomic events that negatively impact RRP availability or adoption.

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

To date, we have been largely successful in demonstrating to regulators that our RRPs are not cigarettes due to the absence of combustion, and as such they are generally taxed either as a separate category or as other tobacco products, which typically yields more favorable tax rates than cigarettes.

Nevertheless, we are unable to predict whether regulators will be issuing new regulations where RRP will be equally taxed in line with other tobacco products such as ordinary cigarettes.

However, if we cease to be successful in these efforts, RRP unit margins may be materially adversely affected.

Consumption of tax-paid cigarettes continues to decline in many of our markets.

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These factors and their potential consequences are discussed more fully below and in the Business Environment section .

A continuous decline in the consumption of cigarettes could have a material adverse effect on our revenue and profitability.

Cigarettes are subject to substantial taxes.

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Because our portfolio is weighted toward the premium-price cigarette category, tax regimes based on sales price can place us at a competitive disadvantage in certain markets.

As a result, our volume and profitability may be adversely affected in these markets.

Increases in cigarette taxes are expected to continue to have an adverse impact on our sales of cigarettes, due to resulting lower consumption levels, a shift in sales from manufactured cigarettes to other combustible tobacco products and from the premium-price to the mid-price or low-price cigarette categories, where we may be under-represented, from local sales to legal cross-border purchases of lower price products, or to illicit products such as contraband, counterfeit and "illicit whites."

Furthermore, our volume and profitability may be adversely affected in these markets.

In addition, increases in cigarette taxes are expected to continue to have an adverse impact on our sales of cigarettes, due to resulting lower consumption levels, a shift in sales from manufactured cigarettes to other combustible tobacco products and from the premium-price to the mid-price or low-price cigarette categories, where we may be under-represented, from local sales to legal cross-border purchases of lower price products, or to illicit products such as contraband, counterfeit and "illicit whites."

Our business faces significant governmental action aimed at increasing regulatory requirements with the goal of reducing or preventing the use of tobacco products.

Governmental actions, combined with the diminishing social acceptance of smoking and private actions to restrict smoking, have resulted in reduced industry volumes in many of our markets, and we expect that such factors will continue to reduce consumption levels and will increase down-trading and the risk of counterfeiting, contraband, "illicit whites" and legal cross-border purchases.

Governmental actions, combined with the diminishing social acceptance of smoking and private actions to restrict smoking, have resulted in reduced industry volumes for our products in many of our markets, and we expect that such factors will continue to reduce consumption levels and will increase down-trading and the risk of counterfeiting, contraband, "illicit whites" and legal cross-border purchases.

Significant regulatory developments will continue to take place over the next few years in most of our markets, driven principally by the World Health Organization's Framework Convention on Tobacco Control (the "FCTC").

Since it came into force in 2005, the FCTC has led to increased efforts by tobacco control advocates and public health organizations to promote increasingly restrictive regulatory measures on the marketing and sale of tobacco products to adult smokers.

Regulatory initiatives that have been proposed, introduced or enacted include:

Regulatory initiatives that have been proposed, introduced or enacted by governmental authorities in various jurisdictions include:

• restrictions on or licensing of outlets permitted to sell cigarettes;

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We are subject to income tax laws in the United States and numerous foreign jurisdictions.

The results of the 2020 U.S.

The new administration resulting from the 2020 U.S.

presidential and congressional elections could lead to changes in the U.S.

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If implemented, such changes, as well as changes in taxing jurisdictions’ administrative interpretations, decisions, policies, or positions, could also have a material adverse impact on our effective tax rate thereby reducing our net earnings.

In future periods, our ability to recover deferred tax assets could be subject to additional uncertainty as a result of such developments.

In future periods, our ability to recover deferred tax assets could be subject to additional uncertainty

as a result of such developments.

Furthermore, changes in the earnings mix or applicable foreign tax laws may result in significant variability in our effective tax rates.

As a result of Russia’s invasion of Ukraine, certain taxing jurisdictions, including the U.S., have proposed punitive tax legislation applicable to companies doing business in Russia.

While we are working on options to exit the Russian market in an orderly manner, these punitive tax law changes, if enacted, could also have a material adverse impact on our effective tax rate thereby reducing our net earnings.

Further, in the event we are able to successfully exit the Russian market, the sale of our Russian assets may result in U.S.

tax liabilities that are material to our financial results.

Because we are a U.S.

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subsidiaries.

Certain countries in which we operate have adopted or could institute currency exchange controls and other regulations that

limit or prohibit our local subsidiaries' ability to convert local currency into U.S.

Certain countries in which we operate have adopted or could institute currency exchange controls and other regulations that limit or prohibit our local subsidiaries' ability to convert local currency into U.S.

dollars or to make payments outside the country.

This could subject us to the risks of local currency devaluation and business disruption.

Risks Related to the Impact of the War in Ukraine on our Business

Our business, results of operations, cash flows and financial position may be adversely impacted by the continuation and consequences of the war in Ukraine.

As previously disclosed in this Form 10-Q, in 2021, Russia accounted for around 10% of our total cigarette and heated tobacco unit shipment volume, and around 6% of our total net revenues.

Ukraine accounted for around 2% of our total cigarette and heated tobacco unit shipment volume, and under 2% of our total net revenues.

We also produce finished goods in Ukraine for export and manufacture products in Russia.

As a result of Russia’s invasion of Ukraine, we have suspended planned investments in Russia, including all new product launches and commercial, innovation, and manufacturing investments.

We have also initiated plans to scale down our Russian manufacturing operations and are working on options to exit the Russian market in an orderly manner.

In Ukraine, we have temporarily reduced operations, including closing our factory in the country.

The short and long-term implications of the Russian invasion of Ukraine for our operations in those countries are impossible to predict at this time.

There can be no assurance that our exit from the Russian market will be successful, orderly, or represent a fair value for our Russian assets and operations.

The likelihood of retaliatory action by the Russian government against companies, including us, as a result of actions and statements made in response to the Russian invasion, including the possibility of legal action against us or our employees or nationalization of foreign businesses or assets, including intangible assets such as trademarks, is impossible to predict.

Further, if we are able to divest our Russian assets in an orderly manner, the nature of our divestiture may adversely impact the value we receive for those assets.

In Ukraine, there is no way to know when and to what extent we will be able to normalize our operations or to what extent our workforce, facilities, inventory, and other assets will remain intact.

These developments have and will continue to have a material adverse impact on our business, results of operations, cash flows and financial position, and may result in impairment charges.

The conflict also elevates the likelihood of supply chain disruptions, both in the region and globally, and may inhibit our ability to timely source materials and services needed to make and sell our products.

For example, we source certain finished goods, production materials and components from both Russia and Ukraine, including printed materials and filters, and the invasion has, and may continue to, disrupt the availability of and impact our supply chain for these materials.

These disruptions, to the extent we are unable to find alternative sources or otherwise address these supply constraints, may impact the availability and cost of our products in other markets, which would adversely impact our business, results of operations, cash flows and financial position, and may result in impairment charges.

The broader consequences of the invasion are also impossible to predict, but could include reputational consequences, further sanctions, financial or currency restrictions, punitive tax law changes, embargoes, regional instability, and geopolitical shifts as well as adverse effects on macroeconomic conditions, security conditions, currency exchange rates, and financial markets.

Given the nature of our business and global operations, such geo-political instability and uncertainty could increase the costs of our materials and operations;

reduce demand for our products;

have a negative impact on our supply chains, manufacturing capabilities, or distribution capabilities;

increase our exposure to currency fluctuations;

constrain our liquidity or our ability to access capital markets;

create staffing or operations difficulties;

or subject us to increased cyber-attacks.

While we will continue to monitor this fluid situation and develop contingency plans as necessary to address any disruptions to our business operations as they develop, the extent of the conflict’s effect on our business and results of operations as well as the global economy, cannot be predicted.

The conflict may also have the effect of heightening many other risks disclosed in this Form 10-Q, any of which could adversely affect our business, results of operations, cash flows or financial position.

Such risks include, but are not limited to, the achievement of our strategic priorities, including achievement of our RRP growth targets;

the availability of third-party

manufacturing resources;

the availability of attractive acquisition and strategic business opportunities and our ability to fully realize the benefits of these transactions;

our ability to attract, motivate, and retain the best global talent;

and our loss of revenue from counterfeiting and similar illicit activities.

Risks Related to Sourcing of Materials, Products and Services

Use of third-party resources may negatively impact quality and availability of our products and services, and we may be required to replace third-party contract manufacturers or service providers with our own resources.

We increasingly rely on third-party resources and their subcontractors/suppliers to manufacture some of our products and product parts (particularly, the electronic devices and accessories), and to provide services, including to support our finance, commercialization and information technology processes.

While many of these arrangements improve efficiencies and decrease our operating costs, they also diminish our direct control.

Such diminished control may have a material adverse effect on the quality and availability of products or services, our supply chain, and the speed and flexibility in our response to changing market conditions and adult consumer preferences, all of which may place us at a competitive disadvantage.

In addition, we may be unable to renew these agreements on satisfactory terms for numerous reasons, including government regulations, and our costs may increase significantly if we must replace such third parties with our own resources.

Government mandated prices, production control programs, shifts in crops driven by economic conditions and the impact of climate change may increase the cost or reduce the quality of the tobacco and other agricultural products used to manufacture our products.

As with other agricultural commodities, the price of tobacco leaf and cloves can be influenced by imbalances in supply and demand and the impacts of natural disasters and pandemics such as COVID-19.

Furthermore, crop quality may be influenced by variations in weather patterns, including those caused by climate change.

Tobacco production in certain countries is subject to a variety of controls, including government mandated prices and production control programs.

Changes in the patterns of demand for agricultural products could cause farmers to produce less tobacco or cloves.

Any significant change in tobacco leaf and clove prices, quality and quantity could affect our profitability and our business.

Risks Related to our International Operations

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Some of the countries in which we operate face the threat of civil unrest and can be subject to regime changes.

In others, nationalization, terrorism, conflict and the threat of war may have a significant impact on the business environment.

Natural disasters, pandemics, economic, political, regulatory or other developments could disrupt our supply chain, manufacturing capabilities or distribution capabilities, and our business continuity plans and other safeguards might not always be effective to fully mitigate their impact.

In addition, such developments could increase costs of our materials and operations and lead to loss of property or equipment that are critical to our business in certain markets and difficulty in staffing and managing our operations, all of which could reduce our volumes, revenues and net earnings.

We discuss risks associated with the COVID-19 pandemic below.

In others, nationalization, terrorism, conflict and the threats of war or acts of war may have a significant impact on the business environment.

Natural disasters, pandemics, economic, political, regulatory, acts of war or threats of war, or other developments could disrupt our supply chain, manufacturing capabilities or distribution capabilities, and our business continuity plans and other safeguards might not always be effective to fully mitigate their impact.

We discuss risks associated with the invasion of Ukraine above and with the COVID-19 pandemic below.

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

In addition, despite our high ethical standards and rigorous control and compliance procedures aimed at preventing and detecting unlawful conduct, given the breadth and scope of our international operations, we may not be able to detect all potential improper or unlawful conduct by our employees and partners.

In addition, despite our high ethical standards and rigorous controls and compliance procedures aimed at preventing and detecting unlawful conduct, given the breadth and scope of our international operations, we may not be able to detect all potential improper or unlawful conduct by our employees and partners.

Such improper or unlawful conduct (actual or alleged) could lead to litigation and regulatory action, cause damage to our reputation and that of our brands, and result in substantial costs.

Our reported results could be adversely affected by unfavorable currency exchange rates, and currency devaluations could impair our competitiveness.

Our reported results could be adversely affected by unfavorable currency exchange rates, and currency fluctuations could impair our competitiveness.

We conduct our business primarily in local currency and, for purposes of financial reporting, the local currency results are translated into U.S.

dollars based on average exchange rates prevailing during a reporting period.

During times of a strengthening U.S.

dollar, our reported net revenues, operating income and EPS will be reduced because the local currency translates into fewer U.S.

During periods of economic crises, such as during the ongoing COVID-19 pandemic, foreign currencies may be devalued significantly against the U.S.

dollar, reducing our margins.

Actions to recover margins may result in lower volume and a weaker competitive position.

Foreign currencies may fluctuate significantly against the U.S.

dollar reducing our net revenues, operating income and EPS.

Our primary local currency

cost bases may be different from our primary currency revenue markets, and U.S.

dollar fluctuations against various currencies may have disproportionate negative impact on net revenues as compared to our gross profit and operating income margins.

Risks Related to Legal Challenges and Investigations

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The FCTC encourages litigation against tobacco product manufacturers.

It is possible that our consolidated results of operations, cash flows or financial position could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation.

Contingencies to our condensed consolidated financial statements for a discussion of pending litigation and "Business Environment—Reduced-Risk Products (RRPs)—Legal Challenges to RRPs."

It is possible that our consolidated results of operations, cash flows or financial position could be materially adversely affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation.

We face various administrative and legal challenges related to certain RRP activities, including allegations concerning product classification, advertising restrictions, corporate communications, product coach activities, scientific substantiation, product liability, and unfair competition.

While we design our programs to comply with relevant regulations, we expect these or similar challenges to continue as we expand our efforts to commercialize RRPs and to communicate publicly.

The outcomes of these matters may affect our RRP commercialization and public communication activities and performance in one or more markets.

Also see Note 8.

Contingencies to our condensed consolidated financial statements for a discussion of pending litigation.

From time to time, we are subject to governmental investigations on a range of matters.

Investigations include allegations of contraband shipments of cigarettes, allegations of unlawful pricing activities within certain markets, allegations of underpayment of income taxes, customs duties and/or excise taxes, allegations of false and misleading usage of descriptors, allegations of unlawful advertising, and allegations of unlawful labor practices.

We cannot predict the outcome of those investigations or whether additional investigations may be commenced, and it is possible that our business could be materially affected by an unfavorable outcome of pending or future investigations.

We cannot predict the outcome of those investigations or whether additional investigations may be commenced, and it is possible that our business could be materially adversely affected by an unfavorable outcome of pending or future investigations.

Contingencies—Other Litigation and “Management's Discussion and Analysis of Financial Condition and Results of Operations—Operating Results by Business Segment—Business Environment—Governmental Investigations” for a description of certain governmental investigations to which we are subject.

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Our intellectual property rights are valuable assets, and their protection is important to our business.

If the steps we take to protect our intellectual property rights globally, including through a combination of trademark, design, patent, trade secrets and other intellectual property rights, are inadequate, or if others infringe or misappropriate our intellectual property rights, notwithstanding legal protection, our business could be adversely impacted.

If the steps we take to protect our intellectual property rights globally, including through applying for, prosecuting, maintaining and enforcing, where relevant, a combination of trademark, design, copyright, patent, trade secrets and other intellectual property rights, are inadequate, or if others infringe or misappropriate our intellectual property rights, notwithstanding legal protection, our business could be adversely impacted.

Moreover, failing to manage our existing and/or future intellectual property may place us at a competitive disadvantage.

Intellectual property rights of third parties may limit our ability to commercialize our products or improve product quality in one or more markets.

Intellectual property rights of third parties may limit our ability to develop, manufacture and/or commercialize our products in one or more markets.

Competitors or other third parties may claim that we infringe their intellectual property rights.

Any such claims, regardless of merit, could divert management’s attention, be costly, disruptive, time-consuming and unpredictable and expose us to litigation costs and damages, and impede our ability to manufacture, commercialize and improve our products.

If, as a result, we are unable to manufacture or sell our RRPs or improve their quality in one or more markets, our ability to convert adult smokers to our RRPs in such markets would be adversely affected.

Any such claims, regardless of merit, could divert management’s attention, be costly, disruptive, time-consuming and unpredictable and expose us to significant litigation costs and damages, and may impede our ability to develop, manufacture and/or commercialize new RRPs and improve our products, and thus have a material adverse effect on our revenue and our profitability.

In addition, if, as a result, we are unable to manufacture or sell our RRPs or improve their quality in one or more markets, our ability to convert adult smokers to our RRPs in such markets would be adversely affected.

Contingencies— Other Litigation to our condensed consolidated financial statements for a description of certain intellectual property proceedings.

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We compete primarily on the basis of product quality, brand recognition, brand loyalty, taste, R&D, innovation, packaging, customer service, marketing, advertising and retail price and, increasingly, adult smoker willingness to convert to our RRPs.

The competitive environment and our competitive position can be significantly influenced by weak economic conditions, erosion of consumer confidence, competitors' introduction of lower-price products or innovative products, higher tobacco product taxes, higher absolute prices and larger gaps between retail price categories, and product regulation that diminishes the ability to differentiate tobacco products and restricts adult consumer access to truthful and non-misleading information about our RRPs.

Competitors include three large international tobacco companies, new market entrants, particularly with respect to innovative products, several regional and local tobacco companies and, in some instances, state-owned tobacco enterprises, principally in Algeria, Egypt, the PRC, Taiwan, Thailand and Vietnam.

Industry consolidation and privatizations of state-owned enterprises have led to an overall increase in competitive pressures.

The competitive environment and our competitive

position can be significantly influenced by weak economic conditions, erosion of consumer confidence, competitors' introduction of lower-price products or innovative products, higher tobacco product taxes, higher absolute prices and larger gaps between retail price categories, and product regulation that diminishes the ability to differentiate tobacco products and restricts adult consumer access to truthful and non-misleading information about our RRPs.

Competitors in our industry include three large international tobacco companies, new market entrants, particularly with respect to innovative products, several regional and local tobacco companies and, in some instances, state-owned tobacco enterprises, principally in Algeria, Egypt, the PRC, Taiwan, Thailand and Vietnam.

Some competitors have different profit, volume and regulatory objectives, and some international competitors are susceptible to changes in different currency exchange rates.

Certain new market entrants may alienate consumers from innovative products through inappropriate marketing campaigns, messaging and inferior product satisfaction, while not relying on scientific substantiation based on appropriate R&D protocols and standards.

The growing use of digital media could increase the speed and extent of the dissemination of inaccurate and misleading information about our RRPs.

Certain new market entrants in the non-combustible product category may alienate consumers from innovative products through inappropriate marketing campaigns, messaging and inferior product satisfaction, while not relying on scientific substantiation based on appropriate R&D protocols and standards.

The growing use of digital media could increase the speed and extent of the dissemination of inaccurate and misleading information about our RRPs, all of which could have a mutual adverse effect on our profitability and results of operations.

We may be unable to anticipate changes in adult consumer preferences.

Our business is subject to changes in adult consumer preferences, which may be influenced by local economic conditions.

Our business is subject to changes in adult consumer preferences, which may be influenced by local economic conditions, accessibility to our products and availability of accurate information related to our products.

To be successful, we must:

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• improve productivity;

• convince adult smokers to convert to our RRPs;

• educate and convince adult smokers to convert to our RRPs;

• ensure effective adult consumer engagement, including communication about product characteristics and usage of RRPs;

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Our ability to grow profitability may be limited by our inability to introduce new products, enter new markets or improve our margins through higher pricing and improvements in our brand and geographic mix.

Our profit growth may be adversely impacted if we are unable to introduce new products or enter new markets successfully, to raise prices or to improve the proportion of our sales of higher margin products and in higher margin geographies.

Our profit growth may be materially adversely impacted if we are unable to introduce new products or enter new markets successfully, to raise prices or to improve the proportion of our sales of higher margin products and in higher margin geographies.

We may be unable to expand our brand portfolio through successful acquisitions or the development of strategic business relationships, and the intended benefits from our investments may not materialize.

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To be successful, we must continue transforming our culture and ways of working, align our talent and organizational design with our increasingly complex business needs, and innovate and transform to a consumer-centric business.

We compete for talent, including in areas that are new to us, such as digital, information technology, life science and pharmaceutical, with companies in the consumer products, technology and other sectors that enjoy greater societal acceptance.

We compete for talent, including in areas that are new to us, such as digital, information technology, life sciences, with companies in the consumer products, technology, pharmaceutical and other sectors that enjoy greater societal acceptance.

As a result, we may be unable to attract, motivate and retain the best global talent with the right degree of diversity, experience and skills to achieve our strategic goals.

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

Our business, results of operations, cash flows and financial position will be adversely impacted during the continuation of the COVID-19 pandemic.

The COVID-19 pandemic has created significant societal and economic disruption, and resulted in closures of stores, factories and offices, and restrictions on manufacturing, distribution and travel, all of which have and will continue to adversely impact our business, results of operations, cash flows and financial position while the pandemic continues.

Our business, results of operations, cash flows and financial position may be adversely impacted during the continuation of the COVID-19 pandemic.

The ongoing COVID-19 pandemic has created significant societal and economic disruption, and resulted in closures of stores, factories and offices, and restrictions on manufacturing, distribution and travel, all of which have and will continue to adversely impact our business, results of operations, cash flows and financial position.

Our business continuity plans and other safeguards may not be effective to mitigate the impact of the pandemic.

Currently, significant risks include our diminished ability to convert adult smokers to our RRPs, significant volume declines in our duty-free business and certain other key markets, disruptions or delays in our manufacturing and supply chain, increased currency volatility, and delays in certain cost saving, transformation and restructuring initiatives.

An adequate supply chain for our cigarettes and RRP portfolio, including the supply of electronic devices, is important to our business.

We work with four electronics manufacturing service providers for the supply of our Platform 1 and Platform 4 devices, and a small number of other providers for other products in our RRP portfolio and related accessories.

Due to the COVID-19 pandemic, the operations of our two main electronic manufacturing service providers were temporarily suspended at different times.

if they will not, the commercialization of our RRPs could be adversely affected.

The production of our RRP portfolio requires various metals, and we believe that there is an adequate supply of such metals in the world markets to satisfy our current and anticipated production requirements.

However, some components and materials necessary for the production of our RRPs, including those for the electronic devices, are obtained from single or limited sources, and can be subject to industry-wide shortages and price fluctuations.

While we were successful in maintaining adequate supply of such components and materials so far, we may not be able to secure such supply going forward, particularly during the COVID-19 pandemic;

this could negatively impact the commercialization of our RRPs.

Significant risks to our business during the ongoing COVID-19 pandemic also include our diminished ability to convert adult smokers to our RRPs, significant volume declines in our duty-free business and certain other key markets, disruptions or delays in our manufacturing and supply chain, including delays and increased costs in the shipment of parts to manufacture our products or for the products themselves, increased currency volatility, and delays in certain cost saving, transformation and restructuring initiatives.

Our business could also be adversely impacted if key personnel or a significant number of employees or business partners become unavailable due to the COVID-19 outbreak.

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In addition, messaging about the potential negative impacts of the use of our products on COVID-19 risks may lead to increasingly restrictive regulatory measures on the sale and use of our products, negatively impact demand for our products and the willingness of adult consumers to switch to our RRPs, and adversely impact our efforts to advocate for the development of science-based regulatory frameworks for the development and commercialization of RRPs.

All of the aforementioned impacts of the ongoing COVID-19 pandemic could have a material adverse effect on our business, operations, results of operations, revenues, cash flow and profitability.

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

Risks Related to Sourcing of Materials, Products and Services

We increasingly rely on third-party resources and their subcontractors/ suppliers to manufacture some of our products and product parts (particularly, the electronic devices and accessories) and to provide services, including to support our finance, commercialization and information technology processes.

While many of these arrangements improve efficiencies and decrease our operating costs, they also diminish our direct control.

Such diminished control may have an adverse effect on the quality and availability of products or services, our supply chain, and the speed and flexibility in our response to changing market conditions and adult consumer preferences, all of which may place us at a competitive disadvantage.

As with other agricultural commodities, the price of tobacco leaf and cloves can be influenced by imbalances in supply and demand and the impacts of natural disasters and pandemics such as COVID-19.

Furthermore, crop quality may be influenced by variations in weather patterns, including those caused by climate change.

Tobacco production in certain countries is subject to a variety of controls, including government mandated prices and production control programs.

Changes in the patterns of demand for agricultural products could cause farmers to produce less tobacco or cloves.

Any significant change in tobacco leaf and clove prices, quality and quantity could affect our profitability and our business.

Risks Related to the Success of our Reduced-Risk Products

The financial and business performance of our reduced-risk products is less predictable than our cigarette business.

The impact of this lower predictability on our projected results for a specific period may be significant, particularly during the early stages of this new product category, during the COVID-19 pandemic and as a result of unpredictability due to shortage of key components in our supply chain.

Our key strategic priorities are:

to develop and commercialize products that present less risk of harm to adult smokers who switch to those products versus continued smoking;

and to convince current adult smokers who would otherwise continue to smoke to switch to those RRPs.

For our efforts to be successful, we must:

• develop RRPs that such adult smokers find acceptable alternatives to smoking;

We might not succeed in our efforts.

This may impede our efforts to advocate for the development of science-based regulatory frameworks for the development and commercialization of RRPs.

We cannot predict whether regulators will permit the sale and/or marketing of RRPs with scientifically substantiated information and claims.

Such restrictions could limit the success of our RRPs.

The WHO study group on tobacco product regulation ("TobReg") published their eighth report on the scientific basis of tobacco product regulation in May 2021.

In August 2021, the WHO FCTC Secretariat published two reports to the ninth session of the CoP of the FCTC, which are not materially different from the WHO study group report.

In August 2021, the WHO Framework Convention on Tobacco Control ("WHO FCTC") published two reports related to HTPs ahead of the ninth Conference of the Party (COP9) meeting in November 2021.

The reports respond to a COP8 decision (“FCTC/COP8(22”)), which requested the WHO to work with scientists, experts, and national authorities to prepare a comprehensive overview of the research and evidence on HTPs, and the FCTC Secretariat to examine the challenges posed by classification of HTPs.

The first report (“FCTC/COP/9/9”) summarizes TobReg’s eighth report on the scientific basis of tobacco product regulation from May 2021, for HTPs in particular, and the second report (FCTC/COP/9/10) focuses on

challenges posed by classification of HTPs.

Based on the FCTC Secretariat’s postulated definitions and terminology of smoke, and the interpretation of the TobReg report, the reports conclude that all FCTC provisions are applicable for HTPs and that HTPs should be classified for regulatory and taxation purposes in the same way as cigarettes, which, if implemented by the Parties, could significantly impact the commercialization of HTPs.

Our RRPs and commercial activities for these products are designed for, and directed toward, current adult smokers and users of nicotine-containing products, and not for non-smokers or youth.

We put significant effort in place to restrict access of our products to non-smokers or youth.

Nevertheless, technological, regulatory and/or commercial setbacks might prevent us in succeeding the delivery of the necessary infrastructure required to fulfill our commitment of having 100% of our RRP device portfolio equipped with “Age Verification”-technology and device activation features by 2023.

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

Moreover, the FDA’s premarket tobacco product and modified risk tobacco product authorizations of a version of our Platform 1 product are subject to strict marketing, reporting and other requirements.

Although we have received these product authorizations from the FDA, there is no guarantee that the product will remain authorized, particularly if there is a significant uptake in youth or non-smoker initiation.

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

If we cease to be successful in these efforts, RRP unit margins may be adversely affected.

Nevertheless, it is unpredictable whether regulators will be issuing new regulations where RRP will be equally taxed in line with other tobacco products such as ordinary cigarettes.

Risks Related to Illicit Trade

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Risks Related to Cybersecurity and Data Governance

The failure of our information systems and systems owned and operated by our business partners to function as intended or their penetration with the intent to corrupt them or our and our business partners failure to adhere to strict data governance and cybersecurity protocols and to comply with privacy laws and regulations could result in business disruption, loss of reputation, litigation and regulatory action, and loss of revenue, assets or personal or other confidential data.

The failure of our information systems and systems owned and operated by our business partners to function as intended, or their penetration with the intent to corrupt them or to extract data from them, or our and our business partners failure to adhere to strict data governance and cybersecurity protocols, and to comply with privacy laws and regulations, could result in business disruption, loss of reputation, litigation and regulatory action, and loss of revenue, assets or personal or other confidential data.

We as well as our business partners use information systems to help manage business processes, collect and interpret data and communicate internally and externally with employees, suppliers, consumers, customers and others.

Some of these information systems are managed by third-party service providers.

We are continuously evolving our approach to business continuity planning and backups to provide appropriate business resilience, particularly in light of the increasing cyber threat landscape.

Nevertheless, failure of these systems to function as intended, or penetration of these systems and systems owned and operated by our business partners by parties intent on extracting or corrupting information or otherwise disrupting business processes, could place us at a competitive disadvantage, result in a loss of revenue, assets, including our intellectual property, personal or other sensitive data, result in litigation and regulatory action, cause damage to our reputation and that of our brands and result in significant remediation and other costs.

Failure to protect personal data, respect the rights of data subjects, and adhere to strict

data governance and cybersecurity protocols could subject us to substantial fines and other legal challenges under regulations such as the EU General Data Protection Regulation.

As we are increasingly relying on digital platforms in our business, and as privacy laws in the jurisdictions in which we do business become more stringent, the magnitude of these risks is likely to increase.

Risks Related to the Acquisitions of Fertin Pharma and Vectura

As previously disclosed in this Form 10-Q, we have acquired Fertin Pharma and Vectura (with the Fertin Pharma acquisition and the Vectura acquisition being collectively referred to in these Risk Factors as the “Acquisitions”).

We may be unable to successfully integrate the businesses that we acquire and unable to realize the anticipated benefits from such Acquisitions.

Our business continuity plans and other safeguards may not be effective to mitigate the impact of service interruptions, connectivity outages, and other failures of these systems to function as intended, or to mitigate the penetration of these systems or systems owned and operated by our business partners by parties intent on extracting or corrupting information or otherwise disrupting business processes.

These events could place us at a competitive disadvantage, result in a loss of revenue, assets, including our intellectual property, personal or other sensitive data, result in litigation and regulatory action, impact our operations, cause damage to our reputation and that of our brands and result in significant remediation and other costs.

Failure to protect personal data, respect the rights of data subjects, and adhere to strict data governance and cybersecurity protocols could subject us to substantial fines and other legal challenges under regulations such as the EU General Data Protection Regulation.

As we are increasingly relying on digital platforms in our business, and as privacy, data and cyber laws in the jurisdictions in which we do business are introduced or become more stringent, the magnitude of these risks is likely to increase.

Risks Related to the Acquisitions of OtiTopic, Inc.

("OtiTopic"), Fertin Pharma A/G ("Fertin Pharma") and Vectura Group Ltd.

As previously disclosed in this Form 10-Q, we have acquired Fertin Pharma and Vectura, and have since launched a new Wellness and Healthcare business consolidating these entities, Vectura Fertin Pharma (with the Fertin Pharma acquisition and the Vectura acquisition being collectively referred to in these Risk Factors as the “Acquisitions”).

We may be unable to successfully integrate and realize the expected benefits from the Acquisitions.

The successful integration of the acquired businesses and their operations into those of our own and our ability to realize the benefits of the Acquisitions, are subject to a number of risks and uncertainties, many of which are not in our control.

The risks and uncertainties relating to integrating the businesses acquired include, among other things:

(i) the challenge of integrating complex organizations, systems, operating procedures, compliance programs, technology, networks and other assets of the businesses that we acquire, and the costs related to such integration efforts;

(ii) the possibility that we are unable to gain access to differentiated proprietary technology and pharmaceutical development expertise as anticipated by these Acquisitions, and thus fail to realize our desired entry into additional smoke-free and beyond nicotine platforms;

(i) the challenge of integrating complex organizations, systems, operating procedures, industry specific compliance programs, technology, networks and other assets of the businesses that we acquire, and the costs related to such integration efforts;

(iii) the challenge of integrating the cultures and business practices of each of Fertin Pharma and Vectura to our culture and business practices, which if not managed correctly, could lead to difficulties in retaining key management and other key employees;

and (iv) the challenge of achieving a successful integration as a result of PMI's affiliation to its combustible product portfolio.

and (iv) the challenge of achieving a successful integration as a result of our affiliation to our combustible product portfolio.

In addition, even if we are able to successfully integrate, the anticipated benefits of the Acquisitions may not be realized fully, or at all, or may take longer to realize than expected.

Furthermore, the success of the Acquisition also depends on the success of the research and development efforts of Fertin Pharma and Vectura, including the ability to obtain regulatory approval for new products, and the ability to commercialize or license these new products developed by them.

Moreover, PMI's affiliation to its combustible product portfolio may stand in the way of introducing and growing new product categories, and may prevent PMI in being successful in developing a long-term sustainable ecosystem of products in the "Beyond Nicotine" categories.

Furthermore, the success of the Acquisition also depends on the success of the research and development efforts of Vectura Fertin Pharma, including the ability to obtain regulatory approval for new products, and the ability to commercialize or license these new products developed by them.

Moreover, our affiliation to its combustible product portfolio may stand in the way of introducing and growing new product categories, and

may prevent us in being successful in developing a long-term sustainable ecosystem of products in the wellness, therapeutic and healthcare categories.

The businesses that we acquire in the Acquisitions may have liabilities that are not known to us.

The businesses that we have acquired in the Acquisitions may have liabilities that we were unable to identify, or were unable to discover, in the course of performing our due diligence investigations during the Acquisitions thereof.

We cannot assure you that the indemnification available to us under the respective acquisition agreements that we have negotiated or will negotiate, as applicable, will be sufficient in amount, scope or duration to fully offset the possible liabilities associated with the respective business or property that we will assume upon consummation of each acquisition.

We cannot assure you that the indemnification available to us under the respective acquisition agreements that we have negotiated, will be sufficient in amount, scope or duration to fully offset the possible liabilities associated with the respective business or property that we will assume upon consummation of each acquisition.

Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operations.

Acquisition accounting adjustments related to the Acquisitions could adversely affect our financial results.

Accounting adjustments related to the Acquisitions could adversely affect our financial results.

We have accounted for the completion of the Acquisitions using the acquisition method of accounting.

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Furthermore, given the nature of the assets being acquired in the Acquisitions, we may not be able to avoid future impairments of those assets, which may also have a material impact on our future results of operation and financial position.

PMI, Fertin Pharma and Vectura may be subject to business uncertainties that could adversely affect our respective businesses, and adversely affect the financial results of our combined businesses.

Our success following these Acquisitions will depend in part upon our ability, and the ability of Fertin Pharma and Vectura, respectively, to maintain respective business relationships.

Uncertainty about the effect of the Fertin Pharma Acquisition and the Vectura acquisition on customers, suppliers, employees and other constituencies of each of Fertin Pharma and Vectura, may have a material adverse effect on us and/or the businesses that we have acquired with the proposed Acquisitions.

Customers, suppliers and others who do business with Fertin Pharma or Vectura may delay or defer business decisions, decide to terminate, modify or renegotiate their relationships, or take other actions as a result of our acquisitions of Fertin Pharma and Vectura, respectively, which could negatively affect the revenues, earnings and cash flows of our company or the businesses that we have acquired with these Acquisitions.

If we are unable to maintain the business and operational relationships of Fertin Pharma

and/or Vectura, our financial position, results of operations or cash flows upon combining with these companies could be adversely affected.

PMI and Vectura Fertin Pharma may be subject to uncertainties that could adversely affect our respective businesses, and adversely affect the financial results of our combined businesses.

Our success following these Acquisitions will depend in part upon our ability, and the ability of Vectura Fertin Pharma, to maintain business relationships.

Uncertainty about the effect of the Acquisitions on customers, suppliers, employees and other constituencies of each of Fertin Pharma and Vectura, may have a material adverse effect on us and/or the businesses that we have acquired with the proposed Acquisitions.

Customers, suppliers and others who do business with Vectura Fertin Pharma may delay or defer business decisions, decide to terminate, modify or renegotiate their relationships, or take other actions as a result of the Acquisitions, which could negatively affect the revenues, earnings and cash flows of our company or the businesses that we have acquired with these Acquisitions.

If we are unable to maintain the business and operational relationships of Vectura Fertin Pharma, our financial position, results of operations or cash flows upon combining with these companies could be adversely affected.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis