← Back to PM filing summaryOriginal filing text · Part I
Item 2 — Management's Discussion and Analysis
Philip Morris International Inc. · 10-Q · Q2 FY2026 · Period ended Jun 30, 2026
View complete filing on SEC EDGAR ↗This is the extracted source text from the SEC filing. Formatting may differ from the original document.
Description of Our Company
We are a leading international consumer goods company, actively delivering a smoke-free future. We are 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 smoke-free products, including heat-not-burn, nicotine pouch and e-vapor products. Since 2008, we have invested over $16 billion to develop, scientifically substantiate and commercialize innovative smoke-free products for adults who would otherwise continue to smoke or use other nicotine-containing consumer products, with the goal of completely ending the sale of cigarettes. This investment 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. In November 2022, we acquired Swedish Match AB ("Swedish Match") – a leader in oral nicotine delivery – creating a global smoke-free combination led by the companies’ IQOS and ZYN brands. As of April 30, 2024, we hold the full rights to commercialize IQOS in the U.S. after reaching an agreement to end our U.S. commercial relationship covering IQOS with Altria Group, Inc. in 2022. Following a robust science-based review, the U.S. Food and Drug Administration (the "FDA") has authorized the marketing of Swedish Match’s General snus and ZYN nicotine pouches and versions of PMI’s IQOS devices and consumables - the first-ever such authorizations in their respective categories. Versions of IQOS devices and consumables, General snus and 20 ZYN nicotine pouch variants also obtained the first-ever Modified Risk Tobacco Product ("MRTP") authorizations from the FDA. We describe the MRTP orders in more detail in the "Business Environment" section of this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A").
With our smoke-free business now operating at scale across our regions, including growth from our U.S. business, PMI has implemented an evolved organizational model with two primary business units: International and U.S. This change was implemented effective January 1, 2026, and as a result PMI, realigned its reportable segments accordingly. The four geographic segments have been replaced with the following three new reportable segments:
•International Smoke-Free;
•International Combustibles; and
•U.S. (including our wellness business unit, Aspeya).
Our cigarettes are sold in approximately 170 markets, and in many of these markets they hold the number one or number two market share position. We have a wide range of premium, mid-price and low-price brands. Our portfolio is comprised of both international and local brands.
Smoke-Free Business ("SFB”) is the term PMI uses to refer to all of its smoke-free products. SFB also includes wellness products, as well as consumer accessories.
Smoke-free products (also referred to herein as "SFPs") is the term PMI uses to refer to all of its products that provide nicotine without combusting tobacco, such as heat-not-burn, e-vapor, and oral smokeless, and that therefore generate far lower levels of harmful chemicals. As such, these products have the potential to present less risk of harm versus continued smoking.
IQOS, ZYN and VEEV are the leading brands in our SFPs portfolio. As of June 30, 2026, our smoke-free products were available for sale in 109 markets.
With a strong foundation and significant expertise in life sciences, PMI has a long-term ambition to expand into wellness areas. The business strategy of our wellness unit, Aspeya, currently focuses on developing and commercializing primarily oral consumer wellness offerings. This includes medical and non-recreational cannabinoid products (including CBD), in line with applicable regulatory requirements, though any revenue related to cannabinoids is expected to be negligible in the near to medium term.
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. Our net revenues and operating income are affected by various factors, including the volume and mix of products we sell, the price of our products and changes in currency exchange rates. Mix is a term used to refer to the proportionate value of premium-price brands to mid-price or low-
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price brands in any given market (product mix). "Mix" can also refer to the proportion of shipment volume in more profitable markets versus shipment volume in less profitable markets (geographic mix). "Other” also includes the currency-neutral net revenue variance attributable to the restructuring of distribution terms in certain markets.
Our cost of sales consists primarily of: tobacco leaf, non-tobacco raw materials, labor and manufacturing costs; shipping and handling costs; and the cost of devices produced by third-party electronics manufacturing service providers. Estimated costs associated with device warranty programs are generally provided for in cost of sales in the period the related revenues are recognized.
Our marketing, administration and research costs include the costs of marketing and selling our products, other costs generally not related to the manufacture of our products (excluding corporate expenses and other), and costs incurred to develop new products. The most significant components of our marketing, administration and research costs are marketing and sales expenses and general and administrative expenses.
Corporate expenses and other include certain other expenses related to foreign currency gains/losses and compensation expense related to restricted share units and performance share units awards, which were reclassified from cost of sales and marketing, administration and research costs.
Executive Summary
The following executive summary provides the business update and significant highlights from the "Discussion and Analysis" that follows.
Consolidated Operating Results for the Six Months Ended June 30, 2026
•Net Revenues - Net revenues of $21.3 billion for the six months ended June 30, 2026, increased by $1.9 billion, or 9.8%, from the comparable 2025 amount. The change in our net revenues from the comparable 2025 amount was driven by the following (variances not to scale with year-to-date results):
For the six months ended June 30, 2026, net revenues increased by 9.8%. Net revenues, excluding currency and acquisitions/divestitures, increased by 5.3%, mainly reflecting: a favorable pricing variance mainly driven by international combustibles; partly offset by unfavorable volume/mix, mainly driven by lower international combustibles and U.S. volumes, notwithstanding higher international smoke-free volumes.
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Net revenues by product category for the six months ended June 30, 2026 and 2025 are shown below:
Note: Sum of product categories might not foot to total PMI due to rounding
•Diluted Earnings Per Share - The changes in our reported diluted earnings per share (“diluted EPS”) for the six months ended June 30, 2026, from the comparable 2025 amounts, were as follows:
Diluted EPS % Change
For the six months ended June 30, 2025 $ 3.67
2025 Restructuring charges 0.13
2025 Impairment of goodwill 0.03
2025 Amortization of intangibles 0.24
2025 Fair value adjustment for equity security investments (0.26)
2025 Income tax impact associated with Swedish Match AB financing (0.24)
2025 Tax items 0.03
Subtotal of 2025 items (0.07)
2026 Restructuring charges (0.01)
2026 Impairment related to RBH equity investment (0.33)
2026 Egypt sales tax settlement adjustment 0.01
2026 Amortization of intangibles (0.25)
2026 Fair value adjustment for equity security investments (0.16)
2026 Income tax impact associated with Swedish Match AB financing (0.06)
Subtotal of 2026 items (0.80)
Currency 0.22
Interest 0.02
Change in tax rate 0.11
Operations 0.21
For the six months ended June 30, 2026 $ 3.36 (8.4) %
Restructuring charges – During the six months ended June 30, 2025, we recorded pre-tax restructuring charges of $243 million (representing $200 million net of income tax and a diluted EPS charge of $0.13 per share), related to the end of combustible tobacco production in two of our factories in Germany. During the six months ended June 30, 2026, we recorded pre-tax restructuring charges of $30 million (representing $24 million net of income tax and a diluted EPS charge of $0.01 per share), related to a series of footprint optimization initiatives in the U.S. For further details, see Note 15. Restructuring Activities.
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Impairment of goodwill – During the second quarter of 2025, after the completion of our annual review of goodwill, it was determined that the estimated fair value of a business, which was a separate reporting unit in 2025, related to the consumer accessories products acquired as part of the Swedish Match acquisition in 2022 was lower than its carrying value. Consequently, PMI recorded a goodwill impairment charge of $41 million (representing a $0.03 per share decrease in diluted EPS). For further details, see Note 5. Goodwill and Other Intangible Assets, net.
Amortization of intangibles – During the six months ended June 30, 2025 and 2026, we recorded amortization of intangibles expense of $496 million (representing $385 million net of income tax or $0.24 per share decrease in diluted EPS) and $503 million (representing $392 million net of income tax or $0.25 per share decrease in diluted EPS), respectively.
Impairment related to RBH equity investment – In May 2026, pursuant to its obligation under its court-approved plan of compromise and arrangement (the "Plan"), RBH provided an annual business plan to its Plan Administrator containing updated five-year financial projections reflecting current industry dynamics. As a result, PMI determined that the estimated fair value of its investment in RBH was lower than its carrying value and recorded a non-cash impairment charge of $511 million (representing $0.33 per share decrease in diluted EPS) in the second quarter of 2026. For further details, see Note 13. Related Parties - Equity Investments and Other.
Egypt sales tax settlement adjustment – In the third quarter of 2024, following a ruling issued by the Higher Administrative Court in Egypt and subsequent evaluation of available remedies at that time, we concluded that an adverse outcome was probable and recorded a pre-tax charge in 2024 of $45 million (representing a diluted EPS charge of $0.03 per share) in relation to tax assessments for general sales tax deducted on imported cutfiller for the years 2014 to 2016. Pursuant to tax amnesty legislation enacted in Egypt in December 2024, PMI submitted review requests with the Dispute Resolution Committee, which issued settlement recommendations subject to court approval. In May 2026, court approval was obtained for the settlement covering the 2016 year, which then became effective. As a result, PMI recorded a favorable sales tax settlement adjustment during the second quarter of 2026 of $18 million net of income tax (representing an increase of $0.01 to diluted EPS).
Fair value adjustment for equity security investments – During the six months ended June 30, 2025 and 2026, we recorded fair value adjustments for our equity security investments in India and Sri Lanka of $410 million gain after tax (or $0.26 per share increase in diluted EPS) and $240 million loss after tax (or $0.16 per share decrease in diluted EPS), respectively. For further details, see Note 13. Related Parties - Equity Investments and Other.
Income taxes – The income tax impact associated with the Swedish Match acquisition financing that increased our 2025 diluted EPS by $0.24 per share and decreased our 2026 diluted EPS by $0.06 per share in the table above was due to a deferred tax impact for unrealized foreign currency gains and losses on intercompany loans related to the Swedish Match acquisition financing reflected in the condensed consolidated statements of earnings, while the underlying pre-tax foreign currency movements fully offset in the condensed consolidated statements of earnings and were reflected as currency translation adjustments in the condensed consolidated statements of stockholders' (deficit) equity.
The 2025 tax items that decreased our 2025 diluted EPS by $0.03 per share in the table above were due to the recognition of current tax expense related to the potential disallowance of deductions for certain intercompany transactions in Indonesia.
The change in the tax rate that increased our diluted EPS by $0.11 per share in the table above was primarily driven by a reduction in tax costs associated with global intangible low-taxed income and discrete tax benefits recognized during the period. For further details, see Note 10. Income Taxes.
Currency – The favorable impact of $0.22 per share from currency over the comparable 2025 period primarily results from the fluctuations of the U.S. dollar, especially against the Euro and Russian ruble, partly offset by the Japanese yen and Swiss franc. This favorable currency movement has impacted our profitability across our primary revenue markets and local currency cost bases.
Interest – The favorable impact of $0.02 per share from interest in the table above was primarily due to higher interest income on investments
Operations – The increase in diluted EPS of $0.21 from our operations in the table above was due primarily to the following:
•International Smoke-Free segment: Favorable volume/mix and favorable pricing; and
•International Combustibles segment: Favorable pricing, partly offset by unfavorable volume/mix;
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partly offset by
•U.S. segment: Unfavorable volume/mix, unfavorable pricing and higher manufacturing costs; and
•Higher marketing, administration and research costs.
Consolidated Operating Results for the Three Months Ended June 30, 2026
•Net Revenues - Net revenues of $11.2 billion for the three months ended June 30, 2026, increased by $1.1 billion, or 10.4%, from the comparable 2025 amount. The change in our net revenues from the comparable 2025 amount was driven by the following (variances not to scale with quarterly results):
During the quarter, net revenues increased by 10.4%. Net revenues, excluding currency and acquisitions/divestitures, increased by 7.6%, mainly reflecting: a favorable pricing variance mainly driven by international combustibles; supported by favorable volume/mix, driven by international smoke-free volumes, notwithstanding adverse international combustibles mix.
Net revenues by product category for the three months ended June 30, 2026 and 2025, are shown below:
Note: Sum of product categories might not foot to total PMI due to rounding
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•Diluted Earnings Per Share - The changes in our diluted EPS for the three months ended June 30, 2026, from the comparable 2025 amounts, were as follows:
Diluted EPS % Change
For the three months ended June 30, 2025 $ 1.95
2025 Restructuring charges 0.13
2025 Impairment of goodwill 0.03
2025 Amortization of intangibles 0.12
2025 Fair value adjustment for equity security investments (0.17)
2025 Income tax impact associated with Swedish Match AB financing (0.18)
2025 Tax items 0.03
Subtotal of 2025 items (0.04)
2026 Restructuring charges —
2026 Impairment related to RBH equity investment (0.33)
2026 Egypt sales tax settlement adjustment 0.01
2026 Amortization of intangibles (0.13)
2026 Fair value adjustment for equity security investments 0.06
2026 Income tax impact associated with Swedish Match AB financing (0.01)
Subtotal of 2026 items (0.40)
Currency 0.03
Interest 0.02
Change in tax rate 0.05
Operations 0.19
For the three months ended June 30, 2026 $ 1.80 (7.7) %
Restructuring charges – During the second quarter of 2025, we recorded pre-tax restructuring charges of $243 million (representing $200 million net of income tax and a diluted EPS charge of $0.13 per share), related to the end of combustible tobacco production in two of our factories in Germany. For further details, see Note 15. Restructuring Activities.
Impairment of goodwill – During the second quarter of 2025, after the completion of our annual review of goodwill, it was determined that the estimated fair value of a business, which was a separate reporting unit in 2025, related to the consumer accessories products acquired as part of the Swedish Match acquisition in 2022 was lower than its carrying value. Consequently, PMI recorded a goodwill impairment charge of $41 million (representing a $0.03 per share decrease in diluted EPS). For further details, see Note 5. Goodwill and Other Intangible Assets, net.
Impairment related to RBH equity investment – In May 2026, pursuant to its obligation under its court-approved plan of compromise and arrangement (the "Plan"), RBH provided an annual business plan to its Plan Administrator containing updated five-year financial projections reflecting current industry dynamics. As a result, PMI determined that the estimated fair value of its investment in RBH was lower than its carrying value and recorded a non-cash impairment charge of $511 million (representing $0.33 per share decrease in diluted EPS) in the second quarter of 2026. For further details, see Note 13. Related Parties - Equity Investments and Other.
Egypt sales tax settlement adjustment – In the third quarter of 2024, following a ruling issued by the Higher Administrative Court in Egypt and subsequent evaluation of available remedies at that time, we concluded that an adverse outcome was probable and recorded a pre-tax charge in 2024 of $45 million (representing a diluted EPS charge of $0.03 per share) in relation to tax assessments for general sales tax deducted on imported cutfiller for the years 2014 to 2016. Pursuant to tax amnesty legislation enacted in Egypt in December 2024, PMI submitted review requests with the Dispute Resolution Committee, which issued settlement recommendations subject to court approval. In May 2026, court approval was obtained for the settlement covering the 2016 year, which then became effective. As a result, PMI recorded a favorable sales tax settlement adjustment during the second quarter of 2026 of $18 million net of income tax (representing an increase of $0.01 to diluted EPS).
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Amortization of intangibles – During the second quarter of 2025 and 2026, we recorded amortization of intangibles expense of $250 million (representing $194 million net of income tax or $0.12 per share decrease in diluted EPS) and $252 million (representing $196 million net of income tax or $0.13 per share decrease in diluted EPS), respectively.
Fair value adjustment for equity security investments – During the second quarter of 2025 and 2026, we recorded fair value adjustments for our equity security investments in India and Sri Lanka of $267 million gain after tax (or $0.17 per share increase in diluted EPS) and $98 million gain after tax (or $0.06 per share increase in diluted EPS), respectively. For further details, see Note 13. Related Parties - Equity Investments and Other.
Income taxes – The income tax impact associated with the Swedish Match acquisition financing that increased our 2025 diluted EPS by $0.18 and decreased our 2026 diluted EPS by $0.01 in the table above was due to a deferred tax impact for unrealized foreign currency gains and losses on intercompany loans related to the Swedish Match acquisition financing reflected in the condensed consolidated statements of earnings, while the underlying pre-tax foreign currency movements fully offset in the condensed consolidated statements of earnings and were reflected as currency translation adjustments in the condensed consolidated statements of stockholders' (deficit) equity.
The 2025 tax items that decreased our 2025 diluted EPS by $0.03 per share in the table above were due to the recognition of current tax expense related to the potential disallowance of deductions for certain intercompany transactions in Indonesia.
The change in the tax rate that increased our diluted EPS by $0.05 per share in the table above was primarily driven by a reduction in tax costs associated with global intangible low-taxed income and discrete tax benefits recognized during the period.
Currency – The favorable impact of $0.03 per share from currency over the comparable 2025 period primarily results from the fluctuations of the U.S. dollar, especially against the Euro and the Russian ruble. This favorable currency movement has impacted our profitability across our primary revenue markets and local currency cost bases.
Interest – The favorable impact of $0.02 per share from interest in the table above was primarily due to higher interest income on investments
Operations – The increase in diluted EPS of $0.19 from our operations in the table above was due primarily to the following:
•International Smoke-Free segment: Favorable volume/mix and favorable pricing; and
•International Combustibles segment: Favorable pricing, partly offset by unfavorable mix;
partly offset by
•U.S. segment: Unfavorable volume/mix, mostly driven by cigars, and higher manufacturing costs; and
•Higher marketing, administration and research costs.
Discussion and Analysis
Critical Accounting Estimates
For information on our critical accounting estimates, see "Critical Accounting Estimates" in the MD&A included in Item 7 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2025.
Consolidated Operating Results
See pages 77 - 88 for a discussion of our "Cautionary Factors That May Affect Future Results." Net revenues, cost of sales and gross profit by segment, as well as total significant expenses and operating income were as follows:
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(in millions) International Smoke-Free International Combustibles U.S. Total
For the Six Months Ended June 30, 2026
Net revenues $ 7,713 $ 12,147 $ 1,478 $ 21,338
Cost of sales (2,313) (3,917) (544) (6,774)
Gross profit $ 5,400 $ 8,229 $ 935 14,564
Marketing, administration and research costs (5,838)
Corporate expenses and other (303)
Operating income $ 8,423
For the Six Months Ended June 30, 2025
Net revenues $ 6,471 $ 11,209 $ 1,762 $ 19,441
Cost of sales (2,066) (3,774) (466) (6,305)
Gross profit $ 4,405 $ 7,435 $ 1,296 13,136
Marketing, administration and research costs (5,416)
Impairment of goodwill (41)
Corporate expenses and other (423)
Operating income $ 7,256
(in millions) International Smoke-Free International Combustibles U.S. Total
For the Three Months Ended June 30, 2026
Net revenues $ 3,877 $ 6,459 $ 856 $ 11,192
Cost of sales (1,161) (2,071) (301) (3,533)
Gross profit 2,716 4,388 555 7,659
Marketing, administration and research costs (2,981)
Corporate expenses and other (148)
Operating income $ 4,530
For the Three Months Ended June 30, 2025
Net revenues $ 3,395 $ 5,883 $ 862 $ 10,140
Cost of sales (1,076) (1,947) (252) (3,274)
Gross profit 2,319 3,936 611 6,866
Marketing, administration and research costs (2,988)
Impairment of goodwill (41)
Corporate expenses and other (125)
Operating income $ 3,712
Note: Amounts may not foot due to rounding
Items affecting the comparability of results from operations were as follows:
•Restructuring charges – See Note 15. Restructuring Activities for details of the pre-tax charges included in marketing, administration and research costs for the six months and three months ended June 30, 2026 and 2025.
•Impairment of goodwill – See Note 5. Goodwill and Other Intangible Assets, net for details of the goodwill impairment charge recorded for the six months and three months ended June 30, 2025.
Marketing, administration and research costs, including restructuring charges, as well as corporate expenses and other are not allocated to segments to determine the primary measure of segment profitability.
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Our net revenues by product category are shown in the table below:
(in millions) For the Six Months Ended June 30, For the Three Months Ended June 30,
2026 2025 Change 2026 2025 Change
Smoke-free:
International Smoke-Free $ 7,713 $ 6,471 19.2 % $ 3,877 $ 3,395 14.2 %
U.S. 1,311 1,584 (17.2) % 768 766 0.3 %
of which, Wellness 118 109 9.0 % 56 57 (1.3) %
Total Smoke-free 9,024 8,055 12.0 % 4,645 4,161 11.7 %
Combustible tobacco:
International Combustibles 12,147 11,209 8.4 % 6,459 5,883 9.8 %
U.S. 167 178 (5.8) % 88 96 (8.5) %
Total Combustible tobacco 12,314 11,386 8.2 % 6,547 5,979 9.5 %
Total PMI net revenues $ 21,338 $ 19,441 9.8 % $ 11,192 $ 10,140 10.4 %
Note: Amounts may not foot due to rounding
Net revenues related to smoke-free, excluding wellness, 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, if applicable. These net revenue amounts consist of the sale of our products that are not combustible tobacco products, such as heat-not-burn, e-vapor, and oral products, as well as consumer accessories. Net revenues related to wellness refer to the operating revenues generated from the sale of products, primarily associated with oral and intra-oral delivery systems.
PMI's heat-not-burn products include licensed KT&G heat-not-burn products.
Net revenues related to combustible tobacco 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. These net revenue amounts consist of the sale of our cigarettes and other tobacco products that are combusted. Other tobacco products primarily include roll-your-own and make-your-own cigarettes, pipe tobacco, cigars and cigarillos and do not include smoke-free products.
References to "Cost" in the Consolidated Financial Summary table of total PMI and the three reportable segments throughout this "Discussion and Analysis" reflects the currency-neutral variances of: cost of sales (excluding the volume/mix cost component); and where applicable, marketing, administration and research costs (including restructuring charges); corporate expenses and other, and amortization and impairment of intangibles.
Following the deconsolidation of our Canadian subsidiary, we continue to report the volume and corresponding royalty revenues of brands sold by RBH for which other PMI subsidiaries are the trademark owners. These include Next, Parliament, TEREA and VEEV. The volume and corresponding royalty revenues of these brands sold by RBH were not material to PMI for all periods presented.
Total shipment volume is defined as the combined total of cigarette, heated tobacco, oral smoke-free products (excluding snuff, snuff leaf and U.S. chew) and e-vapor shipment volume in equivalent units, unless otherwise stated.
Heated tobacco units ("HTUs") is the term we use to refer to heated tobacco consumables, which include our BLENDS, DELIA, HEETS and HEETS Creations (defined collectively as HEETS), SENTIA, TEREA, TEREA CRAFTED and TEREA Dimensions, as well as the KT&G-licensed brands, Fiit and Miix (outside of South Korea). HTUs also include zero tobacco heat-not-burn consumables (BEYOND and LEVIA).
Oral smoke-free product volume excludes snuff, snuff leaf and U.S. chew.
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In-market sales ("IMS") is defined as sales to the trade channels, which serve the end legal age nicotine users. Depending on the market and distribution model, IMS may represent an estimate. Consequently, past reported periods may be updated to ensure comparability and to incorporate the most current information.
Adjusted market share for HTUs is defined as the total in-market sales volume for PMI HTUs as a percentage of the total estimated sales volume for cigarettes and HTUs, excluding the impact of estimated distributor and wholesaler inventory movements.
Unless otherwise stated, market share for HTUs is defined as the IMS volume for HTUs as a percentage of the total estimated industry sales volume for cigarettes and HTUs.
References to total industry and our market share performance reflect cigarettes and heated tobacco units, unless otherwise stated.
Consumer offtake or offtake is the term PMI uses to refer to an approximation of purchases by consumers based on various market specific sources.
Total industry volume, PMI in-market sales volume and PMI market share for the total international market, and Japanese domestic market include the cigarillo category in Japan.
References to total international market, defined as worldwide cigarette and heated tobacco unit volume excluding the United States, total industry (or total market) and market shares throughout this "Discussion and Analysis" are our estimates for tax-paid and Global Travel Retail products based on data from a number of internal and external sources and may, in defined instances, exclude China. Past reported periods may be updated to ensure comparability and to incorporate the most current information for industry and market share reporting.
From time to time, PMI’s shipment volumes and IMS are subject to the impact of distributor inventory movements (or wholesaler inventory movements in certain markets where PMI does not sell to distributors), 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. Such factors may include changes to the manufacturing supply chain, shipment methods, consumer demand, timing of excise tax increases or other influences that may affect the timing of sales to customers. In such instances, in addition to reviewing PMI shipment volumes, IMS, certain estimated total industry/market volumes and estimated market shares on a reported basis, management reviews these measures on an adjusted basis that excludes the impact of distributor and/or estimated trade inventory movements. Management also believes that disclosing PMI's shipment volumes, IMS, and estimated total industry/market volumes and estimated market shares in such circumstances on a basis that excludes the impact of distributor and/or estimated trade inventory movements improves the comparability of performance and trends for these measures over different reporting periods.
Consolidated Operating Results for the Six Months Ended June 30, 2026
The following discussion compares our consolidated operating results for the six months ended June 30, 2026, with the six months ended June 30, 2025.
Total Market
Estimated industry volume (excluding China and the U.S.) for cigarettes and HTUs declined by 0.4%.
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Total Shipment Volume
Our shipment volume for cigarettes and smoke-free products is shown in the table below:
Shipment Volume (equivalent units in billions)
For the Six Months Ended June 30,
2026 2025 Change
Total 389.4 387.9 0.4 %
Cigarettes 294.2 300.0 (1.9) %
Smoke-Free Products 95.2 87.9 8.3 %
HTU 83.1 75.9 9.4 %
Oral SFP 9.6 10.5 (8.8) %
E-vapor 2.6 1.5 72.0 %
Note: Amounts may not foot due to rounding. Oral smoke-free products conversion: 1 pouch equals 1 unit. E-vapor products conversion: one milliliter of e-vapor liquid is equivalent to 10 units.
Our shipment volume, including cigarettes and smoke-free products (in equivalent units), increased by 0.4% with smoke-free volumes, up by 8.3%, driven by HTU and E-vapor categories, partly offset by cigarette volumes, down by 1.9%.
For the full year 2026, we currently expect a broadly stable to slightly growing (previously broadly stable) total PMI cigarette and SFP shipment volume, with high-single digit SFP shipment volume growth, and a cigarette shipment volume decline of 2% to 3%, (previously around 3%).
Financial Summary
Change Fav./(Unfav.) Variance Fav./(Unfav.)
Six Months Ended June 30, 2026 2025 Total Excl. Curr. & Acquis/Divest Total Cur- rency Acq. / Div. Price Vol/ Mix/Other Cost
(in millions)
Net Revenues $ 21,338 $ 19,441 9.8 % 5.3 % $ 1,897 $ 889 $ (17) $ 1,150 $ (125) $ —
Cost of Sales (6,774) (6,305) (7.4) % (3.0) % (469) (294) 13 — (113) (75)
Gross Profit 14,564 13,136 10.9 % 6.4 % 1,428 595 (4) 1,150 (238) (75)
Marketing, Administration and Research Costs (1) (5,838) (5,416) (7.8) % (2.1) % (422) (308) 2 — — (116)
Impairment of Goodwill — (41) +100% +100% 41 — — — — 41
Corporate Expenses and Other (303) (423) 28.4 % (2.6) % 120 131 — — — (11)
Operating Income $ 8,423 $ 7,256 16.1 % 10.4 % $ 1,167 $ 418 $ (2) $ 1,150 $ (238) $ (161)
(1) Cost variance includes charges in 2026 and 2025 of $30 million and $243 million, respectively, related to restructuring charges. For more details, see Note 15. Restructuring Activities.
For the six months ended June 30, 2026, net revenues increased by 9.8%. Net revenues, excluding currency and acquisitions/divestitures, increased by 5.3%, mainly reflecting: a favorable pricing variance mainly driven by international combustibles; partly offset by unfavorable volume/mix, mainly driven by lower international combustibles and U.S. volumes, notwithstanding higher international smoke-free volumes.
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The favorable currency impact in net revenues was due primarily to the Euro and Russian ruble, partly offset by the Japanese yen.
Gross profit increased by 10.9%. Gross profit, excluding currency and acquisitions/divestitures, increased by 6.4%, mainly reflecting the same factors as for net revenues, partly offset by higher manufacturing costs.
Operating income increased by 16.1%. Operating income, excluding currency and acquisitions/divestitures, increased by 10.4%, mainly reflecting: the same factors as for net revenues and lower restructuring charges in 2026, partially offset by higher marketing, administration and research costs.
Interest expense, net, of $480 million decreased by $38 million or 7.3%, primarily due to higher interest income on investments.
Our effective tax rate increased by 1.0 percentage point to 20.5%. We estimate that our 2026 effective tax rate will be around 21.5%, excluding discrete tax events. For further details, see Note 10. Income Taxes.
We recorded a non-cash impairment charge of $511 million related to our RBH equity investment in the condensed consolidated statement of earnings for the six months ended June 30, 2026. For further details, see Note 13. Related Parties - Equity Investments and Other.
Equity investments and securities (income)/loss net was a loss of $244 million in 2026 compared to income of $(581) million in 2025. The variance was primarily due to the unfavorable fair value adjustments for our equity security investments in India and Sri Lanka. For further details, see Note 13. Related Parties - Equity Investments and Other.
Net earnings attributable to PMI of $5.3 billion decreased by $0.5 billion or 8.3%. This decrease was primarily due to the unfavorable fair value adjustments for our equity security investments, the non-cash impairment charge related to our RBH equity investment and a higher effective tax rate, partly offset by higher operating income and lower interest expense, net. Basic and diluted EPS of $3.36 both decreased by 8.4%. Excluding a favorable currency impact of $0.22, diluted EPS decreased by 14.4%.
Consolidated Operating Results for the Three Months Ended June 30, 2026
The following discussion compares our consolidated operating results for the three months ended June 30, 2026, with the three months ended June 30, 2025.
Total Market
During the quarter, estimated industry volume (excluding China and the U.S.) for cigarettes and HTUs increased by 0.8%.
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Total Shipment Volume
Our shipment volume for cigarettes and smoke-free products is shown in the table below:
Shipment Volume (equivalent units in billions)
For the Three Months Ended June 30,
2026 2025 Change
Total 205.2 200.1 2.5 %
Cigarettes 156.9 155.2 1.1 %
Smoke-Free Products 48.2 44.8 7.5 %
HTU 41.8 38.8 7.6 %
Oral SFP 5.1 5.2 (1.2) %
E-vapor 1.3 0.9 55.1 %
Note: Amounts may not foot due to rounding. Oral smoke-free products conversion: 1 pouch equals 1 unit. E-vapor products conversion: one milliliter of e-vapor liquid is equivalent to 10 units.
Our shipment volume, including cigarettes and smoke-free products (in equivalent units), increased by 2.5% driven by a 7.5% increase in smoke-free mainly due to IQOS and complemented by a resilient combustible segment, notably in markets where SFPs are banned or have a limited market presence.
Financial Summary
Change Fav./(Unfav.) Variance Fav./(Unfav.)
Quarters Ended June 30, 2026 2025 Total Excl. Curr. & Acquis/Divest Total Cur- rency Acq. / Div. Price Vol/ Mix/Other Cost
(in millions)
Net Revenues $ 11,192 $ 10,140 10.4 % 7.6 % $ 1,052 $ 299 $ (17) $ 689 $ 81 $ —
Cost of Sales (3,533) (3,274) (7.9) % (5.2) % (259) (101) 13 — (124) (47)
Gross Profit 7,659 6,866 11.5 % 8.7 % 793 198 (4) 689 (43) (47)
Marketing, Administration and Research Costs (1) (2,981) (2,988) 0.2 % 3.8 % 7 (109) 2 — — 114
Impairment of Goodwill — (41) +100% +100% 41 — — — — 41
Corporate Expenses and Other (148) (125) (18.4) % (8.0) % (23) (13) — — — (10)
Operating Income $ 4,530 $ 3,712 22.0 % 20.0 % $ 818 $ 76 $ (2) $ 689 $ (43) $ 98
(1) Cost variance includes charges in 2026 and 2025 of $6 million and $243 million, respectively, related to restructuring charges. For more details, see Note 15. Restructuring Activities.
During the quarter, net revenues increased by 10.4%. Net revenues, excluding currency and acquisitions/divestitures, increased by 7.6%, mainly reflecting: a favorable pricing variance mainly driven by international combustibles; supported by favorable volume/mix, driven by international smoke-free volumes, notwithstanding adverse international combustibles mix.
The favorable currency impact in net revenues was due primarily to the Euro and Russian ruble, partly offset by the Japanese yen.
Gross profit increased by 11.5%. Gross profit, excluding currency and acquisitions/divestitures, increased by 8.7%, mainly reflecting a favorable pricing variance as mentioned in net revenues.
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Operating income increased by 22.0%. Operating income, excluding currency and acquisitions/divestitures, increased by 20.0%, mainly reflecting: a favorable pricing variance and lower restructuring charges in 2026, partly offset by unfavorable volume/mix.
Interest expense, net, of $243 million decreased by $34 million or 12.3%, primarily due to higher interest income on investments.
Our effective tax rate increased by 3.3 percentage points to 22.3%. For further details, see Note 10. Income Taxes.
We recorded an impairment charge of $511 million related to our RBH equity investment in the condensed consolidated statement of earnings for the three months ended June 30, 2026. For further details, see Note 13. Related Parties - Equity Investments and Other.
Equity investments and securities (income)/loss net was income of $(159) million in 2026 compared to income of $(376) million in 2025. The variance was primarily due to the fair value adjustments for our equity security investments in India and Sri Lanka. For further details, see Note 13. Related Parties - Equity Investments and Other.
Net earnings attributable to PMI of $2.8 billion decreased by $0.2 billion or 7.3%. This decrease was primarily due to lower income from our equity security investments, the non-cash impairment charge related to our RBH equity investment and a higher effective tax rate, partly offset by higher operating income and lower interest expense, net. Basic and diluted EPS of $1.80 both decreased by 7.7%. Excluding a favorable currency impact of $0.03, diluted EPS decreased by 9.2%.
Operating Results by Reportable Segment
Segment Operating Results – Three Months and Six Months Ended June 30, 2026
The following discussion compares operating results within each of our segments for the three months and six months ended June 30, 2026, with the three months and six months ended June 30, 2025.
International Smoke-Free Segment:
Financial Summary
Change Fav./(Unfav.) Variance Fav./(Unfav.)
Quarters Ended June 30, 2026 2025 Total Excl. Curr. & Acquis/Divest Total Cur- rency Acq. / Div. Price Vol/Mix/Other Cost
(in millions)
Net Revenues $ 3,877 $ 3,395 14.2 % 11.8 % $ 483 $ 98 $ (17) $ 86 $ 316 $ —
Gross Profit $ 2,716 $ 2,319 17.1 % 14.6 % $ 397 $ 62 $ (4) $ 86 $ 198 $ 56
During the quarter, net revenues increased by 14.2%. Net revenues, excluding currency and acquisitions/divestitures, increased by 11.8%, reflecting: a favorable volume/mix driven by higher HTU and e-vapor volumes and a favorable pricing variance due to HTUs.
The net revenues for 2024, 2025 and 2026 were negatively impacted by the supplemental tax surcharge on heated tobacco products ("HTPs") in Germany, which went into effect in 2022. On March 14, 2024, the Court of Justice of the European Union (the "CJEU") ruled that the German fiscal regulation imposing an additional excise tax on HTPs does not contravene EU law. On May 15, 2024, following the decision issued by the CJEU, the Fiscal Court in Dusseldorf (the "FCD") also ruled that the German fiscal regulation imposing an additional excise tax on HTPs does not contravene EU law. The FCD admitted an appeal to the Federal Tax Court. On June 19, 2024, PMI submitted an appeal. The negative impact will continue, at least until the appeal ruling on the legality of the surcharge is concluded. PMI currently accounts for the surcharge as a reduction in net revenues. The amounts withdrawn before May 15, 2024 were under a payment suspension. Despite this payment suspension and, in order to avoid the future addition of interest, PMI elected, on January 14, 2025, to pay the amount outstanding of EUR 721 million (approximately $751 million), excluding accrued interest. An unfavorable outcome to the appeal would negatively
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impact PMI’s future cash provided by operating activities for the amounts of unpaid interest. A favorable outcome to the appeal would positively impact PMI’s future operating results and future cash provided by operating activities for the amounts paid in January 2025.
Gross profit increased by 17.1%. Gross profit, excluding currency and acquisitions/divestitures, increased by 14.6%, mainly due to the same factors as for net revenues.
Financial Summary
Change Fav./(Unfav.) Variance Fav./(Unfav.)
Six Months Ended June 30, 2026 2025 Total Excl.Curr. & Acquis/Divest Total Cur- rency Acq. / Div. Price Vol/Mix/Other Cost
(in millions)
Net Revenues $ 7,713 $ 6,471 19.2 % 13.7 % $ 1,242 $ 371 $ (17) $ 174 $ 715 $ —
Gross Profit $ 5,400 $ 4,405 22.6 % 16.9 % $ 995 $ 254 $ (4) $ 174 $ 488 $ 83
For the six months ended June 30, 2026, net revenues increased by 19.2%. Net revenues, excluding currency and acquisitions/divestitures, increased by 13.7%, reflecting: a favorable volume/mix driven by higher HTU and e-vapor volumes and a favorable pricing variance due to higher HTU pricing.
Gross profit increased by 22.6%. Gross profit, excluding currency and acquisitions/divestitures, increased by 16.9%, mainly due to the same factors as for net revenues.
International Smoke-Free Segment Shipment Volume
Note: Amounts may not foot due to rounding
In the second quarter, our International Smoke-Free shipment volume increased by 8.0% to 44.7 billion equivalent units, with broad based growth across markets, notably Taiwan, Romania and Greece.
In the heat-not-burn category, IQOS grew shipment volumes by 7.6%. HTU adjusted in-market sales (IMS) volume grew by 5.1%, reflecting broad-based growth notwithstanding the expected pantry de-loading and initial consumer adjustment following
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the April 1 excise-driven price increase in Japan, and the impact of the characterizing flavor ban in Poland. Excluding Japan and Poland, adjusted IMS grew by 10%.
In the Oral Smoke-Free category, modern oral volume growth of 14.7% (26.3% excluding the Nordics) to 0.6 billion pouches was more than offset by continued declines in the legacy snus business in the Nordics, resulting in a total oral SFP volume decrease of 7.0%.
In the E-vapor category, VEEV quarterly shipments grew by 55.1%. VEEV now holds the #1 closed pod position in Europe, with continued growth across a range of markets, notably Germany, Romania and Greece.
For the six months year-to-date, our International Smoke-Free shipment volume increased by 9.9% to 88.8 billion equivalent units, notably due to Taiwan, Italy and Global Travel Retail. In the heat-not-burn category, IQOS grew shipment volumes by 9.4%. In the Oral Smoke-Free category, modern oral volume growth of 17.0% to 1.1 billion pouches. In the E-vapor category, VEEV shipments grew by 72.0%.
International Combustibles Segment:
Financial Summary
Change Fav./(Unfav.) Variance Fav./(Unfav.)
Quarters Ended June 30, 2026 2025 Total Excl. Curr. & Acquis/Divest Total Cur- rency Acq. / Div. Price Vol/Mix/Other Cost
(in millions)
Net Revenues $ 6,459 $ 5,883 9.8 % 6.4 % $ 576 $ 200 $ — $ 588 $ (212) $ —
Gross Profit $ 4,388 $ 3,936 11.5 % 8.0 % $ 452 $ 137 $ — $ 588 $ (217) $ (56)
During the quarter, net revenues increased by 9.8%. Net revenues, excluding currency and acquisitions/divestitures, increased by 6.4%, reflecting: a favorable pricing variance, partially offset by unfavorable mix as growth in developing economies more than offset declines in Europe.
Gross profit increased by 11.5%. Gross profit, excluding currency and acquisitions/divestitures, increased by 8.0%, due to the same factors as for net revenues.
Financial Summary
Change Fav./(Unfav.) Variance Fav./(Unfav.)
Six Months Ended June 30, 2026 2025 Total Excl. Curr. & Acquis/Divest Total Cur- rency Acq. / Div. Price Vol/Mix/Other Cost
(in millions)
Net Revenues $ 12,147 $ 11,209 8.4 % 3.8 % $ 938 $ 510 $ — $ 1,042 $ (614) $ —
Gross Profit $ 8,229 $ 7,435 10.7 % 6.1 % $ 795 $ 342 $ — $ 1,042 $ (522) $ (68)
For the six months ended June 30, 2026, net revenues increased by 8.4%. Net revenues, excluding currency and acquisitions/divestitures, increased by 3.8%, reflecting: an unfavorable volume/mix; more than offset by a favorable pricing variance.
Gross profit increased by 10.7%. Gross profit, excluding currency and acquisitions/divestitures, increased by 6.1%, due to the same factors as for net revenues.
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International Combustibles Segment Shipment Volume
In the second quarter, our cigarette shipment volume in the International Combustibles segment increased by 1.1% to 156.9 billion units, with notable increases in Turkey, Indonesia and Egypt. Our cigarette category volume share stood at 25.3% (flat versus the prior year) despite adverse market mix. Marlboro continued to gain share (up by 0.3 percentage points) matching its record category share of 11.0%.
For the six months year-to-date, our cigarette shipment volume in the International Combustibles segment decreased by 1.9% to 294.2 billion units, with notable decreases in Russia, Mexico and Germany.
U.S. Segment:
Financial Summary
Change Fav./(Unfav.) Variance Fav./(Unfav.)
Quarters Ended June 30, 2026 2025 Total Excl. Curr. & Acquis/Divest Total Cur- rency Acq. / Div. Price Vol/Mix/Other Cost
(in millions)
Net Revenues $ 856 $ 862 (0.7) % (0.9) % $ (6) $ 1 $ — $ 15 $ (23) $ —
Gross Profit $ 555 $ 611 (9.2) % (9.0) % $ (56) $ (1) $ — $ 15 $ (24) $ (47)
During the quarter, net revenues decreased by 0.7%. Net revenues, excluding currency and acquisitions/divestitures, decreased by 0.9%, primarily reflecting: broadly stable ZYN revenues, declines in the cigar business, and unfavorable phasing dynamics in Wellness.
Gross profit decreased by 9.2%. Gross profit, excluding currency and acquisitions/divestitures, decreased by 9.0%, due to the same factors as for net revenues and higher manufacturing costs linked to the expansion of our U.S.footprint.
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Financial Summary
Change Fav./(Unfav.) Variance Fav./(Unfav.)
Six Months Ended June 30, 2026 2025 Total Excl. Curr. & Acquis/Divest Total Cur- rency Acq. / Div. Price Vol/Mix/Other Cost
(in millions)
Net Revenues $ 1,478 $ 1,762 (16.1) % (16.5) % $ (283) $ 8 $ — $ (65) $ (226) $ —
Gross Profit $ 935 $ 1,296 (27.9) % (27.8) % $ (361) $ (1) $ — $ (65) $ (205) $ (89)
For the six months ended June 30, 2026, net revenues decreased by 16.1%. Net revenues, excluding currency and acquisitions/divestitures, decreased by 16.5%, reflecting: unfavorable dynamics in the first quarter with ZYN volumes impacted by distributor and trade inventory movements and an unfavorable price comparison due to low levels of ZYN promotional activity in the prior year.
Gross profit decreased by 27.9%. Gross profit, excluding currency and acquisitions/divestitures, decreased by 27.8%, due to the same factors as for net revenues and higher manufacturing costs.
U.S. Smoke-Free Shipment Volume
In the second quarter, our U.S. smoke-free product shipment volume increased by 1.8%. Our U.S. oral smoke-free products shipment volume increased by 1.8% to 3.5 billion equivalent units, including a 1.8% increase in ZYN shipments to 2.9 billion pouches, despite an inventory tailwind in the second quarter of 2025. ZYN offtake volumes were flat to slightly growing versus the prior year in a growing category, largely as a result of the uneven competitive landscape. In June, we expanded the ZYN portfolio with the first shipments of ZYN ULTRA (9mg and 11mg moist variants at a lower price-per-pouch), as well as additional flavors within the ZYN dry flagship lineup. To support the newly expanded ZYN portfolio, we intend to accelerate U.S. investments in the second half to maximize the long-term value of the brand and also prepare for the future launch of IQOS ILUMA.
For the six months year-to-date, our U.S. smoke-free product shipment volume decreased by 10.0%. Our U.S. oral smoke-free products shipment volume decreased by 10.1% to 6.3 billion equivalent units, including a 11.2% decline in ZYN shipments to 5.2 billion pouches.
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Business Environment
The industries we operate in and our company face a number of challenges that may adversely affect our business, product sales volume, results of operations, cash flows, and financial position. These challenges, which are discussed below and in "Cautionary Factors That May Affect Future Results" include:
•regulatory restrictions on our products, including restrictions on the product formulation, packaging, marketing, registration and sale of tobacco or other nicotine-containing products or related devices that could reduce our competitiveness, eliminate our ability to communicate with adult consumers, or ban certain of our products;
•fiscal challenges, such as excessive excise tax increases and discriminatory tax structures;
•illicit trade in tobacco and nicotine-containing products, including counterfeit, contraband and other non-compliant or otherwise illicit products;
•intense competition, including unfair competition from non-tax paid volume by certain manufacturers; and
•legal challenges, including the pending and threatened litigation discussed in Part I, Item 1. Financial Statements — Note 9. Contingencies in this report.
Smoke-Free Products
Our Approach to SFPs
We recognize that smoking cigarettes causes serious diseases and that the best way to avoid the harm of smoking is to never start or to quit. Nevertheless, according to World Health Organization ("WHO") estimates, there are approximately one billion smokers globally. This number has not meaningfully changed in decades and, based on current trends, is not expected to significantly change in the near future.
Cigarettes burn tobacco, which produces smoke. As a result of the combustion process, the smoker inhales high levels of various toxic substances. In contrast, while SFPs contain nicotine, which is addictive and not risk-free, SFPs do not burn tobacco and therefore contain significantly lower levels of harmful and potentially harmful constituents ("HPHCs") than found in cigarette smoke.
Our SFPs and commercial activities for these products are designed for, and directed toward, current adult smokers and adult users of nicotine-containing products. We take significant measures to restrict access to our products from underage persons.
For adult smokers who would otherwise continue to smoke cigarettes, we believe that SFPs, while not risk-free, offer a much better choice. Accordingly, our key strategic priorities are to: (i) continue developing and commercializing products that have the potential to present less risk of harm to adult smokers who switch to such products versus continued cigarette smoking; and (ii) educate and encourage current adult smokers who would otherwise continue to smoke cigarettes to switch to those products.
We recognize that this transformation from cigarettes to SFPs will take time and that the rate of transformation will depend in part upon factors beyond our control, such as the willingness of governments, regulators, and other policy groups to embrace SFPs as a desirable alternative to continued cigarette smoking. As a leading international cigarette manufacturer, we will continue to accelerate this transformation by using our extensive commercial and distribution infrastructure as an effective platform for the commercialization of our SFPs and communication with adult smokers and trade partners about the substantiated benefits of switching to our SFPs. As long as a significant number of adult smokers continue to smoke cigarettes, responsible leadership of the category is critical. We aim to maintain our competitive position in the cigarette market through selective investment. We are judiciously reallocating resources from cigarettes to SFPs and are streamlining our cigarette portfolio.
We have a range of SFPs in various stages of development, scientific assessment, and commercialization. We are committed to conducting rigorous scientific assessments of our SFPs to substantiate that they reduce exposure to HPHCs 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 SFPs versus continued cigarette smoking. We draw upon a team of expert scientists and engineers from a broad spectrum of
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scientific disciplines, and our extensive learnings of adult consumer preferences, to further develop and assess our SFPs. Our efforts are guided by the following key objectives:
•to develop SFPs as satisfying alternatives to smoking for adult smokers who would otherwise continue to smoke cigarettes;
•for those adult smokers, our goal is to develop and offer SFPs with a scientifically substantiated risk-reduction profile that approaches as closely as possible the risk-reduction profile associated with smoking cessation;
•to substantiate the reduction of risk for the individual adult smoker and the reduction of harm to the population as a whole, based on scientific evidence of the highest standard that is made available for scrutiny and review by external independent scientists and relevant regulatory bodies; and
•to advocate for the development of science-based regulatory frameworks for the development and commercialization of SFPs, including the communication of scientifically substantiated information to enable adult smokers to make better choices.
Our SFPs
Our product development is based on the elimination of combustion via tobacco heating and other innovative systems, as well as through oral tobacco and nicotine products, which we believe are the most promising paths to providing a better consumer choice for those who would otherwise continue to smoke cigarettes. We recognize that no single product will appeal to all adult smokers. Therefore, we are developing and commercializing a portfolio of products intended to appeal to a variety of distinct adult consumer preferences and achieve population harm reduction, including:
•Heat-not-burn products, which use a precisely controlled heating device incorporating our patented technologies, into which a specially designed and proprietary tobacco unit is inserted in a holder 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 submissions to the FDA. In addition to the original version of IQOS, which relies on a heating technology using a blade, a newer version of IQOS uses induction heating. Most of the studies referenced above were conducted with the blade version of IQOS and additional research was conducted with the induction technology. We believe that there is full comparability between the bladed versions of IQOS and the subsequent induction versions of IQOS, and that the data from the studies conducted with the blade version of IQOS remain valid and applicable to the newer and adjacent versions of IQOS. We also produce a heat-not-burn product that utilizes external resistive heating technology, which is commercialized under the BONDS by IQOS brand, and has been launched in certain markets.
•Oral tobacco and nicotine products, which include snus and modern oral pouches. Snus refers to (a) dried loose tobacco, or snuff, which is consumed by sniffing the product through the nose; (b) moist loose tobacco which is put in the mouth between the lower or upper lip and gum; and (c) snus pouches which contain ground tobacco, water, salt and flavors. Modern oral pouches mainly refer to pre-portioned pouches containing nicotine, flavors, and cellulose substrate. In some markets, modern oral pouches may also contain small amounts of tobacco. Users place a pouch between the upper lip and gum and leave it there while the nicotine and flavor are being released. Like snus, nicotine pouches are inherently smoke-free as they are consumed orally, and no combustion process occurs during use. The nicotine in modern oral pouches is pharmaceutical-grade tobacco-derived nicotine like the nicotine used in medicinal products, such as nicotine-containing gums and inhalers, and flavors approved for use in food in accordance with the product quality standards for nicotine pouches developed by the Swedish Institute for Standards and the British Standards Institute. In 2022, we significantly expanded our oral smokeless products portfolio with the acquisition of Swedish Match. Swedish Match's ZYN is the leading smoke-free product brand in the U.S. market.
•e-Vapor products, which are battery-powered devices that produce an aerosol by vaporizing a tobacco-free liquid solution. We have developed e-liquids for our e-Vapor products with different flavor profiles, including e-liquids designed to deliver an authentic tobacco taste. Our tobacco flavored e-liquids use patented technology to extract flavors and nicotine directly from tobacco leaves, which are captured in a tobacco-free liquid solution, without having to add flavoring ingredients.
Data shows that, in a stable regulatory environment, only a very small percentage of adult smokers who convert to IQOS switch back to cigarettes.
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We aim to continue to develop and expand our SFP brand portfolio and market positions. In addition, we continue to use our expertise, technology and capabilities to explore new growth opportunities beyond our current business, including products that do not contain nicotine or tobacco.
Commercialization of SFPs
We are continuing to develop a multiplatform approach and tailoring our commercialization strategy to the characteristics of each specific market. We focus our commercialization efforts on consumer retail experience, guided consumer trials and customer care, and increasingly, digital communication programs and e-commerce. In order to accelerate switching to our SFPs, our initial market introductions typically entail one-on-one consumer engagement (in person or by digital means) and, where applicable, device discounts. These initial commercialization efforts require substantial investment, which we believe will moderate over time.
In 2014, we introduced IQOS in pilot city launches in Nagoya, Japan, and in Milan, Italy. Since then, we have continuously expanded our commercialization activities.
As of June 30, 2026, PMI's smoke-free products were available for sale in 109 markets.
We have integrated the production of our heated tobacco units into several of our existing manufacturing facilities, are progressing with our plans to build manufacturing capacity for our other SFPs, and continue to optimize our manufacturing infrastructure and expand our commercialization activities for new products and markets. We discuss certain risks related to the commercialization and supply of our SFP portfolio in Cautionary Factors That May Affect Future Results below.
On October 20, 2022, PMI announced that it had reached an agreement with Altria Group, Inc., (“Altria”) to end the companies' commercial relationship as of April 30, 2024, with respect to IQOS in the U.S. (the “Altria Agreement”). Under the Altria Agreement, PMI now holds the full rights to commercialize IQOS in the United States - the world’s largest smoke-free market. The Altria Agreement provides a clear path to expanding IQOS’s international success in a market where approximately 25 million adults continue to smoke cigarettes. On March 27, 2025, we began selling IQOS 3.0, the blade version of IQOS, in Austin, Texas. We are pursuing a limited U.S. roll-out of the IQOS device while waiting for authorization to market IQOS ILUMA, the induction version, in the United States.
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. On January 30, 2023, building on three years of collaboration, we announced a long-term collaboration with KT&G to continue to commercialize KT&G's innovative smoke-free devices and consumables on such an exclusive basis. In November 2025, the parties reached an agreement that will facilitate the continuation of the collaboration with a new and revised volume commitment for the 2026-2028 period. For more information, see Acquisitions, Divestitures and Other Business Arrangements below.
Our commercialization efforts for the other PMI-developed SFPs are as follows:
•Since 2022, we began commercializing BONDS devices and BLENDS consumables, and they are now available in 8 markets.
•Since August 2020, we have launched and expanded our portfolio of vaping products (branded VEEV) in 51 markets.
•Following our acquisition of Swedish Match, we have access to a strong portfolio of Swedish Match brands, and more specifically to ZYN. Modern oral pouches are currently available in 61 markets.
Legislation, Regulation, Taxation and Other Matters Regarding the Manufacture, Marketing, Sale and Use of Tobacco and Other Nicotine-Containing Products
Fiscal Challenges
Excessive and disruptive excise, sales and other tax increases and discriminatory tax structures are expected to continue to have an adverse impact on our profitability, due to lower consumption and consumer down-trading to non-premium, discount, other low-price or low-taxed products such as fine cut tobacco, illicit cigarettes or illicit SFPs. In addition, in certain jurisdictions, some of our products are subject to tax structures that discriminate against premium-price products and manufactured cigarettes.
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We believe that such tax policies undermine public health by encouraging consumers to turn to illicit trade or negatively impact the transition of adult smokers to SFPs, and ultimately undercut government revenue objectives, disrupt the competitive environment, and encourage criminal activity. Other jurisdictions have imposed, or are seeking to impose, levies or other taxes specifically on tobacco companies, such as taxes on revenues and/or profits.
On March 14, 2024, the Court of Justice of the European Union (the "CJEU") ruled that the German fiscal regulation imposing an additional excise tax on heated tobacco products ("HTPs") does not contravene EU law. The Fiscal Court in Dusseldorf (the "FCD") had previously referred that question to the CJEU. On May 21, 2024, the FCD delivered its judgment and dismissed the claim of our local affiliate, f6 Cigarettenfabrik GmbH & Co.KG, ("PM Germany"). PM Germany filed a notice of appeal to the Federal Fiscal Court on June 19, 2024. To avoid further accumulation of interest, in January 2025, PM Germany provisionally paid the additional HTP excise tax relating to 2022, 2023 and 2024 (pending the outcome of the FCD decision). An oral hearing is expected at the earliest by the fourth quarter of 2026.
In March 2025, Japan adopted a multi-year tax plan that included changes to its excise tax structure and rates for tobacco products. Under the plan, the excise tax for HTPs will be harmonized with cigarettes in two steps the first step took place in April 1, 2026, and the second step will be on October 1, 2026. The first increase in the harmonized HTP and cigarette excise tax will occur in April 2027, and the plan provides predictability on future excise rate increases for all tobacco product categories until April 2029.
In July 2025, the EU Commission published a legislative proposal for the revision of the EU Tobacco Excise Directive ("TED"). The proposal addresses minimum excise tax rates for combustible tobacco products and expands the scope of the directive to include smoke-free products, such as heated tobacco, e-cigarettes, and nicotine pouches, providing differentiated tax treatment for novel tobacco and nicotine containing products. This proposal marks the beginning of the formal legislative process which requires unanimous approval by all EU Member States and subsequent transposition of TED into national legislation in the EU 27 Member States. The proposal contemplates an implementation date for this directive of January 1, 2028, and provides for an additional transitional period of four years for several categories, including heated tobacco and nicotine pouches.
Legislative and Regulatory Environment
The tobacco industry operates in a highly regulated environment. The well-known risks of smoking have led regulators to impose significant restrictions and high excise taxes on cigarettes. The regulatory landscape for novel nicotine-containing products is inconsistent and evolving but is, in some instances, even more restrictive compared to the regulatory environment for cigarettes.
Much of the regulation that shapes the business environment in which we operate is driven by the WHO Framework Convention on Tobacco Control (the "FCTC"), which entered into force in 2005. The main objective of the FCTC is to establish a global agenda for tobacco regulation, with the purpose of reducing tobacco use. To date, 182 countries and the European Union ("EU") are Parties to the FCTC. The treaty requires Parties to have in place various tobacco control measures and recommends others. The FCTC governing body, the Conference of the Parties (“CoP”), has also adopted non-binding guidelines and policy recommendations related to certain articles of the FCTC that go beyond the text of the treaty. In October 2018, the CoP recognized the need for more scientific assessment and improved reporting to define policy on HTPs. Similar to its previous policy recommendations on e-cigarettes, the CoP invited countries to regulate, restrict or prohibit HTPs, as appropriate under their national laws.
The WHO study group on tobacco product regulation published their ninth and tenth reports on the scientific basis of tobacco product regulation in August 2023 and November 2025, respectively. The reports are 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 and HTPs. 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 access to accurate information about them.
The Eleventh Session of the CoP ("CoP11") took place in November 2025. No specific new decisions or policy recommendations on novel and emerging tobacco or nicotine products were adopted, though the parties were invited to "consider comprehensive regulatory options regarding tobacco and nicotine product components, and related external components that increase environmental harms, taking into consideration public health impacts." The WHO's reports and other FCTC guidelines or recommendations are not binding on the WHO Member States or on Parties to the FCTC. CoP12 will take place in 2027.
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We believe that when better alternatives to cigarettes exist, the discussion should not be whether these alternatives should be made available to the more than one billion people who smoke cigarettes today, but how fast they can be made available, and within what regulatory framework to maximize their adoption by adult smokers while minimizing unintended use. Therefore, we advocate for regulatory frameworks that are based on a continuum of risk where non-combustible products fall below combustible cigarettes. And we 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.
Product regulation should include measures that encourage and accelerate switching to non-combustible products, for example, by allowing adult consumers who would otherwise continue smoking cigarettes to receive truthful and non-misleading information about such alternatives to enable them to make informed decisions and by applying uniform product standards to enable manufacturers to demonstrate the absence of combustion, as well as the reduction in HPHCs.
Regulation should also include specific rules for ingredients, labeling and consumer communication, and should ensure that the public is informed about the health risks of all combustible and non-combustible tobacco and nicotine-containing products. Importantly, regulation must include measures designed to prevent initiation by underage persons and non-nicotine users. We support mandated accurate and factual health warnings on packaging, minimum age laws, restrictions on advertising, and smoking restrictions in public spaces. We also support regulatory measures that help reduce illicit trade. At the same time, we oppose excessive or prohibitive regulations that may prevent adult smokers, who would otherwise continue smoking, from accessing and switching to SFPs or trigger unintended consequences such as illicit trade.
Regulatory Restrictions
SFP Sales Prohibitions: Some governments have, or are seeking to, ban or severely restrict emerging tobacco and nicotine-containing products, such as our SFPs, and communication of truthful and non-misleading information about such products. Significant markets that have prohibited or severely restricted the sale of one or more category of SFPs include Brazil, Canada, France, India, Mexico, Turkey, Australia, Thailand, and Vietnam. In the U.S., some states and municipalities have introduced stringent restrictions on the sale of certain SFPs, including those authorized by the FDA.
These regulations can foreclose or unreasonably restrict adult consumer access to products that might be a better consumer choice than continuing to smoke cigarettes. These regulations could also constitute, in effect, non-tariff barriers to trade. We oppose blanket bans and unreasonable restrictions of products that have the potential to present less risk of harm compared to continued cigarette smoking. By contrast, we support regulation that sets clear standards for all SFP categories and propels innovation to benefit adult smokers who would otherwise continue to smoke cigarettes.
EU Tobacco Products Directive ("TPD"): In April 2014, the EU adopted a significantly revised TPD, which came into force in May 2016. All EU Member States have adopted laws transposing the TPD. The TPD sets forth a comprehensive set of regulatory requirements for tobacco products, including:
•health warnings covering 65% of the front and back panels of cigarette packs, with an option for Member States to further standardize tobacco packaging, including the introduction of plain packaging;
•a ban on characterizing flavors in some tobacco products;
•security features and tracking and tracing measures; and
•a framework for the regulation of novel tobacco products and e-cigarettes, including requirements for health warnings and information leaflets, a prohibition on product packaging text related to reduced risk, and the introduction of notification requirements or authorization procedures in advance of commercialization.
In February 2024, the European Commission published an updated implementation roadmap to Europe's Beating Cancer Plan. On December 16, 2025, the European Commission published the "EU Cardiovascular Health Plan — Safe Hearts Plan," where it announced its intention to propose a revision of the legislative framework on tobacco control (including TPD) in 2026. The European Commission has launched a stakeholder consultation for the revision of TPD in May 2026 and is expected to issue its potential legislative proposal by the end of 2026.
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In May 2024, the EU-wide systems of traceability and security features for tobacco products were extended to include tobacco products other than cigarettes and roll-your-own tobacco products. As such, all tobacco products are covered by the traceability system.
Plain Packaging and Other Packaging Restrictions: Plain packaging legislation bans the use of branding, logos and colors on packaging other than the brand name and variant that may be printed only in specified locations and in a uniform font. To date, plain packaging laws have been adopted in certain markets, including the key markets of Australia, France, Saudi Arabia and Turkey. Some countries, such as Denmark and Israel, adopted plain packaging regulations that apply to all tobacco products, including SFPs. Other countries are also considering plain packaging legislation.
Some countries have adopted, or are considering adopting, packaging restrictions that could have an impact similar to plain packaging. Examples of such restrictions include standardizing the shape and size of packages, prohibiting certain colors or the use of certain descriptive phrases on packaging, and requiring very large graphic health warnings that leave little space for branding.
Restrictions and Bans on the Use of Ingredients: The WHO and others in the public health community have recommended restrictions or total bans on the use of some or all ingredients in both combustible products and SFPs, including menthol. Broad restrictions and ingredient bans would require us to reformulate our American blend tobacco products, which could reduce our ability to differentiate these products in the market in the long term. In many countries, menthol or flavor bans would eliminate entire product categories.
The EU banned cigarettes and roll-your-own tobacco products with characterizing flavors, while exempting other tobacco products under the EU TPD from this characterizing flavor ban. This was also the case for heated tobacco products until November 23, 2022, when the EU Commission published a delegated directive that eliminated this exemption. All EU Member States were required to apply the delegated directive as of October 23, 2023, which bans the use of characterizing flavors in heated tobacco products, impacting a significant proportion of our SFP products currently sold in the EU. Currently, all EU Member States have transposed this directive into national law, withdrawing the heated tobacco product exemption from the characterizing flavor ban. Based on high consumer switching to non-flavored products in reaction to past bans on flavors in other categories and markets, we anticipated that, while short-term volatility would be possible, the ban’s impact on our shipment volumes in the EU would be relatively limited in the near term. To date, our experience is generally consistent with this expectation. There has been some short-term disruption in countries that have implemented the ban, most notably in Italy, but the impact has generally been limited in time and magnitude. But our fundamental view remains that we do not expect a meaningful long-term change in the structural growth of the category. We will continue to actively monitor relevant developments in the EU market, including from an illicit trade standpoint.
Other countries may follow the EU’s approach toward tobacco product ingredients. Broader ingredient bans have been adopted by, among others, Brazil (pending a court decision), Thailand, Hong Kong, and Canada. Specific bans were introduced in countries such as Turkey, which has banned menthol. In the U.S., certain states and localities have adopted, or are considering adopting, flavor bans that apply to SFPs.
Bans on Display of Tobacco Products at Retail: In a number of our markets, including, but not limited to, Australia, Canada and Russia, governments have banned the display of tobacco products at the point of sale. Other countries are considering similar bans.
Bans and Restrictions on Advertising, Marketing, Promotions and Sponsorships: For many years, the FCTC has called for, and countries have imposed, partial or total bans on tobacco advertising, marketing, promotions and sponsorships, including bans and restrictions on advertising on radio and television, in print and on the Internet. The FCTC's non-binding guidelines recommend that governments prohibit all forms of communication with adult smokers. In CoP10, Specific Guidelines were adopted to address cross-border Tobacco Advertising, Promotion, and Sponsorship and the depiction of tobacco in entertainment media. These Specific Guidelines are non-binding on WHO Member States and FCTC Parties.
Product Standards and Restrictions on Product Design: In some countries, including in the EU, cigarettes are subject to testing, disclosure and mandatory emissions limits for tar, nicotine, carbon monoxide and other smoke constituents.
Some members of the public health community are calling for further standardization of tobacco products by requiring, for example, that cigarettes have a certain minimum diameter, which would result in a ban on slim cigarettes, or requiring the use of standardized filter and cigarette paper designs. In the Netherlands, an anti-smoking organization has brought a lawsuit to force the government to require a different test method for measuring cigarette emissions than what is currently required under
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EU law, which, if allowed, could lead to a de facto ban on manufactured cigarettes in the Netherlands and, potentially, in other EU countries. In addition, at its meeting in November 2016, the CoP adopted non-binding guidelines recommending that countries regulate product design features that increase the attractiveness of tobacco products, such as the diameter of cigarettes and the use of flavor capsules.
Currently, national standards in certain countries set minimum quality and safety requirements for heat-not-burn products with technical heat-not-burn specifications and/or methods for demonstrating the absence of combustion, including, for example, Egypt, Indonesia, Kazakhstan, Lebanon, Morocco, the Philippines, Russia, Saudi Arabia, the United Arab Emirates ("UAE"), the United Kingdom ("UK") and Ukraine. These standards may be mandatory or voluntary, depending on the market. In Japan, a voluntary standard sets minimum safety requirements for tobacco heating devices.
For e-Vapor products, national standards setting minimum quality and safety requirements have been adopted in several markets, including, for example, Australia, China, Egypt, Indonesia, Morocco, the Philippines, Russia, Saudi Arabia, the UAE, the UK and Ukraine. These standards may be mandatory or voluntary, depending on the market.
Currently, national standards setting minimum quality and safety requirements for modern oral pouches have been adopted by the East African Community, as well as in several countries, including, for example, Mexico, Morocco, Pakistan, the Philippines, Sweden, UAE, the UK, and Ukraine. These standards may be mandatory or voluntary, depending on the market.
We expect other governments to consider similar product standards for all novel tobacco and nicotine-containing products and encourage making them mandatory.
Restrictions on Public Smoking and Use of Nicotine-Containing Products in Public: The pace and scope of restrictions on the use of our products have increased significantly in most of our markets. Many countries around the world have adopted, or are likely to adopt, regulations that restrict or ban smoking and use of certain nicotine-containing products in public and/or workplaces, restaurants, bars and nightclubs. Some public health groups have called for, and some countries, regional governments and municipalities have adopted or proposed, bans on smoking in outdoor places, as well as bans on smoking in cars (typically, when minors are present) and private homes. On December 3, 2024, the EU Council adopted its legally non-binding recommendation on smoke- and aerosol-free environments. While the recommendations recognize scientifically proven differences between smoke-free and combustible products, they nevertheless encourage EU member states to restrict usage of both conventional tobacco products and inhalable smoke-free products in indoor public spaces and some outdoor areas. Each member state is to decide whether or not to implement these recommendations.
Generational Bans: Certain jurisdictions are considering generational sales bans, which prohibit the sale of certain tobacco or nicotine products to people born after a particular year. In December 2022, New Zealand adopted regulatory measures prohibiting the sale of smoked tobacco products to anyone born on or after January 1, 2009. These measures were limited to smoked tobacco products and did not apply to heated tobacco products and e-cigarettes. The New Zealand parliament repealed the measures in February 2024, before they were implemented. On April 29, 2026, the UK government adopted a bill banning the sale of tobacco products, including HTPs, herbal smoking products and cigarette papers to those born on or after January 1, 2009, as well as enabling the government to ban cigarette filters. The ban does not apply to products that do not contain tobacco, such as e-vapor products and nicotine pouches.
Nicotine Content: Certain jurisdictions have implemented, or are considering to implement, a cap on the nicotine content of certain nicotine-containing products. In addition, some jurisdictions have also indicated that they are exploring reducing nicotine levels further, in some cases to levels that they describe as minimally or non-addictive.
Other Regulatory Issues: Some jurisdictions are considering, or in some cases have adopted, measures designed to reduce the supply of tobacco products. These include regulations intended to reduce the number of retailers selling tobacco products by, for example, reducing the overall number of tobacco retail licenses available or banning the sale of tobacco products within specified distances of certain public facilities, or in certain sales channels. In a limited number of markets, most notably Japan, we are dependent on governmental approvals that may limit our pricing flexibility.
The EU Single-Use Plastics Directive, which requires tobacco manufacturers and importers to cover the costs of public collection systems for tobacco product filters under Extended Producer Responsibility ("EPR") schemes, came into force on July 2, 2019, and subsequently all EU Member States transposed the directive into national legislation and brought into force mandatory EPR schemes and related EPR costs for tobacco manufacturers and importers. We currently expect further adoption of similar laws in other jurisdictions, and we are monitoring developments in this area. We do not estimate a material impact to our business in the EU as a result of compliance with these mandatory EPR schemes.
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SFP Commercialization and Risk Statement Authorizations
Certain markets have instituted regulatory authorization processes that govern the commercialization of SFPs or the use of statements addressing SFP harm-reduction.
FDA Authorization Process and Status of PMI SFPs: In the United States, an established regulatory framework for assessing tobacco products, including MRTPs, exists under the jurisdiction of the FDA. FDA actions may influence the regulatory approach of other governments and international regulatory agencies.
FDA Review of IQOS: We submitted to the FDA a Modified Risk Tobacco Product Application (“MRTPA”) for the IQOS Tobacco Heating System, which includes both the corresponding device and consumables, ("THS") in December 2016, and a Premarket Tobacco Product Application (“PMTA”) for IQOS in March 2017.
On April 30, 2019, following its comprehensive assessment of our PMTA, the FDA determined that marketing a version of IQOS, namely IQOS 2.4 and three related consumables, is appropriate for the protection of public health and authorized those products for sale in the United States. On December 7, 2020, the FDA reached the same determination for IQOS 3.0, authorizing that version of the device for sale in the United States.
On July 7, 2020, the FDA determined that the available scientific evidence demonstrates that the issuance of an exposure modification order would be appropriate for the promotion of public health and authorized the marketing of a version of IQOS, namely IQOS 2.4 and three related consumables, as MRTPs with reduced exposure claims. On March 11, 2022, the FDA reached the same determination for the IQOS 3.0 device. The FDA authorized the marketing of these products in the U.S. with the following claims:
"AVAILABLE EVIDENCE TO DATE:
•the IQOS system heats tobacco but does not burn it.
•this significantly reduces the production of harmful and potentially harmful chemicals.
•scientific studies have shown that switching completely from conventional cigarettes to the IQOS system significantly reduces your body’s exposure to harmful or potentially harmful chemicals."
The FDA may issue two types of MRTP orders: a risk modification order or an exposure modification order. We requested both types of orders for IQOS 2.4 and an initial selection of three related consumable variants. After review, the FDA determined that the evidence did not support issuing a risk modification order at that time, but that it did support issuing an exposure modification order for the product. 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 also received an exposure modification order for IQOS 3.0 in March 2022.
The FDA’s PMTA and MRTP orders do not mean that the agency has “approved” IQOS products. These authorizations are subject to strict marketing, reporting, and other requirements, and are not a guarantee that the product will remain authorized, particularly if there is a significant uptake in underage or non-smoker initiation. The FDA monitors the marketing of the products.
On January 26, 2023, the FDA authorized the marketing of two new tobacco-flavored consumables (Marlboro Sienna HeatSticks and Marlboro Bronze HeatSticks) and a modified version of the authorized Marlboro Amber HeatSticks. These products are line extensions and/or modified versions of the three consumables for which the FDA had previously issued a marketing granted order. In its assessment, the FDA determined that these three variants of HeatSticks were comparable to the previously authorized tobacco-flavored consumables.
On July 5, 2023, we submitted applications to the FDA requesting renewal of the MRTP authorizations previously granted to the IQOS 2.4 device and three related consumables as well as the IQOS 3.0 device in the United States. On April 17, 2026, the FDA renewed the exposure modification orders with a stated expiration date in April 2031.
On October 20, 2023, we submitted bundled PMTAs for our IQOS ILUMA THS products together with MRTPAs requesting authorization of the modified exposure order previously granted for IQOS blade versions. We submitted these applications at
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the same time for the FDA to evaluate the PMTAs and MRTPAs concurrently. In March 2024, the FDA formally accepted our bundled PMTAs and MRTPAs. As our applications proceed through the review process, the FDA may request additional information or conduct subsequent inspections to verify the information we submitted.
On January 19, 2024, the FDA completed its review of our Requests for Exemption from Substantial Equivalence for the five submitted IQOS consumables and determined that these tobacco products were exempt from the requirements outlined for substantial equivalence (a regulatory pathway that can be used to introduce new tobacco products which have the same characteristics as a product previously authorized by the FDA). These submissions were made in November 2022 (for the three initial IQOS consumables) and February 2023 (for the two new IQOS consumables) to enable domestic manufacturing of IQOS consumables utilizing materials purchased from vendors operating in the United States.
On April 30, 2026, we submitted the Annual Report for the IQOS THS to the FDA. The report included a systematic review of the literature covering publications related to the IQOS THS between March 1, 2025, and February 28, 2026. The report included publications in various scientific fields including aerosol chemistry and physics, standard and systems toxicology, clinical studies on exposure reduction to HPHCs, and observational studies. Overall, the review continues to support the finding that IQOS THS is "appropriate for the promotion of public health."
FDA Review of Oral Tobacco and Nicotine Products: PMTAs for 20 varieties of ZYN nicotine pouches were submitted in March 2020. On January 16, 2025, the FDA determined that all 20 ZYN nicotine pouch varieties met the applicable public health standard and were appropriate for the protection of public health and, therefore, authorized them for sale in the United States. In its assessment, the FDA concluded that “among several key considerations, the agency’s evaluation showed that, due to substantially lower amounts of harmful constituents than cigarettes and most smokeless tobacco products, such as moist snuff and snus, the authorized products pose lower risk of cancer and other serious health conditions than such products.”
On January 16, 2026, we submitted the first Annual Report for ZYN products to the FDA. The report included a systematic review of the literature covering publications related to ZYN products between January 16, 2025, and October 31, 2025. The report included publications in various scientific fields, including observational studies on trends related to the potential health impact of the products, and behavioral studies analyzing the impact on former and never smokers, impact on cessation, product acceptance and the impact of marketing approaches. Our review of publications revealed no significant new findings. Overall, the review continues to support the FDA's conclusion that marketing of these ZYN products is "appropriate for the protection of public health."
In April 2024, we submitted MRTPAs for the 20 varieties of ZYN products that received PMTAs and requested authorization of a modified risk claim. In June 2026, the FDA concluded that the modified risk claim is scientifically accurate with respect to each of the 20 ZYN products, that consumers understand the claim, and that marketing the products with the claim would benefit the population as a whole. As a result, these 20 ZYN nicotine pouch products can now be marketed with the following modified risk claim: “Using ZYN instead of cigarettes puts you at a lower risk of mouth cancer, heart disease, lung cancer, stroke, emphysema, and chronic bronchitis.” These 20 ZYN products are the only nicotine pouch products on the U.S. market that have been authorized as MRTPs.
We have made a number of ZYN submissions to the FDA that are at various stages of the regulatory process, and we have brought and are preparing to bring innovations to market in the coming months. We are aware that certain of our competitors have recently marketed, or stated their intention to market, products that were not previously marketed in the United States and did not have a marketing granted order. We continue to evaluate the practices of the FDA and other regulators regarding products with respect to which regulatory submissions have been made. On May 8, 2026, the FDA issued final guidance stating that it does not intend to prioritize enforcement against certain unauthorized ENDS and nicotine pouch products that have demonstrated meaningful progress toward authorization. We have commercialized and may decide to commercialize products for which we have not received a marketing granted order where we believe that FDA enforcement would be inconsistent with its public guidance, present practices or the Family Smoking Prevention and Tobacco Control Act.
On July 17, 2023, Swedish Match USA, Inc. submitted an application to the FDA requesting re-authorization to continue to market its eight snus smokeless tobacco products (sold under the General snus brand name) with a modified risk claim. General snus products received modified risk orders on October 22, 2019. Swedish Match USA, Inc. was authorized to market these products with the claim, “Using General snus instead of cigarettes puts you at a lower risk of mouth cancer, heart disease, lung cancer, stroke, emphysema, and chronic bronchitis.” On November 7, 2024, the FDA renewed the General snus modified risk orders, with a stated expiration date in November 2032.
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Other Commercialization and Risk Statement Authorization Frameworks: On March 22, 2023, a bill amending the Tobacco Hazards Prevention and Control Act in Taiwan went into effect. It regulates heated tobacco products and bans e-cigarettes. The amendment particularly specifies that designated tobacco products (including heated tobacco products) that are not cigarettes, cut tobacco, cigars, snuff or chewing tobacco must undergo a health risk assessment as part of an authorization system. In July 2023, we filed an authorization request to commercialize IQOS in Taiwan pursuant to this Act. We have since received this authorization, which took effect on October 11, 2025.
On March 23, 2023, the Greek Ministry of Health authorized a claim for IQOS with HEETS AMBER to inform Greek IQOS users about reduction in emissions of toxicants when using such product compared to cigarette smoking. The decision authorized the following claim: “The concentration of chemical substances with recognized toxicity produced when using IQOS with HEETS AMBER tobacco sticks is lower compared to conventional smoking. A reduction in the concentration of chemical substances with recognized toxicity does not mean a corresponding reduction in risk for health. The aerosol of this tobacco product contains nicotine and other hazardous chemicals. This tobacco product harms your health and is addictive. The best choice is to quit tobacco and nicotine use altogether.” With this authorization, Greece is the second country officially recognizing the reduction in level of toxicants in the IQOS aerosol compared to cigarette smoke. In February of 2025, the Greek Ministry of Health authorized a substantially similar claim and disclaimer for IQOS ILUMA devices with seven TEREA variants (Amber, Bronze, Russet, Sienna, Silver, Teak and Yellow).
SFP Scientific Findings
We make our scientific findings publicly available for scrutiny and peer review through several channels, including our websites. From time to time, adult consumers, competitors, members of the scientific community, and others inquire into our scientific methodologies, challenge our scientific conclusions or request further study of certain aspects of our SFPs and their health effects. We are committed to a robust and open scientific debate and believe that such debate should be based on accurate and reliable scientific information. We seek to provide accurate and reliable scientific information about our SFPs; nonetheless, we may not be able to prevent third-party dissemination of false, misleading or unsubstantiated information about these products. The dissemination of scientifically unsubstantiated information or studies with a strong confirmation bias by third parties may cause confusion among adult smokers and affect their decision to switch from continued smoking to better alternatives, such as our SFPs.
To date, we have been largely successful in demonstrating to regulators that our SFPs are not cigarettes due to the absence of combustion, and as such, they are frequently taxed either as a separate category or as other tobacco products, which typically yields more favorable tax rates than cigarettes. Although we believe that this is sensible from the public health perspective, some jurisdictions have considered or adopted taxation regimes with SFP taxation rates approaching or equal to cigarettes, and there is no guarantee regulators will maintain current levels of differentiation. Further, there can be no assurance that we will succeed in our efforts to replace cigarettes with SFPs or that regulation will allow us to commercialize SFPs in all markets, to communicate about our SFPs, including making scientifically substantiated risk-reduction claims, or to treat SFPs differently from cigarettes.
To date, several governmental agencies have published their scientific findings that analyze the harm reduction potential of certain SFPs versus continuing to smoke cigarettes, including:
In December 2017, at the request of the UK Department of Health and Public Health England, the UK Committee on Toxicity published its assessment of the risk of heat-not-burn products relative to cigarette smoking. This assessment included analysis of scientific data for two heat-not-burn products, one of which was IQOS. The assessment concluded that, while still harmful to health, compared with the known risks from cigarettes, heat-not-burn products are probably less harmful. Subsequently, in February 2018, Public Health England published a report stating that the available evidence suggests that heat-not-burn products may be considerably less harmful than cigarettes but more harmful than e-cigarettes.
In May 2018, the German Federal Institute for Risk Assessment (“BfR”) published a study on IQOS aerosol relative to cigarette smoke using the Health Canada Intense Smoking Regimen. BfR found reductions in selected HPHCs in a range of 80-99%. This publication indicates that significant reductions in the levels of selected toxicants are likely to reduce toxicant exposure, which BfR stated might be regarded as a discrete benefit compared to combustible cigarettes.
In May 2018, the Dutch National Institute for Public Health and Environment (“RIVM”) published a factsheet on novel tobacco products that heat rather than burn tobacco, focusing on IQOS. RIVM analyzed the aerosol generated by our IQOS product and concluded that the use of this product, while still harmful to health, is probably less harmful than continuing to smoke cigarettes.
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In June 2018, the Korean Food and Drug Administration (“KFDA”) issued a statement on products that heat rather than burn tobacco. The KFDA tested three heat-not-burn products, one of which was IQOS. The KFDA confirmed that the levels of the nine HPHCs tested in the aerosol of these products were on average approximately 90% lower compared to those measured in the cigarette smoke of the top five cigarette brands in South Korea. However, the KFDA stated that it could not establish that the tested heat-not-burn products are less harmful than cigarettes. In October 2018, our Korean subsidiary filed a request with a local court seeking information underlying the KFDA’s analysis, conclusions and public statements. In May 2020, the court ordered KFDA to produce certain records. Subsequent to that decision, and after exchanges between the parties, the case was closed.
In August 2018, the Science & Technology Committee of the UK House of Commons published a report of its inquiry into e-cigarettes and heat-not-burn products. The report concluded that e-cigarettes are significantly less harmful to health than smoking tobacco. The report also observed that for those smokers who do not accept e-cigarettes, heat-not-burn products may offer a public health benefit despite their relative risk. The report called for a risk-proportionate regulatory environment for both e-cigarettes and heat-not-burn products and noted that e-cigarettes should remain the least taxed, cigarettes the most taxed, with heat-not-burn products falling between the two. The UK Committee on Advertising Practice announced the removal of a prohibition of health claims in the advertising of e-cigarettes in the UK, effective November 2018.
In November 2018, the Eurasian Economic Commission (regulatory body of the Eurasian Union consisting of Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia) published the results of its commissioned study on novel nicotine-containing products, including IQOS. The study confirms significantly lower levels of HPHCs in the aerosol generated by this product compared to cigarette smoke.
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 IQOS to 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 IQOS contributed to the difference. The CNTQST stated that the reduction in emissions of harmful constituents cannot be interpreted as a harm/risk reduction for cigarette smokers in the same proportion.
In April 2020, the Superior Health Council of Belgium (“SHC”) published results of its inquiry into heat-not-burn products. The SHC concluded that heat-not-burn products, while not safe, have a more favorable toxicity profile than cigarettes. However, in light of the uncertainty of such products’ short and long-term impacts, the toxic effects of the dual use with cigarettes, and the existence of approved smoking cessation tools, the SHC recommended that current regulations for cigarettes should apply to heat-not-burn products.
In June 2022, the SHC published new advice on e-cigarettes in which they confirm that e-cigarettes are substantially less harmful than smoking cigarettes and, therefore, a better alternative for smokers. The SHC underlines that the vast majority of the risks of tobacco smoking are not caused by nicotine, but by the harmful substances that are released by the combustion of tobacco. Based on the cited science, the SHC calls for legislation that makes a clear distinction between cigarettes and e-cigarettes by focusing on better informing smokers about the benefits of the lower-risk (but not risk-free) alternative, as well as on protecting non-smokers and underage people.
The foregoing scientific findings of government agencies may not be indicative of the measures that the relevant government authorities could take in regulating our products.
Legal Challenges to SFPs
We face various administrative and legal challenges related to certain SFP activities, including allegations concerning product classification; advertising, distribution and sales 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 SFPs and to communicate with the public. The outcomes of these matters may affect our SFP commercialization and public communication activities and performance in one or more markets.
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Illicit Trade
Illicit trade creates a cheap and unregulated supply of tobacco and nicotine-containing products, undermines efforts to reduce smoking prevalence, especially among underage individuals, damages legitimate businesses and intellectual property rights, stimulates organized crime, increases corruption and reduces government tax revenue. We generally estimate that, excluding China and the U.S., illicit trade may account for as much as 16% of global cigarette consumption; this includes counterfeit, contraband and the persistent problem of “illicit whites,” which are cigarettes legally purchased in one jurisdiction for the sole purpose of being exported and illegally sold in another jurisdiction where they have no legitimate market. We estimate that illicit trade in the EU accounted for more than 10% of total cigarette consumption in 2025, mainly driven by counterfeit. Illicit trade also increasingly targets SFPs.
We devote substantial resources to help prevent illicit trade in combustible tobacco products and SFPs. We engage with governments, our business partners and other stakeholders to implement effective measures to combat illicit trade. Where effective and appropriate, we pursue legal remedies to protect our intellectual property rights from counterfeiting or to counter the illicit diversion of our products. We also cooperate with governmental authorities to combat fraudulent imports of non-compliant or unauthorized tobacco and nicotine-containing products.
As an example, the commercial success of the nicotine pouch category makes it more prone to be affected by illicit trade. Our ongoing anti-illicit trade initiatives for nicotine pouches include PMI’s ‘know-your-customer’ and ‘anti-diversion’ governance and other measures, such as volume monitoring, tracking and tracing, product security, as well as internal and external awareness training and communications. We are also expanding our market monitoring (both online and offline) and illicit trade research program to nicotine pouches. PMI affiliates and Swedish Match affiliates are taking appropriate actions to address the illicit resale of certain of our oral products, including nicotine pouches outside their initial intended market of retail, such as Scandinavia, the U.S. and other markets. Such actions include awareness communications to trade partners, cease-and-desist letters to those involved in illicit trade of products bearing our brands and limiting and/or terminating sales to certain customers in both the online and traditional trade.
A number of jurisdictions are considering actions to prevent illicit trade. In November 2012, the FCTC adopted the Protocol to Eliminate Illicit Trade in Tobacco Products (the “Protocol”), which includes supply chain control measures, such as licensing of manufacturers and distributors, enforcement of these control measures in free trade zones, controls on duty free and internet channels and the implementation of tracking and tracing technologies. To date, 73 Parties, including the EU, have ratified the Protocol. The Protocol came into force in September 2018. Since then, implementation in national legislations has been ongoing. The fourth Meeting of the Parties concluded in November 2025, with no restrictions decided as regards duty-free tobacco sales, or as to whether the Protocol’s provisions cover electronic nicotine and non-nicotine delivery systems. MOP5 will take place in 2027. The tracking and tracing regulations for cigarettes and roll-your-own products manufactured or destined for the EU were extended to include tobacco products other than cigarettes, including some of our SFPs, as of May 20, 2024.
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 pending matters in Note 9. Contingencies.
Trade Policy
PMI complies with all applicable trade restrictions and requirements, including sanctions, in the markets in which it operates. We have taken appropriate actions in response to the latest sanctions to ensure full compliance with the relevant restrictions.
We are subject to various trade restrictions imposed by the U.S., the EU, Switzerland, the UK, and other jurisdictions 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. Department of State. It is our policy to comply fully with these Trade Sanctions.
Pursuant to specific exemptions or licenses, or where sanctions do not apply to our business, PMI may make sales in countries subject to Trade Sanctions.
We do not do business or sell products in Belarus, Iran, North Korea, Cuba and Syria.
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Certain states within the U.S. have enacted legislation permitting or requiring state pension funds to divest or abstain from future investment in stocks of companies that do business with certain countries that are sanctioned by the U.S. Because we do business in certain of these countries, consistent with our policy to fully comply with Trade Sanctions and as described above, these state pension funds may have divested of our stock or may not invest in our stock. We do not believe such legislation has had a material effect on the price of our stock.
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 in relation to Russia. While the introduced sanctions vary from jurisdiction to jurisdiction, they are largely aligned. The restrictions target, among others, the Russian financial, banking, oil, military, aviation and marine sectors. The U.S. has also introduced a prohibition on new investment in the Russian Federation by a U.S. person, wherever located, and authorized the imposition of blocking sanctions on anyone operating in the Russian manufacturing sector. 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. The U.S., the EU, Switzerland and Japan introduced additional trade restrictions banning, among many other goods, the export of certain non-tobacco materials used to produce cigarettes and heated tobacco consumables in Russia. The EU, Switzerland and the UK also prohibited technical assistance and other services related to restricted goods. The EU, Switzerland and the UK prohibited import into their territories of certain goods, including cigarettes, among others, which might generate significant revenues for Russia if they originate in Russia or are exported from Russia. The EU and Switzerland prohibited transfer and licensing of intellectual property rights in relation to restricted goods.
PMI holds a 23% equity interest in JSC TK Megapolis ("TKM"), PMI's distributor in Russia, which as of December 31, 2025 had a carrying value of $303 million. Previously, TKM was a subsidiary of Megapolis Distribution B.V. ("MDBV"), a Dutch holding company in which PMI held a 23% equity interest. In June 2024, the Russian government included TKM in the list of economically significant organizations that may be subject to forced localization under applicable Russian law, which referred to the mandatory removal of a foreign holding company from the shareholding structure. On August 8, 2024, the Arbitrazh Court of the Moscow Region granted the forced localization of MDBV as requested by the Ministry of Industry and Trade on July 18, 2024. As a result, MDBV’s shares in TKM were transferred to TKM and subsequently transferred to the Russian subsidiaries of its indirect shareholders during the fourth quarter of 2024. MDBV was dissolved in December of 2025. Previously, Mr. Igor Kesaev was a non-majority shareholder of MDBV. The EU, the U.S., the UK, Switzerland, Canada, Australia, New Zealand and Ukraine imposed sanctions on Mr. Igor Kesaev.
The U.S., the UK, Switzerland and the EU banned the export of electric accumulators, static converters and electronic cigarettes and similar personal electric vaporizing devices, including IQOS devices, to Russia. Certain countries have also banned the delivery of services to Russia, such as information technology consultancy services, accounting and business and management consulting services, or require licenses to continue delivering these services to Russian persons or entities. We are working to mitigate any potential impacts from these restrictions.
Russia introduced certain countermeasures aimed at reducing the effect of Western sanctions. Countermeasures include restrictions on export of certain goods from Russia, including tobacco-related production equipment, restrictions on lending to foreign borrowers, repatriation of dividends and transactions with securities and real estate involving companies from “hostile” countries (i.e., those which introduced sanctions in relation to Russia).
The U.S. has adopted new and increased tariffs on countries and specific goods, subject to evolving exemptions, with additional tariff increases proposed. Although some of these tariffs were ruled unconstitutional by the U.S. Supreme Court in February 2026, new U.S. trade investigations, ongoing international investigations, and the likelihood of additional developments, have created a volatile environment for global trade. We expect the global tariff environment to remain volatile throughout 2026. PMI is actively monitoring developments, evaluating all changes, and adapting operations and compliance practices accordingly. For further details, see the "Impact of Tariffs on Our Business" section of this MD&A.
PMI continues to monitor the development of new sanctions and other trade laws in order to ensure full compliance.
Impact of Inflation on Our Business
Like many other global companies, we experienced inflationary pressures in 2022, 2023, and 2024, including: growing pressures on the cost of certain direct materials, wages, energy, transportation, and logistics as well as an increased cost of
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capital due to interest rate increases driven by the response to increased inflation. In 2025, certain inflationary elements such as direct materials and utilities stabilized, with a moderate overall increase in inflationary pressures driven by tobacco leaf costs. The impact of inflation on cost of sales during 2025 and during the first six months of 2026 was not material to our consolidated financial statements.
The current conflict in the Middle East, as discussed below, may result in increased inflationary pressures globally.
Impact of Tariffs on Our Business
The current U.S. and international political environment, including existing and potential changes to U.S. policies related to global trade and tariffs, have resulted in uncertainty surrounding the future state of the global economy.
While the global tariff environment is volatile, as a global company with a broadly diversified production, a worldwide supplier network, including an established U.S. manufacturing base for nicotine pouches, and existing supply chains that are largely self-contained within their respective trade regions, we currently believe we are well-positioned to mitigate potential supply chain challenges and that the changing tariff environment will not have a material impact on our business. During the first six months of 2026, the impact of new tariffs on our business was not material to our condensed consolidated financial statements. We expect the global tariff environment to remain volatile throughout 2026.
We are actively monitoring developments in the global tariff environment and will continue to evaluate the potential impact of the announced tariffs and related developments on our business and financial condition, as well as on our suppliers, and the actions we may take to mitigate any impact. For our risk factors related to the impact of tariffs, see the "Cautionary Factors That May Affect Future Results” section of this MD&A.
Conflict in the Middle East
The Middle East conflict had an immaterial impact on our business in the first half of 2026. While we have observed increased energy prices and some disruption in energy supply in a number of markets, this has not at this stage translated into a discernible shift in consumer behavior. The situation remains uncertain in both duration and potential impact, and it is difficult to assess the broader long term implications for the consumer or the global cost environment. This situation could lead to increased inflationary pressures, which could further impact consumer behavior as well as our transportation, energy, and other input costs. We will continue to closely monitor developments to assess the mid-to-long term consequences across the main variables.
War in Ukraine
In Ukraine, our main priority remains the safety and security of our employees and their families in the country. We continue commercial activities in select locations where safety allows, in order to provide product availability and service to adult consumers, and supply the market from production centers outside Ukraine. Production at our factory in Kharkiv remains suspended. We have invested over $30 million in a new production facility in the Lviv region, in Western Ukraine, where local production commenced in April 2024. As of June 30, 2026, our Ukrainian operations had approximately $0.6 billion in total assets, excluding intercompany balances.
In Russia, we are continuously assessing the evolving situation in the country. This includes regulatory constraints in the market entailing very complex terms and conditions that must be met for any divestment transaction to be granted approval by the authorities, and restrictions resulting from international regulations. In the event of a divestment, our ability to fully realize the value of the business would likely be subject to material impairment. As of June 30, 2026, our Russian operations had approximately $5.6 billion in total assets, excluding intercompany balances, of which approximately $2.8 billion consisted of cash and cash equivalents held mostly in local currency (Russian rubles).
Additionally, PMI holds a 23% equity interest in JSC TK Megapolis, PMI's distributor in Russia. For further details, see Note 13. Related Parties – Equity Investments and Other.
These developments above have or may 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 the "Trade Policy" and "Cautionary Factors That May Affect Future Results" sections of this MD&A.
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Restructuring Activities
We discuss restructuring activities in Note 15. Restructuring Activities to our condensed consolidated financial statements.
U.S. GAAP Treatment of Highly Inflationary Economies
For the six months ended June 30, 2026 and 2025, we applied highly inflationary accounting to the results of operations of our subsidiaries in Argentina, Egypt, Turkey and Lebanon as the cumulative inflation rate in these economies for a three-year period meets or exceeds 100%, in accordance with U.S. GAAP. As a result, monetary assets and liabilities denominated in local currencies are remeasured to the U.S. Dollar at each balance sheet date, with remeasurement gains and losses recognized in the consolidated statement of earnings.
This impact of currency fluctuations could negatively impact our financial condition and results of operations. For the six months ended June 30, 2026 and 2025, exchange gains (losses) recognized resulting from remeasurement adjustments related to highly inflationary accounting were not material.
As of July 1, 2026, PMI will no longer account for the operations of its Egyptian subsidiaries as highly inflationary and will stop using the U.S. dollar as the functional currency of the subsidiaries. The impact of this change is not expected to have a material impact to our consolidated financial statements.
Environmental and Social Laws and Regulations
While, to date, the effect of environmental and social laws and regulations on PMI has not been material to our business, results of operations or financial condition, consideration of these laws and regulations is an integral aspect of PMI’s risk management process. To this end, we actively monitor the existing and potential impact on PMI of significant pending or existing legislation, regulations, international accords, reporting frameworks, standards, principles, and other forms of guidance related to environmental and social matters.
Acquisitions, Divestitures and Other Business Arrangements
We discuss our acquisitions and divestitures in Note 2. Acquisitions and Divestitures to our condensed consolidated financial statements.
Indonesia
On March 31, 2026, the Indonesia Stock Exchange (“IDX”) issued new free float regulations. Any listed company with a market capitalization of at least IDR 5 trillion and a public free float of less than 12.5% as of March 31, 2026 must increase its free float to at least 12.5% by March 31, 2027 and to at least 15% by March 31, 2028. One of PMI’s Indonesian subsidiaries, PT Hanjaya Mandala Sampoerna Tbk (“HMS”), is listed on the IDX. As of June 30, 2026, 7.5% of HMS’ equity, with a listed value of IDR 5.8 trillion (approximately $351 million), qualified as public free float under the new regulations. HMS is assessing the implications of these new requirements.
KT&G
On January 30, 2023, PMI announced a long-term collaboration with KT&G, South Korea’s leading tobacco and nicotine manufacturer, to continue to commercialize KT&G’s innovative smoke-free devices and consumables on an exclusive, worldwide basis (excluding South Korea).
The agreement covers fifteen years, to January 29, 2038, with performance-review cycles and associated commitments, based on volume, to be confirmed for each three-year period, to allow flexibility for evolving market conditions.
The agreement gives PMI continued exclusive access to KT&G’s smoke-free brands and product-innovation pipeline, including offerings for low- and middle-income markets, that will enhance PMI’s existing portfolio of smoke-free products.
Products sold under the agreement will be subject to assessment to ensure they meet the regulatory requirements in the markets where they are launched, as well as PMI’s high standards of quality and scientific substantiation. PMI and KT&G will seek any necessary regulatory approvals that may be required on a market-by-market basis.
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On July 30, 2024, PMI announced a memorandum of understanding with KT&G. This non-binding memorandum establishes the parties’ intent to collaborate on regulatory submissions for those new KT&G heat-not-burn products that PMI selects to commercialize in the U.S. KT&G’s new platform products are expected to be launched first outside the U.S. Thereafter, the partners plan to work on a PMTA submission for review by the U.S. FDA, in accordance with the memorandum.
Equity Investments
We discuss our equity investments in Note 13. Related Parties - Equity Investments and Other to our condensed consolidated financial statements.
Financial Review
Cash Flow Highlights
For the Six Months Ended June 30,
(in millions) 2026 2025
Net cash provided by (used in) operating activities $ 5,093 $ 3,062
Net cash provided by (used in) investing activities 23 (2,750)
Net cash provided by (used in) financing activities (3,879) (890)
Net Cash Provided by (Used in) Operating Activities
During the first six months of 2026, net cash provided by operating activities was $5.1 billion as compared to $3.1 billion in the first six months of 2025. Excluding favorable currency movements, the favorable variance of $1.9 billion was primarily due to lower working capital requirements of $1.5 billion, and higher currency-neutral net earnings, excluding non-cash depreciation and amortization expense, non-cash movements in deferred income tax benefit, the impairment charge related to the RBH equity investment and non-cash movements related to the changes in the fair value of our investments in equity securities reflected in Other (for further details, see Note 13. Related Parties – Equity Investments and Other).
The lower working capital requirements in 2026 as compared with 2025 were primarily due to less cash used in inventories, and accrued liabilities and other current assets, reflecting the timing of excise tax-paid tactical inventory movements primarily related to excise tax increases and the timing of the corresponding excise tax payments. Additionally, excise tax payments in 2025 included the disputed supplemental tax surcharge on heated tobacco products in Germany of approximately $0.8 billion which PMI elected to pay in January 2025 to avoid the future addition of interest (for further details refer to the International Smoke-Free segment section of this MD&A where we describe the case). Lower cash used in income taxes primarily reflects the final installment payment in 2025 related to the 2017 U.S. Tax Cuts and Jobs Act transition tax liability.
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For the full year 2026, we currently expect net cash provided by operating activities of around $13.5 billion at prevailing exchange rates, subject to year-end working capital requirements.
Net Cash Provided by (Used in) Investing Activities
During the first six months of 2026, net cash provided by investing activities was $23 million as compared to net cash used in investing activities in 2025 of $2,750 million. This favorable variance was primarily due to changes in the cash collateral posted for derivative instruments, reflecting the depreciation of the Euro and the Swiss franc versus the U.S. dollar, and favorable movements in investments in debt securities.
The 2026 capital expenditures were primarily related to our ongoing investments in smoke-free product manufacturing capacity. We expect total capital expenditures in 2026 to be $1.4 billion to $1.6 billion, predominantly supporting the smoke-free business.
Net Cash Provided by (Used in) Financing Activities
During the first six months of 2026, net cash used in financing activities was $3.9 billion as compared to $0.9 billion in the first six months of 2025. The increase in net cash used was primarily due to lower long-term debt issuances in 2026, higher long-term debt repayments in 2026 and higher dividend payments. The increase was partially offset by higher net short-term borrowings in 2026 and changes in the cash collateral received for derivative instruments, reflecting the depreciation of the Euro and the Swiss franc versus the U.S. dollar.
Liquidity and Capital Resources
As a holding company, we depend on dividends and debt repayments from our subsidiaries as our primary sources of funds to pay dividends to our stockholders, make payments on our debt securities and meet other obligations. Our principal wholly owned and majority-owned subsidiaries currently are not limited by long-term debt or other agreements in their ability to pay cash dividends or to make other distributions that are otherwise compliant with law, including governmental capital and foreign currency exchange controls.
In certain jurisdictions, we are impacted by various capital controls and/or foreign currency exchange constraints that affect the ability of our subsidiaries in these jurisdictions to settle foreign currency denominated imports of goods and services and/or to pay dividends. These factors increase foreign currency devaluation risks, which may have a negative impact on our financial condition, net assets and results of operations in these jurisdictions.
We define cash and cash equivalents as short-term, highly liquid investments, readily convertible to known amounts of cash that mature within a maximum of three months and have an insignificant risk of change in value due to interest rate or credit risk changes. As a policy, we do not hold any investments in structured or equity-linked products. Our cash and cash equivalents are mostly held with institutions that have investment-grade long-term credit ratings. As of June 30, 2026 and December 31, 2025, we had cash and cash equivalents of $6.0 billion and $4.9 billion, respectively, the majority of which was held by our foreign subsidiaries, including $2.8 billion and $2.3 billion, respectively, held in Russia.
To meet our ongoing liquidity requirements, our principal source of liquidity is cash generated from operations. Additionally, 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. Our ability to access the capital and credit markets as well as overall dynamics of these markets may impact borrowing costs. We expect that the combination of our long-term and short-term debt financing, the commercial paper program and the committed credit facilities, coupled with our cash generated from operations, will be adequate to meet our liquidity requirements.
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Debt and Borrowing Arrangements
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. On April 14, 2026, Moody’s revised PMI's outlook from "Stable" to "Positive". At June 30, 2026, our credit ratings and outlook by major credit rating agencies were as follows:
Short-term Long-term Outlook
Moody’s P-1 A2 Positive
Standard & Poor’s A-2 A- Positive
Fitch F1 A Stable
Debt – Our total debt was $49.1 billion at June 30, 2026, and $48.8 billion at December 31, 2025. Foreign currency denominated debt and the majority of our $52.2 billion gross notional amount of derivative financial instruments are subject to foreign currency exchange rates fluctuation, primarily between the Euro and U.S. Dollar, which could impact our debt levels and the pace of anticipated deleveraging. For further details, including the fair value and currency denomination of our debt, as well as our debt issuances in 2026, see Note 6. Financial Instruments and Note 11. Indebtedness. The amount of debt that we can issue is subject to approval by our Board of Directors.
On February 6, 2026, we filed a shelf registration statement with the U.S. Securities and Exchange Commission (the "SEC"), under which we may from time to time sell debt securities and/or warrants to purchase debt securities over a three-year period.
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 June 30, 2026, we had $2.7 billion of commercial paper outstanding. At December 31, 2025, we had no commercial paper outstanding. The average commercial paper balance outstanding during the first six months of 2026 was $4.7 billion. The average commercial paper balance outstanding during 2025 was $3.0 billion. For further details, see Note 11. Indebtedness.
Revolving Credit Facilities – At June 30, 2026, our total committed revolving credit facilities were $6.2 billion, and there were no borrowings outstanding. The entire committed amounts were available for borrowing.
All banks participating in our committed revolving credit facilities have an investment-grade long-term credit rating from the credit rating agencies. We continuously monitor the credit quality of our banking group, and at this time we are not aware of any potential non-performing credit provider.
These committed revolving credit facilities do not include any credit rating triggers, material adverse change clauses or any provisions that could require us to post collateral. We expect to continue to meet our covenants.
For further details on our revolving credit facilities, including other short-term credit arrangements, see Note 11. Indebtedness.
Sale of Accounts Receivable – To mitigate credit risk and enhance cash and liquidity management, we sell trade receivables to unaffiliated financial institutions. For further details, see Note 14. Sale of Accounts Receivable.
Supply Chain Financing – We engage with unaffiliated global financial institutions that offer a voluntary supply chain financing program to some of our suppliers. For further details, see Note 17. Supply Chain Financing.
Guarantees – At June 30, 2026, 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. These guarantees have not had, and are not expected to have, a significant impact on PMI’s liquidity.
In August 2024, PMI entered into a guarantee agreement for an equity investee. For further details, see Note 13. Related Parties – Equity Investments and Other.
Swedish Match Notes Consent Solicitation and PMI Guarantee
On June 15, 2023, our wholly owned subsidiary, Swedish Match AB ("Swedish Match"), initiated a public consent solicitation of eligible holders of certain outstanding series of its notes to amend certain terms and conditions of these respective notes. The eligible noteholders provided the requisite irrevocable consent instructions voting in favor of the amendments, which were
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subsequently passed by way of extraordinary resolution at the noteholders’ meeting held on July 28, 2023. As a result of the passage of the extraordinary resolution, Philip Morris International Inc. entered into a guarantee, which guarantees unconditionally and irrevocably to the noteholders the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of the principal, premium, if any, and interest on the notes.
Equity and Dividends
We discuss our stock awards as of June 30, 2026 in Note 3. Stock Plans to our condensed consolidated financial statements.
Dividends paid in the first six months of 2026 were $4.6 billion. During the third quarter of 2025, our Board of Directors approved an 8.9% increase in the quarterly dividend to $1.47 per common share. As a result, the present annualized dividend rate is $5.88 per common share.
Market Risk
Counterparty Risk - We predominantly work with financial institutions with strong short- and long-term credit ratings as assigned by Standard & Poor’s and Moody’s. These banks are also part of a defined group of relationship banks. Non-investment grade institutions are only used in certain emerging markets to the extent required by local business needs. We have a conservative approach when it comes to choosing financial counterparties and financial instruments. As such, we do not invest or hold investments in any structured or equity-linked products. The majority of our cash and cash equivalents is currently invested with maturities of less than 30 days.
We continuously monitor and assess the credit worthiness of all our counterparties.
Derivative Financial Instruments - We operate globally with manufacturing and sales facilities in various locations around the world. Consequently, we use certain financial instruments to manage our foreign currency and interest rate exposure. We use derivative financial instruments principally to reduce our exposure to market risks resulting from fluctuations in foreign exchange and interest rates by creating offsetting exposures. We are not a party to leveraged derivatives and, by policy, do not use derivative financial instruments for speculative purposes.
See Note 6. Financial Instruments to our condensed consolidated financial statements for further details on our derivative financial instruments and the related collateral arrangements.
Contingencies
See Note 9. Contingencies to our condensed consolidated financial statements for a discussion of contingencies.
Cautionary Factors That May Affect Future Results
Forward-Looking and Cautionary Statements
We may from time to time make written or oral forward-looking statements, including statements contained in this Quarterly Report on Form 10-Q and other filings with the SEC, in reports to investors and in press releases and investor webcasts. You can identify these forward-looking statements by use of words such as "strategy," "expects," "continues," "plans," "anticipates," "believes," "will," "aspires," "estimates," "intends," "projects," "aims," "goals," "targets," "forecasts" and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements and whether to invest in or remain invested in our securities. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results and outcomes to differ materially from those contained in any forward-looking statements made by us; any such statement is qualified by reference to the following cautionary statements. We elaborate on these and other risks we face throughout this report, particularly in the Business Environment section of this MD&A. You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider the following to be
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a complete discussion of all potential risks or uncertainties. Additionally, the following disclosures reflect our beliefs and opinions as to future risks and uncertainties. References to past events are provided by way of example only and are not intended to be a complete listing or a representation as to whether or not such factors have occurred in the past or their likelihood of occurring in the future. We do not undertake to update any forward-looking statement that we may make from time to time, except in the normal course of our public disclosure obligations.
Overall Business Risks
We may be unsuccessful in our efforts to introduce, commercialize, and grow smoke-free products in existing and new markets, and regulators may prohibit or significantly restrict the commercialization of these products or the communication of scientifically substantiated information and claims.
Our strategic priority is the continued introduction, commercialization, and growth of our SFPs, and if these efforts are not successful, in key markets or systematically, our financial results and future growth prospects may be materially adversely impacted. If other market participants are more successful in these efforts or if SFP categories where we hold a competitive advantage are inequitably regulated compared to cigarettes or other SFP 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 participants, such as the inappropriate marketing of e-vapor products to underage individuals, as well as alleged health consequences associated with the use of certain SFPs, may unfavorably impact public opinion and/or mischaracterize the health consequences of our SFPs 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 and maintenance of science-based regulatory frameworks for the development and commercialization of SFPs. We cannot predict the extent to which regulators will permit — or continue to permit — the sale and/or marketing of SFPs and regulatory restrictions have, and could further limit, the commercialization of our SFPs.
Additionally, any claims, regardless of merit, challenging our research and clinical data available to date may impact the development and maintenance of science-based regulatory frameworks for the commercialization of the SFP category and the commercialization of the SFP category in general.
Our SFPs and commercial activities for these products are designed for, and directed toward, current adult smokers and adult users of nicotine-containing products. We also put significant effort to restrict access of our products by underage persons. Despite our efforts, technological, operational, and/or regulatory developments might impact the implementation or effectiveness of underage access prevention mechanisms and surrounding infrastructure. If there is significant usage, whether actual or perceived, of our products or competitive products among underage individuals or non-nicotine users, even in situations over which we have no control, our reputation and credibility may suffer, the regulatory approach to our products may become more restrictive, and our efforts to advocate for the development of science-based regulatory frameworks for the development and commercialization of SFPs may be significantly impacted.
Consumption of tax-paid cigarettes continues to decline in many of our markets.
This decline is due to multiple factors, including increased taxes and pricing, governmental actions, the diminishing social acceptance of smoking, health concerns, competition, continuing economic and geopolitical uncertainty, and the continuing prevalence of illicit products. These factors and their potential consequences are discussed more fully below and in the Business Environment section of this MD&A. The decline in the consumption of cigarettes could have a material adverse effect on our revenues, cash flows and profitability, which in turn may have a material adverse effect on our ability to fund our smoke-free transformation.
Our business faces significant governmental actions aimed at increasing regulatory requirements with the goal of reducing or preventing the use of tobacco or nicotine-containing products.
Governmental actions, combined with the diminishing social acceptance of smoking and private actions to restrict smoking, have resulted in reduced industry volumes for our combustible products in many of our markets, and we expect that such factors will continue to reduce combustible consumption levels and will increase down-trading and the risk of counterfeiting, contraband, illicit trade and cross-border purchases.
Governmental actions to restrict or entirely prohibit the use of certain SFP categories have also been considered or adopted in various jurisdictions. A significant factor influencing these developments are reports issued by the WHO and the FCTC, and related proposals, which make a number of policy recommendations on SFPs that, if implemented, could restrict both the availability of these products and the access to accurate information about them. These reports and proposals are not binding on the WHO Member States or on parties to the FCTC, and so it is not possible to predict the extent to which any of the reports or proposals are implemented into regulations by Member States. However, these proposed guidance documents could ultimately
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lead to restrictions on the availability of certain of our SFPs or access to accurate information about them in one or more of our current or future markets, which could have a material adverse effect on our financial results and growth prospects.
We anticipate that significant regulatory restrictions will continue to be considered and adopted in many markets. Regulatory initiatives that have been contemplated, proposed, introduced, or enacted by governmental authorities in various jurisdictions include:
• restrictions on or licensing of outlets permitted to sell tobacco or nicotine-containing products;
• the levying of substantial and increasing tax and duty charges;
• restrictions or bans on advertising, marketing and sponsorship;
• the display of larger health warnings, graphic health warnings and other labeling requirements;
• restrictions on packaging design, including the use of colors, and mandating plain packaging;
• restrictions on packaging and cigarette formats and dimensions;
• restrictions or bans on the display of product packaging at the point of sale and restrictions or bans on vending machines;
• generational sales bans, under which the sale of certain tobacco or nicotine-containing products to people born after a certain year would be prohibited;
• classification of the product as food such that any nicotine amounts beyond de minimis content de facto bans the nicotine product from the market;
• requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and/or other smoke or product constituents;
• disclosure, restrictions, or bans of tobacco and nicotine-containing product ingredients, components or other product features, including bans on the flavors of certain tobacco and nicotine-containing products, and restrictions on certain device features;
• increased restrictions on smoking and use of tobacco and nicotine-containing products in public or private spaces, both indoors and outdoors;
• restrictions or prohibitions of novel tobacco or nicotine-containing products or related devices;
• elimination of duty free sales and duty free allowances for travelers;
• restrictions in terms of importing or exporting our products impacting our logistics activities and ability to ship our products;
• encouraging litigation against tobacco companies; and
• excluding tobacco companies from transparent public dialogue regarding public health and other policy matters.
Our financial results could be materially affected by regulatory initiatives resulting in a significant decrease in demand for our brands. More specifically, requirements that lead to a commoditization of tobacco products or impede adult consumers' ability to access and convert to our SFPs, as well as any significant increase in the cost of complying with new regulatory requirements, could have a material adverse effect on our financial results and growth prospects.
The success of our business in the United States is dependent on an evolving legal and regulatory framework.
Federal, state or local government action, including regulatory actions and inaction by the FDA, may have a material adverse impact on our commercialization of SFPs and in our business in the United States. The FDA’s premarket tobacco product and MRTP authorizations of two versions of our IQOS product as well as the premarket tobacco product and MRTP authorizations of 20 varieties of ZYN nicotine pouches are subject to strict marketing, reporting and other requirements. Although we have received these authorizations from the FDA, there is no guarantee that the products will remain authorized for sale in the United States, or that new versions of IQOS or other ZYN products will receive authorizations, particularly if there is a significant uptake in underage or non-nicotine user initiation.
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The commercialization of our products in the United States is dependent on successfully managing compliance with federal, state, and local laws, regulations, legal agreements, and related interpretations. Failure to successfully manage compliance and to resolve any disputes that may arise regarding the application of legal and administrative requirements to our products could negatively impact the timing, manner, or success of our SFP commercialization in the United States, which could in turn have a material adverse effect on our results of operations, revenues, cash flows, and profitability.
We face intense competition, and our failure to compete effectively could have a material adverse effect on our profitability and results of operations.
We are subject to highly competitive conditions in all aspects of our business. See Item 1, Business—Competition of the Annual Report on Form 10-K for the fiscal year ended December 31, 2025 for a description of the competitive environment in which we operate. 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; adult smoker willingness to convert to our SFPs; higher product taxes; higher absolute prices and larger gaps between retail price categories; unfair competition; more effective adoption of artificial intelligence tools and processes by our competitors; and product regulation that diminishes the ability to differentiate products, restricts adult consumer access to truthful and non-misleading information about our SFPs, or disproportionately impacts the commercialization of our products in relation to our competitors.
Some of our competitors have different profit, volume and regulatory objectives, some international competitors may be less susceptible than PMI to changes in currency exchange rates, and some competitors may sell products in circumvention of applicable regulations that compete directly with our products. Certain SFP competitors may alienate consumers from innovative products through inappropriate marketing campaigns, messaging and inferior product satisfaction, and without scientific substantiation based on appropriate R&D protocols and standards, all of which could have a material 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, and if we do not accurately assess market trends, are unable to adapt our product offerings to evolving consumer demands, or face challenges in product development, we could experience missed opportunities, supply chain challenges, reduced competitiveness, inefficient expenditures, and potential impacts on our customer base and brand reputation. Furthermore, restrictions pertaining to packaging, labeling, or promotional and advertising activities may limit our ability to effectively communicate product innovations intended to address changing adult consumer preferences. Any of these factors could have a material adverse effect on our results of operations, revenues, cash flows, profitability, and prospects for growth.
The financial and business performance of our smoke-free products is less predictable than our cigarette business.
Our SFPs compete in relatively new categories, 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, due to geopolitical or macroeconomic events that negatively impact SFP availability or adoption, which in turn may have a material adverse effect on our results of operations.
Our ability to grow profitability may be limited by our ability to introduce new products, enter new markets, maintain sufficient production capacity, or improve our margins through higher pricing and improvements in our brand and geographic mix.
Our profit growth may be materially adversely impacted if we are unable to introduce new products or enter new markets successfully, to meet the demand for our products with increased production capacity, to raise prices, or to improve the proportion of our sales of higher margin products and in higher margin geographies.
Our management uses certain key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions, and such metrics may not accurately reflect all of the aspects of our business needed to make such evaluations and decisions, in particular as our business continues to evolve.
In addition to our consolidated financial results, our management regularly reviews a number of operating, performance, risk, and financial metrics, including various revenue, user and sales metrics (such as market shares, in-market sales, adjusted in-market sales, and SFP users) to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We believe that these metrics are representative of our current business; however, these metrics may not accurately reflect all aspects of our business, and we anticipate that these metrics may change or may be substituted for additional or different metrics as our business evolves. Furthermore, in some instances the
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metrics are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant uncertainties and contingencies. If our management fails to account for other relevant information or to substitute the key business metrics they review as our business changes or if the assumptions or estimates underlying the metrics are inaccurate, their ability to accurately formulate financial projections and make strategic decisions may be compromised and our business, financial results and future growth prospects may be adversely impacted.
Our ability to achieve our strategic goals may be impaired if we fail to attract, motivate and retain the best global talent and effectively align our organizational design with the goals of our transformation.
To be successful, we must continue evolving 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 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 Taxation and Finance
Cigarettes are subject to substantial taxes. Significant increases in cigarette-related taxes have been proposed or enacted and are likely to continue to be proposed or enacted in numerous jurisdictions. These tax increases may disproportionately affect our profitability and make us less competitive versus certain of our competitors.
Tax regimes, including excise taxes, sales taxes and import duties, can disproportionately affect the retail price of cigarettes versus other combustible tobacco products, or disproportionately affect the relative retail price of our cigarette brands versus cigarette brands manufactured by certain of our competitors. 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. 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 cross-border purchases of lower price products, or to illicit products such as contraband, counterfeit and other non-compliant or otherwise illicit products.
Each of these risks could have a material adverse effect on our business, operations, results of operations, revenues, cash flows and profitability.
We may be unsuccessful in our efforts to differentiate smoke-free products and cigarettes with respect to taxation.
To date, we have been largely successful in demonstrating to regulators that our SFPs are not cigarettes due to the absence of combustion, and accordingly they are frequently taxed either as a separate category or as other tobacco products, which typically yields more favorable tax rates than cigarettes. Nevertheless, some jurisdictions have considered or adopted taxation regimes with SFP taxation rates approaching or equal to cigarettes and we are unable to predict whether new regulations, or reinterpretations of existing regulations, will result in SFPs being taxed in line with other tobacco products such as conventional cigarettes in additional jurisdictions, on a prospective or retroactive basis. If we are not successful in our efforts to maintain differentiation, SFP unit margins may be materially adversely affected, which in turn may have a material adverse effect on our results of operations, revenues, cash flows, and profitability.
Changes in the earnings mix and changes in tax laws may result in significant variability in our effective tax rates. Our ability to receive payments from foreign subsidiaries or to repatriate royalties and dividends could be restricted by local country currency exchange controls and other regulations.
We are subject to income tax laws in the United States and numerous foreign jurisdictions. Changes in the tax laws of foreign jurisdictions could arise as a result of the base erosion and profit shifting project undertaken by the Organisation for Economic Co-operation and Development (the "OECD"), which could have a material adverse impact on our effective tax rate thereby reducing our net earnings. 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. Currently, many countries have enacted or taken actions to align with the OECD’s framework on a global minimum tax (referred to as “Pillar Two”), effective for taxable years beginning after December 31, 2023. 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.
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Unstable geopolitical conditions or events in certain markets, including international conflicts, civil unrest, acts of war, terrorism, governmental changes, or changes in international relations could result in negative tax impacts. 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, which could also have a material adverse impact on our effective tax rate if enacted thereby reducing our net earnings.
We are a U.S. holding company whose most significant source of funds is distributions from our non-U.S. subsidiaries. Certain countries in which we operate have adopted or could institute currency exchange controls and other regulations or policies 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.
Disruptions in the credit markets or changes to our credit ratings may adversely affect our business.
We currently generate significant cash flows from ongoing operations and have access to global credit markets through our various short- and long-term financing activities. Our financial performance, our credit ratings, interest rates, the stability of financial institutions with which we partner, geopolitical or national developments, the stability and liquidity of the credit markets and the state of the global economy could affect the availability and cost of financing.
Disruption in the credit markets, limitations on our ability to borrow, slower than anticipated debt deleveraging, or a downgrade of one or more of our current credit ratings could increase our future borrowing costs which could materially and adversely affect our financial condition and results of operations. In addition, tighter or more volatile credit markets may lead to business disruptions for certain of our suppliers, contract manufacturers or trade customers which could, in turn, adversely impact our business, results of operations, cash flows and financial condition.
We may be required to write down assets due to impairment, which could have a material adverse effect on our results of operations or financial position.
We continuously monitor the values of our long-lived assets, reporting units, intangible assets, as well as investments in equity securities, to determine whether events or changes in circumstances indicate that an impairment exists. We also test goodwill and non-amortizable intangible assets for impairment annually. The values of these assets may be affected by several factors, including general macroeconomic and geopolitical conditions; regulatory and legal developments; changes in product volume growth rates; changes in pricing strategies and cost bases; discount rates; success of planned new product expansions; competitive activity; and income and excise taxes. If an impairment is determined to exist, we will incur impairment losses, which could have a material adverse effect on our results of operations or financial position. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates of our Annual Report on Form 10-K for the fiscal year ended December 31, 2025 for additional information concerning impairment determination and calculation.
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.
In 2025, Russia accounted for around 9% 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 around 1% of our total net revenues.
The full implications of the Russian invasion of Ukraine to our operations in those countries are impossible to predict at this time. The likelihood of action by the Russian government against PMI, including the possibility of legal action against us or our employees; the deprivation of rights in, or access to, our Russian or Russia-related assets; or nationalization of foreign businesses or assets (including cash reserves held in Russia and intangible assets such as trademarks), is impossible to predict. We are continually assessing the evolving situation in Russia, including regulatory constraints in the market involving very complex terms and conditions that must be met for any divestment transaction to be granted approval by the authorities, and restrictions resulting from international regulations. In the event of a divestment, our ability to fully realize the value of the business would likely be subject to material impairment. The deprivation of rights in, or access to, our Russian or Russia-related assets could also result in a material impairment and could cause the deconsolidation of our Russian business. In Ukraine, it is not possible to know when and to what extent we will be able to fully 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 further impairment charges.
The conflict also continues to elevate 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. Furthermore, the imposition of various restrictions on transactions with parties from certain jurisdictions, the ban on exports of various products, and other
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economic and financial restrictions may adversely affect us or certain third parties with which we do business in Russia, such as customers, suppliers, intermediaries, service providers and banks.
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, or geopolitical shifts; and adverse effects on macroeconomic conditions, security conditions, currency exchange rates, and financial markets. Given the nature of our business and global operations, such geopolitical 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 operational 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 heighten many other risks disclosed in this report, any of which could adversely affect our business, results of operations, cash flows or financial position. Such risks could affect, without limitation, the achievement of our strategic priorities, including achievement of our smoke-free business 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, Distribution and Quality of Products, Services and Materials
Use of third-parties may negatively impact the distribution, quality, and availability of our products and services, and we may be required to replace third-party contract distributors, manufacturers or service providers.
We increasingly rely on third-parties and their subcontractors/suppliers, sometimes concentrated in a specific geographic area, for product distribution and to manufacture some of our products and product parts (particularly, electronic devices and accessories), as well as to provide services, including to support our finance, commercialization and information technology processes. While many of these arrangements improve efficiency and decrease our operating costs, they also diminish our direct control. Such diminished control, including, but not limited to, control over third-party manufacturers and the availability of semiconductors and other critical electronic components used in our electronic devices, may lead to disruption in the distribution of our products and 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 or negatively impact our reputation. In addition, we may be unable to renew these arrangements on satisfactory terms for numerous reasons, including government regulations, and the distribution of our products may be disrupted in certain markets or our costs may increase significantly if we must replace such third parties with other partners or our own resources.
Additionally, we expect that these third parties adhere to our applicable standards and to applicable laws related to product quality, responsible marketing, data protection, labor practices, and other areas. Our ability to monitor and enforce compliance is inherently limited, and these parties may fail to comply with our standards or to operate in accordance with our expectations or legal requirements, which could expose us to operational disruptions, legal or regulatory liabilities, reputational damage, or financial losses.
Risks related to the natural environment and related legal or regulatory developments may have a negative impact on our business and results of operations.
While we seek to mitigate the physical risks to our business associated with the natural environment through a comprehensive strategy that includes the development and implementation of robust mitigation and adaptation measures, we recognize that there are residual risks that lie beyond our operational control. For example, increased frequency and intensity of extreme droughts, floods, and/or heatwaves could negatively affect our manufacturing operations, tobacco-growing areas, third-party operators and third-party manufacturers sites, and supply regions for products and raw materials, all of which may lead to disruption of our supply chain and of operations at factories, warehouses and other premises.
Furthermore, there is a continued and, in some cases, increased focus by certain regulatory and legislative bodies on environmental policies, including by the governmental authorities in certain international jurisdictions where we operate. These policies include, among others, carbon emissions and other environmentally focused taxation and fees as well as disclosure requirements, which could lead to additional taxation; energy price increases; disclosure and data assurance risks; new compliance costs; increased distribution and supply chain costs; and other expenses impacting our cost of operations. Moreover, given that the regulatory landscape in this regard is highly dynamic and fragmented across the many jurisdictions where we operate, additional uncertainties may be driven by regulatory changes with limited time for implementation and by
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contradictory requirements across jurisdictions, which could elevate the cost or complexity of our operations or create compliance risks. Additionally, government authorities, non-governmental organizations and other external stakeholders are increasingly filing lawsuits or initiating regulatory actions alleging that public statements regarding sustainability-related matters and practices are misleading or false.
Government mandated prices, production control programs, and shifts in crops driven by economic conditions may increase the cost or reduce the quality of tobacco and other agricultural products used to manufacture our products.
As with other agricultural products, 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. 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.
Additionally, we source the vast majority of our tobacco from a global network of farmers across multiple countries, rather than through commodity markets, which helps ensure the consistency, quality, and traceability of our tobacco supply. However, this model also means that disruptions to farmer livelihoods, if not actively mitigated, could lead to supply chain disruption through farmer exit, reduced crop quality, unsustainable farming practices, increased regulatory scrutiny, and reputational risks.
A prolonged disruption of facilities used to produce our products could have a material adverse effect on our business, financial condition and results of operations.
A prolonged disruption at or shut-down of one or more of the facilities where our products or product components are produced, or sourced from, especially our ZYN production facility in Kentucky, U.S., which currently supplies substantially all of our capacity for ZYN sales in the U.S., due to natural- or man-made disasters or other events outside of our control, such as equipment malfunction or widespread outbreaks of acute illness, including COVID-19, supply chain constraints, a cybersecurity incident, or for any other reason, could limit our capacity to meet customer demands. Such an event could disrupt our operations; delay production, shipments and revenue; and result in significant expense to repair or replace affected facilities. As a result, we could forgo revenue opportunities and potentially lose market share, which could materially and adversely affect our business, financial condition and results of operations.
We could decide, or be required, to recall products, which could have a material adverse effect on our business, reputation, results of operations, cash flows or financial position.
We could decide - or laws, regulations, or administrative action could require us - to recall products due to the failure, or alleged failure, to meet quality or safety standards or specifications, suspected or confirmed and deliberate or unintentional product contamination, manufacturing defects, or other product safety concerns, adulteration, misbranding or tampering. A product recall or a product liability or other claim (even if unsuccessful or without merit) could generate negative publicity about us and our products, and our reputation or that of our brands may be adversely affected. In addition, if another company recalls or experiences negative publicity related to a product in a category in which we compete, adult nicotine consumers might reduce their overall consumption of products in that product category. Any of these events could have a material adverse effect on our business, reputation, results of operations, cash flows or financial position.
Risks Related to our Global Operations
Because we have operations in numerous countries, our results may be adversely impacted by economic, regulatory and political developments, natural disasters, pandemics or conflicts.
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 threats of war or acts of war may have a significant impact on the business environment. Factors beyond our control, such as, without limitation, natural disasters; extreme weather events; pandemics; adverse economic, political or regulatory events; acts of war or threats of war; formal or informal bans or boycotts or changes in consumer preferences resulting from geopolitical developments; geopolitical instability affecting international trade; or other developments, could disrupt or increase the expenses related to our supply chain, manufacturing capabilities, distribution capabilities, or the energy and other utility services required to operate our factories, warehouses, and other premises. Our business continuity plans and other safeguards might not always be effective to fully mitigate their impact.
While we do not now expect that the recent and currently anticipated trade tariffs imposed by the U.S. and other countries will materially impact our business, the global tariff environment is volatile and further tariff or trade related developments could result in risks to PMI’s business, including increased production costs; limited market access; supplier financial condition degradation resulting in reduced or interrupted supplies; and price increases or other economic impacts that could reduce consumer demand. Additionally, while the impact of the Middle East conflict on our business in the first half of 2026 was immaterial, the duration and potential impact of the situation remain uncertain and it could lead to increased inflationary
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pressures, which could impact consumer behavior as well as our transportation, energy, and other input costs; broader geopolitical instability; security or cybersecurity incidents; or other consequences that, individually or in the aggregate, may materially adversely affect our business, results of operations, cash flows, or financial condition.
Any of the foregoing developments could cause significant volume declines in our Global Travel Retail business and certain other key markets; disrupt or delay our distribution, manufacturing or supply chain; increase currency volatility; 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 have a material adverse effect on our business, operations, volumes, revenues, cash flows, financial position, net earnings and profitability. We discuss additional risks associated with Russia's invasion of Ukraine above.
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 controls and compliance policies 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 fluctuations could impair our competitiveness. Our results could also be adversely affected by capital controls or by foreign currency exchange constraints or devaluations.
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. 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 cash flows and on net revenues as compared to our gross profit and operating income margins.
Capital controls and/or foreign currency exchange constraints may affect the ability of our subsidiaries in impacted jurisdictions to settle foreign currency denominated imports of goods and services and/or to pay dividends and royalties. These factors may also increase foreign currency devaluation risks, which may have a negative impact on our net assets and results of operations in these jurisdictions. All of which could have a material adverse effect on our financial condition, including our leverage ratios, cash flows, liquidity, net earnings, and profitability.
A sustained period of elevated inflation across the markets in which we operate could result in higher operating and financing costs and lead to reduced demand for our products.
Inflationary pressures have and may continue to result in significant increases to our expenses, including direct materials, wages, energy, transportation, and logistics costs. Inflation can also increase financing costs due to related increases in benchmark interest rates. While we take actions, wherever possible, to reduce the impact of the effects of inflation, in cases of sustained and elevated inflation across several of our major markets, it may be difficult to effectively control the increases to our costs. Inflationary pressures may also negatively impact consumer purchasing power, which could result in reduced demand for our products. If we are unable to increase our prices sufficiently or take other actions to mitigate the effect of inflationary pressures, our profitability and financial position could be negatively impacted.
Risks Related to Legal Challenges and Investigations
Litigation related to tobacco and nicotine products could substantially reduce our profitability and could severely impair our liquidity.
There is litigation related to tobacco products and/or nicotine products pending in certain jurisdictions in which we operate. Damages claimed in some tobacco-related litigation are significant and, in certain cases, range into the billions of U.S. dollars. 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 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 SFP activities, including allegations concerning product classification, advertising and distribution restrictions, corporate communications, product coach activities, scientific substantiation, product liability, antitrust, and unfair competition. As of March 2024, we began facing litigation related to our oral nicotine products before certain courts in the United States. We anticipate that new cases will continue to be filed. While we design our products to comply with relevant regulations, we expect these or similar challenges to continue as we expand our efforts to commercialize SFPs and to communicate with the public.
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The outcomes of these matters may affect our SFP commercialization and public communication activities and performance in one or more markets. Also, see Note 9. 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, among other matters, 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 or distribution, product safety or specification allegations, 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 adversely affected by an unfavorable outcome of pending or future investigations. See Note 9. Contingencies—Other Litigation to our condensed consolidated financial statements and the Governmental Investigations section of this MD&A.
We may be unable to adequately protect our intellectual property rights, and disputes relating to intellectual property rights could harm our business.
Our intellectual property rights are valuable assets, their protection is important to our business, and that protection may not be equally available in every country in which we operate or in which our products are sold. 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, financial condition, and results of operations 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 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 significant litigation costs and damages, and may impede our ability to develop, manufacture and/or commercialize new or existing SFPs and improve our products, and therefore have a material adverse effect on our revenues and our profitability. In addition, if, as a result, we are unable to manufacture or sell our SFPs or improve their quality in one or more markets, our ability to convert adult smokers to our SFPs in such markets would be adversely affected. See Note 9. Contingencies— Other Litigation to our condensed consolidated financial statements for a description of certain intellectual property proceedings.
The research, development, and commercialization of non-recreational cannabinoid products subjects us to legal, regulatory, reputational and other risks.
Our Wellness business is researching and developing medical and pharmaceutical cannabinoids and non-recreational cannabinoid products (including CBD). Commercialization of these products is currently limited and exploratory. Successful development and commercialization of these products, however, are dependent on compliance with a constantly evolving legal and regulatory environment, and subject to various legal, reputational and regulatory risks, which could have a material, adverse effect on our business and results of operations. A failure by our Wellness business to comply with applicable laws could result in criminal, civil, or tax liability.
Risks Related to Illicit Trade
Our revenues may be materially adversely affected as a result of counterfeiting, contraband, cross-border purchases, illicit products, non-tax-paid volume produced by local manufacturers, and other non-compliant or illicit cigarettes or smoke-free products.
Large quantities of counterfeit cigarettes are sold in the international market. We believe that Marlboro is the most heavily counterfeited international cigarette brand, although we cannot quantify the revenues we lose as a result of this activity. Counterfeits of our smoke-free products are not subject to our scientific validation procedures, are unlikely to meet our product quality standards, and may materially adversely affect the reputation of our smoke-free products with consumers, regulators, and other stakeholders. In addition, our revenues may be materially adversely affected by counterfeiting, contraband, cross-border purchases, non-tax-paid volume produced by local manufacturers and other non-compliant or illicit cigarettes or smoke-free products.
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Risks Related to Cybersecurity, Data Governance and Artificial Intelligence
We are significantly dependent on our and third-party information technology networks and systems, and a cybersecurity incident or attack against those networks or systems may adversely impact our business and operations.
We and our business partners heavily rely on information technology networks and systems, including those connected to the Internet, to help manage business processes and operations, including the collection, storage, interpretation, and processing of confidential, sensitive, personal and other data; internal and external communications; marketing and e-commerce activities; the manufacture, sale, and distribution of our products; management of third-party business relationships; engagement with governmental authorities; innovation through research and development; and other activities necessary for business operations. Some of these information systems and networks are developed, supplied, or managed by third-party service providers that may make us vulnerable to “supply chain” style cyberattacks. The failure or disruption of our information technology networks and systems, or those managed by third-party service providers or owned by our business partners and used in furtherance of PMI’s business, due to cybersecurity attacks; unauthorized attempts to corrupt or extract data; security vulnerabilities; failure to timely respond and mitigate cybersecurity risks; misconfigurations; human error; or failure or inability by us, third-parties, or our business partners to adhere to cybersecurity industry best practices could place us at a competitive disadvantage, cause reputational damage; impact our operations; or result in data breaches, significant business disruption, litigation, regulatory action including significant fines or penalties, financial impact, or loss of revenue or assets, including our intellectual property, personal, confidential, or sensitive data.
Cyberattacks, security incidents and vulnerabilities impacting PMI, acquired companies, our business partners, or our third-party providers continue to dynamically evolve in sophistication and volume, making it difficult for us to predict probability, frequency, and impact severity of security incidents. Further, it may be inherently difficult to detect vulnerabilities during due diligence, for long periods of time, or soon enough to mitigate exploitation. There can be no assurance that such security incidents or vulnerabilities will not have a material adverse effect on us in the future. While PMI works to mitigate these risks by implementing a cybersecurity risk program and a third-party cybersecurity risk management program, there can be no assurance that these programs are comprehensive or accurately identify and sufficiently mitigate all cybersecurity risks.
Cyberattacks, security incidents and vulnerabilities have impacted, and we expect will continue to impact, PMI, our business partners, and our third-party providers. Cyberattacks continue to dynamically evolve in sophistication and volume, making it difficult for us to predict probability, frequency, and impact severity of security incidents on us. We also have, and continue to face, immaterial third-party information security breaches. While these types of incidents have occurred frequently within the last three years, none have been material to our business, financial condition, or results of operations.
Our or our business partners’ failure or inability to adhere to privacy, data, artificial intelligence and information security laws could result in reputational harm, legal liability, and adversely affect our operating results.
An actual or alleged failure to comply with complex and changing privacy, data, artificial intelligence and information security laws and regulations such as under the EU General Data Protection Regulation, various U.S. state and federal laws, and other similar privacy, data, and information security laws, regulations, or voluntary guidelines that could establish legal duties across the various jurisdictions in which PMI operates, such as the failure or inability to protect or safeguard personal or company data, or information systems and networks, including connected products; implement or execute appropriate technological and reasonable security and organizational measures; implement and maintain appropriate safeguards for personal or company data being transferred internationally or between third parties; respect the privacy, digital, or other rights of data subjects; provide sufficient detailed notices, information, or transparency obligations related to personal or other data processing; obtain appropriate consent and opt-outs; respond to data subject or other data requests in a timely fashion; meet stringent timeframe requirements for incident reporting to regulatory authorities or data subjects; notify all relevant regulatory authorities or data subjects; comply with artificial intelligence regulations, and others, could have a material adverse effect on us, subject us to substantial fines and/or legal challenges, and/or harm our business, reputation, financial condition, or operating results. Such laws and regulations across the jurisdictions in which PMI operates may vary, resulting in inconsistent or conflicting legal obligations. Although we maintain a cyber liability insurance policy to address many of these risks, such policy may not be sufficient to prevent a cybersecurity incident or attack from resulting in a material adverse effect on our business, reputation, financial condition, or operating results.
We increasingly use artificial intelligence-based solutions in our business, which could result in reputational harm, legal liability, and adversely affect our operating results.
We and our business partners are increasingly incorporating artificial intelligence ("AI")-based solutions in our ways of working and operations, but this process involves uncertainty and risks, which may or may not yield corresponding benefits. Artificial intelligence technologies are complex, and there are technical and organizational challenges associated with achieving optimal levels of accuracy, efficiency, safety, explicability, reliability, and use for their intended purposes. Flaws, biases, data
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sourcing issues, limitations, errors, misconfiguration, or malfunctions in these systems could result in operational disruptions, including data loss and corruption. There is a risk of artificial intelligence system failures, disruptions, or vulnerabilities that could compromise PMI’s information technology networks and systems and the integrity, availability, security, or privacy of PMI data processed by or through such systems. The emergence of AI and other technologies may also exacerbate other risks, including those related to regulation, litigation, compliance issues, ethical concerns, confidentiality, intellectual property ownership and infringement, and data privacy or security. Separately, AI presents a new attack surface that cybercriminals will attempt to exploit as well as providing means to scale and automate targeted attacks. Ineffective or inadequate artificial intelligence development, adoption, or deployment practices, including any use, reliance, or dependence on AI generated outputs, could result in unintended, unexpected, or otherwise unforeseen adverse consequences. These risks could have a material adverse effect on our business, reputation, financial condition, or operating results.
Risks Related to Acquisitions and Divestitures
We may not successfully identify, complete, or realize the benefits from strategic acquisitions, divestitures, joint ventures, or investments.
From time to time, we evaluate acquisition candidates, joint ventures, or investments that may strategically fit our business objectives. As a result of some of these evaluations, we have acquired and may acquire in the future certain businesses (or parts of businesses) or assets. We have also divested and may divest businesses from time to time. These activities may present financial, managerial, and operational risks including, but not limited to, diversion of management’s attention from existing core businesses; difficulties in integrating, or inability to successfully integrate, acquired businesses, including integrating or separating personnel, information technology, financial and other systems; inability to effectively and immediately implement control environment processes across a diverse employee population; adverse effects on existing or acquired customer and supplier business relationships; potential disputes with buyers, sellers, or partners, as well as other unanticipated problems or liabilities, such as contingent liabilities and litigation. Activities in such areas are regulated by numerous antitrust and competition laws in the United States, the European Union, the United Kingdom, and elsewhere. We have in the past and may in the future be required to obtain approval of these transactions by competition or other regulatory authorities or to satisfy certain legal requirements, and we may be unable to obtain such approvals or satisfy such requirements, each of which may result in additional costs, delays, or our inability to complete such transactions. Any of these factors could prevent us from realizing the anticipated benefits of any such transaction and/or could materially and adversely affect our financial condition and operating results.
We may face additional risks related to divestitures. For example, risks related to our ability to find appropriate buyers, execute transactions on favorable terms, separate divested business operations with minimal impact to our remaining operations, and effectively manage any transitional or long-term service arrangements. Further, our divestiture activities may require us to recognize impairment charges. Any of these factors could materially and adversely affect our financial condition and operating results.