Pm Assembly Line

Image: Philip Morris.

Tobacco giant Philip Morris International (NYSE:PM) is an unusual company in that it's based in the U.S. but does all of its business overseas. That has been a recipe for difficulty lately, as the strong U.S. dollar has held back its profitability.

Coming into Philip Morris International's second-quarter financial report Thursday morning, investors were bracing for weaker revenue and earnings from the tobacco manufacturer, but the actual results turned out better than most had expected. Let's take a closer look at Philip Morris International's latest numbers and whether it can keep moving forward despite its currency headwinds.

Philip Morris stands up to the currency challenge
Those who aren't familiar with Philip Morris International's business might not have been impressed with the company's results, especially given that revenue sank 12% to $6.86 billion. On the bottom line, net income rose 1.9% from year-ago figures to $1.89 billion, producing earnings of $1.21 per share. However, last year's quarterly earnings took a hit from one-time asset impairment charges, and Philip Morris International's earnings came in significantly below last year's adjusted $1.41 per share figure.

Once again, though, much of Philip Morris International's suffering came from the strength in the U.S. dollar. The company said that falling foreign currencies cost it $0.33 per share in earnings during the quarter, and revenue would have been $1.3 billion higher without the dollar's rise. The resulting growth on a currency-neutral basis amounts to 9% in adjusted earnings per share and 4.5% on sales. Investors were actually prepared for much gloomier performance, looking for $6.73 billion in revenue and $1.13 per share in earnings, and so Philip Morris International's results were encouraging overall.

From a revenue perspective, Philip Morris was relatively weak throughout the world. The company's Western Hemisphere performance showed the most stability on a dollar basis, with revenue falling just 0.4%. By contrast, the European Union and Eastern Europe-Middle East-Africa segments both saw dollar-denominated sales plunge by 16% to 17%.

Looking at operating income, the European Union reported a huge gain of 37%, but again, that reflects nearly half a billion dollars of asset-impairment and exit costs allocated to the region in 2014's second quarter. Only the Latin America-Canada segment saw true year-over-year gains, and that division makes up barely a tenth of the company's overall income.

Cigarette shipment volumes weren't able to sustain their impressive performance from earlier in the year, with the quarter's volume of 219.8 billion units representing a 1.4% decrease after accounting for acquisitions. Marlboro shipments fell 1.1%, and despite gains in some popular brands including L&M, Bond Street, and Lark, big drops in sales of the Parliament and Chesterfield brands contributed substantially to overall declines. Still, Philip Morris International gained market share in a number of areas, including Russia, Indonesia, Brazil, and several European countries.

The company was pleased generally with its performance. As CEO Andre Calantzopoulos said, "Our organic volume trends, market share growth, and robust pricing, exemplified by our flagship brand Marlboro, are driving excellent operational performance within an improving macroeconomic environment for our business." Calantzopoulos sees the quarter as having continued Philip Morris International's solid start to the year.

Can Philip Morris International keep its earnings rising?
Philip Morris International also gave investors some encouraging news about its future potential. The company said that it now believes its diluted earnings per share figures for the full 2015 year will move toward the upper end of its previous guidance for 9% to 11% growth, excluding the negative impact of currency fluctuations.

Calantzopoulos also highlighted the company's commitment to returning capital to shareholders, setting the expectation that Philip Morris will pay out "around 100%" of its free cash flow to investors. With the company again having made no share repurchases during the quarter, most of this return of capital will presumably take the form of dividend payments.

Philip Morris also announced a key move to continue its collaboration with former parent Altria Group (NYSE:MO). Under its shared strategic framework, Philip Morris and Altria are working together on developing new cigarette alternatives such as e-vapor products, sharing research and technology and working together on scientific assessment and regulatory efforts. Cross-licensing of products such as Philip Morris International's iQOS could give the company indirect exposure to the U.S. market if Altria chooses to commercialize the product domestically.

Investors in Philip Morris seemed excited about the news, with the stock rising 3% as of noon on Thursday, following the earnings announcement. More importantly, though, if Philip Morris can continue to boost market share in key locations and work toward reduced-risk alternatives, long-term shareholders should eventually see substantial gains once currency headwinds finally start to let up.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.