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EXCEL - IDEA: XBRL DOCUMENT - LORILLARD, LLC | Financial_Report.xls |
EX-31.1 - EX-31.1 - LORILLARD, LLC | g22823exv31w1.htm |
EX-31.2 - EX-31.2 - LORILLARD, LLC | g22823exv31w2.htm |
EX-32.1 - EX-32.1 - LORILLARD, LLC | g22823exv32w1.htm |
EX-10.22 - EX-10.22 - LORILLARD, LLC | g22823exv10w22.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From to
Commission File Number: 001-34097
Lorillard, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 13-1911176 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) |
714 Green Valley Road, Greensboro, North Carolina 27408-7018
(Address of principal executive offices) (Zip Code)
(Address of principal executive offices) (Zip Code)
(336) 335-7000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) during the
preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller Reporting Company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Class | Outstanding at April 28, 2010 | |
Common stock, $0.01 par value | 152,854,802 shares |
TABLE OF CONTENTS
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EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
LORILLARD, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, | December 31, | |||||||
(In millions, except share and per share data) | 2010 | 2009 | ||||||
(Unaudited) | ||||||||
Assets: |
||||||||
Cash and cash equivalents |
$ | 1,659 | $ | 1,384 | ||||
Accounts receivable, less allowances of $3 and $3 |
19 | 9 | ||||||
Other receivables |
38 | 41 | ||||||
Inventories |
321 | 281 | ||||||
Deferred income taxes |
467 | 466 | ||||||
Total current assets |
2,504 | 2,181 | ||||||
Plant and equipment |
238 | 237 | ||||||
Prepaid pension assets |
61 | 60 | ||||||
Deferred income taxes |
47 | 48 | ||||||
Other assets |
52 | 49 | ||||||
Total assets |
$ | 2,902 | $ | 2,575 | ||||
Liabilities and Shareholders Equity (Deficit): |
||||||||
Accounts and drafts payable |
$ | 79 | $ | 23 | ||||
Accrued liabilities |
311 | 318 | ||||||
Settlement costs |
1,258 | 982 | ||||||
Income taxes |
138 | 14 | ||||||
Total current liabilities |
1,786 | 1,337 | ||||||
Long-term debt |
735 | 722 | ||||||
Postretirement pension, medical and life insurance benefits |
294 | 300 | ||||||
Other liabilities |
124 | 129 | ||||||
Total liabilities |
2,939 | 2,488 | ||||||
Commitments and Contingent Liabilities |
||||||||
Shareholders Equity (Deficit): |
||||||||
Preferred stock, $0.01 par value, authorized 10 million shares |
| | ||||||
Common stock: |
||||||||
Authorized600 million shares; par value $0.01 per share |
||||||||
Issued174 million and 174 million shares |
||||||||
Outstanding153 million and 156 million shares |
2 | 2 | ||||||
Additional paid-in capital |
233 | 234 | ||||||
Earnings retained in the business |
1,359 | 1,282 | ||||||
Accumulated other comprehensive loss |
(117 | ) | (121 | ) | ||||
Treasury stock at cost, 21 million and 18 million shares |
(1,514 | ) | (1,310 | ) | ||||
Total shareholders equity (deficit) |
(37 | ) | 87 | |||||
Total liabilities and shareholders equity |
$ | 2,902 | $ | 2,575 | ||||
See Notes to Consolidated Condensed Financial Statements
Table of Contents
LORILLARD, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(UNAUDITED)
Three Months Ended | ||||||||
March 31, | ||||||||
(In millions, except per share data) | 2010 | 2009 | ||||||
Net sales (including excise taxes of $437 and $150, respectively) |
$ | 1,360 | $ | 917 | ||||
Cost of sales |
882 | 534 | ||||||
Gross profit |
478 | 383 | ||||||
Selling, general and administrative |
96 | 89 | ||||||
Operating income |
382 | 294 | ||||||
Investment income |
1 | 1 | ||||||
Interest expense |
(10 | ) | | |||||
Income before income taxes |
373 | 295 | ||||||
Income taxes |
141 | 111 | ||||||
Net income |
$ | 232 | $ | 184 | ||||
Earnings per share: |
||||||||
Basic |
$ | 1.50 | $ | 1.09 | ||||
Diluted |
$ | 1.50 | $ | 1.09 | ||||
Weighted average number of shares outstanding: |
||||||||
Basic |
154.55 | 168.07 | ||||||
Diluted |
154.72 | 168.18 | ||||||
See Notes to Consolidated Condensed Financial Statements
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LORILLARD, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)
(UNAUDITED)
(UNAUDITED)
Additional | Earnings | Accumulated | Total | |||||||||||||||||||||||||
Comprehensive | Common | Paid-in | Retained in | Other | Treasury | Shareholders | ||||||||||||||||||||||
Income | Stock | Capital | the Business | Comprehensive Loss | Shares | Equity (Deficit) | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Balance, January 1, 2009 |
$ | 2 | $ | 222 | $ | 965 | $ | (158 | ) | $ | (400 | ) | $ | 631 | ||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income |
$ | 184 | 184 | 184 | ||||||||||||||||||||||||
Other comprehensive gains,
pension liability, net of tax
expense of $2 |
3 | 3 | 3 | |||||||||||||||||||||||||
Comprehensive income |
$ | 187 | ||||||||||||||||||||||||||
Dividends paid |
(155 | ) | (155 | ) | ||||||||||||||||||||||||
Share-based compensation |
6 | 6 | ||||||||||||||||||||||||||
Balance, March 31, 2009 |
$ | 2 | $ | 228 | $ | 994 | $ | (155 | ) | $ | (400 | ) | $ | 669 | ||||||||||||||
Balance, January 1, 2010 |
$ | 2 | $ | 234 | $ | 1,282 | $ | (121 | ) | $ | (1,310 | ) | $ | 87 | ||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income |
$ | 232 | 232 | 232 | ||||||||||||||||||||||||
Other comprehensive gains,
pension liability, net of tax
expense of $2 |
4 | 4 | 4 | |||||||||||||||||||||||||
Comprehensive income |
$ | 236 | ||||||||||||||||||||||||||
Dividends paid |
(155 | ) | (155 | ) | ||||||||||||||||||||||||
Shares repurchased |
(204 | ) | (204 | ) | ||||||||||||||||||||||||
Share-based compensation |
(1 | ) | (1 | ) | ||||||||||||||||||||||||
Balance, March 31, 2010 |
$ | 2 | $ | 233 | $ | 1,359 | $ | (117 | ) | $ | (1,514 | ) | $ | (37 | ) | |||||||||||||
See Notes to Consolidated Condensed Financial Statements
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Table of Contents
LORILLARD, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(UNAUDITED)
Three Months Ended | ||||||||
March 31, | ||||||||
(In millions) | 2010 | 2009 | ||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 232 | $ | 184 | ||||
Adjustments to reconcile net cash provided by (used in) operating activities : |
||||||||
Depreciation and amortization |
10 | 8 | ||||||
Deferred income taxes |
1 | | ||||||
Share-based compensation |
2 | | ||||||
Pension, health and life insurance benefits expense |
8 | 11 | ||||||
Pension, health and life insurance contributions |
(12 | ) | (4 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Accounts and other receivables |
(7 | ) | | |||||
Inventories |
(40 | ) | (98 | ) | ||||
Accounts payable and accrued liabilities |
51 | 16 | ||||||
Settlement costs |
276 | 243 | ||||||
Income taxes |
124 | 97 | ||||||
Other assets |
| (4 | ) | |||||
Other |
2 | | ||||||
Net cash provided by operating activities |
647 | 453 | ||||||
Cash flows from investing activities: |
||||||||
Additions to plant and equipment |
(10 | ) | (10 | ) | ||||
Net cash used in investing activities |
(10 | ) | (10 | ) | ||||
Cash flows from financing activities: |
||||||||
Dividends paid |
(155 | ) | (155 | ) | ||||
Shares repurchased |
(204 | ) | | |||||
Debt issuance costs |
(3 | ) | | |||||
Excess tax benefits from share-based arrangements |
| 4 | ||||||
Net cash used in financing activities |
(362 | ) | (151 | ) | ||||
Change in cash and cash equivalents |
275 | 292 | ||||||
Cash and cash equivalents, beginning of year |
1,384 | 1,191 | ||||||
Cash and cash equivalents, end of period |
$ | 1,659 | $ | 1,483 | ||||
Cash paid for income taxes |
$ | 14 | $ | 14 | ||||
See Notes to Consolidated Condensed Financial Statements
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Table of Contents
LORILLARD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Overview. Lorillard, Inc., through its subsidiaries, is engaged in the manufacture and sale of
cigarettes. Its principal products are marketed under the brand names of Newport, Kent, True,
Maverick and Old Gold with substantially all of its sales in the United States of America.
The consolidated condensed financial statements of Lorillard, Inc. (the Company), together
with its subsidiaries (Lorillard), include the accounts of the Company and its subsidiaries after
the elimination of intercompany accounts and transactions. The Company manages its operations on
the basis of one reportable segment through its principal subsidiary, Lorillard Tobacco Company
(Lorillard Tobacco).
On May 7, 2008, the Company amended its certificate of incorporation to effect a 1,739,234.29
for 1 stock split of its 100 shares of common stock then outstanding. All common share and per
share information has been retroactively adjusted for the periods presented.
On June 10, 2008, Loews Corporation (Loews) distributed 108,478,429 shares of common stock
of the Company in exchange for and in redemption of all 108,478,429 outstanding shares of Loews
Carolina Group stock, as described in the Registration Statement (File No. 333-149051) on Form S-4
filed with the Securities and Exchange Commission (the SEC) under the Securities act of 1933, as
amended (the Separation). Pursuant to the terms of the Exchange Offer, described in the
Registration Statement, on June 16, 2008, Loews accepted 93,492,857 shares of Loews common stock in
exchange for 65,445,000 shares of the Companys common stock. As a result of such distributions,
Loews ceased to own any equity interest in the Company and the Company became an independent
publicly held company.
Subsequent to the issuance of the Companys March 31, 2009 consolidated condensed financial
statements included in Form 8-K, filed on June 11, 2009, the Company determined that immaterial
errors existed in the footnote disclosure containing the condensed consolidating statement of cash
flows for the three months ended March 31, 2009. The Issuers statement of cash flows for the
three months ended March 31, 2009 has been corrected to reflect $100 million return of capital,
previously reported as a financing inflow, as an investing inflow. In addition, the statement of
cash flows for All Other Subsidiaries for the same period has been corrected to properly include
the $100 million payment to the Issuer, previously reported as return of capital outflow within
financing activities, as a component of dividends paid also within financing activities. These
immaterial errors did not impact operating cash flows for any consolidating entity and had no
impact on the consolidated condensed statement of cash flows for the three months ended March 31,
2009.
Additionally, subsequent to the issuance of the Companys March 31, 2009 consolidated
condensed financial statements included in Form 8-K, filed on June 11, 2009, the Company amended
the presentation of pension and postretirement cash inflows and outflows on the statement of cash
flows by adding the lines Pension, health and life insurance benefits expense and Pension,
health and life insurance contributions to enhance the disclosure of pension related activities.
These changes have been reflected on the consolidated condensed statement of cash flows as well as
the condensed consolidating statement of cash flows for the three months ended March 31, 2009.
Also, subsequent to the issuance of the Companys March 31, 2009 consolidated condensed
financial statements included in Form 8-K, filed on June 11, 2009, the Company determined that
immaterial errors existed in the consolidated condensed statement of income for the three months
ended March 31, 2009. The consolidated condensed statement of income has been corrected to
properly classify $2 million for the three months ended March 31, 2009, previously classified as
selling, general and administrative costs, as cost of sales. Within the condensed consolidating
financial information footnote (Note 13), the correction of the error was reflected in the Issuer
column.
Basis of Presentation. The accompanying unaudited consolidated condensed financial statements
reflect all adjustments necessary to present fairly the financial position as of March 31, 2010 and
December 31, 2009 and the
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consolidated income, shareholders equity (deficit) and cash flows for the three months ended
March 31, 2010 and 2009.
Results of operations for the three months for each of the years reported herein are not
necessarily indicative of results of operations of the entire year.
These consolidated condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and related Notes to Consolidated Financial Statements presented
in the Companys Annual Report on Form 10-K for the year ended December 31, 2009, filed with the
SEC on February 25, 2010.
Recently adopted accounting pronouncements Lorillard adopted FASB ASC Subtopic 715-20
Employers Disclosures about Postretirement Benefit Plan Assets. ASC Subtopic 715-20 requires
disclosure of investment policies and strategies in narrative form. ASC Subtopic 715-20 also
requires employer disclosure on the fair value of plan assets, including (a) the level in the fair
value hierarchy, (b) a reconciliation of beginning and ending fair value balances for Level 3
assets and (c) information on inputs and valuation techniques.
Lorillard adopted FASB ASC Topic 808 Collaborative Arrangements. ASC 808 defines a
collaborative arrangement as an arrangement where the parties are active participants and have
exposure to significant risks. Transactions with third parties should be classified in the
financial statements in the appropriate category according to ASC Subtopic 605-45 Principal Agent
Considerations. Payments between the partners of the collaborative agreement should be categorized
based on the terms of the agreement, business operations and authoritative literature. ASC 808 was
effective for fiscal years beginning after December 15, 2008. The adoption of ASC 808 did not have
a material impact on Lorillards financial position or results of operations.
Lorillard adopted FASB ASC Section 815-10-50 Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB Statement No. 133. ASC 815-10-50 requires
qualitative disclosures about the objectives and strategies for using derivatives; quantitative
data about the fair value of, and gains and losses on, derivative contracts; and details of
credit-risk-related contingent features in hedged positions. ASC 815-10-50 also requires enhanced
disclosure around derivative instruments in financial statements accounted for under ASC Subtopic
815-20, Accounting for Derivative Instruments and Hedging Activities, and how hedges affect an
entitys financial position, financial performance and cash flows. ASC 815-10-50 was effective for
fiscal years and interim periods beginning after November 15, 2008. Lorillard adopted ASC 815-10-50
in September 2009. See Note 9 for related disclosure.
Lorillard adopted FASB ASC Topic 820 Fair Value Measurements and Disclosures on January
1, 2008, utilizing the one year deferral that was granted for the implementation of ASC 820 for all
nonrecurring fair value measurements of non-financial assets and liabilities. The one year deferral
expired on January 1, 2009. ASC 820 defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. The adoption of ASC 820 did not have a
material impact on Lorillards financial position or results of operations.
Lorillard adopted FASB ASC Section 820-10-35 Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly. ASC 820-10-35 includes factors for evaluating if a market has a
significant decrease in the volume and level of activity. If there has been a decrease, then the
entity must do further analysis of the transactions or quoted prices to determine if the
transactions were orderly. The entity cannot ignore available information and should apply
appropriate risk adjustments in the fair value calculation. The effective date was for interim
periods ending after June 15, 2009. The adoption of ASC 820-10-35 did not have a material impact on
Lorillards financial position or results of operations.
Lorillard adopted FASB ASC Section 825-10-65 Interim Disclosures about Fair Value of
Financial Instruments. ASC 825-10-65 requires interim disclosures on the fair value of financial
instruments. The effective date was for interim periods ending after June 15, 2009. The adoption of
ASC 825-10-65 was reflected in our Form 10-Q filed for the second and third quarters of 2009.
Lorillard adopted FASB ASC Topic 855 Subsequent Events, which sets forth (1) the period
after the balance sheet date during which management of a reporting entity shall evaluate events or
transactions that may occur for potential recognition or disclosure in the financial statements,
(2) the circumstances under which an entity shall
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recognize events or transactions occurring after the balance sheet date in its financial
statements and (3) the disclosures that an entity shall make about events or transactions that
occurred after the balance sheet date. ASC 855 applies to the accounting for and disclosure of
subsequent events not addressed in other applicable generally accepted accounting principles
(GAAP). ASC 855 was effective for financial statements issued for interim periods and fiscal years
ending after June 15, 2009. The adoption of ASC 855 did not have a material impact on Lorillards
financial position or results of operations.
Lorillard adopted FASB ASU 2009-05 Fair Value Measurements and Disclosures (Topic 820):
Measuring Liabilities at Fair Value. Fair value of liabilities is defined as a price in an orderly
transaction between market participants, but often liabilities are not transferred in the market
due to significant restrictions. If a quoted price in an active market is available, it should be
used and disclosed as a Level 1 valuation. When that is not available, an entity can use either a)
the quoted price of an identical liability when traded as an asset in an active or inactive market,
b) the quoted price for similar liabilities traded as assets in an active market or c) a valuation
technique, such as the income or present value approaches. No adjustments should be made for the
existence of contractual restrictions that prevent transfer. The update is effective for the first
period after the issue date of August 2009. ASU 2009-05 did not have a material impact on
Lorillards financial position or results of operations.
Lorillard adopted FASB ASU 2010-06 Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value Measurements. ASU 2010-06 establishes additional
disclosures related to fair value. Transfers in and out of Level 1 and Level 2 and the reasons for
the transfers must be disclosed. Level 3 purchases, sales, issuances and settlements should be
presented separately rather than net. In addition, the level of disaggregation and input and
valuation techniques need to be disclosed. The effective dates are periods beginning after December
15, 2010 for the Level 3 purchases, sales, issuances and settlements disclosure, and periods
beginning after December 15, 2009 for all other provisions. ASU 2010-06 did not have a material
impact on Lorillards financial position or results of operations.
Lorillard adopted FASB ASU 2010-09 Subsequent Events (Topic 855): Amendments to Certain
Recognition and Disclosure Requirements. ASU 2010-09 amends Topic 855 for SEC filers to eliminate
the disclosure of the date through which subsequent events have been reviewed. The effective date
is February 24, 2010. ASU 2010-09 did not have a material impact on Lorillards financial position
or results of operations.
2. Inventories
Inventories are valued at the lower of cost, determined on a last-in, first-out (LIFO)
basis, or market and consisted of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(In millions) | ||||||||
Leaf tobacco |
$ | 272 | $ | 236 | ||||
Manufactured stock |
45 | 41 | ||||||
Material and supplies |
4 | 4 | ||||||
$ | 321 | $ | 281 | |||||
If the average cost method of accounting was used, inventories would be greater by
approximately $193 and $189 million at March 31, 2010 and December 31, 2009, respectively.
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3. Plant and Equipment
Plant and equipment is stated at cost and consisted of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(In millions) | ||||||||
Land |
$ | 3 | $ | 3 | ||||
Buildings |
87 | 87 | ||||||
Equipment |
562 | 563 | ||||||
Total |
652 | 653 | ||||||
Accumulated depreciation |
(414 | ) | (416 | ) | ||||
Plant and equipment, net |
$ | 238 | $ | 237 | ||||
4. Other Assets
Other assets were as follows:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(In millions) | ||||||||
Other investments |
$ | 15 | $ | 15 | ||||
Restricted cash |
13 | 13 | ||||||
Debt issuance costs |
8 | 5 | ||||||
Other prepaid assets |
16 | 16 | ||||||
Total |
$ | 52 | $ | 49 | ||||
5. Accrued Liabilities
Accrued liabilities were as follows:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(In millions) | ||||||||
Legal fees |
$ | 26 | $ | 21 | ||||
Salaries and other compensation |
21 | 16 | ||||||
Medical and other employee benefit plans |
31 | 30 | ||||||
Consumer rebates |
48 | 86 | ||||||
Sales promotion |
19 | 21 | ||||||
Excise and other taxes |
86 | 78 | ||||||
Other accrued liabilities |
80 | 66 | ||||||
Total |
$ | 311 | $ | 318 | ||||
6. Fair Value
Fair value is the price that would be received upon sale of an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. The
following fair value hierarchy is used in selecting inputs, with the highest priority given to
Level 1, as these are the most transparent or reliable:
| Level 1 Quoted prices for identical instruments in active markets. | ||
| Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable directly or indirectly. | ||
| Level 3 Valuations derived from valuation techniques in which one or more significant inputs are unobservable. |
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Lorillard is responsible for the valuation process and as part of this process may use data
from outside sources in establishing fair value. Lorillard performs due diligence to understand the
inputs used or how the data was calculated or derived, and corroborates the reasonableness of
external inputs in the valuation process.
Assets and liabilities measured at fair value on a recurring basis as of March 31, 2010, were
as follows:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(In millions) | ||||||||||||||||
Cash and Cash Equivalents: |
||||||||||||||||
Prime money market funds |
$ | 1,659 | $ | | $ | | $ | 1,659 | ||||||||
Total cash and cash equivalents |
$ | 1,659 | $ | | $ | | $ | 1,659 | ||||||||
Derivative Liability: |
||||||||||||||||
Interest rate swaps fixed to floating rate |
$ | | $ | 15 | $ | | $ | 15 | ||||||||
Total derivative instruments |
$ | | $ | 15 | $ | | $ | 15 | ||||||||
Asset and liabilities measured at fair value on a recurring basis at December 31, 2009
were as follows:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(In millions) | ||||||||||||||||
Cash and Cash Equivalents: |
||||||||||||||||
Prime money market funds |
$ | 1,384 | $ | | $ | | $ | 1,384 | ||||||||
Total cash and cash equivalents |
$ | 1,384 | $ | | $ | | $ | 1,384 | ||||||||
Derivative Liability: |
||||||||||||||||
Interest rate swaps fixed to floating rate |
$ | | $ | 28 | $ | | $ | 28 | ||||||||
Total derivative instruments |
$ | | $ | 28 | $ | | $ | 28 | ||||||||
There were no transfers between Level 1 and Level 2 for the twelve months ended December
31, 2009 or the three months ended March 31, 2010.
The fair value of the money market funds, classified as Level 1, utilized quoted prices in
active markets.
The fair value of the interest rate swaps, classified as Level 2, utilized a market approach
model using the notional amount of the interest rate swap multiplied by the observable inputs of
time to maturity and market interest rates. See Note 9 for additional information on the interest
rate swaps.
7. Credit Agreement
On March 26, 2010, Lorillard Tobacco, the principal, wholly-owned operating subsidiary of the
Company, entered into a $185 million revolving credit facility (Revolver) that expires March 26,
2013 and is guaranteed by the Company. Proceeds from the Revolver may be used for general
corporate and working capital purposes. The interest rates on borrowings under the Revolver will
be based on prevailing interest rates and, in part, upon the credit rating applicable to the
Companys senior unsecured long-term debt.
The Revolver requires that the Company maintain a ratio of debt to net income plus income
taxes, interest expense, depreciation and amortization expense, any extraordinary losses, any
non-cash expenses or losses and any losses on sales of assets outside of the ordinary course of
business (EBITDA) of not more than 2.25 to 1 and a ratio of EBITDA to interest expense of not
less than 3.0 to 1. In addition, the Revolver contains customary affirmative and negative
covenants, including restrictions on liens and sale and leaseback transactions subject to a limited
-9-
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exception. The Revolver contains customary events of default, including upon a change in
control, that could result in the acceleration of all amounts and cancellation of all commitments
outstanding, if any, under the Revolver.
There were no borrowings under the Revolver between March 26, 2010 and March 31, 2010.
8. Long Term Debt
In June 2009, Lorillard Tobacco issued $750 million aggregate principal amount of 8.125%
unsecured senior notes due June 23, 2019 (the 2019 Notes) pursuant to an Indenture, dated June
23, 2009, and First Supplemental Indenture, dated June 23, 2009 (the Supplemental Indenture).
The 2019 Notes are unconditionally guaranteed on a senior unsecured basis by the Company. The
interest rate payable on the 2019 Notes is subject to incremental increases from 0.25% to 2.00% in
the event either Moodys Investors Services, Inc. (Moodys), Standard & Poors Ratings Services
(S&P) or both Moodys and S&P downgrade the 2019 Notes below investment grade (Baa3 and BBB- for
Moodys and S&P, respectively).
Upon the occurrence of a change of control triggering event, Lorillard Tobacco will be
required to make an offer to repurchase the Notes at a price equal to 101% of the aggregate
principal amount of the Notes, plus accrued interest. A change of control triggering event occurs
when there is both a change of control (as defined in the Supplemental Indenture) and the Notes
cease to be rated investment grade by both Moodys and S&P within 60 days of the occurrence of a
change of control or public announcement of the intention to effect a change of control. The Notes
are not entitled to any sinking fund and are not redeemable prior to maturity. The Notes contain
covenants that restrict liens and sale and leaseback transactions, subject to a limited exception.
At March 31, 2010, the carrying value of the 2019 Notes was $735 million and the fair value
was $837 million. The fair value of the 2019 Notes was based on market pricing.
9. Derivative Instruments
In September 2009, Lorillard Tobacco entered into interest rate swap agreements, which the
Company guaranteed, with a total notional amount of $750 million to modify its exposure to interest
rate risk by converting the interest rate payable on the 2019 Notes from a fixed rate to a floating
rate. Under the agreements, Lorillard Tobacco receives interest based on a fixed rate of 8.125%
and pays interest based on a floating one-month LIBOR rate plus a spread of 4.625%. The variable
rates were 4.870% and 4.856% as of March 31, 2010 and December 31, 2009, respectively. The
agreements expire in June 2019. The interest rate swap agreements qualify for hedge accounting and
were designated as fair value hedges. Under the swap agreements, Lorillard Tobacco receives a
fixed rate settlement and pays a variable rate settlement with the difference recorded in interest
expense. That difference reduced interest expense by $6 million for the three months ended March
31, 2010.
For derivatives designated as fair value hedges, which relate entirely to hedges of debt,
changes in the fair value of the derivatives are recorded in other assets or other liabilities with
an offsetting adjustment to the carrying amount of the hedged debt. At March 31, 2010 and December
31, 2009, the adjusted carrying amounts of the hedged debt outstanding were $735 million and $722
million, respectively and the amounts included in other liabilities were $15 million and $28
million, respectively.
If our debt rating is downgraded below Ba2 by Moodys or BB by S&P, the swap agreements will
terminate and we will be required to cash settle them before their expiration date.
-10-
Table of Contents
10. Earnings Per Share
Basic and diluted earnings per share (EPS) were calculated using the following:
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
(In millions) | ||||||||
Net Earnings |
$ | 232 | $ | 184 | ||||
Weighted Average Shares Outstanding Basic |
154.55 | 168.07 | ||||||
Stock Options and Stock Appreciation Rights |
.17 | .11 | ||||||
Weighted Average Shares Outstanding Diluted |
154.72 | 168.18 | ||||||
Options to purchase 0.7 million and 0.6 million shares of common stock were excluded from the
diluted earnings per share calculation because their effect would be anti-dilutive for the quarters
ended March 31, 2010 and March 31, 2009, respectively.
11. Benefit Plans
Lorillard has defined benefit pension, postretirement benefits, profit sharing and savings
plans for eligible employees.
Net periodic benefit cost components were as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
Pension Benefits | 2010 | 2009 | ||||||
(In millions) | ||||||||
Service cost |
$ | 4 | $ | 4 | ||||
Interest cost |
14 | 14 | ||||||
Expected return on plan assets |
(17 | ) | (15 | ) | ||||
Amortization of net loss |
2 | 4 | ||||||
Amortization of prior service cost |
1 | 1 | ||||||
Net periodic benefit cost |
$ | 4 | $ | 8 | ||||
Three Months Ended | ||||||||
March 31. | ||||||||
Other Postretirement Benefits | 2010 | 2009 | ||||||
(In millions) | ||||||||
Service cost |
$ | 1 | $ | 1 | ||||
Interest cost |
3 | 3 | ||||||
Net periodic benefit cost |
$ | 4 | $ | 4 | ||||
Lorillard expects to contribute $19 million to its pension plans and $15 million to its other
postretirement benefit plans in 2010, of which $8 million and $4 million has been contributed to
the pension and postretirement benefit plans as of March 31, 2010.
-11-
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12. Share Repurchase Program
As of January 19, 2010, the Company completed its $750 million share repurchase program that
was announced on July 27, 2009, after repurchasing an additional 1.1 million shares in January 2010
for $90 million at an average purchase price of $78.36 per share. In February 2010, the Board of
Directors authorized the repurchase of up to $250 million of the Companys common stock. Purchases
under this program were made from time to time at prevailing market prices in open market
purchases, privately negotiated transactions, block purchases or otherwise, as determined by the
Companys management. The repurchases were funded from existing cash balances.
As of March 31, 2010, the Company repurchased 1.5 million shares of its common stock for $114
million at an average price of $75.60 per share with $136 million the maximum remaining dollar
value of shares that could be purchased under the program. This share repurchase program follows
on prior share repurchase programs authorized by the Board since the Separation as set forth in the
table below:
Number of | ||||||||||
Amount | Shares | |||||||||
Authorized | Authorized | Completed | Repurchased | |||||||
(In millions) | (In millions) | |||||||||
July 2008 |
$ | 400 | October 2008 | 5.9 | ||||||
May 2009 |
250 | July 2009 | 3.7 | |||||||
July 2009 |
750 | January 2010 | 9.7 | |||||||
Total |
$ | 1,400 | 19.3 | |||||||
13. Consolidating Financial Information
The following sets forth the condensed consolidating balance sheets as of March 31, 2010 and
December 31, 2009, condensed consolidating statements of income for the three months ended March
31, 2010 and 2009, and condensed consolidating statements of cash flows for the three months ended
March 31, 2010 and 2009 for Lorillard Tobacco (herein referred to as Issuer) as Issuer of the
2019 Notes (see Note 8 for description of the 2019 Notes), the Company as parent guarantor (herein
referred to as Parent), and all other non-guarantor subsidiaries of the Company and Lorillard
Tobacco (All Other Subsidiaries). These condensed consolidating financial statements were
prepared in accordance with Rule 3-10 of SEC Regulation S-X, Financial Statements of Guarantors
and Issuers of Guaranteed Securities Registered or Being Registered. Lorillard accounts for
investments in these subsidiaries under the equity method of accounting.
-12-
Table of Contents
Condensed Consolidating Balance Sheets
March 31, 2010
(In millions)
(Unaudited)
March 31, 2010
(In millions)
(Unaudited)
All | Total | |||||||||||||||||||
Other | Consolidating | |||||||||||||||||||
Parent | Issuer | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 175 | $ | 1,188 | $ | 296 | $ | | $ | 1,659 | ||||||||||
Accounts receivable, less allowances of $3 |
| 19 | | | 19 | |||||||||||||||
Other receivables |
| 32 | 6 | | 38 | |||||||||||||||
Inventories |
| 321 | | | 321 | |||||||||||||||
Deferred income taxes |
| 467 | | | 467 | |||||||||||||||
Total current assets |
175 | 2,027 | 302 | | 2,504 | |||||||||||||||
Investment in subsidiaries |
(190 | ) | 295 | | (105 | ) | | |||||||||||||
Plant and equipment |
| 238 | | | 238 | |||||||||||||||
Prepaid pension assets |
| 61 | | | 61 | |||||||||||||||
Deferred income taxes |
(5 | ) | 48 | 4 | | 47 | ||||||||||||||
Other assets |
| 37 | 15 | | 52 | |||||||||||||||
Total assets |
$ | (20 | ) | $ | 2,706 | $ | 321 | $ | (105 | ) | $ | 2,902 | ||||||||
Liabilities and Shareholders Equity (Deficit): |
||||||||||||||||||||
Accounts and drafts payable |
$ | | $ | 79 | $ | | $ | | $ | 79 | ||||||||||
Accrued liabilities |
17 | 364 | (70 | ) | | 311 | ||||||||||||||
Settlement costs |
| 1,258 | | | 1,258 | |||||||||||||||
Income taxes |
| 73 | 65 | | 138 | |||||||||||||||
Total current liabilities |
17 | 1,774 | (5 | ) | | 1,786 | ||||||||||||||
Long-term debt |
| 735 | | | 735 | |||||||||||||||
Postretirement pension, medical and life
insurance benefits |
| 294 | | | 294 | |||||||||||||||
Other liabilities |
| 110 | 14 | | 124 | |||||||||||||||
Total liabilities |
17 | 2,913 | 9 | | 2,939 | |||||||||||||||
Shareholders Equity (Deficit): |
||||||||||||||||||||
Common stock |
2 | | | | 2 | |||||||||||||||
Additional paid-in capital |
233 | 275 | 214 | (489 | ) | 233 | ||||||||||||||
Earnings retained in the business |
1,359 | (365 | ) | 98 | 267 | 1,359 | ||||||||||||||
Accumulated other comprehensive loss |
(117 | ) | (117 | ) | | 117 | (117 | ) | ||||||||||||
Treasury stock |
(1,514 | ) | | | | (1,514 | ) | |||||||||||||
Total shareholders equity (deficit) |
(37 | ) | (207 | ) | 312 | (105 | ) | (37 | ) | |||||||||||
Total liabilities and shareholders equity |
$ | (20 | ) | $ | 2,706 | $ | 321 | $ | (105 | ) | $ | 2,902 | ||||||||
-13-
Table of Contents
Condensed Consolidating Balance Sheets
December 31, 2009
(In millions)
December 31, 2009
(In millions)
All | Total | |||||||||||||||||||
Other | Consolidating | |||||||||||||||||||
Parent | Issuer | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 130 | $ | 719 | $ | 535 | $ | | $ | 1,384 | ||||||||||
Accounts receivable, less allowances of $3 |
| 9 | | | 9 | |||||||||||||||
Other receivables |
| 35 | 6 | | 41 | |||||||||||||||
Intercompany receivables |
| | 50 | (50 | ) | | ||||||||||||||
Inventories |
| 281 | | | 281 | |||||||||||||||
Deferred income taxes |
| 466 | | | 466 | |||||||||||||||
Total current assets |
130 | 1,510 | 591 | (50 | ) | 2,181 | ||||||||||||||
Investment in subsidiaries |
(20 | ) | 581 | | (561 | ) | | |||||||||||||
Plant and equipment |
| 237 | | | 237 | |||||||||||||||
Prepaid pension assets |
| 60 | | | 60 | |||||||||||||||
Deferred income taxes |
(5 | ) | 49 | 4 | | 48 | ||||||||||||||
Other assets |
| 34 | 15 | | 49 | |||||||||||||||
Total assets |
$ | 105 | $ | 2,471 | $ | 610 | $ | (611 | ) | $ | 2,575 | |||||||||
Liabilities and Shareholders Equity: |
||||||||||||||||||||
Accounts and drafts payable |
$ | | $ | 23 | $ | | $ | | $ | 23 | ||||||||||
Accrued liabilities |
18 | 300 | | | 318 | |||||||||||||||
Intercompany payables |
| 50 | | (50 | ) | | ||||||||||||||
Settlement costs |
| 982 | | | 982 | |||||||||||||||
Income taxes |
| 14 | | | 14 | |||||||||||||||
Total current liabilities |
18 | 1,369 | | (50 | ) | 1,337 | ||||||||||||||
Long-term debt |
| 722 | | | 722 | |||||||||||||||
Postretirement pension, medical and life
insurance benefits |
| 300 | | | 300 | |||||||||||||||
Other liabilities |
| 116 | 13 | | 129 | |||||||||||||||
Total liabilities |
18 | 2,507 | 13 | (50 | ) | 2,488 | ||||||||||||||
Shareholders Equity: |
||||||||||||||||||||
Common stock |
2 | | | | 2 | |||||||||||||||
Additional paid-in capital |
234 | 276 | 214 | (490 | ) | 234 | ||||||||||||||
Earnings retained in the business |
1,282 | (191 | ) | 383 | (192 | ) | 1,282 | |||||||||||||
Accumulated other comprehensive loss |
(121 | ) | (121 | ) | | 121 | (121 | ) | ||||||||||||
Treasury stock |
(1,310 | ) | | | | (1,310 | ) | |||||||||||||
Total shareholders equity |
87 | (36 | ) | 597 | (561 | ) | 87 | |||||||||||||
Total liabilities and shareholders equity |
$ | 105 | $ | 2,471 | $ | 610 | $ | (611 | ) | $ | 2,575 | |||||||||
-14-
Table of Contents
Condensed Consolidating Statements of Income
For the Three Months Ended March 31, 2010
(In millions)
(Unaudited)
For the Three Months Ended March 31, 2010
(In millions)
(Unaudited)
All | Total | |||||||||||||||||||
Other | Consolidating | |||||||||||||||||||
Parent | Issuer | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
Net sales (including excise taxes of $437) |
$ | | $ | 1,360 | $ | | $ | | $ | 1,360 | ||||||||||
Cost of sales |
| 882 | | | 882 | |||||||||||||||
Gross profit |
| 478 | | | 478 | |||||||||||||||
Selling, general and administrative (1) |
| 276 | (180 | ) | | 96 | ||||||||||||||
Operating income |
| 202 | 180 | | 382 | |||||||||||||||
Investment income |
| 1 | | | 1 | |||||||||||||||
Interest expense |
| (10 | ) | | | (10 | ) | |||||||||||||
Income before taxes |
| 193 | 180 | | 373 | |||||||||||||||
Income taxes |
| 76 | 65 | | 141 | |||||||||||||||
Equity in earnings of subsidiaries |
232 | 115 | | (347 | ) | | ||||||||||||||
Net income |
$ | 232 | $ | 232 | $ | 115 | $ | (347 | ) | $ | 232 | |||||||||
(1) | Includes intercompany royalties between Issuer and other subsidiaries of a corresponding amount. |
Condensed Consolidating Statements of Income
For the Three Months Ended March 31, 2009
(In millions)
(Unaudited)
For the Three Months Ended March 31, 2009
(In millions)
(Unaudited)
All | Total | |||||||||||||||||||
Other | Consolidating | |||||||||||||||||||
Parent | Issuer | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
Net sales (including excise taxes of $150) |
$ | | $ | 917 | $ | | $ | | $ | 917 | ||||||||||
Cost of sales |
| 534 | | | 534 | |||||||||||||||
Gross profit |
| 383 | | | 383 | |||||||||||||||
Selling, general and administrative (1) |
| 219 | (130 | ) | | 89 | ||||||||||||||
Operating income |
| 164 | 130 | | 294 | |||||||||||||||
Investment income |
| 1 | | | 1 | |||||||||||||||
Interest expense |
| | | | | |||||||||||||||
Income before taxes |
| 165 | 130 | | 295 | |||||||||||||||
Income taxes |
| 64 | 47 | | 111 | |||||||||||||||
Equity in earnings of subsidiaries |
184 | 83 | | (267 | ) | | ||||||||||||||
Net income |
$ | 184 | $ | 184 | $ | 83 | $ | (267 | ) | $ | 184 | |||||||||
(1) | Includes intercompany royalties between Issuer and other subsidiaries of a corresponding amount. |
-15-
Table of Contents
Condensed Consolidating Statements of Cash Flows
For the Three Months Ended March 31, 2010
(In millions)
(Unaudited)
For the Three Months Ended March 31, 2010
(In millions)
(Unaudited)
All | Total | |||||||||||||||||||
Other | Consolidating | |||||||||||||||||||
Parent | Issuer | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income |
$ | 232 | $ | 232 | $ | 115 | $ | (347 | ) | $ | 232 | |||||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||||||||||||||
Equity income from subsidiaries |
(232 | ) | (115 | ) | | 347 | | |||||||||||||
Depreciation and amortization |
| 10 | | | 10 | |||||||||||||||
Deferred income taxes |
| 1 | | | 1 | |||||||||||||||
Share-based compensation |
| 2 | | | 2 | |||||||||||||||
Pension, health and life insurance benefits
expense |
| 8 | | | 8 | |||||||||||||||
Pension, health and life insurance contributions |
| (12 | ) | | | (12 | ) | |||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||||||
Accounts and other receivables |
| (7 | ) | | | (7 | ) | |||||||||||||
Inventories |
| (40 | ) | | | (40 | ) | |||||||||||||
Accounts payable and accrued liabilities |
(1 | ) | 71 | (19 | ) | | 51 | |||||||||||||
Settlement costs |
| 276 | | | 276 | |||||||||||||||
Income taxes |
| 59 | 65 | | 124 | |||||||||||||||
Other |
| 2 | | | 2 | |||||||||||||||
Return on investment in subsidiaries |
405 | 400 | | (805 | ) | | ||||||||||||||
Net cash provided by (used in) operating activities |
$ | 404 | $ | 887 | $ | 161 | $ | (805 | ) | $ | 647 | |||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Additions to plant and equipment |
| (10 | ) | | | (10 | ) | |||||||||||||
Net cash
used in investing activities |
| (10 | ) | | | (10 | ) | |||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Dividends paid |
(155 | ) | (405 | ) | (400 | ) | 805 | (155 | ) | |||||||||||
Shares repurchased |
(204 | ) | | | | (204 | ) | |||||||||||||
Debt issuance costs |
| (3 | ) | | | (3 | ) | |||||||||||||
Net cash
provided by/(used in) financing activities |
(359 | ) | (408 | ) | (400 | ) | 805 | (362 | ) | |||||||||||
Change in cash and cash equivalents |
45 | 469 | (239 | ) | | 275 | ||||||||||||||
Cash and cash equivalents, beginning of year |
130 | 719 | 535 | | 1,384 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | 175 | $ | 1,188 | $ | 296 | $ | | $ | 1,659 | ||||||||||
-16-
Table of Contents
Condensed Consolidating Statements of Cash Flows
For the Three Months Ended March 31, 2009
(In millions)
(Unaudited)
For the Three Months Ended March 31, 2009
(In millions)
(Unaudited)
All | Total | |||||||||||||||||||
Other | Consolidating | |||||||||||||||||||
Parent | Issuer | Subsidiaries | Adjustments | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income |
$ | 184 | $ | 184 | $ | 83 | $ | (267 | ) | $ | 184 | |||||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||||||||||||||
Equity income from subsidiaries |
(184 | ) | (83 | ) | | 267 | | |||||||||||||
Depreciation and amortization |
| 8 | | | 8 | |||||||||||||||
Pension, health and life insurance benefits
expense |
| 11 | | | 11 | |||||||||||||||
Pension, health and life insurance contributions |
| (4 | ) | | | (4 | ) | |||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||||||
Inventories |
| (98 | ) | | | (98 | ) | |||||||||||||
Accounts payable and accrued liabilities |
| 10 | 6 | | 16 | |||||||||||||||
Settlement costs |
| 243 | | | 243 | |||||||||||||||
Income taxes |
| 50 | 47 | | 97 | |||||||||||||||
Other assets |
| (4 | ) | | | (4 | ) | |||||||||||||
Return on investment in subsidiaries |
155 | 350 | | (505 | ) | | ||||||||||||||
Net cash provided by (used in) operating activities |
155 | 667 | 136 | (505 | ) | 453 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Return of capital |
| 100 | | (100 | ) | | ||||||||||||||
Additions to plant and equipment |
| (10 | ) | | | (10 | ) | |||||||||||||
Net cash
provided by/(used in) investing activities |
| 90 | | (100 | ) | (10 | ) | |||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Dividends paid |
(155 | ) | (155 | ) | (450 | ) | 605 | (155 | ) | |||||||||||
Excess tax benefits from share-based arrangements |
| 4 | | | 4 | |||||||||||||||
Net cash provided by/(used in) financing activities |
(155 | ) | (151 | ) | (450 | ) | 605 | (151 | ) | |||||||||||
Change in cash and cash equivalents |
| 606 | (314 | ) | | 292 | ||||||||||||||
Cash and cash equivalents, beginning of year |
19 | 565 | 607 | | 1,191 | |||||||||||||||
Cash and cash equivalents, end of period |
$ | 19 | $ | 1,171 | $ | 293 | $ | | $ | 1,483 | ||||||||||
-17-
Table of Contents
14. Legal Proceedings
Tobacco Related Product Liability Litigation
As of May 3, 2010, approximately 11,215 product liability cases are pending against
cigarette manufacturers in the United States. Lorillard Tobacco is a defendant in approximately
10,250 of these cases. Lorillard, Inc. is a co-defendant in approximately 695 cases. Approximately
7,575 of these lawsuits are Engle Progeny Cases, described below, which include approximately
4,400 Engle Progeny claims initially asserted in a small number of multi-plaintiff actions that
were severed into separate lawsuits by one Florida federal court during 2009.
The pending product liability cases are composed of the types of cases listed below.
Pending cases are those in which Lorillard Tobacco or Lorillard, Inc. have been joined to the
litigation by either receipt of service of process, or execution of a waiver thereof, and a
dismissal order has not been entered with respect to Lorillard Tobacco or Lorillard, Inc.
Conventional Product Liability Cases. Conventional Product Liability Cases are brought
by individuals who allege cancer or other health effects caused by smoking cigarettes, by using
smokeless tobacco products, by addiction to tobacco, or by exposure to environmental tobacco smoke.
As of May 3, 2010, approximately 140 cases are pending against cigarette manufacturers, including
approximately 30 cases against Lorillard Tobacco. Lorillard, Inc. is a co-defendant in three cases.
Engle Progeny Cases. Engle Progeny Cases are brought by individuals who purport to be
members of the decertified Engle class. These cases are pending in a number of Florida courts.
Lorillard Tobacco is a defendant in approximately 7,575 Engle Progeny Cases. Lorillard, Inc. is a
co-defendant in approximately 685 cases. Some of the cases have been filed on behalf of multiple
class members. The time period for filing Engle Progeny Cases expired in January 2008 and no
additional cases may be filed.
West Virginia Individual Personal Injury Cases. West Virginia Individual Personal Injury
Cases are brought by individuals who allege cancer or other health effects caused by smoking
cigarettes, by using smokeless tobacco products, or by addiction to cigarette smoking. The cases
are pending in a single West Virginia court and have been consolidated for trial. Lorillard Tobacco
is a defendant in approximately 50 of the 700 pending cases that are part of this proceeding.
Lorillard, Inc. is not a defendant in any of these cases. The first phase of an anticipated
three-phase trial of these consolidated cases is scheduled to begin on June 1, 2010.
Flight Attendant Cases. Flight Attendant Cases are brought by non-smoking flight
attendants alleging injury from exposure to environmental smoke in the cabins of aircraft.
Plaintiffs in these cases may not seek punitive damages for injuries that arose prior to January
15, 1997. Lorillard Tobacco is a defendant in each of the approximately 2,600 pending Flight
Attendant Cases. Lorillard, Inc. is not a defendant in any of these cases. The time for filing
Flight Attendant Cases expired in 2000 and no additional cases in this category may be filed.
Class Action Cases. Class Action Cases are purported to be brought on behalf of large
numbers of individuals for damages allegedly caused by smoking. Six of these cases are pending
against Lorillard Tobacco. Lorillard, Inc. is a co-defendant in two of these six cases. One of the
six cases asserts claims on behalf of purchasers of light cigarettes. Lorillard, Inc. is not a
defendant in this case. Neither Lorillard Tobacco nor Lorillard, Inc. is a defendant in the
approximately 40 additional lights class actions that are pending against other cigarette
manufacturers.
Reimbursement Cases. Reimbursement Cases are brought by or on behalf of entities who
seek reimbursement of expenses incurred in providing health care to individuals who allegedly were
injured by smoking. Plaintiffs in these cases have included the U.S. federal government, U.S. state
and local governments, foreign governmental entities, hospitals or hospital districts, American
Indian tribes, labor unions, private companies and private citizens. Four such cases are pending
against Lorillard Tobacco and other cigarette manufacturers in the United States and one such case
is pending in Israel. Lorillard, Inc. is a co-defendant in two of the cases pending in the United
States. Plaintiffs in the case in Israel have attempted to assert claims against Lorillard, Inc.
Included in this category is the suit filed by the federal government, United States of
America v. Philip Morris USA, Inc. (Phillip Morris), et al., that sought return of profits and
injunctive relief. In August 2006, the trial court issued its verdict and granted injunctive
relief. The verdict did not award monetary damages. In May
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2009, the verdict was largely affirmed by an appellate court. In February 2010, the parties
petitioned the U.S. Supreme Court to review the case. See Reimbursement Cases below.
Filter Cases. In addition to the above, Filter Cases are brought by individuals,
including former employees of Lorillard Tobacco, who seek damages resulting from their alleged
exposure to asbestos fibers that were incorporated into filter material used in one brand of
cigarettes manufactured by Lorillard Tobacco for a limited period of time ending more than 50 years
ago. Lorillard Tobacco is a defendant in 30 such cases, including two cases in which Lorillard,
Inc. is a co-defendant. Lorillard, Inc. is also a defendant in two additional Filter Cases, in
which Lorillard Tobacco is not a defendant.
In addition, Lorillard Tobacco and Lorillard, Inc. were named as defendants in one case
in which it is alleged that a fire caused by a Lorillard cigarette led to an individuals death.
That matter was dismissed during February 2010. Plaintiff did not notice an appeal from the
dismissal order and this matter is concluded.
Plaintiffs assert a broad range of legal theories in these cases, including, among
others, theories of negligence, fraud, misrepresentation, strict liability, breach of warranty,
enterprise liability (including claims asserted under the federal Racketeering Influenced and
Corrupt Organizations Act (RICO)), civil conspiracy, intentional infliction of harm, injunctive
relief, indemnity, restitution, unjust enrichment, public nuisance, claims based on antitrust laws
and state consumer protection acts, and claims based on failure to warn of the harmful or addictive
nature of tobacco products.
Plaintiffs in most of the cases seek unspecified amounts of compensatory damages and
punitive damages that may range into the billions of dollars. Plaintiffs in some of the cases seek
treble damages, statutory damages, disgorgement of profits, equitable and injunctive relief, and
medical monitoring, among other damages.
Conventional Product Liability Cases
As of May 3, 2010, approximately 140 cases are pending against cigarette manufacturers in
the United States. Lorillard Tobacco is a defendant in approximately 30 of these cases. Lorillard,
Inc. is a co-defendant in three of the pending cases.
Since January 1, 2008, verdicts have been returned in three cases. Neither Lorillard
Tobacco nor Lorillard, Inc. was a defendant in any of these trials. Juries found in favor of the
plaintiffs in each of these three trials. In one of the trials, the jury awarded actual damages.
The two other cases were re-trials ordered by appellate courts in which juries were permitted to
consider only the amount of punitive damages to award. Both of these trials resulted in punitive
damages verdicts that awarded the plaintiffs $1.5 million in one of the cases and $13.8 million in
the other. Appeals are pending in the three matters. In rulings addressing cases tried in earlier
years, some appellate courts have reversed verdicts returned in favor of the plaintiffs while other
judgments that awarded damages to smokers have been affirmed on appeal. Manufacturers have
exhausted their appeals and have been required to pay damages to plaintiffs in eleven individual
cases in recent years. Punitive damages were paid to the smokers in five of the eleven cases.
Neither Lorillard Tobacco nor Lorillard, Inc. was a party to these eleven matters.
As of May 3, 2010, trial was underway in one Conventional Product Liability Case. Neither
Lorillard Tobacco nor Lorillard, Inc. is a defendant in this case. Some cases are scheduled for
trial in 2010, including some in which Lorillard Tobacco is a defendant. Trial dates are subject to
change.
Engle Progeny Cases
In 2006, the Florida Supreme Court issued a ruling in a case, Engle v. R.J. Reynolds
Tobacco Co., et al., that had been certified as a class action on behalf of Florida residents, and
survivors of Florida residents, who were injured or died from medical conditions allegedly caused
by addiction to smoking. During a three-phase trial, a Florida jury awarded actual damages to three
individuals and approximately $145 billion in punitive damages to the certified class. In its 2006
decision, the Florida Supreme Court vacated the punitive damages award, determined that the case
could not proceed further as a class action and ordered decertification of the class. The Florida
Supreme Court also reinstated the actual damages awards to two of the three individuals whose
claims were heard during the first phase of the Engle trial. These two awards totaled $7 million,
and both verdicts were paid in February 2008. Lorillard Tobaccos payment to these two individuals,
including interest, totaled approximately $3 million.
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The Florida Supreme Courts 2006 ruling also permitted Engle class members to file
individual actions, including claims for punitive damages. The court further held that these
individuals are entitled to rely on a number of the jurys findings in favor of the plaintiffs in
the first phase of the Engle trial. The time period for filing Engle Progeny Cases expired in
January 2008 and no additional cases may be filed. In 2009, the Florida Supreme Court rejected a
petition that sought to extend the time for purported class members to file an additional lawsuit.
Lorillard Tobacco is a defendant in approximately 7,575 cases filed by individuals who
allege they or their decedents were members of the Engle class. Lorillard, Inc. is a co-defendant
in approximately 685 of the pending cases. Some of the suits are on behalf of multiple plaintiffs.
Various courts have entered orders severing the cases filed by multiple plaintiffs into separate
actions. During 2009, one Florida federal court entered orders that severed the claims of
approximately 4,400 Engle Progeny plaintiffs, initially asserted in a small number of
multi-plaintiff actions, into separate lawsuits. In some cases, spouses of alleged former class
members have also brought derivative claims.
The Engle Progeny Cases are pending in various Florida state and federal courts. Some of
these courts have issued rulings that address whether these individuals are entitled to rely on a
number of the jurys findings in favor of the plaintiffs in the first phase of the Engle trial.
Some of these decisions have led to pending petitions for appeal. The U.S. Court of Appeals for the
Eleventh Circuit is reviewing trial court rulings determining how courts should apply the Florida
Supreme Courts ruling regarding the Engle jurys first phase verdict. In another case, an
intermediate appellate court denied a plaintiffs request to immediately certify an appeal to the
Florida Supreme Court.
Lorillard Tobacco is a defendant in several Engle Progeny Cases that have been placed on
courts 2010 trial calendars or in which specific 2010 trial dates have been set. Lorillard, Inc.
is a defendant in some of these cases. Trial schedules are subject to change and it is not possible
to predict how many of the cases pending against Lorillard Tobacco or Lorillard, Inc. will be tried
during 2010. It also is not possible to predict whether some courts will implement procedures that
consolidate multiple Engle Progeny Cases for trial.
As of May 3, 2010, trial was underway in three of the Engle Progeny Cases.
Verdicts have been returned in 18 Engle Progeny Cases since the Florida Supreme Court
issued its 2006 ruling that permitted members of the Engle class to bring individual lawsuits.
Juries awarded actual damages and punitive damages in nine of the trials. The nine punitive damages
awards were $2 million, $5 million, $5 million, $12.5 million, $18 million, $20 million, $25
million, $80 million and $244 million. In six of the trials, juries awards were limited to actual
damages.
In the three other trials, juries found in favor of the defendants that the plaintiffs
were not former Engle class members. As of May 3, 2010, defendants were contesting, or were
expected to contest, either by appeals or by post-trial motions, each of the 15 verdicts in which
plaintiffs were awarded damages. None of the 15 Engle Progeny trials in which plaintiffs were
awarded damages since the Florida Supreme Courts 2006 decision had reached a final resolution as
of May 3, 2010. Neither Lorillard Tobacco nor Lorillard, Inc. was a defendant in these 18 trials.
In a case tried prior to the Florida Supreme Courts 2006 decision permitting members of
the Engle class to bring individual lawsuits, one Florida court allowed the plaintiff to rely at
trial on certain of the Engle jurys findings. That trial resulted in a verdict for the plaintiffs
in which they were awarded approximately $25 million in actual damages. Neither Lorillard Tobacco
nor Lorillard, Inc. was a party to this case. During 2010, a Florida appellate court affirmed the
jurys verdict. As of May 3, 2010, defendants petitions for rehearing were pending.
In June 2009, Florida amended the security requirements for a stay of execution of any
judgment during the pendency of appeal in Engle Progeny Cases. The amended statute provides for the
amount of security for individual Engle Progeny Cases to vary within prescribed limits based on the
number of adverse judgments that are pending on appeal at a given time. The required security
decreases as the number of appeals increases to ensure that the total security posted or deposited
does not exceed $200 million in the aggregate. This amended statute applies to all judgments
entered on or after June 16, 2009 and expires on December 31, 2012.
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West Virginia Individual Personal Injury Cases
The proceeding known as West Virginia Individual Personal Injury Cases consolidates for
trial in a single West Virginia court a number of cases that have been filed against cigarette
manufacturers, including Lorillard Tobacco. The order that consolidated the cases, among other
things, permitted only those cases filed by September 2000 to participate in the consolidated
trial. As a result, no additional cases may be part of this proceeding.
Approximately 1,250 cases initially were part of this proceeding, and Lorillard Tobacco
was named in all but a few of them. Lorillard, Inc. has not been a defendant in any of these cases.
More than 500 of the cases have been dismissed in their entirety. Lorillard Tobacco has been
dismissed from approximately 650 additional cases because those plaintiffs did not submit evidence
that they had smoked a Lorillard Tobacco product. These 650 additional cases remain pending against
other cigarette manufacturers and some or all the dismissals of Lorillard Tobacco could be
contested in subsequent appeals noticed by the plaintiffs.
Approximately 700 cases are pending. Lorillard Tobacco is a defendant in approximately 50
of the pending cases. The court has entered a trial plan that calls for a multi-phase trial. The
first phase of trial is scheduled to begin on June 1, 2010. Trial dates are subject to change.
Flight Attendant Cases
Approximately 2,600 Flight Attendant Cases are pending. Lorillard Tobacco and three other
cigarette manufacturers are the defendants in each of these matters. Lorillard, Inc. is not a
defendant in any of these cases. These suits were filed as a result of a settlement agreement by
the parties, including Lorillard Tobacco, in Broin v. Philip Morris Companies, Inc., et al.
(Circuit Court, Miami-Dade County, Florida, filed October 31, 1991), a class action brought on
behalf of flight attendants claiming injury as a result of exposure to environmental tobacco smoke.
The settlement agreement, among other things, permitted the plaintiff class members to file these
individual suits. These individuals may not seek punitive damages for injuries that arose prior to
January 15, 1997. The period for filing Flight Attendant Cases expired during 2000 and no
additional cases in this category may be filed.
The judges that have presided over the cases that have been tried have relied upon an
order entered in October 2000 by the Circuit Court of Miami-Dade County, Florida. The October 2000
order has been construed by these judges as holding that the flight attendants are not required to
prove the substantive liability elements of their claims for negligence, strict liability and
breach of implied warranty in order to recover damages. The court further ruled that the trials of
these suits are to address whether the plaintiffs alleged injuries were caused by their exposure
to environmental tobacco smoke and, if so, the amount of damages to be awarded.
Lorillard Tobacco was a defendant in each of the eight flight attendant cases in which
verdicts have been returned. Defendants have prevailed in seven of the eight trials. In one of the
seven cases in which a defense verdict was returned, the court granted plaintiffs motion for a new
trial and, following appeal, the case has been returned to the trial court for a second trial. The
six remaining cases in which defense verdicts were returned are concluded. In the single trial
decided for the plaintiff, French v. Philip Morris Incorporated, et al., the jury awarded $5.5
million in damages. The court, however, reduced this award to $500,000. This verdict, as reduced by
the trial court, was affirmed on appeal and the defendants have paid the award. Lorillard Tobaccos
share of the judgment in this matter, including interest, was approximately $60,000.
As of May 3, 2010, none of the flight attendant cases are scheduled for trial. Trial
dates are subject to change.
Class Action Cases
Lorillard Tobacco is a defendant in six pending cases. Lorillard, Inc. is a co-defendant
in two of these cases. In most of the pending cases, plaintiffs seek class certification on behalf
of groups of cigarette smokers, or the estates of deceased cigarette smokers, who reside in the
state in which the case was filed.
Cigarette manufacturers, including Lorillard Tobacco and Lorillard, Inc., have defeated
motions for class certification in a total of 36 cases, 13 of which were in state court and 23 of
which were in federal court. Motions for class certification have also been ruled upon in some of
the lights cases or in other class actions to which neither Lorillard Tobacco nor Lorillard, Inc.
was a party. In some of these cases, courts have denied class certification to the plaintiffs,
while classes have been certified in other matters.
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The Scott Case. In one of the class actions pending against Lorillard Tobacco, Scott v.
The American Tobacco Company, et al. (District Court, Orleans Parish, Louisiana, filed May 24,
1996), the Louisiana Court of Appeal, Fourth Circuit, issued a decision during April 2010 that
modified the trial courts 2008 amended final judgment. The Court of Appeals April 2010 decision
reduced the judgment amount from approximately $264 million to approximately $242 million to fund a
ten year, court-supervised smoking cessation program. The April 2010 decision also changed the date
on which the award of post-judgment interest will accrue from June 2004 to July 2008. Interest
awarded by the amended final judgment will continue to accrue from July 2008 until the judgment
either is paid or is reversed on appeal. As of May 3, 2010, judicial interest totaled approximately
$25.3 million. Lorillard, Inc., which was a party to the case in the past, is no longer a
defendant. As of May 3, 2010, the deadline for the parties to seek further review of the Court of
Appeals ruling had not expired.
In its April 2010 ruling, the Court of Appeal expressly preserved defendants right to assert
claims on unspent or surplus funds, should any such funds be present, at the conclusion of the
ten-year smoking cessation program.
During 1997, Scott was certified a class action on behalf of certain cigarette smokers
resident in the State of Louisiana who desire to participate in medical monitoring or smoking
cessation programs and who began smoking prior to September 1, 1988, or who began smoking prior to
May 24, 1996 and allege that defendants undermined compliance with the warnings on cigarette
packages.
Trial in Scott was heard in two phases. At the conclusion of the first phase in July
2003, the jury rejected medical monitoring, the primary relief requested by plaintiffs, and
returned sufficient findings in favor of the class to proceed to a Phase II trial on plaintiffs
request for a statewide smoking cessation program. Phase II of the trial, which concluded in May
2004, resulted in an award of $591 million to fund cessation programs for Louisiana smokers.
In February 2007, the Louisiana Court of Appeal reduced the amount of the award by
approximately $328 million; struck an award of prejudgment interest, which totaled approximately
$440 million as of December 31, 2006; and limited class membership to individuals who began smoking
by September 1, 1988, and whose claims accrued by September 1, 1988. In January 2008, the Louisiana
Supreme Court denied plaintiffs and defendants separate petitions for review. In May 2008, U.S.
Supreme Court denied defendants request that it review the case. The case was returned to the
trial court, which subsequently entered an amended final judgment that ordered the defendants to
pay approximately $264 million to fund the court-supervised smoking cessation program for the
members of the certified class. The Court of Appeals April 2010 decision was an appeal from this
judgment.
Should the amended final judgment be sustained on appeal, Lorillard Tobaccos share of
that judgment, including the award of post-judgment interest, has not been determined. In the
fourth quarter of 2007, Lorillard, Inc. recorded a pretax provision of approximately $66 million
for this matter which was included in selling, general and administrative expenses on the
consolidated statements of income and in other liabilities on the consolidated balance sheets.
The parties filed a stipulation in the trial court agreeing that an article of Louisiana
law required that the amount of the bond for the appeal be set at $50 million for all defendants
collectively. The parties further agreed that the plaintiffs have full reservations of rights to
contest in the trial court the sufficiency of the bond on any grounds. Defendants collectively
posted a surety bond in the amount of $50 million, of which Lorillard Tobacco secured 25%, or $12.5
million, which is classified as restricted cash within other assets on the consolidated balance
sheet. While Lorillard Tobacco believes the limitation on the appeal bond amount is valid as
required by Louisiana law, in the event of a successful challenge the amount of the appeal bond
could be set as high as 150% of the judgment and judicial interest combined. If such an event
occurred, Lorillard Tobaccos share of the appeal bond has not been determined.
Other Class Action Cases. In one of the cases pending against Lorillard Tobacco, Brown
v. The American Tobacco Company, Inc., et al. (Superior Court, San Diego County, California, filed
June 10, 1997), the court initially certified the case as a class action but it subsequently
granted defendants motion for class decertification. During 2009, the California Supreme Court
vacated the class decertification order and Brown has been returned to the trial court for further
activity. While it is not possible to predict future developments in Brown, a new class
certification order could be entered. The class previously certified in Brown was composed of
residents of California who smoked at least one of defendants cigarettes between June 10, 1993 and
April 23, 2001 and who were exposed to
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defendants marketing and advertising activities in California. During 2010, the court
reversed a prior order and will permit plaintiffs to reassert claims regarding the allegedly
fraudulent marketing of light or ultra-light cigarettes.
Lights Class Actions. Cigarette manufacturers are defendants in another group of cases
in which plaintiffs claims are based on the allegedly fraudulent marketing of light or
ultra-light cigarettes. Classes have been certified in some of these matters. In one of the
pending lights cases, Good v. Altria Group, Inc., et al., the U.S. Supreme Court ruled that
neither the Federal Cigarette Labeling and Advertising Act nor the Federal Trade Commissions
regulation of cigarettes tar and nicotine disclosures preempts (or bars) some of plaintiffs
claims. Lorillard Tobacco is a defendant in one class action in which plaintiffs claims are limited
to purchasers of light cigarettes, Schwab v. Philip Morris USA, Inc., et al., which is discussed
below. In another case, Cleary v. Philip Morris Incorporated, et al., a court allowed plaintiffs to
amend their complaint in an existing class action to assert claims on behalf of a subclass of
individuals who purchased light cigarettes from the defendants, but it subsequently dismissed the
light cigarettes claims asserted against Lorillard Tobacco. As of May 3, 2010, the deadline for
plaintiffs to appeal this ruling had not expired. The court hearing the case of Brown v. The
American Tobacco Company, et al., has permitted the plaintiffs to reassert claims regarding the
allegedly fraudulent marketing of light or ultra-light cigarettes. Lorillard, Inc. is not a
party to any of the purported lights class actions.
Approximately 40 additional purported lights class actions are pending against other
cigarette manufacturers. During 2009, the Judicial Panel on Multidistrict Litigation consolidated
various federal court lights class actions pending against Philip Morris USA or Altria Group and
transferred those cases to the U.S. District Court of Maine. As of May 3, 2010, 13 cases were part
of the consolidated proceeding. None of the cases pending against Lorillard Tobacco or Lorillard,
Inc. are part of the consolidated proceeding.
The Schwab Case. In the case of Schwab v. Philip Morris USA, Inc., et al. (U.S. District
Court, Eastern District, New York, filed May 11, 2004), plaintiffs base their claims on defendants
alleged violations of the RICO statute in the manufacture, marketing and sale of light
cigarettes. Plaintiffs estimated damages to the class in the hundreds of billions of dollars. Any
damages awarded to the plaintiffs based on defendants violation of the RICO statute would be
trebled. In September 2006, the court granted plaintiffs motion for class certification and
certified a nationwide class action on behalf of purchasers of light cigarettes. In March 2008,
the Second Circuit Court of Appeals reversed the class certification order and ruled that the case
may not proceed as a class action. Schwab has been returned to the U.S. District Court for the
Eastern District of New York for further proceedings, but the future activity in this matter, if
any, is not known. Lorillard, Inc. is not a party to this case.
Reimbursement Cases
Lorillard Tobacco is a defendant in the four Reimbursement Cases that are pending in the
U.S. and it has been named as a party to a case in Israel. Lorillard, Inc. is a co-defendant in two
of the four cases pending in the U.S. Plaintiffs in the case in Israel have attempted to assert
claims against Lorillard, Inc.
U.S. Federal Government Action. In August 2006, the U.S. District Court for the District
of Columbia issued its final judgment and remedial order in the federal governments reimbursement
suit (United States of America v. Philip Morris USA, Inc., et al., U.S. District Court, District of
Columbia, filed September 22, 1999). The verdict concluded a bench trial that began in September
2004. Lorillard Tobacco, other cigarette manufacturers, two parent companies and two trade
associations are defendants in this action. Lorillard, Inc. is not a party to this case.
In its 2006 verdict, the court determined that the defendants, including Lorillard
Tobacco, violated certain provisions of the RICO statute, that there was a likelihood of present
and future RICO violations, and that equitable relief was warranted. The government was not awarded
monetary damages. The equitable relief included permanent injunctions that prohibit the defendants,
including Lorillard Tobacco, from engaging in any act of racketeering, as defined under RICO; from
making any material false or deceptive statements concerning cigarettes; from making any express or
implied statement about health on cigarette packaging or promotional materials (these prohibitions
include a ban on using such descriptors as low tar, light, ultra-light, mild or natural);
and from making any statements that low tar, light, ultra-light, mild or natural or
low-nicotine cigarettes may result in a reduced risk of disease. The final judgment and remedial
order also requires the defendants, including Lorillard Tobacco, to make corrective statements on
their websites, in certain media, in point-of-sale advertisements, and on cigarette package
inserts concerning: the health effects of smoking; the addictiveness of smoking; that there are
no significant health benefits to be gained by smoking low tar, light, ultra-light, mild or
natural cigarettes;
that cigarette design has been manipulated to ensure optimum nicotine delivery to smokers; and
that there are
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adverse effects from exposure to secondhand smoke. If the final judgment and
remedial order are not modified or vacated on appeal, the costs to Lorillard Tobacco for compliance
could exceed $10 million.
Following trial, the defendants, the government and several intervenors noticed appeals
to the Circuit Court of Appeals for the District of Columbia. Defendants received a stay of the
judgment and remedial order from the Court of Appeals that remained in effect while the appeal was
pending. In May 2009, a three judge panel upheld substantially all of the District Courts final
judgment and remedial order. In September 2009, the Court of Appeals denied defendants rehearing
petitions as well as their motion to vacate those statements in the appellate ruling that address
defendants marketing of low tar or lights cigarettes, to vacate those parts of the trial
courts judgment on that issue, and to remand the case with instructions to deny as moot the
governments allegations and requested relief regarding lights cigarettes. The Court of Appeals
has stayed its order that formally relinquishes jurisdiction of defendants appeal pending the
filing and disposition of the governments and the defendants petitions for writ of certiorari to
the U.S. Supreme Court. As of May 3, 2010, the U.S. Supreme Court has not announced whether it will
grant review of any of the petitions for writ of certiorari that were filed on February 19, 2010 by
Lorillard Tobacco, the other defendants, the federal government and the intervenors.
While trial was underway, the Court of Appeals ruled that plaintiff may not seek to recover
profits earned by the defendants. Prior to trial, the government had claimed that it was entitled
to approximately $280 billion from the defendants for its claim to recover profits earned by the
defendants. Recovery of profits may be considered by the U.S. Supreme Court in the pending appeal.
Settlement of State Reimbursement Litigation
On November 23, 1998, Lorillard Tobacco, Philip Morris Incorporated, Brown & Williamson
Tobacco Corporation and R.J. Reynolds Tobacco Company (the Original Participating Manufacturers)
entered into the Master Settlement Agreement (MSA) with 46 states, the District of Columbia, the
Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa and the Commonwealth of
the Northern Mariana Islands to settle the asserted and unasserted health care cost recovery and
certain other claims of those states. These settling entities are generally referred to as the
Settling States. The Original Participating Manufacturers had previously settled similar claims
brought by Mississippi, Florida, Texas and Minnesota, which together with the MSA are referred to
as the State Settlement Agreements.
The State Settlement Agreements provide that the agreements are not admissions,
concessions or evidence of any liability or wrongdoing on the part of any party, and were entered
into by the Original Participating Manufacturers to avoid the further expense, inconvenience,
burden and uncertainty of litigation. Lorillard recorded pretax charges for its obligations under
the State Settlement Agreements of $276 million and $247 million for the three months ended March
2010 and 2009, respectively. Lorillards portion of ongoing adjusted settlement payments and legal
fees is based on its share of domestic cigarette shipments in the year preceding that in which the
payment is due. Accordingly, Lorillard records its portions of ongoing adjusted settlement payments
as part of cost of manufactured products sold as the related sales occur.
The State Settlement Agreements require that the domestic tobacco industry make annual
payments of $10.4 billion, subject to adjustment for several factors, including inflation, market
share and industry volume. In addition, the domestic tobacco industry is required to pay settling
plaintiffs attorneys fees, subject to an annual cap of $500 million, as well as an additional
amount of up to $125 million in each year through 2008. These payment obligations are the several
and not joint obligations of each settling defendant.
The State Settlement Agreements also include provisions relating to significant
advertising and marketing restrictions, public disclosure of certain industry documents,
limitations on challenges to tobacco control and underage use laws, and other provisions. Lorillard
Tobacco and the other Original Participating Manufacturers have notified the States that they
intend to seek an adjustment in the amount of payments made in 2003 pursuant to a provision in the
MSA that permits such adjustment if the companies can prove that the MSA was a significant factor
in their loss of market share to companies not participating in the MSA and that the States failed
to diligently enforce certain statutes passed in connection with the MSA. If the Original
Participating Manufacturers are ultimately successful, any adjustment would be reflected as a
credit against future payments by the Original Participating Manufacturers under the agreement.
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From time to time, lawsuits have been brought against Lorillard Tobacco and other
participating manufacturers to the MSA, or against one or more of the states, challenging the
validity of the MSA on certain grounds, including as a violation of the antitrust laws. See
MSA-Related Antitrust Suit below.
In addition, in connection with the MSA, the Original Participating Manufacturers entered into
an agreement to establish a $5.2 billion trust fund payable between 1999 and 2010 to compensate the
tobacco growing communities in 14 states (the Trust). Payments to the Trust will no longer be
required as a result of an assessment imposed under a new federal law repealing the federal supply
management program for tobacco growers. Under the new law, enacted in October 2004, tobacco quota
holders and growers will be compensated with payments totaling $10.1 billion, funded by an
assessment on tobacco manufacturers and importers. Payments to qualifying tobacco quota holders and
growers commenced in 2005.
Lorillard believes that the State Settlement Agreements will materially adversely affect
its cash flows and operating income in future years. The degree of the adverse impact will depend,
among other things, on the rates of decline in domestic cigarette sales in the premium price and
discount price segments, Lorillards share of the domestic premium price and discount price
cigarette segments, and the effect of any resulting cost advantage of manufacturers not subject to
significant payment obligations under the State Settlement Agreements.
Filter Cases
In addition to the above, claims have been brought against Lorillard Tobacco and
Lorillard, Inc. by individuals who seek damages resulting from their alleged exposure to asbestos
fibers that were incorporated into filter material used in one brand of cigarettes manufactured by
Lorillard Tobacco for a limited period of time ending more than 50 years ago. Lorillard Tobacco is
a defendant in 30 such cases. Lorillard, Inc. is a defendant in four Filter Cases, including two
that also name Lorillard Tobacco. Since January 1, 2008, Lorillard Tobacco has paid, or has reached
agreement to pay, a total of approximately $14.3 million in settlements to finally resolve
approximately 75 claims. The related expense was recorded in selling, general and administrative
expenses on the consolidated statements of income. Since January 1, 2008, verdicts have been
returned in two Filter Cases. During September 2008, a jury in the District Court of Bexar County,
Texas, returned a verdict for Lorillard Tobacco in the case of Young v. Lorillard Tobacco Company.
Plaintiffs in the Young case did not pursue an appeal and that matter is concluded. During January
2010, a jury in the Superior Court of California, Los Angeles County, returned a verdict for
Lorillard Tobacco in the case of Cox v. Asbestos Corporation, Ltd., et al. In the case of Cox, the
deadline for plaintiffs to pursue an appeal had not expired as of May 3, 2010. As of May 3, 2010,
nine of the Filter Cases were scheduled for trial. Trial dates are subject to change.
Tobacco-Related Antitrust Cases
Indirect Purchaser Suits. Approximately 30 antitrust suits were filed in 2000 and 2001
on behalf of putative classes of consumers in various state courts against cigarette manufacturers,
including Lorillard Tobacco. The suits all alleged that the defendants entered into agreements to
fix the wholesale prices of cigarettes in violation of state antitrust laws which permit indirect
purchasers, such as retailers and consumers, to sue under price fixing or consumer fraud statutes.
More than 20 states permit such suits. Lorillard, Inc. was not named as a defendant in any of these
cases. Lorillard Tobacco was a defendant in all but one of these indirect purchaser cases. Three
indirect purchaser suits, in New York, Florida and Michigan, thereafter were dismissed by courts in
those states, and the plaintiffs withdrew their appeals. The actions in all other states, except
for New Mexico and Kansas, were voluntarily dismissed. The New Mexico suit was thereafter dismissed
as to Lorillard Tobacco.
In the Kansas case, the District Court of Seward County certified a class of Kansas
indirect purchasers in 2002. In July 2006, the Court issued an order confirming that fact discovery
was closed, with the exception of privilege issues that the Court determined, based on a Special
Masters report, justified further fact discovery. In October 2007, the Court denied all of the
defendants privilege claims, and the Kansas Supreme Court thereafter denied a petition seeking to
overturn that ruling. Discovery currently is ongoing. No date has been set by the Court for
dispositive motions and trial.
MSA-Related Antitrust Suit. In October 2008, Lorillard Tobacco was named as a defendant
in an action filed in the Western District of Kentucky, Vibo Corporation, Inc. d/b/a/ General
Tobacco v. Conway, et al. The suit alleges that the named defendants, which include 52 state and
territorial attorneys general and 19 tobacco manufacturers, violated the federal Sherman Antitrust
Act of 1890 (the Sherman Act) by entering into and participating in
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the MSA. The plaintiff alleges that MSA participants, like it, that were not in existence when
the MSA was executed in 1998 but subsequently became participants, are unlawfully required to pay
significantly more sums to the states than companies that joined the MSA within 90 days after its
execution. In addition to the Sherman Act claim, plaintiff has raised a number of constitutional
claims against the states. Plaintiff seeks a declaratory judgment in its favor on all claims, an
injunction against the continued enforcement of the MSA, treble damages against the tobacco
manufacturer defendants, including Lorillard Tobacco and other manufacturer defendants, and damages
and injunctive relief against the states, including contract recession and restitution. In December
2008, the court dismissed the complaint against all defendants, including Lorillard Tobacco. The
court entered its final judgment dismissing the suit on January 6, 2010. Thereafter, the plaintiff
filed a notice of appeal to the federal Court of Appeals for the Sixth Circuit. To date, no further
filings have been made.
Defenses
Each of Lorillard Tobacco and Lorillard, Inc. believes that it has valid defenses to the
cases pending against it as well as valid bases for appeal should any adverse verdicts be returned
against either of them. As of May 3, 2010, Lorillard Tobacco was a defendant in approximately
10,250 pending product liability cases, and Lorillard, Inc. was a co-defendant in approximately 695
of these cases. While Lorillard Tobacco and Lorillard, Inc. intend to defend vigorously all tobacco
products liability litigation, it is not possible to predict the outcome of any of this litigation.
Litigation is subject to many uncertainties. Plaintiffs have prevailed in several cases, as noted
above. It is possible that one or more of the pending actions could be decided unfavorably as to
Lorillard Tobacco, Lorillard, Inc. or the other defendants. Lorillard Tobacco and Lorillard, Inc.
may enter into discussions in an attempt to settle particular cases if either believe it is
appropriate to do so.
Neither Lorillard Tobacco nor Lorillard, Inc. can predict the outcome of pending
litigation. Some plaintiffs have been awarded damages from cigarette manufacturers at trial. While
some of these awards have been overturned or reduced, other damages awards have been paid after the
manufacturers have exhausted their appeals. These awards and other litigation activities against
cigarette manufacturers continue to receive media attention. In addition, health issues related to
tobacco products also continue to receive media attention. It is possible, for example, that the
2006 verdict in United States of America v. Philip Morris USA, Inc., et al., which made many
adverse findings regarding the conduct of the defendants, including Lorillard Tobacco, could form
the basis of allegations by other plaintiffs or additional judicial findings against cigarette
manufacturers, including giving collateral estoppel effect to those adverse findings. In addition,
the ruling in Good v. Altria Group, Inc., et al. could result in further lights litigation. Any
such developments could have an adverse effect on the ability of Lorillard Tobacco or Lorillard,
Inc. to prevail in smoking and health litigation and could influence the filing of new suits
against Lorillard Tobacco or Lorillard, Inc. Lorillard Tobacco and Lorillard, Inc. also cannot
predict the type or extent of litigation that could be brought against either of them, or against
other cigarette manufacturers, in the future.
Lorillard records provisions in the consolidated financial statements for pending
litigation when it determines that an unfavorable outcome is probable and the amount of loss can be
reasonably estimated. Except for the impact of the State Settlement Agreements and Scott as
described above, management is unable to make a meaningful estimate of the amount or range of loss
that could result from an unfavorable outcome of material pending litigation and, therefore, no
material provision has been made in the consolidated financial statements for any unfavorable
outcome. It is possible that Lorillards results of operations or cash flows in a particular
quarterly or annual period or its financial position could be materially adversely affected by an
unfavorable outcome or settlement of certain pending litigation.
Indemnification Obligations
In connection with the Separation Lorillard entered into a separation agreement with
Loews (the Separation Agreement) and agreed to indemnify Loews and its officers, directors,
employees and agents against all costs and expenses arising out of third party claims (including,
without limitation, attorneys fees, interest, penalties and costs of investigation or preparation
for defense), judgments, fines, losses, claims, damages, liabilities, taxes, demands, assessments
and amounts paid in settlement based on, arising out of or resulting from, among other things,
Loews ownership of or the operation of Lorillard and its assets and properties, and its operation
or conduct of its businesses at any time prior to or following the Separation (including with
respect to any product liability claims).
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Loews is a defendant in three pending product liability cases. One of these is a
Reimbursement Case in Israel and two are purported Class Action Cases on file in U.S. courts.
Lorillard Tobacco also is a defendant in each of the three product liability cases in which Loews
is involved. Pursuant to the Separation Agreement, Lorillard will be required to indemnify Loews
for the amount of any losses and any legal or other fees with respect to such cases.
Other Litigation
Lorillard is also party to other litigation arising in the ordinary course of business.
The outcome of this other litigation will not, in the opinion of management, materially affect
Lorillards results of operations or equity.
15. Subsequent Event
In April 2010, Lorillard Tobacco issued $1 billion of unsecured senior notes in two tranches
(the Notes) pursuant to an Indenture, dated June 23, 2009, and the Second Supplemental Indenture,
dated April 12, 2010 (the Supplemental Indenture). The first tranche was $750 million aggregate
principal amount of 6.875% Notes due May 1, 2020, and the second tranche was $250 million aggregate
principal amount of 8.125% Notes due May 1, 2040. Lorillard Tobacco is the principal, wholly-owned
operating subsidiary of the Company and the Notes are unconditionally guaranteed on a senior
unsecured basis by the Company.
Upon the occurrence of a change of control triggering event, Lorillard Tobacco will be
required to make an offer to repurchase the Notes at a price equal to 101% of the aggregate
principal amount of the Notes, plus accrued interest. A change of control triggering event
occurs when there is both a change of control (as defined in the Supplemental Indenture) and the
Notes cease to be rated investment grade by both Moodys and S&P within 60 days of the occurrence
of a change of control or public announcement of the intention to effect a change of control. The
Notes are not entitled to any sinking fund and are not redeemable prior to maturity. The Notes
contain covenants that restrict liens and sale and leaseback transactions, subject to a limited
exception. The net proceeds from the issuance will be used for general corporate purposes, which
may include, among other things, the repurchase, redemption or retirement of securities including
its common stock, acquisitions, additions to working capital and capital expenditures.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our historical consolidated
financial statements and the notes related to those financial statements included in this Quarterly
Report on Form 10-Q for the quarter ended March 31, 2010 (the Form 10-Q). In addition to
historical information, the following discussion contains forward-looking statements based on
current expectations that involve risks and uncertainties. Investors are cautioned not to place
undue reliance on these forward-looking statements. Statements preceded by, followed by or that
otherwise include the words believe, expect, anticipate, intend, project, estimate,
plan, may increase, may fluctuate and similar expressions or future or conditional verbs such
as will, should, would, may and could are generally forward-looking in nature and are not
historical facts. Actual results and the timing of certain events may differ significantly from
those projected in such forward-looking statements due to a number of factors, including those risk
factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2009 (the Form
10-K) and those risk factors set forth in Business Environment below, in Part II, Item 1A.
Risk Factors and elsewhere in this Form 10-Q. Except for our ongoing obligations to disclose
material information under the federal securities laws, we undertake no obligation to release
publicly any revisions to any forward-looking statements, to report events or to report the
occurrence of unanticipated events unless required by law. For any forward-looking statements, we
claim the protection of the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995. Our consolidated financial statements are prepared in
conformity with accounting principles generally accepted in the United States (GAAP).
The terms Lorillard, we, our and us refer to Lorillard, Inc., a Delaware corporation,
and its subsidiaries. The terms Lorillard, Inc. and the Company refer solely to the parent
company and Lorillard Tobacco refers solely to Lorillard Tobacco Company, the principal
subsidiary of Lorillard, Inc.
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Overview
We are the third largest manufacturer of cigarettes in the United States. We were founded in
1760 and are the oldest continuously operating tobacco company in the United States. Newport,
which is our flagship brand, is a menthol flavored premium cigarette brand and the top selling
menthol and second largest selling cigarette brand overall in the United States based on gross
units sold in the first three months of 2010 and in the full year 2009. In addition to the Newport
brand, our product line has five additional brand families marketed under the Kent, True, Maverick,
Old Gold and Max brand names. These six cigarette brands include 41 different product offerings
which vary in price, taste, flavor, length and packaging. In the United States and certain U.S.
possessions and territories, we shipped 8.9 billion cigarettes in the first three months of 2010
and 36.3 billion cigarettes for full year 2009. Our major trademarks outside of the United States
were sold in 1977. We manufacture all of our cigarette products at our Greensboro, North Carolina
facility.
Critical Accounting Policies and Estimates
For a description of the critical accounting policies that require the use of significant
judgments and estimates by management, refer to Managements Discussion and Analysis of Financial
Condition and Results of Operations included in our Form 10-K filed with the Securities and
Exchange Commission (SEC) on February 25, 2010.
Business Environment
Participants in the U.S. tobacco industry, including us, face a number of issues that have
adversely affected their results of operations and financial condition in the past and will
continue to do so, including:
| A substantial volume of litigation seeking compensatory and punitive damages ranging into the billions of dollars, as well as equitable and injunctive relief, arising out of allegations of cancer and other health effects resulting from the use of cigarettes, addiction to smoking or exposure to environmental tobacco smoke, including claims for economic damages relating to alleged misrepresentation concerning the use of descriptors such as lights, as well as other alleged damages. | ||
| Substantial annual payments continuing in perpetuity, and significant restrictions on marketing and advertising have been agreed to and are required under the terms of certain settlement agreements, including the Master Settlement Agreement among major tobacco manufacturers and 46 states and various other governments and jurisdictions (the MSA) that we entered into in 1998 along with Philip Morris Incorporated, Brown & Williamson Tobacco Corporation and R.J. Reynolds Tobacco Company (the other Original Participating Manufacturers) to settle asserted and unasserted health care cost recovery and other claims. We and certain other U.S. tobacco product manufacturers previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (the Initial State Settlements, and together with the MSA, the State Settlement Agreements). The State Settlement Agreements impose a stream of future payment obligations on us and the other major U.S. cigarette manufacturers and place significant restrictions on their ability to market and sell cigarettes. | ||
| The domestic cigarette market, in which we currently conduct our only significant business, continues to contract. As a result of price increases, restrictions on advertising, promotions and smoking in public and private facilities, increases in regulation and excise taxes, health concerns, a decline in the social acceptability of smoking, increased pressure from anti-tobacco groups and other factors, domestic cigarette shipments have decreased at a compound rate of approximately 3.2% from the twelve months ended March 31, 2000 through the twelve months ended March 31, 2010. | ||
| Increases in cigarette prices since 1998 have led to an increase in the volume of discount and, specifically, deep discount cigarettes. Cigarette price increases have been driven by increases in federal, state and local excise taxes and by manufacturer price increases. Price increases have led, and continue to lead, to high levels of discounting and other promotional activities for premium brands. Deep discount brands have grown from an estimated share in 1998 of less than 2.0% to an estimated 13.9% for the three months ended March 31, 2010, and continue to be a significant competitive factor in the domestic |
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market. We do not have sufficient empirical data to determine whether the increased price of cigarettes has deterred consumers from starting to smoke or encouraged them to quit smoking, but it is likely that increased prices may have had an adverse effect on consumption and may continue to do so. | |||
| The tobacco industry is subject to substantial and increasing regulation. In June 2009, the U.S. Congress passed, and the President signed into law, the Family Smoking Prevention and Tobacco Control Act granting the FDA authority to regulate tobacco products. Pursuant to the terms of the new law, the FDA could promulgate regulations that could, among other things, result in a ban on or restrict the use of menthol in cigarettes. The law will impose new restrictions on the manner in which cigarettes can be advertised and marketed, require larger and more severe health warnings on cigarette packaging, permit restriction of the level of tar and nicotine contained in or yielded by cigarettes and may alter the way cigarette products are developed and manufactured. We believe that the law will provide our larger competitors with a competitive advantage. In addition, the law established a Tobacco Products Scientific Advisory Committee (TPSAC) to, among other things, evaluate issues surrounding the use of menthol as a flavoring or ingredient in cigarettes. The TPSAC held its first meeting on March 30-31, 2010 and the TPSAC began the process of considering the issues surrounding the use of menthol in cigarettes. No formal resolutions were passed at this meeting. We expect the TPSAC will have further meetings on the issue in 2010. | ||
In August 2009, we, along with RJR Tobacco, other tobacco manufacturers and a tobacco retailer, filed a lawsuit in the U.S. District Court for the Western District of Kentucky against the FDA challenging the constitutionality of certain restrictions on speech included in the new law. These restrictions on speech include, among others, bans on the use of color and graphics in certain tobacco product advertising, limits on the right to make truthful statements regarding modified risk tobacco products, a prohibition on making certain statements about the FDAs regulation of tobacco products, restrictions on the placement of outdoor advertising, a ban on certain promotions offering gifts in consideration for the purchase of tobacco products, a ban on brand name sponsorship of events and the sale of brand name merchandise, and a ban on the distribution of product samples. The suit also challenges the laws requirement for extensive graphic warning labels on all packaging and advertising. The complaint seeks a judgment (i) declaring that such provisions of the new law violate the First and/or Fifth Amendments of the U.S. Constitution and (ii) enjoining the FDA from enforcing the unconstitutional provisions of the law. In January 2010, the district court issued an order (a) striking down the provisions of the new law that banned the use of color and graphics in certain tobacco product advertising and prohibited tobacco manufacturers from making certain statements about the FDAs regulation of tobacco products and (b) upholding the remaining challenged advertising provisions. In March 2010, both sides filed an appeal of the district courts order to the Court of Appeals for the Sixth Circuit. While we believe there is established legal precedent supporting our claims, we cannot predict the outcome of any such appeal. Nor can we make any assurances that our appeal will be successful. | |||
| The federal government and many state and local governments and agencies, as well as private businesses, have adopted legislation, regulations or policies which prohibit, restrict or discourage smoking, including legislation, regulations or policies prohibiting or restricting smoking in public buildings and facilities, stores, restaurants and bars, on airline flights and in the workplace. Other similar laws and regulations are currently under consideration and may be enacted by federal, state and local governments in the future. | ||
| Substantial federal, state and local excise taxes are reflected in the retail price of cigarettes. For the three months ended March 31, 2010, the federal excise tax was $1.0066 per pack and combined state and local excise taxes ranged from $0.07 to $4.25 per pack. For the three months ended March 31, 2010, there were no state excise tax increases implemented. The federal excise tax on cigarettes increased by $0.6166 per pack to $1.0066 per pack, effective April 1, 2009, to finance health insurance for children. It is likely that increases in excise and similar taxes have had an adverse impact on sales of cigarettes and that the most recent increase and future increases, the extent of which cannot be predicted, could result in further volume declines for the cigarette industry, including us, and an increased sales shift toward deep discount cigarettes rather than premium brands. In addition, we and other cigarette |
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manufacturers and importers are required to pay an assessment under a federal law designed to fund payments to tobacco quota holders and growers. |
The domestic market for cigarettes is highly competitive. Competition is primarily based on a
brands price, including the level of discounting and other promotional activities, positioning,
consumer loyalty, retail display, quality and taste. Our principal competitors are the two other
major U.S. cigarette manufacturers, Philip Morris and RJR Tobacco. We also compete with numerous
other smaller manufacturers and importers of cigarettes, including deep discount cigarette
manufacturers. We believe our ability to compete even more effectively has been restrained in some
marketing areas as a result of retail merchandising contracts offered by Philip Morris and RJR
Tobacco which limit the retail shelf space available to our brands. As a result, in some retail
locations we are limited in competitively supporting our promotional programs, which may constrain
sales.
The following table presents Lorillards selected industry and market share data for the three
months ended March 31, 2010 and 2009.
Selected Industry and Market Share Data (1)
Three Months Ended | ||||||||
March 31, | ||||||||
(Volume in billions) | 2010 | 2009 | ||||||
Lorillard total domestic unit volume (in billions) |
8.7 | 7.7 | ||||||
Industry total domestic unit volume |
72.0 | 73.8 | ||||||
Lorillards share of the domestic market |
12.1 | 10.5 | ||||||
Lorillards premium volume as a percentage
of its domestic volume |
87.8 | 90.3 | ||||||
Lorillards share of the premium market |
15.0 | 13.5 | ||||||
Newports share of the domestic market |
10.4 | 9.3 | ||||||
Newports share of the premium market |
14.7 | 13.2 | ||||||
Total menthol segment market share for the
industry |
29.4 | 27.9 | ||||||
Total discount segment market share for the
industry |
29.3 | 29.9 | ||||||
Newports share of the menthol market |
35.4 | 33.2 | ||||||
Newports share of Lorillards total volume(2) |
86.5 | 88.8 | ||||||
Newports share of Lorillards net sales(2) |
90.9 | 93.2 |
(1) | Source: Management Science Associates, Inc. (MSAI), an independent third-party database management organization that collects wholesale shipment data from various cigarette manufacturers. MSAI divides the cigarette market into two price segments, the premium price segment and the discount or reduced price segment. MSAIs information relating to unit sales volume and market share of certain of the smaller, primarily deep discount, cigarette manufacturers is based on estimates derived by MSAI. Management believes that volume and market share information for deep discount manufacturers may be understated and, correspondingly, market share information for the larger manufacturers, including Lorillard, may be overstated by MSAI. Lorillard has made certain adjustments to the data received from MSAI to reflect managements judgment as to which brands are included in the menthol segment. | |
(2) | Source: Lorillard shipment reports. |
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Results of Operations
Three Months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
(In millions) | ||||||||
Net sales (a) |
$ | 1,360 | $ | 917 | ||||
Cost of sales (a) (b) (c) |
882 | 534 | ||||||
Gross profit |
478 | 383 | ||||||
Selling, general and administrative |
96 | 89 | ||||||
Operating income |
382 | 294 | ||||||
Investment income |
1 | 1 | ||||||
Interest expense |
(10 | ) | | |||||
Income before income taxes |
373 | 295 | ||||||
Income taxes |
141 | 111 | ||||||
Net income |
$ | 232 | $ | 184 | ||||
(a) | Includes excise taxes of $437 and $150, respectively. | |
(b) | Includes $276 million and $247 million to accrue obligations under the State Settlement Agreements, respectively. | |
(c) | Includes $27 million and $20 million to accrue obligations under the Federal Assessment for Tobacco Growers, respectively. |
Three Months ended March 31, 2010 Compared to Three Months ended March 31, 2009
Net sales. Net sales increased by $443 million, or 48.3%, from $917 million for the three
months ended March 31, 2009 to $1.360 billion for the three months ended March 31, 2010. Net sales
increased $287 million due to the increase in federal excise taxes effective April 1, 2009, $128
million due to higher unit sales volume, $12 million due to higher average unit prices reflecting
price increases in February and March 2009 and February 2010 and $16 million of lower sales
incentives. Federal excise taxes are included in net sales and increased $30.83 per thousand
units, or $0.62 per pack of 20 units, to $50.33 per thousand cigarettes, or $1.01 per pack of 20
cigarettes, effective April 1, 2009.
Our total unit volume increased 12.1% and domestic unit volume increased 12.7% for the three
months ended March 31, 2010 compared to the corresponding period of 2009. Unit volume figures in
this section are provided on a gross basis. The increase in domestic wholesale shipments in the
first quarter of 2010 reflects the unusually low unit volume in 2009 resulting from tax-driven
trade purchasing patterns in anticipation of the increase in the federal excise tax on cigarettes
on April 1, 2009. In addition to this effect, increases in wholesale inventory levels during the
first quarter of 2010 contributed to this increase in unit volume compared to last year. Total
Newport unit volume increased 9.2% and domestic Newport unit volume increased 9.8% for the three
months ended March 31, 2010 compared to the corresponding period of 2009. Industry-wide domestic
unit volume decreased an estimated 2.4% for the three months ended March 31, 2010 compared to the
corresponding period of 2009. Industry shipments of premium brands comprised 70.7% of
industry-wide domestic unit volume during the three months ended March 31, 2010 compared to 70.1%
in the corresponding period of 2009.
Cost of sales. Cost of sales increased by $348 million, or 65.2%, from $534 million for the
three months ended March 31, 2009 to $882 million for the three months ended March 31, 2010. The
increase in cost of sales is primarily due to the increase in federal excise taxes ($287 million),
higher raw material costs, primarily tobacco and wrapping materials ($6 million), higher unit sales
volume ($12 million) and higher expenses related to the State Settlement Agreements ($29 million)
and the Federal Assessment for Tobacco Growers ($7 million) and the assessment of Food and Drug
Administration fees ($7 million). We recorded pre-tax charges for our obligations under the State
Settlement Agreements of $276 million and $247 million for the three months ended March 31 2010 and
2009, respectively, an increase of $29 million. The $29 million increase is due to higher unit
sales ($29 million), the impact of the inflation adjustment ($7 million), partially offset by other
adjustments ($7 million).
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Selling, general and administrative. Selling, general and administrative expenses increased
$7 million, or 7.9%, from $89 million for the three months ended March 31, 2009 to $96 million for
the three months ended March 31, 2010. The increase in the first quarter of 2010 is primarily due
to a $5 million increase in compensation expenses, a $1 million increase in health care costs and a
$1 million increase in legal expenses due to the continuing defense costs associated with the Engle
progeny cases.
Interest expense. Interest expense increased $10 million for the three months ended March 31,
2010, compared to the three months ended March 31, 2009, and reflects interest on the Senior Notes
issued in the second quarter of 2009, net of the effect of interest rate swap agreements.
Income taxes. Income taxes increased $30 million or 27.0% from $111 million for the three
months ended March 31, 2009 to $141 million in for the three months ended March 31, 2010. The
change reflects an increase in income before income taxes of $78 million in 2010, or 26.4% and an
increase of the effective tax rate from 37.7% in the three months ended March 31, 2009 to 37.8% in
the three months ended March 31, 2010. This increase in the effective rate is primarily due to the
$2 million impact of the repeal of future tax deductions for Medicare Part D subsidies for retiree
drug benefits pursuant to the health care reform legislation enacted during the first quarter of
2010 partially offset by a statutory increase in the manufacturers deduction.
Liquidity and Capital Resources
Our cash and cash equivalents of $1.659 billion at March 31, 2010 were invested in prime money
market funds.
Cash Flows
Cash flow from operating activities. The principal source of liquidity for our business and
operating needs is internally generated funds from our operations. We generated net cash flow from
operations of $647 million for the three months ended March 31, 2010 compared to $453 million for
the three months ended March 31, 2009. The increased cash flow in 2010 primarily reflects higher
net income and the timing of payments for income taxes and State Settlement Agreements.
Cash flow from investing activities. Our cash flow from investing activities used cash of $10
million for capital expenditures for the three months ended March 31, 2010 and 2009, respectively.
The expenditures were primarily used for the modernization of manufacturing equipment. Our capital
expenditures for the year ending December 31, 2010 are forecast to be between $55 million and
$65 million.
Cash flow from financing activities. Our cash flow from operations has exceeded our working
capital and capital expenditure requirements during the first three months of 2010. We paid cash
dividends to our shareholders of $155 million on March 12, 2009 and March 11, 2010, respectively.
On March 26, 2010, Lorillard Tobacco, the principal, wholly-owned operating subsidiary of the
Company, entered into a $185 million revolving credit facility (Revolver) that expires March 26,
2013 and is guaranteed by the Company. Proceeds from the Revolver may be used for general
corporate and working capital purposes. The interest rates on borrowings under the Revolver will
be based on prevailing interest rates and, in part, upon the credit rating applicable to the
Companys senior unsecured long-term debt.
The Revolver requires that the Company maintain a ratio of debt to net income plus income
taxes, interest expense, depreciation and amortization expense, any extraordinary losses, any
non-cash expenses or losses and any losses on sales of assets outside of the ordinary course of
business (EBITDA) of not more than 2.25 to 1 and a ratio of EBITDA to interest expense of not
less than 3.0 to 1. In addition, the Revolver contains customary affirmative and negative
covenants, including restrictions on liens and sale and leaseback transactions subject to a limited
exception. The Revolver contains customary events of default, including upon a change in control,
that could result in the acceleration of all amounts and cancellation of all commitments
outstanding, if any, under the Revolver.
There were no borrowings under the Revolver between March 26, 2010 and March 31, 2010.
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During the first quarter of 2010 the Company completed the $750 million share repurchase that
was announced on July 27, 2009 by repurchasing 1.1 million shares of the common stock at a cost of
$90 million and repurchased approximately 1.5 million shares of its common stock under a $250
million share repurchase program announced on February 25, 2010 at a cost of $114 million.
Liquidity
We believe that cash flow from operating activities will be sufficient for the foreseeable
future to enable us to meet our obligations under the State Settlement Agreements and to fund our
working capital, capital expenditure and debt service requirements. We cannot predict
our cash requirements related to any future settlements or judgments, including cash required to
post bond for any appeals, if necessary, and can make no assurance that we will be able to meet all
of those requirements.
State Settlement Agreements
The State Settlement Agreements require us and the other Original Participating Manufacturers
(Philip Morris Incorporated, Brown & Williamson Tobacco Corporation and R.J. Reynolds Tobacco
Company) to make aggregate annual payments of $10.4 billion in perpetuity, subject to adjustment
for several factors described below. In addition, the Original Participating Manufacturers are
required to pay plaintiffs attorneys fees, subject to an aggregate annual cap of $500 million.
These payment obligations are several and not joint obligations of each of the Original
Participating Manufacturers. Our obligations under the State Settlement Agreements will materially
adversely affect our cash flows and operating income in future years.
Both the aggregate payment obligations of the Original Participating Manufacturers, and our
payment obligations, individually, under the State Settlement Agreements are subject to adjustment
for several factors which include:
| inflation; | ||
| aggregate volume of Original Participating Manufacturers cigarette shipments; | ||
| other Original Participating Manufacturers and our market share; and | ||
| aggregate Original Participating Manufacturers operating income, allocated to such manufacturers that have operating income increases. |
The inflation adjustment increases payments on a compounded annual basis by the greater of
3.0% or the actual total percentage change in the consumer price index for the preceding year. The
inflation adjustment is measured starting with inflation for 1999. The volume adjustment increases
or decreases payments based on the increase or decrease in the total number of cigarettes shipped
in or to the 50 U.S. states, the District of Columbia and Puerto Rico by the Original Participating
Manufacturers during the preceding year compared to the 1997 base year shipments. If volume has
increased, the volume adjustment would increase the annual payment by the same percentage as the
number of cigarettes shipped exceeds the 1997 base number. If volume has decreased, the volume
adjustment would decrease the annual payment by 98.0% of the percentage reduction in volume. In
addition, downward adjustments to the annual payments for changes in volume may, subject to
specified conditions and exceptions, be reduced in the event of an increase in the Original
Participating Manufacturers aggregate operating income from domestic sales of cigarettes over base
year levels established in the State Settlement Agreements, adjusted for inflation. Any
adjustments resulting from increases in operating income would be allocated among those Original
Participating Manufacturers which have had increases.
In April 2010, we paid $829 million under the State Settlement Agreements, primarily based on
2009 volume. In addition, in April 2010, we deposited $92 million, in an interest-bearing escrow
account in accordance with procedures established in the MSA pending resolution of a claim by us
and the other Original Participating Manufacturers that they are entitled to reduce their MSA
payments based on a loss of market share to non-participating manufacturers. Most of the states
that are parties to the MSA are disputing the availability of the reduction and we believe that
this dispute will ultimately be resolved by judicial and arbitration proceedings. Our
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$92 million reduction is based upon the Original Participating Manufacturers collective loss of market share in
2007 and 2006. In April of 2009, 2008, 2007 and 2006, we had previously deposited $69 million, $72
million, $111 million and $109 million, respectively, in the same escrow account discussed above,
which was based on a loss of market share in 2006, 2005, 2004 and 2003 to non-participating
manufacturers. In February 2009, we directed the transfer of $72 million from this account to the
non-disputed account, related to the loss of market share in 2005, pursuant to an Agreement
Concerning Arbitration that we and the other Participating Manufacturers entered into with certain
MSA states. This amount was then paid to the MSA states. We and the other Original Participating
Manufacturers have the right to claim additional reductions of MSA payments in subsequent years
under provisions of the MSA. In addition to the payments made in the first four months of 2010, we
anticipate the additional amount payable in 2010 will be approximately $200 million to $225
million, primarily based on 2010 estimated volume.
Contractual Cash Payment Obligations
The following chart presents our contractual cash payment obligations as of March 31, 2010.
Less than | More than | |||||||||||||||||||
Total | 1 year | 1-3 years | 3-5 years | 5 years | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Senior notes |
$ | 750 | $ | | $ | | $ | | $ | 750 | ||||||||||
Interest payments related to notes |
562 | 61 | 183 | 122 | 196 | |||||||||||||||
Tobacco leaf purchase obligations |
144 | 144 | | | | |||||||||||||||
Machinery purchase obligations |
54 | 53 | 1 | | | |||||||||||||||
Operating lease obligations |
4 | 2 | 2 | | | |||||||||||||||
Total |
$ | 1,514 | $ | 260 | $ | 186 | $ | 122 | $ | 946 | ||||||||||
In addition to the obligations presented in the table above, as of March 31, 2010, we believe
that it is reasonably possible that payments of up to $4 million may be made to various tax
authorities in the next twelve months related to gross unrecognized tax benefits. We cannot make a
reasonably reliable estimate of the amount of liabilities for unrecognized tax benefits that may
result in cash settlements for periods beyond twelve months.
As previously discussed, we have entered into the State Settlement Agreements, which impose a
stream of future payment obligations on us and the other major U.S. cigarette manufacturers. Our
portion of ongoing adjusted settlement payments, including fees to settling plaintiffs attorneys,
is based on a number of factors which are described above. Our cash payment under the State
Settlement Agreements in 2009 amounted to $1.118 billion and we estimate our cash payments in 2010
under the State Settlement Agreements will be between $1.100 billion and $1.150 billion, primarily
based on 2009 estimated industry volume. Payment obligations are not incurred until the related
sales occur and therefore are not reflected in the above table.
Off-Balance Sheet Arrangements
None.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Market Risk
We invest in financial instruments that involve market risk. Our measure of market risk
exposure represents an estimate of the change in fair value of our financial instruments. Market
risk exposure is presented below for each class of financial instrument we held at March 31, 2010,
assuming immediate adverse market movements of the magnitude described below. We believe that the
rate of adverse market movement represents a measure of exposure to loss under hypothetically
assumed adverse conditions. The estimated market risk exposure represents the hypothetical loss to
future earnings and does not represent the maximum possible loss nor any expected actual loss, even
under adverse conditions, because actual adverse fluctuations would likely differ. In addition,
since our investment portfolio is subject to change based on its portfolio management strategy as
well as in response to changes in the market, these estimates are not necessarily indicative of the
actual results which may occur.
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The market risk exposure represents the potential loss in carrying value and pretax impact to future earnings
caused by the hypothetical change in price.
Exposure to market risk is managed and monitored by senior management. Senior management
approves our overall investment strategy and has the responsibility to ensure that the investment
positions are consistent with that strategy with an acceptable level of risk.
Interest rate risk. Our investments, which are included in cash and cash equivalents, consist
of money market funds with major financial institutions. Those investments are exposed to
fluctuations in interest rates. A sensitivity analysis, based on a hypothetical 1% increase or
decrease in interest rates on our average 2010 investments, would cause an increase or decrease in
pretax income of approximately $4 million for the three months ended March 31, 2010.
Our debt is denominated in US Dollars and has been issued at a fixed rate. In September 2009,
we entered into interest rate swap agreements for a total notional amount of $750 million to hedge
changes in fair value of the Notes due to changes in the designated benchmark interest rate.
Changes in the fair value of the derivative are recorded in earnings along with offsetting
adjustments to the carrying amount of the hedged debt. A sensitivity analysis, based on a
hypothetical 1% change in LIBOR, would cause an increase or decrease in pretax income by
approximately $2 million for the three months ended March 31, 2010.
Liquidity risk. We may be forced to cash settle all or a portion of our derivative contracts
before the expiration date if our debt rating is downgraded below Ba2 by Moodys or BB by S&P.
This could have a negative impact on our cash position. Early cash settlement would result in the
timing of our hedge settlement not being matched to the cash settlement of the debt. See Note 9
for additional information on derivatives.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated
the effectiveness of our disclosure controls and procedures pursuant to Rule 13a15 under the
Securities Exchange Act of 1934, as amended, (the Exchange Act) as of the end of the period
covered by this Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of the period covered by this Form 10-Q, our
disclosure controls and procedures (as defined in Rule 13a15(e) under the Exchange Act) are
effective, in all material respects, to provide reasonable assurance that information we are
required to disclose in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in SEC rules and forms, and
that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rule 13a15(f) under
the Exchange Act) occurred during our most recent fiscal quarter that has materially affected, or
is likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Information about legal proceedings is set forth in Note 14, Legal Proceedings and
Commitments Legal Proceedings, in the Notes to Consolidated Condensed Financial Statements
included in Item 1. Financial Statements of this Form 10-Q. Such information is incorporated by
reference as if fully set forth herein.
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Item 1A. Risk Factors.
With the exception of the following, there have been no other material changes in our risk
factors from those disclosed in Part I, Item 1A of our Form 10-K:
As of May 3, 2010, Lorillard Tobacco is a defendant in approximately 10,250 tobacco-related
lawsuits, including approximately 695 cases in which Lorillard, Inc. is a co-defendant. These
cases, which are extremely costly to defend, could result in substantial judgments against
Lorillard Tobacco and/or Lorillard, Inc.
Numerous legal actions, proceedings and claims arising out of the sale, distribution,
manufacture, development, advertising, marketing and claimed health effects of cigarettes are
pending against Lorillard Tobacco and Lorillard, Inc., and it is likely that similar claims will
continue to be filed for the foreseeable future. In addition, several cases have been filed against
Lorillard Tobacco and other tobacco companies challenging certain provisions of the MSA among major
tobacco manufacturers and 46 states and various other governments and jurisdictions, and state
statutes promulgated to carry out and enforce the MSA.
Punitive damages, often in amounts ranging into the billions of dollars, are specifically
pleaded in a number of cases in addition to compensatory and other damages. It is possible that the
outcome of these cases, individually or in the aggregate, could result in bankruptcy. It is also
possible that Lorillard Tobacco and Lorillard, Inc. may be unable to post a surety bond in an
amount sufficient to stay execution of a judgment in jurisdictions that require such bond pending
an appeal on the merits of the case. Even if Lorillard Tobacco and Lorillard, Inc. are successful
in defending some or all of these actions, these types of cases are very expensive to defend. A
material increase in the number of pending claims could significantly increase defense costs and
have an adverse effect on our results of operations and financial condition. Further, adverse
decisions in litigations against other tobacco companies could have an adverse impact on the
industry, including us.
A judgment has been rendered against Lorillard Tobacco in the Scott litigation.
In July 2008, the District Court of Orleans Parish, Louisiana, entered an amended final
judgment in favor of the plaintiffs in Scott v. The American Tobacco Company, et al. (District
Court, Orleans Parish, Louisiana, filed May 24, 1996), a class action on behalf of certain
cigarette smokers resident in the State of Louisiana. In April 2010, the Louisiana Court of Appeal,
Fourth Circuit, issued a decision that modified the trial courts 2008 amended final judgment. The
Court of Appeals decision reduced the judgment amount from approximately $264 million to
approximately $242 million to fund a ten year, court-supervised smoking cessation program. The
April 2010 decision also changed the date on which the award of post-judgment interest will accrue
from June 2004 to July 2008. Interest awarded by the amended final judgment will continue to
accrue from July 2008 until the judgment either is paid or is reversed on appeal. As of May 3,
2010, judicial interest totaled approximately $25.3 million. Lorillard Tobaccos share of any
judgment, including an award of post-judgment interest, has not been determined. In the fourth
quarter of 2007, we recorded a pretax provision of approximately $66 million for this matter.
Lorillard, Inc., which was a party to the case in the past, is no longer a defendant. As of May 3,
2010, the deadline for the parties to seek further review of the Court of Appeals ruling had not
expired. It is not possible to predict the final outcome of this matter.
The Florida Supreme Courts ruling in Engle has resulted in additional litigation against cigarette
manufacturers, including us.
The case of Engle v. R.J. Reynolds Tobacco Co., et al. (Circuit Court, Dade County, Florida,
filed May 5, 1994) was certified as a class action on behalf of Florida residents, and survivors of
Florida residents, who were injured or died from medical conditions allegedly caused by addiction
to smoking. The case was tried between 1998 and 2000 in a multi-phase trial that resulted in
verdicts in favor of the class. During 2006, the Florida Supreme Court issued a ruling that, among
other things, determined that the case could not proceed further as a class action. In February
2008, the trial court entered an order on remand from the Florida Supreme Court that formally
decertified the class.
The 2006 ruling by the Florida Supreme Court in Engle also permitted members of the Engle
class to file individual claims, including claims for punitive damages. The Florida Supreme Court
held that these individual plaintiffs are entitled to rely on a number of the jurys findings in
favor of the plaintiffs in the first phase of the Engle trial. These findings included that smoking
cigarettes causes a number of diseases; that cigarettes are addictive or
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dependence-producing; and that the defendants, including Lorillard Tobacco and Lorillard,
Inc., were negligent, breached express and implied warranties, placed cigarettes on the market that
were defective and unreasonably dangerous, and concealed or conspired to conceal the risks of
smoking. Lorillard Tobacco is a defendant in approximately 7,575 cases pending in various state and
federal courts in Florida that were filed by members of the Engle class (the Engle Progeny
Cases), including approximately 700 cases in which Lorillard, Inc. is a co-defendant.
As of May 3, 2010, Lorillard Tobacco was a defendant in several Engle Progeny Cases that have
been placed on courts 2010 trial calendars or in which specific 2010 trial dates have been set.
Lorillard, Inc. is a co-defendant in some of these cases. Trial schedules are subject to change and
it is not possible to predict how many of the Engle Progeny Cases pending against Lorillard Tobacco
or Lorillard, Inc. will be tried during 2010. It also is not possible to predict whether some
courts will implement procedures that consolidate multiple Engle Progeny Cases for trial.
Verdicts have been returned in 18 Engle Progeny cases since the Florida Supreme Court
issued its 2006 ruling. Neither Lorillard Tobacco nor Lorillard, Inc. was a defendant in these 18
trials. In nine of the 18 trials, juries awarded actual damages and punitive damages. The punitive
damages awards were $2 million, $5 million, $5 million, $12.5 million, $18 million, $20 million,
$25 million, $80 million and $244 million. In six of the trials, juries awarded only actual
damages. In the three other trials, juries found in favor of the defendants that the plaintiffs
were not former Engle class members.
Concerns that mentholated cigarettes may pose greater health risks could adversely affect our
business.
Some plaintiffs and constituencies, including public health agencies, have claimed or
expressed concerns that mentholated cigarettes may pose greater health risks than non-mentholated
cigarettes, including concerns that mentholated cigarettes may make it easier to start smoking and
harder to quit and may seek restrictions or a ban on the production and sale of mentholated
cigarettes. Any ban or material limitation on the use of menthol in cigarettes would materially
adversely affect our results of operations, cash flow and financial condition.
In June 2009, the U.S. Congress passed, and the President signed into law, the Family Smoking
Prevention and Tobacco Control Act (the Act) that includes a provision establishing a Tobacco
Products Scientific Advisory Committee (TPSAC) to, among other things, evaluate issues
surrounding the use of menthol as a flavoring or ingredient in cigarettes. In addition, the
legislation permits the FDA to ban menthol upon a finding that such prohibition would be
appropriate for the public health. The TPSAC held its first meeting on March 30-31, 2010 and began
the process of considering the issues surrounding the use of menthol in cigarettes. No formal
resolutions were passed at this meeting. We expect the TPSAC will have further meetings on the
issue in 2010.
The provisions of the Act relating to menthol were the latest development concerning the use
of menthol as a flavor in cigarettes. In 2002, the U.S. Department of Health and Human Services
National Institutes of Health, Center for Disease Control and Prevention and National Cancer
Institute and other public health agencies supported the First Conference on Menthol Cigarettes
(the First Menthol Conference). The executive summary of the conference proceedings outlined why
it is important to study menthol cigarettes and included statements that menthols sensation of
coolness might result in deeper inhalation and could contribute to increased uptake of inhaled
tobacco constituents, including nicotine and cancer-causing agents. In addition, the Center for
Disease Control and Prevention has published a pamphlet titled Pathways to Freedom, Winning the
Fight Against Tobacco that, under the heading The Dangers of Menthol states that menthol can
make it easier for a smoker to inhale deeply, which may allow more chemicals to enter the lungs.
Menthol in cigarettes does not make smoking safer. In fact, menthol may even make things worse.
In June 2008, seven former U.S. health secretaries criticized a bill then under consideration
in the House of Representatives to grant the FDA the authority to regulate tobacco products and ban
the use of characterizing flavors other than menthol in cigarettes. The former health secretaries
argued that the menthol exemption discriminates against African-American smokers who often prefer
menthol cigarettes and have higher rates of some smoking-related diseases. In the course of
consideration of the bill by a committee of the House of Representatives an amendment was offered
and rejected which would have banned the use of menthol as an ingredient in cigarettes.
In October 2009, several months after the effective date of the Act and in anticipation of the
TPSAC proceedings on menthol, the Second Conference on Menthol Cigarettes (Second Menthol
Conference) was held in Washington, D.C. during which tobacco control advocates met to discuss the
state of science regarding menthol
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cigarettes. In December 2009, the chairs of the Second Menthol Conference provided a Report
to the Food and Drug Administration (FDA) Prepared as Public Comment which summarized the
proceedings of the Second Menthol Conference. Although no formal resolutions were passed at the
Second Menthol Conference, the report contained findings for the banning of menthol which
included, among other things, that menthol may be a starter product for youth, presented a greater
addiction potential and was a social justice issue.
Since we are the leading manufacturer of mentholated cigarettes in the United States, we could
face increased exposure to tobacco-related litigation as a result of such allegations. Even if such
claims are unsubstantiated, increased concerns about the health impact of mentholated cigarettes
could materially adversely affect our sales, including sales of Newport.
Changes in laws, regulations and other requirements could adversely affect our business, results of
operations or financial condition.
In addition to the regulation of our business by the FDA, our business, results of operations
or financial condition could be adversely affected by new or future legal requirements imposed by
legislative or regulatory initiatives, including but not limited to those relating to health care
reform, climate change and environmental matters. For example, the health care reform legislation,
which was signed into law in March 2010, resulted in the repeal of $2 million of future tax
deductions for Medicare Part D subsidies for our retiree drug benefits and could impact our
accounting for retiree medical benefits, employer-sponsored medical plans and related matters in
future periods. However, the extent of that impact, if any, cannot be determined until regulations
are promulgated and additional interpretations of the health care law are available. New
legislation or regulations may result in increased costs directly for our compliance or indirectly
to the extent such requirements increase the prices of goods and services because of increased
costs or reduced availability. We cannot predict whether such legislative or regulatory initiatives
will result in significant changes to existing laws and regulations and/or whether any changes in
such laws or regulations will have a material adverse affect on our business, results of operations
or financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In the first quarter of 2010, the Company repurchased the following number of shares of its
common stock:
Approximate | ||||||||||||||||
Total Number of | Dollar Value of | |||||||||||||||
Shares Purchased | Shares that | |||||||||||||||
Total | Average | as Part of | May Yet Be | |||||||||||||
Number | Price | Publicly | Purchased | |||||||||||||
of Shares | Paid per | Announced Plans | Under the Plans | |||||||||||||
(In millions, except for per share amounts) | Purchased | Share | or Programs | or Programs | ||||||||||||
January 1, 2010January 31, 2010 |
1.1 | $ | 78.36 | 1.1 | $ | | ||||||||||
February 1, 2010February 28, 2010 |
| | | 250 | ||||||||||||
March 1, 2010March 31, 2010 |
1.5 | 75.60 | 1.5 | 136 | ||||||||||||
Total |
2.6 | $ | 76.79 | 2.6 | ||||||||||||
The shares repurchased were acquired under share repurchase programs authorized by the
Board of Directors on July 27, 2009 and February 25, 2010 for a maximum of $750 million and $250
million, respectively. All repurchases were made in open market transactions. The Company records
the repurchase of shares of common stock at cost based on the transaction date of the repurchase.
The $750 million repurchase program was completed on January 19, 2010. As of March 31, 2010, the
maximum dollar value of shares that may yet be purchased under the February 25, 2010 repurchase
program was $136 million.
Item 3. Defaults Upon Senior Securities
None.
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Item 4. Submissions of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit | ||
Number | Description | |
3.1
|
Amended and Restated Certificate of Incorporation of Lorillard, Inc., incorporated herein by reference to Exhibit 3.1 to our Current Report on Form 8-K (File No. 1-34097) filed on June 12, 2008 | |
3.2
|
Amended and Restated Bylaws of Lorillard, Inc., as of February 25, 2010, incorporated herein by reference to Exhibit 3.2 to our Current Report on Form 8-K filed (File No. 1-34097) on March 2, 2010 | |
3.3
|
Certificate of Amendment of Certificate of Incorporation of Lorillard Tobacco Company and Certificate of Incorporation of Lorillard Tobacco Company, incorporated herein by reference to Exhibit 3.3 to Lorillard, Inc.s Registration Statement on Form S-3 (File No. 333-159902) filed on June 11, 2009 | |
3.4
|
Bylaws of Lorillard Tobacco Company, incorporated herein by reference to Exhibit 3.4 to Lorillard, Inc.s Registration Statement on Form S-3 (File No. 333-159902) filed on June 11, 2009 | |
4.1
|
Specimen certificate for shares of common stock of Lorillard, Inc., incorporated herein by reference to Exhibit 4.1 to our Amended Registration Statement on Form S-4 (File No. 333-149051) filed on May 9, 2008 | |
4.2
|
Indenture, dated June 23, 2009, among Lorillard Tobacco Company, Lorillard, Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee, incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K (File No. 1-34097) filed on June 23, 2009 | |
4.3
|
First Supplemental Indenture, dated June 23, 2009, among Lorillard Tobacco Company, Lorillard, Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee, incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K (File No. 1-34097) filed on June 23, 2009 | |
4.5
|
Form of 8.125% Senior Note due 2019 of Lorillard Tobacco Company, incorporated by reference to Exhibit 4.3 to our Current Report on Form 8-K (File No. 1-34097) filed on June 23, 2009 | |
4.6
|
Form of Guarantee Agreement of Lorillard, Inc. for the 8.125% Senior Notes due 2019 of Lorillard Tobacco Company, incorporated by reference to Exhibit 4.4 to Lorillard, Inc.s Current Report on Form 8-K filed on June 23, 2009 | |
10.1
|
Separation Agreement between Loews Corporation and Lorillard, Inc., Lorillard Tobacco Company, Lorillard Licensing Company, LLC, One Park Media Services, Inc. and Plisa, S.A., incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q (File No. 1-34097) filed on August 7, 2008 | |
10.2
|
Amended and Restated Employment Agreement between Lorillard, Inc. and Martin L. Orlowsky, dated December 19, 2008* | |
10.3
|
Comprehensive Settlement Agreement and Release with the State of Florida to settle and resolve with finality all present and future economic claims by the State and its subdivisions relating to the use of or exposure to tobacco products, incorporated herein by reference to Exhibit 10 to Loewss Report on Form 8-K (File No. 1-6541) filed September 5, 1997 |
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Exhibit | ||
Number | Description | |
10.4
|
Comprehensive Settlement Agreement and Release with the State of Texas to settle and resolve with finality all present and future economic claims by the State and its subdivisions relating to the use of or exposure to tobacco products, incorporated herein by reference to Exhibit 10 to Loewss Report on Form 8-K (File No. 1-6541) filed February 3, 1998 | |
10.5
|
State of Minnesota Settlement Agreement and Stipulation for Entry of Consent Judgment to settle and resolve with finality all claims of the State of Minnesota relating to the subject matter of this action which have been or could have been asserted by the State, incorporated herein by reference to Exhibit 10.1 to Loewss Report on Form 10-Q for the quarter ended March 31, 1998 (File No. 1-6541) filed May 15, 1998 | |
10.6
|
State of Minnesota Consent Judgment relating to the settlement of tobacco litigation, incorporated herein by reference to Exhibit 10.2 to Loewss Report on Form 10-Q for the quarter ended March 31, 1998 (File No. 1-6541) filed May 15, 1998 | |
10.7
|
State of Minnesota Settlement Agreement and Release relating to the settlement of tobacco litigation, incorporated herein by reference to Exhibit 10.3 to Loewss Report on Form 10-Q for the quarter ended March 31, 1998 (File No. 1-6541) filed May 15, 1998 | |
10.8
|
State of Minnesota State Escrow Agreement relating to the settlement of tobacco litigation, incorporated herein by reference to Exhibit 10.6 to Loewss Report on Form 10-Q for the quarter ended March 31, 1998 (File No. 1-6541) filed May 15, 1998 | |
10.9
|
Stipulation of Amendment to Settlement Agreement and For Entry of Agreed Order, dated July 2, 1998, regarding the settlement of the State of Mississippi health care cost recovery action, incorporated herein by reference to Exhibit 10.1 to Loewss Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 1-6541) filed August 14, 2008 | |
10.10
|
Mississippi Fee Payment Agreement, dated July 2, 1998, regarding the payment of attorneys fees, incorporated herein by reference to Exhibit 10.2 to Loewss Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 1-6541) filed August 14, 2008 | |
10.11
|
Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree, dated July 24, 1998, regarding the settlement of the Texas health care cost recovery action, incorporated herein by reference to Exhibit 10.4 to Loewss Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 1-6541) filed on August 14, 2008 | |
10.12
|
Texas Fee Payment Agreement, dated July 24, 1998, regarding the payment of attorneys fees, incorporated herein by reference to Exhibit 10.5 to Loewss Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 1-6541) filed on August 14, 2008 | |
10.13
|
Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree, dated September 11, 1998, regarding the settlement of the Florida health care cost recovery action, incorporated herein by reference to Exhibit 10.1 to Loewss Report on Form 10-Q for the quarter ended September 30, 1998 (File No. 1-6541) filed November 17, 2008 | |
10.14
|
Florida Fee Payment Agreement, dated September 11, 1998, regarding the payment of attorneys fees, incorporated herein by reference to Exhibit 10.2 to Loewss Report on Form 10-Q for the quarter ended September 30, 1998 (File No. 1-6541) filed November 17, 2008 | |
10.15
|
Master Settlement Agreement with 46 states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa and the Northern Marianas to settle the asserted and unasserted health care cost recovery and certain other claims of those states, incorporated herein by reference to Exhibit 10 to Loewss Current Report on Form 8-K (File No. 1-6541) filed November 25, 1998 | |
10.16
|
Form of Assignment and Assumption of Services Agreement, dated as of April 1, 2008, by and between R.J. Reynolds Tobacco Company and R.J. Reynolds Global Products, Inc., with a joinder by Lorillard Tobacco Company, incorporated herein by reference to Exhibit 10.17 to our Amended Registration Statement on Form S-4 (File No. 333-149051) filed on March 26, 2008 | |
10.17
|
Lorillard, Inc. 2008 Incentive Compensation Plan, incorporated herein by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 filed on August 7, 2008 |
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Exhibit | ||
Number | Description | |
10.18
|
Form of Lorillard, Inc. indemnification agreement for directors and executive officers, incorporated herein by reference to Exhibit 10.19 to our Amended Registration Statement on Form S-4 (File No. 333-149051) filed on May 9, 2008 | |
10.19
|
Form of Severance Agreement for named executive officers, incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on July 10, 2008 | |
10.20
|
Amendment to Supply Agreement for Reconstituted Tobacco, dated as of October 30, 2008, by and between R.J. Reynolds Tobacco Company and Lorillard Tobacco Company, incorporated herein by reference to Exhibit 10.6 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 filed on November 4, 2008 # | |
10.21
|
Form of Stock Appreciation Rights Award Certificate, incorporated herein by reference to Exhibit 10.7 to our Quarterly Report on Form 10-Q filed on November 4, 2008 | |
10.22
|
Form of Stock Option Award Certificate* | |
10.23
|
Credit Agreement, dated as of March 26, 2010, among the Company, as borrower, Lorillard, as parent guarantor, the lenders referred to therein, and JPMorgan Chase Bank, N.A., as Administrative Agent, incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on March 26, 2010 | |
11.1
|
Statement regarding computation of earnings per share. (See Note 10 to the consolidated financial statements.)* | |
31.1
|
Certification by the Chief Executive Officer of Lorillard, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a)* | |
31.2
|
Certification by the Chief Financial Officer of Lorillard, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a)* | |
32.1
|
Certification by the Chief Executive Officer and Chief Financial Officer of Lorillard, Inc. pursuant to 18 U.S.C. Section 1350 (as adopted by Section 906 of the Sarbanes-Oxley Act of 2002)* | |
101.INS
|
XBRL Instance Document** | |
101.SCH
|
XBRL Taxonomy Extension Schema Document** | |
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document** | |
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document** | |
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document** | |
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document** |
* | Filed herewith. | |
** | Pursuant to applicable securities laws and regulations, the Company is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Company has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fails to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability. | |
# | Confidential treatment has been granted for certain portions of this exhibit pursuant to an order under the Exchange Act of 1934, as amended, which portions have been omitted and filed separately with the Securities and Exchange Commission. | |
| Management or compensatory plan or arrangement required to be filed pursuant to Item 601(b)(10) of Regulation S-K. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 6, 2010
LORILLARD, INC. |
||||
By: | /s/ Martin L. Orlowsky | |||
Name: | Martin L. Orlowsky | |||
Title: | Chairman, President and Chief Executive Officer | |||
By: | /s/ David H. Taylor | |||
Name: | David H. Taylor | |||
Title: | Executive Vice President, Finance and
Planning and Chief Financial Officer |
|||