e10vq
UNITED STATES
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, 2011
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)
(336) 335-7000
(Registrants telephone number, including area code)
NOT APPLICABLE
(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 27, 2011 |
|
|
|
Common stock, $0.01 par value
|
|
143,704,951 shares |
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) |
|
2011 |
|
|
2010 |
|
|
|
(Unaudited) |
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,338 |
|
|
$ |
2,063 |
|
Accounts receivable, less allowances of $3 and $3 |
|
|
12 |
|
|
|
9 |
|
Other receivables |
|
|
63 |
|
|
|
68 |
|
Inventories |
|
|
308 |
|
|
|
277 |
|
Deferred income taxes |
|
|
505 |
|
|
|
503 |
|
Other current assets |
|
|
13 |
|
|
|
15 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
3,239 |
|
|
|
2,935 |
|
Plant and equipment, net |
|
|
240 |
|
|
|
243 |
|
Prepaid pension assets |
|
|
68 |
|
|
|
66 |
|
Deferred income taxes |
|
|
7 |
|
|
|
6 |
|
Other assets |
|
|
36 |
|
|
|
46 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,590 |
|
|
$ |
3,296 |
|
|
|
|
|
|
|
|
Liabilities and Shareholders Deficit: |
|
|
|
|
|
|
|
|
Accounts and drafts payable |
|
$ |
19 |
|
|
$ |
27 |
|
Accrued liabilities |
|
|
418 |
|
|
|
333 |
|
Settlement costs |
|
|
1,381 |
|
|
|
1,060 |
|
Income taxes |
|
|
131 |
|
|
|
6 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,949 |
|
|
|
1,426 |
|
Long-term debt |
|
|
1,759 |
|
|
|
1,769 |
|
Postretirement pension, medical and life insurance benefits |
|
|
284 |
|
|
|
284 |
|
Other liabilities |
|
|
47 |
|
|
|
42 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
4,039 |
|
|
|
3,521 |
|
|
|
|
|
|
|
|
Commitments and Contingent Liabilities |
|
|
|
|
|
|
|
|
Shareholders Deficit: |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, authorized 10 million shares |
|
|
|
|
|
|
|
|
Common stock: |
|
|
|
|
|
|
|
|
Authorized600 million shares; par value $0.01 per share |
|
|
|
|
|
|
|
|
Issued175 million and 174 million shares |
|
|
|
|
|
|
|
|
Outstanding144 million and 147 million shares |
|
|
2 |
|
|
|
2 |
|
Additional paid-in capital |
|
|
246 |
|
|
|
242 |
|
Retained earnings |
|
|
1,726 |
|
|
|
1,666 |
|
Accumulated other comprehensive loss |
|
|
(108 |
) |
|
|
(109 |
) |
Treasury stock at cost, 31 million and 27 million shares |
|
|
(2,315 |
) |
|
|
(2,026 |
) |
|
|
|
|
|
|
|
Total shareholders deficit |
|
|
(449 |
) |
|
|
(225 |
) |
|
|
|
|
|
|
|
Total liabilities and shareholders deficit |
|
$ |
3,590 |
|
|
$ |
3,296 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Condensed Financial Statements
LORILLARD, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(In millions, except per share data) |
|
2011 |
|
|
2010 |
|
Net sales (including excise taxes of $479 and $437, respectively) |
|
$ |
1,535 |
|
|
$ |
1,360 |
|
Cost of sales |
|
|
992 |
|
|
|
882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
543 |
|
|
|
478 |
|
Selling, general and administrative |
|
|
122 |
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
421 |
|
|
|
382 |
|
Investment income |
|
|
1 |
|
|
|
1 |
|
Interest expense |
|
|
(28 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
394 |
|
|
|
373 |
|
Income taxes |
|
|
146 |
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
248 |
|
|
$ |
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.71 |
|
|
$ |
1.50 |
|
Diluted |
|
$ |
1.71 |
|
|
$ |
1.50 |
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
144.80 |
|
|
|
154.55 |
|
Diluted |
|
|
144.94 |
|
|
|
154.72 |
|
See Notes to Consolidated Condensed Financial Statements
-2-
LORILLARD, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Total |
|
|
|
Compre- |
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Sharehold- |
|
|
|
hensive |
|
|
Common |
|
|
Paid-in |
|
|
Retained |
|
|
Compre- |
|
|
Treasury |
|
|
ers Equity |
|
|
|
Income |
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
hensive Loss |
|
|
Shares |
|
|
(Deficit) |
|
|
|
(In millions) |
|
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 ($1.00 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(155 |
) |
|
|
|
|
|
|
|
|
|
|
(155 |
) |
Shares repurchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(204 |
) |
|
|
(204 |
) |
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2010 |
|
|
|
|
|
$ |
2 |
|
|
$ |
233 |
|
|
$ |
1,359 |
|
|
$ |
(117 |
) |
|
$ |
(1,514 |
) |
|
$ |
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2011 |
|
|
|
|
|
$ |
2 |
|
|
$ |
242 |
|
|
$ |
1,666 |
|
|
$ |
(109 |
) |
|
$ |
(2,026 |
) |
|
$ |
(225 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
248 |
|
|
|
|
|
|
|
|
|
|
|
248 |
|
|
|
|
|
|
|
|
|
|
|
248 |
|
Other comprehensive gains,
pension liability, net of tax
expense of $1 |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid ($1.30 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(188 |
) |
|
|
|
|
|
|
|
|
|
|
(188 |
) |
Shares repurchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(289 |
) |
|
|
(289 |
) |
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2011 |
|
|
|
|
|
$ |
2 |
|
|
$ |
246 |
|
|
$ |
1,726 |
|
|
$ |
(108 |
) |
|
$ |
(2,315 |
) |
|
$ |
(449 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Condensed Financial Statements
-3-
LORILLARD, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(In millions) |
|
2011 |
|
|
2010 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
248 |
|
|
$ |
232 |
|
Adjustments to reconcile net cash provided by/(used in) operating activities : |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
10 |
|
|
|
10 |
|
Pension, health and life insurance contributions |
|
|
(8 |
) |
|
|
(12 |
) |
Pension, health and life insurance benefits expense |
|
|
8 |
|
|
|
8 |
|
Deferred income taxes |
|
|
(4 |
) |
|
|
1 |
|
Share-based compensation |
|
|
4 |
|
|
|
2 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts and other receivables |
|
|
(4 |
) |
|
|
(7 |
) |
Inventories |
|
|
(31 |
) |
|
|
(40 |
) |
Accounts payable and accrued liabilities |
|
|
77 |
|
|
|
51 |
|
Settlement costs |
|
|
321 |
|
|
|
276 |
|
Income taxes |
|
|
136 |
|
|
|
124 |
|
Other current assets |
|
|
2 |
|
|
|
|
|
Other |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
759 |
|
|
|
647 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Additions to plant and equipment |
|
|
(7 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(7 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Shares repurchased |
|
|
(289 |
) |
|
|
(204 |
) |
Dividends paid |
|
|
(188 |
) |
|
|
(155 |
) |
Debt issuance costs |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(477 |
) |
|
|
(362 |
) |
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
275 |
|
|
|
275 |
|
Cash and cash equivalents, beginning of year |
|
|
2,063 |
|
|
|
1,384 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
2,338 |
|
|
$ |
1,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
13 |
|
|
$ |
14 |
|
See Notes to Consolidated Condensed Financial Statements
-4-
LORILLARD, INC. AND SUBSIDIARIES
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 or Issuer).
Basis of Presentation. The accompanying unaudited consolidated condensed financial
statements reflect all adjustments necessary to present fairly the financial position as of March
31, 2011 and December 31, 2010 and the consolidated income, shareholders deficit and cash flows
for the three months ended March 31, 2011 and 2010.
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, 2010, filed with the
SEC on February 18, 2011.
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. ASC Subtopic 715-20 was effective
for fiscal years ending after December 15, 2009.
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 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,
-5-
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 interim financial statements beginning with the second quarter
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 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 was 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
was 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, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In millions) |
|
Leaf tobacco |
|
$ |
244 |
|
|
$ |
225 |
|
Manufactured stock |
|
|
60 |
|
|
|
48 |
|
Material and supplies |
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
$ |
308 |
|
|
$ |
277 |
|
|
|
|
|
|
|
|
If the average cost method of accounting was used, inventories would be greater by
approximately $213 and $206 million at March 31, 2011 and December 31, 2010, respectively.
-6-
3. Plant and Equipment, Net
Plant and equipment is stated at cost and consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In millions) |
|
Land |
|
$ |
3 |
|
|
$ |
3 |
|
Buildings |
|
|
89 |
|
|
|
89 |
|
Equipment |
|
|
565 |
|
|
|
573 |
|
|
|
|
|
|
|
|
Total |
|
|
657 |
|
|
|
665 |
|
Accumulated depreciation |
|
|
(417 |
) |
|
|
(422 |
) |
|
|
|
|
|
|
|
Plant and equipment, net |
|
$ |
240 |
|
|
$ |
243 |
|
|
|
|
|
|
|
|
4. Other Assets
Other assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In millions) |
|
Debt issuance costs |
|
$ |
16 |
|
|
$ |
17 |
|
Interest rate swap |
|
|
9 |
|
|
|
19 |
|
Other prepaid assets |
|
|
11 |
|
|
|
10 |
|
|
|
|
|
|
|
|
Total |
|
$ |
36 |
|
|
$ |
46 |
|
|
|
|
|
|
|
|
5. Accrued Liabilities
Accrued liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In millions) |
|
Legal fees |
|
$ |
36 |
|
|
$ |
30 |
|
Salaries and other compensation |
|
|
24 |
|
|
|
18 |
|
Medical and other employee benefit plans |
|
|
29 |
|
|
|
31 |
|
Consumer rebates |
|
|
45 |
|
|
|
59 |
|
Sales promotion |
|
|
20 |
|
|
|
20 |
|
Excise and other taxes |
|
|
90 |
|
|
|
52 |
|
Litigation accrual |
|
|
68 |
|
|
|
68 |
|
Accrued bond interest |
|
|
48 |
|
|
|
14 |
|
Other accrued liabilities |
|
|
58 |
|
|
|
41 |
|
|
|
|
|
|
|
|
Total |
|
$ |
418 |
|
|
$ |
333 |
|
|
|
|
|
|
|
|
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. |
-7-
Lorillard is responsible for the valuation process and as part of this process may use data
from outside sources in estimating 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, 2011, were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
(In millions) |
|
Cash and Cash Equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime money market funds |
|
$ |
2,338 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
$ |
2,338 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Asset: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps fixed to floating rate |
|
$ |
|
|
|
$ |
9 |
|
|
$ |
|
|
|
$ |
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative asset |
|
$ |
|
|
|
$ |
9 |
|
|
$ |
|
|
|
$ |
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities measured at fair value on a recurring basis at December 31, 2010 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
(In millions) |
|
Cash and Cash Equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime money market funds |
|
$ |
2,063 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
$ |
2,063 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Asset: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps fixed to floating rate |
|
$ |
|
|
|
$ |
19 |
|
|
$ |
|
|
|
$ |
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative asset |
|
$ |
|
|
|
$ |
19 |
|
|
$ |
|
|
|
$ |
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transfers between levels within the fair value hierarchy or Level 3 purchases,
sales, issuances or settlements for the three months ended March 31, 2011 or the twelve months
ended December 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 and observable inputs of time to maturity
and market interest rates. See Note 9 for additional information on the interest rate swaps.
7. Credit Agreement
In March 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 are
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.
As of March 31, 2011, Lorillard was in compliance with all financial covenants and there were
no borrowings under the Revolver.
-8-
8. Long-Term Debt
Long-term debt, net of interest rate swaps, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In millions) |
|
2019 Notes 8.125% Notes due 2019 |
|
$ |
759 |
|
|
$ |
769 |
|
2020 Notes 6.875% Notes due 2020 |
|
|
750 |
|
|
|
750 |
|
2040 Notes 8.125% Notes due 2040 |
|
|
250 |
|
|
|
250 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
1,759 |
|
|
$ |
1,769 |
|
|
|
|
|
|
|
|
In April 2010, Lorillard Tobacco issued $1 billion of unsecured senior notes in two tranches
pursuant to an Indenture, dated June 23, 2009, and the Second Supplemental Indenture, dated April
12, 2010 (the Second Supplemental Indenture). The first tranche was $750 million aggregate
principal amount of 6.875% Notes due May 1, 2020 (the 2020 Notes), and the second tranche was
$250 million aggregate principal amount of 8.125% Notes due May 1, 2040 (the 2040 Notes). 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 the Companys
common stock, acquisitions, additions to working capital and capital expenditures.
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 First Supplemental
Indenture).
Lorillard Tobacco is the principal, wholly-owned operating subsidiary of the Company; and the
2019 Notes, 2020 Notes and 2040 Notes (together, the 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). As of March 31, 2011, our debt ratings were Baa2 and BBB-
with Moodys and S&P, respectively, both of which are investment grade.
Upon the occurrence of a change of control triggering event, Lorillard Tobacco would 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 Indentures) 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, 2011 and December 31, 2010, the carrying value of the Notes was $1.759
billion and $1.769 billion, respectively, and the fair value was $1.956 billion and $1.865 billion,
respectively. The fair value of the Notes is 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 effectively 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 rate was 4.886% as of March 31, 2011 and December 31, 2010. 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, 2011 and
March 31, 2010.
-9-
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, 2011 and December
31, 2010, the adjusted carrying amounts of the hedged debt outstanding were $759 million and $769
million, respectively and the amounts included in other assets were $9 million and $19 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. As of March
31, 2011, our debt ratings were Baa2 and BBB- with Moodys and S&P, respectively, both of which are
above the ratings at which settlement of our derivative contracts would be required.
10. Earnings Per Share
Basic and diluted earnings per share (EPS) were calculated using the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In millions) |
|
Numerator: |
|
|
|
|
|
|
|
|
Net income, as reported |
|
$ |
248 |
|
|
$ |
232 |
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to participating securities |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
247 |
|
|
$ |
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Basic EPS- weighted average shares |
|
|
144.80 |
|
|
|
154.55 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Stock Options and SARS |
|
|
0.14 |
|
|
|
0.17 |
|
|
|
|
|
|
|
|
Diluted EPS- adjusted weighted average shares and assumed
conversions |
|
|
144.94 |
|
|
|
154.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.71 |
|
|
$ |
1.50 |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.71 |
|
|
$ |
1.50 |
|
Options to purchase 0.6 million and 0.7 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, 2011 and March 31, 2010, respectively.
-10-
11. Retirement 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 |
|
2011 |
|
|
2010 |
|
|
|
(In millions) |
|
Service cost |
|
$ |
6 |
|
|
$ |
4 |
|
Interest cost |
|
|
14 |
|
|
|
14 |
|
Expected return on plan assets |
|
|
(18 |
) |
|
|
(17 |
) |
Amortization of net loss |
|
|
2 |
|
|
|
2 |
|
Amortization of prior service cost |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
5 |
|
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31. |
|
Other Postretirement Benefits |
|
2011 |
|
|
2010 |
|
|
|
(In millions) |
|
Service cost |
|
$ |
1 |
|
|
$ |
1 |
|
Interest cost |
|
|
3 |
|
|
|
3 |
|
Amortization of net loss |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
3 |
|
|
$ |
4 |
|
|
|
|
|
|
|
|
Lorillard expects to contribute $24 million to its pension plans and $13 million to its other
postretirement benefit plans in 2011, of which $4 million and $4 million had been contributed to
the pension and postretirement benefit plans, respectively, as of March 31, 2011.
12. Share Repurchase Programs
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, which was
completed on May 26, 2010, after repurchasing 3.3 million shares at an average purchase price of
$76.29 per share.
In August 2010, Lorillard, Inc. announced that its Board of Directors had approved a new share
repurchase program authorizing the Company to repurchase in the aggregate up to $1 billion of its
outstanding common stock. Purchases by the Company under this program may be 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 are funded from
existing cash balances, including proceeds from the Companys April 2010 issuance of the Notes (see
Note 8 for a description of the Notes).
This program does not obligate the Company to acquire any particular amount of common stock.
The timing, frequency and amount of repurchase activity will depend on a variety of factors such as
levels of cash generation from operations, cash requirements for investment in the Companys
business, current stock price, market conditions and other factors. The share repurchase program
may be suspended, modified or discontinued at any time and has no set expiration date. During the
first quarter of 2011, the Company repurchased approximately 3.8 million shares of its common stock
at an average price of $76.76 per share, for a total of $289 million. As of March 31, 2011, the
maximum value of shares that could yet be repurchased under the program was $335 million.
-11-
As of March 31, 2011, total shares repurchased under share repurchase programs authorized by
the Board since the Separation were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
February 2010 |
|
|
250 |
|
|
May 2010 |
|
3.3 |
August 2010 |
|
|
1,000 |
|
|
|
|
8.3 |
|
|
|
|
|
|
|
|
Total |
|
$ |
2,650 |
|
|
|
|
30.9 |
|
|
|
|
|
|
|
|
13. Consolidating Financial Information
In June 2009 and April 2010, Lorillard Tobacco, as primarily obligor, issued Notes, which are
unconditionally guaranteed by the Company for the payment and performance of Lorillard Tobaccos
obligation in connection therewith.
The following sets forth the condensed consolidating balance sheets as of March 31, 2011 and
December 31, 2010, condensed consolidating statements of income for the three months ended March
31, 2011 and 2010, and condensed consolidating statements of cash flows for the three months ended
March 31, 2011 and 2010 for the Company as parent guarantor (herein referred to as Parent),
Lorillard Tobacco (herein referred to as Issuer) and all other non-guarantor subsidiaries of the
Company and Lorillard Tobacco. 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-
Condensed Consolidating Balance Sheets
March 31, 2011
(In millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Consolidating |
|
|
|
|
|
|
Parent |
|
|
Issuer |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Consolidated |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
373 |
|
|
$ |
1,584 |
|
|
$ |
381 |
|
|
$ |
|
|
|
$ |
2,338 |
|
Accounts receivable, less allowances of $3 |
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
12 |
|
Other receivables |
|
|
2 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
63 |
|
Inventories |
|
|
|
|
|
|
308 |
|
|
|
|
|
|
|
|
|
|
|
308 |
|
Deferred income taxes |
|
|
|
|
|
|
504 |
|
|
|
1 |
|
|
|
|
|
|
|
505 |
|
Other current assets |
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
375 |
|
|
|
2,482 |
|
|
|
382 |
|
|
|
|
|
|
|
3,239 |
|
Investment in subsidiaries |
|
|
(824 |
) |
|
|
378 |
|
|
|
|
|
|
|
446 |
|
|
|
|
|
Plant and equipment, net |
|
|
|
|
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
240 |
|
Prepaid pension assets |
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
68 |
|
Deferred income taxes |
|
|
|
|
|
|
3 |
|
|
|
4 |
|
|
|
|
|
|
|
7 |
|
Other assets |
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
(449 |
) |
|
$ |
3,207 |
|
|
$ |
386 |
|
|
$ |
446 |
|
|
$ |
3,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity (Deficit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and drafts payable |
|
$ |
|
|
|
$ |
19 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
19 |
|
Accrued liabilities (1) |
|
|
|
|
|
|
512 |
|
|
|
(94 |
) |
|
|
|
|
|
|
418 |
|
Settlement costs |
|
|
|
|
|
|
1,381 |
|
|
|
|
|
|
|
|
|
|
|
1,381 |
|
Income taxes |
|
|
|
|
|
|
42 |
|
|
|
89 |
|
|
|
|
|
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
1,954 |
|
|
|
(5 |
) |
|
|
|
|
|
|
1,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
|
|
1,759 |
|
|
|
|
|
|
|
|
|
|
|
1,759 |
|
Postretirement pension, medical and
life insurance benefits |
|
|
|
|
|
|
284 |
|
|
|
|
|
|
|
|
|
|
|
284 |
|
Other liabilities |
|
|
|
|
|
|
34 |
|
|
|
13 |
|
|
|
|
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
4,031 |
|
|
|
8 |
|
|
|
|
|
|
|
4,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity (Deficit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Additional paid-in capital |
|
|
246 |
|
|
|
286 |
|
|
|
214 |
|
|
|
(500 |
) |
|
|
246 |
|
Retained earnings |
|
|
1,726 |
|
|
|
(1,002 |
) |
|
|
164 |
|
|
|
838 |
|
|
|
1,726 |
|
Accumulated other comprehensive loss |
|
|
(108 |
) |
|
|
(108 |
) |
|
|
|
|
|
|
108 |
|
|
|
(108 |
) |
Treasury stock |
|
|
(2,315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity (deficit) |
|
|
(449 |
) |
|
|
(824 |
) |
|
|
378 |
|
|
|
446 |
|
|
|
(449 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders
equity (deficit) |
|
$ |
(449 |
) |
|
$ |
3,207 |
|
|
$ |
386 |
|
|
$ |
446 |
|
|
$ |
3,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes intercompany royalties between Issuer and other subsidiaries of a corresponding
amount. |
-13-
Condensed Consolidating Balance Sheets
December 31, 2010
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Consolidating |
|
|
|
|
|
|
Parent |
|
|
Issuer |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Consolidated |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
163 |
|
|
$ |
1,181 |
|
|
$ |
719 |
|
|
$ |
|
|
|
$ |
2,063 |
|
Accounts receivable, less allowances of $3 |
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
9 |
|
Other receivables |
|
|
1 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
68 |
|
Inventories |
|
|
|
|
|
|
277 |
|
|
|
|
|
|
|
|
|
|
|
277 |
|
Deferred income taxes |
|
|
|
|
|
|
502 |
|
|
|
1 |
|
|
|
|
|
|
|
503 |
|
Other current assets |
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
164 |
|
|
|
2,051 |
|
|
|
720 |
|
|
|
|
|
|
|
2,935 |
|
Investment in subsidiaries |
|
|
(387 |
) |
|
|
772 |
|
|
|
|
|
|
|
(385 |
) |
|
|
|
|
Plant and equipment, net |
|
|
|
|
|
|
243 |
|
|
|
|
|
|
|
|
|
|
|
243 |
|
Prepaid pension assets |
|
|
|
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
66 |
|
Deferred income taxes |
|
|
|
|
|
|
2 |
|
|
|
4 |
|
|
|
|
|
|
|
6 |
|
Other assets |
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
(223 |
) |
|
$ |
3,180 |
|
|
$ |
724 |
|
|
$ |
(385 |
) |
|
$ |
3,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity (Deficit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and drafts payable |
|
$ |
|
|
|
$ |
27 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
27 |
|
Accrued liabilities (1) |
|
|
2 |
|
|
|
397 |
|
|
|
(66 |
) |
|
|
|
|
|
|
333 |
|
Settlement costs |
|
|
|
|
|
|
1,060 |
|
|
|
|
|
|
|
|
|
|
|
1,060 |
|
Income taxes |
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2 |
|
|
|
1,484 |
|
|
|
(60 |
) |
|
|
|
|
|
|
1,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
|
|
1,769 |
|
|
|
|
|
|
|
|
|
|
|
1,769 |
|
Postretirement pension, medical and
life insurance benefits |
|
|
|
|
|
|
284 |
|
|
|
|
|
|
|
|
|
|
|
284 |
|
Other liabilities |
|
|
|
|
|
|
30 |
|
|
|
12 |
|
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2 |
|
|
|
3,567 |
|
|
|
(48 |
) |
|
|
|
|
|
|
3,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity (Deficit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Additional paid-in capital |
|
|
242 |
|
|
|
283 |
|
|
|
214 |
|
|
|
(497 |
) |
|
|
242 |
|
Retained earnings |
|
|
1,666 |
|
|
|
(561 |
) |
|
|
558 |
|
|
|
3 |
|
|
|
1,666 |
|
Accumulated other comprehensive loss |
|
|
(109 |
) |
|
|
(109 |
) |
|
|
|
|
|
|
109 |
|
|
|
(109 |
) |
Treasury stock |
|
|
(2,026 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,026 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity (deficit) |
|
|
(225 |
) |
|
|
(387 |
) |
|
|
772 |
|
|
|
(385 |
) |
|
|
(225 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders
equity (deficit) |
|
$ |
(223 |
) |
|
$ |
3,180 |
|
|
$ |
724 |
|
|
$ |
(385 |
) |
|
$ |
3,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes intercompany royalties between Issuer and other subsidiaries of a corresponding
amount. |
-14-
Condensed Consolidating Statements of Income
For the Three Months Ended March 31, 2011
(In millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Consolidating |
|
|
|
|
|
|
Parent |
|
|
Issuer |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Consolidated |
|
Net sales (including excise taxes of $479) |
|
$ |
|
|
|
$ |
1,535 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,535 |
|
Cost of sales |
|
|
|
|
|
|
992 |
|
|
|
|
|
|
|
|
|
|
|
992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
543 |
|
|
|
|
|
|
|
|
|
|
|
543 |
|
Selling, general and administrative (1) |
|
|
|
|
|
|
365 |
|
|
|
(243 |
) |
|
|
|
|
|
|
122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
178 |
|
|
|
243 |
|
|
|
|
|
|
|
421 |
|
Investment income |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Interest expense |
|
|
|
|
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
|
|
|
|
151 |
|
|
|
243 |
|
|
|
|
|
|
|
394 |
|
Income taxes |
|
|
|
|
|
|
59 |
|
|
|
87 |
|
|
|
|
|
|
|
146 |
|
Equity in earnings of subsidiaries |
|
|
248 |
|
|
|
156 |
|
|
|
|
|
|
|
(404 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
248 |
|
|
$ |
248 |
|
|
$ |
156 |
|
|
$ |
(404 |
) |
|
$ |
248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 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. |
-15-
Condensed Consolidating Statements of Cash Flows
For the Three Months Ended March 31, 2011
(In millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Consolidating |
|
|
|
|
|
|
Parent |
|
|
Issuer |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Consolidated |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
248 |
|
|
$ |
248 |
|
|
$ |
156 |
|
|
$ |
(404 |
) |
|
$ |
248 |
|
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity income from subsidiaries |
|
|
(248 |
) |
|
|
(156 |
) |
|
|
|
|
|
|
404 |
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
Pension, health and life insurance contributions |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
(8 |
) |
Pension, health and life insurance benefits expense |
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
Deferred income taxes |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
Share-based compensation |
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and other receivables |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
Inventories |
|
|
|
|
|
|
(31 |
) |
|
|
|
|
|
|
|
|
|
|
(31 |
) |
Accounts payable and accrued liabilities |
|
|
(2 |
) |
|
|
107 |
|
|
|
(28 |
) |
|
|
|
|
|
|
77 |
|
Settlement costs |
|
|
|
|
|
|
321 |
|
|
|
|
|
|
|
|
|
|
|
321 |
|
Income taxes |
|
|
|
|
|
|
52 |
|
|
|
84 |
|
|
|
|
|
|
|
136 |
|
Other current assets |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Return on investment in subsidiaries |
|
|
689 |
|
|
|
550 |
|
|
|
|
|
|
|
(1,239 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
687 |
|
|
|
1,099 |
|
|
|
212 |
|
|
|
(1,239 |
) |
|
|
759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to plant and equipment |
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased |
|
|
(289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(289 |
) |
Dividends paid |
|
|
(188 |
) |
|
|
(689 |
) |
|
|
(550 |
) |
|
|
1,239 |
|
|
|
(188 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(477 |
) |
|
|
(689 |
) |
|
|
(550 |
) |
|
|
1,239 |
|
|
|
(477 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
210 |
|
|
|
403 |
|
|
|
(338 |
) |
|
|
|
|
|
|
275 |
|
Cash and cash equivalents, beginning of year |
|
|
163 |
|
|
|
1,181 |
|
|
|
719 |
|
|
|
|
|
|
|
2,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
373 |
|
|
$ |
1,584 |
|
|
$ |
381 |
|
|
$ |
|
|
|
$ |
2,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-16-
Condensed Consolidating Statements of Cash Flows
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 (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity income from subsidiaries |
|
|
(232 |
) |
|
|
(115 |
) |
|
|
|
|
|
|
347 |
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
Pension, health and life insurance contributions |
|
|
|
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
(12 |
) |
Pension, health and life insurance benefits expense |
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
Deferred income taxes |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Share-based compensation |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased |
|
|
(204 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(204 |
) |
Dividends paid |
|
|
(155 |
) |
|
|
(405 |
) |
|
|
(400 |
) |
|
|
805 |
|
|
|
(155 |
) |
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-17-
14. Legal Proceedings
Overview
As
of April 27, 2011, 10,008 product liability cases are pending against cigarette
manufacturers in the United States. Lorillard Tobacco is a defendant
in 9,037 of these cases.
Lorillard, Inc. is a co-defendant in 696 pending cases. A total of
6,362 of these lawsuits are
Engle Progeny Cases, described below. In addition to the product liability cases, Lorillard Tobacco
and, in some instances, Lorillard, Inc., are defendants in Filter Cases and Tobacco-Related
Antitrust Cases.
Pending cases against Lorillard 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. The table below lists the number of certain tobacco-related cases pending against Lorillard as
of the dates listed. A description of each type of case follows the table.
|
|
|
|
|
|
|
Total Number of Cases |
|
|
Pending against
Lorillard as of |
Type of Case |
|
April 27, 2011 |
Conventional Product Liability Cases |
|
|
38 |
|
Engle Progeny Cases |
|
|
6,362 |
|
West Virginia Individual Personal Injury Cases |
|
|
40 |
|
Flight Attendant Cases |
|
|
2,587 |
|
Class Action Cases |
|
|
6 |
|
Reimbursement Cases |
|
|
4 |
|
Filter Cases |
|
|
36 |
|
Tobacco-Related Antitrust Cases |
|
|
2 |
|
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.
Lorillard Tobacco is a defendant in each of the Conventional Product Liability cases listed in the
table above, and Lorillard, Inc. is a co-defendant in four of the Conventional Product Liability
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 each of the Engle Progeny Cases listed in the above table and Lorillard,
Inc. is a co-defendant in 689 Engle Progeny Cases. Some of the Engle Progeny 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. It is possible that courts may sever remaining
suits filed by multiple class members into separate individual cases.
West Virginia Individual Personal Injury Cases. In a 1999 administrative order, the West
Virginia Supreme Court of Appeals transferred a group of cases brought by individuals who allege
cancer or other health effects caused by smoking cigarettes, by smoking cigars, or by using
smokeless tobacco products, to a single West Virginia court (the West Virginia Individual Personal
Injury Cases). The plaintiffs claims alleging injury from smoking cigarettes have been
consolidated for trial. The plaintiffs claims alleging injury from the use of other tobacco
products have been severed from the consolidated cigarette claims and have not been consolidated
for trial. Lorillard Tobacco is a defendant in each of the West Virginia Personal Injury Cases
listed in the above table. Lorillard, Inc. is not a defendant in any of the West Virginia
Individual Personal Injury Cases. The time for filing a case that could be consolidated for trial
with the West Virginia Personal Injury Cases expired in 2000.
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 Flight Attendant Cases listed in the above table. Lorillard,
Inc. is not a defendant in any of the Flight Attendant Cases. The time for filing Flight Attendant
Cases expired in 2000 and no additional cases in this category may be filed.
-18-
Class Action Cases. Class Action Cases are purported to be brought on behalf of large numbers
of individuals for damages allegedly caused by smoking. Lorillard Tobacco is a defendant in each of
the Class Action Cases listed in the above table, and Lorillard, Inc. is a co-defendant in two of
the Class Action Cases. Neither Lorillard Tobacco nor Lorillard, Inc. is a defendant in additional
Class Action Cases that are pending against other cigarette manufacturers, including approximately
35 lights Class Action Cases and four Class Action Cases that are based primarily on medical
monitoring.
Reimbursement Cases. Reimbursement Cases are brought by or on behalf of entities seeking
equitable relief and 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. Three
Reimbursement Cases are pending against Lorillard Tobacco in the United States and one
Reimbursement Case is pending in Israel. Lorillard, Inc. is a co-defendant in one of the
Reimbursement Cases pending in the United States. Plaintiffs in the Reimbursement Case in Israel
have attempted to assert claims against Lorillard, Inc. As of
April 27, 2011, trial was proceeding
and jury deliberations were underway in one of the pending Reimbursement Cases, City of St. Louis
[Missouri] v. American Tobacco Co., Inc., et al. (Circuit Court, City of St. Louis, Missouri).
Lorillard Tobacco is a defendant in the City of St. Louis case. Plaintiffs voluntarily dismissed
Lorillard, Inc. from City of St. Louis while trial was underway.
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 to recover profits
earned by the defendants and other equitable relief. In August 2006, the trial court issued its
final judgment and remedial order and granted injunctive and other equitable relief. The final
judgment did not award monetary damages. In May 2009, the final judgment was largely affirmed by an
appellate court. In June 2010, the U.S. Supreme Court denied review of the case. See Reimbursement
Cases below.
Filter Cases. 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 35 of the 36 Filter Cases listed in the above table. Lorillard, Inc. is a co-defendant
in two of the 35 Filter Cases that are pending against Lorillard Tobacco. Lorillard, Inc. is also a
defendant in one additional Filter Case in which Lorillard Tobacco is not a defendant.
Tobacco-Related
Antitrust Cases. Lorillard Tobacco is a defendant in two Tobacco-Related
Antitrust Cases as set forth in the table above. Lorillard, Inc. is not a defendant in either case. In 2000 and 2001, a number of cases were brought against
cigarette manufacturers alleging that defendants conspired to set the price of cigarettes in
violation of federal and state antitrust and unfair business practices statutes. In these cases,
plaintiffs seek class certification on behalf of persons who purchased cigarettes directly or
indirectly from one or more of the defendant cigarette manufacturers. Lorillard Tobacco is a
defendant in one of these cases. The other case in this category was brought by a small cigarette manufacturer against the
states and the cigarette manufacturers, including Lorillard Tobacco, that signed the Master
Settlement Agreement (as described herein) 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. It alleges that certain provisions of the Master Settlement
Agreement violate the antitrust laws.
Tobacco-Related Product Liability Litigation
Conventional Product Liability Cases
Since January 1, 2009, verdicts have been returned in five Conventional Product Liability
Cases against cigarette manufacturers. Lorillard Tobacco was the only defendant in one of these
five trials, Evans v. Lorillard Tobacco Company (Superior Court, Suffolk County, Massachusetts).
In December 2010, the jury in Evans awarded $50 million in compensatory damages to the estate of a
deceased smoker, $21 million in damages to the deceased smokers son, and $81 million in punitive
damages. As of April 27, 2011, the case remained pending before the trial court because the judge
had not issued a verdict as to a single claim that was not submitted for the jurys consideration.
It is possible the court will award additional damages to the plaintiffs in its verdict that
addresses this final
-19-
claim. It also is possible the court will award attorneys fees to the lawyers representing the
plaintiff. As of April 27, 2011, the court had not ruled on the motions Lorillard Tobacco filed
following the verdicts, which include motions for new trial, for judgment notwithstanding the
verdict, and for reduction or elimination of the jurys damages awards. The court is not expected
to issue a final judgment until it disposes of the final claim or it rules on Lorillard Tobaccos
pending post-trial motions. Lorillard Tobacco may file additional post-trial motions after a final
judgment is entered. Should the final judgment award damages to the plaintiff, Massachusetts
statutes provide that the court may award prejudgment and post-judgment interest. It is possible
the final judgment will incorporate the jurys finding that the decedent was 30% responsible for
her injuries, which could reduce the jurys award of compensatory damages. The opportunity for
Lorillard Tobacco to initiate an appeal from the verdicts in Evans will not begin until the final
judgment is entered. Plaintiff has asked the court to enter a preliminary injunction that directs
Lorillard Tobacco to set aside $272 million in cash or cash equivalents to secure the amounts
awarded by the jury and the interest obligations plaintiff expects the court to order in a final
judgment. As of April 27, 2011, the court had not ruled on plaintiffs motion for preliminary
injunction.
Neither Lorillard Tobacco nor Lorillard, Inc. was a defendant in the four remaining trials
since January 1, 2009. Juries found in favor of the plaintiffs in each of these four trials. One
of the four trials resulted in an award of compensatory damages to the plaintiff. Two of the four
were re-trials that were ordered by appellate courts in which the juries were permitted to consider
only the amounts of punitive damages to award. These two trials resulted in verdicts that awarded
the plaintiffs $1.5 million in punitive damages in one of the cases and $13.8 million in punitive
damages in the second. Appeals are pending in these three matters. In the fourth trial, plaintiff
was awarded compensatory damages and $4.0 million in punitive
damages. As of April 27, 2011, the
court had not addressed all post-verdict issues in the fourth case.
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 twelve individual cases since 2001. Punitive damages were paid to the
smokers in five of these cases. Neither Lorillard Tobacco nor Lorillard, Inc. was a party to any of
these matters.
As
of April 27, 2011, trial was underway in two Conventional Product Liability Cases. Neither
Lorillard Tobacco nor Lorillard, Inc. is a defendant in either of these cases. Some additional
cases are scheduled for trial in 2011. Lorillard Tobacco is not a defendant in any of the
Conventional Product Liability Cases that are scheduled for trial as
of April 27, 2011. Trial
dates are subject to change.
Engle Progeny Cases
In 2006, the Florida Supreme Court issued a ruling in 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 compensatory 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 compensatory 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.
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.
Some of the Engle Progeny Cases were filed on behalf of multiple plaintiffs. Various courts
have entered orders severing the cases filed by multiple plaintiffs into separate actions. In 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 or children of alleged former class members
-20-
have also brought derivative claims. In 2010, one Florida federal court approved plaintiffs
motions to dismiss approximately 500 cases in deference to cases filed by these individuals that
are pending in state court. In April 2011, one federal court dismissed approximately 235 cases because they were
duplicative of cases pending in other courts. The federal court also addressed
approximately 500 cases filed by family members of alleged former class members. The
court had previously separated these 500 cases into individual actions, but its 2011 orders
combined each one of these cases with the case filed by the smoker from which the
family members claim purportedly derived.
The Engle Progeny Cases are pending in various Florida state and federal courts. Some of these
courts, including courts that have presided over Engle Progeny Cases that have been tried, 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 appeals, and some of these appeals are pending. In one of these appeals, the
U.S. Court of Appeals for the Eleventh Circuit returned to a federal trial court for further
consideration the question of how courts should apply the jurys findings in favor of the
plaintiffs in the first phase of the Engle trial. The Court of Appeals determined that, based on
Florida law, plaintiffs in the Engle Progeny Cases are entitled to some use of those jury findings
but that, on the basis of the appellate record, it was premature for the Court of Appeals to decide
what use plaintiffs can make of these findings. The Court of Appeals did not address the question
of the effect of federal due process limitations on the application of the jury findings on the
basis that consideration of federal constitutional limitations was not necessary to its decision.
In another appeal, an intermediate state appellate court issued a decision in December 2010 in
which it ruled that the trial court correctly construed the Florida Supreme Courts 2006 decision
and that it properly instructed the jury on the preclusive effect of certain of the Engle jurys
findings.
Lorillard Tobacco and Lorillard, Inc. are defendants in Engle Progeny Cases that have been
placed on courts 2011 trial calendars or in which specific trial dates have been set. 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 2011. It also is not possible to
predict whether some courts will implement procedures that consolidate multiple Engle Progeny Cases
for trial.
As of April 27, 2011, trial was not underway in any of the Engle Progeny Cases.
As of April 27, 2011, verdicts had been returned in four Engle Progeny Cases in which
Lorillard Tobacco was a defendant. Lorillard, Inc. was not a defendant in any of these four cases.
In Rohr v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, Broward County, Florida), a jury
returned a verdict in favor of the defendants, including Lorillard Tobacco. Plaintiff in Rohr did
not pursue an appeal and the case is concluded. In Mrozek v. Lorillard Tobacco Company (Circuit
Court, Fourth Judicial Circuit, Duval County, Florida), the jury awarded plaintiffs a total of $6
million in compensatory damages and $11.3 million in punitive damages. The jury apportioned 35% of
the fault for the smokers injuries to the smoker and 65% to Lorillard Tobacco. As of April 27,
2011, the court had not ruled on Lorillard Tobaccos post-trial motions or entered a final judgment
in Mrozek. In Tullo v. R.J. Reynolds, et al. (Circuit Court, Palm Beach County, Florida), the jury
awarded plaintiff a total of $4.5 million in compensatory damages. The jury assessed 45% of the
fault to the smoker, 5% to Lorillard Tobacco and 50% to other defendants. The jury did not award
punitive damages to the plaintiff. As of April 27, 2011, the court had not ruled on the parties
post-trial motions in Tullo. The court entered a final judgment that awards plaintiff $225,000 and
post-judgment interest from Lorillard Tobacco, but it has not resolved plaintiffs application for
attorneys fees and costs. As of April 27, 2011, the opportunity for Lorillard Tobacco to notice an
appeal in Tullo had not expired. In Sulcer v. Lorillard Tobacco Company, et al. (Circuit Court,
Escambia County, Florida), the jury awarded $225,000 in compensatory damages to the plaintiff and
it assessed 95% of the fault for the smokers injuries to the smoker and 5% to Lorillard Tobacco.
The jury returned a verdict for Lorillard Tobacco as to whether plaintiff is entitled to punitive
damages. As of April 27, 2011, the deadline for the parties to request post-verdict relief had not
expired, and a final judgment had not been entered in Sulcer.
As of April 27, 2011, verdicts have
been returned in 39 Engle Progeny Cases since the Florida
Supreme Court issued its 2006 ruling that permitted members of the Engle class to bring individual
lawsuits in which neither Lorillard Tobacco nor Lorillard, Inc. was a defendant at trial. Juries
awarded compensatory damages and punitive damages in 17 of the trials. The 17 punitive damages
awards have totaled $565 million and have ranged from $250,000 to $244 million. In seven of the
trials, juries awards were limited to compensatory damages. In the 15 remaining trials, juries
found in favor of the defendants.
As of April 27, 2011, defendants had filed, or were expected to file, challenges to each of the verdicts in which
plaintiffs were awarded damages. None of the Engle Progeny trials in which plaintiffs were awarded
damages since the Florida Supreme Courts 2006 decision had reached a final resolution as of April
27, 2011. In some of the trials decided in
-21-
defendants
favor, plaintiffs have filed motions challenging the verdicts. As of April 27, 2011,
none of these motions had resulted in rulings in favor of the plaintiffs.
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 compensatory damages. Neither Lorillard
Tobacco nor Lorillard, Inc. was a party to this case. In March 2010, a Florida appellate court
affirmed the jurys verdict. The court denied defendants petitions for rehearing in May 2010, and
the defendants have satisfied the judgment by paying the damages award.
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. The plaintiffs in some of the
cases have challenged the constitutionality of the amended statute.
As of April 27, 2011, none of
these motions had been granted and courts either denied these challenges or rulings have not
issued.
West Virginia Individual Personal Injury Cases
The West Virginia Individual Personal Injury Cases are brought by individuals who allege
cancer or other health effects caused by smoking cigarettes, by smoking cigars, or by using
smokeless tobacco products are in a single West Virginia court. A total of 639 West Virginia
Individual Personal Injury Cases are pending. Most of the pending cases have been consolidated for
trial. The order that consolidated the cases for trial, among other things, also limited the
consolidation to those cases that were filed by September 2000. No additional West Virginia
Personal Injury Cases may be consolidated for trial with this group.
In September 2000, there were approximately 1,250 West Virginia Personal Injury Cases, and
Lorillard Tobacco was named in all but a few of them. Plaintiffs in most of the cases alleged
injuries from smoking cigarettes, and the claims alleging injury from smoking cigarettes have been
consolidated for a multi-phase trial (the IPIC Cases). Approximately 600 IPIC Cases have been
dismissed in their entirety. Lorillard Tobacco has been dismissed from approximately 610 additional
IPIC Cases because those plaintiffs did not submit evidence that they used a Lorillard Tobacco
product. These additional IPIC Cases remain pending against other cigarette manufacturers and some
or all of the dismissals of Lorillard Tobacco could be contested in subsequent appeals. As of April
27, 2011, Lorillard Tobacco is a defendant in 33 of the pending IPIC Cases. Lorillard, Inc. was not
a defendant in any of the IPIC Cases.
The court has severed from the IPIC Cases those claims alleging injury from the use of tobacco
products other than cigarettes, including smokeless tobacco and cigars (the Severed IPIC Claims).
The Severed IPIC Claims involve 29 plaintiffs. Twenty-seven of these plaintiffs have asserted
both claims alleging that their injuries were caused by smoking cigarettes as well as claims
alleging that their injuries were caused by using other tobacco products. The former claims will be
considered during the consolidated trial of the IPIC Cases, while the latter claims are among the
Severed IPIC Claims. Lorillard Tobacco is a defendant in seven of the Severed IPIC Claims.
Lorillard, Inc. is not a defendant in any of the Severed IPIC Claims. Two plaintiffs have asserted
only claims alleging that injuries were caused by using tobacco products other than cigarettes, and
no part of their cases will be considered in the consolidated trial of the IPIC Cases (the Severed
IPIC Cases). Neither Lorillard Tobacco nor Lorillard, Inc. is a defendant in either of the
Severed IPIC Cases.
The court has entered a trial plan for the IPIC Cases that calls for a multi-phase trial. The
first phase of that trial is scheduled to begin on October 17,
2011. As of April 27, 2011, the
Severed IPIC Claims and the Severed IPIC Cases were not subject to a trial plan. None of the
Severed IPIC Claims or the Severed IPIC Cases were scheduled for trial
as of April 27, 2011. Trial
dates are subject to change.
Flight Attendant Cases
Lorillard Tobacco and three other cigarette manufacturers are the defendants in each of the
pending Flight Attendant Cases. Lorillard, Inc. is not a defendant in any of these cases. These
suits were filed as a result of a
-22-
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 in 2000 and
no additional cases in this category may be filed.
The judges who 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 April 27, 2011, none of the Flight Attendant Cases were scheduled for trial. Trial dates
are subject to change.
In 2010, some of the attorneys who represent the plaintiffs in the Flight Attendant Cases
filed a motion for sanctions against the defendants, including Lorillard Tobacco, in which
plaintiffs alleged that the defendants engaged in certain conduct. In the motion for sanctions, as
amended, plaintiffs contend that Philip Morris USA, R.J. Reynolds Tobacco Company and Brown &
Williamson Tobacco Corporation tortuously interfered with negotiations the plaintiffs in the Flight
Attendant Cases initiated with Lorillard Tobacco and caused Lorillard Tobacco to reject plaintiffs
offers of judgment. Plaintiffs in all of the Flight Attendant Cases submitted offers of judgment
to Lorillard Tobacco during 2000 that proposed to resolve plaintiffs claims against Lorillard
Tobacco in each of the pending Flight Attendant Cases in which plaintiffs allege lung cancer for
$15,000 and to resolve all remaining Flight Attendant Cases for $2,650. Plaintiffs contend in the
motion for sanctions that Lorillard Tobaccos subsequent rejection of the offers of judgment was
prompted by an agreement it reached with Philip Morris USA, R.J. Reynolds Tobacco Company and Brown
& Williamson Tobacco Corporation to partially indemnify Lorillard Tobacco should it be required to
satisfy any judgment for attorneys fees returned against it in the Flight Attendant Cases.
Plaintiffs contend this agreement constitutes misconduct and that it violates the Broin settlement
agreement. Plaintiffs seek $30 million in sanctions, plus interest of 9% from the date of the
anticipated acceptance of the offers of judgment, on behalf of all of the plaintiffs in the Flight
Attendant Cases.
Class Action Cases
Lorillard Tobacco is a defendant in six pending Class Action 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, 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.
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 in April 2010 (the April 2010
Decision) that modified the trial courts 2008 amended final judgment. The April 2010 Decision
reduced the judgment amount from approximately $264 million
-23-
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
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 April 27, 2011, judicial
interest totaled approximately $34.6 million. Lorillard, Inc., which was a party to the case in the
past, is no longer a defendant.
In its April 2010 Decision, 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.
The Louisiana Supreme Court denied review of the petitions that were filed by the defendants
and the plaintiffs. The U.S. Supreme Court has granted defendants application to stay execution
of the amended final judgment until defendants petition for writ of certiorari is resolved. As of
April 27, 2011, the U.S. Supreme Court had not determined whether it would grant review of
defendants certiorari petition.
In 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 was reclassified from other liabilities to accrued liabilities in the
second quarter of 2010 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 current 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 Class Action Case pending against Lorillard Tobacco, Brown
v. The American Tobacco Company, Inc., et al. (Superior Court, San Diego County, California, filed
June 10, 1997), the California Supreme Court in 2009 vacated an order that had previously
decertified a class and returned Brown to the trial court for further activity. The trial court has
informed the parties that it believes the class previously certified in Brown has been reinstated
as a result of the California Supreme Courts ruling. The class previously certified in Brown is
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 defendants marketing and advertising
activities in California.
-24-
The trial court also has ruled that it will permit plaintiffs to assert claims regarding the
allegedly fraudulent marketing of light or ultra-light cigarettes. Trial in Brown had been
scheduled for May 2011, but the court vacated (or canceled) this
setting. As of April 27, 2011, a
new date for trial had not been set. Trial dates are subject to change. Lorillard, Inc. is not a
defendant in Brown.
In another Class Action Case pending against Lorillard Tobacco, Cleary v. Philip Morris
Incorporated, et al. (U.S. District Court, Northern District, Illinois, filed June 3, 1998), 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. In June
2010, the court dismissed plaintiffs remaining claims, and it entered final judgment in
defendants favor. Plaintiffs have noticed an appeal from the final judgment, including the prior
ruling that dismissed plaintiffs lights claims against Lorillard Tobacco, to the U.S. Court of
Appeals for the Seventh Circuit. Lorillard, Inc. is not a defendant in Cleary.
Lights Class Action Cases. Neither Lorillard Tobacco nor Lorillard, Inc. is a defendant in
another approximately 35 Class Action 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 cases. In one of the lights Class Action Cases, Good v. Altria Group, Inc., et al., the
U.S. Supreme Court ruled in December 2008 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. In 2009, the Judicial Panel on
Multidistrict Litigation consolidated various federal court lights Class Action Cases pending
against Philip Morris USA or Altria Group and transferred those cases to the U.S. District Court of
Maine. As of April 27, 2011, 16 cases were part of that consolidated proceeding.
Reimbursement Cases
Lorillard Tobacco is a defendant in the three 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 three cases pending in the U.S. Plaintiffs in the case in Israel have attempted to assert
claims against Lorillard, Inc.
As
of April 27, 2011, trial was proceeding and jury deliberations were underway in one of the
three Reimbursement Cases pending in the U.S., City of St. Louis [Missouri] v. American Tobacco
Co., Inc., et al. (Circuit Court, City of St. Louis, Missouri, filed November 25, 1998). Along
with other cigarette manufacturers, Lorillard Tobacco is a defendant in City of St. Louis.
Plaintiffs voluntarily dismissed Lorillard, Inc. from City of St. Louis while trial was underway.
Plaintiffs are suing on behalf of 37 Missouri hospitals.
U.S. Government Case. 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 final judgment and remedial order concluded a bench trial that began
in September 2004. Lorillard Tobacco, other cigarette manufacturers, two parent companies and two
trade associations were defendants in this action during trial. Lorillard, Inc. is not a party to
this case.
In its 2006 final judgment and remedial order, 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); 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; and from participating in the management or control of certain entities or their
successors. 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 adverse effects from
exposure to secondhand smoke. Lorillard Tobacco could incur costs in excess of $10 million to
-25-
implement the final judgment and remedial order. The final judgment and remedial order also
requires defendants, including Lorillard Tobacco, to make disclosures of disaggregated marketing
data to the government, and to make document disclosures on a website and in a physical depository.
The final judgment and remedial order prohibits each defendant that manufactures cigarettes,
including Lorillard Tobacco, from selling any of its cigarette brands or certain elements of its
business unless certain conditions are met.
The final judgment and remedial order has not yet been fully implemented. Following trial, the
final judgment and remedial order was stayed because the defendants, the government and several
intervenors noticed appeals to the Circuit Court of Appeals for the District of Columbia. 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 stayed its
order that formally relinquished jurisdiction of defendants appeal pending the disposition of the
petitions for writ of certiorari to the U.S. Supreme Court that were noticed by the defendants, the
government and the intervenors. In June 2010, the U.S. Supreme Court denied all of the petitions
for writ of certiorari. The case has been returned to the trial court for implementation of the
Court of Appeals directions in its 2009 ruling and for entry of an amended final judgment. As of
April 27, 2011, the parties were submitting briefs regarding the issues that were remanded, and the
court had not entered an amended final judgment.
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. The U.S. Supreme Court declined to address the decisions dismissing recovery of profits
when it denied review of the governments and the intervenors petitions.
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 $319 million and $276 million for the three months ended March 31, 2011
and 2010, 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, the other Original
Participating Manufacturers and other subsequent participating manufacturers (collectively, the Participating Manufacturers)
have notified the States that they intend to seek an adjustment in the amount of payments made in 2003 and subsequent years
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 Participating Manufacturers are ultimately successful,
-26-
any recovery would be in the form of reimbursement of proceeds already paid or as a credit against future payments by the
Participating Manufacturers.
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 ended in 2005 as a
result of an assessment imposed under a federal law, enacted in 2004, repealing the federal supply
management program for tobacco growers. Under the law, tobacco quota holders and growers will be
compensated with payments totaling $10.1 billion, funded by an assessment on tobacco manufacturers
and importers. Payments under the law 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 35 Filter Cases. Lorillard, Inc. is a defendant in three Filter Cases, including two
that also name Lorillard Tobacco. Since January 1, 2009, Lorillard Tobacco has paid, or has reached
agreement to pay, a total of approximately $17.9 million in settlements to finally resolve 49
claims. The related expense was recorded in selling, general and administrative expenses on the
consolidated statements of income. Since January 1, 2009, verdicts have been returned in two Filter
Cases, Cox v. Asbestos Corporation, Ltd., et al, which was tried in the Superior Court of
California, Los Angeles County, and Lenney v. Armstrong International, Inc., et al., tried in the
Superior Court of California, San Francisco County. The jury in the Cox case returned a verdict
for Lorillard Tobacco. Plaintiffs voluntarily dismissed Lorillard Tobacco from their appeal to the
California Court of Appeals and the Cox case is concluded. The jury in the Lenney trial awarded
plaintiffs $1.4 million in compensatory damages and damages for loss of consortium from Lorillard
Tobacco and Hollingsworth & Vose. The jury in the Lenney trial determined that plaintiffs were not
entitled to an award of punitive damages from Lorillard Tobacco or Hollingsworth & Vose. As of
April 27, 2011, the deadline for Lorillard Tobacco to seek review of the verdict in Lenney had not
expired. As of April 27, 2011, 14 Filter Cases were scheduled for trial or have been placed on
courts trial calendars. 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. 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 Tobacco
was a defendant in all but one of these indirect purchaser cases. Lorillard, Inc. was not named as
a defendant in any of these cases. Four indirect purchaser suits, in New York, Florida, New Mexico
and Michigan, thereafter were dismissed by courts in those states. The actions in all other states,
except for Kansas, were either voluntarily dismissed or dismissed by the courts.
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
-27-
petition
seeking to overturn that ruling. Discovery currently is ongoing. As of April 27,
2011, the Court had not set dates 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 the MSA. The plaintiff alleges that MSA participants, such as
itself, 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 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 in January 2010. Thereafter, the
plaintiff appealed to the federal Court of Appeals for the Sixth
Circuit. As of April 27, 2011, the
appeal had been fully briefed, but no hearing date had been set.
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. 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. 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,
while it is reasonably possible that an unfavorable outcome of pending litigation may occur, (i)
management has concluded that it is not probable that a loss has been incurred in any material
pending litigation against Lorillard, (ii) management is unable to estimate the possible loss or
range of loss that could result from an unfavorable outcome in any material pending litigation, and
(iii) accordingly, management has not provided any amounts in the consolidated financial statements
for unfavorable potential outcomes of material pending litigation. 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.
-28-
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).
Loews is a defendant in four pending product liability cases. One of these is a Reimbursement
Case in Israel, one is a Filter case pending in the U.S., and two are purported Class Action Cases
on file in U.S. courts. Lorillard Tobacco also is a defendant in each of the four product liability
cases in which Loews is involved. Pursuant to the Separation Agreement, Lorillard is 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.
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, 2011 (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, 2010 (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.
Overview
We are the third largest manufacturer of cigarettes in the United States. Founded in 1760,
Lorillard is the oldest continuously operating tobacco company in the United States. Newport, our
flagship menthol flavored premium cigarette brand, is 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 2011 and in the full year 2010. In addition to the Newport brand, our product line has
four additional brand families marketed under the Kent, True, Maverick and Old Gold brand names.
These five cigarette brands include 43 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 9.7 billion cigarettes in the first three months of 2011 and 38.1 billion cigarettes for
full year 2010. We sold our major trademarks outside of the United States in 1977. We maintain
our headquarters and manufacture all of our products at our Greensboro, North Carolina facility.
-29-
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 18, 2011.
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 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 3.5% from the twelve
months ended March 31, 2001 through the twelve months ended March 31, 2011. |
|
|
|
|
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 14.2% for
the three months ended March 31, 2011, and continue to be a significant competitive
factor in the domestic 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 (the FSPTCA) granting the FDA authority to
regulate tobacco products. Pursuant to the terms of the FSPTCA, the FDA established the
Tobacco Products Scientific Advisory Committee (the TPSAC) to evaluate, among other
things, the impact of the use of menthol in cigarettes on the public health. In March
2011, the TPSAC issued its report to the FDA stating that removal of menthol
cigarettes from the marketplace would benefit public health. The FDA could
promulgate regulations that, among other things, could result in a ban on or restrict
the use of menthol in cigarettes. The law imposes and will impose new restrictions on
the manner in which cigarettes can be advertised and marketed,
requires larger and more
severe health warnings on cigarette packaging, permits 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. |
-30-
|
- |
|
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 FSPTCA. 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 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. On January 4, 2010, the district court
issued an order (a) striking down the provisions of the 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. Both sides have appealed the district courts ruling to the Sixth
Circuit Court of Appeals, and the appeal has been fully briefed. 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 any such appeal
will be successful. |
|
|
- |
|
In February 2011, we, along with RJR Tobacco, filed a lawsuit in the U.S.
District Court for the District of Columbia against the FDA challenging the
composition of the TPSAC because of the FDAs appointment of certain voting
members with significant financial conflicts of interest. We believe these
members are financially biased because they regularly testify as expert witnesses
against tobacco-product manufacturers, and because they are paid consultants for
pharmaceutical companies that develop and market smoking-cessation products. The
suit similarly challenges the presence of certain conflicted individuals on the
Constituents Subcommittee of the TPSAC. The complaint seeks a judgment (i)
declaring that, among other things, the appointment of the conflicted individuals
to the TPSAC (and its Constituents Subcommittee) was arbitrary, capricious, an
abuse of discretion, and otherwise not in compliance with the law because it
prevented the TPSAC from preparing a report that was unbiased and untainted by
conflicts of interest, and (ii) enjoining the FDA from, among other things,
relying on the TPSACs report. |
|
|
|
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 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, 2011, the federal excise tax was
$1.0066 per pack and combined state and local excise taxes ranged from $0.17 to $5.85
per pack. For the three months ended March 31, 2011, there were no state excise tax
increases implemented. On June 21, 2010, New York state legislature approved a $1.60
per pack state excise tax increase that was implemented on July 1, 2010. 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 manufacturers and importers are required to pay an
assessment under a federal law designed to fund payments to tobacco quota holders and
growers and are required to pay an annual user fee to the FDA. |
The domestic market for cigarettes is highly competitive. Competition is primarily based on a
brands taste; quality; price, including the level of discounting and other promotional activities;
positioning; consumer loyalty; and retail display. Our principal competitors are the two other
major U.S. cigarette manufacturers, Philip Morris USA 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
-31-
restrained in some marketing areas as a result of retail merchandising contracts offered
by Philip Morris USA 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.
-32-
The following table presents Lorillards selected industry and market share data for the three
months ended March 31, 2011 and 2010.
Selected Industry and Market Share Data (1)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
(Volume in billions) |
|
2011 |
|
2010 |
Lorillard total domestic unit volume (2) |
|
|
9.5 |
|
|
|
8.7 |
|
Industry total domestic unit volume |
|
|
69.6 |
|
|
|
72.0 |
|
|
|
|
|
|
|
|
|
|
Lorillards share of the domestic market |
|
|
13.7 |
% |
|
|
12.1 |
% |
Lorillards premium volume as a percentage
of its domestic volume |
|
|
86.3 |
% |
|
|
87.8 |
% |
Lorillards share of the premium market |
|
|
16.8 |
% |
|
|
15.0 |
% |
|
|
|
|
|
|
|
|
|
Newports share of the domestic market |
|
|
11.7 |
% |
|
|
10.4 |
% |
Newports share of the premium market |
|
|
16.6 |
% |
|
|
14.7 |
% |
Total
menthol segment market share for the industry |
|
|
30.7 |
% |
|
|
29.4 |
% |
Total
discount segment market share for the industry |
|
|
29.6 |
% |
|
|
29.3 |
% |
Newports share of the menthol market |
|
|
35.7 |
% |
|
|
35.4 |
% |
Newports share of Lorillards total volume(3) |
|
|
85.5 |
% |
|
|
86.5 |
% |
Newports share of Lorillards net sales(3) |
|
|
90.4 |
% |
|
|
90.9 |
% |
|
|
|
(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) |
|
The quarter ended March 31, 2011 contained one more shipping day than the comparable period
ended March 31, 2010. |
|
(3) |
|
Source: Lorillard shipment reports. |
Results of Operations
Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In millions) |
|
Net sales (a) |
|
$ |
1,535 |
|
|
$ |
1,360 |
|
Cost of sales (a) (b) |
|
|
992 |
|
|
|
882 |
|
|
|
|
Gross profit |
|
|
543 |
|
|
|
478 |
|
Selling, general and administrative |
|
|
122 |
|
|
|
96 |
|
|
|
|
Operating income |
|
|
421 |
|
|
|
382 |
|
Investment income |
|
|
1 |
|
|
|
1 |
|
Interest expense |
|
|
(28 |
) |
|
|
(10 |
) |
|
|
|
Income before income taxes |
|
|
394 |
|
|
|
373 |
|
Income taxes |
|
|
146 |
|
|
|
141 |
|
|
|
|
Net income |
|
$ |
248 |
|
|
$ |
232 |
|
|
|
|
|
|
|
(a) |
|
Includes excise taxes of $479 and $437 respectively. |
|
(b) |
|
Cost of sales includes: |
|
|
|
- $319 and $276 to accrue obligations under the State Settlement Agreements, respectively. |
|
|
|
- $30 and $27 to accrue obligations under the Federal Assessment for Tobacco Growers,
respectively. |
|
|
|
- $14 and $7 to accrue Food and Drug Administration user fees, respectively. |
-33-
Three Months ended March 31, 2011 Compared to Three Months ended March 31, 2010
Net sales. Net sales increased by $175 million, or 12.9%, from $1.360 billion for the three
months ended March 31, 2010 to $1.535 billion for the three months ended March 31, 2011. Net sales
increased $158 million due to higher unit sales volume (including $42 million of federal excise
tax), $40 million due to higher average unit prices reflecting price increases in February, May and
November 2010, partially offset by $23 million of higher sales promotion costs driven by the
introduction of Newport Non-Menthol accounted for as a reduction of sales.
Total Lorillard wholesale unit volume, which includes Puerto Rico and U.S. Possessions,
increased 9.5% for the three months ended March 31, 2011 compared to the corresponding period of
2010. Domestic unit volume, which excludes Puerto Rico and U.S. Possessions, increased 9.4% for
the three months ended March 31, 2011 compared to the corresponding period of 2010. Unit volume
figures in this section are provided on a gross basis. Total unit volume for Newport, the
Companys flagship brand, and domestic Newport unit volume increased 8.2% and 8.0%, respectively
for the three months ended March 31, 2011 compared to the corresponding period of 2010. Newport
Non-Menthol, the first significant line extension for Newport in the last decade, was successfully
launched in the fourth quarter of 2010 and significantly contributed to the increase in Newport
domestic wholesale shipments during the first quarter of 2011. Domestic wholesale shipments for
Maverick, the Companys leading discount brand, increased 22.7% for the three months ended March
31, 2011 compared to the corresponding period in 2010. Industry-wide domestic unit volume
decreased an estimated 3.4% for the three months ended March 31, 2011 compared to the corresponding
period of 2010. The first quarter of 2011 included one additional shipping day versus the first
quarter of 2010. Adjusting for the additional day and modest changes in wholesale inventory
patterns, our domestic wholesale shipments increased an estimated 8.3% for the first quarter of
2011. Industry shipments of premium brands comprised 70.4% of industry-wide domestic unit volume
during the three months ended March 31, 2011 compared to 70.7% in the corresponding period of 2010.
Our total domestic wholesale market share, based on wholesale shipments, increased by 1.6
share points during the first quarter of 2011 to 13.7% from 12.1% in the first quarter of 2010.
Newport domestic wholesale market share increased 1.3 share points during the first quarter of 2011
to 11.7% from 10.4% in the first quarter of 2010.
Cost of sales. Cost of sales increased by $110 million, or 12.5%, from $882 million for the
three months ended March 31, 2010 to $992 million for the three months ended March 31, 2011. The
increase in cost of sales ($53 million, including $42 million of federal excise tax) is primarily
due to higher unit sales volume, higher expenses related to the State Settlement Agreements ($43
million) and higher Food and Drug Administration fees ($7 million). We recorded pre-tax charges
for our obligations under the State Settlement Agreements of $319 million and $276 million for the
three months ended March 31, 2011 and 2010, respectively, an increase of $43 million. The $43
million increase is due to the impact of higher unit sales ($32 million), the inflation adjustment
($9 million), and higher other expenses ($2 million).
Selling, general and administrative Selling, general and administrative costs increased $26
million to $122 million in the first quarter of 2011 compared to the first quarter of 2010
primarily as a result of higher legal costs related to the Engle Progeny litigation. In addition,
selling, general and administrative costs include higher administrative costs incurred in support
of the Companys position and industry reports to the FDA regarding the use of menthol in
cigarettes and advertising costs related to the support of Newport Non-Menthol.
Interest expense. Interest expense increased $18 million for the three months ended March
31, 2011, compared to the three months ended March 31, 2010, and reflects interest on the senior
notes issued in the second quarter of 2010.
Income taxes. Income taxes increased $5 million or 3.5% from $141 million for the three
months ended March 31, 2010 to $146 million in for the three months ended March 31, 2011. The
change reflects an increase in income before income taxes of $21 million, or 5.6%, partially offset
by a decrease in the effective tax rate from 37.8% to 37.1% for the three months ended March 31,
2010 and 2011, respectively. This decrease is primarily due to an unfavorable adjustment in the
first quarter of 2010 from the 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 in the
first quarter of 2010.
-34-
Liquidity and Capital Resources
Our cash and cash equivalents of $2.338 billion at March 31, 2011 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 $759 million for the three months ended March 31, 2011 compared to $647 million for
the three months ended March 31, 2010. The increased cash flow in 2011 primarily reflects higher
net income and the timing of payments for State Settlement Agreements.
Cash flow from investing activities. Our cash flow from investing activities used cash of $7
million for the three months ended March 31, 2011 compared to $10 million for the three months
ended March 31, 2010 for capital expenditures. The expenditures were primarily used for the
modernization of manufacturing equipment. Our capital expenditures for the year ending December 31,
2011 are forecast to be between $35 million and $45 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 2011. We paid cash
dividends to our shareholders of $188 million on March 11, 2011 and $155 million on March 11, 2010.
In April 2010, Lorillard Tobacco issued $1 billion of unsecured senior notes in two tranches
pursuant to an Indenture, dated June 23, 2009, and the Second Supplemental Indenture, dated April
12, 2010 (the Second Supplemental Indenture). The first tranche was $750 million aggregate
principal amount of 6.875% Notes due May 1, 2020 (the 2020 Notes), and the second tranche was
$250 million aggregate principal amount of 8.125% Notes due May 1, 2040 (the 2040 Notes).
Lorillard Tobacco is the principal, wholly-owned operating subsidiary of the Company and the 2020
Notes and 2040 Notes (the Notes) are unconditionally guaranteed on a senior unsecured basis by
the Company. The net proceeds from the issuance are used for general corporate purposes, which may
include, among other things, the repurchase, redemption or retirement of securities including the
Companys common stock, acquisitions, additions to working capital and capital expenditures.
Upon the occurrence of a change of control triggering event, Lorillard Tobacco will be
required to make an offer to repurchase the 2020 Notes and 2040 Notes (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 Second
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.
During the first quarter of 2011, we repurchased approximately 3.8 million shares at a cost of
$289 million under the $1 billion repurchase program announced on August 20, 2010. As of March 31,
2011, the maximum dollar value of shares that could yet be purchased under the program was $335
million.
Purchases by the Company under these programs were made from time to time at prevailing market
prices in open market purchases, privately negotiated transactions, block purchase techniques or
otherwise, as determined by the Companys management. The purchases were funded from existing cash
balances, including proceeds from the issuance of the Notes. These programs do not obligate the
Company to acquire any particular amount of its common stock. The timing, frequency and amount of
repurchase activity will depend on a variety of factors such as levels of cash generation from
operations, cash requirements for investment in the Companys business, current stock price, market
conditions and other factors.
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 and capital expenditure
-35-
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 2011, we paid $1.003 billion under the State Settlement Agreements, primarily based
on 2010 volume. Included in the above number was $107 million deposited 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 $107 million
reduction is based upon the Original Participating Manufacturers collective loss of market share in
2008. In April of 2010, 2009, 2008, 2007 and 2006, we had previously deposited $88 million, $74
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 2007, 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 2011, we anticipate the additional amount payable in 2011 will be approximately $225
million to $250 million, primarily based on 2011 estimated volume.
-36-
Contractual Cash Payment Obligations
The following chart presents our contractual cash payment obligations as of March 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
3-5 years |
|
|
5 years |
|
|
|
(In millions) |
|
Senior notes |
|
$ |
1,750 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,750 |
|
Interest payments related to notes |
|
|
1,557 |
|
|
|
133 |
|
|
|
398 |
|
|
|
266 |
|
|
|
760 |
|
Contractual purchase obligations |
|
|
60 |
|
|
|
59 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
|
3 |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,370 |
|
|
$ |
194 |
|
|
$ |
400 |
|
|
$ |
266 |
|
|
$ |
2,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the obligations presented in the table above, as of March 31, 2011, we believe
that it is reasonably possible that payments of up to $0.6 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 2010 amounted to $1.134 billion and we estimate our cash payments in 2011
under the State Settlement Agreements will be between $1.2 billion and $1.3 billion, primarily
based on 2010 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, 2011,
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. 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 2011 investments, would cause an increase or decrease in
pretax income of approximately $6 million for the three months ended March 31, 2011.
-37-
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, 2011.
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. As of March
31, 2011, our debt ratings were Baa2 and BBB- with Moodys and S&P, respectively, both of which are
above the ratings at which settlement of our derivative contracts would be required. 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, 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.
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:
FDA regulation of menthol in cigarettes and concerns that mentholated cigarettes may pose greater
health risks could adversely affect our business.
Some plaintiffs in our litigation and constituencies, including the FDA and other 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.
-38-
Following the passage of the Family Smoking Prevention and Tobacco Control Act (the Act) in
June 2009, the FDA established the Tobacco Products Scientific Advisory Committee (the TPSAC) to
evaluate, among other things, the impact of the use of menthol in cigarettes on the public health,
including such use among children, African-Americans, Hispanics, and other racial and ethnic
minorities. In addition, the Act permits the FDA to impose restrictions regarding the use of
menthol in cigarettes, including a ban, if those restrictions would be appropriate for the public
health. The TPSAC or the Menthol Report Subcommittee held meetings on March 30-31, 2010, July
15-16, 2010, September 27, 2010, October 7, 2010, November 18, 2010, January 10-11, 2011, February
10-11, 2011, March 2, 2011 and March 17-18, 2011 to consider the issues surrounding the use of
menthol in cigarettes. At the March 18, 2011 meeting, TPSAC presented its report and
recommendations on menthol. The reports findings included that menthol likely increases
experimentation and regular smoking, menthol likely increases the likelihood and degree of
addiction for youth smokers, non-white menthol smokers (particularly African-Americans) are less
likely to quit smoking and are less responsive to certain cessation medications, and consumers
continue to believe that smoking menthol cigarettes is less harmful than smoking nonmenthol
cigarettes as a result of the cigarette industrys historical marketing. TPSACs overall
recommendation to the FDA was that [r]emoval of menthol cigarettes from the marketplace would
benefit public health in the United States. FDA indicated that it plans to provide a progress
report on its review of the science related to menthol cigarettes on
or around June 23, 2011. If the FDA determined that the
regulation of menthol is warranted, the FDA could promulgate
regulations that, among other things, could result in a ban on or
restrict the use of menthol in cigarettes.
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. A ban or limitation on the
use of menthol in cigarettes by the FDA would materially adversely affect our business.
The regulation of cigarettes by the Food and Drug Administration may materially adversely affect
our business.
In June 2009, the U.S. Congress passed, and the President signed into law, the Family Smoking
Prevention and Tobacco Control Act that grants the FDA authority to regulate tobacco products. The
legislation:
|
|
|
established a Tobacco Products Scientific Advisory Committee to, among other things,
evaluate the issues surrounding the use of menthol as a flavoring or ingredient in
cigarettes and issue a nonbinding recommendation to the FDA regarding menthol by March
23, 2011; |
|
|
|
|
grants the FDA the regulatory authority to consider and impose broad additional
restrictions through a rule making process, including a ban on the use of menthol in
cigarettes; |
|
|
|
|
requires larger and more severe health warnings, including graphic images, on packs,
cartons and advertising; |
|
|
|
|
bans the use of descriptors on tobacco products, such as low tar and light; |
|
|
|
|
requires the disclosure of ingredients and additives to consumers; |
|
|
|
|
requires pre-market approval by the FDA of all new products, including substantially
equivalent products; |
|
|
|
|
requires pre-market approval by the FDA for claims made with respect to reduced risk
or reduced exposure products; |
|
|
|
|
allows the FDA to require the reduction of nicotine or any other compound in
cigarettes; |
|
|
|
|
allows the FDA to mandate the use of reduced risk technologies in conventional
cigarettes; |
|
|
|
|
allows the FDA to place more severe restrictions on the advertising, marketing and
sales of cigarettes; and |
-39-
|
|
|
permits possible inconsistent state and local regulation of
the advertising or promotion of cigarettes by providing an exception
to certain federal preemption of such regulation. |
We believe that such regulation could have a material adverse effect on our business. For
example, under the Act, we must file a report with the FDA substantiating that any cigarettes
introduced or modified after February 15, 2007 are substantially equivalent to cigarettes on the
market before that date to enable the agency to determine whether the new or modified products are
substantially equivalent to specific predicate products already being sold. For any products
introduced or modified between February 15, 2007 and March 22, 2011, initial reports were required
to be filed with the FDA on or before March 22, 2011. The FDA announced that a product introduced or
modified before March 22, 2011 may remain on the market pending the FDAs review, provided a
substantially equivalent report was filed with the FDA on or before March 22, 2011. We believe,
based on the limited guidance issued by the FDA to date, that we were required to file, and have
filed, reports for all of our cigarettes on or before March 22, 2011 since modifications had been made to our
products since 2007. While all of our cigarettes may remain on the market pending the FDAs
review, they are subject to removal should the FDA determine any are not substantially
equivalent.
The legislation also permits the FDA to impose restrictions regarding the use of menthol in
cigarettes, including a ban, if those restrictions would be appropriate for the public health. Any
ban or material limitation on the use of menthol in cigarettes would materially adversely affect
our results of operations, cash flows and financial condition. It is possible that such additional
regulation, including regulation of menthol short of a ban thereof, could result in a decrease in
cigarette sales in the United States (including sales of our brands), increased costs to us and/or
the development of a significant black market for cigarettes, which may have a material adverse
effect on our financial condition, results of operations, and cash flows.
As
of April 27, 2011, Lorillard Tobacco is a defendant in
approximately 9,040 tobacco-related
lawsuits, including approximately 696 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 jury has returned verdicts that award damages from Lorillard Tobacco in a Conventional Product
Liability Case.
In December 2010, a Massachusetts jury awarded $50 million in compensatory damages to the
estate of a deceased smoker, $21 million in damages to the deceased smokers son, and $81 million
in punitive damages from Lorillard Tobacco in a Conventional Product Liability Case, Evans v.
Lorillard Tobacco Company (Superior Court, Suffolk County,
Massachusetts). As of April 27, 2011,
the case remained pending before the trial court because the judge has not issued a verdict as to a
single claim that was not submitted for the jurys consideration. It is possible the court will
award additional damages to the plaintiffs in its verdict that addresses this final claim. It also
is possible the court will award attorneys fees to the lawyers representing the plaintiff. As of
April 27, 2011, the court had not ruled on the motions filed by Lorillard Tobacco following the
verdicts, which includes motions for new trial, for judgment notwithstanding the verdict, and for
reduction or elimination of the jurys damages awards. The court is
-40-
not expected to issue a final judgment until it disposes of the final claim or it rules on
Lorillard Tobaccos post-trial motions. Lorillard Tobacco may file additional post-trial motions
after a final judgment is entered. Should the final judgment award damages to the plaintiff,
Massachusetts statutes provide that the court may award pre-judgment and post-judgment interest.
The opportunity for Lorillard Tobacco to initiate an appeal from the verdicts in Evans will not
begin until the final judgment is entered. Plaintiff has asked the court to enter a preliminary
injunction that directs Lorillard Tobacco to set aside $272.0 million in cash or cash equivalents
to secure the amounts awarded by the jury and the interest obligations plaintiff expects the court
to order in a final judgment. As of April 27, 2011, the court had not ruled on plaintiffs motion
for preliminary injunction. It is possible that the verdict in this case could lead to additional
litigation.
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 to approximately $242 million
to fund a ten year court-supervised smoking cessation program. The April 2010 decision ordered
that an award of post-judgment interest will accrue from 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 April 27, 2011, judicial interest totaled approximately $34.6
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. The U.S. Supreme Court has granted defendants application to stay
execution of the amended final judgment until defendants petition for writ of certiorari to the
U.S. Supreme Court is resolved. As of April 27, 2011, the U.S. Supreme Court had not determined
whether it will grant review of defendants certiorari petition. 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. In 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
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 7,100 cases pending in various state and federal
courts in Florida that were filed by members of the Engle class (the Engle Progeny Cases),
including 689 cases in which Lorillard, Inc. is a co-defendant.
Lorillard Tobacco and Lorillard, Inc. are
defendants in Engle Progeny Cases that have been placed on courts 2011 trial calendars or in which
specific trial dates have been set. 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 2011. It also is not possible to predict whether some courts will implement
procedures that consolidate multiple Engle Progeny Cases for trial.
As
of April 27, 2011, verdicts had been returned in four Engle Progeny Cases in which
Lorillard Tobacco was a defendant. Lorillard, Inc. was not a defendant in any of these four cases.
In Rohr v. R.J. Reynolds Tobacco
-41-
Company, et al. (Circuit Court, Broward County, Florida), a jury returned a verdict in favor
of the defendants, including Lorillard Tobacco. Plaintiff in Rohr did not pursue an appeal and the
case is concluded. In Mrozek v. Lorillard Tobacco Company (Circuit Court, Fourth Judicial Circuit,
Duval County, Florida), the jury awarded plaintiffs a total of $6,000,000 in compensatory damages
and $11,300,000 in punitive damages. The jury apportioned 35% of the fault for the smokers
injuries to the smoker and 65% to Lorillard Tobacco. As of
April 27, 2011, the court had not ruled
on Lorillard Tobaccos post-trial motions or entered a final judgment in Mrozek. In Tullo v. R.J.
Reynolds, et al. (Circuit Court, Palm Beach County, Florida), the jury awarded plaintiff a total of
$4,500,000 in compensatory damages. The jury assessed 45% of the fault to the smoker, 5% to
Lorillard Tobacco and 50% to other defendants. The jury did not award punitive damages to the
plaintiff. As of April 27, the court had not ruled on the parties post-trial motions in Tullo.
The court entered a final judgment that awards plaintiff $225,000 and post-judgment interest from
Lorillard Tobacco, but it has not resolved plaintiffs application for attorneys fees and costs.
As of April 27, 2011, the opportunity for Lorillard Tobacco to notice an appeal in Tullo had not
expired. In Sulcer v. Lorillard Tobacco Company, et al. (Circuit Court, Escambia County, Florida),
the jury awarded $225,000 in compensatory damages to the plaintiff and it assessed 95% of the fault
for the smokers injuries to the smoker and 5% to Lorillard Tobacco. The jury returned a
verdict for Lorillard Tobacco as to whether plaintiff is entitled to punitive damages. As of April
27, 2011, the deadline for the parties to request post-verdict relief had not expired, and a final
judgment had not been entered in Sulcer.
As
of April 27, 2011, verdicts have been returned in 39 Engle Progeny Cases in which neither
Lorillard Tobacco nor Lorillard, Inc. were defendants since the Florida Supreme Court issued its
2006 ruling. Juries awarded compensatory damages and punitive damages
in 17 of these trials. The
punitive damages awards have totaled $565 million and have ranged from $250,000 to $244 million. In
seven of the trials, juries awarded only compensatory damages. In the 15 other trials, juries found
in favor of the defendants. In some of the trials decided in the defendants favor, plaintiffs
have filed motions challenging the verdicts. It is not possible to predict the final outcome of
this litigation.
We are unable to make a meaningful estimate of the amount or range of loss that could result from
an unfavorable outcome of certain material pending litigation.
We record provisions in our consolidated financial statements for pending litigation when we
determine 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 the provision relating to
the Scott case, as described in the risk factor A judgment has been rendered against Lorillard
Tobacco in the Scott litigation above, while it is reasonably possible that an unfavorable outcome
of pending litigation may occur, (i) management has concluded that it is not probable that a loss
has been incurred in any material pending litigation against Lorillard, (ii) management is unable
to estimate the possible loss or range of loss that could result from an unfavorable outcome in any
material pending litigation and (iii) accordingly, management has not provided any amounts in the
consolidated financial statements for any unfavorable potential outcomes of material pending
litigation. It is possible that our results of operations, cash flows and financial position could
be materially adversely affected by an unfavorable outcome of certain pending or future litigation.
We may not be able to develop, produce or commercialize competitive new products and technologies
required by regulatory changes or changes in consumer preferences.
Consumer health concerns and changes in regulations are likely to require us to introduce new
products or make substantial changes to existing products. For example, all 50 states and the
District of Columbia have passed legislation requiring cigarette manufacturers to reduce the
ignition propensity of their products. We believe that there may be increasing pressure from
public health authorities to develop a conventional cigarette, an alternative cigarette or an
alternative tobacco product that provides a demonstrable reduced risk of adverse health effects.
Certain of the other major cigarette makers have already developed and marketed alternative
cigarette products. We may not be able to develop a reduced risk product that is acceptable to
consumers. In addition, the costs associated with developing any such new products and
technologies could be substantial.
The availability of counterfeit cigarettes could adversely affect our sales volume, revenue and
profitability.
Sales of counterfeit cigarettes in the United States, including counterfeits of our Newport
brand, could adversely impact sales by the manufacturers of the brands that are counterfeited and
potentially damage the value and
-42-
reputation of those brands. Additionally, smokers who mistake counterfeit cigarettes for our
cigarettes may attribute quality and taste deficiencies in the counterfeit product to our brands
and discontinue purchasing our brands. Although we do not believe that sales of counterfeit
Newport cigarettes have had a material adverse effect on our sales volume, revenue and profits to
date, the availability of counterfeit Newport cigarettes together with the potential regulation of
cigarettes and their ingredients, substantial increases in excise taxes and other potential price
increases could result in increased demand for counterfeit product that could have a material
adverse effect on our sales volume, revenue and profits in the future.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In the first quarter of 2011, 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, 2011 January 31, 2011 |
|
|
1.6 |
|
|
$ |
75.98 |
|
|
|
1.6 |
|
|
$ |
500.5 |
|
February 1, 2011 February 28, 2011 |
|
|
1.4 |
|
|
|
76.77 |
|
|
|
1.4 |
|
|
|
395.7 |
|
March 1, 2011 March 31, 2011 |
|
|
0.8 |
|
|
|
78.41 |
|
|
|
0.8 |
|
|
|
335.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3.8 |
|
|
$ |
76.76 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The shares repurchased were acquired under a share repurchase program authorized by the
Board of Directors on August 20, 2010 for a maximum of $1 billion. All repurchases were made in
open market transactions. We record the repurchase of shares of Common Stock at cost based on the
transaction date of the repurchase. As of March 31, 2011, the maximum dollar value of shares that
could yet be purchased under the August 20, 2010 repurchase program was $335 million.
Item 3. Defaults Upon Senior Securities
None.
Item 4. [Reserved]
Item 5. Other Information
On
April 29, 2011, the jury in the City of St. Louis [Missouri] v.
American Tobacco Co., Inc., et al.
(Circuit Court, City of St. Louis, Missouri) returned a verdict for Lorillard Tobacco and the other
cigarette manufacturers that were defendants in the case. Lorillard, Inc. had been voluntarily
dismissed from the case by the plaintiffs during the trial.
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 |
-43-
|
|
|
Exhibit |
|
|
Number |
|
Description |
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 |
|
|
|
4.4
|
|
Second Supplemental Indenture, dated April 12, 2010, 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 April 12,
2010 |
|
|
|
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 6.875% Senior Note due 2020 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 April 12, 2010 |
|
|
|
4.7
|
|
Form of 8.125% Senior Note due 2040 of Lorillard Tobacco Company,
incorporated by reference of Exhibit 4.4 to our Current Report on Form
8-K (File No. 1-34097) filed on April 12, 2010 |
|
|
|
4.8
|
|
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 |
|
|
|
4.9
|
|
Form of Guarantee Agreement of Lorillard, Inc. for the 6.875% Senior
Notes due 2020 of Lorillard Tobacco Company, incorporated by reference
to Exhibit 4.5 to our Current Report on Form 8-K (File No. 1-34097)
filed on April 12, 2010 |
|
|
|
4.10
|
|
Form of Guarantee Agreement of Lorillard, Inc. for the 8.125% Senior
Notes due 2040 of Lorillard Tobacco Company, incorporated by reference
to Exhibit 4.6 to our Current Report on Form 8-K (File No. 1-34097)
filed on April 12, 2010 |
|
|
|
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, incorporated by reference
to Exhibit 10.2 to our Annual Report on Form 10-K (File No. 1-34097)
filed on March 2, 2009* |
|
|
|
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 |
|
|
|
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 |
-44-
|
|
|
Exhibit |
|
|
Number |
|
Description |
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 (File No. 1-34097) filed on August 7,
2008 |
|
|
|
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 (File No.
1-34097) filed on July 10, 2008 |
|
|
|
10.20
|
|
Amendment to Supply Agreement for Reconstituted
Tobacco, dated 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, 2008 (File No. 1-34097) 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 for the quarter ended
September 30, 2008 (File No. 1-34097) filed on November
4, 2008 |
-45-
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.22
|
|
Form of Stock Option Award Certificate, incorporated
herein by reference to Exhibit 10.22 to our Quarterly
Report on Form 10-Q for the quarter ended March 31,
2010 (File No. 1-34097) filed on May 6, 2010 |
|
|
|
10.23
|
|
Form of Restricted Stock Award Certificate,
incorporated herein by reference to Exhibit 10.2 of our
Quarterly Report on Form 10-Q (File No. 1-34097) filed
on May 5, 2009 |
|
|
|
10.24
|
|
Credit Agreement, dated March 26, 2010, among Lorillard
Tobacco Company, as borrower, Lorillard, Inc., 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 (File No. 1-34097) filed on
March 26, 2010 |
|
|
|
10.25
|
|
Consulting Agreement between Lorillard, Inc. and Martin
L. Orlowsky, dated August 12, 2010, incorporated herein
by reference to Exhibit 10.2 to our Current Report on
Form 8-K (File No. 1-34097) filed on August 12, 2010 |
|
|
|
10.26
|
|
Offer Letter between Lorillard, Inc. and Murray S.
Kessler, dated August 12, 2010, incorporated herein by
reference to Exhibit 10.3 to our Current Report on Form
8-K (File No. 1-34097) filed on August 12, 2010 |
|
|
|
10.27
|
|
Severance Agreement between Lorillard, Inc. and Murray
S. Kessler, dated October 11, 2010, incorporated herein
by reference to Exhibit 10.26 to our Quarterly Report
on Form 10-Q (File No. 1-34087) filed on October 27,
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. |
-46-
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 3, 2011
|
|
|
|
|
|
LORILLARD, INC.
|
|
|
By: |
/s/ Murray S. Kessler
|
|
|
|
Name: Murray S. Kessler |
|
|
|
Title: |
Chairman, President and
Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
|
By: |
/s/ David H. Taylor
|
|
|
|
Name: David H. Taylor |
|
|
|
Title: |
Executive Vice President, Finance and
Planning and Chief Financial Officer
(Principal Financial Officer) |
|
|