10-Q

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 June 30, 2014

OR

¨ 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 incorporation or organization)	(I.R.S. Employer Identification No.)

714 Green Valley Road, Greensboro, North Carolina 27408-7018

(Address of principal executive offices) (Zip Code)

(336) 335-7000

(Registrant’s 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  ¨

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  ¨

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	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	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  ¨    No  þ

Class	Outstanding at July 28, 2014
Common stock, $0.01 par value	360,017,227 shares

TABLE OF CONTENTS

		Page No.
INTRODUCTORY NOTE			1
PART I. FINANCIAL INFORMATION			2
Item 1.	Financial Statements.		2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		46
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.		62
Item 4.	Controls and Procedures.		63
PART II. OTHER INFORMATION			63
Item 1.	Legal Proceedings.		63
Item 1A.	Risk Factors.		63
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		72
Item 3.	Defaults Upon Senior Securities		72
Item 4.	Mine Safety Disclosures		72
Item 5.	Other Information		72
Item 6.	Exhibits		72
SIGNATURES			S-1

INTRODUCTORY NOTE

On July 15, 2014, Lorillard, Inc. announced that it had entered into a merger agreement with Reynolds American Inc. (“RAI”) and a wholly owned subsidiary of RAI. Unless stated otherwise, all forward-looking information contained in this report does not take into account or give any effect to the impact of the proposed merger. For additional details regarding the proposed merger, see Note 21 to our consolidated condensed financial statements, “Subsequent Events,” contained in Part I, Item 1, of this report, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part I, Item 2, of this report and “Risk Factors” contained in Part II, Item 1A, of this report.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

LORILLARD, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(UNAUDITED)

(In millions, except share and per share data)	June 30, 2014			December 31, 2013
Assets:
Cash and cash equivalents	$	709		$	1,454
Short-term investments		172			157
Accounts receivable, less allowances of $2 and $3		25			19
Other receivables		19			29
Inventories		475			499
Deferred income taxes		549			555
Other current assets		104			23
Total current assets		2,053			2,736
Plant and equipment, net		312			316
Long-term investments		126			93
Goodwill		103			102
Intangible assets		76			87
Deferred income taxes		58			51
Other assets		165			151
Total assets	$	2,893		$	3,536
Liabilities and Shareholders’ Deficit:
Accounts and drafts payable	$	33		$	42
Accrued liabilities		366			377
Settlement costs		753			1,224
Income taxes		1			8
Total current liabilities		1,153			1,651
Long-term debt		3,566			3,560
Postretirement pension, medical and life insurance benefits		311			305
Other liabilities		91			84
Total liabilities		5,121			5,600
Commitments and Contingent Liabilities
Shareholders’ Deficit:
Preferred stock, $0.01 par value, authorized 10 million shares		—			—
Common stock:
Authorized—600 million shares; par value—$0.01 per share
Issued—383 million and 382 million shares (outstanding 360 million and 365 million shares)		4			4
Additional paid-in capital		275			256
Accumulated deficit		(1,313	)		(1,438	)
Accumulated other comprehensive loss		(124	)		(130	)
Treasury stock at cost, 23 million and 17 million shares		(1,070	)		(756	)
Total shareholders’ deficit		(2,228	)		(2,064	)
Total liabilities and shareholders’ deficit	$	2,893		$	3,536

See Notes to Consolidated Condensed Financial Statements

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LORILLARD, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
(In millions, except per share data)	2014			2013			2014			2013
Net sales (including excise taxes of $502, $516, $947 and $971, respectively)	$	1,799		$	1,804		$	3,391		$	3,381
Cost of sales (including excise taxes of $502, $516, $947 and $971, respectively)		1,116			1,126			2,090			1,990
Gross profit		683			678			1,301			1,391
Selling, general and administrative		151			138			297			290
Operating income		532			540			1,004			1,101
Investment income (loss)		(2	)		—			6			1
Interest expense		(45	)		(41	)		(90	)		(82	)
Income before income taxes		485			499			920			1,020
Income taxes		185			186			349			380
Net income	$	300		$	313		$	571		$	640
Earnings per share:
Basic	$	0.83		$	0.83		$	1.58		$	1.69
Diluted	$	0.83		$	0.83		$	1.57		$	1.69
Weighted average number of shares outstanding:
Basic		360.31			375.86			361.22			377.22
Diluted		360.93			376.61			361.83			378.00
Dividends declared per share	$	0.62		$	0.55		$	1.23		$	1.10

See Notes to Consolidated Condensed Financial Statements

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LORILLARD, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended June 30,					Six Months Ended June 30,
(In millions)	2014		2013			2014		2013
Net income	$	300	$	313		$	571	$	640
Other comprehensive income, net of tax:
Defined benefit retirement plan gains (losses), net of tax expense (benefit) of $1, $(2), $2 and $—		2		(5	)		4		(1	)
Foreign currency translation adjustments, net of tax expense of $—  , $—  , $1 and $—		1		—			2		—
Comprehensive income	$	303	$	308		$	577	$	639

See Notes to Consolidated Condensed Financial Statements

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LORILLARD, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(UNAUDITED)

	Common Stock			Additional Paid-in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Loss			Treasury Shares			Total Shareholders’ Deficit
(In millions, except per share data)
Balance, January 1, 2013	$	5		$	298		$	2,351		$	(241	)	$	(4,190	)	$	(1,777	)
Net income								640									640
Other comprehensive loss, net of tax benefit of $—											(1	)					(1	)
Dividends paid ($1.10 per share)								(417	)								(417	)
Retirement of treasury shares		(1	)		(82	)		(4,146	)					4,229			—
Shares repurchased														(318	)		(318	)
Share-based compensation					11												11
Excess tax benefit on share-based compensation					7												7
Balance, June 30, 2013	$	4		$	234		$	(1,572	)	$	(242	)	$	(279	)	$	(1,855	)
Balance, January 1, 2014	$	4		$	256		$	(1,438	)	$	(130	)	$	(756	)	$	(2,064	)
Net income								571									571
Other comprehensive income, net of tax expense of $3											6						6
Dividends paid ($1.23 per share)								(446	)								(446	)
Shares repurchased														(314	)		(314	)
Share-based compensation					11												11
Excess tax benefit on share-based compensation					8												8
Balance, June 30, 2014	$	4		$	275		$	(1,313	)	$	(124	)	$	(1,070	)	$	(2,228	)

See Notes to Consolidated Condensed Financial Statements

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LORILLARD, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended June 30
	2014			2013
(In millions)
Cash flows from operating activities:
Net income	$	571		$	640
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		37			23
Pension and other postretirement benefits contributions		(6	)		(22	)
Pension and other postretirement benefits expense		9			18
Deferred income taxes		(4	)		(3	)
Share-based compensation		9			9
Excess tax benefits from share-based payment arrangements		(8	)		(7	)
Changes in operating assets and liabilities:
Accounts and other receivables		6			(6	)
Inventories		25			(24	)
Accounts payable and accrued liabilities		(20	)		5
Settlement costs		(471	)		(434	)
Income taxes		(60	)		(27	)
Other current assets		(14	)		7
Other assets		1			3
Net cash provided by operating activities		75			182
Cash flows from investing activities:
Purchase of investments		(337	)		—
Additions to plant and equipment		(22	)		(34	)
Sales, maturities and calls of investments		289			—
Net cash used in investing activities		(70	)		(34	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		—			500
Dividends paid		(446	)		(417	)
Shares repurchased		(314	)		(318	)
Debt issuance costs		—			(4	)
Proceeds from exercise of stock options		2			2
Excess tax benefits from share-based payment arrangements		8			7
Net cash used in financing activities		(750	)		(230	)
Change in cash and cash equivalents		(745	)		(82	)
Cash and cash equivalents, beginning of year		1,454			1,720
Cash and cash equivalents, end of period	$	709		$	1,638
Cash paid for income taxes	$	413		$	409
Cash paid for interest, net of cash received from interest rate swaps of $12 and $12	$	87		$	78

See Notes to Consolidated Condensed Financial Statements

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LORILLARD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

Overview. Lorillard, Inc., through certain of its subsidiaries, is engaged in the manufacture and sale of cigarettes and electronic cigarettes. Lorillard Tobacco Company’s principal cigarette 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. On April 24, 2012 Lorillard acquired blu eCigs, an electronic cigarette brand in the U.S. On October 1, 2013, Lorillard acquired the assets and operations of SKYCIG, now trading as blu (U.K.), a United Kingdom-based electronic cigarette business. Newport, Kent, True, Maverick, Old Gold, blu eCigs and SKYCIG are the registered trademarks of Lorillard, Inc. and its subsidiaries.

The consolidated financial statements of Lorillard, Inc. (the “Company”), together with its subsidiaries (“Lorillard” or “we” or “us” or “our”), include the accounts of the Company and its subsidiaries after the elimination of intercompany accounts and transactions.

The Company has two reportable segments – Cigarettes and Electronic Cigarettes. The Cigarettes segment consists principally of the operations of Lorillard Tobacco Company (“Lorillard Tobacco” or “Issuer”) and related entities. The Electronic Cigarettes segment consists of the operations of LOEC, Inc. (d/b/a blu eCigs), (“LOEC” or “blu eCigs”), Cygnet U.K. Trading Limited (t/a SKYCIG or blu (U.K.)) (“Cygnet”, “SKYCIG” or “blu (U.K.)”) and related entities.

Basis of Presentation. The accompanying unaudited consolidated condensed financial statements reflect all adjustments necessary to present fairly the financial position as of June 30, 2014 and December 31, 2013 and the consolidated income and comprehensive income for the three and six months ended June 30, 2014 and 2013 and the shareholders’ deficit and cash flows for the six months ended June 30, 2014 and 2013.

Results of operations for the three and six 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 21, 2014.

Recently Adopted Accounting Pronouncements. In July 2012, the FASB issued ASU 2012-02 “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” ASU 2012-02 gives an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that indefinite-lived intangible assets other than goodwill are impaired, before being required to complete a quantitative impairment test. If an entity concludes, after assessing the totality of qualitative factors, that it is more likely than not that the indefinite-lived intangible assets are not impaired, then it is not required to complete a quantitative impairment test whereby the fair value of the indefinite-lived intangible asset would be determined and compared with the carrying amount of the intangible asset. The amendments in this update are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, and early adoption is permitted. The adoption of ASU 2012-02 in the first quarter of 2013 did not have a material impact on Lorillard’s financial position or results of operations, but may impact the manner in which Lorillard assesses indefinite-lived intangible assets for impairment.

In February 2013, the FASB issued ASU 2013-02 “Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires an entity to provide information about amounts reclassified out of accumulated other comprehensive income. An entity is also required to present either on the face of the financial statements or in the footnotes, significant items reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety. For other items that are not required under U.S. GAAP to be reclassified to net income in their entirety, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. This standard is effective for public entities prospectively for reporting periods beginning after December 15, 2012. The adoption

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of ASU 2013-02 did not have any impact on Lorillard’s financial position or results of operations, but resulted in disclosure of additional information about amounts reclassified out of accumulated other comprehensive loss. For additional information, see Note 17, “Accumulated Other Comprehensive Loss.”

Accounting Pronouncements not yet adopted – In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers (Topic 606).” ASU 2014, which was a joint project of the FASB and IASB, clarifies the principles for recognizing revenue and provides a common revenue standard under U.S. GAAP and International Financial Reporting Standards that removes inconsistencies and weaknesses in existing revenue requirements; provides a more robust framework for addressing revenue issues; improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; provides more useful information to users of financial statements through improved disclosure requirements; and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The guidance in this proposed update affects any entity that enters into contracts with customers unless those contracts are in the scope of other standards (for example, insurance contracts or lease contracts). The core principle of this update is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity applies the following steps: identify the contract(s) with a customer; identify the separate performance obligations in the contract; determine the transaction price; allocate the transaction price to the separate performance obligations in the contract; and recognize revenue when (or as) the entity satisfies a performance obligation. The amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. We have not yet determined the potential effects on Lorillard’s financial position or results of operations, if any.

2. Acquisitions

On April 24, 2012, Lorillard, Inc., through its wholly owned subsidiary, Lorillard Holdings Company, Inc. (“LHCI”), and its subsidiaries acquired the blu eCigs brand and other assets used in the manufacture, distribution, development, research, marketing, advertising, and sale of electronic cigarettes for $135 million in cash. The acquisition was made pursuant to an asset purchase agreement (the “Agreement”) with BLEC, LLC, Intermark Brands, LLC and QSN Technologies, LLC (the “Sellers”). The Agreement contains customary representations, warranties, covenants and indemnities by the Sellers and LHCI. This acquisition provided Lorillard with the blu eCigs brand and an electronic cigarette product line.

The results of operations of blu eCigs are included in our consolidated financial statements beginning as of April 24, 2012. Lorillard’s consolidated revenues include $81 million and $114 million of sales of blu eCigs during the six months ended June 30, 2014 and 2013, respectively. blu eCigs had operating (loss) income of $(11) million and $9 million during the six months ended June 30, 2014 and 2013, respectively.

The fair values of the assets acquired and liabilities assumed at the date of acquisition are summarized below (in millions):

Assets acquired:
Current assets:
Accounts receivable	$	2
Inventories		15
Total current assets		17
Goodwill		64
Intangible assets		58
Total assets		139
Liabilities assumed:
Current liabilities:
Accounts and drafts payable		4
Purchase price	$	135

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On October 1, 2013, Lorillard acquired certain assets and operations of SKYCIG, now trading as blu (U.K.), a United Kingdom (“U.K.”)-based electronic cigarette (e-cigarette) business for approximately £28 million (approximately $46 million) in cash paid at closing and contingent consideration of up to an additional £30 million (approximately $49 million at October 1, 2013 exchange rates) to be paid in 2016 based on the achievement of certain financial performance benchmarks.

The results of operations of blu (U.K.) are included in our consolidated financial statements beginning as of October 1, 2013. Lorillard’s consolidated revenues include $7 million of sales of blu (U.K.) during the six months ended June 30, 2014. blu (U.K.) had an operating loss of $23 million during the six months ended June 30, 2014.

Lorillard is still in the process of finalizing a working capital adjustment that may increase total consideration transferred by up to $2 million. Therefore, the purchase price and goodwill amounts noted below could increase by up to $2 million as a result of finalizing this working capital adjustment. The fair values of the assets acquired and liabilities assumed at the date of acquisition are summarized below (in millions):

Assets acquired:
Current assets:
Accounts receivable	$	2
Goodwill		38
Intangible assets		35
Total assets		75
Liabilities assumed:
Current liabilities:
Accounts and drafts payable		3
Accrued liabilities		1
Total current liabilities		4
Earn out liability		25
Purchase price	$	46

3. Inventories

Cigarette inventories (including leaf tobacco, manufactured stock and materials and supplies) are valued at the lower of cost, determined on a last-in, first-out (“LIFO”) basis, or market. Electronic cigarette inventories of $71 million and $85 million included in manufactured stock as of June 30, 2014 and December 31, 2013, respectively, are valued at the lower of cost, determined on a first-in, first-out (“FIFO”) basis, or market. Inventories consisted of the following:

	June 30, 2014		December 31, 2013
	(In millions)
Leaf tobacco	$	314	$	349
Manufactured stock		157		143
Material and supplies		4		7
	$	475	$	499

If the average cost method of accounting was used for inventories valued on a LIFO basis, inventories would be greater by approximately $282 million and $264 million at June 30, 2014 and December 31, 2013, respectively.

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4. Other Current Assets

Other current assets were as follows:

	June 30, 2014		December 31, 2013
	(In millions)
Prepaid income taxes	$	67	$	—
Appeal bonds		21		7
Other current assets		16		16
Total	$	104	$	23

5. Plant and Equipment, Net

Plant and equipment is stated at historical cost and consisted of the following:

	June 30, 2014			December 31, 2013
	(In millions)
Land	$	3		$	3
Buildings		106			104
Equipment		683			684
Total		792			791
Accumulated depreciation		(480	)		(475	)
Plant and equipment, net	$	312		$	316

Depreciation expense was $26 million, and $23 million for the six months ended June 30, 2014 and 2013, respectively.

6. Goodwill and Intangible Assets

On April 24, 2012, Lorillard completed the acquisition of blu eCigs. For additional information, see Note 2, “Acquisitions.” The purchase price allocation includes $64 million of goodwill and $58 million of intangible assets, $57 million of which was an indefinite lived intangible asset consisting of the blu eCigs trademark and trade name.

We evaluated our goodwill and indefinite lived intangible assets recorded as a part of the blu eCigs reporting unit for impairment as of November 1, 2013. Based on the results of our impairment analysis, no impairment of the blu eCigs goodwill or the blu eCigs trademark or trade name was determined to exist.

There were no changes in blu eCigs goodwill during the six months ended June 30, 2014.

On October 1, 2013, Lorillard completed the acquisition of SKYCIG, now trading as blu (U.K.). For additional information, see Note 2, “Acquisitions.” The preliminary purchase price allocation includes $38 million of goodwill and $35 million of intangible assets, $33 million of which is the fair value ascribed to the SKYCIG trademark and trade name. Lorillard is still in the process of finalizing a working capital adjustment that may increase total consideration transferred by up to $2 million. Therefore, the goodwill amount noted above could increase by up to $2 million as a result of finalizing this working capital adjustment. The fair value ascribed to the SKYCIG trademark and trade name in connection with the acquisition is being amortized over an estimated life of 18 months, beginning October 1, 2013, after which amortization charges related to the trademark and trade name will cease.

All goodwill and intangible assets have been recorded as a part of our blu eCigs and blu (U.K.) reporting units, both of which are components of our Electronic Cigarettes reporting segment.

There were no changes in blu (U.K.) goodwill during the six months ended June 30, 2014, other than the impact of foreign currency translation.

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Intangible Assets

	Weighted Average Amortization Period		Cost		Foreign Currency Translation		Accumulated Amortization		June  30, 2014 Net Carrying Amount
(In millions)
Amortizable intangible assets:
blu eCigs Non-compete Agreement and Technology		5 years	$	1	$	—	$	1	$	—
SKYCIG Non-compete Agreement and Customer List		5 years		2		—		—		2
SKYCIG trademark and trade name		18 months		33		2		18		17
Amortizable intangible assets, net										19
Indefinite-lived intangible assets:
blu eCigs trademark and trade name										57
Intangible assets, net									$	76

Intangible assets are amortized using the straight-line method. The aggregate amortization expense for the six months ended June 30, 2014 was $11 million. The aggregate amortization expense for the remainder of 2014 and 2015 is estimated to be approximately $11 million and $6 million, respectively.

7. Other Assets

Other assets were as follows:

	June 30, 2014		December 31, 2013
	(In millions)
Debt issuance costs	$	24	$	26
Interest rate swaps		66		60
Prepaid pension		66		55
Other prepaid assets		9		10
Total	$	165	$	151

8. Accrued Liabilities

Accrued liabilities were as follows:

	June 30, 2014		December 31, 2013
	(In millions)
Legal fees	$	38	$	29
Salaries and other compensation		20		20
Medical and other employee benefit plans		28		30
Consumer rebates		64		78
Sales promotion		27		29
Excise and other taxes		93		57
Accrued interest		34		34
Litigation related accruals		22		42
Other accrued liabilities		40		58
Total	$	366	$	377

9. Commitments

At June 30, 2014, Lorillard Tobacco had contractual obligations to purchase leaf tobacco of approximately $117 million and to purchase machinery of approximately $60 million between July 1, 2014 and June 30, 2015.

At June 30, 2014, blu eCigs had contractual purchase obligations of approximately $25 million. These purchase obligations related primarily to agreements to purchase inventory between July 1, 2014 and June 30, 2015.

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At June 30, 2014, blu (U.K.) did not have any contractual purchase obligations.

10. 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.

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 June 30, 2014, were as follows:

(In millions)	Level 1		Level 2		Level 3		Total
Cash and Cash Equivalents:
Prime money market funds	$	709	$	—	$	—	$	709
Total cash and cash equivalents	$	709	$	—	$	—	$	709
Short-term investments:
Corporate debt securities	$	—	$	105	$	—	$	105
U.S. Government agency obligations		—		39		—		39
Commercial paper		—		18		—		18
International government obligations		—		10		—		10
Total short-term investments	$	—	$	172	$	—	$	172
Long-term investments:
Corporate debt securities	$	—	$	108	$	—	$	108
U.S. Government agency obligations		—		18		—		18
Total long-term investments	$	—	$	126	$	—	$	126
Derivative Asset:
Interest rate swaps – fixed to floating rate	$	—	$	66	$	—	$	66
Other liabilities:
SKYCIG earn out liability	$	—	$	—	$	26	$	26

-12-

Assets and liabilities measured at fair value on a recurring basis at December 31, 2013 were as follows:

(In millions)	Level 1		Level 2		Level 3		Total
Cash and Cash Equivalents:
Prime money market funds	$	1,454	$	—	$	—	$	1,454
Total cash and cash equivalents	$	1,454	$	—	$	—	$	1,454
Short-term investments:
Corporate debt securities	$	—	$	63	$	—	$	63
U.S. Government agency obligations		—		59		—		59
Commercial paper		—		22		—		22
International government obligations		—		13		—		13
Total short-term investments	$	—	$	157	$	—	$	157
Long-term investments:
Corporate debt securities	$	—	$	86	$	—	$	86
U.S. Government agency obligations		—		7		—		7
Total long-term investments	$	—	$	93	$	—	$	93
Derivative Asset:
Interest rate swaps — fixed to floating rate	$	—	$	60	$	—	$	60
Other liabilities:
SKYCIG earn out liability	$	—	$	—	$	25	$	25

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 13, “Derivative Instruments,” for additional information on the interest rate swaps.

Short-term and long-term investments include corporate debt securities, U.S. Government agency obligations, commercial paper and international government obligations. The fair value of corporate debt securities, U.S. Government agency obligations, commercial paper and international government obligations, classified as Level 2, utilized quoted prices for identical assets in less active markets or quoted prices for similar assets in active markets.

There were no transfers between levels within the fair value hierarchy. There were no Level 3 purchases, sales, issuances or settlements of these assets and liabilities for the six months ended June 30, 2014 or the six months ended June 30, 2013.

Proceeds from sales, maturities and calls of available for sale securities were $289 million for the six months ended June 30, 2014. There were no proceeds from sales, maturities and calls of available for sale securities for the six months ended June 30, 2013. For the six months ended June 30, 2014, realized gains and losses on sales, maturities and calls of available for sale securities were not material. There were no realized gains and losses on sales, maturities and calls of available for sale securities for the six months ended June 30, 2013.

The fair value of the SKYCIG earn out liability (the “Earn Out”), classified as Level 3 was determined utilizing a discounted cash flows approach using various probability-weighted SKYCIG 2015 financial performance scenarios, upon which the ultimate earn out liability to be paid in 2016 will be based. Significant unobservable inputs used in calculating the fair value of the Earn Out include various SKYCIG financial performance scenarios, the probability of achieving those scenarios, and the discount rate. Based upon this calculation, the fair value of the Earn Out was determined to be £15 million, approximately $25 million, as of the date of the acquisition (October 1, 2013) and approximately $26 million as of June 30, 2014. The amount of the Earn Out that will be ultimately paid in 2016 could range from £0 to £30 million (approximately $0 to $51 million at June 30, 2014 exchange rates). Changes in the fair value of the Earn Out are recorded as a component of selling, general and administrative expenses of the Electronic Cigarettes segment. There was no change in the fair value of the Earn Out other than foreign currency translation during the six months ended June 30, 2014. See Note 2, “Acquisitions” for additional information related to the acquisition of SKYCIG.

-13-

11. Credit Agreement

On July 10, 2012, Lorillard Tobacco, the principal, wholly owned operating subsidiary of the Company, terminated its three year $185 million credit agreement (the “Old Revolver”), dated March 26, 2010, and entered into a $200 million revolving credit facility that expires on July 10, 2017 (the “Revolver”) and is guaranteed by the Company. The Revolver may be increased to $300 million upon request. 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 Company’s 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 (“Adjusted EBITDA”) of not more than 2.25 to 1 and a ratio of Adjusted EBITDA to interest expense of not less than 3.0 to 1. In addition, the Revolver contains other affirmative and negative covenants customary for facilities of this type. The Revolver contains customary events of default, including upon a change in control (as defined therein), that could result in the acceleration of all amounts and cancellation of all commitments outstanding under the Revolver.

As of June 30, 2014, Lorillard was in compliance with all financial covenants and there were no borrowings under the Revolver.

12. Long-Term Debt

Long-term debt consisted of the following:

	June 30, 2014		December 31, 2013
	(In millions)
2016 Notes - 3.500% Notes due 2016	$	500	$	500
2017 Notes - 2.300% Notes due 2017		500		500
2019 Notes - 8.125% Notes due 2019		816		810
2020 Notes - 6.875% Notes due 2020		750		750
2023 Notes - 3.750% Notes due 2023		500		500
2040 Notes - 8.125% Notes due 2040		250		250
2041 Notes - 7.000% Notes due 2041		250		250
Total long-term debt	$	3,566	$	3,560

In August 2012, Lorillard Tobacco issued $500 million aggregate principal amount of 2.300% unsecured senior notes due August 21, 2017 (the “2017 Notes”) pursuant to the Indenture and the Fourth Supplemental Indenture, dated August 21, 2012. The net proceeds from the issuance were used for the repurchase of the Company’s common stock.

In May 2013, Lorillard Tobacco issued $500 million aggregate principal amount of 3.750% unsecured senior notes due May 20, 2023 (the “2023 Notes”) pursuant to the Indenture and the Fifth Supplemental Indenture, dated May 20, 2013. The net proceeds from the issuance were used for the repurchase of the Company’s common stock.

Lorillard Tobacco is the principal, 100% owned operating subsidiary of the Company, and the $750 million aggregate principal amount of 8.125% senior notes issued in June 2009 and due 2019 (the “2019 Notes”), $750 million aggregate principal amount of 6.875% senior notes due 2020 and $250 million aggregate principal amount of 8.125% senior notes due 2040 and issued in April 2010 (the “2020 Notes” and “2040 Notes,” respectively), $500 million aggregate principal amount of 3.500% Notes due 2016, 2017 Notes, 2023 Notes and $250 million aggregate principal amount of 7.000% Notes due 2041 (together, the “Notes”) are unconditionally guaranteed on a senior unsecured basis by the Company.

-14-

The interest rate payable on the 2019 Notes is subject to incremental increases from 0.25% to 2.00% in the event either Moody’s Investors Services, Inc. (“Moody’s”), Standard & Poor’s Ratings Services (“S&P”) or both Moody’s and S&P downgrade the 2019 Notes below investment grade (Baa3 and BBB- for Moody’s and S&P, respectively). As of June 30, 2014 our debt ratings were Baa2 and BBB- with Moody’s 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 Moody’s 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 June 30, 2014 and December 31, 2013, the carrying value of the Notes was $3.566 billion and $3.560 billion, respectively, and the estimated fair value was $4.006 billion and $3.872 billion, respectively. The fair value of the Notes is based on market pricing. The fair value of the Notes, classified as Level 1, utilized quoted prices in active markets.

13. 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 rates were 4.776% and 4.793% as of June 30, 2014 and December 31, 2013, respectively. The agreements expire in June 2019. The interest rate swap agreements qualify for hedge accounting and were designated as fair value hedges. Under the swap agreements, Lorillard Tobacco receives a fixed rate settlement and pays a variable rate settlement with the difference recorded in interest expense. That difference reduced interest expense by $6 million and $12 million for the three and six months ended June 30, 2014 and 2013, respectively.

For derivatives designated as fair value hedges, which relate entirely to hedges of long-term 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 June 30, 2014 and December 31, 2013, the adjusted carrying amounts of the hedged debt were $816 million and $810 million, respectively, and the amounts included in other assets were $66 million and $60 million, respectively.

If our debt rating is downgraded below Ba2 by Moody’s or BB by S&P, the swap agreements will terminate and we will be required to settle them in cash before their expiration date. As of June 30, 2014, our debt ratings were Baa2 and BBB- with Moody’s and S&P, respectively, both of which are above the ratings at which settlement of our derivative contracts would be required.

14. Earnings Per Share

Basic and diluted earnings per share (“EPS”) were calculated using the following:

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(In millions)
Numerator:
Net income, as reported Net	$	300		$	313		$	571		$	640
Less: Net income attributable to participating securities		(1	)		(1	)		(2	)		(2	)
Net income available to common shareholders	$	299		$	312		$	569		$	638
Denominator:
Basic EPS- weighted average shares		360.31			375.86			361.22			377.22
Effect of dilutive securities:
Stock Options and SARS		0.62			0.75			0.61			0.78
Diluted EPS- adjusted weighted average shares and assumed conversions		360.93			376.61			361.83			378.00
Earnings Per Share:
Basic	$	0.83		$	0.83		$	1.58		$	1.69
Diluted	$	0.83		$	0.83		$	1.57		$	1.69

-15-

No options to purchase shares of common stock were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive for the three and six months ended June 30, 2014 or 2013.

15. 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 June 30,						Six Months Ended June 30,
Pension Benefits	2014			2013			2014			2013
	(In millions)
Service cost	$	6		$	7		$	12		$	13
Interest cost		14			13			28			25
Expected return on plan assets		(22	)		(21	)		(44	)		(41	)
Amortization of net loss		2			5			4			11
Amortization of prior service cost		1			1			2			2
Net periodic benefit cost	$	1		$	5		$	2		$	10
	Three Months Ended June 30,						Six Months Ended June 30,
Other Postretirement Benefits	2014			2013			2014			2013
	(In millions)
Service cost	$	2		$	2		$	3		$	3
Interest cost		2			2			5			5
Net periodic benefit cost	$	4		$	4		$	8		$	8

Lorillard expects to contribute $1 million to its pension plans and $13 million to its other postretirement benefit plans in 2014, of which $6 million had been contributed to the postretirement benefit plans as of June 30, 2014.

16. Share Repurchase Programs

As of February 24, 2012, the Company completed its $750 million share repurchase program that was announced in August 2011, after repurchasing an additional 4.9 million shares in January and February 2012 for $188 million at an average purchase price of $38.28. The Company repurchased a total of 20.1 million shares at an average price of $37.29 per share under this program.

As of January 30, 2013, the Company completed its $500 million share repurchase program that was announced in August 2012, after repurchasing an additional 2.8 million shares in January 2013 for $109 million at an average purchase price of $39.24. The Company repurchased a total of 12.7 million shares at an average price of $39.38 per share under this program.

As of June 4, 2014, the Company completed its $1 billion share repurchase program that was announced in March 2013 and amended in May 2013, after repurchasing an additional 2.7 million shares during the second quarter of 2014 for $156 million at an average purchase price of $58.72. The Company repurchased a total of 21.1 million shares at an average price of $47.48 per share under this program. In connection with entering into the Merger Agreement (see Note 21, “Subsequent Events”), Lorillard suspended future share repurchases.

-16-

As of June 30, 2014, total shares repurchased under share repurchase programs authorized by the Board since the separation from Loews in 2008 were as follows:

Program	Amount Authorized		Number of Shares Repurchased
	(In millions)		(In millions)
July 2008 – October 2008	$	400		17.6
May 2009 – July 2009		250		11.0
July 2009 – January 2010		750		29.3
February 2010 – May 2010		250		9.8
August 2010 * – August 2011		1,400		45.1
August 2011 – February 2012		750		20.1
August 2012 – January 2013		500		12.7
March 2013 **– June 2014		1,000		21.1
Total	$	5,300		166.7

* As amended on May 19, 2011

** As amended on May 21, 2013

17. Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss during the six months ended June 30, 2014 consisted of the following:

	Defined Benefit Pension and Post-Retirement Plan Items			Foreign Currency			Total
	(In millions)
Beginning balance, January 1, 2014	$	131		$	(1	)	$	130
Pension and post-retirement plan actuarial gains and prior service cost		(4	)		—			(4	)
Foreign currency translation adjustments		—			(2	)		(2	)
Ending balance, June 30, 2014	$	127		$	(3	)	$	124

Reclassifications out of accumulated other comprehensive loss during the six months ended June 30, 2014 were as follows:

	Amount Reclassified from Accumulated Other Comprehensive Loss			Affected Line Item in the Consolidated Statements of Income
	(In millions)
Amortization of defined benefit pension items:
Prior service costs	$	(2	)	(A)
Actuarial loss		(4	)	(A)
		(6	)	Total before tax
		2		Income tax benefit
Total reclassifications for the period	$	(4	)	Net of tax

(A) These accumulated comprehensive loss components are included in the computation of net periodic pension cost (see Note 15, “Retirement Plans,” for additional details), which is included in cost of sales and selling, general and administrative expenses.

Changes in accumulated other comprehensive loss during the six months ended June 30, 2013 consisted of the following:

	Defined Benefit Pension and Post-Retirement Plan Items
Beginning balance, January 1, 2013	$	241
Pension and post-retirement plan actuarial gains and prior service cost		1
Ending balance, June 30, 2013	$	242

Reclassifications out of accumulated other comprehensive loss during the six months ended June 30, 2013 were as follows:

	Amount Reclassified from Accumulated Other Comprehensive Loss			Affected Line Item in the Consolidated Statements of Income
	(In millions)
Amortization of defined benefit pension items:
Prior service costs	$	(2	)	(A)
Actuarial loss		(11	)	(A)
		(13	)	Total before tax
		5		Income tax benefit
Total reclassifications for the period	$	(8	)	Net of tax

(A) These accumulated comprehensive loss components are included in the computation of net periodic pension cost (see Note 15, “Retirement Plans,” for additional details), which is included in cost of sales and selling, general and administrative expenses.

-17-

18. Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance. Lorillard has two reportable segments, Cigarettes and Electronic Cigarettes. Lorillard identifies segments based on how our chief operating decision maker assesses performance and allocates resources, which is based on the types of products sold by each segment. Centrally incurred costs, such as the cost of Lorillard’s sales force and administrative overhead costs, are allocated to each segment based on the percentage of each segment’s budgeted net sales (excluding federal excise taxes) of Lorillard consolidated net sales (excluding federal excise taxes).

The Cigarettes segment consists principally of the operations of Lorillard Tobacco and related entities. 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 Electronic Cigarettes segment consists of the operations of LOEC (d/b/a blu eCigs), Cygnet (t/a SKYCIG or blu (U.K.)) and related entities. LOEC is an electronic cigarette company in the United States, and markets its products under the blu eCigs brand. Lorillard acquired the blu eCigs brand and other assets used in the manufacture, distribution, development, research, marketing, advertising and sale of electronic cigarettes on April 24, 2012. Lorillard acquired certain of the assets and operations of SKYCIG, a United Kingdom based electronic cigarette business on October 1, 2013.

Prior to the acquisition of blu eCigs on April 24, 2012, Lorillard managed its operations on the basis of one operating and reportable segment.

Lorillard maintains its headquarters and manufactures all of its cigarette products at its Greensboro, North Carolina facilities. Substantially all of Lorillard’s sales and fixed assets are in the United States of America. Newport, Kent, True, Maverick, Old Gold, blu eCigs and SKYCIG are the registered trademarks of Lorillard and its subsidiaries. Lorillard sold its major cigarette trademarks outside of the United States in 1977.

	For the Three Months Ended June 30, 2014
	Cigarettes		Electronic Cigarettes			Consolidating Adjustments			Total Lorillard
(In millions)
Net sales	$	1,762	$	37		$	—		$	1,799
Cost of sales		1,088		28			—			1,116
Gross profit		674		9			—			683
Selling, general and administrative		119		32			—			151
Operating income (loss)	$	555	$	(23	)	$	—		$	532
Depreciation and amortization	$	12	$	6		$	—		$	18
Capital expenditures	$	11	$	2		$	—		$	13
	As of or For the Six Months Ended June 30, 2014
	Cigarettes		Electronic Cigarettes			Consolidating Adjustments			Total Lorillard
(In millions)
Net sales	$	3,303	$	88		$	—		$	3,391
Cost of sales		2,026		64			—			2,090
Gross profit		1,277		24			—			1,301
Selling, general and administrative		239		58			—			297
Operating income (loss)	$	1,038	$	(34	)	$	—		$	1,004
Depreciation and amortization	$	26	$	11		$	—		$	37
Total assets	$	2,678	$	340		$	(125	)	$	2,893
Capital expenditures	$	20	$	2		$	—		$	22

-18-

	For the Three Months Ended June 30, 2013
	Cigarettes		Electronic Cigarettes		Consolidating Adjustments			Total Lorillard
(In millions)
Net sales	$	1,747	$	57	$	—		$	1,804
Cost of sales		1,087		39		—			1,126
Gross profit		660		18		—			678
Selling, general and administrative		122		16		—			138
Operating income	$	538	$	2	$	—		$	540
Depreciation and amortization	$	12	$	—	$	—		$	12
Capital expenditures	$	27	$	—	$	—		$	27
	As of or For the Six Months Ended June 30, 2013
	Cigarettes		Electronic Cigarettes		Consolidating Adjustments			Total Lorillard
(In millions)
Net sales	$	3,267	$	114	$	—		$	3,381
Cost of sales		1,914		76		—			1,990
Gross profit		1,353		38		—			1,391
Selling, general and administrative		261		29		—			290
Operating income	$	1,092	$	9	$	—		$	1,101
Depreciation and amortization	$	23	$	—	$	—		$	23
Total assets	$	3,243	$	217	$	(125	)	$	3,335
Capital expenditures	$	34	$	—	$	—		$	34

19. Consolidating Financial Information

In June 2009, April 2010, August 2011, August 2012 and May 2013, Lorillard Tobacco, as primary obligor, issued the Notes, which are unconditionally guaranteed in full by the Company for the payment and performance of Lorillard Tobacco’s obligation in connection therewith (see Note 12 for a description of the Notes).

The following sets forth the condensed consolidating balance sheets as of June 30, 2014 and December 31, 2013, condensed consolidating statements of income for the three and six months ended June 30, 2014 and 2013, condensed consolidating statements of comprehensive income for the three and six months ended June 30, 2014 and 2013, and condensed consolidating statements of cash flows for the six months ended June 30, 2014 and 2013 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.

-19-

Condensed Consolidating Balance Sheets

June 30, 2014

(In millions)

	Parent			Issuer			Non-guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Assets:
Cash and cash equivalents	$	25		$	509		$	175	$	—		$	709
Short term investments		—			172			—		—			172
Accounts receivable, less allowances of $2		—			16			9		—			25
Other receivables (1)		1			16			101		(99	)		19
Inventories		—			404			71		—			475
Deferred income taxes		—			543			6		—			549
Other current assets		—			92			12		—			104
Total current assets		26			1,752			374		(99	)		2,053
Investment in subsidiaries		—			209			—		(209	)		—
Plant and equipment, net		—			309			3		—			312
Long term investments		—			126			—		—			126
Goodwill		—			—			103		—			103
Intangible assets		—			—			76		—			76
Deferred income taxes		—			50			8		—			58
Other assets		125			165			—		(125	)		165
Total assets	$	151		$	2,611		$	564	$	(433	)	$	2,893
Liabilities and Shareholders’ Equity (Deficit):
Accounts and drafts payable	$	—		$	26		$	7	$	—		$	33
Accrued liabilities (1)		—			450			15		(99	)		366
Settlement costs		—			753			—		—			753
Income taxes		—			—			1		—			1
Total current liabilities		—			1,229			23		(99	)		1,153
Long-term debt		—			3,566			—		—			3,566
Investment in subsidiaries		2,379			—			—		(2,379	)		—
Postretirement pension, medical and life insurance benefits		—			311			—		—			311
Other liabilities		—			49			167		(125	)		91
Total liabilities		2,379			5,155			190		(2,603	)		5,121
Shareholders’ Equity (Deficit):
Common stock		4			—			—		—			4
Additional paid-in capital		275			149			194		(343	)		275
Retained earnings/accumulated (deficit)		(1,313	)		(2,566	)		177		2,389			(1,313	)
Accumulated other comprehensive income (loss)		(124	)		(127	)		3		124			(124	)
Treasury stock		(1,070	)		—			—		—			(1,070	)
Total shareholders’ equity (deficit)		(2,228	)		(2,544	)		374		2,170			(2,228	)
Total liabilities and shareholders’ equity (deficit)	$	151		$	2,611		$	564	$	(433	)	$	2,893

(1) Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

-20-

Condensed Consolidating Balance Sheets

December 31, 2013

(In millions)

	Parent			Issuer			Non-guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Assets:
Cash and cash equivalents	$	341		$	1,002		$	111	$	—		$	1,454
Short term investments		—			157			—		—			157
Accounts receivable, less allowances of $3		—			8			11		—			19
Other receivables (1)		—			24			93		(88	)		29
Inventories		—			412			87		—			499
Deferred income taxes		—			549			6		—			555
Other current assets		—			19			4		—			23
Total current assets		341			2,171			312		(88	)		2,736
Investment in subsidiaries		—			148			—		(148	)		—
Plant and equipment, net		—			315			1		—			316
Long term investments		—			93			—		—			93
Goodwill		—			—			102		—			102
Intangible assets		—			—			87		—			87
Deferred income taxes		—			48			3		—			51
Other assets		125			151			—		(125	)		151
Total assets	$	466		$	2,926		$	505	$	(361	)	$	3,536
Liabilities and Shareholders’ Equity (Deficit):
Accounts and drafts payable	$	—		$	37		$	5	$	—		$	42
Accrued liabilities (1)		13			434			14		(84	)		377
Settlement costs		—			1,224			—		—			1,224
Income taxes		1			11			—		(4	)		8
Total current liabilities		14			1,706			19		(88	)		1,651
Long-term debt		—			3,560			—		—			3,560
Investment in subsidiaries		2,516			—			—		(2,516	)		—
Postretirement pension, medical and life insurance benefits		—			305			—		—			305
Other liabilities		—			44			165		(125	)		84
Total liabilities		2,530			5,615			184		(2,729	)		5,600
Shareholders’ Equity (Deficit):
Common stock		4			—			—		—			4
Additional paid-in capital		256			130			177		(307	)		256
Retained earnings/accumulated (deficit)		(1,438	)		(2,688	)		143		2,545			(1,438	)
Accumulated other comprehensive income (loss)		(130	)		(131	)		1		130			(130	)
Treasury stock		(756	)		—			—		—			(756	)
Total shareholders’ equity (deficit)		(2,064	)		(2,689	)		321		2,368			(2,064	)
Total liabilities and shareholders’ equity (deficit)	$	466		$	2,926		$	505	$	(361	)	$	3,536

(1) Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

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Condensed Consolidating Statements of Income

For the Three Months Ended June 30, 2014

(In millions)

	Parent		Issuer			Non- guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Net sales (including excise taxes of $502) (1)	$	—	$	1,762		$	324		$	(287	)	$	1,799
Cost of sales (including excise taxes of $502)		—		1,088			28			—			1,116
Gross profit		—		674			296			(287	)		683
Selling, general and administrative (1)		—		405			33			(287	)		151
Operating income		—		269			263			—			532
Investment income (loss)		—		(2	)		—			—			(2	)
Interest expense		1		(44	)		(2	)		—			(45	)
Income before income taxes		1		223			261			—			485
Income taxes		—		84			101			—			185
Equity in earnings of subsidiaries		299		178			—			(477	)		—
Net income	$	300	$	317		$	160		$	(477	)	$	300

(1) Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

Condensed Consolidating Statements of Income

For the Six Months Ended June 30, 2014

(In millions)

	Parent			Issuer			Non- guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Net sales (including excise taxes of $947) (1)	$	—		$	3,303		$	627		$	(539	)	$	3,391
Cost of sales (including excise taxes of $947)		—			2,026			64			—			2,090
Gross profit		—			1,277			563			(539	)		1,301
Selling, general and administrative (1)		1			776			59			(539	)		297
Operating income		(1	)		501			504			—			1,004
Investment income		—			6			—			—			6
Interest expense		2			(89	)		(3	)		—			(90	)
Income before income taxes		1			418			501			—			920
Income taxes		—			156			193			—			349
Equity in earnings of subsidiaries		570			335			—			(905	)		—
Net income	$	571		$	597		$	308		$	(905	)	$	571

(1) Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

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Condensed Consolidating Statements of Income

For the Three Months Ended June 30, 2013

(In millions)

	Parent		Issuer			Non- guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Net sales (including excise taxes of $516) (1)	$	—	$	1,747		$	341		$	(284	)	$	1,804
Cost of sales (including excise taxes of $516)		—		1,087			39			—			1,126
Gross profit		—		660			302			(284	)		678
Selling, general and administrative (1)		—		407			15			(284	)		138
Operating income		—		253			287			—			540
Investment income		—		—			—			—			—
Interest expense		2		(42	)		(1	)		—			(41	)
Income before income taxes		2		211			286			—			499
Income taxes		—		79			107			—			186
Equity in earnings of subsidiaries		311		178			—			(489	)		—
Net income	$	313	$	310		$	179		$	(489	)	$	313

(1) Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

Condensed Consolidating Statements of Income

For the Six Months Ended June 30, 2013

(In millions)

	Parent		Issuer			Non- guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Net sales (including excise taxes of $971) (1)	$	—	$	3,267		$	649		$	(535	)	$	3,381
Cost of sales (including excise taxes of $971)		—		1,914			76			—			1,990
Gross profit		—		1,353			573			(535	)		1,391
Selling, general and administrative (1)		—		795			30			(535	)		290
Operating income		—		558			543			—			1,101
Investment income		—		1			—			—			1
Interest expense		3		(83	)		(2	)		—			(82	)
Income before income taxes		3		476			541			—			1,020
Income taxes		1		177			202			—			380
Equity in earnings of subsidiaries		638		335			—			(973	)		—
Net income	$	640	$	634		$	339		$	(973	)	$	640

(1) Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

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Condensed Consolidating Statements of Comprehensive Income

For the Three Months Ended June 30, 2014

(In millions)

	Parent		Issuer		Non-guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Net income
Other comprehensive income, net of tax:	$	300	$	317	$	160	$	(477	)	$	300
Defined benefit retirement plan gains, net of tax expense of $1		2		2		—		(2	)		2
Foreign currency translation adjustments, net of tax expense of $—		1		—		1		(1	)		1
Other comprehensive income		3		2		1		(3	)		3
Comprehensive income	$	303	$	319	$	161	$	(480	)	$	303

Condensed Consolidating Statements of Comprehensive Income

For the Six Months Ended June 30, 2014

(In millions)

	Parent		Issuer		Non-guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Net income
Other comprehensive income, net of tax:	$	571	$	597	$	308	$	(905	)	$	571
Defined benefit retirement plan gains, net of tax expense of $2		4		4		—		(4	)		4
Foreign currency translation adjustments, net of tax expense of $1		2		—		2		(2	)		2
Other comprehensive income		6		4		2		(6	)		6
Comprehensive income	$	577	$	601	$	310	$	(911	)	$	577

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Condensed Consolidating Statements of Comprehensive Income

For the Three Months Ended June 30, 2013

(In millions)

	Parent		Issuer			Non- guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Net income	$	313	$	310		$	179	$	(489	)	$	313
Other comprehensive loss, net of tax:
Defined benefit retirement plan losses, net of tax benefit of $2		—		(5	)		—		—			(5	)
Comprehensive income	$	313	$	305		$	179	$	(489	)	$	308

Condensed Consolidating Statements of Comprehensive Income

For the Six Months Ended June 30, 2013

(In millions)

	Parent		Issuer			Non- guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Net income	$	640	$	634		$	339	$	(973	)	$	640
Other comprehensive loss, net of tax:
Defined benefit retirement plan losses, net of tax benefit of $—		—		(1	)		—		—			(1	)
Comprehensive income	$	640	$	633		$	339	$	(973	)	$	639

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Condensed Consolidating Statements of Cash Flows

For the Six Months Ended June 30, 2014

(In millions)

	Parent			Issuer			Non-guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Cash flows from operating activities:
Net income	$	571		$	597		$	308		$	(905	)	$	571
Adjustments to reconcile to net cash provided by operating activities:
Equity income from subsidiaries		(570	)		(335	)		—			905			—
Depreciation and amortization		—			26			11			—			37
Pension, health and life insurance contributions		—			(6	)		—			—			(6	)
Pension, health and life insurance benefits expense		—			9			—			—			9
Deferred income taxes		—			1			(5	)		—			(4	)
Share-based compensation		—			9			—			—			9
Excess tax benefits from share-based arrangements		—			(8	)		—			—			(8	)
Changes in operating assets and liabilities:
Accounts and other receivables		—			—			(8	)		14			6
Inventories		—			8			17			—			25
Accounts payable and accrued liabilities		(13	)		4			3			(14	)		(20	)
Settlement costs		—			(471	)		—			—			(471	)
Income taxes		(1	)		(61	)		2			—			(60	)
Other current assets		—			(10	)		(4	)		—			(14	)
Other assets		—			1			—			—			1
Return on investment in subsidiaries		474			275			—			(749	)		—
Net cash provided by (used in) operating activities		461			39			324			(749	)		75
Cash flows from investing activities:
Purchases of investments		—			(337	)		—			—			(337	)
Additions to plant and equipment		—			(20	)		(2	)		—			(22	)
Sales, maturities and calls of investments		—			289			—			—			289
Investment in subsidiary		(17	)		—			—			17			—
Net cash provided by (used in) investing activities		(17	)		(68	)		(2	)		17			(70	)
Cash flows from financing activities:
Dividends paid		(446	)		(474	)		(275	)		749			(446	)
Shares repurchased		(314	)		—			—			—			(314	)
Contributions from parent		—			—			17			(17	)		—
Proceeds from exercise of stock options		—			2			—			—			2
Excess tax benefits from share-based arrangements		—			8			—			—			8
Net cash provided by (used in) financing activities		(760	)		(464	)		(258	)		732			(750	)
Change in cash and cash equivalents		(316	)		(493	)		64			—			(745	)
Cash and cash equivalents, beginning of year		341			1,002			111			—			1,454
Cash and cash equivalents, end of period	$	25		$	509		$	175		$	—		$	709

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Condensed Consolidating Statements of Cash Flows

For the Six Months Ended June 30, 2013

(In millions)

	Parent			Issuer			Non- guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Cash flows from operating activities:
Net income	$	640		$	634		$	339		$	(973	)	$	640
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity income from subsidiaries		(638	)		(335	)		—			973			—
Depreciation and amortization		—			23			—			—			23
Pension and other postretirement benefits contributions		—			(22	)		—			—			(22	)
Pension and other postretirement benefits expense		—			18			—			—			18
Deferred income taxes		(1	)		(3	)		1			—			(3	)
Share-based compensation		1			8			—			—			9
Excess tax benefits from share-based payment arrangements		—			(7	)		—			—			(7	)
Changes in operating assets and liabilities:
Accounts and other receivables		—			2			(13	)		5			(6	)
Inventories		—			(34	)		10			—			(24	)
Accounts payable and accrued liabilities		(3	)		9			4			(5	)		5
Settlement costs		—			(434	)		—			—			(434	)
Income taxes		—			(3	)		(24	)		—			(27	)
Other current assets		1			2			4			—			7
Other assets		—			4			(1	)		—			3
Return on investment in subsidiaries		668			—			—			(668	)		—
Net cash provided by (used in) operating activities		668			(138	)		320			(668	)		182
Cash flows from investing activities:
Additions to plant and equipment		—			(33	)		(1	)		—			(34	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		—			500			—			—			500
Dividends paid		(417	)		(668	)		—			668			(417	)
Shares repurchased		(318	)		—			—			—			(318	)
Debt issuance costs		—			(4	)		—			—			(4	)
Proceeds from exercise of stock options		—			2			—			—			2
Excess tax benefits from share-based payment arrangements		—			7			—			—			7
Net cash (used in) provided by financing activities		(735	)		(163	)		—			668			(230	)
Change in cash and cash equivalents		(67	)		(334	)		319			—			(82	)
Cash and cash equivalents, beginning of year		150			1,471			99			—			1,720
Cash and cash equivalents, end of period	$	83		$	1,137		$	418		$	—		$	1,638

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20. Legal Proceedings

Overview

As of July 25, 2014, 7,474 product liability cases are pending against cigarette manufacturers in the United States. Lorillard Tobacco is a defendant in 6,509 of these cases. Lorillard, Inc. is a co-defendant in 651 pending cases, and is a defendant in one case in which Lorillard Tobacco is not a defendant. A total of 3,875 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. Certain Flight Attendant Cases that were dismissed for administrative reasons, but which may be reinstated pursuant to the settlement agreement in Broin v. Philip Morris Companies, Inc., et al . have been included in the count of pending cases. The table below lists the number of certain tobacco-related cases pending against Lorillard as of the date listed. A description of each type of case follows the table.

Type of Case	Total Number of Cases Pending against Lorillard as of July 25, 2014
Conventional Product Liability Cases		24
Engle Progeny Cases		3,875
West Virginia Individual Personal Injury Cases		38
Flight Attendant Cases		2,571
Class Action Cases		1
Reimbursement Cases		1
Filter Cases		66
Tobacco-Related Antitrust Cases		1

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 3,874 of the Engle Progeny Cases listed in the above table. Lorillard, Inc. is a co-defendant in 647 Engle Progeny Cases, and is a defendant in one case in which Lorillard Tobacco is not a defendant. The time period for filing Engle Progeny Cases expired in January 2008 and no additional cases may be filed. Some of the Engle Progeny Cases were filed on behalf of multiple class members. Some of the courts hearing the cases filed by multiple class members have severed these suits into separate individual cases. It is possible the remaining suits filed by multiple class members may also be severed into separate individual cases.

West Virginia Individual Personal Injury Cases. In a 1999 administrative order, the West Virginia Supreme Court of Appeals transferred to a single West Virginia court a group of cases brought by individuals who allege cancer or other health effects caused by smoking cigarettes, smoking cigars, or using smokeless tobacco products (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 Individual 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 Individual 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.

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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 but not Lorillard, Inc. is a defendant in the Class Action Case listed in the above table. Neither Lorillard Tobacco nor Lorillard, Inc. is a defendant in additional Class Action Cases that are pending against other cigarette manufacturers, including approximately 17 “lights” Class Action Cases and one Class Action Case seeking a court- supervised medical monitoring program.

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. Included in this category is the suit filed by the federal government, United States of America v. Philip Morris USA, Inc., et al., (“Philip Morris”), that sought to recover profits earned by the defendants and other equitable relief. Lorillard Tobacco is a defendant in the case, and Lorillard, Inc. is not a party to this case. 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 a predecessor 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 for a limited period of time ending more than 50 years ago. Lorillard Tobacco is a defendant in 65 of the 66 Filter Cases listed in the above table. Lorillard, Inc. is a co-defendant in one of the 65 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. In 2000 and 2001, a number of cases were brought against cigarette manufacturers, including Lorillard Tobacco, alleging that defendants conspired to set the price of cigarettes in violation of federal and state antitrust and unfair business practices statutes. Plaintiffs sought 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 Tobacco-Related Antitrust Case as set forth in the table above. Lorillard, Inc. is not a defendant in this case. All of the other cases have been either successfully defended or voluntarily dismissed.

Loss Accrual and Disclosure Policy

Lorillard establishes accruals in accordance with Accounting Standards Codification Topic 450, Contingencies (“ASC 450”), when a material litigation liability is both probable and can be reasonably estimated. There are a number of factors impacting Lorillard’s ability to estimate the possible loss or a range of loss, including the specific facts of each matter; the legal theories proffered by plaintiffs and legal defenses available to Lorillard Tobacco and Lorillard, Inc.; the wide-ranging outcomes reached in similar cases; differing procedural and substantive laws in the various jurisdictions in which lawsuits have been filed, including whether punitive damages may be pursued or are permissible; the degree of specificity in a plaintiff’s complaint; the history of the case and whether discovery has been completed; plaintiffs’ history of use of Lorillard Tobacco’s cigarettes relative to those of the other defendants; the attribution of damages, if any, among multiple defendants; the application of contributory and/or comparative negligence to the allocation of damage awards among plaintiffs and defendants; the likelihood of settlements for de minimis amounts prior to trial; the likelihood of success at trial; the likelihood of success on appeal; and the impact of current and pending state and federal appellate decisions. It has been Lorillard’s experience and is its continued expectation that the above complexities and uncertainties will not be clarified until the late stages of litigation. For those reasonably possible loss contingencies for which an estimate of the possible loss or range of loss cannot be made, Lorillard discloses the nature of the litigation and any developments as appropriate.

Lorillard monitors the status of all outstanding litigation on an ongoing basis in order to determine the probability of loss and assess whether an estimate of the possible loss or range of loss can be determined. In evaluating litigation, Lorillard considers, among other things, the nature of the claims; the jurisdiction in which the claims have been filed and the law and case law developed in that jurisdiction; the experience of plaintiffs’ counsel in this type of litigation; the parties’ respective litigation strategies; the stage of the proceedings; the outcome of the matters

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at trial or on appeal; the type and amount of damages claimed by plaintiffs; the outcomes and damage awards, if any, for similar matters brought against Lorillard and/or the tobacco industry; and the possibility and likelihood of success on appeal. Lorillard’s assessment of a possible loss or range of loss is based on its assessment of the final outcome of the litigation upon the conclusion of all appeals.

Lorillard records provisions in the consolidated financial statements for pending litigation when it determines that it is probable that a loss has been incurred and the amount of loss can be reasonably estimated. Except for the impact of the State Settlement Agreements, the U.S. Government Case and certain Engle Progeny Cases as described below, while it is reasonably possible that a loss has been incurred, (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 due to the many variables, uncertainties and complexities described above, and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for possible losses related to material pending litigation. It is possible that Lorillard’s 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 or future litigation or an inability to secure bonds where required to stay the execution of judgments on appeal.

Tobacco-Related Product Liability Litigation

Conventional Product Liability Cases

Since January 1, 2010, verdicts have been returned in eleven Conventional Product Liability Cases against cigarette manufacturers. Lorillard Tobacco was the only defendant in one of these eleven trials, Evans v. Lorillard Tobacco Company (Superior Court, Suffolk County, Massachusetts). Lorillard Tobacco paid $79 million in compensatory damages and interest in the Evans case in October 2013. This charge was reflected in selling, general and administrative expense for the third quarter 2013 and the case is concluded.

Neither Lorillard Tobacco nor Lorillard, Inc. was a defendant in the ten other trials since January 1, 2010. Juries found in favor of the plaintiffs and awarded compensatory damages in four of these trials and also awarded $4.0 million in punitive damages in one of these trials. Defendants appealed the verdicts in three of these trials. The verdict in the first case was affirmed on appeal in July 2013; judgment has since been satisfied and this case is concluded. As of July 25, 2014 the appeal in the second case remains pending. In September 2013, an agreement was reached between the parties in the third case and no further appellate review will be taken. Satisfaction of judgment has been filed and this case is concluded. An appeal is pending in the fourth case. The plaintiff in another case was awarded $25 million in punitive damages in a retrial ordered by an appellate court in which the jury was permitted to consider only the amount of punitive damages to award. Defendant’s appeal of the judgment in this case remains pending. Juries found in favor of the defendants in the five other trials. Three of these five cases have concluded. Plaintiffs in two of the cases did not pursue appeals. Plaintiff in the third case noticed an appeal, which was affirmed in February 2013, and then did not seek any further review. Plaintiff in the fourth case filed a notice of appeal to the Alaska Supreme Court from the order denying plaintiff’s motion for a new trial and that appeal remains pending. The plaintiff in the fifth case filed a motion for a new trial, which was denied in August 2013. This case is currently on appeal.

In rulings addressing cases tried in earlier years, some appellate courts have reversed verdicts returned in favor of the plaintiffs in whole or in part, 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 fifteen individual cases since 2001. Punitive damages were paid to the smokers in six of these cases. Neither Lorillard Tobacco nor Lorillard, Inc. was a party to any of these matters.

Trial is underway in the case of Major v. R.J. Reynolds Tobacco, et al. (California Superior Court, Los Angeles County). Lorillard Tobacco is the sole remaining defendant in this case.

As of July 25, 2014, there were no cases scheduled for trial in the remainder of 2014. Trial dates are subject to change.

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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 Tobacco’s payment to these two individuals, including interest, totaled approximately $3 million.

The Florida Supreme Court’s 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 jury’s 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.

Engle Progeny Cases are pending in various Florida state and federal courts. 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 have also brought derivative claims. In 2011, approximately 500 cases that were among the 4,400 cases severed into separate lawsuits in 2009, filed by family members of alleged former class members, were combined with the cases filed by the smoker from which the family members’ claims purportedly derived. On August 1, 2013, Judge William G. Young of the District of Massachusetts took over responsibility for the Engle cases in the Middle District of Florida, Jacksonville Division. Judge Young issued an order that day that called for three groups of cases to be prepared for trial on the following schedule: approximately 50 cases to be made trial ready by January 2, 2014, approximately 107 cases to be made trial ready by May 2014, and approximately 120 cases to be made trial ready by September 2, 2014. On January 17, 2014, Judge Young issued an order calling for an additional three groups of cases to be prepared for trial on the following schedule: approximately 200 cases to be made trial ready by January 2, 2015, approximately 150 cases to be made trial ready by April 1, 2015, and approximately 150 cases to be made trial ready by July 1, 2015. On April 15, 2014, the Court granted a motion to withdraw filed by counsel for plaintiffs in 49 of the cases that are to be made trial ready pursuant to the Court’s January 17, 2014 order. The plaintiffs in these 49 cases have six months to come forward in order to avoid dismissal. On June 23, 2014, Judge Young issued an order calling for an additional three groups of cases to be prepared for trial on the following schedule: approximately 146 cases to be made trial ready by January 4, 2016, approximately 144 cases to be made trial ready by May 1, 2016, and approximately 139 cases to be made trial ready by September 1, 2016. Since the issuance of these three orders, 226 of the cases to be prepared for trial have been dismissed in their entirety, and Lorillard Tobacco has been dismissed from an additional 49 cases involving other defendants. These cases have either been voluntarily dismissed or resolved.

Since January 2010 and through July 25, 2014, the United States District Court for the Middle District of Florida has dismissed a total of approximately 3,489 cases. In some instances, the plaintiffs whose cases were dismissed also were pursuing cases pending in other courts. In other instances, the attorneys who represented the plaintiffs asked the court to enter dismissal orders because they were no longer able to contact their clients. In January 2013, the Court granted a motion by defendants and dismissed approximately 520 cases in which the plaintiffs were deceased at the time their personal injury lawsuits were filed. Plaintiffs appealed the dismissal of these 520 cases to the United States Court of Appeal for the Eleventh Circuit, and as of July 25, 2014, this appeal remains pending. In June 2013, the Court dismissed an additional approximately 440 cases for a variety of reasons. Plaintiffs have appealed the dismissal of approximately 70 of these cases, in which the plaintiffs were deceased at the time their personal injury lawsuits were filed or where the cases were barred by the statute of limitations. The Court granted plaintiffs’ motion to consolidate the appeals from the January and June orders dismissing these groups of federal cases. On June 5, 2014, the Court heard oral argument on these consolidated appeals. On July 7, 2014, Plaintiffs filed a notice of appeal to the United States Court of Appeals for the Eleventh Circuit from an order dismissing 14 cases for failure to produce signed authorizations. Other courts, including state courts, have entered orders dismissing additional cases.

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Various intermediate state and federal Florida appellate courts have issued rulings that address the scope of the preclusive effect of the findings from the first phase of the Engle trial, including whether those findings relieve plaintiffs from the burden of proving certain legal elements of their claims. The Florida Supreme Court granted review in the Douglas case, in which a verdict awarding compensatory damages to the plaintiff was affirmed by an intermediate state Florida appellate court, to address the issue of whether a tobacco manufacturer’s due process rights are violated by reliance upon the Engle Phase I findings. On March 14, 2013, the Florida Supreme Court ruled that application of the Engle Phase I findings to establish certain elements of plaintiffs’ claims is not a violation of the Engle defendants’ due process rights. In order to prevail on either strict liability or negligence claims, the Court found that an Engle plaintiff must establish (i) membership in the Engle class; (ii) that addiction to smoking the Engle defendants’ cigarettes containing nicotine was a legal cause of the injuries the plaintiff alleged; and (iii) damages. On August 12, 2013, defendants filed a petition with the United States Supreme Court seeking review of the Florida Supreme Court’s decision. This petition for review was denied on October 7, 2013. The due process issue was also on appeal in the United States Court of Appeals for the Eleventh Circuit in two cases that had been consolidated for appeal: Duke and Walker. On September 6, 2013, the United States Court of Appeals for the Eleventh Circuit affirmed the verdicts in these cases, holding that the judgment of the Florida Supreme Court in Douglas should be given full faith and credit, and that deference to the decision in Douglas did not violate the due process rights of the defendant. The defendant filed a petition for rehearing of the decision in Duke and Walker with the United States Court of Appeals for the Eleventh Circuit in October 2013. On October 31, 2013, the United States Court of Appeals for the Eleventh Circuit vacated and reconsidered its original opinion. The Court entered a new opinion that is substantively similar to the original opinion. On November 7, 2013, the Court denied defendant’s petition for rehearing. On November 13, 2013, the defendant filed a second petition, seeking review of the October 31, 2013 opinion. On January 6, 2014, the Court denied this petition. On March 28, 2014, the defendant in Duke and Walker filed a petition with the United States Supreme Court seeking to answer the question of whether the Engle Phase I findings can be applied to establish certain elements of plaintiffs’ claims. On the same date, defendants filed similar petitions in the Brown case (an appeal from a Florida state court trial), as well as in eight other state court cases, including two cases in which Lorillard Tobacco is a defendant (Mrozek and Sury). The defendants requested that these petitions be held pending disposition of the Duke, Walker, and Brown cases, and resolved in a similar manner. On June 9, 2014, the United States Supreme Court declined to accept review of the Duke and Walker cases. On the same date, the United States Supreme Court declined to accept review of the Brown case and the eight other state court cases, including Mrozek and Sury, discussed below.

Various courts, including appellate courts, have issued rulings that have addressed the conduct of the cases prior to trial. One intermediate Florida state appellate court ruled in 2011 that plaintiffs are permitted to assert a claim against a cigarette manufacturer even if the smoker did not smoke a brand produced by that manufacturer. Defendants’ petition for review of this decision by the Florida Supreme Court was denied in August 2012. In March 2012, another intermediate state appellate court agreed with the 2011 ruling and reversed dismissals in a group of cases. In June and July 2013, the Florida Supreme Court denied defendants’ petitions for review of the intermediate appellate court’s decision in these cases. These rulings may limit the ability of the defendants, including Lorillard Tobacco and Lorillard, Inc., to be dismissed from cases in which smokers did not use a cigarette manufactured by Lorillard Tobacco. In October 2012, the Florida First District Court of Appeal affirmed a judgment awarding compensatory damages only, however the appeals court certified to the Florida Supreme Court the question of whether Engle class members may pursue an award of punitive damages based on claims of negligence or strict liability. On February 28, 2014 the Florida Supreme Court announced it would grant review of this case. In June 2013, the Florida Supreme Court reversed an intermediate state appellate court and held that a plaintiff’s representative may continue to litigate an existing lawsuit after the original plaintiff has died. Defendants did not seek further review of this decision. In December 2013, the Florida First District Court of Appeal affirmed the summary judgments in favor of the defendants regarding three plaintiffs who had opted out of the Engle class and subsequently reapplied for admission. The Court held that the Florida Supreme Court’s decision in Engle did not provide any basis for the readmission of a former class member in the event that they had timely opted out of the class and did not initiate an individual action until after the statute of limitations had run. Lorillard Tobacco was a defendant in two of these cases.

In connection with the Engle Progeny Cases, Lorillard and various other tobacco manufacturing defendants face various other legal issues that could materially affect the outcome of the Engle cases. These legal issues include, but are not limited to, the application of the statute of limitations and statute of repose, the constitutionality of a cap on the amount of a bond necessary to obtain an automatic stay of a post-trial judgment, whether a judgment based on a claim of intentional conduct should be reduced by a jury’s findings of comparative fault, whether damages can be awarded jointly and severally, and whether plaintiffs’ strict liability and negligence claims are preempted by federal law. Various intermediate Florida appellate courts and Florida Federal Courts have issued rulings on these issues.

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Lorillard Tobacco and Lorillard, Inc. are defendants in Engle Progeny Cases that have been placed on courts’ 2014 and 2015 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 in 2014. It also is not possible to predict whether some courts will implement procedures that consolidate multiple Engle Progeny Cases for trial.

As of July 25, 2014, trial was underway in one Engle Progeny Case in which Lorillard Tobacco is a defendant: Harris v. R.J. Reynolds Tobacco Company, et al. (Federal Court, Middle District, Florida). Lorillard, Inc. is not a defendant in this trial.

As of July 25, 2014, verdicts had been returned in seventeen Engle Progeny Cases in which Lorillard Tobacco was a defendant. Lorillard, Inc. was a defendant in one of these seventeen cases at the time of verdict. Juries awarded compensatory damages to the plaintiffs in twelve of these cases. In four of the twelve cases in which juries awarded compensatory damages, plaintiffs were awarded punitive damages from Lorillard Tobacco. In another case, the court entered an order following trial that awarded plaintiff compensatory damages. The seventeen cases in which Lorillard Tobacco was a defendant are listed below in the order in which the verdicts were returned:

• In Rohr v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, Seventeenth Judicial Circuit, Broward County, Florida), a jury returned a verdict in favor of the defendants, including Lorillard Tobacco, in October 2010. 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 plaintiff a total of $6 million in compensatory damages and $11.3 million in punitive damages, in March 2011. The jury apportioned 35% of the fault for the smoker’s injuries to the smoker and 65% to Lorillard Tobacco. The final judgment entered by the trial court reflected the jury’s verdict and awarded plaintiff $3,900,588 in compensatory damages and $11,300,000 in punitive damages plus the applicable statutory rates of annual interest. In December 2012, the Florida First District Court of Appeal affirmed the final judgment awarding compensatory and punitive damages and Lorillard Tobacco’s motion for rehearing of the appellate court opinion was denied in February 2013. In March 2013, Lorillard Tobacco filed a notice with the Florida Supreme Court seeking review of the appellate court decision. On February 13, 2014, the Florida Supreme Court declined to grant review of this case. In March 2014, Lorillard Tobacco amended the bond necessary to maintain a stay on payment of the final judgment. On March 28, 2014, Lorillard Tobacco filed a petition with the United States Supreme Court, seeking review of the due process issue, and requested that the petition be held and resolved in the same manner as the Duke, Walker, and Brown cases, also pending before the United States Supreme Court. On June 9, 2014, the United States Supreme Court denied the petitions seeking review. The trial court announced on June 25, 2014 that it had granted Lorillard Tobacco’s motion to determine the applicable rates of post-judgment interest that were in dispute. On June 27, 2014, Lorillard Tobacco made a payment of $17,500,197 to satisfy the final judgment awarding compensatory and punitive damages and post-judgment interest. On July 23, 2014, plaintiff filed a satisfaction of judgment. The Florida First District Court of Appeal provisionally granted plaintiff’s motion for intermediate appellate court attorneys’ fees, ruling that the trial court is authorized to award appellate fees if the trial court determines entitlement to attorneys’ fees. In June 2013, the trial court granted plaintiff’s motion for entitlement to trial court attorneys’ costs and fees and also determined that plaintiff was entitled to intermediate appellate court attorneys’ fees. As of July 25, 2014, the trial court had not determined the amount of trial court or intermediate appellate court fees to award. On November 18, 2013, plaintiff filed a motion with the Florida Supreme Court seeking attorneys’ fees in connection with the appeal to the Florida Supreme Court. On February 3, 2014, the Florida Supreme Court provisionally granted plaintiff’s motion for attorney fees in the amount of $2,500, conditioned on the trial court’s determination of entitlement.

• In Tullo v. R.J. Reynolds, et al. (Circuit Court, Fifteenth Judicial Circuit, Palm Beach County, Florida), the jury awarded plaintiff a total of $4.5 million in compensatory damages, in April 2011. 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. The court entered a final judgment that awarded plaintiff $225,000 in compensatory damages from Lorillard Tobacco plus 6% annual interest. Defendants noticed an appeal from the final judgment to the Florida Fourth District Court of Appeal. In August

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2013, the Florida Fourth District Court of Appeal affirmed the final judgment. Defendants filed a notice with the Florida Supreme Court seeking review of the appellate court decision. On March 10, 2014, the trial court entered an order confirming that Lorillard Tobacco had satisfied the judgment awarding compensatory damages and post-judement interest for an amount totaling approximately $263,400. On March 18, 2014, Lorillard Tobacco filed a notice of voluntary dismissal of their petition seeking review of the Florida Supreme Court and the Court entered an order dismissing the petition for review as to Lorillard Tobacco on May 21, 2014. The appeal remains pending as to the other defendants. The Florida Fourth District Court of Appeal provisionally granted plaintiff’s motion for appellate attorneys’ fees, ruling that the trial court is authorized to award appellate fees if the trial court determines entitlement to attorneys’ fees. As of July 25 2014, the trial court had not determined the amount of trial court costs or appellate court fees to award.

• In Sulcer v. Lorillard Tobacco Company, et al. (Circuit Court, First Judicial Circuit, Escambia County, Florida), in April 2011, the jury awarded $225,000 in compensatory damages to the plaintiff and it assessed 95% of the fault for the smoker’s injuries to the smoker with 5% allocated to Lorillard Tobacco. The jury returned a verdict for Lorillard Tobacco as to whether plaintiff is entitled to punitive damages. The court entered a final judgment that incorporated the jury’s determination of the parties’ fault and awarded plaintiff $11,250 in compensatory damages. Lorillard Tobacco paid approximately $246,000 to resolve the verdict, costs and fees, as well as all post-trial motions and any potential appeal by the plaintiff. Following this payment, Sulcer was concluded.

• In Jewett v. R.J. Reynolds Tobacco Co., et al. (Circuit Court, Fourth Judicial Circuit, Duval County, Florida), the jury awarded the estate of the decedent $692,981 in compensatory damages and awarded the plaintiff $400,000 for loss of companionship in May 2011. The jury assessed 70% of the responsibility for the decedent’s injuries to the decedent, 20% to R.J. Reynolds and 10% to Lorillard Tobacco. The jury returned a verdict for the defendants regarding whether punitive damages were warranted. The final judgment entered by the trial court reflected the jury’s verdict and awarded plaintiff a total of $109,298 from Lorillard Tobacco plus 6% annual interest. In June 2012, an agreement was reached between the parties as to the amount of trial court costs and attorneys’ fees incurred, should the judgment be upheld on appeal, and plaintiff’s motion for costs and attorneys’ fees was withdrawn. In November 2012, the Florida First District Court of Appeal reversed the judgment awarding compensatory damages and ordered the case returned to the trial court for a new trial. In January 2013, the appellate court denied a motion filed by the plaintiff for rehearing of the decision reversing the judgment. Both the plaintiff and defendants filed notices with the Florida Supreme Court seeking review of the appellate court decision. On February 14, 2014, the Florida Supreme Court declined to grant review of this case.

• In Weingart v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, Fifteenth Judicial Circuit, Palm Beach County, Florida), in July 2011, the jury determined that the decedent did not sustain any compensatory damages from the defendants, including Lorillard Tobacco, and it returned a verdict for the defendants that punitive damages were not warranted. The jury assessed 91% of the fault for the decedent’s injuries to the decedent, 3% to Lorillard Tobacco and 3% to each of the other two defendants. Following trial, the court granted in part a motion filed by the plaintiff to award damages and it awarded plaintiff $150,000 in compensatory damages. The court entered a final judgment that applied the jury’s comparative fault determinations to the court’s award of compensatory damages. The final judgment awarded plaintiff $4,500 from Lorillard Tobacco. Defendants noticed an appeal to the Florida Fourth District Court of Appeal from the order that awarded compensatory damages to the plaintiff and amended their notice of appeal to address the final judgment. On February 13, 2013, the Florida Fourth District Court of Appeal affirmed the final judgment awarding compensatory damages. Defendants filed a notice with the Florida Supreme Court seeking review of this decision. In March 2012, the trial court entered a judgment against the defendants for costs with Lorillard Tobacco’s share amounting to $43,081 plus 4.75% annual interest. Defendants noticed an appeal from this costs judgment. In June 2013, all defendants satisfied both the final judgment awarding compensatory damages and the costs judgment, with Lorillard Tobacco’s share amounting to approximately $50,000. Defendants’ petition for Florida Supreme Court review and the appeal from the costs judgment have been dismissed. This case is now concluded.

• In Sury v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, Fourth Judicial Circuit, Duval County, Florida), in November 2011, the jury awarded plaintiff $1,000,000 in compensatory damages and assessed 60% of the responsibility for the decedent’s injuries to the decedent, 20% to Lorillard Tobacco

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and 20% to R.J. Reynolds. The jury returned a verdict for the defendants regarding whether punitive damages were warranted. In March 2012, the court entered a final judgment against defendants in the amount of $1,000,000, jointly and severally, plus 4.75% annual interest, declining to apply the jury’s comparative fault findings to causes of action alleging intentional conduct. On June 24, 2013, the Florida First District Court of Appeal affirmed the final judgment. Lorillard Tobacco’s motion for rehearing of this decision with the Florida First District Court of Appeal was denied in August 2013. The Florida Supreme Court declined review of the intermediate appellate court decision in January 2014. On March 28, 2014, Lorillard Tobacco filed a petition with the United States Supreme Court, seeking review of the due process issue, and requested that the petition be held and resolved in the same manner as the Duke, Walker, and Brown cases, also pending before the United States Supreme Court. On June 9, 2014, the United States Supreme Court denied the petitions seeking review. On June 19, 2014, Lorillard Tobacco made a payment of $1,659,674 to satisfy the final judgment awarding compensatory damages plus post judgment interest, trial level attorneys’ fees and costs, and Florida Supreme Court fees. Plaintiff filed a satisfaction of judgment on July 14, 2014. In June 2013, the First District Court of Appeal determined that plaintiff was entitled to attorneys’ fees in connection with the appeal to the First District Court of Appeal and directed the trial court to determine the amount. As of July 25, 2014, the trial court had not determined the amount.

• In Alexander v. Lorillard Tobacco Company, et al . (Circuit Court, Eleventh Judicial Circuit, Miami-Dade County, Florida), the jury awarded plaintiff $20,000,000 in compensatory damages and $25,000,000 in punitive damages in February and March 2012. Lorillard Tobacco is the only defendant in this case. The jury apportioned 20% of the fault for the smoker’s injuries to the smoker and 80% to Lorillard Tobacco. In March 2012, the court entered a final judgment that applied the jury’s comparative fault determination to the court’s award of compensatory damages, awarding the plaintiff $16,000,000 in compensatory damages and $25,000,000 in punitive damages from Lorillard Tobacco. In May 2012, the court granted a motion by Lorillard Tobacco to lower the amount of compensatory damages and reduced the amount awarded to $10,000,000 from Lorillard Tobacco. Other post-trial motions challenging the verdict were denied. The court entered an amended final judgment that applied the jury’s comparative fault determination to the court’s award of compensatory damages, awarding the plaintiff $8,000,000 in compensatory damages and $25,000,000 in punitive damages. The court also awarded plaintiff post-judgment interest (based on a statutory rate) on the compensatory and punitive damages, which totaled approximately $3.7 million as of July 25, 2014. Lorillard Tobacco noticed an appeal from the amended final judgment to the Florida Third District Court of Appeal. On September 4, 2013, the Florida Third District Court of Appeal affirmed the amended final judgment. Lorillard Tobacco’s motion for rehearing of this decision with the Florida Third District Court of Appeal was denied in October 2013. On November 27, 2013, Lorillard Tobacco filed a petition with the Florida Supreme Court seeking review of the intermediate appellate court decision. As of July 25, 2014, the Florida Supreme Court had not announced whether it would grant review of this case. In September 2012, an agreement was reached between the parties as to the amount of trial costs and attorneys’ fees incurred, should the judgment be upheld on appeal. In September 2013, the Florida Third District Court of Appeal determined that plaintiff was entitled to intermediate appellate court attorneys’ fees in connection with the appeal to the Florida Third District Court of Appeal and directed the trial court to determine the amount. As of July 25, 2014, the trial court had not determined the amount of such attorneys’ fees to award. On January 3, 2014, the plaintiff filed a motion with the Florida Supreme Court seeking appellate attorneys’ fees in connection with the appeal to the Florida Supreme Court. As of July 25, 2014, the Florida Supreme Court had not ruled on this motion.

• In Calloway v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, Seventeenth Judicial Circuit, Broward County, Florida), the jury awarded plaintiff and a daughter of the decedent a total of $20,500,000 in compensatory damages in May 2012. The jury apportioned 20.5% of the fault for the smoker’s injuries to the smoker, 27% to R.J. Reynolds, 25% to Philip Morris, 18% to Lorillard Tobacco, and 9.5% to Liggett. The jury awarded $12,600,000 in punitive damages from Lorillard Tobacco and $42,250,000 from the other defendants, for a total punitive damages award of $54,850,000. In August 2012, the court granted a post-trial motion by the defendants and lowered the compensatory damages award to $16,100,000. The court also ruled that the jury’s finding on the plaintiff’s percentage of comparative fault would not be applied to reduce the compensatory damage award because the jury found in favor of the plaintiff on her claims alleging intentional conduct. In August 2012, the court entered final judgment against defendants in the amount of $16,100,000 in compensatory damages, jointly and severally, and $54,850,000 ($12,600,000 from Lorillard Tobacco) in punitive damages. The court also awarded plaintiff post-judgment interest (based on a statutory rate) on the compensatory and punitive damages, which totaled approximately $1.6 million as of July 25, 2014 based on the jury-apportioned fault for Lorillard Tobacco. The final judgment also granted plaintiff’s application for trial court costs and

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attorneys’ fees, but as of July 25, 2014, the trial court had not awarded an amount. Defendants have noticed an appeal from the final judgment to the Florida Fourth District Court of Appeal. On March 31, 2014, plaintiff filed a motion with the Florida Fourth District Court of Appeal seeking attorneys’ fees in connection with the appeal to the Fourth District. As of July 25, 2014, the Florida Fourth District Court of Appeal had not ruled on this motion.

• In Evers v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, Thirteenth Judicial Circuit, Hillsborough County, Florida), the jury awarded plaintiff and the estate of the decedent a total of $3,230,000 in compensatory damages in February 2013. The jury apportioned 31% of the fault for the smoker’s injuries to the smoker, 60% to R.J. Reynolds and 9% to Lorillard Tobacco. The jury found that punitive damages against Lorillard Tobacco were not warranted and awarded $12,362,042 in punitive damages from R.J. Reynolds Tobacco Company. The Court granted a post-trial motion by R.J. Reynolds for a directed verdict on punitive damages and, as a result, the jury’s punitive damages award was set aside. The Court denied a motion filed by the plaintiff to reconsider the directed verdict. At a post-trial hearing, the plaintiff waived entitlement to the jury’s loss of services award which amounted to $280,000 of the total compensatory damages award. In May 2013, the court entered a final judgment that applied the jury’s comparative fault determinations and awarded plaintiff and the estate of the decedent $2,035,500 in compensatory damages ($265,500 from Lorillard Tobacco), plus the statutory rate of interest. Plaintiff and defendants have both appealed the final judgment to the Florida Second District Court of Appeal. Plaintiff also filed a motion for entitlement to trial attorneys’ fees and costs. As of July 25, 2014, the trial court had not ruled on this motion. On May 23, 2014, plaintiff filed a motion with the Florida Second District Court of Appeal seeking attorneys’ fees in connection with the appeal to the Second District. As of July 25, 2014, the Florida Second District Court of Appeal had not ruled on this motion.

• In Cohen v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, Fifteenth Judicial Circuit, Palm Beach County, Florida), the jury awarded plaintiff and the estate of the decedent a total of $2,055,050 in compensatory damages in May 2013. The jury apportioned 40% of the fault for the smoker’s injuries to the smoker, 30% to R.J. Reynolds, 20% to Lorillard Tobacco, and 10% to Liggett. The jury found that punitive damages were not warranted against any of the defendants. On May 6, 2013, the Court entered final judgment against defendants in the amount of $1,233,030 ($411,010 from Lorillard Tobacco) plus 4.75% annual interest. On July 10, 2013, the Court entered an order granting defendants’ motion for a new trial based on the plaintiff’s improper arguments during closing. This order effectively vacated the final judgment. Plaintiff and defendants have both appealed the order granting the motion for new trial to the Florida Fourth District Court of Appeal. Plaintiff’s petition with the Florida Fourth District Court of Appeal seeking to disqualify the trial court judge from further consideration of this case was denied in November 2013, and a second petition seeking to disqualify the trial judge, filed in January 2014, was also subsequently denied.

• In LaMotte v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, First Judicial Circuit, Escambia County, Florida), the jury returned a verdict in favor of the defendants in May 2013. The Court entered final judgment in favor of the defendants in May 2013. Plaintiff has agreed to waive any post-trial or appellate review of the verdict and judgment, and defendants have agreed not to seek to recover costs or fees. This case is concluded.

• In Ruffo v. R.J. Reynolds Tobacco Company, et al . (Circuit Court, Eleventh Judicial Circuit, Miami-Dade County, Florida), the jury awarded plaintiff $1,500,000 in compensatory damages in May 2013. The jury apportioned 85% of the fault for the smoker’s injuries to the smoker, 12% to Philip Morris, and 3% to Lorillard Tobacco. Defendants’ post-trial motions challenging the verdict were denied. On October 4, 2013, the Court entered a final judgment against defendants that applied the jury’s comparative fault determinations and awarded plaintiff $225,000 in compensatory damages ($45,000 from Lorillard Tobacco) plus the statutory rate of interest, which is currently 4.75%. Defendants noticed an appeal from the final judgment to the Florida Third District Court of Appeal. On May 12, 2014, the trial court entered an order confirming that Lorillard Tobacco had satisfied the judgment awarding compensatory damages and post-judgment interest for an amount totaling $46,857. On May 9, 2014, the Florida Third District Court of Appeal entered an order recognizing Lorillard Tobacco’s voluntary dismissal of their appeal to the final judgment. The appeal remains pending as to Philip Morris. Plaintiff filed a motion with the trial court seeking entitlement to attorneys’ costs and fees. In April 2014, the trial court denied this motion. Plaintiff has filed a notice of appeal to the Florida Third District Court of Appeal from the order denying attorneys’ fees and costs.

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• In Gafney v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, Fifteenth Judicial Circuit, Palm Beach County, Florida), the jury awarded plaintiff a total of $5,800,000 in compensatory damages in September 2013. The jury apportioned 34% of the fault for the smoker’s injuries to the smoker, 33% to R.J. Reynolds, and 33% to Lorillard Tobacco. Lorillard, Inc. was also a defendant in this trial but damages and comparative fault were not assessed separately for Lorillard, Inc. Because the jury found in favor of the defendants on the claims alleging intentional conduct, the plaintiff was not entitled to punitive damages. On September 26, 2013, the Court entered a final judgment that applied the jury’s comparative fault determinations and awarded the plaintiff a total of $3,828,000 in compensatory damages ($1,914,000 from Lorillard Tobacco), plus the statutory rate of interest. Defendants’ post-trial motions challenging the verdict were denied in November 2013. Defendants have noticed an appeal from the final judgment to the Florida Fourth District Court of Appeal. Plaintiff has filed a motion with the trial court seeking entitlement to attorneys’ fees and costs. As of July 25, 2014, the trial court had not ruled on this motion.

• In Jacobson v. R.J. Reynolds Tobacco Company, et al. (Federal Court, Southern District, Florida), the jury returned a verdict in favor of the defendants on October 29, 2013. The Court entered final judgment in favor of the defendants on October 30, 2013. Plaintiff filed a motion for new trial which was denied in January 2014. On February 10, 2014, the Court entered an order granting Lorillard’s motion for attorneys’ fees and costs. Lorillard has agreed not to enforce its right to fees and costs in exchange for plaintiff’s agreement not to pursue an appeal of the verdict. This case is concluded.

• In Chamberlain v. R. J. Reynolds Tobacco Company, et al. (Federal Court, Middle District, Jacksonville, Florida) the jury returned a verdict in favor of the defendants on November 15, 2013. The Court entered final judgment in favor of the defendants on November 20, 2013. Plaintiff’s motion for new trial was denied on April 25, 2014. On June 27, 2014, plaintiff filed a notice of appeal from the final judgment with the 11th Circuit Court of Appeals.

• In Burkhart v. R.J. Reynolds Tobacco Company, et al. (Federal Court, Middle District, Jacksonville, Florida), the jury awarded plaintiff a total of $5,000,000 in compensatory damages on May 15, 2014. The jury apportioned 50% of the fault for the smoker’s injuries to the smoker, 25% to R.J. Reynolds, 15% to Philip Morris, and 10% to Lorillard Tobacco. The jury awarded $500,000 in punitive damages from Lorillard Tobacco and $2,000,000 from the other defendants for a total punitive damages award of $2,500,000. The Court ruled that the jury’s finding on the plaintiff’s percentage of comparative fault would not be applied to reduce the compensatory damage award because the jury found in favor of the plaintiff on her claims alleging intentional conduct. On June 11, 2014, the Court entered a final judgment against defendants in the amount of $5,000,000 in compensatory damages, jointly and severally, and $2,500,000 ($500,000 from Lorillard Tobacco) in punitive damages, plus the statutory rate of interest. Defendants have filed post-trial motions challenging the verdict. As of July 25, 2014, the Court had not ruled on these motions. The final judgment also granted plaintiff entitlement to trial court costs, but as of July 25, 2014, the trial court had not awarded an amount. On June 25, 2014, plaintiff filed a motion for attorneys’ fees and costs. As of July 25, 2014, the Court had not ruled on this motion.

As of July 25, 2014, verdicts have been returned in 113 Engle Progeny trials 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 34 of the trials. In 33 of those 34 trials, the amount of punitive damages awarded have totaled approximately $727.5 million and ranged from $20,000 to $244 million. In July 2014, punitive damages of $23.6 billion were awarded in one of these cases. As of July 25, 2014, this award was subject to challenge through post-trial motions and the appellate process. In 34 of the trials, juries’ awards were limited to compensatory damages. In the 45 remaining trials, juries found in favor of the defendants. Post-trial motions challenging the verdicts in some cases and appeals from final judgments in some cases are pending before various Florida circuit and intermediate appellate courts. As of July 25, 2014, one verdict in favor of the defendants and three verdicts in favor of the plaintiff have been reversed on appeal and returned to the trial court for a new trial on all issues. In ten cases, the appellate courts have ruled that the issue of damages awarded must be revisited by the trial court. Motions for rehearing of these appellate court rulings are pending in some cases.

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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. The plaintiffs in some cases challenged the constitutionality of the amended statute. These motions were denied, withdrawn or declared moot. In January 2012, the Florida Supreme Court agreed to review one of the orders denying a challenge to the amended statute. In August 2012, the Florida Supreme Court dismissed the appeal as moot because the defendant had satisfied the judgment.

West Virginia Individual Personal Injury Cases

The West Virginia Individual Personal Injury Cases (the “IPIC Cases”) are brought in a single West Virginia court by individuals who allege cancer or other health effects caused by smoking cigarettes, smoking cigars, or using smokeless tobacco products. Approximately 600 IPIC 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 IPIC Cases may be consolidated for trial with this group. The court has entered a trial plan for the IPIC Cases that calls for a multi-phase trial.

In September 2000, there were approximately 1,250 IPIC 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 were consolidated for a multi-phase trial. Approximately 645 IPIC Cases were dismissed in their entirety. Lorillard Tobacco has been dismissed from approximately 565 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. As of July 25, 2014, Lorillard Tobacco is a defendant in 31 of the pending IPIC Cases. Lorillard, Inc. is not a defendant in any of the IPIC Cases.

The first phase of the consolidated trial began April 15, 2013, and ended with a Phase I verdict returned by the jury on May 15, 2013. In its verdict, the jury found against plaintiffs on their claims for design defect, negligent design, failure to warn, intentional concealment and breach of express warranty. The jury found for plaintiffs on their claim that all ventilated filter cigarettes manufactured and sold by the defendants between 1964 and July 1, 1969 were defective because of a failure to instruct, but found that defendants’ conduct was not willful or wanton. In pleadings filed before trial, no plaintiff in a pending IPIC Case claims to have smoked a ventilated filtered cigarette manufactured and sold by Lorillard Tobacco between 1964 and July 1, 1969.

On September 16, 2013, the court entered a judgment on the jury’s Phase I verdict and entered a separate order denying the parties’ post-trial motions. Plaintiffs filed a motion to alter or amend the judgment on September 24, 2013. In a telephone conference on October 7, 2013 (memorialized in an order entered October 28, 2013), the court informed the parties that, on its own authority, it was vacating the September 16, 2013 judgment and order. On October 28, 2013, the court entered a new judgment and order. The judgment recited that: 1) ventilated filter cigarettes the defendants manufactured and sold between 1964 and July 1, 1969, were found to be defective due to a failure to instruct consumers as to their use; 2) all other cigarettes manufactured and sold by defendants were not found to be defective; 3) defendants’ conduct did not justify an award of punitive damages; 4) the claims of the individual plaintiffs remain to be decided consistent with the Phase I verdict, and 5) there is no just reason for delay in permitting any appellate rights of the parties to be perfected as to the verdict rendered and this order. The order: 1) denied the parties’ post-trial motions; 2) entered final judgments against the plaintiffs in the approximately 645 IPIC cases that were dismissed before trial; and 3) stated that those dismissal orders are now final and available for the proper application of the appellate process.

On November 26, 2013, plaintiffs filed a notice of appeal from the October 28 judgment and order in the Supreme Court of Appeals of West Virginia. The defendants did not file a separate notice of appeal. On April 2, 2014, plaintiffs perfected their appeal by filing their brief and appendix. Defendants filed their brief on June 16, 2014. Plaintiffs served their reply brief on July 2, 2014.

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 30 plaintiffs. Twenty-eight 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 were included in the consolidated trial of the IPIC Cases, while the latter claims are

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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 was included 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.

As of July 25, 2014, 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 was scheduled for trial as of July 25, 2014.

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 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 plaintiff’s 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 Tobacco’s share of the judgment in this matter, including interest, was approximately $60,000.

As of July 25, 2014, none of the Flight Attendant Cases were scheduled for trial.

Class Action Cases

Lorillard Tobacco but not Lorillard Inc. is a defendant in the one pending Class Action Case, in which plaintiffs seek class certification on behalf of groups of cigarette smokers, or the estates of deceased cigarette smokers, who reside in West Virginia. There has been no substantive activity in this case since February 2001.

Cigarette manufacturers, including Lorillard Tobacco, have defeated motions for class certification in a number of cases. 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. On December 17, 2013, in Caronia, et al. v. Philip Morris USA, the New York Court of Appeals, answering a question certified to it by the United States Court of Appeals for the Second Circuit, held that current or former smokers that have not been diagnosed with a smoking-related disease could not pursue an independent cause of action for medical monitoring under New York law.

“Lights” Class Action Cases. Neither Lorillard Tobacco nor Lorillard, Inc. is a defendant in the approximately 17 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 these cases, Craft v. Philip Morris USA (Circuit Court, City of St. Louis, Missouri, filed February 29, 2000), trial began in September 2011. In November 2011, the court ordered a mistrial when the jury was unable to reach a verdict. The retrial of this case

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commenced January 6, 2014, but was continued to a date to be determined in 2015. In another 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 Commission’s 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 (the “MDL cases”). The court denied plaintiffs’ motion for class certification filed in four of the MDL Cases, and a federal appellate court declined to review the class certification order. Following the appellate court’s ruling, plaintiffs dismissed thirteen of the MDL Cases, including Good v. Altria Group, Inc., et al. In April, 2012, the Judicial Panel on Multidistrict Litigation entered an order transferring the four MDL cases that remained pending to the courts in which each originated. On September 23, 2013, in the “Lights” Class Action Case Brown v. The American Tobacco Company, Inc., et al. (Superior Court, San Diego County, California), the Court issued a Statement of Decision that granted judgment in favor of the defendant. The Court held that the defendant misrepresented the health benefits of its “light” cigarette but that plaintiffs were not entitled to restitution or injunctive relief. Final judgment was entered in favor of the defendant on October 15, 2013. In December 2013, plaintiffs filed a notice of appeal of the final judgment, and the appeal remains pending. On April 29, 2014, in the “lights” Class Action Case Price, et al v. Philip Morris Incorporated (Circuit Court, Madison County, Illinois), the Fifth Judicial District of the Appellate Court of Illinois reversed the trial court’s denial of plaintiffs’ petition for relief from judgment and reinstated a 2003 verdict awarding damages. The defendant in this case has filed a petition for leave to appeal in the Supreme Court of Illinois.

Reimbursement Cases

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 government’s 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 “onserts” 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 accrued estimated costs of approximately $20 million in the first quarter of 2013 to comply with the final judgment and remedial order, which was recorded as a charge to selling, general and administrative expenses in 2013. 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 U.S. Court of Appeals for the District of Columbia Circuit. In May 2009, a three judge panel upheld substantially all of the District Court’s 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 court’s judgment on that issue, and to remand the case with instructions to deny as moot the government’s allegations and requested relief regarding “lights” cigarettes. The Court of Appeals stayed its order that formally relinquished jurisdiction of

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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. On November 27, 2012, the court entered an order prescribing the language the defendants must include in the corrective statements defendants are to make on their websites and through other media. The court directed the parties to engage in discussions to implement the publication of those statements. On January 25, 2013, defendants appealed the court’s November 27, 2012 order to the U.S. Court of Appeals for the District of Columbia Circuit. On February 25, 2013, the Court of Appeals granted defendants’ unopposed motion to hold the appeal in abeyance pending the district court’s resolution of the issues regarding the implementation of the corrective statements. On January 10, 2014, the parties filed a joint motion requesting that the district court enter a consent order addressing the implementation of the corrective statements remedy. The proposed consent order does not resolve outstanding issues as to corrective statements in retail point-of-sale displays, and it expressly reserves defendants’ right to appeal the district court’s November 27, 2012, order concerning the language of the corrective statements. The parties engaged in lengthy negotiations concerning the implementation of the corrective statements, aided by a special master. In addition, the district court considered amicus briefs on the implementation issue filed by newspapers, broadcasters, and other entities concerned about the manner in which the corrective statements would be implemented. On June 2, 2014, the district court entered a consent order implementing the corrective statements remedy. On June 25, 2014, defendants filed a notice of appeal from the June 2, 2014 order. Under the terms of the June 2, 2014 order, implementation of the corrective statements remedy will not begin until that appeal has been resolved.

The June 2, 2014 order did not resolve outstanding issues as to whether corrective statements must be posted in retail point-of-sale displays. The parties, as well as two retailer trade groups, filed simultaneous supplemental briefs on that issue in the district court on June 4, 2014. Their simultaneous response briefs were filed on June 18, 2014. As of July 25, 2014, the district court had not entered an amended final judgment regarding the point-of-sale displays.

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 asserted 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 government’s and the intervenors’ petitions in June 2010, which effectively disposed of the claim to recover profits in this case.

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 $358 million, $343 million, $644 million and $519 million for the three and six months ended June 30, 2014 and 2013, respectively. Lorillard’s 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, and was required to pay 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.

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Lorillard Tobacco, the other Original Participating Manufacturers and other subsequent participating manufacturers (collectively, the “Participating Manufacturers”) are seeking from the Settling States an adjustment in the amount of payments for 2003 and subsequent years pursuant to a provision in the MSA that permits such adjustment if it is determined that the MSA was a significant factor in their loss of market share to companies not participating in the MSA and that the Settling States failed to diligently enforce certain statutes passed in connection with the MSA. If the Participating Manufacturers are ultimately successful, any recovery would be in the form of reimbursement of proceeds already paid or as a credit against future payments by the Participating Manufacturers.

On December 17, 2012, the Participating Manufacturers, including Lorillard Tobacco, agreed to settle with 17 states and the District of Columbia and Puerto Rico disputes under the MSA involving payment adjustments relating to nonparticipating manufacturers. The Participating Manufacturers presented the settlement to the arbitration panel responsible for adjudicating the 2003 non-participating manufacturer (“NPM”) adjustment dispute with a request that the panel enter it as a partial settlement and award. On March 12, 2013, the arbitration panel issued a Stipulated Partial Settlement and Award that directed the Independent Auditor under the MSA to implement the settlement provisions involved, thereby allowing the settlement to proceed. Since the panel’s ruling, one additional state joined the settlement on April 12, 2013, two additional states joined the settlement on May 24, 2013, one additional state joined the settlement on June 10, 2014 and one additional state joined the settlement on June 26, 2014.

The settlement resolves the claims for the years 2003 through 2012 and puts in place a new method for calculating this adjustment beginning in 2013. Under the terms of the settlement, Lorillard Tobacco and other Participating Manufacturers will receive credits against their future MSA payments over six years, and the signatory states will be entitled to receive their allocable share of the amounts currently being held in escrow resulting from these disputes. Lorillard Tobacco currently expects to receive credits over six years of approximately $254 million on its outstanding claims, with $165 million having occurred in April 2013, $36 million in April 2014 (including $14 million received in April 2014 related to the 2003 NPM Adjustment award from the two states that joined the settlement in June 2014), and approximately $53 million over the following five years. The estimate is subject to change depending upon a number of factors included in the calculation of the credit.

Based on the terms of the settlement, during the first quarter of 2013 Lorillard Tobacco recorded a reduction in its State Settlements liability and expense of $165 million and reduced its April 15, 2013 MSA Annual Payment by the same amount. The reduction was partially offset by an increase of $21 million in the State Settlements liability and expense related to the industry Volume Adjustment Offset associated with the increase in the industry aggregate operating income under the agreements with the previously settled states. During the second quarter of 2013 Lorillard Tobacco recorded a reduction in its State Settlements liability and expense of $12 million as a result of the two additional states joining the settlement. The reduction was partially offset by an increase of $1 million in the State Settlements liability and expense related to the industry Volume Adjustment Offset associated with the increase in the industry aggregate operating income under agreements with the previously settled states. During the second quarter of 2014 Lorillard Tobacco recorded a reduction in its State Settlements liability and expense of $14 million as a result of the two additional states joining the settlement.

Lorillard Tobacco will continue to pursue these claims against those states that have not settled. Fourteen states that have not joined the settlement have taken action in state court to prevent the settlement from proceeding or to seek other relief related to the settlement. As of July 25, 2014, claims in eleven states remain pending as one state withdrew its opposition and, as noted above, two additional states joined the settlement. Two of the states also unsuccessfully sought to preliminarily enjoin the implementation of the settlement. There is no assurance that such attempts will be resolved favorably to the Company.

On September 11, 2013, the arbitration panel responsible for adjudicating the 2003 NPM adjustment dispute issued a determination that six states failed to diligently enforce escrow provisions applicable to non-participating manufacturers. The six non-diligent states included Indiana, Kentucky, Missouri, New Mexico, Maryland, and Pennsylvania. Nine other states that did not participate in the settlement were considered by the arbitration panel because the OPMs contested their diligence as well. The arbitration panel found those nine states diligent. As a result of the panel’s ruling, the OPMs are entitled to receive $458 million, plus interest and earnings, with Lorillard Tobacco’s share of the principal amount totaling $47 million. The six non-diligent states filed motions in their state courts to vacate the arbitration panel’s non-diligence findings. On March 31, 2014, the MSA Independent Auditor issued final calculations for the April 2014 MSA payments that implement the 2003 NPM Adjustment in that fashion.

On April 10, 2014, the MSA court in Pennsylvania issued its rulings on that state’s motion to vacate the arbitration panel’s rulings with respect to that state. The court upheld the arbitration panel’s non-diligence finding for

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that state. However, the court also ruled that the states that signed the settlement and had been contested in the 2003 NPM Adjustment arbitration would be deemed non-diligent for purposes of calculating that state’s share of the 2003 NPM Adjustment. The OPMs appealed this ruling. The MSA Independent Auditor on April 14, 2014 issued revised final calculations for the April 2014 MSA payments that implement the Pennsylvania court’s ruling. The ruling was reflected as an increase of $12 million in Lorillard Tobacco’s April 15, 2014 MSA payment. On May 2, 2014, the MSA court in Missouri issued a ruling similar to Pennsylvania, which the OPMs appealed. On June 23, 2014, the MSA Independent Auditor issued revised final calculations for the April 2014 MSA payments that implement the Missouri ruling. The ruling was reflected as an increase in Lorillard Tobacco’s State Settlements liability and expense of $4 million during the second quarter of 2014.

Based on the terms of the award, during the first quarter of 2014 Lorillard Tobacco recorded a reduction in its State Settlements liability and expense of $37 million, recorded $7 million as an increase to investment income related to interest earned on the proceeds from the 2003 NPM Adjustment award, including funds paid into and released from the Disputed Payments Account (“DPA”). The reduction was partially offset by an increase of $6 million in the State Settlements liability and expense related to the industry Volume Adjustment Offset associated with the increase in the industry aggregate operating income under the agreements with the previously settled states.

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 Settling States, challenging the validity of the MSA on certain grounds, including as a violation of the antitrust laws.

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 over 10 years 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 and will be completed in 2014. Lorillard recorded pretax charges for its obligations under the law of $36 million and $64 million for the three and six months ended June 30, 2014 and $36 million and $62 million for the three and six months ended June 30, 2013, respectively. We estimate our remaining cash payments in 2014 under the law will be between $64 million and $65 million.

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, Lorillard’s 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 a predecessor to Lorillard Tobacco for a limited period of time ending more than 50 years ago. As of July 25, 2014, Lorillard Tobacco was a defendant in 65 Filter Cases. Lorillard, Inc. was a defendant in two Filter Cases, including one that also names Lorillard Tobacco. Since January 1, 2012, Lorillard Tobacco has paid, or has reached agreement to pay, a total of approximately $31.7 million in settlements to finally resolve 130 claims. Since January 1, 2012, verdicts have been returned in the following three Filter Cases: McGuire v. Lorillard Tobacco Company and Hollingsworth & Vose Company, tried in the Circuit Court, Division Four, of Jefferson County, Kentucky; Couscouris v. Hatch Grinding Wheels, et al., tried in the Superior Court of the State of California, Los Angeles; and DeLisle v. A.W. Chesterton Company, et al., tried in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida. Pursuant to the terms of a 1952 agreement between P. Lorillard Company and H&V Specialties Co., Inc. (the manufacturer of the filter material), Lorillard Tobacco is required to indemnify Hollingsworth & Vose for legal fees, expenses, judgments and resolutions in cases and claims alleging injury from finished products sold by P. Lorillard Company that contained the filter material. The jury in the McGuire case returned a verdict for Lorillard Tobacco and Hollingsworth & Vose, and the Court entered final judgment in May 2012. On February 14, 2014, the Kentucky Court of Appeals affirmed the final judgment in favor of Lorillard Tobacco and Hollingsworth & Vose and on April 3, 2014, the Court of Appeals denied plaintiff’s petition for rehearing. On May 2, 2014, plaintiff moved for discretionary review in the Kentucky Supreme Court. Lorillard Tobacco filed its responsive brief on May 30, 2014. On October 4, 2012, the jury in the

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Couscouris case returned a verdict for Lorillard Tobacco and Hollingsworth & Vose, and the court entered final judgment on November 1, 2012. On June 17, 2013, the California Court of Appeal for the Second Appellate District entered an order dismissing the appeal of the final judgment pursuant to plaintiffs’ request, but plaintiffs’ appeal of the cost judgment remained pending. However, plaintiffs abandoned their appeal on June 2, 2014, and on June 4, 2014, the appeal was dismissed. On September 13, 2013, the jury in the DeLisle case found in favor of the plaintiffs as to their claims for negligence and strict liability, and awarded $8 million. Lorillard Tobacco Company is responsible for 44%, or $3.52 million. Judgment was entered on November 6, 2013. Lorillard Tobacco Company filed its notice of appeal on November 18, 2013. Lorillard Tobacco’s initial brief is due on August 25, 2014. As of July 25, 2014, 29 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 and federal 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. All other actions, except for a state court action in 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 November 2010, defendants filed a motion for summary judgment, and plaintiffs filed a cross motion for summary judgment in July 2011. In March 2012, the District Court of Seward County granted the defendants’ motions for summary judgment dismissing the Kansas suit. Plaintiff’s motion for reconsideration was denied. On July 18, 2012, plaintiff filed a notice of appeal to the Court of Appeals for the State of Kansas. Briefing on plaintiff’s appeal was completed and argument in the Court of Appeals was held on December 11, 2013. On July 18, 2014, the Court of Appeals affirmed the dismissal of the suit. As of July 25, 2014, the time period for the plaintiff to file a certiorari petition seeking review of the decision by the Kansas Supreme Court had not expired.

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 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. 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.

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

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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’s 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 three pending product liability cases, each of which are purported Class Action Cases. 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.

Electronic Cigarette Matters

Lorillard, Inc.’s wholly owned subsidiaries – LOEC and Cygnet sell electronic cigarettes primarily in the United States and United Kingdom, respectively. From time to time, LOEC and Cygnet may be subject to legal actions, proceedings and claims arising out of the sale, distribution, manufacture, development, advertising, marketing and/or claimed health effects of electronic cigarettes. Adverse outcomes in these matters could have a material adverse effect on the results of operations and financial condition of the electronic cigarettes business.

On April 7, 2014, LOEC filed a complaint for declaratory judgment of trademark non-infringement against Zippmark, Inc. and certain affiliated entities (“Zippo”) in the United States District Court for the Central District of California. The lawsuit was predicated by Zippo’s decision to file oppositions with the United States Patent and Trademark Office’s Trademark Trial and Appeal Board against LOEC’s applications to register certain trademarks for “blu” and allegations that LOEC infringed several of Zippo’s registered trademarks. On May 19, 2014, Zippo filed an answer and counterclaim for trademark infringement. On June 12, 2014, LOEC filed its answer to Zippo’s counterclaim and filed its own counterclaim seeking to cancel certain Zippo trademarks based on descriptiveness and for false/fraudulent registration. On July 8, 2014, Zippo responded to LOEC’s counterclaim and included a counterclaim in reply seeking to cancel LOEC’s registered mark for “blu eCigs.” As of July 25, 2014, discovery was commenced with a cut-off date set for January 22, 2015. The trial date is scheduled for April 21, 2015.

LOEC is also a defendant in two lawsuits filed on June 22, 2012 and March 5, 2014 by Ruyan Investment (Holdings) Limited and its successor company, Fontem Ventures B.V. (“Fontem”) in the United States District Court for the Central District of California, alleging infringement of certain patents owned by Fontem related to electronic cigarette technology. The first case has been stayed pending proceedings before the United States Patent and Trademark Office.

Each of LOEC and Cygnet believes that it has valid claims and defenses in the pending cases as well as valid bases for appeal should any adverse verdicts be returned against either of them. It is not possible to predict the outcome of any of this litigation, which is subject to many uncertainties. It is possible that one or more of the pending actions could be decided unfavorably as to LOEC, Cygnet or other defendants. LOEC and Cygnet may enter into discussions in an attempt to settle particular cases if either believe it is appropriate to do so. LOEC and Cygnet cannot predict the type or extent of legal actions, proceedings and claims that could be brought against either of them or against other electronic cigarette manufacturers in the future.

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 Lorillard’s results of operations or equity.

21. Subsequent Events

Merger Agreement with Reynolds American Inc.

On July 15, 2014, the Company, Reynolds American Inc., a North Carolina corporation (“RAI”), and Lantern Acquisition Co., a Delaware corporation and a wholly owned subsidiary of RAI (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, subject to the satisfaction or waiver of certain conditions, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving as a wholly owned subsidiary of RAI.

At the effective time of the Merger (the “Effective Time”), each share of Company common stock (other than treasury stock held by the Company or owned by a subsidiary of the Company, RAI or Merger Sub and shares owned by stockholders of the Company who have properly made and not withdrawn a demand for appraisal rights) will be converted into the right to receive a unit consisting of (i) $50.50 per share in cash and (ii) 0.2909 fully paid and non-assessable shares of common stock of RAI (the “Merger Consideration”).

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Pursuant to the Merger Agreement, at the Effective Time, each outstanding Company equity award (including stock options and stock appreciation rights), whether vested or unvested, will be cancelled in exchange for cash based on the Merger Consideration less, in the case of a stock option, the per share exercise price. In addition, each restricted stock unit and unvested share of restricted Company common stock will, immediately prior to the Effective Time, be converted into unrestricted shares of Company common stock and, at the Effective Time, converted into the right to receive the Merger Consideration.

The completion of the Merger is subject to certain conditions, including, among others, (i) the adoption of the Merger Agreement by the Company’s stockholders, (ii) the approval by RAI’s shareholders of the issuance of RAI common stock in the Merger (the “Stock Issuance”), (iii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iv) the absence of legal restraints prohibiting the completion of the Merger and (v) the effectiveness of the registration statement on Form S-4 to be filed by RAI with the Securities and Exchange Commission (the “SEC”) and the approval for listing on the New York Stock Exchange of the RAI common stock to be issued in the Merger. In addition, RAI’s obligation to complete the Merger is subject to the absence of any legal restraint under applicable antitrust laws that results in any prohibition or limitation on the ownership, control or operation of the businesses of the surviving corporation, RAI or their respective subsidiaries, which, individually or in the aggregate, would reasonably be expected to result in a Substantial Detriment (as defined in the Merger Agreement).

Each of the Company and RAI has made representations and warranties in the Merger Agreement. The Company and RAI have each also agreed to various covenants and agreements, including, among other things, to conduct their respective businesses in the ordinary course in all material respects during the period between the execution of the Merger Agreement and completion of the Merger and not to engage in certain kinds of transactions during this period.

The Merger Agreement contains certain termination rights for both the Company and RAI, including if the Merger is not completed on or before July 15, 2015 (which date will be automatically extended to January 15, 2016 if certain closing conditions related to antitrust matters have not been satisfied) and if the approval of the Company’s stockholders or RAI’s shareholders is not obtained. If the Merger Agreement is terminated in connection with the Company entering into an alternative acquisition agreement in respect of a superior proposal or making a change of recommendation, or in certain other circumstances, the Company must pay RAI a termination fee of $740 million. In the event the Merger Agreement is terminated by the Company due to a change of recommendation by RAI’s board of directors, RAI will be obligated to pay the Company a termination fee of $740 million. In connection with entering the Merger Agreement, Lorillard suspended future share repurchases. As permitted by the Merger Agreement, Lorillard expects to continue its current dividend policy, including annual increases consistent with past practice.

In connection with the Merger Agreement, on July 15, 2014, RAI and Lignum-2, L.L.C. (“Imperial Sub”), a wholly owned subsidiary of Imperial Tobacco Group PLC (“Imperial”), entered into an asset purchase agreement (the “Asset Purchase Agreement”), pursuant to which Imperial Sub has agreed to purchase, immediately following the completion of the Merger, the Kool, Salem, Winston, Maverick and blu eCigs brands and certain other assets for a total consideration of $7.1 billion in cash (subject to certain adjustments). Also, on July 15, 2014, in connection with the asset sale, the Company and Imperial Sub entered into a Transfer Agreement, pursuant to which Imperial Sub agreed to acquire certain assets owned by the Company, including its manufacturing and R&D facilities in Greensboro, N.C., and approximately 2,900 employees.

The Company cannot give any assurance that the Merger and the other related transactions will be completed or that, if completed, they will be exactly on the terms as set forth in the Merger Agreement and the other related transaction agreements. The Company and RAI will file a joint proxy statement/prospectus with the SEC in connection with the proposed Merger, which will form a part of the registration statement on Form S-4 to be filed by RAI with the SEC to register the Stock Issuance.

As of July 25, 2014, the Company and its board of directors are named as defendants in four putative class action lawsuits brought by alleged stockholders challenging the Company’s proposed Merger with RAI. The stockholder actions were filed on July 18, 2014, July 22, 2014, July 24, 2014 and July 25, 2014, in the Court of Chancery of the State of Delaware. The complaints allege, among other things, that each member of the Company’s board of directors breached his or her fiduciary duties to the Company’s stockholders by authorizing the proposed Merger of the Company with RAI. The complaints also allege that RAI and, in one instance, British American Tobacco p.l.c. aided and abetted the breaches of fiduciary duty allegedly committed by the members of the Company’s board of directors. The stockholder actions seek injunctive relief enjoining the Merger, damages and reimbursement of costs, among other remedies. The Company and the Company’s board of directors believe that these claims are without merit and intend to defend them vigorously.

Item 2. Management’s 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 June 30, 2014 (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,”

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“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, 2013 (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. The terms “LOEC” and “blu eCigs” refer to LOEC, Inc. (d/b/a blu eCigs), our U.S. electronic cigarette subsidiary, and the terms “Cygnet”, “SKYCIG” and “blu (U.K.)” refer to Cygnet U.K. Trading Limited (t/a SKYCIG or blu (U.K.)), our U.K. electronic cigarette subsidiary.

Overview

Lorillard has two reportable segments, Cigarettes and Electronic Cigarettes.

The Cigarettes segment consists principally of the operations of Lorillard, Inc., Lorillard Tobacco and related entities. Lorillard Tobacco is the third largest manufacturer of cigarettes in the United States. Founded in 1760, Lorillard Tobacco is the oldest continuously operating tobacco company in the United States. Newport, Lorillard Tobacco’s flagship premium cigarette brand, is the top selling menthol and second largest selling cigarette overall in the United States based on gross units sold in the first six months of 2014 and in the full year 2013. In addition to the Newport brand, the Lorillard Tobacco 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.

The Electronic Cigarettes segment consists of the operations of LOEC (d/b/a blu eCigs), Cygnet (t/a SKYCIG or blu (U.K.)) and related entities. blu eCigs is a leading electronic cigarette company in the United States. Lorillard acquired the blu eCigs brand and other assets used in the manufacture, distribution, development, research, marketing, advertising and sale of electronic cigarettes on April 24, 2012. Lorillard acquired certain assets and operations of SKYCIG, a United Kingdom based electronic cigarette business, on October 1, 2013.

Recent Developments

On July 15, 2014, the Company, Reynolds American Inc., a North Carolina corporation (“RAI”), and Lantern Acquisition Co., a Delaware corporation and a wholly owned subsidiary of RAI (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, subject to the satisfaction or waiver of certain conditions, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving as a wholly owned subsidiary of RAI.

At the effective time of the Merger (the “Effective Time”), each share of Company common stock (other than treasury stock held by the Company or owned by a subsidiary of the Company, RAI or Merger Sub and shares owned by stockholders of the Company who have properly made and not withdrawn a demand for appraisal rights) will be converted into the right to receive a unit consisting of (i) $50.50 per share in cash and (ii) 0.2909 fully paid and non-assessable shares of common stock of RAI (the “Merger Consideration”). On the day of the announcement, the transaction implied an enterprise value of $27.4 billion, representing approximately 13 times Lorillard’s 2013 EBITDA.

Pursuant to the Merger Agreement, at the Effective Time, each outstanding Company equity award (including stock options and stock appreciation rights), whether vested or unvested, will be cancelled in exchange for cash based on the Merger Consideration less, in the case of a stock option, the per share exercise price. In addition, each restricted stock unit and unvested share of restricted Company common stock will, immediately prior to the Effective Time, be converted into unrestricted shares of Company common stock and, at the Effective Time, converted into the right to receive the Merger Consideration.

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The completion of the Merger is subject to certain conditions, including, among others, (i) the adoption of the Merger Agreement by the Company’s stockholders, (ii) the approval by RAI’s shareholders of the issuance of RAI common stock in the Merger (the “Stock Issuance”), (iii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iv) the absence of legal restraints prohibiting the completion of the Merger and (v) the effectiveness of the registration statement on Form S-4 to be filed by RAI with the Securities and Exchange Commission (the “SEC”) and the approval for listing on the New York Stock Exchange of the RAI common stock to be issued in the Merger. In addition, RAI’s obligation to complete the Merger is subject to the absence of any legal restraint under applicable antitrust laws that results in any prohibition or limitation on the ownership, control or operation of the businesses of the surviving corporation, RAI or their respective subsidiaries, which, individually or in the aggregate, would reasonably be expected to result in a Substantial Detriment (as defined in the Merger Agreement).

Each of the Company and RAI has made representations and warranties in the Merger Agreement. The Company and RAI have each also agreed to various covenants and agreements, including, among other things, to conduct their respective businesses in the ordinary course in all material respects during the period between the execution of the Merger Agreement and completion of the Merger and not to engage in certain kinds of transactions during this period.

The Merger Agreement contains certain termination rights for both the Company and RAI, including if the Merger is not completed on or before July 15, 2015 (which date will be automatically extended to January 15, 2016 if certain closing conditions related to antitrust matters have not been satisfied) and if the approval of the Company’s stockholders or RAI’s shareholders is not obtained. If the Merger Agreement is terminated in connection with the Company entering into an alternative acquisition agreement in respect of a superior proposal or making a change of recommendation, or in certain other circumstances, the Company must pay RAI a termination fee of $740 million. In the event the Merger Agreement is terminated by the Company due to a change of recommendation by RAI’s board of directors, RAI will be obligated to pay the Company a termination fee of $740 million.

The foregoing description of the Merger and the Merger Agreement is qualified in its entirety by reference to the Merger Agreement, a copy of which is attached as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 15, 2014 and which is incorporated by reference herein.

In connection with the Merger Agreement, on July 15, 2014, RAI and Lignum-2, L.L.C. (“Imperial Sub”), a wholly owned subsidiary of Imperial Tobacco Group PLC (“Imperial”), entered into an asset purchase agreement (the “Asset Purchase Agreement”), pursuant to which Imperial Sub has agreed to purchase, immediately following the completion of the Merger, the Kool, Salem, Winston, Maverick and blu eCigs brands and certain other assets for a total consideration of $7.1 billion in cash (subject to certain adjustments). Also, on July 15, 2014, in connection with the asset sale, the Company and Imperial Sub entered into a Transfer Agreement, pursuant to which Imperial Sub agreed to acquire certain assets owned by the Company, including its manufacturing and R&D facilities in Greensboro, N.C., and approximately 2,900 employees.

The Company cannot give any assurance that the Merger and the other related transactions will be completed or that, if completed, they will be exactly on the terms as set forth in the Merger Agreement and the other related transaction agreements. The Company and RAI will file a joint proxy statement/prospectus with the SEC in connection with the proposed Merger, which will form a part of the registration statement on Form S-4 to be filed by RAI with the SEC to register the Stock Issuance.

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 “Management’s 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 21, 2014.

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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 (“Phillip Morris USA”), R.J. Reynolds Tobacco Company (“RJR Tobacco”) and Brown & Williamson Tobacco Corporation (now an affiliate of RJR Tobacco) (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 on the other major U.S. cigarette manufacturers as product is sold and place significant restrictions on our and their ability to market and sell cigarettes.

• The domestic cigarette market, in which we conduct our only significant cigarette 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 3.9% from 2004 through 2014.

• 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 domestic shipment share in 1998 of less than 2.0% to an estimated share of 12.5% for the three months ended June 30, 2014, and continue to be a significant competitive factor in the domestic cigarette 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 Family Smoking Prevention and Tobacco Control Act (the “FSPTCA”) was enacted granting the FDA authority to regulate tobacco products. 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.

• 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 (the “TPSAC Menthol Report”) stating that “removal of menthol cigarettes from the marketplace would benefit public health.” On June 27, 2011, the FDA provided a progress report on its review of the science related to menthol cigarettes. In that update, the FDA stated that “[e]xperts within the FDA Center for Tobacco Products are conducting an independent review of the science related to the impact [of menthol] in cigarettes on public health …“ On July 21, 2011, TPSAC considered revisions to its report, and the voting members unanimously approved the final report for submission to the FDA with no change in its recommendation. On January 26, 2012, the FDA stated that its independent review had been submitted to the peer review panel and comments had been received from the panel on the report. On July 23, 2013, the FDA made available its preliminary scientific evaluation (“PSE”) of public health issues related to

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the use of menthol in cigarettes and peer review comments thereto. In the PSE, the FDA concluded that menthol cigarettes likely pose a public health risk above that seen with nonmenthol cigarettes. The FDA also acknowledged that it needed additional information on the impact of menthol in cigarettes. Accordingly, the FDA issued an Advance Notice of Proposed Rulemaking (“ANPRM”) seeking comments on the PSE and requesting additional information related to potential regulatory options it might consider for the regulation of menthol. In addition, the FDA announced that it is funding new research on, among other things, the differences between menthol and nonmenthol cigarettes to obtain information to assist FDA in making informed decisions related to potential regulation of menthol in cigarettes. The FDA established a 60-day comment period for the ANPRM and PSE, and said it will consider all comments and other information submitted to determine what, if any, regulatory action is appropriate. On September 11, 2013, the FDA extended the comment period for an additional 60 days to November 22, 2013. On November 21, 2013, the Company provided comments on the ANPRM and PSE to the FDA.

• 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 FDA’s 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 law’s 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 FDA’s regulation of tobacco products and (b) upholding the remaining challenged advertising provisions. Both sides appealed the district court’s ruling to the Sixth Circuit Court of Appeals, and on March 19, 2012, the Sixth Circuit issued an opinion (i) affirming the district court’s decision upholding the FSPTCA’s restrictions on marketing modified-risk tobacco products, bans on event sponsorship, branding nontobacco merchandise and free sampling; (ii) affirming the district court’s decision upholding the FSPTCA’s requirement that tobacco manufacturers reserve significant packaging space for graphic health warnings; (iii) affirming the district court’s decision striking down the FSPTCA’s restriction of tobacco advertising, in most instances, to black and white text; (iv) reversing the district court’s decision upholding the FSPTCA’s restriction on statements regarding the relative safety of tobacco products based on FDA regulation and its decision upholding the FSPTCA’s ban on tobacco continuity programs in most instances. Plaintiffs’ motion for rehearing en banc was denied, and Plaintiffs filed a petition for certiorari with the U.S. Supreme Court on October 30, 2012. The government declined to seek a petition for certiorari to the U.S. Supreme Court. The government did not appeal the part of the Court of Appeal’s ruling striking the FSPTCA’s restriction of tobacco advertising to black and white text. On April 22, 2013, the U.S. Supreme Court denied plaintiffs’ petition for certiorari.

• 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 FDA’s 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 TPSAC’s Menthol Report. The FDA filed a motion to dismiss this action which the court denied in August 2012. In October 2012, the FDA filed its answer to the amended complaint. The parties completed the briefing for summary judgment motions on September 20, 2013. On July 21, 2014, the District

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Court denied defendants’ motion for summary judgment and granted, in part, our motion for summary judgment entering an order enjoining the FDA (i) to reconstitute the TPSAC membership so that it complies with the applicable ethics laws and (ii) from relying on or using the TPSAC Menthol Report in any manner. As of July 25, 2014, the time for the FDA to appeal this decision had not yet expired.

• In August 2011, we, along with RJR Tobacco and several other tobacco manufacturers, filed a lawsuit in the U.S. District Court for the District of Columbia against the FDA challenging the constitutionality of certain regulations requiring specific graphic warning labels on all packaging and advertising. The Complaint seeks a judgment (i) declaring that the regulations violate the First Amendment; (ii) declaring that the regulations violate various provisions of the Administrative Procedure Act; (iii) declaring that the textual and graphic warnings required under the FSPTCA shall become effective 15 months after the FDA issues regulations that are permissible under the U.S. Constitution and federal law; and (iv) preliminarily and permanently enjoining enforcement of the regulations. Plaintiffs moved for a preliminary injunction, and after full briefing and oral argument, the district court granted plaintiffs’ motion. Plaintiffs also moved in the district court for summary judgment in their favor and after full briefing and oral argument, the district court granted that motion too. The FDA appealed both decisions to the D.C. Circuit Court of Appeals, which consolidated the appeals and heard oral argument on April 10, 2012. On August 24, 2012, the D.C. Circuit Court of Appeals affirmed the lower court’s judgment that the graphic warnings were unconstitutional, vacated the regulations and remanded them to the FDA. On October 9, 2012, the FDA filed a motion with the Court of Appeals for rehearing or rehearing en banc. That motion was denied on December 5, 2012. On March 19, 2013, the government announced that it would not seek review by the U.S. Supreme Court.

• Electronic cigarettes are generally less regulated than cigarettes. However, on April 25, 2014, the FDA released proposed rules that would extend its regulatory authority to electronic cigarettes and certain other tobacco products under the FSPTCA. We are in the process of reviewing and analyzing the proposed rules and their impact on our electronic cigarette business. We preliminarily note that the proposed rules would require that electronic cigarette manufacturers (i) register with the FDA and report electronic cigarette product and ingredient listings; (ii) market new electronic cigarette products only after FDA review; (iii) only make direct and implied claims of reduced risk if the FDA confirms that scientific evidence supports the claim and that marketing the electronic cigarette product will benefit public health as a whole; (iv) not distribute free samples; (v) implement minimum age and identification restrictions to prevent sales to individuals under age 18; (vi) include a health warning; and (vii) not sell electronic cigarettes in vending machines, unless in a facility that never admits youth. The proposed regulation will be subject to a 75-day public comment period, which has been extended by the FDA to August 8, 2014, following which the FDA will finalize the proposed regulation. It is not known how long this regulatory process to finalize and implement the rules may take. Accordingly, although we cannot predict the content of any final rules of the proposed or future regulation or the impact they may have, if enacted they could have a material adverse effect on our electronic cigarette business.

• 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 the sale, marketing and/or use of cigarettes and electronic cigarettes, including legislation, regulations or policies prohibiting or restricting the use of cigarettes and electronic cigarettes 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. In 2013, 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. During 2013, there were three state excise tax increases implemented including a $1.60 per pack increase in Minnesota, effective July 1, 2013 and a $1.00 per pack increase in Massachusetts, effective July 31, 2013. In addition, in 2012, New Hampshire passed legislation that decreased the cigarette tax by $0.10 per pack, but provided for the tax to revert to the original amount if certain revenue goals were not reached. These goals were not reached and the tax increased by $0.10 per pack on August 1, 2013. There was also a tax increase in Cook County, Illinois of $1.00 per pack, effective March 1, 2013. On June 21, 2010, the 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

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$0.6166 per pack to $1.0066 per pack, effective April 1, 2009, to finance health insurance for children. For the six months ending June 2014, there was one state excise tax increase of $0.13 per pack implemented in the state of Oregon, as well as a $0.50 municipal excise tax increase in the City of Chicago, Illinois. 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 brand’s taste; quality; price, including the level of discounting and other promotional activities which became more intense in 2012 and continued in 2013; 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 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.

The following table presents selected Lorillard and industry cigarette shipment data for the three and six months ended June 30, 2014 and 2013.

Selected Industry Data

	Three Months Ended June 30,						Six Months Ended June 30,
(Volume in billions)	2014			2013			2014			2013
Lorillard total domestic unit volume (1) (3)		9.977			10.262			18.815			19.306
Industry total domestic unit volume (1), (3)		67.542			71.474			128.556			134.209
Lorillard’s premium volume as a percentage of its total volume (2)		86.3	%		85.8	%		86.3	%		85.8	%
Newport’s share of Lorillard’s total volume (2)		85.6	%		85.0	%		85.6	%		85.0	%
Newport’s share of Lorillard’s Cigarettes Segment net sales (2)		88.6	%		88.3	%		88.6	%		88.2	%

(1) Source: Management Science Associates, Inc. (“MSAI”), an independent third-party database management organization that collects wholesale shipment data from various cigarette manufacturers. MSAI divides the cigarette market into two price segments, the premium price segment and the discount or reduced price segment. MSAI’s 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.

(2) Source: Lorillard shipment reports.

(3) Domestic unit volume includes cigarette units sold as well as promotional units and excludes volumes for Puerto Rico and U.S. Possessions.

The following table presents selected Lorillard and industry retail market share data for the three and six months ended June 30, 2014 and 2013, based on Lorillard’s proprietary retail shipment database administered by MSAI, which reflects shipments from wholesalers to retailers.

Selected Domestic Retail Cigarette Unit Market Share Data⁽¹⁾

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Lorillard’s share of the retail market		15.0	%		14.8	%		15.1	%		14.8	%
Lorillard’s share of the premium market		17.5	%		17.2	%		17.6	%		17.3	%
Lorillard’s share of the menthol market (2)		40.3	%		40.0	%		40.5	%		40.3	%
Newport’s share of the retail market		12.8	%		12.5	%		12.9	%		12.6	%
Newport’s share of the premium market		17.3	%		17.0	%		17.5	%		17.1	%
Newport’s share of the menthol market (2)		37.1	%		36.9	%		37.3	%		37.2	%
Total menthol segment market share for the industry (2)		31.6	%		31.4	%		31.7	%		31.3	%
Total discount segment market share for the industry		26.0	%		26.4	%		26.1	%		26.5	%

(1) Source: Lorillard’s proprietary retail shipment database administered by MSAI, which reflect shipments from wholesalers to retailers.

(2) Lorillard has made certain adjustments to its proprietary retail shipment data to reflect management’s judgment as to which brands are included in the menthol segment.

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The market for electronic cigarettes is evolving at a very fast pace and is very fragmented, with many companies competing with similar product offerings. In the competition for retail presence, blu eCigs has begun the process of differentiating itself from the competition with unique technology, impactful displays and point of sale materials. Lorillard will be reporting Nielsen dollar share results for blu and the e-cigarette category going forward. According to Nielsen, blu’s domestic all-outlet dollar market share of electronic cigarettes decreased 1.1 share points to 40.9% for the 13 weeks ending July 5, 2014 versus the year ago 13 week period. The method of distribution for many competing companies is predominately over the internet, with only a small number of competitors currently having a significant presence at retail.

blu Domestic Retail Electronic Cigarette Dollar Market Share Data ⁽³⁾

13 Week Reporting Periods Ended:

March 23, 2013	35.3	%
June 22, 2013	42.0	%
September 21, 2013	45.3	%
December 21, 2013	45.8	%
March 15, 2014	45.0	%
July 5, 2014	40.9	%

(3) Based on Nielsen, ScanTrack Database – All Outlets Combined.

Results of Operations

Three and Six Months Ended June 30, 2014 Compared to the Three and Six Months Ended June 30, 2013

Lorillard Consolidated Results

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(in millions)						(in millions)
Net sales (including excise taxes of $502, $516, $947 and $971)	$	1,799		$	1,804		$	3,391		$	3,381
Cost of sales (including excise taxes of $502, $516, $947 and $971)		1,116			1,126			2,090			1,990
Gross profit		683			678			1,301			1,391
Selling, general and administrative		151			138			297			290
Operating income		532			540			1,004			1,101
Investment income (loss)		(2	)		—			6			1
Interest expense		(45	)		(41	)		(90	)		(82	)
Income before income taxes		485			499			920			1,020
Income taxes		185			186			349			380
Net income	$	300		$	313		$	571		$	640

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Cigarettes Segment Results

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
	(in millions)				(in millions)
Net sales (including excise taxes of $502, $516, $947 and $971)	$	1,762	$	1,747	$	3,303	$	3,267
Cost of sales (including excise taxes of $502, $516, $947 and $971)		1,088		1,087		2,026		1,914
Gross profit		674		660		1,277		1,353
Selling, general and administrative		119		122		239		261
Operating income	$	555	$	538	$	1,038	$	1,092

Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013

Net sales. Cigarette net sales increased by $15 million, or 0.9%, from $1.747 billion for the three months ended June 30, 2013 to $1.762 billion for the three months ended June 30, 2014. Cigarette net sales increased due to higher average net selling prices of $74 million which reflect price increases in June and November 2013 and May 2014, partially offset by lower cigarette unit sales volume ($59 million, including $14 million of federal excise tax).

Total Lorillard wholesale cigarette unit volume, which includes Puerto Rico and U.S. Possessions, decreased 3.4% for the second quarter of 2014 compared to the corresponding period of 2013. Puerto Rico and U.S. Possessions declined 38.6% compared to a year ago period in which inventories were built by wholesale in advance of a July 2013 $1.00 per pack excise tax increase in Puerto Rico. Domestic wholesale cigarette unit volume, which excludes Puerto Rico and U.S. Possessions, decreased 2.8% for the second quarter of 2014 compared to the corresponding period of 2013. The Company estimates total cigarette industry domestic wholesale shipments decreased 5.5% for the second quarter of 2014 compared to the second quarter of 2013. Adjusting for the impact of changes in wholesale inventory patterns, Lorillard domestic wholesale shipments decreased an estimated 2.1% in the second quarter of 2014 versus year ago, significantly outperforming adjusted total cigarette industry domestic wholesale shipments which decreased an estimated 4.3% during the quarter compared to second quarter of 2013.

Total wholesale unit volume, including Puerto Rico, for Newport, the Company’s flagship brand, decreased 2.7% for the second quarter of 2014 compared to the corresponding period of 2013. Domestic wholesale cigarette unit volume for Newport, which excludes Puerto Rico and U.S. Possessions, decreased 1.9% for the quarter versus year ago. Adjusting for inventory fluctuations, Newport domestic volume decreased an estimated 1.2% versus year ago. Domestic wholesale shipments for Maverick, the Company’s leading discount brand, decreased 6.6% for the second quarter of 2014 compared to the second quarter of 2013.

Based on Lorillard’s proprietary retail shipment database administered by Management Science Associates, Inc., which measures shipments from wholesale to retail and is unaffected by wholesale inventory changes, Lorillard’s second quarter 2014 domestic retail market share increased 0.2 share points versus year ago to 15.0%, its second consecutive full quarter over 15%. Newport’s domestic retail market share was 12.8%, an increase of 0.3 share points compared to the second quarter of 2013. Lorillard’s domestic retail share of the menthol market increased 0.3 share points to 40.3% for the second quarter of 2014 compared to the corresponding period of 2013. Gains in Newport’s domestic retail market share were primarily attributable to the continued strengthening of Newport Menthol in its core geographies, continued success in expansion markets and the volume impact from the growth of Newport Non-Menthol.

Cost of sales. Cost of sales increased by $1 million, or 0.1%, from $1.087 billion for the three months ended June 30, 2013 to $1.088 billion for the three months ended June 30, 2014. Cost of sales reflects higher expenses related to the State Settlement Agreements ($15 million), higher cigarette raw material input costs (primarily tobacco and other direct costs) ($3 million) and higher Food and Drug Administration fees ($2 million), partially offset by lower unit sales volume ($19 million, including $14 million of Federal Excise Tax). We recorded pre-tax charges for our obligations under the State Settlement Agreements of $358 million and $343 million for the three months ended June 30, 2014 and 2013, respectively, an increase of $15 million. The $15 million increase is primarily due to the impact of the inflation adjustment ($9 million), $4 million unfavorable impact of the reversal of a portion of the 2003 non-participating manufacturer award related to a Missouri court order, the absence of the $12 million favorable impact on Lorillard’s tobacco settlement expense of the settlement to resolve certain MSA payment adjustment disputes approved by the arbitration panel in March 2013 and other adjustments ($4 million), partially offset by the favorable impact of $14 million on Lorillard’s tobacco settlement expense of the settlement to resolve certain MSA payment adjustment disputes with two additional states in the second quarter of 2014.

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Selling, general and administrative. Selling, general and administrative costs decreased $3 million to $119 million in the three months ended June 30, 2014 compared to the three months ended June 30, 2013, primarily due to lower legal defense costs related to Engle Progeny litigation and lower promotional expenses related to Newport Menthol, partially offset by $4 million in costs related to the agreement to merge with RAI.

Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013

Net sales. Cigarette net sales increased by $36 million, or 1.1%, from $3.267 billion for the six months ended June 30, 2013 to $3.303 billion for the six months ended June 30, 2014. Cigarette net sales increased due to higher average net selling prices of $137 million which reflect price increases in June and November 2013 and May 2014, partially offset by lower cigarette unit sales volume ($101 million, including $24 million of federal excise tax).

Total Lorillard wholesale cigarette unit volume, which includes Puerto Rico and U.S. Possessions, decreased 3.2% for the first half of 2014 compared to the corresponding period of 2013. Puerto Rico and U.S. Possessions declined 36.3% compared to a year ago period in which inventories were built by wholesale in advance of a July 2013 $1.00 per pack excise tax increase in Puerto Rico. Domestic wholesale cigarette unit volume, which excludes Puerto Rico and U.S. Possessions, decreased 2.5% for the first half of 2014 compared to the corresponding period of 2013. The Company estimates total cigarette industry domestic wholesale shipments decreased 4.2% for the first half of 2014 compared to the first half of 2013. Adjusting for the impact of changes in wholesale inventory patterns, Lorillard domestic wholesale shipments decreased an estimated 1.9% in the first half of 2014 versus year ago, significantly outperforming adjusted total cigarette industry domestic wholesale shipments which decreased an estimated 4.2% during the first half of 2014 compared to the first half of 2013.

Total wholesale unit volume for Newport, including Puerto Rico and U.S. Possessions, the Company’s flagship brand, decreased 2.5% for the first half of 2014 compared to the corresponding period of 2013. Domestic wholesale cigarette unit volume for Newport, which excludes Puerto Rico and U.S. Possessions, decreased 1.7% for the first half of 2014 versus year ago. Adjusting for inventory fluctuations, Newport domestic volume decreased an estimated 1.0% versus year ago, significantly outperforming the 4.2% estimated adjusted industry decline. Domestic wholesale shipments for Maverick, the Company’s leading discount brand, decreased 6.3% for the first half of 2014 compared to the first half of 2013.

Based on Lorillard’s proprietary retail shipment database administered by Management Science Associates, Inc., which measures shipments from wholesale to retail and is unaffected by wholesale inventory changes, Lorillard’s first half 2014 domestic retail market share increased 0.3 share points versus year ago to 15.1%. Newport’s domestic retail market share reached 12.9%, an increase of 0.3 share points compared to the first half of 2013. Lorillard’s domestic retail share of the menthol market increased 0.2 share points to 40.5% for the first half of 2014. Gains in Newport’s domestic retail market share were primarily attributable to the continued strengthening of Newport Menthol in its core geographies, continued success in expansion markets and volume growth from Newport Non-Menthol.

Cost of sales. Cost of sales increased by $112 million, or 5.9%, from $1.914 billion for the six months ended June 30, 2013 to $2.026 billion for the six months ended June 30, 2014. Cost of sales reflects higher expenses related to the State Settlement Agreements ($125 million), higher cigarette raw material input costs (primarily tobacco and other direct costs) ($13 million), higher Food and Drug Administration fees ($4 million) and an increase in the Federal Assessment for Tobacco Growers ($2 million), partially offset by lower unit sales volume ($32 million, including $24 million of Federal Excise Tax). We recorded pre-tax charges for our obligations under the State Settlement Agreements of $644 million and $519 million for the six months ended June 30, 2014 and 2013, respectively, an increase of $125 million. The $125 million increase is primarily due to the absence of the $154 million favorable impact on Lorillard’s tobacco settlement expense of the settlement to resolve certain MSA payment adjustment disputes approved by the arbitration panel in March 2013, the inflation adjustment of $18 million and $4 million unfavorable impact of the reversal of a portion of the 2003 non-participating manufacturer award related to a Missouri court order, partially offset by the favorable impact of $27 million on Lorillard’s tobacco settlement expense in 2014 related to the 2003 non-participating manufacturer arbitration award as a result of the September 2013 arbitration panel determination that six states failed to diligently enforce escrow provisions applicable to non-participating manufacturers, the $14 million favorable impact of the reduction in Lorillard’s MSA payments as a result of the settlement with two more states in June 2014 and other adjustments ($6 million).

Selling, general and administrative. Selling, general and administrative costs decreased $22 million to $239 million in the six months ended June 30, 2014 compared to the six months ended June 30, 2013, primarily due to the absence of the $20 million in estimated costs to comply with or otherwise resolve the U.S. Government Case judgment incurred in the first quarter of 2013, lower legal defense costs related to Engle Progeny litigation and lower promotional expenses related to Newport Menthol, partially offset by $4 million in costs related to the agreement to merge with RAI.

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Electronic Cigarettes Segment Results*

	Three Months Ended June 30,					Six Months Ended June 30,
	2014			2013		2014			2013
	(in millions)					(in millions)
Net sales	$	37		$	57	$	88		$	114
Cost of sales		28			39		64			76
Gross profit		9			18		24			38
Selling, general and administrative		32			16		58			29
Operating income (loss)	$	(23	)	$	2	$	(34	)	$	9

* Results for the three and six months ended June 30, 2013 provided above are not comparable to the results for the three and six months ended June 30, 2014 as Lorillard purchased the assets and operations of SKYCIG on October 1, 2013.

Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2013

Net sales. Net sales for the Electronic Cigarettes segment were $37 million for the three months ended June 30, 2014, compared to $57 million for the three months ended June 30, 2013. The decline in sales of blu eCigs in the U.S. versus year ago reflects a decrease in unit volume as well as the estimated $4 million mix impact of a lower price on rechargeable kits that were introduced in the third quarter of 2013. The decrease in unit volume is attributed to an unfavorable comparison to the year ago period that included significant pipeline inventory as the brand was in its initial phase of national expansion and was also negatively impacted by new national competitors’ launches during this year’s second quarter.

blu (U.K.), formerly known as SKYCIG, was acquired on October 1, 2013 and generated $4 million in net sales during the second quarter of 2014. The product offering in the U.K. was re-branded as “blu” and launched at retail and online during the second quarter of 2014. The launch and retail rollout has been accompanied by introductory levels of advertising and promotional spending. Retail placement and exposure is expected to increase significantly during the second half of 2014, which, along with continued marketing of blu, is expected to drive an increase in net sales.

Based on the Nielsen ScanTrack Database, blu’s all-outlet dollar market share of electronic cigarettes decreased 1.1% share points to 40.9% for the 13 weeks ending July 5, 2014 versus the year ago 13 week period, tracing to the list price reduction on rechargeable packs and increased competitive activity during this year’s second quarter.

Cost of sales. Cost of sales for the Electronic Cigarettes segment was $28 million for the three months ended June 30, 2014, compared to $39 million for the three months ended June 30, 2013.

Gross profit. Gross profit was $9 million, or 24.3% of net sales, for the three months ended June 30, 2014, compared to $18 million, or 31.6% of net sales, for the three months ended June 30, 2013. Gross profit and gross profit margin for the second quarter ended June 30, 2014 were negatively impacted by the mix impact of the new, lower priced rechargeable kits as well as higher retail distribution costs. This negative drag on gross margin should be minimal going forward as the Company has fully lapped the conversion to the lower priced rechargeable kits.

Selling, general and administrative. Selling, general and administrative costs were $32 million for the three months ended June 30, 2014, compared to $16 million for the three months ended June 30, 2013. Selling, general and administrative costs include increased costs to launch the blu brand in the U.K. Selling, general and administrative costs for the three months ended June 30, 2014 also include $6 million of amortization related to the SKYCIG brand. The fair value ascribed to the SKYCIG brand in connection with the acquisition of £20 million (approximately $35 million at June 30, 2014 exchange rates) is being amortized over an estimated life of 18 months beginning October 1, 2013 after which amortization charges related to the brand will cease.

Operating income (loss). The Electronic Cigarettes segment had an operating loss of $23 million for the three months ended June 30, 2014, compared to operating income of $2 million for the three months ended June 30, 2013. blu (U.K.)’s operating loss was $15 million for the three months ended June 30, 2014.

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Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013

Net sales. Net sales for the Electronic Cigarettes segment were $88 million for the six months ended June 30, 2014, compared to $114 million for the six months ended June 30, 2013. The decline in sales of blu eCigs in the U.S. versus year ago reflects a decrease in unit volume as well as the estimated $11 million mix impact of a lower price on rechargeable kits that were introduced in the third quarter of 2013. The year ago quarter was also favorably impacted by significant pipeline inventory as the brand was in its initial phase of national expansion. blu (U.K.) was acquired on October 1, 2013 and generated $7 million in net sales during the first half of 2014.

Based on the Nielsen ScanTrack Database, blu’s domestic all-outlet dollar market share of electronic cigarettes increased 3.3 share points to 42.8% for the 26 weeks ending July 5, 2014 versus the year ago 26 week period. blu’s robust share growth at retail is attributed to strong consumer pull through from brand equity building activities and increased distribution.

Cost of sales. Cost of sales for the Electronic Cigarettes segment was $64 million for the six months ended June 30, 2014, compared to $76 million for the six months ended June 30, 2013.

Gross profit. Gross profit was $24 million, or 27.3% of net sales, for the six months ended June 30, 2014, compared to $38 million, or 33.3% of net sales, for the six months ended June 30, 2013. Gross profit and gross profit margin for the first half of 2014 were negatively impacted by the mix impact of the new, lower priced rechargeable kits as well as higher retail distribution costs.

Selling, general and administrative. Selling, general and administrative costs were $58 million for the six months ended June 30, 2014, compared to $29 million for the six months ended June 30, 2013. 2014 selling, general and administrative costs include increased advertising and marketing costs associated with brand-building activities in the U.S. and costs to launch the blu brand in the U.K. Selling, general and administrative costs for the six months ended June 30, 2014 also include $11 million of amortization related to the SKYCIG brand. The fair value ascribed to the SKYCIG brand in connection with the acquisition of £20 million (approximately $35 million at June 30, 2014 exchange rates) is being amortized over an estimated life of 18 months beginning October 1, 2013 after which amortization charges related to the brand will cease.

Operating income (loss). The Electronic Cigarettes segment had an operating loss of $34 million for the six months ended June 30, 2014, compared to operating income $9 million for the six months ended June 30, 2013. blu (U.K.)’s operating loss was $23 million for the six months ended June 30, 2014.

Lorillard Consolidated Results

Investment income (loss). Investment income decreased $2 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 primarily due to the unfavorable impact of the Missouri court ruling reversing a portion of the 2003 non-participating manufacturer award in the second quarter of 2014.

Investment income increased $5 million for the six months ended June 30, 2014 compared to the six months ended June 30, 2013, and reflects $7 million of interest income related to the 2003 non-participating manufacturer arbitration award in the first quarter of 2014, partially offset by the unfavorable impact of the Missouri court ruling in the second quarter of 2014.

Interest expense. Interest expense increased $4 million and $8 million for the three and six months ended June 30, 2014, respectively, compared to the three and six months ended June 30, 2013, and reflects interest on the Senior Notes issued in the second quarter of 2013.

Income taxes. Income taxes decreased $1 million, or 0.5%, from $186 million for the three months ended June 30, 2013 to $185 million for the three months ended June 30, 2014. The change reflects a decrease in income before income taxes of $14 million, or 2.8%, partially offset by an increase in the effective tax rate from 37.3% to 38.1% for the three months ended June 30, 2013 and 2014, respectively. The rate increase is mainly due to an increase in state taxes and United Kingdom foreign tax rate differences that negatively impacted the tax rate, partially offset by an increase in the manufacturers’ deduction.

Income taxes decreased $31 million, or 8.2%, from $380 million for the six months ended June 30, 2013 to $349 million for the six months ended June 30, 2014. The change reflects a decrease in income before income taxes of $100 million, or 9.8%, partially offset by an increase in the effective tax rate from 37.2% to 37.9% for the six months ended June 30, 2013 and 2014, respectively. The rate increase is mainly due to an increase in state taxes and United Kingdom foreign tax rate differences that negatively impacted the tax rate, partially offset by an increase in the manufacturers’ deduction.

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Liquidity and Capital Resources

Our cash and cash equivalents of $709 million at June 30, 2014 were invested in prime money market funds.

Our short-term and long-term investments totaled $172 million and $126 million as of June 30, 2014, respectively. Short-term and long-term investments consist of investment grade debt securities, all of which are classified as available for sale.

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 $75 million for the six months ended June 30, 2014 compared to $182 million for the six months ended June 30, 2013. The decreased cash flow in 2014 primarily reflects lower net income, a higher decrease in accrued settlement costs and a higher decrease in income taxes payable, partially offset by lower inventory purchases.

Cash flow from investing activities. Our cash flows from investing activities used cash of $70 million for the six months ended June 30, 2014 compared to $34 million for the six months ended June 30, 2013. The increase in cash used by investing activities is due primarily to the purchase of investments totaling $337 million, partially offset by cash provided by sales of investments of $289 million.

Cash flow from financing activities. Our cash flow from operations has exceeded our working capital and capital expenditure requirements during the six months ended June 30, 2014. We paid cash dividends to our shareholders of $224 million on March 10, 2014, $222 million on June 10, 2014, $209 million on March 11, 2013 and $208 million on June 10, 2013. During the six months ended June 30, 2014 and 2013, we repurchased shares totaling $314 million and $318 million, respectively.

In August 2012, Lorillard Tobacco issued $500 million aggregate principal amount of 2.300% unsecured senior notes due August 21, 2017 (the “2017 Notes”) pursuant to the Indenture and the Fourth Supplemental Indenture, dated August 21, 2012. The net proceeds from the issuance were used for the repurchase of our common stock.

In May 2013, Lorillard Tobacco issued $500 million aggregate principal amount of 3.750% unsecured senior notes due May 20, 2023 (the “2023 Notes”) pursuant to the Indenture and the Fifth Supplemental Indenture, dated May 20, 2013. 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 Company’s common stock, acquisitions, additions to working capital and capital expenditures.

Lorillard Tobacco is the principal, wholly owned operating subsidiary of Lorillard, Inc., and the $750 million aggregate principal amount of 8.125% senior notes issued in June 2009 and due 2019 (the “2019 Notes”), $750 million aggregate principal amount of 6.875% senior notes due 2020, $250 million aggregate principal amount of 8.125% senior notes due 2040, $500 million aggregate principal amount of 3.500% Notes due 2016, 2017 Notes, 2020 Notes, 2023 Notes, 2040 Notes and $250 million aggregate principal amount of 7.000% Notes due 2041 (together, the “Notes”) are unconditionally guaranteed in full on a senior unsecured basis by Lorillard, Inc.

The interest rate payable on the 2019 Notes is subject to incremental increases from 0.25% to 2.00% in the event either Moody’s Investors Services, Inc. (“Moody’s”), Standard & Poor’s Ratings Services (“S&P”) or both Moody’s and S&P downgrade the 2019 Notes below investment grade (Baa3 and BBB- for Moody’s and S&P, respectively). As of June 30, 2014, our debt ratings were Baa2 and BBB- with Moody’s and S&P, respectively, both of which are investment grade.

Upon the occurrence of a change of control triggering event, Lorillard Tobacco will be required to make an offer to repurchase the Notes at a price equal to 101% of the aggregate principal amount of the Notes, plus accrued interest. A “change of control triggering event” occurs when there is both a “change of control” (as defined in the supplemental indentures for each series of Notes) and the Notes cease to be rated investment grade by both Moody’s 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.

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As of June 4, 2014, the Company completed its $1 billion repurchase program announced in March 2013 and amended in May 2013 by repurchasing 2.7 million shares at a cost of $156 million during the second quarter of 2014.

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 requirements. We cannot predict our cash requirements related to any future settlements or judgments, including cash required to bond 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, RJR Tobacco and Brown & Williamson Tobacco Corporation (now an affiliate of RJR Tobacco)) 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 who have had increases.

During April 2014, we paid $1.1 billion under the State Settlement Agreements, primarily based on 2013 volume. Included in the above number was $93 million we deposited in an interest-bearing escrow account (“Disputed Payments 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 $93 million deposit in escrow is based upon the Original Participating Manufacturers collective loss of market share in 2011 that resulted in a reduction of $88 million and for adjustments related to escrow

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payments for other years. In April of 2013, 2012, 2011, 2010, 2009, 2008, 2007 and 2006, we had previously deposited $119 million, $106 million, $104 million, $83 million, $73 million, $72 million, $111 million and $109 million, respectively, in the Disputed Payments Account discussed above, which were based on losses of market share in 2010, 2009, 2008, 2007, 2006, 2005, 2004 and 2003 to non-participating manufacturers. In February 2009, we directed the release of $72 million from the Disputed Payments Account to the MSA states. This amount related to the loss of market share in 2005 and this release was pursuant to an Agreement Regarding Arbitration that we and the other Participating Manufacturers entered into with certain MSA states. In April 2013, October 2013, April 2014 and June 2014, we directed the release of $298 million, $22 million, $40 million and $12 million, respectively, from the Disputed Payments Account to the signatory states to the settlement that resolved the disputes involving MSA payment adjustments relating to non-participating manufacturers, as further discussed below. In addition, in April 2014, we directed the release of $62 million from the Disputed Payments Account to Lorillard Tobacco associated with the 2003 arbitration award, as further discussed below. 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.

On December 17, 2012, the Participating Manufacturers, including Lorillard Tobacco, agreed to settle with 17 states and the District of Columbia and Puerto Rico disputes under the MSA involving payment adjustments relating to non-participating manufacturers. The Participating Manufacturers presented the settlement to the arbitration panel responsible for adjudicating the 2003 NPM adjustment dispute with a request that the panel enter it as a partial settlement and award. On March 12, 2013, the arbitration panel issued a Stipulated Partial Settlement and Award that directed the Independent Auditor under the MSA to implement the settlement provisions involved, thereby allowing the settlement to proceed. Since the panel’s ruling, one additional state joined the settlement on April 12, 2013, two additional states joined the settlement on May 24, 2013, one additional state joined the settlement on June 10, 2014 and one additional state joined the settlement on June 26, 2014.

The settlement resolves the claims for the years 2003 through 2012 and puts in place a new method for calculating this adjustment beginning in 2013. Under the terms of the settlement, Lorillard Tobacco and other Participating Manufacturers will receive credits against their future MSA payments over six years, and the signatory states will be entitled to receive their allocable share of the amounts currently being held in escrow resulting from these disputes. Lorillard Tobacco currently expects to receive credits over six years of approximately $254 million on its outstanding claims, with $165 million having occurred in April 2013, $36 million in April 2014 (including $14 million received in April 2014 related to the 2003 NPM Adjustment award from the two states that joined the settlement in June 2014), and approximately $53 million over the following five years. The estimate is subject to change depending upon a number of factors included in the calculation of the credit.

Based on the terms of the settlement, during the first quarter of 2013 Lorillard Tobacco recorded a reduction in its State Settlements liability and expense of $165 million and reduced its April 15, 2013 MSA Annual Payment by the same amount. The reduction was partially offset by an increase of $21 million in the State Settlements liability and expense related to the industry Volume Adjustment Offset associated with the increase in the industry aggregate operating income under the agreements with the previously settled states. During the second quarter of 2013 Lorillard Tobacco recorded a reduction in its State Settlements liability and expense of $12 million as a result of the two additional states joining the settlement. The reduction was partially offset by an increase of $1 million in the State Settlements liability and expense related to the industry Volume Adjustment Offset associated with the increase in the industry aggregate operating income under agreements with the previously settled states. During the second quarter of 2014 Lorillard Tobacco recorded a reduction in its State Settlements liability and expense of $14 million as a result of the two additional states joining the settlement.

Lorillard Tobacco will continue to pursue these claims against those states that have not settled. Fourteen states that have not joined the settlement have taken action in state court to prevent the settlement from proceeding or to seek other relief related to the settlement. As of July 25, 2014, claims in eleven states remain pending as one state withdrew its opposition and, as noted above, two additional states joined the settlement. Two of the states also unsuccessfully sought to preliminarily enjoin the implementation of the settlement. There is no assurance that such attempts will be resolved favorably to the Company.

On September 11, 2013, the arbitration panel responsible for adjudicating the 2003 NPM adjustment dispute issued a determination that six states failed to diligently enforce escrow provisions applicable to non-participating manufacturers. The six non-diligent states included Indiana, Kentucky, Missouri, New Mexico, Maryland, and Pennsylvania. Nine other states that did not participate in the settlement were considered by the arbitration panel because the OPMs contested their diligence as well. The arbitration panel found those nine states diligent. As a result of the panel’s ruling, the OPMs are entitled to receive $458 million, plus interest and earnings, with Lorillard

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Tobacco’s share of the principal amount totaling $47 million. The six non-diligent states filed motions in their state courts to vacate the arbitration panel’s non-diligence findings. On March 31, 2014 the MSA Independent Auditor issued final calculations for the April 2014 MSA payments that implement the 2003 NPM Adjustment in that fashion.

On April 10, 2014, the MSA court in Pennsylvania issued its rulings on that state’s motion to vacate the arbitration panel’s rulings with respect to that state. The court upheld the arbitration panel’s non-diligence finding for that state. However, the court also ruled that the states that signed the settlement and had been contested in the 2003 NPM Adjustment arbitration would be deemed non-diligent for purposes of calculating that state’s share of the 2003 NPM Adjustment. The OPM’s appealed this ruling. The MSA Independent Auditor on April 14, 2014 issued revised final calculations for the April 2014 MSA payments that implement the Pennsylvania court’s ruling. The ruling was reflected as an increase of $12 million in Lorillard Tobacco’s April 15, 2014 MSA payment. On May 2, 2014, the MSA court in Missouri issued a ruling similar to Pennsylvania, which the OPMs appealed. On June 23, 2014, the MSA Independent Auditor issued revised final calculations for the April 2014 MSA payments that implement the Missouri ruling. The ruling was reflected as an increase in Lorillard Tobacco’s State Settlements liability and expense of $4 million during the second quarter of 2014.

Based on the terms of the award, during the first quarter of 2014 Lorillard Tobacco recorded a reduction in its State Settlements liability and expense of $37 million and recorded $7 million as an increase to investment income related to interest earned on the proceeds from the 2003 NPM Adjustment award, including funds paid into and released from the Disputed Payments Account. The reduction was partially offset by an increase of $6 million in the State Settlements liability and expense related to the industry Volume Adjustment Offset associated with the increase in the industry aggregate operating income under the agreements with the previously settled states.

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 over 10 years 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 and will be completed in 2014. Lorillard recorded pretax charges for its obligations under the law of $36 million and $64 million for the three and six months ended June 30, 2014 and $36 million and $62 million for the three and six months ended June 30, 2013, respectively. We estimate our remaining cash payments in 2014 under the law will be between $64 million and $65 million.

Contractual Cash Payment Obligations

The following chart presents our contractual cash payment obligations of Lorillard as of June 30, 2014:

	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(In millions)
Senior notes	$	3,500	$	—	$	500	$	2,000	$	1,000
Interest payments related to notes		1,839		198		549		267		825
Leaf Purchase obligations		117		117		—		—		—
Contractual purchase obligations		60		60		—		—		—
Operating lease obligations		6		3		2		1		—
Total	$	5,522	$	378	$	1,051	$	2,268	$	1,825

As of June 30, 2014, we do not believe that we will make any payments 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, are based on a number of factors which are described

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above. Our cash payment under the State Settlement Agreements in 2013 amounted to $1.200 billion, net of the NPM settlement credit of $177 million, and we estimate our cash payments in 2014 under the State Settlement Agreements will be between $1.369 billion and $1.419 billion, primarily based on 2013 estimated industry volume. Payment obligations are not incurred until the related sales occur and therefore are not reflected in the above table. The 2014 estimated cash payments include the favorable impact of the release from the DPA on April 15, 2014 of $47 million as a result of the September 2013 arbitration panel determination that six states failed to diligently enforce escrow provisions applicable to non-participating manufacturers.

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 June 30, 2014, assuming immediate adverse market movements of the magnitude described. 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 cash and cash equivalents consist of money market funds with major financial institutions. Our short and long-term investments are made up of available-for-sale securities which include corporate debt securities, U.S. Government agency obligations, commercial paper and international government obligations. All of our 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 2014 investments, would cause an increase or decrease in pretax income of approximately $5 million for the six months ended June 30, 2014.

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 of approximately $4 million for the six months ended June 30, 2014.

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 Moody’s 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 June 30, 2014, our debt ratings were Baa2 and BBB- with Moody’s and S&P, respectively, both of which are above the ratings at which settlement of our derivative contracts would be required. See Note 13, “Derivative Instruments,” to the Consolidated Condensed Financial Statements for additional information on derivatives.

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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 13a–15 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 13a–15(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 13a–15(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 20, “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:

Risks Related to our Pending Merger with Reynolds American Inc.

Completion of the Merger is subject to various conditions, and the Merger may not occur even if we obtain stockholder approval.

The completion of the Merger is subject to certain conditions, including, among others, the adoption of the Merger Agreement by the Company’s stockholders, the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the absence of legal restraints prohibiting the completion of the Merger. Each party’s obligation to consummate the Merger is also subject to the accuracy of the representations and warranties of the other party (subject to certain qualifications and exceptions) and the performance in all material respects of the other party’s covenants under the Merger Agreement, including, with respect to us, certain covenants regarding operation of our business prior to completion of the Merger. As a result of these conditions, we cannot assure you that the Merger will be completed, even if the required stockholder approval of the Merger is obtained or that, if completed, it will be exactly on the terms set forth in the Merger Agreement. If the Merger is not completed for any reason, we expect that we would continue to be managed by our current management, under the direction of our board of directors.

If the proposed Merger is not completed, our stock price will likely fall to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed. In addition, under the circumstances set forth in the Merger Agreement, we may be required to pay a termination fee of $740 million if the Merger Agreement is terminated. Further, the failure of the proposed Merger to be completed may result in negative publicity and/or a negative impression of us in the investment community and may affect our relationship with employees, customers and other partners in the business community.

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The Merger process could adversely affect our business, stock price, reputation and results of operations.

Our efforts to complete the Merger could cause substantial disruptions in our business, which could have an adverse effect on our financial results. Among other things, uncertainty as to whether a transaction will be completed with RAI may affect our ability to recruit prospective employees or to retain and motivate existing employees. Employee retention may be particularly challenging while the Merger is pending, because employees may experience uncertainty about their future roles with RAI or Imperial, as the case may be.

Uncertainty as to our future could adversely affect our business, reputation and our relationship with existing customers and suppliers and potential customers and suppliers. For example, customers, suppliers and others that deal with us could defer decisions concerning working with us, or seek to change existing business relationships with us. Further, a substantial amount of the attention of management and employees is being directed toward completion of the Merger and thus is being diverted from our day-to-day operations because matters related to the Merger require substantial commitments of time and resources.

While the Merger Agreement is in effect, we are subject to restrictions on our business activities.

While the Merger Agreement is in effect, we are subject to restrictions on our business activities and must generally operate our business in the ordinary course in all material respects (subject to certain exceptions). These restrictions could prevent us from pursuing attractive business opportunities that arise prior to the completion of the Merger and are generally outside the ordinary course of business, and otherwise have a material adverse effect on our future results of operations or financial condition.

In certain circumstances, the Merger Agreement requires us to pay a termination fee of $740 million to RAI, a payment which could affect the decisions of a third party considering making an alternative transaction proposal.

Under the terms of the Merger Agreement, we may be required to pay to RAI a termination fee of $740 million if the Merger Agreement is terminated under certain circumstances. This payment could affect the structure, pricing and terms proposed by a third party seeking to acquire or merge with us and could deter such third party from making a competing transaction proposal.

As of July 25, 2014, Lorillard Tobacco is a defendant in approximately 6,510 tobacco-related lawsuits, including approximately 653 cases in which Lorillard, Inc. is a co-defendant. Lorillard, Inc. is a defendant in one case in which Lorillard Tobacco is not a 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.

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The Florida Supreme Court’s 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 jury’s 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 3,874 cases pending in various state and federal courts in Florida that were filed by members of the Engle class (the “Engle Progeny Cases”), including 647 cases in which Lorillard, Inc. is a co-defendant. Lorillard, Inc. is a defendant in one Engle Progeny case in which Lorillard Tobacco is not a defendant.

As of July 25, 2014, trial was underway in one Engle Progeny Case in which Lorillard Tobacco is a defendant: Harris v. R.J. Reynolds Tobacco Company, et al. (Federal Court, Middle District, Florida). Lorillard, Inc. is not a defendant in this trial. As of July 25, 2014, Lorillard Tobacco and Lorillard, Inc. are defendants in Engle Progeny Cases that have been placed on courts’ 2014 and 2015 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 in 2014 and 2015. It also is not possible to predict whether some courts will implement procedures that consolidate multiple Engle Progeny Cases for trial.

Trials of some of the Engle Progeny Cases have resulted in verdicts that have awarded damages from cigarette manufacturers, including us.

As of July 25, 2014, Lorillard has been a defendant in seventeen Engle Progeny Cases tried to a verdict. Plaintiffs in thirteen Engle Progeny Cases were awarded compensatory damages from Lorillard Tobacco. In twelve of these cases the damages were awarded by the jury, and in one case the court entered an order following trial that awarded plaintiff compensatory damages. In four of the thirteen cases, plaintiffs were awarded punitive damages from Lorillard Tobacco. Lorillard, Inc. was a defendant in one of these thirteen cases at the time of verdict. The thirteen cases are listed below in the order in which the verdicts were returned:

• In Mrozek v. Lorillard Tobacco Company (Circuit Court, Fourth Judicial Circuit, Duval County, Florida), the jury awarded plaintiff a total of $6 million in compensatory damages and $11.3 million in punitive damages in March 2011. The jury apportioned 35% of the fault for the smoker’s injuries to the smoker and 65% to Lorillard Tobacco. The final judgment entered by the trial court reflected the jury’s verdict and awarded plaintiff $3,900,588 in compensatory damages and $11,300,000 in punitive damages plus the applicable statutory rates of annual interest. In December 2012, the Florida First District Court of Appeal affirmed the final judgment awarding compensatory and punitive damages and Lorillard Tobacco’s motion for rehearing of the appellate court opinion was denied in February 2013. In March 2013, Lorillard Tobacco filed a notice with the Florida Supreme Court seeking review of the appellate court decision. On February 13, 2014, the Florida Supreme Court declined to grant review of this case. In March 2014, Lorillard Tobacco amended the bond necessary to maintain a stay on payment of the final judgment. On March 28, 2014, Lorillard Tobacco filed a petition with the United States Supreme Court, seeking review of the due process issue, and requested that the petition be held and resolved in the same manner as the Duke, Walker, and Brown cases, also pending before the United States Supreme Court. On June 9, 2014, the United States Supreme Court denied the petitions seeking review. The trial court announced on June 25, 2014 that it had granted Lorillard Tobacco’s motion to determine the applicable rates of post-judgment interest that were in dispute. On June 27, 2014, Lorillard Tobacco made a payment of $17,500,197.37 to satisfy the final judgment awarding compensatory and punitive damages and post-judgment interest. On July 23, 2014, plaintiff filed a satisfaction of judgment. The Florida First District Court of Appeal provisionally

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granted plaintiff’s motion for intermediate appellate court attorneys’ fees, ruling that the trial court is authorized to award appellate fees if the trial court determines entitlement to attorneys’ fees. In June 2013, the trial court granted plaintiffs’ motion for entitlement to trial court attorneys’ costs and fees and also determined that plaintiff was entitled to intermediate appellate court attorneys’ fees. As of July 25, 2014, the trial court had not determined the amount of trial court or intermediate appellate court fees to award. On November 18, 2013, plaintiff filed a motion with the Florida Supreme Court seeking attorneys’ fees in connection with the appeal to the Florida Supreme Court. On February 3, 2014, the Florida Supreme Court provisionally granted plaintiff’s motion for attorney fees in the amount of $2,500, conditioned on the trial court’s determination of entitlement.

• 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 in April 2011. 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. The court entered a final judgment that awarded plaintiff $225,000 in compensatory damages from Lorillard Tobacco plus 6% annual interest. Defendants noticed an appeal from the final judgment to the Florida Fourth District Court of Appeal. In August 2013, the Florida Fourth District Court of Appeal affirmed the final judgment. On October 16, 2013 defendants filed a notice with the Florida Supreme Court seeking review of the appellate court decision. On March 10, 2014, the trial court entered an order confirming that Lorillard Tobacco had satisfied the judgment awarding compensatory damages and post-judgment interest for an amount totaling approximately $263,400. On March 18, 2014, Lorillard Tobacco filed a notice of voluntary dismissal of their petition seeking review of the Florida Supreme Court and the Court entered an order dismissing the petition for review as to Lorillard Tobacco on May 21, 2014. The Florida Fourth District Court of Appeal provisionally granted plaintiff’s motion for appellate attorneys’ fees, ruling that the trial court is authorized to award appellate fees if the trial court determines entitlement to such attorneys’ fees. As of July 25, 2014, the trial court had not determined the amount of trial court costs or appellate court fees to award.

• In Sulcer v. Lorillard Tobacco Company, et al. (Circuit Court, Escambia County, Florida), in April 2011, the jury awarded $225,000 in compensatory damages to the plaintiff and it assessed 95% of the fault for the smoker’s injuries to the smoker with 5% allocated to Lorillard Tobacco. The jury returned a verdict for Lorillard Tobacco as to whether plaintiff is entitled to punitive damages. The court entered a final judgment that incorporated the jury’s determination of the parties’ fault and awarded plaintiff $11,250 in compensatory damages. Lorillard Tobacco paid approximately $246,000 to resolve the damages verdict, costs and fees. Following this payment, Sulcer was concluded.

• In Jewett v. R.J. Reynolds Tobacco Co., et al. (Circuit Court, Duval County, Florida), the jury awarded the estate of the decedent $692,981 in compensatory damages and awarded the plaintiff $400,000 for loss of companionship in May 2011. The jury assessed 70% of the responsibility for the decedent’s injuries to the decedent, 20% to R.J. Reynolds and 10% to Lorillard Tobacco. The jury determined that no punitive damages were warranted. The final judgment entered by the trial court reflected the jury’s verdict and awarded plaintiff a total of $109,298 from Lorillard Tobacco plus 6% annual interest. In June 2012, an agreement was reached between the parties as to the amount of trial court costs and attorneys’ fees incurred, should the judgment be upheld on appeal, and plaintiff’s motion for costs and attorneys’ fees was withdrawn. In November 2012, the Florida First District Court of Appeal reversed the judgment awarding compensatory damages and ordered the case returned to the trial court for a new trial. In January 2013, the appellate court denied a motion filed by the plaintiff for rehearing of the decision reversing the judgment. Both the plaintiff and defendants filed notices with the Florida Supreme Court seeking review of the appellate court decision. On February 14, 2014, the Florida Supreme Court declined to grant review of this case.

• In Weingart v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, Palm Beach County, Florida), in July 2011, the jury determined that the decedent did not sustain any compensatory damages from the defendants, including Lorillard Tobacco, and it returned a verdict for the defendants that punitive damages were not warranted. The jury assessed 91% of the fault for the decedent’s injuries to the decedent, 3% to Lorillard Tobacco and 3% to each of the other two defendants. Following trial, the court granted in part a motion by the plaintiff to award damages, and it tentatively awarded plaintiff $150,000 in compensatory damages. The court entered a final judgment that applied the jury’s comparative fault determinations to the court’s award of compensatory damages. The final judgment awarded plaintiff $4,500 from Lorillard Tobacco. Defendants noticed an appeal to the Florida Fourth District Court of

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Appeal from the order that awarded compensatory damages to the plaintiff and amended their notice of appeal to address the final judgment. On February 13, 2013, the Florida Fourth District Court of Appeal affirmed the final judgment awarding compensatory damages. Defendants filed a notice with the Florida Supreme Court seeking review of this decision. In March 2012, the trial court entered a judgment against the defendants for costs with Lorillard Tobacco’s share amounting to $43,081 plus 4.75% annual interest. Defendants noticed an appeal from this costs judgment. In June 2013, all defendants satisfied both the final judgment awarding compensatory damages and the costs judgment, with Lorillard Tobacco’s share amounting to approximately $50,000. Defendants’ petition for Florida Supreme Court review and the appeal from the costs judgment have been dismissed. This case is now concluded.

• In Sury v. R.J. Reynolds Tobacco Company, et al. , (Circuit Court, Duval County, Florida), in November 2011, the jury awarded plaintiff $1,000,000 in compensatory damages and assessed 60% of the responsibility for the decedent’s injuries to the decedent, 20% to Lorillard Tobacco and 20% to R.J. Reynolds. The jury returned a verdict for the defendants regarding whether punitive damages were warranted. In March 2012, the court entered a final judgment against defendants in the amount of $1,000,000, jointly and severally, plus 4.75% annual interest, declining to apply the jury’s comparative fault findings to causes of action alleging intentional conduct. On June 24, 2013, the Florida First District Court of Appeal affirmed the final judgment. Lorillard Tobacco’s motion for rehearing of this decision with the Florida First District Court of Appeal was denied in August 2013. The Florida Supreme Court declined review of the intermediate appellate court decision in January 2014. On March 28, 2014, Lorillard Tobacco filed a petition with the United States Supreme Court, seeking review of the due process issue, and requested that the petition be held and resolved in the same manner as the Duke, Walker, and Brown cases, also pending before the United States Supreme Court. On June 9, 2014, the United States Supreme Court denied the petitions seeking review. On June 19, 2014, Lorillard Tobacco made a payment of $1,659,674 to satisfy the final judgment awarding compensatory damages plus post judgment interest, trial level attorneys’ fees and costs, and Florida Supreme Court fees. Plaintiff filed a satisfaction of judgment on July 14, 2014. In June 2013, the First District Court of Appeal determined that plaintiff was entitled to attorneys’ fees in connection with the appeal to the First District Court of Appeal and directed the trial court to determine the amount. As of July 25, 2014, the trial court had not determined the amount.

• In Alexander v. Lorillard Tobacco Company, et al. (Circuit Court, Eleventh Judicial Circuit, Miami-Dade County, Florida) the jury awarded plaintiff $20,000,000 in compensatory damages and $25,000,000 in punitive damages in February and March 2012. Lorillard Tobacco is the only defendant in this case. The jury apportioned 20% of the fault for the smoker’s injuries to the smoker and 80% to Lorillard Tobacco. In March 2012, the court entered a final judgment that applied the jury’s comparative fault determination to the court’s award of compensatory damages, awarding the plaintiff $16,000,000 in compensatory damages and $25,000,000 in punitive damages from Lorillard Tobacco. In May 2012, the court granted a motion by Lorillard Tobacco to lower the amount of compensatory damages and reduced the amount awarded to $10,000,000 from Lorillard Tobacco. Other post-trial motions challenging the verdict were denied. The court entered an amended final judgment that applied the jury’s comparative fault determination to the court’s award of compensatory damages, awarding the plaintiff $8,000,000 in compensatory damages and $25,000,000 in punitive damages. The court also awarded plaintiff post-judgment interest (based on a statutory rate) on the compensatory and punitive damages, which totaled approximately $3.7 million as of July 25, 2014. Lorillard Tobacco noticed an appeal from the amended final judgment to the Florida Third District Court of Appeal. On September 4, 2013, the Florida Third District Court of Appeal affirmed the amended final judgment awarding compensatory and punitive damages. Lorillard Tobacco’s motion for rehearing of this decision with the Florida Third District Court of Appeal was denied in October 2013. On November 27, 2013, Lorillard Tobacco filed a petition with the Florida Supreme Court seeking review of the intermediate appellate court decision. As of July 25, 2014, the Florida Supreme Court had not announced whether it would grant review of this case. In September 2012, an agreement was reached between the parties as to the amount of costs and attorneys’ fees incurred, should the judgment be upheld on appeal. In September 2013, the Florida Third District Court of Appeal determined that plaintiff was entitled to intermediate appellate court attorneys’ fees in connection with the appeal to the Florida Third District Court of Appeal and directed the trial court to determine the amount. As of July 25, 2014, the trial court had not determined the amount of such attorneys’ fees to award. On January 3, 2014, the plaintiff filed a motion with the Florida Supreme Court seeking attorneys’ fees in connection with the appeal to the Florida Supreme Court. As of July 25, 2014, the Florida Supreme Court had not ruled on this motion.

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• In Calloway v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, Seventeenth Judicial Circuit, Broward County, Florida), the jury awarded plaintiff and a daughter of the decedent a total of $20,500,000 in compensatory damages in May 2012. The jury apportioned 20.5% of the fault for the smoker’s injuries to the smoker, 27% to R.J. Reynolds, 25% to Philip Morris, 18% to Lorillard Tobacco, and 9.5% to Liggett. The jury awarded $12,600,000 in punitive damages from Lorillard Tobacco and $42,250,000 from the other defendants, for a total punitive damages award of $54,850,000. In August 2012, the court granted a post-trial motion by the defendants and lowered the compensatory damages award to $16,100,000. The court also ruled that the jury’s finding on the plaintiff’s percentage of comparative fault would not be applied to reduce the compensatory damage award because the jury found in favor of the plaintiff on her claims alleging intentional conduct. In August 2012, the court entered final judgment against defendants in the amount of $16,100,000 in compensatory damages, jointly and severally, and $54,850,000 in punitive damages. Lorillard Tobacco is liable for $12,600,000 of the total punitive damages award. The court also awarded plaintiff post-judgment interest (based on a statutory rate) on the compensatory and punitive damages, which totaled approximately $1.6 million as of July 25, 2014 based on the jury-apportioned fault for Lorillard Tobacco. The final judgment also granted plaintiff’s application for trial court costs and attorneys’ fees, but as of July 25, 2014, the trial court had not awarded an amount. Defendants have noticed an appeal from the final judgment to the Florida Fourth District Court of Appeal. On March 31, 2014, plaintiff filed a motion with the Florida Fourth District Court of Appeal seeking attorneys’ fees in connection with the appeal to the Fourth District. As of July 25, 2014, the Florida Fourth District Court of Appeal had not ruled on this motion.

• In Evers v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, Thirteenth Judicial Circuit, Hillsborough County, Florida), the jury awarded plaintiff and the estate of the decedent a total of $3,230,000 in compensatory damages in February 2013. The jury apportioned 31% of the fault for the smoker’s injuries to the smoker, 60% to R.J. Reynolds and 9% to Lorillard Tobacco. The jury found that punitive damages against Lorillard Tobacco were not warranted and awarded $12,362,042 in punitive damages from R.J. Reynolds Tobacco Company. The Court granted a post-trial motion by R.J. Reynolds for a directed verdict on punitive damages and, as a result, the jury’s punitive damages award was set aside. The Court denied a motion filed by the plaintiff to reconsider the directed verdict. At a post-trial hearing, the plaintiff waived entitlement to the jury’s loss of services award which amounted to $280,000 of the total compensatory damages award. In May 2013, the court entered a final judgment that applied the jury’s comparative fault determinations and awarded plaintiff and the estate of the decedent $2,035,500 in compensatory damages ($265,500 from Lorillard Tobacco), plus the statutory rate of interest. Plaintiff and defendants have both appealed the final judgment to the Florida Second District Court of Appeal. Plaintiff also filed a motion for entitlement to trial attorneys’ fees and costs. As of July 25, 2014, the trial court had not ruled on this motion. On May 23, 2014, plaintiff filed a motion with the Florida Second District Court of Appeal seeking attorneys’ fees in connection with the appeal to the Second District. As of July 25, 2014, the Florida Second District Court of Appeal had not ruled on this motion.

• In Cohen v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, Fifteenth Judicial Circuit, Palm Beach County, Florida), the jury awarded plaintiff and the estate of the decedent a total of $2,055,050 in compensatory damages in May 2013. The jury apportioned 40% of the fault for the smoker’s injuries to the smoker, 30% to R.J. Reynolds, 20% to Lorillard Tobacco, and 10% to Liggett. The jury found that punitive damages were not warranted against any of the defendants. On May 6, 2013, the Court entered final judgment against defendants in the amount of $1,233,030 ($411,010 from Lorillard Tobacco) plus 4.75% annual interest. On July 10, 2013, the Court entered an order granting defendants’ motion for a new trial based on the plaintiff’s improper arguments during closing. This order effectively vacated the final judgment. Plaintiff and defendants have both appealed the order granting the motion for new trial to the Florida Fourth District Court of Appeal. Plaintiff’s petition with the Florida Fourth District Court of Appeal seeking to disqualify the trial court judge from further consideration of this case was denied in November 2013, and a second petition seeking to disqualify the trial judge, filed in January 2014, was also subsequently denied.

• In Ruffo v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, Eleventh Judicial Circuit, Miami-Dade County, Florida), the jury awarded plaintiff $1,500,000 in compensatory damages in May 2013. The jury apportioned 85% of the fault for the smoker’s injuries to the smoker, 12% to Philip Morris, and 3% to Lorillard Tobacco. Defendants’ post-trial motions challenging the verdict were denied. On October 4, 2013, the Court entered a final judgment against defendants that applied the jury’s comparative fault determinations and awarded plaintiff $225,000 in compensatory damages ($45,000 from Lorillard Tobacco) plus the statutory rate of interest, which is currently 4.75%. Defendants noticed an

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appeal from the final judgment to the Florida Third District Court of Appeal. On May 12, 2014, the trial court entered an order confirming that Lorillard Tobacco had satisfied the judgment awarding compensatory damages and post-judgment interest for an amount totaling $46,857.43. On May 9, 2014, the Florida Third District Court of Appeal entered an order recognizing Lorillard Tobacco’s voluntary dismissal of their appeal to the final judgment. The appeal remains pending as to Philip Morris. Plaintiff filed a motion with the trial court seeking entitlement to attorneys’ costs and fees. In April 2014, the trial court denied this motion. Plaintiff has filed a notice of appeal to the Florida Third District Court of Appeal from the order denying attorneys’ fees and costs.

• In Gafney v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, Fifteenth Judicial Circuit, Palm Beach County, Florida), the jury awarded plaintiff a total of $5,800,000 in compensatory damages in September 2013. The jury apportioned 34% of the fault for the smoker’s injuries to the smoker, 33% to R.J. Reynolds, and 33% to Lorillard Tobacco. Lorillard, Inc. was also a defendant in this trial but damages and comparative fault were not assessed separately for Lorillard, Inc. Because the jury found in favor of the defendants on the claims alleging intentional conduct, the plaintiff was not entitled to punitive damages. On September 26, 2013, the Court entered a final judgment that applied the jury’s comparative fault determinations and awarded the plaintiff a total of $3,828,000 in compensatory damages ($1,914,000 from Lorillard Tobacco), plus the statutory rate of interest. Defendants’ post-trial motions challenging the verdict were denied in November 2013. Defendants have noticed an appeal from the final judgment to the Florida Fourth District Court of Appeal. Plaintiff has filed a motion with the trial court seeking entitlement to attorneys’ fees and costs. As of July 25, 2014, the trial court had not ruled on this motion.

• In Burkhart v. R.J. Reynolds Tobacco Company, et al. (Federal Court, Middle District, Jacksonville, Florida), the jury awarded plaintiff a total of $5,000,000 in compensatory damages on May 15, 2014. The jury apportioned 50% of the fault for the smoker’s injuries to the smoker, 25% to R.J. Reynolds, 15% to Philip Morris, and 10% to Lorillard Tobacco. The jury awarded $500,000 in punitive damages from Lorillard Tobacco and $2,000,000 from the other defendants for a total punitive damages award of $2,500,000. The Court ruled that the jury’s finding on the plaintiff’s percentage of comparative fault would not be applied to reduce the compensatory damage award because the jury found in favor of the plaintiff on her claims alleging intentional conduct. On June 11, 2014, the Court entered a final judgment against defendants in the amount of $5,000,000 in compensatory damages, jointly and severally, and $2,500,000 ($500,000 from Lorillard Tobacco) in punitive damages, plus the statutory rate of interest. Defendants have filed post-trial motions challenging the verdict. As of July 25, 2014, the Court had not ruled on these motions. The final judgment also granted plaintiff entitlement to trial court costs, but as of July 25, 2014, the trial court had not awarded an amount. On June 25, 2014, plaintiff filed a motion for attorneys’ fees and costs. As of July 25, 2014, the Court had not ruled on this motion.

Since the Florida Supreme Court issued its 2006 ruling, through July 25, 2014 verdicts have been returned in 113 Engle Progeny Cases in which neither Lorillard Tobacco nor Lorillard, Inc. were defendants. Juries awarded compensatory damages and punitive damages in 34 of these trials. In 33 of those 34 trials, the amount of punitive damages awarded totaled approximately $727.5 million and ranged from $20,000 to $244 million. In July 2014, punitive damages of $23.6 billion were awarded in one of these cases. As of July 25, 2014, this award was subject to challenge through post-trial motions and the appellate process. In 34 of the trials, juries awarded only compensatory damages. In the 45 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 and in some cases, appeals from final judgments are pending before various Florida circuit and intermediate appellate courts. As of July 25, 2014, one verdict in favor of the defendants has been reversed on appeal and returned to the trial court for a new trial on all issues. It is not possible to predict the final outcome of this litigation.

Various intermediate state and federal Florida appellate courts have issued rulings that address the scope of the preclusive effect of the findings from the first phase of the Engle trial, including whether those findings relieve plaintiffs from the burden of proving certain legal elements of their claims. The Florida Supreme Court granted review in the Douglas case, in which a verdict awarding compensatory damages to the plaintiff was affirmed by an intermediate state Florida appellate court, to address the issue of whether a tobacco manufacturer’s due process rights are violated by reliance upon the Engle Phase I findings. On March 14, 2013, the Florida Supreme Court ruled that application of the Engle Phase I findings to establish certain elements of plaintiffs’ claims is not a violation of the Engle defendants’ due process rights. In order to prevail on either strict liability or negligence claims, the Court found that plaintiffs must establish (i) membership in the Engle class; (ii) that addiction to smoking the Engle defendants’

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cigarettes containing nicotine was a legal cause of the injuries alleged and (iii) damages. On August 12, 2013, defendants filed a petition with the United States Supreme Court seeking review of the Florida Supreme Court’s decision. This petition for review was denied on October 7, 2013. The due process issue was also on appeal in the United States Court of Appeals for the Eleventh Circuit in two cases that had been consolidated for appeal: Duke and Walker. On September 6, 2013, the United States Court of Appeals for the Eleventh Court affirmed the verdicts in these cases, holding that the judgment of the Florida Supreme Court in Douglas should be given full faith and credit, and that deference to the decision in Douglas does not violate the due process rights of the defendant. The defendant filed a petition for rehearing of the decision in Duke and Walker with the United States Court of Appeals for the Eleventh Circuit in October 2013. On October 31, 2013, the United States Court of Appeals for the Eleventh Circuit vacated and reconsidered its original opinion. The Court entered a new opinion that is substantively similar to the first with the exception that the Court now discusses giving full faith and credit to the Engle decision, as interpreted in Douglas. On November 7, 2013, the Court denied defendant’s petition for rehearing. On November 7, 2013, the defendant filed a second petition seeking review of the October 31, 2013 opinion. On January 6, 2014, the Court denied this petition. On March 28, 2014, the defendant in Duke and Walker filed a petition with the United States Supreme Court seeking to answer the question of whether the Engle Phase I findings can be applied to establish certain elements of plaintiffs’ claims. On the same date, defendants filed similar petitions in the Brown case (an appeal from a Florida state court trial), as well as in eight other state court cases, including two cases in which Lorillard Tobacco is a defendant (Mrozek and Sury). The defendants requested that these petitions be held pending disposition of the Duke, Walker, and Brown cases, and resolved in a similar manner. On June 9, 2014, the United States Supreme Court declined to accept review of the Duke, Walker, and Brown cases. On the same date, the United States Supreme Court declined to accept review of the eight other state court cases, including Mrozek and Sury, discussed above.

In connection with the Engle Progeny Cases, Lorillard and various other tobacco manufacturing defendants face various legal issues that could materially affect the outcome of the Engle cases. These legal issues include, but are not limited to, the application of the statute of limitations and statute of repose, the ability of an Engle plaintiff to pursue a claim against defendants that did not manufacture or market the cigarettes plaintiff smoked, the constitutionality of a cap on the amount of a bond necessary to obtain an automatic stay of a post-trial judgment, whether Engle class members may pursue an award of punitive damages based on claims of negligence or strict liability, and whether a judgment based on a claim of intentional conduct should be reduced by a jury’s findings on comparative fault. Various intermediate Florida appellate courts and Florida Federal Courts have issued rulings on these issues.

In certain cases, trial courts have entered final judgments that define defendants’ liability as joint and several. Four of these judgments have been affirmed by intermediate Florida appellate courts, including one case in which Lorillard Tobacco was a defendant. In such cases, Lorillard Tobacco may face the risk of liability for the entire amount of the judgment even if a percentage of fault was allocated to other defendants, in the event that one or more co-defendants decline or otherwise fail to pay their proportionate or jury-allocated share of a judgment. Also, the presumptive respective share of each joint and several judgment debtor is pro rata, and not proportional to the amount of fault attributable to each defendant by the jury. As a result, Lorillard Tobacco under certain circumstances may have to pay more than their proportionate share of any judgment-related amount.

The judgment entered in the U.S. Government Case, while not final in all respects, could restrict or limit our defenses in other litigation.

In August 2006, a final judgment and remedial order was entered in United States of America v. Philip Morris USA, Inc., et al. (U.S. District Court, District of Columbia, filed September 22, 1999). The court based its final judgment and remedial order on the government’s only remaining claims, which were based on the defendants’ alleged violations of the Racketeering Influenced and Corrupt Organizations Act (“RICO”). Lorillard, Inc. is not a party to this matter, but Lorillard Tobacco is one of the defendants in the case. Although the verdict did not award monetary damages to the plaintiff, the final judgment and remedial order imposed a number of requirements on the defendants. Such requirements include, but are not limited to, the publishing of corrective statements by defendants related to the health effects of smoking.

In 2009, a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit upheld substantially all of the District Court’s final judgment and remedial order. In June 2010, the U.S. Supreme Court denied the parties’ petitions seeking review of the case. The case was remanded to the District Court, for implementation of the Court of Appeals’ directions in its 2009 ruling and for entry of an amended final judgment. As of July 25, 2014, the District Court had not entered the amended final judgment addressing all of the directions from the Court of Appeals, although, as described above, it had entered its order setting forth the language of the corrective statements, and the consent order regarding implementation of the corrective statements. Defendants have filed a notice of appeal regarding the corrective statements.

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The 2006 final judgment and remedial order made many adverse findings regarding the conduct of the defendants. It is possible that the final opinion, final judgment and remedial order entered by the court could form the basis of allegations by the plaintiffs in other matters, or of additional judicial findings by other courts against cigarette manufacturers. It is possible that other courts could apply the findings in the United States of America case to restrict or otherwise limit our defenses in other litigation.

The potential regulation of electronic cigarettes by the Food and Drug Administration and other regulatory agencies may materially adversely affect our electronic cigarette business.

On April 25, 2014, the FDA released proposed rules that would extend its regulatory authority to electronic cigarettes and certain other tobacco products under the FSPTCA. We are in the process of reviewing and analyzing the proposed rules and their impact on our electronic cigarette business. We preliminarily note that the proposed rules would require that electronic cigarette manufacturers (i) register with the FDA and report electronic cigarette product and ingredient listings; (ii) market new electronic cigarette products only after FDA review; (iii) only make direct and implied claims of reduced risk if the FDA confirms that scientific evidence supports the claim and that marketing the electronic cigarette product will benefit public health as a whole; (iv) not distribute free samples; (v) implement minimum age and identification restrictions to prevent sales to individuals under age 18; (vi) include health warnings; and (vii) not sell electronic cigarettes in vending machines, unless in a facility that never admits youth. The proposed regulation will be subject to a 75-day public comment period, which has been extended by the FDA to August 8, 2014, following which the FDA will finalize the proposed regulation. It is not known how long this regulatory process to finalize and implement the rules may take. Accordingly, although we cannot predict the content of any final rules of the proposed or future regulation or the impact they may have, if enacted they could have a material adverse effect on our electronic cigarette business.

In the European Union (“EU”), the Tobacco Products Directive (“TPD”) regulates the content, manufacture, marketing and labeling of tobacco products. An amendment of the TPD was adopted, and became effective in May of this year, which provides for detailed premarket notification requirements for electronic cigarettes and places certain classes of electronic cigarettes under the authority of medicinals regulations in EU member states. The Tobacco Products Directive must be transposed into national legislation by member states by May 20, 2016. Depending on the TPD implementation at national level, certain sales and marketing restrictions on electronic cigarettes may be applicable in the United Kingdom, and this could result in a decrease in sales of our electronic cigarettes in the United Kingdom and have a material adverse effect on our electronic cigarette business in the future.

Increased restrictions on the sale and/or use of cigarettes and electronic cigarettes in public places could adversely affect our sales volume, revenue and profitability.

In recent years, states and many local and municipal governments and agencies, as well as private businesses, in the United States have adopted legislation, regulations or policies which prohibit, restrict, or discourage the sale, marketing and/or use of cigarettes and electronic cigarettes; the use of cigarettes and electronic cigarettes in public buildings and facilities, stores, restaurants and bars; and smoking on airline flights and in the workplace. In addition, smoking in virtually all enclosed public places and workplaces is now prohibited by law throughout the United Kingdom. Other similar laws and regulations are currently under consideration and may be enacted by state and local governments in the United States or in the United Kingdom in the future. At present, several local governments have considered and, in some cases imposed, similar restrictions on the use of electronic cigarettes. Although we have no empirical evidence of the effect of such restrictions, we believe that restrictions on smoking in public and other places may lead to a decrease in the number of people who smoke or a decrease in the number of cigarettes smoked by smokers. Increased restrictions on smoking in public and other places may have caused a decrease, and may continue to cause a decrease in the volume of cigarettes that would otherwise be sold by us absent such restrictions, which may have a material adverse effect on our sales volume, revenue and profits. Should foreign, federal, state, local or municipal governments, agencies or regulators or private industry likewise restrict the sale, marketing and/or use of electronic cigarettes in public and other places, such restrictions may lead to a similar decrease in the volume of electronic cigarettes that would otherwise be sold by us absent such restrictions, which may have an adverse effect on our electronic cigarette business.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit Number	Description
2.1	Agreement and Plan of Merger, dated as of July 15, 2014, among Lorillard, Inc., Reynolds American Inc. and Lantern Acquisition Co., incorporated herein by reference to Exhibit 2.1 to our Current Report on Form 8-K (File No. 1-34097) filed on July 15, 2014
3.1	Amended and Restated Certificate of Incorporation of Lorillard, Inc., as of May 14, 2013, incorporated herein by reference to Exhibit 3.1 to our Current Report on Form 8-K (File No. 1-34097) filed on May 14, 2013
3.2	Amended and Restated Bylaws of Lorillard, Inc., as of May 14, 2013, incorporated herein by reference to Exhibit 3.2 to our Current Report on Form 8-K filed (File No. 1-34097) on May 14, 2013
3.3	Certificate of Amendment of Certificate of Incorporation of Lorillard Tobacco Company and Certificate of Incorporation of Lorillard Tobacco Company, incorporated herein by reference to Exhibit 3.3 to Lorillard, Inc.’s Registration Statement on Form S-3 (File No. 333-159902) filed on June 11, 2009
3.4	Bylaws of Lorillard Tobacco Company, incorporated herein by reference to Exhibit 3.4 to Lorillard, Inc.’s Registration Statement on Form S-3 (File No. 333-159902) filed on June 11, 2009
4.1	Specimen certificate for shares of common stock of Lorillard, Inc., incorporated herein by reference to Exhibit 4.1 to our Amended Registration Statement on Form S-4 (File No. 333-149051) filed on May 9, 2008
4.2	Indenture, dated June 23, 2009, among Lorillard Tobacco Company, Lorillard, Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee, incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K (File No. 1-34097) filed on June 23, 2009
4.3	First Supplemental Indenture, dated June 23, 2009, among Lorillard Tobacco Company, Lorillard, Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee, incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K (File No. 1-34097) filed on June 23, 2009
4.4	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	Third Supplemental Indenture, dated August 4, 2011, 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 August 4, 2011

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4.6	Fourth Supplemental Indenture, dated August 21, 2012, 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 August 21, 2012
4.7	Fifth Supplemental Indenture, dated May 20, 2013, 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 May 20, 2013
4.8	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
4.9	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
4.10	Form of 8.125% Senior Note due 2040 of Lorillard Tobacco Company, incorporated by reference to Exhibit 4.4 to our Current Report on Form 8-K (File No. 1-34097) filed on April 12, 2010
4.11	Form of 3.500% Senior Note due 2016 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 August 4, 2011
4.12	Form of 7.000% Senior Note due 2041 of Lorillard Tobacco Company, incorporated by reference to Exhibit 4.4 to our Current Report on Form 8-K (File No. 1-34097) filed on August 4, 2011
4.13	Form of 2.300% Senior Note due 2017 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 August 21, 2012
4.14	Form of 3.750% Senior Note due 2023 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 May 20, 2013
4.15	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 (File No, 1-34097) filed on June 23, 2009
4.16	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
4.17	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
4.18	Form of Guarantee Agreement of Lorillard, Inc. for the 3.500% Senior Notes due 2016 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 August 4, 2011
4.19	Form of Guarantee Agreement of Lorillard, Inc. for the 7.000% Senior Notes due 2041 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 August 4, 2011
4.20	Form of Guarantee Agreement of Lorillard, Inc. for the 2.300% Senior Notes due 2017 of Lorillard Tobacco Company, incorporated by reference to Exhibit 4.4 to our Current Report on Form 8-K (File No. 1-34097) filed on August 21, 2012
4.21	Form of Guarantee Agreement of Lorillard, Inc. for the 3.750% Senior Notes due 2023 of Lorillard Tobacco Company, incorporated by reference to Exhibit 4.4 to our Current Report on Form 8-K (File No. 1-34097) filed on May 20, 2013
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	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 Loews’s Report on Form 8-K (File No. 1-6541) filed September 5, 1997

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10.3	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 Loews’s Report on Form 8-K (File No. 1-6541) filed February 3, 1998
10.4	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 Loews’s Report on Form 10-Q for the quarter ended March 31, 1998 (File No. 1-6541) filed May 15, 1998
10.5	State of Minnesota Consent Judgment relating to the settlement of tobacco litigation, incorporated herein by reference to Exhibit 10.2 to Loews’s Report on Form 10-Q for the quarter ended March 31, 1998 (File No. 1-6541) filed May 15, 1998
10.6	State of Minnesota Settlement Agreement and Release relating to the settlement of tobacco litigation, incorporated herein by reference to Exhibit 10.3 to Loews’s 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 State Escrow Agreement relating to the settlement of tobacco litigation, incorporated herein by reference to Exhibit 10.6 to Loews’s Report on Form 10-Q for the quarter ended March 31, 1998 (File No. 1-6541) filed May 15, 1998
10.8	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 Loews’s Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 1-6541) filed August 14, 2008
10.9	Mississippi Fee Payment Agreement, dated July 2, 1998, regarding the payment of attorneys’ fees, incorporated herein by reference to Exhibit 10.2 to Loews’s Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 1-6541) filed August 14, 2008
10.10	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 Loews’s Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 1-6541) filed on August 14, 2008
10.11	Texas Fee Payment Agreement, dated July 24, 1998, regarding the payment of attorneys’ fees, incorporated herein by reference to Exhibit 10.5 to Loews’s Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 1-6541) filed on August 14, 2008
10.12	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 Loews’s Report on Form 10-Q for the quarter ended September 30, 1998 (File No. 1-6541) filed November 17, 2008
10.13	Florida Fee Payment Agreement, dated September 11, 1998, regarding the payment of attorneys’ fees, incorporated herein by reference to Exhibit 10.2 to Loews’s Report on Form 10-Q for the quarter ended September 30, 1998 (File No. 1-6541) filed November 17, 2008
10.14	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 Loews’s Current Report on Form 8-K (File No. 1-6541) filed November 25, 1998
10.15	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
10.16	Lorillard, Inc. 2008 Incentive Compensation Plan as amended and restated May 15, 2014, incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K (File No. 1-34097) filed on May 16, 2014†
10.17	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†

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10.18	Form of Severance Agreement for named executive officers other than the Chief Executive Officer, incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K (File No. 1-34097) filed on September 20, 2013†
10.19	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 #
10.20	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†
10.21	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†
10.22	Form of Restricted Stock Award Certificate, incorporated herein by reference to Exhibit 10.2 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 (File No. 1-34097) filed on May 5, 2009†
10.23	Form of Restricted Stock Unit Award Certificate, incorporated herein by reference to Exhibit 10.24 to our Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 1-34097) filed on February 21, 2012†
10.24	Credit Agreement, dated July 10, 2012, 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 July 10, 2012
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 for the quarter ended September 30, 2010 (File No. 1-34087) filed on October 27, 2010†
10.28	Form of Severance Agreement for Named Executive Officers other than Chief Executive Officer, incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K (File No. 1-34087) filed on September 20, 2013†
10.29	Asset Purchase Agreement, dated April 24, 2012, among, Lorillard Holding Company, Inc., formerly known as LRDHC, Inc., and BLEC, LLC, Intermark Brands, LLC and QSN Technologies, LLC, incorporated herein by reference to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (File No. 1-34097) filed on April 27, 2012 ‡
11.10	Statement regarding computation of earnings per share. (See Note 14, “Earnings Per Share,” to the Consolidated Condensed 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**

-75-

* 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.

‡ Schedules and exhibits to Exhibit 2.1, the Asset Purchase Agreement, have been omitted pursuant to Item 601 (b)(2) of Regulation S-K. The Registrant hereby undertakes to furnish supplemental copies of any omitted schedules upon request by the Securities and Exchange Commission

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: July 30, 2014

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)

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Murray S. Kessler, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the period ended June 30, 2014 of Lorillard, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 30, 2014

By:	/s/ Murray S. Kessler
	Murray S. Kessler
	Chairman, President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, David H. Taylor, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the period ended June 30, 2014 of Lorillard, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 30, 2014

By:	/s/ David H. Taylor
	David H. Taylor
	Executive Vice President, Finance and
	Planning and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL

OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Lorillard, Inc. (the “Company”) for the quarter ended June 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Murray S. Kessler, as Chief Executive Officer of the Company, and David H. Taylor, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Murray S. Kessler
Name:	Murray S. Kessler
Title:	Chairman, President and Chief Executive Officer
	(Principal Executive Officer)
Date:	July 30, 2014
/s/ David H. Taylor
Name:	David H. Taylor
Title:	Executive Vice President, Finance and
	Planning and Chief Financial Officer
	(Principal Financial Officer)
Date:	July 30, 2014

This certification shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934, as amended, and will not be incorporated by reference into any registration statement filed under the Securities Act of 1933, as amended, unless specifically identified as being incorporated therein by reference.

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Lorillard, Inc. and will be retained by Lorillard, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Other Assets (Tables)

6 Months Ended

Jun. 30, 2014

Other Assets

Other assets were as follows:

	June 30, 2014		December 31, 2013
	(In millions)
Debt issuance costs	$	24	$	26
Interest rate swaps		66		60
Prepaid pension		66		55
Other prepaid assets		9		10
Total	$	165	$	151

XML

Inventories (Detail) (USD $) In Millions, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Inventory [Line Items]
Leaf tobacco	$ 314	$ 349
Manufactured stock	157	143
Material and supplies	4	7
Inventories	$ 475	$ 499

XML

Consolidating Financial Information (Tables)

6 Months Ended

Jun. 30, 2014

Condensed Consolidating Balance Sheets

Condensed Consolidating Balance Sheets

June 30, 2014

(In millions)

	Parent			Issuer			Non-guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Assets:
Cash and cash equivalents	$	25		$	509		$	175	$	—		$	709
Short term investments		—			172			—		—			172
Accounts receivable, less allowances of $2		—			16			9		—			25
Other receivables (1)		1			16			101		(99	)		19
Inventories		—			404			71		—			475
Deferred income taxes		—			543			6		—			549
Other current assets		—			92			12		—			104
Total current assets		26			1,752			374		(99	)		2,053
Investment in subsidiaries		—			209			—		(209	)		—
Plant and equipment, net		—			309			3		—			312
Long term investments		—			126			—		—			126
Goodwill		—			—			103		—			103
Intangible assets		—			—			76		—			76
Deferred income taxes		—			50			8		—			58
Other assets		125			165			—		(125	)		165
Total assets	$	151		$	2,611		$	564	$	(433	)	$	2,893
Liabilities and Shareholders’ Equity (Deficit):
Accounts and drafts payable	$	—		$	26		$	7	$	—		$	33
Accrued liabilities (1)		—			450			15		(99	)		366
Settlement costs		—			753			—		—			753
Income taxes		—			—			1		—			1
Total current liabilities		—			1,229			23		(99	)		1,153
Long-term debt		—			3,566			—		—			3,566
Investment in subsidiaries		2,379			—			—		(2,379	)		—
Postretirement pension, medical and life insurance benefits		—			311			—		—			311
Other liabilities		—			49			167		(125	)		91
Total liabilities		2,379			5,155			190		(2,603	)		5,121
Shareholders’ Equity (Deficit):
Common stock		4			—			—		—			4
Additional paid-in capital		275			149			194		(343	)		275
Retained earnings/accumulated (deficit)		(1,313	)		(2,566	)		177		2,389			(1,313	)
Accumulated other comprehensive income (loss)		(124	)		(127	)		3		124			(124	)
Treasury stock		(1,070	)		—			—		—			(1,070	)
Total shareholders’ equity (deficit)		(2,228	)		(2,544	)		374		2,170			(2,228	)
Total liabilities and shareholders’ equity (deficit)	$	151		$	2,611		$	564	$	(433	)	$	2,893

(1) Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

Condensed Consolidating Balance Sheets

December 31, 2013

(In millions)

	Parent			Issuer			Non-guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Assets:
Cash and cash equivalents	$	341		$	1,002		$	111	$	—		$	1,454
Short term investments		—			157			—		—			157
Accounts receivable, less allowances of $3		—			8			11		—			19
Other receivables (1)		—			24			93		(88	)		29
Inventories		—			412			87		—			499
Deferred income taxes		—			549			6		—			555
Other current assets		—			19			4		—			23
Total current assets		341			2,171			312		(88	)		2,736
Investment in subsidiaries		—			148			—		(148	)		—
Plant and equipment, net		—			315			1		—			316
Long term investments		—			93			—		—			93
Goodwill		—			—			102		—			102
Intangible assets		—			—			87		—			87
Deferred income taxes		—			48			3		—			51
Other assets		125			151			—		(125	)		151
Total assets	$	466		$	2,926		$	505	$	(361	)	$	3,536
Liabilities and Shareholders’ Equity (Deficit):
Accounts and drafts payable	$	—		$	37		$	5	$	—		$	42
Accrued liabilities (1)		13			434			14		(84	)		377
Settlement costs		—			1,224			—		—			1,224
Income taxes		1			11			—		(4	)		8
Total current liabilities		14			1,706			19		(88	)		1,651
Long-term debt		—			3,560			—		—			3,560
Investment in subsidiaries		2,516			—			—		(2,516	)		—
Postretirement pension, medical and life insurance benefits		—			305			—		—			305
Other liabilities		—			44			165		(125	)		84
Total liabilities		2,530			5,615			184		(2,729	)		5,600
Shareholders’ Equity (Deficit):
Common stock		4			—			—		—			4
Additional paid-in capital		256			130			177		(307	)		256
Retained earnings/accumulated (deficit)		(1,438	)		(2,688	)		143		2,545			(1,438	)
Accumulated other comprehensive income (loss)		(130	)		(131	)		1		130			(130	)
Treasury stock		(756	)		—			—		—			(756	)
Total shareholders’ equity (deficit)		(2,064	)		(2,689	)		321		2,368			(2,064	)
Total liabilities and shareholders’ equity (deficit)	$	466		$	2,926		$	505	$	(361	)	$	3,536

(1) Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

Condensed Consolidating Statements of Income

Condensed Consolidating Statements of Income

For the Three Months Ended June 30, 2014

(In millions)

	Parent		Issuer			Non- guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Net sales (including excise taxes of $502) (1)	$	—	$	1,762		$	324		$	(287	)	$	1,799
Cost of sales (including excise taxes of $502)		—		1,088			28			—			1,116
Gross profit		—		674			296			(287	)		683
Selling, general and administrative (1)		—		405			33			(287	)		151
Operating income		—		269			263			—			532
Investment income		—		(2	)		—			—			(2	)
Interest expense		1		(44	)		(2	)		—			(45	)
Income before income taxes		1		223			261			—			485
Income taxes		—		84			101			—			185
Equity in earnings of subsidiaries		299		178			—			(477	)		—
Net income	$	300	$	317		$	160		$	(477	)	$	300

(1) Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

Condensed Consolidating Statements of Income

For the Six Months Ended June 30, 2014

(In millions)

	Parent			Issuer			Non- guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Net sales (including excise taxes of $947) (1)	$	—		$	3,303		$	627		$	(539	)	$	3,391
Cost of sales (including excise taxes of $947)		—			2,026			64			—			2,090
Gross profit		—			1,277			563			(539	)		1,301
Selling, general and administrative (1)		1			776			59			(539	)		297
Operating income		(1	)		501			504			—			1,004
Investment income		—			6			—			—			6
Interest expense		2			(89	)		(3	)		—			(90	)
Income before income taxes		1			418			501			—			920
Income taxes		—			156			193			—			349
Equity in earnings of subsidiaries		570			335			—			(905	)		—
Net income	$	571		$	597		$	308		$	(905	)	$	571

(1) Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

Condensed Consolidating Statements of Income

For the Three Months Ended June 30, 2013

(In millions)

	Parent		Issuer			Non- guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Net sales (including excise taxes of $516) (1)	$	—	$	1,747		$	341		$	(284	)	$	1,804
Cost of sales (including excise taxes of $516)		—		1,087			39			—			1,126
Gross profit		—		660			302			(284	)		678
Selling, general and administrative (1)		—		407			15			(284	)		138
Operating income		—		253			287			—			540
Investment income		—		—			—			—			—
Interest expense		2		(42	)		(1	)		—			(41	)
Income before income taxes		2		211			286			—			499
Income taxes		—		79			107			—			186
Equity in earnings of subsidiaries		311		178			—			(489	)		—
Net income	$	313	$	310		$	179		$	(489	)	$	313

(1) Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

Condensed Consolidating Statements of Income

For the Six Months Ended June 30, 2013

(In millions)

	Parent		Issuer			Non- guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Net sales (including excise taxes of $971) (1)	$	—	$	3,267		$	649		$	(535	)	$	3,381
Cost of sales (including excise taxes of $971)		—		1,914			76			—			1,990
Gross profit		—		1,353			573			(535	)		1,391
Selling, general and administrative (1)		—		795			30			(535	)		290
Operating income		—		558			543			—			1,101
Investment income		—		1			—			—			1
Interest expense		3		(83	)		(2	)		—			(82	)
Income before income taxes		3		476			541			—			1,020
Income taxes		1		177			202			—			380
Equity in earnings of subsidiaries		638		335			—			(973	)		—
Net income	$	640	$	634		$	339		$	(973	)	$	640

(1) Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

Condensed Consolidating Statements of Comprehensive Income

Condensed Consolidating Statements of Comprehensive Income

For the Three Months Ended June 30, 2014

(In millions)

	Parent		Issuer		Non-guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Net income
Other comprehensive income, net of tax:	$	300	$	317	$	160	$	(477	)	$	300
Defined benefit retirement plan gains, net of tax expense of $1		2		2		—		(2	)		2
Foreign currency translation adjustments, net of tax expense of $—		1		—		1		(1	)		1
Other comprehensive income		3		2		1		(3	)		3
Comprehensive income	$	303	$	319	$	161	$	(480	)	$	303

Condensed Consolidating Statements of Comprehensive Income

For the Six Months Ended June 30, 2014

(In millions)

	Parent		Issuer		Non-guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Net income
Other comprehensive income, net of tax:	$	571	$	597	$	308	$	(905	)	$	571
Defined benefit retirement plan gains, net of tax expense of $2		4		4		—		(4	)		4
Foreign currency translation adjustments, net of tax expense of $1		2		—		2		(2	)		2
Other comprehensive income		6		4		2		(6	)		6
Comprehensive income	$	577	$	601	$	310	$	(911	)	$	577

Condensed Consolidating Statements of Comprehensive Income

For the Three Months Ended June 30, 2013

(In millions)

	Parent		Issuer			Non- guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Net income	$	313	$	310		$	179	$	(489	)	$	313
Other comprehensive loss, net of tax:
Defined benefit retirement plan losses, net of tax benefit of $2		—		(5	)		—		—			(5	)
Comprehensive income	$	313	$	305		$	179	$	(489	)	$	308

Condensed Consolidating Statements of Comprehensive Income

For the Six Months Ended June 30, 2013

(In millions)

	Parent		Issuer			Non- guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Net income	$	640	$	634		$	339	$	(973	)	$	640
Other comprehensive loss, net of tax:
Defined benefit retirement plan losses, net of tax benefit of $—		—		(1	)		—		—			(1	)
Comprehensive income	$	640	$	633		$	339	$	(973	)	$	639

Condensed Consolidating Statements of Cash Flows

Condensed Consolidating Statements of Cash Flows

For the Six Months Ended June 30, 2014

(In millions)

	Parent			Issuer			Non-guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Cash flows from operating activities:
Net income	$	571		$	597		$	308		$	(905	)	$	571
Adjustments to reconcile to net cash provided by operating activities:
Equity income from subsidiaries		(570	)		(335	)		—			905			—
Depreciation and amortization		—			26			11			—			37
Pension, health and life insurance contributions		—			(6	)		—			—			(6	)
Pension, health and life insurance benefits expense		—			9			—			—			9
Deferred income taxes		—			1			(5	)		—			(4	)
Share-based compensation		—			9			—			—			9
Excess tax benefits from share-based arrangements		—			(8	)		—			—			(8	)
Changes in operating assets and liabilities:
Accounts and other receivables		—			—			(8	)		14			6
Inventories		—			8			17			—			25
Accounts payable and accrued liabilities		(13	)		4			3			(14	)		(20	)
Settlement costs		—			(471	)		—			—			(471	)
Income taxes		(1	)		(61	)		2			—			(60	)
Other current assets		—			(10	)		(4	)		—			(14	)
Other assets		—			1			—			—			1
Return on investment in subsidiaries		474			275			—			(749	)		—
Net cash provided by (used in) operating activities		461			39			324			(749	)		75
Cash flows from investing activities:
Purchases of investments		—			(337	)		—			—			(337	)
Additions to plant and equipment		—			(20	)		(2	)		—			(22	)
Sales, maturities and calls of investments		—			289			—			—			289
Investment in subsidiary		(17	)		—			—			17			—
Net cash provided by (used in) investing activities		(17	)		(68	)		(2	)		17			(70	)
Cash flows from financing activities:
Dividends paid		(446	)		(474	)		(275	)		749			(446	)
Shares repurchased		(314	)		—			—			—			(314	)
Contributions from parent		—			—			17			(17	)		—
Proceeds from exercise of stock options		—			2			—			—			2
Excess tax benefits from share-based arrangements		—			8			—			—			8
Net cash provided by (used in) financing activities		(760	)		(464	)		(258	)		732			(750	)
Change in cash and cash equivalents		(316	)		(493	)		64			—			(745	)
Cash and cash equivalents, beginning of year		341			1,002			111			—			1,454
Cash and cash equivalents, end of period	$	25		$	509		$	175		$	—		$	709

Condensed Consolidating Statements of Cash Flows

For the Six Months Ended June 30, 2013

(In millions)

	Parent			Issuer			Non- guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Cash flows from operating activities:
Net income	$	640		$	634		$	339		$	(973	)	$	640
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity income from subsidiaries		(638	)		(335	)		—			973			—
Depreciation and amortization		—			23			—			—			23
Pension and other postretirement benefits contributions		—			(22	)		—			—			(22	)
Pension and other postretirement benefits expense		—			18			—			—			18
Deferred income taxes		(1	)		(3	)		1			—			(3	)
Share-based compensation		1			8			—			—			9
Excess tax benefits from share-based payment arrangements		—			(7	)		—			—			(7	)
Changes in operating assets and liabilities:
Accounts and other receivables		—			2			(13	)		5			(6	)
Inventories		—			(34	)		10			—			(24	)
Accounts payable and accrued liabilities		(3	)		9			4			(5	)		5
Settlement costs		—			(434	)		—			—			(434	)
Income taxes		—			(3	)		(24	)		—			(27	)
Other current assets		1			2			4			—			7
Other assets		—			4			(1	)		—			3
Return on investment in subsidiaries		668			—			—			(668	)		—
Net cash provided by (used in) operating activities		668			(138	)		320			(668	)		182
Cash flows from investing activities:
Additions to plant and equipment		—			(33	)		(1	)		—			(34	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		—			500			—			—			500
Dividends paid		(417	)		(668	)		—			668			(417	)
Shares repurchased		(318	)		—			—			—			(318	)
Debt issuance costs		—			(4	)		—			—			(4	)
Proceeds from exercise of stock options		—			2			—			—			2
Excess tax benefits from share-based payment arrangements		—			7			—			—			7
Net cash (used in) provided by financing activities		(735	)		(163	)		—			668			(230	)
Change in cash and cash equivalents		(67	)		(334	)		319			—			(82	)
Cash and cash equivalents, beginning of year		150			1,471			99			—			1,720
Cash and cash equivalents, end of period	$	83		$	1,137		$	418		$	—		$	1,638

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Earnings Per Share - Additional Information (Detail) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Shares of common stock excluded from diluted earnings per share calculation	0	0	0	0

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Other Current Assets (Detail) (USD $) In Millions, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Other Assets, Current [Line Items]
Prepaid income taxes	$ 67
Appeal bonds	21	7
Other current assets	16	16
Total	$ 104	$ 23

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Segment Information (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2014		Jun. 30, 2013		Jun. 30, 2014		Jun. 30, 2013		Dec. 31, 2013
Revenue from External Customer [Line Items]
Net sales	$ 1,799	[1]	$ 1,804	[1]	$ 3,391	[1]	$ 3,381	[1]
Cost of sales	1,116		1,126		2,090		1,990
Gross profit	683		678		1,301		1,391
Selling, general and administrative	151	[1]	138	[1]	297	[1]	290	[1]
Operating income	532		540		1,004		1,101
Depreciation and amortization	18		12		37		23
Total assets	2,893		3,335		2,893		3,335		3,536
Capital expenditures	13		27		22		34
Operating Segments | Cigarettes
Revenue from External Customer [Line Items]
Net sales	1,762		1,747		3,303		3,267
Cost of sales	1,088		1,087		2,026		1,914
Gross profit	674		660		1,277		1,353
Selling, general and administrative	119		122		239		261
Operating income	555		538		1,038		1,092
Depreciation and amortization	12		12		26		23
Total assets	2,678		3,243		2,678		3,243
Capital expenditures	11		27		20		34
Operating Segments | Electronic Cigarettes
Revenue from External Customer [Line Items]
Net sales	37		57		88		114
Cost of sales	28		39		64		76
Gross profit	9		18		24		38
Selling, general and administrative	32		16		58		29
Operating income	(23)		2		(34)		9
Depreciation and amortization	6				11
Total assets	340		217		340		217
Capital expenditures	2				2
Consolidating Adjustments
Revenue from External Customer [Line Items]
Total assets	$ (125)		$ (125)		$ (125)		$ (125)

[1] Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

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Accumulated Other Comprehensive Loss (Tables)

6 Months Ended

Jun. 30, 2014

Changes in Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss during the six months ended June 30, 2014 consisted of the following:

	Defined Benefit Pension and Post-Retirement Plan Items			Foreign Currency			Total
	(In millions)
Beginning balance, January 1, 2014	$	131		$	(1	)	$	130
Pension and post-retirement plan actuarial gains and prior service cost		(4	)		—			(4	)
Foreign currency translation adjustments		—			(2	)		(2	)
Ending balance, June 30, 2014	$	127		$	(3	)	$	124

Changes in accumulated other comprehensive loss during the six months ended June 30, 2013 consisted of the following:

	Defined Benefit Pension and Post-Retirement Plan Items
Beginning balance, January 1, 2013	$	241
Pension and post-retirement plan actuarial gains and prior service cost		1
Ending balance, June 30, 2013	$	242

Reclassifications Out of Accumulated Other Comprehensive Loss

Reclassifications out of accumulated other comprehensive loss during the six months ended June 30, 2014 were as follows:

	Amount Reclassified from Accumulated Other Comprehensive Loss			Affected Line Item in the Consolidated Statements of Income
	(In millions)
Amortization of defined benefit pension items:
Prior service costs	$	(2	)	(A)
Actuarial loss		(4	)	(A)
		(6	)	Total before tax
		2		Income tax benefit
Total reclassifications for the period	$	(4	)	Net of tax

(A) These accumulated comprehensive loss components are included in the computation of net periodic pension cost (see Note 15, “Retirement Plans,” for additional details), which is included in cost of sales and selling, general and administrative expenses.

Reclassifications out of accumulated other comprehensive loss during the six months ended June 30, 2013 were as follows:

	Amount Reclassified from Accumulated Other Comprehensive Loss			Affected Line Item in the Consolidated Statements of Income
	(In millions)
Amortization of defined benefit pension items:
Prior service costs	$	(2	)	(A)
Actuarial loss		(11	)	(A)
		(13	)	Total before tax
		5		Income tax benefit
Total reclassifications for the period	$	(8	)	Net of tax

(A) These accumulated comprehensive loss components are included in the computation of net periodic pension cost (see Note 15, “Retirement Plans,” for additional details), which is included in cost of sales and selling, general and administrative expenses.

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Basis of Presentation (Policies)

6 Months Ended

Jun. 30, 2014

Basis of Presentation

Basis of Presentation. The accompanying unaudited consolidated condensed financial statements reflect all adjustments necessary to present fairly the financial position as of June 30, 2014 and December 31, 2013 and the consolidated income and comprehensive income for the three and six months ended June 30, 2014 and 2013 and the shareholders’ deficit and cash flows for the six months ended June 30, 2014 and 2013.

Results of operations for the three and six 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 21, 2014.

Recently Adopted Accounting Pronouncements

Recently Adopted Accounting Pronouncements. In July 2012, the FASB issued ASU 2012-02 “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” ASU 2012-02 gives an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that indefinite-lived intangible assets other than goodwill are impaired, before being required to complete a quantitative impairment test. If an entity concludes, after assessing the totality of qualitative factors, that it is more likely than not that the indefinite-lived intangible assets are not impaired, then it is not required to complete a quantitative impairment test whereby the fair value of the indefinite-lived intangible asset would be determined and compared with the carrying amount of the intangible asset. The amendments in this update are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, and early adoption is permitted. The adoption of ASU 2012-02 in the first quarter of 2013 did not have a material impact on Lorillard’s financial position or results of operations, but may impact the manner in which Lorillard assesses indefinite-lived intangible assets for impairment.

In February 2013, the FASB issued ASU 2013-02 “Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires an entity to provide information about amounts reclassified out of accumulated other comprehensive income. An entity is also required to present either on the face of the financial statements or in the footnotes, significant items reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety. For other items that are not required under U.S. GAAP to be reclassified to net income in their entirety, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. This standard is effective for public entities prospectively for reporting periods beginning after December 15, 2012. The adoption of ASU 2013-02 did not have any impact on Lorillard’s financial position or results of operations, but resulted in disclosure of additional information about amounts reclassified out of accumulated other comprehensive loss. For additional information, see Note 17, “Accumulated Other Comprehensive Loss.”

Accounting Pronouncements not yet adopted

Accounting Pronouncements not yet adopted – In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers (Topic 606).” ASU 2014, which was a joint project of the FASB and IASB, clarifies the principles for recognizing revenue and provides a common revenue standard under U.S. GAAP and International Financial Reporting Standards that removes inconsistencies and weaknesses in existing revenue requirements; provides a more robust framework for addressing revenue issues; improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; provides more useful information to users of financial statements through improved disclosure requirements; and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The guidance in this proposed update affects any entity that enters into contracts with customers unless those contracts are in the scope of other standards (for example, insurance contracts or lease contracts). The core principle of this update is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity applies the following steps: identify the contract(s) with a customer; identify the separate performance obligations in the contract; determine the transaction price; allocate the transaction price to the separate performance obligations in the contract; and recognize revenue when (or as) the entity satisfies a performance obligation. The amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. We have not yet determined the potential effects on Lorillard’s financial position or results of operations, if any.

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Condensed Consolidating Balance Sheets (Detail) (USD $) In Millions, unless otherwise specified	Jun. 30, 2014		Dec. 31, 2013		Jun. 30, 2013	Dec. 31, 2012
Assets:
Cash and cash equivalents	$ 709		$ 1,454		$ 1,638	$ 1,720
Short term investments	172		157
Accounts receivable, less allowances of $2 for Jun. 30, 2014 and $3 for Dec. 31, 2013	25		19
Other receivables	19	[1]	29	[1]
Inventories	475		499
Deferred income taxes	549		555
Other current assets	104		23
Total current assets	2,053		2,736
Plant and equipment, net	312		316
Long term investments	126		93
Goodwill	103		102
Intangible assets	76		87
Deferred income taxes	58		51
Other assets	165		151
Total assets	2,893		3,536		3,335
Liabilities and Shareholders' Equity (Deficit):
Accounts and drafts payable	33		42
Accrued liabilities	366	[1]	377	[1]
Settlement costs	753		1,224
Income taxes	1		8
Total current liabilities	1,153		1,651
Long-term debt	3,566		3,560
Postretirement pension, medical and life insurance benefits	311		305
Other liabilities	91		84
Total liabilities	5,121		5,600
Shareholders' Equity (Deficit):
Common stock	4		4
Additional paid-in capital	275		256
Retained earnings/accumulated (deficit)	(1,313)		(1,438)
Accumulated other comprehensive income (loss)	(124)		(130)
Treasury stock	(1,070)		(756)
Total shareholders' deficit	(2,228)		(2,064)		(1,855)	(1,777)
Total liabilities and shareholders' equity (deficit)	2,893		3,536
Parent
Assets:
Cash and cash equivalents	25		341		83	150
Other receivables	1	[1]
Total current assets	26		341
Other assets	125		125
Total assets	151		466
Liabilities and Shareholders' Equity (Deficit):
Accrued liabilities			13	[1]
Income taxes			1
Total current liabilities			14
Investment in subsidiaries	2,379		2,516
Total liabilities	2,379		2,530
Shareholders' Equity (Deficit):
Common stock	4		4
Additional paid-in capital	275		256
Retained earnings/accumulated (deficit)	(1,313)		(1,438)
Accumulated other comprehensive income (loss)	(124)		(130)
Treasury stock	(1,070)		(756)
Total shareholders' deficit	(2,228)		(2,064)
Total liabilities and shareholders' equity (deficit)	151		466
Issuer
Assets:
Cash and cash equivalents	509		1,002		1,137	1,471
Short term investments	172		157
Accounts receivable, less allowances of $2 for Jun. 30, 2014 and $3 for Dec. 31, 2013	16		8
Other receivables	16	[1]	24	[1]
Inventories	404		412
Deferred income taxes	543		549
Other current assets	92		19
Total current assets	1,752		2,171
Investment in subsidiaries	209		148
Plant and equipment, net	309		315
Long term investments	126		93
Deferred income taxes	50		48
Other assets	165		151
Total assets	2,611		2,926
Liabilities and Shareholders' Equity (Deficit):
Accounts and drafts payable	26		37
Accrued liabilities	450	[1]	434	[1]
Settlement costs	753		1,224
Income taxes			11
Total current liabilities	1,229		1,706
Long-term debt	3,566		3,560
Postretirement pension, medical and life insurance benefits	311		305
Other liabilities	49		44
Total liabilities	5,155		5,615
Shareholders' Equity (Deficit):
Additional paid-in capital	149		130
Retained earnings/accumulated (deficit)	(2,566)		(2,688)
Accumulated other comprehensive income (loss)	(127)		(131)
Total shareholders' deficit	(2,544)		(2,689)
Total liabilities and shareholders' equity (deficit)	2,611		2,926
Non-guarantor Subsidiaries
Assets:
Cash and cash equivalents	175		111		418	99
Accounts receivable, less allowances of $2 for Jun. 30, 2014 and $3 for Dec. 31, 2013	9		11
Other receivables	101	[1]	93	[1]
Inventories	71		87
Deferred income taxes	6		6
Other current assets	12		4
Total current assets	374		312
Plant and equipment, net	3		1
Goodwill	103		102
Intangible assets	76		87
Deferred income taxes	8		3
Total assets	564		505
Liabilities and Shareholders' Equity (Deficit):
Accounts and drafts payable	7		5
Accrued liabilities	15	[1]	14	[1]
Income taxes	1
Total current liabilities	23		19
Other liabilities	167		165
Total liabilities	190		184
Shareholders' Equity (Deficit):
Additional paid-in capital	194		177
Retained earnings/accumulated (deficit)	177		143
Accumulated other comprehensive income (loss)	3		1
Total shareholders' deficit	374		321
Total liabilities and shareholders' equity (deficit)	564		505
Consolidating Adjustments
Assets:
Other receivables	(99)	[1]	(88)	[1]
Total current assets	(99)		(88)
Investment in subsidiaries	(209)		(148)
Other assets	(125)		(125)
Total assets	(433)		(361)
Liabilities and Shareholders' Equity (Deficit):
Accrued liabilities	(99)	[1]	(84)	[1]
Income taxes			(4)
Total current liabilities	(99)		(88)
Investment in subsidiaries	(2,379)		(2,516)
Other liabilities	(125)		(125)
Total liabilities	(2,603)		(2,729)
Shareholders' Equity (Deficit):
Additional paid-in capital	(343)		(307)
Retained earnings/accumulated (deficit)	2,389		2,545
Accumulated other comprehensive income (loss)	124		130
Total shareholders' deficit	2,170		2,368
Total liabilities and shareholders' equity (deficit)	$ (433)		$ (361)

[1] Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

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Share Repurchase Programs - Additional Information (Detail) (USD $) In Millions, except Per Share data, unless otherwise specified	6 Months Ended		0 Months Ended	2 Months Ended	6 Months Ended	0 Months Ended	1 Months Ended	6 Months Ended	0 Months Ended	3 Months Ended	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Feb. 24, 2012 Share repurchase program, August 2011 - February 2012	Feb. 29, 2012 Share repurchase program, August 2011 - February 2012	Jun. 30, 2014 Share repurchase program, August 2011 - February 2012	Jan. 30, 2013 Share repurchase program, August 2012 - January 2013	Jan. 31, 2013 Share repurchase program, August 2012 - January 2013	Jun. 30, 2014 Share repurchase program, August 2012 - January 2013	Jun. 04, 2014 Share Repurchase Program March, 2013 - June 2014	Jun. 30, 2014 Share Repurchase Program March, 2013 - June 2014	Jun. 30, 2014 Share Repurchase Program March, 2013 - June 2014
Equity, Class of Treasury Stock [Line Items]
Amount authorized for repurchase of outstanding common stock	$ 5,300		$ 750		$ 750	$ 500		$ 500	$ 1,000		$ 1,000	[1]
Repurchase of common stock, shares	166.7			4.9	20.1		2.8	12.7		2.7	21.1	[1]
Average per share price of repurchase of common stock				$ 38.28	$ 37.29		$ 39.24	$ 39.38		$ 58.72	$ 47.48
Repurchase of common stock	$ 314	$ 318		$ 188			$ 109			$ 156

[1] As amended on May 21, 2013

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Plant and Equipment, Net - Additional Information (Detail) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Property, Plant and Equipment [Line Items]
Depreciation expense	$ 26	$ 23

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Reclassifications Out of Accumulated Other Comprehensive Loss (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014		Jun. 30, 2013
Amortization of defined benefit pension items:
Income taxes	$ (185)	$ (186)	$ (349)		$ (380)
Accumulated Defined Benefit Plans Adjustment | Reclassification out of Accumulated Other Comprehensive Income
Amortization of defined benefit pension items:
Prior service costs			(2)	[1]	(2)	[1]
Actuarial loss			(4)	[1]	(11)	[1]
Income (Loss) from Continuing Operations before Income Taxes, Extraordinary Items, Noncontrolling Interest, Total			(6)		(13)
Income taxes			2		5
Total reclassifications for the period			$ (4)		$ (8)

[1] These accumulated comprehensive loss components are included in the computation of net periodic pension cost (see Note 15, "Retirement Plans," for additional details), which is included in cost of sales and selling, general and administrative expenses.

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Legal Proceedings - Additional Information (Detail) (USD $)	0 Months Ended					3 Months Ended				6 Months Ended					6 Months Ended		0 Months Ended				0 Months Ended			0 Months Ended	3 Months Ended			0 Months Ended		1 Months Ended			6 Months Ended	12 Months Ended				0 Months Ended																0 Months Ended			0 Months Ended					0 Months Ended			0 Months Ended																			0 Months Ended									0 Months Ended				0 Months Ended					0 Months Ended					6 Months Ended				3 Months Ended		6 Months Ended						0 Months Ended
	Apr. 30, 2014	Mar. 05, 2014 LegalMatter	Sep. 11, 2013 State	Apr. 30, 2013	Jun. 22, 2012 LegalMatter	Jun. 30, 2014 State	Mar. 31, 2014	Jun. 30, 2013	Mar. 31, 2013	Jun. 30, 2014 State	Jun. 30, 2013	Apr. 15, 2014	Jun. 30, 2009	Jul. 25, 2014 Subsequent Event LegalMatter	Jun. 30, 2014 Scenario, Forecast Minimum	Jun. 30, 2014 Scenario, Forecast Maximum	Sep. 11, 2013 Lorillard Tobacco	Mar. 31, 2012 Weingart v. R.J. Reynolds Tobacco Company, et al.	Jul. 31, 2011 Weingart v. R.J. Reynolds Tobacco Company, et al.	Jun. 30, 2013 Weingart v. R.J. Reynolds Tobacco Company, et al. Lorillard Tobacco	Sep. 13, 2013 Filter Cases	Jun. 30, 2014 Filter Cases	Jul. 25, 2014 Filter Cases Subsequent Event LegalMatter	Sep. 13, 2013 Filter Cases Lorillard Tobacco	Sep. 30, 2013 Conventional Product Liability Cases	Dec. 31, 2009 Conventional Product Liability Cases LegalMatter	Jul. 25, 2014 Conventional Product Liability Cases Subsequent Event LegalMatter	Jul. 25, 2014 Conventional Product Liability Cases Case One Subsequent Event	Jul. 25, 2014 Conventional Product Liability Cases Case Two Subsequent Event	Jun. 30, 2013 Engle Progeny Cases LegalMatter	Jan. 31, 2013 Engle Progeny Cases LegalMatter	Feb. 28, 2008 Engle Progeny Cases	Jun. 30, 2014 Engle Progeny Cases LegalMatter Case	Dec. 31, 2006 Engle Progeny Cases Employee	Apr. 15, 2014 Engle Progeny Cases LegalMatter	Dec. 31, 2011 Engle Progeny Cases LegalMatter	Dec. 31, 2009 Engle Progeny Cases Claim	Jul. 25, 2014 Engle Progeny Cases Subsequent Event	Jul. 25, 2014 Engle Progeny Cases Subsequent Event LegalMatter	Jul. 07, 2014 Engle Progeny Cases Subsequent Event LegalMatter	Aug. 01, 2013 Engle Progeny Cases January 2, 2014 Case	Aug. 01, 2013 Engle Progeny Cases May 31, 2014 Case	Aug. 01, 2013 Engle Progeny Cases September 2, 2014 Case	Jan. 17, 2014 Engle Progeny Cases January 2, 2015 Case	Jan. 17, 2014 Engle Progeny Cases April 1, 2015 Case	Jan. 17, 2014 Engle Progeny Cases July 1, 2015 Case	Jun. 23, 2014 Engle Progeny Cases January 4, 2016 Case	Jun. 23, 2014 Engle Progeny Cases May 1, 2016 Case	Jun. 23, 2014 Engle Progeny Cases September 1, 2016 Case	May 31, 2013 Engle Progeny Cases Lorillard Tobacco	Apr. 30, 2011 Engle Progeny Cases Sulcer v. Lorillard Tobacco Company, et al.	May 31, 2011 Engle Progeny Cases Jewett v. R.J. Reynolds, et al.	Jul. 31, 2011 Engle Progeny Cases Weingart v. R.J. Reynolds Tobacco Company, et al.	Feb. 03, 2014 Engle Progeny Cases Mrozek v. Lorillard Tobacco Company	Jun. 27, 2014 Engle Progeny Cases Mrozek v. Lorillard Tobacco Company	Mar. 31, 2011 Engle Progeny Cases Mrozek v. Lorillard Tobacco Company	Mar. 10, 2014 Engle Progeny Cases Tullo v. R.J. Reynolds, et al.	Apr. 30, 2011 Engle Progeny Cases Tullo v. R.J. Reynolds, et al.	Jun. 19, 2014 Engle Progeny Cases Sury v. R.J. Reynolds Tobacco Company, et al.	Mar. 31, 2012 Engle Progeny Cases Sury v. R.J. Reynolds Tobacco Company, et al.	Nov. 30, 2011 Engle Progeny Cases Sury v. R.J. Reynolds Tobacco Company, et al.	Jul. 25, 2014 Engle Progeny Cases Alexander v. Lorillard Tobacco Company, et al.	May 31, 2012 Engle Progeny Cases Alexander v. Lorillard Tobacco Company, et al.	Mar. 31, 2012 Engle Progeny Cases Alexander v. Lorillard Tobacco Company, et al.	Jul. 25, 2014 Engle Progeny Cases Calloway v. R.J. Reynolds Tobacco Company, et al.	Aug. 31, 2012 Engle Progeny Cases Calloway v. R.J. Reynolds Tobacco Company, et al.	May 31, 2012 Engle Progeny Cases Calloway v. R.J. Reynolds Tobacco Company, et al.	May 31, 2012 Engle Progeny Cases Calloway v. R.J. Reynolds Tobacco Company, et al. Lorillard Tobacco	May 31, 2012 Engle Progeny Cases Calloway v. R.J. Reynolds Tobacco Company, et al. R J Reynolds	May 31, 2012 Engle Progeny Cases Calloway v. R.J. Reynolds Tobacco Company, et al. Philip Morris	May 31, 2012 Engle Progeny Cases Calloway v. R.J. Reynolds Tobacco Company, et al. Liggett	May 31, 2012 Engle Progeny Cases Calloway v. R.J. Reynolds Tobacco Company, et al. Other Defendants	Feb. 28, 2013 Engle Progeny Cases Evers	May 31, 2013 Engle Progeny Cases Evers v. R.J. Reynolds Tobacco Company, et al.	Feb. 28, 2013 Engle Progeny Cases Evers v. R.J. Reynolds Tobacco Company, et al.	May 31, 2013 Engle Progeny Cases Cohen v. R.J. Reynolds Tobacco Company, et al.	May 06, 2013 Engle Progeny Cases Cohen v. R.J. Reynolds Tobacco Company, et al.	May 31, 2013 Engle Progeny Cases Cohen v. R.J. Reynolds Tobacco Company, et al. Lorillard Tobacco	May 06, 2013 Engle Progeny Cases Cohen v. R.J. Reynolds Tobacco Company, et al. Lorillard Tobacco	May 31, 2013 Engle Progeny Cases Cohen v. R.J. Reynolds Tobacco Company, et al. R J Reynolds	May 31, 2013 Engle Progeny Cases Cohen v. R.J. Reynolds Tobacco Company, et al. Liggett	Oct. 04, 2013 Engle Progeny Cases Ruffo	May 31, 2013 Engle Progeny Cases Ruffo	May 12, 2014 Engle Progeny Cases Ruffo Lorillard Tobacco	Oct. 04, 2013 Engle Progeny Cases Ruffo Lorillard Tobacco	May 31, 2013 Engle Progeny Cases Ruffo Lorillard Tobacco	May 31, 2013 Engle Progeny Cases Ruffo Philip Morris	Sep. 30, 2013 Engle Progeny Cases Gafney v. R.J. Reynolds Tobacco Company	Sep. 26, 2013 Engle Progeny Cases Gafney v. R.J. Reynolds Tobacco Company	Sep. 30, 2013 Engle Progeny Cases Gafney v. R.J. Reynolds Tobacco Company Lorillard Tobacco	Sep. 26, 2013 Engle Progeny Cases Gafney v. R.J. Reynolds Tobacco Company Lorillard Tobacco	Sep. 30, 2013 Engle Progeny Cases Gafney v. R.J. Reynolds Tobacco Company R J Reynolds	Jun. 11, 2014 Engle Progeny Cases Burkhart Versus Rj Reynolds Tobacco Company [Member]	Jun. 30, 2014 Engle Progeny Cases Burkhart Versus Rj Reynolds Tobacco Company [Member]	Jun. 11, 2014 Engle Progeny Cases Burkhart Versus Rj Reynolds Tobacco Company [Member]	May 15, 2014 Engle Progeny Cases Burkhart Versus Rj Reynolds Tobacco Company [Member]	Jun. 11, 2014 Engle Progeny Cases Burkhart Versus Rj Reynolds Tobacco Company [Member] Lorillard Tobacco	Jun. 30, 2014 Engle Progeny Cases Burkhart Versus Rj Reynolds Tobacco Company [Member] Lorillard Tobacco	Jun. 11, 2014 Engle Progeny Cases Burkhart Versus Rj Reynolds Tobacco Company [Member] Lorillard Tobacco	Jun. 30, 2014 Engle Progeny Cases Burkhart Versus Rj Reynolds Tobacco Company [Member] R J Reynolds	Jun. 30, 2014 Engle Progeny Cases Burkhart Versus Rj Reynolds Tobacco Company [Member] Philip Morris	Jun. 11, 2014 Engle Progeny Cases Burkhart Versus Rj Reynolds Tobacco Company [Member] Other Defendants	Jul. 25, 2014 West Virginia Individual Personal Injury Cases LegalMatter	Jun. 30, 2014 West Virginia Individual Personal Injury Cases Plaintiff LegalMatter	Sep. 30, 2000 West Virginia Individual Personal Injury Cases LegalMatter	Jul. 25, 2014 West Virginia Individual Personal Injury Cases Subsequent Event LegalMatter	Jun. 30, 2014 Flight Attendant Cases LegalMatter	Jul. 25, 2014 Flight Attendant Cases Subsequent Event LegalMatter	Jun. 30, 2014 Class Action Cases LegalMatter	Jul. 25, 2014 Class Action Cases Subsequent Event LegalMatter	Jun. 30, 2014 Reimbursement Cases	Jun. 30, 2013 Reimbursement Cases	Jun. 30, 2014 Reimbursement Cases	Jun. 30, 2013 Reimbursement Cases	Jul. 25, 2014 Reimbursement Cases Subsequent Event LegalMatter	Jun. 30, 2014 Tobacco-Related Antitrust Cases State LegalMatter	Jul. 25, 2014 Tobacco-Related Antitrust Cases Subsequent Event LegalMatter	Jun. 30, 2014 Indemnification Obligations LegalMatter	Apr. 30, 2014 2003 NPM Adjustment award
Loss Contingencies [Line Items]
Cases pending against cigarette manufacturers														7,474																																																																																										600
Lorillard Tobacco as defendant														6,509									65										17																																																																						31
Lorillard Tobacco or Lorillard Inc as defendant																							66				24						4						3,875																																																																			38		2,571	1	1					1		1
Lorillard Inc. as co-defendant														651									1																647																																																																	0
Lorillard Inc. as non defendant														1																									1
Lorillard Tobacco or Lorillard Inc as defendant																																							3,874
Lights cases pending against other manufacturers, excluding Lorillard																																																																																																														17
Medical monitoring Class Action cases																																																																																																														2
Number of additional filter cases in which parent is defendant but which subsidiary is not defendant																							1
Verdict returned for cigarette manufacturers																										11
Lorillard Tobacco's share																									$ 79,000,000							$ 3,000,000																																																																											$ 60,000
Punitive damages award																												4,000,000	25,000,000					145,000,000,000				23,600,000,000																																																							2,500,000				500,000					2,000,000
Damages paid to plaintiffs in individual cases by manufacturers																											15
Punitive damages paid to smokers																											6
Actual damages paid																																		3
Reinstated the compensatory damages awards by Florida Supreme Court																																		2
Compensatory damages awarded																					8,000,000			3,520,000								7,000,000																									263,400
Cases filed by family members																																				500
Number of claims severed into separate lawsuits																																					4,400
Cases scheduled for trial																																									50	107	120	200	150	150	146	144	139																																																							0				0
Number of cases dismissed																															3,489		226
Additional Number of cases dismissed																															520		49
Court granted plaintiff's motion for a new trial																																			49																																																																								1
Number of cases dismissed for a variety of reasons																														440
Number of appeal filed by plaintiffs																														70
Loss contingency claims failure to produce signed authorization																																								14
Percentage of fault of company for injuries																								44.00%																											5.00%	10.00%	3.00%			65.00%		5.00%			20.00%			80.00%				18.00%					9.00%					20.00%								3.00%				33.00%		33.00%						10.00%		25.00%	15.00%
Jury apportion of fault for smoker's injuries to smokers																																																			95.00%	70.00%	91.00%			35.00%		45.00%			60.00%			20.00%			20.50%						31.00%			40.00%							85.00%					34.00%						50.00%
Compensatory damages awarded to plaintiff																			4,500																																225,000	692,981	150,000			6,000,000		4,500,000		1,000,000	1,000,000			20,000,000									3,230,000			2,055,050												5,800,000							5,000,000	5,000,000
Punitive damages awarded to plaintiff in final judgment																																																								11,300,000																																							2,500,000				500,000
Compensatory damages awarded to plaintiff in final judgment																		43,081		50,000																														265,500	11,250	109,298				3,900,588		225,000								16,100,000								2,035,500			1,233,030		411,010			225,000	1,500,000		45,000				3,828,000		1,914,000
Compensatory damages awarded in punitive																																																								11,300,000								25,000,000
Provisionally granted plaintiff's motion for attorney fees																																																						2,500
Compensatory and punitive damages awarded to plaintiff in final judgment																																																							17,500,197				1,659,674
Percentage of fault of other defendants for injuries																																																										50.00%
Annual interest rate on damages awarded in final judgment																																																										6.00%
Litigation cost and fees to company																																																			246,000
Damages awarded to plaintiffs for loss of companionship																																																				400,000
Jury apportion of fault for smoker's injuries to other defendants																																																				20.00%	3.00%								20.00%								27.00%	25.00%	9.50%		60.00%							30.00%	10.00%						12.00%
Final judgment of annual interest																		4.75%																																		6.00%								4.75%																	4.75%					4.75%
Reduction in compensatory damages																																																															10,000,000
Loss contingency compensatory damages awarded value																																																															8,000,000	16,000,000			20,500,000								280,000
Final contingency punitive damages awarded value																																																																25,000,000			54,850,000	12,600,000				42,250,000			12,362,042
Interest on compensatory and punitive damages																																																														3,700,000			1,600,000																			46,857
Verdict returned against other cigarette manufacturers																																							113
Actual and punitive damages were paid in Engle Progeny Cases																																							33
Punitive damages award in cases against other cigarette manufacturers																																							727,500,000
Minimum punitive damages award in one of the twelve cases against other cigarette manufacturers																																							20,000
Maximum punitive damages award in one of the cases against other cigarette manufacturers																																							244,000,000
Maximum security deposit for Engle Progeny cases													200,000,000
Cases dismissed																																																																																																									645
Lorillard Tobacco has been dismissed from cases in lack of evidence against them																																																																																																									565
Cases consolidated for trial																																																																																																									1,250
Number of plaintiffs asserting both claims																																																																																																								28
Number of plaintiffs involved in severed IPIC claims																																																																																																								30
Lorillard Tobacco as a defendant in Severed IPIC Claims																																																																																																								7
Number of plaintiffs involved in Severed IPIC claims using only other tobacco products in which neither Lorillard Inc nor Lorillard Tobacco are Defendants																																																																																																								2
Cigarette Manufacturers companies and Trade associations as defendants																																																																																																											3
Additional cases to be filed																																																																																																											0
Verdicts returned																																																																																																											8
Cases are concluded																																																																																																											6
Defendant Prevailed																																																																																																											7
Damages awarded to plaintiff for French v. Philip Morris Incorporated																																																																																																											5,500,000
Damages reduced by trial court for French v. Philip Morris Incorporated																																																																																																											500,000
The cost of compliance to Lorillard Tobacco								20,000,000			20,000,000
Amount claimed to recover profits earned by defendants																																																																																																															280,000,000,000		280,000,000,000
Pretax charges for obligations under state settlement agreements						36,000,000		36,000,000		64,000,000	62,000,000																																																																																																				358,000,000	644,000,000	343,000,000	519,000,000
Annual payment by domestic tobacco industry																																																																																																															10,400,000,000		10,400,000,000
Cap on plaintiffs attorneys fees paid by domestic tobacco industry																																																																																																															500,000,000		500,000,000
Additional amount paid for plaintiffs attorneys fees																																																																																																															125,000,000		125,000,000
Number of states involved in master settlement agreement						17				17
Amount of expected credit to be received over the next five years										254,000,000
Amount of expected credit to be received over the next four years	36,000,000			165,000,000																																																																																																																			14,000,000
Amount of expected credit to be received over the next five years										53,000,000
Amount of expected credit to be received						14,000,000	37,000,000	12,000,000	165,000,000
Increase under state settlements liability and expenses							7,000,000	1,000,000	21,000,000
Number of states failed to diligently enforce escrow			6
Number of states that did not participate in the settlement			9
Compensatory damages expected to be paid			458,000,000														47,000,000
Increase in share amount						4,000,000				4,000,000		12,000,000
Reduction offset by an increase under state settlements liability and expenses							6,000,000
Trust fund payable to compensate tobacco growing communities										5,200,000,000
Number of states having tobacco growing communities to be compensated by "Trust"						14				14
Number of years compensated by law to tobacco quota holders and tobacco growers										10 years
Compensation to tobacco quota holders and tobacco growers						10,100,000,000				10,100,000,000
Estimated cash payments															64,000,000	65,000,000
Payment made in settlement																						$ 31,700,000
Indirect purchaser suits																																																																																																																				30
Number of states involved in Tobacco-Related Antitrust Indirect Purchasers Suits																																																																																																																				20
Indirect purchaser suits dismissed by courts																																																																																																																				4
Loews as co-defendant																																																																																																																						3
Number of lawsuits filed		2			2

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Condensed Consolidating Statements of Income (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2014		Jun. 30, 2013		Jun. 30, 2014		Jun. 30, 2013
Condensed Income Statements, Captions [Line Items]
Net sales	$ 1,799	[1]	$ 1,804	[1]	$ 3,391	[1]	$ 3,381	[1]
Cost of sales	1,116		1,126		2,090		1,990
Gross profit	683		678		1,301		1,391
Selling, general and administrative	151	[1]	138	[1]	297	[1]	290	[1]
Operating income	532		540		1,004		1,101
Investment income (loss)	(2)				6		1
Interest expense	(45)		(41)		(90)		(82)
Income before income taxes	485		499		920		1,020
Income taxes	185		186		349		380
Net income	300		313		571		640
Parent
Condensed Income Statements, Captions [Line Items]
Selling, general and administrative					1	[1]
Operating income					(1)
Interest expense	1		2		2		3
Income before income taxes	1		2		1		3
Income taxes							1
Equity in earnings of subsidiaries	299		311		570		638
Net income	300		313		571		640
Issuer
Condensed Income Statements, Captions [Line Items]
Net sales	1,762	[1]	1,747	[1]	3,303	[1]	3,267	[1]
Cost of sales	1,088		1,087		2,026		1,914
Gross profit	674		660		1,277		1,353
Selling, general and administrative	405	[1]	407	[1]	776	[1]	795	[1]
Operating income	269		253		501		558
Investment income (loss)	(2)				6		1
Interest expense	(44)		(42)		(89)		(83)
Income before income taxes	223		211		418		476
Income taxes	84		79		156		177
Equity in earnings of subsidiaries	178		178		335		335
Net income	317		310		597		634
Non-guarantor Subsidiaries
Condensed Income Statements, Captions [Line Items]
Net sales	324	[1]	341	[1]	627	[1]	649	[1]
Cost of sales	28		39		64		76
Gross profit	296		302		563		573
Selling, general and administrative	33	[1]	15	[1]	59	[1]	30	[1]
Operating income	263		287		504		543
Interest expense	(2)		(1)		(3)		(2)
Income before income taxes	261		286		501		541
Income taxes	101		107		193		202
Net income	160		179		308		339
Consolidating Adjustments
Condensed Income Statements, Captions [Line Items]
Net sales	(287)	[1]	(284)	[1]	(539)	[1]	(535)	[1]
Gross profit	(287)		(284)		(539)		(535)
Selling, general and administrative	(287)	[1]	(284)	[1]	(539)	[1]	(535)	[1]
Equity in earnings of subsidiaries	(477)		(489)		(905)		(973)
Net income	$ (477)		$ (489)		$ (905)		$ (973)

[1] Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

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Number of Cases Pending (Detail)	Jul. 25, 2014 Conventional Product Liability Cases Subsequent Event LegalMatter	Jun. 30, 2014 Engle Progeny Cases LegalMatter	Jul. 25, 2014 Engle Progeny Cases Subsequent Event LegalMatter	Jul. 25, 2014 West Virginia Individual Personal Injury Cases Subsequent Event LegalMatter	Jul. 25, 2014 Flight Attendant Cases Subsequent Event LegalMatter	Jun. 30, 2014 Class Action Cases LegalMatter	Jul. 25, 2014 Class Action Cases Subsequent Event LegalMatter	Jul. 25, 2014 Reimbursement Cases Subsequent Event LegalMatter	Jul. 25, 2014 Filter Cases Subsequent Event LegalMatter	Jul. 25, 2014 Tobacco-Related Antitrust Cases Subsequent Event LegalMatter
Loss Contingencies [Line Items]
Loss contingency pending claims number	24	4	3,875	38	2,571	1	1	1	66	1

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Segment Information - Additional Information (Detail)	0 Months Ended	6 Months Ended
	Apr. 24, 2012 Segment	Jun. 30, 2014 Segment
Segment Reporting Information [Line Items]
Number of reportable segments	1	2

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Net Periodic Pension and Other Postretirement Benefit Cost (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Pension Benefits
Defined Benefit Plan Disclosure [Line Items]
Service cost	$ 6	$ 7	$ 12	$ 13
Interest cost	14	13	28	25
Expected return on plan assets	(22)	(21)	(44)	(41)
Amortization of net loss	2	5	4	11
Amortization of prior service cost	1	1	2	2
Net periodic benefit cost	1	5	2	10
Other Postretirement Benefits
Defined Benefit Plan Disclosure [Line Items]
Service cost	2	2	3	3
Interest cost	2	2	5	5
Net periodic benefit cost	$ 4	$ 4	$ 8	$ 8

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Earnings Per Share

6 Months Ended

Jun. 30, 2014

Earnings Per Share

14. Earnings Per Share

Basic and diluted earnings per share (“EPS”) were calculated using the following:

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(In millions)
Numerator:
Net income, as reported Net	$	300		$	313		$	571		$	640
Less: Net income attributable to participating securities		(1	)		(1	)		(2	)		(2	)
Net income available to common shareholders	$	299		$	312		$	569		$	638
Denominator:
Basic EPS- weighted average shares		360.31			375.86			361.22			377.22
Effect of dilutive securities:
Stock Options and SARS		0.62			0.75			0.61			0.78
Diluted EPS- adjusted weighted average shares and assumed conversions		360.93			376.61			361.83			378.00
Earnings Per Share:
Basic	$	0.83		$	0.83		$	1.58		$	1.69
Diluted	$	0.83		$	0.83		$	1.57		$	1.69

No options to purchase shares of common stock were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive for the three and six months ended June 30, 2014 or 2013.

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Basis of Presentation - Additional Information (Detail)	0 Months Ended	6 Months Ended
	Apr. 24, 2012 Segment	Jun. 30, 2014 Segment
Basis of Presentation [Line Items]
Number of reportable segments	1	2

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Long-Term Debt (Tables)

6 Months Ended

Jun. 30, 2014

Long-Term Debt

Long-term debt consisted of the following:

	June 30, 2014		December 31, 2013
	(In millions)
2016 Notes - 3.500% Notes due 2016	$	500	$	500
2017 Notes - 2.300% Notes due 2017		500		500
2019 Notes - 8.125% Notes due 2019		816		810
2020 Notes - 6.875% Notes due 2020		750		750
2023 Notes - 3.750% Notes due 2023		500		500
2040 Notes - 8.125% Notes due 2040		250		250
2041 Notes - 7.000% Notes due 2041		250		250
Total long-term debt	$	3,566	$	3,560

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Changes in Accumulated Other Comprehensive Loss (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance			$ (130)
Pension and post-retirement plan actuarial gains and prior service cost	2	(5)	4	(1)
Foreign currency translation adjustments			(1)
Ending balance	(124)		(124)
Accumulated Defined Benefit Plans Adjustment
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance			130
Pension and post-retirement plan actuarial gains and prior service cost			(4)
Foreign currency translation adjustments			(2)
Ending balance	124		124
Accumulated Defined Benefit Plans Adjustment | Defined Benefit Pension and Post-Retirement Plans
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance			131	241
Pension and post-retirement plan actuarial gains and prior service cost			(4)	1
Ending balance	127	242	127	242
Accumulated Defined Benefit Plans Adjustment | Foreign Currency
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance			(1)
Foreign currency translation adjustments			(2)
Ending balance	$ (3)		$ (3)

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Plant and Equipment, Net (Tables)

6 Months Ended

Jun. 30, 2014

Plant and Equipment Stated at Historical Cost

Plant and equipment is stated at historical cost and consisted of the following:

	June 30, 2014			December 31, 2013
	(In millions)
Land	$	3		$	3
Buildings		106			104
Equipment		683			684
Total		792			791
Accumulated depreciation		(480	)		(475	)
Plant and equipment, net	$	312		$	316

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Fair Values of Assets Acquired and Liabilities Assumed (Detail) In Millions, unless otherwise specified	Jun. 30, 2014 USD ($)	Dec. 31, 2013 USD ($)	Jun. 30, 2014 Blu eCigs USD ($)	Apr. 24, 2012 Blu eCigs USD ($)	Oct. 01, 2013 blu (U.K.) USD ($)	Oct. 01, 2013 blu (U.K.) GBP (£)
Current assets:
Accounts receivable				$ 2	$ 2
Inventories				15
Total current assets				17
Goodwill	103	102	0	64	38
Intangible assets				58	35
Total assets				139	75
Current liabilities:
Accounts and drafts payable				4	3
Accrued liabilities					1
Total current liabilities					4
Earn out liability					25
Purchase price				$ 135	$ 46	£ 28

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Long-Term Debt - Additional Information (Detail) (USD $) In Millions, unless otherwise specified	6 Months Ended			1 Months Ended			6 Months Ended			1 Months Ended		6 Months Ended
	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2014 Lorillard Tobacco	Aug. 21, 2012 2017 Notes - 2.300% Notes due 2017	May 31, 2013 2023 Notes - 3.750% Notes due 2023	Jun. 30, 2009 2019 Notes - 8.125% Notes due 2019	Jun. 30, 2014 2019 Notes - 8.125% Notes due 2019	Jun. 30, 2014 2019 Notes - 8.125% Notes due 2019 Minimum	Jun. 30, 2014 2019 Notes - 8.125% Notes due 2019 Maximum	Apr. 30, 2010 2020 Notes - 6.875% Notes due 2020	Apr. 30, 2010 2040 Notes - 8.125% Notes due 2040	Jun. 30, 2014 2016 Notes - 3.500% Notes due 2016	Jun. 30, 2014 2041 Notes - 7.000% Notes due 2041
Debt Instrument [Line Items]
Issuance of unsecured senior notes				$ 500	$ 500	$ 750				$ 750	$ 250	$ 500	$ 250
Unsecured senior debt stated interest rate percent				2.30%	3.75%	8.125%				6.875%	8.125%	3.50%	7.00%
Debt instrument maturity date				Aug. 21, 2017	May 20, 2023
Percentage of ownership interest in subsidiary			100.00%
Incremental increase in interest rate on the notes								0.25%	2.00%
Debt instrument description							The interest rate payable on the 2019 Notes is subject to incremental increases from 0.25% to 2.00% in the event either Moody's Investors Services, Inc. ("Moody's"), Standard & Poor's Ratings Services ("S&P") or both Moody's and S&P downgrade the 2019 Notes below investment grade (Baa3 and BBB- for Moody's and S&P, respectively). As of June 30, 2014 our debt ratings were Baa2 and BBB- with Moody's and S&P, respectively, both of which are investment grade.
Offer to repurchase notes upon change of control triggering event	101.00%
Number of days ceased to be rated investment grade for becoming change of control triggering event	60 days
Carrying value of notes	3,566	3,560
Estimated fair value of notes	$ 4,006	$ 3,872

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Accrued Liabilities (Detail) (USD $) In Millions, unless otherwise specified	Jun. 30, 2014		Dec. 31, 2013
Accrued liabilities
Legal fees	$ 38		$ 29
Salaries and other compensation	20		20
Medical and other employee benefit plans	28		30
Consumer rebates	64		78
Sales promotion	27		29
Excise and other taxes	93		57
Accrued interest	34		34
Litigation related accruals	22		42
Other accrued liabilities	40		58
Total	$ 366	[1]	$ 377	[1]

[1] Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

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Segment Information (Tables)

6 Months Ended

Jun. 30, 2014

Segment Information

	For the Three Months Ended June 30, 2014
	Cigarettes		Electronic Cigarettes			Consolidating Adjustments			Total Lorillard
(In millions)
Net sales	$	1,762	$	37		$	—		$	1,799
Cost of sales		1,088		28			—			1,116
Gross profit		674		9			—			683
Selling, general and administrative		119		32			—			151
Operating income (loss)	$	555	$	(23	)	$	—		$	532
Depreciation and amortization	$	12	$	6		$	—		$	18
Capital expenditures	$	11	$	2		$	—		$	13
	As of or For the Six Months Ended June 30, 2014
	Cigarettes		Electronic Cigarettes			Consolidating Adjustments			Total Lorillard
(In millions)
Net sales	$	3,303	$	88		$	—		$	3,391
Cost of sales		2,026		64			—			2,090
Gross profit		1,277		24			—			1,301
Selling, general and administrative		239		58			—			297
Operating income (loss)	$	1,038	$	(34	)	$	—		$	1,004
Depreciation and amortization	$	26	$	11		$	—		$	37
Total assets	$	2,678	$	340		$	(125	)	$	2,893
Capital expenditures	$	20	$	2		$	—		$	22

	For the Three Months Ended June 30, 2013
	Cigarettes		Electronic Cigarettes		Consolidating Adjustments			Total Lorillard
(In millions)
Net sales	$	1,747	$	57	$	—		$	1,804
Cost of sales		1,087		39		—			1,126
Gross profit		660		18		—			678
Selling, general and administrative		122		16		—			138
Operating income	$	538	$	2	$	—		$	540
Depreciation and amortization	$	12	$	—	$	—		$	12
Capital expenditures	$	27	$	—	$	—		$	27
	As of or For the Six Months Ended June 30, 2013
	Cigarettes		Electronic Cigarettes		Consolidating Adjustments			Total Lorillard
(In millions)
Net sales	$	3,267	$	114	$	—		$	3,381
Cost of sales		1,914		76		—			1,990
Gross profit		1,353		38		—			1,391
Selling, general and administrative		261		29		—			290
Operating income	$	1,092	$	9	$	—		$	1,101
Depreciation and amortization	$	23	$	—	$	—		$	23
Total assets	$	3,243	$	217	$	(125	)	$	3,335
Capital expenditures	$	34	$	—	$	—		$	34

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CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS DEFICIT (Parenthetical) (USD $) In Millions, except Per Share data, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Other comprehensive (loss) income, tax expense	$ 3
Dividends paid per share	$ 1.23	$ 1.10

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Commitments - Additional Information (Detail) (USD $) In Millions, unless otherwise specified	Jun. 30, 2014
blu (U.K.)
Unrecorded Unconditional Purchase Obligation [Line Items]
Approximate Contractual purchase obligations between January 1, 2014 and December 31, 2014	$ 0
Blu eCigs | Inventory
Unrecorded Unconditional Purchase Obligation [Line Items]
Approximate Contractual purchase obligations between January 1, 2014 and December 31, 2014	25
Lorillard Tobacco | Machinery
Unrecorded Unconditional Purchase Obligation [Line Items]
Approximate Contractual purchase obligations between January 1, 2014 and December 31, 2014	60
Lorillard Tobacco | Leaf Tobacco
Unrecorded Unconditional Purchase Obligation [Line Items]
Approximate Contractual purchase obligations between January 1, 2014 and December 31, 2014	$ 117

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Earnings Per Share (Tables)

6 Months Ended

Jun. 30, 2014

Basic and Diluted Earnings Per Share

Basic and diluted earnings per share (“EPS”) were calculated using the following:

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(In millions)
Numerator:
Net income, as reported Net	$	300		$	313		$	571		$	640
Less: Net income attributable to participating securities		(1	)		(1	)		(2	)		(2	)
Net income available to common shareholders	$	299		$	312		$	569		$	638
Denominator:
Basic EPS- weighted average shares		360.31			375.86			361.22			377.22
Effect of dilutive securities:
Stock Options and SARS		0.62			0.75			0.61			0.78
Diluted EPS- adjusted weighted average shares and assumed conversions		360.93			376.61			361.83			378.00
Earnings Per Share:
Basic	$	0.83		$	0.83		$	1.58		$	1.69
Diluted	$	0.83		$	0.83		$	1.57		$	1.69

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Segment Information

6 Months Ended

Jun. 30, 2014

Segment Information

18. Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance. Lorillard has two reportable segments, Cigarettes and Electronic Cigarettes. Lorillard identifies segments based on how our chief operating decision maker assesses performance and allocates resources, which is based on the types of products sold by each segment. Centrally incurred costs, such as the cost of Lorillard’s sales force and administrative overhead costs, are allocated to each segment based on the percentage of each segment’s budgeted net sales (excluding federal excise taxes) of Lorillard consolidated net sales (excluding federal excise taxes).

The Cigarettes segment consists principally of the operations of Lorillard Tobacco and related entities. 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 Electronic Cigarettes segment consists of the operations of LOEC (d/b/a blu eCigs), Cygnet (t/a SKYCIG or blu (U.K.)) and related entities. LOEC is an electronic cigarette company in the United States, and markets its products under the blu eCigs brand. Lorillard acquired the blu eCigs brand and other assets used in the manufacture, distribution, development, research, marketing, advertising and sale of electronic cigarettes on April 24, 2012. Lorillard acquired certain of the assets and operations of SKYCIG, a United Kingdom based electronic cigarette business on October 1, 2013.

Prior to the acquisition of blu eCigs on April 24, 2012, Lorillard managed its operations on the basis of one operating and reportable segment.

Lorillard maintains its headquarters and manufactures all of its cigarette products at its Greensboro, North Carolina facilities. Substantially all of Lorillard’s sales and fixed assets are in the United States of America. Newport, Kent, True, Maverick, Old Gold, blu eCigs and SKYCIG are the registered trademarks of Lorillard and its subsidiaries. Lorillard sold its major cigarette trademarks outside of the United States in 1977.

	For the Three Months Ended June 30, 2014
	Cigarettes		Electronic Cigarettes			Consolidating Adjustments			Total Lorillard
(In millions)
Net sales	$	1,762	$	37		$	—		$	1,799
Cost of sales		1,088		28			—			1,116
Gross profit		674		9			—			683
Selling, general and administrative		119		32			—			151
Operating income (loss)	$	555	$	(23	)	$	—		$	532
Depreciation and amortization	$	12	$	6		$	—		$	18
Capital expenditures	$	11	$	2		$	—		$	13
	As of or For the Six Months Ended June 30, 2014
	Cigarettes		Electronic Cigarettes			Consolidating Adjustments			Total Lorillard
(In millions)
Net sales	$	3,303	$	88		$	—		$	3,391
Cost of sales		2,026		64			—			2,090
Gross profit		1,277		24			—			1,301
Selling, general and administrative		239		58			—			297
Operating income (loss)	$	1,038	$	(34	)	$	—		$	1,004
Depreciation and amortization	$	26	$	11		$	—		$	37
Total assets	$	2,678	$	340		$	(125	)	$	2,893
Capital expenditures	$	20	$	2		$	—		$	22

	For the Three Months Ended June 30, 2013
	Cigarettes		Electronic Cigarettes		Consolidating Adjustments			Total Lorillard
(In millions)
Net sales	$	1,747	$	57	$	—		$	1,804
Cost of sales		1,087		39		—			1,126
Gross profit		660		18		—			678
Selling, general and administrative		122		16		—			138
Operating income	$	538	$	2	$	—		$	540
Depreciation and amortization	$	12	$	—	$	—		$	12
Capital expenditures	$	27	$	—	$	—		$	27
	As of or For the Six Months Ended June 30, 2013
	Cigarettes		Electronic Cigarettes		Consolidating Adjustments			Total Lorillard
(In millions)
Net sales	$	3,267	$	114	$	—		$	3,381
Cost of sales		1,914		76		—			1,990
Gross profit		1,353		38		—			1,391
Selling, general and administrative		261		29		—			290
Operating income	$	1,092	$	9	$	—		$	1,101
Depreciation and amortization	$	23	$	—	$	—		$	23
Total assets	$	3,243	$	217	$	(125	)	$	3,335
Capital expenditures	$	34	$	—	$	—		$	34

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Accumulated Other Comprehensive Loss

6 Months Ended

Jun. 30, 2014

Accumulated Other Comprehensive Loss

17. Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss during the six months ended June 30, 2014 consisted of the following:

	Defined Benefit Pension and Post-Retirement Plan Items			Foreign Currency			Total
	(In millions)
Beginning balance, January 1, 2014	$	131		$	(1	)	$	130
Pension and post-retirement plan actuarial gains and prior service cost		(4	)		—			(4	)
Foreign currency translation adjustments		—			(2	)		(2	)
Ending balance, June 30, 2014	$	127		$	(3	)	$	124

Reclassifications out of accumulated other comprehensive loss during the six months ended June 30, 2014 were as follows:

	Amount Reclassified from Accumulated Other Comprehensive Loss			Affected Line Item in the Consolidated Statements of Income
	(In millions)
Amortization of defined benefit pension items:
Prior service costs	$	(2	)	(A)
Actuarial loss		(4	)	(A)
		(6	)	Total before tax
		2		Income tax benefit
Total reclassifications for the period	$	(4	)	Net of tax

(A) These accumulated comprehensive loss components are included in the computation of net periodic pension cost (see Note 15, “Retirement Plans,” for additional details), which is included in cost of sales and selling, general and administrative expenses.

Changes in accumulated other comprehensive loss during the six months ended June 30, 2013 consisted of the following:

	Defined Benefit Pension and Post-Retirement Plan Items
Beginning balance, January 1, 2013	$	241
Pension and post-retirement plan actuarial gains and prior service cost		1
Ending balance, June 30, 2013	$	242

Reclassifications out of accumulated other comprehensive loss during the six months ended June 30, 2013 were as follows:

	Amount Reclassified from Accumulated Other Comprehensive Loss			Affected Line Item in the Consolidated Statements of Income
	(In millions)
Amortization of defined benefit pension items:
Prior service costs	$	(2	)	(A)
Actuarial loss		(11	)	(A)
		(13	)	Total before tax
		5		Income tax benefit
Total reclassifications for the period	$	(8	)	Net of tax

(A) These accumulated comprehensive loss components are included in the computation of net periodic pension cost (see Note 15, “Retirement Plans,” for additional details), which is included in cost of sales and selling, general and administrative expenses.

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Plant and Equipment Stated at Historical Cost (Detail) (USD $) In Millions, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Property, Plant and Equipment [Line Items]
Land	$ 3	$ 3
Buildings	106	104
Equipment	683	684
Total	792	791
Accumulated depreciation	(480)	(475)
Plant and equipment, net	$ 312	$ 316

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Retirement Plans (Tables)

6 Months Ended

Jun. 30, 2014

Net Periodic Pension and Other Postretirement Benefit Costs

Net periodic benefit cost components were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
Pension Benefits	2014			2013			2014			2013
	(In millions)
Service cost	$	6		$	7		$	12		$	13
Interest cost		14			13			28			25
Expected return on plan assets		(22	)		(21	)		(44	)		(41	)
Amortization of net loss		2			5			4			11
Amortization of prior service cost		1			1			2			2
Net periodic benefit cost	$	1		$	5		$	2		$	10
	Three Months Ended June 30,						Six Months Ended June 30,
Other Postretirement Benefits	2014			2013			2014			2013
	(In millions)
Service cost	$	2		$	2		$	3		$	3
Interest cost		2			2			5			5
Net periodic benefit cost	$	4		$	4		$	8		$	8

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Consolidating Financial Information

6 Months Ended

Jun. 30, 2014

Consolidating Financial Information

19. Consolidating Financial Information

In June 2009, April 2010, August 2011, August 2012 and May 2013, Lorillard Tobacco, as primary obligor, issued the Notes, which are unconditionally guaranteed in full by the Company for the payment and performance of Lorillard Tobacco’s obligation in connection therewith (see Note 12 for a description of the Notes).

The following sets forth the condensed consolidating balance sheets as of June 30, 2014 and December 31, 2013, condensed consolidating statements of income for the three and six months ended June 30, 2014 and 2013, condensed consolidating statements of comprehensive income for the three and six months ended June 30, 2014 and 2013, and condensed consolidating statements of cash flows for the six months ended June 30, 2014 and 2013 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.

Condensed Consolidating Balance Sheets

June 30, 2014

(In millions)

	Parent			Issuer			Non-guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Assets:
Cash and cash equivalents	$	25		$	509		$	175	$	—		$	709
Short term investments		—			172			—		—			172
Accounts receivable, less allowances of $2		—			16			9		—			25
Other receivables (1)		1			16			101		(99	)		19
Inventories		—			404			71		—			475
Deferred income taxes		—			543			6		—			549
Other current assets		—			92			12		—			104
Total current assets		26			1,752			374		(99	)		2,053
Investment in subsidiaries		—			209			—		(209	)		—
Plant and equipment, net		—			309			3		—			312
Long term investments		—			126			—		—			126
Goodwill		—			—			103		—			103
Intangible assets		—			—			76		—			76
Deferred income taxes		—			50			8		—			58
Other assets		125			165			—		(125	)		165
Total assets	$	151		$	2,611		$	564	$	(433	)	$	2,893
Liabilities and Shareholders’ Equity (Deficit):
Accounts and drafts payable	$	—		$	26		$	7	$	—		$	33
Accrued liabilities (1)		—			450			15		(99	)		366
Settlement costs		—			753			—		—			753
Income taxes		—			—			1		—			1
Total current liabilities		—			1,229			23		(99	)		1,153
Long-term debt		—			3,566			—		—			3,566
Investment in subsidiaries		2,379			—			—		(2,379	)		—
Postretirement pension, medical and life insurance benefits		—			311			—		—			311
Other liabilities		—			49			167		(125	)		91
Total liabilities		2,379			5,155			190		(2,603	)		5,121
Shareholders’ Equity (Deficit):
Common stock		4			—			—		—			4
Additional paid-in capital		275			149			194		(343	)		275
Retained earnings/accumulated (deficit)		(1,313	)		(2,566	)		177		2,389			(1,313	)
Accumulated other comprehensive income (loss)		(124	)		(127	)		3		124			(124	)
Treasury stock		(1,070	)		—			—		—			(1,070	)
Total shareholders’ equity (deficit)		(2,228	)		(2,544	)		374		2,170			(2,228	)
Total liabilities and shareholders’ equity (deficit)	$	151		$	2,611		$	564	$	(433	)	$	2,893

(1) Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

Condensed Consolidating Balance Sheets

December 31, 2013

(In millions)

	Parent			Issuer			Non-guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Assets:
Cash and cash equivalents	$	341		$	1,002		$	111	$	—		$	1,454
Short term investments		—			157			—		—			157
Accounts receivable, less allowances of $3		—			8			11		—			19
Other receivables (1)		—			24			93		(88	)		29
Inventories		—			412			87		—			499
Deferred income taxes		—			549			6		—			555
Other current assets		—			19			4		—			23
Total current assets		341			2,171			312		(88	)		2,736
Investment in subsidiaries		—			148			—		(148	)		—
Plant and equipment, net		—			315			1		—			316
Long term investments		—			93			—		—			93
Goodwill		—			—			102		—			102
Intangible assets		—			—			87		—			87
Deferred income taxes		—			48			3		—			51
Other assets		125			151			—		(125	)		151
Total assets	$	466		$	2,926		$	505	$	(361	)	$	3,536
Liabilities and Shareholders’ Equity (Deficit):
Accounts and drafts payable	$	—		$	37		$	5	$	—		$	42
Accrued liabilities (1)		13			434			14		(84	)		377
Settlement costs		—			1,224			—		—			1,224
Income taxes		1			11			—		(4	)		8
Total current liabilities		14			1,706			19		(88	)		1,651
Long-term debt		—			3,560			—		—			3,560
Investment in subsidiaries		2,516			—			—		(2,516	)		—
Postretirement pension, medical and life insurance benefits		—			305			—		—			305
Other liabilities		—			44			165		(125	)		84
Total liabilities		2,530			5,615			184		(2,729	)		5,600
Shareholders’ Equity (Deficit):
Common stock		4			—			—		—			4
Additional paid-in capital		256			130			177		(307	)		256
Retained earnings/accumulated (deficit)		(1,438	)		(2,688	)		143		2,545			(1,438	)
Accumulated other comprehensive income (loss)		(130	)		(131	)		1		130			(130	)
Treasury stock		(756	)		—			—		—			(756	)
Total shareholders’ equity (deficit)		(2,064	)		(2,689	)		321		2,368			(2,064	)
Total liabilities and shareholders’ equity (deficit)	$	466		$	2,926		$	505	$	(361	)	$	3,536

(1) Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

Condensed Consolidating Statements of Income

For the Three Months Ended June 30, 2014

(In millions)

	Parent		Issuer			Non- guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Net sales (including excise taxes of $502) (1)	$	—	$	1,762		$	324		$	(287	)	$	1,799
Cost of sales (including excise taxes of $502)		—		1,088			28			—			1,116
Gross profit		—		674			296			(287	)		683
Selling, general and administrative (1)		—		405			33			(287	)		151
Operating income		—		269			263			—			532
Investment income (loss)		—		(2	)		—			—			(2	)
Interest expense		1		(44	)		(2	)		—			(45	)
Income before income taxes		1		223			261			—			485
Income taxes		—		84			101			—			185
Equity in earnings of subsidiaries		299		178			—			(477	)		—
Net income	$	300	$	317		$	160		$	(477	)	$	300

(1) Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

Condensed Consolidating Statements of Income

For the Six Months Ended June 30, 2014

(In millions)

	Parent			Issuer			Non- guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Net sales (including excise taxes of $947) (1)	$	—		$	3,303		$	627		$	(539	)	$	3,391
Cost of sales (including excise taxes of $947)		—			2,026			64			—			2,090
Gross profit		—			1,277			563			(539	)		1,301
Selling, general and administrative (1)		1			776			59			(539	)		297
Operating income		(1	)		501			504			—			1,004
Investment income		—			6			—			—			6
Interest expense		2			(89	)		(3	)		—			(90	)
Income before income taxes		1			418			501			—			920
Income taxes		—			156			193			—			349
Equity in earnings of subsidiaries		570			335			—			(905	)		—
Net income	$	571		$	597		$	308		$	(905	)	$	571

(1) Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

Condensed Consolidating Statements of Income

For the Three Months Ended June 30, 2013

(In millions)

	Parent		Issuer			Non- guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Net sales (including excise taxes of $516) (1)	$	—	$	1,747		$	341		$	(284	)	$	1,804
Cost of sales (including excise taxes of $516)		—		1,087			39			—			1,126
Gross profit		—		660			302			(284	)		678
Selling, general and administrative (1)		—		407			15			(284	)		138
Operating income		—		253			287			—			540
Investment income		—		—			—			—			—
Interest expense		2		(42	)		(1	)		—			(41	)
Income before income taxes		2		211			286			—			499
Income taxes		—		79			107			—			186
Equity in earnings of subsidiaries		311		178			—			(489	)		—
Net income	$	313	$	310		$	179		$	(489	)	$	313

(1) Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

Condensed Consolidating Statements of Income

For the Six Months Ended June 30, 2013

(In millions)

	Parent		Issuer			Non- guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Net sales (including excise taxes of $971) (1)	$	—	$	3,267		$	649		$	(535	)	$	3,381
Cost of sales (including excise taxes of $971)		—		1,914			76			—			1,990
Gross profit		—		1,353			573			(535	)		1,391
Selling, general and administrative (1)		—		795			30			(535	)		290
Operating income		—		558			543			—			1,101
Investment income		—		1			—			—			1
Interest expense		3		(83	)		(2	)		—			(82	)
Income before income taxes		3		476			541			—			1,020
Income taxes		1		177			202			—			380
Equity in earnings of subsidiaries		638		335			—			(973	)		—
Net income	$	640	$	634		$	339		$	(973	)	$	640

(1) Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

Condensed Consolidating Statements of Comprehensive Income

For the Three Months Ended June 30, 2014

(In millions)

	Parent		Issuer		Non-guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Net income
Other comprehensive income, net of tax:	$	300	$	317	$	160	$	(477	)	$	300
Defined benefit retirement plan gains, net of tax expense of $1		2		2		—		(2	)		2
Foreign currency translation adjustments, net of tax expense of $—		1		—		1		(1	)		1
Other comprehensive income		3		2		1		(3	)		3
Comprehensive income	$	303	$	319	$	161	$	(480	)	$	303

Condensed Consolidating Statements of Comprehensive Income

For the Six Months Ended June 30, 2014

(In millions)

	Parent		Issuer		Non-guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Net income
Other comprehensive income, net of tax:	$	571	$	597	$	308	$	(905	)	$	571
Defined benefit retirement plan gains, net of tax expense of $2		4		4		—		(4	)		4
Foreign currency translation adjustments, net of tax expense of $1		2		—		2		(2	)		2
Other comprehensive income		6		4		2		(6	)		6
Comprehensive income	$	577	$	601	$	310	$	(911	)	$	577

Condensed Consolidating Statements of Comprehensive Income

For the Three Months Ended June 30, 2013

(In millions)

	Parent		Issuer			Non- guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Net income	$	313	$	310		$	179	$	(489	)	$	313
Other comprehensive loss, net of tax:
Defined benefit retirement plan losses, net of tax benefit of $2		—		(5	)		—		—			(5	)
Comprehensive income	$	313	$	305		$	179	$	(489	)	$	308

Condensed Consolidating Statements of Comprehensive Income

For the Six Months Ended June 30, 2013

(In millions)

	Parent		Issuer			Non- guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Net income	$	640	$	634		$	339	$	(973	)	$	640
Other comprehensive loss, net of tax:
Defined benefit retirement plan losses, net of tax benefit of $—		—		(1	)		—		—			(1	)
Comprehensive income	$	640	$	633		$	339	$	(973	)	$	639

Condensed Consolidating Statements of Cash Flows

For the Six Months Ended June 30, 2014

(In millions)

	Parent			Issuer			Non-guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Cash flows from operating activities:
Net income	$	571		$	597		$	308		$	(905	)	$	571
Adjustments to reconcile to net cash provided by operating activities:
Equity income from subsidiaries		(570	)		(335	)		—			905			—
Depreciation and amortization		—			26			11			—			37
Pension, health and life insurance contributions		—			(6	)		—			—			(6	)
Pension, health and life insurance benefits expense		—			9			—			—			9
Deferred income taxes		—			1			(5	)		—			(4	)
Share-based compensation		—			9			—			—			9
Excess tax benefits from share-based arrangements		—			(8	)		—			—			(8	)
Changes in operating assets and liabilities:
Accounts and other receivables		—			—			(8	)		14			6
Inventories		—			8			17			—			25
Accounts payable and accrued liabilities		(13	)		4			3			(14	)		(20	)
Settlement costs		—			(471	)		—			—			(471	)
Income taxes		(1	)		(61	)		2			—			(60	)
Other current assets		—			(10	)		(4	)		—			(14	)
Other assets		—			1			—			—			1
Return on investment in subsidiaries		474			275			—			(749	)		—
Net cash provided by (used in) operating activities		461			39			324			(749	)		75
Cash flows from investing activities:
Purchases of investments		—			(337	)		—			—			(337	)
Additions to plant and equipment		—			(20	)		(2	)		—			(22	)
Sales, maturities and calls of investments		—			289			—			—			289
Investment in subsidiary		(17	)		—			—			17			—
Net cash provided by (used in) investing activities		(17	)		(68	)		(2	)		17			(70	)
Cash flows from financing activities:
Dividends paid		(446	)		(474	)		(275	)		749			(446	)
Shares repurchased		(314	)		—			—			—			(314	)
Contributions from parent		—			—			17			(17	)		—
Proceeds from exercise of stock options		—			2			—			—			2
Excess tax benefits from share-based arrangements		—			8			—			—			8
Net cash provided by (used in) financing activities		(760	)		(464	)		(258	)		732			(750	)
Change in cash and cash equivalents		(316	)		(493	)		64			—			(745	)
Cash and cash equivalents, beginning of year		341			1,002			111			—			1,454
Cash and cash equivalents, end of period	$	25		$	509		$	175		$	—		$	709

Condensed Consolidating Statements of Cash Flows

For the Six Months Ended June 30, 2013

(In millions)

	Parent			Issuer			Non- guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Cash flows from operating activities:
Net income	$	640		$	634		$	339		$	(973	)	$	640
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity income from subsidiaries		(638	)		(335	)		—			973			—
Depreciation and amortization		—			23			—			—			23
Pension and other postretirement benefits contributions		—			(22	)		—			—			(22	)
Pension and other postretirement benefits expense		—			18			—			—			18
Deferred income taxes		(1	)		(3	)		1			—			(3	)
Share-based compensation		1			8			—			—			9
Excess tax benefits from share-based payment arrangements		—			(7	)		—			—			(7	)
Changes in operating assets and liabilities:
Accounts and other receivables		—			2			(13	)		5			(6	)
Inventories		—			(34	)		10			—			(24	)
Accounts payable and accrued liabilities		(3	)		9			4			(5	)		5
Settlement costs		—			(434	)		—			—			(434	)
Income taxes		—			(3	)		(24	)		—			(27	)
Other current assets		1			2			4			—			7
Other assets		—			4			(1	)		—			3
Return on investment in subsidiaries		668			—			—			(668	)		—
Net cash provided by (used in) operating activities		668			(138	)		320			(668	)		182
Cash flows from investing activities:
Additions to plant and equipment		—			(33	)		(1	)		—			(34	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		—			500			—			—			500
Dividends paid		(417	)		(668	)		—			668			(417	)
Shares repurchased		(318	)		—			—			—			(318	)
Debt issuance costs		—			(4	)		—			—			(4	)
Proceeds from exercise of stock options		—			2			—			—			2
Excess tax benefits from share-based payment arrangements		—			7			—			—			7
Net cash (used in) provided by financing activities		(735	)		(163	)		—			668			(230	)
Change in cash and cash equivalents		(67	)		(334	)		319			—			(82	)
Cash and cash equivalents, beginning of year		150			1,471			99			—			1,720
Cash and cash equivalents, end of period	$	83		$	1,137		$	418		$	—		$	1,638

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Legal Proceedings

6 Months Ended

Jun. 30, 2014

Legal Proceedings

20. Legal Proceedings

Overview

As of July 25, 2014, 7,474 product liability cases are pending against cigarette manufacturers in the United States. Lorillard Tobacco is a defendant in 6,509 of these cases. Lorillard, Inc. is a co-defendant in 651 pending cases, and is a defendant in one case in which Lorillard Tobacco is not a defendant. A total of 3,875 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. Certain Flight Attendant Cases that were dismissed for administrative reasons, but which may be reinstated pursuant to the settlement agreement in Broin v. Philip Morris Companies, Inc., et al . have been included in the count of pending cases. The table below lists the number of certain tobacco-related cases pending against Lorillard as of the date listed. A description of each type of case follows the table.

Type of Case	Total Number of Cases Pending against Lorillard as of July 25, 2014
Conventional Product Liability Cases		24
Engle Progeny Cases		3,875
West Virginia Individual Personal Injury Cases		38
Flight Attendant Cases		2,571
Class Action Cases		1
Reimbursement Cases		1
Filter Cases		66
Tobacco-Related Antitrust Cases		1

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 3,874 of the Engle Progeny Cases listed in the above table. Lorillard, Inc. is a co-defendant in 647 Engle Progeny Cases, and is a defendant in one case in which Lorillard Tobacco is not a defendant. The time period for filing Engle Progeny Cases expired in January 2008 and no additional cases may be filed. Some of the Engle Progeny Cases were filed on behalf of multiple class members. Some of the courts hearing the cases filed by multiple class members have severed these suits into separate individual cases. It is possible the remaining suits filed by multiple class members may also be severed into separate individual cases.

West Virginia Individual Personal Injury Cases. In a 1999 administrative order, the West Virginia Supreme Court of Appeals transferred to a single West Virginia court a group of cases brought by individuals who allege cancer or other health effects caused by smoking cigarettes, smoking cigars, or using smokeless tobacco products (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 Individual 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 Individual 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.

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 but not Lorillard, Inc. is a defendant in the Class Action Case listed in the above table. Neither Lorillard Tobacco nor Lorillard, Inc. is a defendant in additional Class Action Cases that are pending against other cigarette manufacturers, including approximately 17 “lights” Class Action Cases and one Class Action Case seeking a court- supervised medical monitoring program.

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. Included in this category is the suit filed by the federal government, United States of America v. Philip Morris USA, Inc., et al., (“Philip Morris”), that sought to recover profits earned by the defendants and other equitable relief. Lorillard Tobacco is a defendant in the case, and Lorillard, Inc. is not a party to this case. 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 a predecessor 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 for a limited period of time ending more than 50 years ago. Lorillard Tobacco is a defendant in 65 of the 66 Filter Cases listed in the above table. Lorillard, Inc. is a co-defendant in one of the 65 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. In 2000 and 2001, a number of cases were brought against cigarette manufacturers, including Lorillard Tobacco, alleging that defendants conspired to set the price of cigarettes in violation of federal and state antitrust and unfair business practices statutes. Plaintiffs sought 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 Tobacco-Related Antitrust Case as set forth in the table above. Lorillard, Inc. is not a defendant in this case. All of the other cases have been either successfully defended or voluntarily dismissed.

Loss Accrual and Disclosure Policy

Lorillard establishes accruals in accordance with Accounting Standards Codification Topic 450, Contingencies (“ASC 450”), when a material litigation liability is both probable and can be reasonably estimated. There are a number of factors impacting Lorillard’s ability to estimate the possible loss or a range of loss, including the specific facts of each matter; the legal theories proffered by plaintiffs and legal defenses available to Lorillard Tobacco and Lorillard, Inc.; the wide-ranging outcomes reached in similar cases; differing procedural and substantive laws in the various jurisdictions in which lawsuits have been filed, including whether punitive damages may be pursued or are permissible; the degree of specificity in a plaintiff’s complaint; the history of the case and whether discovery has been completed; plaintiffs’ history of use of Lorillard Tobacco’s cigarettes relative to those of the other defendants; the attribution of damages, if any, among multiple defendants; the application of contributory and/or comparative negligence to the allocation of damage awards among plaintiffs and defendants; the likelihood of settlements for de minimis amounts prior to trial; the likelihood of success at trial; the likelihood of success on appeal; and the impact of current and pending state and federal appellate decisions. It has been Lorillard’s experience and is its continued expectation that the above complexities and uncertainties will not be clarified until the late stages of litigation. For those reasonably possible loss contingencies for which an estimate of the possible loss or range of loss cannot be made, Lorillard discloses the nature of the litigation and any developments as appropriate.

Lorillard monitors the status of all outstanding litigation on an ongoing basis in order to determine the probability of loss and assess whether an estimate of the possible loss or range of loss can be determined. In evaluating litigation, Lorillard considers, among other things, the nature of the claims; the jurisdiction in which the claims have been filed and the law and case law developed in that jurisdiction; the experience of plaintiffs’ counsel in this type of litigation; the parties’ respective litigation strategies; the stage of the proceedings; the outcome of the matters at trial or on appeal; the type and amount of damages claimed by plaintiffs; the outcomes and damage awards, if any, for similar matters brought against Lorillard and/or the tobacco industry; and the possibility and likelihood of success on appeal. Lorillard’s assessment of a possible loss or range of loss is based on its assessment of the final outcome of the litigation upon the conclusion of all appeals.

Lorillard records provisions in the consolidated financial statements for pending litigation when it determines that it is probable that a loss has been incurred and the amount of loss can be reasonably estimated. Except for the impact of the State Settlement Agreements, the U.S. Government Case and certain Engle Progeny Cases as described below, while it is reasonably possible that a loss has been incurred, (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 due to the many variables, uncertainties and complexities described above, and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for possible losses related to material pending litigation. It is possible that Lorillard’s 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 or future litigation or an inability to secure bonds where required to stay the execution of judgments on appeal.

Tobacco-Related Product Liability Litigation

Conventional Product Liability Cases

Since January 1, 2010, verdicts have been returned in eleven Conventional Product Liability Cases against cigarette manufacturers. Lorillard Tobacco was the only defendant in one of these eleven trials, Evans v. Lorillard Tobacco Company (Superior Court, Suffolk County, Massachusetts). Lorillard Tobacco paid $79 million in compensatory damages and interest in the Evans case in October 2013. This charge was reflected in selling, general and administrative expense for the third quarter 2013 and the case is concluded.

Neither Lorillard Tobacco nor Lorillard, Inc. was a defendant in the ten other trials since January 1, 2010. Juries found in favor of the plaintiffs and awarded compensatory damages in four of these trials and also awarded $4.0 million in punitive damages in one of these trials. Defendants appealed the verdicts in three of these trials. The verdict in the first case was affirmed on appeal in July 2013; judgment has since been satisfied and this case is concluded. As of July 25, 2014 the appeal in the second case remains pending. In September 2013, an agreement was reached between the parties in the third case and no further appellate review will be taken. Satisfaction of judgment has been filed and this case is concluded. An appeal is pending in the fourth case. The plaintiff in another case was awarded $25 million in punitive damages in a retrial ordered by an appellate court in which the jury was permitted to consider only the amount of punitive damages to award. Defendant’s appeal of the judgment in this case remains pending. Juries found in favor of the defendants in the five other trials. Three of these five cases have concluded. Plaintiffs in two of the cases did not pursue appeals. Plaintiff in the third case noticed an appeal, which was affirmed in February 2013, and then did not seek any further review. Plaintiff in the fourth case filed a notice of appeal to the Alaska Supreme Court from the order denying plaintiff’s motion for a new trial and that appeal remains pending. The plaintiff in the fifth case filed a motion for a new trial, which was denied in August 2013. This case is currently on appeal.

In rulings addressing cases tried in earlier years, some appellate courts have reversed verdicts returned in favor of the plaintiffs in whole or in part, 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 fifteen individual cases since 2001. Punitive damages were paid to the smokers in six of these cases. Neither Lorillard Tobacco nor Lorillard, Inc. was a party to any of these matters.

Trial is underway in the case of Major v. R.J. Reynolds Tobacco, et al. (California Superior Court, Los Angeles County). Lorillard Tobacco is the sole remaining defendant in this case.

As of July 25, 2014, there were no cases scheduled for trial in the remainder of 2014. 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 Tobacco’s payment to these two individuals, including interest, totaled approximately $3 million.

The Florida Supreme Court’s 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 jury’s 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.

Engle Progeny Cases are pending in various Florida state and federal courts. 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 have also brought derivative claims. In 2011, approximately 500 cases that were among the 4,400 cases severed into separate lawsuits in 2009, filed by family members of alleged former class members, were combined with the cases filed by the smoker from which the family members’ claims purportedly derived. On August 1, 2013, Judge William G. Young of the District of Massachusetts took over responsibility for the Engle cases in the Middle District of Florida, Jacksonville Division. Judge Young issued an order that day that called for three groups of cases to be prepared for trial on the following schedule: approximately 50 cases to be made trial ready by January 2, 2014, approximately 107 cases to be made trial ready by May 2014, and approximately 120 cases to be made trial ready by September 2, 2014. On January 17, 2014, Judge Young issued an order calling for an additional three groups of cases to be prepared for trial on the following schedule: approximately 200 cases to be made trial ready by January 2, 2015, approximately 150 cases to be made trial ready by April 1, 2015, and approximately 150 cases to be made trial ready by July 1, 2015. On April 15, 2014, the Court granted a motion to withdraw filed by counsel for plaintiffs in 49 of the cases that are to be made trial ready pursuant to the Court’s January 17, 2014 order. The plaintiffs in these 49 cases have six months to come forward in order to avoid dismissal. On June 23, 2014, Judge Young issued an order calling for an additional three groups of cases to be prepared for trial on the following schedule: approximately 146 cases to be made trial ready by January 4, 2016, approximately 144 cases to be made trial ready by May 1, 2016, and approximately 139 cases to be made trial ready by September 1, 2016. Since the issuance of these three orders, 226 of the cases to be prepared for trial have been dismissed in their entirety, and Lorillard Tobacco has been dismissed from an additional 49 cases involving other defendants. These cases have either been voluntarily dismissed or resolved.

Since January 2010 and through July 25, 2014, the United States District Court for the Middle District of Florida has dismissed a total of approximately 3,489 cases. In some instances, the plaintiffs whose cases were dismissed also were pursuing cases pending in other courts. In other instances, the attorneys who represented the plaintiffs asked the court to enter dismissal orders because they were no longer able to contact their clients. In January 2013, the Court granted a motion by defendants and dismissed approximately 520 cases in which the plaintiffs were deceased at the time their personal injury lawsuits were filed. Plaintiffs appealed the dismissal of these 520 cases to the United States Court of Appeal for the Eleventh Circuit, and as of July 25, 2014, this appeal remains pending. In June 2013, the Court dismissed an additional approximately 440 cases for a variety of reasons. Plaintiffs have appealed the dismissal of approximately 70 of these cases, in which the plaintiffs were deceased at the time their personal injury lawsuits were filed or where the cases were barred by the statute of limitations. The Court granted plaintiffs’ motion to consolidate the appeals from the January and June orders dismissing these groups of federal cases. On June 5, 2014, the Court heard oral argument on these consolidated appeals. On July 7, 2014, Plaintiffs filed a notice of appeal to the United States Court of Appeals for the Eleventh Circuit from an order dismissing 14 cases for failure to produce signed authorizations. Other courts, including state courts, have entered orders dismissing additional cases.

Various intermediate state and federal Florida appellate courts have issued rulings that address the scope of the preclusive effect of the findings from the first phase of the Engle trial, including whether those findings relieve plaintiffs from the burden of proving certain legal elements of their claims. The Florida Supreme Court granted review in the Douglas case, in which a verdict awarding compensatory damages to the plaintiff was affirmed by an intermediate state Florida appellate court, to address the issue of whether a tobacco manufacturer’s due process rights are violated by reliance upon the Engle Phase I findings. On March 14, 2013, the Florida Supreme Court ruled that application of the Engle Phase I findings to establish certain elements of plaintiffs’ claims is not a violation of the Engle defendants’ due process rights. In order to prevail on either strict liability or negligence claims, the Court found that an Engle plaintiff must establish (i) membership in the Engle class; (ii) that addiction to smoking the Engle defendants’ cigarettes containing nicotine was a legal cause of the injuries the plaintiff alleged; and (iii) damages. On August 12, 2013, defendants filed a petition with the United States Supreme Court seeking review of the Florida Supreme Court’s decision. This petition for review was denied on October 7, 2013. The due process issue was also on appeal in the United States Court of Appeals for the Eleventh Circuit in two cases that had been consolidated for appeal: Duke and Walker. On September 6, 2013, the United States Court of Appeals for the Eleventh Circuit affirmed the verdicts in these cases, holding that the judgment of the Florida Supreme Court in Douglas should be given full faith and credit, and that deference to the decision in Douglas did not violate the due process rights of the defendant. The defendant filed a petition for rehearing of the decision in Duke and Walker with the United States Court of Appeals for the Eleventh Circuit in October 2013. On October 31, 2013, the United States Court of Appeals for the Eleventh Circuit vacated and reconsidered its original opinion. The Court entered a new opinion that is substantively similar to the original opinion. On November 7, 2013, the Court denied defendant’s petition for rehearing. On November 13, 2013, the defendant filed a second petition, seeking review of the October 31, 2013 opinion. On January 6, 2014, the Court denied this petition. On March 28, 2014, the defendant in Duke and Walker filed a petition with the United States Supreme Court seeking to answer the question of whether the Engle Phase I findings can be applied to establish certain elements of plaintiffs’ claims. On the same date, defendants filed similar petitions in the Brown case (an appeal from a Florida state court trial), as well as in eight other state court cases, including two cases in which Lorillard Tobacco is a defendant (Mrozek and Sury). The defendants requested that these petitions be held pending disposition of the Duke, Walker, and Brown cases, and resolved in a similar manner. On June 9, 2014, the United States Supreme Court declined to accept review of the Duke and Walker cases. On the same date, the United States Supreme Court declined to accept review of the Brown case and the eight other state court cases, including Mrozek and Sury, discussed below.

Various courts, including appellate courts, have issued rulings that have addressed the conduct of the cases prior to trial. One intermediate Florida state appellate court ruled in 2011 that plaintiffs are permitted to assert a claim against a cigarette manufacturer even if the smoker did not smoke a brand produced by that manufacturer. Defendants’ petition for review of this decision by the Florida Supreme Court was denied in August 2012. In March 2012, another intermediate state appellate court agreed with the 2011 ruling and reversed dismissals in a group of cases. In June and July 2013, the Florida Supreme Court denied defendants’ petitions for review of the intermediate appellate court’s decision in these cases. These rulings may limit the ability of the defendants, including Lorillard Tobacco and Lorillard, Inc., to be dismissed from cases in which smokers did not use a cigarette manufactured by Lorillard Tobacco. In October 2012, the Florida First District Court of Appeal affirmed a judgment awarding compensatory damages only, however the appeals court certified to the Florida Supreme Court the question of whether Engle class members may pursue an award of punitive damages based on claims of negligence or strict liability. On February 28, 2014 the Florida Supreme Court announced it would grant review of this case. In June 2013, the Florida Supreme Court reversed an intermediate state appellate court and held that a plaintiff’s representative may continue to litigate an existing lawsuit after the original plaintiff has died. Defendants did not seek further review of this decision. In December 2013, the Florida First District Court of Appeal affirmed the summary judgments in favor of the defendants regarding three plaintiffs who had opted out of the Engle class and subsequently reapplied for admission. The Court held that the Florida Supreme Court’s decision in Engle did not provide any basis for the readmission of a former class member in the event that they had timely opted out of the class and did not initiate an individual action until after the statute of limitations had run. Lorillard Tobacco was a defendant in two of these cases.

In connection with the Engle Progeny Cases, Lorillard and various other tobacco manufacturing defendants face various other legal issues that could materially affect the outcome of the Engle cases. These legal issues include, but are not limited to, the application of the statute of limitations and statute of repose, the constitutionality of a cap on the amount of a bond necessary to obtain an automatic stay of a post-trial judgment, whether a judgment based on a claim of intentional conduct should be reduced by a jury’s findings of comparative fault, whether damages can be awarded jointly and severally, and whether plaintiffs’ strict liability and negligence claims are preempted by federal law. Various intermediate Florida appellate courts and Florida Federal Courts have issued rulings on these issues.

Lorillard Tobacco and Lorillard, Inc. are defendants in Engle Progeny Cases that have been placed on courts’ 2014 and 2015 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 in 2014. It also is not possible to predict whether some courts will implement procedures that consolidate multiple Engle Progeny Cases for trial.

As of July 25, 2014, trial was underway in one Engle Progeny Case in which Lorillard Tobacco is a defendant: Harris v. R.J. Reynolds Tobacco Company, et al. (Federal Court, Middle District, Florida). Lorillard, Inc. is not a defendant in this trial.

As of July 25, 2014, verdicts had been returned in seventeen Engle Progeny Cases in which Lorillard Tobacco was a defendant. Lorillard, Inc. was a defendant in one of these seventeen cases at the time of verdict. Juries awarded compensatory damages to the plaintiffs in twelve of these cases. In four of the twelve cases in which juries awarded compensatory damages, plaintiffs were awarded punitive damages from Lorillard Tobacco. In another case, the court entered an order following trial that awarded plaintiff compensatory damages. The seventeen cases in which Lorillard Tobacco was a defendant are listed below in the order in which the verdicts were returned:

• In Rohr v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, Seventeenth Judicial Circuit, Broward County, Florida), a jury returned a verdict in favor of the defendants, including Lorillard Tobacco, in October 2010. 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 plaintiff a total of $6 million in compensatory damages and $11.3 million in punitive damages, in March 2011. The jury apportioned 35% of the fault for the smoker’s injuries to the smoker and 65% to Lorillard Tobacco. The final judgment entered by the trial court reflected the jury’s verdict and awarded plaintiff $3,900,588 in compensatory damages and $11,300,000 in punitive damages plus the applicable statutory rates of annual interest. In December 2012, the Florida First District Court of Appeal affirmed the final judgment awarding compensatory and punitive damages and Lorillard Tobacco’s motion for rehearing of the appellate court opinion was denied in February 2013. In March 2013, Lorillard Tobacco filed a notice with the Florida Supreme Court seeking review of the appellate court decision. On February 13, 2014, the Florida Supreme Court declined to grant review of this case. In March 2014, Lorillard Tobacco amended the bond necessary to maintain a stay on payment of the final judgment. On March 28, 2014, Lorillard Tobacco filed a petition with the United States Supreme Court, seeking review of the due process issue, and requested that the petition be held and resolved in the same manner as the Duke, Walker, and Brown cases, also pending before the United States Supreme Court. On June 9, 2014, the United States Supreme Court denied the petitions seeking review. The trial court announced on June 25, 2014 that it had granted Lorillard Tobacco’s motion to determine the applicable rates of post-judgment interest that were in dispute. On June 27, 2014, Lorillard Tobacco made a payment of $17,500,197 to satisfy the final judgment awarding compensatory and punitive damages and post-judgment interest. On July 23, 2014, plaintiff filed a satisfaction of judgment. The Florida First District Court of Appeal provisionally granted plaintiff’s motion for intermediate appellate court attorneys’ fees, ruling that the trial court is authorized to award appellate fees if the trial court determines entitlement to attorneys’ fees. In June 2013, the trial court granted plaintiff’s motion for entitlement to trial court attorneys’ costs and fees and also determined that plaintiff was entitled to intermediate appellate court attorneys’ fees. As of July 25, 2014, the trial court had not determined the amount of trial court or intermediate appellate court fees to award. On November 18, 2013, plaintiff filed a motion with the Florida Supreme Court seeking attorneys’ fees in connection with the appeal to the Florida Supreme Court. On February 3, 2014, the Florida Supreme Court provisionally granted plaintiff’s motion for attorney fees in the amount of $2,500, conditioned on the trial court’s determination of entitlement.

• In Tullo v. R.J. Reynolds, et al. (Circuit Court, Fifteenth Judicial Circuit, Palm Beach County, Florida), the jury awarded plaintiff a total of $4.5 million in compensatory damages, in April 2011. 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. The court entered a final judgment that awarded plaintiff $225,000 in compensatory damages from Lorillard Tobacco plus 6% annual interest. Defendants noticed an appeal from the final judgment to the Florida Fourth District Court of Appeal. In August 2013, the Florida Fourth District Court of Appeal affirmed the final judgment. Defendants filed a notice with the Florida Supreme Court seeking review of the appellate court decision. On March 10, 2014, the trial court entered an order confirming that Lorillard Tobacco had satisfied the judgment awarding compensatory damages and post-judement interest for an amount totaling approximately $263,400. On March 18, 2014, Lorillard Tobacco filed a notice of voluntary dismissal of their petition seeking review of the Florida Supreme Court and the Court entered an order dismissing the petition for review as to Lorillard Tobacco on May 21, 2014. The appeal remains pending as to the other defendants. The Florida Fourth District Court of Appeal provisionally granted plaintiff’s motion for appellate attorneys’ fees, ruling that the trial court is authorized to award appellate fees if the trial court determines entitlement to attorneys’ fees. As of July 25 2014, the trial court had not determined the amount of trial court costs or appellate court fees to award.

• In Sulcer v. Lorillard Tobacco Company, et al. (Circuit Court, First Judicial Circuit, Escambia County, Florida), in April 2011, the jury awarded $225,000 in compensatory damages to the plaintiff and it assessed 95% of the fault for the smoker’s injuries to the smoker with 5% allocated to Lorillard Tobacco. The jury returned a verdict for Lorillard Tobacco as to whether plaintiff is entitled to punitive damages. The court entered a final judgment that incorporated the jury’s determination of the parties’ fault and awarded plaintiff $11,250 in compensatory damages. Lorillard Tobacco paid approximately $246,000 to resolve the verdict, costs and fees, as well as all post-trial motions and any potential appeal by the plaintiff. Following this payment, Sulcer was concluded.

• In Jewett v. R.J. Reynolds Tobacco Co., et al. (Circuit Court, Fourth Judicial Circuit, Duval County, Florida), the jury awarded the estate of the decedent $692,981 in compensatory damages and awarded the plaintiff $400,000 for loss of companionship in May 2011. The jury assessed 70% of the responsibility for the decedent’s injuries to the decedent, 20% to R.J. Reynolds and 10% to Lorillard Tobacco. The jury returned a verdict for the defendants regarding whether punitive damages were warranted. The final judgment entered by the trial court reflected the jury’s verdict and awarded plaintiff a total of $109,298 from Lorillard Tobacco plus 6% annual interest. In June 2012, an agreement was reached between the parties as to the amount of trial court costs and attorneys’ fees incurred, should the judgment be upheld on appeal, and plaintiff’s motion for costs and attorneys’ fees was withdrawn. In November 2012, the Florida First District Court of Appeal reversed the judgment awarding compensatory damages and ordered the case returned to the trial court for a new trial. In January 2013, the appellate court denied a motion filed by the plaintiff for rehearing of the decision reversing the judgment. Both the plaintiff and defendants filed notices with the Florida Supreme Court seeking review of the appellate court decision. On February 14, 2014, the Florida Supreme Court declined to grant review of this case.

• In Weingart v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, Fifteenth Judicial Circuit, Palm Beach County, Florida), in July 2011, the jury determined that the decedent did not sustain any compensatory damages from the defendants, including Lorillard Tobacco, and it returned a verdict for the defendants that punitive damages were not warranted. The jury assessed 91% of the fault for the decedent’s injuries to the decedent, 3% to Lorillard Tobacco and 3% to each of the other two defendants. Following trial, the court granted in part a motion filed by the plaintiff to award damages and it awarded plaintiff $150,000 in compensatory damages. The court entered a final judgment that applied the jury’s comparative fault determinations to the court’s award of compensatory damages. The final judgment awarded plaintiff $4,500 from Lorillard Tobacco. Defendants noticed an appeal to the Florida Fourth District Court of Appeal from the order that awarded compensatory damages to the plaintiff and amended their notice of appeal to address the final judgment. On February 13, 2013, the Florida Fourth District Court of Appeal affirmed the final judgment awarding compensatory damages. Defendants filed a notice with the Florida Supreme Court seeking review of this decision. In March 2012, the trial court entered a judgment against the defendants for costs with Lorillard Tobacco’s share amounting to $43,081 plus 4.75% annual interest. Defendants noticed an appeal from this costs judgment. In June 2013, all defendants satisfied both the final judgment awarding compensatory damages and the costs judgment, with Lorillard Tobacco’s share amounting to approximately $50,000. Defendants’ petition for Florida Supreme Court review and the appeal from the costs judgment have been dismissed. This case is now concluded.

• In Sury v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, Fourth Judicial Circuit, Duval County, Florida), in November 2011, the jury awarded plaintiff $1,000,000 in compensatory damages and assessed 60% of the responsibility for the decedent’s injuries to the decedent, 20% to Lorillard Tobacco and 20% to R.J. Reynolds. The jury returned a verdict for the defendants regarding whether punitive damages were warranted. In March 2012, the court entered a final judgment against defendants in the amount of $1,000,000, jointly and severally, plus 4.75% annual interest, declining to apply the jury’s comparative fault findings to causes of action alleging intentional conduct. On June 24, 2013, the Florida First District Court of Appeal affirmed the final judgment. Lorillard Tobacco’s motion for rehearing of this decision with the Florida First District Court of Appeal was denied in August 2013. The Florida Supreme Court declined review of the intermediate appellate court decision in January 2014. On March 28, 2014, Lorillard Tobacco filed a petition with the United States Supreme Court, seeking review of the due process issue, and requested that the petition be held and resolved in the same manner as the Duke, Walker, and Brown cases, also pending before the United States Supreme Court. On June 9, 2014, the United States Supreme Court denied the petitions seeking review. On June 19, 2014, Lorillard Tobacco made a payment of $1,659,674 to satisfy the final judgment awarding compensatory damages plus post judgment interest, trial level attorneys’ fees and costs, and Florida Supreme Court fees. Plaintiff filed a satisfaction of judgment on July 14, 2014. In June 2013, the First District Court of Appeal determined that plaintiff was entitled to attorneys’ fees in connection with the appeal to the First District Court of Appeal and directed the trial court to determine the amount. As of July 25, 2014, the trial court had not determined the amount.

• In Alexander v. Lorillard Tobacco Company, et al . (Circuit Court, Eleventh Judicial Circuit, Miami-Dade County, Florida), the jury awarded plaintiff $20,000,000 in compensatory damages and $25,000,000 in punitive damages in February and March 2012. Lorillard Tobacco is the only defendant in this case. The jury apportioned 20% of the fault for the smoker’s injuries to the smoker and 80% to Lorillard Tobacco. In March 2012, the court entered a final judgment that applied the jury’s comparative fault determination to the court’s award of compensatory damages, awarding the plaintiff $16,000,000 in compensatory damages and $25,000,000 in punitive damages from Lorillard Tobacco. In May 2012, the court granted a motion by Lorillard Tobacco to lower the amount of compensatory damages and reduced the amount awarded to $10,000,000 from Lorillard Tobacco. Other post-trial motions challenging the verdict were denied. The court entered an amended final judgment that applied the jury’s comparative fault determination to the court’s award of compensatory damages, awarding the plaintiff $8,000,000 in compensatory damages and $25,000,000 in punitive damages. The court also awarded plaintiff post-judgment interest (based on a statutory rate) on the compensatory and punitive damages, which totaled approximately $3.7 million as of July 25, 2014. Lorillard Tobacco noticed an appeal from the amended final judgment to the Florida Third District Court of Appeal. On September 4, 2013, the Florida Third District Court of Appeal affirmed the amended final judgment. Lorillard Tobacco’s motion for rehearing of this decision with the Florida Third District Court of Appeal was denied in October 2013. On November 27, 2013, Lorillard Tobacco filed a petition with the Florida Supreme Court seeking review of the intermediate appellate court decision. As of July 25, 2014, the Florida Supreme Court had not announced whether it would grant review of this case. In September 2012, an agreement was reached between the parties as to the amount of trial costs and attorneys’ fees incurred, should the judgment be upheld on appeal. In September 2013, the Florida Third District Court of Appeal determined that plaintiff was entitled to intermediate appellate court attorneys’ fees in connection with the appeal to the Florida Third District Court of Appeal and directed the trial court to determine the amount. As of July 25, 2014, the trial court had not determined the amount of such attorneys’ fees to award. On January 3, 2014, the plaintiff filed a motion with the Florida Supreme Court seeking appellate attorneys’ fees in connection with the appeal to the Florida Supreme Court. As of July 25, 2014, the Florida Supreme Court had not ruled on this motion.

• In Calloway v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, Seventeenth Judicial Circuit, Broward County, Florida), the jury awarded plaintiff and a daughter of the decedent a total of $20,500,000 in compensatory damages in May 2012. The jury apportioned 20.5% of the fault for the smoker’s injuries to the smoker, 27% to R.J. Reynolds, 25% to Philip Morris, 18% to Lorillard Tobacco, and 9.5% to Liggett. The jury awarded $12,600,000 in punitive damages from Lorillard Tobacco and $42,250,000 from the other defendants, for a total punitive damages award of $54,850,000. In August 2012, the court granted a post-trial motion by the defendants and lowered the compensatory damages award to $16,100,000. The court also ruled that the jury’s finding on the plaintiff’s percentage of comparative fault would not be applied to reduce the compensatory damage award because the jury found in favor of the plaintiff on her claims alleging intentional conduct. In August 2012, the court entered final judgment against defendants in the amount of $16,100,000 in compensatory damages, jointly and severally, and $54,850,000 ($12,600,000 from Lorillard Tobacco) in punitive damages. The court also awarded plaintiff post-judgment interest (based on a statutory rate) on the compensatory and punitive damages, which totaled approximately $1.6 million as of July 25, 2014 based on the jury-apportioned fault for Lorillard Tobacco. The final judgment also granted plaintiff’s application for trial court costs and attorneys’ fees, but as of July 25, 2014, the trial court had not awarded an amount. Defendants have noticed an appeal from the final judgment to the Florida Fourth District Court of Appeal. On March 31, 2014, plaintiff filed a motion with the Florida Fourth District Court of Appeal seeking attorneys’ fees in connection with the appeal to the Fourth District. As of July 25, 2014, the Florida Fourth District Court of Appeal had not ruled on this motion.

• In Evers v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, Thirteenth Judicial Circuit, Hillsborough County, Florida), the jury awarded plaintiff and the estate of the decedent a total of $3,230,000 in compensatory damages in February 2013. The jury apportioned 31% of the fault for the smoker’s injuries to the smoker, 60% to R.J. Reynolds and 9% to Lorillard Tobacco. The jury found that punitive damages against Lorillard Tobacco were not warranted and awarded $12,362,042 in punitive damages from R.J. Reynolds Tobacco Company. The Court granted a post-trial motion by R.J. Reynolds for a directed verdict on punitive damages and, as a result, the jury’s punitive damages award was set aside. The Court denied a motion filed by the plaintiff to reconsider the directed verdict. At a post-trial hearing, the plaintiff waived entitlement to the jury’s loss of services award which amounted to $280,000 of the total compensatory damages award. In May 2013, the court entered a final judgment that applied the jury’s comparative fault determinations and awarded plaintiff and the estate of the decedent $2,035,500 in compensatory damages ($265,500 from Lorillard Tobacco), plus the statutory rate of interest. Plaintiff and defendants have both appealed the final judgment to the Florida Second District Court of Appeal. Plaintiff also filed a motion for entitlement to trial attorneys’ fees and costs. As of July 25, 2014, the trial court had not ruled on this motion. On May 23, 2014, plaintiff filed a motion with the Florida Second District Court of Appeal seeking attorneys’ fees in connection with the appeal to the Second District. As of July 25, 2014, the Florida Second District Court of Appeal had not ruled on this motion.

• In Cohen v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, Fifteenth Judicial Circuit, Palm Beach County, Florida), the jury awarded plaintiff and the estate of the decedent a total of $2,055,050 in compensatory damages in May 2013. The jury apportioned 40% of the fault for the smoker’s injuries to the smoker, 30% to R.J. Reynolds, 20% to Lorillard Tobacco, and 10% to Liggett. The jury found that punitive damages were not warranted against any of the defendants. On May 6, 2013, the Court entered final judgment against defendants in the amount of $1,233,030 ($411,010 from Lorillard Tobacco) plus 4.75% annual interest. On July 10, 2013, the Court entered an order granting defendants’ motion for a new trial based on the plaintiff’s improper arguments during closing. This order effectively vacated the final judgment. Plaintiff and defendants have both appealed the order granting the motion for new trial to the Florida Fourth District Court of Appeal. Plaintiff’s petition with the Florida Fourth District Court of Appeal seeking to disqualify the trial court judge from further consideration of this case was denied in November 2013, and a second petition seeking to disqualify the trial judge, filed in January 2014, was also subsequently denied.

• In LaMotte v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, First Judicial Circuit, Escambia County, Florida), the jury returned a verdict in favor of the defendants in May 2013. The Court entered final judgment in favor of the defendants in May 2013. Plaintiff has agreed to waive any post-trial or appellate review of the verdict and judgment, and defendants have agreed not to seek to recover costs or fees. This case is concluded.

• In Ruffo v. R.J. Reynolds Tobacco Company, et al . (Circuit Court, Eleventh Judicial Circuit, Miami-Dade County, Florida), the jury awarded plaintiff $1,500,000 in compensatory damages in May 2013. The jury apportioned 85% of the fault for the smoker’s injuries to the smoker, 12% to Philip Morris, and 3% to Lorillard Tobacco. Defendants’ post-trial motions challenging the verdict were denied. On October 4, 2013, the Court entered a final judgment against defendants that applied the jury’s comparative fault determinations and awarded plaintiff $225,000 in compensatory damages ($45,000 from Lorillard Tobacco) plus the statutory rate of interest, which is currently 4.75%. Defendants noticed an appeal from the final judgment to the Florida Third District Court of Appeal. On May 12, 2014, the trial court entered an order confirming that Lorillard Tobacco had satisfied the judgment awarding compensatory damages and post-judgment interest for an amount totaling $46,857. On May 9, 2014, the Florida Third District Court of Appeal entered an order recognizing Lorillard Tobacco’s voluntary dismissal of their appeal to the final judgment. The appeal remains pending as to Philip Morris. Plaintiff filed a motion with the trial court seeking entitlement to attorneys’ costs and fees. In April 2014, the trial court denied this motion. Plaintiff has filed a notice of appeal to the Florida Third District Court of Appeal from the order denying attorneys’ fees and costs.

• In Gafney v. R.J. Reynolds Tobacco Company, et al. (Circuit Court, Fifteenth Judicial Circuit, Palm Beach County, Florida), the jury awarded plaintiff a total of $5,800,000 in compensatory damages in September 2013. The jury apportioned 34% of the fault for the smoker’s injuries to the smoker, 33% to R.J. Reynolds, and 33% to Lorillard Tobacco. Lorillard, Inc. was also a defendant in this trial but damages and comparative fault were not assessed separately for Lorillard, Inc. Because the jury found in favor of the defendants on the claims alleging intentional conduct, the plaintiff was not entitled to punitive damages. On September 26, 2013, the Court entered a final judgment that applied the jury’s comparative fault determinations and awarded the plaintiff a total of $3,828,000 in compensatory damages ($1,914,000 from Lorillard Tobacco), plus the statutory rate of interest. Defendants’ post-trial motions challenging the verdict were denied in November 2013. Defendants have noticed an appeal from the final judgment to the Florida Fourth District Court of Appeal. Plaintiff has filed a motion with the trial court seeking entitlement to attorneys’ fees and costs. As of July 25, 2014, the trial court had not ruled on this motion.

• In Jacobson v. R.J. Reynolds Tobacco Company, et al. (Federal Court, Southern District, Florida), the jury returned a verdict in favor of the defendants on October 29, 2013. The Court entered final judgment in favor of the defendants on October 30, 2013. Plaintiff filed a motion for new trial which was denied in January 2014. On February 10, 2014, the Court entered an order granting Lorillard’s motion for attorneys’ fees and costs. Lorillard has agreed not to enforce its right to fees and costs in exchange for plaintiff’s agreement not to pursue an appeal of the verdict. This case is concluded.

• In Chamberlain v. R. J. Reynolds Tobacco Company, et al. (Federal Court, Middle District, Jacksonville, Florida) the jury returned a verdict in favor of the defendants on November 15, 2013. The Court entered final judgment in favor of the defendants on November 20, 2013. Plaintiff’s motion for new trial was denied on April 25, 2014. On June 27, 2014, plaintiff filed a notice of appeal from the final judgment with the 11th Circuit Court of Appeals.

• In Burkhart v. R.J. Reynolds Tobacco Company, et al. (Federal Court, Middle District, Jacksonville, Florida), the jury awarded plaintiff a total of $5,000,000 in compensatory damages on May 15, 2014. The jury apportioned 50% of the fault for the smoker’s injuries to the smoker, 25% to R.J. Reynolds, 15% to Philip Morris, and 10% to Lorillard Tobacco. The jury awarded $500,000 in punitive damages from Lorillard Tobacco and $2,000,000 from the other defendants for a total punitive damages award of $2,500,000. The Court ruled that the jury’s finding on the plaintiff’s percentage of comparative fault would not be applied to reduce the compensatory damage award because the jury found in favor of the plaintiff on her claims alleging intentional conduct. On June 11, 2014, the Court entered a final judgment against defendants in the amount of $5,000,000 in compensatory damages, jointly and severally, and $2,500,000 ($500,000 from Lorillard Tobacco) in punitive damages, plus the statutory rate of interest. Defendants have filed post-trial motions challenging the verdict. As of July 25, 2014, the Court had not ruled on these motions. The final judgment also granted plaintiff entitlement to trial court costs, but as of July 25, 2014, the trial court had not awarded an amount. On June 25, 2014, plaintiff filed a motion for attorneys’ fees and costs. As of July 25, 2014, the Court had not ruled on this motion.

As of July 25, 2014, verdicts have been returned in 113 Engle Progeny trials 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 34 of the trials. In 33 of those 34 trials, the amount of punitive damages awarded have totaled approximately $727.5 million and ranged from $20,000 to $244 million. In July 2014, punitive damages of $23.6 billion were awarded in one of these cases. As of July 25, 2014, this award was subject to challenge through post-trial motions and the appellate process. In 34 of the trials, juries’ awards were limited to compensatory damages. In the 45 remaining trials, juries found in favor of the defendants. Post-trial motions challenging the verdicts in some cases and appeals from final judgments in some cases are pending before various Florida circuit and intermediate appellate courts. As of July 25, 2014, one verdict in favor of the defendants and three verdicts in favor of the plaintiff have been reversed on appeal and returned to the trial court for a new trial on all issues. In ten cases, the appellate courts have ruled that the issue of damages awarded must be revisited by the trial court. Motions for rehearing of these appellate court rulings are pending in some cases.

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. The plaintiffs in some cases challenged the constitutionality of the amended statute. These motions were denied, withdrawn or declared moot. In January 2012, the Florida Supreme Court agreed to review one of the orders denying a challenge to the amended statute. In August 2012, the Florida Supreme Court dismissed the appeal as moot because the defendant had satisfied the judgment.

West Virginia Individual Personal Injury Cases

The West Virginia Individual Personal Injury Cases (the “IPIC Cases”) are brought in a single West Virginia court by individuals who allege cancer or other health effects caused by smoking cigarettes, smoking cigars, or using smokeless tobacco products. Approximately 600 IPIC 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 IPIC Cases may be consolidated for trial with this group. The court has entered a trial plan for the IPIC Cases that calls for a multi-phase trial.

In September 2000, there were approximately 1,250 IPIC 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 were consolidated for a multi-phase trial. Approximately 645 IPIC Cases were dismissed in their entirety. Lorillard Tobacco has been dismissed from approximately 565 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. As of July 25, 2014, Lorillard Tobacco is a defendant in 31 of the pending IPIC Cases. Lorillard, Inc. is not a defendant in any of the IPIC Cases.

The first phase of the consolidated trial began April 15, 2013, and ended with a Phase I verdict returned by the jury on May 15, 2013. In its verdict, the jury found against plaintiffs on their claims for design defect, negligent design, failure to warn, intentional concealment and breach of express warranty. The jury found for plaintiffs on their claim that all ventilated filter cigarettes manufactured and sold by the defendants between 1964 and July 1, 1969 were defective because of a failure to instruct, but found that defendants’ conduct was not willful or wanton. In pleadings filed before trial, no plaintiff in a pending IPIC Case claims to have smoked a ventilated filtered cigarette manufactured and sold by Lorillard Tobacco between 1964 and July 1, 1969.

On September 16, 2013, the court entered a judgment on the jury’s Phase I verdict and entered a separate order denying the parties’ post-trial motions. Plaintiffs filed a motion to alter or amend the judgment on September 24, 2013. In a telephone conference on October 7, 2013 (memorialized in an order entered October 28, 2013), the court informed the parties that, on its own authority, it was vacating the September 16, 2013 judgment and order. On October 28, 2013, the court entered a new judgment and order. The judgment recited that: 1) ventilated filter cigarettes the defendants manufactured and sold between 1964 and July 1, 1969, were found to be defective due to a failure to instruct consumers as to their use; 2) all other cigarettes manufactured and sold by defendants were not found to be defective; 3) defendants’ conduct did not justify an award of punitive damages; 4) the claims of the individual plaintiffs remain to be decided consistent with the Phase I verdict, and 5) there is no just reason for delay in permitting any appellate rights of the parties to be perfected as to the verdict rendered and this order. The order: 1) denied the parties’ post-trial motions; 2) entered final judgments against the plaintiffs in the approximately 645 IPIC cases that were dismissed before trial; and 3) stated that those dismissal orders are now final and available for the proper application of the appellate process.

On November 26, 2013, plaintiffs filed a notice of appeal from the October 28 judgment and order in the Supreme Court of Appeals of West Virginia. The defendants did not file a separate notice of appeal. On April 2, 2014, plaintiffs perfected their appeal by filing their brief and appendix. Defendants filed their brief on June 16, 2014. Plaintiffs served their reply brief on July 2, 2014.

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 30 plaintiffs. Twenty-eight 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 were included in 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 was included 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.

As of July 25, 2014, 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 was scheduled for trial as of July 25, 2014.

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 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 plaintiff’s 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 Tobacco’s share of the judgment in this matter, including interest, was approximately $60,000.

As of July 25, 2014, none of the Flight Attendant Cases were scheduled for trial.

Class Action Cases

Lorillard Tobacco but not Lorillard Inc. is a defendant in the one pending Class Action Case, in which plaintiffs seek class certification on behalf of groups of cigarette smokers, or the estates of deceased cigarette smokers, who reside in West Virginia. There has been no substantive activity in this case since February 2001.

Cigarette manufacturers, including Lorillard Tobacco, have defeated motions for class certification in a number of cases. 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. On December 17, 2013, in Caronia, et al. v. Philip Morris USA, the New York Court of Appeals, answering a question certified to it by the United States Court of Appeals for the Second Circuit, held that current or former smokers that have not been diagnosed with a smoking-related disease could not pursue an independent cause of action for medical monitoring under New York law.

“Lights” Class Action Cases. Neither Lorillard Tobacco nor Lorillard, Inc. is a defendant in the approximately 17 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 these cases, Craft v. Philip Morris USA (Circuit Court, City of St. Louis, Missouri, filed February 29, 2000), trial began in September 2011. In November 2011, the court ordered a mistrial when the jury was unable to reach a verdict. The retrial of this case commenced January 6, 2014, but was continued to a date to be determined in 2015. In another 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 Commission’s 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 (the “MDL cases”). The court denied plaintiffs’ motion for class certification filed in four of the MDL Cases, and a federal appellate court declined to review the class certification order. Following the appellate court’s ruling, plaintiffs dismissed thirteen of the MDL Cases, including Good v. Altria Group, Inc., et al. In April, 2012, the Judicial Panel on Multidistrict Litigation entered an order transferring the four MDL cases that remained pending to the courts in which each originated. On September 23, 2013, in the “Lights” Class Action Case Brown v. The American Tobacco Company, Inc., et al. (Superior Court, San Diego County, California), the Court issued a Statement of Decision that granted judgment in favor of the defendant. The Court held that the defendant misrepresented the health benefits of its “light” cigarette but that plaintiffs were not entitled to restitution or injunctive relief. Final judgment was entered in favor of the defendant on October 15, 2013. In December 2013, plaintiffs filed a notice of appeal of the final judgment, and the appeal remains pending. On April 29, 2014, in the “lights” Class Action Case Price, et al v. Philip Morris Incorporated (Circuit Court, Madison County, Illinois), the Fifth Judicial District of the Appellate Court of Illinois reversed the trial court’s denial of plaintiffs’ petition for relief from judgment and reinstated a 2003 verdict awarding damages. The defendant in this case has filed a petition for leave to appeal in the Supreme Court of Illinois.

Reimbursement Cases

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 government’s 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 “onserts” 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 accrued estimated costs of approximately $20 million in the first quarter of 2013 to comply with the final judgment and remedial order, which was recorded as a charge to selling, general and administrative expenses in 2013. 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 U.S. Court of Appeals for the District of Columbia Circuit. In May 2009, a three judge panel upheld substantially all of the District Court’s 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 court’s judgment on that issue, and to remand the case with instructions to deny as moot the government’s 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. On November 27, 2012, the court entered an order prescribing the language the defendants must include in the corrective statements defendants are to make on their websites and through other media. The court directed the parties to engage in discussions to implement the publication of those statements. On January 25, 2013, defendants appealed the court’s November 27, 2012 order to the U.S. Court of Appeals for the District of Columbia Circuit. On February 25, 2013, the Court of Appeals granted defendants’ unopposed motion to hold the appeal in abeyance pending the district court’s resolution of the issues regarding the implementation of the corrective statements. On January 10, 2014, the parties filed a joint motion requesting that the district court enter a consent order addressing the implementation of the corrective statements remedy. The proposed consent order does not resolve outstanding issues as to corrective statements in retail point-of-sale displays, and it expressly reserves defendants’ right to appeal the district court’s November 27, 2012, order concerning the language of the corrective statements. The parties engaged in lengthy negotiations concerning the implementation of the corrective statements, aided by a special master. In addition, the district court considered amicus briefs on the implementation issue filed by newspapers, broadcasters, and other entities concerned about the manner in which the corrective statements would be implemented. On June 2, 2014, the district court entered a consent order implementing the corrective statements remedy. On June 25, 2014, defendants filed a notice of appeal from the June 2, 2014 order. Under the terms of the June 2, 2014 order, implementation of the corrective statements remedy will not begin until that appeal has been resolved.

The June 2, 2014 order did not resolve outstanding issues as to whether corrective statements must be posted in retail point-of-sale displays. The parties, as well as two retailer trade groups, filed simultaneous supplemental briefs on that issue in the district court on June 4, 2014. Their simultaneous response briefs were filed on June 18, 2014. As of July 25, 2014, the district court had not entered an amended final judgment regarding the point-of-sale displays.

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 asserted 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 government’s and the intervenors’ petitions in June 2010, which effectively disposed of the claim to recover profits in this case.

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 $358 million, $343 million, $644 million and $519 million for the three and six months ended June 30, 2014 and 2013, respectively. Lorillard’s 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, and was required to pay 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”) are seeking from the Settling States an adjustment in the amount of payments for 2003 and subsequent years pursuant to a provision in the MSA that permits such adjustment if it is determined that the MSA was a significant factor in their loss of market share to companies not participating in the MSA and that the Settling States failed to diligently enforce certain statutes passed in connection with the MSA. If the Participating Manufacturers are ultimately successful, any recovery would be in the form of reimbursement of proceeds already paid or as a credit against future payments by the Participating Manufacturers.

On December 17, 2012, the Participating Manufacturers, including Lorillard Tobacco, agreed to settle with 17 states and the District of Columbia and Puerto Rico disputes under the MSA involving payment adjustments relating to nonparticipating manufacturers. The Participating Manufacturers presented the settlement to the arbitration panel responsible for adjudicating the 2003 non-participating manufacturer (“NPM”) adjustment dispute with a request that the panel enter it as a partial settlement and award. On March 12, 2013, the arbitration panel issued a Stipulated Partial Settlement and Award that directed the Independent Auditor under the MSA to implement the settlement provisions involved, thereby allowing the settlement to proceed. Since the panel’s ruling, one additional state joined the settlement on April 12, 2013, two additional states joined the settlement on May 24, 2013, one additional state joined the settlement on June 10, 2014 and one additional state joined the settlement on June 26, 2014.

The settlement resolves the claims for the years 2003 through 2012 and puts in place a new method for calculating this adjustment beginning in 2013. Under the terms of the settlement, Lorillard Tobacco and other Participating Manufacturers will receive credits against their future MSA payments over six years, and the signatory states will be entitled to receive their allocable share of the amounts currently being held in escrow resulting from these disputes. Lorillard Tobacco currently expects to receive credits over six years of approximately $254 million on its outstanding claims, with $165 million having occurred in April 2013, $36 million in April 2014 (including $14 million received in April 2014 related to the 2003 NPM Adjustment award from the two states that joined the settlement in June 2014), and approximately $53 million over the following five years. The estimate is subject to change depending upon a number of factors included in the calculation of the credit.

Based on the terms of the settlement, during the first quarter of 2013 Lorillard Tobacco recorded a reduction in its State Settlements liability and expense of $165 million and reduced its April 15, 2013 MSA Annual Payment by the same amount. The reduction was partially offset by an increase of $21 million in the State Settlements liability and expense related to the industry Volume Adjustment Offset associated with the increase in the industry aggregate operating income under the agreements with the previously settled states. During the second quarter of 2013 Lorillard Tobacco recorded a reduction in its State Settlements liability and expense of $12 million as a result of the two additional states joining the settlement. The reduction was partially offset by an increase of $1 million in the State Settlements liability and expense related to the industry Volume Adjustment Offset associated with the increase in the industry aggregate operating income under agreements with the previously settled states. During the second quarter of 2014 Lorillard Tobacco recorded a reduction in its State Settlements liability and expense of $14 million as a result of the two additional states joining the settlement.

Lorillard Tobacco will continue to pursue these claims against those states that have not settled. Fourteen states that have not joined the settlement have taken action in state court to prevent the settlement from proceeding or to seek other relief related to the settlement. As of July 25, 2014, claims in eleven states remain pending as one state withdrew its opposition and, as noted above, two additional states joined the settlement. Two of the states also unsuccessfully sought to preliminarily enjoin the implementation of the settlement. There is no assurance that such attempts will be resolved favorably to the Company.

On September 11, 2013, the arbitration panel responsible for adjudicating the 2003 NPM adjustment dispute issued a determination that six states failed to diligently enforce escrow provisions applicable to non-participating manufacturers. The six non-diligent states included Indiana, Kentucky, Missouri, New Mexico, Maryland, and Pennsylvania. Nine other states that did not participate in the settlement were considered by the arbitration panel because the OPMs contested their diligence as well. The arbitration panel found those nine states diligent. As a result of the panel’s ruling, the OPMs are entitled to receive $458 million, plus interest and earnings, with Lorillard Tobacco’s share of the principal amount totaling $47 million. The six non-diligent states filed motions in their state courts to vacate the arbitration panel’s non-diligence findings. On March 31, 2014, the MSA Independent Auditor issued final calculations for the April 2014 MSA payments that implement the 2003 NPM Adjustment in that fashion.

On April 10, 2014, the MSA court in Pennsylvania issued its rulings on that state’s motion to vacate the arbitration panel’s rulings with respect to that state. The court upheld the arbitration panel’s non-diligence finding for that state. However, the court also ruled that the states that signed the settlement and had been contested in the 2003 NPM Adjustment arbitration would be deemed non-diligent for purposes of calculating that state’s share of the 2003 NPM Adjustment. The OPMs appealed this ruling. The MSA Independent Auditor on April 14, 2014 issued revised final calculations for the April 2014 MSA payments that implement the Pennsylvania court’s ruling. The ruling was reflected as an increase of $12 million in Lorillard Tobacco’s April 15, 2014 MSA payment. On May 2, 2014, the MSA court in Missouri issued a ruling similar to Pennsylvania, which the OPMs appealed. On June 23, 2014, the MSA Independent Auditor issued revised final calculations for the April 2014 MSA payments that implement the Missouri ruling. The ruling was reflected as an increase in Lorillard Tobacco’s State Settlements liability and expense of $4 million during the second quarter of 2014.

Based on the terms of the award, during the first quarter of 2014 Lorillard Tobacco recorded a reduction in its State Settlements liability and expense of $37 million, recorded $7 million as an increase to investment income related to interest earned on the proceeds from the 2003 NPM Adjustment award, including funds paid into and released from the Disputed Payments Account (“DPA”). The reduction was partially offset by an increase of $6 million in the State Settlements liability and expense related to the industry Volume Adjustment Offset associated with the increase in the industry aggregate operating income under the agreements with the previously settled states.

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 Settling States, challenging the validity of the MSA on certain grounds, including as a violation of the antitrust laws.

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 over 10 years 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 and will be completed in 2014. Lorillard recorded pretax charges for its obligations under the law of $36 million and $64 million for the three and six months ended June 30, 2014 and $36 million and $62 million for the three and six months ended June 30, 2013, respectively. We estimate our remaining cash payments in 2014 under the law will be between $64 million and $65 million.

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, Lorillard’s 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 a predecessor to Lorillard Tobacco for a limited period of time ending more than 50 years ago. As of July 25, 2014, Lorillard Tobacco was a defendant in 65 Filter Cases. Lorillard, Inc. was a defendant in two Filter Cases, including one that also names Lorillard Tobacco. Since January 1, 2012, Lorillard Tobacco has paid, or has reached agreement to pay, a total of approximately $31.7 million in settlements to finally resolve 130 claims. Since January 1, 2012, verdicts have been returned in the following three Filter Cases: McGuire v. Lorillard Tobacco Company and Hollingsworth & Vose Company, tried in the Circuit Court, Division Four, of Jefferson County, Kentucky; Couscouris v. Hatch Grinding Wheels, et al., tried in the Superior Court of the State of California, Los Angeles; and DeLisle v. A.W. Chesterton Company, et al., tried in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida. Pursuant to the terms of a 1952 agreement between P. Lorillard Company and H&V Specialties Co., Inc. (the manufacturer of the filter material), Lorillard Tobacco is required to indemnify Hollingsworth & Vose for legal fees, expenses, judgments and resolutions in cases and claims alleging injury from finished products sold by P. Lorillard Company that contained the filter material. The jury in the McGuire case returned a verdict for Lorillard Tobacco and Hollingsworth & Vose, and the Court entered final judgment in May 2012. On February 14, 2014, the Kentucky Court of Appeals affirmed the final judgment in favor of Lorillard Tobacco and Hollingsworth & Vose and on April 3, 2014, the Court of Appeals denied plaintiff’s petition for rehearing. On May 2, 2014, plaintiff moved for discretionary review in the Kentucky Supreme Court. Lorillard Tobacco filed its responsive brief on May 30, 2014. On October 4, 2012, the jury in the Couscouris case returned a verdict for Lorillard Tobacco and Hollingsworth & Vose, and the court entered final judgment on November 1, 2012. On June 17, 2013, the California Court of Appeal for the Second Appellate District entered an order dismissing the appeal of the final judgment pursuant to plaintiffs’ request, but plaintiffs’ appeal of the cost judgment remained pending. However, plaintiffs abandoned their appeal on June 2, 2014, and on June 4, 2014, the appeal was dismissed. On September 13, 2013, the jury in the DeLisle case found in favor of the plaintiffs as to their claims for negligence and strict liability, and awarded $8 million. Lorillard Tobacco Company is responsible for 44%, or $3.52 million. Judgment was entered on November 6, 2013. Lorillard Tobacco Company filed its notice of appeal on November 18, 2013. Lorillard Tobacco’s initial brief is due on August 25, 2014. As of July 25, 2014, 29 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 and federal 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. All other actions, except for a state court action in 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 November 2010, defendants filed a motion for summary judgment, and plaintiffs filed a cross motion for summary judgment in July 2011. In March 2012, the District Court of Seward County granted the defendants’ motions for summary judgment dismissing the Kansas suit. Plaintiff’s motion for reconsideration was denied. On July 18, 2012, plaintiff filed a notice of appeal to the Court of Appeals for the State of Kansas. Briefing on plaintiff’s appeal was completed and argument in the Court of Appeals was held on December 11, 2013. On July 18, 2014, the Court of Appeals affirmed the dismissal of the suit. As of July 25, 2014, the time period for the plaintiff to file a certiorari petition seeking review of the decision by the Kansas Supreme Court had not expired.

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 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. 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.

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’s 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 three pending product liability cases, each of which are purported Class Action Cases. 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.

Electronic Cigarette Matters

Lorillard, Inc.’s wholly owned subsidiaries – LOEC and Cygnet sell electronic cigarettes primarily in the United States and United Kingdom, respectively. From time to time, LOEC and Cygnet may be subject to legal actions, proceedings and claims arising out of the sale, distribution, manufacture, development, advertising, marketing and/or claimed health effects of electronic cigarettes. Adverse outcomes in these matters could have a material adverse effect on the results of operations and financial condition of the electronic cigarettes business.

On April 7, 2014, LOEC filed a complaint for declaratory judgment of trademark non-infringement against Zippmark, Inc. and certain affiliated entities (“Zippo”) in the United States District Court for the Central District of California. The lawsuit was predicated by Zippo’s decision to file oppositions with the United States Patent and Trademark Office’s Trademark Trial and Appeal Board against LOEC’s applications to register certain trademarks for “blu” and allegations that LOEC infringed several of Zippo’s registered trademarks. On May 19, 2014, Zippo filed an answer and counterclaim for trademark infringement. On June 12, 2014, LOEC filed its answer to Zippo’s counterclaim and filed its own counterclaim seeking to cancel certain Zippo trademarks based on descriptiveness and for false/fraudulent registration. On July 8, 2014, Zippo responded to LOEC’s counterclaim and included a counterclaim in reply seeking to cancel LOEC’s registered mark for “blu eCigs.” As of July 25, 2014, discovery was commenced with a cut-off date set for January 22, 2015. The trial date is scheduled for April 21, 2015.

LOEC is also a defendant in two lawsuits filed on June 22, 2012 and March 5, 2014 by Ruyan Investment (Holdings) Limited and its successor company, Fontem Ventures B.V. (“Fontem”) in the United States District Court for the Central District of California, alleging infringement of certain patents owned by Fontem related to electronic cigarette technology. The first case has been stayed pending proceedings before the United States Patent and Trademark Office.

Each of LOEC and Cygnet believes that it has valid claims and defenses in the pending cases as well as valid bases for appeal should any adverse verdicts be returned against either of them. It is not possible to predict the outcome of any of this litigation, which is subject to many uncertainties. It is possible that one or more of the pending actions could be decided unfavorably as to LOEC, Cygnet or other defendants. LOEC and Cygnet may enter into discussions in an attempt to settle particular cases if either believe it is appropriate to do so. LOEC and Cygnet cannot predict the type or extent of legal actions, proceedings and claims that could be brought against either of them or against other electronic cigarette manufacturers in the future.

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 Lorillard’s results of operations or equity.

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CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS DEFICIT (USD $) In Millions	Total	Common Stock	Additional Paid-in Capital	Retained Earnings	Accumulated Other Comprehensive Loss	Treasury Shares
Beginning Balance at Dec. 31, 2012	$ (1,777)	$ 5	$ 298	$ 2,351	$ (241)	$ (4,190)
Net income	640			640
Other comprehensive income (loss), net of tax expense of $3 in 2014 and $- in 2013	(1)				(1)
Dividends paid ($1.23 per share) in 2014 and ($1.10 per share) in 2013	(417)			(417)
Retirement of treasury shares		(1)	(82)	(4,146)		4,229
Shares repurchased	(318)					(318)
Share-based compensation	11		11
Excess tax benefit on share-based compensation	7		7
Ending Balance at Jun. 30, 2013	(1,855)	4	234	(1,572)	(242)	(279)
Beginning Balance at Dec. 31, 2013	(2,064)	4	256	(1,438)	(130)	(756)
Net income	571			571
Other comprehensive income (loss), net of tax expense of $3 in 2014 and $- in 2013	6				6
Dividends paid ($1.23 per share) in 2014 and ($1.10 per share) in 2013	(446)			(446)
Shares repurchased	(314)					(314)
Share-based compensation	11		11
Excess tax benefit on share-based compensation	8		8
Ending Balance at Jun. 30, 2014	$ (2,228)	$ 4	$ 275	$ (1,313)	$ (124)	$ (1,070)

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Subsequent Events

6 Months Ended

Jun. 30, 2014

Subsequent Events

21. Subsequent Events

Merger Agreement with Reynolds American Inc.

On July 15, 2014, the Company, Reynolds American Inc., a North Carolina corporation (“RAI”), and Lantern Acquisition Co., a Delaware corporation and a wholly owned subsidiary of RAI (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, subject to the satisfaction or waiver of certain conditions, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving as a wholly owned subsidiary of RAI.

At the effective time of the Merger (the “Effective Time”), each share of Company common stock (other than treasury stock held by the Company or owned by a subsidiary of the Company, RAI or Merger Sub and shares owned by stockholders of the Company who have properly made and not withdrawn a demand for appraisal rights) will be converted into the right to receive a unit consisting of (i) $50.50 per share in cash and (ii) 0.2909 fully paid and non-assessable shares of common stock of RAI (the “Merger Consideration”).

Pursuant to the Merger Agreement, at the Effective Time, each outstanding Company equity award (including stock options and stock appreciation rights), whether vested or unvested, will be cancelled in exchange for cash based on the Merger Consideration less, in the case of a stock option, the per share exercise price. In addition, each restricted stock unit and unvested share of restricted Company common stock will, immediately prior to the Effective Time, be converted into unrestricted shares of Company common stock and, at the Effective Time, converted into the right to receive the Merger Consideration.

The completion of the Merger is subject to certain conditions, including, among others, (i) the adoption of the Merger Agreement by the Company’s stockholders, (ii) the approval by RAI’s shareholders of the issuance of RAI common stock in the Merger (the “Stock Issuance”), (iii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iv) the absence of legal restraints prohibiting the completion of the Merger and (v) the effectiveness of the registration statement on Form S-4 to be filed by RAI with the Securities and Exchange Commission (the “SEC”) and the approval for listing on the New York Stock Exchange of the RAI common stock to be issued in the Merger. In addition, RAI’s obligation to complete the Merger is subject to the absence of any legal restraint under applicable antitrust laws that results in any prohibition or limitation on the ownership, control or operation of the businesses of the surviving corporation, RAI or their respective subsidiaries, which, individually or in the aggregate, would reasonably be expected to result in a Substantial Detriment (as defined in the Merger Agreement).

Each of the Company and RAI has made representations and warranties in the Merger Agreement. The Company and RAI have each also agreed to various covenants and agreements, including, among other things, to conduct their respective businesses in the ordinary course in all material respects during the period between the execution of the Merger Agreement and completion of the Merger and not to engage in certain kinds of transactions during this period.

The Merger Agreement contains certain termination rights for both the Company and RAI, including if the Merger is not completed on or before July 15, 2015 (which date will be automatically extended to January 15, 2016 if certain closing conditions related to antitrust matters have not been satisfied) and if the approval of the Company’s stockholders or RAI’s shareholders is not obtained. If the Merger Agreement is terminated in connection with the Company entering into an alternative acquisition agreement in respect of a superior proposal or making a change of recommendation, or in certain other circumstances, the Company must pay RAI a termination fee of $740 million. In the event the Merger Agreement is terminated by the Company due to a change of recommendation by RAI’s board of directors, RAI will be obligated to pay the Company a termination fee of $740 million. In connection with entering the Merger Agreement, Lorillard suspended future share repurchases. As permitted by the Merger Agreement, Lorillard expects to continue its current dividend policy, including annual increases consistent with past practice.

In connection with the Merger Agreement, on July 15, 2014, RAI and Lignum-2, L.L.C. (“Imperial Sub”), a wholly owned subsidiary of Imperial Tobacco Group PLC (“Imperial”), entered into an asset purchase agreement (the “Asset Purchase Agreement”), pursuant to which Imperial Sub has agreed to purchase, immediately following the completion of the Merger, the Kool, Salem, Winston, Maverick and blu eCigs brands and certain other assets for a total consideration of $7.1 billion in cash (subject to certain adjustments). Also, on July 15, 2014, in connection with the asset sale, the Company and Imperial Sub entered into a Transfer Agreement, pursuant to which Imperial Sub agreed to acquire certain assets owned by the Company, including its manufacturing and R&D facilities in Greensboro, N.C., and approximately 2,900 employees.

The Company cannot give any assurance that the Merger and the other related transactions will be completed or that, if completed, they will be exactly on the terms as set forth in the Merger Agreement and the other related transaction agreements. The Company and RAI will file a joint proxy statement/prospectus with the SEC in connection with the proposed Merger, which will form a part of the registration statement on Form S-4 to be filed by RAI with the SEC to register the Stock Issuance.

As of July 25, 2014, the Company and its board of directors are named as defendants in four putative class action lawsuits brought by alleged stockholders challenging the Company’s proposed Merger with RAI. The stockholder actions were filed on July 18, 2014, July 22, 2014, July 24, 2014 and July 25, 2014, in the Court of Chancery of the State of Delaware. The complaints allege, among other things, that each member of the Company’s board of directors breached his or her fiduciary duties to the Company’s stockholders by authorizing the proposed Merger of the Company with RAI. The complaints also allege that RAI and, in one instance, British American Tobacco p.l.c. aided and abetted the breaches of fiduciary duty allegedly committed by the members of the Company’s board of directors. The stockholder actions seek injunctive relief enjoining the Merger, damages and reimbursement of costs, among other remedies. The Company and the Company’s board of directors believe that these claims are without merit and intend to defend them vigorously.

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Condensed Consolidating Statements of Comprehensive Income (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Condensed Financial Statements, Captions [Line Items]
Net income	$ 300	$ 313	$ 571	$ 640
Other comprehensive income, net of tax:
Defined benefit retirement plan gains (losses), net of tax expense (benefit) of $1, $(2), $2 and $-	2	(5)	4	(1)
Foreign currency translation adjustments, net of tax expense of $- and $1	1		2
Other comprehensive income (loss)	3		6	(1)
Comprehensive income	303	308	577	639
Parent
Condensed Financial Statements, Captions [Line Items]
Net income	300	313	571	640
Other comprehensive income, net of tax:
Defined benefit retirement plan gains (losses), net of tax expense (benefit) of $1, $(2), $2 and $-	2		4
Foreign currency translation adjustments, net of tax expense of $- and $1	1		2
Other comprehensive income (loss)	3		6
Comprehensive income	303	313	577	640
Issuer
Condensed Financial Statements, Captions [Line Items]
Net income	317	310	597	634
Other comprehensive income, net of tax:
Defined benefit retirement plan gains (losses), net of tax expense (benefit) of $1, $(2), $2 and $-	2	(5)	4	(1)
Other comprehensive income (loss)	2		4
Comprehensive income	319	305	601	633
Non-guarantor Subsidiaries
Condensed Financial Statements, Captions [Line Items]
Net income	160	179	308	339
Other comprehensive income, net of tax:
Foreign currency translation adjustments, net of tax expense of $- and $1	1		2
Other comprehensive income (loss)	1		2
Comprehensive income	161	179	310	339
Consolidating Adjustments
Condensed Financial Statements, Captions [Line Items]
Net income	(477)	(489)	(905)	(973)
Other comprehensive income, net of tax:
Defined benefit retirement plan gains (losses), net of tax expense (benefit) of $1, $(2), $2 and $-	(2)		(4)
Foreign currency translation adjustments, net of tax expense of $- and $1	(1)		(2)
Other comprehensive income (loss)	(3)		(6)
Comprehensive income	$ (480)	$ (489)	$ (911)	$ (973)

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Accrued Liabilities (Tables)

6 Months Ended

Jun. 30, 2014

Accrued Liabilities

Accrued liabilities were as follows:

	June 30, 2014		December 31, 2013
	(In millions)
Legal fees	$	38	$	29
Salaries and other compensation		20		20
Medical and other employee benefit plans		28		30
Consumer rebates		64		78
Sales promotion		27		29
Excise and other taxes		93		57
Accrued interest		34		34
Litigation related accruals		22		42
Other accrued liabilities		40		58
Total	$	366	$	377

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Inventories - Additional Information (Detail) (USD $) In Millions, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Inventory [Line Items]
Manufactured stock in first-in, first-out basis	$ 71	$ 85
Excess of average cost over stated value of inventories valued on LIFO basis	$ 282	$ 264

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Retirement Plans - Additional Information (Detail) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2014
Pension Benefits
Defined Benefit Plan Disclosure [Line Items]
Defined benefit plan expected contributions for 2014	$ 1
Other Postretirement Benefits
Defined Benefit Plan Disclosure [Line Items]
Defined benefit plan expected contributions for 2014	13
Contribution under plan	$ 6

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CONSOLIDATED CONDENSED BALANCE SHEETS (USD $) In Millions, unless otherwise specified	Jun. 30, 2014		Dec. 31, 2013
Assets:
Cash and cash equivalents	$ 709		$ 1,454
Short-term investments	172		157
Accounts receivable, less allowances of $2 and $3	25		19
Other receivables	19	[1]	29	[1]
Inventories	475		499
Deferred income taxes	549		555
Other current assets	104		23
Total current assets	2,053		2,736
Plant and equipment, net	312		316
Long-term investments	126		93
Goodwill	103		102
Intangible assets	76		87
Deferred income taxes	58		51
Other assets	165		151
Total assets	2,893		3,536
Liabilities and Shareholders' Deficit:
Accounts and drafts payable	33		42
Accrued liabilities	366	[1]	377	[1]
Settlement costs	753		1,224
Income taxes	1		8
Total current liabilities	1,153		1,651
Long-term debt	3,566		3,560
Postretirement pension, medical and life insurance benefits	311		305
Other liabilities	91		84
Total liabilities	5,121		5,600
Commitments and Contingent Liabilities
Shareholders' Deficit:
Preferred stock, $0.01 par value, authorized 10 million shares
Common stock:
Authorized-600 million shares; par value-$0.01 per share Issued-383 million and 382 million shares (outstanding 360 million and 365 million shares)	4		4
Additional paid-in capital	275		256
Accumulated deficit	(1,313)		(1,438)
Accumulated other comprehensive loss	(124)		(130)
Treasury stock at cost, 23 million and 17 million shares	(1,070)		(756)
Total shareholders' deficit	(2,228)		(2,064)
Total liabilities and shareholders' deficit	$ 2,893		$ 3,536

[1] Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

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Share Repurchase Programs (Tables)

6 Months Ended

Jun. 30, 2014

Share Repurchase Program

As of June 30, 2014, total shares repurchased under share repurchase programs authorized by the Board since the separation from Loews in 2008 were as follows:

Program	Amount Authorized		Number of Shares Repurchased
	(In millions)		(In millions)
July 2008 – October 2008	$	400		17.6
May 2009 – July 2009		250		11.0
July 2009 – January 2010		750		29.3
February 2010 – May 2010		250		9.8
August 2010 * – August 2011		1,400		45.1
August 2011 – February 2012		750		20.1
August 2012 – January 2013		500		12.7
March 2013 **– June 2014		1,000		21.1
Total	$	5,300		166.7

* As amended on May 19, 2011

** As amended on May 21, 2013

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CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Net income	$ 300	$ 313	$ 571	$ 640
Other comprehensive income, net of tax:
Defined benefit retirement plan gains (losses), net of tax expense (benefit) of $1, $(2), $2 and $-	2	(5)	4	(1)
Foreign currency translation adjustments, net of tax expense of $- , $- , $1 and $-	1		2
Comprehensive income	$ 303	$ 308	$ 577	$ 639

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Intangible Assets (Detail) (USD $) In Millions, unless otherwise specified			6 Months Ended		6 Months Ended
	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2014 Blu eCigs Non-compete Agreement and Technology	Jun. 30, 2014 Blu eCigs Trade Names And Trademarks Indefinite Lived	Jun. 30, 2014 SKYCIG Customer List	Jun. 30, 2014 SKYCIG Trademarks and Trade names
Finite-Lived and Indefinite-Lived Intangible Assets [Line Items]
Amortizable intangible assets, weighted average amortization period			5 years		5 years	18 months
Amortizable intangible assets, cost			$ 1		$ 2	$ 33
Amortizable intangible assets, foreign currency translation						2
Amortizable intangible assets, accumulated amortization			1			18
Amortizable intangible assets, net carrying amount	19			57	2	17
Intangible assets, net	$ 76	$ 87

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Inventories (Tables)

6 Months Ended

Jun. 30, 2014

Inventories

Inventories consisted of the following:

	June 30, 2014		December 31, 2013
	(In millions)
Leaf tobacco	$	314	$	349
Manufactured stock		157		143
Material and supplies		4		7
	$	475	$	499

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Credit Agreement - Additional Information (Detail) (USD $) In Millions, unless otherwise specified	6 Months Ended		6 Months Ended		0 Months Ended
	Jun. 30, 2014	Jul. 10, 2012	Jun. 30, 2014 Maximum	Jun. 30, 2014 Minimum	Mar. 26, 2010 Old Revolving Credit Facility
Line of Credit Facility [Line Items]
Revolving credit facility		$ 200			$ 185
Credit facility maturity term					3 years
Revolving credit facility, initiation date	Jul. 10, 2012
Revolving credit facility, expiration date	Jul. 10, 2017
Revolving credit facility, increase, additional borrowing	300
Ratio of Debt to EBITDA to be maintained as per Revolver requirement			Not more than 2.25 to 1
Ratio of EBITDA to interest expense to be maintained as per Revolver requirement				Not less than 3.0 to 1
Maximum ratio of debt to EBITDA	225.00%
Minimum ratio of EBITDA to interest expense	300.00%
Revolving credit facility outstanding	$ 0

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Credit Agreement

6 Months Ended

Jun. 30, 2014

Credit Agreement

11. Credit Agreement

On July 10, 2012, Lorillard Tobacco, the principal, wholly owned operating subsidiary of the Company, terminated its three year $185 million credit agreement (the “Old Revolver”), dated March 26, 2010, and entered into a $200 million revolving credit facility that expires on July 10, 2017 (the “Revolver”) and is guaranteed by the Company. The Revolver may be increased to $300 million upon request. 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 Company’s 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 (“Adjusted EBITDA”) of not more than 2.25 to 1 and a ratio of Adjusted EBITDA to interest expense of not less than 3.0 to 1. In addition, the Revolver contains other affirmative and negative covenants customary for facilities of this type. The Revolver contains customary events of default, including upon a change in control (as defined therein), that could result in the acceleration of all amounts and cancellation of all commitments outstanding under the Revolver.

As of June 30, 2014, Lorillard was in compliance with all financial covenants and there were no borrowings under the Revolver.

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Other Current Assets (Tables)

6 Months Ended

Jun. 30, 2014

Other Current Assets

Other current assets were as follows:

	June 30, 2014		December 31, 2013
	(In millions)
Prepaid income taxes	$	67	$	—
Appeal bonds		21		7
Other current assets		16		16
Total	$	104	$	23

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Derivative Instruments

6 Months Ended

Jun. 30, 2014

Derivative Instruments

13. 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 rates were 4.776% and 4.793% as of June 30, 2014 and December 31, 2013, respectively. The agreements expire in June 2019. The interest rate swap agreements qualify for hedge accounting and were designated as fair value hedges. Under the swap agreements, Lorillard Tobacco receives a fixed rate settlement and pays a variable rate settlement with the difference recorded in interest expense. That difference reduced interest expense by $6 million and $12 million for the three and six months ended June 30, 2014 and 2013, respectively.

For derivatives designated as fair value hedges, which relate entirely to hedges of long-term 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 June 30, 2014 and December 31, 2013, the adjusted carrying amounts of the hedged debt were $816 million and $810 million, respectively, and the amounts included in other assets were $66 million and $60 million, respectively.

If our debt rating is downgraded below Ba2 by Moody’s or BB by S&P, the swap agreements will terminate and we will be required to settle them in cash before their expiration date. As of June 30, 2014, our debt ratings were Baa2 and BBB- with Moody’s and S&P, respectively, both of which are above the ratings at which settlement of our derivative contracts would be required.

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Derivative Instruments - Additional Information (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013	Sep. 30, 2009
Debt Instrument [Line Items]
Notional amount of interest rate swap						$ 750
Fixed interest rate under interest rate swap agreement						8.125%
Spread on variable rate based on one month LIBOR						4.625%
Variable interest rate	4.776%		4.776%		4.793%
Reduction in interest expense	6	6	12	12
Interest rate swap agreements expiration date			2019-06
2019 Notes - 8.125% Notes due 2019
Debt Instrument [Line Items]
Adjusted carrying amounts of hedged debt outstanding	816		816		810
Other Assets
Debt Instrument [Line Items]
Fair value of the interest rate swaps	$ 66		$ 66		$ 60

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CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (Parenthetical) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014
Defined benefit retirement plan gains, tax expense	$ 1	$ (2)	$ 2
Foreign currency translation adjustments, tax expense			$ 1

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CONSOLIDATED CONDENSED BALANCE SHEETS (Parenthetical) (USD $) In Millions, except Per Share data, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Accounts receivable, allowances	$ 2	$ 3
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	10	10
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	600	600
Common stock, shares issued	383	382
Common stock, shares outstanding	360	365
Treasury stock, shares	23	17

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Goodwill and Intangible Assets

6 Months Ended

Jun. 30, 2014

Goodwill and Intangible Assets

6. Goodwill and Intangible Assets

On April 24, 2012, Lorillard completed the acquisition of blu eCigs. For additional information, see Note 2, “Acquisitions.” The purchase price allocation includes $64 million of goodwill and $58 million of intangible assets, $57 million of which was an indefinite lived intangible asset consisting of the blu eCigs trademark and trade name.

We evaluated our goodwill and indefinite lived intangible assets recorded as a part of the blu eCigs reporting unit for impairment as of November 1, 2013. Based on the results of our impairment analysis, no impairment of the blu eCigs goodwill or the blu eCigs trademark or trade name was determined to exist.

There were no changes in blu eCigs goodwill during the six months ended June 30, 2014.

On October 1, 2013, Lorillard completed the acquisition of SKYCIG, now trading as blu (U.K.). For additional information, see Note 2, “Acquisitions.” The preliminary purchase price allocation includes $38 million of goodwill and $35 million of intangible assets, $33 million of which is the fair value ascribed to the SKYCIG trademark and trade name. Lorillard is still in the process of finalizing a working capital adjustment that may increase total consideration transferred by up to $2 million. Therefore, the goodwill amount noted above could increase by up to $2 million as a result of finalizing this working capital adjustment. The fair value ascribed to the SKYCIG trademark and trade name in connection with the acquisition is being amortized over an estimated life of 18 months, beginning October 1, 2013, after which amortization charges related to the trademark and trade name will cease.

All goodwill and intangible assets have been recorded as a part of our blu eCigs and blu (U.K.) reporting units, both of which are components of our Electronic Cigarettes reporting segment.

There were no changes in blu (U.K.) goodwill during the six months ended June 30, 2014, other than the impact of foreign currency translation.

Intangible Assets

	Weighted Average Amortization Period		Cost		Foreign Currency Translation		Accumulated Amortization		June  30, 2014 Net Carrying Amount
(In millions)
Amortizable intangible assets:
blu eCigs Non-compete Agreement and Technology		5 years	$	1	$	—	$	1	$	—
SKYCIG Non-compete Agreement and Customer List		5 years		2		—		—		2
SKYCIG trademark and trade name		18 months		33		2		18		17
Amortizable intangible assets, net										19
Indefinite-lived intangible assets:
blu eCigs trademark and trade name										57
Intangible assets, net									$	76

Intangible assets are amortized using the straight-line method. The aggregate amortization expense for the six months ended June 30, 2014 was $11 million. The aggregate amortization expense for the remainder of 2014 and 2015 is estimated to be approximately $11 million and $6 million, respectively.

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Document and Entity Information	6 Months Ended
	Jun. 30, 2014	Jul. 28, 2014
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2014
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q2
Trading Symbol	LO
Entity Registrant Name	LORILLARD, INC.
Entity Central Index Key	0001424847
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		360,017,227

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Other Assets

6 Months Ended

Jun. 30, 2014

Other Assets

7. Other Assets

Other assets were as follows:

	June 30, 2014		December 31, 2013
	(In millions)
Debt issuance costs	$	24	$	26
Interest rate swaps		66		60
Prepaid pension		66		55
Other prepaid assets		9		10
Total	$	165	$	151

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Condensed Consolidating Balance Sheets (Parenthetical) (Detail) (USD $) In Millions, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Condensed Balance Sheet Statements, Captions [Line Items]
Accounts receivable, allowances	$ 2	$ 3

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CONSOLIDATED CONDENSED STATEMENTS OF INCOME (USD $) In Millions, except Per Share data, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2014		Jun. 30, 2013		Jun. 30, 2014		Jun. 30, 2013
Net sales (including excise taxes of $502, $516, $947 and $971, respectively)	$ 1,799	[1]	$ 1,804	[1]	$ 3,391	[1]	$ 3,381	[1]
Cost of sales (including excise taxes of $502, $516, $947 and $971, respectively)	1,116		1,126		2,090		1,990
Gross profit	683		678		1,301		1,391
Selling, general and administrative	151	[1]	138	[1]	297	[1]	290	[1]
Operating income	532		540		1,004		1,101
Investment income (loss)	(2)				6		1
Interest expense	(45)		(41)		(90)		(82)
Income before income taxes	485		499		920		1,020
Income taxes	185		186		349		380
Net income	$ 300		$ 313		$ 571		$ 640
Earnings per share:
Basic	$ 0.83		$ 0.83		$ 1.58		$ 1.69
Diluted	$ 0.83		$ 0.83		$ 1.57		$ 1.69
Weighted average number of shares outstanding:
Basic	360.31		375.86		361.22		377.22
Diluted	360.93		376.61		361.83		378.00
Dividends declared per share	$ 0.62		$ 0.55		$ 1.23		$ 1.10

[1] Includes intercompany royalties between Issuer and Non-guarantor Subsidiaries of a corresponding amount.

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Basis of Presentation

6 Months Ended

Jun. 30, 2014

Basis of Presentation

1. Basis of Presentation

Overview. Lorillard, Inc., through certain of its subsidiaries, is engaged in the manufacture and sale of cigarettes and electronic cigarettes. Lorillard Tobacco Company’s principal cigarette 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. On April 24, 2012 Lorillard acquired blu eCigs, an electronic cigarette brand in the U.S. On October 1, 2013, Lorillard acquired the assets and operations of SKYCIG, now trading as blu (U.K.), a United Kingdom-based electronic cigarette business. Newport, Kent, True, Maverick, Old Gold, blu eCigs and SKYCIG are the registered trademarks of Lorillard, Inc. and its subsidiaries.

The consolidated financial statements of Lorillard, Inc. (the “Company”), together with its subsidiaries (“Lorillard” or “we” or “us” or “our”), include the accounts of the Company and its subsidiaries after the elimination of intercompany accounts and transactions.

The Company has two reportable segments – Cigarettes and Electronic Cigarettes. The Cigarettes segment consists principally of the operations of Lorillard Tobacco Company (“Lorillard Tobacco” or “Issuer”) and related entities. The Electronic Cigarettes segment consists of the operations of LOEC, Inc. (d/b/a blu eCigs), (“LOEC” or “blu eCigs”), Cygnet U.K. Trading Limited (t/a SKYCIG or blu (U.K.)) (“Cygnet”, “SKYCIG” or “blu (U.K.)”) and related entities.

Basis of Presentation. The accompanying unaudited consolidated condensed financial statements reflect all adjustments necessary to present fairly the financial position as of June 30, 2014 and December 31, 2013 and the consolidated income and comprehensive income for the three and six months ended June 30, 2014 and 2013 and the shareholders’ deficit and cash flows for the six months ended June 30, 2014 and 2013.

Results of operations for the three and six 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 21, 2014.

Recently Adopted Accounting Pronouncements. In July 2012, the FASB issued ASU 2012-02 “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” ASU 2012-02 gives an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that indefinite-lived intangible assets other than goodwill are impaired, before being required to complete a quantitative impairment test. If an entity concludes, after assessing the totality of qualitative factors, that it is more likely than not that the indefinite-lived intangible assets are not impaired, then it is not required to complete a quantitative impairment test whereby the fair value of the indefinite-lived intangible asset would be determined and compared with the carrying amount of the intangible asset. The amendments in this update are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, and early adoption is permitted. The adoption of ASU 2012-02 in the first quarter of 2013 did not have a material impact on Lorillard’s financial position or results of operations, but may impact the manner in which Lorillard assesses indefinite-lived intangible assets for impairment.

In February 2013, the FASB issued ASU 2013-02 “Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires an entity to provide information about amounts reclassified out of accumulated other comprehensive income. An entity is also required to present either on the face of the financial statements or in the footnotes, significant items reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety. For other items that are not required under U.S. GAAP to be reclassified to net income in their entirety, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. This standard is effective for public entities prospectively for reporting periods beginning after December 15, 2012. The adoption of ASU 2013-02 did not have any impact on Lorillard’s financial position or results of operations, but resulted in disclosure of additional information about amounts reclassified out of accumulated other comprehensive loss. For additional information, see Note 17, “Accumulated Other Comprehensive Loss.”

Accounting Pronouncements not yet adopted – In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers (Topic 606).” ASU 2014, which was a joint project of the FASB and IASB, clarifies the principles for recognizing revenue and provides a common revenue standard under U.S. GAAP and International Financial Reporting Standards that removes inconsistencies and weaknesses in existing revenue requirements; provides a more robust framework for addressing revenue issues; improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; provides more useful information to users of financial statements through improved disclosure requirements; and simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer. The guidance in this proposed update affects any entity that enters into contracts with customers unless those contracts are in the scope of other standards (for example, insurance contracts or lease contracts). The core principle of this update is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity applies the following steps: identify the contract(s) with a customer; identify the separate performance obligations in the contract; determine the transaction price; allocate the transaction price to the separate performance obligations in the contract; and recognize revenue when (or as) the entity satisfies a performance obligation. The amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. We have not yet determined the potential effects on Lorillard’s financial position or results of operations, if any.

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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Parenthetical) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Net of cash received from interest rate swaps	$ 12	$ 12

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Long-Term Debt

6 Months Ended

Jun. 30, 2014

Long-Term Debt

12. Long-Term Debt

Long-term debt consisted of the following:

	June 30, 2014		December 31, 2013
	(In millions)
2016 Notes - 3.500% Notes due 2016	$	500	$	500
2017 Notes - 2.300% Notes due 2017		500		500
2019 Notes - 8.125% Notes due 2019		816		810
2020 Notes - 6.875% Notes due 2020		750		750
2023 Notes - 3.750% Notes due 2023		500		500
2040 Notes - 8.125% Notes due 2040		250		250
2041 Notes - 7.000% Notes due 2041		250		250
Total long-term debt	$	3,566	$	3,560

In August 2012, Lorillard Tobacco issued $500 million aggregate principal amount of 2.300% unsecured senior notes due August 21, 2017 (the “2017 Notes”) pursuant to the Indenture and the Fourth Supplemental Indenture, dated August 21, 2012. The net proceeds from the issuance were used for the repurchase of the Company’s common stock.

In May 2013, Lorillard Tobacco issued $500 million aggregate principal amount of 3.750% unsecured senior notes due May 20, 2023 (the “2023 Notes”) pursuant to the Indenture and the Fifth Supplemental Indenture, dated May 20, 2013. The net proceeds from the issuance were used for the repurchase of the Company’s common stock.

Lorillard Tobacco is the principal, 100% owned operating subsidiary of the Company, and the $750 million aggregate principal amount of 8.125% senior notes issued in June 2009 and due 2019 (the “2019 Notes”), $750 million aggregate principal amount of 6.875% senior notes due 2020 and $250 million aggregate principal amount of 8.125% senior notes due 2040 and issued in April 2010 (the “2020 Notes” and “2040 Notes,” respectively), $500 million aggregate principal amount of 3.500% Notes due 2016, 2017 Notes, 2023 Notes and $250 million aggregate principal amount of 7.000% Notes due 2041 (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 Moody’s Investors Services, Inc. (“Moody’s”), Standard & Poor’s Ratings Services (“S&P”) or both Moody’s and S&P downgrade the 2019 Notes below investment grade (Baa3 and BBB- for Moody’s and S&P, respectively). As of June 30, 2014 our debt ratings were Baa2 and BBB- with Moody’s 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 Moody’s 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 June 30, 2014 and December 31, 2013, the carrying value of the Notes was $3.566 billion and $3.560 billion, respectively, and the estimated fair value was $4.006 billion and $3.872 billion, respectively. The fair value of the Notes is based on market pricing. The fair value of the Notes, classified as Level 1, utilized quoted prices in active markets.

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Accrued Liabilities

6 Months Ended

Jun. 30, 2014

Accrued Liabilities

8. Accrued Liabilities

Accrued liabilities were as follows:

	June 30, 2014		December 31, 2013
	(In millions)
Legal fees	$	38	$	29
Salaries and other compensation		20		20
Medical and other employee benefit plans		28		30
Consumer rebates		64		78
Sales promotion		27		29
Excise and other taxes		93		57
Accrued interest		34		34
Litigation related accruals		22		42
Other accrued liabilities		40		58
Total	$	366	$	377

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Condensed Consolidating Statements of Comprehensive Income (Parenthetical) (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014
Condensed Financial Statements, Captions [Line Items]
Defined benefit retirement plan gain (loss), tax expense (benefit)	$ 1	$ (2)	$ 2
Foreign currency translation adjustments, tax expense (benefit)			$ 1

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Other Current Assets

6 Months Ended

Jun. 30, 2014

Other Current Assets

4. Other Current Assets

Other current assets were as follows:

	June 30, 2014		December 31, 2013
	(In millions)
Prepaid income taxes	$	67	$	—
Appeal bonds		21		7
Other current assets		16		16
Total	$	104	$	23

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Other Assets (Detail) (USD $) In Millions, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Other Assets [Line Items]
Debt issuance costs	$ 24	$ 26
Interest rate swaps	66	60
Prepaid pension	66	55
Other prepaid assets	9	10
Total	$ 165	$ 151

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Acquisitions

6 Months Ended

Jun. 30, 2014

Acquisitions

2. Acquisitions

On April 24, 2012, Lorillard, Inc., through its wholly owned subsidiary, Lorillard Holdings Company, Inc. (“LHCI”), and its subsidiaries acquired the blu eCigs brand and other assets used in the manufacture, distribution, development, research, marketing, advertising, and sale of electronic cigarettes for $135 million in cash. The acquisition was made pursuant to an asset purchase agreement (the “Agreement”) with BLEC, LLC, Intermark Brands, LLC and QSN Technologies, LLC (the “Sellers”). The Agreement contains customary representations, warranties, covenants and indemnities by the Sellers and LHCI. This acquisition provided Lorillard with the blu eCigs brand and an electronic cigarette product line.

The results of operations of blu eCigs are included in our consolidated financial statements beginning as of April 24, 2012. Lorillard’s consolidated revenues include $81 million and $114 million of sales of blu eCigs during the six months ended June 30, 2014 and 2013, respectively. blu eCigs had operating (loss) income of $(11) million and $9 million during the six months ended June 30, 2014 and 2013, respectively.

The fair values of the assets acquired and liabilities assumed at the date of acquisition are summarized below (in millions):

Assets acquired:
Current assets:
Accounts receivable	$	2
Inventories		15
Total current assets		17
Goodwill		64
Intangible assets		58
Total assets		139
Liabilities assumed:
Current liabilities:
Accounts and drafts payable		4
Purchase price	$	135

On October 1, 2013, Lorillard acquired certain assets and operations of SKYCIG, now trading as blu (U.K.), a United Kingdom (“U.K.”)-based electronic cigarette (e-cigarette) business for approximately £28 million (approximately $46 million) in cash paid at closing and contingent consideration of up to an additional £30 million (approximately $49 million at October 1, 2013 exchange rates) to be paid in 2016 based on the achievement of certain financial performance benchmarks.

The results of operations of blu (U.K.) are included in our consolidated financial statements beginning as of October 1, 2013. Lorillard’s consolidated revenues include $7 million of sales of blu (U.K.) during the six months ended June 30, 2014. blu (U.K.) had an operating loss of $23 million during the six months ended June 30, 2014.

Lorillard is still in the process of finalizing a working capital adjustment that may increase total consideration transferred by up to $2 million. Therefore, the purchase price and goodwill amounts noted below could increase by up to $2 million as a result of finalizing this working capital adjustment. The fair values of the assets acquired and liabilities assumed at the date of acquisition are summarized below (in millions):

Assets acquired:
Current assets:
Accounts receivable	$	2
Goodwill		38
Intangible assets		35
Total assets		75
Liabilities assumed:
Current liabilities:
Accounts and drafts payable		3
Accrued liabilities		1
Total current liabilities		4
Earn out liability		25
Purchase price	$	46

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Inventories

6 Months Ended

Jun. 30, 2014

Inventories

3. Inventories

Cigarette inventories (including leaf tobacco, manufactured stock and materials and supplies) are valued at the lower of cost, determined on a last-in, first-out (“LIFO”) basis, or market. Electronic cigarette inventories of $71 million and $85 million included in manufactured stock as of June 30, 2014 and December 31, 2013, respectively, are valued at the lower of cost, determined on a first-in, first-out (“FIFO”) basis, or market. Inventories consisted of the following:

	June 30, 2014		December 31, 2013
	(In millions)
Leaf tobacco	$	314	$	349
Manufactured stock		157		143
Material and supplies		4		7
	$	475	$	499

If the average cost method of accounting was used for inventories valued on a LIFO basis, inventories would be greater by approximately $282 million and $264 million at June 30, 2014 and December 31, 2013, respectively.

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Plant and Equipment, Net

6 Months Ended

Jun. 30, 2014

Plant and Equipment, Net

5. Plant and Equipment, Net

Plant and equipment is stated at historical cost and consisted of the following:

	June 30, 2014			December 31, 2013
	(In millions)
Land	$	3		$	3
Buildings		106			104
Equipment		683			684
Total		792			791
Accumulated depreciation		(480	)		(475	)
Plant and equipment, net	$	312		$	316

Depreciation expense was $26 million, and $23 million for the six months ended June 30, 2014 and 2013, respectively.

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Fair Value - Additional Information (Detail) In Millions, unless otherwise specified	6 Months Ended									6 Months Ended
	Jun. 30, 2014 USD ($)	Jun. 30, 2013 USD ($)	Jun. 30, 2014 SKYCIG USD ($)	Oct. 01, 2013 SKYCIG USD ($)	Oct. 01, 2013 SKYCIG GBP (£)	Jun. 30, 2014 SKYCIG Minimum USD ($)	Jun. 30, 2014 SKYCIG Minimum GBP (£)	Jun. 30, 2014 SKYCIG Maximum USD ($)	Jun. 30, 2014 SKYCIG Maximum GBP (£)	Jun. 30, 2014 Level 3 USD ($)	Jun. 30, 2013 Level 3 USD ($)
Fair Value Measurements Disclosure [Line Items]
Transfers between levels within the fair value hierarchy	$ 0
Purchases, sales, issuances or settlements of these assets and liabilities										0	0
Proceeds from sales, maturities and calls of available for sale securities	289	0
Realized gains and losses on sales, maturities and calls of available for sale securities		0
Fair value of earn out liability			26	25	15
Earn Out that will be ultimately paid						0	0	51	30
Fair value of the Earn Out			$ 0

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Condensed Consolidating Statements of Cash Flows (Detail) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Cash flows from operating activities:
Net income	$ 571	$ 640
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	37	23
Pension and other postretirement benefits contributions	(6)	(22)
Pension and other postretirement benefits expense	9	18
Deferred income taxes	(4)	(3)
Share-based compensation	9	9
Excess tax benefits from share-based arrangements	(8)	(7)
Changes in operating assets and liabilities:
Accounts and other receivables	6	(6)
Inventories	25	(24)
Accounts payable and accrued liabilities	(20)	5
Settlement costs	(471)	(434)
Income taxes	(60)	(27)
Other current assets	(14)	7
Other assets	1	3
Net cash provided by (used in) operating activities	75	182
Cash flows from investing activities:
Purchases of investments	(337)
Additions to plant and equipment	(22)	(34)
Sales, maturities and calls of investments	289	0
Net cash provided by (used in) investing activities	(70)	(34)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		500
Dividends paid	(446)	(417)
Shares repurchased	(314)	(318)
Debt issuance costs		(4)
Proceeds from exercise of stock options	2	2
Excess tax benefits from share-based arrangements	8	7
Net cash (used in) provided by financing activities	(750)	(230)
Change in cash and cash equivalents	(745)	(82)
Cash and cash equivalents, beginning of year	1,454	1,720
Cash and cash equivalents, end of period	709	1,638
Parent
Cash flows from operating activities:
Net income	571	640
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity income from subsidiaries	(570)	(638)
Deferred income taxes		(1)
Share-based compensation		1
Changes in operating assets and liabilities:
Accounts payable and accrued liabilities	(13)	(3)
Income taxes	(1)
Other current assets		1
Return on investment in subsidiaries	474	668
Net cash provided by (used in) operating activities	461	668
Cash flows from investing activities:
Investment in subsidiary	(17)
Net cash provided by (used in) investing activities	(17)
Cash flows from financing activities:
Dividends paid	(446)	(417)
Shares repurchased	(314)	(318)
Net cash (used in) provided by financing activities	(760)	(735)
Change in cash and cash equivalents	(316)	(67)
Cash and cash equivalents, beginning of year	341	150
Cash and cash equivalents, end of period	25	83
Issuer
Cash flows from operating activities:
Net income	597	634
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity income from subsidiaries	(335)	(335)
Depreciation and amortization	26	23
Pension and other postretirement benefits contributions	(6)	(22)
Pension and other postretirement benefits expense	9	18
Deferred income taxes	1	(3)
Share-based compensation	9	8
Excess tax benefits from share-based arrangements	(8)	(7)
Changes in operating assets and liabilities:
Accounts and other receivables		2
Inventories	8	(34)
Accounts payable and accrued liabilities	4	9
Settlement costs	(471)	(434)
Income taxes	(61)	(3)
Other current assets	(10)	2
Other assets	1	4
Return on investment in subsidiaries	275
Net cash provided by (used in) operating activities	39	(138)
Cash flows from investing activities:
Purchases of investments	(337)
Additions to plant and equipment	(20)	(33)
Sales, maturities and calls of investments	289
Net cash provided by (used in) investing activities	(68)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		500
Dividends paid	(474)	(668)
Debt issuance costs		(4)
Proceeds from exercise of stock options	2	2
Excess tax benefits from share-based arrangements	8	7
Net cash (used in) provided by financing activities	(464)	(163)
Change in cash and cash equivalents	(493)	(334)
Cash and cash equivalents, beginning of year	1,002	1,471
Cash and cash equivalents, end of period	509	1,137
Non-guarantor Subsidiaries
Cash flows from operating activities:
Net income	308	339
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	11
Deferred income taxes	(5)	1
Changes in operating assets and liabilities:
Accounts and other receivables	(8)	(13)
Inventories	17	10
Accounts payable and accrued liabilities	3	4
Income taxes	2	(24)
Other current assets	(4)	4
Other assets		(1)
Net cash provided by (used in) operating activities	324	320
Cash flows from investing activities:
Additions to plant and equipment	(2)	(1)
Net cash provided by (used in) investing activities	(2)
Cash flows from financing activities:
Dividends paid	(275)
Contributions from parent	17
Net cash (used in) provided by financing activities	(258)
Change in cash and cash equivalents	64	319
Cash and cash equivalents, beginning of year	111	99
Cash and cash equivalents, end of period	175	418
Consolidating Adjustments
Cash flows from operating activities:
Net income	(905)	(973)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity income from subsidiaries	905	973
Changes in operating assets and liabilities:
Accounts and other receivables	14	5
Accounts payable and accrued liabilities	(14)	(5)
Return on investment in subsidiaries	(749)	(668)
Net cash provided by (used in) operating activities	(749)	(668)
Cash flows from investing activities:
Investment in subsidiary	17
Net cash provided by (used in) investing activities	17
Cash flows from financing activities:
Dividends paid	749	668
Contributions from parent	(17)
Net cash (used in) provided by financing activities	$ 732	$ 668

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Long-Term Debt (Detail) (USD $) In Millions, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Debt Instrument [Line Items]
Total long-term debt	$ 3,566	$ 3,560
2016 Notes - 3.500% Notes due 2016
Debt Instrument [Line Items]
Senior Long Term Notes	500	500
2017 Notes - 2.300% Notes due 2017
Debt Instrument [Line Items]
Senior Long Term Notes	500	500
2019 Notes - 8.125% Notes due 2019
Debt Instrument [Line Items]
Senior Long Term Notes	816	810
2020 Notes - 6.875% Notes due 2020
Debt Instrument [Line Items]
Senior Long Term Notes	750	750
2023 Notes - 3.750% Notes due 2023
Debt Instrument [Line Items]
Senior Long Term Notes	500	500
2040 Notes - 8.125% Notes due 2040
Debt Instrument [Line Items]
Senior Long Term Notes	250	250
2041 Notes - 7.000% Notes due 2041
Debt Instrument [Line Items]
Senior Long Term Notes	$ 250	$ 250

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Assets and Liabilities Measured at Fair Value on Recurring Basis (Detail) (USD $) In Millions, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Cash and Cash Equivalents:
Total cash and cash equivalents	$ 709	$ 1,454
Short-term investments:
Total short-term investments	172	157
Long-term investments:
Total long-term investments	126	93
SKYCIG | Earn out liability
Other liabilities:
Total other liabilities	26	25
Interest rate swaps - fixed to floating rate
Derivative Asset:
Total derivative asset	66	60
Prime money market funds
Cash and Cash Equivalents:
Total cash and cash equivalents	709	1,454
Corporate debt securities
Short-term investments:
Total short-term investments	105	63
Long-term investments:
Total long-term investments	108	86
U.S. Government agency obligations
Short-term investments:
Total short-term investments	39	59
Long-term investments:
Total long-term investments	18	7
Commercial paper
Short-term investments:
Total short-term investments	18	22
International government obligations
Short-term investments:
Total short-term investments	10	13
Level 1
Cash and Cash Equivalents:
Total cash and cash equivalents	709	1,454
Level 1 | Prime money market funds
Cash and Cash Equivalents:
Total cash and cash equivalents	709	1,454
Level 2
Short-term investments:
Total short-term investments	172	157
Long-term investments:
Total long-term investments	126	93
Level 2 | Interest rate swaps - fixed to floating rate
Derivative Asset:
Total derivative asset	66	60
Level 2 | Corporate debt securities
Short-term investments:
Total short-term investments	105	63
Long-term investments:
Total long-term investments	108	86
Level 2 | U.S. Government agency obligations
Short-term investments:
Total short-term investments	39	59
Long-term investments:
Total long-term investments	18	7
Level 2 | Commercial paper
Short-term investments:
Total short-term investments	18	22
Level 2 | International government obligations
Short-term investments:
Total short-term investments	10	13
Level 3 | SKYCIG | Earn out liability
Other liabilities:
Total other liabilities	$ 26	$ 25

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Acquisitions (Tables)

6 Months Ended

Jun. 30, 2014

Blu eCigs

Fair Values of Assets Acquired and Liabilities Assumed

The fair values of the assets acquired and liabilities assumed at the date of acquisition are summarized below (in millions):

Assets acquired:
Current assets:
Accounts receivable	$	2
Inventories		15
Total current assets		17
Goodwill		64
Intangible assets		58
Total assets		139
Liabilities assumed:
Current liabilities:
Accounts and drafts payable		4
Purchase price	$	135

SKYCIG

Fair Values of Assets Acquired and Liabilities Assumed

adjustment. The fair values of the assets acquired and liabilities assumed at the date of acquisition are summarized below (in millions):

Assets acquired:
Current assets:
Accounts receivable	$	2
Goodwill		38
Intangible assets		35
Total assets		75
Liabilities assumed:
Current liabilities:
Accounts and drafts payable		3
Accrued liabilities		1
Total current liabilities		4
Earn out liability		25
Purchase price	$	46

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Acquisitions - Additional Information (Detail) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended					6 Months Ended			6 Months Ended
	Jun. 30, 2014 USD ($)	Jun. 30, 2013 USD ($)	Jun. 30, 2014 USD ($)	Jun. 30, 2013 USD ($)	Jun. 30, 2014 Blu eCigs USD ($)	Jun. 30, 2013 Blu eCigs USD ($)	Apr. 24, 2012 Blu eCigs USD ($)	Jun. 30, 2014 blu (U.K.) USD ($)	Oct. 01, 2013 blu (U.K.) USD ($)	Oct. 01, 2013 blu (U.K.) GBP (£)	Jun. 30, 2014 blu (U.K.) Maximum USD ($)
Business Acquisition [Line Items]
Business acquisition purchase price cash paid							$ 135		$ 46	£ 28
Revenues					81	114		7
Operating income (loss)	532	540	1,004	1,101	(11)	9		23
Contingent consideration									49	30
Increase in total consideration to be transferred											2
Increase in purchase price and goodwill											$ 2

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Fair Value

6 Months Ended

Jun. 30, 2014

Fair Value

10. 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.

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 June 30, 2014, were as follows:

(In millions)	Level 1		Level 2		Level 3		Total
Cash and Cash Equivalents:
Prime money market funds	$	709	$	—	$	—	$	709
Total cash and cash equivalents	$	709	$	—	$	—	$	709
Short-term investments:
Corporate debt securities	$	—	$	105	$	—	$	105
U.S. Government agency obligations		—		39		—		39
Commercial paper		—		18		—		18
International government obligations		—		10		—		10
Total short-term investments	$	—	$	172	$	—	$	172
Long-term investments:
Corporate debt securities	$	—	$	108	$	—	$	108
U.S. Government agency obligations		—		18		—		18
Total long-term investments	$	—	$	126	$	—	$	126
Derivative Asset:
Interest rate swaps – fixed to floating rate	$	—	$	66	$	—	$	66
Other liabilities:
SKYCIG earn out liability	$	—	$	—	$	26	$	26

Assets and liabilities measured at fair value on a recurring basis at December 31, 2013 were as follows:

(In millions)	Level 1		Level 2		Level 3		Total
Cash and Cash Equivalents:
Prime money market funds	$	1,454	$	—	$	—	$	1,454
Total cash and cash equivalents	$	1,454	$	—	$	—	$	1,454
Short-term investments:
Corporate debt securities	$	—	$	63	$	—	$	63
U.S. Government agency obligations		—		59		—		59
Commercial paper		—		22		—		22
International government obligations		—		13		—		13
Total short-term investments	$	—	$	157	$	—	$	157
Long-term investments:
Corporate debt securities	$	—	$	86	$	—	$	86
U.S. Government agency obligations		—		7		—		7
Total long-term investments	$	—	$	93	$	—	$	93
Derivative Asset:
Interest rate swaps — fixed to floating rate	$	—	$	60	$	—	$	60
Other liabilities:
SKYCIG earn out liability	$	—	$	—	$	25	$	25

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 13, “Derivative Instruments,” for additional information on the interest rate swaps.

Short-term and long-term investments include corporate debt securities, U.S. Government agency obligations, commercial paper and international government obligations. The fair value of corporate debt securities, U.S. Government agency obligations, commercial paper and international government obligations, classified as Level 2, utilized quoted prices for identical assets in less active markets or quoted prices for similar assets in active markets.

There were no transfers between levels within the fair value hierarchy. There were no Level 3 purchases, sales, issuances or settlements of these assets and liabilities for the six months ended June 30, 2014 or the six months ended June 30, 2013.

Proceeds from sales, maturities and calls of available for sale securities were $289 million for the six months ended June 30, 2014. There were no proceeds from sales, maturities and calls of available for sale securities for the six months ended June 30, 2013. For the six months ended June 30, 2014, realized gains and losses on sales, maturities and calls of available for sale securities were not material. There were no realized gains and losses on sales, maturities and calls of available for sale securities for the six months ended June 30, 2013.

The fair value of the SKYCIG earn out liability (the “Earn Out”), classified as Level 3 was determined utilizing a discounted cash flows approach using various probability-weighted SKYCIG 2015 financial performance scenarios, upon which the ultimate earn out liability to be paid in 2016 will be based. Significant unobservable inputs used in calculating the fair value of the Earn Out include various SKYCIG financial performance scenarios, the probability of achieving those scenarios, and the discount rate. Based upon this calculation, the fair value of the Earn Out was determined to be £15 million, approximately $25 million, as of the date of the acquisition (October 1, 2013) and approximately $26 million as of June 30, 2014. The amount of the Earn Out that will be ultimately paid in 2016 could range from £0 to £30 million (approximately $0 to $51 million at June 30, 2014 exchange rates). Changes in the fair value of the Earn Out are recorded as a component of selling, general and administrative expenses of the Electronic Cigarettes segment. There was no change in the fair value of the Earn Out other than foreign currency translation during the six months ended June 30, 2014. See Note 2, “Acquisitions” for additional information related to the acquisition of SKYCIG.

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Retirement Plans

6 Months Ended

Jun. 30, 2014

Retirement Plans

15. 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 June 30,						Six Months Ended June 30,
Pension Benefits	2014			2013			2014			2013
	(In millions)
Service cost	$	6		$	7		$	12		$	13
Interest cost		14			13			28			25
Expected return on plan assets		(22	)		(21	)		(44	)		(41	)
Amortization of net loss		2			5			4			11
Amortization of prior service cost		1			1			2			2
Net periodic benefit cost	$	1		$	5		$	2		$	10
	Three Months Ended June 30,						Six Months Ended June 30,
Other Postretirement Benefits	2014			2013			2014			2013
	(In millions)
Service cost	$	2		$	2		$	3		$	3
Interest cost		2			2			5			5
Net periodic benefit cost	$	4		$	4		$	8		$	8

Lorillard expects to contribute $1 million to its pension plans and $13 million to its other postretirement benefit plans in 2014, of which $6 million had been contributed to the postretirement benefit plans as of June 30, 2014.

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Legal Proceedings (Tables)

6 Months Ended

Jun. 30, 2014

Number of Cases Pending

The table below lists the number of certain tobacco-related cases pending against Lorillard as of the date listed. A description of each type of case follows the table.

Type of Case	Total Number of Cases Pending against Lorillard as of July 25, 2014
Conventional Product Liability Cases		24
Engle Progeny Cases		3,875
West Virginia Individual Personal Injury Cases		38
Flight Attendant Cases		2,571
Class Action Cases		1
Reimbursement Cases		1
Filter Cases		66
Tobacco-Related Antitrust Cases		1

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Fair Value (Tables)

6 Months Ended

Jun. 30, 2014

Assets and Liabilities Measured at Fair Value on Recurring Basis

Assets and liabilities measured at fair value on a recurring basis as of June 30, 2014, were as follows:

(In millions)	Level 1		Level 2		Level 3		Total
Cash and Cash Equivalents:
Prime money market funds	$	709	$	—	$	—	$	709
Total cash and cash equivalents	$	709	$	—	$	—	$	709
Short-term investments:
Corporate debt securities	$	—	$	105	$	—	$	105
U.S. Government agency obligations		—		39		—		39
Commercial paper		—		18		—		18
International government obligations		—		10		—		10
Total short-term investments	$	—	$	172	$	—	$	172
Long-term investments:
Corporate debt securities	$	—	$	108	$	—	$	108
U.S. Government agency obligations		—		18		—		18
Total long-term investments	$	—	$	126	$	—	$	126
Derivative Asset:
Interest rate swaps – fixed to floating rate	$	—	$	66	$	—	$	66
Other liabilities:
SKYCIG earn out liability	$	—	$	—	$	26	$	26

Assets and liabilities measured at fair value on a recurring basis at December 31, 2013 were as follows:

(In millions)	Level 1		Level 2		Level 3		Total
Cash and Cash Equivalents:
Prime money market funds	$	1,454	$	—	$	—	$	1,454
Total cash and cash equivalents	$	1,454	$	—	$	—	$	1,454
Short-term investments:
Corporate debt securities	$	—	$	63	$	—	$	63
U.S. Government agency obligations		—		59		—		59
Commercial paper		—		22		—		22
International government obligations		—		13		—		13
Total short-term investments	$	—	$	157	$	—	$	157
Long-term investments:
Corporate debt securities	$	—	$	86	$	—	$	86
U.S. Government agency obligations		—		7		—		7
Total long-term investments	$	—	$	93	$	—	$	93
Derivative Asset:
Interest rate swaps — fixed to floating rate	$	—	$	60	$	—	$	60
Other liabilities:
SKYCIG earn out liability	$	—	$	—	$	25	$	25

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CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Parenthetical) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Excise taxes	$ 502	$ 516	$ 947	$ 971
Excise taxes	$ 502	$ 516	$ 947	$ 971

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Subsequent Events - Additional Information (Detail) (Subsequent Event, USD $)	0 Months Ended
	Jul. 15, 2014 Employee	Jul. 15, 2014
Subsequent Event
Business Acquisition [Line Items]
Merger agreement, cash consideration in each unit		$ 50.50
Merger agreement, shares of common stock in each unit		0.2909
Fee payable in the event merger agreement is terminated by either party		$ 740,000,000
Asset sale	$ 7,100,000,000
Employees transferred	2,900

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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Cash flows from operating activities:
Net income	$ 571	$ 640
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	37	23
Pension and other postretirement benefits contributions	(6)	(22)
Pension and other postretirement benefits expense	9	18
Deferred income taxes	(4)	(3)
Share-based compensation	9	9
Excess tax benefits from share-based payment arrangements	(8)	(7)
Changes in operating assets and liabilities:
Accounts and other receivables	6	(6)
Inventories	25	(24)
Accounts payable and accrued liabilities	(20)	5
Settlement costs	(471)	(434)
Income taxes	(60)	(27)
Other current assets	(14)	7
Other assets	1	3
Net cash provided by (used in) operating activities	75	182
Cash flows from investing activities:
Purchase of investments	(337)
Additions to plant and equipment	(22)	(34)
Sales, maturities and calls of investments	289	0
Net cash provided by (used in) investing activities	(70)	(34)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		500
Dividends paid	(446)	(417)
Shares repurchased	(314)	(318)
Debt issuance costs		(4)
Proceeds from exercise of stock options	2	2
Excess tax benefits from share-based payment arrangements	8	7
Net cash (used in) provided by financing activities	(750)	(230)
Change in cash and cash equivalents	(745)	(82)
Cash and cash equivalents, beginning of year	1,454	1,720
Cash and cash equivalents, end of period	709	1,638
Cash paid for income taxes	413	409
Cash paid for interest, net of cash received from interest rate swaps of $12 and $12	$ 87	$ 78

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Goodwill and Intangible Assets - Additional Information (Detail) (USD $) In Millions, unless otherwise specified	6 Months Ended		6 Months Ended				6 Months Ended	1 Months Ended
	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2014 Blu eCigs	Apr. 24, 2012 Blu eCigs	Apr. 24, 2012 Blu eCigs Trade Names And Trademarks Indefinite Lived	Oct. 01, 2013 blu (U.K.)	Jun. 30, 2014 blu (U.K.) Maximum	Oct. 01, 2013 blu (U.K.) Trademarks and Trade names
Intangible Assets And Goodwill [Line Items]
Acquisition resulted in recognition of goodwill	$ 103	$ 102	$ 0	$ 64		$ 38
Acquisition resulted in recognition of intangible assets				58		35
Acquisition resulted in recognition of indefinite lived intangible assets					57
Impairment of goodwill			0
Acquisition resulted in recognition of finite lived intangible assets								33
Trademark and trade name, estimated life								18 months
Increase in total consideration to be transferred							2
Increase in purchase price and goodwill							2
Aggregate amortization expense	11
Aggregate amortization expense for remainder of 2014	11
Aggregate amortization expense for 2015	$ 6

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Condensed Consolidating Statements of Income (Parenthetical) (Detail) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Condensed Income Statements, Captions [Line Items]
Excise taxes	$ 502	$ 516	$ 947	$ 971

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Basic and Diluted Earnings Per Share (Detail) (USD $) In Millions, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Numerator:
Net income, as reported Net	$ 300	$ 313	$ 571	$ 640
Less: Net income attributable to participating securities	(1)	(1)	(2)	(2)
Net income available to common shareholders	$ 299	$ 312	$ 569	$ 638
Denominator:
Basic EPS- weighted average shares	360.31	375.86	361.22	377.22
Effect of dilutive securities:
Stock Options and SARS	0.62	0.75	0.61	0.78
Diluted EPS- adjusted weighted average shares and assumed conversions	360.93	376.61	361.83	378.00
Earnings Per Share:
Basic	$ 0.83	$ 0.83	$ 1.58	$ 1.69
Diluted	$ 0.83	$ 0.83	$ 1.57	$ 1.69

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Share Repurchase Programs

6 Months Ended

Jun. 30, 2014

Share Repurchase Programs

16. Share Repurchase Programs

As of February 24, 2012, the Company completed its $750 million share repurchase program that was announced in August 2011, after repurchasing an additional 4.9 million shares in January and February 2012 for $188 million at an average purchase price of $38.28. The Company repurchased a total of 20.1 million shares at an average price of $37.29 per share under this program.

As of January 30, 2013, the Company completed its $500 million share repurchase program that was announced in August 2012, after repurchasing an additional 2.8 million shares in January 2013 for $109 million at an average purchase price of $39.24. The Company repurchased a total of 12.7 million shares at an average price of $39.38 per share under this program.

As of June 4, 2014, the Company completed its $1 billion share repurchase program that was announced in March 2013 and amended in May 2013, after repurchasing an additional 2.7 million shares during the second quarter of 2014 for $156 million at an average purchase price of $58.72. The Company repurchased a total of 21.1 million shares at an average price of $47.48 per share under this program. In connection with entering into the Merger Agreement (see Note 21, “Subsequent Events”), Lorillard suspended future share repurchases.

As of June 30, 2014, total shares repurchased under share repurchase programs authorized by the Board since the separation from Loews in 2008 were as follows:

Program	Amount Authorized		Number of Shares Repurchased
	(In millions)		(In millions)
July 2008 – October 2008	$	400		17.6
May 2009 – July 2009		250		11.0
July 2009 – January 2010		750		29.3
February 2010 – May 2010		250		9.8
August 2010 * – August 2011		1,400		45.1
August 2011 – February 2012		750		20.1
August 2012 – January 2013		500		12.7
March 2013 **– June 2014		1,000		21.1
Total	$	5,300		166.7

* As amended on May 19, 2011

** As amended on May 21, 2013

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Share Repurchase Program (Detail) (USD $) In Millions, unless otherwise specified	6 Months Ended							0 Months Ended	2 Months Ended	6 Months Ended	0 Months Ended	1 Months Ended	6 Months Ended	0 Months Ended	3 Months Ended	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2014 Share repurchase program, July 2008 - October 2008	Jun. 30, 2014 Share repurchase programs, May 2009 - July 2009	Jun. 30, 2014 Share repurchase program, July 2009 - January 2010	Jun. 30, 2014 Share repurchase program, February 2010 - May 2010	Jun. 30, 2014 Share repurchase program, August 2010 - August 2011		Feb. 24, 2012 Share repurchase program, August 2011 - February 2012	Feb. 29, 2012 Share repurchase program, August 2011 - February 2012	Jun. 30, 2014 Share repurchase program, August 2011 - February 2012	Jan. 30, 2013 Share repurchase program, August 2012 - January 2013	Jan. 31, 2013 Share repurchase program, August 2012 - January 2013	Jun. 30, 2014 Share repurchase program, August 2012 - January 2013	Jun. 04, 2014 Share Repurchase Program March, 2013 - June 2014	Jun. 30, 2014 Share Repurchase Program March, 2013 - June 2014	Jun. 30, 2014 Share Repurchase Program March, 2013 - June 2014
Equity, Class of Treasury Stock [Line Items]
Amount authorized	$ 5,300	$ 400	$ 250	$ 750	$ 250	$ 1,400	[1]	$ 750		$ 750	$ 500		$ 500	$ 1,000		$ 1,000	[2]
Number of shares repurchased	166.7	17.6	11.0	29.3	9.8	45.1	[1]		4.9	20.1		2.8	12.7		2.7	21.1	[2]
Share repurchase program periods		July 2008 - October 2008	May 2009 - July 2009	July 2009 - January 2010	February 2010 - May 2010	August 2010 - August 2011	[1]			August 2011 - February 2012			August 2012 - January 2013			March 2013 - June 2014	[2]

[1] As amended on May 19, 2011

[2] As amended on May 21, 2013

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Goodwill and Intangible Assets (Tables)

6 Months Ended

Jun. 30, 2014

Intangible Assets

Intangible Assets

	Weighted Average Amortization Period		Cost		Foreign Currency Translation		Accumulated Amortization		June  30, 2014 Net Carrying Amount
(In millions)
Amortizable intangible assets:
blu eCigs Non-compete Agreement and Technology		5 years	$	1	$	—	$	1	$	—
SKYCIG Non-compete Agreement and Customer List		5 years		2		—		—		2
SKYCIG trademark and trade name		18 months		33		2		18		17
Amortizable intangible assets, net										19
Indefinite-lived intangible assets:
blu eCigs trademark and trade name										57
Intangible assets, net									$	76

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Commitments

6 Months Ended

Jun. 30, 2014

Commitments

9. Commitments

At June 30, 2014, Lorillard Tobacco had contractual obligations to purchase leaf tobacco of approximately $117 million and to purchase machinery of approximately $60 million between July 1, 2014 and June 30, 2015.

At June 30, 2014, blu eCigs had contractual purchase obligations of approximately $25 million. These purchase obligations related primarily to agreements to purchase inventory between July 1, 2014 and June 30, 2015.

At June 30, 2014, blu (U.K.) did not have any contractual purchase obligations.