In Jewett v. The jury determined that no punitive damages were warranted. In November , 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 , the appellate court denied a motion filed by the plaintiff for rehearing of the decision reversing the judgment.
In Weingart v. Circuit Court, Palm Beach County, Florida , 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. Defendants have noticed an appeal to the Florida Fourth District Court of Appeal from the order that awarded compensatory damages to the plaintiff and have amended their notice of appeal to address the final judgment.
Defendants have noticed an appeal from this cost judgment. In Sury v. The jury returned a verdict for the defendants regarding whether punitive damages were warranted. Defendants have noticed an appeal to the Florida First District Court of Appeal from the final judgment that awarded compensatory damages to the plaintiff. In December , Lorillard Tobacco reached an agreement with the plaintiff to resolve the trial costs and fees, should the judgment be upheld on appeal. In Alexander v. Lorillard Tobacco is the only defendant in this case.
Other post-trial motions challenging the verdict were denied. Lorillard Tobacco has noticed an appeal from the amended final judgment to the Florida Third District Court of Appeal. In Calloway v.
The jury apportioned Defendants have noticed an appeal from the final judgment to the Florida Fourth District Court of Appeal. In Evers v. The jury found that punitive damages against Lorillard Tobacco were not warranted. The jury determined that punitive damages were warranted against R.
Reynolds Tobacco Company. As of February 11, , the trial had not proceeded to a second phase to determine the amount of punitive damages, if any. Juries awarded compensatory damages and punitive damages in 24 of these trials. In 20 of the trials, juries awarded only compensatory damages.
In the 27 other trials, juries found in favor of the defendants. 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.
In July , the United States Court of Appeals for the Eleventh Circuit reversed the decision of the trial court in the Bernice Brown case, finding that it was premature to address the extent of any preclusive effect of the Engle Phase I findings until the scope of the factual issues decided in Engle Phase I was determined by the trial court. In December , the U. Since the. Table of Contents Martin and Jimmie Lee Brown decisions, 15 other verdicts awarding damages to plaintiffs have been affirmed in intermediate state Florida appellate courts.
The Florida Supreme Court heard argument in September 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. Various intermediate Florida appellate courts and Florida Federal Courts have issued rulings on these issues.
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 June , the U. The case has been returned to the U. The 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. A ruling by the United States Supreme Court could limit the ability of cigarette manufacturers to contend that certain claims asserted against them in product liability litigation are barred.
Altria Group, Inc.
We were not a defendant in Good. The U. Surgeon General has issued reports regarding the risks of cigarette smoking to non-smokers that could result in additional litigation against cigarette manufacturers, additional restrictions placed on the use of cigarettes, and additional regulations placed on the manufacture or sale of cigarettes. According to this report, scientific evidence supported six major conclusions:. Second-hand smoke causes premature death and disease in children and in adults who do not smoke. Children exposed to second-hand smoke are at an increased risk for sudden infant death syndrome, acute respiratory infections and ear problems.
Exposure of adults to second-hand smoke has immediate adverse effects on the cardiovascular system and causes heart disease and lung cancer. The scientific evidence indicates that there is no risk-free level of exposure to second-hand smoke. Many millions of Americans, both children and adults, are exposed to second-hand smoke in their homes and workplaces. Eliminating smoking in indoor spaces fully protects non-smokers from exposure to second-hand smoke. Separating smokers from non-smokers, cleaning the air, and ventilating buildings cannot eliminate exposures of non-smokers to second-hand smoke.
These reports could form the basis of additional litigation against cigarette manufacturers, including us. The reports have been and in the future could be used to support litigation against us or other cigarette manufacturers.
It is possible that such additional restrictions or regulations could result in a decrease in cigarette sales in the United States, including sales of our brands. These developments may have a material adverse effect on our financial condition, results of operations, and cash flows. We have substantial payment obligations under the State Settlement Agreements which will have a material adverse effect on our cash flows and operating income in future periods. We and certain other U.
Annual payments under the State Settlement Agreements are required to be paid in perpetuity and are based, among other things, on our domestic market share and unit volume of domestic shipments, with respect to the MSA, in the year preceding the year in which payment is due, and, with respect to the Initial State Settlements, in the year in which payment is due. Such method of accounting for pension and postretirement benefits results in the recognition of actuarial gains and losses on pension and postretirement plan assets or benefit obligations in the year it is incurred rather than amortized over the average future service period of the active employees in such plans.
Amounts due under the State Settlement Agreements are impacted by a number of factors, including industry volume, market share and industry operating profits. As a result of the change to mark-to-market pension accounting announced by RAI, the industry operating profits as defined in the State Settlement Agreements may be impacted positively or negatively in any given year. We are unable to estimate the amount or range of loss that could result from an unfavorable outcome of certain material pending litigation.
We record provisions in the consolidated financial statements for pending litigation when we determine that it is probable that a loss has been incurred and the amount of loss can be reasonably estimated. It is possible that our 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.
We may not be able to develop, produce or commercialize competitive new products and technologies required by regulatory changes or changes in consumer preferences. Consumer health concerns and changes in regulations are likely to require us to introduce new products or make substantial changes to existing products.
For example, all 50 states and the District of Columbia require cigarette manufacturers to reduce the ignition propensity of their products. We believe that there may be increasing pressure from public health authorities to develop a conventional cigarette, an alternative cigarette or an alternative tobacco product that provides a demonstrable reduced risk of adverse health effects. Certain of the other major cigarette makers have already developed and marketed alternative cigarette products. We may not be able to develop a reduced risk or reduced exposure product that the FDA allows to be marketed or is acceptable to consumers.
In addition, the costs associated with developing any such new products and technologies could be substantial. We face intense competition and our failure to compete effectively could have a material adverse effect on our profitability and results of operations. We compete primarily on the basis of product quality, brand recognition, brand loyalty, service, marketing, advertising and price. We are subject to highly competitive conditions in all aspects of our business.
We also compete against numerous other smaller manufacturers or importers of cigarettes. If our major. Table of Contents competitors were to significantly increase the level of price discounts offered to consumers, we could respond by increasing price discounts, which could have a materially adverse effect on our profitability and results of operations.
The market for electronic cigarettes is evolving at a very fast pace and is very fragmented, and we compete with many smaller companies with similar product offerings. We are subject to important limitations on advertising and marketing cigarettes that could harm our competitive position. Television and radio advertisements of cigarettes have been prohibited since In addition, the MSA prohibits the targeting of youth in advertising, promotion or marketing of cigarettes. Accordingly, we have determined not to advertise our cigarettes in magazines with large readership among people under the age of Pursuant to the FSPTCA, the FDA reissued a set of marketing and sales restrictions originally promulgated in as part of an unsuccessful effort by the agency to assert jurisdiction over cigarettes.
In addition, many states, cities and counties have enacted legislation or regulations further restricting tobacco advertising, marketing and sales promotions, and others may do so in the future. Additional restrictions may be imposed or agreed to in the future. These limitations may make it difficult to maintain the value of an existing brand if sales or market share decline for any reason. Moreover, these limitations significantly impair the ability of cigarette manufacturers, including us, to launch new premium brands.
The potential regulation of electronic cigarettes by the Food and Drug Administration may materially adversely affect our electronic cigarette business. The application of the FSPTCA to electronic cigarettes could impose, among other things, restrictions on the advertising, marketing and sale of electronic cigarettes, the use of certain flavorings and introducing new products. Changes in laws, regulations and other requirements could adversely affect our business, results of operations or financial condition. In addition to the regulation of our business by the FDA, our business, results of operations or financial condition could be adversely affected by new or future legal requirements imposed by legislative or regulatory initiatives, including but not limited to those relating to health care reform, climate change and environmental matters.
However, the extent of that impact, if any, cannot be determined until regulations are promulgated and additional interpretations of the health care law are available. New legislation or regulations may result in increased costs directly for our compliance or indirectly to the extent such requirements increase. Table of Contents the prices of goods and services because of increased costs or reduced availability. Sales of cigarettes are subject to substantial federal, state and local excise taxes.
Various states and localities have raised the excise tax on cigarettes substantially in recent years. It is our expectation that several states will propose further increases in and in subsequent years. We believe that increases in excise and similar taxes have had an adverse impact on sales of cigarettes. In addition, we believe that the increase in the federal excise tax, as well as possible future increases, the extent of which cannot be predicted, compounded by poor economic conditions, could result in further volume declines for the cigarette industry, including us, and an increased sales shift toward lower priced discount cigarettes rather than premium brands.
We are dependent on the domestic cigarette business, which we expect to continue to contract. Although we conduct business in Puerto Rico, Guam and the U. We do not have foreign cigarette sales that could offset these effects, as we sold the international rights to substantially all of our cigarette brands, including Newport, in As a result of price increases, restrictions on advertising and promotions, 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, industry-wide domestic cigarette shipments have decreased at a compound annual rate of approximately 3.
Industry-wide domestic cigarette shipments decreased by an estimated 2. We expect the domestic cigarette market to continue to contract, which could have a material adverse effect on our results of operation and financial condition. We derive most of our revenue from one brand. Our largest selling brand, Newport, accounted for approximately Our principal strategic plan revolves around the marketing and sales promotion in support of the Newport brand.
We cannot ensure that we will continue to successfully implement our strategic plan with respect to Newport or that implementation of our strategic plan will result in the maintenance, growth or profitability of the Newport brand. The use of significant amounts of promotion expenses and sales incentives in response to competitive actions and market price sensitivity may have a material adverse impact on our business. Since , the cigarette market has been increasingly price competitive due to the impact of, among other things, higher state and local excise taxes and the market share of deep discount brands.
In response to these and other competitor actions and pricing pressures, we have engaged in the significant use of promotional expenses and sales incentives. The cost of these measures could have a material adverse impact on our business. Accordingly, unit sales volume and sales promotion costs in any period are not necessarily indicative of sales and costs that may be realized in subsequent periods. We rely on a limited number of key executives and may continue to experience difficulty in attracting and hiring qualified new personnel in some areas of our business.
The loss of any of our key employees could adversely affect our business. As a tobacco company, we may experience difficulty in identifying and hiring qualified executives and other personnel in some areas of our business. This difficulty is primarily attributable to the health and social issues associated with the tobacco. Table of Contents industry. The loss of services of any key personnel or our inability to attract and hire personnel with requisite skills could restrict our ability to develop new products, enhance existing products in a timely manner, sell products or manage our business effectively.
These factors could have a material adverse effect on our results of operations and financial condition. Increased restrictions on smoking 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, have adopted legislation, regulations or policies which prohibit, restrict, or discourage smoking; smoking in public buildings and facilities, stores, restaurants and bars; and smoking on airline flights and in the workplace.
Other similar laws and regulations are currently under consideration and may be enacted by state and local governments in the future. 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.
We rely on a single manufacturing facility for the production of our cigarettes. We produce all of our traditional cigarettes at our Greensboro, North Carolina manufacturing facility. If our manufacturing plant is damaged, destroyed or incapacitated or we are otherwise unable to operate our manufacturing facility, we may be unable to produce cigarettes and may be unable to meet customer demand which could have a material adverse effect on our sales volume, revenue and profits.
We rely on a small number of suppliers for certain of our leaf tobacco and reconstituted tobacco. If Alliance One becomes unwilling or unable to supply leaf tobacco to us, we believe that leaf tobacco may not be available at prices comparable to those we pay to Alliance One, which could have a material adverse effect on our future profits.
In addition, we purchase all of our reconstituted tobacco from one supplier, which is an affiliate of RAI, one of our major competitors. If RAI becomes unwilling or unable to supply us and we are unable to find an alternative supplier on a timely basis, our operations could be disrupted resulting in lower production levels and reduced sales, which could have a material adverse effect on our sales volume, revenue and profits in the future. The availability of counterfeit cigarettes could adversely affect our sales volume, revenue and profitability. Sales of counterfeit cigarettes in the United States, including counterfeits of our Newport brand, could adversely impact sales by the manufacturers of the brands that are counterfeited and potentially damage the value and reputation of those brands.
Additionally, smokers who mistake counterfeit cigarettes for our cigarettes may attribute quality and taste deficiencies in the counterfeit product to our brands and discontinue purchasing our brands. Although we do not believe that sales of counterfeit Newport cigarettes have had a material adverse effect on our sales volume, revenue and profits to date, the availability of counterfeit Newport cigarettes together with the potential regulation of cigarettes and their ingredients, substantial increases in excise taxes and other potential price increases could result in increased demand for counterfeit product that could have a material adverse effect on our sales volume, revenue and profits in the future.
Table of Contents We may not be able to adequately protect our intellectual property, which could harm the value of our brands and have a material adverse effect on our business. Our intellectual property is material to the conduct of our business. Our ability to maintain and further build brand recognition is dependent on the continued and exclusive use of our trademarks, service marks, trade dress, trade secrets and other proprietary intellectual property, including our name and logo and the unique features of our tobacco products.
If our efforts to protect our intellectual property are ineffective, thereby permitting a third-party to misappropriate or infringe on our intellectual property, the value of our brands may be harmed, which could have a material adverse effect on our business and might prevent our brands from growing or maintaining market share.
Our business could be materially adversely affected by any failure, interruption or security lapse of our information technology systems. Our ability to effectively manage our business depends significantly on our information systems. The failure of our current systems, or future upgrades, to operate effectively or to integrate with other systems, could result in transaction errors, processing inefficiencies, and the loss of sales and customers, disrupting our business. In addition, cybersecurity threats are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, denial of service attacks and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information and corruption of data.
Although we have in place various processes, procedures and controls to monitor and mitigate these threats, there can be no assurance that these will be sufficient to prevent a material security threat. If any of these events were to materialize, they could lead to disruption of our operations, loss of sensitive information or damage to our reputation, and could have a material adverse effect on our financial position, results of operations, or cash flows.
Provisions in our certificate of incorporation and by-laws, and of Delaware law, may prevent or delay an acquisition of us, which could decrease the trading price of our Common Stock. Our certificate of incorporation and by-laws contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids and to encourage prospective acquirers to negotiate with our Board of Directors rather than to attempt a hostile takeover.
These provisions include:. We believe these provisions protect our shareholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our Board of Directors and by providing our board with time to assess any acquisition proposal. These provisions are not intended to prevent such takeovers. However, these provisions apply even if the offer may be considered beneficial by some shareholders and could delay or prevent an acquisition that our Board of Directors determines is not in our best interests and those of our shareholders.
The Separation Agreement between us and Loews contains provisions that may prevent or discourage other companies from acquiring us. The tax-free nature of the Separation may be affected by certain transactions undertaken by us. This indemnification obligation applies regardless of whether the action is restricted as described above, or whether we or a potential acquirer obtains a supplemental ruling or an opinion of counsel. These restrictions and potential indemnification obligations may prevent or discourage other companies from acquiring us.
We are required to indemnify Loews against losses and other expenses incurred at any time including with respect to smoking and health claims and litigation with respect to our assets, properties and businesses. In the Separation Agreement, we have agreed to indemnify Loews and its officers, directors, employees and agents against costs and expenses including, but not limited to, litigation matters and other claims based on, arising out of or resulting from, among other things, the ownership or the operation of us and our assets and properties, and the operation or conduct of us and our businesses at any time prior to or following the Separation including with respect to smoking and health claims and litigation.
If Loews incurs legal or other fees or costs and expenses resulting from the operation of our businesses or otherwise with respect to us, we are required to reimburse Loews for such losses and any legal or other fees related thereto, which could be substantial. These indemnification obligations may discourage third parties from trying to acquire us because our indemnification obligations are binding on our successors and we are prohibited by the Separation Agreement from merging, consolidating or transferring all or a significant portion of our properties or assets unless the resulting entity, transferee or successor agrees to be bound by these indemnification obligations.
In addition, we could face substantial charges for indemnification payments to Loews, which could have a material adverse effect on our cash flows, financial condition and results of operations. We do not believe the Separation has altered or will alter our legal exposure with respect to tobacco-related claims. Our cigarette manufacturing facility is located on approximately 80 acres in Greensboro, North Carolina.
This , square-foot plant contains modern high-speed cigarette manufacturing machinery. The Greensboro facility also includes a warehouse with shipping and receiving areas totaling , square feet. In addition, we own tobacco receiving and storage facilities totaling approximately 1,, square feet in Danville, Virginia.
Our executive offices are located in a , square-foot, four-story office building in Greensboro. Our 93, square-foot research facility is also located in Greensboro. Our principal properties are owned in fee and generally we own all of the machinery we use. We believe that our properties and machinery are in generally good condition. We lease sales offices in major cities throughout the United States, a cold-storage facility in Greensboro and warehousing space in 18 public distribution warehouses located throughout the United States. Table of Contents We lease an office for headquarters, marketing and administrative personnel in our electronic cigarettes business in Charlotte, NC as well as an office for product development in Campbell, CA.
We also lease a warehouse with shipping and receiving areas totaling approximately 7, square feet in Charlotte, NC that is used for the fulfillment of consumer orders over the internet. There were 77 shareholders of record as of February 13, This figure excludes any estimate of the indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies.
The following table presents the high and low sales prices of our Common Stock on the NYSE as well as cash dividends declared per share during the fiscal quarters indicated:. Common Stock Market Price. Fourth Quarter. Third Quarter. Second Quarter. First Quarter. Dividend Policy. The declaration and payment of future dividends to holders of our Common Stock will be at the discretion of our Board of Directors and depend upon many factors, including our financial condition, earnings, capital requirements of our business, legal requirements, regulatory constraints, industry practice, and other factors that the Board of Directors may deem relevant.
As a holding company with no material liquid assets other than the capital stock of our subsidiaries, our ability to pay dividends is dependent on the receipt of dividends from our operating subsidiaries. We expect to continue to pay cash dividends on our Common Stock. Stock Split. Table of Contents Performance Graph. The table below the graph shows the dollar value of those investments as of the dates in the graph.
The comparisons in the graph are required by the SEC and are not intended to forecast or be indicative of future performance of our Common Stock. Lorillard Common Stock. In the fourth quarter of , we repurchased the following number of shares of our Common Stock:.
In millions, except for per share amounts. All repurchases were made in open market transactions. We record the repurchase of shares of Common Stock at cost based on the transaction date of the repurchase. The following table includes our selected historical consolidated financial information as of the dates and for the periods indicated. Results of Operations:. Net sales 1. Cost of sales 1.
Gross profit. Selling, general and administrative 2. Operating income 3. Investment income 4. Interest expense. Income before income taxes. Income taxes. Net income. Diluted weighted average number of shares outstanding 5. Diluted earnings per share 5. Dividends per share 5.
Ratio of earnings to fixed charges. Segment data:. Net sales. Cigarettes 1. Electronic cigarettes. Operating income. In millions. Financial Position:. Current assets. Total assets. Current liabilities. Long-term debt. Total liabilities. In addition to historical information, the following discussion contains forward-looking statements based on current expectations that involve risks and uncertainties. The Cigarettes segment consists principally of the operations of Lorillard, Inc. Lorillard Tobacco is the third largest manufacturer of cigarettes in the United States.
Founded in , Lorillard Tobacco is the oldest continuously operating tobacco company in the United States. In addition to the Newport brand, the Lorillard product line has four additional brand families marketed under the Kent, True, Maverick and Old Gold brand names. These five cigarette brands include 39 different product offerings which vary in price, taste, flavor, length and packaging. LOEC, Inc. Certain selling, general and administrative expenses of the Cigarettes segment have been allocated to the Electronic Cigarettes segment.
Critical Accounting Policies and Estimates. The preparation of the consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and the related notes. Actual results could differ from those estimates.
The financial statements include our subsidiaries after the elimination of intercompany accounts and transactions. The consolidated financial statements and accompanying notes have been prepared in accordance with GAAP, applied on a consistent basis. We continually evaluate the accounting policies and estimates used to prepare the consolidated financial statements. In general, our estimates are based on historical experience, evaluation of current trends, information from third party professionals and various other assumptions that we believe are reasonable under the known facts and circumstances at the time.
Due to the inherent uncertainties involved with this type of judgment, actual results could differ significantly from estimates and may have a material adverse impact on our results of operations and equity. Table of Contents Goodwill and Intangible Assets. The acquisition of blu eCigs in April of has resulted in the recording of goodwill, trademarks and other intangible assets. Upon acquisition, the purchase price was first allocated to identifiable assets and liabilities, including trademarks and other intangible assets, and the remainder of the purchase price was recorded as goodwill.
Our trademarks and goodwill are considered indefinite lived intangible assets and as such are not amortized. All of our trademarks and recognized intangible assets have been recorded as a part of our Electronic Cigarettes reporting segment. Goodwill Valuations. Goodwill is evaluated using a two-step impairment test at the reporting unit level. The first step of the goodwill impairment test compares the book value of a reporting unit, including goodwill, with its fair value.
If the book value of a reporting unit exceeds its fair value, we perform the second step of the impairment test. The difference between the total fair value of the reporting unit and the fair value of all of the assets and liabilities other than goodwill is the implied fair value of that goodwill. The amount of impairment loss is equal to the excess of the book value of the goodwill over the implied fair value of that goodwill. In arriving at the fair value of a reporting unit, we utilize a combination of the income and market approaches. Other estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements.
The multiples are derived from comparable publicly traded companies with similar operating and investment characteristics. Finally, we consider the implied control premium and conclude whether the implied control premium is reasonable based on other recent market transactions. Intangible Asset Valuations. The fair value of our acquired trademarks and trade names are estimated utilizing the relief from royalty method, and compared to the carrying value.
The main assumptions utilized in the relief from royalty method are projected revenues from our long range plan, assumed royalty rates that could be payable if we did not own the trademarks and a discount rate. We recognize an impairment loss when the estimated fair value of the indefinite lived intangible asset is less than its carrying value. For additional information about goodwill and intangible asset valuations, see Notes 1 and 6 to our consolidated financial statements beginning on page Revenue Recognition.
Revenue from product sales, net of sales incentives, is recognized at the time ownership of the goods transfers to customers and collectability is reasonably assured. Federal excise taxes are recognized on a gross. Table of Contents basis and are included in both sales and cost of sales. Sales incentives include retail price discounts, coupons and retail display allowances and are recorded as a reduction of revenue based on amounts estimated as due to customers and consumers at the end of a period based primarily on use and redemption rates.
Tobacco Settlement Costs.
We record our portion of ongoing adjusted settlement payments as part of cost of sales as product is shipped. Tobacco and Other Litigation.
We and other cigarette manufacturers continue to be confronted with substantial litigation. Plaintiffs in most of the cases seek unspecified amounts of compensatory damages and punitive damages, although some seek damages ranging into the billions of dollars. Plaintiffs in some of the cases seek treble damages, statutory damages, return of profits, equitable and injunctive relief, and medical monitoring, among other damages. We believe that we have valid defenses to the cases pending against us. We also believe we have valid bases for appeal of the adverse verdicts against us.
While we intend to defend vigorously all tobacco products liability litigation, it is not possible to predict the outcome of any of this litigation. Litigation is subject to many uncertainties, and it is possible that some of these actions could be decided unfavorably. We may enter into discussions in an attempt to settle particular cases if we believe it is appropriate to do so. It has been our experience and is our 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, we disclose the nature of the litigation and any developments as appropriate. We monitor 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. Our assessment of a possible loss or range of loss is based on our assessment of the final outcome of the litigation upon the conclusion of all appeals. It is possible that our results of operations or cash flows in a particular quarterly or annual period or our 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.
Defense costs associated with product liability claims are a significant component of our selling, general and administrative expenses and are accrued as incurred. Numerous factors affect product liability defense costs in any given period. The principal factors are as follows:. Pension and Postretirement Benefit Obligations.
We are required to make a significant number of assumptions in order to estimate the liabilities and costs related to our pension and postretirement benefit obligations to employees under our benefit plans. The assumptions that have the most impact on pension costs are the discount rate, the expected return on plan assets and the expected rate of compensation increases. These assumptions are evaluated relative to current market factors such as inflation, interest rates and fiscal and monetary policies. Changes in these assumptions can have a material impact on pension obligations and pension expense.
In determining the discount rate assumption, we utilized current market information and liability information, including a discounted cash flow analysis of our pension and postretirement obligations. In particular, the basis for our discount rate selection was the yield on indices of highly rated fixed income debt securities with durations comparable to that of our plan liabilities.
Table of Contents The salary growth assumption reflects our long-term actual experience and future and near-term outlook. Our major assumptions are set forth in Note 16 to our Consolidated Financial Statements beginning on page For , hypothetical changes in the assumptions we used for the pension plans would have had the following impact on our pension expense:. Income Taxes. Under ASC , deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse.
Judgment is required in determining income tax provisions and in evaluating tax positions. The uncertain tax provisions of ASC prescribe a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.
Additionally, ASC provides guidance on the measurement, derecognition, classification and disclosure of tax positions, along with accounting for the related interest and penalties. The inventory of leaf tobacco is classified as a current asset in accordance with generally recognized trade practice although, due to the duration of the aging processes, a significant portion of the tobacco on hand will not be sold or used within one year. Recent Accounting Pronouncements. Business Environment. Participants in the U. The State Settlement Agreements impose a stream of future payment obligations on us and on the other major U.
The domestic cigarette market, in which we conduct our only significant business, continues to contract. As a result of price increases, restrictions on advertising, promotions and smoking in public and private facilities, increases in regulation and excise taxes, health concerns, a decline in the social acceptability of smoking, increased pressure from anti-tobacco groups and other factors, domestic cigarette shipments have decreased at a compound rate of approximately 3.
Lorillard coupon redemption form
Increases in cigarette prices since 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 of less than 2. 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. 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.
The FDA also indicated that its final report, including the peer review comments, will be released for public comment at a future date. Plaintiffs motion for rehearing en banc was denied, and Plaintiffs filed a petition for certiorari with the U. Supreme Court on October 30, While we believe there is established legal precedent supporting our petition for certiorari and our claims we cannot predict the outcome of that petition or any further appeal. Nor can we make any assurances that our petition or any such appeal will be successful. 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.
District Court for the District of Columbia. 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. 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. That motion was denied on December 5, Supreme Court is March 5, The federal government and many state and local governments and agencies, as well as private businesses, have adopted legislation, regulations or policies which prohibit, restrict or discourage smoking, including legislation, regulations or policies prohibiting or restricting smoking in public buildings and facilities, stores, restaurants and bars, on airline flights and in the workplace.
Other similar laws and regulations are under consideration and may be enacted by federal, state and local governments in the future. Substantial federal, state and local excise taxes are reflected in the retail price of cigarettes. 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. 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.
Selected Industry Data. Lorillard total domestic unit volume 1 , 3. Industry total domestic unit volume 1 , 3. Total menthol segment market share for the industry 2. Total discount segment market share for the industry. Table of Contents 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.
Income Statement Captions. Net sales includes revenue from product sales, net of sales incentives, and is recognized at the time that ownership of the goods transfers to customers and collectability is reasonably assured. Federal excise taxes on cigarettes are recognized on a gross basis, and are included in both net sales and cost of sales.
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Sales incentives include retail price discounts, coupons and retail display allowances, and are recorded as a reduction of revenue based on amounts estimated as due to customers and consumers at the end of a period based primarily on use and redemption rates. Cost of sales includes federal excise taxes, leaf tobacco cost, wrapping and casing material, manufacturing labor and production salaries, wages and overhead, depreciation related to manufacturing plant and equipment, research and development costs, distribution, other manufacturing costs, State Settlement Agreement expenses, the federal assessment for tobacco growers, Food and Drug Administration fees, promotional product expenses and electronic cigarette raw materials and manufacturing costs.
Selling, general and administrative expenses includes sales force expenses, legal and other costs of litigating and administering product liability claims, administrative expenses and advertising and marketing costs. Advertising and marketing costs include items such as direct mail, advertising, agency fees and point of sale materials. Investment income includes interest and dividend income, realized gains and losses on sale of investments and equity in the earnings of limited partnership investments. Interest expense includes interest expense related to debt and income taxes.
Results of Operations. Lorillard Consolidated Results. Selling, general and administrative. Investment income. Table of Contents Cigarettes Segment Results. Total Lorillard wholesale cigarette unit volume, which includes Puerto Rico and U. Possessions, decreased 1. Domestic wholesale cigarette unit volume, which excludes Puerto Rico and U. Possessions, also decreased 1.
Adjusting for the negative impact of changes in wholesale inventory patterns, Lorillard domestic wholesale shipments decreased an estimated 0. Total cigarette industry domestic wholesale shipments decreased an estimated 2. Changes in total cigarette industry wholesale inventory patterns had a minimal impact in as compared to Domestic wholesale cigarette unit volume for Newport, which excludes Puerto Rico and U. Possessions decreased 1.
Adjusting for the negative impact of changes in wholesale inventory patterns, Newport domestic wholesale shipments were down an estimated 1. Gains in market share were largely attributable to unit volume outperformance of Newport Menthol in our core markets, geographic promotional expansion of Newport Menthol, and continued growth of Maverick, and were achieved despite the heightened level of competitive menthol activity.
Cost of sales. Since date of acquisition - April 24, Table of Contents Net sales. Total Lorillard wholesale unit volume, which includes Puerto Rico and U. Possessions, increased 6. Domestic unit volume, which excludes Puerto Rico and U. Possessions, also increased 6. Unit volume figures in this section are provided on a gross basis.
Total cigarette industry domestic wholesale shipments decreased an estimated 3. The increase in is primarily a result of higher legal costs related to the Engle Progeny litigation. Table of Contents partially by a decrease in the effective tax rate from The decrease was primarily driven by state tax law changes enacted during the second quarter of as well as the settlement of certain state and federal tax matters.
Liquidity and Capital Resources. 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. The decreased net cash flow in primarily reflects the decrease in net income and an increase in cash paid for settlement costs and inventories, partially offset by a decrease in cash paid for income taxes.
The increased cash flow in primarily reflects an increase in net income. Cash flow from investing activities. The increase in cash used by investing activities in is due to increased purchases of equipment. The expenditures were primarily for the modernization of manufacturing equipment. Cash flow from financing activities. The net proceeds from the issuance were used for the repurchase of our common stock.
Table of Contents Lorillard Tobacco is the principal, wholly owned operating subsidiary of Lorillard, Inc. The interest rate payable on the Notes is subject to incremental increases from 0. The Notes are not entitled to any sinking fund and are not redeemable prior to maturity. The Notes contain covenants that restrict liens and sale and leaseback transactions, subject to a limited exception. During , we repurchased approximately Purchases under these programs were made from time to time at prevailing market prices in open market purchases, privately negotiated transactions, block purchase techniques or otherwise, as determined by management.
The purchases were funded from existing cash balances, including proceeds from the issuance of the Notes. These programs do not obligate us to acquire any particular amount of our common stock. The timing, frequency and amount of repurchase activity will depend on a variety of factors such as levels of cash generation from operations, cash requirements for investment in our business, current stock price, market conditions and other factors.
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.
The rate of return on our pension assets in was a positive We believe that it is appropriate for a company of our size and financial characteristics to have a prudent level of debt as a component of our capital structure in order to reduce our total cost of capital and improve total shareholder returns. The proceeds of any such debt financing may.
Table of Contents be used to fund stock repurchases, acquisitions, dividends or for other general corporate purposes. We presently have no commitments or agreements with or from any third party regarding any debt financing transactions and no assurance can be given that we will ultimately pursue any debt financing or, if pursued, that we will be able to obtain debt financing at the suggested levels or on attractive terms.
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 our senior unsecured long-term debt. In addition, the Revolver contains customary affirmative and negative covenants, including restrictions on liens and sale and leaseback transactions subject to a limited exception.
The Revolver contains customary events of default, including upon a change in control that could result in the acceleration of all amounts and cancellation of all commitments outstanding, if any, under the Revolver. There were no borrowings under the Revolver during , or State Settlement Agreements. 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:. The inflation adjustment increases payments on a compounded annual basis by the greater of 3. The inflation adjustment is measured starting with inflation for 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.
If volume has increased, the volume adjustment would increase the annual payment by the same percentage as the number of cigarettes shipped exceeds the base number. If volume has decreased, the. Table of Contents volume adjustment would decrease the annual payment by 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. 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. This amount was then paid to the MSA states. The settlement would resolve the claims for the years through and would put in place a new method for calculating this adjustment beginning in Under the terms of the agreement, Lorillard Tobacco and other manufacturers will receive credits against their future MSA payments over the next five 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.
The term sheet is subject to approval by the arbitration panel presiding over the arbitration of the dispute for No amounts have been included in results related to the settlement. Certain non-settling states have objected to the request for approval. No assurance can be given that the arbitration panel will issue the order necessary for the agreement to proceed or that the objections or any other such actions by nonsignatory states will be resolved in a manner favorable to Lorillard. Contractual Cash Payment Obligations.
Senior notes. Interest payments related to notes. Contractual purchase obligations. Operating lease obligations. Emails promoting menthol had a 1. Little is known about tobacco company email marketing and this study fills an identified research gap. A deeper understanding of this type of marketing is needed in order to counter tobacco industry messaging and advance tobacco control.
Abstract Tobacco companies are restricted from engaging in many traditional forms of marketing. Keywords Tobacco industry.