##### Table of Contents



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 September 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period From  to
 Commission File Number: 001-34097
 Lorillard, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    13-1911176(State or other jurisdiction of 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)
  þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ
 Class
    
    Outstanding at October 28, 2008Common stock, $0.01 par value
    
    168,070,689 shares




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##### 



Table of Contents
 Page No.PART I. FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    29PART II. OTHER INFORMATION
    
    
    30Item 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3. Defaults Upon Senior Securities
    
    
    34Item 4. Submissions of Matters to a Vote of Security Holders
    
    
    34Item 5. Other Information
    
    
    35Item 6. Exhibits
    
    
    36SIGNATURES
    
    
    37EX-10.6EX-10.7EX-31.1EX-31.2EX-32.1
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 LORILLARD, INC. AND SUBSIDIARIES
 CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
 September 30,
    
    
    December 31,(In millions, except share and per share data)
    
    2008
    
    
    2007Assets:Cash and cash equivalents
    
    $
    1,208
    
    
    $
    1,210Accounts receivables, less allowance of $2 and $2
    
    
    23
    
    
    
    10Receivables from limited partnerships
    
    
    19
    
    
    
    198Inventories (Note 2)
    
    
    261
    
    
    
    223Deferred income taxes
    
    
    432
    
    
    
    462Total current assets
    
    
    1,943
    
    
    
    2,103Plant and equipment (Note 3)
    
    
    218
    
    
    
    207Prepaid pension assets
    
    
    109
    
    
    
    103Other investments
    
    
    15
    
    
    
    65Deferred taxes and other assets
    
    
    61
    
    
    
    122Total assets
    
    $
    2,346
    
    
    $
    2,600Liabilities and Shareholders Equity:Accounts and drafts payable
    
    $
    16
    
    
    $
    29Accrued liabilities (Note 4)
    
    
    257
    
    
    
    231Settlement costs
    
    
    895
    
    
    
    919Income taxes
    
    
    65
    
    
    
    9Total current liabilities
    
    
    1,233
    
    
    
    1,188Postretirement pension, medical and life insurance benefits
    
    
    276
    
    
    
    284Other liabilities
    
    
    112
    
    
    
    115Total liabilities
    
    
    1,621
    
    
    
    1,587Commitments and Contingent Liabilities (Notes 7 and 8)Shareholders Equity:Preferred stock, $0.01 par value, authorized 10,000,000 shares
    
    
    
    
    
    
    Common stock:Authorized - 600,000,000 shares; par value$0.01 per shareIssued and
outstanding  170,034,682 and 173,923,429 shares
    
    
    2
    
    
    
    2Additional paid-in capital
    
    
    220
    
    
    
    217Earnings retained in the business
    
    
    862
    
    
    
    882Accumulated other comprehensive loss
    
    
    (85
    )
    
    
    (88
    )999
    
    
    
    1,013Treasury shares at cost, 3,897,575 shares in 2008
    
    
    (274
    )
    
    
    Total shareholders equity
    
    
    725
    
    
    
    1,013Total liabilities and shareholders equity
    
    $
    2,346
    
    
    $
    2,600
  3




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##### Table of Contents



LORILLARD, INC. AND SUBSIDIARIES
 CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions, except per share data)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales (including excise taxes
of $189, $181, $536 and $522
respectively)
    
   $
    1,125
    
    
    $
    1,044
    
    
    $
    3,116
    
    
    $
    3,012Cost of sales
    
    
    653
    
    
    
    614
    
    
    
    1,834
    
    
    
    1,772Gross profit
    
    
    472
    
    
    
    430
    
    
    
    1,282
    
    
    
    1,240Selling, general and administrative
    
    
    90
    
    
    
    82
    
    
    
    281
    
    
    
    246Operating income
    
    
    382
    
    
    
    348
    
    
    
    1,001
    
    
    
    994Other income (expense), net (Note 5)
    
    
    4
    
    
    
    33
    
    
    
    18
    
    
    
    86Income before income taxes
    
    
    386
    
    
    
    381
    
    
    
    1,019
    
    
    
    1,080Income taxes
    
    
    149
    
    
    
    137
    
    
    
    390
    
    
    
    396Net income
    
    $
    237
    
    
    $
    244
    
    
    $
    629
    
    
    $
    684Earnings per share:Basic
    
    $
    1.38
    
    
    $
    1.40
    
    
    $
    3.63
    
    
    $
    3.93Diluted
    
    $
    1.38
    
    
    $
    1.40
    
    
    $
    3.62
    
    
    $
    3.93Number of shares outstanding:Basic
    
    
    172.37
    
    
    
    173.92
    
    
    
    173.40
    
    
    
    173.92Diluted
    
    
    172.49
    
    
    
    173.92
    
    
    
    173.53
    
    
    
    173.92
  4




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##### Table of Contents



LORILLARD, INC. AND SUBSIDIARIES
 CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS EQUITY
(UNAUDITED)
 Accum-ulatedCompre-
    
    
    
    
    
    
    
    
    
    
    Earnings
    
    
    Other
    
    
    
    
    
    
    Totalhensive
    
    
    
    
    
    
    Additional
    
    
    Retained
    
    
    Compre-
    
    
    
    
    
    
    Stock-Income
    
    
    Common
    
    
    Paid-in
    
    
    in the
    
    
    hensive
    
    
    Treasury
    
    
    holders(In millions)
    
    (Loss)
    
    
    Stock
    
    
    Capital
    
    
    Business
    
    
    Loss
    
    
    Shares
    
    
    EquityBalance, January 1, 2007,
as previously reported
    
    
    
    
    
    $
    
    
    
    $
    215
    
    
    $
    1,179
    
    
    $
    (99
    )
    
    $
    
    
    
    $
    1,295Par value adjustment, Lorillard
common stock - 1.7 million to
1 stock split
    
    
    
    
    
    
    2
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Effect of adopting FIN No. 48
on retained earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25
    )
    
    
    
    
    
    
    
    
    
    
    (25
    )Balance, January 1, 2007,
as adjusted
    
    
    
    
    
    
    2
    
    
    
    213
    
    
    
    1,154
    
    
    
    (99
    )
    
    
    
    
    
    
    1,270Comprehensive income:Net income
    
    $
    684
    
    
    
    
    
    
    
    
    
    
    
    684
    
    
    
    
    
    
    
    
    
    
    
    684Other comprehensive
gains, pension
liability
pension liability
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3Comprehensive income
    
    $
    687Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (676
    )
    
    
    
    
    
    
    
    
    
    
    (676
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Balance, September 30, 2007
    
    
    
    
    
    $
    2
    
    
    $
    216
    
    
    $
    1,162
    
    
    $
    (96
    )
    
    $
    
    
    
    $
    1,284Balance, January 1, 2008,
as previously reported
    
    
    
    
    
    $
    
    
    
    $
    219
    
    
    $
    882
    
    
    $
    (88
    )
    
    $
    
    
    
    $
    1,013Par value adjustment, Lorillard
common stock - 1.7 million to
1 stock split
    
    
    
    
    
    
    2
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, January 1, 2008,
as adjusted
    
    
    
    
    
    
    2
    
    
    
    217
    
    
    
    882
    
    
    
    (88
    )
    
    
    
    
    
    
    1,013Comprehensive income:Net income
    
    $
    629
    
    
    
    
    
    
    
    
    
    
    
    629
    
    
    
    
    
    
    
    
    
    
    
    629Other comprehensive
gains, pension
liability
   
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3Comprehensive income
    
    $
    632Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (649
    )
    
    
    
    
    
    
    
    
    
    
    (649
    )Shares repurchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (274
    )
    
    
    (274
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Balance, September 30, 2008
    
    
    
    
    
    $
    2
    
    
    $
    220
    
    
    $
    862
    
    
    $
    (85
    )
    
    $
    (274
    )
    
    $
    725
  5




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##### Table of Contents



LORILLARD, INC. AND SUBSIDIARIES
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Nine Months EndedSeptember 30,(In millions)
    
    2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    629
    
    
    $
    684Adjustments to reconcile net cash provided (used in) by
operating activities :Depreciation and amortization
    
    
    25
    
    
    
    31Deferred income taxes
    
    
    84
    
    
    
    (40
    )Share-based compensation
    
    
    2
    
    
    
    1Amortization of marketable securities
    
    
    
    
    
    
    (19
    )Investment income
    
    
    
    
    
    
    (31
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (13
    )
    
    
    2Inventories
    
    
    (38
    )
    
    
    (31
    )Accounts payable and accrued liabilities
    
    
    12
    
    
    
    (33
    )Settlement costs
    
    
    (24
    )
    
    
    43Income taxes
    
    
    56
    
    
    
    119Other assets
    
    
    5
    
    
    
    (1
    )Postretirement health and life insurance benefits
    
    
    (8
    )
    
    
    (7
    )Other
    
    
    (2
    )
    
    
    (2
    )Net cash provided by operating activities
    
    
    728
    
    
    
    716Cash flows from investing activities:Purchases of investments
    
    
    (800
    )
    
    
    (3,620
    )Proceeds from maturities of investments
    
    
    500
    
    
    
    2,100Proceeds from sales of investments
    
    
    528
    
    
    
    1,785Additions to plant and equipment
    
    
    (35
    )
    
    
    (42
    )Net cash provided by investing activities
    
    
    193
    
    
    
    223Cash flows from financing activities:Dividends paid
    
    
    (649
    )
    
    
    (676
    )Shares repurchased
    
    
    (274
    )
    
    
    Excess tax benefits from share-based arrangements
    
    
    
    
    
    
    2Net cash used in financing activities
    
    
    (923
    )
    
    
    (674
    )Change in cash and cash equivalents
    
    
    (2
    )
    
    
    265Cash and cash equivalents, beginning of year
    
    
    1,210
    
    
    
    1,128Cash and cash equivalents, end of period
    
    $
    1,208
    
    
    $
    1,393Cash paid for income taxes
    
    $
    266
    
    
    $
    320
  6




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LORILLARD, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 1. Basis of Presentation
         7




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LORILLARD, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
       8




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LORILLARD, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)
(Unaudited)
 2. Inventories
  September 30,
    
    
    December 31,(In millions)
    
    2008
    
    
    2007Leaf tobacco
    
    $
    212
    
    
    $
    172Manufactured stock
    
    
    43
    
    
    
    45Material and supplies
    
    
    6
    
    
    
    6$
    261
    
    
    $
    223
  3. Plant and Equipment
  September 30,
    
    
    December 31,(In millions)
    
    2008
    
    
    2007Land
    
    $
    3
    
    
    $
    3Buildings
    
    
    85
    
    
    
    85Equipment
    
    
    534
    
    
    
    565Total
    
    
    622
    
    
    
    653Accumulated depreciation
    
    
    (404
    )
    
    
    (446
    )Plant and equipment-net
    
    $
    218
    
    
    $
    207
 4. Accrued Liabilities
  September 30,
    
    
    December 31,(In millions)
    
    2008
    
    
    2007Legal fees
    
    $
    27
    
    
    $
    17Salaries and other compensation
    
    
    19
    
    
    
    19Medical and other employee benefit plans
    
    
    27
    
    
    
    29Consumer rebates
    
    
    68
    
    
    
    66Sales promotion
    
    
    22
    
    
    
    24Excise and other taxes
    
    
    33
    
    
    
    45Due to brokers
    
    
    27
    
    
    
    Other accrued liabilities
    
    
    34
    
    
    
    31Total
    
    $
    257
    
    
    $
    231
 9




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LORILLARD, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)
(Unaudited)
 5. Other Income (Expense), Net
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Interest income, net
    
    $
    5
    
    
    $
    21
    
    
    $
    18
    
    
    $
    55Limited partnership equity income (loss)
    
    
    (1
    )
    
    
    12
    
    
    
    
    
    
    
    31Other income (expense), net
    
    $
    4
    
    
    $
    33
    
    
    $
    18
    
    
    $
    86
 6. Fair Value
  
    
    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 in active markets.
    
    Level 3  Valuations derived from valuation techniques in which one or
more significant inputs are unobservable.
   (In millions)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalCash
    
    $
    1
    
    
    $
    
    
    
    $
    
    
    
    $
    1Repurchase agreements collateralized by treasury securities
    
    
    1,186
    
    
    
    
    
    
    
    
    
    
    
    1,186Treasury money market funds
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    19Money market funds
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Total cash and cash equivalents
    
    $
    1,208
    
    
    $
    
    
    
    $
    
    
    
    $
    1,208
 10




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LORILLARD, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)
(Unaudited)
 7. Earnings Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net Earnings
    
    $
    237
    
    
    $
    244
    
    
    $
    629
    
    
    $
    684Weighted Average Shares Outstanding  Basic
    
    
    172.37
    
    
    
    173.92
    
    
    
    173.40
    
    
    
    173.92Stock Options and Stock Appreciation Rights
    
    
    0.12
    
    
    
    0.00
    
    
    
    0.13
    
    
    
    0.00Weighted Average Shares Outstanding  Diluted
    
    
    172.49
    
    
    
    173.92
    
    
    
    173.53
    
    
    
    173.92
   8. Benefit Plans
   Three Months Ended
    
    
    Nine Months EndedPension Benefits
    
    September 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Service cost
    
    $
    4
    
    
    $
    4
    
    
    $
    13
    
    
    $
    13Interest cost
    
    
    14
    
    
    
    13
    
    
    
    41
    
    
    
    39Expected return on plan assets
    
    
    (17
    )
    
    
    (17
    )
    
    
    (53
    )
    
    
    (51
    )Amortization of net loss
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Amortization of prior service cost
    
    
    1
    
    
    
    1
    
    
    
    4
    
    
    
    4Net periodic benefit cost
    
    $
    2
    
    
    $
    2
    
    
    $
    5
    
    
    $
    6
 11




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LORILLARD, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS(Continued)
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedOther Postretirement Benefits
    
    September 30,
    
    
    September 30,(In millions)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Service cost
    
    $
    1
    
    
    $
    1
    
    
    $
    3
    
    
    $
    3Interest cost
    
    
    3
    
    
    
    3
    
    
    
    9
    
    
    
    9Amortization of net loss
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    Net periodic benefit cost
    
    $
    3
    
    
    $
    4
    
    
    $
    11
    
    
    $
    12
 9. Legal Proceedings and Commitments
 Commitments
  Legal Proceedings
 Tobacco Related Product Liability Litigation
 Engle
   Engle Engle Engle
   12




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Schwab v. Philip Morris USA, Inc., et al.
  United States of
America v. Philip Morris USA, Inc., et al.,
       Engle
 13




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##### Table of Contents



Engle Engle
 Engle
 Engle Engle Engle
 Engle Engle
    Broin v. Philip Morris Companies, Inc., et al.
  14




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##### Table of Contents



French v. Philip Morris Incorporated, et al.,
  Schwab v. Philip
Morris USA, Inc., et al. Schwab
  Scott Scott v. The
American Tobacco Company, et al. Scott
 Scott
 Scott
 15




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##### Table of Contents



Engle Engle v. R.J. Reynolds Tobacco Co., et al. Engle
 Engle
 Engle Engle Engle Engle Engle Engle Engle
 Other
class action cases Brown v. The
American Tobacco Company, Inc., et al. Brown
 16




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##### Table of Contents



Lights
class actions Good v. Altria Group, Inc., et al. Schwab v.
Philip Morris USA, Inc., et al
 Schwab Schwab v. Philip Morris USA, Inc., et al. Schwab
  United States of America v. Philip Morris USA, Inc., et al.
  17




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18




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Young v. Lorillard Tobacco Company
      19




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##### Table of Contents



Defenses
  United States of America v. Philip Morris USA, Inc., et al.
 Scott
 OTHER LITIGATION
  20




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##### Table of Contents



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 September 30, 2008 (the Form 10-Q). In addition to
historical information, the following discussion contains forward-looking statements based on
current expectations that involve risks and uncertainties. Investors are cautioned not to place
undue reliance on these forward-looking statements. Statements preceded by, followed by or that
otherwise include the words believe, expect, anticipate, intend, project, estimate,
plan, may increase, may fluctuate and similar expressions or future or conditional verbs such
as will, should, would, may and could are generally forward-looking in nature and are not
historical facts. Actual results and the timing of certain events may differ significantly from
those projected in such forward-looking statements due to a number of factors, including those set
forth in Business Environment below, 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. and its consolidated
subsidiaries. We use the terms the Company and Lorillard Tobacco when we wish to refer only to
Lorillard, Inc. or Lorillard Tobacco Company, respectively.
 Overview
  Critical Accounting Policies and Estimates
  Business Environment
  
    
    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.
 21




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##### Table of Contents




    
    Substantial annual payments continuing in perpetuity, and significant restrictions
on marketing and advertising have been agreed to and are required under the terms of
certain settlement agreements, including the Master Settlement Agreement among major
tobacco manufacturers and 46 states and various other governments and jurisdictions
(the MSA) that we entered into in 1998 along with Philip Morris Incorporated, Brown &
Williamson Tobacco Corporation and R.J. Reynolds Tobacco Company (the Original
Participating Manufacturers) to settle asserted and unasserted health care cost
recovery and other claims. We and certain other U.S. tobacco product manufacturers
previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota
(the Initial State Settlements, and together with the MSA, the State Settlement
Agreements). The State Settlement Agreements impose a stream of future payment
obligations on us and the other major U.S. cigarette manufacturers and place
significant restrictions on their ability to market and sell cigarettes.
    
    The continuing contraction of the domestic cigarette market, in which we currently
conduct our only significant business. 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 2.2% from the
twelve months ended September 30, 1999 through the twelve months ended September 30,
2008.
    
    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 state and local excise taxes and by manufacturer price
increases. Price increases have led, and continue to lead, to high levels of
discounting and other promotional activities for premium brands. Deep discount brands
have grown from an estimated share in 1998 of less than 1.5% to an estimated 13.2% for
the nine months ended September 30, 2008, and continue to be a significant competitive
factor in the domestic market. We do not have sufficient empirical data to determine
whether the increased price of cigarettes has deterred consumers from starting to smoke
or encouraged them to quit smoking, but it is likely that increased prices may have had
an adverse effect on consumption and may continue to do so.
    
    Substantial and increasing regulation of the tobacco industry. A bill was introduced
in February 2007 in the U.S. Congress to grant the FDA authority to regulate tobacco
products. The bill has been considered and approved by Congressional committees in both
houses of Congress during 2007 and 2008 and was approved by the House of
Representatives on July 30, 2008. It is possible that the Senate will consider and
approve a version of the bill later in 2008. We believe that the FDA could promulgate
regulations, if the bill is enacted into law, that could among other things result in a
ban on or restrict the use of menthol in cigarettes. The bill would impose new
restrictions on the manner in which cigarettes can be advertised and marketed, require
larger and more severe health warnings on cigarette packaging, restrict the level of
tar and nicotine contained in or yielded by cigarettes and may alter the way cigarette
products are developed and manufactured. We also believe that any such proposals, if
enacted, would provide our larger competitors with a competitive advantage.
    
    Substantial federal, state and local excise taxes which are reflected in the retail
price of cigarettes. For the nine months ended September 30, 2008, the federal excise
tax was $0.39 per pack and combined state and local excise taxes ranged from $0.07 to
$4.25 per pack. For the nine months ended September 30, 2008, excise tax increases
ranging from $0.20 to $1.25 per pack were implemented in six states. Increases in state
excise taxes on cigarette sales were enacted in ten states during 2007 and ranged from
$0.20 per pack to $1.00 per pack. One measure passed by Congress in September 2007
would have increased the federal excise tax on cigarettes by $0.61 per pack to finance
health insurance for children. While this bill was vetoed by the President, it is
possible that similar bills or other proposals containing a federal excise tax increase
may be considered by Congress in the future. It is likely that increases in excise and
similar taxes have had an adverse impact on sales of cigarettes and that 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.
 22




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
    
    Continuing and substantial restrictions on smoking. Over the last decade, 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, including legislation, regulations or policies prohibiting or restricting
smoking in public buildings and facilities, stores, restaurants and bars, on airline
flights and in the workplace. Other similar laws and regulations are currently under
consideration and may be enacted by state and local governments in the future. It is
likely that such smoking restrictions may have had an adverse effect on consumption and
may continue to do so.
    
    The domestic market for cigarettes is highly competitive. Competition is primarily
based on a brands price, including the level of discounting and other promotional
activities, positioning, consumer loyalty, retail display, quality and taste. Lorillard
Tobaccos principal competitors are the two other major U.S. cigarette manufacturers,
Philip Morris USA (Philip Morris) and Reynolds American, Inc. (RAI). Lorillard
Tobacco also competes with numerous other smaller manufacturers and importers of
cigarettes, including deep discount cigarette manufacturers. Lorillard Tobacco believes
its ability to compete even more effectively has been restrained in some marketing
areas as a result of retail merchandising contracts offered by Philip Morris and RAI
which limit the retail shelf space available to its brands. As a result, in some retail
locations Lorillard Tobacco is limited in competitively supporting its promotional
programs, which may constrain sales.The following table presents Lorillard Tobaccos
selected industry and market share data for the three and nine months ended September 30, 2008 and 2007. The three and nine month periods
ended September 30, 2008 contain one more shipping day than the comparable 2007 periods.
 Selected Industry and Market Share Data (1)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(Units in billions)
    
    2008
    
    2007
    
    2008
    
    2007Lorillard Tobacco total domestic unit volume
    
    
    9.893
    
    
    
    9.466
    
    
    
    27.772
    
    
    
    27.327Industry total domestic unit volume
    
    
    91.648
    
    
    
    94.900
    
    
    
    261.707
    
    
    
    270.711Lorillard Tobacco share of the domestic market
    
    
    10.8
    %
    
    
    10.0
    %
    
    
    10.6
    %
    
    
    10.1
    %Lorillard Tobacco premium segment as a percentage
of its total domestic volume
    
    
    91.9
    %
    
    
    94.3
    %
    
    
    92.6
    %
    
    
    94.6
    %Lorillard Tobacco share of the premium segment
    
    
    13.7
    %
    
    
    12.9
    %
    
    
    13.5
    %
    
    
    13.0
    %Newport share of the domestic market
    
    
    9.7
    %
    
    
    9.1
    %
    
    
    9.6
    %
    
    
    9.3
    %Newport share of the premium segment
    
    
    13.4
    %
    
    
    12.5
    %
    
    
    13.2
    %
    
    
    12.7
    %Total menthol segment market share for the industry
    
    
    28.6
    %
    
    
    27.8
    %
    
    
    28.5
    %
    
    
    28.0
    %Total discount segment market share for the industry
    
    
    27.8
    %
    
    
    27.2
    %
    
    
    27.3
    %
    
    
    26.8
    %Newports share of the menthol segment
    
    
    33.9
    %
    
    
    32.9
    %
    
    
    33.7
    %
    
    
    33.1
    %Newports share of Lorillard Tobaccos total volume (2)
    
    
    90.1
    %
    
    
    91.8
    %
    
    
    90.7
    %
    
    
    92.1
    %Newports share of Lorillard Tobaccos net sales (2)
    
    
    93.4
    %
    
    
    93.9
    %
    
    
    93.7
    %
    
    
    93.9
    %
 
 (1)
    
    Market share data is based on data made available by 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 and, correspondingly, market share information for the larger
manufacturers, including Lorillard Tobacco, may be overstated by MSAI.(2)
    
    Source: Lorillard Tobacco shipment reports. 23




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Result of Operations
 Three and Nine Months ended September 30, 2008 Compared to the Three and Nine Months ended
September 30, 2007
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In millions)
    
    
    (In millions)Net sales (including excise taxes
of $189, $181, $536 and $522
respectively)

    $
    1,125
    
    
    $
    1,044
    
    
    $
    3,116
    
    
    $
    3,012Cost of sales
    
    
    653
    
    
    
    614
    
    
    
    1,834
    
    
    
    1,772Gross profit
    
    
    472
    
    
    
    430
    
    
    
    1,282
    
    
    
    1,240Selling, general and administrative
    
    
    90
    
    
    
    82
    
    
    
    281
    
    
    
    246Operating income
    
    
    382
    
    
    
    348
    
    
    
    1,001
    
    
    
    994Other income (expense), net
    
    
    4
    
    
    
    33
    
    
    
    18
    
    
    
    86Income before income taxes
    
    
    386
    
    
    
    381
    
    
    
    1,019
    
    
    
    1,080Income taxes
    
    
    149
    
    
    
    137
    
    
    
    390
    
    
    
    396Net income
    
    $
    237
    
    
    $
    244
    
    
    $
    629
    
    
    $
    684
 Three Months ended September 30, 2008 Compared to Three Months ended September 30, 2007
 Net sales
  Cost of sales
 Selling, general and administrative Engle
 24




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Other income (expense), net
 Income taxes
 Nine Months ended September 30, 2008 Compared to Nine Months ended September 30, 2007
 Net sales
  Cost of sales
 Selling, general and administrative Engle
 Other income (expense), net
 25




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Income taxes
 Liquidity and Capital Resources
  Cash Flows
 Cash flow from operating activities
 Cash flow from investing activities.
  Cash flow from financing activities
 Liquidity
   26




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State Settlement Agreements
   
    
    inflation;
    
    aggregate volume of Original Participating Manufacturers cigarette shipments;
    
    other Original Participating Manufacturers and Lorillard Tobaccos market share; and
    
    aggregate Original Participating Manufacturers operating income, allocated to such
manufacturers that
have operating income increases.
  27




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Contractual Cash Payment Obligations
  MoreLess than
    
    
    
    
    
    
    
    
    
    
    than 5Total
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    years($ in millions)Tobacco leaf purchase obligations
    
    $
    292
    
    
    $
    197
    
    
    $
    95
    
    
    $
    
    
    
    $
    Operating lease obligations
    
    
    4
    
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    Purchase obligations
    
    
    61
    
    
    
    49
    
    
    
    12
    
    
    
    
    
    
    
    Total
    
    $
    357
    
    
    $
    248
    
    
    $
    109
    
    
    $
    
    
    
    $
    
 28




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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
 Market Risk
   Interest rate risk
 Equity price risk
 
 Item 4. Controls and Procedures.
   29




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
   As of November 1, 2008, Lorillard Tobacco is a defendant in approximately 4,950 tobacco-related
lawsuits. As of November 1, 2008, the Company is a defendant in approximately 1,085 tobacco-related
lawsuits. These cases, which are extremely costly to defend, could result in substantial judgments
against the Company and/or Lorillard Tobacco.
   Williams v. Philip Morris USA, Inc Williams
 30




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A judgment has been rendered against Lorillard Tobacco in the Scott litigation.
 Scott v. The
American Tobacco Company, et al.
 , Scott
 The Florida Supreme Courts ruling in Engle has resulted in additional litigation against cigarette
manufacturers, including the Company and Lorillard Tobacco.
 Engle v. R.J. Reynolds Tobacco Co., et al.
 Engle Engle Engle Engle Engle Engle
 Lorillard Tobacco has substantial payment obligations under litigation settlement agreements which
will materially adversely affect its cash flows and operating income in future periods.
   31




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##### Table of Contents



Concerns that mentholated cigarettes may pose greater health risks could adversely affect us.
  Sales of cigarettes are subject to substantial federal, state and local excise taxes.
  Lorillard Tobacco derives most of its revenue from one brand.
  32




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##### Table of Contents



Lorillard Tobacco is a defendant in a case that was initially certified as a nationwide class
action involving lights cigarettes and that could result in a substantial verdict, if the class
certification order is reinstated.
 Schwab v. Philip Morris USA, Inc., et al. Schwab
 The proposed regulation of cigarettes by the Food and Drug Administration may adversely affect us.
   
    
    require a Tobacco Scientific Advisory Committee established by the
bill to evaluate issues surrounding the use of menthol in cigarettes
within one year of its establishment;
    
    require larger and more severe health warnings on packs and cartons;
    
    ban the use of descriptors on tobacco products, such as low-tar and light;
    
    require the disclosure of ingredients and additives to consumers;
    
    require pre-market approval by the FDA for claims made with respect to
reduced risk or reduced exposure products;
    
    require the reduction or elimination of nicotine or any other compound in cigarettes;
    
    allow the FDA to mandate the use of reduced risk technologies in conventional cigarettes;
    
    allow the FDA to place more severe restrictions on the advertising,
marketing and sales of cigarettes;
    
    permit inconsistent state regulation of labeling and advertising and
eliminate the existing federal preemption of such regulation; and
    
    grant the FDA the regulatory authority to consider and impose broad
additional restrictions through a rule making process, including a ban
on the use of menthol in cigarettes.
  33




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##### Table of Contents



Lorillard Tobacco may not be able to develop, produce or commercialize competitive new products and
technologies required by regulatory changes or changes in consumer preferences.
  Increased restrictions on smoking in public places could adversely affect Lorillard Tobaccos sales
volume, revenue and profitability.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  ApproximateTotal Number of
    
    
    Dollar Value ofShares Purchased
    
    
    Shares thatTotal
    
    
    Average
    
    
    as Part of
    
    
    May Yet BeNumber
    
    
    Price
    
    
    Publicly
    
    
    Purchasedof Shares
    
    
    Paid per
    
    
    Announced Plans
    
    
    Under the Plans(In millions, except for per share amounts)
    
    Purchased
    
    
    Share
    
    
    or Programs
    
    
    or ProgramsJuly 1, 2008July 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    400.0August 1, 2008August 31, 2008
    
    
    2.5
    
    
    $
    69.83
    
    
    
    2.5
    
    
    $
    222.3September 1, 2008September 30, 2008
    
    
    1.4
    
    
    
    71.35
    
    
    
    1.4
    
    
    $
    125.8Total
    
    
    3.9
    
    
    $
    70.36
    
    
    
    3.9
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submissions of Matters to a Vote of Security Holders
  34




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Item 5. Other Information
 2009 Annual Meeting of Shareholders
  Amendment to Supply Agreement for Reconstituted Tobacco
  35




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Item 6. Exhibits
 ExhibitNumber
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of
Lorillard, Inc., incorporated herein by reference to
Exhibit 3.1 to Lorillards Current Report on Form 8-K filed
on June 12, 20083.2
    
    Amended and Restated By-Laws of Lorillard, Inc.,
incorporated herein by reference to Exhibit 3.2 to
Lorillards Current Report on Form 8-K filed on June 12,
20084.1
    
    Specimen certificate for shares of common stock of
Lorillard, Inc., incorporated herein by reference to
Exhibit 4.1 to Lorillard, Inc.s Registration Statement on
Form S-4 (File No. 333-149051) filed on May 9, 200810.1
    
    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 Lorillards Quarterly Report on Form 10-Q filed on
August 7, 200810.2
    
    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 Lorillard, Inc.s
Registration Statement on Form S-4 (File No. 333-149051)
filed on May 9, 200810.3
    
    Lorillard, Inc. 2008 Incentive Compensation Plan,
incorporated herein by reference to Exhibit 10.3 to
Lorillards Quarterly Report on Form 10-Q filed on August
7, 200810.4
    
    Form of Lorillard, Inc. indemnification agreement for
directors and executive officers, incorporated herein by
reference to Exhibit 10.19 to Lorillard, Inc.s
Registration Statement on Form S-4 (File No. 333-149051)
filed on May 9, 200810.5
    
    Amendment to Employment Agreement between Lorillard, Inc.
and Martin L. Orlowsky, dated May 5, 2008, incorporated
herein by reference to Exhibit 10.20 to Lorillard, Inc.s
Registration Statement on Form S-4 (File No. 333-149051)
filed on May 9, 200810.6
    
    Amendment to Supply Agreement for Reconstituted Tobacco,
dated as of October 30, 2008, by and between R.J.
Reynolds Tobacco Company and Lorillard Tobacco Company *10.7
    
    Form of Stock Appreciation Rights Award Certificate *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) *
 
 *
    
    Filed herewith. 36




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SIGNATURES
   LORILLARD, INC.By:
    /s/ Martin L. OrlowskyMartin L. OrlowskyChairman, President and Chief
Executive OfficerBy:
    /s/ David H. TaylorDavid H. TaylorDirector, Executive Vice President,

Finance and Planning and Chief Financial
Officer 37