##### 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 March 31, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the Transition Period From  to
 Commission File Number: 001-34097
 Lorillard, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    13-1911176(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 714 Green Valley Road, Greensboro, North Carolina 27408-7018
(Address of principal executive offices) (Zip Code)
 (336) 335-7000
(Registrants telephone number, including area code)
 NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
  þ o
  o o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ
 Class
    
    Outstanding at April 29, 2009Common stock, $0.01 par value
    
    168,169,110 shares




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##### 



TABLE OF CONTENTS
 Page No.PART I. FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART II. OTHER INFORMATION
    
    
    26Item 1. Legal Proceedings
    
    
    26Item 1A. Risk Factors
    
    
    26Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3. Defaults Upon Senior Securities
    
    
    28Item 4. Submissions of Matters to a Vote of Security Holders
    
    
    28Item 5. Other Information
    
    
    28Item 6. Exhibits
    
    
    29SIGNATURES
    
    
    S-1EX-10.1EX-10.2EX-31.1EX-31.2EX-32.1




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 LORILLARD, INC. AND SUBSIDIARIES
 CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
 March 31,
    
    December 31,2009
    
    2008(In millions)Assets:Cash and cash equivalents
    
    $
    1,483
    
    
    $
    1,191Accounts receivables, less allowance of $2 and $2
    
    
    9
    
    
    
    7Other Receivables
    
    
    52
    
    
    
    55Inventories
    
    
    353
    
    
    
    255Deferred income taxes
    
    
    454
    
    
    
    454Total current assets
    
    
    2,351
    
    
    
    1,962Plant and equipment
    
    
    220
    
    
    
    218Prepaid pension assets
    
    
    37
    
    
    
    36Other investments
    
    
    15
    
    
    
    15Deferred taxes and other assets
    
    
    96
    
    
    
    90Total assets
    
    $
    2,719
    
    
    $
    2,321Liabilities and Shareholders Equity:Accounts and drafts payable
    
    $
    21
    
    
    $
    30Accrued liabilities
    
    
    279
    
    
    
    255Settlement costs
    
    
    1,217
    
    
    
    974Income taxes
    
    
    111
    
    
    
    14Total current liabilities
    
    
    1,628
    
    
    
    1,273Postretirement pension, medical and life insurance benefits
    
    
    320
    
    
    
    317Other liabilities
    
    
    102
    
    
    
    100Total liabilities
    
    
    2,050
    
    
    
    1,690Commitments and Contingent LiabilitiesShareholders Equity:Preferred stock, $0.01 par value, authorized 10 million shares
    
    
    
    
    
    
    Common stock:Authorized600 million shares; par value  $0.01 per shareIssued174 million and 174 million sharesOutstanding168 million and 174 million shares
    
    
    2
    
    
    
    2Additional paid-in capital
    
    
    228
    
    
    
    222Earnings retained in the business
    
    
    994
    
    
    
    965Accumulated other comprehensive loss
    
    
    (155
    )
    
    
    (158
    )1,069
    
    
    
    1,031Treasury shares at cost, 6 million shares in 2008
    
    
    (400
    )
    
    
    (400
    )Total shareholders equity
    
    
    669
    
    
    
    631Total liabilities and shareholders equity
    
    $
    2,719
    
    
    $
    2,321




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LORILLARD, INC. AND SUBSIDIARIES
 CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
 Three Months EndedMarch 31,(In millions, except per share data)
    
    2009
    
    2008Net sales (including excise taxes of $150 and $163, respectively)
    
    $
    917
    
    
    $
    921Cost of sales
    
    
    532
    
    
    
    555Gross profit
    
    
    385
    
    
    
    366Selling, general and administrative
    
    
    91
    
    
    
    100Operating income
    
    
    294
    
    
    
    266Other income (expense), net
    
    
    1
    
    
    
    9Income before income taxes
    
    
    295
    
    
    
    275Income taxes
    
    
    111
    
    
    
    101Net income
    
    $
    184
    
    
    $
    174Earnings per share:Basic
    
    $
    1.09
    
    
    $
    1.00Diluted
    
    $
    1.09
    
    
    $
    1.00Number of shares outstanding:Basic
    
    
    168.07
    
    
    
    173.92Diluted
    
    
    168.18
    
    
    
    173.92
  -2-




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LORILLARD, INC. AND SUBSIDIARIES
 CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS EQUITY
(UNAUDITED)
 Accumulated
    
    
    
    
    
    
    TotalCompre-
    
    
    
    
    
    
    Additional
    
    
    Earnings
    
    
    Other
    
    
    
    
    
    
    Sharehold-hensive
    
    
    Common
    
    
    Paid-in
    
    
    Retained in
    
    
    Compre-
    
    
    Treasury
    
    
    ersIncome
    
    
    Stock
    
    
    Capital
    
    
    the Business
    
    
    hensive Loss
    
    
    Shares
    
    
    Equity(In millions)Balance 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
    
    $
    174
    
    
    
    
    
    
    
    
    
    
    
    174
    
    
    
    
    
    
    
    
    
    
    
    174Other comprehensive gains,
pension liability
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Comprehensive income
    
    $
    175Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (291
    )
    
    
    
    
    
    
    
    
    
    
    (291
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Balance, March 31, 2008
    
    
    
    
    
    $
    2
    
    
    $
    218
    
    
    $
    765
    
    
    $
    (87
    )
    
    $
    
    
    
    $
    898Balance, January 1, 2009
    
    
    
    
    
    $
    2
    
    
    $
    222
    
    
    $
    965
    
    
    $
    (158
    )
    
    $
    (400
    )
    
    $
    631Comprehensive income:Net income
    
    $
    184
    
    
    
    
    
    
    
    
    
    
    
    184
    
    
    
    
    
    
    
    
    
    
    
    184Other comprehensive gains,
pension liability
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3Comprehensive income
    
    $
    187Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (155
    )
    
    
    
    
    
    
    
    
    
    
    (155
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6Balance, March 31, 2009
    
    
    
    
    
    $
    2
    
    
    $
    228
    
    
    $
    994
    
    
    $
    (155
    )
    
    $
    (400
    )
    
    $
    669
  -3-




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LORILLARD, INC. AND SUBSIDIARIES
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Three Months EndedMarch 31,2009
    
    2008(In millions)Cash flows from operating activities:Net income
    
    $
    184
    
    
    $
    174Adjustments to reconcile net cash provided (used in) by operating activities :Depreciation and amortization
    
    
    8
    
    
    
    9Deferred income taxes
    
    
    
    
    
    
    89Changes in operating assets and liabilities:Accounts receivable
    
    
    
    
    
    
    (2
    )Inventories
    
    
    (98
    )
    
    
    (36
    )Accounts payable and accrued liabilities
    
    
    16
    
    
    
    14Settlement costs
    
    
    243
    
    
    
    253Income taxes
    
    
    97
    
    
    
    4Other assets
    
    
    (4
    )
    
    
    (3
    )Postretirement health and life insurance benefits
    
    
    7
    
    
    
    2Other
    
    
    
    
    
    
    (5
    )Net cash provided by operating activities
    
    
    453
    
    
    
    499Cash flows from investing activities:Purchases of investments
    
    
    
    
    
    
    (800
    )Proceeds from sales of investments
    
    
    
    
    
    
    196Additions to plant and equipment
    
    
    (10
    )
    
    
    (7
    )Net cash used in investing activities
    
    
    (10
    )
    
    
    (611
    )Cash flows from financing activities:Dividends paid
    
    
    (155
    )
    
    
    (291
    )Excess tax benefits from share-based arrangements
    
    
    4
    
    
    
    Net cash used in financing activities
    
    
    (151
    )
    
    
    (291
    )Change in cash and cash equivalents
    
    
    292
    
    
    
    (403
    )Cash and cash equivalents, beginning of year
    
    
    1,191
    
    
    
    1,210Cash and cash equivalents, end of period
    
    $
    1,483
    
    
    $
    807Cash paid for income taxes
    
    $
    14
    
    
    $
    16
  -4-




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LORILLARD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 1. Basis of Presentation
 Overview.
        Recently adopted accounting pronouncements.
 -5-




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Accounting pronouncements not yet adopted
    -6-




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2. Inventories
  March 31,
    
    December 31,2009
    
    2008(In millions)Leaf tobacco
    
    $
    252
    
    
    $
    208Manufactured stock
    
    
    95
    
    
    
    42Material and supplies
    
    
    6
    
    
    
    5$
    353
    
    
    $
    255
  3. Plant and Equipment
  March 31,
    
    December 31,2009
    
    2008(In millions)Land
    
    $
    3
    
    
    $
    3Buildings
    
    
    87
    
    
    
    87Equipment
    
    
    541
    
    
    
    532Total
    
    
    631
    
    
    
    622Accumulated depreciation
    
    
    (411
    )
    
    
    (404
    )Plant and equipment, net
    
    $
    220
    
    
    $
    218
 4. Accrued Liabilities
  March 31,
    
    December 31,2009
    
    2008(In millions)Legal fees
    
    $
    25
    
    
    $
    21Salaries and other compensation
    
    
    20
    
    
    
    21Medical and other employee benefit plans
    
    
    29
    
    
    
    27Consumer rebates
    
    
    54
    
    
    
    62Sales promotion
    
    
    23
    
    
    
    23Excise and other taxes
    
    
    74
    
    
    
    56Other accrued liabilities
    
    
    54
    
    
    
    45Total
    
    $
    279
    
    
    $
    255
 -7-




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5. 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 directly or
indirectly.
    
    Level 3  Valuations derived from valuation techniques in which one or more
significant inputs are unobservable.
   Level 1
    
    Level 2
    
    Level 3
    
    Total(In millions)Cash
    
    $
    1
    
    
    $
    
    
    
    $
    
    
    
    $
    1Repurchase agreements
collateralized by treasury
securities
    
    
    155
    
    
    
    
    
    
    
    
    
    
    
    155Treasury money market funds
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    23Government money market funds
    
    
    1,303
    
    
    
    
    
    
    
    
    
    
    
    1,303Prime money market funds
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Total cash and cash equivalents
    
    $
    1,483
    
    
    $
    
    
    
    $
    
    
    
    $
    1,483
 6. Earnings Per Share
  Three Months EndedMarch 31,2009
    
    2008(In millions)Net Earnings
    
    $
    184
    
    
    $
    174Weighted Average Shares Outstanding  Basic
    
    
    168.07
    
    
    
    173.92Stock Options and Stock Appreciation Rights
    
    
    .11
    
    
    
    .00Weighted Average Shares Outstanding  Diluted
    
    
    168.18
    
    
    
    173.92
   -8-




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7. Benefit Plans
   Three Months EndedMarch 31,Pension Benefits
    
    2009
    
    2008(In millions)Service cost
    
    $
    4
    
    
    $
    4Interest cost
    
    
    14
    
    
    
    14Expected return on plan assets
    
    
    (15
    )
    
    
    (17
    )Amortization of net loss
    
    
    4
    
    
    
    Amortization of prior service cost
    
    
    1
    
    
    
    1Net periodic benefit cost
    
    $
    8
    
    
    $
    2
 Three Months EndedMarch 31,Other Postretirement Benefits
    
    2009
    
    2008(In millions)Service cost
    
    $
    1
    
    
    $
    1Interest cost
    
    
    3
    
    
    
    3Amortization of net loss
    
    
    
    
    
    
    Net periodic benefit cost
    
    $
    4
    
    
    $
    4
 8. Legal Proceedings
 Legal Proceedings
 Tobacco-Related Product Liability Litigation
 Engle
  Conventional Product Liability Cases
 Engle Progeny Cases Engle Engle Engle Engle
 -9-




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West Virginia Individual Personal Injury Cases
 Flight Attendant Cases
 Class Action Cases
 Reimbursement Cases
 United States of
America v. Philip Morris USA Inc. et al.
 Filter Cases
    Conventional Product Liability Cases
  -10-




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Engle Progeny Cases
 Engle Engle Engle Engle
 Engle
 Engle Engle Engle
 Engle Engle
 Engle Engle Engle Engle Engle Engle
 West Virginia Individual Personal Injury Cases
  -11-




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Flight Attendant Cases
 Broin v. Philip Morris Companies Inc. et al.
  French v. Philip Morris Incorporated et al.
  Class Action Cases
   -12-




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The Scott Case . Scott v. The
American Tobacco Company et al. Scott
 Scott
 Scott
    The Engle Case . Engle v. R.J. Reynolds Tobacco Co. et al. Engle
 -13-




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Engle
 Other Class Action Cases Brown v. The
American Tobacco Company Inc. et al. Brown
 Lights Class Actions . Good v. Altria Group Inc. et al. Schwab v. Philip Morris USA Inc. et al Cleary v. Philip Morris Incorporated, et al. Cleary Schwab
 The Schwab Case . Schwab v. Philip Morris USA Inc. et al. Schwab
 Reimbursement Cases
  U.S. Federal Government Action United States of America v. Philip Morris USA Inc. et al
  -14-




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Settlement of State Reimbursement Litigation
      -15-




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Filter Cases
 Young v. Lorillard Tobacco Company
 Tobacco-Related Antitrust Cases
 Indirect Purchaser Suits
   -16-




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MSA-Related Antitrust Suit . Vibo Corporation, Inc. d/b/a/ General Tobacco v.
Conway, et al
 Defenses
  United States of America v. Philip Morris USA Inc. et al. Good v. Altria Group, Inc. et al
 Scott
 Indemnification Obligations
  -17-




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Other Litigation
  
 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 March 31 2009 (the Form 10-Q). In addition to
historical information the following discussion contains forward-looking statements based on
current expectations that involve risks and uncertainties. Investors are cautioned not to place
undue reliance on these forward-looking statements. Statements preceded by followed by or that
otherwise include the words believe  expect  anticipate  intend  project  estimate 
plan  may increase  may fluctuate and similar expressions or future or conditional verbs such
as will  should  would  may and could are generally forward-looking in nature and are not
historical facts. Actual results and the timing of certain events may differ significantly from
those projected in such forward-looking statements due to a number of factors including those risk
factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2008 (the Form
10-K) and those risk factors set forth in Business Environment below in Part II Item 1A.
Risk Factors and elsewhere in this Form 10-Q. Except for our ongoing obligations to disclose
material information under the federal securities laws we undertake no obligation to release
publicly any revisions to any forward-looking statements to report events or to report the
occurrence of unanticipated events unless required by law. For any forward-looking statements we
claim the protection of the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995. Our consolidated financial statements are prepared in
conformity with accounting principles generally accepted in the United States (GAAP).
 The terms Lorillard we our and us refer to Lorillard Inc., a Delaware corporation,
and its subsidiaries. The terms Lorillard, Inc. and the Company refer solely to the parent
company and Lorillard Tobacco refers solely to Lorillard Tobacco Company, the principal
subsidiary of Lorillard, Inc.
 Overview
  -18-




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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.
    
    Substantial annual payments continuing in perpetuity, and significant
restrictions on marketing and advertising have been agreed to and are required
under the terms of certain settlement agreements, including the Master Settlement
Agreement among major tobacco manufacturers and 46 states and various other
governments and jurisdictions (the MSA) that we entered into in 1998 along with
Philip Morris Incorporated, Brown & Williamson Tobacco Corporation and R.J.
Reynolds Tobacco Company (the other Original Participating Manufacturers) to
settle asserted and unasserted health care cost recovery and other claims. We and
certain other U.S. tobacco product manufacturers previously settled similar claims
brought by Mississippi, Florida, Texas and Minnesota (the Initial State
Settlements, and together with the MSA, the State Settlement Agreements). The
State Settlement Agreements impose a stream of future payment obligations on us and
the other major U.S. cigarette manufacturers and place significant restrictions on
their ability to market and sell cigarettes.
    
    The 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 2.6% from the twelve months ended March 31, 1999 through the
twelve months ended March 31, 2009.
    
    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
14.3% for the three months ended March 31, 2009, 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 and government
restrictions on smoking. 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, 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. A
bill was introduced in March 2009 in the
 -19-




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U.S. Congress to grant the Food and Drug Administration (FDA) authority to
regulate tobacco products. The bill was approved by the House of Representatives in
April 2009 and may be considered by the Senate later this year. If the bill is
enacted into law, we believe that the FDA could promulgate regulations 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 the bill, 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 three months ended March 31, 2009, 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 three months ended March 31, 2009, an excise tax
increase of $0.56 per pack was implemented in one state. Congress recently enacted
and the President signed into law an increase in the federal excise tax on
cigarettes by $0.6166 per pack to $1.0066 per pack, effective April 1, 2009, to
finance health insurance for children. It is likely that increases in excise and
similar taxes have had an adverse impact on sales of cigarettes and that the most
recent increase and future increases, the extent of which cannot be predicted,
could result in further volume declines for the cigarette industry, including us,
and an increased sales shift toward deep discount cigarettes rather than premium
brands. In addition, we and other cigarette manufacturers and importers are
required to pay an assessment under a federal law designed to fund payments to
tobacco quota holders and growers.
   -20-




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Selected Industry and Market Share Data (1)
 Three Months EndedMarch 31,2009
    
    2008Lorillard total domestic unit volume (in billions)
    
    
    7.7
    
    
    
    8.4Industry total domestic unit volume
    
    
    72.0
    
    
    
    80.4Lorillards share of the domestic market
    
    
    10.7
    
    
    
    10.5Lorillards premium volume as a percentage
of its domestic volume
    
    
    90.3
    
    
    
    93.3Lorillards share of the premium market
    
    
    13.6
    
    
    
    13.3Newports share of the domestic market
    
    
    9.5
    
    
    
    9.5Newports share of the premium market
    
    
    13.3
    
    
    
    13.0Total menthol segment market share for the
industry
    
    
    28.7
    
    
    
    28.4Total discount segment market share for the
industry
    
    
    28.5
    
    
    
    26.9Newports share of the menthol market
    
    
    33.1
    
    
    
    33.5Newports share of Lorillards total volume(2)
    
    
    88.8
    
    
    
    91.1Newports share of Lorillards net sales(2)
    
    
    93.2
    
    
    
    94.1
 
 (1)
    
    Source: Management Science Associates, Inc. (MSAI), an independent third-party database
management organization that collects wholesale shipment data from various cigarette
manufacturers. MSAI divides the cigarette market into two price segments, the premium price
segment and the discount or reduced price segment. MSAIs information relating to unit sales
volume and market share of certain of the smaller, primarily deep discount, cigarette
manufacturers is based on estimates derived by MSAI. Management believes that volume and
market share information for deep discount manufacturers may be understated and,
correspondingly, market share information for the larger manufacturers, including Lorillard
Tobacco, may be overstated by MSAI.(2)
    
    Source: Lorillard shipment reports. Result of Operations
 Three Months Ended March 31, 2009 Compared to the Three Months Ended March 31, 2008
 Three Months EndedMarch 31,2009
    
    2008(In millions)Net sales (including excise taxes of $150 and $163,
respectively)
    
    $
    917
    
    
    $
    921Cost of sales
    
    
    532
    
    
    
    555Gross profit
    
    
    385
    
    
    
    366Selling, general and administrative
    
    
    91
    
    
    
    100Operating income
    
    
    294
    
    
    
    266Other income, net
    
    
    1
    
    
    
    9Income before income taxes
    
    
    295
    
    
    
    275Income taxes
    
    
    111
    
    
    
    101Net income
    
    $
    184
    
    
    $
    174
 Net sales
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Cost of sales
 Selling general and administrative Engle
 Other income net
 Income taxes
 Liquidity and Capital Resources
  -22-




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Cash Flows
 Cash flow from operating activities
 Cash flow from investing activities.
  Cash flow from financing activities
 Liquidity
   State Settlement Agreements
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
    
    inflation;
    
    aggregate volume of Original Participating Manufacturers cigarette shipments;
    
    other Original Participating Manufacturers and our market share; and
    
    aggregate Original Participating Manufacturers operating income, allocated to
such manufacturers that have operating income increases.
   Contractual Cash Payment Obligations
  Less than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 years(In millions)Tobacco leaf purchase obligations
    
    $
    340
    
    
    $
    208
    
    
    $
    115
    
    
    $
    17
    
    
    $
    Operating lease obligations
    
    
    4
    
    
    
    1
    
    
    
    3
    
    
    
    
    
    
    
    Purchase obligations
    
    
    70
    
    
    
    68
    
    
    
    2
    
    
    
    
    
    
    
    Total
    
    $
    414
    
    
    $
    277
    
    
    $
    120
    
    
    $
    17
    
    
    $
    
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Off-Balance Sheet Arrangements
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
 Market Risk
   Interest rate risk
 
 Item 4. Controls and Procedures.
 Disclosure Controls and Procedures
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Changes in Internal Control over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
  As of April 27, 2009, Lorillard Tobacco is a defendant in approximately 5,900 tobacco-related
lawsuits,
including approximately 1,085 cases in which Lorillard, Inc. is a co-defendant. These cases, which
are extremely costly to defend, could result in substantial judgments against Lorillard Tobacco
and/or
Lorillard, Inc.
   The Florida Supreme Courts ruling in Engle has resulted in additional litigation against cigarette
manufacturers, including us.
 Engle v. R.J. Reynolds Tobacco Co., et al.
 Engle Engle Engle
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Engle Engle
 Engle Engle Engle
 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 Schwab
 The proposed regulation of cigarettes by the Food and Drug Administration may adversely affect our
business.
  §
    
    establish a Tobacco Scientific Advisory Panel to evaluate the issues surrounding the use of menthol as a flavoring or
ingredient in cigarettes;§
    
    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.
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Concerns that mentholated cigarettes may pose greater health risks could adversely affect our
business.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submissions of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  -28-




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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
    
    Lorillard Tobacco Company Senior Executive Severance Plan, dated as of November 1, 2007*10.2
    
    Form of Restricted Stock Award Certificate*11.1
    
    Statement regarding computation of earnings per share (see note 7 to the consolidated
condensed financial statements).*31.1
    
    Certification by the Chief Executive Officer of Lorillard, Inc. pursuant to Rule
13a-14(a) or Rule 15d-14(a) *31.2
    
    Certification by the Chief Financial Officer of Lorillard, Inc. pursuant to Rule
13a-14(a) or Rule 15d-14(a) *32.1
    
    Certification by the Chief Executive Officer and Chief Financial Officer of Lorillard,
Inc. pursuant to 18 U.S.C. Section 1350 (as adopted by Section 906 of the Sarbanes-Oxley
Act of 2002) **
 
 *
    
    Filed herewith.**
    
    Furnished herewith.
    
    Management or compensatory plan or arrangement required to be filed pursuant to Item 601(b)(10)
of Regulation S-K. -29-




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SIGNATURES
   LORILLARD, INC.By:
    /s/ MARTIN L. ORLOWSKYName:
    Martin L. OrlowskyTitle:
    Chairman, President and
Chief Executive OfficerBy:
    /s/ DAVID H. TAYLORDavid H. TaylorDirector, Executive Vice President
Finance and Planning and Chief Financial
Officer