Lorillard's Q2 net income down 1.4% year-over-year to US$287M; net sales up 2.3% to US$1.73B, driven by higher average prices

GREENSBORO, North Carolina , August 6, 2012 (press release) – Lorillard, Inc. announced today its results for the quarter ended June 30, 2012.  

Second Quarter Highlights

Reported (GAAP) diluted earnings per share increased 5.9% versus last year to $2.17.

Adjusted (Non-GAAP) diluted earnings per share increased 6.8% versus last year to $2.19.

Net sales increased 2.3% over last year to $1.731 billion.

Total Lorillard retail market share increased 0.1 share points in the second quarter versus last year to 14.3%.

Gross margin was stable versus last year at 35.4%.

Average net price per cigarette unit increased 4.5% in the quarter.

Blu ecigs® acquisition completed.

"In a quarter that saw significant competitive activity, Lorillard grew sales and market share without sacrificing gross margin," said Murray S. Kessler, Chairman, CEO & President. "With strong second half plans in place and a more favorable inventory position, the company reaffirms its 2012 goal of a double digit total shareholder return as measured by EPS growth and the dividend yield."

        Financial Results Summary
        (Unaudited) (Amounts in Millions, Except Per Share Data)
                                                                                            Three Months             Six Months
                                                                                            Ended June 30,           Ended June 30,
                                                                                            2012            2011     2012              2011
        Net sales                                                                           $1,731          $1,692   $3,257            $3,227
        Operating income
        Reported (GAAP)                                                                     $484            $487     $875              $908
        Adjusted (Non-GAAP)                                                                 489             487      887               908
        Net income
        Reported (GAAP)                                                                     $284            $291     $507              $539
        Adjusted (Non-GAAP)                                                                 287             291      515               539
        Diluted earnings per share
        Reported (GAAP)                                                                     $2.17           $2.05    $3.87             $3.75
        Adjusted (Non-GAAP)                                                                 2.19            2.05     3.93              3.75
        Adjusted results for the three and six months ended June 30, 2012 exclude expenses of $5 million incurred in conjunction with the acquisition of blu ecigs.  Adjusted results for the six months ended June 30, 2012 also exclude the unfavorable impact on tobacco settlement expense of $7 million resulting from a competitor's adjustments in the first quarter of 2012 to certain historical components of the calculation of the industry volume adjustment offset under the State Settlement Agreements. Such adjustments related to the competitor's operating income for 2001 - 2005.  Tobacco settlement expenses are impacted by a number of factors including industry profits, as defined in the State Settlement Agreements, which were increased in the first quarter by these changes. See Reconciliation of Reported (GAAP) to Adjusted (Non-GAAP) Results table included with this release for further discussion of these adjustments.
        


Second Quarter 2012 Results Net sales increased $39 million to $1.731 billion in the second quarter of 2012, compared to $1.692 billion in the second quarter of 2011, an increase of 2.3%. The increase resulted primarily from higher average prices, partially offset by lower unit sales volume. Post acquisition, blu ecigs contributed $8 million to Lorillard's total net sales for the quarter.

Total Lorillard wholesale cigarette unit volume, which includes Puerto Rico and U.S. Possessions, decreased 1.2% for the second quarter of 2012 compared to the corresponding period of 2011. Domestic cigarette unit volume, which excludes Puerto Rico and U.S. Possessions, decreased 1.3% for the second quarter of 2012, compared to the corresponding period of 2011. Changes in wholesale inventory patterns had a minimal impact in the second quarter of 2012 as compared to the second quarter of 2011. These results outpaced the total cigarette industry which saw domestic wholesale shipments decrease an estimated 1.7% for the second quarter of 2012 compared to the second quarter of 2011. The total industry decline of 1.7% compares favorably to the 3 to 4% decline experienced over the past few years. See attached table for details of Lorillard's wholesale shipments.

Total unit volume for Newport, the Company's flagship brand, decreased 1.8% for the second quarter of 2012 and domestic Newport unit volume decreased 2.0% for the second quarter of 2012 compared to the corresponding period of 2011. Domestic wholesale shipments for Maverick, the Company's leading discount brand, increased 4.9% for the second quarter of 2012 compared to the corresponding period in 2011.

Based on Lorillard's proprietary retail shipment data ("EXCEL"), which measures shipments from wholesale to retail, Lorillard once again gained domestic retail market share in the second quarter of 2012 with an increase of 0.1 share points to 14.3%. Newport's domestic retail market share was unchanged versus the second quarter of 2011 at 12.0%. Total Lorillard domestic retail share of the menthol market was 39.3% for the second quarter of 2012, a decrease of 0.1 share points compared to the second quarter of 2011.

Gross profit was $612 million in the second quarter of 2012, or 35.4% of net sales, compared to $599 million, or 35.4% of net sales, in the second quarter of 2011. The increase in gross profit and stable gross margin reflects the increase in net sales, partially offset by higher costs related to the State Settlement Agreements, higher raw material input costs (primarily tobacco and other direct costs), higher expenses for the Federal Assessment for Tobacco Growers and higher Food and Drug Administration user fees.

Selling, general and administrative costs increased $16 million to $128 million in the second quarter of 2012 compared to the second quarter of 2011 primarily as a result of higher legal costs related to the Engle Progeny litigation and $5 million of expenses incurred in the second quarter of 2012 in conjunction with the acquisition of blu ecigs.

Interest expense increased $9 million in the second quarter of 2012 compared to the second quarter of 2011 and reflects interest on the senior notes issued in the third quarter of 2011.

Lorillard's effective income tax rate was 36.5% in the second quarter of 2012 compared to 36.6% in the second quarter of 2011.

Adjusted net income in the second quarter of 2012 was $287 million, or $2.19 per share (diluted), compared to $291 million, or $2.05 per share (diluted), in the second quarter of 2011. The 6.8% increase in adjusted diluted earnings per share for the second quarter includes the benefit of the Company's share repurchase program which resulted in lower outstanding shares, and contributed $0.17 to the increase in earnings per share. Reported net income in the second quarter of 2012 was $284 million, or $2.17 per share (diluted).

First Half 2012 Results Net sales increased 0.9% to $3.257 billion in the first half of 2012, compared to $3.227 billion in the first half of 2011. The increase resulted from higher average prices, partially offset by lower unit sales volume. Post acquisition, blu ecigs contributed $8 million to Lorillard's total net sales for the first half of 2012.

Total Lorillard wholesale cigarette unit volume, which includes Puerto Rico and U.S. Possessions, decreased 1.9% for the first half of 2012 compared to the corresponding period of 2011. Domestic cigarette unit volume, which excludes Puerto Rico and U.S. Possessions, also decreased 1.9% for the first half of 2012, compared to the corresponding period of 2011. Total cigarette industry domestic wholesale shipments decreased an estimated 2.8% for the first half of 2012 compared to the first half of 2011. Changes in wholesale inventory patterns are estimated to have negatively impacted year ago comparisons by approximately 400 million units, or 1.9 percentage points. Adjusting for this effect, Lorillard domestic wholesale shipments were flat compared to the first half of 2011. See attached table for details of Lorillard's wholesale shipments.

Total wholesale unit volume for Newport, the Company's flagship brand, decreased 3.0% for the first half of 2012 and domestic Newport unit volume decreased 2.9% for the first half of 2012 compared to the corresponding period of 2011. Changes in wholesale inventory patterns are estimated to have negatively impacted year ago comparisons by approximately 300 million units, or 2.0 percentage points. Adjusting for this effect, Newport domestic wholesale shipments in the first half of 2012 were down 0.9%. Domestic wholesale shipments for Maverick, the Company's leading discount brand, increased 7.1% for the first half of 2012 compared to the corresponding period in 2011.

Based on Lorillard's proprietary retail shipment data ("EXCEL"), which measures shipments from wholesale to retail and is unaffected by wholesale inventory changes, Lorillard's domestic retail market share once again posted solid gains in the first half of 2012, increasing 0.3 share points. Newport's domestic retail market share reached 12.1% for the first half of 2012, an increase of 0.1 share points compared to the first half of 2011. Total Lorillard domestic retail share of the menthol market reached 39.6% for the first half of 2012, an increase of 0.4 share points compared to the first half of 2011. Continued share gains were primarily attributable to the geographic promotional expansion of Newport Menthol and continued retail shipment growth on Maverick.

Adjusted gross profit was $1.142 billion in the first half of 2012, or 35.1% of net sales, compared to $1.142 billion, or 35.4% of net sales, in the first half of 2011. As detailed in the reconciliation table, adjusted gross profit excludes the unfavorable impact on tobacco settlement expense of $7 million resulting from a competitor's adjustments in the first quarter of 2012 to certain historical components of the calculation of the industry volume adjustment offset under the State Settlement Agreements. Such adjustments related to the competitor's operating income for 2001 - 2005. Adjusted gross profit reflects the increase in net sales, offset by higher adjusted costs related to the State Settlement Agreements, higher raw material input costs (primarily tobacco and other direct costs) and higher Food and Drug Administration user fees.

Selling, general and administrative costs increased $26 million to $260 million in the first half of 2012 compared to the first half of 2011 primarily as a result of higher legal costs related to the Engle Progeny litigation and $5 million of expenses incurred in the second quarter of 2012 in conjunction with the acquisition of blu ecigs.

Interest expense increased $20 million in the first half of 2012 compared to the first half of 2011 and reflects interest on the senior notes issued in the third quarter of 2011.

Lorillard's effective income tax rate was 36.7% in the first half of 2012 compared to 36.8% in the first half of 2011.

Adjusted net income in the first half of 2012 was $515 million, or $3.93 per share (diluted), compared to $539 million, or $3.75 per share (diluted), in the first half of 2011. The 4.8% increase in adjusted diluted earnings per share for the first half of 2012 includes the benefit of the Company's share repurchase program which resulted in lower outstanding shares, and contributed $0.34 to the increase in earnings per share. Reported net income in the first half of 2012 was $507 million, or $3.87 per share (diluted).

Additional News On May 17, 2012, Lorillard, Inc. announced that its Board of Directors approved a quarterly dividend on its common stock of $1.55 per share. The dividend was payable on June 11, 2012 to shareholders of record as of June 1, 2012.

Conference Call A conference call to discuss the second quarter 2012 results of Lorillard, Inc. has been scheduled for 9:00 a.m. Eastern Time on Wednesday, July 25, 2012. A live broadcast of the call will be available online at the Lorillard, Inc. website ( www.lorillard.com ). Please go to the website at least ten minutes before the event begins to register and to download and install any necessary audio software.

Those interested in participating in the question and answer session of the conference call should dial (888) 239-6824 (domestic) or (706) 902-3787 (international). The passcode for this event is: 97837890.

An online replay will be available at the Company's website following the call. If you wish to listen to the replay of this conference call, please visit Lorillard's website at www.lorillard.com or dial (855) 859-2056 (domestic) or (404) 537-3406 (international) and enter passcode: 97837890. The conference call will be available for replay in its entirety through August 1, 2012.

About Lorillard, Inc. Lorillard, Inc. /quotes/zigman/511272/quotes/nls/lo LO -0.15% , through its Lorillard Tobacco Company subsidiary, is the third largest manufacturer of cigarettes in the United States. Founded in 1760, Lorillard is the oldest continuously operating tobacco company in the U.S. Newport, Lorillard's flagship premium cigarette brand, is the top selling menthol and second largest selling cigarette in the U.S. In addition to Newport, the Lorillard product line has four additional cigarette brand families marketed under the Kent, True, Maverick and Old Gold brand names. These five brands include 43 different product offerings which vary in price, taste, flavor, length and packaging. Lorillard, through its LOEC, Inc. subsidiary, is also the leading electronic cigarette company in the U.S, marketed under the blu ecigs brand. Lorillard maintains its headquarters and manufactures all of its traditional cigarette products in Greensboro, North Carolina.

Forward-Looking Statements Certain statements made in this press release are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain the words "expect," "intend," "plan," "anticipate," "estimate," "believe," "may," "will be," "will continue," "will likely result" and similar expressions. In addition, any statement that may be provided by management concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects and possible actions by Lorillard, Inc. are also forward-looking statements as defined by the Reform Act.

Forward-looking statements are based on current expectations and projections about future events and are inherently subject to a variety of risks and uncertainties, many of which are beyond our control, that could cause actual results to differ materially from those anticipated or projected. Information describing factors that could cause actual results to differ materially from those in forward-looking statements is available in Lorillard, Inc.'s filings with the Securities and Exchange Commission (the "SEC"), including but not limited to, our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. These filings are available from the SEC over the Internet or in hard copy, and are available on our website at www.lorillard.com . Forward-looking statements speak only as of the time they are made, and we expressly disclaim any obligation or undertaking to update these statements to reflect any change in expectations or beliefs or any change in events, conditions or circumstances on which any forward-looking statement is based.

        Lorillard, Inc. and Subsidiaries
        Consolidated Condensed Statements of Income
                                                        Three Months            Six Months
                                                        Ended June 30,          Ended June 30,
                                                            2012        2011        2012        2011
        (Amounts in millions, except per share data)    (Unaudited)
        Net sales (a)                                   $   1,731   $   1,692   $   3,257   $   3,227
        Cost of sales (a) (b)                               1,119       1,093       2,122       2,085
        Gross profit                                        612         599         1,135       1,142
        Selling, general and administrative                 128         112         260         234
        Operating income                                    484         487         875         908
        Investment income                                   --          1           2           2
        Interest expense                                    (37)        (28)        (76)        (56)
        Income before income taxes                          447         460         801         854
        Income taxes                                        163         169         294         315
        Net income                                      $   284     $   291     $   507     $   539
        Earnings per share:
        Basic                                           $   2.17    $   2.05    $   3.88    $   3.75
        Diluted                                         $   2.17    $   2.05    $   3.87    $   3.75
        Weighted average number of shares outstanding:
        Basic                                               130.18      141.79      130.34      143.28
        Diluted                                             130.49      141.96      130.66      143.57
        Supplemental information:
        (a)     Includes excise taxes.                      $526        $533        $993        $1,012
        (b)     Cost of sales includes:
        - Charges to accrue obligations under the
        State Settlement Agreements.                        364         353         702         673
        - Charges to accrue obligations under the
        Federal Assessment for Tobacco Growers.             35          33          63          63
        - Charges to accrue Food and Drug                   17          15          33          30
        Administration user fees.
        



        Lorillard, Inc. and Subsidiaries
        Consolidated Condensed Balance Sheets
                                                                       June 30,           December 31,
                                                                       2012               2011
        (In millions)                                                  (Unaudited)
        Assets:
        Cash and cash equivalents                                      $    946       $        1,634
        Accounts receivable, less allowances of $2 and $2                   14                 10
        Other receivables                                                   14                 83
        Inventories                                                         365                277
        Deferred income taxes                                               535                535
        Other current assets                                                108                25
        Total current assets                                                1,982              2,564
        Plant and equipment, net                                            278                262
        Goodwill                                                            64                 --
        Intangible assets                                                   58                 --
        Deferred income taxes                                               50                 54
        Other assets                                                        144                128
        Total assets                                                   $    2,576     $        3,008
        Liabilities and Shareholders' Deficit:
        Accounts and drafts payable                                    $    31        $        32
        Accrued liabilities                                                 321                296
        Settlement costs                                                    747                1,151
        Income taxes                                                        2                  6
        Total current liabilities                                           1,101              1,485
        Long-term debt                                                      2,610              2,595
        Postretirement pension, medical and life insurance benefits         375                388
        Other liabilities                                                   58                 53
        Total liabilities                                                   4,144              4,521
        Commitments and Contingent Liabilities
        Shareholders' Deficit:
        Preferred stock, $0.01 par value, authorized 10 million shares      --                 --
        Common stock:
        Authorized - 600 million shares; par value--$0.01 per share
        Issued -175 million and 175 million shares (outstanding
        131 million and 132 million shares)                                 2                  2
        Additional paid-in capital                                          288                266
        Retained earnings                                                   2,161              2,059
        Accumulated other comprehensive loss                                (219)              (228)
        Treasury stock at cost, 44 million and 43 million shares            (3,800)            (3,612)
        Total shareholders' deficit                                         (1,568)            (1,513)
        Total liabilities and shareholders' deficit                    $    2,576     $        3,008
        


        Lorillard, Inc. and Subsidiaries
        Wholesale Cigarette Shipments
        Information regarding unit volume shipped by Lorillard Tobacco Company to its direct buying customers by brand follows:
                                                Three Months                       Six Months
                                                Ended June 30,                     Ended June 30,
        (All units in thousands)                2012        2011        % Chg      2012        2011        % Chg
        Full Price Brands
        Newport                                 8,806,557   8,982,225   -2.0       16,598,767  17,096,265  -2.9
        Kent                                    46,674      54,864      -14.9      88,944      105,096     -15.4
        True                                    49,506      57,360      -13.7      93,960      109,914     -14.5
        Total Full Price Brands                 8,902,737   9,094,449   -2.1       16,781,671  17,311,275  -3.1
        Price/Value Brands
        Old Gold                                128,214     139,812     -8.3       249,276     272,802     -8.6
        Maverick                                1,430,268   1,363,380   4.9        2,717,124   2,537,400   7.1
        Total Price/Value Brands                1,558,482   1,503,192   3.7        2,966,400   2,810,202   5.6
        Total Domestic Cigarettes               10,461,219  10,597,641  -1.3       19,748,071  20,121,477  -1.9
        Total Puerto Rico and U.S. Possessions  167,358     156,816     6.7        321,588     340,596     -5.6
        Grand Total  Cigarettes                 10,628,577  10,754,457  -1.2       20,069,659  20,462,073  -1.9
        


        Notes:
        1.  This information is unaudited and is not adjusted for returns or the impact of wholesale trade inventory fluctuations.
        2.  Domestic unit volume includes units sold as well as promotional units and excludes volumes for Puerto Rico and U.S. Possessions.
        3.  Unit volume for a quarter is not necessarily indicative of unit volume for any subsequent period.
        4.  Unit volume is not necessarily indicative of the level of revenues for any period.
        



        Lorillard, Inc. and Subsidiaries
        Selected Domestic Retail Cigarette Market Share Data (1)
                                           Three Months               Six Months
                                           Ended June 30,             Ended June 30,
                                           2012     2011     Pt Chg   2012     2011     Pt Chg
        Lorillard                          14.3     14.2     0.1      14.4     14.1     0.3
        Newport                            12.0     12.0     0.0      12.1     12.0     0.1
        Total Industry Menthol             30.9     30.3     0.6      31.0     30.6     0.4
        Lorillard Share of Menthol Segment 39.3     39.4     -0.1     39.6     39.2     0.4
        Newport Share of Menthol Segment   36.2     36.5     -0.3     36.5     36.4     0.1
        (1) Unaudited information based on Lorillard's Proprietary Retail Database ("EXCEL")
        


        Reconciliation of Reported (GAAP) to Adjusted (Non-GAAP) Results
        (Amounts in millions, except per share data)
        (Unaudited)
        The reconciliation provided below reconciles the non-GAAP financial measures adjusted gross profit, adjusted operating profit, adjusted net income and adjusted diluted earnings per share, with the most directly comparable GAAP financial measures, reported gross profit, reported operating profit, reported net income and reported diluted earnings per share available to Lorillard common stockholders, for the three and six months ended June 30, 2012. Lorillard management uses adjusted (non-GAAP) measurements to set performance goals and to measure the performance of the overall company, and believes that investors' understanding of the underlying performance of the company's continuing operations is enhanced through the disclosure of these metrics. Adjusted (non-GAAP) results are not, and should not be viewed as, substitutes for reported (GAAP) results.
        The adjustments to reported results summarized below remove the following items: (1) expenses incurred in conjunction with the acquisition of blu ecigs which are included in selling, general and administrative expenses on the accompanying consolidated condensed statements of income and (2) the unfavorable impact of adjustments to certain operating income data as reported in the years 2001 through 2005 by RJ Reynolds Tobacco Company ("RJRT") in the first quarter of 2012 on Lorillard's tobacco settlement expense, which is included in cost of sales on the accompanying consolidated condensed statements of income. 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 these adjustments provided to the Independent Auditor under the State Settlement Agreements by RJRT, the industry operating profits, as defined in those agreements, were increased. As a result, our costs related to the State Settlement Agreements for the first quarter of 2012 have been increased. The increase in our costs associated with these adjustments reported by RJRT amounted to approximately $7 million and was recorded in the first quarter of 2012. If further prior year profit adjustments are reported by industry participants in the future, our costs related to the State Settlement Agreements could be affected, either up or down.
        Three months ended June 30, 2012
                                                                                              Gross Profit          Operating Income        Net Income        Diluted
                                                                                                                                                              EPS
        Reported (GAAP) results                                                                            $612                      $484              $284           $2.17
        GAAP results include the following:
        (1) Expenses incurred in conjunction                                                               --                        5                 3              0.02
        with the acquisition of blu ecigs
        Adjusted (Non-GAAP) results                                                                        $612                      $489              $287           $2.19
        Six months ended June 30, 2012
                                                                                              Gross Profit          Operating Income        Net Income        Diluted
                                                                                                                                                              EPS
        Reported (GAAP) results                                                                            $1,135                    $875              $507           $3.87
        GAAP results include the following:
        (1) Expenses incurred in conjunction                                                               --                        5                 3              0.02
        with the acquisition of blu ecigs
        (2) Impact of RJRT adjustments to its                                                              7                         7                 5              0.04
        2001 - 2005 operating income
        and restructuring charges on
        Lorillard's tobacco settlement
        expense included in cost of sales
        Adjusted (Non-GAAP) results                                                                        $1,142                    $887              $515           $3.93
        

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