Lorillard reports Q3 net earnings of US$258M, down 8.8% from year-ago period amid legal costs, acquisition of an overseas e-cigarette company; net sales rise 10% to US$1.82B

GREENSBORO, North Carolina , October 23, 2013 (press release) – Lorillard, Inc. (NYSE: LO) announced today its results for the quarter ended September 30, 2013.

Third Quarter Highlights

Net sales increased 10.0% over last year to $1.827 billion.

Reported (GAAP) diluted earnings per share decreased 4.2% versus last year to $0.69.

Adjusted (Non-GAAP) operating income increased 12.5% over last year to $541 million.

Adjusted (Non-GAAP) diluted earnings per share increased 15.3% versus last year to $0.83.

Lorillard continued to gain retail market share of cigarettes increasing its total share 0.5 share points to 14.9% driven by Newport Menthol.

blu eCigs further established itself as the e-cigarette category leader achieving approximately a 49% share.

Lorillard repurchased 5.7 million shares during the quarter at a cost of $249 million.

Lorillard acquired SKYCIG, a British-based e-cigarette business, on October 1, 2013.

"Lorillard had a strong third quarter of 2013 marked by market share, volume and margin gains for our cigarette business, market share and sequential volume gains for our market leading e-cigarette business and the acquisition of a small UK e-cigarette business," stated Murray S. Kessler, Lorillard Chairman, President and CEO. "We are very pleased that the company's continued industry leading fundamentals have resulted in robust financial results for the quarter and year to date, with adjusted EPS growth of more than 15% in the third quarter and more than 13% for the first nine months of 2013. We remain steadfast in delivering on our promise to consistently deliver a double digit total shareholder return as measured by EPS growth and the dividend yield over the long-term."

Net sales increased by $166 million, or 10.0%, to $1.827 billion in the third quarter of 2013 due to increases in net sales of cigarettes and electronic cigarettes of $117 million and $49 million, respectively. Net sales increased by $289 million, or 5.9%, to $5.208 billion in the first nine months of 2013 due to increases in net sales of cigarettes and electronic cigarettes of $134 million and $155 million, respectively.

Reported diluted earnings per share decreased $0.03, or 4.2%, to $0.69 in the third quarter of 2013, and increased $0.37, or 18.4%, to $2.38 in the first nine months of 2013. As discussed further below, reported diluted earnings per share for the third quarter include a $79 million charge to dismiss the Evans case. Adjusted diluted earnings per share increased $0.11, or 15.3%, to $0.83 in the third quarter of 2013, and increased $0.27, or 13.3%, to $2.30 in the first nine months of 2013, due primarily to strong operating performance of the
Cigarettes segment, the impact of share repurchases and continued growth in the Electronic Cigarettes segment.

The following is a discussion of third quarter and first nine months of 2013 performance of Lorillard's two operating segments, Cigarettes and Electronic Cigarettes.

Third Quarter 2013

Cigarette net sales increased $117 million, or 7.1%, to $1.764 billion in the third quarter of 2013, compared to $1.647 billion in the third quarter of 2012. The increase in cigarette net sales resulted primarily from higher cigarette unit sales volume and higher average net cigarette selling prices.

Total Lorillard wholesale cigarette unit volume, which includes Puerto Rico and U.S. Possessions, increased 3.5% for the third quarter of 2013 compared to the corresponding period of 2012. Domestic wholesale cigarette unit volume, which excludes Puerto Rico and U.S. Possessions, increased 3.8% for the third quarter of 2013 compared to the corresponding period of 2012. The Company estimates total cigarette industry domestic wholesale shipments were flat for the third quarter of 2013 compared to the third quarter of 2012. Adjusting for the impact of changes in wholesale inventory patterns and differences in quarterly shipping calendars, Lorillard domestic wholesale shipments were up slightly in the third quarter of 2013 versus year ago, significantly outperforming adjusted total cigarette industry domestic wholesale shipments which decreased an estimated 3.5% to 4.0% during the quarter compared to third quarter of 2012.

Total wholesale unit volume for Newport, the Company's flagship brand, increased 4.9% for the third quarter of 2013 compared to the corresponding period of 2012. Domestic wholesale cigarette unit volume for Newport, which excludes Puerto Rico and U.S. Possessions, increased 5.3% for the quarter versus year ago. Adjusting for inventory fluctuations and calendar differences, Newport domestic volume increased approximately 1.6% versus year ago. Domestic wholesale shipments for Maverick, the Company's leading discount brand, decreased 2.5% for the third quarter of 2013 compared to the third quarter of 2012.

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 third quarter 2013 domestic retail market share once again posted solid gains, increasing 0.5 share points versus year ago to 14.9%. Newport's domestic retail market share reached 12.6%, an increase of 0.5 share points compared to the third quarter of 2012. Lorillard's domestic retail share of the menthol market reached 40.4%, an increase of 0.8 share points compared to the third quarter of 2012. Gains in market share were primarily attributable to the continued strengthening of Newport Menthol in its core geographies, continued success in expansion markets and the volume impact of Newport Smooth Select's introduction in the second quarter of 2013.

Gross profit was $654 million, or 37.1% of net sales, in the third quarter of 2013 and $598 million, or 36.3% of net sales, in the third quarter of 2012. The increase in gross profit reflects higher average net cigarette selling prices and increased cigarette unit sales volume, and the increase in gross profit margin reflects higher average net cigarette selling prices.

Reported selling, general and administrative costs increased $83 million to $196 million in the third quarter of 2013 compared to the third quarter of 2012, due to $79 million in accrued costs related to compensatory damages and statutory interest to dismiss the Evans case and $4 million of expenses incurred in conjunction with the acquisition of SKYCIG. As detailed in the reconciliation table, third quarter 2013 adjusted selling, general and administrative costs exclude these items and remained flat at $113 million compared to the third quarter of 2012.

Lorillard Tobacco was the only defendant in Evans v. Lorillard Tobacco Company, a conventional product liability case. Following a jury trial, the trial court entered judgment for $35 million in compensatory damages, $81 million in punitive damages and statutory interest on each of the awards at the rate of 12% per year from the date the case was filed in 2004.
Lorillard Tobacco appealed the final judgment to the Massachusetts Supreme Judicial Court, which in June 2013 affirmed the compensatory damages award but remanded the case to the trial court for a new trial on the issue of punitive damages, among other things. Lorillard Tobacco paid the $79 million in compensatory damages and statutory interest, and the case is now dismissed in its entirety, including the potential for punitive or other damages.

Reported operating income for the Cigarettes segment decreased $27 million to $458 million in the third quarter of 2013 from $485 million in the third quarter of 2012. Adjusted operating income for the Cigarettes segment increased $56 million, or 11.5%, to $541 million in the third quarter of 2013 from $485 million in the third quarter of 2012.

First Nine Months 2013

Cigarette net sales increased $134 million, or 2.7%, to $5.031 billion in the first nine months of 2013, compared to $4.897 billion in the first nine months of 2012. The increase in cigarette net sales resulted primarily from higher average net cigarette selling prices.

Total Lorillard first nine months 2013 wholesale cigarette unit volume, which includes Puerto Rico and U.S. Possessions, decreased 0.1% compared to a year ago. Domestic wholesale cigarette unit volume, which excludes Puerto Rico and U.S. Possessions, decreased 0.2% for the first nine months compared to the corresponding period of 2012. Total cigarette industry domestic wholesale shipments decreased an estimated 4% for the first nine months of 2013 compared to the first nine months of 2012.

Total wholesale unit volume for Newport, the Company's flagship brand, increased 0.9% in the first nine months versus year ago. Domestic wholesale cigarette unit volume for Newport, which excludes Puerto Rico and U.S. Possessions, increased 0.8% for the first nine months of 2013 compared to the corresponding period of 2012. Domestic wholesale shipments for Maverick, the Company's leading discount brand, decreased 4.4% during the same period.

Based on EXCEL, Lorillard's domestic retail market share once again posted strong gains in the first nine months of 2013, increasing 0.5 share points to 14.9%. Newport's domestic retail market share reached 12.6% for the first nine months, an increase of 0.5 share points versus year ago. Lorillard's domestic retail share of the menthol market reached 40.5% for the first nine months, an increase of 0.9 share points compared to year ago. Gains in market share were primarily attributable to the continued strengthening of Newport Menthol in its core geographies, continued success in expansion markets and the volume impact of Newport Smooth Select's introduction in the second quarter of 2013.

Reported gross profit was $2.006 billion, or 39.9% of net sales, in the first nine months of 2013 and $1.733 billion, or 35.4% of net sales, in the first nine months of 2012. Adjusted gross profit was $1.852 billion in the first nine months of 2013, or 36.8% of net sales, compared to $1.740 billion, or 35.5% of net sales, in the first nine months of 2012. As detailed in the reconciliation table, adjusted gross profit excludes the $154 million favorable impact on Lorillard's tobacco settlement expense in the first nine months of 2013 of the reduction in Lorillard's Master Settlement Agreement ("MSA") payments as a result of the settlement with certain states to resolve certain MSA payment adjustment disputes in March 2013. Adjusted gross profit for the first nine months of 2012 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. The increase in adjusted gross profit and adjusted gross profit margin reflects higher average net cigarette selling prices.

Reported selling, general and administrative costs increased $85 million to $456 million in the first nine months of 2013 compared to the first nine months of 2012, primarily due to $79 million in accrued costs related to compensatory damages and statutory interest to dismiss the Evans case and $20 million in estimated costs to comply with or otherwise resolve the U.S. Government Case judgment, offset partially by lower legal defense costs related to Engle Progeny litigation. As detailed in the reconciliation table, adjusted selling, general and administrative costs exclude certain items and decreased $13 million to $353 million in the first nine months of 2013 compared to the first nine months of 2012, primarily due to lower legal defense costs related to the Engle Progeny litigation.

Reported operating income for the Cigarettes segment increased $188 million to $1.550 billion in the first nine months of 2013 from $1.362 billion in the first nine months of 2012. Adjusted operating income for the Cigarettes segment increased $125 million, or 9.1%, to $1.499 billion in the first nine months of 2013 from $1.374 billion in the first nine months of 2012.

Electronic Cigarettes Segment Results*

Third Quarter and First Nine Months 2013

Net sales for the Electronic Cigarettes segment were $63 million and $177 million for the three and nine months ended September 30, 2013, respectively, compared to $14 million and $22 million for the three and nine months ended September 30, 2012, respectively. Strong sales of blu eCigs resulted from significant brand building activities highlighted by a national television advertising campaign, expansion of retail distribution into a total of over 127,000 retail outlets, the launch of new, lower priced rechargeable kits and strong repeat purchases.

According to EXCEL which includes electronic cigarettes beginning in the fourth quarter of 2012, blu eCigs domestic retail market share of the electronic cigarettes market reached approximately 49% for the third quarter 2013 and approximately 44% for the first nine months of 2013.

Gross profit was $15 million, or 23.8% of net sales, and $54 million, or 30.5% of sales, for the three and nine months ended September 30, 2013, respectively, compared to $4 million, or 28.6% of sales, and $5 million, or 22.7% of sales, for the three and nine months ended September 30, 2012, respectively. Gross profit and gross profit margin for the third quarter of 2013 was negatively impacted by the change in product offering arising from the introduction of our new, lower priced rechargeable kit that began shipping to wholesale late in the second quarter.

Reported selling, general and administrative costs were $15 million and $45 million for the three and nine months ended September 30, 2013, respectively, compared to $9 million and $11 million for the three and nine months ended September 30, 2012, respectively. Selling, general and administrative costs include marketing and administrative costs associated with the blu eCigs' national retail roll-out.

Reported operating income/(loss) for the Electronic Cigarettes segment was $0 and $9 million for the three and nine months ended September 30, 2013, respectively, compared to $(5) million and $(6) million for the three and nine months ended September 30, 2012, respectively.

Acquisition of SKYCIG®

Lorillard announced on October 1, 2013 that it had acquired all of the assets and operations of SKYCIG, a British-based electronic cigarette (e-cigarette) business for approximately £30 million (approximately $49 million) in cash paid at closing and additional contingent consideration of up to an additional £30 million (approximately $49 million at October 1, 2013 exchange rates) to be paid in 2016 based on the achievement of certain financial performance benchmarks.

The acquisition provides Lorillard with a major UK electronic cigarette brand and, along with its leading U.S. electronic cigarette brand – blu eCigs®, a global presence in the rapidly growing worldwide e-cigarette category. SKYCIG is expected to benefit from Lorillard's significant sales, marketing, regulatory, research and development expertise to further strengthen its competitive position in the UK e-cigarette market.

Additional News

On August 16, 2013, Lorillard, Inc. announced that its Board of Directors approved a quarterly dividend on its common stock of $0.55 per share. The dividend was payable on September 10, 2013 to shareholders of record as of August 30, 2013.

During the third quarter of 2013, the Company repurchased approximately 5.7 million shares at a cost of $249 million under the amended $1 billion share repurchase program announced in March 2013 and amended in May 2013. As of September 30, 2013, the maximum dollar value of shares that could yet be purchased under the $1 billion share repurchase program was $542 million.

On September 11, 2013, the arbitration panel responsible for adjudicating the 2003 NPM adjustment dispute issued a determination that 6 states failed to diligently enforce escrow provisions applicable to non-participating manufacturers. As a result of the Panel's ruling, the Original Participating Manufacturers are entitled to receive $457.9 million, plus interest and earnings, with Lorillard's share of the principal amount totaling $46.9 million. No amount has been recorded in Lorillard's financial statements related to this award as it is Lorillard's expectation that the six states found non-diligent by the arbitration panel will contest the arbitration panel's findings in their individual state MSA courts, and, as a result, it is uncertain this award will be realized.

Conference Call

A conference call to discuss third quarter 2013 results of Lorillard, Inc. has been scheduled for 9:00 a.m. Eastern Time on October 23, 2013. 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: 80062601.

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: 80062601. The conference call will be available for replay in its entirety through October 30, 2013.

About Lorillard, Inc.

Lorillard, Inc. (NYSE: LO), 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 other subsidiaries, is also a leading global electronic cigarette company, marketed under the blu eCigs and SKYCIG brands. Newport, Kent, True, Maverick, Old Gold, blu eCigs and SKYCIG are the registered trademarks of Lorillard and its subsidiaries. Lorillard maintains its corporate headquarters and manufactures all of its traditional cigarette products in Greensboro, North Carolina.

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