Consolidating Financial Information

9 Months Ended

Sep. 30, 2012

Consolidating Financial Information [Abstract]

Consolidating Financial Information

16. Consolidating Financial Information

In June 2009, April 2010, August 2011 and August 2012, Lorillard Tobacco, as primarily obligor, issued the Notes, which are unconditionally guaranteed by the Company for the payment and performance of Lorillard Tobacco’s obligation in connection therewith.

The following sets forth the condensed consolidating balance sheets as of September 30, 2012 and December 31, 2011, condensed consolidating statements of income for the three and nine months ended September 30, 2012 and 2011, condensed consolidating statements of comprehensive income for the three and nine months ended September 30, 2012 and 2011, and condensed consolidating statements of cash flows for the nine months ended September 30, 2012 and 2011 for the Company as parent guarantor (herein referred to as “Parent”), Lorillard Tobacco (herein referred to as “Issuer”) and all other non-guarantor subsidiaries of the Company and Lorillard Tobacco. These condensed consolidating financial statements were prepared in accordance with Rule 3-10 of SEC Regulation S-X, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.” Lorillard accounts for investments in these subsidiaries under the equity method of accounting.

Condensed Consolidating Balance Sheets

September 30, 2012

(In millions)

(Unaudited)

	Parent			Issuer			All Other Subsidiaries			Total Consolidating Adjustments			Consolidated
Assets:
Cash and cash equivalents	$	194		$	1,071		$	450		$	—		$	1,715
Accounts receivable, less allowances of $3		—			10			6			—			16
Other receivables		—			28			—			—			28
Inventories		—			387			29			—			416
Deferred income taxes		1			537			—			—			538
Other current assets		—			92			15			—			107
Total current assets		195			2,125			500			—			2,820
Investment in subsidiaries		(1,487	)		724			—			763			—
Plant and equipment, net		—			283			—			—			283
Goodwill		—			—			64			—			64
Intangible assets		—			—			58			—			58
Deferred income taxes		—			40			5			—			45
Other assets (2)		125			328			213			(512	)		154
Total assets	$	(1,167	)	$	3,500		$	840		$	251		$	3,424
Liabilities and Shareholders’ Equity (Deficit):
Accounts and drafts payable	$	—		$	30		$	3		$	—		$	33
Accrued liabilities (1)		10			418			(73	)		—			355
Settlement costs		—			1,067			—			—			1,067
Income taxes		—			—			1			—			1
Total current liabilities		10			1,515			(69	)		—			1,456
Long-term debt		—			3,116			—			—			3,116
Postretirement pension, medical and life insurance benefits		—			360			—			—			360
Other liabilities (2)		387			41			140			(512	)		56
Total liabilities		397			5,032			71			(512	)		4,988
Shareholders’ Equity (Deficit):
Common stock		2			—			—			—			2
Additional paid-in capital		294			82			264			(346	)		294
Retained earnings		2,241			(1,399	)		505			894			2,241
Accumulated other comprehensive loss		(215	)		(215	)		—			215			(215	)
Treasury stock		(3,886	)		—			—			—			(3,886	)
Total shareholders’ equity (deficit)		(1,564	)		(1,532	)		769			763			(1,564	)
Total liabilities and shareholders’ equity (deficit)	$	(1,167	)	$	3,500		$	840		$	251		$	3,424

(1) Includes intercompany royalties between Issuer and other subsidiaries of a corresponding amount.

(2) Other assets of Issuer includes a note receivable from Parent of $174 million due 2016. The note payable is included in other liabilities.

Condensed Consolidating Balance Sheets

December 31, 2011

(In millions)

	Parent			Issuer			All Other Subsidiaries		Total Consolidating Adjustments			Consolidated
Assets:
Cash and cash equivalents	$	235		$	582		$	817	$	—		$	1,634
Accounts receivable, less allowances of $2		—			10			—		—			10
Other receivables		—			956			2		(875	)		83
Inventories		—			277			—		—			277
Deferred income taxes		—			535			—		—			535
Other current assets		—			25			—		—			25
Total current assets		235			2,385			819		(875	)		2,564
Investment in subsidiaries		(1,347	)		219			—		1,128			—
Plant and equipment, net		—			262			—		—			262
Deferred income taxes		—			50			4		—			54
Other assets (2)		—			302			213		(387	)		128
Total assets	$	(1,112	)	$	3,218		$	1,036	$	(134	)	$	3,008
Liabilities and Shareholders’ Equity (Deficit):
Accounts and drafts payable	$	—		$	32		$	—	$	—		$	32
Accrued liabilities (1)		14			354			803		(875	)		296
Settlement costs		—			1,151			—		—			1,151
Income taxes		—			6			—		—			6
Total current liabilities		14			1,543			803		(875	)		1,485
Long-term debt		—			2,595			—		—			2,595
Postretirement pension, medical and life insurance benefits		—			388			—		—			388
Other liabilities (2)		387			39			14		(387	)		53
Total liabilities		401			4,565			817		(1,262	)		4,521
Shareholders’ Equity (Deficit):
Common stock		2			—			—		—			2
Additional paid-in capital		266			55			214		(269	)		266
Retained earnings		2,059			(1,174	)		5		1,169			2,059
Accumulated other comprehensive loss		(228	)		(228	)		—		228			(228	)
Treasury stock		(3,612	)		—			—		—			(3,612	)
Total shareholders’ equity (deficit)		(1,513	)		(1,347	)		219		1,128			(1,513	)
Total liabilities and shareholders’ equity (deficit)	$	(1,112	)	$	3,218		$	1,036	$	(134	)	$	3,008

(1) Includes intercompany royalties between Issuer and other subsidiaries of a corresponding amount.

(2) Other assets of Issuer includes a note receivable from Parent of $174 million due 2016. The note payable is included in other liabilities.

Condensed Consolidating Statements of Income

For the Three Months Ended September 30, 2012

(In millions)

(Unaudited)

	Parent		Issuer			All Other Subsidiaries			Total Consolidating Adjustments			Consolidated
Net sales (including excise taxes of $498)	$	—	$	1,647		$	14		$	—		$	1,661
Cost of sales		—		1,049			10			—			1,059
Gross profit		—		598			4			—			602
Selling, general and administrative (1)		—		379			(257	)		—			122
Operating income		—		219			261			—			480
Investment income		—		1			—			—			1
Interest expense		—		(37	)		(1	)		—			(38	)
Income before income taxes		—		183			260			—			443
Income taxes		—		67			93			—			160
Equity in earnings of subsidiaries		283		171			—			(454	)		—
Net income	$	283	$	287		$	167		$	(454	)	$	283

(1) Includes intercompany royalties between Issuer and other subsidiaries of a corresponding amount.

Condensed Consolidating Statements of Income

For the Nine Months Ended September 30, 2012

(In millions)

(Unaudited)

	Parent			Issuer			All Other Subsidiaries			Total Consolidating Adjustments			Consolidated
Net sales (including excise taxes of $1,491)	$	—		$	4,897		$	22		$	—		$	4,919
Cost of sales		—			3,165			16			—			3,181
Gross profit		—			1,732			6			—			1,738
Selling, general and administrative (1)		1			1,157			(776	)		—			382
Operating income		(1	)		575			782			—			1,356
Investment income		—			2			1			—			3
Interest expense		(1	)		(112	)		(1	)		—			(114	)
Income before income taxes		(2	)		465			782			—			1,245
Income taxes		(1	)		174			282			—			455
Equity in earnings of subsidiaries		791			505			—			(1,296	)		—
Net income	$	790		$	796		$	500		$	(1,296	)	$	790

(1) Includes intercompany royalties between Issuer and other subsidiaries of a corresponding amount.

Condensed Consolidating Statements of Income

For the Three Months Ended September 30, 2011

(In millions)

(Unaudited)

	Parent		Issuer			All Other Subsidiaries			Total Consolidating Adjustments			Consolidated
Net sales (including excise taxes of $509)	$	—	$	1,622		$	—		$	—		$	1,622
Cost of sales		—		1,059			—			—			1,059
Gross profit		—		563			—			—			563
Selling, general and administrative (1)		—		368			(260	)		—			108
Operating income		—		195			260			—			455
Investment income		—		—			—			—			—
Interest expense		—		(34	)		—			—			(34	)
Income before income taxes		—		161			260			—			421
Income taxes		—		62			92			—			154
Equity in earnings of subsidiaries		267		168			—			(435	)		—
Net income	$	267	$	267		$	168		$	(435	)	$	267

(1) Includes intercompany royalties between Issuer and other subsidiaries of a corresponding amount.

Condensed Consolidating Statements of Income

For the Nine Months Ended September 30, 2011

(In millions)

(Unaudited)

	Parent		Issuer			All Other Subsidiaries			Total Consolidating Adjustments			Consolidated
Net sales (including excise taxes of $1,521)	$	—	$	4,849		$	—		$	—		$	4,849
Cost of sales		—		3,144			—			—			3,144
Gross profit		—		1,705			—			—			1,705
Selling, general and administrative (1)		—		1,113			(771	)		—			342
Operating income		—		592			771			—			1,363
Investment income		—		2			—			—			2
Interest expense		—		(90	)		—			—			(90	)
Income before income taxes		—		504			771			—			1,275
Income taxes		—		195			274			—			469
Equity in earnings of subsidiaries		806		497			—			(1,303	)		—
Net income	$	806	$	806		$	497		$	(1,303	)	$	806

(1) Includes intercompany royalties between Issuer and other subsidiaries of a corresponding amount.

Condensed Consolidating Statements of Comprehensive Income

For the Three Months Ended September 30, 2012

(In millions)

(Unaudited)

	Parent		Issuer		All Other Subsidiaries		Total Consolidating Adjustments			Consolidated
Net income	$	283	$	287	$	167	$	(454	)	$	283
Other comprehensive income, net of tax:
Defined benefit retirement plan gains, net of tax expense of $2		—		4		—		—			4
Other comprehensive income		—		4		—		—			4
Comprehensive income	$	283	$	291	$	167	$	(454	)	$	287

Condensed Consolidating Statements of Comprehensive Income

For the Nine Months Ended September 30, 2012

(In millions)

(Unaudited)

	Parent		Issuer		All Other Subsidiaries		Total Consolidating Adjustments			Consolidated
Net income	$	790	$	796	$	500	$	(1,296	)	$	790
Other comprehensive income, net of tax:
Defined benefit retirement plan gains, net of tax expense of $7		—		13		—		—			13
Other comprehensive income		—		13		—		—			13
Comprehensive income	$	790	$	809	$	500	$	(1,296	)	$	803

Condensed Consolidating Statements of Comprehensive Income

For the Three Months Ended September 30, 2011

(In millions)

(Unaudited)

	Parent		Issuer		All Other Subsidiaries		Total Consolidating Adjustments			Consolidated
Net income	$	267	$	267	$	168	$	(435	)	$	267
Other comprehensive income, net of tax:
Defined benefit retirement plan gains, net of tax expense of $1		—		1		—		—			1
Other comprehensive income		—		1		—		—			1
Comprehensive income	$	267	$	268	$	168	$	(435	)	$	268

Condensed Consolidating Statements of Comprehensive Income

For the Nine Months Ended September 30, 2011

(In millions)

(Unaudited)

	Parent		Issuer			All Other Subsidiaries		Total Consolidating Adjustments			Consolidated
Net income	$	806	$	806		$	497	$	(1,303	)	$	806
Other comprehensive income, net of tax:
Defined benefit retirement plan loss, net of tax benefit of $1		—		(2	)		—		—			(2	)
Other comprehensive loss		—		(2	)		—		—			(2	)
Comprehensive income	$	806	$	804		$	497	$	(1,303	)	$	804

Condensed Consolidating Statements of Cash Flows

For the Nine Months Ended September 30, 2012

(In millions)

(Unaudited)

	Parent			Issuer			All Other Subsidiaries			Total Consolidating Adjustments			Consolidated
Cash flows from operating activities:
Net income	$	790		$	796		$	500		$	(1,296	)	$	790
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity income from subsidiaries		(791	)		(505	)		—			1,296			—
Depreciation and amortization		—			30			—			—			30
Pension and other postretirement benefits contributions		—			(41	)		—			—			(41	)
Pension and other postretirement benefits expense		—			34			—			—			34
Deferred income taxes		(1	)		1			(1	)		—			(1	)
Share-based compensation		1			13			—			—			14
Excess tax benefits from share-based payment arrangements		—			(9	)		—			—			(9	)
Changes in operating assets and liabilities:
Accounts and other receivables		—			864			(2	)		(875	)		(13	)
Inventories		—			(110	)		(14	)		—			(124	)
Accounts payable and accrued liabilities		(4	)		60			(877	)		875			54
Settlement costs		—			(84	)		—			—			(84	)
Income taxes		—			(15	)		(2	)		—			(17	)
Other current assets		—			17			(11	)		—			6
Other assets		(125	)		2			—			125			2
Return on investment in subsidiaries		1,021			—			—			(1,021	)		—
Net cash provided by (used in) operating activities		891			1,053			(407	)		(896	)		641
Cash flows from investing activities:
Business acquisition, net of cash acquired		—			—			(135	)		—			(135	)
Additions to plant and equipment		—			(51	)		—			—			(51	)
Investment in subsidiary		(50	)		—			—			50			—
Net cash (used in) investing activities		(50	)		(51	)		(135	)		50			(186	)
Cash flows from financing activities:
Shares repurchased		(274	)		—			—			—			(274	)
Dividends paid		(608	)		(1,021	)		—			1,021			(608	)
Proceeds from issuance of long-term debt		—			500			125			(125	)		500
Debt issuance costs Contributions from Parent		—   —			(6 —	)		—   50			—   (50	)		(6 —	)
Proceeds from exercise of stock options		—			5			—			—			5
Excess tax benefits from share-based payment arrangements		—			9			—			—			9
Net cash (used in) provided by financing activities		(882	)		(513	)		175			846			(374	)
Change in cash and cash equivalents		(41	)		489			(367	)		—			81
Cash and cash equivalents, beginning of year		235			582			817			—			1,634
Cash and cash equivalents, end of period	$	194		$	1,071		$	450		$	—		$	1,715

Condensed Consolidating Statements of Cash Flows

For the Nine Months Ended September 30, 2011

(In millions)

(Unaudited)

	Parent			Issuer			All Other Subsidiaries			Total Consolidating Adjustments			Consolidated
Cash flows from operating activities:
Net income	$	806		$	806		$	497		$	(1,303	)	$	806
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity income from subsidiaries		(806	)		(497	)		—			1,303			—
Depreciation and amortization		—			28			—			—			28
Pension and other postretirement benefits contributions		—			(33	)		—			—			(33	)
Pension and other postretirement benefits expense		—			22			—			—			22
Deferred income taxes		—			(8	)		1			—			(7	)
Share-based compensation		—			11			—			—			11
Excess tax benefits from share-based payment arrangements		—			(3	)		—			—			(3	)
Changes in operating assets and liabilities:
Accounts and other receivables		1			(10	)		—			—			(9	)
Inventories		—			(42	)		—			—			(42	)
Accounts payable and accrued liabilities		17			(14	)		(20	)		—			(17	)
Settlement costs		—			(3	)		—			—			(3	)
Income taxes		—			(55	)		—			—			(55	)
Other current assets		—			(6	)		—			—			(6	)
Return on investment in subsidiaries		2,196			550			—			(2,746	)		—
Net cash provided by operating activities		2,214			746			478			(2,746	)		692
Cash flows from investing activities:
Additions to plant and equipment		—			(33	)		—			—			(33	)
Cash flows from financing activities:
Shares repurchased		(1,221	)		—			—			—			(1,221	)
Proceeds from issuance of long-term debt		—			750			—			—			750
Dividends paid		(550	)		(2,196	)		(550	)		2,746			(550	)
Debt issuance costs		—			(6	)		—			—			(6	)
Proceeds from exercise of stock options		—			7			—			—			7
Excess tax benefits from share-based payment arrangements		—			3			—			—			3
Net cash (used in) provided by financing activities		(1,771	)		(1,442	)		(550	)		2,746			(1,017	)
Change in cash and cash equivalents		443			(729	)		(72	)		—			(358	)
Cash and cash equivalents, beginning of year		163			1,181			719			—			2,063
Cash and cash equivalents, end of period	$	606		$	452		$	647		$	—		$	1,705