Share - Based Compensation

12 Months Ended

Dec. 31, 2011

Share-based Compensation [Abstract]

Share-Based Compensation

15. Share-Based Compensation

Stock Option Plan—On June 10, 2008, Lorillard separated from Loews, and all of the outstanding equity awards granted from the Carolina Group 2002 Stock Option Plan (the “Carolina Group Plan”) were converted on a one-for-one basis to equity awards granted from the Lorillard Inc. 2008 Incentive Compensation Plan (the “Lorillard Plan”) with the same terms and conditions. In May 2008, Lorillard’s sole shareholder and Board of Directors approved the Lorillard Plan in connection with the issuance of the Company’s Common Stock for the benefit of certain Lorillard employees. The aggregate number of shares of the Company’s Common Stock for which options, stock appreciation rights (“SARs”) or restricted stock may be granted under the Lorillard Plan is 3,714,825 shares, of which 714,825 were outstanding Carolina Group stock options converted to the Lorillard Plan; and the maximum number of shares of Lorillard Common Stock with respect to which options or SARs may be granted to any individual in any calendar year is 500,000 shares. The exercise price per share may not be less than the fair value of the Company’s Common Stock on the date of the grant. Generally, options and SARs vest ratably over a four-year period and expire ten years from the date of grant. The fair value of the awards immediately after the Separation did not exceed the fair value of the awards immediately before the Separation, and no incremental compensation expense was recorded as a result of the modification of the Carolina Group awards.

A summary of the stock option and SAR transactions for the Lorillard Plan for 2011, 2010 and 2009 is as follows:

	2011					2010					2009
	Number of Awards			Weighted Average Exercise Price		Number of Awards			Weighted Average Exercise Price		Number of Awards			Weighted Average Exercise Price
Awards outstanding, January 1,		1,476,113		$	69.56		1,525,185		$	65.60		814,950		$	57.21
Granted		342,020			103.11		254,728			77.84		810,421			70.59
Exercised		(346,698	)		67.96		(252,787	)		53.39		(100,186	)		37.74
Forfeited		(8,481	)		71.17		(51,013	)		62.18		—			—
Awards outstanding, December 31		1,462,954			77.82		1,476,113			69.56		1,525,185			65.60
Awards exercisable, December 31		501,775			66.70		503,469			62.66		399,240			51.09
Shares available for grant, December 31		1,423,483					1,767,101					2,110,418

The following table summarizes information about stock options and SARs outstanding in connection with the Lorillard Plan at December 31, 2011:

	Awards Outstanding						Awards Vested
Range of exercise prices	Number of Shares		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
$20.00 – 34.99		40,064		2.7	$	29.38		40,064	$	29.38
35.00 – 49.99		36,937		3.8		44.75		36,937		44.75
50.00 – 64.99		191,823		6.5		59.36		94,018		58.49
65.00 – 79.99		608,460		7.3		73.04		212,164		72.43
80.00 – 94.99		323,456		7.4		81.13		112,884		81.42
95.00 – 109.99		102,630		9.2		107.33		5,708		101.94
110.00 – 114.00		159,584		9.3		112.35		—		—

During the period January 1, 2010 to December 31, 2011, Lorillard awarded non-qualified stock options totaling 596,748 shares. During the period January 1, 2006 to December 31, 2009, Lorillard awarded SARs. In accordance with the Lorillard Plan, Lorillard has the ability to settle SARs in shares or cash and has the intention to settle in shares. The SARs balance at December 31, 2011 was 858,537 shares and the non-qualified stock options balance at December 31, 2011 was 604,417 shares.

The weighted average remaining contractual term of awards outstanding and vested as of December 31, 2011, was 7.20 years and 5.84 years, respectively. The aggregate intrinsic value of awards outstanding and vested at December 31, 2011 was $53 million and $24 million, respectively. The total intrinsic value of awards exercised during the year ended December 31, 2011 was $13 million.

Lorillard recorded stock-based compensation expense of $5 million, $8 million and $5 million related to the Lorillard Plan during 2011, 2010 and 2009 respectively. The related income tax benefits recognized were $2 million, $3 million and $2 million for 2011, 2010 and 2009, respectively. At December 31, 2011, the compensation cost related to nonvested awards not yet recognized was $7 million, and the weighted average period over which it is expected to be recognized is 2.34 years.

The fair value of granted options and SARs for the Lorillard Plan was estimated at the grant date using the Black-Scholes pricing model with the following assumptions and results:

Year Ended December 31,	2011			2010			2009
Weighted average expected dividend yield		5.8	%		6.2	%		5.5	%
Weighted average expected implied volatility		30.0	%		23.6	%		30.5	%
Weighted average risk-free interest rate		1.5	%		1.9	%		2.3	%
Expected holding period (in years)		5.0			5.0			5.0
Weighted average fair value of awards	$	14.71		$	7.34		$	11.08

The expected dividend yield is based on the expected dividend rate and the price of the Company’s Common Stock over the most recent period. The expected volatility is based upon the implied volatility of traded call options on the Company’s Stock with remaining maturities of greater than 180 days. The risk-free interest rate is based upon the interest rate on U.S. Treasury securities with maturities that correspond with the expected life of the applicable stock options. The expected holding period is estimated based upon historical exercise data for previously awarded options, taking into consideration the vesting period and contractual lives of the applicable options. Compensation expense is net of an estimated forfeiture rate based on historical experience with similar options.

Restricted Stock Plan— As part of the Lorillard Plan mentioned above, restricted stock may be granted to employees (“Employees”) and/or non-employee directors (“Directors”) annually. The restricted stock is included as part of the shares available for grant shown above. The restricted stock was granted based on the per share closing price of the Company’s Common Stock on the date of the grant.

Lorillard may grant shares of restricted stock to Employees and/or Directors, giving them in most instances all of the rights of stockholders, except that they may not sell, assign, pledge or otherwise encumber such shares for a vesting period of three years for Employees or one year for Directors (“Restriction Period”). Such shares are subject to forfeiture if certain conditions are not met.

The fair value of the restricted shares at the date of grant is amortized to expense ratably over the Restriction Period. Lorillard recorded pre-tax expense related to restricted stock for the years ended December 31, 2011, 2010 and 2009 of $11 million, $5 million and $2 million, respectively. The tax benefits recognized related to this expense for the years ended December 31, 2011 and 2010 were $4 million and $2 million, respectively. The unamortized expense related to restricted stock was $16 million at December 31, 2011, and the weighted average period over which it is expected to be recognized is 1.81 years.

Restricted stock activity was as follows for the years ended December 31, 2011, 2010 and 2009:

	2011					2010					2009
	Number of Awards			Weighted -Average Grant Date Fair Value Per Share		Number of Awards			Weighted -Average Grant Date Fair Value Per Share		Number of Awards			Weighted -Average Grant Date Fair Value Per Share
Balance at January 1,		252,683		$	71.29		89,433		$	60.06		4,057		$	67.94
Granted		199,842			79.49		184,350			76.07		89,433			60.06
Vested		(8,052	)		74.54		(9,990	)		60.06		(4,057	)		67.94
Forfeited		(7,600	)		74.84		(11,110	)		70.33		—			—
Balance at December 31,		436,873			74.92		252,683			71.29		89,433			60.06