17. Share-Based Compensation

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”), restricted stock or restricted stock units may be granted under the Lorillard Plan is 11,144,475 shares, of which 2,144,475 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 1,500,000 shares.

Stock Option Plan—Stock options are granted with an exercise price per share that 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.

A summary of the stock option and SAR transactions for the Lorillard Plan for 2013, 2012, and 2011 is as follows:


	2013					2012					2011
	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,		3,434,256		$	26.95		4,388,862		$	25.94		4,428,339		$	23.19
Granted		—			—		—			—		1,026,060			34.37
Exercised		(1,404,674	)		24.10		(930,156	)		22.28		(1,040,094	)		22.65
Forfeited		—			—		(20,631	)		23.62		(25,443	)		23.72
Expired		—			—		(3,819	)		23.53		—			—

Awards outstanding, December 31		2,029,582			28.92		3,434,256			26.95		4,388,862			25.94

Awards exercisable, December 31		1,350,409			27.31		1,760,898			25.05		1,505,325			22.23

Shares available for grant, December 31		4,690,378					4,375,683					4,270,449

The following table summarizes information about stock options and SARs outstanding in connection with the Lorillard Plan at December 31, 2013:


	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
$6.67 – 11.66		3,000		1.1	$	10.84		3,000	$	10.84
11.67 – 16.66		31,686		2.1		15.67		31,686		15.67
16.67 – 21.66		144,285		4.4		19.87		144,285		19.87
21.67 – 26.66		728,053		5.7		24.83		525,271		24.51
26.67 – 31.66		419,148		5.4		27.09		318,960		27.09
31.67 – 36.66		280,146		7.2		35.73		143,325		35.46
36.67 – 38.00		423,264		7.2		37.45		183,882		37.45

During the period January 1, 2010 to December 31, 2011, Lorillard awarded non-qualified stock options totaling 1,790,244 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, 2013 was 777,172 shares and the non-qualified stock options balance at December 31, 2013 was 1,252,410 shares.

The weighted average remaining contractual term of awards outstanding and vested as of December 31, 2013, was 5.93 years and 5.46 years, respectively. The aggregate intrinsic value of awards outstanding and vested at December 31, 2013 was $44 million and $32 million, respectively. The total intrinsic value of awards exercised during the year ended December 31, 2013 was $31 million.

Lorillard recorded stock-based compensation expense of $2 million, $5 million, and $5 million related to stock options and SARS issued under the Lorillard Plan during 2013, 2012, and 2011 respectively. The related income tax benefits recognized were $1 million, $1 million, and $2 million for 2013, 2012, and 2011, respectively. At December 31, 2013, the compensation cost related to nonvested awards not yet recognized was $1 million, and the weighted average period over which it is expected to be recognized is 1.07 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
Weighted average expected dividend yield		5.8	%
Weighted average expected implied volatility		30.0	%
Weighted average risk-free interest rate		1.5	%
Expected holding period (in years)		5.0
Weighted average fair value of awards	$	4.90

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 units (“RSUs”) may be granted to employees (“Employees”) annually. These RSUs enable the recipients to receive restricted shares of Lorillard’s common stock at the end of a one year performance period. The restricted shares vest at the end of two additional years and convert to unrestricted common stock at the conclusion of the vesting period. RSUs may be granted to Employees on an annual basis. The final award may equal 0-200% of a target based on pre-established Lorillard financial performance measures related to the one year performance period. Performance-based RSUs were issued for the first time on February 17, 2012. The 2012 RSU performance period ended on December 31, 2012 and the RSUs converted to restricted shares on February 17, 2013 based on achievement of the performance measures. Dividend equivalents accrue without compounding on the RSUs and are subject to the same risks of forfeiture as the RSUs.

RSU activity was as follows for the year ended December 31, 2013:


	2013					2012
	Number of Restricted Stock Units			Weighted Average Grant Date Fair Value		Number of Restricted Stock Units			Weighted Average Grant Date Fair Value
Outstanding, January 1,		207,339		$	42.36		—		$	—
Granted		217,216			41.63		210,891			42.36
Transferred to restricted		(192,672	)		42.35		—			—
Forfeited		(12,672	)		42.42		(3,552	)		42.35

Outstanding, December 31		219,211			41.64		207,339			42.36

The total fair values of performance-based RSUs granted during 2013 and 2012 were $9 million and $9 million, respectively, which were equal to the market value of the underlying Lorillard common stock. The total market value of awards outstanding at the end of 2013 and 2012 were $11 million and $8 million, respectively.

As part of the Lorillard Plan mentioned above, restricted stock may be granted to 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 and RSUs 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, 2013, 2012, and 2011 of $16 million, $15 million, and $11 million, respectively. The tax benefits recognized related to this expense for the years ended December 31, 2013, 2012 and 2011 were $5 million, $5 million and $4 million, respectively. The unamortized expense related to restricted stock was $16 million at December 31, 2013, and the weighted average period over which it is expected to be recognized is 1.74 years.

Restricted stock activity was as follows for the years ended December 31, 2013, 2012 and 2011:


	2013					2012					2011
	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,		1,028,844		$	28.33		1,310,619		$	24.97		758,049		$	23.76
Granted		166,125			41.28		156,450			40.97		599,526			26.50
Transferred from RSU		179,280			42.35		—			—		—			—
Vested		(362,100	)		26.25		(396,786	)		22.27		(24,156	)		24.85
Forfeited		(18,837	)		31.49		(41,439	)		28.01		(22,800	)		24.95

Balance at December 31,		993,312			33.72		1,028,844			28.33		1,310,619			24.97

Employee Stock Purchase Plan— On September 1, 2012, the Company established the Lorillard Inc. Employee Stock Purchase Plan (“ESPP”). Under the plan, certain full-time employees, who do not receive annual equity awards under the Lorillard Plan, may purchase shares of Lorillard common stock. The plan provides for two offering periods for purchases: March through August and September through February. At the end of each offering period, employees are able to purchase shares of our common stock at a price equal to 95% of the fair market value of the common stock on the last day of the offering period. The purchases are made through payroll deductions, and an aggregate of up to 1,500,000 shares of Lorillard common stock may be purchased by eligible employees pursuant to the ESPP. Purchases of common stock from the initial offering period were made on February 28, 2013.