22. Consolidating Financial Information

In June 2009, April 2010, August 2011, August 2012 and May 2013, Lorillard Tobacco, as primary obligor, issued the Notes, which are unconditionally guaranteed in full by the Company for the payment and performance of Lorillard Tobacco’s obligation in connection therewith (see Note 12 for a description of the Notes).

The following sets forth the condensed consolidating balance sheets as of December 31, 2013 and 2012, condensed consolidating statements of income for the years ended December 31, 2013, 2012 and 2011, condensed consolidating statements of comprehensive income for the years ended December 31, 2013, 2012 and 2011 and condensed consolidating statements of cash flows for the years ended December 31, 2013, 2012 and 2011 for the Company as parent guarantor (herein referred to as “Parent”), Lorillard Tobacco (herein referred to as “Issuer”) and all 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

December 31, 2013

(In millions)


	Parent			Issuer			Non- guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Assets:
Cash and cash equivalents	$	341		$	1,002		$	111	$	—		$	1,454
Short term investments—available for sale securities		—			157			—		—			157
Accounts receivable, less allowances of $3		—			8			11		—			19
Other receivables (1)		—			24			93		(88	)		29
Inventories		—			412			87		—			499
Deferred income taxes		—			549			6		—			555
Other current assets		—			19			4		—			23

Total current assets		341			2,171			312		(88	)		2,736
Investment in subsidiaries		—			148			—		(148	)		—
Plant and equipment, net		—			315			1		—			316
Long term investments—available for sale securities		—			93			—		—			93
Goodwill		—			—			102		—			102
Intangible assets		—			—			87		—			87
Deferred income taxes		—			48			3		—			51
Other assets		125			151			—		(125	)		151

Total assets	$	466		$	2,926		$	505	$	(361	)	$	3,536

Liabilities and Shareholders’ Equity (Deficit):
Accounts and drafts payable	$	—		$	37		$	5	$	—		$	42
Accrued liabilities (1)		13			434			14		(84	)		377
Settlement costs		—			1,224			—		—			1,224
Income taxes		1			11			—		(4	)		8

Total current liabilities		14			1,706			19		(88	)		1,651
Long-term debt		—			3,560			—		—			3,560
Investment in subsidiaries		2,516			—			—		(2,516	)		—
Postretirement pension, medical and life insurance benefits		—			305			—		—			305
Other liabilities		—			44			165		(125	)		84

Total liabilities		2,530			5,615			184		(2,729	)		5,600

Shareholders’ Equity (Deficit):
Common stock		4			—			—		—			4
Additional paid-in capital		256			130			177		(307	)		256
Retained earnings/accumulated (deficit)		(1,438	)		(2,688	)		143		2,545			(1,438	)
Accumulated other comprehensive income (loss)		(130	)		(131	)		1		130			(130	)
Treasury stock		(756	)		—			—		—			(756	)

Total shareholders’ equity (deficit)		(2,064	)		(2,689	)		321		2,368			(2,064	)

Total liabilities and shareholders’ equity (deficit)	$	466		$	2,926		$	505	$	(361	)	$	3,536

(1)	Includes intercompany royalties between Issuer and non-guarantor subsidiaries of a corresponding amount.

Condensed Consolidating Balance Sheets

December 31, 2012

(In millions)


	Parent			Issuer			Non- guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Assets:
Cash and cash equivalents	$	150		$	1,471		$	99	$	—		$	1,720
Accounts receivable, less allowances of $3		—			8			10		—			18
Other receivables (1)		1			41			77		(67	)		52
Inventories		—			369			41		—			410
Deferred income taxes		—			555			2		—			557
Other current assets		—			12			8		—			20

Total current assets		151			2,456			237		(67	)		2,777
Investment in subsidiaries		—			118			—		(118	)		—
Plant and equipment, net		—			298			—		—			298
Goodwill		—			—			64		—			64
Intangible assets		—			—			57		—			57
Deferred income taxes		—			45			5		(2	)		48
Other assets		125			152			—		(125	)		152

Total assets	$	276		$	3,069		$	363	$	(312	)	$	3,396

Liabilities and Shareholders’ Equity (Deficit):
Accounts and drafts payable	$	—		$	35		$	4	$	—		$	39
Accrued liabilities (1)		14			399			10		(67	)		356
Settlement costs		—			1,183			—		—			1,183
Income taxes		—			—			23		—			23

Total current liabilities		14			1,617			37		(67	)		1,601
Long-term debt		—			3,111			—		—			3,111
Investment in subsidiaries		2,037			—			—		(2,037	)		—
Postretirement pension, medical and life insurance benefits		—			409			—		—			409
Other liabilities		2			39			138		(127	)		52

Total liabilities		2,053			5,176			175		(2,231	)		5,173

Shareholders’ Equity (Deficit):
Common stock		5			—			—		—			5
Additional paid-in capital		298			92			72		(164	)		298
Retained earnings/accumulated (deficit)		2,351			(1,958	)		116		1,842			2,351
Accumulated other comprehensive income (loss)		(241	)		(241	)		—		241			(241	)
Treasury stock		(4,190	)		—			—		—			(4,190	)

Total shareholders’ equity (deficit)		(1,777	)		(2,107	)		188		1,919			(1,777	)

Total liabilities and shareholders’ equity (deficit)	$	276		$	3,069		$	363	$	(312	)	$	3,396

(1)	Includes intercompany royalties between Issuer and non-guarantor subsidiaries of a corresponding amount.

Condensed Consolidating Statements of Income

For the Year Ended December 31, 2013

(In millions)


	Parent			Issuer			Non- guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Net sales (including excise taxes of $1,978)	$	—		$	6,720		$	1,333		$	(1,103	)	$	6,950
Cost of sales (including excise taxes of $1,978)		—			4,071			160			—			4,231

Gross profit		—			2,649			1,173			(1,103	)		2,719
Selling, general and administrative (1)		2			1,692			74			(1,103	)		665

Operating income		(2	)		957			1,099			—			2,054
Investment income		6			2			—			(6	)		2
Interest expense		—			(172	)		(6	)		6			(172	)

Income before taxes		4			787			1,093			—			1,884
Income taxes		4			295			405			—			704
Equity in earnings of subsidiaries		1,180			690			—			(1,870	)		—

Net income	$	1,180		$	1,182		$	688		$	(1,870	)	$	1,180

(1)	Includes intercompany royalties between Issuer and non-guarantor subsidiaries of a corresponding amount.

Condensed Consolidating Statements of Income

For the Year Ended December 31, 2012

(In millions)


	Parent			Issuer			Non- guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Net sales (including excise taxes of $1,987)	$	—		$	6,562		$	1,118		$	(1,057	)	$	6,623
Cost of sales (including excise taxes of $1,987)		—			4,201			40			—			4,241

Gross profit		—			2,361			1,078			(1,057	)		2,382
Selling, general and administrative (1)		1			1,536			24			(1,057	)		504

Operating income		(1	)		825			1,054			—			1,878
Investment income		—			3			1			—			4
Interest expense		(1	)		(151	)		(2	)		—			(154	)

Income before taxes		(2	)		677			1,053			—			1,728
Income taxes		(1	)		238			392			—			629
Equity in earnings of subsidiaries		1,100			661			—			(1,761	)		—

Net income	$	1,099		$	1,100		$	661		$	(1,761	)	$	1,099

(1)	Includes intercompany royalties between Issuer and non-guarantor subsidiaries of a corresponding amount.

Condensed Consolidating Statements of Income

For the Year Ended December 31, 2011

(In millions)


	Parent		Issuer			Non- guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Net sales (including excise taxes of $2,014)	$	—	$	6,466		$	—		$	—		$	6,466
Cost of sales (including excise taxes of $2,014)		—		4,123			—			—			4,123

Gross profit		—		2,343			—			—			2,343
Selling, general and administrative (1)		—		1,473			(1,022	)		—			451

Operating income		—		870			1,022			—			1,892
Investment income		1		1			1			—			3
Interest expense		—		(125	)		—			—			(125	)

Income before taxes		1		746			1,023			—			1,770
Income taxes		—		290			364			—			654
Equity in earnings of subsidiaries		1,115		659			—			(1,774	)		—

Net income	$	1,116	$	1,115		$	659		$	(1,774	)	$	1,116

(1)	Includes intercompany royalties between Issuer and non-guarantor subsidiaries of a corresponding amount.

Condensed Consolidating Statements of Comprehensive Income

For the Year Ended December 31, 2013

(In millions)


	Parent		Issuer		Non- guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Net income	$	1,180	$	1,182	$	688	$	(1,870	)	$	1,180

Other comprehensive income, net of tax:
Defined benefit retirement plans gain, net of tax expense of $41		110		110		—		(110	)		110
Foreign currency translation adjustments, net of tax benefit of $–		1		—		1		(1	)		1

Other comprehensive income		111		110		1		(111	)		111

Comprehensive income	$	1,291	$	1,292	$	689	$	(1,981	)	$	1,291

Condensed Consolidating Statements of Comprehensive Income

For the Year Ended December 31, 2012

(In millions)


	Parent		Issuer			Non- guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Net income	$	1,099	$	1,100		$	661	$	(1,761	)	$	1,099

Other comprehensive loss, net of tax:
Defined benefit retirement plans loss, net of tax benefit of $(4)		—		(13	)		—		—			(13	)

Other comprehensive loss		—		(13	)		—		—			(13	)

Comprehensive income	$	1,099	$	1,087		$	661	$	(1,761	)	$	1,086

Condensed Consolidating Statements of Comprehensive Income

For the Year Ended December 31, 2011

(In millions)


	Parent		Issuer			Non- guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
Net income	$	1,116	$	1,115		$	659	$	(1,774	)	$	1,116

Other comprehensive loss, net of tax:
Defined benefit retirement plans loss, net of tax benefit of $(64)		—		(119	)		—		—			(119	)

Other comprehensive loss		—		(119	)		—		—			(119	)

Comprehensive income	$	1,116	$	996		$	659	$	(1,774	)	$	997

Condensed Consolidating Statements of Cash Flows

For the Year Ended December 31, 2013

(In millions)


	Parent			Issuer			Non- guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Cash flows from operating activities:
Net income	$	1,180		$	1,182		$	688		$	(1,870	)	$	1,180
Adjustments to reconcile to net cash provided by operating activities:
Equity income from subsidiaries		(1,180	)		(690	)		—			1,870			—
Depreciation and amortization		—			44			6			—			50
Pension, health and life insurance contributions		—			(44	)		—			—			(44	)
Pension, health and life insurance benefits expense		—			36			—			—			36
Deferred income taxes		(1	)		(39	)		(2	)		—			(42	)
Share-based compensation		1			17			—			—			18
Excess tax benefits from share-based arrangements		—			(13	)		—			—			(13	)
Changes in operating assets and liabilities:
Accounts and other receivables		—			(8	)		(16	)		17			(7	)
Inventories		—			(43	)		(46	)		—			(89	)
Accounts payable and accrued liabilities		(1	)		37			1			(17	)		20
Settlement costs		—			41			—			—			41
Income taxes		2			54			(20	)					36
Other current assets		—			(1	)		4			—			3
Other assets		—			3			—			—			3
Return on investment in subsidiaries		1,913			661			—			(2,574	)		—

Net cash provided by (used in) operating activities		1,914			1,237			615			(2,574	)		1,192

Cash flows from investing activities:
Purchases of investments		—			(276	)		—			—			(276	)
Business acquisition		—			—			(46	)		—			(46	)
Additions to plant and equipment		—			(61	)		(1	)		—			(62	)
Sales, maturities and calls of investments		—			26			—			—			26
Investment in subsidiary		(105	)		—			—			105			—

Net cash provided by (used in) investing activities		(105	)		(311	)		(47	)		105			(358	)

Cash flows from financing activities:
Proceeds from issuance of long-term debt		—			500			—			—			500
Dividends paid		(823	)		(1,913	)		(661	)		2,574			(823	)
Shares repurchased		(795	)		—			—			—			(795	)
Debt issuance costs		—			(4	)		—			—			(4	)
Contributions from parent		—			—			105			(105	)		—
Proceeds from exercise of stock options		—			9			—			—			9
Excess tax benefits from share-based arrangements		—			13			—			—			13

Net cash provided by (used in) financing activities		(1,618	)		(1,395	)		(556	)		2,469			(1,100	)
Effect of foreign currency rate changes on cash and cash equivalents		—			—			—			—			—
Change in cash and cash equivalents		191			(469	)		12			—			(266	)
Cash and cash equivalents, beginning of year		150			1,471			99			—			1,720

Cash and cash equivalents, end of year	$	341		$	1,002		$	111		$	—		$	1,454

Condensed Consolidating Statements of Cash Flows

For the Year Ended December 31, 2012

(In millions)


	Parent			Issuer			Non- guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Cash flows from operating activities:
Net income	$	1,099		$	1,100		$	661		$	(1,761	)	$	1,099
Adjustments to reconcile to net cash provided by operating activities:
Equity income from subsidiaries		(1,100	)		(661	)		—			1,761			—
Depreciation and amortization		—			38			1			—			39
Pension, health and life insurance contributions		—			(43	)		—			—			(43	)
Pension, health and life insurance benefits expense		—			44			—			—			44
Deferred income taxes		1			(10	)		(2	)		—			(11	)
Share-based compensation		1			19			—			—			20
Excess tax benefits from share-based arrangements		—			(11	)		—			—			(11	)
Changes in operating assets and liabilities:
Accounts and other receivables		—			877			(10	)		(875	)		(8	)
Inventories		—			(92	)		(26	)		—			(118	)
Accounts payable and accrued liabilities		—			50			(861	)		875			64
Settlement costs		—			32			—			—			32
Income taxes		(1	)		43			17						59
Other current assets		—			13			(8	)		—			5
Other assets		—			(1	)		—			—			(1	)
Return on investment in subsidiaries		1,495			550			—			(2,045	)		—

Net cash provided by (used in) operating activities		1,495			1,948			(228	)		(2,045	)		1,170

Cash flows from investing activities:
Business acquisition, net of cash acquired (1)		(125	)		—			(135	)		125			(135	)
Additions to plant and equipment		—			(74	)		—			—			(74	)
Investment in subsidiary		(70	)		—			—			70			—

Net cash provided by (used in) investing activities		(195	)		(74	)		(135	)		195			(209	)

Cash flows from financing activities:
Shares repurchased		(578	)		—			—			—			(578	)
Proceeds from issuance of long-term debt		—			500			125			(125	)		500
Dividends paid		(807	)		(1,495	)		(550	)		2,045			(807	)
Debt issuance costs		—			(5	)		—			—			(5	)
Contributions from parent		—			—			70			(70	)		—
Proceeds from exercise of stock options		—			5			—			—			5
Excess tax benefits from share-based arrangements		—			10			—			—			10

Net cash provided by (used in) financing activities		(1,385	)		(985	)		(355	)		1,850			(875	)

Change in cash and cash equivalents		(85	)		889			(718	)		—			86
Cash and cash equivalents, beginning of year		235			582			817			—			1,634

Cash and cash equivalents, end of year	$	150		$	1,471		$	99		$	—		$	1,720

(1)	$125 million reflected as cash flows used by Parent consists of a loan from Parent to a Non-guarantor Subsidiary.

Condensed Consolidating Statements of Cash Flows

For the Year Ended December 31, 2011

(In millions)


	Parent			Issuer			Non- guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Cash flows from operating activities:
Net income	$	1,116		$	1,115		$	659		$	(1,774	)	$	1,116
Adjustments to reconcile to net cash provided by operating activities:
Equity income from subsidiaries		(1,115	)		(659	)		—			1,774			—
Depreciation and amortization		—			37			—			—			37
Pension, health and life insurance contributions		—			(42	)		—			—			(42	)
Pension, health and life insurance benefits expense		—			28			—			—			28
Deferred income taxes		—			(16	)		1			—			(15	)
Share-based compensation		—			16			—			—			16
Excess tax benefits from share-based arrangements		—			(4	)		—			—			(4	)
Changes in operating assets and liabilities:
Accounts and other receivables		(1	)		(873	)		(2	)		877			1
Accounts payable and accrued liabilities		12			(37	)		869			(877	)		(33	)
Settlement costs		—			91			—			—			91
Income taxes		—			(2	)		(4	)					(6	)
Other current assets		—			(10	)		—			—			(10	)
Other assets		—			(170	)		(213	)		387			4
Return on investment in subsidiaries		1,730			1,212			—			(2,942	)		—

Net cash provided by (used in) operating activities		1,742			686			1,310			(2,555	)		1,183

Cash flows from investing activities:
Additions to plant and equipment		—			(56	)		—			—			(56	)
Return of capital		252			—			—			(252	)		—

Net cash provided by (used in) investing activities		252			(56	)		—			(252	)		(56	)

Cash flows from financing activities:
Shares repurchased		(1,586	)		—			—			—			(1,586	)
Proceeds from issuance of long-term debt		387			750			—			(387	)		750
Dividends paid		(723	)		(1,982	)		(1,212	)		3,194			(723	)
Debt issuance costs		—			(9	)		—			—			(9	)
Proceeds from exercise of stock options		—			8			—			—			8
Excess tax benefits from share-based arrangements		—			4			—			—			4

Net cash provided by (used in) financing activities		(1,922	)		(1,229	)		(1,212	)		2,807			(1,556	)

Change in cash and cash equivalents		72			(599	)		98			—			(429	)
Cash and cash equivalents, beginning of year		163			1,181			719			—			2,063

Cash and cash equivalents, end of year	$	235		$	582		$	817		$	—		$	1,634