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LORILLARD, INC Reports Operating Results (10-Q)

October 26, 2012 | About:

10qk

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LORILLARD, INC (LO) filed Quarterly Report for the period ended 2012-09-30.

Lorillard, Inc. has a market cap of $15.32 billion; its shares were traded at around $115 with a P/E ratio of 14.5 and P/S ratio of 2.4. The dividend yield of Lorillard, Inc. stocks is 5.3%.

Highlight of Business Operations:

Substantial federal, state and local excise taxes are reflected in the retail price of cigarettes. For the nine months ended September 30, 2012, the federal excise tax was $1.0066 per pack and combined state and local excise taxes ranged from $0.17 to $5.85 per pack. For the nine months ended September 30, 2012, there were two state excise tax increases implemented ranging from $0.04 to $1.00 per pack. On June 21, 2010, New York state legislature approved a $1.60 per pack state excise tax increase that was implemented on July 1, 2010. The federal excise tax on cigarettes increased by $0.6166 per pack to $1.0066 per pack, effective April 1, 2009, to finance health insurance for children. It is likely that increases in excise and similar taxes have had an adverse impact on sales of cigarettes and that the most recent increase and future increases, the extent of which cannot be predicted, could result in further volume declines for the cigarette industry, including us, and an increased sales shift toward deep discount cigarettes rather than premium brands. In addition, we and other cigarette manufacturers and importers are required to pay an assessment under a federal law designed to fund payments to tobacco quota holders and growers and are required to pay an annual user fee to the FDA.

Net sales. Net sales increased by $39 million, or 2.4%, from $1.622 billion for the three months ended September 30, 2011 to $1.661 billion for the three months ended September 30, 2012. Net sales increased $61 million due to higher cigarette average unit prices reflecting price increases in July and December 2011 and June 2012, partially offset by lower cigarette unit sales volume ($36 million, including $11 million of federal excise tax). Sales of blu eCigs contributed $14 million to Lorillards total net sales in the three months ended September 30, 2012.

Cost of sales. Cost of sales remained flat at $1.059 billion for the three months ended September 30, 2011 and 2012. Cost of sales reflects higher cigarette raw material input costs (primarily tobacco and other direct costs), higher expenses related to the State Settlement Agreements, higher Food and Drug Administration fees, partially offset by lower unit sales volume and a decrease in the Federal Assessment for Tobacco Growers. In addition, cost of sales includes blu eCigs cost of sales for the three months ended September 30, 2012. We recorded pre-tax charges for our obligations under the State Settlement Agreements of $343 million and $341 million for the three months ended September 30, 2012 and 2011, respectively, an increase of $2 million. The $2 million increase is due to the inflation adjustment, partially offset by the impact of lower unit sales and other adjustments.

Net sales. Net sales increased by $70 million, or 1.4%, from $4.849 billion for the nine months ended September 30, 2011 to $4.919 billion for the nine months ended September 30, 2012. Net sales increased $152 million due to higher average cigarette unit prices reflecting price increases in July and December 2011 and June 2012, partially offset by lower cigarette unit sales volume ($100 million, including $30 million of federal excise tax) and higher retail display allowances ($3 million). Post acquisition, sales of blu eCigs contributed $21 million to Lorillards total net sales in the nine months ended September 30, 2012.

Cost of sales. Cost of sales increased by $37 million, or 1.2%, from $3.144 billion for the nine months ended September 30, 2011 to $3.181 billion for the nine months ended September 30, 2012. The increase in cost of sales is primarily due to higher expenses related to the State Settlement Agreements, higher raw material input costs (primarily tobacco and other direct costs) and higher Food and Drug Administration fees, partially offset by lower cigarette unit sales volume. In addition, cost of sales includes blu eCigs cost of sales for the nine months ended September 30, 2012. We recorded pre-tax charges for our obligations under the State Settlement Agreements of $1.045 billion and $1.013 billion for the nine months ended September 30, 2012 and 2011, respectively, an increase of $32 million. The $32 million increase is due to the inflation adjustment and higher other expenses, partially offset by the impact of lower unit sales. Other expenses include the unfavorable impact on tobacco settlement expense of $7 million resulting from a competitors adjustments in the first quarter of 2012 of certain historical components of the calculation of the industry volume adjustment offset under the State Settlement Agreements. Such adjustments related to the competitors operating income for 2001 2005. Tobacco settlement expenses are impacted by a number of factors including industry profits, as defined in the State Settlement Agreements, which were increased in the first quarter by these changes. If further prior year profit adjustments are reported by industry participants in the future, our costs related to the State Settlement Agreements could be affected, either up or down.

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