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CHICAGO - Lorillard Inc, the No. 3 U.S. cigarette maker, posted lower-than-expected quarterly profit on Monday, hurt by higher-than-expected excise taxes and expenses from the national tobacco settlement agreement.

However, Lorillard, which separated from conglomerate Loews Corp (L.N: Quote, Profile, Research) in June, also continued to gain market share. Shares of the company, whose brands include Newport, Kent, True and Maverick, rose nearly 2 percent.

Net income fell 9 percent to $217 million, or $1.25 a share, in the second quarter from $239 million, or $1.37 a share, a year earlier.

Excluding one-time items, Lorillard earned $1.29 a share, below the analysts' average forecast of $1.36, according to Reuters Estimates. Goldman Sachs said the company had earned $1.32 a share before items.

Goldman analyst Judy Hong said the quarter was "not a stellar" one for the Lorillard. In a research note, she blamed the profit shortfall on higher-than-expected excise taxes and settlement expenses, but said the company's U.S. volumes came in better than expected and it continued to gain market share.

Hong said she expected profits to improve in the second half of the year as the company benefits from price increases.

Big U.S. tobacco companies agreed in 1998 to pay $206 billion to 46 states to help pay the costs of treating ailing smokers under a 25-year master settlement. The deal, which ended a long legal battle, included restrictions on the advertising and marketing of tobacco.

Lorillard's sales rose 1.3 percent to $1.07 billion, above the $1.03 billion analysts had expected.

The Greensboro, North Carolina-based company credited the sales increase to higher average unit prices and higher net unit sales volume