Reynolds American (RAI) 10-Q 31 Jul 09 2009 Q2 Quarterly report Financial data

Document and Company Informatio

Document and Company Information (USD $)
In Billions, except Share data	6 Months Ended Jun. 30, 2009	Jul. 10, 2009	Jun. 30, 2008
Document And Company Information [Abstract]
Entity Registrant Name	Reynolds American Inc.
Entity Central Index Key	0001275283
Document Type	10-Q
Document Period End Date	2009-06-30
Amendment Flag	false
Amendment Description	N/A
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	Yes
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Public Float			7.9
Entity Common Stock, Shares Outstanding		291,358,325

Condensed Consolidated Statemen

Condensed Consolidated Statements of Income (USD $)
In Millions, except Per Share data	3 Months Ended Jun. 30, 2009		3 Months Ended Jun. 30, 2008		6 Months Ended Jun. 30, 2009		6 Months Ended Jun. 30, 2008
Net sales	$2,140	[1]	$2,230	[1]	$3,972	[1]	$4,174	[1]
Net sales, related party	110		109		199		222
Net sales	2,250		2,339		4,171		4,396
Costs and expenses:
Cost of products sold	1,201	[1],[2],[3]	1,305	[1],[2],[3]	2,199	[1],[2],[3]	2,469	[1],[2],[3]
Selling, general and administrative expenses	393		391		758		773
Amortization expense	7		6		15		11
Trademark impairment charge	0		0		453		0
Operating income	649		637		746		1,143
Interest and debt expense	64		68		130		140
Interest income	(5)		(13)		(10)		(35)
Gain on termination of joint venture	0		0		0		(328)
Other (income) expense, net	(12)		2		7		(10)
Income before income taxes	602		580		619		1,376
Provision for income taxes	225		216		234		507
Net income	$377		$364		$385		$869
Basic income per share:
Net income	1.29		1.24		1.32		2.95
Diluted income per share:
Net income	1.29		1.23		1.32		2.94
Dividends declared per share	0.85		0.85		1.7		1.7
[1]Excludes excise taxes of $1,247 million and $500 million for the three months ended June 30, 2009 and 2008, respectively, and $1,657 million and $937 million for the six months ended June 30, 2009 and 2008, respectively.
[2]Includes federal tobacco quota buyout expenses of $66 million and $64 million for the three months ended June 30, 2009 and 2008, respectively, and $118 million and $127 million for the six months ended June 30, 2009 and 2008, respectively.
[3]Includes Master Settlement Agreement, referred to as MSA, and other settlement agreements with the states of Mississippi, Florida, Texas and Minnesota, together with the MSA collectively referred to as the State Settlement Agreements, expense of $696 million and $730 million for the three months ended June 30, 2009 and 2008, respectively, and $1,274 million and $1,384 million for the six months ended June 30, 2009 and 2008, respectively.

1_Condensed Consolidated Statem

Condensed Consolidated Statements of Cash Flows (USD $)
In Millions	6 Months Ended Jun. 30, 2009	6 Months Ended Jun. 30, 2008
Cash flows from (used in) operating activities:
Net income	$385	$869
Adjustments to reconcile to net cash flows from (used in) continuing operating activities:
Depreciation and amortization	74	70
Gain on termination of joint venture	0	(328)
Restructuring charges, net of cash payments	(19)	(2)
Trademark impairment charge	453	0
Deferred income tax expense	(220)	140
Tobacco settlement accruals	(527)	(940)
Other, net	145	(110)
Net cash flows from (used in) operating activities	291	(301)
Cash flows from (used in) investing activities:
Proceeds from settlement of short-term investments	17	211
Capital expenditures	(48)	(70)
Proceeds from termination of joint venture	24	164
Other, net	14	34
Net cash flows used in investing activities	7	339
Cash flows from (used in) financing activities:
Dividends paid on common stock	(495)	(502)
Repurchase of common stock	(5)	(118)
Repayment of long-term debt	(200)	0
Excess tax benefit from stock-based compensation	1	2
Other, net	1	1
Net cash flows used in financing activities	(698)	(617)
Effect of exchange rate changes on cash and cash equivalents	2	0
Net change in cash and cash equivalents	(398)	(579)
Cash and cash equivalents at beginning of period	2,578	2,215
Cash and cash equivalents at end of period	2,180	1,636
Income taxes paid, net of refunds	437	417
Interest paid	$127	$138

Condensed Consolidated Balance

Condensed Consolidated Balance Sheets (USD $)
In Millions	Jun. 30, 2009	Dec. 31, 2008
Current assets:
Cash and cash equivalents	$2,180	$2,578
Short-term investments	6	23
Accounts receivable, net of allowance (2009 - $1; 2008 - $1)	95	84
Accounts receivable, related party	63	91
Notes receivable	31	35
Other receivables	15	37
Inventories	1,118	1,170
Deferred income taxes, net	874	838
Prepaid expenses and other	328	163
Total current assets	4,710	5,019
Property, plant and equipment, net of accumulated depreciation (2009 - $1,559; 2008 - $1,549)	999	1,031
Trademarks and other intangible assets, net of accumulated amortization (2009 - $634; 2008 - $619)	2,802	3,270
Goodwill	8,174	8,174
Other assets and deferred charges	572	660
Total assets	17,257	18,154
Current liabilities:
Accounts payable	112	206
Tobacco settlement accruals	1,790	2,321
Due to related party	3	3
Deferred revenue, related party	24	50
Current maturities of long-term debt	0	200
Other current liabilities	1,434	1,143
Total current liabilities	3,363	3,923
Long-term debt (less current maturities)	4,452	4,486
Deferred income taxes, net	137	282
Long-term retirement benefits (less current portion)	2,732	2,836
Other noncurrent liabilities	375	390
Shareholders' equity:
Common stock (shares issued: 2009 - 291,358,325; 2008 - 291,450,762)	0	0
Paid-in capital	8,482	8,463
Accumulated deficit	(643)	(531)
Accumulated other comprehensive loss - (Defined benefit pension and post-retirement plans: 2009 - $(1,575) and 2008 - $(1,643), net of tax)	(1,641)	(1,695)
Total shareholders' equity	6,198	6,237
Total liabilities and stockholders' equity	$17,257	$18,154

2_Condensed Consolidated Balanc

Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data	Jun. 30, 2009	Dec. 31, 2008
Allowance for accounts receivable	$1	$1
Accumulated depreciation on property, plant and equipment	1,559	1,549
Accumulated amortization on trademarks and other intangible assets	634	619
Common stock, shares issued	291,358,325	291,450,762
Defined benefit pension and post-retirement plans	($1,575)	($1,643)

Business and Summary of Signifi

Business and Summary of Significant Accounting Policies
	6 Months Ended Jun. 30, 2009 USD / shares
Business and Summary of Significant Accounting Policies [Abstract]
Business and Summary of Significant Accounting Policies	Note 1 Business and Summary of Significant Accounting Policies Overview The condensed consolidated financial statements (unaudited)include the accounts of Reynolds American Inc., referred to as RAI, and its wholly owned operating subsidiaries. RAIs wholly owned subsidiaries include R. J. Reynolds Tobacco Company; Santa Fe Natural Tobacco Company, Inc., referred to as Santa Fe; Lane, Limited, referred to as Lane; Conwood Holdings, Inc.; and Conwood Company, LLC and Rosswil LLC, collectively referred to as the Conwood companies. RAI was incorporated as a holding company in the state of North Carolina on January5, 2004, and its common stock is listed on the NYSE under the symbol RAI. RAI was created to facilitate the business combination of the U.S. business of Brown Williamson Holdings, Inc., referred to as BW, with R. J. Reynolds Tobacco Company on July30, 2004. References to RJR Tobacco prior to July30, 2004, relate to R. J. Reynolds Tobacco Company, a New Jersey corporation and a wholly owned subsidiary of R.J. Reynolds Tobacco Holdings, Inc., referred to as RJR. References to RJR Tobacco on and subsequent to July30, 2004, relate to the combined U.S. assets, liabilities and operations of BW and R. J. Reynolds Tobacco Company, a North Carolina corporation. RAIs reportable operating segments are RJR Tobacco and Conwood. The RJR Tobacco segment consists of the primary operations of R. J. Reynolds Tobacco Company. The Conwood segment consists of Conwood Holdings, Inc., the primary operations of the Conwood companies and Lane. RAIs wholly owned subsidiary, Santa Fe, among others, is included in All Other. The segments were identified based on how RAIs chief operating decision maker allocates resources and assesses performance. Some of RAIs wholly owned operating subsidiaries have entered into intercompany agreements for products or services with other RAI operating subsidiaries. As a result, certain activities of an operating subsidiary may be included in a different segment of RAI. RAIs operating subsidiaries primarily conduct their business in the United States. Basis of Presentation The accompanying interim condensed consolidated financial statements (unaudited)have been prepared in accordance with accounting principles generally accepted in the United States of America, referred to as GAAP, for interim financial information and, in managements opinion, contain all adjustments, consisting only of normal recurring items, necessary for a fair presentation of the results for the periods presented. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. For interim reporting purposes, certain costs and expenses are charged to operations in proportion to the estimated total annual amount expected to be incurred primarily based on sales volumes. The results for the interim period ended June30, 2009, are not necessarily indicative of the results that may be expected for the year ending December31, 2009. The equity method is used to account for investments in businesses that RAI does not control, but has the ability to significantly influence operat

Fair Value Measurement

Fair Value Measurement
	6 Months Ended Jun. 30, 2009 USD / shares
Fair Value Measurement [Abstract]
Fair Value Measurement	Note 2 Fair Value Measurement SFAS No.157 establishes a fair value hierarchy and defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price. The levels of the fair value hierarchy established by SFAS No.157 are: Level 1: inputs are quoted prices, unadjusted, in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2: inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. A Level 2 input must be observable for substantially the full term of the asset or liability. Level 3: inputs are unobservable and reflect the reporting entitys own assumptions about the assumptions that market participants would use in pricing the asset or liability. Financial assets carried at fair value on a recurring basis as of June30, 2009, were as follows: Level 1 Level 2 Level 3 Total Money market funds $ 2,111 $ $ 6 $ 2,117 Auction rate securities corporate credit risk 25 25 Auction rate securities financial insurance companies 18 18 Mortgage-backed security 14 14 Assets held in grantor trusts 14 14 Interest rate swaps fixed to floating rate 180 180 Interest rate swaps floating to fixed rate 61 61 The fair value of the interest rate swaps, classified as a Level 2, utilized a market approach model using the notional amount of the interest rate swap multiplied by the observable inputs of time to maturity, interest rates and credit spreads. See note 9 for additional information on interest rate swaps. The fair value of the money market funds, classified as a Level 3, utilized an income approach model and was based upon expected future cash flows from accumulated cash in the fund and future maturities of the remaining securities held in the fund. During the first six months of 2009, redemptions of $4million were received from the Reserve Fund-Primary Fund and redemptions of $13 million were received from the Reserve Fund-International Liquidity Fund. No current valuations had been issued by either fund, and RAI was unable to identify a similar fund that carried identical holdings. As a result, the observable transactions and pricing were not current. The funds did issue a detailed listing of the securities that were held and not matured, as well as their face value and maturity date. This observable data, along with unobservable factors such as assumptions about fund liquidation of accumulated cash and the collectability of the outstanding underlying securities were used to determine the fair value of the funds as of June30, 2009. The fair value of the auction rate securities, either related to certain financial insurance companies or linked to the longer-term credit risk of a diverse range of corporatio

Intangible Assets

Intangible Assets
	6 Months Ended Jun. 30, 2009 USD / shares
Intangible Assets [Abstract]
Intangible Assets	Note 3 Intangible Assets The carrying amounts of indefinite-lived intangible assets by segment not subject to amortization were as follows: RJR Tobacco Conwood All Other Consolidated Trademarks $ 1,653 $ 1,222 $ 155 $ 3,030 Other intangibles 55 48 103 Balance as of December31, 2008 $ 1,708 $ 1,222 $ 203 $ 3,133 Trademarks $ 1,277 $ 1,152 $ 155 $ 2,584 Other intangibles 99 4 103 Balance as of June30, 2009 $ 1,376 $ 1,152 $ 159 $ 2,687 Concurrent with the transfer of the management of tobacco products sold to certain U.S. territories, U.S. duty-free shops and U.S. overseas military bases, from R. J. Reynolds Global Products, Inc., referred to as GPI, to RJR Tobacco on January1, 2009, a $44million indefinite-lived intangible asset was transferred from All Other to RJR Tobacco. During the first quarter of 2009, President Obama signed into law an increase of $0.62 in the federal excise tax per pack of cigarettes as well as significant tax increases on other tobacco products, to fund expansion of the State Childrens Health Insurance Program, referred to as the SCHIP. The tax increases were effective April1, 2009. The increase in federal excise tax was expected to adversely impact the net sales of RAIs operating subsidiaries. This event was considered a triggering event and required the testing for impairment of the carrying value of trademarks and goodwill during the first quarter of 2009. As a result of this testing, RJR Tobacco recorded a trademark impairment charge of $377million, and Conwood recorded a trademark impairment charge of $76million in the first quarter of 2009. These charges were based on the excess of certain brands carrying values over their estimated fair values. The analysis of the fair value of trademarks in accordance with SFAS No.142, Goodwill and Other Intangible Assets, was based on estimates of fair value on an income approach using a discounted cash flow valuation model under a relief from royalty methodology. The relief from royalty model includes the estimates of the royalty rate that a market participant might assume, projected revenues and judgment regarding the 10.50% discount rate applied to those estimated cash flows. The determination of the discount rate was based on a cost of equity model, using a risk-free rate, adjusted by a stock beta-adjusted risk premium and a size premium. The trademark impairment charge is reflected as a decrease in the carrying value of the trademarks in the condensed consolidated balance sheet (unaudited)as of June30, 2009, as a trademark impairment charge in the condensed consolidated statement of income (unaudited)for the six months ended June30, 2009, and had no impact on cash flows. Details of finite-lived intangible assets subject to amortization as of June30, 2009, were as follows: Accumulated Gross Amortization Net Contrac

Restructuring Charges

Restructuring Charges
	6 Months Ended Jun. 30, 2009 USD / shares
Restructuring Charges [Abstract]
Restructuring Charges	Note 4 Restructuring Charges 2008 Restructuring Charge In 2008, RAI and RJR Tobacco announced changes in their organizational structures to streamline non-core business processes and programs in order to allocate additional resources to strategic growth initiatives. The reorganizations will result in the elimination of approximately 600 full-time jobs, expected to be substantially completed by December31, 2009. Under existing benefit plans, $83million of severance-related cash benefits and $7million of non-cash pension-related benefits comprised a restructuring charge of $90million in 2008. Of this charge, $81million was recorded in the RJR Tobacco segment. Of the cash portion of the charge, $23million was paid as of June30, 2009. Accordingly, in the condensed consolidated balance sheet (unaudited)as of June30, 2009, $41million was included in other current liabilities, and $19million was included in other noncurrent liabilities. The cash benefits are expected to be substantially paid by December31, 2010. The component of the restructuring charge accrued and utilized was as follows: Employee Severance and Benefits Original accrual $ 91 Utilized in 2008 (12 ) Adjusted in 2008 (1 ) Balance as of December31, 2008 78 Utilized in 2009 (18 ) Balance as of June30, 2009 $ 60

Income Per Share

Income Per Share
	6 Months Ended Jun. 30, 2009 USD / shares
Income Per Share [Abstract]
Income Per Share	Note 5 Income Per Share On January1, 2009, RAI adopted FSP No.EITF 03-6-1, which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share. Unvested restricted shares awarded under the 2007 and 2008 LTIP grants have been determined to be participating securities as defined by FSP No.EITF 03-6-1 because they have non-forfeitable dividend rights equivalent to common shares. Accordingly, these restricted shares are included in the basic EPS calculation for the second quarter and first six months of 2009 and retrospectively in the basic EPS calculation for the second quarter and first six months of 2008. The components of the calculation of income per share were as follows: For the Three Months For the Six Months Ended June 30, Ended June 30, 2009 2008 2009 2008 Net income $ 377 $ 364 $ 385 $ 869 Basic weighted average shares, in thousands 291,344 294,664 291,384 294,881 Effect of dilutive potential shares: Options 137 205 140 218 Stock units 218 128 Diluted weighted average shares, in thousands 291,699 294,869 291,652 295,099

Investments

Investments
	6 Months Ended Jun. 30, 2009 USD / shares
Investments [Abstract]
Investments	Note 6 Investments Short-term investments classified as available-for-sale were as follows: June 30, 2009 December 31, 2008 Gross Estimated Realized Estimated Cost Redemptions Fair Value Cost Loss Redemptions Fair Value Reserve Fund Primary Fund $ 7 $ (4 ) $ 3 $ 37 $ (1 ) $ (29 ) $ 7 Reserve Fund International Liquidity Fund 16 (13 ) 3 17 (1 ) 16 $ 23 $ (17 ) $ 6 $ 54 $ (2 ) $ (29 ) $ 23 In May2009, the SEC filed fraud charges against several entities and individuals who operate the Reserve Fund-Primary Fund for failing to provide key material facts to investors and trustees about the funds vulnerability as Lehman Brothers Holdings, Inc. sought bankruptcy protection. In bringing the enforcement action, the SEC also seeks to expedite the distribution of the funds remaining assets to investors. RAI has the intent and the ability to hold the investments in the Reserve Funds until distribution or maturity. Long-term investments classified as available-for-sale were as follows: June 30, 2009 December 31, 2008 Gross Gross Gross Unrealized Estimated Realized Unrealized Estimated Cost Redemptions (Loss) Gain Fair Value Cost Loss Loss Fair Value Auction rate securities corporate credit risk $ 95 $ $ (70 ) $ 25 $ 95 $ $ (51 ) $ 44 Auction rate securities financial insurance companies 17 1 18 50 (33 ) (2 ) 15 Mortgage-backed security 37 (3 ) (20 ) 14 37 (16 ) 21 $ 149 $ (3 ) $ (89 ) $ 57 $ 182 $ (33 ) $ (69 ) $ 80 RAI has five investments in auction rate securities linked to corporate credit risk, four investments in auction rate securities related to financial insurance companies and one investment in a mortgage-backed security. These securities were included in other assets and deferred charges in RAIs condensed consolidated balance sheet (unaudited)as of June30, 2009. The funds associated with the auction rate securities will not be accessible until a successful auction occurs or a buyer is found. The mortgage-backed security matures in March2010. RAI is in the process of evaluating its alternatives surrounding extending this investment beyond 2010. RAI reviews these investments on a quarterly basis to determine if it is probable that RAI will realize some portion of the unrealized loss in accordance with SFAS No.115, FSP No.FAS 115-1 and FAS 124-1, FSP No.EITF 99-20-1 and FSP No.FAS 115-2 and FAS 124-2 to determine the classification of the impairment as temporary or other-tha

Inventories

Inventories
	6 Months Ended Jun. 30, 2009 USD / shares
Inventories [Abstract]
Inventories	Note 7 Inventories The major components of inventories were as follows: June 30, 2009 December 31, 2008 Leaf tobacco $ 880 $ 993 Other raw materials 70 60 Work in process 65 58 Finished products 190 145 Other 41 26 Total 1,246 1,282 Less LIFO allowance 128 112 $ 1,118 $ 1,170 RJR Tobacco will perform its annual LIFO inventory valuation at December31, 2009, as interim periods represent an estimate of the expected annual valuation.

Income Taxes

Income Taxes
	6 Months Ended Jun. 30, 2009 USD / shares
Income Taxes [Abstract]
Income Taxes	Note 8 Income Taxes The provision for income taxes in the second quarter of 2009 was $225million, or an effective rate of 37.4%, compared with $216million, or an effective rate of 37.2%, in the second quarter of 2008. The provision for income taxes in the first six months of 2009 was $234million, or an effective rate of 37.8%, compared with $507million, or an effective rate of 36.8%, in the first six months of 2008. The effective tax rate for the first six months of 2009 was unfavorably impacted by increases in unrecognized income tax benefits and increases in tax attributable to accumulated and undistributed foreign earnings. The effective rate for the first six months of 2008 was favorably impacted by a lower tax rate related to the gain on the termination of the Reynolds-Gallaher International Sarl joint venture. The effective rate exceeds the federal statutory rate of 35% primarily due to the impact of state taxes and certain other nondeductible items, offset by the domestic production activities deduction of the American Jobs Creation Act, enacted on October22, 2004. The gross accruals for unrecognized income tax benefits, including interest and penalties, reflected in other noncurrent liabilities were $164million and $159million at June30, 2009 and December31, 2008, respectively. RAI accrues interest and penalties related to accruals for income taxes and reflects these amounts in tax expense. The gross amount of interest accrued at June30, 2009 and December31, 2008, was $53million and $50million, respectively. The gross amount of penalties accrued was $12million at June30, 2009 and December31, 2008. Gross increases in unrecognized tax benefits related to tax positions were $3million for the six months ended June30, 2009, attributable to current year tax positions. Gross decreases in unrecognized tax benefits were $1million for the six months ended June30, 2009, attributable to prior-year tax positions. As of June30, 2009, $58million of unrecognized tax benefits and $45million of interest and penalties, if recognized, would affect the effective tax rate. Included in the provision for income taxes for the three months and six months ended June30, 2009, was $2million and $4million of additional tax expense, including $1million and $3million of interest expense, net of federal benefit, and penalties associated with unrecognized tax benefits, respectively. Comparable amounts for the three and six months ended June30, 2008, were $1million and $9million of additional tax expense, including $1million and $2million of interest expense, net of federal benefit, and penalties, respectively. RAI and its subsidiaries may be subject to income taxes in the United States, certain foreign jurisdictions and multiple state jurisdictions. A number of years may elapse before a particular matter, for which RAI has established an accrual, is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. RAIs major taxing jurisdictions and related open tax audits are discussed below. RAI filed a federal consolidated income tax return for the years 2005 through 2007. RAI expect

Financial Instruments

Financial Instruments
	6 Months Ended Jun. 30, 2009 USD / shares
Financial Instruments [Abstract]
Financial Instruments	Note 9 Financial Instruments Fair Value of Debt The estimated fair value of RAIs and RJRs outstanding long-term notes was $4.1billion and $3.5billion with an effective average annual interest rate of 5.49% and 5.67%, as of June30, 2009 and December31, 2008, respectively. The fair values are based on available market quotes, credit spreads and discounted cash flows, as appropriate. Interest Rate Management RAI and RJR use interest rate swaps to manage interest rate risk on a portion of their respective debt obligations. Interest rate swaps existed on the following principal amounts of debt: Fixed to Floating Rate Floating to Fixed Rate Fixed to Floating Rate June 30, 2009 June 30, 2009 December 31, 2008 RJR 7.25% notes, due 2012 $ 44 $ 44 $ 57 Total swapped RJR debt 44 44 57 RAI 7.25% notes, due 2012 306 306 393 RAI 7.625% notes, due 2016 450 450 450 RAI 6.75% notes, due 2017 700 700 700 Total swapped RAI debt 1,456 1,456 1,543 Total notional amount $ 1,500 $ 1,500 $ 1,600 Historically, the interest rate swap agreements were derivative instruments that qualified for hedge accounting under SFAS No.133. RAI and RJR assess at the inception of the hedge whether the hedging derivatives are highly effective in offsetting changes in fair value of the hedged item. Ineffectiveness results when changes in the market value of the hedged debt are not completely offset by changes in the market value of the interest rate swap. There was no ineffectiveness recognized related to derivative instruments during 2009 or 2008. As detailed below, at June30, 2009, RAI and RJR had no derivative instruments designated as hedges. On January6, 2009, the fair value of RAIs and RJRs fixed to floating interest rate swaps, designated as hedges, was $258million. RAI and RJR locked in the value of these swaps by entering into offsetting floating to fixed interest rate swap agreements in the notional amount of $1.5billion with maturity dates ranging from June1, 2012 to June15, 2017. The floating to fixed interest rate swaps were entered into with the same financial institution that holds a notional amount of $1.5billion of fixed to floating interest rate swaps and have a legal right of offset. The future cash flows, established as a result of entering into the January6, 2009, floating to fixed interest rate swaps, total $321million, and will be amortized and effectively reduce net interest costs over the remaining life of the notes. Concurrent with entering the floating to fixed interest rate swap agreements on January6, 2009, which were not designated as hedging instruments, RAI and RJR removed the designation of fair value hedge from the fixed to floating interest rate swaps. On January7, 2009, RAI and RJR terminated an interest rate swap agreement in the notional amount of $100million with a maturity date of June1, 2

Commitments and Contingencies

Commitments and Contingencies
	6 Months Ended Jun. 30, 2009 USD / shares
Commitments and Contingencies [Abstract]
Commitments and Contingencies	Note 10 Commitments and Contingencies Tobacco Litigation General Introduction Various legal proceedings or claims, including litigation claiming that cancer and other diseases, as well as addiction, have resulted from the use of, or exposure to, RAIs operating subsidiaries products, are pending or may be instituted against RJR Tobacco, the Conwood companies or their affiliates, including RAI and RJR, or indemnitees, including BW. These pending legal proceedings include claims relating to cigarette products manufactured by RJR Tobacco or certain of its affiliates and indemnitees, as well as claims relating to smokeless tobacco products manufactured by the Conwood companies. A discussion of the legal proceedings relating to cigarette products is set forth below under the heading Litigation Affecting the Cigarette Industry. All of the references under that heading to tobacco-related litigation, smoking and health litigation and other similar references are references to legal proceedings relating to cigarette products and are not references to legal proceedings involving smokeless tobacco products, and case numbers under that heading include only cases involving cigarette products. The legal proceedings relating to the smokeless tobacco products manufactured by the Conwood companies are discussed separately under the heading " Smokeless Tobacco Litigation below. In connection with the BW business combination, RJR Tobacco has agreed to indemnify BW and its affiliates, including its indirect parent, British American Tobacco p.l.c., referred to as BAT, against certain liabilities, costs and expenses incurred by BW or its affiliates arising out of the U.S. cigarette and tobacco business of BW. As a result of this indemnity, RJR Tobacco has assumed the defense of pending BW-specific tobacco-related litigation, has paid the judgments and costs related to certain pre-business combination tobacco-related litigation of BW, and has posted bonds on behalf of BW, where necessary, in connection with cases decided since the BW business combination. In addition, pursuant to this indemnity, RJR Tobacco expensed less than $1million during each of the first six months of 2009 and 2008 for funds to be reimbursed to BAT for costs and expenses incurred arising out of certain tobacco-related litigation. Certain Terms and Phrases Certain terms and phrases used in this disclosure may require some explanation. The term judgment or final judgment refers to the final decision of the court resolving the dispute and determining the rights and obligations of the parties. At the trial court level, for example, a final judgment generally is entered by the court after a jury verdict and after post-verdict motions have been decided. In most cases, the losing party can appeal a verdict only after a final judgment has been entered by the trial court. The term damages refers to the amount of money sought by a plaintiff in a complaint, or awarded to a party by a jury or, in some cases, by a judge. Compensatory damages are awarded to compensate the prevailing party for actual losses suffered, if liability is proved. In cases in which there is a finding

Shareholders Equity

Shareholders Equity
	6 Months Ended Jun. 30, 2009 USD / shares
Shareholders' Equity [Abstract]
Shareholders' Equity	Note 11 Shareholders Equity Accumulated Other Total Common Paid-In Accumulated Comprehensive Shareholders Comprehensive Stock Capital Deficit Loss Equity Income Balance as of December31, 2008 $ $ 8,463 $ (531 ) $ (1,695 ) $ 6,237 Net income 385 385 $ 385 Retirement benefits, net of $45million tax expense(1) 68 68 68 Unrealized loss on long-term investments, net of $8million tax benefit (12 ) (12 ) (12 ) Cumulative translation adjustment, net of $4 million tax expense (2 ) (2 ) (2 ) Total comprehensive income $ 439 Dividends $1.70 per share (497 ) (497 ) Common stock repurchased (5 ) (5 ) Equity incentive award plan and stock-based compensation 23 23 Excess tax benefit on stock-based compensation plans 1 1 Balance as of June30, 2009 $ $ 8,482 $ (643 ) $ (1,641 ) $ 6,198 (1) Includes $39million, net of $27million tax expense, for changes in the demographic data used in the calculation of the long-term retirement benefits liability. Due to RAIs incorporation in North Carolina, which does not recognize treasury shares, the shares repurchased are cancelled at the time of repurchase. During the first six months of 2009, at a cost of $5million, RAI purchased 150,834 shares that were forfeited with respect to tax liabilities associated with restricted stock vesting under its LTIP. On February3, 2009 and May6, 2009, RAIs board of directors declared a quarterly cash dividend of $0.85 per common share, or $3.40 on an annualized basis, to shareholders of record as of March10, 2009 and June10, 2009, respectively.

Stock Plans

Stock Plans
	6 Months Ended Jun. 30, 2009 USD / shares
Stock Plans [Abstract]
Stock Plans	Note 12 Stock Plans In February2009, the board of directors of RAI approved a grant, to key employees of RAI and its subsidiaries, of nonvested share units under the LTIP, effective March2, 2009, which will be settled exclusively in shares of RAI common stock. The 1,382,243 units were granted based on the average per share closing price of RAI common stock for the 60 trading days prior to the grant date, or $39.23. These units generally will vest on March2, 2012. Upon settlement, each grantee will receive a number of shares of RAIs common stock equal to the product of the number of vested units and a percentage from 0%-150% based on the average RAI annual incentive award plan score over the three-year period ending December31, 2011. As an equity-based grant, compensation expense relating to the February2009 LTIP grant will take into account the vesting period lapsed and will be calculated on the per share closing price of RAI common stock on the date of grant, or $33.10. Dividends paid on shares of RAI common stock will accumulate on the units and be paid to the grantee on the vesting date. If RAI fails to pay its shareholders cumulative dividends of at least $10.20 per share for the three-year performance period ending December31, 2011, then each award will be reduced by an amount equal to three times the percentage of the dividend underpayment, up to a maximum reduction of 50%. The LTIP expired on June14, 2009. The outstanding grants made under the LTIP prior to its expiration will remain outstanding in accordance with their terms. In May2009, the shareholders of RAI approved the Reynolds American Inc. 2009 Omnibus Incentive Compensation Plan, referred to as the Omnibus Plan. Subject to adjustments as set forth in the Omnibus Plan, the maximum number of shares of RAI common stock that may be issued with respect to awards under the Omnibus Plan will not exceed 19,000,000 shares in the aggregate.

Segment Information

Segment Information
	6 Months Ended Jun. 30, 2009 USD / shares
Segment Information [Abstract]
Segment Information	Note 13 Segment Information RAIs reportable operating segments are RJR Tobacco and Conwood. The RJR Tobacco segment consists of the primary operations of R. J. Reynolds Tobacco Company. The Conwood segment consists of Conwood Holdings, Inc., the primary operations of the Conwood companies and Lane. RAIs wholly owned subsidiary, Santa Fe, among others, is included in All Other. The segments were identified based on how RAIs chief operating decision maker allocates resources and assesses performance. Some of RAIs wholly owned operating subsidiaries have entered into intercompany agreements for products or services with other RAI operating subsidiaries. As a result, certain activities of an operating subsidiary may be included in a different segment of RAI. RAIs largest reportable operating segment, RJR Tobacco, is the second largest cigarette manufacturer in the United States. RJR Tobaccos largest-selling cigarette brands, CAMEL, PALL MALL, WINSTON, KOOL and DORAL, were five of the ten best-selling brands of cigarettes in the United States as of June30, 2009. Those brands, and its other brands, including SALEM, MISTY and CAPRI, are manufactured in a variety of styles and marketed in the United States. RJR Tobacco also manages contract manufacturing of cigarette and tobacco products through arrangements with BAT affiliates. On January1, 2009, the management of tobacco products sold to certain U.S. territories, U.S. duty-free shops and U.S. overseas military bases was transferred to RJR Tobacco from GPI. RAIs other reportable operating segment, Conwood, is the second largest smokeless tobacco products manufacturer in the United States. Conwoods primary brands include its largest-selling moist snuff brands, GRIZZLY, the best-selling moist snuff brand in the United States as of June30, 2009, and KODIAK. Conwoods other products include loose leaf chewing tobacco, dry snuff, plug and twist tobacco products, as well as WINCHESTER and CAPTAIN BLACK little cigars, and BUGLER roll-your-own tobacco. Santa Fe manufactures and markets cigarettes and other tobacco products under the NATURAL AMERICAN SPIRIT brand, as well as manages the super premium cigarette brands licensed from BAT, DUNHILL and STATE EXPRESS 555. The financial position and results of operations of this operating segment do not meet the materiality criteria to be reportable. The amounts with respect to the income statements presented for prior periods have been reclassified to reflect the current segment composition. Intersegment revenues and items below the operating income line of the condensed consolidated statements of income are not presented by segment, since they are excluded from the measure of segment profitability reviewed by RAIs chief operating decision maker. Segment Data: For the Three Months For the Six Months Ended June 30, Ended June 30, 2009 2008 2009 2008 Net sales: RJR Tobacco $ 1,975 $ 2,057 $ 3,646 $ 3,864 Conwood 169 188 335 355 All Other 106 94 190 177

Related Party Transactions

Related Party Transactions
	6 Months Ended Jun. 30, 2009 USD / shares
Related Party Transactions [Abstract]
Related Party Transactions	Note 14 Related Party Transactions RAIs operating subsidiaries engage in transactions with affiliates of BAT, the indirect parent of BW. The following is a summary of balances and transactions with such BAT affiliates. Balances: June 30, December 31, 2009 2008 Accounts receivable, BAT $ 63 $ 91 Due to BAT 3 3 Deferred revenue, BAT 24 50 Transactions for the six months ended June30: 2009 2008 Net sales, related party, BAT $ 199 $ 222 Research and development services billed to BAT 1 1 Purchases from BAT 8 5 Equipment lease payments to BAT 1 RAIs operating subsidiaries sell contract-manufactured cigarettes, processed strip leaf, pipe tobacco and little cigars to BAT affiliates. Pricing for contract-manufactured cigarettes is generally calculated based on 2004 prices, using BWs forecasted 2004 manufacturing costs plus 10%, increased by a multiple equal to the increase in the Producer Price Index for subsequent years, reported by the U.S. Bureau of Labor Statistics. Net sales to BAT affiliates, primarily cigarettes, represented approximately 5.0% of RAIs total net sales during the six months ended June30, 2009. RJR Tobacco records deferred sales revenue relating to leaf sold to BAT affiliates that has not been delivered as of the end of the respective quarter, given that RJR Tobacco has a legal right to bill the BAT affiliates. Leaf sales revenue to BAT affiliates is recognized when the product is shipped to the customer. RJR Tobacco performs certain research and development for BAT affiliates pursuant to a joint technology sharing agreement entered into as a part of the BW business combination. These services were accrued and billed to BAT affiliates and were recorded in RJR Tobaccos selling, general and administrative expenses, net of associated costs. RAIs operating subsidiaries also purchase unprocessed leaf at market prices, and import cigarettes at prices not to exceed manufacturing costs plus 10%, from BAT affiliates. The payable due to related party in the condensed consolidated balance sheet (unaudited)primarily relates to cigarette purchases. RJR Tobacco leases certain cigarette manufacturing equipment from a BAT affiliate. RJR Tobacco recorded in selling, general and administrative expenses, funds to indemnify BW and its affiliates for costs and expenses related to tobacco-related litigation in the United States. For additional information relating to this indemnification, see note 10.

RAI Guaranteed, Unsecured Notes

RAI Guaranteed, Unsecured Notes Condensed Consolidating Financial Statements
	6 Months Ended Jun. 30, 2009 USD / shares
RAI Guaranteed, Unsecured Notes - Condensed Consolidating Financial Statements Parent [Abstract]
RAI Guaranteed, Unsecured Notes - Condensed Consolidating Financial Statements	Note 15 RAI Guaranteed, Unsecured Notes Condensed Consolidating Financial Statements The following condensed consolidating financial statements have been prepared pursuant to Rule3-10 of RegulationS-X, relating to the guaranties of RAIs $4.3billion, unsecured notes. RAIs direct, wholly owned subsidiaries and certain of its indirectly owned subsidiaries have fully and unconditionally and jointly and severally, guaranteed these notes. The following condensed consolidating financial statements include: the accounts and activities of RAI, the parent issuer; RJR, RJR Tobacco, the Conwood companies, Conwood Holdings, Inc., Santa Fe, Lane, GPI and certain of RJR Tobaccos other subsidiaries, the Guarantors; other indirect subsidiaries of RAI that are not Guarantors; and elimination adjustments. Condensed Consolidating Statements of Income (Dollars in Millions) Parent Non- Issuer Guarantors Guarantors Eliminations Consolidated For the Three Months Ended June30, 2009 Net sales $ $ 2,133 $ 40 $ (33 ) $ 2,140 Net sales, related party 110 110 Cost of products sold 1,211 22 (32 ) 1,201 Selling, general and administrative expenses 7 368 18 393 Amortization expense 7 7 Operating income (loss) (7 ) 657 (1 ) 649 Interest and debt expense 61 3 64 Interest income (3 ) (2 ) (5 ) Intercompany interest (income)expense (28 ) 28 Intercompany dividend income (10 ) 10 Other income, net (11 ) (1 ) (12 ) Income (loss)before income taxes (29 ) 640 2 (11 ) 602 Provision for (benefit from) income taxes (10 ) 236 (1 ) 225 Equity income from subsidiaries 396 4 (400 ) Net income $ 377 $ 408 $ 3 $ (411 ) $ 377 For the Three Months Ended June30, 2008 Net sales $ $ 2,224 $ 38 $ (32 ) $ 2,230 Net sales, related party 109 109 Cost of products sold 1,320 18 (33 ) 1,305 Selling, general and administrative expenses 3 371 17 391 Amortization expense 6 6 Operating income (loss) (3 ) 636 3 1 637 Interest and debt expense 65 3 68 Interest income (1 ) (8 ) (4 ) (13 ) Intercompany interest (income)expense (22 ) 20 2 Intercompany dividend income (10 ) 10 Other expense, net 1 1 2 Income (loss)before income taxes

RJR Guaranteed, Unsecured Notes

RJR Guaranteed, Unsecured Notes Condensed Consolidating Financial Statements
	6 Months Ended Jun. 30, 2009 USD / shares
RJR Guaranteed, Unsecured Notes - Condensed Consolidating Financial Statements Subsidiary [Abstract]
RJR Guaranteed, Unsecured Notes - Condensed Consolidating Financial Statements	Note 16 RJR Guaranteed, Unsecured Notes Condensed Consolidating Financial Statements The following condensed consolidating financial statements have been prepared pursuant to Rule3-10 of RegulationS-X, relating to the guaranties of RJRs $63million unsecured notes. RAI and certain of its direct or indirect, wholly owned subsidiaries, have fully and unconditionally, and jointly and severally, guaranteed these notes. The following condensed consolidating financial statements include: the accounts and activities of RAI, the parent Guarantor; RJR, the issuer of the debt securities; RJR Tobacco, GPI and certain of RJRs other subsidiaries, the other Guarantors; other subsidiaries of RAI and RJR, including Santa Fe, Lane and the Conwood companies, that are not Guarantors; and elimination adjustments. Condensed Consolidating Statements of Income (Dollars in Millions) Parent Other Non- Guarantor Issuer Guarantors Guarantors Eliminations Consolidated For the Three Months Ended June30, 2009 Net sales $ $ $ 1,904 $ 292 $ (56 ) $ 2,140 Net sales, related party 106 4 110 Cost of products sold 1,154 102 (55 ) 1,201 Selling, general and administrative expenses 7 1 308 77 393 Amortization expense 7 7 Operating income (loss) (7 ) (1 ) 541 117 (1 ) 649 Interest and debt expense 61 2 1 64 Interest income (2 ) (3 ) (5 ) Intercompany interest (income)expense (28 ) (2 ) (13 ) 43 Intercompany dividend income (10 ) 10 Other income, net (11 ) (1 ) (12 ) Income (loss)before income taxes (29 ) 10 556 76 (11 ) 602 Provision for (benefit from) income taxes (10 ) 209 26 225 Equity income from subsidiaries 396 350 3 (749 ) Net income $ 377 $ 360 $ 350 $ 50 $ (760 ) $ 377 For the Three Months Ended June30, 2008 Net sales $ $ $ 1,990 $ 294 $ (54 ) $ 2,230 Net sales, related party 108 1 109 Cost of products sold 1,256 103 (54 ) 1,305 Selling, general and administrative expenses 3 1 313 74 391 Amortization expense 5 1 6 Operating income (loss) (3 ) (1 ) 524 117 637 Interest and debt expense 65 3 68 Interest income (1 ) (7 ) (5 ) (13 ) Intercom