Document and Company Informatio
Document and Company Information (USD $) | |||
In Billions, except Share data | 9 Months Ended
Sep. 30, 2009 | Oct. 09, 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 | 2009-09-30 | ||
Amendment Flag | false | ||
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 | 291,376,154 |
Condensed Consolidated Statemen
Condensed Consolidated Statements of Income (Unaudited) (USD $) | |||||||||||||||||||
In Millions, except Per Share data | 3 Months Ended
Sep. 30, 2009 | 3 Months Ended
Sep. 30, 2008 | 9 Months Ended
Sep. 30, 2009 | 9 Months Ended
Sep. 30, 2008 | |||||||||||||||
Net sales | $2,045 | [1] | $2,156 | [1] | $6,017 | [1] | $6,330 | [1] | |||||||||||
Net sales, related party | 107 | 116 | 306 | 338 | |||||||||||||||
Net sales | 2,152 | 2,272 | 6,323 | 6,668 | |||||||||||||||
Costs and expenses: | |||||||||||||||||||
Cost of products sold | 1,138 | [1],[2],[3] | 1,229 | [1],[2],[3] | 3,337 | [1],[2],[3] | 3,698 | [1],[2],[3] | |||||||||||
Selling, general and administrative expenses | 371 | 375 | 1,129 | 1,148 | |||||||||||||||
Amortization expense | 7 | 5 | 22 | 16 | |||||||||||||||
Restructuring charge | 0 | 91 | 0 | 91 | |||||||||||||||
Trademark impairment charge | 0 | 173 | 453 | 173 | |||||||||||||||
Operating income | 636 | 399 | 1,382 | 1,542 | |||||||||||||||
Interest and debt expense | 60 | 68 | 190 | 208 | |||||||||||||||
Interest income | (5) | (16) | (15) | (51) | |||||||||||||||
Gain on termination of joint venture | 0 | 0 | 0 | (328) | |||||||||||||||
Other expense, net | 2 | 13 | 9 | 3 | |||||||||||||||
Income before income taxes | 579 | 334 | 1,198 | 1,710 | |||||||||||||||
Provision for income taxes | 217 | 123 | 451 | 630 | |||||||||||||||
Net income | $362 | $211 | $747 | $1,080 | |||||||||||||||
Basic income per share: | |||||||||||||||||||
Net income | 1.24 | 0.72 | 2.56 | 3.67 | |||||||||||||||
Diluted income per share: | |||||||||||||||||||
Net income | 1.24 | 0.72 | 2.56 | 3.67 | |||||||||||||||
Dividends declared per share | 0.85 | 0.85 | 2.55 | 2.55 | |||||||||||||||
[1]Excludes excise taxes of $1,155 million and $492 million for the three months ended September 30, 2009 and 2008, respectively, and $2,812 million and $1,429 million for the nine months ended September 30, 2009 and 2008, respectively. | |||||||||||||||||||
[2]Includes federal tobacco quota buyout expenses of $61 million and $59 million for the three months ended September 30, 2009 and 2008, respectively, and $179 million and $186 million for the nine months ended September 30, 2009 and 2008, respectively. | |||||||||||||||||||
[3]Includes Master Settlement Agreement, referred to as the MSA, and other settlement agreements with the states of Mississippi, Florida, Texas and Minnesota, which together with the MSA are collectively referred to as the State Settlement Agreements, expense of $643 million and $695 million for the three months ended September 30, 2009 and 2008, respectively, and $1,917 million and $2,079 million for the nine months ended September 30, 2009 and 2008, respectively. |
1_Condensed Consolidated Statem
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $) | ||
In Millions | 9 Months Ended
Sep. 30, 2009 | 9 Months Ended
Sep. 30, 2008 |
Cash flows from (used in) operating activities: | ||
Net income | $747 | $1,080 |
Adjustments to reconcile to net cash flows from (used in) continuing operating activities: | ||
Depreciation and amortization | 109 | 106 |
Gain on termination of joint venture | 0 | (328) |
Restructuring charge, net of cash payments | (30) | 81 |
Trademark impairment charge | 453 | 173 |
Deferred income tax expense | (184) | 38 |
Tobacco settlement accruals | 79 | (283) |
Other, net | (285) | (39) |
Net cash flows from operating activities | 889 | 828 |
Cash flows from (used in) investing activities: | ||
Proceeds from settlement of short-term investments | 17 | 208 |
Capital expenditures | (75) | (95) |
Proceeds from termination of joint venture | 24 | 164 |
Other, net | 17 | (13) |
Net cash flows (used in) from investing activities | (17) | 264 |
Cash flows from (used in) financing activities: | ||
Dividends paid on common stock | (743) | (752) |
Repurchase of common stock | (5) | (207) |
Repayment of long-term debt | (200) | 0 |
Excess tax benefit from stock-based compensation | 1 | 2 |
Other, net | 1 | 2 |
Net cash flows used in financing activities | (946) | (955) |
Effect of exchange rate changes on cash and cash equivalents | 9 | (23) |
Net change in cash and cash equivalents | (65) | 114 |
Cash and cash equivalents at beginning of period | 2,578 | 2,215 |
Cash and cash equivalents at end of period | 2,513 | 2,329 |
Income taxes paid, net of refunds | 584 | 624 |
Interest paid | $149 | $161 |
Condensed Consolidated Balance
Condensed Consolidated Balance Sheets (Unaudited) (USD $) | ||
In Millions | Sep. 30, 2009
| Dec. 31, 2008
|
Current assets: | ||
Cash and cash equivalents | $2,513 | $2,578 |
Short-term investments | 6 | 23 |
Accounts receivable, net of allowance (2009 - $1; 2008 - $1) | 93 | 84 |
Accounts receivable, related party | 65 | 91 |
Notes receivable | 35 | 35 |
Other receivables | 15 | 37 |
Inventories | 1,095 | 1,170 |
Deferred income taxes, net | 912 | 838 |
Prepaid expenses and other | 342 | 163 |
Total current assets | 5,076 | 5,019 |
Property, plant and equipment, net of accumulated depreciation (2009 - $1,563; 2008 - $1,549) | 990 | 1,031 |
Trademarks and other intangible assets, net of accumulated amortization (2009 - $641; 2008 - $619) | 2,795 | 3,270 |
Goodwill | 8,174 | 8,174 |
Other assets and deferred charges | 603 | 660 |
Total assets | 17,638 | 18,154 |
Current liabilities: | ||
Accounts payable | 112 | 206 |
Tobacco settlement accruals | 2,396 | 2,321 |
Due to related party | 3 | 3 |
Deferred revenue, related party | 13 | 50 |
Current maturities of long-term debt | 300 | 200 |
Other current liabilities | 1,097 | 1,143 |
Total current liabilities | 3,921 | 3,923 |
Long-term debt (less current maturities) | 4,144 | 4,486 |
Deferred income taxes, net | 233 | 282 |
Long-term retirement benefits (less current portion) | 2,614 | 2,836 |
Other noncurrent liabilities | 370 | 390 |
Shareholders' equity: | ||
Common stock (shares issued: 2009 - 291,374,965; 2008 - 291,450,762) | 0 | 0 |
Paid-in capital | 8,490 | 8,463 |
Accumulated deficit | (530) | (531) |
Accumulated other comprehensive loss - (Defined benefit pension and post-retirement plans: 2009 - $(1,561) and 2008 - $(1,643), net of tax) | (1,604) | (1,695) |
Total shareholders' equity | 6,356 | 6,237 |
Total liabilities and stockholders' equity | $17,638 | $18,154 |
2_Condensed Consolidated Balanc
Condensed Consolidated Balance Sheets (Parenthetical) (Unaudited) (USD $) | ||
In Millions, except Share data | Sep. 30, 2009
| Dec. 31, 2008
|
Current assets: | ||
Allowance for accounts receivable | $1 | $1 |
Accumulated depreciation on property, plant and equipment | 1,563 | 1,549 |
Accumulated amortization on trademarks and other intangible assets | 641 | 619 |
Shareholders' equity: | ||
Common stock, shares issued | 291,374,965 | 291,450,762 |
Defined benefit pension and post-retirement plans | ($1,561) | ($1,643) |
Business and Summary of Signifi
Business and Summary of Significant Accounting Policies | |
9 Months Ended
Sep. 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 September30, 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 ope |
Fair Value Measurement
Fair Value Measurement | |
9 Months Ended
Sep. 30, 2009 USD / shares | |
Fair Value Measurement [Abstract] | |
Fair Value Measurement | Note 2 Fair Value Measurement RAI determines fair value of assets using a fair value hierarchy that distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity, and the reporting entitys own assumptions about market participant assumptions developed based on the best information available in the circumstances and expands disclosure about fair value measurements. Fair value is 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 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 September30, 2009, were as follows: Level 1 Level 2 Level 3 Total Money market funds $ 2,257 $ $ 6 $ 2,263 Auction rate securities corporate credit risk 23 23 Auction rate securities financial insurance companies 21 21 Mortgage-backed security 14 14 Marketable equity security 20 20 Assets held in grantor trusts 14 14 Interest rate swaps fixed to floating rate 231 231 Interest rate swaps floating to fixed rate 21 21 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 10 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 nine 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 |
Intangible Assets
Intangible Assets | |
9 Months Ended
Sep. 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 intangible assets 55 48 103 Balance as of December31, 2008 $ 1,708 $ 1,222 $ 203 $ 3,133 Trademarks $ 1,277 $ 1,152 $ 155 $ 2,584 Other intangible assets 99 4 103 Balance as of September30, 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 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 included 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 September30, 2009, as a trademark impairment charge in the condensed consolidated statement of income (unaudited)for the nine months ended September30, 2009, and had no impact on cash flows. Details of finite-lived intangible assets subject to amortization as of September30, 2009, were as follows: Accumulated Gross Amortization Net Contract manufacturing $ 151 $ 78 |
Restructuring Charges
Restructuring Charges | |
9 Months Ended
Sep. 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, $33million was paid as of September30, 2009. Accordingly, in the condensed consolidated balance sheet (unaudited)as of September30, 2009, $36million was included in other current liabilities, and $14million 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 (28 ) Balance as of September30, 2009 $ 50 |
Income Per Share
Income Per Share | |
9 Months Ended
Sep. 30, 2009 USD / shares | |
Income Per Share [Abstract] | |
Income Per Share | Note 5 Income Per Share On January1, 2009, RAI adopted authoritative GAAP that address 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 because they have non-forfeitable dividend rights equivalent to common shares. Accordingly, these restricted shares are included in the basic EPS calculation for the third quarter and first nine months of 2009 and retrospectively in the basic EPS calculation for the third quarter and first nine months of 2008. The components of the calculation of income per share were as follows: For the Three Months For the Nine Months Ended September 30, Ended September 30, 2009 2008 2009 2008 Net income $ 362 $ 211 $ 747 $ 1,080 Basic weighted average shares, in thousands 291,371 292,388 291,380 294,050 Effect of dilutive potential shares: Options 130 190 137 209 Stock units 419 224 Diluted weighted average shares, in thousands 291,920 292,578 291,741 294,259 |
Investments
Investments | |
9 Months Ended
Sep. 30, 2009 USD / shares | |
Investments [Abstract] | |
Investments | Note 6 Investments Short-term investments classified as available-for-sale were as follows: September 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 Long-term investments classified as available-for-sale were as follows: September 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 $ $ (72 ) $ 23 $ 95 $ $ (51 ) $ 44 Auction rate securities financial insurance companies 17 4 21 50 (33 ) (2 ) 15 Mortgage-backed security 37 (5 ) (18 ) 14 37 (16 ) 21 Marketable equity security 2 18 20 2 2 $ 151 $ (5 ) $ (68 ) $ 78 $ 184 $ (33 ) $ (69 ) $ 82 RAI has five investments in auction rate securities linked to corporate credit risk, four investments in auction rate securities related to financial insurance companies, one investment in a mortgage-backed security and one investment in a marketable equity security. Investments classified as available-for-sale were carried at fair value and included in other assets and deferred charges, and unrealized gains and losses, net of tax, were reported in accumulated other comprehensive loss in RAIs condensed consolidated balance sheet (unaudited)as of September30, 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 and to determine the classification of the impairment as temporary or other-than-temporary. Since the adoption of authoritative GAAP in June 2009, RAI recognizes the credit loss component of an other-than-temporary impairment of its debt securities in earnings, and the noncredit component in other comprehensive loss for those securities which RAI does not intend to sell and as to which it is more likely than not that RAI w |
Inventories
Inventories | |
9 Months Ended
Sep. 30, 2009 USD / shares | |
Inventories [Abstract] | |
Inventories | Note 7 Inventories The major components of inventories were as follows: September 30, 2009 December 31, 2008 Leaf tobacco $ 875 $ 993 Other raw materials 61 60 Work in process 80 58 Finished products 204 145 Other 38 26 Total 1,258 1,282 Less LIFO allowance 163 112 $ 1,095 $ 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 | |
9 Months Ended
Sep. 30, 2009 USD / shares | |
Income Taxes [Abstract] | |
Income Taxes | Note 8 Income Taxes The provision for income taxes in the third quarter of 2009 was $217million, for an effective rate of 37.5%, compared with $123million, for an effective rate of 36.8%, in the third quarter of 2008. The provision for income taxes in the first nine months of 2009 was $451million, for an effective rate of 37.6%, compared with $630million, for an effective rate of 36.8%, in the first nine months of 2008. The effective tax rate for the first nine 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 nine 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, but was offset by unfavorability related to tax reserves and U.S. taxes recorded on foreign earnings. The effective rate exceeds the federal statutory rate of 35% primarily due to the impact of state taxes and certain nondeductible items, offset by the domestic production activities deduction of the American Jobs Creation Act of 2004. The gross accruals for unrecognized income tax benefits, including interest and penalties, reflected in other noncurrent liabilities were $161million and $159million at September30, 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 September30, 2009 and December31, 2008, was $53million and $50million, respectively. The gross amount of penalties accrued was $12million at September30, 2009 and December31, 2008. Gross increases in unrecognized tax benefits related to tax positions were $7million for the nine months ended September30, 2009, consisting of $5million for current year tax positions and $2million for prior year tax positions. Gross decreases in unrecognized tax benefits were $8million for the nine months ended September30, 2009, consisting of $2million for prior year tax positions, $3million for settlement with taxing authorities and $3million for statute expirations. As of September30, 2009, $56million 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 nine months ended September30, 2009, was $4million of additional tax expense, including $3million of interest expense, net of federal benefit, and penalties associated with unrecognized tax benefits. Comparable amounts for the three and nine months ended September30, 2008, were $2 million and $11million of additional tax expense, including $1million and $3million 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 au |
Borrowing Arrangements
Borrowing Arrangements | |
9 Months Ended
Sep. 30, 2009 USD / shares | |
Borrowing Arrangements [Abstract] | |
Borrowing Arrangements | Note 9 Borrowing Arrangements On June28, 2007, RAI entered into a Fifth Amended and Restated Credit Agreement, which, as subsequently amended, provides for a five-year, $498million revolving credit facility, which may be increased up to $848million at the discretion of the lenders upon the request of RAI. Effective July3, 2009, RAI entered into a Second Amendment to Credit Agreement, referred to as the Second Amendment, amending RAIs credit facility. The Second Amendment amends the credit facility by, among other things: terminating the revolving loan commitment of Lehman Commercial Paper Inc., which filed for protection under Chapter11 of the federal Bankruptcy Code on October5, 2008, and thereby reducing the total revolving loan commitment under the credit facility from $550 million to $498million; amending the definition of Lender Default and certain related definitions; granting RAI the right under certain circumstances to terminate the revolving loan commitment of a Defaulting Lender, as defined in the credit facility, if RAI is unable to replace such Defaulting Lender; and otherwise clarifying the rights and responsibilities of the parties to the credit facility upon the occurrence of a Lender Default. |
Financial Instruments
Financial Instruments | |
9 Months Ended
Sep. 30, 2009 USD / shares | |
Financial Instruments [Abstract] | |
Financial Instruments | Note 10 Financial Instruments Fair Value of Debt The estimated fair value of RAIs and RJRs outstanding long-term notes in the aggregate, was $4.3billion and $3.5billion with an effective average annual interest rate of approximately 5.5% and 5.7%, as of September30, 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 September 30, 2009 September 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. 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 September30, 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 $1.5 billion 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 $100milli |
Commitments and Contingencies
Commitments and Contingencies | |
9 Months Ended
Sep. 30, 2009 USD / shares | |
Commitments and Contingencies [Abstract] | |
Commitments and Contingencies | Note 11 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 nine 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 findin |
Shareholders Equity
Shareholders Equity | |
9 Months Ended
Sep. 30, 2009 USD / shares | |
Shareholders' Equity [Abstract] | |
Shareholders' Equity | Note 12 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 747 747 $ 747 Retirement benefits, net of $55 million tax expense(1) 82 82 82 Unrealized gain on long-term investments, net of $1million tax benefit 1 1 1 Cumulative translation adjustment, net of $9million tax expense 8 8 8 Total comprehensive income $ 838 Dividends $2.55 per share (746 ) (746 ) Common stock repurchased (5 ) (5 ) Equity incentive award plan and stock-based compensation 31 31 Excess tax benefit on stock-based compensation plans 1 1 Balance as of September30, 2009 $ $ 8,490 $ (530 ) $ (1,604 ) $ 6,356 (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 nine months of 2009, at a cost of $5million, RAI purchased 152,155 shares that were forfeited with respect to tax liabilities associated with restricted stock vesting under its LTIP. On February3, 2009, May6, 2009 and July16, 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, June10, 2009 and September10, 2009, respectively. |
Stock Plans
Stock Plans | |
9 Months Ended
Sep. 30, 2009 USD / shares | |
Stock Plans [Abstract] | |
Stock Plans | Note 13 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 based 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 will 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 | |
9 Months Ended
Sep. 30, 2009 USD / shares | |
Segment Information [Abstract] | |
Segment Information | Note 14 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 September30, 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 September30, 2009, and KODIAK. Conwood launched CAMEL Dip, a premium moist snuff, in lead markets during the second quarter of 2009. 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 Nine Months Ended September 30, Ended September 30, 2009 2008 2009 2008 Net sales: RJR Tobacco $ 1,867 $ 1,994 $ 5,513 $ 5,858 |
Related Party Transactions
Related Party Transactions | |
9 Months Ended
Sep. 30, 2009 USD / shares | |
Related Party Transactions [Abstract] | |
Related Party Transactions | Note 15 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: September 30, December 31, 2009 2008 Accounts receivable, BAT $ 65 $ 91 Due to BAT 3 3 Deferred revenue, BAT 13 50 Transactions for the nine months ended September30: 2009 2008 Net sales, related party, BAT $ 306 $ 338 Research and development services billed to BAT 2 2 Purchases from BAT 10 11 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 nine months ended September30, 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 11. |
RAI Guaranteed, Unsecured Notes
RAI Guaranteed, Unsecured Notes Condensed Consolidating Financial Statements | |
9 Months Ended
Sep. 30, 2009 USD / shares | |
Guaranteed Unsecured Notes Condensed Consolidating Financial Statements Parent [Abstract] | |
RAI Guaranteed, Unsecured Notes - Condensed Consolidating Financial Statements | Note 16 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 September30, 2009 Net sales $ $ 2,035 $ 40 $ (30 ) $ 2,045 Net sales, related party 107 107 Cost of products sold 1,149 19 (30 ) 1,138 Selling, general and administrative expenses 354 17 371 Amortization expense 7 7 Operating income (loss) 632 4 636 Interest and debt expense 58 2 60 Interest income (2 ) (3 ) (5 ) Intercompany interest (income)expense (30 ) 29 1 Intercompany dividend income (11 ) 11 Other (income)expense, net (9 ) 11 2 Income (loss)before income taxes (19 ) 603 6 (11 ) 579 Provision for (benefit from) income taxes (8 ) 224 1 217 Equity income from subsidiaries 373 6 (379 ) Net income $ 362 $ 385 $ 5 $ (390 ) $ 362 For the Three Months Ended September30, 2008 Net sales $ $ 2,148 $ 41 $ (33 ) $ 2,156 Net sales, related party 116 116 Cost of products sold 1,242 20 (33 ) 1,229 Selling, general and administrative expenses 8 349 18 375 Amortization expense 5 5 Restructuring charge 6 81 4 91 Trademark impairment charge 173 173 Operating income (loss) (14 ) 414 (1 ) 399 Interest and debt expense 65 2 1 68 Interest income (10 ) (6 ) (16 ) Intercompany interest (income)expense (23 ) 22 1 Intercompany dividend income (11 ) |
RJR Guaranteed, Unsecured Notes
RJR Guaranteed, Unsecured Notes Condensed Consolidating Financial Statements | |
9 Months Ended
Sep. 30, 2009 USD / shares | |
Guaranteed Unsecured Notes Condensed Consolidating Financial Statements Subsidiary [Abstract] | |
RJR Guaranteed, Unsecured Notes - Condensed Consolidating Financial Statements | Note 17 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 September30, 2009 Net sales $ $ $ 1,790 $ 295 $ (40 ) $ 2,045 Net sales, related party 106 1 107 Cost of products sold 1,080 99 (41 ) 1,138 Selling, general and administrative expenses 1 292 78 371 Amortization expense 7 7 Operating income (loss) (1 ) 517 119 1 636 Interest and debt expense 58 3 (1 ) 60 Interest income (2 ) (3 ) (5 ) Intercompany interest (income)expense (30 ) (1 ) (12 ) 43 Intercompany dividend income (11 ) 11 Other (income)expense, net (9 ) 12 (1 ) 2 Income (loss)before income taxes (19 ) (4 ) 532 80 (10 ) 579 Provision for (benefit from) income taxes (8 ) (5 ) 204 26 217 Equity income from subsidiaries 373 333 6 (712 ) Net income $ 362 $ 334 $ 334 $ 54 $ (722 ) $ 362 For the Three Months Ended September30, 2008 Net sales $ $ $ 1,923 $ 291 $ (58 ) $ 2,156 Net sales, related party 114 2 116 Cost of products sold 1,186 101 (58 ) 1,229 Selling, general and administrative expenses 8 302 65 375 Amortization expense 6 (1 ) 5 Restructuring charge 6 81 4 91 Trademark impairment charge 173 173 Operating income (loss) (14 ) 289 124 399 Int |