Reynolds American (RAI) 10-Q 29 Apr 10 2010 Q1 Quarterly report Financial data

Document and Entity Information

Document and Entity Information (USD $)
In Billions, except Share data	3 Months Ended Mar. 31, 2010	Apr. 09, 2010	Jun. 30, 2009
Document and Entity Information [Abstract]
Entity Registrant Name	REYNOLDS AMERICAN INC
Entity Central Index Key	0001275283
Document Type	10-Q
Document Period End Date	2010-03-31
Amendment Flag	false
Document Fiscal Year Focus	2,010
Document Fiscal Period Focus	Q1
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			6.5
Entity Common Stock, Shares Outstanding		291,452,114

Condensed Consolidated Statemen

Condensed Consolidated Statements of Income (Unaudited) (USD $)
In Millions, except Per Share data	3 Months Ended Mar. 31, 2010		3 Months Ended Mar. 31, 2009
Condensed Consolidated Statements of Income (Unaudited) [Abstract]
Net sales(1)	$1,858	[1]	$1,832	[1]
Net sales, related party	128		89
Net sales	1,986		1,921
Costs and expenses:
Cost of products sold(1)(2)(3)(4)	1,070	[1],[2],[3],[4]	998	[1],[2],[3],[4]
Selling, general and administrative expenses	339		365
Amortization expense	7		8
Trademark impairment charge			453
Operating income	570		97
Interest and debt expense	60		66
Interest income	(4)		(5)
Other expense, net	2		19
Income from continuing operations before income taxes	512		17
Provision for income taxes	214		9
Income from continuing operations	298		8
Losses from discontinued operations, net of tax	(216)
Net income	$82		$8
Basic income per share:
Income from continuing operations	1.02		0.03
Losses from discontinued operations	-0.74
Net income	0.28		0.03
Diluted income per share:
Income from continuing operations	1.02		0.03
Losses from discontinued operations	-0.74
Net income	0.28		0.03
Dividends declared per share	0.9		0.85
[1] Excludes excise taxes of $1,017 million and $410 million for the three months ended March 31, 2010 and 2009, respectively.
[2]Includes federal tobacco quota buyout expenses of $61 million and $52 million for the three months ended March 31, 2010 and 2009, 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 $587 million and $578 million for the three months ended March 31, 2010 and 2009, respectively.
[4]Includes U.S. Food and Drug Administration, referred to as FDA, user fees of $16 million for the three months ended March 31, 2010.

1_Condensed Consolidated Statem

Condensed Consolidated Statements of Income (Unaudited) (Parenthetical) (USD $)
In Millions	3 Months Ended Mar. 31, 2010	3 Months Ended Mar. 31, 2009
Costs and expenses:
Excise taxes	$1,017	$410
State settlement agreements expense	587	578
Federal tobacco quota buyout expenses	61	52
FDA expense	$16

2_Condensed Consolidated Statem

Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Millions	3 Months Ended Mar. 31, 2010	3 Months Ended Mar. 31, 2009
Cash flows from (used in) operating activities:
Net income	$82	$8
Losses from discontinued operations, net of tax	216
Adjustments to reconcile to net cash flows from (used in) continuing operating activities:
Depreciation and amortization	35	38
Trademark impairment charge		453
Deferred income tax expense	46	(198)
Pension and postretirement	(275)	32
Tobacco settlement accruals	588	580
Other, net	148	(50)
Net cash flows from operating activities	840	863
Cash flows from (used in) investing activities:
Proceeds from settlement of long-term investments	10	2
Capital expenditures	(32)	(27)
Other, net	3	13
Net cash flows used in investing activities	(19)	(12)
Cash flows from (used in) financing activities:
Dividends paid on common stock	(262)	(248)
Other, net	(3)	(4)
Net cash flows used in financing activities	(265)	(252)
Effect of exchange rate changes on cash and cash equivalents	(7)	(8)
Net change in cash and cash equivalents	549	591
Cash and cash equivalents at beginning of period	2,723	2,578
Cash and cash equivalents at end of period	3,272	3,169
Income taxes paid, net of refunds	40	10
Interest paid, net of capitalized interest (2010 - $1)	$21	$23

3_Condensed Consolidated Statem

Condensed Consolidated Statements of Cash Flows (Unaudited) (Parenthetical) (USD $)
In Millions	3 Months Ended Mar. 31, 2010
Condensed Consolidated Statements of Cash Flows (Unaudited) [Abstract]
Capitalized interest	$1

Condensed Consolidated Balance

Condensed Consolidated Balance Sheets (USD $)
In Millions	3 Months Ended Mar. 31, 2010	12 Months Ended Dec. 31, 2009
Current assets:
Cash and cash equivalents	$3,272	$2,723
Accounts receivable	117	109
Accounts receivable, related party	72	96
Notes receivable	36	36
Other receivables	16	15
Inventories	1,190	1,219
Deferred income taxes, net	951	956
Prepaid expenses and other	247	341
Total current assets	5,901	5,495
Property, plant and equipment, net of accumulated depreciation (2010 - $1,576; 2009 - $1,570)	1,024	1,025
Trademarks and other intangible assets, net of accumulated amortization (2010 - $654; 2009 - $647)	2,711	2,718
Goodwill	8,185	8,185
Other assets and deferred charges	581	586
Total assets	18,402	18,009
Current liabilities:
Accounts payable	114	196
Tobacco settlement accruals	3,196	2,611
Due to related party	2	3
Deferred revenue, related party	37	57
Current maturities of long-term debt	300	300
Other current liabilities	1,592	1,173
Total current liabilities	5,241	4,340
Long-term debt (less current maturities)	4,127	4,136
Deferred income taxes, net	454	441
Long-term retirement benefits (less current portion)	1,913	2,218
Other noncurrent liabilities	306	376
Commitments and contingencies:
Shareholders' equity:
Common stock (shares issued: 2010 - 291,438,896; 2009 - 291,424,051)	0	0
Paid-in capital	8,503	8,498
Accumulated deficit	(761)	(579)
Accumulated other comprehensive loss - (Defined benefit pension and postretirement plans: 2010 - $(1,327) and 2009 - $(1,376), net of tax)	(1,381)	(1,421)
Total shareholders' equity	6,361	6,498
Total liabilities and stockholders' equity	$18,402	$18,009

4_Condensed Consolidated Balanc

Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data	Mar. 31, 2010	Dec. 31, 2009
Assets
Accumulated depreciation	$1,576	$1,570
Accumulated amortization on trademarks and other intangible assets	654	647
Shareholders' equity:
Common stock, shares issued	291,438,896	291,424,051
Defined benefit pension and postretirement plans	($1,327)	($1,376)

Business and Summary of Signifi

Business and Summary of Significant Accounting Policies
	3 Months Ended Mar. 31, 2010
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 operating subsidiaries include R. J. Reynolds Tobacco Company; Santa Fe Natural Tobacco Company, Inc., referred to as Santa Fe; Lane, Limited, referred to as Lane; American Snuff Company, LLC (formerly known as Conwood Company, LLC) referred to as American Snuff Co., and Niconovum AB. RAI was incorporated as a holding company in the state of North Carolina in 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 American Snuff (formerly the Conwood segment). The RJR Tobacco segment consists of the primary operations of R. J. Reynolds Tobacco Company. The American Snuff segment consists of the primary operations of American Snuff Co. and Lane. RAIs wholly owned subsidiaries, Santa Fe and Niconovum AB, among other RAI subsidiaries, are included in All Other. The segments were identified based on how RAIs chief operating decision maker allocates resources and assesses performance. Certain 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. All material intercompany balances have been eliminated. RAI has no investments that are accounted for under the equity or cost methods. 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 March31, 2010, are not necessarily indicative of the results that may be

Fair Value of Financial Instrum

Fair Value of Financial Instruments
	3 Months Ended Mar. 31, 2010
Fair Value of Financial Instruments [Abstract]
Fair Value of Financial Instruments	Note 2 Fair Value of Financial Instruments RAI determines fair value of assets/(liabilities) using a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity, and the reporting entitys own assumptions about market participant assumptions 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/(liabilities) carried at fair value in the condensed consolidated balance sheet (unaudited)as of March31, 2010, were as follows: Level 1 Level 2 Level 3 Total Cash and cash equivalents: Cash equivalents $ 3,218 $ $ $ 3,218 Other assets and deferred charges: Auction rate securities corporate credit risk 34 34 Auction rate securities financial insurance companies 8 8 Mortgage-backed security 15 15 Marketable equity security 18 18 Assets held in grantor trusts 12 12 Interest rate swaps fixed to floating rate 215 215 Interest rate swaps floating to fixed rate 29 29 Other noncurrent liabilities: Interest rate swaps floating to fixed rate (7 ) (7 ) Financial assets/(liabilities)carried at fair value in the condensed consolidated balance sheet (unaudited) as of December31, 2009, were as follows: Level 1 Level 2 Level 3 Total Cash and cash equivalents: Cash equivalents $ 2,679 $ $ $ 2,679 Other assets and deferred charges: Auction rate securities corporate credit risk 30 30 Auction rate securities financial insurance companies 17 17 Mortgage-backed security 16 16 Marketable equity security 19 19 Assets held in grantor trusts 12 12 Interest rate swaps fixed to floating rate 182 182 Interest rate swaps

Intangible Assets

Intangible Assets
	3 Months Ended Mar. 31, 2010
Intangible Assets [Abstract]
Intangible Assets	Note 3 Intangible Assets There were no changes to the carrying amount of goodwill during the three months ended March 31, 2010. The carrying amounts of trademarks and other intangible assets by segment were as follows: American RJR Tobacco Snuff All Other Consolidated Trademarks Other Trademarks Trademarks Other Trademarks Other Finite-lived: Balance as of December31, 2009 $ 20 $ 69 $ 13 $ $ $ 33 $ 69 Amortization (2 ) (4 ) (1 ) (3 ) (4 ) Balance as of March31, 2010 $ 18 $ 65 $ 12 $ $ $ 30 $ 65 Indefinite-lived: Balance as of December31, 2009 $ 1,163 $ 99 $ 1,152 $ 155 $ 47 $ 2,470 $ 146 Balance as of March31, 2009 $ 1,163 $ 99 $ 1,152 $ 155 $ 47 $ 2,470 $ 146 Details of finite-lived intangible assets subject to amortization as of March31, 2010, were as follows: Accumulated Gross Amortization Net Contract manufacturing $ 151 $ 86 $ 65 Trademarks 95 65 30 $ 246 $ 151 $ 95 The estimated remaining amortization associated with finite-lived intangible assets is expected to be expensed as follows: Year Amount Remainder of 2010 $ 19 2011 23 2012 20 2013 16 2014 10 Thereafter 7 $ 95

Restructuring Charges

Restructuring Charges
	3 Months Ended Mar. 31, 2010
Restructuring Charges [Abstract]
Restructuring Charges	Note 4 Restructuring Charges 2009 Restructuring Charge In 2009, RJR Tobacco announced the elimination of approximately 400 full-time production positions to be substantially completed by December31, 2010. The cash benefits are expected to be substantially paid by December31, 2011. 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 resulted in the elimination of approximately 600 full-time jobs. The cash benefits are expected to be substantially paid by December31, 2011. The activity in the restructuring accruals, comprised of employee severance and related benefits, was as follows: 2009 2008 Restructuring Restructuring Charge Charge Balance as of December31, 2009 48 40 Cash paid in 2010 (2 ) (9 ) Balance as of March31, 2010 $ 46 $ 31 The restructuring accruals were included in the condensed consolidated balance sheet (unaudited)as of March31, 2010 as follows: 2009 2008 Restructuring Restructuring Charge Charge Other current liabilities $ 27 $ 23 Other noncurrent liabilities 19 8 $ 46 $ 31

Discontinued Operations

Discontinued Operations
	3 Months Ended Mar. 31, 2010
Discontinued Operations [Abstract]
Discontinued Operations	Note 5 Discontinued Operations In 1999, RJR and RJR Tobacco sold the international tobacco business to Japan Tobacco Inc., referred to as JTI. Northern Brands International, Inc., referred to as Northern Brands, was part of the international business of R.J. Reynolds International B.V., a former Netherlands subsidiary of RJR Tobacco, which was managed by RJR-Macdonald, Inc., referred to as RJR-MI. Northern Brands ceased being an operating company in 1997 and has been an inactive subsidiary of RJR since that time. Effective April13, 2010, RJR Tobacco entered into a comprehensive agreement with the Canadian federal, provincial and territorial governments, referred to as the Comprehensive Agreement, resolving a variety of civil claims related to cigarette smuggling in Canada during the period from 1985 through 1999. The Comprehensive Agreement covers all civil claims related to the movement of contraband tobacco products in Canada during the period 1985 through 1999 that the governments have asserted or could assert against RJR Tobacco and its affiliates. On April13, 2010, RJR Tobacco paid the governments a total of Cdn $325million. Should RJR Tobacco or its affiliates decide in the future to sell tobacco products in Canada, they also have agreed to adopt packaging, marking and other measures that will assist the Canadian governments in their efforts to combat the movement of contraband tobacco products in Canada. Separately, on April13, 2010, Northern Brands entered into a plea agreement with the Ministry of the Attorney General of Ontario. Under the terms of this agreement, Northern Brands pled guilty to a one count violation of the Canadian Criminal Code for conspiring to aid other persons to sell and be in possession of tobacco products that were not packaged and stamped in conformity with the Canadian Excise Act during the period February18, 1993 through December31, 1996. The Judge of the Ontario Court of Justice accepted the plea by Northern Brands and required it to pay a fine of Cdn $75million, which was paid on April13, 2010. By this plea, the criminal charges that were originally commenced against Northern Brands and certain of its affiliates in 2003 and any other charges that could be commenced against Northern Brands and its affiliates by the Canadian governments relating to contraband tobacco activities have now come to an end. Although the settlements entered into by RJR Tobacco pursuant to the Comprehensive Agreement and by Northern Brands related to the plea agreement were effective April13, 2010, the events that gave rise to the matters that were the subject of the respective settlements occurred prior to March31, 2010. Accordingly, in addition to the $91million liability previously accrued by RJR, an adjustment, to reflect the impact of the separate RJR Tobacco settlement to resolve civil claims and the separate Northern Brands plea agreement, in the aggregate of $307million, or $216million after tax, was recorded during the first quarter of 2010. This accrual adjustment has been included in losses from discontinued operations in the condensed consolidated statement of income (unaudited)for the quarter ende

Income Per Share

Income Per Share
	3 Months Ended Mar. 31, 2010
Income Per Share [Abstract]
Income Per Share	Note 6 Income Per Share The components of the calculation of income per share were as follows: For the Three Months Ended March 31, 2010 2009 Income from continuing operations $ 298 $ 8 Losses from discontinued operations (216 ) Net income $ 82 $ 8 Basic weighted average shares, in thousands 291,431 291,424 Effect of dilutive potential shares: Options 95 144 Stock units 643 38 Diluted weighted average shares, in thousands 292,169 291,606 The basic income per share calculation includes the unvested restricted shares awarded under the RAI Long-Term Incentive Plan, referred to as the LTIP, as the shares have been determined to be participating securities because they have non-forfeitable dividend rights equivalent to common shares.

Inventories

Inventories
	3 Months Ended Mar. 31, 2010
Inventories [Abstract]
Inventories	Note 7 Inventories The major components of inventories were as follows: March 31, 2010 December 31, 2009 Leaf tobacco $ 1,015 $ 1,052 Other raw materials 61 65 Work in process 82 80 Finished products 185 180 Other 33 32 Total 1,376 1,409 Less LIFO allowance 186 190 $ 1,190 $ 1,219 RJR Tobacco will perform its annual LIFO inventory valuation at December31, 2010, as interim periods represent an estimate of the expected annual valuation.

Income Taxes

Income Taxes
	3 Months Ended Mar. 31, 2010
Income Tax [Abstract]
Income Taxes	Note 8 Income Taxes The provision for income taxes from continuing operations was as follows: For the Three Months Ended March 31, 2010 2009 Provision for income taxes from continuing operations $ 214 $ 9 Effective tax rate 41.8 % 53.3 % The effective tax rate for the first three months of 2010 was unfavorably impacted by a $27 million increase in tax attributable to the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010. The effective tax rate for the first three 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 tax rate includes the impact of federal and state taxes and certain nondeductible items, offset by the domestic production activities deduction of the American Jobs Creation Act of 2004.

Commitments and Contingencies

Commitments and Contingencies
	3 Months Ended Mar. 31, 2010
Commitments and Contingencies [Abstract]
Commitments and Contingencies	Note 9 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, American Snuff Co. 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 American Snuff Co. 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 American Snuff Co. 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 the first three months of each of 2010 and 2009 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 that a defen

Shareholders Equity

Shareholders Equity
	3 Months Ended Mar. 31, 2010
Shareholders' Equity [Abstract]
Shareholders' Equity	Note 10 Shareholders Equity Accumulated Other Total Common Paid-In Accumulated Comprehensive Shareholders Comprehensive Stock Capital Deficit Loss Equity Income Balance as of December31, 2009 $ $ 8,498 $ (579 ) $ (1,421 ) $ 6,498 Net income 82 82 $ 82 Retirement benefits, includes $18million tax benefit 49 49 49 Unrealized gain on long-term investments, net of $2million tax expense 2 2 2 Cumulative translation adjustment, net of $8 million tax benefit (11 ) (11 ) (11 ) Total comprehensive income $ 122 Dividends $0.90 per share (264 ) (264 ) Common stock repurchased (5 ) (5 ) Equity incentive award plan and stock-based compensation 8 8 Excess tax benefit on stock-based compensation plans 2 2 Balance as of March31, 2010 $ $ 8,503 $ (761 ) $ (1,381 ) $ 6,361 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 three months of 2010, RAI purchased 88,748 shares that were forfeited with respect to tax liabilities associated with restricted stock vesting under the LTIP, a plan which expired in 2009 and was replaced by the Reynolds American Inc. 2009 Omnibus Incentive Compensation Plan, referred to as the Omnibus Plan. On February2, 2010, RAIs board of directors declared a quarterly cash dividend of $0.90 per common share, or $3.60 on an annualized basis, to shareholders of record as of March10, 2010.

Stock Plans

Stock Plans
	3 Months Ended Mar. 31, 2010
Stock Plans [Abstract]
Stock Plans	Note 11 Stock Plans In February2010, the board of directors of RAI approved a grant, to key employees of RAI and its subsidiaries, of nonvested restricted stock units under the Omnibus Plan, effective March1, 2010. The 990,083 restricted stock units generally will vest on March1, 2013. 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, 2013. As an equity-based grant, compensation expense relating to the 2010 Omnibus Plan 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 $53.24. Dividends paid on shares of RAI common stock will accumulate on the restricted stock units and will be paid to the grantee on the vesting date. If RAI fails to pay its shareholders cumulative dividends of at least $10.80 per share for the three-year performance period ending December31, 2013, 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%.

Segment Information

Segment Information
	3 Months Ended Mar. 31, 2010
Segment Information [Abstract]
Segment Information	Note 12 Segment Information RAIs reportable operating segments are RJR Tobacco and American Snuff. The RJR Tobacco segment consists of the primary operations of R. J. Reynolds Tobacco Company. The American Snuff segment consists of the primary operations of American Snuff Co. and Lane. RAIs wholly owned subsidiaries, Santa Fe and Niconovum AB, among other RAI subsidiaries, are included in All Other. The segments were identified based on how RAIs chief operating decision maker allocates resources and assesses performance. Certain 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, DORAL and KOOL were five of the ten best-selling brands of cigarettes in the United States as of March31, 2010. Those brands, and its other brands, including SALEM, MISTY and CAPRI, are manufactured in a variety of styles and marketed in the United States. As part of its total tobacco strategy, RJR Tobacco also offers two types of smoke-free tobacco products, CAMEL Snus and CAMEL Dissolvables. RJR Tobacco also manages contract manufacturing of cigarette and tobacco products through arrangements with BAT affiliates and manages the export of tobacco products to certain U.S. territories, U.S. duty-free shops and U.S. overseas military bases. RAIs other reportable operating segment, American Snuff, is the second largest smokeless tobacco products manufacturer in the United States. American Snuffs primary brands include its largest-selling moist snuff brands, GRIZZLY and KODIAK, as well as CAMEL Dip, a premium moist snuff. American Snuffs other products include 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 RJR Tobaccos super premium cigarette brands, DUNHILL and STATE EXPRESS 555, which are licensed from BAT. The financial position and results of operations of this operating segment do not meet the materiality criteria to be reportable. Intersegment revenues and items below the operating income line of the condensed consolidated statements of income (unaudited) are not presented by segment, since they are excluded from the measure of segment profitability reviewed by RAIs chief operating decision maker. Additionally, information about total assets by segment is not reviewed by RAIs chief operating decision maker and therefore is not disclosed. Segment Data: For the Three Months Ended March 31, 2010 2009 Net sales: RJR Tobacco $ 1,720 $ 1,671 American Snuff 161 166 All Other 105 84 Consolidated net sales $ 1,986 $ 1,921 Operating income: RJR Tobac

Related Party Transactions

Related Party Transactions
	3 Months Ended Mar. 31, 2010
Related Party Transactions [Abstract]
Related Party Transactions	Note 13 Related Party Transactions RAIs operating subsidiaries engage in transactions with affiliates of BAT. The following is a summary of balances and transactions with such BAT affiliates. Balances: March 31, December 31, 2010 2009 Accounts receivable $ 72 $ 96 Accounts payable 2 3 Deferred revenue 37 57 Transactions for the three months ended March31: 2010 2009 Net sales $ 128 $ 89 RAIs operating subsidiaries sell contract-manufactured cigarettes, processed strip leaf, pipe tobacco and little cigars to BAT affiliates. Pending the outcome of on-going negotiations between parties, during 2010, pricing for contract manufactured cigarettes will remain the same as the pricing that was in effect during 2009 (pricing equal to BWs 2004 forecasted costs plus 10%, adjusted for inflation). Net sales to BAT affiliates, primarily cigarettes, represented approximately 6.0% of RAIs total net sales during the three months ended March31, 2010. RJR Tobacco recorded deferred sales revenue relating to leaf sold to BAT affiliates that had 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 will be shipped to the customer. 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 9.

RAI Guaranteed, Unsecured Notes

RAI Guaranteed, Unsecured Notes - Condensed Consolidating Financial Statements
	3 Months Ended Mar. 31, 2010
RAI Guaranteed, Unsecured Notes - Condensed Consolidating Financial Statements [Abstract]
RAI Guaranteed, Unsecured Notes - Condensed Consolidating Financial Statements	Note 14 RAI Guaranteed, Unsecured Notes Condensed Consolidating Financial Statements The following condensed consolidating financial statements have been prepared pursuant to Rule 3-10 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, American Snuff Co., Rosswil, LLC, 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 March31, 2010 Net sales $ $ 1,851 $ 38 $ (31 ) $ 1,858 Net sales, related party 128 128 Cost of products sold 1,083 18 (31 ) 1,070 Selling, general and administrative expenses 5 318 16 339 Amortization expense 7 7 Operating income (loss) (5 ) 571 4 570 Interest and debt expense 58 2 60 Interest income (2 ) (2 ) (4 ) Intercompany interest (income)expense (31 ) 31 Intercompany dividend income (11 ) 11 Other expense, net 1 1 2 Income (loss)from continuing operations before income taxes (33 ) 550 6 (11 ) 512 Provision for (benefit from) income taxes (11 ) 226 (1 ) 214 Equity income (loss)from subsidiaries 104 (65 ) (39 ) Income from continuing operations 82 259 7 (50 ) 298 Losses from discontinued operations, net of tax (142 ) (74 ) (216 ) Net income (loss) $ 82 $ 117 $ (67 ) $ (50 ) $ 82 For the Three Months Ended March31, 2009 Net sales $ $ 1,830 $ 40 $ (38 ) $ 1,832 Net sales, related party 89 89 Cost of products sold 1,018 18 (38 ) 998 Selling, general and administrative expenses 3 348 14 365 Amortization expense 8 8 Trademark impairment charge 453 453 Operating income (loss) (3 ) 92 8 97 Interest and debt expense 64 2 66 Interest income

RJR Guaranteed, Unsecured Notes

RJR Guaranteed, Unsecured Notes - Condensed Consolidating Financial Statements
	3 Months Ended Mar. 31, 2010
RJR Guaranteed, Unsecured Notes - Condensed Consolidating Financial Statements [Abstract]
RJR Guaranteed, Unsecured Notes - Condensed Consolidating Financial Statements	Note 15 RJR Guaranteed, Unsecured Notes Condensed Consolidating Financial Statements The following condensed consolidating financial statements have been prepared pursuant to Rule 3-10 of RegulationS-X, relating to the guaranties of RJRs $62million 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, American Snuff Co. and Rosswil, LLC 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 March31, 2010 Net sales $ $ $ 1,626 $ 275 $ (43 ) $ 1,858 Net sales, related party 126 2 128 Cost of products sold 1,019 94 (43 ) 1,070 Selling, general and administrative expenses 5 265 69 339 Amortization expense 7 7 Operating income (loss) (5 ) 461 114 570 Interest and debt expense 58 2 60 Interest income (1 ) (3 ) (4 ) Intercompany interest (income)expense (31 ) (1 ) (10 ) 42 Intercompany dividend income (11 ) 11 Other expense, net 1 1 2 Income (loss)from continuing operations before income taxes (33 ) 9 472 75 (11 ) 512 Provision for (benefit from) income taxes (11 ) 202 23 214 Equity income (loss)from subsidiaries 104 (24 ) 11 (91 ) Income (loss)from continuing operations 82 (15 ) 281 52 (102 ) 298 Losses from discontinued operations, net of tax 88 (230 ) (74 ) (216 ) Net income (loss) $ 82 $ 73 $ 51 $ (22 ) $ (102 ) $ 82 For the Three Months Ended March31, 2009 Net sales $ $ $ 1,625 $ 267 $ (60 ) $ 1,832 Net sales, related party 87 2 89 Cost of products sold 961 97 (60 ) 998 Selling, general and administrative expenses 3 296 66 365 Amortization expense 7 1 8 Tradema