WINSTON-SALEM, N.C., Oct. 26 /PRNewswire-FirstCall/ -- Reynolds
American Inc. (NYSE:RAI) today reported third-quarter results that
continue to demonstrate the benefits the company is deriving from
the 2004 merger. RAI revised its earnings guidance for the full
year, primarily to reflect incremental charges related to the
tobacco quota buyout legislation. The pre- tax impact of those
costs, totaling $127 million, is reflected in the company's
third-quarter and nine-month net income and earnings per share
results. (Logo:
http://www.newscom.com/cgi-bin/prnh/20040720/CLTU061LOGO) "As we
approach the end of the year, we are pleased that we have met all
our major milestones and have built momentum for continued growth
in 2006," said Susan M. Ivey, chief executive officer and president
of RAI. "We successfully rolled out R.J. Reynolds' portfolio
strategy, are achieving the merger synergies on schedule, and are
well on the way to building a high- performance culture within the
company." RAI's third-quarter and nine-month results follow in two
sections: one that presents measurements reported in accordance
with U.S. generally accepted accounting principles (GAAP); and a
second section that provides certain pro forma GAAP measurements,
to provide additional perspective on the company's performance.
GAAP Third Quarter and Nine Month Results - Highlights (dollars in
millions, except per-share amounts) Third Quarter Nine Months % %
2005(1) 2004(3,4) Change 2005(2) 2004(3,4) Change Net sales $2,149
$1,866 15.2% $6,209 $4,436 40.0% Operating income $357 $346 3.2%
$1,241 $833 49.0% Net income $213 $339 (37.2)% $745 $ 612 21.7% Net
income per diluted share $1.44 $2.66 (45.9)% $5.05 $6.16 (18.0)%
(1) Third-quarter 2005 results include $53 million in incremental
charges related to Phase II tobacco grower obligations and a $74
million incremental charge related to the stabilization inventory
pool losses associated with the tobacco quota buyout program
(FETRA), for a total of $127 million in incremental charges in the
quarter. (2) Nine-month 2005 results include the $53 million in
incremental charges related to Phase II tobacco grower obligations,
$81 million in incremental charges related to the stabilization
inventory pool losses, as well as the benefit of a $79 million
Phase II growers' trust offset. These factors net to $55 million in
charges for the nine-month period. Nine-month 2005 operating
results also include net charges of $25 million related to the
second-quarter sale of R.J. Reynolds' packaging business. (3)
Third-quarter and nine-month 2004 operating results include the net
benefit of a $7 million and $25 million reversal, respectively, for
previously recorded restructuring charges. Nine-month 2004 results
also reflect a $33 million charge in the first quarter of 2004
related to R.J. Reynolds' settlement of the DeLoach case (the
tobacco growers' lawsuit). (4) Net income in the third quarter of
2004 included a benefit of $141 million resulting from favorable
resolution of certain prior-year tax matters. GAAP Balance Sheet
Highlights (as of Sept. 30, 2005) - Cash and short-term
investments: $2.5 billion - Debt: $1.8 billion - Equity: $6.3
billion - Dividend: $1.05 per share quarterly $4.20 per share
annualized Third Quarter Financial Results (GAAP) For the third
quarter 2005, net sales were $2.15 billion, up 15.2 percent
compared with $1.87 billion in 2004. The increase was due primarily
to incremental revenues resulting from the July 30, 2004, business
combination of R.J. Reynolds Tobacco Company and the U.S.
operations of Brown & Williamson Tobacco Corporation (B&W),
as well as improved pricing. Operating income was $357 million, up
3.2 percent from the prior year period, due primarily to the same
factors that positively impacted net sales, as well as
merger-related synergies, partially offset by $127 million in
incremental charges related to tobacco grower buyout legislation,
as well as increased settlement expense. Net income was $213
million, down 37.2 percent compared with the prior- year quarter,
reflecting the impact of the factors cited above. In addition, net
income for the prior-year period included $141 million in
favorability resulting from resolution of certain prior-year tax
matters. Earnings per diluted share were $1.44 compared with $2.66
in the prior-year period. A table that details significant items
that were included in GAAP earnings during the third-quarter
periods of 2004 and 2005 is attached. Nine-Month Financial Results
(GAAP) For the first nine months of 2005, net sales were $6.21
billion, up 40 percent compared with the first nine months of 2004,
due primarily to incremental revenues resulting from the July 30,
2004 business combination of R.J. Reynolds Tobacco Co. and B&W,
as well as improved pricing. Operating income for the first nine
months was $1.24 billion, up 49.0 percent from the year-ago period,
reflecting the same factors that impacted net sales, as well as
merger-related synergies. These were partially offset by $55
million net incremental charges related to tobacco quota buyout
legislation, increased settlement expense, and $25 million in net
charges related to the sale of R.J. Reynolds' packaging business.
Net income of $745 million was up 21.7 percent from the first nine
months of 2004, reflecting the same factors that affected
nine-month operating income. The 2004 period also benefited from
$141 million in tax favorability related to the resolution of
certain prior-year tax matters. Earnings per diluted share were
$5.05, compared with $6.16 in the prior-year period. Operating
Company Volume The following table summarizes third-quarter and
nine-month 2005 U.S. cigarette shipment volume for RAI's operating
companies. The volume increases were driven by the addition of
former B&W brands beginning July 30, 2004. For the Three Months
For the Nine Months Ended Sept. 30 Ended Sept. 30 (volume in
billions % % of units) 2005 2004 Change 2005 2004 Change R.J.
Reynolds volume 28.2 26.0 8.4% 80.7 63.6 26.9% Full-price 17.0 15.9
7.1% 48.6 40.4 20.4% Savings 11.2 10.1 10.4% 32.1 23.2 38.2% Other
volume(1) 0.6 0.6 0% 1.8 1.7 10.0% Total domestic volume(2) 28.8
26.6 8.2% 82.6 65.3 26.5% 1. Other volume includes U.S. volume for
Lane Limited's 2005 U.S. cigarette sales, as well as volume for
Santa Fe Natural Tobacco Co., Puerto Rico and other U.S.
territories. 2. Amounts presented in this table are rounded on an
individual basis and, accordingly, may not sum on an aggregate
basis. Percentages are calculated from unrounded volume numbers.
Industry Volume and Mix Based on information from Management
Science Associates, Inc. (MSAi), industry volume for the third
quarter of 2005 was 99.1 billion units, down 1.9 percent from the
prior-year period. The industry's full-price mix was 71.0 percent
for the third quarter of 2005, up 1.0 percentage point from the
year- ago quarter. For the first nine months of 2005, industry
volume was 287.1 billion units, down 2.8 percent from the
prior-year period. Industry full-price mix was 71.3, up 1.6
percentage points compared with the first nine months of 2004. Pro
Forma GAAP Results The following results are presented as if the
business combination had been completed as of Jan. 1, 2004 (pro
forma GAAP basis). A table that reconciles GAAP to pro forma GAAP
is attached. This table also details significant adjustments that
were included in GAAP earnings during the third- quarter and
nine-month periods of 2004 and 2005. Pro Forma GAAP Third Quarter
and Nine Month Results - Highlights(1) Third Quarter Nine Months %
% (dollars in millions) 2005 2004 Change 2005 2004 Change Net sales
$2,149 $2,092 2.7% $6,209 $6,284 (1.2)% Operating income $357 $350
2.0% $1,241 $1,003 23.7% Net income $213 $340 (37.4)% $745 $713
4.5% 1. See the Reconciliation of GAAP to Pro Forma GAAP Results
table attached at the end of this document. On a pro forma GAAP
basis, Reynolds American's third-quarter 2005 operating earnings
increased 2.0 percent to $357 million compared with the prior-year
quarter. For the first nine months, RAI's pro forma GAAP operating
earnings increased 23.7 percent to $1.24 billion. During both 2005
periods, operating earnings were positively impacted by improved
pricing, net merger- related synergies and other cost reductions.
These factors were partially offset by lower volume, higher net
costs related to settlements and tobacco grower legislation, and
charges related to the sale of R.J. Reynolds' packaging business.
Pro forma GAAP net income in the third quarter declined 37.4
percent, to $213 million. For the first nine months, pro forma GAAP
net income rose 4.5 percent to $745 million. Net income for both
periods was impacted by the factors cited above, and also reflects
$141 million in tax favorability in the 2004 period related to the
resolution of certain prior-year tax matters. Pro Forma Operating
Company Cigarette Volume For the Three Months For the Nine Months
Ended Sept. 30 Ended Sept. 30 (volume in billions % % of units)
2005 2004 Change 2005 2004 Change R.J. Reynolds volume 28.2 29.1
(3.0)% 80.7 85.6 (5.7)% Full-price 17.0 17.3 (1.7)% 48.6 50.8
(4.2)% Savings 11.2 11.7 (4.9)% 32.1 34.8 (7.7)% Other volume(1)
0.6 0.6 (2.9)% 1.8 1.8 1.9% Total domestic volume(2) 28.8 29.7
(3.0)% 82.6 87.5 (5.5)% 1. Other volume includes U.S. cigarette
volume for Santa Fe, Lane, and Puerto Rico and other U.S.
territories. 2. Amounts presented in this table are rounded on an
individual basis and, accordingly, may not sum on an aggregate
basis. Percentages are calculated from unrounded volume numbers.
R.J. Reynolds' Shipment Volume (Pro Forma) The following volume
information is reported as if all brands were part of R.J. Reynolds
beginning Jan. 1, 2004. R.J. Reynolds' 2005 third-quarter pro forma
shipment volume of 28.2 billion units was down 3.0 percent, which
includes the positive impact of trade inventory movements. For the
first nine months, pro forma shipment volume declined 5.7 percent
to 80.7 billion units. The company now estimates a full-year 2005
volume decline in line with its year-to-date performance. For the
quarter, full-price mix improved to 60.4 percent, up 0.8 percentage
points from the year-ago quarter. For the first nine months of
2005, full-price mix improved 0.9 percentage points to 60.2
percent. R.J. Reynolds' Retail Share (Pro Forma) The following
share information is reported as if all brands were part of R.J.
Reynolds beginning Jan. 1, 2004. R.J. Reynolds' third-quarter 2005
share of U.S. retail cigarette sales was 29.66 percent, down 1.08
percentage points from the prior-year period. As expected under
R.J. Reynolds' brand portfolio strategy, which focuses resources
behind investment brands Camel and Kool, these brands' growth
partially offset declines on the company's selective support and
non-support brands. In the third quarter, Camel's filtered styles
and Kool gained 0.43 share points on a combined basis compared to
the same period in 2004, totaling 9.55 share points in the quarter.
Camel continued its growth trend, gaining 0.18 share points over
the prior-year period. Year to date, compared to the same
nine-month period of 2004, Camel has gained 0.32 share points. Kool
gained 0.24 share points in the quarter versus the prior-year
period, benefiting from the enhanced retail presence and increased
marketing support it received as an R.J. Reynolds investment brand.
Year to date, Kool has gained 0.16 share points. R.J. Reynolds'
selective support and non-support brands were down 1.51 share
points in the quarter versus the year-ago quarter. Reynolds
American Outlook "We've adjusted our outlook for the year to
reflect the third-quarter charges related to the tobacco quota
legislation," said Dianne M. Neal, Reynolds American's chief
financial officer. "Excluding those charges, we are delivering
against the plans we set for 2005. As we move forward, our focused
marketplace approach and continuous productivity gains will be the
drivers that enable us to deliver sustainable earnings growth."
Reynolds American expects the following for 2005: - Operating
income of $1.55 billion to $1.60 billion; - Net income of $940
million to $970 million; and - Diluted earnings per share of $6.35
to $6.55. Among the factors contributing to operating results are:
- Incremental synergies of approximately $350 million; -
Merger-related expenses of approximately $115 million; and - Total
MSA and quota buyout expenses of approximately $3.0 billion.
Reynolds American expects merger-related cash costs of
approximately $225 million in 2005. Today's guidance excludes any
potential impact of the annual assessment of intangible asset
valuations. The company expects to end the year with cash and
short-term investments of approximately $2.7 billion and $1.8
billion in debt. Conference Call Webcast Today Reynolds American
will webcast a conference call to discuss third-quarter and
nine-month 2005 financial results at 9:30 a.m. Eastern Time on
Wednesday, October 26. The call will be available live online on a
listen-only basis. To register for the call, please visit the
"Investors" section of http://www.reynoldsamerican.com/. A replay
of the call will be available on the site for seven days. Remarks
made during the conference call will be current at the time of the
call and will not be updated to reflect subsequent material
developments. Although news media representatives will not be
permitted to ask questions during the call, they are welcome to
monitor the remarks on a listen-only basis. Following the call,
media representatives may direct inquiries to Maura Payne at (336)
741-6996. Cautionary Information Regarding Forward-Looking
Statements Statements included in this news release that are not
historical in nature are forward-looking statements made pursuant
to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements regarding RAI's
future performance and financial results inherently are subject to
a variety of risks and uncertainties that could cause actual
results to differ materially from those described in the
forward-looking statements. These risks and uncertainties include
the substantial and increasing regulation and taxation of the
cigarette industry; various legal actions, proceedings and claims
relating to the sale, distribution, manufacture, development,
advertising, marketing and claimed health effects of cigarettes
that are pending or may be instituted against RAI or its
subsidiaries; the substantial payment obligations and limitations
on the advertising and marketing of cigarettes under various
litigation settlement agreements; the continuing decline in volume
in the domestic cigarette industry; competition from other
cigarette manufacturers, including increased promotional activities
and the growth of deep-discount brands; the success or failure of
new product innovations and acquisitions; the responsiveness of
both the trade and consumers to new products and marketing and
promotional programs; the ability to realize the benefits and
synergies arising from the combination of R.J. Reynolds Tobacco
Company and the U.S. cigarette and tobacco business of B&W; any
potential costs or savings associated with realigning the cost
structure of RAI and its subsidiaries; the ability to achieve
efficiencies in manufacturing and distribution operations without
negatively affecting sales; the cost of tobacco leaf and other raw
materials and commodities used in products, including future market
pricing of tobacco leaf which could adversely impact inventory
valuations; the effect of market conditions on the performance of
pension assets, foreign currency exchange rate risk, interest rate
risk and the return on corporate cash; any adverse effects of
regulatory changes on pension expense or required funding; the
ratings of securities issued by R.J. Reynolds Tobacco Holdings,
Inc.; any adverse impacts from the transition of the packaging
operations formerly conducted by RJR Packaging, LLC, a wholly owned
subsidiary of R.J. Reynolds Tobacco Company, to the buyers of RJR
Packaging, LLC's businesses; and the potential existence of
significant deficiencies or material weaknesses in internal
controls over financial reporting that may be identified during the
performance of testing required under Section 404 of the
Sarbanes-Oxley Act of 2002. Due to these risks and uncertainties,
you are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this
news release. Except as provided by federal securities laws, RAI is
not required to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or
otherwise. Reynolds American Inc. is the parent company of R.J.
Reynolds Tobacco Company, Santa Fe Natural Tobacco Company, Inc.,
Lane Limited and R.J. Reynolds Global Products, Inc. R.J. Reynolds
Tobacco Company, the second- largest U.S. tobacco company,
manufactures about one of every three cigarettes sold in the United
States, including five of the nation's 10 best-selling brands:
Camel, Winston, Kool, Salem and Doral. Santa Fe Natural Tobacco
Company, Inc. manufactures Natural American Spirit cigarettes and
other tobacco products, and markets them both nationally and
internationally. Lane Limited manufactures several roll-your-own,
pipe tobacco and little cigar brands, and distributes Dunhill
tobacco products. R.J. Reynolds Global Products, Inc. manufactures,
sells and distributes American-blend cigarettes and other tobacco
products to a variety of customers worldwide. Copies of RAI's news
releases, annual reports, SEC filings and other financial materials
are available on the company's Web site,
http://www.reynoldsamerican.com/. REYNOLDS AMERICAN INC. CONDENSED
CONSOLIDATED STATEMENTS OF INCOME-GAAP (Dollars in Millions, Except
Per Share Amounts) (Unaudited) Three Months Ended Nine Months Ended
September 30, September 30, 2005 2004 2005 2004 Net sales $2,149
$1,866 $6,209 $4,436 Cost of products sold 1,384 1,139 3,736 2,647
Selling, general and administrative expenses 399 377 1,175 970 Loss
on sale of assets - - 25 - Amortization expense 9 11 33 11
Restructuring adjustments - (7) (1) (25) Operating income 357 346
1,241 833 Interest and debt expense 31 21 81 62 Interest income
(23) (7) (53) (16) Other (income) expense, net 7 (1) 14 4 Income
from continuing operations before income taxes 342 333 1,199 783
Provision for income taxes 129 43 454 221 Income from continuing
operations 213 290 745 562 Gain on sale of discontinued businesses,
net of income taxes (1) - - - 1 Income before extraordinary item
213 290 745 563 Extraordinary item, net of income taxes (2) - 49 -
49 Net income $213 $339 $745 $612 Basic income per share: Income
from continuing operations $1.45 $2.29 $5.05 $5.70 Gain on sale of
discontinued businesses (1) - - - 0.01 Extraordinary item (2) -
0.38 - 0.50 Net income $1.45 $2.67 $5.05 $6.21 Diluted income per
share: Income from continuing operations $1.44 $2.28 $5.05 $5.66
Gain on sale of discontinued businesses (1) - - - 0.01
Extraordinary item (2) - 0.38 - 0.49 Net income $1.44 $2.66 $5.05
$6.16 Basic weighted average shares, in thousands 147,396 126,885
147,388 98,549 Diluted weighted average shares, in thousands
147,584 127,467 147,581 99,351 (1) The 1999 gain on the sale of the
international tobacco business was adjusted as a result of a
favorable resolution of prior-year tax matters. (2) Includes
primarily adjustments to the 2000 extraordinary gain on
acquisition, resulting from favorable resolution of prior-years'
tax matters. REYNOLDS AMERICAN INC. Reconciliation of 2004 GAAP
Results to 2005 GAAP Results (Dollars in Millions) (Unaudited)
Third Quarter Nine Months Operating Net Operating Net Income Income
Income Income 2004 Results $346 $339 $833 $612 Deduct 2004
restructuring and impairment adjustments (7) (4) (25) (14) Add back
2004 settlement of tobacco growers' lawsuit - - 33 20 Add back 2004
merger/integration costs 62 44 87 60 Deduct 2004 favorable
resolution of tax matters - (96) - (96) Deduct 2004 gain on
discontinued businesses - - - (1) Deduct 2004 extraordinary gain on
acquisition - (49) - (49) Merger/integration costs (36) (22) (88)
(55) Loss on sale of assets - - (25) (16) Phase II growers' trust
offset - - 79 49 Phase II growers' trust related expenses (53) (33)
(53) (33) Federal tobacco buyout assessment (74) (46) (81) (50)
Operations and other 119 80 481 318 2005 Results $357 $213 $1,241
$745 CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Millions)
September 30, December 31, 2005 2004 (Unaudited) Assets Cash and
cash equivalents $1,392 $1,499 Short-term investments 1,118 473
Other current assets 2,324 2,652 Trademarks, net 2,390 2,403
Goodwill 5,685 5,685 Other noncurrent assets 1,607 1,716 $14,516
$14,428 Liabilities and shareholders' equity Tobacco settlement and
related accruals $2,174 $2,381 Current maturities of long-term debt
191 50 Accrued liabilities and other current liabilities 1,788
1,624 Long-term debt (less current maturities) 1,564 1,595 Deferred
income taxes 676 805 Long-term retirement benefits 1,597 1,469
Other noncurrent liabilities 277 328 Shareholders' equity 6,249
6,176 $14,516 $14,428 REYNOLDS AMERICAN INC. Reconciliation of GAAP
to Pro-forma GAAP Results The pro-forma GAAP results for the
quarter and nine months ended September 30, 2004, are presented as
if the merger had been completed on January 1, 2004. Third Quarter
Nine Months 2005 2004 2005 2004 Operating income: RAI GAAP $357
$346 $1,241 $833 B&W/Lane GAAP results - 102 - 328 Proforma
adjustments - (98) - (158) RAI pro-forma GAAP $357 $350 $1,241
$1,003 The proforma GAAP operating results include the following
expenses (income): RAI merger/integration costs 36 62 88 87 RAI
loss on sale of assets - - 25 - RAI Phase II growers' trust offset
- - (79) - RAI Phase II growers' trust related expenses 53 - 53 -
RAI federal tobacco buyout assessment 74 - 81 - RJR net
restructuring charges (adjustments) - (7) (1) (25) RJR settlements
- - - 33 B&W merger/integration costs - 20 - 34 B&W
restructuring charge - - - 1 Net income: RAI GAAP $213 $339 $745
$612 B&W/Lane GAAP Results - 60 - 180 Proforma adjustments -
(59) - (79) RAI pro-forma GAAP $213 $340 $745 $713 The proforma
GAAP results include the following expenses (income): RAI
merger/integration costs 22 44 55 60 RAI loss on sale of assets - -
16 - RAI Phase II growers' trust offset - - (49) - RAI Phase II
growers' trust expense 33 - 33 - RAI federal tobacco buyout
assessment 46 - 50 - RJR net restructuring charges (adjustments) -
(4) (1) (14) RJR settlements - - - 20 RJR favorable resolution of
tax matters - (96) - (96) RAI gain on sale of discontinued
operations - - - (1) RAI extraordinary gain on acquisition - (49) -
(49) B&W merger/integration costs - 12 - 21 B&W
restructuring charge - - - 1
http://www.newscom.com/cgi-bin/prnh/20040720/CLTU061LOGO
http://photoarchive.ap.org/ DATASOURCE: Reynolds American Inc.
CONTACT: Investor Relations, Ken Whitehurst, +1-336-741-0951, or
Media, Maura Payne, +1-336-741-6996, both of Reynolds American Inc.
Web site: http://www.reynoldsamerican.com/ http://www.rjrt.com/
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