CORRECT: 2nd UPDATE: Reynolds American 2Q Profit Slips 11%, Narrows View

NEW YORK (Dow Jones)--Reynolds American Inc.'s (RAI) second-quarter earnings slipped 11% as the company booked a litigation charge and saw costs rise.

Still, the company raised the low end of its full-year earnings forecast by 2 cents a share, now expecting $2.62 to $2.70 a share, as higher cigarette and smokeless-tobacco prices work their way down to the bottom line.

Shares fell 5.9% to $36.24 in recent trading, as results for the latest period missed analyst expectations. The stock has gained 18% year-to-date through Thursday's close.

Reynolds American, the nation's second-largest tobacco company behind Altria Group Inc. (MO), continues to see cigarette volumes decline on demographic changes and widespread public-smoking bans. The company in recent years has turned its attention to a few core brands, such as Pall Mall and Camel, and is looking to smokeless products like its Grizzly moist snuff for growth.

Reynolds and its competitors have managed to offset volume declines with higher pricing. On Wednesday, Altria reported revenue from cigarettes rose 3.6% excluding excise tax even though volume slid 0.7%. Lorillard Inc. (LO), the third major U.S. tobacco manufacturer, reports results next week.

Despite the industry tumult, manufacturers have generally appeased shareholders by increasing dividends and buying back stock. Reynolds American Chief Financial Officer Thomas Adams said the company--which doesn't currently have a share repurchase program--will have significant capital investments into 2012 as it pays for changes to its sales structure and the litigation charge and contributes to its underfunded pension. However, Adams said the board continues to discuss shareholder returns.

For the latest period, Reynolds reported a profit of $304 million, or 52 cents a share, down from $341 million, or 58 cents a share, a year earlier. Excluding a court settlement and other items, adjusted earnings rose to 67 cents a share from 66 cents. Net sales edged up 1% to $2.267 billion.

Analysts polled by Thomson Reuters had expected earnings of 71 cents a share on $2.27 billion.

In June, the U.S. Supreme Court rejected the tobacco industry's appeal of a long-running lawsuit, requiring the companies to fund a Louisiana smoking-cessation program.

R.J. Reynolds Tobacco, the company's cigarette unit, saw its top line increase 0.7% to $1.96 billion as domestic volume fell 4.4%. Accounting for the elimination of private-label brands, volume fell 3.6%, still below the industrywide decline of 1.3%. Total market share, excluding private label brands, was unchanged from a year ago at 27.3%.

Growth brands, which include Camel and Pall Mall, gained 1.5 points of market share to hold 16.3% of the market.

The quarter saw "intense competitive activity," Chief Executive Daniel Delen said, and sales continue to struggle due to continued economic weakness. He said the company is focused on balancing profitability and market-share growth, and competitors were more aggressive in their promotional activity in April and May.

At the American Snuff unit, which makes Grizzly- and Kodiak-brand moist snuff, revenue fell 16% to $153 million, as the prior year included Lane Ltd, which was sold earlier this year. Volume rose 3.6%, with market share increasing 1.5 points to 31.3%.

Though smokeless tobacco has been a strong point for Reynolds American, the market is growing crowded. Altria has extended its Skoal product line, pricing the new products level with Reynolds American's Grizzly. Copenhagen Wintergreen, also made by Altria, has similar pricing, making for what Stifel Nicolaus analysts called "a formidable obstacle" to the business.

-By Melissa Korn, Dow Jones Newswires; 212-416-2271; melissa.korn@dowjones.com

-Mia Lamar contributed to this story.

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