DOW JONES NEWSWIRES

Reynolds American Inc.'s (RAI) fourth-quarter net income skidded 13%, as the company wrote down brands hit hard by a general decline in cigarette volume.

U.S. cigarette sales volume has been declining, partly due to a more health-conscious attitude among consumers, but also because of higher prices to offset state and federal excise taxes and the payments under a 1998 settlement agreement with states.

Now, Reynolds and its rivals are expected to feel even more pain as a federal excise tax was raised a further 61 cents per pack to $1.

Reynolds, the second-largest U.S. tobacco company behind Altria Group Inc. (MO), reported net income of $258 million, or 89 cents a share, down from $297 million, or $1.01 a share, a year earlier.

Excluding items, including the write-downs and restructuring charges, earnings rose to $1.27 a share from $1.15 a share.

The company said in October its R.J. Reynolds Tobacco subsidiary planned to reduce marketing support for its Kool menthol cigarette brand, which would reduce the value of the Kool trademark as it turned its focus to Camel in the menthol sector. The U.S. menthol market is dominated by Lorillard Inc.'s (LO) Newport brand, with 89% of sales.

Net sales fell 2.4% to $2.18 billion.

Analysts polled by Thomson Reuters were looking for earnings of $1.16 a share on revenue of $2.2 billion.

Gross margin edged down to 46.5% from 46.6% as cigarette volume dropped 5.6%, higher than the industry average of 3.3%.

The R.J. Reynolds Tobacco division saw a 15% drop in operating income as sales fell 3.6%. The company's U.S. market share fell to 28% from 28.5%.

The Conwood division, which makes smokeless-tobacco brands Kodiak and Grizzly, swung to a $43 million loss from net income of $52 million on write-downs, despite revenue rising 6.9%. Total market share rose 1.5 percentage points to 28.2%.

Reynolds and other tobacco companies have entered the smokeless market, aiming to offset declining cigarette sales. Reynolds expanded its Camel Snus smoke-free offering to U.S. major markets last spring and plans to take it national early this year. Reynolds also is continuing to test other smokeless products. Reynolds' bigger rival Altria has also entered the smokeless market, last month completing its acquisition of UST Inc., maker of Skoal and Copenhagen smokeless tobacco products.

Despite the tax hikes, the moist smokeless tobacco sector is expected to flourish because the sector's taxes are still relatively low, Citigroup said in a recent note.

Shares of Reynolds American closed at $38.86 on Tuesday, down 3%, and didn't trade premarket.

-By Mike Barris, Dow Jones Newswires; 201-938-5658; mike.barris@dowjones.com;