Reynolds American Profit Down on Charges

Reynolds American Inc. (RAI), the nation's No. 2 tobacco company, on Wednesday reported third-quarter profit slid 37 percent, weighed down by big charges related to payments to tobacco growers and an industry buyout of a tobacco quota plan.

The company lowered its full-year forecast to reflect those charges.

Reynolds, parent of R.J. Reynolds Tobacco Co. (search) , Santa Fe Natural Tobacco Co. (search) and other brands, reported net income of $213 million, or $1.44 per share, for the three months ended Sept. 30 versus a year-ago profit of $339 million, or $2.66 per share. Sales rose 15 percent to $2.15 billion from $1.87 billion a year ago.

The quarter's results include $74 million in payouts for last year's tobacco quota buyout legislation. The nation's cigarette makers agreed to pay $10.1 billion over 10 years to tobacco farmers who own quotas or have the right to grow a set amount of tobacco, ending a system that began in the 1930s. The buyout package was signed into law last October.

Reynolds American also recorded $53 million in so-called Phase II payouts. It was one of the tobacco companies that agreed in 1999 to pay growers and quota-holders $5.1 billion over 12 years to compensate them for reduced demand. The Phase II portion that grew out of the $206 billion settlement of anti-smoking lawsuits filed by 46 states against the nation's largest cigarette makers.

Earlier this year, North Carolina's Supreme Court struck down a lower court ruling that said the tobacco-quota buyout approved by Congress ended the company's obligation to make the Phase II payments.

Wall Street had forecast earnings of $2.02 per share, the average estimate of nine analysts surveyed by Thomson Financial, on estimated sales of $2.07 billion.

Reynolds lowered its forecast for 2005 net income between $940 million to $970 million, or $6.35 to $6.55 per share, from $6.71 to $7.11 per share, reflecting the payouts. Analysts' consensus view for 2005 is $7.15 per share.

Reynolds said the outlook includes quota buyout expenses of about $3 billion, merger-related expenses of $115 million, and merger-related cash costs of about $225 million. The company was formed by last year's combination of R.J. Reynolds Tobacco Holdings and Brown & Williamson.