Reynolds American cuts debt in quarter, boasts 1.5x leverage ratio

By Paul Deckelman

New York, Oct. 21 - Reynolds American Inc. continued to cut debt during the third quarter ended Sept. 30, company executives said in a conference call with analysts on Thursday after the Winston-Salem, N.C.-based cigarette and tobacco products manufacturer released its results for the quarter.

The chief financial officer, Thomas R. Adams, noted that the company repaid $300 million of maturing debt on July 15 out of available cash, leaving it with a $2.3 billion cash balance as of Sept. 30.

Powered by revenue increases as well as better adjusted operating income and margins at its two component subsidiaries, that cash balance was still up from the $1.6 billion balance, which Reynolds reported following the end of the second quarter on June 30.

At the previous quarter's end, the company had made its annual $2 billion payment under the terms of the master settlement agreement, which Reynolds and other cigarette manufacturers entered into in 1998 with the attorneys general from 46 states to settle state lawsuits against the tobacco industry.

Pension move to cut leverage

Adams said that Reynolds had an end-of-third-quarter leverage ratio of debt to EBITDA of 1.5 times.

In response to an analyst's question, the CFO said that the company is trying to target a ratio between 1.5x and 2.5x.

He elaborated that "clearly on the debt side, we're at 1.5x today," but added that, including pension-plan obligations - Reynolds will contribute an additional $500 million to its employee pension plans in the fourth quarter - the overall ratio is "more like at 2x."

However, he said that after the obligation is paid, "we'll tick that down to about 1.8x, so we're strengthening the balance sheet by doing this."

He further noted that the pension payment is deductable under the federal tax code, "so frankly, it only costs us 60 cents on the dollar in cash."

No debt buybacks on horizon

There was no discussion during the call of any potential buying back of debt.

Reynolds closed out the third quarter with long-term debt, less current maturities, of some $3.71 billion. That compares with $3.719 billion at the end of the second quarter, $4.127 billion at the end of the first quarter on March 31, and $4.136 billion at the end of the previous fiscal year and fourth quarter on Dec. 31, 2009.

Adams said that Reynolds "continue[s] to evaluate additional opportunities to effectively use our cash and return value to our shareholders." In answering an analyst's query, he said that the idea of buying back shares in 2011 is "in the mix," but added that there has been no decision on that.

Solid results for quarter

For the quarter, the maker of such well-known brands as Camel, Pall Mall and Winston as well as snuff and other smokeless tobacco products posted earnings of $381 million, or $1.30 per share, helped by higher cigarette prices, which offset a 2.6% falloff in the actual overall number of cigarettes sold, as rising prices and health concerns appeared to take their toll. The third-quarter numbers were up 4.8% from earnings of $362 million, or $1.24 per share, in the year-ago quarter.

Excluding special items, such as costs related to plant closings and changes in its marketing set-up, Reynolds earned $1.35 per share, about a penny per share more than Wall Street was anticipating.

Revenues of $2.239 billion, up 4% from $2.152 billion a year ago, came in above analysts' consensus expectations around $2.2 billion.

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