Note 12 — Shareholders’ Equity
RAI’s authorized capital stock at December 31, 2013 and 2012, consisted of 100 million shares of preferred stock, par value $.01 per share, and 1.6 billion shares of common stock, par value $.0001 per share. Four million shares of the preferred stock are designated as Series A Junior Participating Preferred Stock, none of which is issued or outstanding. The Series A Junior Participating Preferred Stock will rank junior as to dividends and upon liquidation to all other series of RAI preferred stock, unless specified otherwise. Also, of the preferred stock, one million shares are designated as Series B Preferred Stock, all of which are issued and outstanding. The Series B Preferred Stock ranks senior upon liquidation, but not with respect to dividends, to all other series of RAI capital stock, unless specified otherwise. As a part of the B&W business combination, RJR is the holder of the outstanding Series B Preferred Stock. In each of 2013, 2012 and 2011, RAI declared $43 million in dividends to RJR with respect to the Series B Preferred Stock.
In 2004, RAI’s board of directors adopted a shareholder rights plan, pursuant to which RAI declared a dividend of one preferred stock purchase right on each share of RAI common stock outstanding on July 30, 2004. The board also authorized the issuance of rights for each share of RAI common stock issued after the dividend record date, until the occurrence of certain specified events. By virtue of RAI’s two-for-one stock split in both 2006 and 2010, the number of rights associated with each share of RAI common stock is .25. The rights will expire on July 30, 2014, unless earlier redeemed, exercised or exchanged under the terms of the rights plan.
The rights are not exercisable until a distribution date that is the earlier of:
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ten days following an announcement that a person or group, other than BAT and its subsidiaries, except in certain circumstances, has acquired beneficial ownership of at least 15% of RAI common stock, and |
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ten business days, or such later date as may be determined by the board, following the announcement of a tender offer which would result in a person becoming an acquiring person. |
If the acquiring person or tender offeror is BAT or one of its subsidiaries, then the foregoing 15% threshold is subject to adjustment. The rights are initially exercisable for 1/100th of a share of RAI’s Series A Junior Participating Preferred Stock at a purchase price of $130, subject to adjustment. Each fractional share of such preferred stock would give the holder approximately the same dividend, voting and liquidation rights as does one share of RAI common stock. Until the distribution date, the rights will be evidenced by RAI common stock certificates and trade with such shares. Upon the occurrence of certain events after the distribution date, holders of rights, other than the acquiring person, will be entitled to receive upon exercise of the right, in lieu of shares of preferred stock, RAI common stock or common stock of the acquiring corporation having in either case a market value of two times the exercise price of the right.
RAI’s board of directors declared the following quarterly cash dividends per share of RAI common stock in 2013, 2012 and 2011:
| 2013 | 2012 | 2011 | ||||||||||
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First |
$ | 0.59 | $ | 0.56 | $ | 0.53 | ||||||
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Second |
$ | 0.63 | $ | 0.59 | $ | 0.53 | ||||||
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Third |
$ | 0.63 | $ | 0.59 | $ | 0.53 | ||||||
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Fourth |
$ | 0.63 | $ | 0.59 | $ | 0.56 | ||||||
Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive loss, net of tax, for the year ended December 31, 2013, were as follows:
| Retirement Benefits |
Unrealized Gain (Loss) on Long- Term Investments |
Realized Loss on Hedging Instruments |
Cumulative Translation Adjustment and Other |
Total | ||||||||||||||||
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Balance at December 31, 2012 |
$ | (265 | ) | $ | (21 | ) | $ | (14 | ) | $ | (11 | ) | $ | (311 | ) | |||||
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Other comprehensive income before reclassifications |
271 | 5 | — | 1 | 277 | |||||||||||||||
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Amounts reclassified from accumulated other comprehensive income (loss) |
(23 | ) | — | 1 | — | (22 | ) | |||||||||||||
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Net current-period other comprehensive income |
248 | 5 | 1 | 1 | 255 | |||||||||||||||
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Balance at December 31, 2013 |
$ | (17 | ) | $ | (16 | ) | $ | (13 | ) | $ | (10 | ) | $ | (56 | ) | |||||
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Details about the reclassifications out of accumulated other comprehensive loss and the affected line items in the consolidated statement of income for the year ended December 31, 2013, were as follows:
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Components |
Amounts Reclassified |
Affected Line Item |
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Defined benefit pension and postretirement plans: |
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Amortization of prior service costs |
$ | (21 | ) | Cost of products sold | ||
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Amortization of prior service costs |
(18 | ) | Selling, general and administrative expenses | |||
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| (39 | ) | |||||
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Deferred taxes |
16 | Provision for income taxes | ||||
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Net of tax |
$ | (23 | ) | |||
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Loss on hedging instruments: |
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Amortization of realized loss |
$ | 2 | Interest and debt expense | |||
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Deferred taxes |
(1 | ) | Provision for income taxes | |||
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Net of tax |
$ | 1 | ||||
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Total reclassifications |
$ | (22 | ) | Net income | ||
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Share Repurchases and Other
On November 14, 2011, the board of directors of RAI authorized the repurchase, from time to time on or before mid-2014, of up to $2.5 billion of outstanding shares of RAI common stock in open-market or privately negotiated transactions. The repurchases are subject to prevailing market and business conditions, and the program may be terminated or suspended at any time. In connection with the share repurchase program, RAI and B&W entered into an agreement, pursuant to which B&W has agreed to participate in the repurchase program on a basis approximately proportionate with B&W’s 42% ownership of RAI’s common stock. RAI, B&W and BAT also entered into Amendment No. 3 to the governance agreement, pursuant to which RAI has agreed that, so long as B&W’s ownership interest has not dropped below 25%, if RAI issues shares of its common stock or any other RAI equity security to certain designated persons, including its directors, officers or employees, then RAI will repurchase a number of shares of outstanding RAI common stock so that the number of outstanding shares of RAI common stock are not increased, and B&W’s ownership interest is not decreased, by such issuance after taking into account such repurchase.
During 2013, RAI repurchased and cancelled 15,917,174 shares for $750 million, resulting in total repurchases of 47,638,044 shares for $2.1 billion as of December 31, 2013. Due to RAI’s incorporation in North Carolina, which does not recognize treasury shares, the shares are cancelled at the time of repurchase.
The RAI Long-Term Incentive Plan, referred to as the LTIP, a plan which expired in 2009, was replaced by the Reynolds American Inc. 2009 Omnibus Incentive Plan, referred to as the Omnibus Plan, which was approved by the shareholders of RAI in 2009.
Restricted stock units granted in March 2010 under the Omnibus Plan vested in March 2013 and were settled with the issuance of 1,572,389 shares of RAI common stock. In addition, during the year ended December 31, 2013, at a cost of $25 million, RAI purchased 574,383 shares that were forfeited and cancelled with respect to tax liabilities associated with restricted stock units vesting under the Omnibus Plan.
Changes in RAI common stock outstanding were as follows:
| 2013 | 2012 | 2011 | ||||||||||
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Shares outstanding at beginning of year |
552,940,767 | 576,135,199 | 583,043,872 | |||||||||
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LTIP shares forfeited |
— | — | (433 | ) | ||||||||
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LTIP tax shares repurchased and cancelled |
— | (921,646 | ) | (162,257 | ) | |||||||
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LTIP shares issued from vesting of restricted stock units |
— | 2,640,408 | — | |||||||||
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Omnibus Plan tax shares repurchased and cancelled |
(574,383 | ) | — | — | ||||||||
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Omnibus Plan shares issued from vesting of restricted stock units |
1,572,389 | — | — | |||||||||
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Shares repurchased and cancelled |
(15,917,174 | ) | (24,944,233 | ) | (6,776,637 | ) | ||||||
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Equity incentive award plan shares issued |
31,425 | 31,039 | 30,654 | |||||||||
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Shares outstanding at end of year |
538,053,024 | 552,940,767 | 576,135,199 | |||||||||
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