<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-17506
UST Inc.
(Exact name of registrant as specified in its charter)
Delaware 06-1193986
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 West Putnam Avenue, Greenwich, CT 06830
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 661-1100
NONE
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Number of Common shares ($.50 par value) outstanding at September 30, 1999,
171,093,376
<PAGE> 2
UST Inc.
(Registrant)
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information:
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statement of Financial Position -
September 30, 1999 and December 31, 1998 2
Condensed Consolidated Statement of Earnings -
Three and nine months ended September 30, 1999 and 1998 3
Condensed Consolidated Statement of Cash Flows -
Nine months ended September 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Operations and
Financial Condition 9
Part II. Other Information:
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
27. Financial Data Schedule
Signature 15
</TABLE>
(1)
<PAGE> 3
UST Inc.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------- -----------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 12,965 $ 33,210
Accounts receivable 74,665 63,269
Inventories:
Leaf tobacco 187,286 178,078
Products in process 94,782 110,752
Finished goods 87,548 66,688
Other materials and supplies 19,531 17,116
----------- -----------
389,147 372,634
Prepaid expenses and other current assets 26,460 24,653
Deferred income taxes 12,265 13,447
----------- -----------
Total current assets 515,502 507,213
Property, plant and equipment, net 348,233 338,695
Other assets 76,282 67,411
----------- -----------
Total assets $ 940,017 $ 913,319
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term obligations $ 91,500 $ --
Accounts payable and accrued expenses 153,039 156,699
Income taxes 41,383 40,617
----------- -----------
Total current liabilities 285,922 197,316
Long-term debt 240,000 100,000
Postretirement benefits other than pensions 80,044 78,567
Other liabilities 66,334 69,143
Contingencies (see note) -- --
----------- -----------
Total liabilities 672,300 445,026
Stockholders' equity
Preferred stock - par value $.10 per share:
Authorized - 10 million shares; issued - none
Common stock - par value $.50 per share:
Authorized - 600 million shares;
issued 208,851,476 shares in 1999
and 208,095,836 shares in 1998 104,426 104,048
Additional paid-in capital 525,191 512,089
Retained earnings 814,545 684,489
Accumulated other comprehensive loss (14,659) (18,420)
----------- -----------
1,429,503 1,282,206
Less cost of shares in treasury - 37,758,100 shares in 1999
and 26,008,500 in 1998 1,161,786 813,913
----------- -----------
Total stockholders' equity 267,717 468,293
----------- -----------
Total liabilities and stockholders' equity $ 940,017 $ 913,319
=========== ===========
</TABLE>
Note: The statement of financial position at December 31, 1998 has been
derived from the audited financial statements at that date.
See Notes to Condensed Consolidated Financial Statements.
(2)
<PAGE> 4
UST Inc.
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 383,367 $ 354,146 $ 1,111,552 $ 1,051,700
Costs and expenses
Cost of products sold 67,487 62,400 191,942 186,837
Excise taxes 7,318 6,433 19,638 18,969
Selling, advertising and administrative 109,712 96,648 320,561 283,695
----------- ----------- ----------- -----------
Total costs and expenses 184,517 165,481 532,141 489,501
----------- ----------- ----------- -----------
Operating income 198,850 188,665 579,411 562,199
Interest expense (income), net 4,030 (1,303) 8,279 (578)
----------- ----------- ----------- -----------
Earnings before income taxes 194,820 189,968 571,132 562,777
Income taxes 75,003 72,215 219,881 213,907
----------- ----------- ----------- -----------
Net earnings $ 119,817 $ 117,753 $ 351,251 $ 348,870
=========== =========== =========== ===========
Net earnings per share
Basic $ .69 $ .63 $ 1.99 $ 1.88
Diluted $ .69 $ .63 $ 1.98 $ 1.87
Dividends per share $ .42 $.40 1/2 $ 1.26 $1.21 1/2
Average number of shares
Basic 173,386 185,919 176,145 185,630
Diluted 174,345 186,674 177,012 186,873
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
(3)
<PAGE> 5
UST Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities $ 338,503 $ 327,151
INVESTING ACTIVITIES
Purchases of property, plant and equipment (36,204) (41,349)
Dispositions of property, plant and equipment 1,544 19,213
Proceeds from the sale of a business -- 20,152
--------- ---------
Net cash used in investing activities (34,660) (1,984)
--------- ---------
FINANCING ACTIVITIES
Proceeds from borrowings 416,900 --
Repayment of borrowings (185,400) (10,000)
Proceeds from the issuance of stock 13,480 24,716
Dividends paid (221,195) (225,678)
Stock repurchased (347,873) --
--------- ---------
Net cash used in financing activities (324,088) (210,962)
--------- ---------
(Decrease) increase in cash and cash equivalents (20,245) 114,205
Cash and cash equivalents at beginning of year 33,210 6,927
--------- ---------
Cash and cash equivalents at end of period $ 12,965 $ 121,132
========= =========
- ------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the period for:
Income taxes $ 217,504 $ 191,315
Interest 3,978 4,243
- ------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
(4)
<PAGE> 6
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999. For further information, refer to
the consolidated financial statements and footnotes thereto included in
Registrant's annual report on Form 10-K for the year ended December 31, 1998.
REPURCHASE OF COMMON STOCK
In 1999, Registrant continued its program, approved in 1996, to repurchase a
portion of its outstanding stock, up to a maximum of 20 million shares. During
the first nine months of 1999, Registrant repurchased 11.2 million shares
costing $347.9 million. Total repurchases as of September 30, 1999, under the
1996 program, were 18.2 million shares. Subsequent to September 30, 1999,
Registrant repurchased shares up to the authorized limit of the 1996 program.
In order to continue its repurchase efforts, the Board of Directors approved a
new stock repurchase program in October 1999, authorizing Registrant to
repurchase up to 20 million shares of its common stock from time to time in
open market or negotiated transactions. This new program commenced immediately
upon the completion of the 1996 program, and shares repurchased will be used in
connection with benefit and compensation plans and other corporate purposes.
COMPREHENSIVE INCOME
Components of comprehensive income for Registrant are net earnings, foreign
currency translation adjustments and additional minimum pension liability
adjustments. For the third quarter of 1999 and 1998, total comprehensive income,
net of taxes, amounted to $119,844,000 and $117,587,000, respectively. For the
first nine months of 1999 and 1998 total comprehensive income, net of taxes, was
$355,012,000 and $341,205,000, respectively.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which provides new accounting rules for
various derivatives and related transactions. In June 1999, the FASB deferred
the effective date of SFAS No. 133 to fiscal quarters of fiscal years beginning
after June 15, 2000. Registrant is currently evaluating the timing of adoption
of SFAS No. 133. No material impact is expected upon adoption of this standard.
(5)
<PAGE> 7
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
EARNINGS PER SHARE
(In thousands, except per share amounts)
The following table presents the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net earnings $119,817 $117,753 $351,251 $348,870
-------- -------- -------- --------
Denominator:
Denominator for basic earnings per share -
weighted-average shares 173,386 185,919 176,145 185,630
Dilutive effect of employee stock options 959 755 867 1,243
-------- -------- -------- --------
Denominator for diluted earnings per share 174,345 186,674 177,012 186,873
======== ======== ======== ========
Basic earnings per share $ .69 $ .63 $ 1.99 $ 1.88
Diluted earnings per share $ .69 $ .63 $ 1.98 $ 1.87
</TABLE>
SEGMENT INFORMATION
Registrant's reportable segments are Tobacco and Wine. Those business units that
do not meet quantitative reportable thresholds are included in all other
operations. Included in all other operations for both periods is Registrant's
international and cigar operations, while the nine months ended September 30,
1998 also includes a divested business. Interim segment information is as
follows:
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
---------------------------- ----------------------------
Net Sales to Unaffiliated Customers: 1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Tobacco $ 330,297 $ 312,079 $ 976,156 $ 928,029
Wine 45,605 34,315 113,914 101,319
All other 7,465 7,752 21,482 22,352
----------- ----------- ----------- -----------
Net sales $ 383,367 $ 354,146 $ 1,111,552 $ 1,051,700
=========== =========== =========== ===========
Operating Profit (Loss):
Tobacco $ 196,925 $ 189,165 $ 583,415 $ 553,578
Wine 5,906 3,561 10,203 13,069
All other (2,164) (1,842) (6,109) 3,540
----------- ----------- ----------- -----------
Operating profit 200,667 190,884 587,509 570,187
Corporate expenses (1,817) (2,219) (8,098) (7,988)
Interest (expense) income, net (4,030) 1,303 (8,279) 578
----------- ----------- ----------- -----------
Earnings before income taxes $ 194,820 $ 189,968 $ 571,132 $ 562,777
=========== =========== =========== ===========
</TABLE>
Registrant's identifiable assets did not change significantly from amounts
appearing in the December 31, 1998 Consolidated Segment Information (See Form
10-K for the year then ended).
(6)
<PAGE> 8
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONTINGENCIES
Registrant has been named in certain health care cost reimbursement/third party
recoupment/class action litigation against the major domestic cigarette
companies and others seeking damages and other relief. The complaints in these
cases on their face predominantly relate to the usage of cigarettes; within that
context, certain complaints contain a few allegations relating specifically to
smokeless tobacco products. These actions are in varying stages of pretrial
activities.
Registrant believes that these pending litigation matters will not result in any
material liability for a number of reasons, including the fact that Registrant
has had only limited involvement with cigarettes and Registrant's current
percentage of total tobacco industry sales is relatively small. Prior to 1986,
Registrant manufactured some cigarette products which had a de minimis market
share. From May 1, 1982 to August 1, 1994, Registrant distributed a small volume
of imported cigarettes and is indemnified against claims relating to those
products.
Registrant has been named in three actions brought by individual plaintiffs, all
of whom are represented by the same Louisiana attorney, against a number of
smokeless tobacco manufacturers, cigarette manufacturers and certain other
organizations seeking damages and other relief in connection with injuries
allegedly sustained as a result of tobacco usage, including smokeless tobacco
products.
Registrant is also named in an action in Illinois brought by an individual
plaintiff and purporting to state a class action "on behalf of himself and all
other persons similarly situated" alleging that Registrant "manipulates the
nicotine levels and absorption rates" in its smokeless tobacco products and
seeking to recover monetary damages "in an amount not less than the purchase
price" of Registrant's smokeless tobacco products and certain other relief. The
purported class excludes all persons who claim any personal injury as a result
of using Registrant's smokeless tobacco products.
Registrant is also named in several actions in West Virginia brought on behalf
of individual plaintiffs against cigarette manufacturers, smokeless tobacco
manufacturers, and other organizations seeking damages and other relief in
connection with injuries allegedly sustained as a result of tobacco usage,
including smokeless tobacco products. Included among the plaintiffs are two
individuals alleging, in addition to the use of other tobacco products, use of
Registrant's smokeless tobacco products and alleging the types of injuries
claimed to be associated with the use of smokeless tobacco products.
Registrant has been named in an action commenced in Nevada by an individual
plaintiff against cigarette and smokeless tobacco manufacturers seeking damages
and other relief for injuries allegedly sustained as a result of his exposure to
environmental tobacco smoke, cigarette smoking and use of smokeless tobacco
products.
Registrant has been named in a wrongful death and survival action in California
brought by a plaintiff, individually and as executrix of decedent's estate, for
injuries allegedly sustained as a result of decedent's use of Registrant's
smokeless tobacco products. Plaintiff seeks compensatory and punitive damages
and other relief.
(7)
<PAGE> 9
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Registrant is also named in an action in San Francisco, California along with
five other smokeless tobacco manufacturers seeking damages and other relief
brought by the City and County of San Francisco and the Environmental Law
Foundation purportedly on behalf of "the residents of San Francisco County and
the general public" alleging violation of The Safe Drinking Water and Toxic
Enforcement Act of 1986, Health and Safety Code Sections 25249.6, et seq.
("Proposition 65") and the California Unfair Competition Act, Business and
Professions Code Sections 17200, et seq. The action alleges, among other things,
that the defendants sold smokeless tobacco products in California without
providing a ". . . 'clear and reasonable' warning that their use results in
multiple exposures to substances known to the State of California to cause
cancer, birth defects and reproductive harm."
Registrant is named in an action in Kentucky seeking more than $400 million in
"actual damages" before trebling, punitive damages and injunctive relief brought
by one of Registrant's competitors alleging that certain actions and practices
of Registrant violate federal antitrust and advertising laws in connection with
the marketing and sale of its moist snuff brands and also alleges various
violations of tort and state law.
Registrant believes, and has been so advised by counsel handling these cases,
that it has a number of meritorious defenses to all such pending litigation.
Except as to Registrant's willingness to consider alternative solutions for
resolving certain regulatory and litigation issues, all such cases are, and will
continue to be, vigorously defended. Registrant believes that the ultimate
outcome of all such pending litigation will not have a material adverse effect
on the consolidated financial position of Registrant, but may have a material
impact on Registrant's consolidated financial results for a particular reporting
period in which resolved.
On August 28, 1996, the Food and Drug Administration (FDA) published regulations
asserting unprecedented jurisdiction over nicotine in tobacco as a "drug" and
purporting to regulate smokeless tobacco products as a "medical device."
Registrant and other smokeless tobacco manufacturers filed suit against the FDA
seeking a judicial declaration that the FDA has no authority to regulate
smokeless tobacco products. On April 25, 1997, a federal district court ruled
that the FDA, as a matter of law, is not precluded from regulating cigarettes
and smokeless tobacco as "medical devices" and implementing certain labeling and
access restrictions. The court, granting Registrant's motion for summary
judgment, also ruled that the FDA has no authority to implement restrictions on
the advertising and promotion of smokeless tobacco products. The court issued an
injunction to prohibit most of the restrictions (labeling, access and
advertising/promotion) set for August 28, 1997 from taking effect, pending
resolution of any appeals and subsequent proceedings; the court also certified
the ruling for interlocutory appeal on the grounds that it involves "controlling
questions of law as to which there is substantial ground for difference of
opinion." On August 14, 1998, the Fourth Circuit Court of Appeals ruled in favor
of Registrant and other tobacco product manufacturers stating that the FDA lacks
jurisdiction to regulate tobacco products and that all of the regulations
published by the FDA on August 26, 1996 are invalid. On January 19, 1999, the
FDA filed a petition for certiorari seeking review of the Fourth Circuit's
ruling by the United States Supreme Court. On April 26, 1999, the United States
Supreme Court announced its intention to review that ruling and oral argument is
scheduled for December 1, 1999; any decision is not expected until 2000.
Registrant is not able to predict the outcome of the appeal, or assess the
future effect that these FDA regulations, if implemented, may have on its
smokeless tobacco business.
(8)
<PAGE> 10
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
(Unaudited)
Results of Operations
Third quarter and nine months of 1999 compared
with the corresponding periods of 1998
CONSOLIDATED RESULTS
Consolidated net sales increased 8.3 percent to $383.4 million for the third
quarter and 5.7 percent to $1,111.6 million for the first nine months of 1999.
Net earnings for the third quarter rose 1.8 percent to $119.8 million, compared
to $117.8 million in 1998. For the first nine months of 1999, net earnings
increased 0.7 percent to $351.3 million over the corresponding 1998 period.
Basic and diluted earnings per share increased 9.5 percent to $.69 per share in
the third quarter of 1999, and for the first nine months basic and diluted
earnings per share increased 5.9 percent to $1.99 and $1.98, respectively.
Results for the third quarter of 1999 include a LIFO inventory benefit of $2.8
million, which is a result of the reorganization of Registrant's tobacco
manufacturing subsidiary, partially offset by tobacco settlement related
charges of $1.6 million. Third quarter 1998 results include tobacco settlement
related charges of $3.1 million and LIFO inventory expense of $0.9 million.
Results for the first nine months of 1999 include tobacco settlement related
charges of $7.7 million, partially offset by a LIFO inventory benefit of $4.5
million. Included in results for the first nine months of 1998 was a $10.7
million gain on the sale of certain commercial agricultural properties and
Registrant's video entertainment subsidiary, partially offset by tobacco
settlement related charges of $7.7 million and LIFO inventory expense of $2.7
million. Excluding these items in the nine month periods, the variance in
diluted earnings per share would have increased 6.4 percent over the same
period in the prior year.
The consolidated gross profit percentage for the third quarter approximated that
of the corresponding 1998 period. For the first nine months of 1999, the gross
profit percentage increased slightly, primarily due to higher selling prices for
moist smokeless tobacco products and the effect of the LIFO inventory benefit,
partially offset by higher wine costs. Corporate expenses for the third quarter
of 1999 decreased slightly versus the third quarter of 1998, while corporate
expenses for the first nine months of 1999 remained level with those of the
corresponding 1998 period. Net interest expense increased to $4.0 million and
$8.3 million for the third quarter and first nine months of 1999, respectively,
as a result of higher average debt outstanding and lower income on cash
equivalent investments as compared to the same periods in 1998.
Income taxes increased for both 1999 periods primarily as a result of a higher
effective tax rate and slightly higher earnings compared with the corresponding
1998 periods.
(9)
<PAGE> 11
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION (Continued)
TOBACCO SEGMENT
For the third quarter of 1999 Tobacco segment net sales increased 5.8 percent to
$330.3 million. Over the first nine months of 1999, Tobacco segment net sales
increased 5.2 percent to $976.2 million. The increase in both periods was
primarily attributable to higher selling prices for our moist smokeless tobacco
products versus both 1998 periods. Net unit volume for moist smokeless tobacco
products increased 1.2 percent to 161.7 million cans and 1.5 percent to 475.0
million cans for the third quarter and first nine months of 1999, respectively.
The increase in both periods is attributable to higher unit sales of
Registrant's non-premium brand, Red Seal, partially offset by lower unit sales
of premium products. Returned goods for both periods were significantly lower
than the corresponding 1998 periods primarily due to improved management of
promotional activities. Returned goods for the first nine months of 1998 were
adversely affected by the initial implementation of Registrant's program to
enhance product freshness at retail and several large promotions run in the
latter part of the previous year.
Cost of products sold decreased 5.2 percent for the third quarter and 4.4
percent for the first nine months of 1999 primarily as a result of lower unit
costs for moist smokeless tobacco products. The resulting lower unit costs
include the effects of the LIFO inventory benefit recorded in the third quarter
and first nine months of 1999, respectively. Tobacco segment gross profit
increased 7.7 percent for the third quarter and 6.9 percent for the first nine
months of 1999 as compared to the corresponding 1998 periods. The increases were
primarily due to the higher selling prices and lower unit costs on Registrant's
moist smokeless tobacco products. Gross profit percentages for both periods
increased slightly versus the prior year periods as a result of these factors.
Selling and advertising expenses for the segment increased significantly for
the third quarter and first nine months of 1999. The increase in both 1999
periods was primarily due to higher spending on promotional activities and
direct marketing initiatives to increase category growth and to be more
competitive in the marketplace. Indirect selling expenses were higher in both
1999 periods primarily due to salaries and related costs, attributable to
additional sales and support personnel in the salesforce. Additionally, for the
nine month period these expenses were higher as a result of increased spending
on sales training and market research. Administrative expenses increased in
both periods primarily as a result of higher salaries and related costs,
increased research and development activities and legal fees. Tobacco related
settlement charges were lower for the third quarter of 1999 and level for the
first nine months of 1999.
Operating profit for the Tobacco segment increased 4.1 percent to $196.9 million
and 5.4 percent to $583.4 million for the third quarter and first nine months of
1999, respectively.
(10)
<PAGE> 12
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION (Continued)
WINE SEGMENT
Wine segment net sales increased 32.9 percent to $45.6 million and 12.4 percent
to $113.9 million for the third quarter and first nine months of 1999,
respectively. The net sales increase in both periods is primarily attributable
to higher unit volume for premium wines. Unit volume for Registrant's two
leading brands of premium wine, Columbia Crest and Chateau Ste. Michelle (which
accounted for more than 71 percent of Wine segment unit sales in both 1999
periods), increased 29.8 percent and 14.0 percent for the third quarter and
first nine months of 1999, respectively, over the corresponding periods in 1998.
Wine unit costs increased for both 1999 periods due to significantly higher
average grape costs associated with prior years' harvests used in production.
The increased unit costs resulted in a decreased gross profit percentage for the
Wine segment for both 1999 periods. For the third quarter, the increased unit
volume for premium wines more than offset the effects of the increased unit
costs resulting in a 23.8 percent increase in Wine segment gross profit, while
gross profit was stable for the nine month period.
Selling, advertising and administrative expenses were higher for both the third
quarter and the first nine months of 1999 compared to the same periods in 1998.
Selling expenses were comparatively stable in both periods. Advertising
expenses were significantly higher for the 1999 periods, primarily as a result
of media spending and point of sale initiatives associated with Registrant's
premium varietal brands. Administrative and other expenses increased in both
1999 periods, principally as a result of higher salaries and related costs.
For the third quarter of 1999, operating profit for the Wine segment increased
65.9 percent to $5.9 million, while for the first nine months of 1999, segment
operating profit declined 21.9 percent to $10.2 million, as compared to the
corresponding 1998 periods.
ALL OTHER OPERATIONS
Net sales for all other operations for the third quarter and the first nine
months of 1999 decreased 3.7 percent to $7.5 million and 3.9 percent to $21.5
million, respectively. The decrease was primarily attributable to lower unit
volume in Registrant's cigar operations, partially offset by higher revenues
from Registrant's international operations. Overall, all other operations
recorded operating losses of $2.2 million and $6.1 million for the third quarter
and first nine months of 1999, respectively, compared to an operating loss of
$1.8 million and operating profit of $3.5 million for the corresponding 1998
periods. Results for the first nine months of 1998 include the effects of the
$10.7 million pretax gain on the sale of certain commercial agricultural
properties and Registrant's video entertainment subsidiary, which was reported
as a reduction to administrative expenses.
(11)
<PAGE> 13
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION (Continued)
LIQUIDITY AND SOURCES OF CAPITAL
CHANGES IN FINANCIAL CONDITION SINCE DECEMBER 31, 1998
Net cash provided by operating activities increased compared to the
corresponding period in the prior year. The primary source of cash from
operations was net earnings generated by the Tobacco segment, while the primary
uses of cash in operations were for raw material inventories, mainly seasonal
purchases of leaf tobacco for moist smokeless tobacco products, and increased
accounts receivable and other assets. Registrant anticipates that 1999 overall
raw material purchases for leaf tobacco and grapes will approximate amounts
expended in 1998.
Net cash used in investing activities was $34.7 million in 1999, compared to
$2.0 million in the prior year. Both periods include expenditures for purchases
of property, plant and equipment. The net cash used in investing activities in
1998 includes the effects of Registrant's disposition of its video entertainment
subsidiary along with the sale of property, plant and equipment, principally
certain commercial agricultural properties. Registrant expects the 1999 capital
program to approximate $63 million.
Net cash used in financing activities increased to $324.1 million in 1999 from
$211.0 million in 1998. The increase in 1999 is primarily due to cash expended
for the repurchase of common stock and the repayment of short-term borrowings,
partially offset by proceeds from additional borrowings. Included in the
proceeds from borrowings are the funds received upon issuance, in the second
quarter of 1999, of $240 million in 10-year senior notes payable. The net
proceeds from the issuance of these notes were primarily used to repay other
outstanding debt. 1998 includes the effect of Registrant's suspension of its
stock repurchase program. Funds allocated to the stock repurchase program for
the remainder of 1999 will approximate $100 million.
Registrant will continue to have significant cash requirements for the remainder
of 1999, primarily for the repurchase of common stock, payment of dividends and
capital spending. These requirements are expected to be met by internally
generated funds supported by additional borrowings, when necessary.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the second quarter of 1999, Registrant executed an interest rate swap
contract with a third party to effectively hedge the interest rate on the $40
million in floating rate 10-year senior notes payable issued on that date. The
$200 million in 10-year senior notes payable is not subject to changes in market
rates of interest as these notes carry a fixed rate of interest.
(12)
<PAGE> 14
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION (Continued)
YEAR 2000 ISSUE
Based on a risk assessment, Registrant has developed plans to address the year
2000 issue. Registrant's year 2000 plan includes both information technology
(IT) systems and non-IT systems and a risk assessment of its major vendors and
customers. Registrant's most critical business system was replaced with year
2000 compliant software in 1998 and all other identified critical business
systems were replaced or modified during the first half of 1999. The assessment
and remediation processes for non-critical business IT systems and non-IT
systems are complete. Final testing of these systems is ongoing and will be
completed during the fourth quarter of 1999.
In order to determine the state of readiness and potential effects on its
business, Registrant has surveyed its major vendors and customers. Registrant
has also completed several site visits of its most critical vendors and
customers. Based upon Registrant's inquiries and site visits, it has determined
that its major vendors and customers appear to have adequately addressed the
year 2000 issue. However, Registrant has no assurance that these vendors and
customers will be year 2000 ready.
Based on currently available information, Registrant estimates that the cost to
become year 2000 compliant will not be material.
Incomplete or untimely resolution of the year 2000 issue by Registrant or
critically important customers or vendors could cause delays in Registrant's
ability to manufacture and ship its products, process transactions or engage in
similar normal business activities, which would have a material financial impact
on Registrant's operations. With the implementation of its year 2000 plan,
Registrant believes the year 2000 issue should not pose any significant
operational problems.
Registrant has developed contingency plans and will evaluate the need for
modifications as additional information becomes available. Registrant's
contingency plans include pre-arranged shipments to customers and stockpiling or
securing alternate sources of manufacturing supplies in order to minimize the
potential disruption of business operations that may result if its vendors or
customers fail to become year 2000 compliant.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Reference is made to the section captioned "Cautionary Statement Regarding
Forward-Looking Information" which was filed as part of Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Registrant's 1998 Form 10-K, and in the registration statement on Form S-4,
dated August 16, 1999 and in the first and second quarters' Forms 10-Q regarding
important factors that could cause actual results to differ materially from
those contained in any forward-looking statement made by Registrant, including
forward-looking statements contained in this report.
(13)
<PAGE> 15
UST Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In Roger L. Campbell v. American Tobacco Company, et al.,
(File No. 98CVS1064), General Court of Justice, Superior Court
Division, Guilford County, North Carolina, on October 8, 1999,
the court entered an Order dismissing the action with
prejudice.
On September 22, 1999, Registrant was served with a Summons
and Complaint in an action entitled Amy Leslie, individually
and as Executor of the Estate of Robert Leslie v. United
States Tobacco Company, et al., (No. C99-2874-VRW), United
States District Court, Northern District of California. This
wrongful death and survival action, brought against
Registrant only, seeks compensatory and punitive damages and
other relief for "fatal cancer of the mouth" allegedly
sustained by Plaintiff's decedent as a result of his use of
Registrant's smokeless tobacco products.
On September 24, 1999, Registrant was served with a Second
Supplemental and Amending Complaint for Damages in an action
entitled Robert Murphy v. The American Tobacco Company, et al
(No. CV-S-98-00021-HDM)(RJJ), United States District Court,
District of Nevada, brought by an individual plaintiff against
cigarette and smokeless tobacco manufacturers for injuries
allegedly sustained as a result of his exposure to
environmental tobacco smoke, cigarette smoking and use of
smokeless tobacco products. Plaintiff alleges that he was
"diagnosed with throat cancer" and that his throat cancer "was
caused by his use of smokeless tobacco" or, alternatively,
that his throat cancer was caused by his "smoking cigarettes
and/or his exposure to second hand smoke". Further, Plaintiff
alleges that he "was diagnosed with lung cancer and chest wall
cancer" and that "his direct smoking and second hand exposure
caused his cancers and injuries". Alternatively, he alleges
"his cancers were caused by all of defendants' products,
including smokeless tobacco". Plaintiff seeks compensatory
damages and other relief.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
On August 24, 1999, Registrant filed a Current Report on Form
8-K which reported an exchange offer pursuant to the filing of
a registration statement on Form S-4 relating to the
registration of $200 million of new 7.25% senior notes due
June 1, 2009 and $40 million of new floating rate senior notes
due June 1, 2009.
(14)
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UST Inc.
(Registrant)
Date November 12, 1999 /s/ Robert T. D'Alessandro
----------------- -----------------------------------------
Robert T. D'Alessandro
Senior Vice President and Controller
(Principal Accounting Officer and
Principal Financial Officer)
(15)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION AND CONDENSED
CONSOLIDATED STATEMENT OF EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS. (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS).
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 12,965
<SECURITIES> 0
<RECEIVABLES> 74,665
<ALLOWANCES> 0
<INVENTORY> 389,147
<CURRENT-ASSETS> 515,502
<PP&E> 616,616
<DEPRECIATION> 268,383
<TOTAL-ASSETS> 940,017
<CURRENT-LIABILITIES> 285,922
<BONDS> 240,000
0
0
<COMMON> 104,426
<OTHER-SE> 163,291
<TOTAL-LIABILITY-AND-EQUITY> 940,017
<SALES> 1,111,552
<TOTAL-REVENUES> 1,111,552
<CGS> 211,580
<TOTAL-COSTS> 211,580
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,279
<INCOME-PRETAX> 571,132
<INCOME-TAX> 219,881
<INCOME-CONTINUING> 351,251
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 351,251
<EPS-BASIC> 1.99
<EPS-DILUTED> 1.98
</TABLE>
