<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, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-17506
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UST Inc.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 06-1193986
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 West Putnam Avenue, Greenwich, CT 06830
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(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (203) 661-1100
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NONE
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(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, 2000
162,904,016
<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, 2000 and December 31, 1999 2
Condensed Consolidated Statement of Earnings -
Three and nine months ended September 30, 2000 and 1999 3
Condensed Consolidated Statement of Cash Flows -
Nine months ended September 30, 2000 and 1999 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Operations and
Financial Condition 11
Part II. Other Information:
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 16
27. Financial Data Schedule
Signature 17
</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,
2000 1999
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 178,102 $ 74,989
Accounts receivable 75,210 64,349
Inventories:
Leaf tobacco 186,344 189,414
Products in process 115,287 116,291
Finished goods 94,795 75,757
Other materials and supplies 22,371 22,007
----------- -----------
418,797 403,469
Prepaid expenses and other current assets 26,930 26,709
Deferred income taxes 9,972 10,508
----------- -----------
Total current assets 709,011 580,024
Property, plant and equipment, net 362,343 361,882
Other assets 84,732 73,742
----------- -----------
Total assets $ 1,156,086 $ 1,015,648
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt $ -- $ 70,965
Accounts payable and accrued expenses 130,178 144,678
Income taxes 112,971 45,684
----------- -----------
Total current liabilities 243,149 261,327
Long-term debt 540,000 411,000
Postretirement benefits other than pensions 81,379 80,547
Other liabilities 64,303 61,970
Contingencies (see note) -- --
----------- -----------
Total liabilities 928,831 814,844
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 204,725,616 shares in 2000
and 208,936,586 shares in 1999 102,363 104,468
Additional paid-in capital 525,711 526,676
Retained earnings 841,576 861,816
Accumulated other comprehensive loss (12,131) (12,277)
----------- -----------
1,457,519 1,480,683
Less cost of shares in treasury - 41,821,600 shares in 2000
and 42,129,500 in 1999 1,230,264 1,279,879
----------- -----------
Total stockholders' equity 227,255 200,804
----------- -----------
Total liabilities and stockholders' equity $ 1,156,086 $ 1,015,648
=========== ===========
</TABLE>
Note: The statement of financial position at December 31, 1999 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,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 389,862 $ 383,367 $1,150,198 $1,111,552
Costs and expenses
Cost of products sold 74,302 67,487 211,522 191,942
Excise taxes 8,871 7,318 25,863 19,638
Selling, advertising and administrative 115,603 109,712 356,166 320,561
---------- ---------- ---------- ----------
Total costs and expenses 198,776 184,517 593,551 532,141
---------- ---------- ---------- ----------
Operating income 191,086 198,850 556,647 579,411
Interest, net 8,186 4,030 25,427 8,279
---------- ---------- ---------- ----------
Earnings before income taxes 182,900 194,820 531,220 571,132
Income taxes 70,402 75,003 204,511 219,881
---------- ---------- ---------- ----------
Net earnings $ 112,498 $ 119,817 $ 326,709 $ 351,251
========== ========== ========== ==========
Net earnings per share
Basic $ .69 $ .69 $ 2.00 $ 1.99
Diluted $ .69 $ .69 $ 2.00 $ 1.98
Dividends per share $ .44 $ .42 $ 1.32 $ 1.26
Average number of shares
Basic 162,624 173,386 163,272 176,145
Diluted 162,966 174,345 163,453 177,012
</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,
-------------------------------
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities $ 375,436 $ 342,167
INVESTING ACTIVITIES
Purchases of property, plant and equipment (43,000) (36,204)
Dispositions of property, plant and equipment 14,225 1,544
--------- ---------
Net cash used in investing activities (28,775) (34,660)
FINANCING ACTIVITIES
Proceeds from borrowings 300,000 416,900
Repayment of borrowings (241,965) (185,400)
Proceeds from the issuance of stock 11,218 9,816
Dividends paid (215,331) (221,195)
Stock repurchased (97,470) (347,873)
--------- ---------
Net cash used in financing activities (243,548) (327,752)
--------- ---------
Increase (decrease) in cash and cash equivalents 103,113 (20,245)
Cash and cash equivalents at beginning of year 74,989 33,210
--------- ---------
Cash and cash equivalents at end of period $ 178,102 $ 12,965
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Income taxes $ 137,528 $ 217,504
Interest 25,186 3,978
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
(4)
<PAGE> 6
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(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, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000. 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, 1999.
Certain 1999 amounts reported on the Consolidated Statement of Cash Flows have
been reclassified to conform to the 2000 presentation as required by Emerging
Issues Task Force (EITF) Issue No. 00-15, "Classification in the Statement of
Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a
Nonqualified Employee Stock Option."
CAPITAL STOCK
In 2000, Registrant repurchased 4.7 million shares costing $97.5 million. The
repurchases were pursuant to Registrant's authorized program to repurchase its
outstanding common stock up to a maximum of 20 million shares. As of September
30, 2000, 7.2 million shares were repurchased under this program. Registrant
suspended its stock repurchase program at the end of the first quarter due to
its antitrust litigation.
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 2000 and 1999, total comprehensive income,
net of taxes, amounted to $112,303,000 and $119,844,000, respectively. For the
first nine months of 2000 and 1999 total comprehensive income, net of taxes, was
$326,855,000 and $355,012,000, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2000, the EITF reached a consensus on Issue No. 00-14, "Accounting for
Certain Sales Incentives." The income statement reclassifications required by
this new rule will not affect Registrant's operating income or net earnings.
Additionally, at their September meeting, the EITF further discussed sales
incentive-related issues in Issue No. 00-25, "Accounting for Consideration from
a Vendor to a Retailer in Connection with the Purchase or Promotion of the
Vendor's Products," however no consensus was reached. A final decision on this
issue could modify and/or expand selected conclusions reached in Issue No.
00-14. Registrant is currently evaluating its application of these new rules,
which it plans to adopt in the fourth quarter of 2000, barring any additional
revisions to the EITF's adoption provisions.
(5)
<PAGE> 7
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Additionally, effective January 1, 2001, Registrant will adopt Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which requires all companies to recognize derivatives
at fair value on the balance sheet as assets or liabilities. Registrant does not
anticipate that this adoption will have a material impact on its consolidated
results of operations, financial position or cash flows.
OTHER MATTERS
On October 10, 2000, Registrant deposited $330 million and a letter of credit in
the amount of $170 million with the U.S. District Court (the "District Court")
in connection with the bonding requirements imposed by the District Court for
the antitrust litigation involving its smokeless tobacco subsidiary.
In conjunction with the posting of the bond, Registrant entered into a new
senior secured $1 billion financing agreement (the "New Credit Facility")
comprised of a (1) $300 million 364-day revolving credit facility, (2) a $370
million three-year term loan facility (which includes a $170 million letter of
credit commitment) and (3) a four and one-half year $330 million term loan
facility (which was drawn down and used to make the October 10, 2000 deposit
with the District Court). The New Credit Facility, which replaces the existing
facility, is secured by a first priority perfected lien and security interest in
Registrant's cash and cash equivalents, investments, accounts receivable, tax
claims and inventory.
The New Credit Facility requires, among other things, that additional cash
deposits be made with the District Court to reduce the principal amount of the
letter of credit and, once the principal amount of the letter of credit is
reduced to zero, for cash deposits to be made from time to time into a
collateral account to be established by the lenders.
Provisions of the New Credit Facility require the maintenance of certain
financial ratios, and include restrictions on yearly capital expenditures and
other transactions, as defined in the agreement. Terms of the credit facility
also permit Registrant to increase cash dividends by up to 5 percent annually.
Registrant expects to incur net annual costs of approximately $12 million, which
includes annual commitment fees and amortization of debt costs, so long as it is
required to maintain the security with the District Court. Actual costs will
depend upon, among other things, Registrant's debt rating in effect from time to
time. Approximately $17 million of debt costs were capitalized in the fourth
quarter of 2000 and will be amortized over the life of the New Credit Facility.
Registrant anticipates that if it ultimately prevails on appeal, some or all of
the costs associated with the bonding requirement could be recoverable from the
plaintiff.
In March 2000, Registrant issued $300 million aggregate principal amount of 8.8
percent fixed rate senior notes. These notes mature on March 15, 2005, with
semiannual interest payments. Costs associated with the issuance of the notes
have been capitalized and are being amortized over the term of the notes.
Capitalized costs were immaterial.
(6)
<PAGE> 8
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,
--------- --- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net earnings $112,498 $119,817 $326,709 $351,251
-------- -------- -------- --------
Denominator:
Denominator for basic earnings per share -
weighted-average shares 162,624 173,386 163,272 176,145
Dilutive effect of employee stock options 342 959 181 867
-------- -------- -------- --------
Denominator for diluted earnings per share 162,966 174,345 163,453 177,012
======== ======== ======== ========
Basic earnings per share $ .69 $ .69 $ 2.00 $ 1.99
Diluted earnings per share $ .69 $ .69 $ 2.00 $ 1.98
</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. Interim segment information is as follows:
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
------------- -------------
Net Sales to Unaffiliated Customers: 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Tobacco $ 335,106 $ 330,297 $ 1,007,116 $ 976,156
Wine 46,939 45,605 120,856 113,914
All other 7,817 7,465 22,226 21,482
----------- ----------- ----------- -----------
Net sales $ 389,862 $ 383,367 $ 1,150,198 $ 1,111,552
=========== =========== =========== ===========
Operating Profit (Loss):
Tobacco $ 190,530 $ 196,925 $ 566,912 $ 583,415
Wine 6,115 5,906 9,751 10,203
All other (2,170) (2,164) (5,964) (6,109)
----------- ----------- ----------- -----------
Operating profit 194,475 200,667 570,699 587,509
Corporate expenses (3,389) (1,817) (14,052) (8,098)
Interest, net (8,186) (4,030) (25,427) (8,279)
----------- ----------- ----------- -----------
Earnings before income taxes $ 182,900 $ 194,820 $ 531,220 $ 571,132
=========== =========== =========== ===========
</TABLE>
Registrant's identifiable assets did not change significantly from amounts
appearing in the December 31, 1999 Consolidated Segment Information except
corporate assets which increased due to the accumulation of cash. (See Form 10-K
for the year then ended).
(7)
<PAGE> 9
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 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 two actions brought by individual plaintiffs, both
of which 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 certain 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 six
individuals alleging use of Registrant's smokeless tobacco products and alleging
the types of injuries claimed to be associated with the use of smokeless tobacco
products; five of the six individuals also allege the use of other tobacco
products.
Registrant has been named in an action in Florida by an individual plaintiff and
his spouse seeking damages and other relief for personal injuries, including
"cancer of the tongue," allegedly sustained by plaintiff as a result of his use
of Registrant's smokeless tobacco products.
Registrant is named in an action in San Francisco, California along with five
other smokeless tobacco manufacturers seeking unspecified 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."
(8)
<PAGE> 10
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONTINGENCIES (Continued)
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 September 11, 2000, Registrant filed its notice of appeal to the United
States Court of Appeals for the Sixth Circuit from the final and interlocutory
orders entered by the District Court in connection with the Conwood litigation.
On October 10, 2000, Registrant satisfied the $500 million bonding requirement
imposed by the District Court. Registrant believes that the evidence presented
at trial was insufficient to support the jury verdict and, as a result,
believes that, while there can be no assurances, the judgment should ultimately
be reversed on appeal. Registrant is not presently able to reasonably estimate
the amount of damages, if any, which may be ultimately imposed and,
accordingly, no charge relating to the judgment is reflected in Registrant's
financial statements. While Registrant believes that the judgment should
ultimately be reversed, if the adverse judgment is sustained after all appeals,
satisfaction of the judgment is likely to have a material adverse effect on
Registrant's consolidated financial results for a particular year, but is not
expected to have a material adverse effect on Registrant's consolidated
financial position.
Registrant was also named in two purported class actions filed in state court in
Tennessee and New Mexico on behalf of putative class members who were indirect
purchasers of smokeless tobacco products manufactured by Registrant during the
period April 1996 through March 28, 2000, alleging that Registrant has violated
the antitrust laws, unfair or deceptive trade practices statutes and the common
law of certain states. The plaintiffs seek to recover compensatory and statutory
damages in an amount not to exceed $74,000 after trebling per putative class
member, and certain other relief. The actions are similar in all material
respects and are derived directly from the Conwood litigation and therefore will
need to overcome the same issues raised by Registrant in its post-trial motions
discussed above. Even if Conwood were ultimately to prevail on issues which
Registrant will challenge on appeal, the plaintiffs in these two actions will
still need to establish additional elements before liability can be imposed upon
Registrant. Registrant believes that it has meritorious defenses in this regard,
and that the ultimate outcome of these purported class actions will not have a
material adverse effect on its consolidated financial position, although if
plaintiffs were to prevail, these actions could have a material impact on its
consolidated financial results for a particular reporting period in which
resolved.
(9)
<PAGE> 11
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONTINGENCIES (Continued)
Registrant was also named in two actions, an individual action and a purported
class action, filed in federal court in Washington D.C. by
wholesalers/distributors of Registrant's smokeless tobacco products. Other than
the fact that one purports to be a class action, the two actions are similar in
all material respects, contain the same substantive allegations, and were
brought by the same plaintiffs' counsel. Plaintiffs allege that Registrant
engaged in conduct that violates the federal antitrust laws, including Sections
1 and 2 of the Sherman Act and Section 3 of the Clayton Act, and that
Registrant engaged in this conduct unilaterally and in concert with "its
co-conspirators (including various retailers and distributors)". Plaintiffs
seek to recover unspecified statutory damages, before trebling, and certain
equitable and other relief. These two actions are derived directly from the
Conwood litigation and therefore will need to overcome the same issues raised
by Registrant in its post-trial motions discussed above. Even if Conwood were
ultimately to prevail on issues which Registrant will challenge on appeal, the
plaintiffs in these two actions will still need to establish additional
elements before liability can be imposed upon Registrant. Registrant believes
that it has meritorious defenses in this regard, and that the ultimate outcome
of these actions will not have a material adverse effect on its consolidated
financial position, although if plaintiffs were to prevail, these actions could
have a material impact on its consolidated financial results for a particular
reporting period in which resolved.
(10)
<PAGE> 12
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
(Unaudited)
Results of Operations
Third quarter and nine months of 2000 compared
with the corresponding periods of 1999
CONSOLIDATED RESULTS
Consolidated net sales increased 1.7 percent and 3.5 percent to $389.9 million
and $1,150.2 million for the third quarter and first nine months of 2000,
respectively. Operating income decreased 3.9 percent for both 2000 periods to
$191.1 million for the third quarter and $556.6 million for the first nine
months, as compared to the corresponding 1999 periods. In the third quarter of
2000, net earnings decreased 6.1 percent to $112.5 million, while basic and
diluted earnings per share remained level at $0.69 per share. For the nine
months ended September 30, 2000, net earnings decreased 7 percent from the
corresponding 1999 period to $326.7 million. Both basic and diluted earnings
per share were $2.00 for the first nine months of 2000, an increase of 0.5
percent for basic and 1 percent for diluted earnings per share compared to the
first nine months of 1999. The consolidated gross profit percentage decreased
slightly for both 2000 periods. Higher selling prices for moist smokeless
tobacco products were more than offset by increased unit costs and changes in
product mix. Corporate expenses increased significantly, primarily due to
higher professional fees in both periods and hedging losses recognized for the
March 2000 debt issuance in the nine-month period. Net interest expense
increased significantly to $8.2 million and $25.4 million for the third quarter
and first nine months of 2000, respectively, as higher average debt levels at
higher interest rates were partially offset by increased income generated from
accumulated cash. Income taxes decreased for both 2000 periods versus the
corresponding 1999 periods, due to lower earnings before taxes. The effective
tax rates for both periods were level with the similar 1999 periods.
TOBACCO SEGMENT
Tobacco segment net sales increased 1.5 percent to $335.1 million and 3.2
percent to $1,007.1 million for the third quarter and first nine months of 2000,
respectively, accounting for 87.6 percent of year-to-date consolidated net
sales. The net sales increase for both 2000 periods included higher selling
prices for all moist smokeless tobacco products, higher unit volume for
price-value products and lower unit volume for premium products. Net unit volume
for moist smokeless tobacco products decreased 2.9 percent to 157.1 million cans
for the third quarter, while increasing 0.5 percent to 477.3 million cans for
the first nine months of 2000. Price-value products contributed an additional
4.3 million cans and 14.6 million cans to the third quarter and nine-month
periods of 2000, respectively. The value conversion from 1.0 oz. to 1.2 oz. for
Registrant's Skoal Long Cut products continued to have an adverse effect on
premium products' unit volume comparisons between 2000 and 1999 periods.
(11)
<PAGE> 13
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION (Continued)
Costs of products sold increased 17.1 percent and 16.8 percent in the third
quarter and first nine months of 2000, respectively, primarily due to increased
federal excise taxes, higher costs for leaf tobacco primarily as a result of the
value conversion of Registrant's Skoal Long Cut products and increased LIFO
inventory expense. Tobacco segment gross profit remained stable for both 2000
periods as compared to the corresponding 1999 periods. The gross profit
percentage for both 2000 periods decreased slightly versus the corresponding
1999 periods primarily as a result of the aforementioned unfavorable factors in
costs of products sold.
Selling and advertising expenses increased significantly for both the third
quarter and nine-month periods, due to continued higher planned spending on
retail promotional activities to stimulate category growth. Indirect selling
expenses also increased for both 2000 periods due to costs associated with the
field salesforce primarily related to travel, training and salaries and related
costs. Administrative expenses for the Tobacco segment remained stable in the
third quarter primarily as a result of lower legal spending, offset by increased
tobacco settlement-related charges. For the first nine months of 2000,
administrative expenses increased predominantly as result of the Conwood bonding
cost and higher tobacco settlement-related charges, partially offset by lower
legal spending.
Tobacco segment operating profit for the third quarter and first nine months of
2000 decreased 3.2 percent to $190.5 million and 2.8 percent to $566.9 million,
respectively.
WINE SEGMENT
Wine segment net sales increased 2.9 percent to $46.9 million and 6.1 percent to
$120.9 million for the third quarter and first nine months of 2000,
respectively, accounting for 10.5 percent of consolidated net sales for the
nine-month period. Premium case volume was level for the third quarter, as
increased volume for the Chateau Ste. Michelle and Columbia Crest brands
approximated the decline in the Domaine Ste. Michelle brand. Premium case volume
increased 4.1 percent for the nine month period, primarily as a result of the
Chateau Ste. Michelle and Villa Mt. Eden brands, partially offset by a decline
in the Domaine Ste. Michelle brand. Registrant's two leading brands of premium
wine, Chateau Ste. Michelle and Columbia Crest, accounted for 80.1 percent of
total premium wine case sales in 2000.
Cost of products sold increased slightly for the third quarter and first nine
months of 2000, respectively. The increase for the third quarter was primarily a
result of slightly higher wine unit costs, while for the first nine months the
increase was primarily a function of higher premium case sales. Gross profit for
the Wine segment increased 4.1 percent to $18 million and 8.1 percent to $47.6
million for the third quarter and first nine months of 2000, respectively,
primarily as a result of higher selling prices and improved product mix for both
periods and higher premium case unit volume for the nine month period. The Wine
segment gross profit percentage increased slightly for both 2000 periods
compared to the corresponding 1999 periods.
(12)
<PAGE> 14
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION (Continued)
Selling and advertising expenses for the third quarter were relatively level
with those of the corresponding 1999 period, whereas they increased slightly for
the nine month period, primarily as a result of increased spending on sales
literature and media advertising. Indirect selling, administrative and other
expenses were higher for both 2000 periods, principally due to higher salaries
and related costs and other spending to meet current and expected growth. The
nine-month period of 2000 also included costs incurred for a cancelled
acquisition.
Operating profit for the third quarter increased 3.5 percent to $6.1 million,
while for the first nine months of 2000, Wine segment operating profit declined
4.4 percent to $9.8 million, compared to the similar 1999 periods.
ALL OTHER OPERATIONS
Net sales for all other operations increased 4.7 percent to $7.8 million and 3.5
percent to $22.2 million for the third quarter and first nine months of 2000,
respectively, compared to the corresponding 1999 periods. All other operations
for the third quarter and nine-month periods reported operating losses of $2.2
million and $6 million, respectively, which approximated 1999 levels.
LIQUIDITY AND CAPITAL RESOURCES
CHANGES IN FINANCIAL CONDITION SINCE DECEMBER 31, 1999
Net cash provided by operating activities increased to $375.4 million from
$342.2 million for the corresponding 1999 period. The primary origin of the
increase was increased income taxes payable, partially offset by lower net
earnings. The major source of cash from operations was net earnings generated by
the Tobacco segment, while the most significant uses of cash in operations were
purchases of leaf tobacco for use in Registrant's moist smokeless tobacco
products along with decreased accounts payable and accrued expenses and
increased accounts receivable. Registrant estimates that 2000 overall raw
material inventory purchases and other costs, for leaf tobacco and grapes, will
approximate amounts expended in 1999.
Net cash used in investing activities was $28.8 million in 2000 compared to
$34.7 million in 1999. Expenditures for both years were for the acquisition of
property, plant and equipment, while 2000 included the offsetting effect of the
disposition of an office building and related fixed assets.
Net cash used in financing activities for 2000 was $243.5 million, a decrease
from $327.8 million in 1999. This decrease was primarily due to lower
expenditures for the repurchase of common stock, partially offset by a decrease
in net borrowings. Registrant expended $97.5 million during 2000 for its stock
repurchase program, compared to $347.9 million in 1999. This program has been
suspended since the end of the first quarter of 2000, due to Registrant's
antitrust litigation.
(13)
<PAGE> 15
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION (Continued)
On October 10, 2000, Registrant entered into a new senior secured $1 billion
financing arrangement with various financial institutions in connection with the
posting of the bond for the antitrust litigation (see Notes to Condensed
Consolidated Financial Statements). Registrant's cash requirements for the
remainder of 2000 are for dividends, capital expenditures and deposits with the
District Court. Additional borrowings under the new credit facilities and
internally generated funds will be the primary means of meeting cash
requirements over this period.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In March 2000, Registrant issued $300 million aggregate principal amount of 8.8
percent fixed rate senior notes, which mature on March 15, 2005. Upon this
issuance, Registrant settled its treasury lock interest agreements used to hedge
the exposure of interest rate fluctuations. There were no other material changes
in market risk since December 31, 1999.
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 1999 Form 10-K, 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.
(14)
<PAGE> 16
UST Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On September 14, 2000, Registrant was served with a Summons
and Consolidated Complaint in an action entitled Hobert
Kennedy, et al. v. Philip Morris Incorporated, et al. (No.
00-C-644), Circuit Court of Ohio County, West Virginia. This
action was brought by an individual plaintiff and his spouse
against cigarette manufacturers, smokeless tobacco
manufacturers, including Registrant, cigar manufacturers and
others for mouth cancer and other injuries allegedly sustained
as a result of his use of various tobacco products, including
one of Registrant's smokeless tobacco products. The
Consolidated Complaint seeks unspecified compensatory and
punitive damages and other relief.
On September 14, 2000, Registrant was served with a Summons
and Consolidated Complaint in an action entitled Sherman
Mullins, et al v. Phillip Morris Incorporated, et al. (No.
00-C-735), Circuit Court of Ohio County, West Virginia. This
action was brought by an individual plaintiff and his spouse
against cigarette manufacturers, smokeless tobacco
manufacturers, including Registrant, cigar manufacturers and
others for "pre-cancerous spots on gums, gum loss and lesions"
allegedly sustained as a result of his use of one of
Registrant's smokeless tobacco products. The Consolidated
Complaint seeks unspecified compensatory and punitive damages
and other relief.
On September 14, 2000, Registrant was served with a Summons
and Consolidated Complaint in an action entitled Marvin E.
Robe v. Philip Morris Incorporated, et al. (No. 00-C-781),
Circuit Court of Ohio County, West Virginia. This action was
brought by an individual plaintiff against cigarette
manufacturers, smokeless tobacco manufacturers, including
Registrant, cigar manufacturers and others for mouth cancer
and other injuries allegedly sustained as a result of his use
of various tobacco products, including one of Registrant's
smokeless tobacco products. The Consolidated Complaint seeks
unspecified compensatory and punitive damages and other
relief.
In Robert Murphy v. The American Tobacco Company, et al., (No.
CV-S-98-00021-PMP(RJJ)), United States District Court,
District of Nevada, on August 25, 2000, the court entered a
Stipulation and Order dismissing this action without
prejudice.
(15)
<PAGE> 17
UST Inc.
PART II - OTHER INFORMATION (continued)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
On July 11, 2000, Registrant filed a Current Report
on Form 8-K, which reported two wholesaler actions
brought against Registrant in connection with the
Conwood litigation.
On August 14, 2000, Registrant filed a Current Report
on Form 8-K, which reported the reduction by the
District Court of Registrant's bond requirement in
connection with the Conwood litigation.
On September 8, 2000, Registrant filed a Current
Report on Form 8-K, which reported new commitment
arrangements obtained by Registrant for its bond
financing in connection with the Conwood litigation.
(16)
<PAGE> 18
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 9, 2000 /s/ Robert T. D'Alessandro
---------------- ------------------------------------
Robert T. D'Alessandro
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer and
Principal Financial Officer)
(17)
