UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549-1004

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For quarterly period ended September 30, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

UST Inc.

Delaware		06-1193986
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
6 High Ridge Park, Building A, Stamford, Connecticut		06905
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (203) 817-3000

 

 

Indicate by check mark whether the 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 the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Number of Common Shares ($.50 par value) outstanding at October 24, 2008 148,394,153

 

 

UST Inc.

(the “Registrant” or the “Company”)

INDEX

		Page No.
Part I. Financial Information:
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statement of Financial Position — September 30, 2008 and December 31, 2007			2
Condensed Consolidated Statement of Operations — Three and nine months ended September 30, 2008 and 2007			3
Condensed Consolidated Statement of Cash Flows — Nine months ended September 30, 2008 and 2007			4
Notes to Condensed Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3. Quantitative and Qualitative Disclosures about Market Risk			59
Item 4. Controls and Procedures			60
Part II. Other Information:
Item 1. Legal Proceedings			61
Item 1A. Risk Factors			61
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			62
Item 6. Exhibits			63
Signatures			64
Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 10.4
Exhibit 10.5
Exhibit 31.1
Exhibit 31.2
Exhibit 32

Part I. FINANCIAL INFORMATION

		September 30, 2008				December 31, 2007
		(Unaudited)				(Note)
Assets
Current assets:
Cash and cash equivalents		$	29,501			$	73,697
Accounts receivable			64,406				60,318
Inventories
Leaf tobacco			163,159				202,137
Products in process			205,879				258,814
Finished goods			196,438				163,247
Other materials and supplies			23,014				22,365
Total inventories			588,490				646,563
Deferred income taxes			22,743				26,737
Income taxes receivable			7,848				8,663
Assets held for sale			25,047				—
Prepaid expenses and other current assets			30,673				30,296
Total current assets			768,708				846,274
Property, plant and equipment, net			486,280				505,101
Deferred income taxes			45,397				35,972
Goodwill			28,093				28,304
Intangible assets, net			55,385				56,221
Other assets			18,325				15,206
Total assets		$	1,402,188			$	1,487,078
Liabilities and stockholders’ deficit
Current liabilities:
Short-term borrowings		$	40,000			$	—
Current portion of long-term debt			240,000				—
Accounts payable and accrued expenses			228,574				321,256
Litigation liability			23,380				75,360
Total current liabilities			531,954				396,616
Long-term debt			900,000				1,090,000
Postretirement benefits other than pensions			86,235				81,668
Pensions			165,781				150,318
Income taxes payable			28,519				38,510
Other liabilities			15,268				20,162
Total liabilities			1,727,757				1,777,274
Contingencies (see Note 14)
Minority interest and put arrangement			30,504				30,006
Stockholders’ deficit:
Capital stock (1)			106,187				105,635
Additional paid-in capital			1,153,190				1,096,923
Retained earnings			883,418				773,829
Accumulated other comprehensive loss			(48,633	)			(45,083	)
			2,094,162				1,931,304
Less treasury stock (2)			2,450,235				2,251,506
Total stockholders’ deficit			(356,073	)			(320,202	)
Total liabilities and stockholders’ deficit		$	1,402,188			$	1,487,078

See Notes to Condensed Consolidated Financial Statements.

UST Inc.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Net sales		$	484,631			$	479,612			$	1,463,516			$	1,417,884
Costs and expenses:
Cost of products sold			121,250				112,150				363,594				328,064
Excise taxes			22,414				14,319				51,725				40,907
Selling, advertising and administrative			123,347				129,832				376,851				395,450
Restructuring charges			6,406				1,677				8,024				9,105
Antitrust litigation			450				3,158				1,975				125,258
Acquisition-related costs			7,082				—				7,082				—
Total costs and expenses			280,949				261,136				809,251				898,784
Gain on sale of corporate headquarters building			—				—				—				105,143
Operating income			203,682				218,476				654,265				624,243
Interest, net			18,493				9,308				55,024				27,438
Earnings before income taxes, minority interest and equity earnings			185,189				209,168				599,241				596,805
Income tax expense			59,286				75,484				207,620				215,296
Earnings before minority interest and equity earnings			125,903				133,684				391,621				381,509
Minority interest expense and equity earnings, net			581				84				1,305				425
Net earnings		$	125,322			$	133,600			$	390,316			$	381,084
Net earnings per share:
Basic		$	0.85			$	0.85			$	2.64			$	2.40
Diluted			0.84				0.84				2.62				2.37
Dividends per share		$	0.63			$	0.60			$	1.89			$	1.80
Average number of shares:
Basic			147,212				157,666				147,861				159,056
Diluted			148,653				158,951				149,202				160,536

See Notes to Condensed Consolidated Financial Statements.

UST Inc.

		Nine Months Ended September 30,
		2008				2007
Operating Activities:
Net earnings		$	390,316			$	381,084
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			39,542				33,362
Share-based compensation expense			8,357				9,575
Excess tax benefits from share-based compensation			(11,644	)			(7,520	)
Minority interest expense and equity earnings, net			1,305				423
Gain on sale of corporate headquarters			—				(105,143	)
Gain on disposition of property, plant and equipment			(1,260	)			(474	)
Amortization of imputed rent on corporate headquarters			—				6,740
Deferred income taxes			(3,518	)			(12,024	)
Changes in operating assets and liabilities:
Accounts receivable			(4,088	)			(9,856	)
Inventories			58,073				41,914
Prepaid expenses and other assets			1,619				(1,476	)
Accounts payable, accrued expenses, pensions and other liabilities			(67,669	)			(16,462	)
Income taxes			4,395				3,802
Litigation liability			(51,980	)			119,597
Net cash provided by operating activities			363,448				443,542
Investing Activities:
Short-term investments, net			—				10,000
Purchases of property, plant and equipment			(46,990	)			(51,504	)
Proceeds from dispositions of property, plant and equipment			2,733				130,701
Acquisition of business			—				(155,202	)
Loan to minority interest holder			—				(27,096	)
Repayment of loan by minority interest holder			—				27,096
Investment in joint venture			(339	)			(579	)
Net cash used in investing activities			(44,596	)			(66,584	)
Financing Activities:
Repayment of debt			—				(7,095	)
Revolving credit facility repayments, net			(210,000	)			—
Proceeds from the issuance of debt			296,307				—
Change in book cash overdraft			(16,973	)			—
Excess tax benefits from share-based compensation			11,644				7,520
Proceeds from the issuance of stock			34,916				30,517
Dividends paid			(280,213	)			(286,622	)
Stock repurchased			(198,729	)			(250,014	)
Net cash used in financing activities			(363,048	)			(505,694	)
Decrease in cash and cash equivalents			(44,196	)			(128,736	)
Cash and cash equivalents at beginning of year			73,697				254,393
Cash and cash equivalents at end of the period		$	29,501			$	125,657
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes		$	206,883			$	224,126
Interest			61,450				48,717

See Notes to Condensed Consolidated Financial Statements.

UST Inc.

(In thousands, except per share amounts or where otherwise noted)

1 — BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. Management believes that all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated financial statements include the accounts of UST Inc. (the “Company”) and all of its subsidiaries after the elimination of intercompany accounts and transactions. The Company provides for minority interests in consolidated companies in which the Company’s ownership is less than 100 percent. Certain prior year amounts have been reclassified to conform to the 2008 financial statement presentation. Operating results for the nine month period ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ended December 31, 2008. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 (“2007 Form 10-K”).

2 — RECENT ACCOUNTING PRONOUNCEMENTS

In June 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share pursuant to the two-class method, as described in Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings per Share (“SFAS No. 128”). The FSP requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents as a separate class of securities in calculating earnings per share. FSP EITF 03-6-1 is to be applied on a retrospective basis and is effective for fiscal years beginning after December 15, 2008; as such, the Company plans to adopt the provisions of this FSP on January 1, 2009. The Company does not expect the adoption of this FSP to have a material impact on its results of operations.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS No. 162”). This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP. SFAS No. 162 is effective 60 days following approval by the SEC of the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company does not expect the adoption of this standard to have a material impact on the preparation of its consolidated financial statements.

UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”), in April 2008. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset, as determined under the provisions of SFAS No. 142, and the period of expected cash flows used to measure the fair value of the asset in accordance with SFAS No. 141(R), Business Combinations (“SFAS No. 141(R)”). FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively to intangible assets acquired subsequent to its effective date. Accordingly, the Company plans to adopt the provisions of this FSP on January 1, 2009. The impact that the adoption of FSP FAS 142-3 may have on the Company’s results of operations and financial condition will depend on the nature and extent of any intangible assets acquired subsequent to its effective date.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 requires entities to provide enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”) and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008, and, as such, the Company plans to adopt the provisions of this standard on January 1, 2009. Although SFAS No. 161 requires enhanced disclosures, its adoption will not impact the Company’s results of operations or financial condition.

In December 2007, the FASB issued SFAS No. 141(R). SFAS No. 141(R), replaces SFAS No. 141, Business Combinations, and establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, and any goodwill acquired in a business combination. SFAS No. 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of a business combination. SFAS No. 141(R) is to be applied on a prospective basis and, for the Company, would be effective for any business combination transactions with an acquisition date on or after January 1, 2009. The impact that the adoption of this pronouncement may have on the Company’s results of operations and financial condition will depend on the nature and extent of any business combinations subsequent to its effective date.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS No. 160”), which establishes accounting and reporting standards for the noncontrolling interest (minority interest) in a subsidiary and for the deconsolidation of a subsidiary. The key provisions of SFAS No. 160 included the following: (1) noncontrolling interests in consolidated subsidiaries shall be presented in the consolidated statement of financial position within equity, but separate from the parent’s equity, (2) consolidated net income shall include amounts attributable to both the parent and the noncontrolling interest, with the amount applicable to each party clearly presented in the consolidated statement of operations, (3) fair value measures shall be used when deconsolidating a subsidiary and determining any resulting gain or loss, and (4) sufficient disclosures shall be made to clearly distinguish between the interests of the parent and the interests of the noncontrolling owners. The calculation of net earnings per share will continue to be based only on income attributable to the parent. SFAS No. 160 is to be applied on a prospective basis, except for the presentation and disclosure requirements, which are to be applied retrospectively. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008, and, as such, the Company plans to adopt the provisions of this standard on January 1, 2009. The Company is in the process of evaluating the impact that the adoption of this pronouncement may have on its results of operations and financial condition.

UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure eligible financial instruments and certain other items at fair value at specified election dates. The Company adopted the provisions of SFAS No. 159 on January 1, 2008, as required. The adoption of SFAS No. 159 did not have an impact on the Company’s results of operations or financial condition, as the Company has not elected to measure any eligible items at fair value.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 provides a common definition of fair value to be applied to existing GAAP requiring the use of fair value measures, establishes a framework for measuring fair value and enhances disclosure about fair value measures under other accounting pronouncements, but does not change existing guidance as to whether or not an asset or liability is carried at fair value. The Company adopted the provisions of SFAS No. 157 on January 1, 2008, as required. See Note 12, “Derivative Instruments and Hedging Activities,” for more details.

3 — CAPITAL STOCK

There were no repurchases of outstanding common stock made by the Company during the three months ended September 30, 2008. During the nine months ended September 30, 2008, the Company repurchased approximately 3.7 million shares of outstanding common stock at a cost of approximately $198.7 million. Of the total shares repurchased, 1.9 million shares were repurchased at a cost of $104.8 million pursuant to the Company’s authorized program, approved in December 2004, bringing the total repurchases of outstanding common stock under the program to the authorized maximum of 20 million shares. The cumulative cost of repurchases under the completed program was approximately $1 billion. The remaining 1.8 million shares repurchased during the nine months ended September 30, 2008 were made pursuant to a new program to repurchase up to 20 million shares of the Company’s outstanding common stock, which was authorized by the Company’s Board of Directors in December 2007. As of September 30, 2008, the cumulative cost of the 1.8 million shares repurchased under the new program was approximately $93.9 million.

UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4 — SHARE-BASED COMPENSATION

The Company accounts for share-based compensation in accordance with the provisions of SFAS No. 123(R), Share-Based Payment, (“SFAS No. 123(R)”). SFAS No. 123(R) requires all share-based payments issued to acquire goods or services, including grants of employee stock options, to be recognized in the statement of operations based on their fair values, net of estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Compensation expense related to share-based awards is recognized over the requisite service period, which is generally the vesting period.

The following table provides a breakdown by line item of the pre-tax share-based compensation expense recognized in the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2008 and 2007, respectively, as well as the related income tax benefit and amounts capitalized as a component of inventory for each period.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Selling, advertising and administrative expense (1)		$	2,474			$	2,380			$	7,703			$	9,082
Cost of products sold			187				138				517				426
Restructuring charges (2)			137				56				137				67
Total pre-tax share-based compensation expense		$	2,798			$	2,574			$	8,357			$	9,575
Income tax benefit		$	1,021			$	1,025			$	3,049			$	3,788
Capitalized as inventory			52				30				138				92

A summary of the status of restricted stock and restricted stock units for the nine months ended September 30, 2008 is presented below:

		Restricted Stock								Restricted Stock Units
						Weighted average								Weighted average
		Number of				grant-date fair value				Number of				grant-date fair value
		Shares				per share				Units				per unit
Nonvested at January 1, 2008			386,640			$	46.56				222,448			$	43.87
Granted			131,828			$	52.07				53,464			$	52.42
Forfeited			(10,400	)		$	49.52				(7,467	)		$	44.63
Vested			(18,940	)		$	36.46				(4,196	)		$	41.28
Nonvested at September 30, 2008			489,128			$	48.37				264,249			$	45.61

UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In addition to the table above, during the second quarter of 2008, the Company awarded 143,100 restricted shares for which the performance targets had not been established as of September 30, 2008. In accordance with SFAS No. 123(R), a grant date, for purposes of measuring compensation expense, cannot occur until the performance measures are established, as that is when both the Company and the award recipients would have a mutual understanding of the key terms and conditions of the award. The restricted shares granted presented in the table above include 112,325 restricted shares that were originally awarded in 2007 for which the performance targets were established in 2008.

During the three and nine months ended September 30, 2008, 0.8 million and 1.1 million options were exercised with a weighted-average exercise price of $31.31 and $31.53, respectively. At September 30, 2008, there were 2.6 million options outstanding, of which 2.3 million options were exercisable, with weighted-average exercise prices of $35.31 and $33.60, respectively. Of the total options outstanding at September 30, 2008, 1.2 million were issued under the UST Inc. 1992 Stock Option Plan (“1992 Plan”) with a weighted-average exercise price of $30.53. The 1992 Plan contains contingent cash settlement provisions that require cash settlement upon the occurrence of certain events outside of the option holder’s control. Specifically, if the Company’s shareholders approve the acquisition of the Company at a future shareholders’ meeting, all options outstanding under the 1992 Plan would be settled in cash at such time, irrespective of when and if the transaction is ultimately consummated. For additional information regarding the pending acquisition of the Company, refer to Note 17, “Other Matters.”

UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5 — EMPLOYEE BENEFIT PLANS

In accordance with SFAS No. 132, Employers’ Disclosures About Pensions and Other Postretirement Benefits (Revised 2003), as amended by SFAS No. 158, Employers’ Accounting For Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R), the following provides the components of net periodic benefit cost for the three and nine months ended September 30, 2008 and 2007, respectively:

										Postretirement Benefits
		Pension Plans								Other than Pensions
		Three Months Ended								Three Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Service cost		$	4,477			$	4,766			$	964			$	1,154
Interest cost			8,837				8,338				1,176				1,215
Expected return on plan assets			(7,339	)			(7,239	)			—				—
Amortization of unrecognized transition asset			—				(2	)			—				—
Amortization of prior service cost (credit)			23				18				(1,041	)			(1,229	)
Recognized actuarial loss			659				979				39				87
Special termination benefits			3,052				—				1,114				—
Net periodic benefit cost		$	9,709			$	6,860			$	2,252			$	1,227

										Postretirement Benefits
		Pension Plans								Other than Pensions
		Nine Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Service cost		$	13,429			$	14,223			$	2,892			$	3,463
Interest cost			26,510				24,881				3,527				3,646
Expected return on plan assets			(22,019	)			(21,603	)			—				—
Amortization of unrecognized transition asset			—				(6	)			—				—
Amortization of prior service cost (credit)			68				56				(3,125	)			(3,690	)
Recognized actuarial loss			1,976				2,922				116				263
Curtailment and special termination benefits			3,600				1,974				1,453				—
Net periodic benefit cost		$	23,564			$	22,447			$	4,863			$	3,682

During the third quarter and first nine months of 2008, in connection with restructuring activities, the Company recorded special termination benefit charges of approximately $4.2 million and $5.1 million, respectively, related to its defined benefit pension plans and other postretirement benefit plans. These charges relate to enhanced retirement benefits to be provided to qualified individuals impacted by the restructuring activities and are reported on the “restructuring charges” line in the Condensed Consolidated Statement of Operations (See Note 13, “Restructuring”). During the first quarter of 2007, the Company recorded a charge for special termination benefits related to its defined benefit pension plans in connection with an executive officer’s separation from service.

UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company expects to contribute approximately $7.5 million to its non-qualified defined benefit pension plans in 2008, of which approximately $5.6 million was contributed during the first nine months of 2008.

In the fourth quarter of 2007, the Company amended its retiree health and welfare plans to limit the annual increase in costs subsidized by the Company to the annual percentage increase in the consumer price index. This amendment, which was effective beginning January 1, 2008, had a favorable impact on the calculation of the Company’s 2008 net periodic benefit cost.

6 — INCOME TAXES

The Company’s income tax provision takes into consideration pre-tax income, statutory tax rates and the Company’s tax profile in the various jurisdictions in which it operates. The tax bases of the Company’s assets and liabilities reflect its best estimate of the future tax benefit and costs it expects to realize when such amounts are included in its tax returns. Quantitative and probability analysis, which incorporates management’s judgment, is required in determining the Company’s effective tax rate and in evaluating its tax positions. The Company recognizes tax benefits in accordance with the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”).

As of September 30, 2008 and December 31, 2007, the total liability for unrecognized tax benefits was $28.1 million and $39.2 million, respectively, representing the gross tax liability for all jurisdictions. Approximately $0.8 million and $0.9 million of this liability, net of federal tax benefit, is included on the “income taxes receivable” line of the Condensed Consolidated Statement of Financial Position as of September 30, 2008 and December 31, 2007, respectively. The remaining $27.3 million and $38.3 million of this liability, net of federal tax benefit, as of September 30, 2008 and December 31, 2007, respectively, is reported on the “income taxes payable” line in the non-current liabilities section of the Condensed Consolidated Statement of Financial Position.

The Company recognizes accruals of interest and penalties related to unrecognized tax benefits in income tax expense. For the three and nine months ended September 30, 2008, the Company recognized a decrease in interest and penalties of approximately $4.4 million and $2.9 million, respectively, primarily due to negotiated resolutions. For the three and nine months ended September 30, 2007, the Company recognized an increase in interest and penalties of $0.8 million and $2.5 million, respectively. As of September 30, 2008 and December 31, 2007, the Company had a liability of approximately $7.8 million and $10.7 million, respectively, for the payment of interest and penalties. As of September 30, 2008 and December 31, 2007, approximately $0.2 million of this liability is included on the “income taxes receivable” line of the Condensed Consolidated Statement of Financial Position. The remaining balance for both periods is included on the “income taxes payable” line in the non-current liabilities section of the Condensed Consolidated Statement of Financial Position.

UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company continually and regularly evaluates, assesses and adjusts its accruals for income taxes in light of changing facts and circumstances, which could cause the effective tax rate to fluctuate from period to period. Of the total $28.1 million of unrecognized tax benefits as of September 30, 2008, approximately $9.5 million would impact the annual effective tax rate if such amounts were recognized. The remaining $18.6 million of unrecognized tax benefits relate to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. Based on information obtained to date, the Company believes it is reasonably possible that the total amount of unrecognized tax benefits could decrease by $0.3 million within the next 12 months due to negotiated resolution payments, lapses in statutes of limitations and the resolution of various examinations in multiple jurisdictions.

The Internal Revenue Service and other tax authorities in various states and foreign jurisdictions audit the Company’s income tax returns on a continuous basis. Depending on the tax jurisdiction, a number of years may elapse before a particular matter for which the Company has an unrecognized tax benefit is audited and ultimately resolved. With few exceptions, the Company is no longer subject to income tax examinations by tax authorities for years before 2004. While it is often difficult to predict the timing of tax audits and their final outcome, the Company believes that its estimates reflect the most likely outcome of known tax contingencies. However, the final resolution of any such tax audit could result in either a reduction in the Company’s accruals or an increase in its income tax provision, both of which could have a significant impact on its results of operations in any given period.

The Company’s effective tax rate, before minority interest and equity earnings, decreased to 32 percent and 34.6 percent for the third quarter and first nine months of 2008, respectively, from 36.1 percent for both the third quarter and first nine months of 2007. The decline in the effective tax rate was a result of $10.2 million of income tax accrual reversals, net of federal benefit, in the current year, of which $5.9 million, net of federal benefit, related to negotiated resolutions and $4.3 million, net of federal benefit, related to the expiration of statutes of limitation in multiple jurisdictions.

UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7 — SEGMENT INFORMATION

The Company’s reportable segments are Smokeless 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 are the Company’s international operations. Interim segment information is as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
Net Sales to Unaffiliated Customers
Smokeless Tobacco		$	364,148			$	384,067			$	1,131,399			$	1,150,518
Wine (3)			99,760				82,286				285,060				230,581
All Other			20,723				13,259				47,057				36,785
Net sales		$	484,631			$	479,612			$	1,463,516			$	1,417,884
Operating Profit (1)
Smokeless Tobacco (2)		$	194,806			$	213,073			$	624,606			$	507,821
Wine (3)			16,331				12,758				43,037				35,478
All Other			6,281				4,195				15,085				13,136
Operating profit			217,418				230,026				682,728				556,435
Gain on Sale of Corporate Headquarters Building			—				—				—				105,143
Corporate expenses (1)			(13,736	)			(11,550	)			(28,463	)			(37,335	)
Interest, net			(18,493	)			(9,308	)			(55,024	)			(27,438	)
Earnings before income taxes, minority interest and equity earnings		$	185,189			$	209,168			$	599,241			$	596,805

The Company’s identifiable assets by reportable segment as of September 30, 2008 did not change significantly from amounts appearing in the December 31, 2007 Consolidated Segment Information (See the 2007 Form 10-K), with the exception of corporate assets which reflect a decrease in cash and cash equivalents.

UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8 — ASSETS HELD FOR SALE

The Company had $25.1 million classified as “assets held for sale” at September 30, 2008, reflecting the net carrying value of one of the Company’s two corporate aircraft. Management, having proper authority, initiated the disposal of the aircraft in connection with the Company’s Project Momentum cost-reduction initiative (see Note 13, “Restructuring” for additional information regarding this initiative). The aircraft met the criteria to be considered held for sale under SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), at September 30, 2008. As the net carrying value of the aircraft was lower than its respective estimated fair value less costs to sell, there was no impairment charge recorded in 2008 upon management’s commitment to dispose of the asset. In accordance with SFAS No. 144, upon meeting the held for sale criteria, the Company ceased depreciation on the aircraft. The Company currently anticipates that the sale of the aircraft will occur within the next 12 months.

At December 31, 2007, the Company did not have any assets classified as held for sale.

In March 2008 and January 2007, the Company sold winery properties located in the State of Washington for net proceeds of $1.8 million and $3.1 million, respectively, resulting in pre-tax gains of $1.4 million and $2 million, respectively, which were recorded as a reduction to selling, advertising and administrative (“SA&A”) expenses in the Condensed Consolidated Statement of Operations. The net proceeds from the March 2008 property sale included cash of approximately $0.4 million and a note receivable of approximately $1.4 million, which has a three-year term.

In March 2007, the Company finalized the sale of its corporate headquarters for cash proceeds of $130 million, as well as a below-market, short-term lease with an imputed fair market value of approximately $6.7 million. This sale resulted in a pre-tax gain of approximately $105 million, which is reported on the “gain on sale of corporate headquarters building” line in the Condensed Consolidated Statement of Operations.

9 — NET EARNINGS PER SHARE

Basic earnings per share is computed by dividing net earnings by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net earnings by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had all potentially dilutive shares of common stock been issued. The dilutive effect of outstanding options, restricted stock and restricted stock units is reflected in diluted earnings per share by applying the treasury stock method under SFAS No. 128. Under the treasury stock method, an increase in the fair value of the Company’s common stock can result in a greater dilutive effect from outstanding options, restricted stock and restricted stock units. Furthermore, the exercise of options and the vesting of restricted stock and restricted stock units can result in a greater dilutive effect on earnings per share than that recognized under the treasury stock method.

UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the computation of basic and diluted net earnings per share:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Numerator:
Net earnings		$	125,322			$	133,600			$	390,316			$	381,084
Denominator:
Denominator for basic earnings per share-weighted average shares			147,212				157,666				147,861				159,056
Dilutive effect of share-based awards			1,441				1,285				1,341				1,480
Denominator for diluted earnings per share			148,653				158,951				149,202				160,536
Basic earnings per share		$	0.85			$	0.85			$	2.64			$	2.40
Diluted earnings per share		$	0.84			$	0.84			$	2.62			$	2.37

At September 30, 2008, all options outstanding were dilutive as their exercise prices were lower than the average market price of the Company’s common stock. Options to purchase 0.3 million shares of common stock outstanding as of September 30, 2007 were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of the Company’s common stock and, therefore, were antidilutive.

10 — COMPREHENSIVE INCOME

The components of comprehensive income for the Company are net earnings, foreign currency translation adjustments, the change in the fair value of derivatives designated as effective cash flow hedges and changes in deferred components of net periodic pension and other postretirement benefit costs. For the third quarter of 2008 and 2007, total comprehensive income, net of taxes, amounted to $121.6 million and $131.6 million, respectively. For the first nine months of 2008 and 2007, total comprehensive income, net of taxes, amounted to $386.7 million and $382.5 million, respectively.

11 — PURCHASE COMMITMENTS

As of September 30, 2008, the Company had entered into unconditional purchase obligations in the form of contractual commitments. Unconditional purchase obligations are commitments that are either noncancelable or cancelable only under certain predefined conditions.

Through September 30, 2008, the Company completed $12.4 million in leaf tobacco purchases in fulfillment of certain contracts outstanding at December 31, 2007. As of September 30, 2008, the Company has contractual obligations of approximately $67.8 million for the purchase of leaf tobacco to be used in the production of moist smokeless tobacco products, the majority of which are expected to be fulfilled by the end of 2008.

UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Purchase commitments under contracts to purchase grapes for the periods beyond one year are subject to variability resulting from potential changes in applicable grape market price indices. The following table presents a summary of the net change in the Company’s future payment obligations since January 1, 2008, and the balance of such commitments at September 30, 2008, for the purchases and processing of grapes for use in the production of wine, based upon estimated yields and market conditions:

		2008				2009				2010				2011				2012				Thereafter				Total
Grape commitments — January 1, 2008		$	73,623			$	73,067			$	72,713			$	62,490			$	36,742			$	93,356			$	411,991
Net (decrease) increase			(5,976	)			7,231				7,587				9,136				25,886				106,086				149,950
Grape commitments — September 30, 2008		$	67,647			$	80,298			$	80,300			$	71,626			$	62,628			$	199,442			$	561,941

12 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company has hedged against the variability of forecasted interest payments attributable to changes in interest rates through the date of an anticipated debt issuance in 2009 via a forward starting interest rate swap. The forward starting interest rate swap has a notional amount of $100 million and the terms call for the Company to receive interest quarterly at a variable rate equal to the London InterBank Offered Rate (“LIBOR”) and to pay interest semi-annually at a fixed rate of 5.715 percent. The fair value of the forward starting interest rate swap at September 30, 2008 was a net liability of $8.7 million, based upon analysis derived from relevant observable market inputs, giving consideration to counterparty credit risk, and was included in “accounts payable and accrued expenses” on the Condensed Consolidated Statement of Financial Position. Accumulated other comprehensive loss at September 30, 2008 included the accumulated loss on the cash flow hedge (net of taxes) of $5.7 million, which reflects $1.7 million of other comprehensive loss recognized during each of the three and nine months ended September 30, 2008, respectively, in connection with the change in fair value of the swap.

The Company has hedged the interest rate risk on its $40 million aggregate principal amount of floating rate senior notes with a ten-year interest rate swap having a notional amount of $40 million and quarterly settlement dates over the term of the contract. The Company pays a fixed rate of 7.25 percent and receives a floating rate of three-month LIBOR plus 90 basis points on the notional amount. The fair value of the swap at September 30, 2008 was a net liability of $1.7 million, based upon analysis derived from relevant observable market inputs, giving consideration to counterparty credit risk, and was included in “accounts payable and accrued expenses” on the Condensed Consolidated Statement of Financial Position. Accumulated other comprehensive loss at September 30, 2008 included the accumulated loss on the cash flow hedge (net of taxes) of $1.1 million, which reflects the $0.3 million and $0.2 million of other comprehensive loss recognized for the three and nine months ended September 30, 2008, respectively, in connection with the change in fair value of the swap.

During 2008, the Company entered into foreign currency forward and option contracts. Such contracts have been designated as effective cash flow hedges, in order to hedge the risk of variability in cash flows associated with foreign currency payments required in connection with anticipated oak barrel purchases for its wine operations and equipment purchases for its smokeless tobacco operations. The aggregate fair value of the foreign currency forward and options contracts is presented in the table below. The amounts reflected in net earnings and accumulated other comprehensive loss during the three and nine months ended September 30, 2008 with respect to these contracts were not material.

UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

On January 1, 2008, the Company adopted the provisions of SFAS No. 157, which establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy, which gives the highest priority to quoted prices in active markets, is comprised of the following three levels:

Level 1 – Unadjusted quoted market prices in active markets for identical assets and liabilities.

Level 2 – Observable inputs, other than Level 1 inputs. Level 2 inputs would typically include quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.

Level 3 – Prices or valuations that require inputs that are both significant to the measurement and unobservable.

In accordance with the provisions of SFAS No. 157, the following table presents the fair value measurements for the Company’s derivative financial instruments at September 30, 2008, grouped by the level within the fair value hierarchy under which the measurement falls:

						Fair value measurements at reporting date using:
						Quoted prices				Significant
						in active				other				Significant
						markets for				observable				unobservable
		September 30,				identical assets				inputs				inputs
		2008				(level 1)				(level 2)				(level 3)
Liabilities
Derivatives — swaps		$	10,399			$	—			$	10,399			$	—
Derivatives — foreign currency hedges			35			$	—				35			$	—
Total		$	10,434			$	—			$	10,434			$	—

13 — RESTRUCTURING

During the third quarter of 2006, the Company announced and commenced implementation of a cost-reduction initiative called “Project Momentum.” This initiative was designed to create additional resources for growth via operational productivity and efficiency enhancements. The Company believes that such an effort is prudent as it provides additional flexibility in the increasingly competitive smokeless tobacco category.

UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In connection with Project Momentum, restructuring charges of $6.4 million and $8 million were recognized for the three and nine months ended September 30, 2008, respectively, and $1.7 million and $9.1 million were recognized for the three and nine months ended September 30, 2007, respectively. These amounts are reported on the “restructuring charges” line in the Condensed Consolidated Statement of Operations. The charges were incurred in connection with the formal plans undertaken by management and are accounted for in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The recognition of certain restructuring charges involves the use of judgments and estimates regarding the nature, timing and amount of costs to be incurred under Project Momentum. While the Company believes that its estimates are appropriate and reasonable based upon the information available, actual results could differ from such estimates. The following table provides a summary of restructuring charges incurred for the three and nine months ended September 30, 2008, as well as cumulative charges incurred to date and the total amount of charges expected to be incurred, in connection with Project Momentum, for each major type of cost associated with the initiative:

		Restructuring Charges				Restructuring Charges
		Incurred for the Three				Incurred for the Nine				Cumulative Charges				Total Charges
		Months Ended				Months Ended				Incurred as of				Expected to be
		September 30, 2008				September 30, 2008				September 30, 2008				Incurred(1)
One-time termination benefits		$	6,358			$	7,908			$	26,717			$	26,700 - $27,000
Contract termination costs			—				—				492				500
Other restructuring costs			48				116				13,616				13,600 - 13,800
Total		$	6,406			$	8,024			$	40,825			$	40,800 - $41,300

One-time termination benefits relate to severance-related costs and outplacement services for employees terminated in connection with Project Momentum, as well as enhanced retirement benefits for qualified individuals. Contract termination costs primarily relate to the termination of operating leases in conjunction with the consolidation and relocation of facilities. Other restructuring costs are mainly comprised of other costs directly related to the implementation of Project Momentum, primarily professional fees, as well as asset impairment charges and costs incurred in connection with the relocation of the Company’s headquarters.

The following table provides a summary of restructuring charges incurred for the three and nine months ended September 30, 2008, as well as cumulative charges incurred to date and the total amount of charges expected to be incurred, in connection with Project Momentum, by reportable segment:

		Restructuring Charges				Restructuring Charges
		Incurred for the Three				Incurred for the Nine				Cumulative Charges				Total Charges
		Months Ended				Months Ended				Incurred as of				Expected to be
		September 30, 2008				September 30, 2008				September 30, 2008				Incurred
Smokeless Tobacco		$	5,913			$	7,235			$	35,007			$	35,000 - $35,300
Wine			273				273				595				600
All Other Operations			(118	)			98				1,087				1,100 - 1,200
Total — reportable segments			6,068				7,606				36,689				36,700 - 37,100
Corporate (unallocated)			338				418				4,136				4,100 - 4,200
Total		$	6,406			$	8,024			$	40,825			$	40,800 - $41,300

UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accrued restructuring charges are included in the “accounts payable and accrued expenses” line on the Condensed Consolidated Statement of Financial Position. A reconciliation of the changes in the liability balance since December 31, 2007 is presented below.

		One-Time				Contract
		Termination				Termination				Other
		Benefits				Costs				Costs				Total
Balance as of December 31, 2007		$	1,643			$	78			$	—			$	1,721
Add: restructuring charges incurred			8,026				—				116				8,142
Less: payments			(2,123	)			(47	)			(112	)			(2,282	)
Less: reclassified liabilities (1)			(5,189	)			—				(4	)			(5,193	)
Less: other adjustments			(118	)			—				—				(118	)
Balance as of September 30, 2008		$	2,239			$	31			$	—			$	2,270

14 — CONTINGENCIES

The Company 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. The Company believes these pending litigation matters will not result in any material liability for a number of reasons, including the fact that the Company has had only limited involvement with cigarettes and the Company’s current percentage of total tobacco industry sales is relatively small. Prior to 1986, the Company manufactured some cigarette products which had a de minimis market share. From May 1, 1982 to August 1, 1994, the Company distributed a small volume of imported cigarettes and is indemnified against claims relating to those products.

Smokeless Tobacco Litigation

The Company is 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 three individuals alleging use of the Company’s smokeless tobacco products and alleging the types of injuries claimed to be associated with the use of smokeless tobacco products. These individuals also allege the use of other tobacco products.

The Company is named in an action in Florida by an individual plaintiff against various smokeless tobacco manufacturers including the Company for personal injuries, including cancer, oral lesions, leukoplakia, gum loss and other injuries allegedly resulting from the use of the Company’s smokeless tobacco products. The plaintiff also claims nicotine “addiction” and seeks unspecified compensatory damages and certain equitable and other relief, including, but not limited to, medical monitoring.

UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company has been named in an action in Connecticut brought by a plaintiff individually, as executrix and fiduciary of her deceased husband’s estate and on behalf of their minor children for injuries, including “squamous cell carcinoma of the tongue,” allegedly sustained by decedent as a result of his use of the Company’s smokeless tobacco products. The Complaint also alleges “addiction” to smokeless tobacco. The Complaint seeks compensatory and punitive damages in excess of $15 thousand and other relief.

The Company 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 the Company’s willingness to consider alternative solutions for resolving certain litigation issues, all such cases are, and will continue to be, vigorously defended. The Company believes that the ultimate outcome of such pending litigation will not have a material adverse effect on its consolidated financial results or its consolidated financial position, although if plaintiffs were to prevail, the effect of any judgment or settlement could have a material adverse impact on its consolidated financial results in the particular reporting period in which resolved and, depending on the size of any such judgment or settlement, a material adverse effect on its consolidated financial position. Notwithstanding the Company’s assessment of the potential financial impact of these cases, the Company is not able to estimate with any certainty the amount of loss, if any, which would be associated with an adverse resolution.

Antitrust Litigation

Following a previous antitrust action brought against the Company by a competitor, Conwood Company L.P, the Company was named as a defendant in certain actions brought by indirect purchasers (consumers and retailers) in a number of jurisdictions. As indirect purchasers of the Company’s smokeless tobacco products during various periods of time ranging from January 1990 to the date of certification or potential certification of the proposed class, plaintiffs in those actions allege, individually and on behalf of putative class members in a particular state or individually and on behalf of class members in the applicable states, that the Company has violated the antitrust laws, unfair and deceptive trade practices statutes and/or common law of those states. In connection with these actions, plaintiffs sought to recover compensatory and statutory damages in an amount not to exceed $75 thousand per purported class member or per class member, and certain other relief. The indirect purchaser actions, as filed, were similar in all material respects.

To date, indirect purchaser actions in almost all of the jurisdictions have been resolved, including those subject to court approval. Pursuant to the settlements in all jurisdictions except California, adult consumers received coupons redeemable on future purchases of the Company’s moist smokeless tobacco products, and the Company agreed to pay all related administrative costs and plaintiffs’ attorneys’ fees.

In September 2007, the Company entered into a Settlement Agreement to resolve the California class action (for additional details regarding the resolution of the California class action, see the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2007; also refer to Note 17, “Other Matters,” for further information). In March 2008, the court entered an order granting final approval of the California settlement, entering judgment and dismissing the settling defendants with prejudice. The court also granted plaintiffs’ motion for attorneys’ fees and costs. A Notice of Appeal from the judgment and order granting final approval of the settlement, and order granting plaintiffs’ attorneys’ fees was filed by an individual class member in April 2008.

UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In January 2008, the Company entered into a Settlement Agreement to resolve the New Hampshire action. In July 2008, the court entered a final judgment granting final approval of the settlement, including attorneys’ fees and costs, and dismissing the action with prejudice. A Notice of Appeal was filed by an individual class member in August 2008. Also in January 2008, the Company entered into a Settlement Agreement to resolve the Massachusetts class action. In April 2008, the court denied preliminary approval of the Massachusetts settlement but invited the parties to submit an amended settlement agreement to the court for preliminary approval. In connection with the settlements of the New Hampshire action and Massachusetts class action, during the fourth quarter of 2007 the Company recognized a liability reflecting the costs attributable to coupons expected to be distributed to consumers, which will be redeemable on future purchases of the Company’s moist smokeless tobacco products, as well as plaintiffs’ attorneys’ fees and other administrative costs of the settlements. Although the court denied preliminary approval of the Massachusetts settlement, since the court has invited the parties to submit an amended settlement agreement, the Company believes the liability recognized for the Massachusetts class action currently represents its best estimate of the costs to ultimately resolve this action. Notwithstanding the Company’s decision to enter into the settlement, the Company believes the facts and circumstances in the Massachusetts class action would continue to support its defenses.

Notwithstanding the fact that the Company has chosen to resolve various indirect purchaser actions via settlements, the Company believes, and has been so advised by counsel handling these cases, that it has meritorious defenses, and, in the event that any such settlements do not receive final court approval, these actions will continue to be vigorously defended.

In addition, an unresolved action remains in the State of Pennsylvania which is pending in a federal court in Pennsylvania. In this action, the Company filed an appeal of the trial court’s denial of the Company’s motion to dismiss the complaint. In August 2008 the Third Circuit Court of Appeals ruled in the Company’s favor, issuing an opinion vacating the trial court’s denial and remanding the case to the trial court to determine whether plaintiffs should be granted permission to amend their complaint. For the plaintiffs in the foregoing action to prevail, they will now have to be granted permission to amend the complaint and then amend such complaint in a manner that satisfies the standards set forth in the August 2008 Third Circuit opinion. The plaintiffs will also have to obtain class certification and favorable determinations on issues relating to liability, causation and damages. The Company believes, and has been so advised by counsel handling this case, that it has meritorious defenses in this regard, and it is, and will continue to be, vigorously defended.

The Company believes that the ultimate outcome of these actions will not have a material adverse effect on its consolidated financial results or its consolidated financial position, although if plaintiffs were to prevail, beyond the amounts accrued, the effect of any judgment or settlement could have a material adverse impact on its consolidated financial results in the particular reporting period in which resolved and, depending on the size of any such judgment or settlement, a material adverse effect on its consolidated financial position. Notwithstanding the Company’s assessment of the financial impact of these actions, management is not able to estimate the amount of loss, if any, beyond the amounts accrued, which could be associated with an adverse resolution.

UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The liability associated with the Company’s estimated costs to resolve all indirect purchaser actions decreased to $23.4 million at September 30, 2008, from $75.4 million at December 31, 2007, primarily as a result of a payment made in connection with the California settlement, actual coupon redemption and payments of administrative costs related to previous settlements, partially offset by charges recognized in the first nine months of 2008 reflecting a change in the estimated costs associated with the resolution of certain indirect purchaser antitrust actions.

The Company was served with a purported class action complaint filed in federal court in West Virginia, attempting to challenge certain aspects of a prior settlement approved by the Tennessee state court and seeking additional amounts purportedly consistent with subsequent settlements of similar actions, estimated by plaintiffs to be between $8.9 million and $214.2 million, as well as punitive damages and attorneys’ fees. In May 2008, the court granted defendants’ motion to dismiss, thereby dismissing this action with prejudice. In June 2008, plaintiffs filed a Notice of Appeal. In September 2008, plaintiffs’ motion to voluntarily dismiss their appeal as to the Company was granted by the court, thereby dismissing this action as to the Company.

Other Litigation

On September 7, 2008, the Company and Altria Group, Inc. (“Altria”) entered into a merger agreement, pursuant to which Altria will acquire all outstanding shares of the Company’s common stock for a price of $69.50 per share. Subsequently, the Company has been named in a purported class action filed in Connecticut by a plaintiff against the Company, the members of its Board of Directors (“Board”) and Altria challenging the transaction contemplated by the merger agreement between the Company and Altria and alleging, among other things, that the per share price offered by Altria is unfair and grossly inadequate and that the termination fee provision of the merger agreement is excessive and operates as a deterrent to other potential bidders. The complaint also alleges that the Company’s directors breached their fiduciary obligations by failing to maximize stockholder value by putting their own interests ahead of stockholder interests. The complaint also asserts a claim for aiding and abetting breaches of fiduciary duty against Altria. Recently, the plaintiff filed an amended class action complaint adding additional allegations about certain payments that the Company’s officers and directors will receive for their Company stock options and restricted stock in connection with the merger and under certain employment agreements with Altria. Further, the amended complaint adds a claim for aiding and abetting breaches of fiduciary duty against the Company and alleges that the Company’s proxy statement prepared in connection with the merger transaction, filed on October 29, 2008, omits certain material information, including information relating to the Board’s process leading to the merger and the financial analysis utilized by the Company’s financial advisors in connection with their fairness opinions. The plaintiff seeks to enjoin the merger unless and until the Company supplements its proxy, as well as attorneys’ fees and costs. The Company believes that the claims asserted by the plaintiff are wholly without merit and intends to defend vigorously against this action. See Note 17 – “Other Matters,” for additional information regarding the pending acquisition transaction.

The Company believes, and has been so advised by counsel handling this case, that it has a number of meritorious defenses. Except as to the Company’s willingness to consider alternative solutions for resolving certain litigation issues, this case has been, and will continue to be, vigorously defended. The Company believes that the ultimate outcome of this matter will not have a material adverse effect on its consolidated financial results or its consolidated financial position, although if plaintiffs were to seek damages and to prevail, the effect of any judgment or settlement could have a material adverse impact on its consolidated financial results in the particular reporting period in which resolved and, depending on the size of any such judgment or settlement, a material adverse effect on its consolidated financial position. Notwithstanding the Company’s assessment of the potential financial impact of this case, the Company is not able to estimate with any certainty the amount of loss, if any, which would be associated with an adverse resolution.

UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15 — BORROWING ARRANGEMENTS

Senior Notes

On February 29, 2008, the Company completed the issuance and sale of $300 million aggregate principal amount of 5.75 percent senior notes in a public offering at a price to the underwriters of 98.982 percent of the principal amount. These senior notes mature on March 1, 2018, with interest payable semiannually. Costs of $2.6 million associated with the issuance of the senior notes were capitalized and are being amortized over the term of the senior notes. Approximately $0.1 million and $0.2 million of these costs were recognized during the three and nine months ended September 30, 2008, respectively. Upon the completion of the issuance of the senior notes, the Company repaid $100 million of borrowings outstanding under the Company’s $200 million six-month credit agreement (the “Credit Agreement”) and $200 million of borrowings outstanding under the Company’s five-year revolving credit facility. In accordance with its terms, the Credit Agreement was terminated upon the issuance of the senior notes and the repayment of outstanding borrowings.

The Company’s $240 million aggregate principal amount senior notes, of which $200 million is 7.25 percent fixed rate debt and $40 million is floating rate debt, mature on June 1, 2009. As such, these notes are classified as “current portion of long-term debt” on the September 30, 2008 Condensed Consolidated Statement of Financial Position.

Revolving Credit Facility

The Company has a $300 million, five-year revolving credit facility (the “Credit Facility”) which will expire on June 29, 2012. Borrowings under the Credit Facility are primarily used for general corporate purposes, including the support of commercial paper borrowings. At September 30, 2008, the Company had borrowings of $40 million outstanding under the Credit Facility.

16 — GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The following table presents the changes in the carrying amount of goodwill for the nine months ended September 30, 2008:

		Total
Goodwill as of December 31, 2007		$	28,304
Translation adjustments			(211	)
Goodwill as of September 30, 2008		$	28,093

Approximately $25.2 million of the goodwill balance at September 30, 2008 and December 31, 2007 related to the Company’s Wine segment, with the remainder related to the Company’s international operations.

UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Non-amortizable Intangible Assets Other than Goodwill

At both September 30, 2008 and December 31, 2007, the Company had $41.9 million of identifiable intangible assets that were not being amortized, as such assets were deemed to have indefinite useful lives. These non-amortizable intangible assets relate to Wine segment acquired trademarks. There were no impairment charges recorded relating to these assets during the nine months ended September 30, 2008 or 2007.

Amortizable Intangible Assets

The value of the Company’s amortizable intangible assets at September 30, 2008 and December 31, 2007 were approximately $13.5 million and $14.3 million (net of accumulated amortization of $2.2 million and $1.4 million), respectively. These assets consist primarily of acquired customer relationships, customer lists and intellectual property, which are being amortized on a straight-line basis over a weighted-average period of approximately 18 years.

For the third quarter of 2008 and 2007, amortization expense related to intangible assets was approximately $0.3 million and $0.1 million, respectively. For the first nine months of 2008 and 2007, amortization expense related to intangible assets was approximately $0.8 million and $0.3 million, respectively.

17 — OTHER MATTERS

Minority Put Arrangement

In September 2007 the Company completed the acquisition of Stag’s Leap Wine Cellars through one of the Company’s consolidated subsidiaries, Michelle-Antinori, LLC (“Michelle-Antinori”), in which the Company holds an 85 percent ownership interest, with a 15 percent non-controlling interest held by Antinori California (“Antinori”). In connection with the acquisition of Stag’s Leap Wine Cellars and the related formation of Michelle-Antinori, the Company provided a put right to Antinori (“minority put arrangement”). The minority put arrangement, as amended, provides Antinori with the right to require the Company to purchase its 15 percent ownership interest in Michelle-Antinori at a price equivalent to Antinori’s initial investment. The minority put arrangement becomes exercisable beginning on the third anniversary of the Stag’s Leap Wine Cellars acquisition (September 11, 2010). The Company accounts for the minority put arrangement as mandatorily redeemable securities under Accounting Series Release No. 268, Redeemable Preferred Stocks, and Emerging Issues Task Force Abstract Topic No. D-98, Classification and Measurement of Redeemable Securities, as redemption is outside of the control of the Company. Under this accounting model, to the extent the value of the minority put arrangement is greater than the minority interest reflected on the balance sheet (“traditional minority interest”), the Company recognizes the difference as an increase to the value of minority interest, with an offset to retained earnings and a similar reduction to the numerator in the earnings per share available to common shareholders calculation.  The Company also reflects any decreases to the amount in a similar manner, with the floor in all cases being the traditionally calculated minority interest balance as of that date. The Company values the put arrangement as if the redemption date were the end of the current reporting period. As of September 30, 2008, the value of the minority put arrangement did not exceed the traditional minority interest balance. Therefore, no adjustment was recognized in the Condensed Consolidated Statement of Financial Position or in the calculation of earnings per share.

UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Antitrust Litigation

In the first quarter of 2007 the Company recorded a $122.1 million pre-tax charge, representing the estimated costs to be incurred in connection with the resolution of the Wisconsin and California indirect purchaser class actions. Approximately $28.5 million of this charge related to settlement of the Wisconsin action resulting from court-ordered mediation in April 2007. The charge reflected costs attributable to coupons that will be distributed to consumers, which will be redeemable on future purchases of the Company’s moist smokeless tobacco products. Also reflected in the Wisconsin charge are plaintiffs’ attorneys’ fees and other administrative costs of the settlement. The terms of the Wisconsin settlement were approved by the court in December 2007. The remaining $93.6 million of the first quarter 2007 charge related to settlement of the California action in May 2007, as a result of court-ordered mediation. This charge brought the total recognized liability for the California action to $96 million, which reflected the cost of cash payments to be made to the benefit of class members, as well as plaintiffs’ attorneys’ fees and other administrative costs of the settlement. Refer to Note 14, “Contingencies,” for additional information.

Pending Acquisition

On September 7, 2008, the Company, Altria, and Armchair Merger Sub, Inc., a wholly-owned subsidiary of Altria, entered into an Agreement and Plan of Merger (as previously amended, the “Merger Agreement”), pursuant to which Altria will acquire all outstanding shares of the Company’s common stock for a price of $69.50 per share. The completion of the acquisition is subject to certain customary conditions, including, but not limited to, the receipt of applicable shareholder and regulatory approvals. The Merger Agreement contains specified termination rights for each of the parties and provides that, in certain circumstances, the Company would be required to pay Altria a termination fee of $250 million plus the reimbursement of certain expenses up to an aggregate amount of $10 million. Additionally, in certain circumstances Altria would be required to pay the Company a reverse termination fee of either $200 million or $300 million. The foregoing summary of the Merger Agreement and the transactions contemplated therein does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement. For the complete Merger Agreement, including any amendments thereto, please refer to Exhibits 2.1 and 2.2 to this Quarterly Report on Form 10-Q.

The Company incurred $7.1 million of acquisition-related costs during the third quarter of 2008, consisting of legal and other professional fees. These amounts are reported on the “acquisition-related costs” line in the Condensed Consolidated Statement of Operations.

In October 2008, the Federal Trade Commission granted early termination of the initial waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and, therefore, no further regulatory review by the federal antitrust authorities is required in connection with the acquisition. Assuming shareholder approval is provided at a special shareholder meeting to be held on December 4, 2008 and all other conditions to close are satisfied, the transaction is anticipated to close the first week of January 2009 and no later than January 7, 2009.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the Company’s consolidated results of operations and financial condition should be read in conjunction with the condensed consolidated financial statements and notes to the condensed consolidated financial statements within this Quarterly Report on Form 10-Q, as well as the consolidated financial statements and notes thereto included in the 2007 Form 10-K. Herein, the Company makes forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in those forward-looking statements as a result of various factors, including, but not limited to, those presented under “Cautionary Statement Regarding Forward-Looking Information” within “Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).” In addition, the Company has presented certain risk factors relevant to the Company’s business included in Item 1A in Part I of the 2007 Form 10-K, as well as additional risk factors associated with the Company’s pending acquisition by Altria, which are included in Item 1A in Part II of this Quarterly Report on Form 10-Q.

INTRODUCTION

MD&A is provided as a supplement to the accompanying consolidated financial statements and notes thereto, to assist individuals in their review of such statements. MD&A has been organized as follows:

	•		OVERVIEW – This section provides context for the remainder of MD&A, including a general description of the Company’s overall business, its business segments and a high-level summary of Company-specific and industry-wide factors impacting its operations.
	•		RESULTS OF OPERATIONS – This section provides an analysis of the Company’s results of operations for the three and nine months ended September 30, 2008 and 2007. This section is organized using a layered approach, beginning with a discussion of consolidated results at a summary level, followed by more detailed discussions of business segment results and unallocated corporate items, including interest and income taxes.
	•		OUTLOOK – This section provides information regarding the Company’s current expectations, mainly with regard to the remainder of the current fiscal year, and is organized to provide information by business segment and on a consolidated basis.
	•		LIQUIDITY AND CAPITAL RESOURCES – This section provides an analysis of the Company’s financial condition, including cash flows for the nine months ended September 30, 2008 and 2007 and any material updates to the Company’s aggregate contractual obligations as of September 30, 2008.
	•		OFF-BALANCE SHEET ARRANGEMENTS – This section provides information regarding any off-balance sheet arrangements that are, or could be, material to the Company’s results of operations or financial condition.
	•		NEW ACCOUNTING STANDARDS – This section provides information regarding any newly issued accounting standards which have not yet been adopted by the Company.

OVERVIEW

BUSINESS

UST Inc. is a holding company for its wholly-owned subsidiaries: U.S. Smokeless Tobacco Company and International Wine & Spirits Ltd. The Company’s largest subsidiary, U.S. Smokeless Tobacco Company, is the leading manufacturer and marketer of moist smokeless tobacco products, including the iconic premium brands Copenhagen and Skoal, and the value brands Red Seal and Husky. The Company’s International Wine & Spirits Ltd. subsidiary produces and markets premium wines sold nationally, via its Ste. Michelle Wine Estates subsidiary, under 20 different labels including Chateau Ste. Michelle, Columbia Crest, Conn Creek, Red Diamond, Erath and Stag’s Leap Wine Cellars. The Company also produces and markets sparkling wine under the Domaine Ste. Michelle label. In addition, the Company is the exclusive United States importer and distributor of the portfolio of wines produced by the Italian winemaker Marchesi Antinori, Srl (“Antinori”).

The Company conducts its business principally in the United States. The Company’s operations are divided primarily into two reportable segments: Smokeless Tobacco and Wine. The Company’s international smokeless tobacco operations, which are less significant, are reported as All Other Operations.

As discussed in Item 1, “Financial Statements – Notes to Condensed Consolidated Financial Statements – Note 17, Other Matters,” on September 7, 2008, the Company and Altria entered into a merger agreement, pursuant to which Altria will acquire all outstanding shares of the Company’s common stock for a price of $69.50 per share. The completion of the acquisition is subject to certain customary conditions, including, but not limited to, the receipt of shareholder approval. The transaction is currently expected to close, subject to the satisfaction of all conditions to closing, the first week of January 2009 and no later than January 7, 2009. The matters set forth in this Quarterly Report on Form 10-Q do not reflect any actions that Altria may take, or request the Company to take, following completion of the transaction.

SMOKELESS TOBACCO SEGMENT

The Company’s vision in the Smokeless Tobacco segment is for its smoke-free products to be recognized by adults as the preferred way to experience tobacco satisfaction. The Company’s primary objective in the Smokeless Tobacco segment is to continue to grow the moist smokeless tobacco category by building awareness and social acceptability of smokeless tobacco products among adults, primarily smokers, with a secondary objective of competing effectively in every segment of the moist smokeless tobacco category.

Category Growth

Category growth is the Company’s top focus, as moist smokeless tobacco is a low incidence category and offers a viable option to adult smokers who are increasingly facing restrictions and are seeking a discreet and convenient alternative. For perspective, the number of adults who smoke is significantly larger than the number of adults who use smokeless tobacco products. As a result, every one percent of adult smokers who converts to moist smokeless tobacco products represent a 7 percent to 8 percent increase in the moist smokeless tobacco category’s adult consumer base. The Company views conversion as essential because consumer research indicates that the majority of new adult consumers who enter the category do so in the premium segment, of which the Company has approximately a 91 percent share.

In addition to advertising initiatives focused on category growth, the Company has utilized its direct mail and one-on-one marketing programs to promote the discreetness and convenience of smokeless tobacco relative to cigarettes. These programs, which the Company believes have been successful over the past several years, reaching over 6 million adult smokers, continue in 2008. The success of the category growth initiatives is also impacted by product innovation, as evidenced by the contribution that new products have made to the Smokeless Tobacco segment’s results over the past several years. The success of the category growth initiatives is further evidenced by the fact that over the past several years, a majority of the new adult consumers who have recently entered the moist smokeless tobacco category first smoked cigarettes and that category growth has accelerated since the initiatives’ inception. Based on these results and the rate of growth experienced for the first nine months of 2008, the Company expects category growth of about 7 percent for full-year 2008.

Competing Effectively

The Company is committed to competing effectively in every segment of the moist smokeless tobacco category by accelerating profitable volume growth, with the goal of growing as fast as the category. The Company intends to achieve this goal through its premium brand loyalty and brand-building initiatives, and also through price-focused efforts related to price-value products.

Premium Brand Loyalty – While category growth remains the Company’s top priority, it has also significantly enhanced its efforts on adult consumer loyalty for its premium moist smokeless tobacco products. The premium brand loyalty plan is designed to minimize migration from premium to price-value products by delivering value to adult consumers through product quality and brand-building efforts, along with promotional spending and other initiatives. The Company believes this effort has been successful over the last two years, as demonstrated by the premium net can volume growth experienced during the vast majority of that period. However, during the second quarter of 2008, there was some softness in premium net unit volume as a result of macroeconomic challenges, high gasoline prices and increased competitive activity, in response to which the Company increased its promotional efforts. The Company believes these efforts were effective, as evidenced by an improving trend in premium net can volume in the latter half of the third quarter, with an increase of approximately 1.2 percent, versus the corresponding period of 2007. For the first nine months of 2008, despite the challenging external environment, premium net can volume increased 0.3 percent, as compared to the first nine months of 2007. The Company believes that the increased competitive activity experienced earlier in the year is moderating, with price-value brands all taking price increases. In addition, the rate of growth experienced by competitors is also expected to moderate, as they begin to compare to prior year product launches. Taking this improvement, as well as lower gasoline prices, into consideration, the Company does not intend any further increase to its premium brand-building and loyalty initiatives beyond currently planned levels for the remainder of 2008.

Price-Value Initiatives – The Company’s commitment to accelerate profitable volume growth reflects a balanced portfolio approach, which also includes a full complement of marketing support for its price-value products. The Company’s successful execution of a balanced portfolio approach continued in the first nine months of 2008, as 6.9 percent growth in price-value net can volume occurred at the same time as 0.3 percent growth in premium net can volume. Of note, the Company repriced and repositioned its Rooster brand to compete as a price-value brand during the second quarter of 2008.

WINE SEGMENT

The Company’s vision in the Wine segment is for Ste. Michelle Wine Estates to be recognized as the premier fine wine company in the world. This is a vision based on continuous improvement in quality and greater recognition through third-party acclaim and superior products. In connection with that vision, the Company aims to elevate awareness of the quality of Washington state wines and increase its prestige to that of the top regions of the world through superior products, innovation and customer focus. In order to achieve these goals, attention is directed towards traditional style wines in the super premium to luxury-priced categories. The Company has made progress towards its vision, as demonstrated by its recent accomplishments, with premium case volume growth of 17.8 percent in the first nine months of 2008, as compared to the corresponding period of 2007. According to ACNielsen, Ste. Michelle Wine Estates continued to be the fastest growing of the ten largest wineries in the United States during the first nine months of 2008. During the first nine months of 2008, the Company’s Chateau Ste. Michelle brand was the fastest growing top ten premium brand, according to ACNielsen. In addition, as reported by ACNielsen, volume growth for Washington state wines, where the Company maintained its strong leadership position, outpaced most other major regions thus far during 2008, with a growth rate of approximately 10 percent.

Strategic alliances and acquisitions in the Wine segment outside of Washington State have also been important in enabling the Company to achieve its long-term vision. The alliance with Antinori, to become its exclusive United States importer and distributor, and the purchase of the Erath label and winery, both of which occurred in 2006, have broadened the Company’s position with respect to two key wine regions, Tuscany and Oregon. The addition of Antinori wines positions the Company as a leader in United States distribution of Tuscan wines, while the addition of Erath establishes the Company as one of the largest producers of Oregon Pinot Noir. The Company also completed the acquisition of Stag’s Leap Wine Cellars and its signature Napa Valley, CA vineyards in September 2007, with a 15 percent minority interest held by Antinori California. This acquisition provides additional prestige to the Wine segment’s acclaimed portfolio, further strengthens the Company’s relationship with Antinori, and has contributed favorably to the segment’s continued operating profit growth.

Another key element of the Wine segment’s strategy is expanded domestic distribution of its wines, especially in certain account categories such as restaurants, wholesale clubs, supermarkets, wine shops and mass merchandisers. To that end, the Company remains focused on the continued expansion of its sales force and category management staff.

RESULTS OF OPERATIONS
(In thousands, except per share amounts or where otherwise noted)

CONSOLIDATED RESULTS
Third Quarter of 2008 compared with the Third Quarter of 2007

		Three Months Ended
		September 30,								Increase/(Decrease)
		2008				2007				Amount				%
Net sales		$	484,631			$	479,612			$	5,019				1.0
Net earnings			125,322				133,600				(8,278	)			(6.2	)
Basic earnings per share			0.85				0.85				—				—
Diluted earnings per share			0.84				0.84				—				—
Restructuring charges			6,406				1,677				4,729				—
Antitrust litigation			450				3,158				(2,708	)			(85.8	)
Acquisition-related costs			7,082				—				7,082				—

Net Earnings

Consolidated net earnings decreased in the third quarter of 2008, as compared to the third quarter of 2007, primarily due to decreased operating income and higher net interest expense, partially offset by lower income tax expense. The Company reported operating income of $203.7 million in the third quarter of 2008, representing 42 percent of consolidated net sales, compared to operating income of $218.5 million, or 45.6 percent of consolidated net sales, in the third quarter of 2007. The decrease in operating income was primarily due to the following:

	•		Lower net sales and gross margin in the Smokeless Tobacco segment;
	•		The impact of $7.1 million in acquisition-related costs recognized in connection with the pending acquisition of the Company by Altria, which adversely impacted the operating margin by 1.5 percentage points;
	•		Higher restructuring charges incurred in connection with the Project Momentum initiative (see Restructuring Charges section below). The impact of restructuring charges adversely impacted the operating margin percentage by approximately 1.3 percentage points and 0.3 percentage points in the third quarter of 2008 and 2007, respectively; and
	•		Higher SA&A expenses in the Wine segment, including the impact of the addition of Stag’s Leap Wine Cellars, which was acquired in mid-September 2007.

These factors were partially offset by:

	•		Increased net sales and gross margin in the Wine segment and the Company’s international operations;
	•		Lower SA&A expenses in the Smokeless Tobacco segment, which can be attributed to Project Momentum;
	•		Lower unallocated corporate expenses, primarily due to the absence of the amortization of imputed rent related to a below-market short-term lease the Company executed in connection with the sale of its former corporate headquarters building, which adversely impacted the third quarter of 2007 operating margin percentage by 0.6 percentage points, as well as lower professional fees; and
	•		Lower antitrust litigation charges which adversely impacted the operating margin by 0.1 percentage points and 0.7 percentage points in the third quarter of 2008 and 2007, respectively.

Basic and diluted earnings per share of $0.85 and $0.84, respectively, for the third quarter of 2008, were equal to the corresponding comparative measures in 2007. Basic average shares outstanding in the third quarter of 2008 were 6.6 percent lower than in the comparable prior year period, primarily as a result of the 10 million shares repurchased during the 12-month period ended September 30, 2008, the majority of which were repurchased in the latter half of 2007, partially offset by the exercise of stock options. This decline in basic average shares outstanding occurred despite the Company’s suspension of its share repurchase program during the second quarter of 2008 in connection with the pending acquisition by Altria. Diluted average shares outstanding in the third quarter of 2008 were lower than those in the third quarter of 2007 mainly due to the decrease in basic average shares outstanding and a lower level of dilutive options outstanding.

Net Sales

		Three Months Ended
		September 30,								Increase/(Decrease)
		2008				2007				Amount				%
Net Sales by Segment:
Smokeless Tobacco		$	364,148			$	384,067			$	(19,919	)			(5.2	)
Wine			99,760				82,286				17,474				21.2
All Other Operations			20,723				13,259				7,464				56.3
Consolidated Net Sales		$	484,631			$	479,612			$	5,019				1.0

The increase in consolidated net sales for the third quarter of 2008, as compared to the third quarter of 2007, was primarily due to the following:

	•		Improved case volume for existing premium wine brands, as well as the incremental impact from the addition of the Stag’s Leap Wine Cellars portfolio of wines, which was acquired in September 2007;
	•		Higher international net sales, primarily relating to a Canadian excise tax increase, which is passed through to customers; and
	•		Increased net can volume for price-value moist smokeless tobacco products.

These factors were partially offset by:

	•		A slight decrease in premium net can volume for moist smokeless tobacco products; and
	•		Lower net revenue realization per can in the Smokeless Tobacco segment.

Segment Net Sales as a Percentage of Consolidated Net Sales

Gross Margin

		Three Months Ended
		September 30,								Increase/(Decrease)
		2008				2007				Amount				%
Gross Margin by Segment:
Smokeless Tobacco		$	294,299			$	315,199			$	(20,900	)			(6.6	)
Wine			36,920				29,626				7,294				24.6
All Other Operations			9,748				8,318				1,430				17.2
Consolidated Gross Margin		$	340,967			$	353,143			$	(12,176	)			(3.4	)

The consolidated gross margin decrease in the third quarter of 2008, as compared to the third quarter of 2007, was primarily due to lower net sales in the Smokeless Tobacco segment and higher cost of products sold in all segments, partially offset by higher net sales in the Wine segment and the Company’s international operations.

		Three Months Ended
		September 30,								Increase/
		2008				2007				(Decrease)
Gross Margin as a % of Net Sales by Segment:
Smokeless Tobacco			80.8	%			82.1	%			(1.3	)
Wine			37.0	%			36.0	%			1.0
All Other Operations			47.0	%			62.7	%			(15.7	)
Consolidated			70.4	%			73.6	%			(3.2	)

The decline in the consolidated gross margin, as a percentage of net sales, was mainly due to a change in segment mix, as case volume for wine, which sells at comparatively lower margins, grew faster than the net can volume for moist smokeless tobacco products. Also contributing to this decline was the lower net revenue realization per can in the Smokeless Tobacco segment, as well as the impact of a Canadian excise tax related price increase affecting the Company’s international operations. Gross margin percentages for each segment are discussed further below.

Acquisition-Related Costs

In connection with Altria’s pending acquisition of the Company, $7.1 million of acquisition-related costs were incurred during the third quarter of 2008, consisting of legal and other professional fees.

Restructuring Charges

The Company recognized $6.4 million and $1.7 million in restructuring charges in the third quarter of 2008 and 2007, respectively, related to further actions undertaken in connection with Project Momentum. Under this initiative, the Company has targeted at least $150 million in annual savings to be realized within the three years following its initial implementation in September 2006, of which $130 million has been achieved through September 30, 2008. Refer to the Restructuring Charges section within the First Nine Months of 2008 compared with the First Nine Months of 2007 discussion below for additional information.

First Nine Months of 2008 compared with the First Nine Months of 2007

		Nine Months Ended
		September 30,								Increase/(Decrease)
		2008				2007				Amount				%
Net sales		$	1,463,516			$	1,417,884			$	45,632				3.2
Net earnings			390,316				381,084				9,232				2.4
Basic earnings per share			2.64				2.40				0.24				10.0
Diluted earnings per share			2.62				2.37				0.25				10.5
Gain on sale of corp. HQ bldg.			—				105,143				(105,143	)			—
Restructuring charges			8,024				9,105				(1,081	)			(11.9	)
Antitrust litigation			1,975				125,258				(123,283	)			(98.4	)
Acquisition-related costs			7,082				—				7,082				—

Net Earnings

Consolidated net earnings increased in the first nine months of 2008, as compared to the first nine months of 2007, as a result of increased operating income and the impact of a lower effective tax rate, partially offset by higher net interest expense. The Company reported operating income of $654.3 million in the first nine months of 2008, representing 44.7 percent of consolidated net sales, compared to operating income of $624.2 million, or 44 percent of consolidated net sales, in the first nine months of 2007. The increase in operating income was primarily due to the following:

	•		Lower antitrust litigation charges, as the 2008 period included $2 million and the prior year period included $125.3 million. The charges in 2007 represented the estimated costs associated with the resolution of indirect purchaser antitrust class actions in the States of Wisconsin and California. Antitrust litigation charges adversely impacted the operating margin percentage by 0.1 percentage points and 8.8 percentage points in the first nine months of 2008 and 2007, respectively;
	•		Increased net sales and gross margin in the Wine segment and the Company’s international operations;
	•		Lower SA&A expenses in the Smokeless Tobacco segment, which can be attributed to Project Momentum;
	•		Lower restructuring charges incurred in connection with the Project Momentum initiative (see Restructuring Charges section below). The impact of restructuring charges adversely impacted the operating margin percentage by approximately 0.5 percentage points and 0.6 percentage points in the first nine months of 2008 and 2007, respectively; and
	•		Lower unallocated corporate expenses, primarily due to lower costs related to changes in executive management and the absence of amortization of imputed rent related to a below-market short-term lease the Company executed in connection with the sale of its former corporate headquarters building. The impact of such charges adversely impacted the operating margin percentage by 0.1 and 0.8 percentage points in the first nine months of 2008 and 2007, respectively.

These factors were partially offset by:

	•		The absence of a $105 million pre-tax gain recognized in the prior year in connection with the sale of the Company’s former corporate headquarters building, which favorably impacted the prior year operating margin by 7.4 percentage points;
	•		Lower net sales and gross margin in the Smokeless Tobacco segment;
	•		The impact of $7.1 million in acquisition-related costs recognized in connection with the pending acquisition of the Company by Altria, which adversely impacted the operating margin by 0.5 percentage points; and
	•		Higher SA&A expenses in the Wine segment, including the impact of the addition of Stag’s Leap Wine Cellars, which was acquired in September 2007.

Basic and diluted earnings per share were $2.64 and $2.62, respectively, for the first nine months of 2008, representing increases of 10 percent and 10.5 percent, respectively, from each of the corresponding comparative measures in 2007. Basic average shares outstanding in the first nine months of 2008 were 7 percent lower than in the comparable prior year period, primarily as a result of the 10 million shares repurchased during the 12-month period ended September 30, 2008, partially offset by the exercise of stock options. Diluted average shares outstanding in the first nine months of 2008 were lower than those in the first nine months of 2007 mainly due to the decrease in basic average shares outstanding and a lower level of dilutive options outstanding.

Net Sales

		Nine Months Ended
		September 30,								Increase/(Decrease)
		2008				2007				Amount				%
Net Sales by Segment:
Smokeless Tobacco		$	1,131,399			$	1,150,518			$	(19,119	)			(1.7	)
Wine			285,060				230,581				54,479				23.6
All Other Operations			47,057				36,785				10,272				27.9
Consolidated Net Sales		$	1,463,516			$	1,417,884			$	45,632				3.2

The increase in consolidated net sales for the first nine months of 2008, as compared to the first nine months of 2007, was primarily due to the following:

	•		Higher case volume for premium wine, including the incremental impact from the addition of the Stag’s Leap Wine Cellars portfolio of wines, which was acquired in September 2007;
	•		Improved net can volume for moist smokeless tobacco products, with increases for both premium and price-value products; and
	•		Improved international results.

These factors were partially offset by:

•

Lower net revenue realization per can in the Smokeless Tobacco segment.

Segment Net Sales as a Percentage of Consolidated Net Sales

Gross Margin

		Nine Months Ended
		September 30,								Increase/(Decrease)
		2008				2007				Amount				%
Gross Margin by Segment:
Smokeless Tobacco		$	920,235			$	945,138			$	(24,903	)			(2.6	)
Wine			102,119				80,575				21,544				26.7
All Other Operations			25,843				23,200				2,643				11.4
Consolidated Gross Margin		$	1,048,197			$	1,048,913			$	(716	)			(0.1	)

The consolidated gross margin in the first nine months of 2008 remained relatively flat, as compared to the first nine months of 2007, as higher net sales in the Wine segment and the Company’s international operations were offset by lower sales in the Smokeless Tobacco segment and higher cost of products sold in all segments.

		Nine Months Ended
		September 30,								Increase/
		2008				2007				(Decrease)
Gross Margin as a % of Net Sales by Segment:
Smokeless Tobacco			81.3	%			82.1	%			(0.8	)
Wine			35.8	%			34.9	%			0.9
All Other Operations			54.9	%			63.1	%			(8.2	)
Consolidated			71.6	%			74.0	%			(2.4	)