1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended March 31, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-17506
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UST Inc.
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(Exact name of registrant as specified in its charter)
Delaware 06-1193986
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 West Putnam Avenue, Greenwich, CT 06830
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 661-1100
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NONE
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Number of Common shares ($.50 par value) outstanding at March 31, 2001
163,275,116
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2
UST Inc.
(Registrant)
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statement of Financial Position --
March 31, 2001 and December 31, 2000 2
Condensed Consolidated Statement of Earnings --
Three months ended March 31, 2001 and 2000 3
Condensed Consolidated Statement of Cash Flows --
Three months ended March 31, 2001 and 2000 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Operations and
Financial Condition 10
Part II. Other Information:
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
(1)
3
UST Inc.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Dollars in thousands, except per share data)
March 31, December 31,
2001 2000
----------- -----------
(Unaudited) (Note)
ASSETS
Current assets
Cash and cash equivalents ......................................... $ 99,107 $ 96,034
Accounts receivable ............................................... 71,837 82,698
Inventories:
Leaf tobacco .................................................... 234,212 199,382
Products in process ............................................. 140,956 141,561
Finished goods .................................................. 86,001 88,739
Other materials and supplies .................................... 21,406 19,602
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482,575 449,284
Deferred income taxes ............................................. 9,913 9,907
Income taxes receivable ........................................... -- 28,915
Prepaid expenses and other current assets ......................... 24,582 24,567
----------- -----------
Total current assets ...................................... 688,014 691,405
Property, plant and equipment, net .................................. 354,878 358,586
Restricted deposits ................................................. 571,582 505,755
Other assets ........................................................ 90,588 90,653
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Total assets .............................................. $ 1,705,062 $ 1,646,399
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses ............................. $ 96,235 $ 155,179
Income taxes payable .............................................. 91,886 14,393
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Total current liabilities ................................. 188,121 169,572
Long-term debt ...................................................... 868,350 869,175
Postretirement benefits other than pensions ......................... 81,778 81,677
Deferred income taxes ............................................... 183,261 186,559
Other liabilities ................................................... 72,749 68,844
Contingencies (see note) ............................................ -- --
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Total liabilities ......................................... 1,394,259 1,375,827
Stockholders' equity
Preferred stock -- par value $.10 per share:
Authorized -- 10 million shares; issued - none
Common stock -- par value $.50 per share:
Authorized -- 600 million shares;
issued 205,096,716 shares in 2001
and 204,743,236 shares in 2000 ................................. 102,548 102,372
Additional paid-in capital ........................................ 536,446 526,996
Retained earnings ................................................. 917,980 885,074
Accumulated other comprehensive loss .............................. (15,907) (13,606)
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1,541,067 1,500,836
Less treasury stock -- 41,821,600 shares .......................... 1,230,264 1,230,264
----------- -----------
Total stockholders' equity ................................ 310,803 270,572
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Total liabilities and stockholders' equity ................ $ 1,705,062 $ 1,646,399
=========== ===========
Note: The statement of financial position at December 31, 2000 has been derived
from the audited financial statements at that date.
See Notes to Condensed Consolidated Financial Statements.
(2)
4
UST Inc.
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
Three months ended
March 31,
----------------------
2001 2000
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Net sales ............................................ $ 382,965 $ 368,295
Costs and expenses
Cost of products sold .............................. 72,532 66,975
Excise taxes ....................................... 8,257 8,396
Selling, advertising and administrative ............ 117,700 119,509
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Total costs and expenses ....................... 198,489 194,880
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Operating income ..................................... 184,476 173,415
Interest, net ........................................ 8,887 7,527
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Earnings before income taxes ......................... 175,589 165,888
Income taxes ......................................... 67,582 63,924
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Net earnings ......................................... $ 108,007 $ 101,964
========= =========
Net earnings per share
Basic ............................................. $ .66 $ .62
Diluted ........................................... $ .66 $ .62
Dividends per share .................................. $ .46 $ .44
Average number of shares
Basic ............................................. 163,029 164,961
Diluted ........................................... 164,115 165,123
See Notes to Condensed Consolidated Financial Statements.
(3)
5
UST Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Three months ended
March 31,
----------------------
2001 2000
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OPERATING ACTIVITIES
Net cash provided by operating activities ............ $ 141,312 $ 85,409
INVESTING ACTIVITIES
Purchases of property, plant and equipment ........... (6,546) (13,153)
Dispositions of property, plant and equipment ........ 1,128 601
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Net cash used in investing activities ................ (5,418) (12,552)
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FINANCING ACTIVITIES
Proceeds from debt ................................... -- 300,000
Repayment of debt .................................... (825) (241,965)
Proceeds from the issuance of stock .................. 8,932 1,948
Restricted deposits .................................. (65,827) --
Dividends paid ....................................... (75,101) (72,266)
Stock repurchased .................................... -- (97,470)
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Net cash used in financing activities ................ (132,821) (109,753)
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Increase (decrease) in cash and cash equivalents. 3,073 (36,896)
Cash and cash equivalents at beginning of year... 96,034 74,989
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Cash and cash equivalents at end of period ...... $ 99,107 $ 38,093
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Income taxes.................................... $ 3,918 $ 5,276
Interest........................................ 18,367 2,621
See Notes to Condensed Consolidated Financial Statements.
(4)
6
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(Unaudited)
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. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three month
period ended March 31, 2001 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2001. For further information,
refer to the consolidated financial statements and footnotes thereto included in
Registrant's annual report on Form 10-K for the year ended December 31, 2000.
Certain amounts reported on the 2000 Condensed Consolidated Statement of Cash
Flows have been reclassified to conform to the 2001 presentation.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, Registrant adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," as it relates to the use of
derivative instruments, on a cumulative basis. SFAS No. 133 requires the
recognition of all derivatives as either assets or liabilities in the statement
of financial position with measurement at fair value. The Statement calls for
derivative instruments, which meet the necessary criteria for hedge accounting,
to be given a formal designation as fair value, cash flow or foreign currency
hedges. Changes in the fair value of derivative instruments are recognized in
either net income or other comprehensive income based upon their designated
purpose and whether or not they meet effectiveness standards. Upon adoption of
SFAS No. 133, Registrant had fulfilled all of the pre-adoption requirements in
order to qualify for post-adoption cash flow hedge accounting for its interest
rate swap.
Registrant, from time to time, enters into derivative financial instruments to
hedge against exposure to risks associated with changes in interest rates and,
to a lesser extent, foreign currency exchange rates. Registrant's risk
management policy involves increasing its liquidity and maintaining its
financial flexibility by reducing or transferring risk exposure at appropriate
costs. Registrant has implemented risk management controls and limits to monitor
its risk position and ensure that hedging performance is in line with agreed
upon objectives. Registrant's risk management policy does not permit the use of
complex multi-faceted derivative instruments or compound derivative instruments
without the approval of the Board of Directors. In addition, the policy does not
permit the use of leveraged financial instruments. Registrant does not use
derivatives for trading or speculative purposes.
(5)
7
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In connection with the May 1999 issuance of $40 million aggregate principal
amount of floating-rate senior notes, Registrant hedged its interest rate risk
by entering into a ten-year interest rate swap with a notional amount of $40
million and quarterly settlement dates over the term of the contract. Registrant
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. Registrant entered into such
an agreement so that changes in the cash flows from the interest rate swap
perfectly offset the changes in the cash flows associated with the floating rate
of interest on the $40 million debt principal. Registrant has designated this
instrument a cash flow hedge, which is perfectly effective as the terms and
conditions of the floating rate debt coincide perfectly with the swap. The
transition adjustment on the cash flow hedge was a loss of $0.6 million ($0.4
million net of taxes) and was recorded on January 1, 2001 in "accumulated other
comprehensive loss" on the Condensed Consolidated Statement of Financial
Position. The amount reclassified from "accumulated other comprehensive loss" to
net earnings during the quarter ended March 31, 2001 in connection with this
interest rate swap was not material. The fair value of the swap at March 31,
2001 was a net liability of $2.3 million based on a dealer quote, considering
current market rates and was included in "other liabilities" on the Condensed
Consolidated Statement of Financial Position. "Accumulated other comprehensive
loss" at March 31, 2001 included the accumulated loss on the cash flow hedge
(net of taxes) of $1.5 million. As of March 31, 2001, Registrant anticipates
that approximately $0.7 million of the deferred loss on the swap, included in
"accumulated other comprehensive loss," will be reclassified into net earnings
during the next twelve months as a result of the floating rate interest payable
on the hedged senior notes.
There were no other derivative contracts at March 31, 2001, with the exception
of forward contracts to purchase grapes and bulk wine for use in the normal
course of business.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2001, the Emerging Issues Task force reached a consensus on Issue No.
00-25, "Vendor Income Statement Characterization of Consideration From a Vendor
to a Retailer", which affected the previous consensus reached on Issue No.
00-14, "Accounting for Certain Sales Incentives." These issues require that
costs associated with certain sales incentives be reclassified from selling,
advertising and administrative expenses to a reduction in net sales for all
periods presented on the Condensed Consolidated Statement of Earnings.
Registrant had planned to adopt these Issues in the second quarter of 2001;
however, as the effective date of both Issues was deferred with the consensus
reached in April, Registrant will now adopt Issues 00-14 and 00-25 in the first
quarter of 2002, as required. The income statement reclassifications required by
these Issues will have no effect on Registrant's operating income or net
earnings.
COMPREHENSIVE INCOME
The components of comprehensive income for Registrant are net earnings, foreign
currency translation adjustments, additional minimum pension liability
adjustments and the change in the fair value of derivatives designated as
effective cash flow hedges. For the first quarter of 2001 and 2000, total
comprehensive income, net of taxes, amounted to $105,706,000 and $101,985,000,
respectively.
(6)
8
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per
share:
Three months ended
March 31,
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2001 2000
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Numerator:
Net earnings ...................................... $ 108,007 $ 101,964
========= =========
Denominator:
Denominator for basic earnings per share -
weighted-average shares ......................... 163,029 164,961
Dilutive effect of stock options .................. 1,086 162
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Denominator for diluted earnings per share ...... 164,115 165,123
========= =========
Basic earnings per share ............................. $ .66 $ .62
Diluted earnings per share ........................... $ .66 $ .62
Options to purchase 11.9 million shares and 14.5 million shares of common stock
outstanding as of March 31, 2001 and 2000, respectively, were not included in
the computation of diluted earnings per share because their exercise prices were
greater than the average market price of the common shares and, therefore, would
be antidilutive.
SEGMENT INFORMATION
Registrant's reportable segments are Tobacco and Wine. Those business units that
do not meet quantitative reportable thresholds are included in all other
operations. Included in all other operations for both periods is Registrant's
international and cigar operations. Interim segment information is as follows:
Three months ended
March 31,
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2001 2000
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Net Sales to Unaffiliated Customers:
Smokeless tobacco ................................. $ 335,245 $ 324,231
Wine............................................... 41,023 37,107
All other operations .............................. 6,697 6,957
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Net sales ...................................... $ 382,965 $ 368,295
========= =========
Operating Profit (Loss):
Smokeless tobacco ................................. $ 185,309 $ 179,640
Wine .............................................. 4,042 2,477
All other operations .............................. (1,157) (2,027)
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Operating profit ............................... 188,194 180,090
Corporate expenses ................................ (3,718) (6,675)
Interest, net ..................................... (8,887) (7,527)
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Earnings before income taxes ................... $ 175,589 $ 165,888
========= =========
Registrant's identifiable assets did not change significantly from amounts
appearing in the December 31, 2000 Consolidated Segment Information (See Form
10-K for the year then ended).
(7)
9
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONTINGENCIES
Registrant has been named in certain health care cost reimbursement/third party
recoupment/class action litigation against the major domestic cigarette
companies and others seeking damages and other relief. The complaints in these
cases on their face predominantly relate to the usage of cigarettes; within that
context, certain complaints contain a few allegations relating specifically to
smokeless tobacco products. These actions are in varying stages of pretrial
activities.
Registrant believes these pending litigation matters will not result in any
material liability for a number of reasons, including the fact that Registrant
has had only limited involvement with cigarettes and Registrant's current
percentage of total tobacco industry sales is relatively small. Prior to 1986,
Registrant manufactured some cigarette products which had a de minimis market
share. From May 1, 1982 to August 1, 1994, Registrant distributed a small volume
of imported cigarettes and is indemnified against claims relating to those
products.
Registrant is also named in an action in Illinois brought by an individual
plaintiff and purporting to state a class action "on behalf of himself and all
other persons similarly situated" alleging that Registrant "manipulates the
nicotine levels and absorption rates" in its smokeless tobacco products and
seeking to recover monetary damages "in an amount not less than the purchase
price" of Registrant's smokeless tobacco products and certain other relief. The
purported class excludes all persons who claim any personal injury as a result
of using Registrant's smokeless tobacco products.
Registrant is also named in certain actions in West Virginia brought on behalf
of individual plaintiffs against cigarette manufacturers, smokeless tobacco
manufacturers, and other organizations seeking damages and other relief in
connection with injuries allegedly sustained as a result of tobacco usage,
including smokeless tobacco products. Included among the plaintiffs are six
individuals alleging use of Registrant's smokeless tobacco products and alleging
the types of injuries claimed to be associated with the use of smokeless tobacco
products; five of the six individuals also allege the use of other tobacco
products.
Registrant has been named in an action in Florida by an individual plaintiff and
his spouse seeking damages and other relief for personal injuries, including
"cancer of the tongue," allegedly sustained by plaintiff as a result of his use
of Registrant's smokeless tobacco products.
Registrant is named in an action in San Francisco, California along with five
other smokeless tobacco manufacturers seeking unspecified damages and other
relief brought by the City and County of San Francisco and the Environmental Law
Foundation purportedly on behalf of "the residents of San Francisco County and
the general public" alleging violation of The Safe Drinking Water and Toxic
Enforcement Act of 1986, Health and Safety Code ss.ss.25249.6, et seq.
("Proposition 65") and the California Unfair Competition Act, Business and
Professions Code ss.ss.17200, et seq. The action alleges, among other things,
that the defendants sold smokeless tobacco products in California without
providing a ". . . `clear and reasonable' warning that their use results in
multiple exposures to substances known to the State of California to cause
cancer, birth defects and reproductive harm.
Registrant believes, and has been so advised by counsel handling these cases,
that it has a number of meritorious defenses to all such pending litigation.
Except as to Registrant's willingness to consider alternative solutions for
resolving certain regulatory and litigation issues, all such cases are, and will
continue to be, vigorously defended. Registrant believes that the ultimate
outcome of all such pending
(8)
10
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONTINGENCIES (Continued)
litigation will not have a material adverse effect on the consolidated financial
position of Registrant, but may have a material impact on Registrant's
consolidated financial results for a particular reporting period in which
resolved.
On September 11, 2000, Registrant filed its notice of appeal to the United
States Court of Appeals for the Sixth Circuit from the final and interlocutory
orders entered by the District Court in connection with the Conwood litigation.
On October 10, 2000, Registrant satisfied the $500 million bonding requirement
imposed by the District Court. Registrant believes that the evidence presented
at trial was insufficient to support the jury verdict and, as a result, believes
that, while there can be no assurances, the judgment should ultimately be
reversed on appeal. Registrant is not presently able to reasonably estimate the
amount of damages, if any, which may be ultimately imposed and, accordingly, no
charge relating to the judgment is reflected in Registrant's financial
statements. While Registrant believes that the judgment should ultimately be
reversed, if the adverse judgment is sustained after all appeals, satisfaction
of the judgment is likely to have a material adverse effect on Registrant's
consolidated financial results for a particular year, but is not expected to
have a material adverse effect on Registrant's consolidated financial position.
Registrant has been named in three purported class actions filed in state court
in Tennessee, New Mexico and West Virginia on behalf of putative class members
who were indirect purchasers of Registrant's smokeless tobacco products in those
states during the period April 1996 through March 28, 2000 (Tennessee and New
Mexico) and through December 31, 2000 (West Virginia), alleging that Registrant
has violated the antitrust laws, unfair or deceptive trade practices statutes
and the common law of those states. The plaintiffs seek to recover compensatory
and statutory damages in an amount not to exceed $74,000 after trebling per
putative class member, and certain other relief.
Registrant has also been named in a purported class action (reported previously
as an individual action and a purported class action and then consolidated on
January 8, 2001), filed in federal court in Washington D.C. by
wholesalers/distributors of Registrant's smokeless tobacco products. Plaintiffs
allege that Registrant engaged in conduct that violates the federal antitrust
laws, including Sections 1 and 2 of the Sherman Act and Section 3 of the Clayton
Act, and that Registrant engaged in this conduct unilaterally and in concert
with "its co-conspirators." Plaintiffs seek to recover unspecified statutory
damages, before trebling, and certain equitable and other relief.
Each of the foregoing actions is derived directly from the Conwood litigation
and therefore will need to overcome the same issues raised by Registrant in its
post-trial motions and on appeal. Even if Conwood were ultimately to prevail on
issues which Registrant will challenge on appeal, the plaintiffs in each of
these actions will still need to establish additional elements before liability
can be imposed upon Registrant. Registrant believes that it has meritorious
defenses in this regard, and that the ultimate outcome of these purported class
actions will not have a material adverse effect on its consolidated financial
position, although if plaintiffs were to prevail, these actions could have a
material impact on its consolidated financial results for a particular reporting
period in which resolved.
(9)
11
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
(Unaudited)
RESULTS OF OPERATIONS
FIRST QUARTER 2001 COMPARED WITH FIRST QUARTER OF 2000
CONSOLIDATED RESULTS
For the first quarter of 2001, consolidated net sales increased 4 percent to
$383 million, operating income increased 6.4 percent to $184.5 million, and net
earnings increased 5.9 percent to $108 million compared to the corresponding
2000 period. Basic and diluted earnings per share both increased 6.5 percent to
$0.66 compared to the first quarter of 2000. The consolidated gross margin
percentage decreased slightly for the first quarter of 2001, primarily due to
higher unit costs incurred for wine and moist smokeless tobacco, partially
offset by increased selling prices for our moist smokeless tobacco products.
Corporate expenses decreased for the first quarter of 2001, as the corresponding
2000 period included a loss on derivative contracts recognized in connection
with a debt issuance. Net interest expense increased significantly as a result
of higher average debt levels and higher average interest rates on such debt,
partially offset by increased income generated from accumulated cash. Income
taxes increased for the first quarter of 2001 due to higher earnings before
taxes as compared to the similar 2000 period. The effective tax rate remained
level with the corresponding 2000 period.
SMOKELESS TOBACCO SEGMENT
Net sales for the Smokeless Tobacco segment increased 3.4 percent to $335.2
million and accounted for approximately 87.5 percent of consolidated net sales
for the first quarter of 2001. This increase resulted from higher selling prices
on all moist smokeless tobacco products and higher unit volume for non-premium
products, which incrementally contributed 3 million cans to the quarter,
partially offset by lower unit volume for premium products. Overall net unit
volume for moist smokeless tobacco products increased 0.1 percent to 152.7
million cans. Share data based on Registrant's Retail Activity Data (RAD) for
the period ended March 3, 2001, indicates that on a can share basis, the total
smokeless category increased 0.9 percent versus the corresponding prior year
period, with the non-premium segment increasing 2.3 points to 18 percent.
Registrant's category share decreased 0.6 points to 77.1 percent. Net sales and
unit volume results for the first quarter of 2001 continue to be affected by the
Skoal Long Cut increased value conversion.
Cost of products sold increased 3.1 percent in the first quarter of 2001 mainly
due to higher unit costs for Registrant's moist smokeless tobacco products.
Smokeless Tobacco segment gross profit increased 3.5 percent over the
corresponding 2000 period. The gross profit percentage remained level with the
first quarter of 2000, as higher selling prices, along with the improved
profitability of premium promotional and non-premium products, were offset by
the aforementioned unfavorable factors in cost of products sold.
(10)
12
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION (Continued)
Selling and advertising expenses for the first quarter of 2001 remained level
with the similar 2000 period, as higher print media spending was significantly
offset by lower promotional spending. Indirect selling expenses increased
significantly in 2001 due to costs associated with the field salesforce,
primarily for higher salaries and related costs and training. Administrative
expenses for the Smokeless Tobacco segment increased primarily as a result of
the ongoing bonding costs incurred in connection with Registrant's antitrust
litigation.
Smokeless Tobacco segment operating profit for the first quarter of 2001
increased 3.2 percent to $185.3 million compared to the corresponding 2000
period.
WINE SEGMENT
Wine segment net sales increased 10.6 percent to $41 million versus the first
quarter of 2000, accounting for approximately 10.7 percent of consolidated 2001
net sales. This increase was primarily attributable to a 12.4 percent increase
in premium wine case volume. The case volume growth was primarily due to
improved sales volume of Registrant's Columbia Crest and Chateau Ste. Michelle
brands, partially offset by a decline in the Villa Mt. Eden brand. Registrant's
two leading brands of premium wine, Columbia Crest and Chateau Ste. Michelle,
accounted for 85 percent of Registrant's total wine sales in the first quarter
of 2001.
Cost of products sold increased for the first quarter of 2001, primarily as a
result of higher average cost of grapes used in production versus the
corresponding 2000 period. Gross profit for the wine segment was relatively
level with the prior year as higher unit volume on Columbia Crest and Chateau
Ste. Michelle wines was significantly offset by the unfavorable increase in the
aforementioned premium case costs. This combination of factors, as well as
inventory adjustments and write-downs for non-strategic brands, resulted in a
significantly lower gross profit percentage for the first quarter of 2001 versus
the corresponding 2000 period.
Selling and advertising expenses for the first quarter were slightly lower than
the corresponding 2000 period. Indirect selling, administrative and other
expenses were lower for the first quarter of 2001, primarily due to a $0.8
million charge for expenses incurred in the first quarter of 2000 related to a
cancelled acquisition.
Operating profit for the Wine segment increased 63.2 percent to $4 million for
the first quarter of 2001 versus the similar 2000 period.
ALL OTHER OPERATIONS
Net sales for all other operations decreased 3.7 percent to $6.7 million
compared to the corresponding 2000 period, accounting for 1.8 percent of
consolidated net sales. Overall, all other operations reported an operating loss
of $1.2 million for the first quarter of 2001 versus an operating loss of $2
million for the corresponding 2000 period.
(11)
13
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION (Continued)
LIQUIDITY AND CAPITAL RESOURCES
CHANGES IN FINANCIAL CONDITION SINCE DECEMBER 31, 2000
Net cash provided by operating activities increased in the first quarter of 2001
to $141.3 million as compared with $85.4 million for the corresponding 2000
period. The primary reason was increased income taxes payable, decreased
accounts receivable and increased net earnings. Registrant's primary sources of
cash from operations were net earnings generated by the Smokeless Tobacco
segment and an increase in income taxes payable, while the most significant uses
of cash in operations were for the reduction of accounts payable and accrued
expenses and for purchases of leaf tobacco for use in Registrant's moist
smokeless tobacco products. Registrant estimates that 2001 overall raw material
inventory purchases and other costs, for leaf tobacco and grapes, will
approximate amounts expended in 2000.
Net cash used in investing activities was $5.4 million in 2001 compared to $12.6
million in 2000. Expenditures for both years were for the purchase of property,
plant and equipment. Registrant expects spending on the 2001 capital program to
approximate $51 million.
Net cash used in financing activities for 2001 increased to $132.8 million from
$109.8 million in 2000. This increase was primarily attributable to additional
cash deposits required in connection with the $1 billion credit facility along
with lower net proceeds from borrowings, partially offset by the absence of
stock repurchases in 2001. The stock repurchase program has been suspended since
the end of the first quarter of 2000, due to Registrant's antitrust litigation.
Registrant will continue to have significant cash requirements for the remainder
of 2001, primarily for payment of dividends, additional cash deposits in
connection with the credit facility and capital spending. Additional borrowings
under existing credit facilities and funds generated from net earnings will be
the primary means of meeting cash requirements over this period.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk since December 31, 2000.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Reference is made to the section captioned "Cautionary Statement Regarding
Forward-Looking Information" which was filed as part of item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Registrant's 2000 Form 10-K, regarding important factors that could cause actual
results to differ materially from those contained in any forward-looking
statement made by Registrant, including forward-looking statements contained in
this report.
(12)
14
UST Inc.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
On March 14, 2001, Registrant was served with a Summons and Class
Action Complaint in an action entitled Matthew H. Filben, et al. v.
United States Tobacco Company, et al. (Civil Action No. 01-C-51K),
Circuit Court for Marshall County, West Virginia. This action was
brought by an individual plaintiff on behalf of himself and a
purported class of indirect purchasers of Registrant's smokeless
tobacco products in the State of West Virginia during the period April
1996 through December 31, 2000. Plaintiffs allege Registrant has
violated the antitrust laws and unfair or deceptive trade practices
statutes of West Virginia, as well as the common law of West Virginia.
Plaintiffs seek unspecified compensatory and statutory damages in an
amount not to exceed $74,000 including trebling per putative class
member and certain other relief. Registrant intends to defend this
action vigorously.
The Filben action is derived directly from the Conwood litigation and
therefore will need to overcome the same issues raised by Registrant
in its post-trial motions and on appeal. Even if Conwood were
ultimately to prevail on issues which Registrant is challenging on
appeal, plaintiffs will still need to establish additional elements
before liability can be imposed upon Registrant. Registrant believes
that it has meritorious defenses in this regard, and that the ultimate
outcome of this purported class action will not have a material
adverse effect on its consolidated financial position, although if
plaintiffs were to prevail, this action could have a material impact
on its consolidated financial results for a particular reporting
period in which resolved.
In Arthur Sontag, et al. v. United States Tobacco Company, et al.,
(No. 95-6434), 14th Judicial District Court, Parish of Calcasieu,
Louisiana, on December 21, 2000, the court entered an Order granting
certain defendants' motion to dismiss for want of prosecution,
dismissing the action with prejudice.
In Dezire Junior Hebert, et al. v. United States Tobacco Co., et al.,
(No. 96-2281), 14th Judicial District Court, Parish of Calcasieu,
Louisiana on March 23, 2001, the court entered an Order granting
defendants' motion to dismiss for want of prosecution, dismissing the
action with prejudice.
(13)
15
UST Inc.
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on May 1, 2001.
(c) Matters voted upon at the meeting:
Broker
Affirmative Negative Abstentions Non-Votes
----------- ----------- ----------- -----------
Approval of 2001
Stock Option Plan
(Proposal No. 2) 123,955,996 16,276,329 962,412 N/A
Ratification and
Approval of Independent
Auditors (Proposal No. 3) 139,472,031 1,160,768 561,938 N/A
Stockholder Proposal
(Proposal No. 4) 5,413,036 105,230,811 8,535,001 22,015,889
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
There were no reports on Form 8-K for the three months ended
March 31, 2001.
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16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UST Inc.
(Registrant)
Date May 11, 2001 /s/ Robert T. D'Alessandro
----------------------------------------
Robert T. D'Alessandro
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ James D. Patracuolla
----------------------------------------
James D. Patracuolla
Vice President and Controller
(Principal Accounting Officer)
(15)