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 June 30, 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
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
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Number of Common shares ($.50 par value) outstanding at June 30, 2001
163,392,396
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2
UST Inc.
(Registrant)
INDEX
Page No.
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Part I. Financial Information:
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statement of Financial Position -
June 30, 2001 and December 31, 2000 2
Condensed Consolidated Statement of Earnings -
Three and six months ended June 30, 2001 and 2000 3
Condensed Consolidated Statement of Cash Flows -
Six months ended June 30, 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 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)
June 30, December 31,
2001 2000
----------------------------------
(Unaudited) (Note)
ASSETS
Current assets
Cash and cash equivalents $114,527 $96,034
Accounts receivable 74,790 82,698
Inventories:
Leaf tobacco 216,636 199,382
Products in process 133,994 141,561
Finished goods 86,488 88,739
Other materials and supplies 19,371 19,602
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456,489 449,284
Deferred income taxes 10,635 9,907
Income taxes receivable - 28,915
Prepaid expenses and other current assets 22,673 24,567
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Total current assets 679,114 691,405
Property, plant and equipment, net 352,885 358,586
Restricted deposits 593,152 505,755
Other assets 89,183 90,653
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Total assets $1,714,334 $1,646,399
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $3,300 $3,300
Accounts payable and accrued expenses 112,769 155,179
Income taxes payable 37,275 14,393
---------- ----------
Total current liabilities 153,344 172,872
Long-term debt 864,225 865,875
Postretirement benefits other than pensions 81,628 81,677
Deferred income taxes 181,292 186,559
Other liabilities 74,001 68,844
Contingencies (see note) - -
---------- ----------
Total liabilities 1,354,490 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 199,213,996 shares
in 2001 and 204,743,236 shares in 2000 99,607 102,372
Additional paid-in capital 522,908 526,996
Retained earnings 807,080 885,074
Accumulated other comprehensive loss (15,989) (13,606)
---------- ----------
1,413,606 1,500,836
Less treasury stock - 35,821,600 shares in 2001
and 41,821,600 shares in 2000 1,053,762 1,230,264
---------- ----------
Total stockholders' equity 359,844 270,572
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Total liabilities and stockholders' equity $1,714,334 $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 Six months ended
June 30, June 30,
------------------------ -------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net sales $422,194 $392,041 $805,159 $760,336
Costs and expenses
Cost of products sold 76,313 70,245 148,845 137,220
Excise taxes 9,361 8,596 17,618 16,992
Selling, advertising and administrative 129,974 121,054 247,674 240,563
-------- -------- -------- --------
Total costs and expenses 215,648 199,895 414,137 394,775
-------- -------- -------- --------
Operating income 206,546 192,146 391,022 365,561
Interest, net 8,627 9,714 17,514 17,241
-------- -------- -------- --------
Earnings before income taxes 197,919 182,432 373,508 348,320
Income taxes 76,251 70,185 143,833 134,109
-------- -------- -------- --------
Net earnings $121,668 $112,247 $229,675 $214,211
======== ======== ======== ========
Net earnings per share
Basic $ .74 $ .69 $ 1.41 $ 1.31
Diluted $ .74 $ .69 $ 1.40 $ 1.31
Dividends per share $ .46 $ .44 $ .92 $ .88
Average number of shares
Basic 163,328 162,238 163,179 163,600
Diluted 164,504 162,277 164,311 163,700
See Notes to Condensed Consolidated Financial Statements.
(3)
5
UST Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended June 30,
-------------------------
2001 2000
---- ----
OPERATING ACTIVITIES
Net cash provided by operating activities $258,484 $161,717
INVESTING ACTIVITIES
Purchases of property, plant and equipment (13,458) (28,349)
Dispositions of property, plant and equipment 1,362 13,631
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Net cash used in investing activities (12,096) (14,718)
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FINANCING ACTIVITIES
Proceeds from debt -- 300,000
Repayment of debt (1,650) (241,965)
Proceeds from the issuance of stock 11,412 4,103
Restricted deposits (87,397) --
Dividends paid (150,260) (143,653)
Stock repurchased -- (97,470)
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Net cash used in financing activities (227,895) (178,985)
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Increase (decrease) in cash and cash equivalents 18,493 (31,986)
Cash and cash equivalents at beginning of year 96,034 74,989
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Cash and cash equivalents at end of period $114,527 $43,003
======== =======
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Supplemental disclosure of cash flow information Cash paid during the period
for:
Income taxes $137,061 $131,440
Interest 34,970 11,326
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See Notes to Condensed Consolidated Financial Statements.
(4)
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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and six month periods ended June 30, 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 Statements of
Financial Position and Cash Flows have been reclassified to conform to the 2001
presentation.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Registrant holds certain financial instruments defined as derivatives in
accordance with Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting For Derivatives and Hedging Activities. Registrant has hedged the
interest rate risk on its $40 million aggregate principal amount of
floating-rate senior notes by holding a ten-year interest rate swap, designated
as a cash flow hedge. This hedge is perfectly effective as the terms and
conditions of the floating rate debt coincide perfectly with the swap. The fair
value of the swap at June 30, 2001 was a net liability of $0.5 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 June 30, 2001 included the accumulated
loss on the cash flow hedge (net of taxes) of $0.4 million. This reflects $1.1
million (net of taxes) of other comprehensive income recognized for the quarter
ended June 30, 2001 in connection with the net payments/receipts and change in
fair value of the swap since March 31, 2001. Registrant anticipates that
approximately $0.9 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. The amount reclassified from "accumulated other
comprehensive loss" to net earnings during the quarter ended June 30, 2001 in
connection with this interest rate swap was $0.5 million (net of taxes).
Registrant has entered into French Franc and EURO forward contracts, designated
as cash flow hedges, in order to hedge the risk of variability in cash flows
associated with foreign currency payments required in connection with firm
commitments to purchase oak barrels for its wine operations. These hedges are
considered perfectly effective as the terms and conditions of the forward
contracts coincide perfectly with the underlying purchase commitments. The fair
value of the forward contracts at June 30, 2001 was a net liability of $0.1
million, based on foreign exchange rates provided by the respective banking
institutions with which these forward contracts were entered into. This balance
is included in "other liabilities" on the Condensed Consolidated Statement of
Financial Position at June 30, 2001. The accumulated loss on this cash flow
hedge (net of taxes)
(5)
7
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
included in "accumulated other comprehensive loss" at June 30, 2001 was not
material and Registrant anticipates that all of the deferred loss on the forward
contracts, included in "accumulated other comprehensive loss," will be
reclassified into net earnings during the next twelve months as all of the
related wine barrel purchases will be made by the end of October 2001.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 eliminates the pooling-of-interests method of accounting for
business combinations that are completed after June 30, 2001. In addition, SFAS
No. 141 changes the criteria to recognize acquired intangible assets separately
from goodwill. SFAS No. 142 eliminates amortization of existing and acquired
goodwill and indefinite lived intangible assets and requires goodwill and
indefinite lived intangible assets to be reviewed for impairment at least
annually, or more frequently if impairment indicators exist. Intangible assets
with finite lives will continue to be amortized over their useful lives.
Provisions of SFAS No. 142 apply to goodwill and intangible assets acquired
after June 30, 2001. Registrant's existing goodwill and intangibles will
continue to be amortized until adoption. Registrant will adopt these Statements
effective January 1, 2002, as required. During 2002, Registrant will perform the
first of the required impairment tests of goodwill and indefinite lived
intangible assets as of January 1, 2002 and the effect of these tests are not
expected to have a material impact on Registrant's results of operations,
financial position or cash flows.
Registrant will adopt Emerging Issues Task Force (EITF) Issue No. 00-25, "Vendor
Income Statement Characterization of Consideration From a Vendor to a Retailer"
and Issue No. 00-14, "Accounting for Certain Sales Incentives" 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 second quarter of 2001 and 2000, total
comprehensive income, net of taxes, amounted to $121,587,000 and $112,567,000,
respectively. For the first six months of 2001 and 2000 total comprehensive
income, net of taxes, was $227,292,000 and $214,552,000, respectively.
CAPITAL STOCK
In May 2001, Registrant authorized that 6 million shares of its common stock be
reserved for issuance under the 2001 Stock Option Plan. Six million shares of
Registrant's treasury stock were canceled for this purpose.
(6)
8
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
EARNINGS PER SHARE
(In thousands, except per share amounts)
The following table presents the computation of basic and diluted earnings per
share:
Three months ended Six months ended
June 30, June 30,
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2001 2000 2001 2000
---- ---- ---- ----
Numerator:
Net earnings $121,668 $112,247 $229,675 $214,211
-------- -------- -------- --------
Denominator:
Denominator for basic earnings per share -
weighted-average shares 163,328 162,238 163,179 163,600
Dilutive effect of employee stock options 1,176 39 1,132 100
-------- -------- -------- --------
Denominator for diluted earnings per share 164,504 162,277 164,311 163,700
======== ======== ======== ========
Basic earnings per share $ .74 $ .69 $ 1.41 $ 1.31
Diluted earnings per share $ .74 $ .69 $ 1.40 $ 1.31
SEGMENT INFORMATION
Registrant'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 is
Registrant's international and cigar operations. Interim segment information is
as follows:
Three Months ended June 30, Six Months ended June 30,
--------------------------- -------------------------
Net Sales to Unaffiliated Customers: 2001 2000 2001 2000
---- ---- ---- ----
Tobacco $371,701 $347,779 $706,946 $672,010
Wine 42,766 36,810 83,789 73,917
All other 7,727 7,452 14,424 14,409
-------- -------- -------- --------
Net sales $422,194 $392,041 $805,159 $760,336
======== ======== ======== ========
Operating Profit (Loss):
Tobacco $207,330 $196,742 $392,639 $376,382
Wine 3,542 1,159 7,584 3,636
All other (675) (1,767) (1,832) (3,794)
-------- -------- -------- --------
Operating profit 210,197 196,134 398,391 376,224
Corporate expenses (3,651) (3,988) (7,369) (10,663)
Interest, net (8,627) (9,714) (17,514) (17,241)
-------- -------- -------- --------
Earnings before income taxes $197,919 $182,432 $373,508 $348,320
======== ======== ======== ========
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 Sections 25249.6, et seq.
("Proposition 65") and the California Unfair Competition Act, Business and
Professions Code Sections 17200, et seq. The action alleges, among other
things, that the defendants sold smokeless tobacco products in California
without providing a ". . . `clear and reasonable' warning that their use results
in multiple exposures to substances known to the State of California to cause
cancer, birth defects and reproductive harm."
(8)
10
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONTINGENCIES (Continued)
Registrant believes, and has been so advised by counsel handling these cases,
that it has a number of meritorious defenses to all such pending litigation.
Except as to Registrant's willingness to consider alternative solutions for
resolving certain regulatory and litigation issues, all such cases are, and will
continue to be, vigorously defended. Registrant believes that the ultimate
outcome of all such pending litigation will not have a material adverse effect
on the consolidated financial position of Registrant, but may have a material
impact on Registrant's consolidated financial results for a particular reporting
period in which resolved.
On September 11, 2000, Registrant filed its notice of appeal to the United
States Court of Appeals for the Sixth Circuit from the final and interlocutory
orders entered by the District Court in connection with the Conwood litigation.
On October 10, 2000, Registrant satisfied the $500 million bonding requirement
imposed by the District Court. Registrant believes that the evidence presented
at trial was insufficient to support the jury verdict and, as a result, believes
that, while there can be no assurances, the judgment should ultimately be
reversed on appeal. Registrant is not presently able to reasonably estimate the
amount of damages, if any, which may be ultimately imposed and, accordingly, no
charge relating to the judgment is reflected in Registrant's financial
statements. While Registrant believes that the judgment should ultimately be
reversed, if the adverse judgment is sustained after all appeals, satisfaction
of the judgment is likely to have a material adverse effect on Registrant's
consolidated financial results for a particular year, but is not expected to
have a material adverse effect on Registrant's consolidated financial position.
Registrant 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
Second quarter and six months of 2001 compared
with the corresponding periods of 2000
CONSOLIDATED RESULTS
Consolidated net sales for the second quarter of 2001 increased 7.7 percent to
$422.2 million, while net sales for the first six months of 2001 increased 5.9
percent to $805.2 million. For the second quarter and first six months of 2001,
operating income increased by 7.5 percent to $206.5 million and 7 percent to
$391 million, respectively, as compared to the related 2000 periods. In the
second quarter of 2001, net earnings increased 8.4 percent to $121.7 million,
while basic and diluted earnings per share increased 7.2 percent to $0.74 per
share. For the six months ended June 30, 2001, net earnings increased by 7.2
percent to $229.7 million versus $214.2 million during the same period in 2000.
Year-to-date basic and diluted earnings per share for 2001 increased 7.6 percent
to $1.41 per share and 6.9 percent to $1.40 per share, respectively. The
consolidated gross profit percentage decreased slightly for both periods as
increased sales of wine products, which sell at lower margins, were partially
offset by higher margins achieved by the Smokeless Tobacco segment. Corporate
expenses for the second quarter of 2001 decreased slightly from the
corresponding 2000 period, and decreased more significantly for the six-month
period primarily as a result of prior year hedging losses related to the
issuance of debt. Net interest expense for the second quarter of 2001 decreased
to $8.6 million, primarily as a result of higher interest income on accumulated
cash, partially offset by higher average debt outstanding. For the first six
months of 2001, net interest expense approximated the corresponding 2000 period.
Income taxes increased in both 2001 periods, as a result of higher earnings
before taxes compared to 2000. The effective tax rates for both periods remained
level with the corresponding 2000 periods.
SMOKELESS TOBACCO SEGMENT
Smokeless Tobacco segment net sales increased 6.9 percent to $371.7 million for
the second quarter of 2001, and increased 5.2 percent to $706.9 million for the
six-month period, accounting for 87.8 percent of year-to-date consolidated net
sales. The increase for both periods was primarily attributable to higher
selling prices for moist smokeless tobacco products as compared to the
corresponding 2000 periods, along with higher unit volume for non-premium
products. Net unit volume for moist smokeless tobacco products increased 0.9
percent to 169.2 million cans and 0.5 percent to 321.9 million cans for the
second quarter and six-month period, respectively. Net unit volume for premium
products declined 0.7 percent and 1.3 percent for the second quarter and
six-month period, respectively. However, full-priced premium products increased
1.2 percent for the second quarter, driven by strong Skoal Long Cut volume,
which posted a 3.3 percent increase. For the six-month period, full-priced
premium products net unit volume decreased 1.0 percent. Unit volume results
reflect non-premium products contribution of an additional 2.6 million cans and
5.6 million cans to the second quarter and six-month period of 2001,
respectively. During the second quarter and six-month period, three new
products, Copenhagen Black, Rooster Wild Berry and Red Seal Long Cut Straight,
contributed approximately 5 million and 6.2 million cans, respectively to
(10)
12
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION (Continued)
net can sales. Share data based on Registrant's Retail Activity Data Share &
Volume Tracking System for the quarter-to-date period ended June 16, 2001,
indicates that on a can volume basis, the total category increased approximately
2.6 percent versus the corresponding 2000 period, with premium segment can sales
increasing slightly and non-premium can sales increasing approximately 15
percent. The non-premium segment grew 1.9 share points to 17.9 percent of the
category. Registrant estimates its total category share for the second quarter
declined slightly to 77.8 percent.
Cost of products sold increased 4.6 percent and 3.9 percent in the second
quarter and first six months of 2001, respectively, primarily as a result of
higher unit costs for moist smokeless tobacco products, along with increased
unit volume. Smokeless Tobacco segment gross profit increased 7.3 percent for
the second quarter and 5.4 percent for the six-month period, as compared to the
similar 2000 periods. The gross profit percentage for both 2001 periods
increased slightly versus the corresponding 2000 periods primarily as a result
of increased selling prices for moist smokeless tobacco products partially
offset by the aforementioned unfavorable factors in cost of products sold. Also
favorably affecting the gross margin percentage for the second quarter was the
reduction of premium promotional units of 2.6 million cans and non-premium
promotional units of 1.0 million cans, in favor of full-priced can sales.
Selling and advertising expenses increased in both 2001 periods, primarily due
to greater spending on print media as well as higher spending on promotional
activities at retail, partially offset by lower spending on trade promotions.
Selling and advertising expenses for the six-month period also reflect lower
spending on direct marketing initiatives. Indirect selling expenses also rose in
both periods, primarily as a result of increased salaries and related costs
along with training attributable to the salesforce. Smokeless Tobacco segment
administrative expenses increased in the second quarter primarily as a result of
higher tobacco settlement-related charges, legal spending and administrative
spending in other areas. For the first six months of 2001, higher ongoing
bonding costs associated with Registrant's antitrust litigation and higher
tobacco settlement-related charges contributed to the increased administrative
expenses.
Operating profit for the Smokeless Tobacco segment increased 5.4 percent to
$207.3 million and 4.3 percent to $392.6 million for the second quarter and
first six months of 2001, respectively.
WINE SEGMENT
Wine segment net sales increased 16.2 percent to $42.8 million and 13.4 percent
to $83.8 million for the quarter and six months ended June 30, 2001,
respectively, accounting for 10.4 percent of year-to-date consolidated net
sales. Premium wine case volume increases of 18.1 percent and 15.3 percent for
the quarter and six-month periods, respectively, were the primary sources of the
increased net sales in both periods. The premium case volume growth for the
quarter and year-to-date periods was attributable to the Columbia Crest, Chateau
Ste. Michelle and Domaine Ste. Michelle brands, with the six-month period
reflecting decreased volume for the Villa Mt. Eden brand. Registrant's two
leading brands of premium wine, Chateau Ste. Michelle and Columbia Crest
accounted for 83.8 percent of Registrant's total year-to-date premium wine sales
dollars in 2001.
(11)
13
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION (Continued)
Cost of products sold increased significantly for both 2001 periods, primarily
as a result of higher premium case volume and higher average unit costs. Gross
profit for the Wine segment increased 11.7 percent to $16.1 million and 6.2
percent to $31.4 million for the second quarter and six-month periods,
respectively, as the increased premium case unit volume was partially offset by
the increased costs. The Wine segment gross profit percentage decreased for both
2001 periods compared to the similar 2000 periods as a result of these factors.
Selling and advertising expenses were lower for both 2001 periods primarily as a
result of lower spending for point of sale and media advertising. Indirect
selling, administrative and other expenses were slightly lower for the second
quarter of 2001, while the decrease for the year-to-date period was more
significant, primarily due to a $0.8 million charge in 2000 related to a
cancelled acquisition and lower spending in other areas.
For the second quarter and first six months of 2001, operating profit for the
Wine segment increased significantly to $3.5 million and $7.6 million,
respectively, as compared to $1.2 million and $3.6 million in the corresponding
2000 periods.
ALL OTHER OPERATIONS
Net sales for all other operations for the second quarter of 2001 increased 3.7
percent to $7.7 million. For the six-month period, all other operations net
sales of $14.4 million approximated the level of the corresponding 2000 period.
Overall, all other operations recorded operating losses of $0.7 million and $1.8
million for the second quarter and first six months of 2001, respectively,
compared to operating losses of $1.8 million and $3.8 million for the similar
2000 periods.
LIQUIDITY AND CAPITAL RESOURCES
CHANGES IN FINANCIAL CONDITION SINCE DECEMBER 31, 2000
Net cash provided by operating activities increased to $258.5 million as
compared to $161.7 million for the corresponding 2000 period, primarily as a
result of higher income taxes payable, lower accounts receivable and increased
net earnings. The primary sources of cash from operations were net earnings
generated by the Smokeless Tobacco segment and increased income taxes payable,
while the principal 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 $12.1 million in 2001 versus $14.7
million in 2000. Expenditures in both years relate to purchases of property,
plant and equipment, with 2000 also reflecting the disposition of an office
building. Registrant expects that spending on the 2001 capital program will
approximate $52 million.
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UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION (Continued)
Net cash used in financing activities increased to $227.9 million from $179
million in 2000. This increase was primarily a result of additional cash
deposits required under the $1 billion credit facility as well as lower net
proceeds from borrowings, partially offset by the absence of stock repurchases
in 2001. Registrant's stock repurchase program has been suspended since the end
of the first quarter of 2000, as a result of its antitrust litigation.
Registrant will continue to have significant cash requirements for the remainder
of 2001, primarily for payment of dividends, additional cash deposits under the
credit facility and capital spending. These requirements are expected to be met
by internally generated funds supported by borrowings under existing credit
facilities, when necessary.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In April 2001, Registrant entered into several French Franc and Euro foreign
currency forward contracts to hedge approximately 50 percent of its 2001 wine
barrel purchase commitments. Each of these forward contracts will expire before
October 31, 2001, corresponding with the last date at which the underlying
barrels can be purchased. The fair value of such contracts at June 30, 2001 was
a net liability of $0.1 million.
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.
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UST Inc.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
There were no reports on Form 8-K for the three months ended
June 30, 2001.
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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 August 10, 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)
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