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EXHIBIT 13.4
UST
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
1993 COMPARED WITH 1992
Consolidated net sales rose to $1.11 billion, a 6.8 percent increase over
1992.
Tobacco segment sales increased 7.6 percent, and accounted for 95.2 percent
of the $71 million sales increase. The Wine segment also contributed to the
overall sales gain, posting a 13.8 percent increase. Other segment sales were
lower due to the absence of Zig-Zag cigarette papers and related products
resulting from the sale of its distribution rights on March 31, 1993.
Over the last three years, net sales have increased 45.8 percent at an
average annual rate of 13.5 percent.
Cost of products sold decreased 4 percent to $246.4 million. Cost of
products sold for the Tobacco segment was lower due to significant volume
declines for other tobacco products which was partially offset by higher unit
costs and increased unit volume for moist smokeless tobacco. Costs for the Other
segment were lower primarily due to the absence of cigarette papers, while Wine
segment unit costs were higher.
Gross profit increased $81.4 million, or 10.4 percent over 1992 primarily
due to higher selling prices and increased unit volume for moist smokeless
tobacco.
The gross profit percentage rose to 77.8 percent mainly due to the
favorable results for moist smokeless tobacco and volume declines for lower
margin products. The gross profit percentage has increased 3 percentage points
over the last three years.
Selling, advertising and administrative expenses rose 6.2 percent to $299.2
million. Selling and advertising expenses increased for all segments.
Administrative and other expenses were generally lower, with increases in salary
and related costs being offset by lower spending in other areas and gains
recorded on the sale of corporate investments.
Operating income increased 12.8 percent in 1993 to $564.8 million.
The Company realized net interest income as a result of income from cash
equivalent investments exceeding interest expense.
Results for 1993, as compared to 1992, were affected by several
developments. The Company sold its distribution rights for Zig-Zag cigarette
papers and related products on March 31, 1993 for $39 million in cash and
additional consideration based on future earnings for the next ten years. This
transaction resulted in an after-tax gain of $22 million, amounting to 10 cents
per share. The absence of these products in operating results for the remainder
of 1993 reduced primary earnings per share by 2 cents. In addition, the "Omnibus
Budget Reconciliation Act," which increased the statutory corporate federal
income tax rate to 35 percent retroactive to January 1, 1993, reduced primary
earnings per share by 3 cents for the year.
In the first quarter of 1993 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," and SFAS No. 109, "Accounting for Income Taxes."
As a result of adopting SFAS No. 106 the Company recorded a one-time charge to
net earnings of $32.7 million. The adoption of SFAS No. 109 resulted in an
increase in net earnings of $12.8 million. The cumulative effect of these
accounting changes reduced primary earnings per share by 9 cents for the year.
Profit margins rose to 54.2 percent on earnings before income taxes and the
cumulative effect of accounting changes of $601.8 million. Over the last three
years, earnings before income taxes and the
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cumulative effect of accounting changes have increased 70.9 percent at an
average annual rate of 19.6 percent, while pretax margins have averaged 49.9
percent.
The overall tax rate for 1993 increased due to the higher statutory
corporate federal income tax rate.
Net earnings increased for the 33rd consecutive year rising 11.7 percent to
$349 million. Primary earnings per share before the cumulative effect of
accounting changes rose to $1.71, a 21.3 percent increase over 1992, and have
increased 74.5 percent over the last three years at an average annual rate of
20.4 percent. Primary earnings per share, after the cumulative effect of
accounting changes, rose to $1.62, a 14.9 percent increase over 1992. Primary
earnings per share have increased 65.3 percent over the last three years at an
average annual rate of 18.3 percent.
1992 COMPARED WITH 1991
Certain amounts reported in 1992 and 1991 have been reclassified to conform
to the 1993 presentation. (See Wine segment for additional information.)
Consolidated net sales rose 14.9 percent to $1.04 billion.
The Tobacco segment accounted for 82.1 percent of the $134.9 million sales
increase. The Wine and Other segments also contributed to the sales increase,
posting gains of 15.5 percent and 19.4 percent, respectively.
Cost of products sold increased 12.9 percent to $256.8 million, primarily
due to increased unit sales and higher unit costs for other tobacco products,
moist smokeless tobacco and wine. Volume gains for businesses in the Other
segment also contributed to the increase.
Gross profit increased $105.7 million, or 15.6 percent over 1991, primarily
due to higher selling prices and increased unit volume for moist smokeless
tobacco.
The gross profit percentage for 1992 rose slightly to 75.3 percent with the
increase of moist smokeless tobacco margins being partially offset by lower
margins for other tobacco products and the Wine segment.
Selling, advertising and administrative expenses rose 11.4 percent to
$281.8 million. Selling and advertising expenses increased in all segments.
Administrative and other expenses were generally higher, primarily due to salary
and related costs.
Interest income resulted as income from cash equivalent investments
exceeded interest expense.
Pretax profit margins rose to 48.4 percent on earnings before taxes of
$502.6 million.
The overall tax rate for 1992 remained stable.
Net earnings increased 17.5 percent to $312.6 million. Primary earnings per
share rose to $1.41, a 19.5 percent increase over 1991.
TOBACCO SEGMENT
1993 COMPARED WITH 1992
Tobacco segment sales increased 7.6 percent to $951.6 million and accounted
for 85.7 percent of consolidated revenues. Smokeless tobacco sales increased
11.7 percent to $930.5 million, representing 83.8 percent of consolidated sales.
Other tobacco product sales decreased significantly due to lower unit volume of
imported cigarettes.
The increase in smokeless tobacco sales resulted from higher selling prices
and unit volume gains for moist smokeless tobacco. Unit volume results for both
the year and fourth quarter of 1993 included one less shipping day as compared
with the similar periods in 1992. Domestic unit volume for moist smokeless
tobacco products increased 2.3 percent in 1993 to 611.6 million cans, as
compared with the similar period for 1992, and would have increased 3.1 percent
on an equivalent shipping day basis. Fourth quarter unit volume remained
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stable on sales of 152 million cans, compared with the similar 1992 period, and
would have increased 3 percent on an equivalent shipping day basis.
Moist smokeless tobacco unit costs increased slightly due to higher leaf
tobacco costs and increased excise taxes imposed January 1, 1993. Cost of sales
for the Tobacco segment were significantly lower due to decreased unit volume
for other tobacco products which have higher unit costs as compared to moist
smokeless tobacco.
Gross profit for the segment rose substantially during 1993. Higher selling
prices and unit volume gains for moist smokeless tobacco were the primary
reasons for the increase.
Selling expenses increased 12.9 percent, primarily due to higher costs
associated with promotional activities as well as higher salaries and increased
expenses for the sales force.
Advertising costs increased significantly as compared with the prior year.
Selling and advertising expenses were directed at the promotion and support of
our moist smokeless tobacco products, including the two new flavors which were
introduced during the year. Administrative expenses were lower as increased
salary and related costs were offset by lower spending in other areas.
Operating profit increased 12.4 percent to $572.1 million.
1992 COMPARED WITH 1991
Tobacco segment sales rose to $884 million for an increase of 14.3 percent
and accounted for 85 percent of consolidated revenues. Smokeless tobacco sales
increased 13.8 percent to $832.9 million, and represented 80.1 percent of
consolidated sales. Other tobacco product sales increased significantly due to
higher unit volume of imported cigarettes.
The increase in smokeless tobacco sales resulted from higher selling prices
and unit volume gains for moist smokeless tobacco. Domestic unit volume for
moist smokeless tobacco products increased 3.7 percent in 1992, to 597.8 million
cans.
Moist smokeless tobacco unit costs increased slightly due to higher leaf
tobacco costs. Cost of sales for other tobacco products were substantially
higher, primarily due to volume gains and higher unit costs.
Gross profit for the segment rose substantially during 1992 as a result of
higher selling prices and unit volume gains for moist smokeless tobacco.
Selling expenses increased 6.9 percent, primarily due to higher salaries
and increased expenses for the sales force and higher costs associated with
promotional activities. Advertising costs increased significantly as compared
with the prior year. Selling and advertising expenses were aimed at supporting
and expanding consumer awareness of our moist smokeless tobacco products.
Administrative expenses were higher primarily due to increased salary and
related costs.
Operating profit increased 16 percent to $508.8 million.
WINE SEGMENT
1993 COMPARED WITH 1992
Wine segment revenue increased 13.8 percent to $80.2 million and accounted
for 7.2 percent of consolidated sales. Higher case volume for premium wine
accounted for the increase. Case volume for premium wine increased 14.4 percent,
while overall case volume for the Wine segment increased 7.6 percent. Chateau
Ste. Michelle and Columbia Crest, our two leading brands of premium wine,
accounted for approximately 69 percent of total wine revenue.
Overall, unit costs increased primarily due to higher grape costs resulting
from low harvest yields in 1991 and prior years.
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The Company uses grapes both harvested from its own vineyards and purchased
from regional independent growers in its wine production. For the second
consecutive year, the 1993 grape harvest yields experienced by the Company and
throughout the region were exceptional. Total grape tonnage harvested and
purchased in 1993 was significantly higher than in 1992 resulting in increased
inventory levels. The outstanding harvest in 1993 will continue to assist the
Company in meeting its expanding requirements for premium brands and will have a
favorable effect on future unit costs.
Gross profit for the Wine segment increased 10.7 percent primarily as a
result of an increase in premium wine case volume partially offset by higher
unit costs.
Selling, advertising and administrative expenses increased in 1993. Selling
expenses increased primarily to support higher volume levels of premium brands.
Advertising expenses were higher and were aimed at supporting and expanding
national brand awareness of our existing premium wines and recently introduced
products.
Administrative and other expenses were slightly lower as compared to 1992,
as higher salary and related costs were offset by lower spending in other areas.
The Wine segment recorded an operating profit of $6.1 million in 1993, an
increase of 28.4 percent over 1992.
1992 COMPARED WITH 1991
In 1993, the Company reclassified certain discounts and allowances which
were previously included in selling expense, to sales and cost of sales, to
better reflect competitive market conditions. All prior period amounts have been
reclassified to conform to the 1993 presentation.
Wine segment revenue increased 15.5 percent to $70.5 million and accounted
for 6.8 percent of consolidated sales. Higher case volume for premium wine
accounted for the increase. Overall case volume for the Wine segment increased
12.3 percent, while case volume for premium wine increased 14 percent.
Overall, unit costs increased primarily due to higher grape costs resulting
from low harvest yields in prior years.
Total grape tonnage harvested and purchased in 1992 was higher than in
1991, resulting in increased inventory levels which will provide lower future
unit costs. However, unit costs for 1993 will continue to reflect higher costs
due to lower harvest yields in prior years.
Gross profit for the Wine segment increased 6.9 percent primarily as a
result of an increase in premium wine case volume.
Selling, advertising and administrative expenses increased in 1992. Selling
expenses increased primarily due to promotions and expenses incurred to support
higher volume levels of premium brands.
Advertising expenses increased and were focused on supporting and expanding
national brand awareness of Columbia Crest.
Administrative expenses increased due to higher salary and related costs.
The Wine segment recorded an operating profit of $4.8 million in 1992.
OTHER SEGMENT
1993 COMPARED WITH 1992
Other segment sales were $81.5 million, a 7 percent decrease from 1992, and
accounted for 7.3 percent of consolidated sales. Other segment sales were lower
due to the sale of the distribution rights for Zig-Zag cigarette papers and
related products on March 31, 1993. The absence of these products for the
remainder of 1993 had an adverse effect on the operating results for the Other
segment and will continue to have an adverse effect in the first quarter of
1994.
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Operating profit was significantly lower for tobacco-related products due
to the sale of the cigarette paper business, but was partially offset by
favorable results for other businesses. Overall, the Other segment recorded an
operating profit of $9.2 million in 1993.
1992 COMPARED WITH 1991
Other segment sales rose 19.4 percent to $87.6 million and accounted for
8.4 percent of consolidated sales. Volume gains and higher selling prices for
Zig-Zag cigarette papers and related products accounted for the majority of the
increase. Operating profit for these tobacco-related products, which increased
significantly in 1992, were partially offset by losses recorded for other
businesses. The Other segment recorded an operating profit of $9.6 million in
1992.
HEALTH CARE REFORM
In October 1993, the Clinton Administration announced the Health Security
Act, which provides for, among other things, increased federal excise taxes on
all tobacco products, including moist snuff. The proposed federal excise tax
rate on moist snuff would increase from 36 cents per pound to $12.86 per pound.
The Company intends to vigorously oppose this proposed increase. The debate over
this health care proposal, as well as other alternatives which do not include
excise tax increases, is expected to continue for many months in Congress.
Accordingly, the Company is not able to predict the amount, if any, by which the
federal excise tax rate may increase, or assess the future effect that any such
increase may have on the sale of its tobacco products.
FINANCIAL CONDITION
SOURCES AND USES OF CASH -- OPERATIONS
Cash provided by operating activities is the major source of funds
available to the Company. Cash from operations increased to $367.6 million in
1993, as compared to $288.8 million in 1992 and $272 million in 1991. The
primary reason for the increase was higher earnings generated by the Tobacco
segment.
Significant inventories of leaf tobacco are required primarily in
connection with our smokeless tobacco products. During the last three years,
$158.1 million was used for the purchase of leaf tobacco. In addition, the cost
of grapes harvested and purchased totaled $61.6 million over the last three
years.
INVESTING ACTIVITIES
Net cash used in investing activities was $17.3 million in 1993. Purchases
of property, plant and equipment over the last three years totaled $122.2
million.
Major areas of capital spending from 1991 through 1993 were:
Tobacco segment
o Manufacturing, processing and packaging equipment
o Automobiles for the sales force
o Building renovations
Wine segment
o Storage capacity and processing equipment
o New facilities and building renovations
o Irrigation and vineyard development
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Other segment
o Equipment
o Building additions and renovations
Shared assets
o Transportation equipment -- primarily aircraft
o Headquarters, conference and training facility renovations
In 1994, the Company's capital program is expected to approximate $38
million, and will primarily include improvements to the tobacco processing and
manufacturing operations and the expansion of wine processing and storage
facilities.
On March 31, 1993, the Company sold its distribution rights for Zig-Zag
cigarette papers and related products for $39 million in cash and additional
consideration based on future earnings.
FINANCING ACTIVITIES
Other significant sources and uses of cash over the last three years have
included long-term borrowings, the issuance of common stock, stock repurchases
and cash dividends. During the fourth quarter of 1993, the Company borrowed $40
million under a short-term line of credit with a bank and used the proceeds to
repurchase additional shares of its common stock. In January 1994, the Company
entered into a revolving credit and term loan agreement for $50 million with the
same bank and converted the outstanding amount of $40 million to long-term debt.
The Company intends to borrow the additional $10 million in 1994 to increase the
funds available for the stock repurchase program. (See Revolving Credit and Term
Loan Agreement and Short-Term Lines of Credit Note.)
Common stock was issued upon the exercise of options granted under the
Company's stock option plans. Options are granted to employees who have made or
who are expected to make contributions to the growth of the Company. The Company
receives income tax benefits upon the exercise of certain of these options.
Since 1990, funds received from the exercise of options, together with these tax
benefits, totaled $203.4 million.
During 1993, the Company continued its program to repurchase shares of its
common stock as authorized by the Board of Directors. The current program
authorizes the Company to repurchase up to 40 million shares of its common stock
from time to time in open market or negotiated transactions to be used in
connection with employee benefit programs and other corporate purposes.
During 1993, the Company repurchased 8.5 million shares at a cost of $236.7
million and as of December 31, 1993, 6.4 million shares remained to be
repurchased under the current program. The Company anticipates repurchasing
these remaining shares in 1994.
It is the Company's philosophy that its stockholders should benefit
directly from increases in net earnings. Accordingly, the Company has regularly
increased dividend payments as earnings have risen. During the last three years,
cash dividends distributed to stockholders amounted to $507.3 million, totaling
54.7 percent of net earnings for the period.
LIQUIDITY
Uses of cash exceeded sources of cash by $11 million in 1993. The Company
anticipates that cash generated from operating activities will meet most of its
requirements in 1994. Seasonal purchases of leaf tobacco occasionally require
the Company to use short-term borrowings in the form of commercial paper, when
necessary, to augment cash generated by operating activities. In 1993 sufficient
cash was generated to meet these requirements and short-term borrowings were
limited. The Company anticipates that leaf tobacco purchases in 1994 will
approximate $55.4 million as compared to $54.1 million for 1993.
The ratio of current assets to current liabilities (current ratio) at
December 31, 1993 was 3.1 to 1 and has averaged 3.5 to 1 over the last three
years. Cash used in investing and financing activities, along with an increase
in income taxes payable, reduced the current ratio from prior years. However,
the Company continues
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to maintain a strong liquidity position. Further enhancing this position is the
fact that certain inventories are carried at costs computed under the LIFO
method. The average costs of these inventories was $39.6 million more than the
amount at which they are carried in the Consolidated Statement of Financial
Position at December 31, 1993.
The Company believes that adequate credit facilities are available through
committed short-term credit lines. The Company has available short-term lines of
credit with domestic and foreign banks totaling $100 million at December 31,
1993. The lines of credit are generally committed for a one-year period expiring
mid-1994 and provide for borrowing at prime rates. These arrangements require
commitment fees which are not significant. These facilities can be used as bank
financing or as support for commercial paper borrowing. The commercial paper
market is expected to continue as an attractive source of funds. The Company has
the highest ratings available on its commercial paper.
The Company intends to maintain appropriate facilities to ensure access to
credit markets providing sufficient financial resources and operational
flexibility.
CAPITAL RESOURCES
The Company had $40 million of long-term debt outstanding at December 31,
1993. The percentage of long-term debt outstanding to stockholders' equity is
8.6 percent. The Company had no short-term debt outstanding at December 31,
1993.
Stockholders' equity decreased in 1993, as the effects of the stock
repurchase program and dividend payments exceeded the effects of net earnings
and common stock issued under the Company's stock option plans.
The return on average stockholders' equity has increased by 24.6 percentage
points to 71.3 percent over the last three years.
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DIVIDENDS AND STOCK PRICES
CASH DIVIDENDS
The Company increased its 1993 cash dividend by 20 percent to an annual
rate of 96 cents per share. Since 1990, the dividend rate has increased 74.5
percent reflecting an average annual increase of 20.4 percent. Total cash
dividends paid by the Company in 1993 were $199.7 million or 57.2 percent of net
earnings. Cash dividends paid to stockholders have exceeded 50 percent of net
earnings in each of the last three years.
In December 1993, the Board of Directors approved a first quarter 1994
dividend of 28 cents per share. This equates to an indicated annual rate of
$1.12 and represents an increase of 16.7 percent. The Company has paid cash
dividends without interruption since 1912. Future dividends depend on many
factors, including internal estimates of future performance and the Company's
need for funds.
STOCK PRICES
UST shares are traded on the New York Stock Exchange and the Pacific Stock
Exchange, ticker symbol -- UST.
The number of stockholders of record at December 31, 1993 was 13,601. The
following table sets forth dividends paid per share and the high and low market
prices for the year and each quarter of 1993 and 1992.
MARKET PRICE
CASH PER COMMON SHARE
DIVIDENDS --------------------
PAID HIGH LOW
--------- ----- -----
1st Quarter
1993................................ $ .24 $32 3/4 $24 3/4
1992................................ .20 33 1/4 26 3/4
2nd Quarter
1993................................ .24 30 7/8 25 7/8
1992................................ .20 32 1/2 25 3/8
3rd Quarter
1993................................ .24 29 7/8 26 1/4
1992................................ .20 33 28 1/4
4th Quarter
1993................................ .24 31 3/8 24 3/8
1992................................ .20 35 3/8 30 1/8
Year
1993................................ .96 32 3/4 24 3/8
1992................................ .80 35 3/8 25 3/8
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GRAPHICAL INFORMATION INCLUDED IN EXHIBIT 13.4 IS DESCRIBED BELOW.
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS AND PERCENTAGES)
The following are bar graphs:
Consolidated Net Sales: 1991 -- $904.4, 1992 -- $1,039.4 and 1993 -- $1,110.4.
Consolidated Gross Profit: 1991 -- $676.9, 1992 -- $782.6 and 1993 -- $864.0
Pretax Margins: 1991 -- 47.1%, 1992 -- 48.4% and 1993 -- 54.2%.
Earnings Per Share: 1991 -- $1.18, 1992 -- $1.41 and 1993 -- $1.62.
Tobacco Sales: 1991 -- $773.2, 1992 -- $884.0 and 1993 -- $951.6.
Wine Sales: 1991 -- $61.0, 1992 -- $70.5 and 1993 -- $80.2.
Other Sales: 1991 -- $73.4, 1992 -- $87.6 and 1993 -- $81.5.
Net Cash Provided by Operating Activities: 1991 -- $272.0, 1992 -- $288.8 and
1993 -- $367.6.
Return on Average Stockholders' Equity: 1991 -- 55.6%, 1992 -- 62.5% and
1993 -- 71.3%.
Dividends Per Share: 1991 -- $.66, 1992 -- $.80 and 1993 -- $.96.
The following bar graph illustrates the relationship between net earnings and
dividends paid:
Net Earnings: 1991 -- $265.9, 1992 -- $312.6 and 1993 -- $349.0.
Dividends Paid: 1991 -- $139.7, 1992 -- $168.0 and 1993 -- $199.7.
A pie chart illustrating the percentage of capital expenditures by segment for
1991-1993:
Tobacco 66%, Wine 24%, Other 5% and Corporate 5%.