UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549-1004

FORM 10-Q

(Mark One)

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

For quarterly period ended September 30, 2007

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

For the transition period from ___________ to ___________

UST Inc.

 

(Exact name of Registrant as specified in its charter)

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

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

100 West Putnam Avenue, Greenwich, Connecticut 06830

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

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

Large accelerated filer þ                    Accelerated filer o                    Non-accelerated filer o

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

Number of Common Shares ($.50 par value) outstanding at October 31, 2007  156,650,476

 

 

UST Inc.

(“Registrant” or the “Company”)

INDEX

						Page No.
Part I. Financial Information:
		Item 1.		Financial Statements (Unaudited)
				Condensed Consolidated Statement of Financial Position — September 30, 2007 and December 31, 2006			2
				Condensed Consolidated Statement of Operations — Three and nine months ended September 30, 2007 and 2006			3
				Condensed Consolidated Statement of Cash Flows — Nine months ended September 30, 2007 and 2006			4
				Notes to Condensed Consolidated Financial Statements			5
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
		Item 3.		Quantitative and Qualitative Disclosures about Market Risk			55
		Item 4.		Controls and Procedures			56
Part II. Other Information:
		Item 1.		Legal Proceedings			57
		Item 1A.		Risk Factors			57
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			58
		Item 6.		Exhibits			58
Signatures							59
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32: CERTIFICATION

Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

UST Inc.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Dollars in thousands, except per share data)

		September 30, 2007				December 31, 2006
		(Unaudited)				(Note)
Assets:
Current assets:
Cash and cash equivalents		$	125,657			$	254,393
Short-term investments			10,000				20,000
Accounts receivable			67,952				52,501
Inventories
Leaf tobacco			164,500				201,035
Products in process			220,418				233,741
Finished goods			186,030				145,820
Other materials and supplies			22,702				20,662
Total inventories			593,650				601,258
Deferred income taxes			23,708				11,370
Income taxes receivable			6,866				—
Assets held for sale			—				31,452
Prepaid expenses and other current assets			31,201				27,136
Total current assets			859,034				998,110
Property, plant and equipment, net			486,955				389,810
Deferred income taxes			40,469				26,239
Goodwill			34,499				6,547
Intangible assets			56,907				4,723
Other assets			14,381				14,919
Total assets		$	1,492,245			$	1,440,348
Liabilities and Stockholders’ (deficit) equity:
Current liabilities:
Accounts payable and accrued expenses		$	237,157			$	268,254
Income taxes payable			—				18,896
Litigation liability			132,524				12,927
Total current liabilities			369,681				300,077
Long-term debt			840,000				840,000
Postretirement benefits other than pensions			91,098				86,413
Pensions			154,952				142,424
Income taxes payable			37,728				—
Other liabilities			12,801				5,608
Total liabilities			1,506,260				1,374,522
Contingencies (see Note 14)
Minority interest and put arrangement			27,592				—
Stockholders’ (deficit) equity:
Capital stock (1)			105,510				104,956
Additional paid-in capital			1,085,634				1,036,237
Retained earnings			726,493				635,272
Accumulated other comprehensive loss			(55,462	)			(56,871	)
			1,862,175				1,719,594
Less treasury stock (2)			1,903,782				1,653,768
Total stockholders’ (deficit) equity			(41,607	)			65,826
Total liabilities and stockholders’ (deficit) equity		$	1,492,245			$	1,440,348

Note: The Condensed Consolidated Statement of Financial Position at December 31, 2006 has been derived from the audited financial statements at that date.

See Notes to Condensed Consolidated Financial Statements.

UST Inc.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Net sales		$	479,612			$	458,649			$	1,417,884			$	1,365,190
Costs and expenses:
Cost of products sold			112,150				102,871				328,064				293,964
Excise taxes			14,319				12,984				40,907				38,515
Selling, advertising and administrative			129,916				133,186				395,875				399,796
Restructuring charges			1,677				17,495				9,105				17,495
Antitrust litigation			3,158				—				125,258				1,350
Total costs and expenses			261,220				266,536				899,209				751,120
Gain on sale of corporate headquarters building			—				—				105,143				—
Operating income			218,392				192,113				623,818				614,070
Interest, net			9,308				9,955				27,438				32,218
Earnings from continuing operations before income taxes			209,084				182,158				596,380				581,852
Income tax expense			75,484				67,963				215,296				217,089
Earnings from continuing operations			133,600				114,195				381,084				364,763
Income from discontinued operations, including income tax effect			—				3,890				—				3,890
Net earnings			133,600				118,085				381,084				368,653
Net earnings per basic share:
Earnings from continuing operations		$	0.85			$	0.71			$	2.40			$	2.27
Income from discontinued operations			—				0.03				—				0.02
Net earnings per basic share		$	0.85			$	0.74			$	2.40			$	2.29
Net earnings per diluted share:
Earnings from continuing operations		$	0.84			$	0.71			$	2.37			$	2.25
Income from discontinued operations			—				0.02				—				0.02
Net earnings per diluted share		$	0.84			$	0.73			$	2.37			$	2.27
Dividends per share		$	0.60			$	0.57			$	1.80			$	1.71
Average number of shares:
Basic			157,666				160,440				159,056				160,940
Diluted			158,951				162,187				160,536				162,355

See Notes to Condensed Consolidated Financial Statements.

UST Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)

		Nine Months Ended September 30,
		2007				2006
Operating Activities:
Net earnings		$	381,084			$	368,653
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			33,362				33,722
Share-based compensation expense			9,575				7,610
Excess tax benefits from share-based compensation			(7,520	)			(6,559	)
Gain on sale of corporate headquarters building			(105,143	)			—
Gain on disposition of property, plant and equipment			(474	)			(1,915	)
Amortization of imputed rent on corporate headquarters building			6,740				—
Deferred income taxes			(12,024	)			(9,513	)
Changes in operating assets and liabilities:
Accounts receivable			(9,856	)			4,364
Inventories			41,914				45,594
Prepaid expenses and other assets			(2,122	)			12,618
Accounts payable, accrued expenses, pensions and other liabilities			(15,650	)			(26,407	)
Income taxes			3,802				3,628
Litigation liability			119,597				(918	)
Net cash provided by operating activities			443,285				430,877
Investing Activities:
Short-term investments, net			10,000				(10,000	)
Purchases of property, plant and equipment			(51,504	)			(25,177	)
Proceeds from dispositions of property, plant and equipment			130,701				6,157
Acquisition of business			(155,202	)			(10,578	)
Loan to minority interest holder			(27,096	)			—
Repayment of loan by minority interest holder			27,096				—
Investment in joint venture			(322	)			(2,921	)
Net cash used in investing activities			(66,327	)			(42,519	)
Financing Activities:
Repayment of debt			(7,095	)			—
Proceeds from the issuance of stock			30,517				53,792
Excess tax benefits from share-based compensation			7,520				6,559
Dividends paid			(286,622	)			(275,871	)
Stock repurchased			(250,014	)			(150,034	)
Net cash used in financing activities			(505,694	)			(365,554	)
(Decrease)/Increase in cash and cash equivalents			(128,736	)			22,804
Cash and cash equivalents at beginning of year			254,393				202,025
Cash and cash equivalents at end of the period		$	125,657			$	224,829
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes		$	224,126			$	221,389
Interest			48,717				48,450

See Notes to Condensed Consolidated Financial Statements.

UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(Unaudited)

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

1 — BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the U.S. Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. Management believes that all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated financial statements include the accounts of UST Inc. (the “Company”) and all of its subsidiaries after the elimination of intercompany accounts and transactions. The Company provides for minority interests in consolidated companies in which the Company’s ownership is less than 100 percent. Certain prior year amounts on the Condensed Consolidated Statement of Financial Position have been reclassified to conform to the 2007 presentation. Operating results for the nine month period ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ended December 31, 2007. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 (“2006 Form 10-K”).

2 — RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes (“FIN 48”), to create a single model to address accounting for uncertainty in tax positions. The Company adopted the provisions of FIN 48 on January 1, 2007, as required. See Note 6, “Income Taxes” for more details.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 provides a common definition of fair value to be applied to existing GAAP requiring the use of fair value measures, establishes a framework for measuring fair value and enhances disclosure about fair value measures under other accounting pronouncements, but does not change existing guidance as to whether an asset or liability is carried at fair value. SFAS No. 157 is to be applied on a prospective basis, with limited exceptions for specified financial instruments. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and, as such, the Company plans to adopt the provisions of SFAS No. 157 on January 1, 2008. The Company is in the process of evaluating the impact that the adoption of this pronouncement will have on its results of operations and financial condition.

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

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to irrevocably choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. For any eligible items that exist at the effective date for which an entity chooses to elect the fair value option, the effect of the first remeasurement to fair value shall be reported as a cumulative-effect adjustment to the opening balance of retained earnings. The Company is in the process of evaluating the impact that this pronouncement may have on its results of operations and financial condition.

3 — CAPITAL STOCK

The Company repurchased approximately 2.6 million shares of outstanding common stock at a cost of approximately $130 million during the quarter ended September 30, 2007. During the first nine months of 2007, the Company repurchased approximately 4.7 million shares of outstanding common stock at a cost of approximately $250 million. The repurchases were made pursuant to the Company’s authorized program, approved in December 2004, to repurchase up to 20 million shares of its outstanding common stock. As of September 30, 2007, approximately 11.8 million shares have been repurchased at a cost of approximately $567 million under the program.

4 — SHARE-BASED COMPENSATION

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

The following table provides a breakdown by line item of the pre-tax share-based compensation expense recognized in the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2007 and 2006, respectively, as well as the related income tax benefit and amounts capitalized as a component of inventory for each period.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Selling, advertising and administrative expense (1)		$	2,380			$	2,457			$	9,082			$	6,820
Cost of products sold			138				154				426				342
Restructuring charges (2)			56				448				67				448
Total pre-tax share-based compensation expense		$	2,574			$	3,059			$	9,575			$	7,610
Income tax benefit		$	1,025			$	1,110			$	3,788			$	2,759
Capitalized as inventory			30				36				92				84

A summary of the status of restricted stock and restricted stock units for the nine months ended September 30, 2007 is presented below:

		Restricted Stock								Restricted Stock Units
						Weighted average								Weighted average
		Number of				grant-date fair				Number of				grant-date fair
		Shares				value per share				Shares				value per share
Nonvested at January 1, 2007			460,438			$	41.17				230,475			$	41.23
Granted			126,300			$	59.83				36,749			$	56.33
Forfeited			(25,399	)		$	55.12				(10,830	)		$	42.82
Vested			(148,949	)		$	44.71				(30,234	)		$	39.37
Nonvested at September 30, 2007			412,390			$	46.23				226,160			$	43.86

In addition to the table above, in May 2007 and August 2007, the Company awarded 106,900 restricted shares and 9,425 restricted shares, respectively, for which the performance targets had not been established as of September 30, 2007. In accordance with SFAS No. 123(R), a grant date, for purposes of measuring compensation expense, cannot occur until the performance measures are established, as that is when both the Company and the award recipients would have a mutual understanding of the key terms and conditions of the award. During the third quarter of 2007, 4,000 of such performance-based restricted shares were forfeited, leaving a total of 112,325 performance-based restricted shares for which performance targets had not been established at September 30, 2007.

During the three and nine months ended September 30, 2007, 0.2 million and 1 million options were exercised with a weighted-average exercise price of $30.64 and $31.32, respectively. At September 30, 2007, there were 4 million options outstanding, of which 3.7 million options were exercisable, with weighted-average exercise prices of $34.03 and $32.60, respectively.

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

5 — EMPLOYEE BENEFIT PLANS

In accordance with SFAS No. 132, Employers’ Disclosures About Pensions and Other Postretirement Benefits (Revised 2003), as amended by SFAS No. 158, Employers’ Accounting For Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R), the following provides the components of net periodic benefit cost for the three and nine months ended September 30, 2007 and 2006, respectively:

										Postretirement Benefits
		Pension Plans								Other than Pensions
		Three Months Ended								Three Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Service cost		$	4,766			$	4,192			$	1,154			$	1,034
Interest cost			8,338				7,831				1,215				1,102
Expected return on plan assets			(7,239	)			(6,662	)			—				—
Amortization of unrecognized transition asset			(2	)			(2	)			—				—
Amortization of prior service cost (credit)			18				5				(1,229	)			(1,048	)
Recognized actuarial loss			979				1,284				87				224
Curtailment and special termination benefits			—				4,042				—				2,789
Net periodic benefit cost		$	6,860			$	10,690			$	1,227			$	4,101

										Postretirement Benefits Other
		Pension Plans								than Pensions
		Nine Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Service cost		$	14,223			$	14,232			$	3,463			$	4,038
Interest cost			24,881				22,870				3,646				3,692
Expected return on plan assets			(21,603	)			(19,641	)			—				—
Amortization of unrecognized transition asset			(6	)			(6	)			—				—
Amortization of prior service cost (credit)			56				14				(3,690	)			(4,067	)
Recognized actuarial loss			2,922				4,800				263				1,058
Special termination benefits			1,974				4,042				—				2,789
Net periodic benefit cost		$	22,447			$	26,311			$	3,682			$	7,510

During the first quarter of 2007, the Company recorded a charge for special termination benefits related to its defined benefit pension plans in connection with an executive officer’s separation from service. In connection with restructuring activities, during the third quarter of 2006, the Company recorded special termination benefit charges of approximately $4 million related to its defined benefit pension plans and $2.8 million of net curtailment and special termination benefit charges related to its other postretirement benefit plans.

The Company expects to contribute $7.4 million to its non-qualified defined benefit pension plans in 2007 which is slightly higher than the $7.2 million previously disclosed in the Company’s 2006 Form 10-K.

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

6 — INCOME TAXES

The Company’s income tax provision takes into consideration pre-tax income, statutory tax rates and the Company’s tax profile in the various jurisdictions in which it operates. The tax bases of the Company’s assets and liabilities reflect its best estimate of the future tax benefit and costs it expects to realize when such amounts are included in its tax returns. Quantitative and probability analysis, which incorporates management’s judgment, is required in determining the Company’s effective tax rate and in evaluating its tax positions. The Company recognizes tax benefits in accordance with the provisions of FIN 48, which it adopted as of January 1, 2007. Prior to the Company’s adoption of FIN 48, accruals for uncertain income tax positions were established in accordance with SFAS No. 5, Accounting for Contingencies.

Upon the adoption of FIN 48, the Company recognized a $16.4 million increase in the liability for unrecognized tax benefits of which $0.1 million was accounted for as a reduction to the opening balance of retained earnings and $16.3 million was accounted for as an adjustment to deferred taxes for amounts related to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. As of January 1, 2007 and September 30, 2007, the total liability for unrecognized tax benefits was $38.2 million and $39.4 million, respectively. The $39.4 million liability for unrecognized tax benefits as of September 30, 2007 represents the gross tax liability for all jurisdictions. Approximately $0.6 million of this liability, net of federal tax benefit, is included on the “income taxes receivable” line of the Condensed Consolidated Statement of Financial Position, while the remaining $38.8 million of this liability, net of federal tax benefit, is reported on the “income taxes payable” line in the non-current liabilities section of the Condensed Consolidated Statement of Financial Position.

The Company recognizes accruals of interest and penalties related to unrecognized tax benefits in income tax expense. During the three months ended September 30, 2007 and 2006, the Company recognized approximately $0.8 million and $0.5 million, respectively, in interest and penalties. For the nine months ended September 30, 2007 and 2006, the Company recognized approximately $2.5 million and $1.4 million, respectively, in interest and penalties. As of January 1, 2007 and September 30, 2007, the Company had a liability of approximately $8.2 million and $10.3 million, respectively, for the payment of interest and penalties. Approximately $0.3 million of this liability is included on the “income taxes receivable” line of the Condensed Consolidated Statement of Financial Position, while the remaining $10 million of this liability is included on the “income taxes payable” line in the non-current liabilities section of the Condensed Consolidated Statement of Financial Position.

The Company continually and regularly evaluates, assesses and adjusts its accruals for income taxes in light of changing facts and circumstances, which could cause the effective tax rate to fluctuate from period to period. Of the total $39.4 million of unrecognized tax benefits as of September 30, 2007, approximately $22.4 million would impact the annual effective tax rate if such amounts were recognized. The remaining $17 million of unrecognized tax benefits relate to tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. Based on information obtained to date, the Company believes that it is reasonably possible that within the next 12 months certain U.S. state examinations will be resolved, which could result in a decrease in unrecognized tax benefits of up to $0.6 million. Additionally, the Company believes it is reasonably possible that the total amount of unrecognized tax benefits could decrease by $1.4 million within the next 12 months due to lapses in statutes of limitations in multiple state jurisdictions.

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

The Internal Revenue Service (“IRS”) and other tax authorities in various states and foreign jurisdictions audit the Company’s income tax returns on a continuous basis. Depending on the tax jurisdiction, a number of years may elapse before a particular matter for which the Company has an unrecognized tax benefit is audited and ultimately resolved. With few exceptions, the Company is no longer subject to federal, state and local or foreign income tax examinations by tax authorities for years before 2003. While it is often difficult to predict the timing of tax audits and their final outcome, the Company believes that its estimates reflect the most likely outcome of known tax contingencies. However, the final resolution of any such tax audit could result in either a reduction in the Company’s accruals or an increase in its income tax provision, both of which could have a significant impact on its results of operations in any given period.

The Company’s effective tax rate on earnings from continuing operations decreased to 36.1 percent for both the third quarter and first nine months of 2007, from 37.3 percent for both the third quarter and first nine months of 2006. The decrease in the effective tax rate on earnings from continuing operations for both 2007 periods, as compared to 2006, was primarily due to the scheduled statutory increase in 2007 for the deduction available for qualified domestic production activities.

7 — SEGMENT INFORMATION

The Company’s reportable segments are Smokeless Tobacco and Wine. Those business units that do not meet quantitative reportable thresholds are included in All Other Operations. Included in All Other Operations for both periods are the Company’s international operations. Interim segment information is as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Net Sales to Unaffiliated Customers
Smokeless Tobacco		$	384,067			$	377,258			$	1,150,518			$	1,142,646
Wine (3)			82,286				69,536				230,581				187,845
All Other			13,259				11,855				36,785				34,699
Net sales		$	479,612			$	458,649			$	1,417,884			$	1,365,190
Operating Profit (1)
Smokeless Tobacco (2)		$	213,073			$	186,153			$	507,821			$	597,295
Wine (3)			12,674				9,448				35,053				27,371
All Other			4,195				4,336				13,136				11,955
Operating profit			229,942				199,937				556,010				636,621
Gain on Sale of Corporate Headquarters Building			—				—				105,143				—
Corporate expenses (1)			(11,550	)			(7,824	)			(37,335	)			(22,551	)
Interest, net			(9,308	)			(9,955	)			(27,438	)			(32,218	)
Earnings from continuing operations before income taxes		$	209,084			$	182,158			$	596,380			$	581,852

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

The Company’s identifiable assets by reportable segment as of September 30, 2007 did not change significantly from amounts appearing in the December 31, 2006 Consolidated Segment Information (See the 2006 Form 10-K), with the exception of Corporate and Wine segment assets. Wine segment assets reflect an increase due to the acquisition of Stag’s Leap Wine Cellars, with a related decrease in Corporate assets due to the cash paid in connection with the acquisition (See Note 15, “Other Matters” for further information).

8 — ASSETS HELD FOR SALE

At September 30, 2007, the Company had no assets classified as held for sale, as the properties held for sale at December 31, 2006 were either sold or reclassified back into property, plant and equipment during the nine months ended September 30, 2007.

In September 2007, $1.8 million relating to the Company’s corporate conference center located in Watch Hill, Rhode Island was reclassified to “property, plant and equipment, net” as the Company no longer expects it will be able to sell the property within the twelve-month period allowed under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. A cumulative retroactive depreciation adjustment upon reclassification was not required, as the carrying value of the property was equal to its estimated salvage value at the time of initial classification within “assets held for sale.” Prior to this reclassification, the property was included within “assets held for sale” on the December 31, 2006 Consolidated Statement of Financial Position.

In March 2007, the Company finalized the sale of its corporate headquarters for cash proceeds of $130 million, as well as a below-market, short-term lease with an imputed fair market value of approximately $6.7 million. This sale resulted in a pre-tax gain of approximately $105 million, which is reported on the “gain on sale of corporate headquarters building” line in the Condensed Consolidated Statement of Operations. Prior to this transaction, the property was included within “assets held for sale” on the December 31, 2006 Consolidated Statement of Financial Position.

In January 2007, the Company sold a winery property located in the State of Washington for net proceeds of $3.1 million, resulting in a pre-tax gain of $2 million, which was recorded as a reduction to selling, advertising and administrative (“SA&A”) expenses in the Condensed Consolidated Statement of Operations. Prior to this transaction, the property was included within “assets held for sale” on the December 31, 2006 Consolidated Statement of Financial Position.

In March 2006, the Company sold a winery property located in California with a carrying value of $3.4 million for net proceeds of $5.9 million, resulting in a pre-tax gain of $2.5 million, which was recorded as a reduction to SA&A expenses in the Condensed Consolidated Statement of Operations.

9 — NET EARNINGS PER SHARE

Basic earnings per share is computed by dividing net earnings by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net earnings by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had all potentially dilutive shares of common stock been issued. The dilutive effect of outstanding options, restricted stock and restricted stock units is reflected in diluted earnings per share by applying the treasury stock

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method under SFAS No. 128, Earnings per Share. Under the treasury stock method, an increase in the fair value of the Company’s common stock can result in a greater dilutive effect from outstanding options, restricted stock and restricted stock units. Furthermore, the exercise of options and the vesting of restricted stock and restricted stock units can result in a greater dilutive effect on earnings per share than that recognized under the treasury stock method.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Numerator:
Earnings from continuing operations		$	133,600			$	114,195			$	381,084			$	364,763
Income from discontinued operations			—				3,890				—				3,890
Net earnings		$	133,600			$	118,085			$	381,084			$	368,653
Denominator:
Denominator for basic earnings per share — weighted-average shares			157,666				160,440				159,056				160,940
Dilutive effect of share-based awards			1,285				1,747				1,480				1,415
Denominator for diluted earnings per share			158,951				162,187				160,536				162,355
Net earnings per basic share:
Earnings from continuing operations		$	0.85			$	0.71			$	2.40			$	2.27
Income from discontinued operations			—				0.03				—				0.02
Net earnings per basic share		$	0.85			$	0.74			$	2.40			$	2.29
Net earnings per diluted share:
Earnings from continuing operations		$	0.84			$	0.71			$	2.37			$	2.25
Income from discontinued operations			—				0.02				—				0.02
Net earnings per diluted share		$	0.84			$	0.73			$	2.37			$	2.27

Options to purchase approximately 0.3 million and nine thousand shares of common stock outstanding as of September 30, 2007 and 2006, 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 Company’s common stock and, therefore, were antidilutive.

10 — COMPREHENSIVE INCOME

The components of comprehensive income for the Company are net earnings, foreign currency translation adjustments, the change in the fair value of derivatives designated as effective cash flow hedges and changes in deferred components of net periodic pension and other postretirement benefit costs. For the third quarter of 2007 and 2006, total comprehensive income, net of taxes, amounted to $131.6 million and $114.7 million, respectively. For the first nine months of 2007 and 2006, total comprehensive income, net of taxes, amounted to $382.5 million and $367.5 million, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

11 — PURCHASE COMMITMENTS

As of September 30, 2007, the Company had entered into unconditional purchase obligations in the form of contractual commitments. Unconditional purchase obligations are commitments that are either noncancelable or cancelable only under certain predefined conditions.

As of September 30, 2007, the Company has contractual obligations of approximately $83.5 million for the purchase of leaf tobacco to be used in the production of moist smokeless tobacco products. In the first quarter of 2007, the Company completed $15.3 million in leaf tobacco purchases related to all contracts outstanding at December 31, 2006. The majority of the contractual obligations to purchase leaf tobacco are expected to be fulfilled by the end of 2008.

Purchase commitments under contracts to purchase grapes for the periods beyond one year are subject to variability resulting from potential changes in applicable grape market price indices. The following table presents a summary of the net change in the Company’s future payment obligations since January 1, 2007, and the balance of such commitments at September 30, 2007, for the purchases and processing of grapes for use in the production of wine, based upon estimated yields and market conditions:

		2007				2008				2009				2010				2011				Thereafter				Total
Grape commitments — January 1, 2007		$	66,805			$	65,605			$	65,776			$	63,193			$	59,047			$	125,011			$	445,437
Net (decrease) increase			(12,380	)			7,903				5,393				4,040				2,658				10,937				18,551
Grape commitments — Sept 30, 2007		$	54,425			$	73,508			$	71,169			$	67,233			$	61,705			$	135,948			$	463,988

12 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company has hedged against the variability of forecasted interest payments attributable to changes in interest rates through the date of an anticipated debt issuance in 2009 via a forward starting interest rate swap. The forward starting interest rate swap has a notional amount of $100 million and the terms call for the Company to receive interest quarterly at a variable rate equal to the London InterBank Offered Rate (“LIBOR”) and to pay interest semi-annually at a fixed rate of 5.715 percent. The fair value of the forward starting interest rate swap at September 30, 2007 was a net liability of $2.2 million, based on a dealer quote, considering current market rates, and was included in “other assets” on the Condensed Consolidated Statement of Financial Position. Accumulated other comprehensive loss at September 30, 2007 included the accumulated loss on the cash flow hedge (net of taxes) of $1.4 million, which reflects $1.8 million of other comprehensive loss and $0.6 million of other comprehensive income recognized for the three and nine months ended September 30, 2007, respectively, in connection with the change in fair value of the swap.

The Company has hedged the interest rate risk on its $40 million aggregate principal amount of floating rate senior notes with a ten-year interest rate swap having a notional amount of $40 million and quarterly settlement dates over the term of the contract. The Company pays a fixed rate of 7.25 percent and receives a floating rate of three-month LIBOR plus 90 basis points on the notional amount. The fair value of the swap at September 30, 2007 was a net liability of $1.8 million, based on a dealer quote, considering current market conditions, and was included in “other liabilities” on the Condensed Consolidated Statement of Financial Position. Accumulated other comprehensive loss at September 30, 2007 included the accumulated loss on the cash flow hedge (net of taxes) of $1.2 million, which reflects the $0.7 million and $0.5 million of other

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

comprehensive loss recognized for the three and nine months ended September 30, 2007, respectively, in connection with the change in fair value of the swap.

13 — RESTRUCTURING

During the third quarter of 2006, the Company announced and commenced implementation of a cost-reduction initiative called “Project Momentum,” with targeted savings of at least $100 million over its first three years. This initiative is designed to create additional resources for growth via operational productivity and efficiency enhancements. The Company believes that such an effort is prudent as it will provide additional financial flexibility in the increasingly competitive smokeless tobacco category. As previously reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, the Company finalized plans on various other initiatives, primarily related to manufacturing operations and procurement functions, expected to generate $50 million in additional savings beyond the initial $100 million of targeted savings. The incremental $50 million of savings are expected to be realized in 2008 and 2009.

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

		Restructuring
		Charges Incurred for				Restructuring Charges
		the Three Months				Incurred for the Nine				Cumulative Charges				Total Charges
		Ended				Months Ended				Incurred as of				Expected to be
		September 30, 2007				September 30, 2007				September 30, 2007				Incurred(1)
One-time termination benefits		$	828			$	1,472			$	17,097			$	19,700 - $21,200
Contract termination costs			85				106				496				400 - 500
Other restructuring costs			764				7,527				13,509				13,400 - 13,800
Total		$	1,677			$	9,105			$	31,102			$	33,500-$35,500

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

The following table provides a summary of restructuring charges incurred for the three and nine months ended September 30, 2007, as well as cumulative charges incurred to date and the total amount of charges expected to be incurred, in connection with Project Momentum, by reportable segment:

		Restructuring				Restructuring
		Charges Incurred for				Charges Incurred for
		the Three Months				the Nine Months				Cumulative Charges				Total Charges
		Ended				Ended				Incurred as of				Expected to be
		September 30, 2007				September 30, 2007				September 30, 2007				Incurred
Smokeless Tobacco		$	403			$	6,889			$	26,431			$	28,500 - $30,200
Wine			—				—				322				400 - 500
All Other Operations			615				615				766				1,100 - 1,200
Total — reportable segments			1,018				7,504				27,519			$	30,000 - $31,900
Corporate (unallocated)			659				1,601				3,583				3,500 - 3,600
Total		$	1,677			$	9,105			$	31,102			$	33,500 - $35,500

Accrued restructuring charges are included in the “accounts payable and accrued expenses” line on the Condensed Consolidated Statement of Financial Position. A reconciliation of the changes in the liability balance since December 31, 2006 is presented below.

		One-Time				Contract
		Termination				Termination				Other
		Benefits				Costs				Costs				Total
Balance as of December 31, 2006		$	4,349			$	192			$	52			$	4,593
Add: restructuring charges incurred			1,472				106				7,527				9,105
Less: payments			(4,685	)			(187	)			(6,464	)			(11,336	)
Less: reclassified liabilities (1)			(67	)			—				(713	)			(780	)
Balance as of September 30, 2007		$	1,069			$	111			$	402			$	1,582

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

14 — CONTINGENCIES

The Company has been named in certain health care cost reimbursement/third party recoupment/class action litigation against the major domestic cigarette companies and others seeking damages and other relief. The complaints in these cases on their face predominantly relate to the usage of cigarettes; within that context, certain complaints contain a few allegations relating specifically to smokeless tobacco products. These actions are in varying stages of pretrial activities. The Company believes these pending litigation matters will not result in any material liability for a number of reasons, including the fact that the Company has had only limited involvement with cigarettes and the Company’s current percentage of total tobacco industry sales is relatively small. Prior to 1986, the Company manufactured some cigarette products which had a de minimis market share. From May 1, 1982 to August 1, 1994, the Company distributed a small volume of imported cigarettes and is indemnified against claims relating to those products.

Smokeless Tobacco Litigation

The Company is named in certain actions in West Virginia brought on behalf of individual plaintiffs against cigarette manufacturers, smokeless tobacco manufacturers, and other organizations seeking damages and other relief in connection with injuries allegedly sustained as a result of tobacco usage, including smokeless tobacco products. Included among the plaintiffs are three individuals alleging use of the Company’s smokeless tobacco products and alleging the types of injuries claimed to be associated with the use of smokeless tobacco products. These individuals also allege the use of other tobacco products.

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

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

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Antitrust Litigation

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

Prior to 2007, actions in all but four of the jurisdictions were resolved, either through court-approved settlements or dismissals, including a dismissal in the New Hampshire action that was subsequently reversed on appeal by the plaintiffs. Pursuant to the settlements, adult consumers received coupons redeemable on future purchases of the Company’s moist smokeless tobacco products, and the Company agreed to pay all related administrative costs and plaintiffs’ attorneys’ fees.

In May 2007, the Company entered into a Settlement Agreement to resolve the Wisconsin class action. The Wisconsin Settlement Agreement has been preliminarily approved by the court. In September 2007, the Company entered into a Settlement Agreement to resolve the California class action which has been preliminarily approved by the court. For additional details on the resolution of the California class action, see “Item 1. Legal Proceedings” in Part II. In connection with the resolution of the Wisconsin and California class actions, the Company recorded a $122.1 million pre-tax charge in the first quarter of 2007 related to the estimated costs to resolve these actions, subject to respective court approval. Approximately $28.5 million of this charge relates to settlement of the Wisconsin action resulting from court-ordered mediation in April 2007. The charge reflects costs attributable to coupons that will be distributed to consumers, which will be redeemable on future purchases of the Company’s moist smokeless tobacco products. Also reflected in the Wisconsin charge are plaintiffs’ attorneys’ fees and other administrative costs of the settlement. The remaining $93.6 million of the first quarter 2007 charge relates to settlement of the California action in May 2007, as a result of court-ordered mediation. This charge brings the total recognized liability for the California action to $96 million, which reflects the cost of cash payments to be made to the benefit of class members, as well as plaintiffs’ attorneys’ fees and other administrative costs of the settlement.

The liability associated with the Company’s estimated costs to resolve all indirect purchaser actions increased to approximately $132.5 million at September 30, 2007, from $12.9 million at December 31, 2006, primarily as a result of the charge recognized for the Wisconsin and California settlements, as well as a charge recognized in connection with the Kansas and New York settlement, as discussed further below. These increases were partially offset by actual coupon redemption and payments of administrative costs related to previous settlements.

To date, indirect purchaser actions in almost all of the jurisdictions have been resolved, including those subject to court approval, leaving three unresolved actions in the States of Pennsylvania, Massachusetts and New Hampshire. In the Pennsylvania action, which is before a federal court in Pennsylvania, the Third Circuit Court of Appeals has accepted the Company’s appeal of the trial court’s denial of the Company’s motion to dismiss the complaint. The Company continues to believe there is insufficient basis for plaintiffs’

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

complaint. In August 2007, the New Hampshire Supreme Court reversed the order granting the Company’s motion to dismiss the New Hampshire action and remanded the case for further proceedings. The Company believes the facts and circumstances in the New Hampshire action and the Massachusetts class action will continue to support its defenses. The Company believes, and has been so advised by counsel handling these actions, that it has meritorious defenses in this regard, and they are and will continue to be vigorously defended. The Company believes that the ultimate outcome of these actions will not have a material adverse effect on its consolidated financial results or its consolidated financial position, although if plaintiffs were to prevail, beyond the amounts accrued, the effect of any judgment or settlement could have a material adverse impact on its consolidated financial results in the particular reporting period in which resolved and, depending on the size of any such judgment or settlement, a material adverse effect on its consolidated financial position. Notwithstanding the Company’s assessment of the financial impact of these actions, management is not able to estimate the amount of loss, if any, beyond the amounts accrued, which could be associated with an adverse resolution.

Also, two additional matters remain outstanding in connection with indirect purchaser actions.

Counsel for plaintiffs in the settlement of the Kansas and New York actions filed a motion for an additional amount of approximately $8.5 million in attorneys’ fees, expenses and costs, plus interest, beyond the previously agreed-upon amounts already paid by the Company. An evidentiary hearing on plaintiffs’ motion was held in April 2006. In August 2007, the court granted plaintiffs’ motion and entered judgment against the Company in the amount of approximately $3 million in additional attorneys’ fees and expenses, along with prejudgment interest on a portion of the award. In connection with the court’s granting of this motion, a charge of $3.2 million, inclusive of interest, was recognized in the third quarter of 2007.

The Company has been served with a purported class action complaint filed in federal court in West Virginia, attempting to challenge certain aspects of a prior settlement approved by the Tennessee state court and seeking additional amounts purportedly consistent with subsequent settlements of similar actions, estimated by plaintiffs to be between $8.9 million and $214.2 million, as well as punitive damages and attorneys’ fees. The Company believes, and has been so advised by counsel handling this case, that it has meritorious defenses in this regard, and will continue to vigorously defend against this complaint. As such, the Company has not recognized a liability for the additional amounts sought in this complaint.

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

Other Litigation

The Company has been named in an action in California brought by the People of the State of California, in the name of the Attorney General of the State of California, alleging that the Company’s sponsorship relating to the National Hot Rod Association violates various provisions of the Smokeless Tobacco Master Settlement Agreement (“STMSA”) and the related Consent Decree entered in connection with the STMSA (see Note 15, “Other Matters” for additional information regarding the STMSA). The complaint seeks

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

declaratory and injunctive relief, unspecified monetary sanctions, attorneys’ fees and costs, and a finding of civil contempt. In July 2007, the parties reached a non-binding agreement in principle to resolve this matter. In connection with such agreement, a charge was recognized during the second quarter of 2007. In August 2007, the Court entered a Stipulation for Entry of Judgment and Final Judgment, thereby dismissing this matter without prejudice.

15 — OTHER MATTERS

Tobacco Reform Act

On October 22, 2004, the “Fair and Equitable Tobacco Reform Act of 2004” (the “Tobacco Reform Act”) was enacted in connection with a comprehensive federal corporate reform and jobs creation bill. Under the Tobacco Reform Act, the Secretary of Agriculture imposes quarterly assessments on tobacco manufacturers and importers used to fund a trust to compensate tobacco quota farmers. The Company does not believe that the assessments imposed under the Tobacco Reform Act will have a material adverse impact on its consolidated financial position, results of operations or cash flows in any reporting period. The Company recognized charges of approximately $0.9 million and $2.8 million for the three and nine months ended September 30, 2007, respectively, and $0.8 million and $2.4 million for the three and nine months ended September 30, 2006, respectively, associated with the assessments required by the Tobacco Reform Act.

Smokeless Tobacco Master Settlement Agreement

In November 1998, the Company entered into the STMSA with the attorneys general of various states and U.S. territories to resolve the remaining health care cost reimbursement cases initiated against the Company. The STMSA required the Company to adopt various marketing and advertising restrictions and make payments potentially totaling $100 million over a minimum of 10 years for programs to reduce youth usage of tobacco and combat youth substance abuse and for enforcement purposes. For the third quarter and nine months ended September 30, 2007, total charges recorded by the Company in connection with the STMSA were $4.6 million and $13.8 million, respectively. Total charges recorded by the Company in connection with the STMSA for the third quarter and nine months ended September 30, 2006 were $4.1 million and $12.5 million, respectively.

For further information on both items, refer to Part II, Item 8 “Financial Statements and Supplementary Data — Notes to the Consolidated Financial Statements — Note 22, Other Matters,” in the 2006 Form 10-K.

Acquisition

On September 11, 2007, the Company completed its acquisition of Stag’s Leap Wine Cellars (“Stag’s Leap”) and its signature Napa Valley, CA vineyards. Stag’s Leap is one of the world’s most highly regarded winery estates, known for distinctive world-class wines, which includes its icon brand CASK 23, as well as the Fay, S.L.V., Arcadia, Artemis, Karia and Hawk Crest labels. Consistent with the Company’s focus on becoming one of the premier fine wine companies in the world, this acquisition provides additional prestige to the Wine segment’s acclaimed portfolio and is expected to contribute to the segment’s continued operating profit growth.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The acquisition of Stag’s Leap was completed through one of the Company’s consolidated subsidiaries, Michelle-Antinori, LLC (“Michelle-Antinori”), in which the Company holds an 85 percent ownership interest, with a 15 percent minority ownership interest held by Antinori California (“Antinori”). Michelle-Antinori acquired 100 percent of Stag’s Leap for a total aggregate consideration of approximately $185 million, comprised of cash and assumed debt. The purchase price was based primarily on the estimated future operating results of the Stag’s Leap business, as well as an estimated benefit from operating cost synergies. Concurrent with the closing of the acquisition, the Company repaid the entire amount of assumed debt, plus accrued interest. In connection with the acquisition, the Company provided short-term bridge financing to Antinori for its 15 percent share of the purchase price via a non-recourse loan bearing an interest rate of 7 percent. As of September 30, 2007, the full amount of the loan was repaid by Antinori.

The results of operations of the Stag’s Leap business are reported in the Wine segment and have been included in the Condensed Consolidated Statement of Operations since the acquisition date.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in connection with the Stag’s Leap acquisition. The allocated purchase price includes estimated direct acquisition costs of $1.9 million. In determining the fair values of intangible assets, as well as certain tangible assets, the Company obtained third-party valuations. The Company is currently in the process of completing its review of these reports and may require additional information; thus, the allocation of the purchase price is deemed to be preliminary and may be subject to refinements. Estimated fair values at September 11, 2007 are as follows:

Current assets		$	41,262
Property, plant and equipment			72,147
Intangible assets			52,440
Goodwill			27,386
Other assets			319
Total assets acquired			193,554
Current liabilities			10,964
Total liabilities assumed			10,964
Net assets acquired		$	182,590

Of the $52.4 million of acquired intangible assets, $39.2 million was assigned to trademarks that are not subject to amortization. The remaining $13.2 million of acquired intangible assets are subject to amortization, and include customer relationships of $12.9 million (18-year weighted average useful life) and a non-compete agreement of $0.3 million (3-year useful life). The entire amount of goodwill is expected to be deductible for tax purposes.

In connection with the acquisition of Stag’s Leap and the related formation of Michelle-Antinori, the Company provided a put right to Antinori (“minority put arrangement”). The minority put arrangement provides Antinori the right to require the Company to purchase its 15 percent ownership interest in Michelle-Antinori at a price based on a fixed multiple of Stag’s Leap’s earnings before income taxes, depreciation, amortization and other non-cash items. The minority put arrangement becomes exercisable beginning on the third anniversary of the Stag’s Leap acquisition (September 11, 2010). The Company accounts for the minority put arrangement as mandatorily redeemable securities under Accounting Series Release No. 268, Redeemable Preferred Stocks, and Emerging Issues Task Force Abstract Topic No. D-98, Classification and

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Measurement of Redeemable Securities, as redemption is outside of the control of the Company. Under this accounting model, to the extent the value of the minority put arrangement is greater than the minority interest reflected on the balance sheet (“traditional minority interest”), the Company recognizes the difference as an increase to the value of minority interest, with an offset to retained earnings and a similar reduction to the numerator in the earnings per share available to common shareholders calculation. The Company also reflects any decreases to the amount in the same manner, with the floor in all cases being the traditionally calculated minority interest balance as of that date. The Company values the put arrangement by estimating its redemption value as if the redemption date were the end of the current reporting period, using the most recent 12-month trailing earnings before income taxes, depreciation, amortization and other non-cash items. As of September 30, 2007, the value of the minority put arrangement did not exceed the traditional minority interest balance. Therefore, no adjustment was recognized in the Condensed Consolidated Statement of Financial Position or in the calculation of earnings per share.

16 — BORROWING ARRANGEMENTS

On June 29, 2007, the Company entered into a $300 million, five-year revolving credit facility (the “Credit Facility”) which will primarily be used for general corporate purposes, including the support of commercial paper borrowings. The Company may elect to increase its borrowing capacity under the Credit Facility to $500 million subject to certain terms. The Credit Facility replaces the Company’s previous $300 million, three-year revolving credit facility which was terminated on June 29, 2007. The Company did not have any borrowings under the Credit Facility at September 30, 2007.

Costs of approximately $0.3 million associated with the establishment of the Credit Facility were capitalized and will be amortized over the applicable term. Approximately $16 thousand of these costs were recognized in both the three and nine months ended September 30, 2007. The Credit Facility requires the maintenance of a fixed charge coverage ratio, the payment of commitment and administrative fees and includes affirmative and negative covenants customary for facilities of this type. The commitment fee payable on the unused portion of the Credit Facility is determined based on an interest rate, within a range of rates, dependent upon the Company’s senior unsecured debt rating. The commitment fee currently payable is 0.05 percent per annum. Commitment fees of $38 thousand were recognized in both the three and nine months ended September 30, 2007.

17 — DISCONTINUED OPERATIONS

Net earnings for 2006 included after-tax income of $3.9 million from discontinued operations, which resulted from the reversal of an accrual for an income tax-related contingency originally recorded in connection with the June 2004 transfer of the Company’s former cigar operations to a smokeless tobacco competitor. This reversal resulted from a change in facts and circumstances, as the income tax consequences of the Company’s anticipated sale of its corporate headquarters in connection with Project Momentum have eliminated the need for the aforementioned contingency. The entire amount of this reversal was recognized as an income tax benefit from discontinued operations.

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

The following discussion and analysis of the Company’s consolidated results of operations and financial condition should be read in conjunction with the condensed consolidated financial statements and notes to the condensed consolidated financial statements within this Quarterly Report on Form 10-Q, as well as the consolidated financial statements and notes thereto included in the 2006 Form 10-K. Herein, the Company makes forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in those forward-looking statements as a result of various factors, including, but not limited to, those presented under “Cautionary Statement Regarding Forward-Looking Information” within “Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).” In addition, the Company has presented certain risk factors relevant to the Company’s business included in Item 1A in Part I of the 2006 Form 10-K.

INTRODUCTION

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

	•		OVERVIEW — This section provides context for the remainder of MD&A, including a general description of the Company’s overall business, its business segments and a high-level summary of Company-specific and industry-wide factors impacting its operations.
	•		RESULTS OF OPERATIONS — This section provides an analysis of the Company’s results of operations for the three and nine months ended September 30, 2007 and 2006. This section is organized using a layered approach, beginning with a discussion of consolidated results at a summary level, followed by more detailed discussions of business segment results and unallocated corporate items, including interest and income taxes.
	•		OUTLOOK — This section provides information regarding the Company’s current expectations, mainly with regard to the remainder of the current fiscal year, and is organized to provide information by business segment and on a consolidated basis.
	•		LIQUIDITY AND CAPITAL RESOURCES — This section provides an analysis of the Company’s financial condition, including cash flows for the nine months ended September 30, 2007 and 2006 and any material updates to the Company’s aggregate contractual obligations as of September 30, 2007.
	•		NEW ACCOUNTING STANDARDS — This section provides information regarding any newly issued accounting standards which have not yet been adopted by the Company.

OVERVIEW

BUSINESS

UST Inc. is a holding company for its wholly-owned subsidiaries: U.S. Smokeless Tobacco Company and International Wine & Spirits Ltd. Through its largest subsidiary, U.S. Smokeless Tobacco Company, the Company is a leading manufacturer and marketer of moist smokeless tobacco products including brands such as Copenhagen, Skoal, Red Seal, Husky and Rooster. Through International Wine & Spirits Ltd., the Company produces and markets premium wines sold nationally, via its Ste. Michelle Wine Estates subsidiary, under labels such as Chateau Ste. Michelle, Columbia Crest, Conn Creek, Villa Mt. Eden, Red

Diamond, Distant Bay, 14 Hands and Erath. In September 2007, through its acquisition of Stag’s Leap Wine Cellars (“Stag’s Leap”) , the Company added the following labels: Cask 23, Fay, S.L.V., Arcadia, Artemis, Karia and Hawk Crest. The Company also produces and markets sparkling wine under the Domaine Ste. Michelle label. In addition, the Company is the exclusive United States importer and distributor of the portfolio of wines produced by the Italian winemaker Antinori, which includes such labels as Tignanello, Solaia, Tormaresca, Montenisa and Haras de Pirque.

The Company conducts its business principally in the United States. The Company’s operations are divided primarily into two reportable segments: Smokeless Tobacco and Wine. The Company’s international smokeless tobacco operations, which are not significant, are reported as All Other Operations.

In the third quarter of 2006, the Company commenced implementation of a cost-reduction initiative called “Project Momentum,” with targeted savings of at least $100 million over its first three years. In addition, during 2007, the Company finalized plans on various other initiatives under Project Momentum, primarily related to manufacturing operations and the procurement function, which are expected to generate at least $50 million in additional savings beyond the original target, resulting in a new savings target of at least $150 million over the original three-year period. The majority of the incremental $50 million in savings are expected to be realized in 2008 and 2009. The Company believes that Project Momentum is prudent from a long-term growth perspective, as it is designed to provide resources for additional financial flexibility, whether to address potential competitive challenges in the smokeless tobacco category, make further investments behind its brands or increase net earnings. Operating income results in both the third quarter and nine-month periods of 2007 include the positive contribution realized from this initiative, with certain savings realized earlier than originally planned. Given this progress to date, the Company is confident that it is on track to realize Project Momentum’s overall targeted savings within the aforementioned three-year timeframe. See Consolidated Results — Restructuring Charges within the Results of Operations section below for further information.

Category Growth

The Company’s primary objective in the Smokeless Tobacco segment is to continue to grow the moist smokeless tobacco category by building awareness and social acceptability of smokeless tobacco products among adults, primarily smokers, with a secondary objective of being competitive in every segment of the moist smokeless tobacco category. Over the past several years, industry trends have shown that some adult consumers in this category have migrated from premium brands to brands in the price-value segment. As such, a key to the Company’s future growth and profitability is attracting growing numbers of adult consumers, primarily smokers, to the moist smokeless tobacco category, as approximately every one percent of adult smokers who convert to moist smokeless tobacco represents a 7 percent to 8 percent increase in the category’s adult consumer base, and consumer research indicates that the majority of new adult consumers enter the category in the premium segment.

In addition to advertising and one-on-one marketing initiatives focused on category growth, the Company has utilized its direct mail marketing program to promote the discreetness and convenience of smokeless tobacco relative to cigarettes to over 4.5 million adult smokers. The direct mail program, which the Company believes has been successful over the past two years, continues in 2007. The success of the Smokeless Tobacco segment’s category growth initiatives is also impacted by product innovation, as evidenced by the contribution that new products have made over the past several years. The Company believes that its

category growth efforts have contributed to the moist smokeless tobacco category’s strong growth rates since their implementation.

Premium Brand Loyalty

While category growth remains the Company’s priority, it has also focused its efforts on adult consumer loyalty for its premium moist smokeless tobacco products. The premium brand loyalty plan is designed to minimize migration from premium to price-value products by delivering value to adult consumers through promotional spending and other price-focused initiatives. As a result of this effort, premium volume has grown on a sequential basis during each of the last five quarters. For 2007, the Company now expects year-over-year premium net can volume growth of approximately 2 percent (excluding the positive impact of an extra billing day in the fourth quarter), which is in line with the trends seen so far this year.

WINE SEGMENT

The Company’s focus in the Wine segment is to become one of the premier fine wine companies in the world, to elevate Washington state wines to the quality and prestige of the top regions of the world, and to be known for superior products, innovation and customer focus. In order to achieve these goals, attention is directed towards traditional style wines in the super premium to luxury-priced categories. Recent achievements have been well aligned with these goals. According to ACNielsen, Ste. Michelle Wine Estates was the fastest growing top-10 winery in the U.S. during the first nine months of 2007, with the Company’s wines comprising 7.1 percent of total domestic 750ml units over that period, as compared to 6.2 percent for the full year in 2006. The Company continued to be the category leader for Riesling in 2007, based on ACNielsen data, comprising 32 percent of the domestic market on a year-to-date basis, reflecting a 2 percentage point increase over the Company’s reported full-year 2006 share. Overall, the Wine segment maintained its strong leadership position in Washington State.

Strategic alliances and acquisitions in the Wine segment have also been important in enabling the Company to achieve its long-term goals. The alliance with Antinori, to become its exclusive United States importer and distributor, and the purchase of the Erath label and winery, both of which occurred in 2006, have broadened the Wine segment’s position with respect to the two key wine regions represented by Antinori and Erath. The addition of Antinori wines positions the Wine segment as a leader in U.S. distribution of Tuscan wines, while the addition of Erath establishes the Company’s Wine segment as one of the largest producers of Oregon Pinot Noir. Consistent with the Company’s focus on becoming one of the premier fine wine companies in the world, in September 2007, the Company completed its acquisition of Stag’s Leap and its signature Napa Valley, CA vineyards for approximately $185 million, with a 15 percent minority interest held by Antinori California. This acquisition provides additional prestige to the Wine segment’s acclaimed portfolio, further strengthens the Company’s relationship with Antinori, and is expected to contribute to the segment’s continued operating profit growth.

The Company remains focused on the continued expansion of its sales force and category management staff to further broaden the distribution of its wines in the domestic market, especially in certain account categories such as restaurants, wholesale chains and mass merchandisers. Sustained growth in the Wine segment will also be dependent on third party acclaim and ongoing category growth.

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

CONSOLIDATED RESULTS

Third Quarter of 2007 compared with the Third Quarter of 2006

		Three Months Ended								Increase/
		September 30,								(Decrease)
		2007				2006				Amount				%
Net sales		$	479,612			$	458,649			$	20,963				4.6
Net earnings			133,600				118,085				15,515				13.1
Basic earnings per share			0.85				0.74				0.11				14.9
Diluted earnings per share			0.84				0.73				0.11				15.1
Restructuring charges			1,677				17,495				(15,818	)			(90.4	)
Antitrust litigation			3,158				—				3,158				—

Net Earnings

Consolidated net earnings increased in the third quarter of 2007, as compared to the third quarter of 2006, as a result of increased operating income, the impact of a lower effective tax rate on earnings from continuing operations and lower net interest expense. The Company reported operating income of $218.4 million in the third quarter of 2007, representing 45.5 percent of consolidated net sales, compared to operating income of $192.1 million, or 41.9 percent of consolidated net sales, in the third quarter of 2006. The increase in operating income was primarily due to the following:

	•		Increased net sales and gross margins in all segments;
	•		Lower selling, advertising and administrative (“SA&A”) expenses in the Smokeless Tobacco segment, which can be attributed to Project Momentum; and
	•		Lower restructuring charges incurred in connection with the Project Momentum initiative, which commenced in the third quarter of 2006 (see Restructuring Charges section below). The impact of restructuring charges adversely impacted the operating margin percentage by approximately 0.3 percentage points and 3.8 percentage points in the third quarter of 2007 and 2006, respectively.

These factors were partially offset by:

	•		An antitrust litigation charge of $3.2 million related to a ruling on a motion filed with respect to the settlement of the Kansas and New York actions seeking additional plaintiffs’ attorneys’ fees, expenses and costs, plus interest, which adversely impacted the operating margin by 0.7 percentage points; and
	•		Increased unallocated corporate expenses, primarily due to the amortization of imputed rent related to a below-market short-term lease the Company executed in connection with the sale of its corporate headquarters building, which adversely impacted the 2007 operating margin by 0.6 percentage points, as well as higher professional fees.

Net earnings for the third quarter of 2006 included after-tax income of $3.9 million from discontinued operations, which resulted from the reversal of an accrual for an income tax-related contingency originally recorded in connection with the June 2004 transfer of the Company’s former cigar operations to a smokeless

tobacco competitor. This reversal resulted from a change in facts and circumstances, as the income tax consequences of the Company’s then anticipated sale of its corporate headquarters in connection with Project Momentum eliminated the need for the aforementioned contingency.

Basic and diluted earnings per share were $0.85 and $0.84, respectively, for the third quarter of 2007, representing increases of 14.9 percent and 15.1 percent, respectively, from each of the corresponding comparative measures in 2006. Average basic shares outstanding were lower in the third quarter of 2007 than in the comparable prior year period, primarily as a result of share repurchases, partially offset by the exercise of stock options. Average diluted shares outstanding in the third quarter of 2007 were lower than those in the third quarter of 2006 due to the impact of share repurchases and a lower level of dilutive options outstanding.

Net Sales

		Three Months Ended								Increase/
		September 30,								(Decrease)
		2007				2006				Amount				%
Net Sales by Segment:
Smokeless Tobacco		$	384,067			$	377,258			$	6,809				1.8
Wine			82,286				69,536				12,750				18.3
All Other Operations			13,259				11,855				1,404				11.8
Consolidated Net Sales		$	479,612			$	458,649			$	20,963				4.6

The increase in consolidated net sales for the third quarter of 2007, as compared to the third quarter of 2006, was primarily due to the following:

	•		Improved case volume for premium wine, including the addition of Stag’s Leap wines late in the quarter;
	•		An increase in both premium and overall net can volume for moist smokeless tobacco products; and
	•		Improved international results.

These factors were partially offset by:

•

Lower net revenue realization per unit in the Smokeless Tobacco segment, reflecting the impact of the premium brand loyalty plan.

Segment Net Sales as a Percentage of Consolidated Net Sales

Gross Margin

		Three Months Ended								Increase/
		September 30,								(Decrease)
		2007				2006				Amount				%
Gross Margin by Segment:
Smokeless Tobacco		$	315,199			$	311,053			$	4,146				1.3
Wine			29,626				24,210				5,416				22.4
All Other Operations			8,318				7,531				787				10.5
Consolidated Gross Margin		$	353,143			$	342,794			$	10,349				3.0

The consolidated gross margin increase in the third quarter of 2007, as compared to the third quarter of 2006, was due to higher net sales in all segments, partially offset by higher cost of products sold in all segments.

		Three Months Ended
		September 30,								Increase/
		2007				2006				(Decrease)
Gross Margin as a % of Net Sales by Segment:
Smokeless Tobacco			82.1	%			82.5	%			(0.4	)
Wine			36.0	%			34.8	%			1.2
All Other Operations			62.7	%			63.5	%			(0.8	)
Consolidated			73.6	%			74.7	%			(1.1	)

The decline in the consolidated gross margin, as a percentage of net sales, was mainly due to the following:

	•		Higher case volume for wine, which sells at lower margins than moist smokeless tobacco products;
	•		Increased unit costs in the Wine and Smokeless Tobacco segments; and
	•		Lower net revenue realization per unit in the Smokeless Tobacco segment.

Restructuring Charges

The Company recognized $1.7 million in restructuring charges in the third quarter of 2007 in connection with the continued implementation of Project Momentum, the Company’s previously announced cost-reduction initiative. Restructuring charges recognized in the third quarter of 2006, when the Project Momentum initiative commenced, amounted to $17.5 million. This initiative is designed to create additional financial resources for growth via operational productivity and efficiency enhancements. The Company believes that such an effort is prudent as it is designed to provide additional flexibility in the increasingly competitive smokeless tobacco category. Refer to the Restructuring Charges section within the “First Nine Months of 2007 compared with the First Nine Months of 2006” discussion below for additional information, including cumulative charges incurred to date and the total amount of charges expected to be incurred in connection with Project Momentum for each major type of cost associated with the initiative.

First Nine Months of 2007 compared with the First Nine Months of 2006

		Nine Months Ended								Increase/
		September 30,								(Decrease)
		2007				2006				Amount				%
Net sales		$	1,417,884			$	1,365,190			$	52,694				3.9
Net earnings			381,084				368,653				12,431				3.4
Basic earnings per share			2.40				2.29				0.11				4.8
Diluted earnings per share			2.37				2.27				0.10				4.4
Gain on sale of corp. HQ bldg.			105,143				—				105,143				—
Antitrust litigation			125,258				1,350				123,908				—
Restructuring charges			9,105				17,495				(8,390	)			(48.0)

Net Earnings

Consolidated net earnings increased in the first nine months of 2007, as compared to the first nine months of 2006, as a result of increased operating income, the impact of a lower effective tax rate on earnings from continuing operations and lower net interest expense. The Company reported operating income of $623.8 million in the first nine months of 2007, representing 44 percent of consolidated net sales, compared to operating income of $614.1 million, or 45 percent of consolidated net sales, in the first nine months of 2006. The increase in operating income was primarily due to the following:

	•		The impact of a $105 million pre-tax gain recognized in connection with the sale of the Company’s corporate headquarters building, which favorably impacted the operating margin percentage by 7.4 percentage points;
	•		Increased net sales and gross margin in all segments;
	•		Lower SA&A expenses in the Smokeless Tobacco segment, which can be traced to the impact of Project Momentum; and
	•		Lower restructuring charges incurred in connection with the Project Momentum initiative, which commenced in the third quarter of 2006 (see Restructuring Charges section below). The impact of restructuring charges adversely impacted the operating margin percentage by approximately 0.6 percentage points and 1.3 percentage points in the first nine months of 2007 and 2006, respectively.

These factors were partially offset by:

	•		Antitrust litigation charges of $125.3 million, primarily representing the estimated costs associated with the resolution of indirect purchaser class actions in the States of Wisconsin and California, which adversely impacted the operating margin percentage by approximately 8.8 percentage points; and
	•		Increased unallocated corporate expenses, primarily due to amortization charges for the below-market short-term lease on its former corporate headquarters building and costs associated with a change in executive management, the aggregate amount of which adversely impacted the operating margin by 0.8 percentage points.

Net earnings for the first nine months of 2006 included after-tax income of $3.9 million from discontinued operations, which resulted from the reversal of an accrual for an income tax-related contingency, as discussed in the “Third Quarter of 2007 compared with the Third Quarter of 2006” discussion above.

Basic and diluted earnings per share were $2.40 and $2.37, respectively, for the first nine months of 2007, representing increases of 4.8 percent and 4.4 percent, respectively, from each of the corresponding comparative measures in 2006. Average basic shares outstanding were lower in the first nine months of 2007 than in the comparable prior year period, primarily as a result of share repurchases, partially offset by the exercise of stock options. Average diluted shares outstanding in the first nine months of 2007 were lower than those in the first nine months of 2006 due to the impact of share repurchases and a lower level of dilutive options outstanding, partially offset by the impact of a comparatively higher average stock price in 2007, which effectively increases diluted shares outstanding.

Net Sales

		Nine Months Ended								Increase/
		September 30,								(Decrease)
		2007				2006				Amount				%
Net Sales by Segment:
Smokeless Tobacco		$	1,150,518			$	1,142,646			$	7,872				0.7
Wine			230,581				187,845				42,736				22.8
All Other Operations			36,785				34,699				2,086				6.0
Consolidated Net Sales		$	1,417,884			$	1,365,190			$	52,694				3.9

The increase in consolidated net sales for the first nine months of 2007, as compared to the first nine months of 2006, was primarily due to the following:

	•		Improved case volume for premium wine;
	•		Net sales growth in the Smokeless Tobacco segment, reflecting an increase in both premium and overall net can volume for moist smokeless tobacco products ; and
	•		Improved international results.

These factors were partially offset by:

•

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

Segment Net Sales as a Percentage of Consolidated Net Sales

Gross Margin

		Nine Months Ended								Increase/
		September 30,								(Decrease)
		2007				2006				Amount				%
Gross Margin by Segment:
Smokeless Tobacco		$	945,138			$	943,072			$	2,066				0.2
Wine			80,575				67,471				13,104				19.4
All Other Operations			23,200				22,168				1,032				4.7
Consolidated Gross Margin		$	1,048,913			$	1,032,711			$	16,202				1.6

The consolidated gross margin increase in the first nine months of 2007, as compared to the first nine months of 2006, was due to higher net sales in all segments, partially offset by higher cost of products sold in all segments.

		Nine Months Ended
		September 30,								Increase/
		2007				2006				(Decrease)
Gross Margin as a % of Net Sales by Segment:
Smokeless Tobacco			82.1	%			82.5	%			(0.4	)
Wine			34.9	%			35.9	%			(1.0	)
All Other Operations			63.1	%			63.9	%			(0.8	)
Consolidated			74.0	%			75.6	%			(1.6	)

The decline in the consolidated gross margin, as a percentage of net sales, was mainly due to the following:

	•		Higher case volume for wine, which sells at lower margins than moist smokeless tobacco products;
	•		Lower net revenue realization per unit in the Smokeless Tobacco segment; and
	•		Increased costs of products sold in the Smokeless Tobacco and Wine segments.

Restructuring Charges

The Company recognized $9.1 million in restructuring charges in the first nine months of 2007 related to actions undertaken in connection with Project Momentum. Under this initiative, the Company has now targeted at least $150 million in savings to be realized within the three years following its implementation. The following table provides a summary of restructuring charges incurred during the third quarter and first nine months of 2007, the cumulative charges incurred to date and the total amount of charges expected to be incurred in connection with this initiative for each major cost, by category:

		Restructuring				Restructuring
		Charges Incurred				Charges Incurred				Cumulative
		for the Three				for the Nine				Charges Incurred				Total Charges
		Months Ended				Months Ended				as of				Expected to be
		September 30, 2007				September 30, 2007				September 30, 2007				Incurred(1)
One-time termination benefits		$	828			$	1,472			$	17,097			$	19,700-$21,200
Contract termination costs			85				106				496				400 - 500
Other restructuring costs			764				7,527				13,509				13,400 - 13,800
Total		$	1,677			$	9,105			$	31,102			$	33,500-$35,500