<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-17506
UST Inc.
(Exact name of registrant as specified in its charter)
Delaware 06-1193986
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 West Putnam Avenue, Greenwich, CT 06830
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 661-1100
NONE
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Number of Common shares ($.50 par value) outstanding at March 31, 1997
183,636,036
<PAGE> 2
UST INC.
(REGISTRANT)
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information:
Condensed Consolidated Statement of Financial Position -
March 31, 1997 and December 31, 1996 2
Condensed Consolidated Statement of Earnings -
Three months ended March 31, 1997 and 1996 3
Condensed Consolidated Statement of Cash Flows -
Three months ended March 31, 1997 and 1996 4
Notes to Condensed Consolidated Financial Statements 5
Management's Discussion and Analysis of Operations and
Financial Condition 7
Part II. Other Information:
Item 1. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 6. Exhibits and Reports on Form 8-K 9
27. Financial Data Schedule
Signatures 10
</TABLE>
(1)
<PAGE> 3
UST Inc.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- -----------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 16,874 $ 54,452
Accounts receivable 89,214 77,855
Inventories:
Leaf tobacco 167,704 136,881
Products in process and finished goods 116,756 117,924
Other materials and supplies 17,100 16,620
-------- --------
301,560 271,425
Prepaid expenses and other current assets 45,575 40,446
-------- --------
Total current assets 453,223 444,178
Property, plant and equipment, net 306,159 300,885
Deferred income taxes 7,330 7,626
Other assets 57,910 54,703
-------- --------
Total assets $824,622 $807,392
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term obligations $114,000 $150,000
Accounts payable and accrued expenses 89,010 113,635
Income taxes 97,609 42,918
-------- --------
Total current liabilities 300,619 306,553
Long-term debt 100,000 100,000
Postretirement benefits other than pensions 71,399 70,209
Other liabilities 54,308 48,610
-------- --------
Total liabilities 526,326 525,372
Stockholders' equity
Preferred stock - par value $.10 per share:
Authorized - 10 million shares; issued - none
Common stock - par value $.50 per share:
Authorized - 600 million shares;
issued 204,976,036 shares in 1997
and 204,154,736 shares in 1996 102,488 102,077
Additional paid-in capital 435,328 414,274
Retained earnings 415,418 388,505
-------- --------
953,234 904,856
Less cost of shares in treasury - 21,340,000
shares in 1997 and 20,299,000 shares in 1996 654,938 622,836
-------- --------
Total stockholders' equity 298,296 282,020
-------- --------
Total liabilities and stockholders' equity $824,622 $807,392
======== ========
</TABLE>
Note: The statement of financial position at December 31, 1996 has been derived
from the audited financial statements at that date.
See Notes to Condensed Consolidated Financial Statements.
(2)
<PAGE> 4
UST Inc.
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Net sales $340,539 $327,791
Costs and expenses
Cost of products sold 65,090 63,525
Selling, advertising and administrative 110,771 89,266
Interest, net 2,467 1,332
-------- --------
Total costs and expenses 178,328 154,123
-------- --------
Earnings before income taxes 162,211 173,668
Income taxes 61,005 66,872
-------- --------
Net earnings $101,206 $106,796
======== ========
Net earnings per share $ .55 $ .55
Cash dividends per common share $.40 1/2 $ .37
Average number of common shares outstanding
1996 amounts include common stock
equivalents 183,607 194,638
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
(3)
<PAGE> 5
UST Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1997 1996
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities $ 96,158 $ 94,907
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net (12,806) (7,421)
--------- ---------
Net cash used in investing activities (12,806) (7,421)
--------- ---------
FINANCING ACTIVITIES
Repayment of borrowings (36,000) (25,000)
Proceeds from the issuance of common stock 21,465 14,567
Dividends paid (74,293) (70,126)
Common stock repurchased (32,102) (59,779)
--------- ---------
Net cash used in financing activities (120,930) (140,338)
--------- ---------
Decrease in cash and cash equivalents (37,578) (52,852)
Cash and cash equivalents at beginning of year 54,452 69,403
--------- ---------
Cash and cash equivalents at end of period $ 16,874 $ 16,551
========= =========
- ----------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the period for:
Income taxes $ 3,242 $ 20,826
Interest 2,230 1,677
- ----------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
(4)
<PAGE> 6
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(Unaudited)
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 1997
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto included in Registrant's annual
report on Form 10-K for the year ended December 31, 1996.
REPURCHASE OF COMMON STOCK
During 1997, Registrant continued its program to repurchase a portion of its
outstanding common stock, up to a maximum of twenty million shares. As of
December 31, 1996, .5 million shares were repurchased under the current program.
Through March 31, 1997 an additional 1 million shares costing $32.1 million were
repurchased.
EARNINGS PER SHARE
On December 31, 1997, Registrant is required to adopt Statement of Financial
Accounting Standards (SFAS) No. 128 "Earnings per Share." This new rule requires
Registrant to change the method it currently uses to compute earnings per share
and requires restatement of all prior periods. Under the new requirements, the
dilutive effect of stock options are excluded from computing primary earnings
per share. The impact of SFAS No. 128 will not change earnings per share
reported for the first quarter of 1997 since Registrant was not required to
include the dilutive effect of stock options under the current accounting rules.
However, earnings per share for the first quarter of 1996 would have increased
by 1 cent to 56 cents per share. Under SFAS No. 128 diluted earnings per share
would have been 55 cents per share for both the first quarter of 1997 and 1996.
CONTINGENCIES
Registrant has been named in certain health care cost reimbursement/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.
(5)
<PAGE> 7
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Registrant believes that these pending litigation matters will not result in any
material liability for a number of reasons, including the fact that Registrant
has had only limited involvement with cigarettes and Registrant's current
percentage of total tobacco industry sales is relatively small. Prior to 1986,
Registrant manufactured some cigarette products which had a de minimis market
share. From May 1, 1982 to August 1, 1994, Registrant distributed a small volume
of imported cigarettes and is indemnified against claims relating to those
products.
Registrant has been named in three actions brought by individual plaintiffs, all
of whom are represented by the same Louisiana attorney, against a number of
smokeless tobacco manufacturers, cigarette manufacturers and certain other
organizations seeking damages and other relief in connection with injuries
allegedly sustained as a result of tobacco usage, including smokeless tobacco
products. Registrant also has been named in an action seeking damages and other
relief and purports to state a class action on behalf of residents of Louisiana
who have purchased and used smokeless tobacco manufactured by defendants. This
action is brought against Registrant and certain other organizations by various
plaintiffs' counsel, including counsel who initiated a similiar action on behalf
of Kansas residents which ultimately was dismissed by court order in 1995.
On April 28, 1997, Registrant was served with a Summons and Complaint in an
action seeking damages and other relief brought by an individual plaintiff and
purports to state a class action "on behalf of himself and all other persons
similarly situated" alleging that his use of Registrant's smokeless tobacco
products "resulted in his addiction to nicotine, increased use of defendants'
smokeless tobacco products and gum deterioration."
Registrant believes, and has been so advised by counsel handling these cases,
that it has a number of meritorious defenses to all such pending litigation. All
such cases are, and will continue to be, vigorously defended, and Registrant
believes that the ultimate outcome of all such pending litigation will not have
a material adverse effect on the consolidated financial statements of
Registrant.
OTHER MATTERS
On August 28, 1996, the Food and Drug Administration (FDA) published regulations
asserting unprecedented jurisdiction over nicotine in tobacco as a "drug" and
purport to regulate smokeless tobacco products as a "medical device." The final
regulations include severe restrictions on the advertising, marketing and
promotion of smokeless tobacco products and will require Registrant to comply
with a wide range of labeling, reporting and other requirements. Registrant and
other smokeless tobacco manufacturers filed suit seeking a judicial declaration
that the FDA has no authority to regulate smokeless tobacco products. On April
25, 1997, a federal district court ruled that the FDA, as a matter of law, is
not precluded from regulating cigarettes and smokeless tobacco as "medical
devices" and implementing certain labeling and access restrictions. Further
trial proceedings are still required to determine whether FDA, based on the
facts, can prove that smokeless tobacco products fit the statutory definitions
and the restrictions are justified. The court, granting Registrant's motion for
summary judgment, also ruled that the FDA has no authority to implement
restrictions on the advertising and promotion of smokeless tobacco products. The
court issued an injunction to prohibit any of the restrictions (labeling, access
and advertising/promotion) set for August 28, 1997 from taking effect, pending
resolution of any appeals and subsequent proceedings; the court also certified
the ruling for interlocutory appeal on the grounds that it involves "controlling
questions of law as to which there is substantial ground for difference of
opinion." Registrant intends to appeal certain aspects of this ruling to the
Fourth Circuit Court of Appeals. Registrant is not able to predict the outcome
of the appeal, or assess the future effect that these FDA regulations, if
implemented, may have on its tobacco business.
(6)
<PAGE> 8
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
(Unaudited)
Results of Operations
First quarter 1997 compared
with the first quarter of 1996
Net sales for the first quarter were $340.5 million, a 4 percent increase over
the corresponding period in the prior year. The Wine and Other segments posted
sales gains for the first quarter. Tobacco segment sales remained stable as
higher selling prices were offset by a 2.9 percent decline in domestic unit
volume for moist smokeless tobacco. Higher selling prices and volume gains for
wine and cigars were the primary reasons for the consolidated net sales gain.
Registrant believes that unit volume results for moist smokeless tobacco for the
first quarter of 1997 were adversely affected primarily by continuing
competitive pressures in the marketplace. Also, a one-time unit volume
adjustment due to a change in Registrant's delivery pattern to wholesalers
offset additional unit volume generated by the introduction of a new product,
Copenhagen Long Cut, which occurred at the end of the first quarter.
Cost of products sold increased for the first quarter due to higher unit costs
for domestic moist smokeless tobacco and unit volume gains for cigars and wine,
partially offset by the absence of costs for businesses sold in 1996 and the
volume decline for domestic moist smokeless tobacco. The overall gross profit
percentage remained stable in the first quarter as higher selling prices were
offset by higher unit costs for domestic moist smokeless tobacco.
Selling, advertising and administrative expenses increased for the Tobacco and
Other segments and remained stable for the Wine segment. Increased selling and
advertising expenses in the Tobacco segment were primarily due to higher than
anticipated costs for consumer promotions in support of our moist smokeless
tobacco products. The Other segment increase resulted from higher spending for
the entertainment business and the international operations primarily related to
smokeless tobacco market development expenses in Mexico and the cigar business.
Also included in administrative and other expenses is a one-time charge
resulting from recording the present value of future obligations arising under
employment contracts for two former officers and higher professional fees
associated with addressing legal and regulatory issues.
Net interest expense increased significantly primarily due to higher average
levels of debt outstanding.
Net earnings decreased 5 percent and earnings per share were the same as
compared to the corresponding period in the prior year.
(7)
<PAGE> 9
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
Liquidity and Sources of Capital
Changes in Financial Condition Since December 31, 1996
Net cash provided by operating activities represents net income adjusted for the
non-cash items included in the determination of net income as well as changes in
operating assets and liabilities. Net cash provided by operating activities
remained stable as compared to the similar period in the prior year primarily
due to increases in income taxes payable, offset by increases to accounts
receivable, along with lower net earnings. A primary use of cash in operations
was for purchases of leaf tobacco and related costs of $44.2 million, which were
lower than amounts expended in the corresponding period in the prior year. In
1997, Registrant anticipates that total purchases of leaf tobacco and related
costs will approximate amounts expended in 1996.
Net cash used in investing activities was for the purchase of property, plant
and equipment. Registrant expects the total 1997 capital program to approximate
$71 million.
Net cash used in financing activities were amounts expended for dividends, the
stock repurchase program and the reduction of borrowings. Amounts expended for
the stock repurchase program were lower than the corresponding period in the
prior year. At the present time Registrant has allocated approximately $24
million for the stock repurchase program for the second quarter of 1997.
Registrant expects to review the program during the second half of 1997.
Availability of funds and market prices will determine the number of shares
actually repurchased, as well as whether additional borrowings will be utilized
to augment the share repurchase program for the remainder of the year.
Registrant will continue to have significant cash requirements for the remainder
of 1997, primarily for dividends, the stock repurchase program and capital
spending. Registrant expects to meet these requirements with internally
generated funds augmented by borrowings when necessary.
(8)
<PAGE> 10
UST Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On April 28, 1997, Registrant was served with a Summons and
Complaint in an action entitled Swanson v. United States Tobacco
Company, et al., (No. 97CH004873), Circuit Court of Cook County,
Illinois, County Department, Chancery Division. This action is
brought by an individual plaintiff and purports to state a class
action "on behalf of himself and all other persons similarly
situated." Plaintiff alleges that his use of Registrant's smokeless
tobacco products "resulted in his addiction to nicotine, increased
use of defendants' smokeless tobacco products and gum
deterioration." The action seeks certification of the class,
unspecified compensatory damages, attorneys fees and other relief.
Registrant intends to defend this action vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The 1997 Annual Meeting of Stockholders was held on May 6, 1997.
(c) Matters voted upon at the meeting:
<TABLE>
<CAPTION>
Affirmative Negative Broker
Votes Votes Abstentions Non-Votes
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Ratification 161,303,972 475,570 489,610 N/A
and Approval
of Independent
Auditors
(Proposal No. 2)
Stockholder 6,421,383 130,470,113 8,459,490 16,918,166
Proposal
(Proposal No. 3)
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K for the three months ended March
31, 1997.
(9)
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UST Inc.
----------------
(Registrant)
Date May 9, 1997 /s/ Robert T. D'Alessandro
------------ ------------------------------------
Robert T. D'Alessandro
Senior Vice President and Controller
(Principal Accounting Officer and
Principal Financial Officer)
(10)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION AND CONDENSED
CONSOLIDATED STATEMENT OF EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS. (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS).
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 16,874
<SECURITIES> 0
<RECEIVABLES> 89,214
<ALLOWANCES> 0
<INVENTORY> 301,560
<CURRENT-ASSETS> 453,223
<PP&E> 526,137
<DEPRECIATION> 219,978
<TOTAL-ASSETS> 824,622
<CURRENT-LIABILITIES> 300,619
<BONDS> 100,000
0
0
<COMMON> 102,488
<OTHER-SE> 195,808
<TOTAL-LIABILITY-AND-EQUITY> 824,622
<SALES> 340,539
<TOTAL-REVENUES> 340,539
<CGS> 65,090
<TOTAL-COSTS> 65,090
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,467
<INCOME-PRETAX> 162,211
<INCOME-TAX> 61,005
<INCOME-CONTINUING> 101,206
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 101,206
<EPS-PRIMARY> .55
<EPS-DILUTED> 0
</TABLE>
