<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 June 30, 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 June 30, 1997
183,838,536
<PAGE> 2
UST Inc.
(Registrant)
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information:
Condensed Consolidated Statement of Financial Position -
June 30, 1997 and December 31, 1996 2
Condensed Consolidated Statement of Earnings -
Three and six months ended June 30, 1997 and 1996 3
Condensed Consolidated Statement of Cash Flows -
Six months ended June 30, 1997 and 1996 4
Notes to Condensed Consolidated Financial Statements 5
Management's Discussion and Analysis of Operations and
Financial Condition 8
Part II. Other Information:
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 10
27. Financial Data Schedule
Signature 11
</TABLE>
(1)
<PAGE> 3
UST Inc.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 22,658 $ 54,452
Accounts receivable 76,897 77,855
Inventories:
Leaf tobacco 154,585 136,881
Products in process and finished goods 112,767 117,924
Other materials and supplies 18,232 16,620
---------- --------
285,584 271,425
Prepaid expenses and other current assets 39,187 40,446
---------- --------
Total current assets 424,326 444,178
Property, plant and equipment, net 307,944 300,885
Deferred income taxes 10,885 7,626
Other assets 56,157 54,703
---------- --------
Total assets $ 799,312 $807,392
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term obligations $ 105,000 $150,000
Accounts payable and accrued expenses 94,044 113,635
Income taxes 34,509 42,918
---------- --------
Total current liabilities 233,553 306,553
Long-term debt 100,000 100,000
Postretirement benefits other than pensions 72,046 70,209
Other liabilities 45,703 48,610
---------- --------
Total liabilities 451,302 525,372
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 205,663,536 shares in 1997,
and 204,154,736 shares in 1996 102,832 102,077
Additional paid-in capital 455,967 414,274
Retained earnings 457,766 388,505
---------- --------
1,016,565 904,856
Less cost of shares in treasury - 21,825,000
shares in 1997 and 20,299,000 shares in 1996 668,555 622,836
---------- --------
Total stockholders' equity 348,010 282,020
---------- --------
Total liabilities and stockholders' equity $ 799,312 $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 Six months ended
June 30, June 30,
--------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $365,107 $350,542 $705,646 $678,333
Costs and expenses:
Cost of products sold 71,358 67,048 136,448 130,573
Selling, advertising and administrative 103,858 88,229 214,629 177,495
Interest, net 2,582 1,749 5,049 3,081
-------- -------- -------- --------
Total costs and expenses 177,798 157,026 356,126 311,149
-------- -------- -------- --------
Earnings before income taxes 187,309 193,516 349,520 367,184
Income taxes 70,420 74,439 131,425 141,311
-------- -------- -------- --------
Net earnings $116,889 $119,077 $218,095 $225,873
======== ======== ======== ========
Net earnings per share $ .64 $ .62 $ 1.19 $ 1.17
Cash dividends per common share $ .40 1/2 $ .37 $ .81 $ .74
Average number of common shares outstanding
1996 amounts include common stock
equivalents 183,620 192,803 183,614 193,721
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
(3)
<PAGE> 5
UST Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities $ 169,438 $ 180,476
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net (22,043) (12,284)
Proceeds received from prepayment of royalties 25,732 --
--------- ---------
Net cash provided by (used in) investing activities 3,689 (12,284)
--------- ---------
FINANCING ACTIVITIES
Repayment of borrowings (45,000) (25,000)
Proceeds from the issuance of common stock 34,496 25,651
Dividends paid (148,698) (139,756)
Common stock repurchased (45,719) (86,498)
--------- ---------
Net cash used in financing activities (204,921) (225,603)
--------- ---------
Decrease in cash and cash equivalents (31,794) (57,411)
Cash and cash equivalents at beginning of year 54,452 69,403
--------- ---------
Cash and cash equivalents at end of period $ 22,658 $ 11,992
========= =========
- ---------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the period for:
Income taxes $ 136,317 $ 150,364
Interest 4,794 3,753
- ---------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
(4)
<PAGE> 6
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 and six month periods ended June
30, 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.
In the first six months of 1997, an additional 1.5 million shares costing $45.7
million were repurchased. Registrant has suspended its stock repurchase program
indefinitely in anticipation of the proposed resolution of regulatory and
litigation issues affecting the United States tobacco industry. (See Other
Matters Note.)
ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share"
and SFAS No. 129 "Disclosure of Information About Capital Structure," both with
effective dates in the fourth quarter of 1997. SFAS No. 128 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 "basic" earnings
per share and remain in the diluted computation. The impact of SFAS No. 128 will
not change earnings per share reported for the second quarter and six month
periods of 1997 since Registrant was not required to include the dilutive effect
of stock options under the current accounting rules. However, 1996 earnings per
share would have increased by 1 cent to 63 cents per share for the second
quarter and by 3 cents to $1.20 per share for the six month period. Under SFAS
No. 128 diluted earnings per share would have been 63 cents and 62 cents for the
second quarter of 1997 and 1996, respectively, and would have been $1.18 per
share for both six month periods of 1997 and 1996. Registrant anticipates no
additional disclosure requirements upon adoption of SFAS No. 129.
(5)
<PAGE> 7
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Also in June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 is effective for the first quarter of 1998,
while SFAS No. 131 is effective for year end financial reporting in 1998 and
additionally on an interim basis thereafter. Both pronouncements require
Registrant to provide additional disclosures and Registrant expects no material
impact upon adoption of these two pronouncements.
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.
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 two actions seeking damages and/or
other relief and purport to state class actions on behalf of residents of
Louisiana who have purchased and used smokeless tobacco manufactured by
defendants.
Registrant has also been named in another action in Illinois 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.
(6)
<PAGE> 8
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 the 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." Certain aspects of this ruling have been appealed 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.
On June 20, 1997, Registrant's subsidiary, United States Tobacco Company, along
with other manufacturers in the United States tobacco industry, executed a
Memorandum of Understanding (the "Memorandum") to support the adoption of
federal legislation incorporating the features described in the proposed
resolution attached to the Memorandum. The proposed resolution, if enacted into
law, would achieve a resolution of many of the regulatory and litigation issues
affecting the United States tobacco industry and, thereby, reduce uncertainties
facing the industry and increase stability in business and capital markets.
However, if such legislation were enacted the financial obligations to be
imposed on Registrant are expected to be significant although the precise amount
of such obligations cannot be determined at this time. Discussions with other
tobacco manufacturers, who were participants in the negotiations which led to
the Memorandum, are continuing regarding the allocation of both the initial and
subsequent payments and Registrant's obligations related thereto. Depending on
the amounts required to be paid by Registrant, as well as a number of other
factors, including (i) the timing of any payments and the means used to finance
such payments; (ii) the effect of the legislation on the pricing and consumption
of smokeless tobacco products; and (iii) the impact of the legislation on
Registrant's competitive position in the smokeless tobacco industry, its
financial position could be materially adversely affected in the year of
implementation and the unit volume, operating revenues and operating income of
Registrant could be materially adversely affected in future years. There can be
no assurance that legislation reflecting the proposed resolution or any
legislation will be enacted.
Also, during the second quarter Registrant received a $25.7 million prepayment
of royalties (approximately 8 cents per share) in connection with a previous
divestiture. Additionally, Registrant recorded a write-down of production costs
and prepaid royalties of $24.1 million as a result of revised sales and
marketing strategies at its entertainment subsidiary.
(7)
<PAGE> 9
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
(Unaudited)
Results of Operations
Second quarter and six months of 1997 compared
with the corresponding periods of 1996
Net sales increased by 4 percent for both the second quarter and six month
periods as compared with the corresponding periods in the prior year. The
Tobacco and Wine segments posted sales gains for both periods while sales for
the Other segment increased for the six month period but were lower for the
second quarter. Higher selling prices for domestic moist smokeless tobacco
products, wine and cigars along with increased case volume for premium wine were
the primary reasons for the increase in consolidated net sales in both periods.
Domestic unit volume for moist smokeless tobacco increased 0.4 percent for the
second quarter and decreased 1.2 percent for the six month period. Registrant
believes that unit volume results for moist smokeless tobacco were adversely
affected by continuing competitive pressures in the marketplace. On July 24,
1997 Registrant through its wholly owned subsidiary United States Tobacco
Company announced a series of new marketing and sales initiatives intended to
help address the competitive situation in the marketplace.
Cost of products sold increased for both the second quarter and six month
period. Both periods included higher unit costs for domestic moist smokeless
tobacco and unit volume gains for wine, partially offset by the absence of costs
for businesses sold in 1996. The six month period also included increased costs
due to a volume gain for cigars. The overall gross profit percentage remained
stable for the second quarter and six month period. Both periods include the
effects of higher selling prices offset by higher unit costs for domestic moist
smokeless tobacco.
Selling, advertising and administrative expenses increased for both the second
quarter and six month periods for the Tobacco and Other segments and remained
stable for the Wine segment. Selling and advertising expenses increased for the
Tobacco segment in both periods primarily due to consumer promotions in support
of moist smokeless tobacco products including the introduction of a new product,
Copenhagen Long Cut. The increase in the Other segment for both periods resulted
from higher spending for the international operations primarily related to moist
smokeless tobacco market development expenses in Mexico and higher spending in
the cigar business. Also included in the Other segment for both periods is
income resulting from the prepayment of royalties received in connection with a
previous divestiture. Offsetting this income is a write-down of production costs
and prepaid royalties as a result of revised sales and marketing strategies at
the entertainment subsidiary. Administrative and other expenses increased in
both periods primarily due to higher professional fees associated with legal and
regulatory issues. The six month period also includes a one-time charge
resulting from recording the present value of future obligations arising under
the employment contracts for two former executive officers.
Net interest expense increased significantly in both periods primarily due to
higher average levels of debt outstanding.
Net earnings for the second quarter and six month period decreased 2 percent and
3 percent, respectively, as compared to the corresponding periods in the prior
year. Earnings per share increased 3 percent for the second quarter and 2
percent for the six month period as a result of lower average shares outstanding
due to the share repurchase program and the fact that Registrant's common stock
equivalents were not included in its 1997 average shares computation since they
did not meet the dilution test.
(8)
<PAGE> 10
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. The decrease in net cash provided by operating
activities as compared to the similar period in the prior year was primarily due
to an increase in inventories and lower net earnings, partially offset by a
decrease in income taxes payable. A primary use of cash in operations was for
purchases of leaf tobacco and related costs of $49.1 million, which were lower
than amounts expended in the corresponding period in the prior year. Registrant
anticipates that total purchases of leaf tobacco and related costs in 1997 will
approximate amounts expended in 1996.
Net cash provided by investing activities resulted from the proceeds received
from the prepayment of royalties in connection with a previous divestiture,
partially offset by the purchase of property, plant and equipment. Registrant
expects the 1997 capital program to approximate $71 million.
Net cash used in financing activities were amounts expended for dividends, the
stock repurchase program and the repayment of borrowings. Amounts expended for
the stock repurchase program were lower than in the corresponding period of the
prior year and are expected to be lower for the remainder of 1997 due to the
indefinite suspension of the program. (See Other Matters Note.)
Registrant will continue to have significant cash requirements for the remainder
of 1997, primarily for dividends and capital spending. Registrant expects to
meet these requirements with internally generated funds augmented by borrowings
when necessary. If legislation implementing the proposed resolution or similar
legislation were enacted, the financial obligations to be imposed on Registrant
are expected to be significant, although the precise amount of such obligations
cannot be determined at this time. (See Other Matters Note.)
Forward-Looking and Cautionary Statements
Reference is made to the section captioned "Cautionary Statement Regarding
Forward-Looking Information" which was filed as part of Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Registrant's 1996 Form 10-K, and to the legal and regulatory initiatives
described in Form 8-K, dated July 3, 1997, regarding important factors that
could cause actual results to differ materially from those contained in any
forward-looking statement made by Registrant, including forward-looking
statements contained in this report.
(9)
<PAGE> 11
UST Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In Norma R. Broin, et al. v. Philip Morris Companies, Inc., et al.,
(Case No. 91-49738(22)), on May 30, 1997, the Court entered an Order
dismissing Registrant's subsidiary, United States Tobacco Company, from
the action.
On July 3, 1997, Registrant was served with a Summons and Complaint in
an action entitled Doyle v. United States Tobacco Company, et al.,
(Case No. C-97-380), 33rd Judicial District Court, Parish of Allen,
Louisiana. This action is brought by an individual plaintiff and
purports to state a class action on behalf of himself and "all
Louisiana residents or former Louisiana residents who are or who were
smokeless tobacco users on or before June 30, 1997." The action seeks
the establishment of a medical monitoring fund; the complaint does not
state a claim for compensatory damages and states that "plaintiffs
represent that no individual claim within the class will exceed
$75,000."
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 June 30,
1997.
(10)
<PAGE> 12
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UST Inc.
---------------------------
(Registrant)
Date: August 13, 1997 /s/ Robert T. D'Alessandro
-------------------------------------
Robert T. D'Alessandro
Senior Vice President and Controller
(Principal Accounting Officer and
Principal Financial Officer)
(11)
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 22,658
<SECURITIES> 0
<RECEIVABLES> 76,897
<ALLOWANCES> 0
<INVENTORY> 285,584
<CURRENT-ASSETS> 424,326
<PP&E> 534,761
<DEPRECIATION> 226,817
<TOTAL-ASSETS> 799,312
<CURRENT-LIABILITIES> 233,553
<BONDS> 100,000
0
0
<COMMON> 102,832
<OTHER-SE> 245,178
<TOTAL-LIABILITY-AND-EQUITY> 799,312
<SALES> 705,646
<TOTAL-REVENUES> 705,646
<CGS> 136,448
<TOTAL-COSTS> 136,448
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,049
<INCOME-PRETAX> 349,520
<INCOME-TAX> 131,425
<INCOME-CONTINUING> 218,095
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 218,095
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 0
</TABLE>
