<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, 1998
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, 1998 185,745,536
<PAGE> 2
UST Inc.
(Registrant)
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information:
Condensed Consolidated Statement of Financial Position -
June 30, 1998 and December 31, 1997 2
Condensed Consolidated Statement of Earnings -
Three and six months ended June 30, 1998 and 1997 3
Condensed Consolidated Statement of Cash Flows -
Six months ended June 30, 1998 and 1997 4
Notes to Condensed Consolidated Financial Statements 5
Management's Discussion and Analysis of Operations and
Financial Condition 9
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 12
27. Financial Data Schedule
Signature 13
</TABLE>
(1)
<PAGE> 3
UST Inc.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 71,689 $ 6,927
Accounts receivable 63,407 67,702
Inventories:
Leaf tobacco 183,331 152,869
Products in process and finished goods 143,166 148,720
Other materials and supplies 19,402 18,077
----------- -----------
345,899 319,666
Prepaid expenses and other current assets 36,405 31,753
Deferred income taxes 11,397 15,796
----------- -----------
Total current assets 528,797 441,844
Property, plant and equipment, net 324,981 326,709
Other assets 61,041 57,025
----------- -----------
Total assets $ 914,819 $ 825,578
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term obligations $ -- $ 10,000
Accounts payable and accrued expenses 91,719 119,345
Income taxes 56,854 37,174
----------- -----------
Total current liabilities 148,573 166,519
Long-term debt 100,000 100,000
Postretirement benefits other than pensions 75,695 73,868
Other liabilities 60,231 48,396
Contingencies (see note) -- --
----------- -----------
Total liabilities 384,499 388,783
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 207,570,536 shares in 1998
and 206,614,236 shares in 1997 103,785 103,307
Additional paid-in capital 494,457 474,661
Retained earnings 616,764 536,014
Accumulated other comprehensive loss (16,131) (8,632)
----------- -----------
1,198,875 1,105,350
Less cost of shares in treasury - 21,825,000 shares 668,555 668,555
----------- -----------
Total stockholders' equity 530,320 436,795
----------- -----------
Total liabilities and stockholders' equity $ 914,819 $ 825,578
=========== ===========
</TABLE>
Note: The statement of financial position at December 31, 1997 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,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $357,390 $355,764 $697,554 $690,380
Costs and expenses
Cost of products sold 62,485 64,616 124,436 123,570
Excise taxes 6,620 6,742 12,537 12,878
Selling, advertising and administrative 95,930 94,515 187,047 199,363
Interest, net 154 2,582 725 5,049
-------- -------- -------- --------
Total costs and expenses 165,189 168,455 324,745 340,860
-------- -------- -------- --------
Earnings before income taxes 192,201 187,309 372,809 349,520
Income taxes 73,061 70,420 141,692 131,425
-------- -------- -------- --------
Net earnings $119,140 $116,889 $231,117 $218,095
======== ======== ======== ========
Net earnings per share
Basic $ .64 $ .64 $ 1.25 $ 1.19
Diluted $ .64 $ .63 $ 1.24 $ 1.18
Dividends per share $.40 1/2 $.40 1/2 $ .81 $ .81
Average number of shares
Basic 185,708 183,620 185,483 183,614
Diluted 186,490 185,207 186,970 185,494
</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,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities $ 191,130 $ 169,438
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net (25,120) (22,375)
Dispositions of property, plant and equipment 18,693 332
Proceeds from the sale of a business 20,152 --
Proceeds received from prepayment of royalties -- 25,732
--------- ---------
Net cash provided by investing activities 13,725 3,689
--------- ---------
FINANCING ACTIVITIES
Repayment of borrowings (10,000) (45,000)
Proceeds from the issuance of stock 20,274 34,496
Dividends paid (150,367) (148,698)
Stock repurchased -- (45,719)
--------- ---------
Net cash used in financing activities (140,093) (204,921)
--------- ---------
Increase (decrease) in cash and cash equivalents 64,762 (31,794)
Cash and cash equivalents at beginning of year 6,927 54,452
--------- ---------
Cash and cash equivalents at end of period $ 71,689 $ 22,658
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Income taxes $ 110,395 $ 136,317
Interest 2,279 4,794
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
(4)
<PAGE> 6
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(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, 1998 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1998. 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, 1997.
COMPREHENSIVE INCOME
In the first quarter Registrant adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income," which establishes
standards for the reporting of comprehensive income. The main components of
comprehensive income that directly relate to Registrant are net earnings,
foreign currency translation adjustments (SFAS No. 52) and additional minimum
pension liability adjustments (SFAS No. 87). Prior to adoption, the pension
adjustment was included in stockholders' equity and the translation adjustment
was included in other assets. The December 31, 1997 Statement of Financial
Position has been reclassified to conform to the requirements of SFAS No. 130.
For the second quarter of 1998 and 1997, total comprehensive income, net of
taxes, amounted to $111,745,000 and $116,845,000, respectively. For the first
six months of 1998 and 1997 total comprehensive income, net of taxes, was
$223,618,000 and $217,956,000, respectively.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 requires Registrant to provide additional disclosures and is effective
for year end reporting beginning in 1998 and additionally on an interim basis
thereafter. In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132 will
revise Registrant's disclosures for year end reporting beginning in 1998.
Registrant expects no material impact upon adoption of these two pronouncements.
(5)
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UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
EARNINGS PER SHARE
(In thousands, except per share amounts)
The following table presents the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net earnings $119,140 $116,889 $231,117 $218,095
Denominator:
Denominator for basic earnings per share -
weighted-average shares 185,708 183,620 185,483 183,614
Dilutive effect of employee stock options 782 1,587 1,487 1,880
-------- -------- -------- --------
Denominator for diluted earnings per share 186,490 185,207 186,970 185,494
Basic earnings per share $ .64 $ .64 $ 1.25 $ 1.19
Diluted earnings per share $ .64 $ .63 $ 1.24 $ 1.18
</TABLE>
CONTINGENCIES
Registrant has been named in certain health care cost reimbursement/third party
recoupment/class action litigation against the major domestic cigarette
companies and others seeking damages and other relief. The complaints in these
cases on their face predominantly relate to the usage of cigarettes; within that
context, certain complaints contain a few allegations relating specifically to
smokeless tobacco products. These actions are in varying stages of pretrial
activities.
Registrant believes 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 is also named in an action in Illinois seeking damages and other
relief brought by an individual plaintiff and purporting 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' products and gum deterioration."
(6)
<PAGE> 8
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Registrant is also named in an action in San Francisco, California along with
five other smokeless tobacco manufacturers seeking damages and other relief
brought by the City and County of San Francisco and the Environmental Law
Foundation purportedly on behalf of "the residents of San Francisco County and
the general public" alleging violation of The Safe Drinking Water and Toxic
Enforcement Act of 1986, Health and Safety Code Sections 25249.6, et seq.
("Proposition 65") and the California Unfair Competition Act, Business and
Professions Code Sections 17200, et seq. The action alleges, among other things,
that the defendants sold smokeless tobacco products in California without
providing a ". . . 'clear and reasonable' warning that their use results in
multiple exposures to substances known to the State of California to cause
cancer, birth defects and reproductive harm."
Registrant believes, and has been so advised by counsel handling these cases,
that it has a number of meritorious defenses to all such pending litigation.
Except as to Registrant's willingness to consider alternative solutions for
resolving certain regulatory and litigation issues, all such cases are, and
will continue to be, vigorously defended. Registrant believes that the ultimate
outcome of all such pending litigation will not have a material adverse effect
on the consolidated financial statements of Registrant.
Registrant is named in an action in Kentucky seeking more than $400 million in
"actual damages" before trebling, punitive damages and injunctive relief brought
by one of Registrant's competitors alleging that certain actions and practices
of Registrant violate federal antitrust and advertising laws in connection with
the marketing and sale of its moist snuff brands and also alleges various
violations of tort and state law. Registrant believes that this action is
without merit and intends to defend itself vigorously, and also believes that
the ultimate outcome of this action will not have a material adverse effect on
its consolidated financial statements.
On August 28, 1996, the Food and Drug Administration (FDA) published regulations
asserting unprecedented jurisdiction over nicotine in tobacco as a "drug" and
purporting 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 against the FDA 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 most 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 appealed to the
Fourth Circuit Court of Appeals are awaiting decision. 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 smokeless tobacco business.
(7)
<PAGE> 9
UST Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Since the June 20, 1997 Memorandum of Understanding which was executed by
Registrant's subsidiary, United States Tobacco Company, to support the adoption
of federal legislation concerning the regulatory and litigation issues affecting
the United States tobacco industry (as discussed in Registrant's 1997 Form
10-K), a number of legislative proposals have been introduced in Congress, some
of which reflect all or part of the substantive provisions contained in the
proposed resolution and others which reflect more extreme views on how to
address the current controversy regarding tobacco issues. Registrant continues
to believe that the proposed resolution represents the best approach to
resolving the issues surrounding tobacco products. However, Registrant
reluctantly has concluded that Congress is unlikely to enact -- and the
President does not intend to sign -- legislation reflecting the provisions of
the June 20 proposal. On April 8, 1998, Registrant announced that it will
vigorously oppose any excise tax or other regulatory proposals that are punitive
in nature, such as the Senate Commerce Committee bill, and that do not truly
address the issue of youth usage of smokeless tobacco products in a constructive
and comprehensive fashion. There can be no assurance that any legislation will
be enacted, however, enactment of certain legislative proposals could result in
a material adverse effect on Registrant's financial position, results of
operations and cash flows.
(8)
<PAGE> 10
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
(Unaudited)
Results of Operations
Second quarter and six months of 1998 compared
with the corresponding periods of 1997
Net sales for the second quarter of 1998 were $357.4 million and approximated
the second quarter of 1997, while net sales for the first six months of 1998
rose 1% to $697.6 million. The Tobacco segment posted sales gains for both
periods, while sales for the Wine segment increased for the six month period and
remained stable for the second quarter. Other segment sales declined
substantially for both periods. The Tobacco segment increases were primarily due
to higher selling prices for moist smokeless tobacco, partially offset by the
absence of sales for a divested product line. Gross unit volume for moist
smokeless tobacco for the second quarter increased 1% and 0.1% net of returned
goods. For the six month period gross unit volume and net of returned goods
amounts increased 2.8% and 0.7%, respectively. Although the returned goods as a
percent of can sales improved in the second quarter as compared to the first
quarter, returned goods were higher than the second quarter of 1997 due to an
emphasis on increasing product freshness at retail and promotional units sold in
prior periods. Registrant expects that the returned goods comparison will
continue to moderate as the year progresses. The increase in Wine segment sales
for the six month period was mainly due to higher selling prices. The decrease
in Other segment sales for both periods were primarily due to the continued
weakness in the premium cigar business and the absence of sales for businesses
divested.
Cost of products sold and excise taxes decreased 3.2% for the second quarter
and remained stable for the six month period. Both 1998 periods included higher
costs for moist smokeless tobacco and wine, did not include the costs for
businesses divested and had lower costs for premium cigars due to a decline in
unit volume. The overall gross margin percentage increased slightly in both
periods primarily due to higher selling prices, partially offset by higher unit
costs for moist smokeless tobacco.
Selling, advertising and administrative costs increased 1.5% for the second
quarter and decreased 6.2% for the six months. Both periods included higher
costs for the Tobacco and Wine segments, offset by lower costs for the Other
segment. Selling and advertising expenses increased for the Tobacco segment in
both periods primarily due to the continuing implementation of sales and
marketing initiatives which began in the second half of 1997. The six month
period also included a $4.6 million charge resulting from Registrants' portion
of the funding for a pilot program, primarily to reduce youth access to tobacco
products, and related expenses, as part of the settlement with the state of
Texas in connection with its health care cost reimbursement litigation.
Increased spending in the Wine segment was in support of premium varietal wines.
The decrease in the Other segment for both periods was due to the absence of
expenses for the video entertainment subsidiary, which was sold in the first
quarter of 1998, and lower spending in international markets. The decrease for
the six month period also included gains recorded on the sale of certain
commercial agricultural properties and the video entertainment subsidiary, which
amounted to $10.7 million. Administrative and other expenses decreased in both
periods primarily due to lower overall spending, primarily professional fees.
The decrease in the six month period was also attributable to the absence of a
1997 charge ($6.6 million) related to recording the present value of future
obligations arising under employment contracts with two former executive
officers.
(9)
<PAGE> 11
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION (Continued)
Net interest expense decreased significantly in both periods, as compared to the
corresponding periods in the prior year, primarily due to lower average levels
of debt outstanding and higher income on cash equivalent investments.
Net earnings increased 1.9% to $119.1 million for the second quarter and
increased 6% to $231.1 million for the six month period, as compared to the
corresponding periods in the prior year. Diluted earnings per share increased
1.6% (basic remained stable) to 64 cents for the second quarter and increased
5.1% (5% basic) to $1.24 for the six month period, as compared to the
corresponding periods in the prior year.
Liquidity and Sources of Capital
Changes in Financial Condition Since December 31, 1997
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 increase in net cash provided by operating
activities as compared to the similar period in the prior year was primarily due
to higher net income and changes in certain operating account balances such as
taxes payable, inventories and prepaid expenses. Primary uses of cash in
operations were for raw material inventories, principally seasonal purchases of
leaf tobacco for moist smokeless tobacco, leaf tobacco purchases for cigars and
grape purchases for the wine operations. Registrant anticipates that overall raw
material inventory purchases in 1998 will approximate amounts expended in 1997.
Net cash provided by investing activities resulted from the proceeds from the
sale of Registrant's video entertainment subsidiary and the disposition of
property, plant and equipment, primarily the sale of certain commercial
agricultural properties, partially offset by the purchases of property, plant
and equipment. Registrant expects the 1998 capital program to approximate $66
million.
Net cash used in financing activities were amounts expended for dividends and
the repayment of borrowings, partially offset by proceeds from the issuance of
common stock. Registrant had suspended its stock repurchase program in 1997 and
did not increase its 1998 quarterly dividend rate as a result of regulatory and
litigation issues affecting the tobacco industry. (See Contingencies Note.)
Registrant will continue to have significant cash requirements for the remainder
of 1998, primarily for dividends and capital spending. Registrant expects to
meet these requirements with internally generated funds. 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 Contingencies Note.)
(10)
<PAGE> 12
UST Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS AND FINANCIAL CONDITION (Continued)
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 1997 Form 10-K, and to the legal and regulatory initiatives
described in Form 8-K, dated July 3, 1997, and first quarter Form 10-Q 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.
(11)
<PAGE> 13
UST Inc.
PART II - OTHER INFORMATION
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, 1998.
(12)
<PAGE> 14
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 7, 1998 /s/ Robert T. D'Alessandro
-------------- --------------------------
Robert T. D'Alessandro
Senior Vice President and Controller
(Principal Accounting Officer and
Principal Financial Officer)
(13)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 71,689
<SECURITIES> 0
<RECEIVABLES> 63,407
<ALLOWANCES> 0
<INVENTORY> 345,899
<CURRENT-ASSETS> 528,797
<PP&E> 568,202
<DEPRECIATION> 243,221
<TOTAL-ASSETS> 914,819
<CURRENT-LIABILITIES> 148,573
<BONDS> 100,000
0
0
<COMMON> 103,785
<OTHER-SE> 426,535
<TOTAL-LIABILITY-AND-EQUITY> 914,819
<SALES> 697,554
<TOTAL-REVENUES> 697,554
<CGS> 136,973
<TOTAL-COSTS> 136,973
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 725
<INCOME-PRETAX> 372,809
<INCOME-TAX> 141,692
<INCOME-CONTINUING> 231,117
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 231,117
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.24
</TABLE>
