Debt Policy at UST Inc.

Harvard Business School Case N9-200-069

Case Software 2-200-709
Copyright 2000 by the President and Fellows of Harvard College
This case was prepared by Professor Mark Mitchell, with the assistance of Janet T. Mitchell, as the
basis for class discussion rather than to illustrate either effective or ineffective handling of an
administrative situation.

Exhibit 1

UST Inc. Product Information

Category

Introduction

% 1998
Sales

1998
Average
Retail Cost
per Can

Copenhagen

Full Price

1822

48%

Skoal Fine Cut

Full Price

1935

Skoal Long Cut

Full Price

Skoal Bandits

Full Price

Red Seal

Price Value

Rooster

Full Price

Brands

Description

Competition

$3.13

Top selling brand in the industry. Straight-flavored.

Copenhagen has a "made-date" on bottom of its
container so consumers recognize that it is fresh.
Both fine and long cut varieties. Long cut variety
introduced in the first quarter of 1997.

Timberwolf (Swedish Match)

and Redwood (Swisher)

18%

$2.98

Second largest selling brand in the industry.

Wintergreen and straight-flavored.

Kodiak (Conwood)

1984

29%

$3.11

Available in six varieties: wintergreen, straight,

mint, cherry, classic and spearmint.

Kodiak (Conwood),
Timberwolf (Swedish Match)
and Silver Creek (Helme)

National introduction
in 1983

3%

$3.10

Skoal packed in "tea bags" that are individual

portion packs that make it easy to use and dispose.

Renegades (Swedish
Match)

Third Qtr 1997

1%

$1.29

Available in wintergreen and straight-flavors.

Introduced in a 1.2 oz package.

Timberwolf (Swedish
Match), Cougar, Redwood
(Swisher) and Silver Creek
(Helme)

Test Marketed in
Fourth Qtr 1997;
National introduction
in 1998

<1%

$2.44

Long-cut wintergreen and straight-flavored. Priced

competitively to Copenhagen and Skoal but is
packaged in a 1.5 oz can, offering consumers 25%
more tobacco for their money.

Kodiak (Conwood)

Source: Credit Suisse First Boston research dated August 27, 1999.

Exhibit 2

UST Inc. Market Share Information, 1991-1998

1991

Industry
Premium Market Share %
Price Value Market Share %

1992

1993

1994

1995

1996

1997

1998

7 Yr. CAGR

99.0%
1.0%

97.9%
2.1%

97.2%
2.8%

96.3%
3.7%

94.9%
5.1%

92.7%
7.3%

90.9%
9.1%

89.2%
10.8%

(1.5%)
40.5%

86.2%

84.6%
(1.9%)
84.6%
0.0%

85.1%
0.6%
85.1%
0.0%

83.8%
(1.5%)
83.8%
0.0%

81.7%
(2.5%)
81.7%
0.0%

79.5%
(2.7%)
79.5%
0.0%

78.2%
(1.6%)
78.2%
0.0%

77.2%
(1.3%)
76.6%
0.6%

(1.6%)

11.3%
11.9%
11.3%
0.0%

10.8%
(4.4%)
10.8%
0.0%

11.1%
2.8%
11.1%
0.0%

11.9%
7.2%
11.9%
0.0%

12.8%
7.6%
12.2%
0.6%

13.1%
2.3%
11.8%
1.3%

13.2%
0.8%
11.6%
1.6%

3.9%

2.0%
11.1%
2.0%
0.0%

1.0%
(50.0%)
1.0%
0.0%

1.1%
10.0%
1.0%
0.1%

1.4%
27.3%
0.8%
0.6%

2.3%
64.3%
0.5%
1.8%

3.0%
30.4%
0.3%
2.7%

4.6%
53.3%
0.3%
4.3%

14.3%

2.8%
33.3%
0.0%
2.8%

3.6%
28.6%
0.0%
3.6%

4.5%
25.0%
0.0%
4.5%

4.9%
8.9%
0.0%
4.9%

5.1%
4.1%
0.0%
5.1%

3.8%
(25.5%)
0.0%
3.8%

21.0%

0.0%
1.0%

2.1%
110.0%
0.0%
2.1%

Other Manufacturers
Total Market Share %
0.9%
Increase/(Decrease)%
Premium Market Share %
0.9%
UST Inc. Price Value Market Share % 0.0%

0.0%
(100.0%)
0.0%
0.0%

0.3%
NM
0.3%
0.0%

0.4%
33.3%
0.4%
0.0%

0.5%
25.0%
0.5%
0.0%

0.5%
0.0%
0.5%
0.0%

0.6%
20.0%
0.6%
0.0%

1.2%
100.0%
0.7%
0.5%

4.2%

UST
Total Market Share %
Increase/(Decrease)%
Premium Market Share %
Price Value Market Share %
Conwood
Total Market Share %
Increase/(Decrease)%
Premium Market Share %
Price Value Market Share %
Swedish Match
Total Market Share %
Increase/(Decrease)%
Premium Market Share %
Price Value Market Share %
Swisher
Total Market Share %
Increase/(Decrease)%
Premium Market Share %
Price Value Market Share %

86.2%
0.0%
10.1%
10.1%
0.0%
1.8%
1.8%
0.0%
1.0%

Source: Credit Suisse First Boston Research dated August 27, 1999. Compiled from A.C. Neilson data and estimates.

(1.7%)
-

2.0%
-

(22.6%)
-

21.0%

(3.5%)
-

Exhibit 3

UST Inc. Summary Financial Information--Eleven Years (1988-1998) (in millions, except per share data and ratios)

Summary Operating Data

Net Sales
Gross Profit
EBITDA
EBIT
Interest Expense (Income)
Pretax Earnings
Net Income

1988

1989

1990

1991

1992

1993

1994

$ 611.9
437.3
277.9
260.2
(1.1)
261.3
162.2

$ 673.9
488.4
315.0
298.4
(3.2)
301.6
190.5

$ 756.4
564.6
368.6
349.0
(3.2)
352.2
223.3

$ 898.4 $ 1,032.2 $ 1,097.5 $ 1,204.0

670.9
775.4
851.1
952.0
446.4
525.2
591.4
668.9
423.8
500.8
564.8
640.7
(2.3)
(1.9)
(2.0)
0.1
426.1
502.6
566.8
640.6
265.9
312.6
347.9
387.5

$ 135.2
-

$ 195.1
-

$ 217.8
-

$ 247.3
-

1995

1996

1997

$ 1,305.8
1,043.6
736.9
707.8
3.2
704.6
429.8

$ 1,371.7
1,098.9
779.2
750.9
6.4
744.5
464.0

$ 1,401.7
1,109.8
749.8
719.3
7.5
703.9
443.9

$ 521.2
-

$ 456.4
-

$ 287.4
$ 8.0

1998

5 Year
CAGR

10 Year
CAGR

Free Operating Cash Flow

Special Charges/Non-Recurring Items (Gains) 2
Basic Earnings per Share
Diluted Earnings per Share
Dividend per Share
Dividend Payout Ratio

$ 0.74
$ 0.71
$ 0.37
50%

Balance Sheet & Cash Flow Data

Cash and Cash Equivalents
Total Assets
Long-Term Debt
Total Debt
Shareholders' Equity

$ 72.7
$ 598.0
$ 21.8
$ 30.8
$ 453.3

Average Basic Shares Outstanding

$ 0.87
$ 0.83
$ 0.46
53%

$ 54.6
$ 630.2
$ 6.8
$ 14.5
$ 482.3

$ 1.04
$ 0.99
$ 0.55
53%

$ 46.6
$ 622.6
$ 3.1
$ 4.8
$ 473.9

$ 1.26
$ 1.20
$ 0.66
52%

$ 41.5
$ 656.5
$ 1.3
$ 482.9

$ 267.9
-

$ 340.7
$ (35.0)

$ 1.49
$ 1.43
$ 0.80
54%

$ 1.67
$ 1.63
$ 0.96
58%

$ 36.4
$ 674.0
$ 516.6

$ 25.3
$ 706.2
$ 40.0
$ 40.0
$ 463.0

$ 399.2
$ 1.92
$ 1.88
$ 1.12
58%

$ 50.7
$ 741.2
$ 125.0
$ 125.0
$ 361.7

$ 2.21
$ 2.17
$ 1.30
59%

$ 69.4
$ 784.0
$ 100.0
$ 200.0
$ 292.8

$ 2.48
$ 2.44
$ 1.48
60%

$ 54.5
$ 806.6
$ 100.0
$ 250.0
$ 281.2

$ 2.41
$ 2.39
$ 1.62
67%

$ 6.9
$ 826.4
$ 100.0
$ 110.0
$ 436.8

$ 1,423.2
1,139.7
785.0
753.3
(2.2)
755.5
467.9

5%

9%

6%
6%

11%
11%

6%

11%

$ 429.5
$ 21.0

5%

12%

9%
9%
11%

13%
13%
16%

5%

13%

$ 2.52
$ 2.50
$ 1.62
64%

$ 33.2
$ 913.3
$ 100.0
$ 100.0
$ 468.3

220.6

219.8

215.2

211.6

209.8

208.5

202.0

194.4

187.4

183.9

185.5

Working Capital
Capital Expenditures3
Dividends Paid
Share Repurchases

$ 221.1
$ 20.8
$ 81.7
$ 67.4

$ 209.3
$ 23.7
$ 101.2
$ 97.5

$ 197.2
$ 37.2
$ 118.3
$ 151.3

$ 210.0
$ 28.4
$ 139.7
$ 184.4

$ 249.0
$ 30.1
$ 168.0
$ 212.6

$ 228.4
$ 54.5
$ 199.7
$ 236.7

$ 221.2
$ 23.7
$ 225.7
$ 298.8

$ 144.8
$ 14.0
$ 252.4
$ 274.8

$ 144.0
$ 36.7
$ 277.3
$ 237.8

$ 275.3
$ 55.8
$ 298.1
$ 45.7

$ 309.9
$ 35.5
$ 301.1
$ 151.6

Stock Price Data

High
Low
Year End
Price/Earnings Ratio4

$ 10.50
$ 6.00
$ 10.25
13.9x

$ 15.38
$ 9.63
$ 15.31
17.6x

$ 18.25
$ 12.38
$ 18.25
17.5x

$ 33.88
$ 16.38
$ 32.75
26.0x

$ 35.38
$ 25.38
$ 32.00
21.5x

$ 32.75
$ 24.38
$ 27.75
16.6x

$ 31.50
$ 23.63
$ 27.88
14.5x

$ 36.00
$ 26.63
$ 33.38
15.1x

$ 35.88
$ 28.25
$ 32.38
13.1x

$ 36.94
$ 25.50
$ 36.94
15.3x

$ 36.88
$ 24.56
$ 34.88
13.8x

Market Equity5

$ 2,260.6

$ 3,366.0

$ 3,926.6

$ 6,930.0

$ 6,713.7

$ 5,785.0

$ 5,630.6

$ 6,487.2

$ 6,066.6

$ 6,794.0

$ 6,470.8

Selected Growth Rates and Ratios

Sales Growth
Net Income Growth
Dividend Growth

7.2%
23.9%
23.3%

10.1%
17.5%
24.3%

12.3%
17.2%
19.6%

18.8%
19.1%
20.0%

14.9%
17.5%
21.2%

6.3%
11.3%
20.0%

9.7%
11.4%
16.7%

8.5%
10.9%
16.1%

5.0%
8.0%
13.8%

2.2%
(4.3%)
9.5%

1.5%
5.4%
0.0%

5-Yr Avg 10-Yr Avg

Gross Profit Margin

EBITDA Margin
EBIT Margin
Net Margin

71.5%
45.4%
42.5%
26.5%

72.5%
46.7%
44.3%
28.3%

74.6%
48.7%
46.1%
29.5%

74.7%
49.7%
47.2%
29.6%

75.1%
50.9%
48.5%
30.3%

77.5%
53.9%
51.5%
31.7%

79.1%
55.6%
53.2%
32.2%

79.9%
56.4%
54.2%
32.9%

80.1%
56.8%
54.7%
33.8%

79.2%
53.5%
51.3%
31.7%

80.1%
55.2%
52.9%
32.9%

79.7%
55.5%
53.3%
32.7%

77.3%
52.7%
50.4%
31.3%

Return on Average Equity

Return on Average Assets
Long-Term Debt/Capitalization
Total Debt/Capitalization

38.0%
28.3%
4.6%
6.4%

40.7%
31.0%
1.4%
2.9%

46.7%
35.6%
0.6%
1.0%

55.6%
41.6%
0.0%
0.3%

62.5%
47.0%
0.0%
0.0%

71.0%
50.4%
8.0%
8.0%

94.0%
53.5%
25.7%
25.7%

131.3%
56.4%
25.5%
40.6%

161.7%
58.3%
26.2%
47.1%

123.7%
54.4%
18.6%
20.1%

103.4%
53.8%
17.6%
17.6%

122.8%
55.3%
22.7%
30.2%

89.1%
48.2%
12.4%
16.3%

Source: Company annual report for fiscal year ended December 31, 1998 and author's adjustments and calculations.
Before the cumulative effect of accounting changes. Excludes settlement charges and other special charges or non-recurring items. All net income adjustments apply a 40% tax rate.

1
2

Authors' estimates of settlement charges and other special charges or non-recurring items. Does not include effect of accounting changes.

Additions of property, plant and equipment net of dispositions.

Based upon year-end stock price and basic earnings per share.

Based upon average basic shares outstanding and year-end stock price.

Exhibit 4

UST Inc. Summary Financial Information--Segment Data (1996-1998) (in millions)

1996

Net Sales (unaffiliated customers)

Tobacco
Wine
Other
Total Net Sales
Operating Profit
Tobacco
Wine
Other
Total Operating Profit
Operating Profit Margin
Tobacco
Wine
Other
Identifiable Assets at December 31
Tobacco
Wine
Other
Corporate
Total Identifiable Assets

% Total

1997

% Total

1998

% Total

$ 1,167.5 85.1%
122.5 8.9%
81.7 6.0%
$ 1,371.7

$ 1,181.8 84.3%
145.0 10.3%
74.9 5.3%
$ 1,401.7

$ 1,245.6 87.5%
148.5 10.4%
29.2 2.1%
$ 1,423.2

$ 745.6 97.6%
17.9 2.3%
0.1 0.0%
$ 763.5

$ 700.4 96.3%
28.2 3.9%
(1.3) (0.2%)
$ 727.3

$ 720.6 96.8%
22.1 3.0%
1.7 0.2%
$ 744.4

63.9%
14.6%
0.1%

59.3%
19.4%
(1.7%)

57.9%
14.9%
5.9%

$ 458.2
194.9
91.6
61.9
$ 806.6

56.8%
24.2%
11.4%
7.7%

$ 468.0
230.9
102.2
25.3
$ 826.4

56.6%
27.9%
12.4%
3.1%

$ 497.6
277.2
87.2
51.3
$ 913.3

54.5%
30.4%
9.5%
5.6%

Capital Expenditures (Gross)

Tobacco
Wine
Other
Corporate
Total Capital Expenditures

$ 29.2
12.0
2.7
0.8
$ 44.7

65.3%
26.9%
6.0%
1.8%

$ 29.4
20.1
6.1
2.5
$ 58.2

50.6%
34.6%
10.5%
4.3%

$ 27.7
25.6
2.5
0.5
$ 56.3

49.2%
45.6%
4.4%
0.8%

Depreciation
Tobacco
Wine
Other
Corporate
Total Depreciation

$ 15.8
8.9
1.8
1.6
$ 28.1

56.2%
31.7%
6.4%
5.8%

$ 16.3
10.4
1.8
1.6
$ 30.1

54.0%
34.6%
6.1%
5.3%

$ 16.1
12.0
1.7
1.7
$ 31.4

51.3%
38.1%
5.3%
5.3%

Source: Company annual report for fiscal year ended December 31, 1998 and author's calculations.

Exhibit 5

Summary Financial Information--Selected Tobacco Companies, Fiscal Years Ended in 1998 (in millions, except per share data and ratios)

UST Inc.

Tobacco Product Manufacturers

North
Atlantic
Philip Morris
Trading Co.

Tobacco Leaf Merchants

RJR
Nabisco
Holdings9

DiMon Inc.

Dec 31, 1998

June 30, 1998

Standard
Commercial

Universal Corp

Summary Operating Data

Fiscal Year End

Dec 31, 1998

Dec 31, 1998

Net Sales
Gross Profit
EBITDA2
EBIT2
Interest Expense (Income)
Pretax Earnings
Net Income

$ 1,423.2
1,139.7
785.0
753.3
(2.2)
755.5
467.9

$ 74,391.0
30,993.0
15,501.0
13,811.0
890.0
12,921.0
7,672.4

$ 93.1
60.9
36.3
29.1
24.9
4.2
1.0

$ 20,563.0
9,493.0
3,602.0
2,467.0
880.0
1,455.0
718.0

$ 2,171.8
266.9
200.2
156.7
83.8
72.9
52.0

$ 429.5
$ 21.0

$ 6,076.4
$ 3,834.0

$ 14.5
-

$ 2,016.0
$ 2,069.0

$ 52.5
$ 16.9

$ (61.3)
-

$ 110.2
$ (16.7)

$ 1.17
$ 1.16
$ 0.66
56%

$ 2.18
$ 2.05
0%

$ 3.71
$ 3.68
$ 1.11
30%

Free Operating Cash Flow

3
Special Charges/Non-Recurring Items (Gains)
Basic Earnings per Share
Diluted Earnings per Share
Dividend per Share (Common)
Dividend Payout Ratio

$ 2.52
$ 2.50
$ 1.62
64%

Balance Sheet & Cash Flow Data

Cash and Cash Equivalents
Total Assets
Long-Term Debt
Total Debt
Preferred Stock & Minority Interest
Shareholders' Equity

$ 33.2
$ 913.3
$ 100.0
$ 100.0
$ 468.3

Average Basic Shares Outstanding

$ 3.16
$ 3.14
$ 1.68
53%

$ 4,081.0
$ 59,920.0
$ 12,615.0
$ 14,662.0
$ 16,197.0

Dec 31, 1998

$ (7.09)
$ (7.09)
0%

185.5

2,429.0

528.2

$ 309.9
$ 35.5

$ 3,851.0
$ 1,804.0

$ 42.0
$ 0.5

Stock Price Data

Fiscal Year End
Price/Earnings Ratio5

$ 34.88
13.8x

Market Equity6

$ 6,470.8

Selected Growth Rates and Ratios

Sales Growth
Gross Profit Margin
EBITDA Margin
EBIT Margin
Net Margin
Return on Average Equity
Return on Average Assets
Long-Term Debt/Capitalization
Total Debt/Capitalization

$ 129,951.5

$ 2.8
$ 260.0
$ 202.6
$ 215.6
$ 39.3
$ (15.4)

Working Capital
Capital Expenditures4

$ 53.50
16.9x

$ 2.22
$ 2.22
$ 2.05
92%

$ 300.0
$ 28,892.0
$ 9,982.0
$ 10,467.0
$ 957.0
$ 7,809.0
323.9

NA
NA

NA

March 31, 1998

$ 1,492.8
145.0
85.8
65.3
37.8
37.1
26.9

$ 18.7
$ 1,797.5
$ 797.0
$ 1,079.5
$ 0.5
$ 421.9

$ 4,287.2
613.6
329.5
278.4
64.0
231.3
130.4

$ 79.8
$ 2,056.7
$ 263.1
$ 849.6
$ 31.7
$ 547.9

44.5

12.4

35.2

$ (259.0)
$ 576.0

$ 706.4
$ 36.6

$ 219.1
$ 9.7

$ 328.8
$ 90.0

$ 29.69
13.4x

$ 11.25
9.6x

$ 15.94
7.3x

$ 37.38
10.1x

$ 500.3

$ 197.3

$ 9,614.4

$ 1,315.2
Median
(excl.
UST)

Mean
(excl.
UST)

1.5%

3.2%

10.2%

(0.5%)

2.2%

10.2%

4.2%

80.1%
55.2%
52.9%
32.9%

41.7%
20.8%
18.6%
10.3%

65.4%
39.0%
31.3%
1.1%

46.2%
17.5%
12.0%
3.5%

12.3%
9.2%
7.2%
2.4%

9.7%
5.7%
4.4%
1.8%

14.3%
7.7%
6.5%
3.0%

28.0%
13.4%
9.6%
2.7%

31.6%
16.7%
13.3%
3.7%

103.4%
53.8%
17.6%
17.6%

49.3%
13.2%
43.8%
47.5%

NM
0.4%
89.4%
90.0%

8.4%
2.4%
53.2%
54.4%

12.5%
2.7%
65.4%
71.9%

22.5%
3.4%
52.3%
72.3%

25.6%
6.5%
31.2%
59.4%

22.5%
3.1%
52.8%
65.7%

23.7%
4.8%
55.9%
65.9%

Source: Company financial statements and author's calculations and adjustments.

Before the cumulative effect of accounting changes and discontinued operations. Excludes settlement charges, special charges, and non-recurring items. Net income adjustments generally apply a 40% tax rate.

1
2

Excludes Other Income and Expense.

Authors' estimates of settlement charges and other special charges or non-recurring items. Does not include discontinued operations or effect of accounting changes.

Additions of property, plant and equipment net of dispositions.

Based upon fiscal year-end stock price and basic earnings per share.

Based upon average basic shares outstanding and fiscal year-end stock price.

Includes impact of preferred stock dividends.

North Atlantic Trading Company is privately held.

$ 34.1
$ 839.5
$ 197.1
$ 469.9
$ 30.3
$ 149.6

June 30, 1998

RJR Nabisco Holdings spun its tobacco business (R.J. Reynolds Tobacco) off to shareholders in 1999.

Exhibit 6

Standard & Poor's Key Financial Ratios for Tobacco Companies

Tobacco Product Manufacturers

Three-years (1996-1998)
Corporate Credit Rating
Outlook
EBIT interest coverage (x)
EBITDA interest coverage (x)
Fund flow/total debt (%)
Free operating cash flow/total debt (%)
Return on capital (%)
Operating income/sales (%)
Total debt/capital (including ST debt) (%)
Source: Standard & Poor's analysis
Data for 1997-1998.

1
2

Excludes UST Inc.

Tobacco Leaf Merchants

Philip Morris

North
Atlantic
Trading
Co.1

RJR Nabisco

DiMon Inc.

A
Stable

B+
Stable

BBBStable

BB+
Negative

11.2
12.7
56.3
41.8
38.4
26.0
49.3

1.3
1.6
6.8
5.6
11.8
38.1
90.6

2.5
3.7
14.5
6.8
10.3
15.6
55.1

2.6
3.3
12.3
10.1
13.4
16.4
67.8

Standard
Commercia
l
Universal Corp
BBPositive
3.3
5.4
6.7
(2.6)
6.6
3.6
77.5

Tobacco
Companies
Median2

UST Inc.

3.0
4.1
13.4
6.2
12.6
16.0
66.8

101.5
105.6
364.0
296.5
140.6
55.7
28.2

AStable
3.5
4.4
18.5
2.9
16.9
7.6
65.8

Exhibit 7

Standard & Poor's Key Financial Ratios

Adjusted Key Industrial Financial Ratios - Senior Debt Ratings

Industrial Long-Term Debt
Three-years (1996-1998) medians

AAA

EBIT interest coverage (x)

EBITDA interest coverage (x)
Fund flow/total debt (%)
Free operating cash flow/total debt (%)
Return on capital (%)
Operating income/sales (%)
Long-term debt/capital (%)
Total debt/capital (including ST debt) (%)

Debt Yields - December 22, 1998

10-Year (%)
20-Year (%)

Investment Grade
AA
A

12.9
18.7
89.7
40.5
30.6
30.9
21.4
31.8

9.2
14.0
67.0
21.6
25.1
25.2
29.3
37.0

AAA
5.60
6.47

AA
5.84
6.76

U.S. Treasury
4.70
5.45

7.2
10.0
49.5
17.4
19.6
17.9
33.3
39.2

BBB

Non-Investment Grade/Speculative
BB
B
CCC

4.1
6.3
32.2
6.3
15.4
15.8
40.8
46.4

2.5
3.9
20.1
1.0
12.6
14.4
55.3
58.5

1.2
2.3
10.5
(4.0)
9.2
11.2
68.8
71.4

(0.9)
0.2
7.4
(25.4)
(8.8)
5.0
71.5
79.4

Corporate Bond Yields

A
BBB
BB+
6.12
6.84
7.70
7.05
7.82
-

BB/BB8.72
-

BB
11.19
-

Formulas for Adjusted Key Industrial Financial Ratios

EBIT interest coverage=

Earnings from continuing operations before interest and taxes/

Gross interest incurred before subtracting capitalized interest and interest income

EBITDA interest coverage=

Earnings from continuing operations before interest, taxes, depreciation and amortization/
Gross interest incurred before subtracting capitalized interest and interest income

Funds from operations/Total debt=

Net income from continuing operations + depreciation, amortization, deferred income taxes, and other non-cash items/
Long-term debt + current maturities, commercial paper, and other short-term borrowings

Free operating cash flow/Total debt=

Funds from operations - capital expenditures - (+) the increase (decrease) in working capital (excl. changes in cash, marketable securities & ST debt)/
Long-term debt + current maturities, commercial paper, and other short-term borrowings

Pretax return on capital=

EBIT + interest expense/

Avg of beginning and ending year capital, including short-term debt, current maturities, long-term debt, non-current deferred taxes & equity

Operating income/Sales=

Sales minus cost of goods manufactured (before depreciation and amortization), SG&A and R&D costs/
Sales

Long-term debt/Capitalization=

Long-term debt/
Long-term debt + shareholders equity (including preferred stock) + minority interest

Total debt/Capitalization=

Long-term debt + current maturities, commercial paper, and other short-term borrowings/
Long-term debt + current maturities, commercial paper and other ST borrowings + shareholders equity (including preferred stock) + minority interest

Source: Standard & Poor's Credit Week, July 28, 1999, and Standard & Poor's The Outlook, January 6, 1999.
Note: Excludes discussion of operating lease equivalents as defined by S&P for simplification purposes .