UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedSEPTEMBERJune 30, 20172020
or
o☐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: 1-1463
UNION CARBIDE CORPORATIONUnion Carbide Corporation
(Exact name of registrant as specified in its charter)
|
| | | | | | | |
New York | | 13-1421730 |
(State or other jurisdiction of
incorporation or organization) | | 13-1421730
(I.R.S. Employer Identification No.) |
7501 STATE HIGHWAY 185 NORTH, SEADRIFT, TEXASTX 77983
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 361-553-2997
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the 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.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
| Large accelerated filer | ☐ | | Accelerated filer | ☐ |
| Non-accelerated filer | ☑ | | Smaller reporting company | ☐ |
| | |
Large accelerated filer o
| | Accelerated filer o
|
Non-accelerated filer þ
| (Do not check if a smaller reporting company) | Smaller reporting company o
|
| | Emerging growth companyo | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
At SeptemberJune 30, 2017,2020, 935.51 shares of common stock were outstanding, all of which were held by the registrant’s parent, The Dow Chemical Company.
The registrant meets the conditions set forth in General InstructionsInstruction H(1)(a) and (b) for Form 10-Q and is therefore filing this form with a reduced disclosure format.
Union Carbide Corporation
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended SeptemberJune 30, 20172020
TABLE OF CONTENTS
| | | | | | | | |
| | PAGE |
| | |
| | PAGE |
| | |
| | |
| | |
| Item 1. | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Item 2. | | |
| | |
| | |
| | |
| | |
| | |
| Item 3. | | |
| | |
| Item 4. | | |
| | |
| | |
| | |
| Item 1. | | |
| | |
| Item 1A. | | |
| | |
| Item 4. | | |
| | |
| Item 6. | | |
| | |
| |
| |
| |
|
| |
| Union Carbide Corporation and Subsidiaries |
Throughout this Quarterly Report on Form 10-Q, except as otherwise indicated by the context, the terms "Corporation" or "UCC" as used herein mean Union Carbide Corporation and its subsidiaries.
FORWARD-LOOKING STATEMENTS
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995,federal securities laws, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934.1934, as amended. Forward-looking statements may appear throughout this report, including without limitation, the following sections:section titled "Management's Discussion and Analysis"Analysis of Financial Condition and "Risk Factors.Results of Operations." These forward-looking statements are generally identified byoften address expected future business and financial performance and financial condition, including the potential impacts of the coronavirus disease 2019 pandemic and crude oil supply and price volatility and estimates regarding benefits achieved through contemplated restructuring activities, such as workforce reductions and exit and disposal activities. In this context, forward looking statements often contain words or phrases such as "anticipate," "believe," "estimate," "expect," "future," "intend," "may," "opportunity," "outlook," "plan," "project," "seek," "should," "strategy," "will,"target," "would,"will," "will be," "will continue," "will likely result"result," "would" and similar expressions.expressions and variations or negatives of these words. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements.
A detailed discussion of principal risks and uncertainties which may cause actual results and events to differ materially from those projected, anticipated or implied in such forward-looking statements is included in the section titled "Risk Factors" (seecontained in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2016).2019. UCC undertakesassumes no obligation to update or revise publicly any forward-looking statements whether because of new information, future events or otherwise, except as required by securities and other applicable laws.
| | |
| PART I - FINANCIAL INFORMATION |
ITEM 1. FINANCIAL STATEMENTS
Union Carbide Corporation and Subsidiaries
Consolidated Statements of Income
| | | | Three Months Ended | Nine Months Ended | | Three Months Ended | | Six Months Ended | |
| In millions (Unaudited) | Sep 30,
2017 | Sep 30,
2016 | Sep 30,
2017 | Sep 30,
2016 | In millions (Unaudited) | Jun 30,
2020 | Jun 30,
2019 | Jun 30,
2020 | Jun 30,
2019 |
| Net trade sales | $ | 31 |
| $ | 27 |
| $ | 113 |
| $ | 77 |
| Net trade sales | $ | 21 | | $ | 47 | | $ | 50 | | $ | 75 | |
| Net sales to related companies | 1,184 |
| 1,221 |
| 3,722 |
| 3,644 |
| Net sales to related companies | 849 | | 992 | | 1,862 | | 2,242 | |
| Total Net Sales | 1,215 |
| 1,248 |
| 3,835 |
| 3,721 |
| |
| Total net sales | | Total net sales | 870 | | 1,039 | | 1,912 | | 2,317 | |
| Cost of sales | 991 |
| 957 |
| 3,056 |
| 2,726 |
| Cost of sales | 746 | | 902 | | 1,572 | | 1,852 | |
| Research and development expenses | 4 |
| 5 |
| 14 |
| 14 |
| Research and development expenses | 5 | | 7 | | 11 | | 13 | |
| Selling, general and administrative expenses | 1 |
| 1 |
| 4 |
| 5 |
| Selling, general and administrative expenses | 2 | | — | | 4 | | 2 | |
| Restructuring and asset related charges - net | 8 |
| — |
| 10 |
| 2 |
| |
| Restructuring charges | | Restructuring charges | — | | 1 | | 2 | | 2 | |
| Integration and separation costs | 1 |
| — |
| 1 |
| — |
| Integration and separation costs | — | | 1 | | — | | 2 | |
| Equity in earnings of nonconsolidated affiliate | — |
| — |
| — |
| 3 |
| |
| | Sundry income (expense) - net | (8 | ) | (10 | ) | 6 |
| 20 |
| Sundry income (expense) - net | (22) | | (18) | | (40) | | (39) | |
| Interest income | | Interest income | 2 | | 10 | | 9 | | 19 | |
| Interest expense and amortization of debt discount | 6 |
| 7 |
| 20 |
| 18 |
| Interest expense and amortization of debt discount | 11 | | 7 | | 19 | | 14 | |
| Income Before Income Taxes | 196 |
| 268 |
| 736 |
| 979 |
| |
| Income before income taxes | | Income before income taxes | 86 | | 113 | | 273 | | 412 | |
| Provision for income taxes | 152 |
| 82 |
| 337 |
| 380 |
| Provision for income taxes | 18 | | 3 | | 59 | | 57 | |
| Net Income Attributable to Union Carbide Corporation | $ | 44 |
| $ | 186 |
| $ | 399 |
| $ | 599 |
| |
| Net income attributable to Union Carbide Corporation | | Net income attributable to Union Carbide Corporation | $ | 68 | | $ | 110 | | $ | 214 | | $ | 355 | |
| | | |
| Depreciation | $ | 45 |
| $ | 39 |
| $ | 132 |
| $ | 120 |
| Depreciation | $ | 46 | | $ | 42 | | $ | 91 | | $ | 85 | |
| Capital Expenditures | $ | 47 |
| $ | 55 |
| $ | 145 |
| $ | 173 |
| |
| Capital expenditures | | Capital expenditures | $ | 32 | | $ | 45 | | $ | 65 | | $ | 105 | |
See Notes to the Consolidated Financial Statements.
Union Carbide Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
| | | | Three Months Ended | Nine Months Ended | | Three Months Ended | | Six Months Ended | |
| In millions (Unaudited) | Sep 30,
2017 | Sep 30,
2016 | Sep 30,
2017 | Sep 30,
2016 | In millions (Unaudited) | Jun 30,
2020 | Jun 30,
2019 | Jun 30,
2020 | Jun 30,
2019 |
| Net Income Attributable to Union Carbide Corporation | $ | 44 |
| $ | 186 |
| $ | 399 |
| $ | 599 |
| |
| Other Comprehensive Income, Net of Tax | |
| |
| |
| |
| |
| Net income attributable to Union Carbide Corporation | | Net income attributable to Union Carbide Corporation | $ | 68 | | $ | 110 | | $ | 214 | | $ | 355 | |
| Other comprehensive income, net of tax | | Other comprehensive income, net of tax | | |
| Cumulative translation adjustments | 1 |
| — |
| 4 |
| — |
| Cumulative translation adjustments | — | | — | | 3 | | — | |
| Pension and other postretirement benefit plans | 12 |
| 11 |
| 36 |
| 32 |
| Pension and other postretirement benefit plans | 19 | | 14 | | 39 | | 29 | |
| Total other comprehensive income | 13 |
| 11 |
| 40 |
| 32 |
| Total other comprehensive income | 19 | | 14 | | 42 | | 29 | |
| Comprehensive Income Attributable to Union Carbide Corporation | $ | 57 |
| $ | 197 |
| $ | 439 |
| $ | 631 |
| |
| Comprehensive income attributable to Union Carbide Corporation | | Comprehensive income attributable to Union Carbide Corporation | $ | 87 | | $ | 124 | | $ | 256 | | $ | 384 | |
See Notes to the Consolidated Financial Statements.
Union Carbide Corporation and Subsidiaries
Consolidated Balance Sheets
| | | In millions, except share amounts (Unaudited) | Sep 30,
2017 | Dec 31,
2016 | In millions, except share amounts (Unaudited) | Jun 30,
2020 | Dec 31,
2019 |
| Assets | | | Assets | | |
| Current Assets | | | Current Assets | | |
| Cash and cash equivalents | $ | 13 |
| $ | 11 |
| Cash and cash equivalents | $ | 11 | | $ | 11 | |
| Accounts receivable: |
|
|
|
| Accounts receivable: | | |
| Trade (net of allowance for doubtful receivables 2017: $-; 2016: $-) | 20 |
| 15 |
| |
| Trade (net of allowance for doubtful receivables 2020: $—; 2019: $—) | | Trade (net of allowance for doubtful receivables 2020: $—; 2019: $—) | 16 | | 26 | |
| Related companies | 893 |
| 843 |
| Related companies | 595 | | 658 | |
| Other | 48 |
| 36 |
| Other | 20 | | 17 | |
| Income taxes receivable | 242 |
| 275 |
| Income taxes receivable | 355 | | 337 | |
| Notes receivable from related companies | 1,257 |
| 1,411 |
| Notes receivable from related companies | 1,598 | | 1,505 | |
| Inventories | 299 |
| 307 |
| Inventories | 227 | | 247 | |
| Other current assets | 18 |
| 39 |
| Other current assets | 28 | | 20 | |
| Total current assets | 2,790 |
| 2,937 |
| Total current assets | 2,850 | | 2,821 | |
| Investments | |
| |
| Investments | | |
| Investments in related companies | 639 |
| 639 |
| Investments in related companies | 237 | | 238 | |
| Investment in nonconsolidated affiliate | — |
| 14 |
| |
| | Other investments | 25 |
| 30 |
| Other investments | 22 | | 22 | |
| Noncurrent receivables | 58 |
| 52 |
| Noncurrent receivables | 120 | | 118 | |
| Noncurrent receivables from related companies | 54 |
| 57 |
| Noncurrent receivables from related companies | 66 | | 66 | |
| Total investments | 776 |
| 792 |
| Total investments | 445 | | 444 | |
| Property | |
| |
| Property | | |
| Property | 7,243 |
| 7,144 |
| Property | 7,307 | | 7,247 | |
| Less accumulated depreciation | 5,837 |
| 5,750 |
| Less accumulated depreciation | 5,967 | | 5,878 | |
| Net property | 1,406 |
| 1,394 |
| Net property | 1,340 | | 1,369 | |
| Other Assets | |
| |
| Other Assets | | |
Intangible assets (net of accumulated amortization 2017: $80; 2016: $78) | 26 |
| 25 |
| |
| Intangible assets (net of accumulated amortization 2020: $94; 2019: $90) | | Intangible assets (net of accumulated amortization 2020: $94; 2019: $90) | 20 | | 22 | |
| Operating lease right-of-use assets | | Operating lease right-of-use assets | 86 | | 89 | |
| Deferred income tax assets | 797 |
| 928 |
| Deferred income tax assets | 492 | | 507 | |
| | Deferred charges and other assets | 39 |
| 70 |
| Deferred charges and other assets | 29 | | 26 | |
| Total other assets | 862 |
| 1,023 |
| Total other assets | 627 | | 644 | |
| Total Assets | $ | 5,834 |
| $ | 6,146 |
| Total Assets | $ | 5,262 | | $ | 5,278 | |
| Liabilities and Equity | | | Liabilities and Equity | | |
| Current Liabilities | |
| |
| Current Liabilities | | |
| Notes payable to related companies | $ | 27 |
| $ | 25 |
| Notes payable to related companies | $ | 30 | | $ | 32 | |
| Notes payable - other | 2 |
| — |
| Notes payable - other | 9 | | 6 | |
| Long-term debt due within one year | 1 |
| 1 |
| Long-term debt due within one year | 1 | | 1 | |
| Accounts payable: |
|
|
|
| Accounts payable: | | |
| Trade | 253 |
| 249 |
| Trade | 204 | | 218 | |
| Related companies | 537 |
| 521 |
| Related companies | 334 | | 386 | |
| Other | 15 |
| 7 |
| Other | 20 | | 10 | |
| | Operating lease liabilities - current | | Operating lease liabilities - current | 16 | | 16 | |
| Income taxes payable | 103 |
| 23 |
| Income taxes payable | 25 | | 25 | |
| Asbestos-related liabilities - current | 132 |
| 126 |
| Asbestos-related liabilities - current | 95 | | 105 | |
| Accrued and other current liabilities | 189 |
| 181 |
| Accrued and other current liabilities | 142 | | 126 | |
| Total current liabilities | 1,259 |
| 1,133 |
| Total current liabilities | 876 | | 925 | |
| Long-Term Debt | 474 |
| 475 |
| Long-Term Debt | 472 | | 473 | |
| Other Noncurrent Liabilities | |
| |
| Other Noncurrent Liabilities | | |
| Pension and other postretirement benefits - noncurrent | 955 |
| 1,170 |
| Pension and other postretirement benefits - noncurrent | 1,125 | | 1,154 | |
| Asbestos-related liabilities - noncurrent | 1,266 |
| 1,364 |
| Asbestos-related liabilities - noncurrent | 1,038 | | 1,060 | |
| Operating lease liabilities - noncurrent | | Operating lease liabilities - noncurrent | 70 | | 74 | |
| Other noncurrent obligations | 174 |
| 206 |
| Other noncurrent obligations | 189 | | 194 | |
| Total other noncurrent liabilities | 2,395 |
| 2,740 |
| Total other noncurrent liabilities | 2,422 | | 2,482 | |
| Stockholder's Equity | |
| |
| Stockholder's Equity | | |
Common stock (authorized: 1,000 shares of $0.01 par value each; issued: 935.51 shares) | — |
| — |
| Common stock (authorized: 1,000 shares of $0.01 par value each; issued: 935.51 shares) | — | | — | |
| Additional paid-in capital | 138 |
| 138 |
| Additional paid-in capital | 141 | | 141 | |
| Retained earnings | 2,848 |
| 2,980 |
| Retained earnings | 2,974 | | 2,922 | |
| Accumulated other comprehensive loss | (1,280 | ) | (1,320 | ) | Accumulated other comprehensive loss | (1,623) | | (1,665) | |
| Union Carbide Corporation's stockholder's equity | 1,706 |
| 1,798 |
| Union Carbide Corporation's stockholder's equity | 1,492 | | 1,398 | |
| | Total Liabilities and Equity | $ | 5,834 |
| $ | 6,146 |
| Total Liabilities and Equity | $ | 5,262 | | $ | 5,278 | |
See Notes to the Consolidated Financial Statements.
Union Carbide Corporation and Subsidiaries
Consolidated Statements of Cash Flows
| | | | Nine Months Ended | | Six Months Ended | |
| In millions (Unaudited) | Sep 30,
2017 | Sep 30,
2016 | In millions (Unaudited) | Jun 30,
2020 | Jun 30,
2019 |
| Operating Activities | | | Operating Activities | | |
| Net Income Attributable to Union Carbide Corporation | $ | 399 |
| $ | 599 |
| |
| Net income attributable to Union Carbide Corporation | | Net income attributable to Union Carbide Corporation | $ | 214 | | $ | 355 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Depreciation and amortization | 148 |
| 138 |
| Depreciation and amortization | 105 | | 99 | |
| Provision (credit) for deferred income tax | 109 |
| (306 | ) | |
| Earnings of nonconsolidated affiliate in excess of dividends received | — |
| (2 | ) | |
| Provision for deferred income tax | | Provision for deferred income tax | 3 | | 15 | |
| | Net gain on sales of property and investments | (26 | ) | (50 | ) | Net gain on sales of property and investments | (1) | | — | |
| Net gain on sale of ownership interest in nonconsolidated affiliate | (4 | ) | — |
| |
| Restructuring and asset related charges - net | 10 |
| 2 |
| |
| | Restructuring charges | | Restructuring charges | 2 | | 2 | |
| Net periodic pension benefit cost | 21 |
| 21 |
| Net periodic pension benefit cost | 27 | | 26 | |
| Pension contributions | (162 | ) | (52 | ) | Pension contributions | (1) | | (1) | |
| Other, net | — |
| (1 | ) | |
| | Changes in assets and liabilities: | | | Changes in assets and liabilities: | | |
| Accounts and notes receivable | 10 |
| (3 | ) | Accounts and notes receivable | 7 | | (24) | |
| Related company receivables | 104 |
| (82 | ) | Related company receivables | (30) | | 129 | |
| Inventories | 8 |
| (24 | ) | Inventories | 20 | | 11 | |
| Accounts payable | 15 |
| (25 | ) | Accounts payable | (2) | | 6 | |
| Related company payables | 18 |
| 114 |
| Related company payables | (54) | | (70) | |
| Asbestos-related payments | (92 | ) | (39 | ) | Asbestos-related payments | (32) | | (42) | |
| Other assets and liabilities | 67 |
| 272 |
| Other assets and liabilities | (34) | | (63) | |
| Cash provided by operating activities | 625 |
| 562 |
| Cash provided by operating activities | 224 | | 443 | |
| Investing Activities | |
| |
| Investing Activities | | |
| Capital expenditures | (145 | ) | (173 | ) | Capital expenditures | (65) | | (105) | |
| Change in noncurrent receivable from related company | 3 |
| 7 |
| Change in noncurrent receivable from related company | — | | (3) | |
| Proceeds from sale of ownership interest in nonconsolidated affiliate | 22 |
| — |
| |
| | Proceeds from sales of property | 18 |
| 58 |
| Proceeds from sales of property | 1 | | — | |
| | Proceeds from sales of investments | 9 |
| 3 |
| Proceeds from sales of investments | — | | 2 | |
| Cash used in investing activities | (93 | ) | (105 | ) | |
| Cash used for investing activities | | Cash used for investing activities | (64) | | (106) | |
| Financing Activities | |
| |
| Financing Activities | | |
| Dividends paid to stockholder | (531 | ) | (455 | ) | |
| | Dividends paid to parent | | Dividends paid to parent | (162) | | (338) | |
| Changes in short-term notes payable | 2 |
| — |
| Changes in short-term notes payable | 3 | | 1 | |
| Payments on long-term debt | (1 | ) | (1 | ) | Payments on long-term debt | (1) | | — | |
| Cash used in financing activities | (530 | ) | (456 | ) | |
| Cash used for financing activities | | Cash used for financing activities | (160) | | (337) | |
| Summary | |
| |
| Summary | | |
| Increase in cash and cash equivalents | 2 |
| 1 |
| Increase in cash and cash equivalents | — | | — | |
| Cash and cash equivalents at beginning of year | 11 |
| 23 |
| |
| Cash and cash equivalents at beginning of period | | Cash and cash equivalents at beginning of period | 11 | | 13 | |
| Cash and cash equivalents at end of period | $ | 13 |
| $ | 24 |
| Cash and cash equivalents at end of period | $ | 11 | | $ | 13 | |
See Notes to the Consolidated Financial Statements.
Union Carbide Corporation and Subsidiaries
Consolidated Statements of Equity
| | | | | | | | | | | | | | Three Months Ended | | Six Months Ended | |
| In millions (Unaudited) | Common Stock | Additional Paid-in Capital | Retained Earnings | Accum. Other Comp Loss | Total Equity | In millions (Unaudited) | Jun 30,
2020 | Jun 30,
2019 | Jun 30,
2020 | Jun 30,
2019 |
| 2016 | | | |
| Balance at Jan 1, 2016 | $ | — |
| $ | 138 |
| $ | 3,391 |
| $ | (1,228 | ) | $ | 2,301 |
| |
| Common Stock | | Common Stock | | | |
| Balance at beginning and end of period | | Balance at beginning and end of period | $ | — | | $ | — | | $ | — | | $ | — | |
| Additional Paid-in Capital | | Additional Paid-in Capital | | | |
| Balance at beginning and end of period | | Balance at beginning and end of period | 141 | | 138 | | 141 | | 138 | |
| | Retained Earnings | | Retained Earnings | | | |
| Balance at beginning of period | | Balance at beginning of period | 2,987 | | 2,951 | | 2,922 | | 3,338 | |
| | Net income attributable to Union Carbide Corporation | — |
| — |
| 599 |
| — |
| 599 |
| Net income attributable to Union Carbide Corporation | 68 | | 110 | | 214 | | 355 | |
| Other comprehensive income | — |
| — |
| — |
| 32 |
| 32 |
| |
| Dividends declared | — |
| — |
| (455 | ) | — |
| (455 | ) | Dividends declared | (81) | | (178) | | (162) | | (810) | |
| Other | — |
| — |
| 1 |
| — |
| 1 |
| Other | — | | (1) | | — | | (1) | |
| Balance at Sep 30, 2016 | $ | — |
| $ | 138 |
| $ | 3,536 |
| $ | (1,196 | ) | $ | 2,478 |
| |
| 2017 | | | |
| Balance at Jan 1, 2017 | $ | — |
| $ | 138 |
| $ | 2,980 |
| $ | (1,320 | ) | $ | 1,798 |
| |
| Net income attributable to Union Carbide Corporation | — |
| — |
| 399 |
| — |
| 399 |
| |
| Balance at end of period | | Balance at end of period | 2,974 | | 2,882 | | 2,974 | | 2,882 | |
| Accumulated Other Comprehensive Loss, Net of Tax | | Accumulated Other Comprehensive Loss, Net of Tax | | | |
| Balance at beginning of period | | Balance at beginning of period | (1,642) | | (1,546) | | (1,665) | | (1,561) | |
| | Other comprehensive income | — |
| — |
| — |
| 40 |
| 40 |
| Other comprehensive income | 19 | | 14 | | 42 | | 29 | |
| Dividends declared | — |
| — |
| (531 | ) | — |
| (531 | ) | |
| Balance at Sep 30, 2017 | $ | — |
| $ | 138 |
| $ | 2,848 |
| $ | (1,280 | ) | $ | 1,706 |
| |
| Balance at end of period | | Balance at end of period | (1,623) | | (1,532) | | (1,623) | | (1,532) | |
| Union Carbide Corporation's Stockholder's Equity | | Union Carbide Corporation's Stockholder's Equity | $ | 1,492 | | $ | 1,488 | | $ | 1,492 | | $ | 1,488 | |
See Notes to the Consolidated Financial Statements.
Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
|
| | |
| Union Carbide Corporation and Subsidiaries |
| (Unaudited) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
| | | | | | | | |
| Note | | Page |
| 1 | | |
| 2 | | |
| 3 | | |
| 4 | | |
| 5 | | |
| 6 | | |
| 7 | | |
| 8 | | |
| 9 | | |
| 10 | | |
| 11 | | |
| 12 | | |
| 13 | | |
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The unaudited interim consolidated financial statements of Union Carbide Corporation and its subsidiaries (the "Corporation" or "UCC") were prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and reflect all adjustments (including normal recurring accruals) which, in the opinion of management, are considered necessary for the fair presentation of the results for the periods presented. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019.
The Corporation is a wholly owned subsidiary of The Dow Chemical Company ("Dow"TDCC"). In accordance with the accounting guidance for earnings per share, the presentation of earnings per share is not required in financial statements of wholly owned subsidiaries.
The Corporation’s business activities comprise components of Dow’sTDCC’s global operations rather than stand-alone operations. DowTDCC conducts its worldwide operations through global businesses. Because there are no separable reportable business segments for UCC under the accounting guidance related to segment reporting and no detailed business information is provided to a chief operating decision maker regarding the Corporation’s stand-alone operations, the Corporation’s results are reported as a single operating segment.
Intercompany transactionsOn April 1, 2019, DowDuPont Inc. (“DowDuPont” and balances are eliminated in consolidation. Transactions witheffective June 3, 2019, n/k/a DuPont de Nemours, Inc.) completed the Corporation’sseparation of its materials science business and Dow Inc. became the direct parent company Dow,of TDCC and other Dow subsidiaries have been reflected as related company transactions in theits consolidated financial statements. See Note 11 for further discussion.
These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2016.
Effective August 31, 2017, pursuant tosubsidiaries. The separation was contemplated by the merger of equals transaction contemplated byeffective August 31, 2017, under the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017, Dow2017. TDCC and E. I. du Pont de Nemours and Company and its consolidated subsidiaries ("Historical DuPont") each merged with subsidiaries of DowDuPont Inc. ("DowDuPont") and, as a result, DowTDCC and Historical DuPont became subsidiaries of DowDuPont (the "Merger"“Merger”). Subsequent to the Merger, TDCC and Historical DuPont engaged in a series of internal reorganization and realignment steps to realign their businesses into three subgroups: agriculture, materials science and specialty products. Dow Inc. was formed as a wholly owned subsidiary of DowDuPont to serve as the holding company for the materials science business. UCC remains a wholly owned subsidiary of TDCC. See Note 3 for additional information.
Intercompany transactions and balances are eliminated in consolidation. Transactions with the Corporation’s parent company, TDCC, and other subsidiaries of TDCC, have been reflected as related company transactions in the consolidated financial statements. See Note 12 for additional information.
Significant Accounting Policy Update
Integration and Separation Costs
The Corporation classifies expenses related to the Merger as integration and separation costs. Merger-related costs include: costs incurred to prepare for and close the Merger, post-Merger integration expenses and costs incurred to prepare for the separation of Dow’s agriculture business, specialty products business and materials science business.
Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
Changes in Financial Statement Presentation
Consolidated Statements of Cash Flows
In the first quarter of 2017, the Corporation made a change to the consolidated statements of cash flows to include a new line under "Operating Activities" entitled "Asbestos-related payments." The new line captures cash payments made for asbestos-related claim and resolution activity as well as asbestos-related defense and processing costs (effective as of the fourth quarter of 2016 as a result of an accounting policy change).
In the third quarter of 2017, the Corporation changed the presentation to the consolidated statements of cash flows to conform to the presentation that was adopted for DowDuPont. "Net period pension benefit cost" are now separately reported and have been reclassified from "Other assets and liabilities." Prior periods have been updated to conform to the current year presentation and are summarized below:
|
| | | | | | |
| Summary of Changes to the Consolidated Statements of Cash Flows | Nine Months Ended Sep 30, 2016 |
| In millions | As filed | Updated |
| Operating Activities | | |
| Net periodic pension benefit cost | $ | — |
| $ | 21 |
|
| Asbestos-related payments | $ | — |
| $ | (39 | ) |
| Other assets and liabilities | $ | 254 |
| $ | 272 |
|
Consolidated Statements of Income
In the third quarter of 2017, the Corporation changed the presentation of certain line items on the face of the consolidated statements of income to conform to the presentation that was adopted for DowDuPont. Costs associated with integration and separation activities are now separately reported as “Integration and separation costs” and “Interest income” has been reclassified to “Sundry income (expense) - net.” The changes were retrospectively applied and are summarized below:
|
| | | | | | | | | | | | |
| Summary of Changes to the Consolidated Statements of Income | Three Months Ended | Nine Months Ended |
| | Sep 30, 2016 | Sep 30, 2016 | Sep 30, 2016 | Sep 30, 2016 |
| In millions | As Filed | Updated | As Filed | Updated |
| Sundry income (expense) - net | $ | (14 | ) | $ | (10 | ) | $ | 10 |
| $ | 20 |
|
| Interest income | $ | 4 |
| $ | — |
| $ | 10 |
| $ | — |
|
NOTE 2 - RECENT ACCOUNTING GUIDANCE
Accounting Guidance Issued But Not Yet Adopted at SeptemberJune 30, 20172020
In May 2014,December 2019, the Financial Accounting Standards Board ("FASB"(“FASB”) issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers2019-12, "Income Taxes (Topic 606),740): Simplifying the Accounting for Income Taxes." which isThe amendments simplify the new comprehensive revenue recognition standard that will supersede all existing revenue recognition guidance under U.S. GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchangeaccounting for those goods or services. ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," issued in August 2015, revised the effective date for this ASU to annual and interim periods beginning on or after December 15, 2017, with early adoption permitted, but not earlier than the original effective date of annual and interim periods beginning on or after December 15, 2016, for public entities. Entities will have the option of using either a full retrospective approach or a modified approach to adopt the guidance in ASU 2014-09.
In May 2014, the FASB and International Accounting Standards Board formed The Joint Transition Resource Group for Revenue Recognition ("TRG"), consisting of financial statement preparers, auditors and users, to seek feedback on potential issues relatedincome taxes by removing certain exceptions to the implementationgeneral principles of the new revenue standard. As a result of feedback from the TRG, the FASB issued additional guidance to provide clarification, implementation guidanceTopic 740, "Income Taxes" and practical expedients to address some of the challenges of implementation. In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)," which is an amendment on assessing whether an entity is a principal or
Union Carbide Corporationimprove consistent application by clarifying and Subsidiaries
Notes to the Consolidated Financial Statements
an agent in a revenue transaction. This amendment addresses issues to clarify the principal versus agent assessment and lead to more consistent application. In April 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing," which contains amendments to the new revenue recognition standard on identifying performance obligations and accounting for licenses of intellectual property. The amendments related to identifying performance obligations clarify when a promised good or service is separately identifiable and allows entities to disregard items that are immaterial in the context of a contract. The licensing implementation amendments clarify how an entity should evaluate the nature of its promise in granting a license of intellectual property, which will determine whether revenue is recognized over time or at a point in time. In May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients," which provides clarity and implementation guidance on assessing collectibility, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. The new standards have the same effective date and transition requirements as ASU 2014-09.
The Corporation has a team in place to analyze ASU 2014-09 and the related ASU's across all revenue streams to evaluate the impact of the new standard on revenue contracts. This includes reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements under the new standard. The Corporation is completing contract evaluations and validating the results of applying the new revenueamending existing guidance. The Corporation is in the process of finalizing its accounting policies, drafting the new disclosures, quantifying the potential financial adjustment and completing its evaluation of the impact of the accounting and disclosure requirements on business processes, controls and systems. Full implementation will be completed by the end of 2017. Based on analysis completed to date, the Corporation expects the potential impact on the recognition of revenue from product sales and licensing arrangements to remain substantially unchanged. The Corporation expects to adopt the new standard using the modified retrospective approach, under which the cumulative effect of initially applying the new guidance is recognized as an adjustment to the opening balance of retained earnings in the first quarter of 2018.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The new guidance requires that a lessee recognize assets and liabilities for leases with lease terms of more than twelve months and recognition, presentation and measurement in the financial statements will depend on its classification as a finance or operating lease. In addition, the new guidance will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. Lessor accounting remains largely unchanged from current U.S. GAAP but does contain some targeted improvements to align with the new revenue recognition guidance issued in 2014 (ASU 2014-09). The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, using a modified retrospective approach, and early2020. Early adoption is permitted. The Corporation has a team in placepermitted, with the amendments to evaluate the new guidance and is in the process of implementing a software solution to facilitate the development of business processes and controls around leases to meet the new accounting and disclosure requirements upon adoption in the first quarter of 2019.
In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory," which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied on a retrospective, modified retrospective or prospective basis, through a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption. Early adoption is permitted in the first interim period of an annual reporting period for which financial statements have not been issued. The Corporation will adopt the new guidance in the first quarter of 2018 and the adoption of this guidance will not have a material impactdepending on the Consolidated Financial Statements.
In February 2017, the FASB issued ASU 2017-05, "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets," which clarifies the scope of guidance on nonfinancial asset derecognition in Accounting Standards Codification 610-20 and the accounting for partial sales of nonfinancial assets. The new guidance also conforms the derecognition guidance for nonfinancial assets with the model in the new revenue standard (ASU 2014-09). The new standard is effective for annual reporting periods, and interim periods within those fiscal years, beginning after December 15, 2017, and an entity is required to apply the amendments at the same time that it applies the amendments in ASU 2014-09. The Corporation is planning to apply the new guidance with the implementation of the new revenue standard in the first quarter of 2018.
In March 2017, the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which amends the requirements related to the income statement presentation of the components of net periodic benefit cost for employer sponsored defined benefit pension and other
Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
postretirement benefit plans. Under the new guidance, an entity must disaggregate and present the service cost component of the net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period, and only the service cost component will be eligible for capitalization. Other components of net periodic benefit cost will be presented separately from the line item(s) that includes the service cost. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted at the beginning of an annual period in which the financial statements have not been issued. Entities must use a retrospective transition method to adopt the requirement for separate presentation of the income statement service cost and other components, and a prospective transition method to adopt the requirement to limit the capitalization of benefit cost to the service component.specific amendment. The Corporation is currently evaluating the impact of adopting this guidance.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The amendments provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments are intended to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. The new standard is effective March 12, 2020 through December 31, 2022, with the adoption date being dependent upon the Corporation’s election. The Corporation is currently evaluating the impact of adopting this guidance.
NOTE 3 - RESTRUCTURING AND ASSET RELATED CHARGES - NETBUSINESS SEPARATION
On April 1, 2019, DowDuPont completed the separation of its materials science business and Dow Inc. became the direct parent company of TDCC. UCC remains a wholly owned subsidiary of TDCC.
In September 2017, the Corporation approved restructuring actions that arefirst quarter of 2019, in anticipation of DowDuPont's intended separation of its materials science business, UCC's assets and liabilities aligned with DowDuPont’s synergy targets.TDCC's specialty products business were transferred to TDCC as part of the internal reorganization steps to align TDCC's specialty products business to DowDuPont. In order to align entity ownership under TDCC, UCC distributed shares and assets to TDCC through dividends or asset distributions. As a result, in February 2019, UCC issued to TDCC a dividend of 1,067 shares of common stock of Dow International Holdings Company (“DIHC”), a cost method investment, resulting in a reduction in "Investments in related companies" of $401 million. UCC also transferred, as an asset distribution, the assets and liabilities aligned with TDCC's specialty products business for an additional dividend of $71 million to TDCC. The results of these actions, the Corporation recorded a pretax restructuring charge for severancetransactions are reflected in “Investments in related companies” and related benefit costs of $8 million in the third quarter of 2017. The impact of this charge is shown as “Restructuring and asset related charges - net”“Retained earnings” in the consolidated statements of income. These actions are expected to be substantially completed by September 30, 2019. At September 30, 2017, severance of $1 million was paid, leaving a liability of $7 million.balance sheets. See Note 12 for additional information.
The Corporation expects to incur additional costs inevaluated the future related to restructuring activities,impact of the specialty products product line transfer and determined it did not represent a strategic shift that had a major effect on the Corporation’s operations and financial results and did not qualify as UCC continually looks for ways to enhancean individually significant component of the efficiency and cost effectiveness of itsCorporation. As a result, this transfer was not reported as discontinued operations. The Corporation expects to incur additional employee-related costs, including involuntary termination benefits, related to its other optimization activities. These costs cannot be reasonably estimated at this time.
NOTE 4 - INCOME TAXESREVENUE
A transactionSubstantially all of the Corporation's revenue is generated by sales to TDCC. Products are sold to and purchased from TDCC at market-based prices in accordance with the terms of an agreement between UCC and TDCC. The Corporation's revenue related to sales of product was approximately 98 percent for the salethree months ended June 30, 2020 and 99 percent for the six months ended June 30, 2020 (99 percent for the three and six months ended June 30, 2019); the remaining revenue primarily related to the licensing of stock betweenpatents and technology. The Corporation sells its products to TDCC to simplify the customer interface process.
The Corporation’s contract liabilities include payments received in advance of performance under long-term contracts for product sales and royalties with remaining contract terms that range up to 21 years. Amounts are recognized in revenue when the performance obligations for the contract are met. The Corporation has rights to additional consideration when product is delivered to the customer. The balance of contract liabilities was $39 million at June 30, 2020 ($41 million at December 31, 2019), of which $3 million ($4 million at December 31, 2019) was included in "Accrued and Dowother current liabilities" and $36 million ($37 million at December 31, 2019) was included in 2014 created a gain that was initially deferred for tax purposes. This deferred gain became taxable as a result of activities executed in anticipation of the intended separation of DowDuPont into three publicly traded companies. As a result, in the third quarter of 2017, the Corporation increased “Income taxes payable”"Other noncurrent obligations" in the consolidated balance sheetssheets.
The Corporation disaggregates its revenue from contracts with customers by type of customer (sales to related parties and recorded a chargesales to “Provision for income taxes”trade customers) as presented in the consolidated statements of income and believes this disaggregation best depicts the nature, amount, timing and uncertainty of $97 million.
The total amountits revenue and cash flows. Substantially all of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $1 million at September 30, 2017 and $1 million at December 31, 2016. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $1 million at September 30, 2017 and $1 million at December 31, 2016.
In the second quarter of 2016, an adjustment wasproduct sales are made to a reserve for a tax matter regarding a historical change in the legal ownership structure of a former nonconsolidated affiliate. The adjustment arose due to legal proceedingsCorporation's parent company, TDCC, and the Corporation’s ongoing assessment of the unrecognized tax benefits, which resulted in an unfavorable impact of $57 million to “Provision for income taxes” in the consolidated statements of income.
Interestthere are no unique economic factors that affect revenue recognition and penaltiescash flows associated with uncertain tax positions are recognized as components of "Provision for income taxes" in the consolidated statements of income which totaled an insignificant amount for the three months ended September 30, 2017 and 2016. In the nine months ended September 30, 2017, the Corporation recognized a benefit of $2 million for interest and penalties (a charge of $82 million in the nine months ended September 30, 2016).these product sales.
The Corporation is included in Dow's consolidated federal income tax group and consolidated tax return. Current and deferred tax expenses are calculated for the Corporation as a stand-alone group and are allocated to the group from the consolidated totals. UCC is currently under examination in a number of tax jurisdictions, including the U.S. federal and various state jurisdictions. Positions challenged by the tax authorities may be settled or appealed by the Corporation. As a result, there is an uncertainty in income taxes recognized in the Corporation’s financial statements in accordance with accounting for income taxes and accounting for uncertainty in income taxes. Net reductions to the Corporation’s global unrecognized tax benefits are not expected to be material within the next twelve months.
Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 5 - INVENTORIES
The following table provides a breakdown of inventories:
| | | | | | | | |
| Inventories | Jun 30,
2020 | Dec 31,
2019 |
| In millions | | |
| Finished goods | $ | 146 | | $ | 162 | |
| Work in process | 22 | | 31 | |
| Raw materials | 43 | | 47 | |
| Supplies | 88 | | 92 | |
| Total | $ | 299 | | $ | 332 | |
| Adjustment of inventories to a LIFO basis | (72) | | (85) | |
| Total inventories | $ | 227 | | $ | 247 | |
|
| | | | | | |
Inventories
| Sep 30,
2017 | Dec 31,
2016 |
| In millions |
| Finished goods | $ | 210 |
| $ | 186 |
|
| Work in process | 44 |
| 38 |
|
| Raw materials | 53 |
| 50 |
|
| Supplies | 79 |
| 87 |
|
| Total | $ | 386 |
| $ | 361 |
|
| Adjustment of inventories to a LIFO basis | (87 | ) | (54 | ) |
| Total inventories | $ | 299 |
| $ | 307 |
|
NOTE 6 - INTANGIBLE ASSETS
The following table provides information regarding the Corporation’s intangible assets:
| | | | | | | | | | | | | | | | | | | | |
| Intangible Assets | Jun 30, 2020 | | | Dec 31, 2019 | | |
| In millions | Gross
Carrying Amount | Accumulated Amortization | Net | Gross
Carrying Amount | Accumulated Amortization | Net |
| Intangible assets with finite lives: | | | | | | |
| Developed technology | $ | 33 | | $ | (33) | | $ | — | | $ | 33 | | $ | (33) | | $ | — | |
| Software | 81 | | (61) | | 20 | | 79 | | (57) | | 22 | |
| Total intangible assets | $ | 114 | | $ | (94) | | $ | 20 | | $ | 112 | | $ | (90) | | $ | 22 | |
|
| | | | | | | | | | | | | | | | | | |
| Intangible Assets | Sep 30, 2017 | Dec 31, 2016 |
| In millions | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net |
| Intangible assets with finite lives: | | | | | | |
| Licenses and intellectual property | $ | 33 |
| $ | (33 | ) | $ | — |
| $ | 33 |
| $ | (33 | ) | $ | — |
|
| Software | 73 |
| (47 | ) | 26 |
| 70 |
| (45 | ) | 25 |
|
| Total intangible assets | $ | 106 |
| $ | (80 | ) | $ | 26 |
| $ | 103 |
| $ | (78 | ) | $ | 25 |
|
Total estimated amortization expense for 20172020 and the five succeeding fiscal years, including amounts expected to be capitalized, is as follows:
| | | | | |
| Estimated Amortization Expense | |
| In millions | |
| 2020 | $ | 8 | |
| 2021 | $ | 6 | |
| 2022 | $ | 5 | |
| 2023 | $ | 3 | |
| 2024 | $ | 1 | |
| 2025 | $ | — | |
|
| | | |
Estimated Amortization Expense
|
| In millions |
| 2017 | $ | 4 |
|
| 2018 | $ | 6 |
|
| 2019 | $ | 6 |
|
| 2020 | $ | 6 |
|
| 2021 | $ | 4 |
|
| 2022 | $ | 2 |
|
Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES
Environmental Matters
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies.
At SeptemberJune 30, 2017,2020, the Corporation had accrued obligations of $119$126 million for probable environmental remediation and restoration costs, including $20$19 million for the remediation of Superfund sites. These obligations are included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the consolidated balance sheets. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Corporation has accrued liabilities, although it is reasonably possible that the ultimate cost with respect to these particular matters could range up to approximately threetwo and a half times that amount. Consequently, it is reasonably possible that environmental remediation and restoration costs in excess of amounts accrued could have a material impact on the Corporation's results of operations, financial condition and cash flows. It is the opinion of the Corporation’s management that the possibility is remote that costs in excess of the range disclosed will have a material impact on the Corporation’s results of operations, financial condition and cash flows. Inherent uncertainties exist in these estimates primarily due to unknown environmental conditions, changing governmental regulations and legal standards regarding liability, and emerging remediation technologies for handling site remediation and restoration. As new or additional information becomes available and/or certain spending trends become known, management will evaluate such information in determination of the current estimate of the environmental liability. At December 31, 2016,2019, the Corporation had accrued obligations of $145$132 million for probable environmental remediation and restoration costs, including $20 million for the remediation of Superfund sites.
Litigation
The Corporation is involved in a number of legal proceedings and claims with both private and governmental parties. These cover a wide range of matters, including, but not limited to: product liability; trade regulation; governmental regulatory proceedings; health, safety and environmental matters; employment; patents; contracts; taxes; and commercial disputes.
Asbestos-Related Matters
A descriptionsummary of asbestos-related matters can be found in Note 1314 to the Consolidated Financial Statements included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2016.2019.
Introduction
The Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that UCC sold in the past, alleged exposure to asbestos-containing products located on UCC’s premises and UCC’s responsibility for asbestos suits filed against a former UCC subsidiary, Amchem Products, Inc. ("Amchem"). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to the Corporation’s products.
The Corporation expects more asbestos-related suits to be filed against UCC and Amchem in the future, and will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.
Estimating the Asbestos-Related Liability
Since 2003, the Corporation has engaged Ankura Consulting Group, LLC ("Ankura"), a third party actuarial specialist, to review the Corporation's historical asbestos-related claim and resolution activity in order to assist UCC management in estimating the Corporation's asbestos-related liability. Each year, the Corporation requests Ankura has reviewed theto review its claim and resolution activity, including asbestos-related defense and processing costs, to determine the appropriateness of updating the most recent Ankura study. Historically, every other year beginning in October, Ankura has completed a full review and formal update to the most recent Ankura study.
Based on the review completed by Ankura in December 2016 Ankura study2019 and the Corporation's owninternal review of the data, and taking into account the change in accounting policy that occurred in the fourth quarter of 2016,process, the Corporation's total asbestos-related liability through the terminal year of 2049, including asbestos-related defense and processing costs, was $1,490$1,165 million at December 31, 2016,2019, and was included in “Asbestos-related liabilities - current” and “Asbestos-related liabilities - noncurrent” in the consolidated balance sheets.
Each quarter, the Corporation reviews claims filed, settled and dismissed, as well as average settlement and resolution costs by disease category. The Corporation also considers additional quantitative and qualitative factors such as the nature of pending claims, trial experience of the Corporation and other asbestos defendants, current spending for defense and processing costs, significant appellate rulings and legislative developments, trends in the tort system, and their respective effects on expected future
Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
resolution costs. UCC management considers all these factors in conjunction with the most recent Ankura study and determines whether a change in the estimate is warranted. Based on the Corporation's review of 20172020 activity, it was determined that no adjustment to the accrual was required at SeptemberJune 30, 2017.2020.
The Corporation’s total asbestos-related liability for pending and future claims and defense and processing costs was $1,398$1,133 million at SeptemberJune 30, 2017,2020, and approximately 1520 percent of the recorded claim liability related to pending claims and approximately 8580 percent related to future claims.
Summary
The Corporation's management believes the amounts recorded for the asbestos-related liability, (includingincluding defense and processing costs)costs, reflect reasonable and probable estimates of the liability based on current, known facts. However, future events, such as the number of new claims to be filed and/or received each year and the average cost of defending and disposing of each such claim, as well as the numerous uncertainties surrounding asbestos litigation in the United States over a significant period of time, could cause the actual costs for the Corporation to be higher or lower than those projected or those recorded. Any such event could result in an increase or decrease in the recorded liability.
Because of the uncertainties described above, the Corporation cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing UCC and Amchem. As a result, it is reasonably possible that an additional cost of disposing of asbestos-related claims, including future defense and processing costs, could have a material impact on the Corporation's results of operations and cash flows for a particular period and on the consolidated financial position.
Other Litigation Matters
The Corporation is also involved in a number of legal proceedings and claims with both private and governmental parties. These cover a wide range of matters, including, but not limited to: product liability; trade regulation; governmental tax and regulatory disputes; health, safety and environmental matters; employment matters; patent infringement; contracts; and commercial litigation. While it is not possible at this time to determine with certainty the ultimate outcome of any of the legal proceedings and claims referred to in this filing, management believes that the possibility is remote that the aggregate of all such other claims and lawsuits will have a material adverse impact on the results of operations, cash flows and financial position of the Corporation.
NOTE 8 - LEASES
For additional information on the Corporation's leases, see Note 15 to the Consolidated Financial Statements included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2019.
The components of lease cost for operating and finance leases for the three and six months ended June 30, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | |
| Lease Cost | Three Months Ended | | Six Months Ended | |
| In millions | Jun 30, 2020 | Jun 30, 2019 | Jun 30, 2020 | Jun 30, 2019 |
| Operating lease cost | $ | 5 | | $ | 5 | | $ | 10 | | $ | 11 | |
| Short-term lease cost | 5 | | 7 | | 11 | | 14 | |
| Variable lease cost | 2 | | 2 | | 4 | | 2 | |
| | | | |
| Amortization of right-of-use assets - finance | 1 | | 1 | | 1 | | 1 | |
| | | | |
| Total lease cost | $ | 13 | | $ | 15 | | $ | 26 | | $ | 28 | |
The following table provides supplemental cash flow information related to leases:
| | | | | | | | |
| Other Lease Information | Six Months Ended | |
| In millions | Jun 30, 2020 | Jun 30, 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | |
| Operating cash flows for operating leases | $ | 10 | | $ | 11 | |
| Financing cash flows for finance leases | $ | 1 | | $ | — | |
The following table summarizes the lease-related assets and liabilities recorded in the consolidated balance sheets at June 30, 2020 and December 31, 2019:
| | | | | | | | | | | |
| Lease Position | Balance Sheet Classification | Jun 30, 2020 | Dec 31, 2019 |
| In millions | | | |
| Right-of-use assets obtained in exchange for lease obligations: | | | |
Operating leases 1 | | $ | 3 | | $ | 105 | |
| Assets | | | |
| Operating lease assets | Operating lease right-of-use assets | $ | 86 | | $ | 89 | |
| Finance lease assets | Property | 12 | | 12 | |
| Finance lease amortization | Accumulated depreciation | (7) | | (6) | |
| Total lease assets | | $ | 91 | | $ | 95 | |
| Liabilities | | | |
| Current | | | |
| Operating | Operating lease liabilities - current | $ | 16 | | $ | 16 | |
| Finance | Long-term debt due within one year | 1 | | 1 | |
| Noncurrent | | | |
| Operating | Operating lease liabilities - noncurrent | 70 | | 74 | |
| Finance | Long-Term Debt | 4 | | 5 | |
| Total lease liabilities | | $ | 91 | | $ | 96 | |
1. Includes $99 million for the period ended December 31, 2019 related to the adoption of ASU 2016-02, "Leases (Topic 842)," and the associated ASUs, in the first quarter of 2019.
| | | | | | | | |
| Lease Term and Discount Rate | Jun 30, 2020 | Dec 31, 2019 |
| Weighted-average remaining lease term | | |
| Operating leases | 6.0 years | 6.3 years |
| Finance leases | 4.0 years | 4.5 years |
| Weighted-average discount rate | | |
| Operating leases | 4.17 | % | 4.13 | % |
| Finance leases | 4.22 | % | 4.22 | % |
The following table provides the maturities of lease liabilities at June 30, 2020:
| | | | | | | | |
| Maturities of Lease Liabilities | Jun 30, 2020 | |
| Operating Leases | Finance Leases |
| In millions | | |
| 2020 | $ | 10 | | $ | 1 | |
| 2021 | 18 | | 2 | |
| 2022 | 16 | | 1 | |
| 2023 | 14 | | 1 | |
| 2024 | 13 | | 1 | |
| 2025 and thereafter | 27 | | — | |
| Total future undiscounted lease payments | $ | 98 | | $ | 6 | |
| Less imputed interest | 12 | | 1 | |
| Total present value of lease liabilities | $ | 86 | | $ | 5 | |
At June 30, 2020, the Corporation had additional leases of approximately $16 million for equipment and a rail yard, which had not yet commenced. These leases are expected to commence in 2020 and 2021, with lease terms of up to 20 years.
NOTE 89 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table summarizeschanges in the changes and after-tax balances offor each component of accumulated other comprehensive loss ("AOCL") for the ninethree and six months ended SeptemberJune 30, 20172020 and 2016:2019 were as follows:
| | | | | | | | | | | | | | |
| Accumulated Other Comprehensive Loss | Three Months Ended | | Six Months Ended | |
| In millions | Jun 30, 2020 | Jun 30, 2019 | Jun 30, 2020 | Jun 30, 2019 |
| Cumulative Translation Adjustment | | | | |
| Beginning balance | $ | (53) | | $ | (57) | | $ | (56) | | $ | (57) | |
| Gains on foreign currency translation | — | | — | | 3 | | — | |
| | | | |
| | | | |
| | | | |
| | | | |
| Ending balance | $ | (53) | | $ | (57) | | $ | (53) | | $ | (57) | |
| Pension and Other Postretirement Benefits | | | | |
| Beginning balance | $ | (1,589) | | $ | (1,489) | | $ | (1,609) | | $ | (1,504) | |
| | | | |
| | | | |
| | | | |
Amortization and recognition of net loss 1 | 25 | | 19 | | 51 | | 38 | |
Less: Tax expense (benefit) 2 | (6) | | (5) | | (12) | | (9) | |
| Other comprehensive income, net of tax | 19 | | 14 | | 39 | | 29 | |
| | | | |
| Ending balance | $ | (1,570) | | $ | (1,475) | | $ | (1,570) | | $ | (1,475) | |
| Total AOCL ending balance | $ | (1,623) | | $ | (1,532) | | $ | (1,623) | | $ | (1,532) | |
1. These AOCL components are included in the computation of net periodic benefit cost of the Corporation's defined benefit pension and other postretirement benefit plans. See Note 10 for additional information.
2. Reclassified to "Provision for income taxes."
NOTE 10 - PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
|
| | | | | | | | | |
| Accumulated Other Comprehensive Loss | Cumulative Translation Adj | Pension and Other Postretire Benefits | Accum Other Comp Loss |
| In millions |
| Balance at Jan 1, 2016 | $ | (61 | ) | $ | (1,167 | ) | $ | (1,228 | ) |
| Amounts reclassified from accumulated other comprehensive income | — |
| 32 |
| 32 |
|
| Net other comprehensive income | — |
| 32 |
| 32 |
|
| Balance at Sep 30, 2016 | $ | (61 | ) | $ | (1,135 | ) | $ | (1,196 | ) |
| | | | |
| Balance at Jan 1, 2017 | $ | (62 | ) | $ | (1,258 | ) | $ | (1,320 | ) |
| Other comprehensive income before reclassifications | 1 |
| — |
| 1 |
|
| Amounts reclassified from accumulated other comprehensive income | 3 |
| 36 |
| 39 |
|
| Net other comprehensive income | 4 |
| 36 |
| 40 |
|
| Balance at Sep 30, 2017 | $ | (58 | ) | $ | (1,222 | ) | $ | (1,280 | ) |
Union Carbide Corporationthe Corporation's pension and Subsidiaries
Notesother postretirement benefit plans can be found in Note 17 to the Consolidated Financial Statements included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2019. The following table provides the components of the Corporation's net periodic benefit cost for all significant plans:
| | | | | | | | | | | | | | |
| Net Periodic Benefit Cost for All Significant Plans | Three Months Ended | | Six Months Ended | |
| In millions | Jun 30,
2020 | Jun 30,
2019 | Jun 30,
2020 | Jun 30,
2019 |
| Defined Benefit Pension Plans: | | | | |
| Service cost | $ | 8 | | $ | 9 | | $ | 17 | | $ | 18 | |
| Interest cost | 28 | | 36 | | 56 | | 72 | |
| Expected return on plan assets | (50) | | (53) | | (100) | | (106) | |
| Amortization of net loss | 27 | | 21 | | 54 | | 42 | |
| Net periodic benefit cost | $ | 13 | | $ | 13 | | $ | 27 | | $ | 26 | |
| | | | |
| Other Postretirement Benefit Plan: | | | | |
| Service cost | $ | 1 | | $ | — | | $ | 1 | | $ | — | |
| Interest cost | 2 | | 2 | | 3 | | 4 | |
| Amortization of net gain | (2) | | (2) | | (3) | | (4) | |
| Net periodic benefit cost | $ | 1 | | $ | — | | $ | 1 | | $ | — | |
Net periodic benefit cost, other than the service cost component, is included in "Sundry income (expense) - net" in the consolidated statements of income.
The tax effects on the net activity related to each component of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2017 and 2016 were as follows:
|
| | | | | | | | | | | | |
| Tax Benefit | Three Months Ended | Nine Months Ended |
| In millions | Sep 30, 2017 | Sep 30, 2016 | Sep 30, 2017 | Sep 30, 2016 |
| Pension and other postretirement benefits | $ | 6 |
| $ | 6 |
| $ | 22 |
| $ | 20 |
|
A summary of the reclassifications out of accumulated other comprehensive loss for the three and nine months ended September 30, 2017 and 2016 is provided as follows:
|
| | | | | | | | | | | | | |
| Reclassifications Out of Accumulated Other Comprehensive Loss | Three Months Ended | Nine Months Ended | Consolidated Statements of Income Classification |
| Sep 30, 2017 | Sep 30, 2016 | Sep 30, 2017 | Sep 30, 2016 |
| In millions |
| Cumulative translation adjustments | $ | — |
| $ | — |
| $ | 3 |
| $ | — |
| See (1) below |
| Pension and other postretirement benefits | 18 |
| 17 |
| 58 |
| 52 |
| See (2) below |
| Tax benefit | (6 | ) | (6 | ) | (22 | ) | (20 | ) | See (3) below |
| After-tax | 12 |
| 11 |
| 36 |
| 32 |
| |
| Total reclassifications for the period, after-tax | $ | 12 |
| $ | 11 |
| $ | 39 |
| $ | 32 |
| |
| |
1. | "Sundry income (expense) - net." |
| |
2. | Included in the computation of net periodic benefit cost of the Corporation's pension and other postretirement plans. See Note 9 for additional information. |
| |
3. | "Provision for income taxes." |
NOTE 9 - PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
|
| | | | | | | | | | | | |
| Net Periodic Benefit Cost for All Significant Plans | Three Months Ended | Nine Months Ended |
| In millions | Sep 30,
2017 | Sep 30,
2016 | Sep 30,
2017 | Sep 30,
2016 |
| Defined Benefit Pension Plans: | | | | |
| Service cost | $ | 10 |
| $ | 9 |
| $ | 28 |
| $ | 27 |
|
| Interest cost | 33 |
| 33 |
| 97 |
| 99 |
|
| Expected return on plan assets | (56 | ) | (54 | ) | (166 | ) | (162 | ) |
| Amortization of net loss | 20 |
| 19 |
| 62 |
| 57 |
|
| Net periodic benefit cost | $ | 7 |
| $ | 7 |
| $ | 21 |
| $ | 21 |
|
| | | | | |
| Other Postretirement Benefits: | | | | |
| Interest cost | $ | 2 |
| $ | 2 |
| $ | 6 |
| $ | 6 |
|
| Amortization of net gain | (2 | ) | (2 | ) | (4 | ) | (5 | ) |
| Net periodic benefit cost | $ | — |
| $ | — |
| $ | 2 |
| $ | 1 |
|
Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 1011 - FINANCIAL INSTRUMENTS
InvestmentsFAIR VALUE MEASUREMENTS
The Corporation's investments in marketable securitiesfinancial instruments are classified as available-for-sale. Proceeds from sales of available-for-sale securities were $2 million forLevel 2 measurements. For assets and liabilities classified as Level 2 measurements, where the nine-month period ended September 30, 2017 ($2 million in proceeds from the maturity of marketable securities for the nine-month period ended September 30, 2016).
For securitiessecurity is frequently traded in less active markets, fair value is based on the closing price at the end of the period; where the security is less frequently traded, fair value is based on the price a dealer would pay for the security or similar securities, adjusted for any terms specific to that asset or liability, or by using observable market data points of similar, more liquid securities to imply the price. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance/quality checks.
The following table summarizes the fair value of the Corporation's financial instruments at June 30, 2020 and December 31, 2019: |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value of Financial Instruments | Sep 30, 2017 | Dec 31, 2016 |
| In millions | Cost | Gain | Loss | Fair Value | Cost | Gain | Loss | Fair Value |
| Cash equivalents | $ | 9 |
| $ | — |
| $ | — |
| $ | 9 |
| $ | 7 |
| $ | — |
| $ | — |
| $ | 7 |
|
Debt securities 1 | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 2 |
| $ | — |
| $ | — |
| $ | 2 |
|
| Long-term debt including debt due within one year | $ | (475 | ) | $ | — |
| $ | (134 | ) | $ | (609 | ) | $ | (476 | ) | $ | — |
| $ | (95 | ) | $ | (571 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value of Financial Instruments | Jun 30, 2020 | | | | Dec 31, 2019 | | | |
| In millions | Cost | Gain | Loss | Fair Value | Cost | Gain | Loss | Fair Value |
Cash equivalents 1 | $ | 10 | | $ | — | | $ | — | | $ | 10 | | $ | 10 | | $ | — | | $ | — | | $ | 10 | |
| | | | | | | | |
| Long-term debt including debt due within one year | $ | (473) | | $ | — | | $ | (102) | | $ | (575) | | $ | (474) | | $ | — | | $ | (115) | | $ | (589) | |
1. Marketable securities areMoney market fund is included in "Other investments""Cash and cash equivalents" in the consolidated balance sheets.sheets and held at amortized cost, which approximates fair value.
ForCost approximates fair value for all other financial instruments, cost approximates fair value.instruments.
NOTE 1112 - RELATED PARTY TRANSACTIONS
The Corporation sells its products to DowTDCC to simplify the customer interface process. Products are sold to and purchased from DowTDCC at market-based prices in accordance with the terms of Dow’s intercompany pricing policies.an agreement between UCC and TDCC. After each quarter, the Corporation and DowTDCC analyze the pricing used for the sales in that quarter and reach agreement on any necessary adjustments, at which point the prices are final. The Corporation also procures certain commodities and raw materials through a DowTDCC subsidiary and pays a commission to that DowTDCC subsidiary based on the volume and type of commodities and raw materials purchased. The commission expense iswas included in "Sundry income (expense) - net" in the consolidated statements of income. Purchases from that DowTDCC subsidiary were $377$206 million in the thirdsecond quarter of 20172020 ($379280 million in the thirdsecond quarter of 2016)2019) and $1,213$437 million induring the first ninesix months of 20172020 ($1,011614 million induring the first ninesix months of 2016)2019). The increasedecrease in purchase costs infor the first ninethree and six months of 2017ended June 30, 2020 when compared with the same periodperiods last year iswas primarily due to higherlower feedstock and energy costs.
The Corporation has a master services agreement with DowTDCC, whereby DowTDCC provides services including, but not limited to, accounting, legal,to: accounting; legal; treasury (investments, cash management, risk management, insurance), procurement,; procurement; human resources, environmental,resources; environmental; health and safetysafety; and business management for UCC. Under the master services agreement with Dow,TDCC, general administrative and overhead type services that DowTDCC routinely allocates to various businesses are charged to UCC. The master services agreement cost allocation basis is headcount and includes a 10 percent service fee. This agreement resulted in expense of $8 million in the thirdsecond quarter of 20172020 ($76 million in the thirdsecond quarter of 2016)2019) and $24$16 million infor the first ninesix months of 20172020 ($2112 million infor the first ninesix months of 2016)2019) for general administrative and overhead type services and the 10 percent service fee, included in "Sundry income (expense) - net" in the consolidated statements of income. The remaining activity-based costs were $20$24 million in the thirdsecond quarter of 20172020 ($1921 million in the thirdsecond quarter of 2016)2019) and $60$47 million infor the first ninesix months of 20172020 ($5344 million infor the first ninesix months of 2016)2019), and were included in "Cost of sales" in the consolidated statements of income.
Management believes the method used for determining expenses charged by DowTDCC is reasonable. DowTDCC provides these services by leveraging its centralized functional service centers to provide services at a cost that management believes provides an advantage to the Corporation.
The monitoring and execution of risk management policies related to interest rate and foreign currency risks, which are based on Dow’sTDCC’s risk management philosophy, are provided as a service to UCC.
As part of Dow’sTDCC’s cash management process, UCC is a party to revolving loans with DowTDCC that have interest rates based on LIBOR (London Interbank Offered Rate) with varying maturities. At SeptemberJune 30, 2017,2020, the Corporation had a note receivable of
Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
$1.2 $1.6 billion ($1.41.5 billion at December 31, 2016)2019) from DowTDCC under a revolving loan agreement. The Corporation may draw from this note receivable in support of its daily working capital requirements and, as such, the net effect of cash inflows and outflows under this revolving loan agreement is presented in the consolidated statements of cash flows as an operating activity.
The Corporation also has a separate revolving credit agreement with DowTDCC that allows the Corporation to borrow or obtain credit enhancements up to an aggregate of $1 billion that matures on December 30, 2017. Dow2020. TDCC may demand repayment with a 30-day written notice to the Corporation, subject to certain restrictions. A related collateral agreement provides for the replacement of certain existing pledged assets, primarily equity interests in various subsidiaries, with cash collateral. At SeptemberJune 30, 2017, $9492020, $937 million was available under the revolving credit agreement ($947937 million at December 31, 2016)2019). The cash collateral iswas reported as “Noncurrent receivables from related companies” in the consolidated balance sheets.
On a quarterly basis, the Corporation's Board of Directors (the "Board") reviews and determines if there will be a dividend distribution to its parent company and sole shareholder, Dow.TDCC. The Board takes into consideration the level of earnings and cash flows, among other factors, in determining the amount of the dividend distribution. In the thirdsecond quarter of 2017,2020, the Corporation declared and paid a cash dividend of $181$81 million to Dow;TDCC; cash dividends to DowTDCC totaled $531$162 million infor the first ninesix months of 2017.2020. In the thirdsecond quarter of 2016,2019, the Corporation declared and paid a cash dividend of $55$178 million to Dow;TDCC; cash dividends to DowTDCC totaled $455$338 million infor the first ninesix months of 2016.2019.
NOTE 12 - MERGER WITH DUPONT
Effective August 31, 2017, Dow and DuPont completedIn the previously announced mergerfirst quarter of equals transaction contemplated by the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017 (the "Merger Agreement"), by and among Dow, DuPont, DowDuPont, Diamond Merger Sub, Inc. and Orion Merger Sub, Inc. Pursuant to the Merger Agreement, (i) Diamond Merger Sub, Inc. was merged with and into Dow, with Dow surviving the merger as a subsidiary of DowDuPont (the "Diamond Merger") and (ii) Orion Merger Sub, Inc. was merged with and into DuPont, with DuPont surviving the merger as a subsidiary of DowDuPont (the "Orion Merger" and, together with the Diamond Merger, the "Mergers"). Following the consummation2019, in anticipation of the Mergers, each of Dow and DuPont became subsidiaries of DowDuPont (collectively, the "Merger"). Following the Merger, Dow and DuPont intendbusiness separation activities to pursue, subject to the receipt of regulatory approvals and approval by the board of directors of DowDuPont ("DowDuPont Board"), the separation of the combined company's agriculture business,align TDCC's specialty products business with DowDuPont, UCC issued a stock dividend to TDCC for 63.4 percent of its ownership interest in DIHC, a cost method investment, which totaled $401 million. UCC also distributed assets and materials science business through one or more tax-efficient transactions ("Intended Business Separations").
On August 31, 2017, following the Diamond Merger, Dow requested that the New York Stock Exchange ("NYSE") withdraw the shares of Dow Common Stock from listing on the NYSE and file a Form 25liabilities aligned with the U.S. Securities and Exchange Commission ("SEC") to report that the shares of Dow Common Stock are no longer listed on the NYSE. The shares of Dow Common Stock were suspended from trading on the NYSE prior to the open of trading on September 1, 2017.
On September 12, 2017, DowDuPont announced that the DowDuPont Board and management, with the assistance of independent advisors, completed their comprehensive review of the portfolio composition of the three intended independent companies. The DowDuPont Board unanimously concluded that, in light of knowledge gained since the announcement of the proposed merger of equals, certain targeted adjustments will be made between the materials science and specialty products businesses, which will enhance the competitive advantages of the intended resulting companies. As a result of this change, it is expected that a portion of UCC's business will move to theTDCC's specialty products business as partfor an additional dividend to TDCC of $71 million. See Note 3 for additional information.
NOTE 13 - SUBSEQUENT EVENT
On July 2, 2020, TDCC entered into a definitive agreement to sell its rail infrastructure assets and related equipment at certain sites in the intended spin-off transactions,U.S. & Canada for expected cash proceeds in excess of $310 million. Included in the transaction are certain assets and equipment located at UCC's sites in St. Charles, Louisiana and Seadrift, Texas. TDCC will also enter into long-term service agreements with the buyer for the continuation of certain rail-related services for TDCC's and UCC's existing operations at these sites. The transaction is expected to close in the fourth quarter of 2020, subject to customary closing conditions, and the Corporation does not expect the intended spin-off transactionsexpects to haverecord a material impactgain on the Consolidated Financial Statements.transaction.
|
| | |
Union Carbide Corporation and Subsidiaries |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Pursuant to General Instruction H ofH(1)(a) and (b) for Form 10-Q "Omission of Information by Certain Wholly-Owned Subsidiaries," the Corporation is filing this section includes only management's narrative analysis of the results of operations for the nine-month period ended September 30, 2017, the most recent period, comparedForm 10-Q with the nine-month period ended September 30, 2016, the corresponding period in the preceding fiscal year.a reduced disclosure format.
References to "Dow""TDCC" refer to The Dow Chemical Company and its consolidated subsidiaries, except as otherwise indicated by the context. Union Carbide Corporation (the "Corporation" or "UCC") has been a wholly owned subsidiary of TDCC since 2001. On April 1, 2019, DowDuPont Inc. (“DowDuPont” and effective June 3, 2019, n/k/a DuPont de Nemours, Inc.) completed the separation of its materials science business and Dow Inc. became the direct parent company of TDCC. The separation was contemplated by the merger of equals transaction effective August 31, 2017, under the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017. TDCC and E. I. du Pont de Nemours and Company and its consolidated subsidiaries ("Historical DuPont") each merged with subsidiaries of DowDuPont and, as a result, TDCC and Historical DuPont became subsidiaries of DowDuPont (the “Merger”). Subsequent to the Merger, TDCC and Historical DuPont engaged in a series of internal reorganization and realignment steps to realign their businesses into three subgroups: agriculture, materials science and specialty products. This included transferring certain Corporation assets and liabilities aligned with the specialty products business to TDCC (the "Business Separation"). Dow Inc. was formed as a wholly owned subsidiary of DowDuPont to serve as the holding company for the materials science business. UCC remains a wholly owned subsidiary of TDCC.
DowTDCC conducts its worldwide operations through global businesses. Union Carbide Corporation’s (the "Corporation" or "UCC")UCC's business activities comprise components of Dow’sTDCC’s global operationsbusinesses rather than stand-alone operations. Because there are no separable reportable business segments for UCC and no detailed business information is provided to a chief operating decision maker regarding the Corporation’s stand-alone operations, the Corporation’s results are reported as a single operating segment.
Statement on COVID-19 and Oil Price Volatility
Overview of UCC’s Response to COVID-19
The pandemic caused by coronavirus disease 2019 ("COVID-19") has impacted all geographic regions where UCC’s products are produced and sold. Financial markets were volatile towards the end of the first quarter and early in the second quarter of 2020, primarily due to uncertainty with respect to the severity and duration of the pandemic, coupled with fluctuations in crude oil prices due in part to the global spread of COVID-19. As the second quarter progressed, crude oil prices increased, driven by improved supply/demand fundamentals. Financial markets have also improved as economies in the U.S. and Western Europe have started to reopen.
Dow Inc. (together, with TDCC and its consolidated subsidiaries, “Dow”) directs global safety, crisis management and security protocols for all of Dow’s assets and workforce, which includes the assets and workforce of UCC. UCC’s primary manufacturing operations are in the United States, where efforts to contain the spread of COVID-19 resulted in significant mitigation measures, including social distancing and stay-at-home mandates, travel restrictions and/or bans, and restricted access to certain corporate facilities and manufacturing sites. The Corporation’s manufacturing facilities in the United States have been designated essential operations by state and local governments and all of UCC’s manufacturing sites and facilities, including its smaller sites in Asia Pacific, continue to operate and are doing so safely, having implemented social distancing and enhanced health, safety and sanitization measures as directed by Dow’s regional Crisis Management Teams (“CMTs”). The CMTs continue to work closely with site leadership and are adjusting alert levels as warranted on a site by site basis. UCC has also implemented necessary procedures to enable the workforce not essential to site operations to work remotely. The CMTs have initiated the implementation of Dow’s comprehensive Return to Workplace plan that is tailored for each site and includes a number of health and safety measures to be followed in a gradual and phased approach. The Corporation is also encouraging its workforce to follow safety measures when away from work to help prevent community spread of COVID-19.
During this public health crisis, UCC is focused on the health and safety of its employees, contractors, customers and suppliers around the world and maintaining safe and reliable operations of its manufacturing sites. Although supply disruptions and related logistical issues have posed challenges across all modes of transportation, UCC’s manufacturing sites have continued to operate during the COVID-19 pandemic, with no significant impact to manufacturing whether through shutdowns or shortages in labor, raw materials or personal protective equipment. Supply chain and logistical challenges are expected to ease through the remainder of 2020, absent significant impacts from COVID-19 infection resurgences.
Recognizing the significant impact the COVID-19 pandemic would have on demand in the second quarter of 2020, Dow took proactive measures to electively focus on cash and maintain financial strength with a continued emphasis on safe, reliable operations and disciplined capital allocation. In accordance with these actions, the Corporation reduced its 2020 capital expenditures target to approximately $130 million and temporarily idled one of the Corporation’s polyethylene production units in the U.S. to balance production to demand across markets more severely affected by restrained economic activity. Based on current demand, the polyethylene production unit has restarted.
Review of First Half 2020 Financial Impacts from COVID-19
The Corporation's sales declined 17 percent in the first six months of 2020, as the COVID-19 pandemic significantly impacted the global economy and supply/demand fundamentals. While demand has remained strong for products utilized in consumer applications, such as cleaning and detergent ingredients and food, health and hygiene packaging, the Corporation has experienced reduced demand for products used in durable good end-markets, such as automotive.
Local prices declined in the first quarter and continued to decline in the second quarter of 2020, largely impacted by lower global energy prices. In March and April 2020, crude oil prices declined significantly, due in part to the COVID-19 pandemic, coupled with increased supply from oil producers. Declines in crude oil prices impact the pace of oil drilling in the U.S. & Canada, which makes natural gas, a significant by-product of oil drilling and the primary feedstock used in the U.S. by UCC and other ethylene producers, less cost advantaged. The Corporation has feedstock flexibility, driven by manufacturing assets that have the ability to produce ethylene from natural gas liquids or crude oil-based feedstocks, and benefits from Dow's comprehensive financial and physical hedging programs. The Corporation's feedstock flexibility and fully integrated feedstock position enable the Corporation to proactively respond to the challenges from oil price volatility.
The Corporation experienced margin compression in the second quarter, largely due to lower global energy prices. In the latter half of the second quarter, crude oil prices increased as supply/demand fundamentals improved, driving higher feedstock costs which should be beneficial to product prices and margins in the third quarter of 2020. See Results of Operations in this report for additional discussion of results for the three and six months ended June 30, 2020.
In July 2020, Dow announced plans to take further disciplined actions, including plans to initiate a restructuring program in the third quarter of 2020, which is expected to impact the Corporation. These actions are necessary to maintain competitiveness while the economic recovery gains traction.
At the time of this filing, the ultimate severity and duration of the COVID-19 pandemic and oil price volatility cannot be reasonably estimated. The COVID-19 pandemic has had and could continue to have a substantial negative impact on the Corporation’s results of operations, financial condition and cash flows. The effects of the COVID-19 pandemic in the first six months of 2020 and the additional risks associated with these conditions are more fully discussed in this report in Part II, Item 1A, Risk Factors. The Corporation is actively monitoring for potential financial impacts from the COVID-19 pandemic and oil price volatility, including, but not limited to: evaluating the recoverability of its assets; enhancing cyber security monitoring; and evaluating ongoing appropriateness of its estimates.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the U.S. The Corporation continues to assess the provisions and potential impacts of this legislation; however, there have been no significant impacts to the Corporation's results of operations or financial position resulting from the CARES Act in the three and six months ended June 30, 2020.
RESULTS OF OPERATIONS
Net Sales
Total net sales were $1,215$870 million in the thirdsecond quarter of 20172020 compared with $1,248$1,039 million in the thirdsecond quarter of 2016,2019, a decrease of 316 percent. Total net sales were $3,835$1,912 million infor the first ninesix months of 20172020 compared with $3,721$2,317 million infor the first ninesix months of 2016, an increase2019, a decrease of 317 percent. Net sales to related companies, principally to Dow,TDCC, and based on market prices for the related products, were $1,184$849 million in the thirdsecond quarter of 20172020 compared with $1,221$992 million in the thirdsecond quarter of 2016,2019, a decrease of 314 percent. Net sales to related companies were $3,722$1,862 million in the first ninesix months of 20172020 compared with $3,644$2,242 million in the first ninesix months of 2016, an increase2019, a decrease of 217 percent.
Average selling prices increased 5price decreased 19 percent in the thirdsecond quarter of 20172020 compared with the same quarter last year. Price increasesdecreased across almost all products wereexcept polyglycols, primarily driven by tight market supply as a result of hurricane-related supply disruptions,in response to lower feedstock and other raw material costs, with the largest price increasesdecreases in polyethylene, plastics used for wire and cable applications, oxo alcohols, ethylene oxide/ethylene glycol ("EO/EG"), and glycol ethers. Despite the impact of the COVID-19 pandemic, volume was up 3 percent in the second quarter of 2020 compared with the second quarter of 2019 with increases in vinyl acetate monomers, oxo alcohols and vinyl acetate monomers. Total saleshome and personal care products, partially offset by volume was down 8 percentdecreases resulting from the divestiture of the Corporation's acetone derivatives product line in the thirdfourth quarter of 2017 compared with2019, and volume decreases in glycol ethers. Volume in the thirdsecond quarter of 2016 as a result of hurricane-related production disruptions and the impact of2019 was unfavorably impacted by planned maintenance turnarounds. Increases in sales volume in water soluble polymers and glutaraldehydes were more than offset by lower sales volume in electrical and telecommunications, polyethylene, EO/EG, glycol ethers and ethanolamines.turnaround activity at multiple production facilities.
In the first ninesix months of 2017,2020, average selling prices were up 5decreased 19 percent with price increases in most products compared with the first ninesix months of 2016, driven by higher2019, with price decreases across all products, primarily in response to lower feedstock energy and other raw material costs, with the largest decreases in polyethylene, oxo alcohols, glycol ethers, EO/EG and tight market supply as a resultethanolamines. Despite the impact of hurricane-related supply disruptions in the third quarter of 2017. SalesCOVID-19 pandemic, volume infor the first ninesix months of 20172020 was downup 2 percent when compared with the first ninesix months of 2016. Sales volume2019, with increases in EO/EG, driven by demand growth in the first quarter of 2020, polyethylene, which was impacted by railcar shortages in the first quarter of 2019, and vinyl acetate monomers, acrylic monomers and glutaraldehydeswhich was unfavorably impacted by planned maintenance turnaround activity in the second quarter of 2019. These volume increases were more thanpartially offset by lower sales volume decreases resulting from the divestiture of the Corporation's acetone derivatives product line in electricalthe fourth quarter of 2019 and telecommunications, EO/EG and oxo alcohols.the Business Separation.
Cost of Sales
Cost of sales were $991was $746 million in the thirdsecond quarter of 20172020 compared with $957$902 million in the thirdsecond quarter of 2016, an increase2019, a decrease of 417 percent. Cost of sales increased 12decreased 15 percent from $2,726$1,852 million in the first ninesix months of 20162019 to $3,056$1,572 million in the first ninesix months of 2017. Increases2020. The decline in cost of sales for the three-three and nine-month periodssix months ended SeptemberJune 30, 2017, were2020 was driven primarily by higherlower feedstock energy and other raw material costs, as well as increased planned maintenance turnaround spending when compared with the same periods last year, and hurricane-related production and supply disruptions and repair costsdivestiture of the Corporation's acetone derivatives product line in the thirdfourth quarter of 2017.2019 and the impact from the Business Separation.
Research and Development ("R&D"), Selling, General and Administrative ("SG&A") Expenses
R&D expenses were $4 million in the third quarter of 2017 compared with $5 million in the thirdsecond quarter of 2016. In2020, compared with $7 million in the same period last year. For the first ninesix months of 2017,2020, R&D expenses were $14$11 million flat when compared with $13 million in the first ninesix months of 2016.2019. SG&A expenses were $1$2 million in the thirdsecond quarter of 2017 and2020, compared with 0 in the thirdsame period last year due to a year-to-date adjustment in the second quarter of 2016. In2019. For the first ninesix months of 2017,2020, SG&A expenses were $4 million compared with $5$2 million in the first ninesix months of 2016.2019. The increase was driven primarily by administrative fees associated with ongoing service arrangements.
Restructuring and Asset Related Charges - Net
In the third quarter ofSeptember and November 2017, the Corporation approved restructuring actions that arewere aligned with DowDuPont’s synergy targets. As a result of these actions,the restructuring program has ended, the Corporation recorded a pretaxhad no additional restructuring chargecharges in the second quarter of 2020, compared with restructuring charges for severance and related benefit costs of $8$1 million in the third quarter of 2017. The impact of this charge is shown as “Restructuring and asset related charges - net” in the consolidated
|
| | |
Union Carbide Corporation and Subsidiaries |
statements of income. See Note 3 to the Consolidated Financial Statements for additional information on the Corporation's restructuring activities.
Equity in Earnings of Nonconsolidated Affiliate
Equity in earnings of a nonconsolidated affiliate was zero in the third quarter of 2017 and the first nine months of 2017, compared with zero in the third quarter of 2016 and $3 million in the first nine months of 2016. On March 16, 2017, UCC entered into a share sale and purchase agreement to sell its ownership interest in Asian Acetyls Co., Ltd. ("ASACCO"), a nonconsolidated affiliate accounted for under the equity method of accounting. ASACCO agreed to purchase all of the shares of registered common stock owned by UCC. On April 24, 2017, the sale was completed for proceeds of $22 million. In the second quarter of 2017,2019. For the six months ended June 30, 2020, the Corporation recorded a pretax gainrestructuring charges of $4$2 million onfor severance and related benefit costs, compared with $2 million for the sale, included in "Sundry income (expense) - net" in the consolidated statements of income.six months ended June 30, 2019.
Sundry Income (Expense) - Net
Sundry income (expense) – net includes a variety of income and expense items such as the gaingains or losslosses on foreign currency exchange, commissions, charges for management services provided by Dow, interest income,TDCC, non-operating pension and other postretirement benefit plan credits or costs, and gains and losses on sales of investments and assets. Sundry income (expense) - net in the thirdsecond quarter of 20172020 was expense of $8$22 million compared with expense of $10$18 million in the same quarter last year. InFor the first ninesix months of 2017,2020, sundry income (expense) -– net was incomeexpense of $6$40 million compared with incomeexpense of $20$39 million in the first ninesix months of 2016. Sundry income (expense) - net includes the pretax gains on the sales of land at the Corporation's Texas City, Texas, site2019. The increase in the second quarters of 2016 and 2017.
Texas City, Texas, Land Sales
On June 27, 2016, UCC signed agreements for the sale of excess land at the Texas City, Texas, manufacturing site. As a result,expense in the second quarter of 2016, UCC recorded2020 was primarily a pretax gainresult of $46 million onincreased expenses associated with the sale of one parcel of land. On April 3, 2017, the Corporation sold a second parcel of land, which also included terminal assets and ancillary agreements for the supply of energy and site and terminalmaster services and recorded a pretax gain of $23agreement with TDCC.
Interest Income
Interest income was $2 million in the second quarter of 2017.2020 ($9 million for the first six months of 2020) compared with$10 million in the second quarter of 2019 ($19 million for the first six months of 2019). The decrease in interest income primarily resulted from the impact of the significant drop in interest rates due to the current interest rate environment.
Interest Expense and Amortization of Debt Discount
Interest expense and amortization of debt discount was $6$11 million in the thirdsecond quarter of 2017 ($20 million in the first nine months of 2017)2020 compared with $7 million in the thirdsecond quarter of 2016 ($182019. For the first six months of 2020, interest expense and amortization of debt discount was $19 million compared with $14 million in the first ninesix months of 2016).2019. The increase in interest expense and amortization of debt discount was primarily due to the payment of interest and penalties in May 2020 to settle sales and use tax disputes in Seadrift, Texas and Texas City, Texas.
Provision for Income Taxes
The Corporation reported a tax provision of $152$18 million in the thirdsecond quarter of 2017,2020, which resulted in an effective tax rate of 77.6 percent. This20.9 percent, compared with a tax provision of $82$3 million in the thirdsecond quarter of 2016,2019, which resulted in an effective tax rate of 30.62.7 percent. InFor the first ninesix months of 2017,2020, the Corporation reported a tax provision of $337$59 million, which resulted in an effective tax rate of 45.8 percent. This21.6 percent, compared with a tax provision of $380$57 million infor the first ninesix months of 2016,2019, which resulted in an effective tax rate of 38.813.8 percent. The effective tax rate fluctuates based on, among other factors, where income is earned, dividends received from investments in related companies and the level of income relative to tax credits available.earned. The effective tax rate forwas favorably impacted in the third quarterthree and six months ended June 30, 2019, due to the restoration of 2017 was impactedtax basis in assets, driven by a deferred gain related to the sale of stock between UCC and Dow in 2014. The gain on the transaction was deferred for tax purposes, but with the activitiescourt judgment that were executed in anticipation of the intended separation of DowDuPont into three publicly traded companies, the gain became taxable, resulting in a charge to the tax provision of $97 million. In the second quarter of 2016,did not involve the Corporation, adjusted the reserve for uncertain tax positions for a tax matter regarding the historical changeand deductions allowed in the legal ownership structure of a former nonconsolidated affiliate, resulting in a chargeU.S. for certain sales to the tax provision of $57 million. See Note 4 to the Consolidated Financial Statements for additional information.foreign customers.
Net Income Attributable to UCC
The Corporation reported net income of $44$68 million in the thirdsecond quarter of 20172020 compared with $186$110 million in the thirdsecond quarter of 2016.2019. Net income infor the first ninesix months of 20172020 was $399$214 million compared with $599$355 million in the first ninesix months of 2016.2019.
Capital Expenditures
Capital spending in the thirdsecond quarter of 20172020 was $47$32 million ($14565 million for the first six months of 2020) compared with $45 million in the second quarter of 2019 ($105 million for the first ninesix months of 2017) compared with $55 million in the third quarter of 2016 ($173 million in the first nine months of 2016), reflecting2019). Capital spending decreased as spending for U.S. Gulf Coast projects and site infrastructure projects in both years.continues to trend down and the Corporation reduces its 2020 capital expenditures target to retain the financial strength of the Corporation and Dow Inc.
|
| | |
Union Carbide Corporation and Subsidiaries |
Subsequent Event - Sale of Rail Infrastructure Assets and Related Equipment
On July 2, 2020, TDCC entered into a definitive agreement to sell its rail infrastructure assets and related equipment at certain sites in the U.S. & Canada for expected cash proceeds in excess of $310 million. Included in the transaction are certain assets and equipment located at UCC's sites in St. Charles, Louisiana and Seadrift, Texas. TDCC will also enter into long-term service agreements with the buyer for the continuation of certain rail-related services for TDCC's and UCC's operations at these sites. The transaction is expected to close in the fourth quarter of 2020, subject to customary closing conditions, and the Corporation expects to record a gain on the transaction.
OTHER MATTERS
Recent Accounting Guidance
See Note 2 to the Consolidated Financial Statements for a summary of recent accounting guidance.
Critical Accounting PoliciesEstimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 1 to the Consolidated Financial Statements in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 20162019 ("20162019 10-K") describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. The Corporation’s critical accounting policies that are impacted by judgments, assumptions and estimates are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Corporation’s 20162019 10-K. Since December 31, 2016,2019, there have been no material changes in the Corporation’s critical accounting policies.policies that are impacted by judgments, assumptions and estimates.
Asbestos-Related Matters
The Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that UCC sold in the past, alleged exposure to asbestos-containing products located on UCC’s premises, and UCC’s responsibility for asbestos suits filed against a former UCC subsidiary, Amchem Products, Inc. ("Amchem"). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to UCC’s products.
The table below provides information regarding asbestos-related claims pending against the Corporation and Amchem based on criteria developed by UCC and its external consultants.consultants:
| | | | | | | | |
| Asbestos-Related Claim Activity | 2020 | 2019 |
| Claims unresolved at Jan 1 | 11,117 | | 12,780 | |
| Claims filed | 2,194 | | 2,819 | |
| Claims settled, dismissed or otherwise resolved | (2,488) | | (3,477) | |
| Claims unresolved at Jun 30 | 10,823 | | 12,122 | |
| Claimants with claims against both UCC and Amchem | (3,555) | | (4,217) | |
| Individual claimants at Jun 30 | 7,268 | | 7,905 | |
|
| | | | |
| Asbestos-Related Claim Activity | 2017 | 2016 |
| Claims unresolved at Jan 1 | 16,141 |
| 18,778 |
|
| Claims filed | 5,598 |
| 5,909 |
|
| Claims settled, dismissed or otherwise resolved | (6,560 | ) | (7,052 | ) |
| Claims unresolved at Sep 30 | 15,179 |
| 17,635 |
|
| Claimants with claims against both UCC and Amchem | (5,544 | ) | (6,444 | ) |
| Individual claimants at Sep 30 | 9,635 |
| 11,191 |
|
Plaintiffs' lawyers often sue numerous defendants in individual lawsuits or on behalf of numerous claimants. As a result, the damages alleged are not expressly identified as to UCC, Amchem or any other particular defendant, even when specific damages are alleged with respect to a specific disease or injury. In fact, there are no personal injury cases in which only the Corporation and/or Amchem are the sole named defendants. For these reasons and based upon the Corporation's litigation and settlement experience, the Corporation does not consider the damages alleged against it and Amchem to be a meaningful factor in its determination of any potential asbestos-related liability.
For additional information, see Asbestos-Related Matters in Note 7 to the Consolidated Financial Statements and Part II, Item 1. Legal Proceedings.
Debt Covenants and Default Provisions
The Corporation’s outstanding public debt has been issued under indentures which contain, among other provisions, covenants that the Corporation must comply with while the underlying notes are outstanding. Such covenants are typically based on the Corporation’s size and financial position and include, subject to the exceptions and qualifications contained in the indentures, obligations not to (i) allow liens on principal U.S. manufacturing facilities, (ii) enter into sale and lease-back transactions with respect to principal U.S. manufacturing facilities, or (iii) merge into or consolidate with any other entity or sell or convey all or substantially all of its assets. Failure of the Corporation to comply with any of these covenants could, after the passage of any applicable grace period, result in a default under the applicable indenture which would allow the note holders to accelerate the due date of the outstanding principal and accrued interest on the subject notes. Management believes the Corporation was in compliance with the covenants referred to above at SeptemberJune 30, 2017.2020.
|
| | |
Union Carbide Corporation and Subsidiaries |
Dividends
On a quarterly basis, the Corporation's Board of Directors (the "Board") reviews and determines if there will be a dividend distribution to its parent company and sole shareholder, Dow.TDCC. The Board takes into consideration the level of earnings and cash flows, among other factors, in determining the amount of the dividend distribution.
In the thirdsecond quarter of 2017,2020, the Corporation declared and paid a cash dividend of $181$81 million to Dow; dividends paid to Dow totaled $531TDCC ($162 million infor the first ninesix months of 2017.2020). In the thirdsecond quarter of 2016,2019, the Corporation declared and paid a cash dividend of $55$178 million to Dow; dividends paid to Dow totaled $455($338 million infor the first ninesix months of 2016.2019). On November 2, 2017,July 20, 2020, the UCC Board of Directors approved a dividend to DowTDCC of $72$25 million, payable on December 22, 2017.or before September 25, 2020.
In the first quarter of 2019, in anticipation of the business separation activities to align TDCC's specialty products business with DowDuPont, UCC issued a stock dividend to TDCC for 63.4 percent of its ownership interest in Dow International Holdings Company, a cost method investment, which totaled $401 million. UCC also distributed assets and liabilities aligned with TDCC's specialty products business for an additional dividend to TDCC of $71 million.
|
| | |
Union Carbide Corporation and Subsidiaries |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted pursuant to General Instruction H of Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation's Disclosure Committee and the Corporation's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures pursuant to paragraph (b) of Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Corporation's disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in the Corporation's internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 and 15d-15 that was conducted during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting.
Effective August 31, 2017, pursuant to the merger
PART II – | | |
Union Carbide Corporation and Subsidiaries PART II - OTHER INFORMATION |
ITEM 1. LEGAL PROCEEDINGS
Litigation
Asbestos-Related Matters
No material developments in asbestos-related matters occurred in the thirdsecond quarter of 2017.2020. For a current status of asbestos-related matters, see Note 7 to the Consolidated Financial Statements.
Environmental Proceedings
On October 23, 2019, UCC received a proposed Agreed Order from the Texas Commission on Environmental Quality (“TCEQ”) relating to emissions of ethylene oxide from a process leak at the Corporation's manufacturing facility in Seadrift, Texas. The proposed Agreed Order included an administrative penalty of $800,000. On December 30, 2019, the TCEQ sent a revised Agreed Order reducing the penalty to $600,000 based on UCC's corrective actions and allowing for half of the administrative penalty amount to be used to fund a Supplemental Environmental Project. UCC paid $300,000 in January 2020. The revised Agreed Order was approved by the TCEQ Commissioners on July 1, 2020.
ITEM 1A. RISK FACTORS
There wereSince December 31, 2019, there have been no material changes into the Corporation's Risk Factors, except as noted below:
Public Health Crisis: A public health crisis or global outbreak of disease, including the pandemic caused by coronavirus disease 2019 (“COVID-19”) has had, and could continue to have, a negative effect on the Corporation's manufacturing operations, supply chain and workforce, creating disruptions that could continue to have a substantial negative impact on the Corporation’s results of operations, financial condition and cash flows.
UCC sells substantially all of its products to TDCC in order to simplify the worldwide customer interface process and, as a result, the Corporation is subject to many of the same global risk factors facing TDCC, including those presented by COVID-19. The pandemic caused by COVID-19 has impacted all geographic regions where UCC's products are produced and sold. The global, regional and local spread of COVID-19 has resulted in significant global mitigation measures, including government-directed quarantines, social distancing and shelter-in-place mandates, travel restrictions and/or bans, and restricted access to certain corporate facilities and manufacturing sites. Uncertainty with respect to the third quarterseverity and duration of 2017.the COVID-19 pandemic, coupled with crude oil price fluctuations due in part to the global spread of COVID-19, has contributed to the volatility of financial markets. While the severity and duration of the COVID-19 pandemic in key geographic regions and end-markets cannot be reasonably estimated at this time, impacts to the Corporation include, but are not limited to: a decrease in demand for certain Corporation products; reduced profitability; supply chain disruptions impeding the Corporation’s ability to ship and/or receive product; temporary idling of select manufacturing facilities; interruptions or limitations to manufacturing operations imposed by local, state or federal governments; workforce absenteeism and distraction; labor shortages; and increased cyber security risk and data accessibility disruptions due to remote working arrangements. Additional risks may include, but are not limited to: shortages of key raw materials; asset impairment charges; increased obligations related to the Corporation’s pension and other postretirement benefit plans; and deferred tax valuation allowances. Disruptions and market volatility resulting from the COVID-19 pandemic have had and could continue to have a substantial negative impact on the Corporation’s results of operations, financial condition and cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 6. EXHIBITS
See the Exhibit Index of this Quarterly Report on Form 10-Q for exhibits filed with this report.
| | | | | | | | | | | |
| EXHIBIT NO. | | DESCRIPTION |
| | | |
| | | Ankura Consulting Group, LLC's Consent. |
| | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS | | The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| 104 | | Cover Page Interactive Data File. The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
* Filed herewith
|
| |
Union Carbide Corporation and Subsidiaries Signatures |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
UNION CARBIDE CORPORATION
Registrant
| | | | | | | | | | | |
| Date: | July 24, 2020 | | |
| | By: | /s/ RONALD C. EDMONDS |
| | | Ronald C. Edmonds |
| | | Controller and Vice President |
| | |
Date: November 6, 2017 | | |
| By: | /s/ RONALD C. EDMONDS |
| | Ronald C. Edmonds |
| | Controller and Vice President |
| | of Controllers and Tax |
| | | The Dow Chemical Company |
| | | Authorized Representative of |
| | | Union Carbide Corporation |
| | | |
| | | |
| By: | By: | /s/ IGNACIO MOLINA |
| | | Ignacio Molina |
| | | Vice President, Treasurer and |
| | Chief Financial Officer |
|
|
Union Carbide Corporation and Subsidiaries
Exhibit Index
|
|
| | |
EXHIBIT NO. | | DESCRIPTION |
| | |
| | Ankura Consulting Group, LLC's Consent. |
| | |
| | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
101.INS | | XBRL Instance Document. |
| | |
101.SCH | | XBRL Taxonomy Extension Schema Document. |
| | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
| | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
| | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document.Chief Financial Officer |