UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D C 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JuneQuarterly Period Ended September 30, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-1463
UNION CARBIDE CORPORATION
A Subsidiary of The Dow Chemical CompanySUBSIDIARY OF THE DOW CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
New York 13-1421730
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
39 Old Ridgebury Road, Danbury, CT 06817-0001
(Address of principal executive offices) (Zip Code)
203-794-2000
Registrant's telephone number, including area code
(Former name, former address and former fiscal year,
if changed since last report.)
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. Yes X No__
At JulyOctober 31, 2001, 1,000 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 InstructionsTHE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a) and (b) for Form(A)
AND (B) FOR FORM 10-Q and is therefore filing this form with a
reduced disclosure format.AND IS THEREFORE FILING THIS FORM WITH A REDUCED
DISCLOSURE FORMAT.
Total number of sequentially numbered pages in this filing,
including exhibits thereto: 2021
Union Carbide Corporation
(a Subsidiary of The Dow Chemical Company)UNION CARBIDE CORPORATION
(A SUBSIDIARY OF THE DOW CHEMICAL COMPANY)
Table of Contents
PAGE
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 6
Consolidated Statements of Comprehensive Income 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
Cautionary statement: All statements in this Quarterly Report on Form 10-Q
that do not reflect historical information are forward-looking statements,
within the meaning of the Private Securities Litigation Reform Act of 1995
(as amended). Forward-looking statements include statements concerning plans,
including those regarding the integration of the corporation with and into
The Dow Chemical Company ("Dow"); capital expenditures; environmental
accruals; anticipated future events; interest rate and currency risk
management; ongoing and planned capacity additions and other expansions;
joint ventures; Management's Discussion and Analysis of Financial Condition
and Results of Operations, and any other statements that do not reflect
historical information. Such forward-looking statements are subject to risks
and uncertainties. Important factors that could cause actual results to
differ materially from those discussed in such forward-looking statements
include the supply/demand balance for the corporation's products; competitive
pricing pressures; raw material availability and costs; changes in industry
production capacities and operating rates; currency exchange rates; global
economic conditions; competitive technology positions; failure by the
corporation to achieve technology objectives or complete projects on schedule
and on budget, and an inability to obtain new customers or retain existing
ones. Accordingly, there is no assurance that the corporation's expectations
will be realized. The corporation assumes no obligation to provide revisions
to any forward-looking statements should circumstances change.
-2-
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PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 6
Consolidated Statements of Comprehensive Income 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURE 21
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2
PART I. FINANCIAL INFORMATION
Item--------------------------------------------------------------------------------
ITEM 1: Financial Statements:FINANCIAL STATEMENTS:
--------------------------------------------------------------------------------
UNION CARBIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Union Carbide Corporation and Subsidiaries
Consolidated Statements of Income
Three Months Ended SixNine Months Ended
June-------------------- -------------------
Sept. 30, JuneSept. 30, JuneSept. 30, JuneSept. 30,
In millionsMillions (Unaudited) 2001 2000 2001 2000
----------------------------------------------------- -------- -------- -------- --------
Net trade sales $ 1,166827 $ 1,6741,637 $ 2,7023,529 $ 3,2914,928
Net sales to related companies 530350 - 530880 -
------- ------- ------- -------
Total Net Sales $ 1,6961,177 $ 1,6741,637 $ 3,2324,409 $ 3,2914,928
Cost of sales 1,549 1,436 3,025 2,8381,114 1,494 4,139 4,332
Research and development expenses 34 58 80 11632 51 112 167
Selling, general and administrative expenses 52 59 107 12331 57 138 180
Amortization of intangibles 1 4 3 7 78 11
Merger-related expenses and restructuring (13)- - 1,262 -
Insurance and finance company
operations, pretax income (loss) (2) 4 (1) 510 (3) 15
Equity in earnings of nonconsolidated affiliates 11 52 23 9419 27 42 121
Sundry income (expense) - net 25 29 24 367 (4) 31 32
------- ------- ------- -------
Earnings (Loss) Before Interest, Income Taxes, and
Minority Interests 104 203 (1,203) 34223 64 (1,180) 406
------- ------- ------- --------
Interest income 2 3 4 193 7 22
Interest expense and amortization of debt discount 47 45 98 8235 143 117
------- ------- ------- --------
Income (Loss) Before Income Taxes and Minority Interests 59 161 (1,297) 279(19) 32 (1,316) 311
Provision (benefit) for income taxes 18 29 (468)(8) - (476) 49
Minority interests' share in income 2 21 3 34 6
------- ------- ------- --------
Net Income (Loss) $ 39(12) $ 13029 $ (832)(844) $ 227256
======= ======= ======= ========
Depreciation $ 11191 $ 9996 $ 211302 $ 197293
======= ======= ======= ========
Capital Expenditures $ 2516 $ 12775 $ 5975 $ 322397
======= ======= ======= ========
--------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
-3-3
UNION CARBIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Union Carbide Corporation and Subsidiaries
Consolidated Balance Sheets
JuneSept. 30, Dec. 31,
In millionsMillions (Unaudited) 2001 2000
--------------------------------------------------------------------------------
AssetsASSETS
Current Assets
Cash and cash equivalents $ 4030 $ 63
Marketable securities --- 74
Accounts and notes receivable:
Trade (net of allowance for doubtful receivables -
2001: $14;$13; 2000: $11) 457317 897
Related companies 665 -824 --
Other 516614 137
Inventories:
Finished and work in process 290284 557
Materials and supplies 177152 193
Deferred income tax assets - current 514348 142
Other current assets 11-- 113
------ ------
Total current assets 2,6702,569 2,176
------ ------
Investments
Investment in nonconsolidated affiliates 840595 1,008
Other investments 311298 97
Noncurrent receivables 191527 154
------ ------
Total investments 1,3421,420 1,259
------ ------
Property
Property 9,1538,736 9,361
Less accumulated depreciation 5,3265,110 4,840
------ ------
Net property 3,8273,626 4,521
Other Assets
Goodwill (net of accumulated amortization -
2001: $43;$49; 2000: $54) 3528 41
Deferred charges and other assets 348371 349
------ ------
Total other assets 383399 390
------ ------
Total assets $ 8,222 $ 8,346$8,014 $8,346
====== ======
--------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
-4-4
UNION CARBIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Union Carbide Corporation and Subsidiaries
Consolidated Balance Sheets
JuneSept. 30, Dec. 31,
In millionsMillions (Unaudited) 2001 2000
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable:
Related companies $ 1,3911,214 $ ---
Other 3221 1,171
Long-term debt due within one year 12 7
Accounts payable:
Trade 357327 703
Related companies 332 -537 --
Other 4346 67
Income taxes payable 47 -63 --
Deferred income tax liabilities - current 13 -5 --
Accrued and other current liabilities 275249 352
------- --------
Total current liabilities 2,4912,464 2,300
------- --------
Long-Term Debt 1,744 1,748
------- --------
Other Noncurrent Liabilities
Deferred income tax liabilities - noncurrent 299261 278
Pension and other postretirement benefits -
noncurrent 685693 492
Other noncurrent obligations 1,1961,063 834
------- --------
Total other noncurrent liabilities 2,1802,017 1,604
------- --------
Minority Interest in Subsidiaries 439 40
------- --------
Stockholders' Equity
Common stock - issued - 1,000 shares
(158,994,683 shares in 2000) --- 159
Additional paid-in capital --- 217
Unearned ESOP shares (50) (50)
Retained earnings 2,0792,067 3,572
Accumulated other comprehensive loss (265)(237) (224)
Treasury stock, at cost - no shares
(23,431,939 shares in 2000) --- (1,020)
------- --------
Total stockholders' equity 1,7641,780 2,654
------- --------
Total Liabilities and Stockholders' Equity $ 8,2228,014 $ 8,346
======= ========
--------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
-5-5
UNION CARBIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Union Carbide Corporation and Subsidiaries
Consolidated Statements of Cash Flows
SixNine Months Ended JuneSept. 30,
In millionsMillions (Unaudited) 2001 2000
------------------------- ------ ------
Operating ActivitiesOPERATING ACTIVITIES
Net income (loss) $ (832)(844) $ 227256
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 218 204299 304
Provision (credit) for deferred income taxes (334) 58(225) 41
Undistributed earnings of nonconsolidated affiliates (14) (57)(33) (84)
Minority interests' share in income 3 34 6
Other net gain (39) (54)(26) (84)
Merger-related expenses and restructuring 1,028 -951 --
Tax benefit-nonqualified stock options exercises 4 6
Changes in assets and liabilities that provided
(used) cash:
Accounts and notes receivable 110 (24)277 24
Related company receivables (799) -(965) --
Inventories 209 (63)220 (21)
Accounts payable (417) 9(443) 51
Related company payables 512 -722 --
Other assets and liabilities (160) (45)(268) (114)
------- -------
Cash provided by (used in) operating activities (511) 264
Investing Activities(327) 385
------- -------
INVESTING ACTIVITIES
Capital expenditures (59) (322)(75) (397)
Proceeds from sales of property -4 8
Investments in nonconsolidated affiliates (63) (135)(92) (184)
Proceeds from sale of nonconsolidated affiliate 180 ---
Proceeds from the sale of investments 96 65165 143
Purchase of investments (90) (38)(122) (84)
------- -------
Cash provided by (used in) investing activities 64 (422)
Financing Activities60 (514)
------- -------
FINANCING ACTIVITIES
Change in short-term notes payable (939) 330(952) 331
Change in notes payable to related companies 1,391 -1,214 --
Repayments of long-term debt (5) (114)
Purchases of treasury stock (1) ---
Proceeds from sales of common stock 6 2025
Dividends paid to stockholders (28) (61)(91)
------- -------
Cash provided by financing activities 424 175234 151
------- -------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents - 1-- --
------- -------
Summary
Increase (decrease) in cash and cash equivalents (23) 18(33) 22
Cash and cash equivalents, beginning-of-period 63 41
Cash and cash equivalents, end-of-period------- -------
CASH AND CASH EQUIVALENTS, END-OF-PERIOD $ 4030 $ 5963
======= =======
--------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
-6-6
UNION CARBIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Union Carbide Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
Three Months Ended SixNine Months Ended
June-------------------- --------------------
Sept. 30, JuneSept. 30, JuneSept. 30, JuneSept. 30,
In millionsMillions (Unaudited) 2001 2000 2001 2000
----------------------- ------- -------- -------- ---------
Net income (loss) $ 39(12) $ 13029 $ (832)(844) $ 227256
Other comprehensive income (loss), net of tax:
Unrealized gains and losses on investments (2) -(4) (3) 4(7) 1
Cumulative translation adjustments 41 (25) (38) (35)32 (23) (6) (58)
------- -------- --------- --------
Comprehensive income (loss) $ 7816 $ 1053 $ (873)(857) $ 196199
======= ======= ========= =======
--------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
-7-7
Union Carbide Corporation and Subsidiaries
Notes to Consolidated Financial Statements
NoteUNION CARBIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - Consolidated Financial StatementsCONSOLIDATED FINANCIAL STATEMENTS
The unaudited interim financial statements reflect all adjustments
(consisting of normal recurring accruals) which, in the opinion of
management, are considered necessary for a fair presentation of the results
for the periods covered. Certain reclassifications of prior period amounts
have been made to conform to the current period's presentation. These
statements should be read in conjunction with the audited Notes to
Financial Statements of Union Carbide Corporation and Subsidiaries (the
"corporation" or "UCC") in the 2000 Annual Report on Form 10-K.
Condensed Summary of Significant Accounting Policies:
Business and Geographic Segment InformationCONDENSED SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
----------------------------------------------------
BUSINESS AND GEOGRAPHIC SEGMENT INFORMATION - Effective with the merger of
the corporation into a wholly owned subsidiary of The Dow (theChemical Company
("Dow", and with regard to the merger, the "Dow Merger"), the corporation's
business activities were fully integrated with those of Dow and are no
longer operated as separate business units. Dow conducts its worldwide
operations through global businesses which extend beyond the boundaries of
both geography and legal entities. This results in the corporation's
business activities comprising fully integrated components of Dow's global
businesses rather than stand-alone operations. Because there are no
separable reportable business segments for the corporation under Statement
of Financial Accounting Standards ("Statement") No. 131, "Disclosures about
Segments of an Enterprise and Related Information," and the information
used by the chief operating decision maker regarding the corporation's
operations relates to the corporation in its entirety, the corporation's
results are reported as a single operating segment. Prior to the Dow
Merger, the corporation was managed as two separate business segments,
Specialties and Intermediates and Basic Chemicals and Polymers, as well as
a non-operatingnonoperating segment ("Other"). Prior periods have been restated to
conform to the current period's presentation.
Research and DevelopmentRESEARCH AND DEVELOPMENT - Research and development costs are charged to
expense as incurred. Depreciation expense applicable to research and
development facilities and equipment is included in "Research and
development expenses" in the Consolidated Statements of Income.
Related CompaniesRELATED COMPANIES - Significant transactions with the corporation's parent
company, Dow, or other Dow subsidiaries have been characterized as related
company transactions in the consolidated financial statements.
Earnings Per ShareEARNINGS PER SHARE - In accordance with Statement No. 128, "Earnings Per
Share," the presentation of earnings per share is not required in financial
statements of wholly owned subsidiaries.
-8-8
NoteNOTE B - The Dow Merger and Merger-related Expenses and Restructuring
On February 6, 2001, the corporation merged with a wholly owned
subsidiary of Dow. As a result of the merger, each share of Union
Carbide common stock outstanding immediately prior to the merger was
exchanged for 1.611 shares of Dow common stock, and Union Carbide became
a wholly owned subsidiary of Dow.
Contemporaneous with the merger, certain rights vested and stock units
equivalent of Union Carbide common stock were converted into stock units
equivalent of Dow common stock under various employee benefit and
incentive plans, such as the ESOP Plan, the 1997 Union Carbide Long-Term
Incentive Plan and the deferred compensation plan.
On February 23, 2001, the corporation cancelled its unused $1 billion
major bank credit agreement.
In order to satisfy the European Commission's condition for approval of
the merger, the corporation divested its 50-percent interest in Polimeri
Europa S.r.l. ("Polimeri Europa") to EniChem S.p.A. in April 2001.
On March 29, 2001, Dow's management made certain decisions relative to
employment levels, duplicate assets and facilities and excess capacity
resulting from the merger of the corporation into a subsidiary of Dow.
These decisions were based on Dow management's assessment of the actions
necessary to achieve synergies as the result of the merger. The economic
effects of these decisions, combined with merger-related transaction
costs and certain asset impairments, resulted in a pretax special charge
in the first quarter of $1,275 million which was reduced by $13 million
in the second quarter. The following table shows the major components of
the special charge:
In millions
Transaction costs $ 41
Labor-related costs 616
Write-down of assets and facilities 605
Total $1,262
Transaction costs of $41 million consisted primarily of investment
banking, legal and accounting fees, all of which had been paid at March
31, 2001.
Employee-related costs consisted predominantly of provisions for employee
severance, change of control obligations, medical and retirement
benefits, and outplacement services. Dow's integration plans include a
workforce reduction of approximately 4,500 people, primarily from the
corporation's administrative, marketing, purchasing, research and
development, and manufacturing workforce. The charge for severance was
based upon the severance plan provisions communicated to employees.
Headcount reductions began in the second quarter of 2001. More than one-
half of the reductions will be completed by the end of September;
approximately 80 percent will be completed by the end of the first 12
months following the merger. The corporation expects that approximately
66 percent of the employee-related costs will be expended in cash within
the next two years, though the timing of severance payments is dependent
upon employee elections. Expenditures with respect to employee-related
costs associated with pension and postretirement benefit plans will occur
over a much more extended period that is not currently determinable.
-9-
The special charge included $605 million for the write-down of duplicate
assets and facilities directly related to the merger, the loss on
divestitures required to obtain regulatory approval for the merger, asset
impairments and lease abandonment reserves. Duplicate assets consist
principally of capitalized software costs, information technology
equipment, research and development facilities and equipment, all of
which were written off during the first quarter. The fair values of the
impaired assets, which include production facilities and transportation
equipment, were determined based on discounted cash flows and an
appraisal, respectively. These components of the special charge will
require limited future cash outlays, and will result in a decrease in
annual depreciation of approximately $65 million.
As of June 30, 2001, severance of $261 million had been paid to 1,344
former employees.
The following table summarizes the activity in the special charge reserve
for the three month periods ended March 31, 2001 and June 30, 2001:
In millions
Additions Charges
Opening To Against Balance at
Quarter Balance Reserve Reserve Period End
1Q01 - $1,275 $ 646 $ 629
2Q01 $ 629 (13) 158 458
Note C - Commitments and Contingencies
The corporation has two major agreements for the purchase of ethylene-
related products and two other purchase agreements in the U.S. and
Canada. The net present value of the fixed and determinable portion of
obligations under these purchase commitments at June 30, 2001 totaled
$172 million including one contract for the purchase of ethylene from Dow
representing $134 million of this obligation.
The corporation is subject to loss contingencies resulting from
environmental laws and regulations, which include obligations to remove
or remediate the effects on the environment of the disposal or release of
certain wastes and substances at various sites. The corporation has
established accruals in current dollars for those hazardous waste sites
where it is probable that a loss has been incurred and the amount of the
loss can be reasonably estimated. The reliability and precision of the
loss estimates are affected by numerous factors, such as different stages
of site evaluation, the allocation of responsibility among potentially
responsible parties and the assertion of additional claims. The
corporation adjusts its accruals as new remediation requirements are
defined, as information becomes available permitting reasonable estimates
to be made, and to reflect new and changing facts.
At June 30, 2001, the corporation had established environmental
remediation accruals in the amount of $173 million. These accruals have
two components, estimated future expenditures for site investigation and
cleanup and estimated future expenditures for closure and postclosure
activities. In addition, the corporation had environmental loss
contingencies of $64 million.
-10-
The corporation has sole responsibility for the remediation of
approximately 40 percent of its environmental sites for which accruals
have been established. These sites are well advanced in the
investigation and cleanup stage. The corporation's environmental
accruals at June 30, 2001 included $141 million for these sites, of which
$36 million was for estimated future expenditures for site investigation
and cleanup and $105 million was for estimated future expenditures for
closure and postclosure activities. In addition, $49 million of the
corporation's environmental loss contingencies related to these sites.
The three sites with the largest total potential cost to the corporation
are nonoperating sites. Of the above accruals, these sites accounted for
$44 million, of which $9 million was for estimated future expenditures
for site investigation and cleanup and $35 million was for estimated
future expenditures for closure and postclosure activities. In addition,
$32 million of the above environmental loss contingencies related to
these sites.
The corporation does not have sole responsibility at the remainder of its
environmental sites for which accruals have been established. All of
these sites are in the investigation and cleanup stage. The
corporation's environmental accruals at June 30, 2001 included
$32 million for estimated future expenditures for site investigation and
cleanup at these sites. In addition, $15 million of the corporation's
environmental loss contingencies related to these sites. The largest two
of these sites are also nonoperating sites. Of the above accruals, these
sites accounted for $10 million for estimated future expenditures for
site investigation and cleanup. In addition, $2 million of the above
environmental loss contingencies related to these sites.
In 2000, worldwide expenses related to environmental protection for
compliance with federal, state and local laws regulating solid and
hazardous wastes and discharge of materials to air and water, as well as
for waste site remedial activities, totaled $104 million. Expenses in
1999 and 1998 were $118 million and $91 million, respectively. While
estimates of the costs of environmental protection for 2001 are
necessarily imprecise, the corporation estimates that these expenses will
approximate the average of the last three years.
The corporation severally guaranteed up to approximately $54 million at
June 30, 2001 of EQUATE Petrochemical Company K.S.C.'s ("EQUATE") debt
and working capital financing needs. The corporation has also severally
guaranteed certain sales volume targets until EQUATE's sales capabilities
are proved. In addition, the corporation has pledged its shares in
EQUATE as security for EQUATE's debt. The corporation has political risk
insurance coverage for its equity investment and a majority of its
guarantee of EQUATE's debt.
The corporation had additional contingent obligations at June 30, 2001
totaling $66 million, of which $26 million related to guarantees of debt.
The corporation and its consolidated subsidiaries are 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. In some of these
legal proceedings and claims, the cost of remedies that may be sought or
damages claimed is substantial.
-11-
The corporation has recorded nonenvironmental litigation accruals of
$172 million and related insurance recovery receivables of $141 million.
At June 30, 2001, the corporation had nonenvironmental litigation loss
contingencies of $59 million.
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 note, management believes that adequate provisions have been made
for probable losses with respect thereto and that such ultimate outcome,
after provisions therefor, will not have a material adverse effect on the
consolidated financial position of the corporation, but could have a
material effect on consolidated results of operations in a given quarter
or year. Should any losses be sustained in connection with any of such
legal proceedings and claims in excess of provisions therefor, they will
be charged to income when determinable.
Note D - Exchange of Assets with Related Companies
Effective June 30, 2001, the corporation contributed all of its ownership
interests in several wholly owned entities in Europe and Latin America to
wholly owned subsidiaries of Dow. In return for the contribution of
interests, the corporation received stock in the acquiring company equal
to the book value of the net assets that the corporation contributed.
The corporation's percentage ownership in these entities ranges from 10
to 15 percent. These investments have been accounted for using the cost
method of accounting and have been included in "Other investments" on the
balance sheet. The following chart reflects the combined book value of
these entities on the effective date:
In millions
Balance Sheet Data
Current assets $496
Non-current assets 123
Total assets $619
Current liabilities $454
Non-current liabilities 5
Total liabilities $459
Net assets $160
Income Statement Data
Sales $455
EBIT $147
Net Income $138
Income statement data represents amounts included in the corporation's
consolidated results for the six months ended June 30, 2001.
The corporation will continue to integrate into the Dow organization over
the next several months in order to realize synergies of the merger.
-12-
Note E - Sale of Receivables
During the second quarter of 2001, the corporation sold $300 million in
trade receivables to a third party. In those sales, Dow will be
providing the servicing responsibilities. The third party has no recourse
against the corporation for receivables which are in default. In the
second quarter of 2001, the corporation recorded a pretax loss of
$0.7 million on the sale of these receivables.
Note F - Liquidation of LIFO Inventory
During the quarter ended June 30, 2001, certain inventory quantities were
reduced which resulted in a liquidation of certain LIFO inventory layers
carried at lower costs which prevailed in prior years. The effect of the
liquidation was to decrease cost of goods sold by $51 million and
increase after-tax earnings by $33 million.
Note G - Accounting ChangesACCOUNTING CHANGES
In 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities." It
requires that an entity recognize all derivative instruments as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. Changes in the fair value of those
derivatives will be reported in earnings or accumulated other comprehensive
loss, depending on the uses of the derivatives and whether they qualify for
hedge accounting. This Statement, as amended by Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133," and Statement No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133," is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The
corporation adopted the provisions of Statement No. 133, as amended, on
January 1, 2001. Due to the corporation's limited use of financial
instruments to manage its exposure to market risks, primarily related only
to changes in foreign currency exchange rates, the adoption of Statement
No. 133 on January 1, 2001 did not have a material effect on the
corporation's financial position or results of operations.
In 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements," which
summarizes the staff's views regarding the application of generally
accepted accounting principles to selected revenue recognition issues. The
corporation adopted the provisions of SAB 101 on October 1, 2000, the
effect of which was not material to the corporation's financial position or
results of operations.
In July 2001, the FASB issued Statement No. 141, "Business Combinations,"
and Statement No. 142, "Goodwill and Other Intangible Assets." These
Statements replace Accounting Principles Board ("APB") Opinion No. 16,
"Business Combinations," and APB Opinion No. 17, "Intangible Assets,"
respectively. Under Statement No. 141 all business combinations initiated
after June 30, 2001 are accounted for using only the purchase method.
Statement No. 142 is effective for fiscal years beginning after December
15, 2001. Under this Statement, goodwill will not be amortized, but will be
subject to impairment testing. The corporation is currently assessing the
impact of adopting these Statements.
-13-In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations," which requires an entity to record the fair value
of a liability for an asset retirement obligation in the period in which it
is incurred and a corresponding increase in the related long-lived asset.
The liability is adjusted to its present value each period and the asset is
depreciated over its useful life. A gain or loss may be incurred upon
settlement of the liability. Statement No. 143 is effective for fiscal
years beginning after June 15, 2002. The corporation is currently assessing
the impact of adopting this Statement.
9
ItemIn October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which replaces Statement No.
121 and provisions of APB Opinion No.30 for the disposal of segments of a
business. The statement creates one accounting model, based on the
framework established in Statement No. 121, to be applied to all long-lived
assets including discontinued operations. Statement No. 144 is effective
for fiscal years beginning after December 15, 2001. The corporation is
currently assessing the impact of adopting this Statement.
NOTE C - THE DOW MERGER AND MERGER-RELATED EXPENSES AND RESTRUCTURING
On February 6, 2001, the corporation merged with a wholly owned subsidiary
of Dow. As a result of the merger, each share of Union Carbide common stock
outstanding immediately prior to the merger was exchanged for 1.611 shares
of Dow common stock, and Union Carbide became a wholly owned subsidiary of
Dow.
Contemporaneous with the merger, certain rights vested and stock units
equivalent of Union Carbide common stock were converted into stock units
equivalent of Dow common stock under various employee benefit and incentive
plans, such as the ESOP Plan, the 1997 Union Carbide Long-Term Incentive
Plan and the deferred compensation plan.
On February 23, 2001, the corporation cancelled its unused $1 billion major
bank credit agreement.
In order to satisfy the European Commission's condition for approval of the
merger, the corporation divested its 50-percent interest in Polimeri Europa
S.r.l. ("Polimeri Europa") to EniChem S.p.A. in April 2001.
On March 29, 2001, Dow's management made certain decisions relative to
employment levels, duplicate assets and facilities and excess capacity
resulting from the Dow Merger. These decisions were based on Dow
management's assessment of the actions necessary to achieve synergies as
the result of the merger. The economic effects of these decisions, combined
with merger-related transaction costs and certain asset impairments,
resulted in a pretax special charge in the first quarter of $1,275 million
which was reduced by $13 million in the second quarter. The following table
shows the major components of the special charge:
In millions
-----------
Transaction costs $ 41
Labor-related costs 616
Write-down of assets and facilities 605
-------
Total $1,262
-------
Transaction costs of $41 million consisted primarily of investment banking,
legal and accounting fees, all of which had been paid at March 31, 2001.
10
Employee-related costs consisted predominantly of provisions for employee
severance, change of control obligations, medical and retirement benefits,
and outplacement services. Dow's integration plans include a workforce
reduction of approximately 4,500 people, primarily from the corporation's
administrative, marketing, purchasing, research and development, and
manufacturing workforce. The charge for severance was based upon the
severance plan provisions communicated to employees. Headcount reductions
began in the second quarter of 2001. As planned, more than one-half of the
reductions were completed by the end of September; approximately 80 percent
will be completed by the end of the first 12 months following the merger.
The corporation expects that approximately 66 percent of the
employee-related costs will be expended in cash within the next two years,
though the timing of severance payments is dependent upon employee
elections. Expenditures with respect to employee-related costs associated
with pension and postretirement benefit plans will occur over a much more
extended period that is not currently determinable.
The special charge included $605 million for the write-down of duplicate
assets and facilities directly related to the merger, the loss on
divestitures required to obtain regulatory approval for the merger, asset
impairments and lease abandonment reserves. Duplicate assets consist
principally of capitalized software costs, information technology equipment
and research and development facilities and equipment, all of which were
written off during the first quarter. The fair values of the impaired
assets, which include production facilities and transportation equipment,
were determined based on discounted cash flows and an appraisal,
respectively. At September 30, 2001, $101 million of the reserve remained
for the abandonment of leased facilities. These components of the special
charge will require limited future cash outlays, and will result in a
decrease in annual depreciation of approximately $65 million.
As of September 30, 2001, severance of approximately $282 million had been
paid to approximately 2,400 former employees.
The following table summarizes the activity in the special charge reserve
for the year by quarter:
In millions
-------------
Opening Additions Charges Against Balance at
Quarter Balance To Reserve Reserve Period End
-------- --------- ------------ ---------------- -----------
1Q01 $ - $1,275 $ 646 $ 629
2Q01 629 (13) 158 458
3Q01 458 - 23 435
11
NOTE D - COMMITMENTS AND CONTINGENCIES
The corporation has two major agreements for the purchase of
ethylene-related products and two other purchase agreements in the U.S. and
Canada. The net present value of the fixed and determinable portion of
obligations under these purchase commitments at September 30, 2001 totaled
$162 million including one contract for the purchase of ethylene from Dow
representing $127 million of this obligation.
The corporation is subject to loss contingencies resulting from
environmental laws and regulations, which include obligations to remove or
remediate the effects on the environment of the disposal or release of
certain wastes and substances at various sites. The corporation has
established accruals in current dollars for those hazardous waste sites
where it is probable that a loss has been incurred and the amount of the
loss can be reasonably estimated. The reliability and precision of the loss
estimates are affected by numerous factors, such as different stages of
site evaluation, the allocation of responsibility among potentially
responsible parties and the assertion of additional claims. The corporation
adjusts its accruals as new remediation requirements are defined, as
information becomes available permitting reasonable estimates to be made,
and to reflect new and changing facts.
At September 30, 2001, the corporation had established environmental
remediation accruals in the amount of $157 million. These accruals have two
components, estimated future expenditures for site investigation and
cleanup and estimated future expenditures for closure and postclosure
activities. In addition, the corporation had environmental loss
contingencies of $59 million.
The corporation has sole responsibility for the remediation of
approximately 40 percent of its environmental sites for which accruals have
been established. These sites are well advanced in the investigation and
cleanup stage. The corporation's environmental accruals at September 30,
2001 included $132 million for these sites, of which $30 million was for
estimated future expenditures for site investigation and cleanup and $102
million was for estimated future expenditures for closure and postclosure
activities. In addition, $44 million of the corporation's environmental
loss contingencies related to these sites. The three sites with the largest
total potential cost to the corporation are nonoperating sites. Of the
above accruals, these sites accounted for $39 million, of which $8 million
was for estimated future expenditures for site investigation and cleanup
and $31 million was for estimated future expenditures for closure and
postclosure activities. In addition, $30 million of the above environmental
loss contingencies related to these sites.
The corporation does not have sole responsibility at the remainder of its
environmental sites for which accruals have been established. All of these
sites are in the investigation and cleanup stage. The corporation's
environmental accruals at September 30, 2001 included $25 million for
estimated future expenditures for site investigation and cleanup at these
sites. In addition, $15 million of the corporation's environmental loss
contingencies related to these sites. The largest two of these sites are
also nonoperating sites. Of the above accruals, these sites accounted for
$10 million for estimated future expenditures for site investigation and
cleanup. In addition, $2 million of the above environmental loss
contingencies related to these sites.
12
In 2000, worldwide expenses related to environmental protection for
compliance with federal, state and local laws regulating solid and
hazardous wastes and discharge of materials to air and water, as well as
for waste site remedial activities, totaled $104 million. Expenses in 1999
and 1998 were $118 million and $91 million, respectively.
The corporation severally guaranteed up to approximately $54 million at
September 30, 2001 of EQUATE Petrochemical Company K.S.C.'s ("EQUATE") debt
and working capital financing needs. The corporation has also severally
guaranteed certain sales volume targets until EQUATE's sales capabilities
are proved. In addition, the corporation has pledged its shares in EQUATE
as security for EQUATE's debt. The corporation has political risk insurance
coverage for its equity investment and a majority of its guarantee of
EQUATE's debt.
The corporation had additional contingent obligations at September 30, 2001
totaling $68 million, of which $25 million related to guarantees of debt.
The corporation and its consolidated subsidiaries are 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. In some of these legal proceedings and claims, the
cost of remedies that may be sought or damages claimed is substantial.
The corporation has recorded nonenvironmental litigation accruals of $175
million and related insurance recovery receivables of $146 million. At
September 30, 2001, the corporation had nonenvironmental litigation loss
contingencies of $58 million.
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 note, management believes that adequate provisions have been made for
probable losses with respect thereto and that such ultimate outcome, after
provisions therefor, will not have a material adverse effect on the
consolidated financial position of the corporation, but could have a
material effect on consolidated results of operations in a given quarter or
year. Should any losses be sustained in connection with any of such legal
proceedings and claims in excess of provisions therefor, they will be
charged to income when determinable.
13
NOTE E - EXCHANGE OF ASSETS WITH RELATED COMPANIES
Effective June 30, 2001, the corporation contributed all of its ownership
interests in several wholly owned entities in Europe and Latin America to
wholly owned subsidiaries of Dow. In return for the contribution of
interests, the corporation received stock in the acquiring company equal to
the book value of the net assets that the corporation contributed. The
corporation's percentage ownership in these entities ranges from 10 to 15
percent. These investments have been accounted for using the cost method of
accounting and have been included in "Other investments" on the balance
sheet. The following chart reflects the combined book value of these
entities on the effective date of transfer and the amounts included in the
corporation's consolidated results for the six months ended June 30, 2001:
In millions
--------------------------------------------------------------------------
BALANCE SHEET DATA
Current assets $496
Non-current assets 123
----
Total assets $619
Current liabilities $454
Non-current liabilities 5
----
Total liabilities $459
Net assets $160
====
INCOME STATEMENT DATA
Sales $455
====
EBIT $147
====
Net Income $138
====
Effective on September 30, 2001, the corporation contributed all of its
ownership interests in several wholly owned entities in Latin America to a
Brazilian subsidiary of Modeland International Holdings Inc. ("Modeland"),
a wholly owned subsidiary of Dow. In return for the contribution of
interests, the corporation received stock in Modeland equal to the book
value of the net assets that the corporation contributed, which represents
41 percent of Modeland's stock outstanding. This investment has been
accounted for using the cost method of accounting and has been included in
"Other investments" on the balance sheet. The following chart reflects the
combined book value of these entities on September 30, 2001 and the amounts
included in the corporation's consolidated results for the nine months
ended September 30, 2001:
14
In millions
--------------------------------------------------------------------------------
BALANCE SHEET DATA
Current assets $ 71
Non-current assets 56
-----
Total assets $127
Current liabilities $ 36
Non-current liabilities (33)
-----
Total liabilities $ 3
Net assets $124
=====
INCOME STATEMENT DATA
Sales $139
=====
EBIT $ 3
=====
Net Income $ 6
=====
The corporation will continue to integrate into the Dow organization over
the next several months in order to realize synergies of the merger.
NOTE F - LOAN RECEIVABLE
During the third quarter of 2001, the corporation, Petroliam Nasional
Berhad (Petronas) and Polifin International Investments (PTY) Ltd. entered
into agreements with the OPTIMAL Group (consisting of OPTIMAL Chemicals
(Malaysia) Sdn Bhd, OPTIMAL Olefins (Malaysia) Sdn Bhd and OPTIMAL Glycols
(Malaysia) Sdn Bhn), to provide loans and drawing facilities to the OPTIMAL
Group with the terms expiring between September 2007 and September 2009.
The loans and drawing facilities bear floating rates based on the six month
LIBOR, and are payable by the respective OPTIMAL Group members. At
September 30, 2001, $313 million of previously funded amounts by the
corporation to the OPTIMAL Group were converted into loans. Previously
funded amounts were recorded as part of the corporation's investment in the
OPTIMAL Group and presented in "Investments in nonconsolidated affiliates"
on the balance sheet. Subsequent to this conversion, this amount has been
recorded and presented in "Noncurrent receivables".
NOTE G - SALE OF RECEIVABLES
During the second quarter of 2001, the corporation entered into an
agreement under which certain qualifying trade accounts receivables are
sold to a third party. For those sales, Dow will provide servicing
responsibilities. The third party has no recourse against the corporation
for receivables that are in default. The average quarterly amount sold and
the average quarterly discount on sales during the quarter ended September
30, 2001 were approximately $400 million and $1.2 million, respectively.
NOTE H - LIQUIDATION OF LIFO INVENTORY
During the quarter ended June 30, 2001, certain inventory quantities were
reduced which resulted in a liquidation of certain LIFO inventory layers
carried at lower costs that prevailed in prior years. The effect of the
liquidation was to decrease cost of goods sold by $51 million and increase
after-tax earnings by $33 million.
15
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of OperationsMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
Pursuant to General Instruction H of Form 10-Q, this section includes only
management's narrative analysis of the results of operations for the three and
sixnine month periods ended JuneSeptember 30, 2001, the most recent periods, and the
three and sixnine month periods ended JuneSeptember 30, 2000, the same periods in the
year immediately preceding it.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements made by or on behalf of Union Carbide Corporation
(Union Carbide or the corporation). This section covers the current performance
of the corporation. The forward-looking statements contained in this section and
in other parts of this document involve risks and uncertainties that may affect
the corporation's operations, markets, products, services, prices and other
factors as more fully discussed elsewhere and in filings with the U.S.
Securities and Exchange Commission (SEC). These risks and uncertainties include,
but are not limited to, economic, competitive, legal, governmental and
technological factors. Accordingly, there is no assurance that the corporation's
expectations will be realized. The corporation has no obligation to provide
revisions to any forward-looking statements should circumstances change.
INTRODUCTORY NOTES TO READERS
On February 6, 2001, the corporation merged with a wholly owned subsidiary of
Dow. As a result of the merger, each share of Union Carbide common stock
outstanding immediately prior to the merger was exchanged for 1.611 shares of
Dow common stock and Union Carbide became a wholly owned subsidiary of Dow. The
merger received clearance from the U.S. Federal Trade Commission, the European
Commission and the Canadian Competition Bureau, subject to the divestiture of
certain assets and the contribution of UNIPOL (trademark symbol) polyethylene
technology licensing and polyethylene conventional catalyst businesses of the
corporation to its joint venture Univation Technologies, LLC. The transaction is
intended to qualify as a tax-free reorganization for U.S. federal income tax
purposes and has been accounted for under the pooling-of-interests method of
accounting.
In order to realize synergies of the merger, onthe corporation entered into
several agreements with Dow to combine legal entities. On June 30, 2001, the
corporation contributed all of its ownership interests in several wholly owned
entities in Europe and Latin America to wholly owned subsidiaries of Dow. In
return for the contribution of interests, the corporation received stock in each
acquiring company equal to the book value of the net assets that the corporation
contributed. The corporation's percentage ownership in these entities ranges
from 10 to 15 percent. Additionally, on September 30, 2001, the corporation
contributed all of its ownership interests in several other wholly owned
entities in Latin America to a Brazilian subsidiary of Modeland International
Holdings Inc. ("Modeland"), a wholly owned subsidiary of Dow. In return for the
contribution of interests, the corporation received stock in Modeland equal to
the book value of the net assets that the corporation contributed, which
represents 41 percent of Modeland's stock outstanding. For further details, see
Note DE to the corporation's consolidated financial statements included in this
Quarterly Report on Form 10-Q. Further integration of the corporation with and
into the Dow organization is expected to occur over the next several months.
Results of Operations16
RESULTS OF OPERATIONS
The corporation reported net incomeloss of $39$12 million for the secondthird quarter of 2001,
compared with $130net income of $29 million for the same quarter of 2000. Net loss
for the first halfnine months of 2001 was $832$844 million, compared with net income of
$227$256 million for the same halfnine months of 2000. In the first half of 2001,
results of operations were impacted by a special charge of $1,262 million ($829
million after tax) related to the merger of the corporation into a subsidiary of
Dow.
The first half ofDow (see Note C to the corporation's consolidated financial statements included
in this Quarterly Report on Form 10-Q).
Like other companies in the chemical industry, throughout 2001 proved to be one ofthe corporation
has experienced the most challenging periods everdifficult industry conditions in years. While
hydrocarbon and energy costs declined during the quarter from unusually high
levels, selling prices fell more sharply, compressing margins. The tragic events
that began on September 11 have further eroded consumer confidence and dampened
the outlook for the North American chemicalglobal economy. This year's macroeconomic and industry
and forconditions have resulted in a significant negative impact on the corporation.
Total net sales for the secondthird quarter of 2001 increased 1decreased 28 percent to $1,696$1,177
million from $1,674$1,637 million in the secondsame quarter of 2000. However, netNet trade sales for the
secondthird quarter of 2001 declined 2949 percent to $827 million from $1,674$1,637 million in
the secondthird quarter of 2000. Total net sales for the first nine months of 2001,
compared with the same period of 2000, declined 11 percent from $4,928 million
to $1,166 million in the second quarter of 2001.$4,409 million. Net trade sales for the first halfnine months of 2001 compared withdeclined 28
percent to $3,529 million from $4,928 million in the same halfnine months of 2000,
decreased 18 percent from $3,291 million to $2,702 million.2000.
In the second quarter of 2001, the corporation commenced selling product to its
parent company, Dow. The effect of the related company sales accounted for the
majoritya
portion of the decline in trade sales primarily in volume, for both the quarterly and year-to-date
periods. Volume was also negatively impacted by
the supply/demand imbalances within the chemical industry. The mostFurther declines in net trade sales represented a significant volume decline
in average selling prices coupled with smaller decline in volume. Declines in
average selling prices occurred in ethylene oxide/glycol, where weak
demandalmost all products for both the three and
high ethylene costs led to the temporary shutdown of production at
-14-
the corporation's ethylene glycol facility in Prentiss, Alberta, Canada,
during the first half of the year. In comparisonnine month periods ended September 30, 2001, as compared with the same periods
in 2000, overallalthough greater declines occurred in the third quarter of 2001.
Eroding average selling prices forreflect the current quartermarket's response to declines in raw
materials and energy costs and coupled with declines due to competitive market
pressures. Volume declines were down 1
percent while, for the six month period, average selling prices increased 2
percent. Average selling pricesmost significant in products such as oxide derivatives, industrialcore
chemicals, polyethylene and ethylene oxide/glycol. While most of these declines
related to market demand, especially in ethylene oxide/glycol, polyethylene, and
organic intermediates, solvents and monomers reported("OISM"), other declines reflected
the majoritycorporation's decision to forego lower margin sales. This was apparent by
the shutdown of the increases; however, these increases were partly
offset by declines in the corporation's more basic chemicals and plastics,
such as ethylene oxide/glycol, polyethylene and polypropylene.
Although total net sales remained relatively flatPrentiss, Alberta, Canada plant for the second quarter and
first
six monthshalf of 2001 compared with 2000, cost2001. Although the plant restarted in mid-July, operating rates for
ethylene glycol on the U.S. Gulf Coast were reduced.
17
Cost of sales increased by $113declined $380 million or 8 percent,(25 percent) and $187$193 million or 7 percent,(4 percent)
for the three and nine month periods ended September 30, 2001, respectively, as
compared with the same periods respectively. While thein 2000. The cost of oil and natural gas-related
raw materials and energy droppedcontinued to drop from the first quarter 2001high levels total costs were
higher forexperienced in
2000 and the three and six month periods ended June 30, 2001beginning of 2001. However, these declines did not occur as compared
with the same periodsquickly
as declines in average selling prices thereby causing a decrease in the
prior year. Gross margin was 8.7 percent for
the second quarter of 2001, a decline from 14.2 percent for the same periodcorporation's gross margins in 2000. For the first six months of 2001,2001. Additional declines in gross margin was 6.4 percent
compared with 13.8 percent for the same period last year. Salesmargins
occurred as sales to Dow in
the second quarter of 2001 were made at cost-to-produce thereby realizing
no profit. Additionally,For the nine month period, competitive pressures in the beginning of
2001, for most products, prevented the corporation from raising average selling
prices enough to totally offset the increase in raw material costs that the
companycorporation experienced throughout 2000 and the beginning of 2001. SomeThese
declines were offset by some margin improvement, in the second quarter of
2001, which was obtained by
producing a greater volume of polyethylene at the corporation's new Canadian
plant, where raw material cost is advantaged.
Research and development, and selling, general and administrative expenses
declined $24$19 million and $7$26 million, respectively, for the secondthird quarter of
2001 compared with the same quarter of 2000. For the first half ofnine month period ended
September 30, 2001, compared with the same halfperiod of 2000, research and
development, and selling, general and administrative expenses declined $36$55
million and $16$42 million, respectively. These declines are primarily the result
of decreases in
accruals for employee incentive plans coupled with synergies associated with the integration of the corporation into Dow.
In the first half of 2001, pretax costs of $1,262 million were recorded for
merger-related expenses and restructuring. These costs, the majority of which
were recorded in the first quarter, included transaction costs, employee
severance, and the write-down of duplicate assets and facilities. For further
details, see Note BC to the corporation's consolidated financial statements
included in this Quarterly Report on Form 10-Q.
Insurance and finance company operations, pretax income (loss) declined from
pretax income of $10 million in the third quarter of 2000 to a pretax loss of $2
million for the same quarter of 2001. Operations for the nine months ended
September 30, declined from pretax income of $15 million in 2000 to a pretax
loss of $3 million in 2001. Decline for the three and nine month periods
represent a reduction in investment income related to poor economic conditions
coupled with a decline in policy income as the corporation's insurance company
novates its policies to an insurance company of Dow.
Equity in earnings of nonconsolidated affiliates decreased from $52$27 million in
the secondthird quarter of 2000 to $11$19 million in the same quarter of 2001 while
earnings for the first sixnine months of 2001 declined from $94$121 million in 2000 to
$23$42 million in 2001. These declines principally reflect the absence of earnings
from Polimeri Europa, which was required to be divested as part of the merger
clearance from the European Union. Additionally, decreasedAdditional declines in the nine month period
reflected a decrease in earnings at UOP LLC ("UOP") and EQUATE which were partly
offset by lower losses related to Aspell Polymeres SNC. UOP's earnings continue
to be negatively impacted by the slowdown of projects in the oil and gas
industry which the venture services. EQUATE's earnings reflect weaker market
conditions, primarily declines in selling prices, for ethylene derivatives as
compared with the same periods last year.
-15-18
Sundry income - net(expense) for the second quarter and first six monthsnine-month period ended September
30, 2001 included a gain of $8 million from the sale of certain
available-for-sale securities. The nine month period ended September 30, 2000
included an $18 million ($11 million after tax) gain on shares received and
sold in connection with the demutualization of Metropolitan Life Insurance
Company a provider of certain employee benefit programs for the corporation.
Interest income for the secondthird quarter of 2001 remained relatively flat with the secondthird quarter
of 2000. However, interest income of $4 million infor the first half ofnine months ended September 30, 2001
declined $15to $7 million from the $19$22 million reported for the first halfsame nine months of
2000. The decline in the first halfnine-month amount wasis primarily the result of $15
million in interest income associated with a tax refund whichthat was received in the
first quarter of 2000.
Although interestInterest expense and amortization of debt discount for the quarterthree month and nine
month periods ended JuneSeptember 30, 2001 was comparable
to the same period in 2000, interest expense for the first half of 2001
increased $16$10 million asand $26 million,
respectively, compared with the first halfsame periods of 2000. The majority of the year-to-date increase representedthese
increases are related to a decline in capitalized interest from the prior year's
first half.comparable periods. Capitalized interest for the first sixnine months of 2000
related primarily to the corporation's olefins and polyethylene projects in
Canada, both of which were completed in the second half of 2000.
EnvironmentalENVIRONMENTAL
Estimates of future expenses related to environmental protection for compliance
with federal, state and local laws regulating solid and hazardous wastes and
discharge of materials to air and water, as well as for waste site remedial
activities, have not changed materially since December 31, 2000. The reliability
and precision of the loss estimates are affected by numerous factors, such as
different stages of site evaluation, the allocation of responsibility among
potentially responsible parties and the assertion of additional claims. The
corporation's environmental exposures are discussed in more detail in Note CD to
the consolidated financial statements included in this Quarterly Report on Form
10-Q.
Accounting ChangesACCOUNTING CHANGES
See Note GB to the consolidated financial statements included in this Quarterly
Report on Form 10-Q.
ItemITEM 3: Qualitative and Quantitative Disclosure About Market RiskQUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------------------
Omitted pursuant to General Instruction H of Form 10-Q.
-16-19
PartPART II. Other Information
ItemOTHER INFORMATION
--------------------------------------------------------------------------------
ITEM 1. Legal ProceedingsLEGAL PROCEEDINGS
See Note CD to the corporation's consolidated financial statements
included in this Quarterly Report on Form 10-Q.
ItemITEM 6. Exhibits and Reports on FormEXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1 Certificate of Change of Union Carbide Corporation
Under Section 805-A of the Business Corporation Law,
dated April 27, 2001.None
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed during this period.
-17-20
SIGNATURE
--------------------------------------------------------------------------------
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: August 14,November 6, 2001 By: /s/ Frank H. Brod
Frank H. Brod
Vice President & Controller
The Dow Chemical Company
Authorized Representative of
Union Carbide Corporation
-18-
21