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 JuneSeptember 30, 1999
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
(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 _______
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at JulyOctober 31, 1999
Common Stock, $1 par value 133,180,727133,857,750 shares
Total number of sequentially numbered pages in this filing,
including exhibits thereto: 27
UNION CARBIDE CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements of Union Carbide Corporation and
Subsidiaries
Condensed Consolidated Statement of Income -
Quarter ended JuneSeptember 30, 1999 and 1998...................1998.............. 3
Condensed Consolidated Statement of Income -
SixNine months ended JuneSeptember 30, 1999 and 1998................1998.......... 4
Condensed Consolidated Balance Sheet -
JuneSeptember 30, 1999 and December 31, 1998....................1998............... 5
Condensed Consolidated Statement of Cash Flows -
SixNine months ended JuneSeptember 30, 1999 and 1998................1998.......... 6
Notes to Condensed Consolidated Financial Statements..... 7-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 14-23
Item 3. Quantitative and Qualitative Disclosure About Market Risk. 15-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 24
Item 6. Exhibits and Reports on Form 8-K......................... 24
Signature.......................................................... 25
Exhibit Index...................................................... 26
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 the
pending merger with The Dow Chemical Company (the "Dow Merger"); plans;
objectives; strategies; anticipated future events or performance; sales;
cost, expense and earnings expectations; the Year 2000 issue; interest rate
and currency risk management; the chemical markets in 1999 and beyond;
cost reduction targets;
earnings and profitability targets; development, production and acceptance of new products and process
technologies; ongoing and planned capacity additions and expansions; joint
ventures; Management's Discussion & Analysis; 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-lookingforward-
looking statements include the supply/demand balance for the corporation's
products; customer inventory levels; competitive pricing pressures; feedstockraw
material availability and costs; changes in industry production capacities
and operating rates; currency exchange rates; interest rates; global economic
conditions; disruption in transportation facilities;
competitive technology positions; failure by the corporation to
achieve technology objectives, complete Year 2000 readiness, achieve cost
reduction targets or complete projects on schedule and on budget; inability
to obtain new customers or retain existing ones; and with respect to the Dow
Merger, failure to obtain necessary regulatory and other governmental
approvals and failure to satisfy conditions of the merger agreement.
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PART I. FINANCIAL INFORMATION
UNION CARBIDE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
Millions of dollars
(Except per share figures)
Quarter ended JuneSeptember 30,
1999 1998
NET SALES $1,418 $1,459$1,498 $1,350
Cost of sales, exclusive of depreciation and
amortization 1,115 1,0871,232 1,036
Research and development 39 3638 34
Selling, administrative and other expenses(a) 57 72 78
Depreciation and amortization 103 95 98
Partnership income (loss) (4) 2718 (46)
Other income - net 27 1052 129
INCOME BEFORE INTEREST EXPENSE AND PROVISION FOR
INCOME TAXES 135 203123 190
Interest expense 35 2932 28
INCOME BEFORE PROVISION FOR INCOME TAXES 100 17491 162
Provision for income taxes 25 5124 58
INCOME OF CONSOLIDATED COMPANIES AND PARTNERSHIPS 75 12367 104
Minority interest 1 1
Loss2 -
Income (loss) from corporate investments
carried at equity 18 412 (28)
NET INCOME $ 5677 $ 11876
Earnings per common share
Basic $ 0.420.58 $ 0.870.56
Diluted $ 0.410.57 $ 0.850.55
Cash dividends declared per common share $ 0.225 $ 0.225
(a) Selling, administrative and other expenses include:
Selling $ 2324 $ 2325
Administrative 16 2928 26
Other expenses 18 20 $ 5727
$ 72 $ 78
The Notes to Condensed Consolidated Financial Statements on Pages 7
through 13 should be read in conjunction with this statement.
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UNION CARBIDE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
Millions of dollars
(Except per share figures)
SixNine months ended JuneSeptember 30,
1999 1998
NET SALES $2,820 $3,020$4,318 $4,370
Cost of sales, exclusive of depreciation and
amortization 2,157 2,2483,369 3,284
Research and development 76 73114 107
Selling, administrative and other expenses(a) 127 156199 234
Depreciation and amortization 199 193302 288
Partnership income 2 6420 18
Other income - net 41 2193 150
INCOME BEFORE INTEREST EXPENSE AND PROVISION FOR
INCOME TAXES 304 435447 625
Interest expense 66 5698 84
INCOME BEFORE PROVISION FOR INCOME TAXES 238 379349 541
Provision for income taxes 59 11090 168
INCOME OF CONSOLIDATED COMPANIES AND PARTNERSHIPS 179 269259 373
Minority interest 24 2
Loss from corporate investments carried at equity 50 738 35
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 127 260217 336
Cumulative effect of change in accounting principle (20) -
NET INCOME $ 107197 $ 260336
Earnings per common share
Basic -
Income before cumulative effect of change
in accounting principle $ 0.951.63 $ 1.912.47
Cumulative effect of change in accounting principle (0.15) -
Net income 0.80 1.911.48 2.47
Diluted -
Income before cumulative effect of change
in accounting principle $ 0.931.59 $ 1.862.41
Cumulative effect of change in accounting principle (0.14) -
Net income 0.79 1.861.45 2.41
Cash dividends declared per common share $ 0.450.675 $ 0.450.675
(a) Selling, administrative and other expenses include:
Selling $ 4670 $ 4974
Administrative 41 5869 84
Other expenses 40 4960 76
$ 127199 $ 156234
The Notes to Condensed Consolidated Financial Statements on Pages 7 through 13
should be read in conjunction with this statement.
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UNION CARBIDE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
Millions of dollars
JuneSept. 30, Dec. 31,
1999 1998
ASSETS
ASSETS
Cash and cash equivalents $ 4136 $ 49
Notes and accounts receivable 1,0751,112 933
Inventories 599608 667
Other current assets 247257 257
Total current assets 1,9622,013 1,906
Property, plant and equipment 8,7148,872 8,409
Less: Accumulated depreciation 4,3634,444 4,228
Net fixed assets 4,3514,428 4,181
Companies carried at equity 561629 624
Other investments and advances 11988 141
Total investments and advances 680717 765
Other assets 472502 439
Total assets $ 7,465$7,660 $7,291
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 259267 $ 264
Short-term debt and current portion of
long-term debt 419634 426
Accrued income and other taxes 2230 110
Other accrued liabilities 662693 670
Total current liabilities 1,3621,624 1,470
Long-term debt 2,0441,868 1,796
Postretirement benefit obligation 439434 450
Other long-term obligations 591608 602
Deferred credits 550562 488
Minority stockholders' equity in consolidated
subsidiaries 3840 36
Stockholders' equity:
Common stock - authorized - 500,000,000 shares
- issued - 156,563,343157,226,880 shares 157 155
(155,052,017 shares in 1998)
Additional paid-in capital 114128 79
Other equity adjustments (2)(1) (2)
Accumulated other comprehensive loss (157)(150) (104)
Retained earnings 3,4043,466 3,357
Unearned employee compensation - ESOP (56)(57) (67)
Treasury stock, at cost-23,415,856cost- 23,414,857 shares
(22,366,017 shares in 1998) (1,019) (969)
Total stockholders' equity 2,4412,524 2,449
Total liabilities and stockholders' equity $ 7,465$7,660 $7,291
The Notes to Condensed Consolidated Financial Statements on Pages 7 through 13
should be read in conjunction with this statement.
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UNION CARBIDE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Millions of dollars
SixNine months ended JuneSept. 30,
1999 1998
Increase (decrease) in
cash and cash equivalents
OPERATIONS
Income before cumulative effect of change in
accounting principle $ 127217 $ 260336
Noncash charges (credits) to net incomeincome:
Depreciation and amortization 199 193302 288
Deferred income taxes 81 9899 93
Equity in (earnings) losses of joint ventures,
net of cash received 68 453 104
Other 21 3836 32
Increase in working capital(a) (215) (200)(211) (49)
Long-term assets and liabilities (33) (36)(77) (55)
Cash Flow From Operations 248 357419 749
INVESTING
Capital expenditures (381) (357)(559) (571)
Investments, advances and acquisitions (62) (23)(91) (30)
Proceeds from the sale of
available-for-sale securities 18 1728 33
Purchase of available-for-sale securities (28) (22)(35) (39)
Sale of fixed and other assets 19 626 7
Cash Flow Used For Investing (434) (379)(631) (600)
FINANCING
Change in short-term debt (3 months or less) 20 (73)243 (70)
Proceeds from short-term debt 2 2522
Repayments of short-term debt (8) -(17) (11)
Proceeds from long-term debt 285 248
Repayments of long-term debt (52) (3)(227) (5)
Issuance of common stock 30 2441 34
Purchase of common stock (50) (129)(258)
Payment of dividends (60) (61)(90) (92)
Other 11 9
Cash Flow From (Used For) Financing 178 40198 (123)
Effect of exchange rate changes on cash and
cash equivalents - -1 (1)
Change in cash and cash equivalents (8) 18(13) 25
Cash and cash equivalents beginning-of-period 49 20
Cash and cash equivalents end-of-period $ 4136 $ 3845
Cash paid for interest and income taxes
Interest (net of amount capitalized) $ 7293 $ 5473
Income taxes $ 1831 $ 2434
_____________
(a) Net change in certain components of working capital (excluding
non-cash expenditures):
(Increase) decrease in current assets
Notes and accounts receivable $(146)$(176) $ (1)71
Inventories 71 (15)62 2
Other current assets (20) 7(21) (21)
Decrease in payables and accruals (120) (191)(76) (101)
Increase in working capital $(215) $(200)$(211) $ (49)
The Notes to Condensed Consolidated Financial Statements on Pages 7
through 13 should be read in conjunction with this statement.
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UNION CARBIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Consolidated Financial Statements
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments necessary for
a fair statement of the results for the interim periods. These
adjustments consist of only normal recurring adjustments. The
accompanying statements should be read in conjunction with the Notes to
Financial Statements of Union Carbide Corporation and Subsidiaries ("the
corporation" or "UCC") in the 1998 annual report to stockholders.
Unrealized gains and losses resulting from translating foreign
subsidiaries' assets and liabilities into U.S. dollars generally are
recognized as part of "Comprehensive Income," and are included in
"Accumulated other comprehensive loss" on the Condensed Consolidated
Balance Sheet until such time as the subsidiary is sold or substantially
or completely liquidated. Translation gains and losses relating to
those operations located in Latin American countries where
hyperinflation exists and to international operations using the U.S.
dollar as their functional currency are included in the Condensed
Consolidated Statement of Income.
Certain amounts in the Condensed Consolidated Statement of Cash Flows
for the nine months ended September 30, 1998 have been reclassified to
conform to the current period's presentation.
2. Comprehensive Income
The following summary presents the components of comprehensive income:
Millions of dollars Quarter Ended SixNine Months Ended
JuneSept. 30 JuneSept. 30,
1999 1998 1999 1998
Net income $56 $118 $107 $260$77 $ 76 $197 $336
Other comprehensive income (loss):
Unrealized gains and losses on
available-for-sale securities, net of
reclassification adjustment, net of tax 2 (2) 2 4(1) (3) 1 1
Foreign currency translation adjustments (2) (16) (55) (8)8 (26) (47) (34)
Total comprehensive income $56 $100$84 $ 54 $25647 $151 $303
3. Inventories
JuneSept. 30, Dec. 31,
Millions of dollars 1999 1998
Raw materials and supplies $148$150 $187
Work in process 5068 41
Finished goods 401390 439
$599$608 $667
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4. Business and Geographic Segment Information
The corporation has two operating segments, Specialties & Intermediates
("S&I") and Basic Chemicals & Polymers ("BC&P"). The S&I segment
includes the corporation's specialty chemicals and polymers product
lines, licensing, and solvents and chemical intermediates. The BC&P
segment includes the corporation's ethylene and propylene manufacturing
operations as well as the production of first-level ethylene and
propylene derivatives-
polyethylene,derivatives-polyethylene, polypropylene, ethylene oxide and
ethylene glycol. In addition to its operating segments, the
corporation's Other segment includes its non-core operations and
financial transactions other than derivatives designated as hedges, which
are included in the same segment as the item being hedged.
Sales of the BC&P segment include intersegment sales, principally
ethylene oxide, which are made at the estimated market value of the
products transferred. The corporation evaluates performance based on
Income before interest expense and provision for income taxes (operating
profit).
S&I BC&P Other Total
Millions of dollars
three monthsquarter ended
JuneSeptember 30, 1999
Net sales $1,036 $382$1,057 $441 $ - $1,418$1,498
Intersegment revenues - 5481 - 5481
Segment revenues 1,036 4361,057 522 - 1,4721,579
Depreciation and amortization 62 3367 36 - 95103
Partnership income (loss) (2) (2)17 1 - (4)18
Operating profit (loss) 182 (46) (1) 135134 (7) (4) 123
Interest expense - - 35 3532 32
Income (loss) from corporate
investments carried at equity - (18)12 - (18)
June12
September 30, 1998
Net sales $1,060 $399$ 995 $355 $ - $1,459$1,350
Intersegment revenues - 8166 - 8166
Segment revenues 1,060 480995 421 - 1,5401,416
Depreciation and amortization 61 3734 - 9895
Partnership income 24(loss) (49) 3 - 27(46)
Operating profit (loss) 166 42 (5) 203233 (13) (30) 190
Interest expense - - 29 2928 28
Income (loss) from corporate
investments carried at equity 2 (6)(3) (25) - (4)(28)
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S&I BC&P Other Total
Millions of dollars
sixnine months ended
JuneSeptember 30, 1999
Net sales $2,070 $750$3,127 $1,191 $ - $2,820$4,318
Intersegment revenues - 107188 - 107188
Segment revenues 2,070 8573,127 1,379 - 2,9274,506
Depreciation and amortization 125 74192 110 - 199302
Partnership income 219 1 - - 220
Operating profit (loss) 385 (84) 3 304530 (82) (1) 447
Interest expense - - 66 6698 98
Income (loss) from corporate
investments carried at equity 4 (54)(42) - (50)
June(38)
September 30, 1998
Net sales $2,180 $840$3,175 $1,195 $ - $3,020$4,370
Intersegment revenues - 158224 - 158224
Segment revenues 2,180 9983,175 1,419 - 3,1784,594
Depreciation and amortization 121 72182 106 - 193288
Partnership income 61 312 6 - 6418
Operating profit (loss) 368 78 (11) 435601 65 (41) 625
Interest expense - - 56 5684 84
Income (loss) from corporate
investments carried at equity 5 (12)2 (37) - (7)(35)
The operatingOperating profit of the S&I segment includes $38 million and $50 million
in net gains from litigation settlements related to the licensing
business for the threequarter and sixnine months ended JuneSeptember 30, 1999,
respectively.
Operating profit of the S&I segment includes a $12 million net gain fromof $118 million
related to the favorable settlement of UNIPOL Systems business litigation
and a litigation settlement.$53 million reduction in partnership earnings related to losses
associated with Aspell Polymeres SNC for the quarter and nine months
ended September 30, 1998.
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5. Earnings Per Share
Millions of dollars, Quarter Ended JuneSept. 30, SixNine Months Ended JuneSept. 30,
except per share amounts 1999 1998 1999 1998
Basic -
Income before cumulative effect of change
in accounting principle $ 5677 $ 11876 $ 127217 $ 260336
Cumulative effect of change in accounting
principle - - (20) -
Net income $ 5677 $ 11876 $ 107197 $ 260336
Weighted average number of shares
outstanding for basic calculation 133,088,173 136,132,527 132,968,994 136,502,193133,464,524 134,286,957 133,135,986 135,755,666
Earnings per share -
Income before cumulative effect of change
in accounting principle $0.42 $0.87 $0.95 $1.91$0.58 $0.56 $1.63 $2.47
Cumulative effect of change in accounting
principle - - (0.15) -
Net income $0.42 $0.87 $0.80 $1.91$0.58 $0.56 $1.48 $2.47
Diluted -
Income before cumulative effect of change
in accounting principle $ 5677 $ 11876 $ 127217 $ 260336
Cumulative effect of change in accounting
principle - - (20) -
Net income $ 5677 $ 11876 $ 107197 $ 260336
Weighted average number of shares
outstanding for basic calculation 133,088,173 136,132,527 132,968,994 136,502,193133,464,524 134,286,957 133,135,986 135,755,666
Add: Effect of stock options 3,365,490 3,772,915 3,113,510 3,653,5833,434,248 3,258,418 3,220,422 3,521,861
Weighted average number of shares
outstanding for diluted calculation 136,453,663 139,905,442 136,082,504 140,155,776136,898,772 137,545,375 136,356,408 139,277,527
Earnings per share -
Income before cumulative effect of change
in accounting principle $0.41 $0.85 $0.93 $1.86$0.57 $0.55 $1.59 $2.41
Cumulative effect of change in accounting
principle - - (0.14) -
Net income $0.41 $0.85 $0.79 $1.86$0.57 $0.55 $1.45 $2.41
6. Long-Term Debt
In April 1999, the corporation issued $250 million 6.70 percent Public
Notes due April 2009. These notes pay interest semi-annually in April
and October of each year.
The corporation intends to refinance its $110 million of Floating Rate
Public Notes due in April 2000 by either borrowing under its existing
major bank credit agreement aggregating $1 billion or under a prospective
borrowing. Accordingly, such amount has been classified as non-current
debt.
7. Common Stock
Since inception of its repurchase authorization in 1993 through June 30,
1999, the corporation has repurchased 56.4 million shares (1.0 million
during the first six months of 1999) out of a total authorization of 60
million shares, at an average effective price of $36.01 per share.
On August 3, 1999, the Board of Directors rescinded the corporation's
authorization to repurchase shares under the common stock repurchase
authorization, subsequent to thisthat date. Since inception of its
repurchase
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In conjunction withauthorization in 1993 through August 3, 1999, the corporation's repurchasecorporation repurchased
56.4 million shares (1.0 million during the first nine months of 1999)
out of a total authorization put options
were sold in a series of private placements, all of which were either
exercised or expired unexercised prior to December 31, 1997. Premiums
received were recorded as Additional paid-in capital and reduced the60 million shares, at an average
effective price of repurchased shares from $36.25$36.26 per share to $36.01 per share, since
inception of the repurchase authorization.
7.share.
8. Commitments and Contingencies
The corporation has entered into three major agreements for the purchase
of ethylene-related products and two other purchase agreements. The net
present value of the fixed and determinable portion of these obligations
at JuneSeptember 30, 1999 totaled $220$206 million.
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 JuneSeptember 30, 1999, the corporation had established environmental
remediation accruals in the amount of $202$198 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
$119$120 million.
The corporation has sole responsibility for the remediation of
approximately 40 percent of its environmental sites. These sites are
well advanced in the investigation and cleanup stage. The corporation's
environmental accruals at JuneSeptember 30, 1999 included $161$158 million for
these sites, of which $58 million was for estimated future expenditures
for site investigation and cleanup and $103$100 million was for estimated
future expenditures for closure and postclosure activities. In addition,
$68$81 million of the corporation's environmental loss contingencies related
to these sites. The two sites with the largest total potential cost to
the corporation are nonoperating sites. Of the above accruals, these
sites accounted for $37$36 million, of which $17$18 million was for estimated
future expenditures for site investigation and cleanup and $20$18 million
was for estimated future expenditures for closure and postclosure
activities. In addition, $42 million of the above environmental loss
contingencies related to these sites.
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The corporation does not have sole responsibility at the remainder of its
environmental sites. All of these sites are in the investigation and
cleanup stage. The corporation's environmental accruals at JuneSeptember 30,
1999 included $41$40 million for estimated future expenditures for site
investigation and cleanup at these sites. In addition, $51$39 million of
the corporation's environmental loss contingencies related to these
sites. The largest three of these sites are also nonoperating sites. Of
the above accruals, these sites accounted for $15 million for estimated
future expenditures for site investigation and cleanup. In addition,
$17 million of the above environmental loss contingencies related to
these sites.
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In 1998, worldwide expenses of continuing operations 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 $91
million. Expenses in 1997 and 1996 were $100 million and $110 million,
respectively. While estimates of the costs of environmental protection
for 1999 are necessarily imprecise, the corporation estimates that the
level of these expenses will be at a level comparable to the average of
the last three years.
The corporation has severally guaranteed 45 percent (approximately
$526$641 million at JuneSeptember 30, 1999) of EQUATE Petrochemical Company's
("EQUATE") debt and working capital financing needsneeds. Of this amount,
approximately $474 million is severally guaranteed until certain
completion and financial tests are achieved. If these tests are met, a
$54 million several guarantee will provide ongoing support thereafter. The corporation 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, through
March 31, 2001, substantially all of its guarantee of EQUATE's debt.
The corporation had additional contingent obligations at JuneSeptember 30,
1999 of $128$123 million, of which $32 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 and taxes. 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
$129 million, and related insurance recovery receivables of $113$112 million.
At JuneSeptember 30, 1999, the corporation had nonenvironmental litigation
loss contingencies of $62$66 million.
While it is impossible 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.
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8.9. Accounting Changes
Effective January 1, 1999, the corporation adopted the provisions of the
American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities."
This SOP requires the expensing of certain costs, such as pre-operating
expenses and organizational costs associated with an entity's start-up
activities. In accordance with this SOP's provisions, on January 1, 1999,
the corporation recognized a charge of $27 million ($20 million after tax)
as a cumulative effect of change in accounting principle, the majority of
which represented formation costs associated with the corporation's joint
ventures.
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Also effective January 1, 1999, the corporation prospectively adopted the
provisions of the AICPA's SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The effect of this
adoption was not material to the corporation's results of operations or
financial condition in the quarter of adoption and is not expected to be
material to the corporation's results of operations or financial
condition for the year ending December 31, 1999.
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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. 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," is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000.
The corporation is currently evaluating the effect this Statement No. 133 will
have on its financial position and results of operations in the period of
adoption.
9. Subsequent Events
In July 1999, the corporation received a favorable licensing litigation
settlement of $38 million, which will be included in Other income of
the S&I segment in the third quarter of 1999.10. The Dow Merger
On August 3, 1999 the corporation and The Dow Chemical Company ("Dow")
entered into a definitive Agreement and Plan of Merger. Under the
agreement the corporation's shareholders will receive 0.537 sharesof a share of
Dow Common
Stockcommon stock for each share of UCC Common Stockcommon stock they own as of the
date of the merger, which is not anticipated to occur before the first quarter of
2000. Additionally, themerger. The merger is subject to certain conditions including
approval by UCC shareholders, and review by antitrust regulatory
authorities in the United States, Europe and Canada.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Union Carbide operates in two business segments. The Specialties &
Intermediates ("S&I") segment converts basic and intermediate chemicals into a
diverse portfolio of chemicals and polymers serving industrial customers in
many markets. This segment also provides technology services, including
licensing, to the oil and petrochemicals industries. The Basic Chemicals &
Polymers ("BC&P") segment converts hydrocarbon feedstocks, principally
liquefied petroleum gas and naphtha, into ethylene or propylene used to
manufacture polyethylene, polypropylene, ethylene oxide and ethylene glycol
for sale to third-party customers, as well as ethylene, propylene, ethylene
oxide and ethylene glycol for consumption by the S&I segment. In comparison
to those of S&I, the revenues and operating profit of BC&P tend to be more
cyclical and very sensitive to a number of external variables, including
overall economic demand, hydrocarbon feedstock costs, industry capacity
increases and plant operating rates.
In addition to its business segments, the corporation's Other segment includes
its non-core operations and financial transactions other than derivatives
designated as hedges, which are included in the same segment as the item being
hedged.
Summary
The corporation reported secondthird quarter net income of $56$77 million, or $0.41$0.57 per
diluted share ($0.420.58 per basic share). For the correspondingsame quarter inof 1998 the
corporation reported net income of $118$76 million, or $0.85$0.55 per diluted share
($0.870.56 per basic share). Net income for the sixfirst nine months ended June 30,of 1999 was
$107$197 million, or $0.79$1.45 per diluted share ($0.801.48 per basic share) after a
charge for the cumulative effect of a change in accounting principle of $20
million, or $0.14 per diluted share ($0.15 per basic share), reported in the
first quarter of 1999. ForNet income for the same sixfirst nine months of 1998 the corporation reported
net income of $260was $336
million, or $1.86$2.41 per diluted share ($1.912.47 per basic share).
Included in operating profitConsolidated net sales for the secondthird quarter of 1999 is a net
gain of $12increased $148 million,
($9 million after-tax) related to a litigation settlement.
Consolidated net sales declined 2.8or 11.0 percent from $1,459$1,350 million forin the secondthird quarter of 1998 to $1,418 million for the second quarter of 1999.1998. This
declineincrease was the result of a 13.84.3 percent decrease in average customer selling
prices
partially offset by a 12.815.8 percent increase in customer volume. Consolidated net
sales for the six month period ended June 30,first nine months of 1999 compared todecreased $52 million, or 1.2 percent
over the same six monthsperiod in 1998 decreased 6.6 percent from $3,020 million in 1998 to $2,820
million in 1999.1998. The decline in the six month figures representsyear-to-date amounts is the
result of a 16.412.5 percent declinedecrease in average customer selling prices somewhatpartially
offset by an 11.5a 12.9 percent increase in customer volume. DeclinesVolume increases in
average selling pricesboth segments, for the three and sixnine month periods ended September 30, 1999
compared with the same periods in 1998, reflected an increase in current year
demand, as well as an increase in the continuing declinesproduction and sale of hydrocarbon
co-products. In the third quarter of 1998, production and sale of hydrocarbon
co-products were reduced as the result of a longer than anticipated plant
shutdown at Taft, La. in average selling pricesconnection with a scheduled plant turnaround and
expansion. Additionally, shipments for the chemical industry, since 1998, which primarilyprior year nine month period were
adversely affected products in the
BC&P segment. However, during the second quarter of 1999, commodity
polyethylene did experience some increase in average selling prices, although
these increases were unable to match the selling price levels experienced in
1998. Both segments benefited from volume increases for the quarter and year-
to-date periods. BC&P experienced the greatest volume benefit due to
increased demand and the absence ofby transportation delays in the U.S. Gulf Coast region which occurred during the first half of 1998, while S&I
experienced some increase due to a higher volume of sales to Asia offset
slightly by some seasonal volume declines, particularly in deicers.
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Coast.
Consolidated unit variable margin (revenues less variable manufacturing and
distribution costs divided by customer volume) declined from 17.917.5 cents per
pound forin the secondthird quarter of 1998 to 14.414.1 cents per pound forin the comparable
period of 1999.1999 mainly due to rising raw material costs. Consolidated unit
variable margin for the first halfnine months of 1998 was 18.218.0 cents per pound
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compared to 15.2with 15.0 cents per pound infor the first halfsame period of 1999. Declines in
unit variable margin are largely due tofor the nine month period reflected falling average
selling prices particularly in the BC&P segment, coupled with rising raw material costs.costs, particularly ethane.
Fixed cost per pound of products sold (fixed manufacturing and distribution
costs, plus research and development and selling, administrative and other
expenses, divided by customer volume) droppeddeclined from 10.811.9 cents per pound in
the secondthird quarter of 1998 to 9.510.4 cents per pound infor the secondsame quarter of
1999. For the first half ofnine months ended September 30, 1999, consolidated fixed cost
per pound of productproducts sold was 9.7decreased from 11.3 cents per pound versus 11.0in the same
period of 1998 to 9.9 cents per pound for the first half of
1998. Declinespound. Overall, declines are primarily due to
higher volumes and slightly lowerover relatively stable fixed costs in each of the comparable
periods. DecreasesFixed costs in fixed1999 included costs a majority
of which was in selling, administrative and other expenses, reflected lower
spending associated with certain information technology projectsa plant
turnaround in Canada and lowera fire at the corporation's plant in Wilton, U.K.
Fixed costs of incentive compensation, insurance and taxes.in 1998 included costs related to the longer than anticipated
plant turnaround at the Taft, La. facility.
Partnership income decreased $31increased from a loss of $46 million in the third quarter
of 1998 to income of $18 million in the third quarter of 1999. Partnership
income for the nine months ended September 30, 1999 increased $2 million to
$20 million over the same nine months of 1998. Increases for the three and
nine month periods reflect lower losses from Aspell Polymeres, SNC ("Aspell")
in 1999 than those recognized by the corporation in the same periods of 1998.
Additionally, the nine month period includes lower income from the
corporation's UOP,LLC ("UOP") joint venture. Throughout the end of 1998 and
into the beginning of 1999, UOP experienced lower sales in areas with weak
economies such as Russia, Asia and the Middle East.
Other income - net for the quarter and nine months ended September 30, 1999
includes $38 million and $62$50 million, respectively, of net gains from
favorable litigation settlements related to the licensing business. Other
income - net for the third quarter and first nine months of 1998 included a
net gain from a favorable litigation settlement related to the licensing
business of $118 million.
Interest expense increased $4 million and $14 million for the three and sixnine
month periods ended JuneSeptember 30, 1999, respectively, as compared to the samesimilar
periods in 1998. Declines for each periodThese increases are principally the result of a
decline in earnings of UOP LLC (UOP), which has been significantly affected by
depressed economic conditions in Asia, Russia and the Middle East since latedue to additional debt outstanding
throughout 1999 as compared to 1998.
The depressed conditions have caused many UOP customers to defer a
number of projects until stronger market conditions exist. Loss from
corporate investments carried at equity increased $14 millioneffective tax rate was 26.4 percent and $43 million25.8 percent for the three and
sixnine month periods ended JuneSeptember 30, 1999, respectively,
compared torespectively. The corporation's
effective tax rate for the same three and nine month periods in 1998 was 35.8
percent and 31.1 percent, respectively. The effective tax rate for 1998 was
increased as the result of higher tax rates associated with the corporation's
favorable litigation settlement in the third quarter of 1998. These increased losses are related toExcluding this
settlement, the decline in worldwide basic chemicaleffective tax rates would have been 27.3 percent and polymer selling prices which began
in 1998, particularly in Asia and Europe, for the comparable periods.
Interest expense increased $6 million and $10 million28.8
percent for the three and sixnine month periods ended June 30, 1999, respectively, as compared to the three and
six month periods ended JuneSeptember 30, 1998.
These increases areDeclines in the result of
additional debt incurred throughout the periods.
For the quarter and six months ended June 30, 1999 the corporation's tax rate
was 25 percent, a decline of approximately 4 percentage pointsrates from the quarter and six months ended June 30,adjusted 1998 rates principally reflectingreflect
the expected effect of a higher percentage of research and experimentation and
foreign sales corporation tax credits in 1999.
Corporate Matters
Interest Rate and Currency Risk Management
The corporation selectively uses financial instruments to manage its exposure
to market risk related to changes in foreign currency exchange rates and
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interest rates. The corporation does not hold derivative financial
instruments for trading purposes.
At JuneSeptember 30, 1999, the corporation held open foreign currency forward
contracts and purchased options with net notional amounts of $335$253 million and
an unrecognized net gainloss of $2.8$1.0 million.
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The corporation used sensitivity analysis to evaluate the potential effect of
movements in foreign currency exchange rates and interest rates on the
condensed consolidated financial statements. Based on this analysis, a
hypothetical 10 percent weakening in the U.S. dollar across all currencies
would have resulted in a $3.4$0.2 million net gainloss at JuneSeptember 30, 1999.
Alternatively, a hypothetical 10 percent strengthening in the U.S. dollar
across all currencies would have resulted in a $9.6$4.9 million net gain at
JuneSeptember 30, 1999. These types of gains and losses, if any, would generally
be offset by fluctuations in underlying currency transactions.
The corporation's total long-term debt totaled $2,045$1,869 million at JuneSeptember 30, 1999,
of which $125 million was variable-rate debt. The corporation held short-term
debt of $418$633 million at JuneSeptember 30, 1999. At that date, a hypothetical
10 percent increase or decrease in market interest rates would not have
materially affected interest expense or cash flows related to variable-rate
debt or short-term debt. A 10 percent increase in market interest rates would
have decreased the net fair market value of fixed-rate debt instruments by
$104$103 million at JuneSeptember 30, 1999, and a 10 percent decrease in market
interest rates would have increased the net fair market value of fixed-rate
debt instruments by $117$116 million at JuneSeptember 30, 1999.
Outlook - Corporate
The corporation anticipates that thirdfourth quarter results will reflect recently
announced increases in average selling prices for certain of the BC&P
segment's products, which will be partially offset by slight increases in the
cost of raw materials. Customerpolyethylene, polypropylene
and for ethylene glycol. Although volume is expected to remain at second
quarter levels. Although licensing income forbe similar to the
third quarter, may be lower
than second quarter levels, the corporation anticipates that licensing income
for the year will approximate 1998 levels. Partnership results arecost of sales is expected to improvebe negatively affected by raw
material cost increases which are anticipated to continue into the fourth
quarter. Licensing income, excluding the litigation settlement received in the
third quarter, but are unlikelyis expected to experienceincrease slightly from third quarter levels.
Partnership income could decline, as a full
recovery until stability occurs in long-term oil prices and economies in Asia,
Russia and the Middle East improve. Income before interest expense and
provision forresult of increased expenses associated
with cost reduction programs at UOP; however, income taxes will reflect a favorable litigation settlement of
$38 million. The corporation's share of Losses from corporate
investments carried at equity mayshould show improvement. Excluding the
litigation gain in the third quarter of 1999, the combination of improved
results for BC&P and corporate investments carried at equity are anticipated
to more than offset any decline as increases in worldwide basic chemical and
polymer selling prices and steady demand are expected to continue throughout
1999.the S&I results for overall improved fourth
quarter net income.
On August 3, 1999 the corporation and The Dow Chemical Company ("Dow") entered
into a definitive Agreement and Plan of Merger. Under the agreement the
corporation's shareholders will receive 0.537 sharesof a share of Dow Common Stockcommon stock
for each share of UCC Common Stockcommon stock they own as of the date of the merger, which is not
anticipated to occur before the first quarter of 2000. Additionally, themerger. The
merger is subject to certain conditions including approval by UCC shareholders,
and review by antitrust regulatory authorities in the United States, Europe and
Canada. The transaction is intended to qualify as a tax-free reorganization for
United States Federal income tax purposes and is expected to be accounted for
under the pooling-of-
interestspooling-of-interests method of accounting.
The corporation regularly reviews its assets with the objective of maximizing
the deployment of resources in core operations. In this regard, UCC continues
to consider strategies and/or transactions with respect to assets not essential
to the operation of the business that, if implemented, could result in material
nonrecurring gains or losses.
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Specialties and Intermediates
Quarter Ended SixNine Months Ended
Millions of dollars, JuneSept. 30, JuneSept. 30, JuneSept. 30, JuneSept. 30,
except as indicated 1999 1998 1999 1998
Segment revenues $1,036 $1,060 $2,070 $2,180$1,057 $ 995 $3,127 $3,175
Depreciation and amortization 6267 61 125 121192 182
Partnership income (loss) (2) 24 2 6117 (49) 19 12
Operating profit 182 166 385 368134 233 530 601
Income (loss) from corporate
investments carried at equity - 2(3) 4 52
Unit variable margin (cents/pound) 22.5 23.1 24.1 23.720.1 25.3 22.9 24.2
Fixed cost per pound of products
sold (cents/pound) 13.0 13.9 13.5 14.214.1 14.7 13.7 14.3
Capital expenditures 93 131 162 22158 111 220 332
Segment revenues offor the S&I segment declined 2.3increased 6.2 percent for the third
quarter ended
June 30,of 1999, the result of a 13.16.4 percent decline in average selling prices
partiallywhich was offset by a 12.613.3 percent increase in customer volume, versuscompared with
the same quarter in 1998. S&I segment revenues for the first halfnine months of
1999 declined 5.01.5 percent, reflecting an 11.5a 9.9 percent decline in average selling
prices, andpartially offset by a 7.39.3 percent increase in customer volume.
AverageDeclines in average selling prices which progressively
declined during 1998 andfor the first half of 1999, reflectedcurrent periods reflect worldwide
competitive pricing pressure particularly on sales in Asian marketssolvent, intermediate, monomer, industrial
performance chemical and of
solvents, intermediatewire and monomercable products. Volume increases for the
quarter and year-to-date periods ended JuneSeptember 30, 1999 reflected an
increase in demand, particularlypartly in Asia, over the same periods in the second quarter of 1999, which was partially offset
by a seasonal decline in products such as deicers during the second quarter of
1999.1998.
For the second quarter ofand nine months ended September 30, 1999, compared to the same quarter of 1998, unit variable margin
decreased 2.620.6 percent and 5.4 percent, respectively, as compared with the
same periods in 1998, as average selling prices declined at a
faster rate than the direct cost to produce those products. Unit variable
margin for the first half of 1999 improved 1.7 percent over the same period in
1998 reflecting an increase in sales of products with higher variable margin
as well as a reduction inwhile raw material
costs in the first quarter, partially
offset by increasedincreased. Throughout 1999, raw material costs have steadily been
rising to the high levels experienced in the secondthird quarter. Historically,
average selling price increases for products in the S&I segment have generally
lagged raw material cost increases.
Fixed cost per pound of products sold decreased for the three and sixnine month
periods ended JuneSeptember 30, 1999 compared to the same periods in 1998
primarily due to an increase in volume partiallywhich more than offset by somewhat higher fixed
costs.
The declineIncreases in Partnershippartnership income is primarily attributable to unfavorable
market conditionsfor the three and nine month periods ended
September 30, 1999 as compared with the same periods in Asia, Russia and1998, resulted from
the Middle East, which have caused UOP's
customers to defer projects until stronger market conditions are present,
coupled withrecognition of lower losses related to Aspell Polymeres, SNC.in 1999. Additionally, the
nine month period was negatively impacted by poor results experienced by UOP
due to a decline in projects coming from markets in Russia, Asia and the
Middle East.
Operating profit for the quarter and nine months ended September 30, 1999
included $38 million and $50 million of net gains from litigation settlements
related to the licensing business, respectively. Operating profit for the
same periods in 1998 included the above mentioned $53 million of losses
associated with Aspell and a $118 million net gain fromrelated to a favorable
litigation settlement of $12
million infor the second quarter of 1999.licensing business.
Outlook - Specialties &and Intermediates
ForLooking into the third quarter of 1999, segment revenues and operating profit for the
S&I segment are anticipated to be below second quarter amounts. In general,
selling prices for most of the S&I products should remain flat, however, some
increases in the corporation's solvent, intermediates and monomer products may
occur. Although licensing income is expected to decline from second quarter
amounts in the thirdfourth quarter, the corporation anticipatesexpects that licensing
income for the yearmargins will
approximate 1998 levels. Partnership results are
expectedcontinue to improvesuffer as increases in the third quarter, but are unlikelyaverage selling prices will continue to experience alag
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full recovery until stability occursincreases in long-term oil prices and Asian,
Russian and Middle Eastern economies improve. Additionally, this segment's
operating profit will benefitraw material costs. Excluding the reported litigation gain,
licensing income is anticipated to increase slightly from third quarter 1999
levels. Partnership income may decline as a favorable litigation settlementresult of $38
million in the third quarter.increased expenses
associated with cost reduction programs at UOP.
Basic Chemicals & Polymers
Quarter Ended SixNine Months Ended
Millions of dollars, JuneSept. 30, JuneSept. 30, JuneSept. 30, JuneSept. 30,
except as indicated 1999 1998 1999 1998
Segment revenues $ 436522 $ 480 $ 857 $ 998421 $1,379 $1,419
Depreciation and amortization 33 37 74 7236 34 110 106
Partnership income (loss) (2)1 3 - 31 6
Operating profit (loss) (46) 42 (84) 78(7) (13) (82) 65
Income (loss) from corporate
investments carried at equity (18) (6) (54) (12)12 (25) (42) (37)
Unit variable margin (cents/pound) 4.5 11.5 4.9 11.47.1 8.2 5.8 10.3
Fixed cost per pound of products
sold (cents/pound) 5.2 7.2 5.2 7.15.9 7.8 5.4 7.4
Capital expenditures 115 80 219 136120 103 339 239
Segment revenues for the third quarter ended June 30,of 1999 as compared with the same
quarter of 1998 reflected a 15.14.1 percent declineincrease in customer average selling price partially offset by a 13.1prices and
an 18.9 percent increase in customer volume, as compared to the same quarter of 1998.volume. Segment revenues for the first
halfnine months of 1999 reflected a 23.414.9 percent decline in customer average selling prices
partially offset byand a 16.817.4 percent increase in customer volume. Average customer selling
prices declined steadily throughout 1998, experienced a smallerslower decline in the
first quarter of 1999 and showed some recoverygrowing improvement in the second and third
quarters of 1999. Although pricing in the third quarter of 1999.1999 was higher
than in the same quarter of 1998, the overall average for the nine months is
much lower due to weak pricing in the first half of 1999 as compared with the
first half of 1998. Volume increases forin both the three and nine month periods
are principally attributable to increasedreflected an increase in current year demand and an increase in the absenceproduction
and sale of hydrocarbon co-products in the current year. In the third quarter
of 1998, production and sale of hydrocarbon co-products were reduced as a
result of the longer than anticipated plant shutdown at Taft, La. in
connection with a scheduled plant turnaround and expansion. Additionally,
shipments for the prior year nine month period were adversely affected by
transportation delays in the U.S. Gulf Coast which occurred during the first
half of 1998.region.
Unit variable margin for the three and sixthird quarter of 1999, as compared with the same
quarter of 1998, declined as increases in average selling prices were unable
to offset the increases in raw material costs. Unit variable margin for the
nine month periodsperiod ended JuneSeptember 30, 1999, as compared to the same periodsperiod in
1998, declined as average customer selling prices fell at a far faster rate than didwhile the cost of raw
materials.materials increased. The reduction in fixed cost per pound of products sold
was the result of volume increases and a decline in fixed costs from levels
for the three and six month
periods ended June 30, 1998.
Partnership income decreased minimally for the quarter and six months ended
June 30, 1999 compared to the same periods in 1998, while Loss from corporate
investments carried at equity increased from a loss of $6 million for the 1998
second quarter to $18 million for the 1999 second quarter, and from a loss of
$12 million for the first half of 1998 to a loss of $54 million for the first
half of 1999. The increase in Loss1998.
Income from corporate investments carried at equity was caused primarily by a decline$12 million in worldwide average basic chemical
and polymer selling prices during 1998 and into the first quarter of 1999.
Some recovery of these selling prices was noted in the second quarter of 1999;
however, the increases only partially offset increases in raw material costs.
Outlook - Basic Chemicals & Polymers
The corporation anticipates that third quarter results will benefit from an
increase in ethylene glycol, polyethylene and polypropylene average selling
prices which will be partially offset by some further increases in the cost of
raw materials. Volumes for the
third quarter are expectedof 1999, a significant improvement over the loss of $25 million
reported in the same quarter of 1998. This improvement was mainly
attributable to remain at second
quarter levels. Thethe corporation's sharejoint venture based in Kuwait, EQUATE
Petrochemical Company K.S.C. ("EQUATE"). In addition to strong manufacturing
operations, this venture benefited from rising basic chemical prices coupled
with advantaged raw material supply arrangements. In addition, losses in 1998
reflected the effects of LossEQUATE's plant shutdown due to a power supply
disruption. Losses from corporate investments carried at equity is expected to decline as worldwide basic chemical andtotaled $42
million in the nine month period ended September 30, 1999 compared with $37
- 18 -
polymers sellingmillion in the same period of 1998. Increased losses in the year-to-date
period reflected lower average basic chemical prices improve and demand remains consistent with levels seen in the first half of 1999.1999
versus the same period of 1998.
Outlook - Basic Chemicals and Polymers
The corporation anticipates that announced fourth quarter price increases in
polyethylene, polypropylene and ethylene glycol could offset any anticipated
increase in raw material costs. Additionally, it is expected that the
corporation's companies carried at equity will continue to show improved
profitability.
Environmental
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, 1998. 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 the "Commitments and Contingencies" footnote to the condensed
consolidated financial statements on pages 11 and 12 of this report on Form
10-Q.
Accounting Changes
Effective January 1, 1999, the corporation adopted the provisions of the
American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." This
SOP requires the expensing of certain costs, such as pre-operating expenses and
organizational costs associated with an entity's start-up activities. In
accordance with this SOP's provisions, on January 1, 1999, the corporation
recognized a charge of $27 million ($20 million after tax) as a cumulative
effect of change in accounting principle, the majority of which represented
formation costs associated with the corporation's joint ventures.
Also effective January 1, 1999, the corporation prospectively adopted the
provisions of the AICPA's SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The effect of this adoption
was not material to the corporation's results of operations or financial
condition in the quarter of adoption and is not expected to be material to the
corporation's results of operations or financial condition for the year ending
December 31, 1999.
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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.
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," is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The corporation is currently evaluating the
effect this Statement No. 133 will have on its financial position and results of
operations in the period of adoption.
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Year 2000 Readiness Disclosure
Overview
The corporation has a comprehensive program to address its systems that may be
affected by the Year 2000 problem, including hardware and software, and to
assess the readiness of its customers and suppliers. Year 2000 readiness
remains one of the corporation's top priorities for the remainder of 1999.
Remediation efforts
- 19 -
and discussions with entities outside the corporation
whose Year 2000 readiness could impact the corporation are continuing.
Internal Activities
Since 1995, the corporation has been working to ready its internal operations
and has expended significant funds to replace most of its U.S. office
information systems with an integrated, advanced system supported by Systems
Applications and Products("Products ("SAP") software. This SAP project, implemented
during 1998, made Year 2000 ready, the corporation's internal finance, plant
operation and supply chain computer systems. SAP was implemented at selected
U.S. subsidiaries and Canadian operations in early November. Additionally, in
1998 a total upgrade of the principal integrated business software application
used outside of North America was completed, andwhich made that system Year 2000
ready.
As of JuneSeptember 30, 1999, an inventory of potential problems and a prioritization
of remaining remedialthe Year 2000 remediation program is essentially
complete, with only minor work is complete, and theremaining. The applications supporting payroll
systems, employee benefits, select Health, Safety and Environmental systems,
select engineering systems, select Process IT Applications, electronic data
interchange and the local and wide area network systems have been made Year
2000 ready.
TheYear 2000 readiness for the following systems and equipment are scheduled for completion or
replacement duringwill be finalized
in the second halffourth quarter of 1999:
- - Commercial computer systems in Health, Safety and EnvironmentEnvironmental Management
and Engineering Research and Development. Testing is essentially complete
and only system implementation remains.A few implementations remain to be
completed by the middle of November.
- - Process control systems, logic controllers, process and laboratory
analyzers, embedded devices, office and medical equipment and building/site
systems. The implementation that remainsA few minor items will be coordinated with planned
major maintenance shutdowns. Remediation has already been accomplished atcompleted in the corporation's Texas City, Tex. and Taft, La. hydrocarbons units.fourth quarter.
- - International computer infrastructure. Remediation of international
commercial applications began in 1997 andinfrastructure was essentially completed during
the fourth quarter of 1998. Small applications remediation and
international infrastructure is scheduled to be completed byin October
of this year. - - SAP implementation at selected U.S. subsidiariesAll major sites have been completed and Canadian operations.only two minor sites
remain.
The corporation is addressing these areashas addressed the Year 2000 project with resources of more
than 300 employees around the world.world at the peak in midyear. This staffing has
been substantially reduced since the midyear peak. At the completionend of 1999, all of
the corporation's business information systems are expected to be Year 2000
ready.
Business Continuity Planning
Business continuity planning was essentially completed during the third
quarter. The contingency and recovery plans for the corporation's business
-20 -
operations were developed, reviewed and approved. The implementation of these
plans will be finalized during the fourth quarter.
The objectives of business continuity planning are to guide the business in
managing risks resulting from potential Year 2000 events, provide a work
process flow to businesses, geographic areas, and common services for
integration of Year 2000 business continuity plans, and to institute a process
for dealing with potential unforeseen Year 2000 problems.
Finally, Event Management design, communications strategy and plans have been
developed. The Event Management team will be staffed 24 hours a day during the
Year 2000 changeover and will serve as an information clearinghouse and will
facilitate business and operational decisions as required during any
communication outage.
External Groups
TheWhile business applications and commercial computing are essentially Year 2000
compliant, the corporation is reviewing its external relationships to address
potential Year 2000 impacts arising from interfaces with customers, suppliers
and service providers with whom the corporation has a significant
relationship, as
well asincluding the corporation's joint ventures.
The corporation conducts ongoing risk assessments and continues to communicate
with its most significant suppliers and customers to assess their ability to
meet their sales and purchasing obligations, as well as with its joint
ventures to assess their readiness for the Year 2000. The corporation has
assessed its 500 most critical suppliers as toregarding their Year 2000 readiness.
MoreIt is anticipated that less than 952 percent of these critical suppliers have
- 20 -
comprehensive Year 2000 programs and appearwill require
contingency plans to be making progress. The
corporation is closely monitoringimplemented during the progress of the other 5 percent for
potential inclusion in its contingency planning.fourth quarter. Additionally,
the corporation is continually assessing approximately 10001,000 vendors supplying
other products, such as office equipment, to assess their Year 2000 readiness.
In North America, theAt this time we are not anticipating any business continuity issues with these
1,000 vendors.
The corporation has providedcompleted written responses to approximately 3,0006,500
inquiries sent by its customers. The corporation has
responded to another 1,600 customer inquiriescustomers: 4,500 in North America and 2,000 outside
North America. The corporation's Year 2000 efforts to monitor customers and
suppliers will continue into the early part of the Year 2000. The corporation
is in the process of assessinghas assessed its 500 most critical domestic and select international customers
as to their Year 2000 readiness and a similar program is in place
overseas. Thisbased on this assessment, is expected to be completed by the end of the third
quarter. The corporation'scorporation
does not anticipate Year 2000 efforts relative to customers and
suppliers will continue into the Year 2000.issues with these customers.
Expenditures
Costs for project work are expected to range between $40$47 and $45$49 million.
Additionally, internal personnel costs are expected to range between $30$31 and
$35$33 million. All costs are expected to be funded through operations of the
corporation. As of JuneSeptember 30, 1999, approximately $33$43 million and $25$29
million had been incurred for costs of project work and internal personnel,
respectively. Approximately 75 percent of the planned external costs are
expected to relate to repairing or upgrading current systems and 25 percent to
replacement of existing hardware and software. These estimates do not include
costs associated with the replacement of most of the corporation's U.S.North
American computer systems with SAP, the environmental reporting project,
international information technology infrastructure, or Year 2000 issues whichthat
the corporation's joint ventures may incur, all of which are being implemented
independently of the corporation's Year 2000 project. It is anticipated that
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the corporation's share of the internal and external cost incurred by its
joint ventures to address Year 2000 issues will range between $8$9 and $12$10
million.
Risks and Contingency Plan
Failure to sufficiently remediate thenewly identified Year 2000 problem in a timely fashion
poses substantialproblems would pose risks for
the corporation. Reasonable worst-case scenarios include, but are not limited
to, manufacturing system malfunctions including shutdowns and failure in the
supply chain. The full extent of these risk scenarios is uncertain at this
time, and the corporation is taking extensive measures to minimize its exposure
The process for contingency planning was initiated in the first quarter, and
plans should be in place, as necessary, by the end of the third quarter.
Contingency plans will include, but not be limited to, consideration of
alternative sources of supply, customer communications and plant andthrough business response plans.continuity planning.
The corporation plans to completehas essentially completed its Year 2000 project prior to the new year.project. However, some work remains to be accomplished, and
unforeseen difficulties may arise that could adversely affect the
corporation's ability to complete
systems modifications correctly, on time and/or within cost estimates.operations. In addition, there can be no assurance that
customers, suppliers and service providers on whom the corporation relies, as
well as the corporation's joint ventures, will resolve their Year 2000 issues
accurately, thoroughly and on time. Failure by the corporation or failure by
the corporation's customers, suppliers, service providers or joint ventures to
complete the Year 2000 - 21 -
project by the new year end could have a material adverse
effect on future operating results and the financial condition of the
corporation.
Financial Condition - JuneSeptember 30, 1999
Cash flow from operations for the first sixnine months of 1999 was $248$419 million,
downa decrease of $330 million from $357 millionthe same period in the first six months of 1998. The decline
primarily results primarily from a decreasean increase in working capital coupled with decreases
in income before the cumulative effect of change in accounting principle partially offset by an increaseand
equity in noncash charges.(earnings)/losses of joint ventures. The increase in noncash chargesworking
capital is mainly attributable to increases in joint
venture losses, partiallynotes and accounts receivable and a
decrease in payables and accruals, partly offset by decreasesa decrease in deferred income taxes and
other noncash charges.inventory.
Cash flow used for investing totaled $434totalled $631 million, an increase of $55$31 million
from $379$600 million in the comparable period of 1998 principally due1998. The majority of cash flow
used for investing related to increases in capital expenditures and investments, advances and acquisitions.expenditures. Funding of major capital
projects in the first halfnine months of 1999 included a new olefins facility,
being built jointly with NOVA Chemicals Corporation, and a polyolefins
project, both in Canada. Major capital projects funded in the first halfsame nine
months of 1998 included work on an olefins expansion, a new butanol unit and a
new CARBOWAX polyethylene glycol and TERGITOL surfactants facility, all at
Taft, La.; the new olefins facility and polyolefins project, both in Canada;
and the upgrade of information technology infrastructure.
At JuneSeptember 30, 1999, the corporation hashad approximately $271$244 million in
commitments related to authorized construction projects. These commitments
are anticipated to be sourced through operating cash flows and borrowings.
Cash flow from financing inwas $198 million for the first halfnine months of 1999
was $178 million in
comparison tocompared with cash flow fromused for financing of $40$123 million in the first halfsame period
of 1998. The first halfnine months of 1999 included net proceeds of $250 million
from the April issuance of 6.70 percent Public Notes due in April 2009, common
stock repurchases of 1.0$50 million, shares for cash of $47 million under the common
stock repurchase authorization, $3 million of common stock reacquired from
employees to satisfy tax withholding requirements on restricted shares issued
under employee benefit plans, cash dividends paid of $60$90 million and net
repayments ofincreases in debt, excluding the April 1999 issuance of Public Notes, of $3$36
million. The first halfnine months of 1998 included net proceeds of $248 million
from the issuance of 6.25 percent public debentures due in June 15, 2003, common
stock repurchases of 2.7$258 million, shares for cash of $126 million under the
common stock repurchase authorization, $3 million of common stock reacquired
from employees to satisfy tax withholding requirements on restricted shares
issued under employee benefit plans, cash dividends paid of $61$92 million and net
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repayments of debt, excluding the June 1998 issuance of public debentures, of
$51$64 million.
On August 3, 1999, the Board of Directors rescinded the corporation's
authorization to repurchase shares under the common stock repurchase
authorization, subsequent to thisthat date.
In April 1998, the corporation and Petroliam Nasional Berhad ("PETRONAS"), the
national oil company of Malaysia, agreed to form three joint venture companies
(the OPTIMAL Group) that will build and operate a 600,000 metric-tons-per-year
ethylene plant, a 385,000 metric-tons-per-year ethylene oxide/glycol plant,
and a multiple specialties & intermediates derivatives plant in Kerteh,
Terengganu, Malaysia. The joint ventures' primary marketing focus will be in
Southeast Asia. The corporation anticipates funding its approximate
$500 million share of the cost of the complex through its 2001 planned startupstart-
up date with internally generated funds and external debt. At JuneSeptember 30,
1999, the
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corporation had invested approximately $49$79 million, and was firmly
committed to an additional $60$76 million.
The corporation's ratio of debt to total capital was 49.849.4 percent at JuneSeptember
30, 1999 compared to 47.2 percent at December 31, 1998. At JuneSeptember 30, 1999
there were no outstanding borrowings under the existing major bank credit
agreement aggregating $1 billion.
The corporation has an effective shelf registration
statement covering $500 million of public debt securities at June 30, 1999.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 78 to the corporation's condensed consolidated financial
statements on pages 11 and 12 of this report on Form 10-Q.
As reported in the corporation's Form 10-K for the period ended
December 31, 1998, on November 23, 1998, the West Virginia Division
of Environmental Protection issued a Proposed Order to the
corporation alleging violations of hazardous waste regulations at the
corporation's South Charleston, West Virginia plant. The Proposed
Order sought a civil penalty of $359,200. On July 15, 1999, the
corporation and WVDEP reached a settlement of this matter pursuant to
which the corporation agreed to pay a penalty of $50,000 and to
perform Supplemental Environmental Projects at a cost of $47,100.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
2 -Agreement and Plan of Merger dated as of August 3, 1999
among the corporation, The Dow Chemical Company
and Transition Sub Inc. (See Exhibit 2 of the
corporation's Current Report on Form 8-K dated
August 3, 1999).
3.2 By-Laws of Union Carbide Corporation, amended as of
September 22, 1999. (See Exhibit 3 of the corporation's
Current Report on Form 8-K dated September 22, 1999).
27 Financial Data Schedule.
99 Stock Option Agreement dated as of August 3, 1999
between the corporation and The Dow Chemical Company
(See Exhibit 99.1 of the corporation's Current Report
on Form 8-K dated August 3, 1999).
(b) The corporation filed the following current reports on Form 8-K
for the quarter ended September 30, 1999:
1. Form 8-K dated July 26, 1999, contained the corporation's
press release dated July 26, 1999.
2. Form 8-K dated August 3, 1999, contained:
a. an Agreement and Plan of Merger, dated August 3, 1999,
by and among the corporation, and The Dow Chemical Company
and Transition Sub Inc. (See Exhibit 2 of the
corporation's Form 8-K dated August 3, 1999).
27 - Financial Data Schedule.
99 -;
b. a Stock Option Agreement, dated August 3, 1999, by and
between the corporation and The Dow Chemical Company
(See Exhibit 99.1Company;
and
c. the text of a joint press release, dated August 4, 1999,
issued by the corporation'scorporation and The Dow Chemical Company.
3. Form 8-K dated August 3, 1999).
(b) TheSeptember 22, 1999, contained the By-Laws
of the corporation filedand the following reports on Form 8-K for the
three months ended June 30, 1999:
1.corporation's press release
dated September 22, 1999.
4. Form 8-K dated April 7, 1999, contained the corporation's
Computation of Ratio of Earnings to Fixed Charges for the
year ended December 31, 1998.
2. Form 8-K dated April 26,September 23, 1999, contained the
corporation's press release dated April 26,September 23, 1999.
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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 13,November 9, 1999 By: /S/ /s/John K. Wulff
JOHN K. WULFF
Vice-President, Chief
Financial Officer and
Controller
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EXHIBIT INDEX
Exhibit
No. Exhibit
2 Agreement and Plan of Merger dated as of August 3, 1999
by and among the corporation, and The Dow Chemical Company
and Transition Sub Inc. (See Exhibit 2 of the
corporation's Current Report on Form 8-K dated
August 3, 1999).
3.2 By-Laws of Union Carbide Corporation, amended as of
September 22, 1999. (See Exhibit 3 of the corporation's
Current Report on Form 8-K dated September 22, 1999).
27 Financial Data ScheduleSchedule.
99 Stock Option Agreement dated as of August 3, 1999 by and
between the corporation and The Dow Chemical Company
(See Exhibit 99.1 of the corporation's Current Report
on Form 8-K dated August 3, 1999).
Wherever an exhibit listed above refers to another exhibit (e.g., "See Exhibit
6 of..."), that exhibit or document is incorporated herein by such reference.
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