-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O5vx1zglPrN2bZPdlFHaco4JHfoZyFd+8/IPxJWLKrxh9ryAAKkC1gejnoXeWfVS g9UFIYb3LjgnPcaWIpft9A== 0000100790-98-000014.txt : 19980814 0000100790-98-000014.hdr.sgml : 19980814 ACCESSION NUMBER: 0000100790-98-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: CSX SROS: NYSE SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNION CARBIDE CORP /NEW/ CENTRAL INDEX KEY: 0000100790 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 131421730 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-01463 FILM NUMBER: 98686078 BUSINESS ADDRESS: STREET 1: 39 OLD RIDGEBURY RD CITY: DANBURY STATE: CT ZIP: 06817-0001 BUSINESS PHONE: 2037942000 MAIL ADDRESS: STREET 1: 39 OLD RIDGEBURY RD CITY: DANBURY STATE: CT ZIP: 06817-0001 FORMER COMPANY: FORMER CONFORMED NAME: UNION CARBIDE CORP DATE OF NAME CHANGE: 19890806 FORMER COMPANY: FORMER CONFORMED NAME: UNION CARBIDE & CARBON CORP DATE OF NAME CHANGE: 19710317 10-Q 1 FORM 10-Q 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 June 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 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 July 31, 1998 Common Stock, $1 par value 135,269,257 shares Total number of sequentially numbered pages in this filing, including exhibits thereto: 28 UNION CARBIDE CORPORATION AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION PAGE Financial Statements Condensed Consolidated Statement of Income - Quarter ended June 30, 1998 and 1997......................... 3 Condensed Consolidated Statement of Income - Six months ended June 30, 1998 and 1997...................... 4 Condensed Consolidated Balance Sheet - June 30, 1998 and December 31, 1997.......................... 5 Condensed Consolidated Statement of Cash Flows - Six months ended June 30, 1998 and 1997...................... 6 Notes to Condensed Consolidated Financial Statements............. 7-12 Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 13-20 PART II. OTHER INFORMATION Item 1. Legal Proceedings....................................... 21 Item 6. Exhibits and Reports on Form 8-K........................ 21 Signature........................................................ 22 Exhibit Index.................................................... 23 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. 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; customer inventory levels; competitive pricing pressures; feedstock costs; changes in industry production capacities and operating rates; currency exchange rates; interest rates; global economic conditions, particularly in Asia; disruption in railroad and other transportation facilities; competitive technology positions; failure by the corporation to achieve technology objectives; and failure by the corporation to achieve cost reduction targets or complete projects on schedule. PART I. FINANCIAL INFORMATION UNION CARBIDE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF INCOME
Millions of dollars (Except per share figures) Quarter ended June 30, 1998 1997 NET SALES $ 1,459 $ 1,666 Cost of sales, exclusive of depreciation and amortization 1,087 1,220 Research and development 36 41 Selling, administration and other expenses(a) 72 75 Depreciation and amortization 98 87 Partnership income 27 37 Other income - net 10 11 INCOME BEFORE INTEREST EXPENSE AND PROVISION FOR INCOME TAXES 203 291 Interest expense 29 19 INCOME BEFORE PROVISION FOR INCOME TAXES 174 272 Provision for income taxes 51 79 INCOME OF CONSOLIDATED COMPANIES AND PARTNERSHIPS 123 193 Minority interest 1 5 Income (loss) from corporate investments carried at equity (4) 3 NET INCOME 118 191 Preferred stock dividend, net of income taxes - 3 NET INCOME - COMMON STOCKHOLDERS $ 118 $ 188 Earnings per common share Basic $ 0.87 $ 1.46 Diluted $ 0.85 $ 1.28 Cash dividends declared per common share $ 0.2250 $ 0.1875 (a) Selling, administration and other expenses include: Selling $ 23 $ 31 Administration 29 34 Other expenses 20 10 $ 72 $ 75 The Notes to Condensed Consolidated Financial Statements on Pages 7 through 12 should be read in conjunction with this statement.
UNION CARBIDE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF INCOME
Millions of dollars (Except per share figures) Six months ended June 30, 1998 1997 NET SALES $ 3,020 $ 3,304 Cost of sales, exclusive of depreciation and amortization 2,248 2,451 Research and development 73 81 Selling, administration and other expenses(a) 156 155 Depreciation and amortization 193 169 Partnership income 64 72 Other income - net 21 18 INCOME BEFORE INTEREST EXPENSE AND PROVISION FOR INCOME TAXES 435 538 Interest expense 56 38 INCOME BEFORE PROVISION FOR INCOME TAXES 379 500 Provision for income taxes 110 145 INCOME OF CONSOLIDATED COMPANIES AND PARTNERSHIPS 269 355 Minority interest 2 8 Income (loss) from corporate investments carried at equity (7) 1 NET INCOME 260 348 Preferred stock dividend, net of income taxes - 5 NET INCOME - COMMON STOCKHOLDERS $ 260 $ 343 Earnings per common share Basic $ 1.91 $ 2.63 Diluted $ 1.86 $ 2.31 Cash dividends declared per common share $ 0.450 $ 0.375 (a) Selling, administration and other expenses include: Selling $ 49 $ 62 Administration 58 63 Other expenses 49 30 $ 156 $ 155 The Notes to Condensed Consolidated Financial Statements on Pages 7 through 12 should be read in conjunction with this statement.
UNION CARBIDE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET
Millions of dollars June 30, Dec. 31, 1998 1997 ASSETS Cash and cash equivalents $ 38 $ 20 Notes and accounts receivable 1,002 993 Inventories 619 604 Other current assets 248 249 Total current assets 1,907 1,866 Property, plant and equipment 8,003 7,707 Less: Accumulated depreciation 4,061 3,927 Net fixed assets 3,942 3,780 Companies carried at equity 706 690 Other investments and advances 69 73 Total investments and advances 775 763 Other assets 497 555 Total assets $7,121 $6,964 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 230 $ 273 Short-term debt and current portion of long-term debt 381 429 Accrued income and other taxes 46 75 Other accrued liabilities 658 727 Total current liabilities 1,315 1,504 Long-term debt 1,705 1,458 Postretirement benefit obligation 457 464 Other long-term obligations 663 738 Deferred credits 475 419 Minority stockholders' equity in consolidated subsidiaries 35 33 Stockholders' equity: Common stock - authorized - 500,000,000 shares - issued - 154,609,669 shares 155 155 Additional paid-in capital 56 47 Other equity adjustments (5) (3) Retained earnings 3,273 3,074 Accumulated other comprehensive loss (105) (101) Unearned employee compensation - ESOP (70) (80) Less: Treasury stock, at cost-19,273,271 shares (17,666,164 shares in 1997) 833 744 Total stockholders' equity 2,471 2,348 Total liabilities and stockholders' equity $7,121 $6,964 The Notes to Condensed Consolidated Financial Statements on Pages 7 through 12 should be read in conjunction with this statement.
UNION CARBIDE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Millions of dollars Six months ended June 30, 1998 1997 Increase (decrease) in cash and cash equivalents OPERATIONS Net income $ 260 $ 348 Noncash charges (credits) to net income Depreciation and amortization 193 169 Deferred income taxes 98 37 Other 44 (10) Increase in working capital(a) (207) (153) Long-term assets and liabilities (36) 6 Cash Flow From Operations 352 397 INVESTING Capital expenditures (357) (328) Investments, advances and acquisitions (excluding cash acquired) (23) (43) Sale of fixed and other assets 6 1 Cash Flow Used for Investing (374) (370) FINANCING Change in short-term debt (3 months or less) (73) (41) Proceeds from short-term debt 25 20 Proceeds from long-term debt 248 14 Repayment of long-term debt (3) (20) Issuance of common stock 24 25 Purchase of common stock (129) (176) Proceeds from subsidiary preferred stock - 246 Payment of dividends (61) (66) Other 9 (13) Cash Flow From (Used for) Financing 40 (11) Effect of exchange rate changes on cash and cash equivalents - (1) Change in cash and cash equivalents 18 15 Cash and cash equivalents beginning-of-period 20 57 Cash and cash equivalents end-of-period $ 38 $ 72 Cash paid for interest and income taxes Interest (net of amount capitalized) $ 54 $ 38 Income taxes $ 24 $ 60 _____________ (a) Net change in certain components of working capital (excluding non-cash expenditures): (Increase) decrease in current assets Notes and accounts receivable $ (1) $ (31) Inventories (15) (3) Other current assets - 6 Decrease in payables and accruals (191) (125) Increase in working capital $(207) $(153) The Notes to Condensed Consolidated Financial Statements on Pages 7 through 12 should be read in conjunction with this statement.
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 1997 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", as described in Note 2, 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 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. Effective January 1, 1998, Brazil is no longer considered a hyperinflationary economy. Marketable securities have been reclassified from "Cash and cash equivalents" to "Other current assets" to conform to the current period's presentation. 2. Comprehensive Income In the first quarter of 1998, the corporation adopted Statement of Financial Accounting Standards ("Statement") No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. The financial statements for earlier periods have been reclassified to reflect application of the provisions of Statement No. 130. (In millions of dollars) Quarter Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 Net income $ 118 $ 191 $ 260 $ 348 Other comprehensive income/(loss): Unrealized gains/(losses) on available-for-sale securities, net of reclassification adjustment, net of tax (2) 2 4 (1) Foreign currency translation adjustments (16) (1) (8) (17) Total comprehensive income $ 100 $ 192 $ 256 $ 330 3. Earnings Per Share
(In millions of dollars Quarter Ended June 30, Six Months Ended June 30, except per share amounts) 1998 1997 1998 1997 Basic - Net income $ 118 $ 191 $ 260 $ 348 Less: Dividends on ESOP shares, pre-tax - 3 - 6 Appreciation on ESOP shares redeemed for cash - 7 - 12 Net income - common stockholders, for basic calculation $ 118 $ 181 $ 260 $ 330 Weighted average number of shares outstanding for basic calculation 136,132,527 124,687,095 136,502,193 125,542,213 Earnings per share $0.87 $1.46 $1.91 $2.63 Diluted - Net income - common stockholders, for basic calculation $ 118 $ 181 $ 260 $ 330 Add: Dividends on ESOP shares, pre-tax - 3 - 6 Net income - common stockholders, for diluted calculation $ 118 $ 184 $ 260 $ 336 Weighted average number of shares outstanding for basic calculation 136,132,527 124,687,095 136,502,193 125,542,213 Add: Effect of stock options 3,772,915 4,074,872 3,653,583 4,151,185 Shares issuable upon conversion of UCC's convertible ESOP shares - 15,593,263 - 15,722,461 139,905,442 144,355,230 140,155,776 145,415,859 Earnings per share $0.85 $1.28 $1.86 $2.31
4. Inventories Millions of dollars June 30, Dec. 31, 1998 1997 Raw materials and supplies $ 103 $ 135 Work in process 49 62 Finished goods 467 407 $ 619 $ 604 5. Long-Term Debt In June 1998 the corporation completed a $250 million public offering of 6.25 percent debentures due June 15, 2003. These debentures pay interest semi-annually in June and December. 6. Common Stock Since inception of its 60 million common share repurchase program through June 30, 1998, the corporation has repurchased 52.0 million shares (2.7 million during the first six months of 1998) at an average effective price of $35.36 per share. The corporation intends to acquire additional shares from time to time at prevailing market prices, at a rate consistent with the combination of corporate cash flow and market conditions. In conjunction with the corporation's common stock buyback program, put options were sold in a series of private placements entitling the holders to sell 12.9 million shares of common stock to UCC, at specified prices upon exercise of the options. Since inception of this program, through June 30, 1998, options representing 9.8 million common shares have expired unexercised, while options representing 3.1 million shares were exercised for $129 million, or an average price of $40.94 per share. There were no outstanding options at June 30, 1998. Premiums received since the inception of the program, recorded as additional paid-in capital, have reduced the average price of repurchased shares from $35.62 per share to $35.36 per share. 7. Commitments and Contingencies The corporation has entered into three 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 these obligations at June 30, 1998 totaled $272 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 June 30, 1998, the corporation had established environmental remediation accruals in the amount of $237 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 $151 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 June 30, 1998 included $185 million for these sites, of which $74 million was for estimated future expenditures for site investigation and cleanup and $111 million was for estimated future expenditures for closure and postclosure activities. In addition, $83 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 $36 million, of which $17 million was for estimated future expenditures for site investigation and cleanup and $19 million was for estimated future expenditures for closure and postclosure activities. In addition, $51 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. All of these sites are in the investigation and cleanup stage. The corporation's environmental accruals at June 30, 1998 included $52 million for estimated future expenditures for site investigation and cleanup at these sites. In addition, $68 million of the corporation's environmental loss contingencies related to these sites. The largest of these sites is also a nonoperating site. Of the above accruals, this site accounted for $9 million for estimated future expenditures for site investigation and cleanup. In addition, $9 million of the above environmental loss contingencies related to this site. In 1997, 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 $100 million. Expenses in 1996 and 1995 were $110 million and $138 million, respectively. While estimates of the costs of environmental protection for 1998 are necessarily imprecise, the corporation estimates that the level of these expenses will be similar to that experienced in 1997. The corporation has severally guaranteed 45 percent (approximately $582 million at June 30, 1998) of EQUATE Petrochemical Company's debt and working capital financing needs 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 September 30, 1998, substantially all of its guarantee of EQUATE's debt. The corporation is in the process of extending the political risk insurance for its debt guarantee through March 31, 1999. The corporation had additional contingent obligations at June 30, 1998 of $61 million, of which $27 million related to guarantees of debt. The corporation is one of a number of defendants named in approximately 4,900 lawsuits in both Federal and state courts, some of which have more than one plaintiff, involving silicone breast implants. The corporation was not a manufacturer of breast implants but did supply generic bulk silicone materials to certain manufacturers. Also, the corporation in 1990 acquired and in 1992 divested the stock of a small specialty silicones company that, among other things, supplied silicone gel intermediates and silicone dispersions for breast implants. In 1993, most of the suits that were brought in Federal courts were consolidated for pre-trial purposes in the United States District Court, Northern District of Alabama. In 1995, the District Court approved a settlement program proposed by certain defendants, including the corporation. In August 1997, the court ruled that all claims based solely on the supply of generic bulk silicone materials should be dismissed against the corporation. That decision is final with respect to cases in Federal courts, but does not affect the corporation's participation in the settlement program. The corporation believes that after probable insurance recovery neither the settlement nor litigation outside the settlement will have a material adverse effect on the consolidated financial position of the corporation. In addition to the above, 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 $119 million, and related insurance recovery receivables of $114 million. At June 30, 1998, the corporation had nonenvironmental litigation loss contingencies of $68 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 in the future. 8. Other Accounting Changes Effective January 1, 1998 the corporation adopted Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information," and Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." These Statements address presentation and disclosure matters and will have no impact on the corporation's financial position or results of operations. As required by Statement 131 and Statement 132, compliance with the respective reporting disclosures will be reflected in the corporation's 1998 Annual Report on Form 10-K. In 1998, the Financial Accounting Standards Board 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. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The corporation is currently evaluating the effect this statement will have on its financial position and results of operations in the period of adoption. In 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. The corporation is currently evaluating the effect this SOP will have on its financial position and results of operations in the period of adoption. Also in 1998, the AICPA issued 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 the corporation's start-up activities, and is effective for years beginning after December 15, 1998. The effect of adoption is required to be accounted for as a cumulative effect of change in accounting principle. The corporation is still evaluating the effect of this statement on its results of operations and financial position. The corporation anticipates that the amount recognized as a cumulative effect of change in accounting principle may be material to the results of operations in the quarter in which the SOP is adopted, but should not be material to the corporation's annual results of operations. The corporation may consider early adoption of one or more of the preceding pronouncements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The corporation reported second quarter 1998 net income available to common stockholders of $118 million, or $0.85 per diluted share, ($0.87 per basic share). For the first six months of 1998, net income available to common stockholders was $260 million, or $1.86 per diluted share, ($1.91 per basic share). For the corresponding quarter in 1997, the corporation reported net income available to common stockholders of $188 million, or $1.28 per diluted share, ($1.46 per basic share). For the first six months of 1997, net income available to common stockholders was $343 million, or $2.31 per diluted share, ($2.63 per basic share). The corporation's earnings for the quarter and six month periods ended June 30, 1998 decreased compared to the same periods in 1997. Decreases in net sales and operating profit were driven by reduced customer volumes, primarily in solvents, intermediates and monomers and polyethylene resin product lines, coupled with declines in Basic Chemicals & Polymers average selling prices. The effect of reduced average selling prices and volumes was partially offset by lower raw material costs as compared with the three and six month periods ended June 30, 1997. Operating profit for both the three and six month periods ended June 30, 1998 was additionally impacted negatively by variations in quarterly licensing sales activity both for the corporation as well as the corporation's UOP joint venture, while net income available to common stockholders for the same periods was further impacted by additional interest expense and increased losses associated with the start-up of EQUATE, the corporation's Kuwait-based petrochemical joint venture. Average selling prices for the Basic Chemical & Polymers segment are likely to continue to decline in the third quarter of 1998 reflecting the combined impact of reduced Asian demand and additional industry capacity. As a result, the corporation anticipates that Basic Chemicals & Polymers operating profit will decrease compared with the second quarter of 1998. Operating profit for the Specialties & Intermediates segment will likely benefit from declines in raw material costs but will continue to be negatively impacted by the Asian economic downturn and the effect of a strong dollar. The corporation's share of earnings for UOP is anticipated to be below prior year levels in the third quarter, followed by improvement in the fourth quarter. The corporation's share of loss from corporate investments carried at equity will likely increase somewhat in the third quarter assuming continued deterioration of average selling prices of Basic Chemicals & Polymers products. The 1997 Union Carbide Corporation EPS Incentive Plan is designed to grant awards to a limited number of senior managers if the corporation achieves $4.00 or more diluted earnings per share performance during 1999 and 2000. The plan requires these senior managers to put an amount equivalent to a portion of their annual base pay at risk, should diluted earnings per share not equal or exceed $4.00 in the years 1999 and 2000. Because of the Asian crisis and other reasons, there is increasing uncertainty as to whether the goal of $4.00 is attainable, at least for 1999. Therefore, while the corporation has not ruled out meeting that goal in either 1999 or 2000, there can be no assurance that the goal will be met. Failure to meet the requirements of the plan will result in forfeiture of the amounts at risk. The corporation regularly reviews its assets, including investments, with the objective of maximizing the deployment of resources. In this regard, strategies or transactions implemented could result in material nonrecurring gains and losses. Results of Operations Net sales decreased 12.4 percent in the second quarter and 8.6 percent in the first half of 1998, compared to the same periods in 1997. Average selling prices declined 10.3 percent for the second quarter and 6.3 percent for the first half of 1998 compared to the same periods in 1997. While average selling prices decreased most significantly in the Basic Chemicals & Polymers segment, pricing in the Specialties & Intermediates segment was adversely affected by Asian economic conditions and the effect of the strengthening U.S. dollar on foreign exchange rates. Customer volume declined 2.5 percent for the second quarter and 2.3 percent for the first half of 1998 as compared to similar periods in 1997 due mainly to declines in polyethylene, attributable in part to Gulf Coast railroad distribution problems, and to declines in solvents, intermediates and monomers, resulting from demand weakness in Asia. Variable margin (net sales less variable manufacturing and distribution costs) was 45.6 percent and 45.3 percent for the current three and six month periods, respectively, compared to 44.5 percent and 43.4 percent, respectively, for the same periods in 1997. These increases are related to changes in product mix within the Specialties & Intermediates segment toward the sale of higher margin items, offset by variable margin declines in the Basic Chemicals & Polymers products as average selling prices dropped at a faster rate than raw material costs. Industry Segments The corporation's operations are classified into two main business segments, Specialties & Intermediates and Basic Chemicals & Polymers. The Specialties & Intermediates segment includes the corporation's specialty chemicals and polymers product lines, licensing and solvents and chemical intermediates. The Basic Chemicals & Polymers segment includes the corporation's ethylene and propylene manufacturing operations as well as the production of first level ethylene and propylene derivatives - polyethylene, polypropylene, ethylene oxide and ethylene glycol. The corporation's noncore operations and financial transactions are included in the Other segment. Information about the corporation's operations in its business segments for the second quarter and six month periods of 1998 and 1997 follows. Sales of the Basic Chemicals & Polymers segment include intersegment sales, principally ethylene oxide, which are made at the estimated market value of the products transferred. Operating profit represents income before interest expense and provision for income taxes. Quarter ended Six months ended June 30, June 30, Millions of dollars 1998 1997 1998 1997 Sales Specialties & Intermediates $1,060 $1,139 $2,180 $2,261 Basic Chemicals & Polymers 480 604 998 1,201 Intersegment Eliminations (81) (77) (158) (158) Total $1,459 $1,666 $3,020 $3,304 Operating Profit Specialties & Intermediates $ 166 $ 191 $ 368 $ 375 Basic Chemicals & Polymers 42 101 78 163 Other (5) (1) (11) - Total $ 203 $ 291 $ 435 $ 538 Depreciation and Amortization Specialties & Intermediates $ 61 $ 55 $ 121 $ 106 Basic Chemicals & Polymers 37 32 72 63 Total $ 98 $ 87 $ 193 $ 169 Capital Expenditures Specialties & Intermediates $ 131 $ 103 $ 221 $ 191 Basic Chemicals & Polymers 80 87 136 137 Total $ 211 $ 190 $ 357 $ 328 Net sales of the Specialties & Intermediates segment decreased $79 million, or 6.9 percent in the current quarter over the same quarter in 1997, and $81 million, or 3.6 percent in the current six month period as compared to the same six months of 1997. Operating profit for the second quarter of 1998 declined 13.1 percent to $166 million, from $191 million for the same quarter of 1997; operating profit was $368 million for the first half of 1998, versus $375 million for the comparable period in 1997. For the three month period ended June 30, 1998, this segment's volume declined 3.1 percent, compared to the same period in 1997, coupled with a decline in average selling prices of 3.9 percent. For the first six months of 1998, average selling prices decreased 3.3 percent as compared to the same period of 1997, while volume remained essentially constant. The most significant declines, for both the three and six month periods, are related to the solvents, intermediates and monomers product lines where the effect of the Asian economic downturn has significantly reduced volumes and average selling prices. Net sales of the Basic Chemicals & Polymers segment decreased $124 million, or 20.5 percent in the current quarter over the same quarter of 1997 and $203 million, or 16.9 percent in the first half of 1998 over the first half of 1997. Operating profit declined by $59 million, or 58.4 percent and $85 million, or 52.1 percent in the current quarter and the six month period ended June 30, 1998, respectively, compared to the same periods in 1997. These decreases were the result of a 23.0 percent and 15.7 percent decrease in average selling prices in the quarter and first six months of 1998, respectively, versus the comparable periods of 1997. In addition to the decline in the average selling prices, customer volume levels decreased 1.6 percent and 4.6 percent for the same periods. Declines in customer volumes and average selling prices are related to declining market conditions of the industry coupled with difficulties in transporting commodity polyethylene resin products, via rail, from the corporation's U.S. Gulf Coast facilities. Seasonal volume increases in ethylene glycol in North America and lower raw material costs mitigated the overall effect of these declines. Partnership income decreased $10 million for the second quarter of 1998 compared to the second quarter of 1997 due to variations in quarterly sales activity within UOP and continued costs, principally research and development, of Univation. For the first half of 1998 partnership income decreased $8 million, as compared to the same period in 1997. This decline represents a full six months of losses for Univation in 1998, compared to only three months of losses in 1997, coupled with decreased earnings in Petromont due to industry declines in average selling prices for polyethylene. Depreciation and amortization increased $11 million to $98 million for the second quarter and $24 million to $193 million for the first half of 1998, compared to similar periods in 1997. The increase is principally the result of depreciation associated with completed capital projects. Interest expense increased $10 million to $29 million for the second quarter of 1998 compared to the second quarter a year ago and increased $18 million in the first half of 1998 compared to the first half of 1997, as the result of increased debt levels and a reduction in capitalized interest associated with the corporation's capital program. Income (loss) from corporate investments carried at equity decreased $7 million to a loss of $4 million in the second quarter of 1998, from income of $3 million in the second quarter of 1997. For the first half of 1998, income (loss) from corporate investments carried at equity was a loss of $7 million compared to income of $1 million in the first half of 1997. Lower earnings in the three and six month periods are mainly attributable to reduced earnings in Polimeri Europa as lower average selling prices of resin products more than offset increases in volumes and lower raw material costs. 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, 1997. 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 financial statements on pages 9 through 11 of this report on Form 10-Q. The corporation is named as one of a number of defendants in lawsuits involving silicone gel breast implants. The corporation supplied bulk silicone materials to certain companies that at various times were involved in the manufacture of breast implants. These cases are discussed in more detail in the "Commitments and Contingencies" footnote to the financial statements on pages 9 through 11 of this report on Form 10-Q. Accounting Changes Effective January 1, 1998 the corporation adopted Statement of Financial Accounting Standards ("Statement") No. 130, "Reporting Comprehensive Income," Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information," and Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." These statements address presentation and disclosure matters and will have no impact on the corporation's financial position or results of operations. The corporation has complied with the disclosure requirements of Statement 130 in the "Comprehensive Income" footnote to the financial statements on page 7 of this report on Form 10-Q. As required by Statement 131 and Statement 132, compliance with the respective reporting disclosures will be reflected in the corporation's 1998 Annual Report on Form 10-K. In 1998, the Financial Accounting Standards Board 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. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The corporation is currently evaluating the effect this statement will have on its financial position and results of operations in the period of adoption. In 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. The corporation is currently evaluating the effect this SOP will have on its financial position and results of operations in the period of adoption. Also in 1998, the AICPA issued 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 the corporation's start-up activities, and is effective for years beginning after December 15, 1998. The effect of adoption is required to be accounted for as a cumulative effect of change in accounting principle. The corporation is still evaluating the effect of this statement on its results of operations and financial position. The corporation anticipates that the amount recognized as a cumulative effect of change in accounting principle may be material to the results of operations in the quarter in which the SOP is adopted, but should not be material to the corporation's annual results of operations. The corporation may consider early adoption of one or more of the preceding pronouncements. Year 2000 Issue Most of the corporation's computer and process control systems were designed to use only two digits to represent years. Thus they may not recognize "00" as representing the year 2000, but rather 1900, which could result in errors or system failures. These systems must be corrected in a timely manner to remain functional. The corporation is addressing the year 2000 issue in several ways. Since 1995, the corporation has expended significant funds to upgrade the bulk of its domestic commercial computer systems to enhance the information available to the corporation. This upgrade will correct the year 2000 issue for the computer systems it replaces. The upgrade is being implemented in three parts, the first of which, covering finance and control, commenced operation in January 1998. The second part, plant maintenance and material management, is currently being implemented on a plant by plant basis and is scheduled for completion by year end. The third part, supply chain, will be implemented in the fourth quarter of this year. Additionally, the infrastructure to support the international commercial system upgrade will be implemented in the third quarter of 1999 and will correct most of the year 2000 international infrastructure problems. A project to consolidate environmental compliance reporting is underway, and is scheduled to be completed in 1999. This new system will also correct year 2000 problems for those systems it replaces. The corporation is addressing the year 2000 issues in the balance of its domestic and international internal processes, including hardware, software and control systems. The corporation has inventoried and prioritized potentially affected systems and several different repair projects are underway. For example, repairs to the corporation's international finance and order management system, which began in 1997, have already been implemented in many of the corporation's world area offices, with the balance to be completed by year end. Other projects are at various stages based largely upon the importance of the system to the corporation and the size and complexity of the repairs. To a large extent, the path forward is known for systems with problems and projects have been or are being defined to correct them. The corporation estimates its external worldwide expenditures related to this year 2000 work could range between $50 and $60 million over the life of the project. The corporation expects approximately 55 percent of the estimated expenditures will relate to repairing or upgrading current systems and 45 percent will relate to replacement of existing hardware and software. To date approximately $7 million of this amount has been incurred. The estimates explained in this paragraph do not include the upgrade of commercial systems and the environmental compliance project noted above. The corporation expects to have resolved internal systems year 2000 issues that could impact operational sustainability by the third quarter of 1999. Union Carbide is also reviewing its external relationships to address potential year 2000 impacts arising from interfaces with customers, suppliers and service providers. The corporation is currently communicating with its significant suppliers and key customers to assess their ability to meet their sales and purchasing obligations despite the year 2000 issue, and will continue to monitor this into the year 2000. Contingency plans are being considered and will be in place, as required, by the third quarter of 1999 in the event that the corporation is at risk in regard to suppliers, customers or its own internal hardware and software. Contingency plans will include, but will not be limited to, consideration of alternative sources of supply, customer communication plans, and plant and business response plans. The corporation believes the year 2000 project will be completed prior to the year 2000. However, considerable work remains to be accomplished in a limited period of time and unforeseen difficulties may arise which could adversely affect the corporation's ability to complete its systems modifications correctly, completely, on time and/or within its cost estimate. In addition, there can be no assurance that customers, suppliers and service providers on which the corporation relies will resolve their year 2000 issues accurately, thoroughly and on time. Failure to complete the year 2000 project by the year 2000 could have a material adverse affect on future operating results or financial condition. Financial Condition - June 30, 1998 Cash flow from operations for the first six months of 1998 was $352 million, down from $397 million in the first six months of 1997. The decline results primarily from an increase in working capital primarily attributable to a decrease in payables and accruals and an increase in long-term assets and liabilities partially offset by an increase in the total of net income and non-cash charges (credits) to net income. Cash flow used for investing totaled $374 million, an increase of $4 million from $370 million in the comparable period of 1997 principally due to lower investments, advances and acquisitions in 1998, offset by an increase in capital expenditures. Funding of major capital projects in the first half of 1998 included continuing work on an olefins expansion, a new butanol unit and a new CARBOWAX polyethylene glycol and TERGITOL surfactants facility, an ethanolamine unit and an olefins expansion, all at Taft, La., a new olefins facility, being built jointly with NOVA Chemicals Ltd., and a polyolefins project, both in Canada, as well as the upgrade of information technology infrastructure. Major capital projects funded in the first six months of 1997 included work on the new CARBOWAX polyethylene glycol and TERGITOL surfactants facility, an ethanolamine unit and olefins expansion, all at Taft, La., and the continuing work on the corporation's upgrade of information technology infrastructure. Cash flow from financing in the first half of 1998 was $40 million in comparison to cash flow used for financing of $11 million in the first half of 1997. The first half of 1998 included net proceeds of $248 million from the issuance of 6.25 percent public debentures, due June 15, 2003, compared to the first half of 1997 which included $246 million net proceeds from the issuance of preferred stock of a subsidiary. Common stock repurchases for the first six months of 1998 totaled 2.7 million shares for cash of $126 million under the existing common stock repurchase program. Additional common stock repurchases, not included in the repurchase program, totaled $3 million in cash. The corporation intends to acquire additional shares from time to time at prevailing market rates consistent with the combination of corporate cash flow and market conditions. Cash dividends for the first half of 1998 totaled $61 million, while net repayments of debt, excluding the June 1998 issuance of public debentures, totaled $51 million. In April 1998, the corporation and PETRONAS, the national oil company of Malaysia, agreed to form three joint venture companies that will build and operate a 600,000 metric-tons-per-year ethylene plant, a 385,000 metric-tons-per-year ethylene oxide 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 startup date with internally generated funds and external debt. The corporation's ratio of debt to total capital increased to 45.4 percent at June 30, 1998 from 44.2 percent at December 31, 1997. At June 30, 1998 there were no outstanding borrowings under the existing major bank credit agreement aggregating $1 billion. The corporation filed with the Securities and Exchange Commission a shelf registration statement covering $500 million of public debentures which became effective on July 31, 1998. PART II. OTHER INFORMATION Item 1. Legal Proceedings See Note 7 to the corporation's consolidated financial statements on pages 9 through 11 of this report on Form 10-Q. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following exhibits are filed as part of this report: 3 - Restated Articles of Incorporation, amended as of June 25, 1998. 27 - Financial Data Schedule. (b) No reports on Form 8-K were filed for the three months ended June 30, 1998. 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, 1998 By: /s/John K. Wulff JOHN K. WULFF Vice-President, Chief Financial Officer and Controller EXHIBIT INDEX Exhibit Page No. Exhibit No. 3 Restated Articles of Incorporation, amended as of June 25, 1998 24 27 Financial Data Schedule 28 EX-3 2 RESTATED ARTICLES OF INCORPORATION Exhibit 3 RESTATED CERTIFICATE OF INCORPORATION OF UNION CARBIDE CORPORATION UNDER SECTION 807 OF THE BUSINESS CORPORATION LAW The undersigned William H. Joyce and John Macdonald, being respectively the Chairman of the Board and Assistant Secretary of Union Carbide Corporation hereby certify as follows: 1. The name of the Corporation is Union Carbide Corporation. The name under which the Corporation was formed was Union Carbide and Carbon Corporation. 2. The certificate of incorporation was filed in the Office of the Secretary of State of the State of New York on November 1, 1917. 3. The certificate of incorporation of the Corporation is hereby amended to delete in its entirety subparagraph (c) of paragraph 3 thereof which states the number, designation, relative rights, preferences and limitations of the ESOP Convertible Preferred Stock. None of the authorized shares of ESOP Convertible Preferred Stock are outstanding, no shares of ESOP Convertible Preferred Stock will be issued subject to the certificate of incorporation, and upon the filing of this certificate the shares will be restored to the status of authorized but unissued shares of Preferred Stock of the Corporation. 4. This amended and restated certificate of incorporation of the Corporation was authorized by resolution adopted by the Board of Directors of the Corporation on June 24, 1998 pursuant to Sections 502 and 807 of the Business Corporation Law. 5. The certificate of incorporation of the Corporation is hereby restated as amended hereby, to read in its entirety as follows: CERTIFICATE OF INCORPORATION OF UNION CARBIDE CORPORATION UNDER SECTION 402 OF THE BUSINESS CORPORATION LAW 1. The name of the Corporation is Union Carbide Corporation. 2. The Corporation may engage in any lawful act or activity for which corporations may be organized under the Business Corporation Law provided that the Corporation is not formed to engage in any act or activity which requires the consent or approval of any state official, department, board, agency or other body, without such consent or approval first being obtained. 3. The total number of shares that the Corporation may issue is 525,000,000 of which 500,000,000 shall be shares of Common Stock, par value $1.00 each, and 25,000,000 shall be shares of Preferred Stock, par value $1.00 each. (a) The holders of the Common Stock shall be entitled to one vote per share on all matters upon which stockholders are entitled to vote and shall not be entitled to any preference in the distribution of dividends or assets. (b) The Preferred Stock may be issued from time to time in series. Each share of a series shall be equal to every other share of the same series. The Board of Directors is authorized to establish and designate series and to fix the number of shares and the relative rights, preferences and limitations as between series, subject to such limitations as may be prescribed by law. In particular, the Board of Directors may establish, designate and fix the following with respect to each series of Preferred Stock: (1) The distinctive serial designation of the shares of the series which shall distinguish those shares from the shares of all other series; (2) The number of shares included in the series, which may be increased or decreased from time to time unless otherwise provided by the Board of Directors in creating the series; (3) The annual dividend rate for the shares of the series and the date or dates upon which such dividends shall be payable; (4) Whether dividends on the shares of the series shall be cumulative and, on the shares of any series having cumulative dividend rights, the date or dates or method of determining the date or dates from which dividends on the shares of the series shall be cumulative; (5) The amount or amounts which shall be paid out of the assets of the Corporation to the holders of the shares of the series upon the involuntary liquidation, dissolution or winding up of the Corporation and upon the voluntary liquidation, dissolution or winding up of the Corporation; (6) The price or prices at which, the period or periods within which and the terms and conditions upon which the shares of the series may be redeemed in whole or in part, at the option of the Corporation; (7) The obligation, if any, of the Corporation to purchase or redeem shares of the series pursuant to a sinking fund and the price or prices at which, the period or periods within which and the terms and conditions upon which the shares of the series shall be redeemed, in whole or in part, pursuant to such sinking fund; (8) The period or periods within which and the terms and conditions, if any, including the price or prices or the rate or rates of conversion and the terms and conditions of any adjustments thereof, upon which the shares of the series shall be convertible at the option of the holder into shares of any class of stock or into shares of any other series of Preferred Stock, except into a class of shares having rights or preferences as to dividends or distributions of assets upon liquidation which are prior or superior in rank to those of shares being converted; (9) The voting rights, if any, of the shares of the series in addition to those required by law, including the number of votes per share and the transaction of any business or of any specified item of business in connection with which the shares of the series shall vote as a class; and (10) Any other relative rights, preferences, or limitations of the shares of the series not inconsistent herewith or with applicable law. 4. The holders of shares of stock of the Corporation shall have no preemptive rights to purchase any shares of stock or any other securities of the Corporation. 5. The number of directors of the Corporation shall be fixed and may from time to time be increased or decreased by resolution or other action of the Board of Directors, but in no event shall the number of directors be less than three or more than 19. 6. The office of the Corporation is to be located in the City of New York, County of New York. The Secretary of State of the State of New York is designated as the agent of the Corporation upon whom process in any action or proceeding against it may be served, and the address without the State to which the Secretary of State shall mail a copy of process in any action or proceeding against the Corporation which may be served upon him is: Union Carbide Corporation 39 Old Ridgebury Road Danbury, Connecticut 06817-0001 7. The By-laws may be adopted, amended or repealed by the stockholders, or by the Board of Directors by a vote of a majority of the entire Board. 8. A person who is or was a director of the Corporation shall not be liable to the Corporation or its stockholders for damages for any breach of duty in such capacity, except to the extent such liability may not be eliminated or limited by applicable law from time to time in effect. IN WITNESS WHEREOF, the undersigned have signed this Restated Certificate of Incorporation this 24th day of June, 1998 and affirm the statements contained herein as true under the penalties of perjury. /s/William H. Joyce William H. Joyce Chairman of the Board /s/ John Macdonald John Macdonald Assistant Secretary EX-27 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Union Carbide Corporation's Form 10-Q for the quarter ended June 30, 1998, and is qualified in its entirety by reference to such financial statements. 0000100790 UNION CARBIDE CORPORATION 1,000,000 6-MOS DEC-31-1998 JUN-30-1998 38 0 1002 0 619 1907 8003 4061 7121 1315 1705 0 0 155 2316 7121 3020 3020 2248 2248 266 0 56 379 110 260 0 0 0 260 1.91 1.86 Other expenses are equal to research and development of 73 and depreciation and amortization of 193. The EPS-PRIMARY amount represents basic earnings per share and the EPS-DILUTED amount represents diluted earnings per share, computed in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
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