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, 2000
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, 2000
Common Stock, $1 par value 134,922,253 shares
Total number of sequentially numbered pages in this filing,
including exhibits thereto: 24
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INDEX
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PART I. FINANCIAL INFORMATION
------------------------------
<S> <C> <C>
Item 1. Financial Statements of Union Carbide
Corporation and Subsidiaries
Condensed Consolidated Statement of Income -
Quarter Ended June 30, 2000 and 1999 3
Condensed Consolidated Statement of Income -
Six Months Ended June 30, 2000 and 1999 4
Condensed Consolidated Balance Sheet -
June 30, 2000 and December 31, 1999 5
Condensed Consolidated Statement of Cash Flows -
Six Months Ended June 30, 2000 and 1999 6
Notes to Condensed Consolidated Financial
Statements 7-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-20
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 15-16
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
Exhibit Index 23
</TABLE>
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 (and, with regard to the merger, the Dow
Merger); plans; objectives; strategies; anticipated future events
or performance; sales; cost, expense and earnings expectations;
interest rate and currency risk management; the chemical markets
in 2000 and beyond; development, production and acceptance of new
products and process technologies; ongoing and planned capacity
additions and expansions; joint ventures; Management's Discussion
and 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-looking statements include the supply/demand balance
for the corporation's products; customer inventory levels;
competitive pricing pressures; raw material availability and
costs; changes in industry production capacities and operating
rates; currency exchange rates; interest rates; global economic
conditions; competitive technology positions; failure by the
corporation to achieve technology objectives, 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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<CAPTION>
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,
2000 1999
---- ----
<S> <C> <C>
NET SALES $1,674 $1,418
------ ------
Cost of sales, exclusive of depreciation and
amortization 1,354 1,105
Research and development 39 39
Selling, administrative and other expenses(a) 61 57
Depreciation and amortization 102 95
Partnership income (loss) 9 (4)
Other income - net 36 27
------ ------
INCOME BEFORE INTEREST EXPENSE AND PROVISION
FOR INCOME TAXES 163 145
Interest expense 45 35
------ ------
INCOME BEFORE PROVISION FOR INCOME TAXES 118 110
Provision for income taxes 29 28
------ ------
INCOME OF CONSOLIDATED COMPANIES AND PARTNERSHIPS 89 82
Minority interest 2 1
Income (loss) from corporate investments
carried at equity 43 (18)
------ ------
NET INCOME $ 130 $ 63
====== ======
Earnings per common share
Basic $ 0.96 $ 0.47
Diluted $ 0.94 $ 0.46
Cash dividends declared per common share $ 0.225 $ 0.225
(a) Selling, administrative and other expenses include:
Selling $ 22 $ 23
Administrative 22 16
Other expenses 17 18
------ ------
$ 61 $ 57
====== ======
The Notes to Condensed Consolidated Financial Statements on Pages
7 through 13 should be read in conjunction with this statement.
</TABLE>
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<TABLE>
<CAPTION>
UNION CARBIDE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
Millions of dollars
(Except per share figures)
Six months ended June 30,
2000 1999
---- ----
<S> <C> <C>
NET SALES $3,291 $2,820
------ ------
Cost of sales, exclusive of depreciation and
amortization 2,668 2,137
Research and development 78 76
Selling, administrative and other expenses(a) 134 127
Depreciation and amortization 204 199
Partnership income 12 2
Other income - net 60 41
------ ------
INCOME BEFORE INTEREST EXPENSE AND PROVISION
FOR INCOME TAXES 279 324
Interest expense 82 66
------ ------
INCOME BEFORE PROVISION FOR INCOME TAXES 197 258
Provision for income taxes 49 66
------ ------
INCOME OF CONSOLIDATED COMPANIES AND PARTNERSHIPS 148 192
Minority interest 3 2
Income (loss) from corporate investments
carried at equity 82 (50)
------ ------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 227 140
Cumulative effect of change in accounting
principle - (20)
------ ------
NET INCOME $ 227 $ 120
====== ======
Earnings per common share
Basic -
Income before cumulative effect of change
in accounting principle $ 1.68 $ 1.05
Cumulative effect of change in accounting
principle - $(0.15)
------ ------
Net income $ 1.68 $ 0.90
====== ======
Diluted -
Income before cumulative effect of change
in accounting principle $ 1.65 $ 1.02
Cumulative effect of change in accounting
principle - (0.14)
------ ------
Net income $ 1.65 $ 0.88
====== ======
Cash dividends declared per common share $ 0.45 $ 0.45
(a) Selling, administrative and other expenses include:
Selling $ 45 $ 46
Administrative 44 41
Other expenses 45 40
------ ------
$ 134 $ 127
====== ======
The Notes to Condensed Consolidated Financial Statements on Pages
7 through 13 should be read in conjunction with this statement.
</TABLE>
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<TABLE>
<CAPTION>
UNION CARBIDE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
Millions of dollars
June 30, Dec. 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 59 $ 41
Notes and accounts receivable 1,166 1,132
Inventories 743 680
Other current assets 301 297
------ -------
Total current assets 2,269 2,150
Property, plant and equipment 9,303 9,057
Less: Accumulated depreciation 4,687 4,536
------ -------
Net fixed assets 4,616 4,521
Companies carried at equity 915 756
Other investments and advances 92 75
------ -------
Total investments and advances 1,007 831
Other assets 525 455
------ -------
Total assets $8,417 $ 7,957
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Accounts payable $ 298 $ 329
Short-term debt and current portion of
long-term debt 1,109 782
Accrued income and other taxes 15 -
Other accrued liabilities 758 678
------ -------
Total current liabilities 2,180 1,789
Long-term debt 1,758 1,869
Postretirement benefit obligation 431 438
Other long-term obligations 567 603
Deferred credits 652 599
Minority stockholders' equity in consolidated
subsidiaries 44 42
Stockholders' equity:
Common stock - authorized - 500,000,000 shares
- issued - 158,297,608 shares
(157,571,933 shares in 1999) 158 158
Additional paid-in capital 193 165
Other equity adjustments (2) (1)
Accumulated other comprehensive loss (191) (160)
Retained earnings 3,697 3,530
Unearned employee compensation - ESOP (51) (56)
Treasury stock, at cost - 23,416,034 shares
(23,428,229 shares in 1999) (1,019) (1,019)
------ ------
Total stockholders' equity 2,785 2,617
------ -------
Total liabilities and stockholders' equity $8,417 $ 7,957
====== =======
The Notes to Condensed Consolidated Financial Statements on Pages 7
through 13 should be read in conjunction with this statement.
</TABLE>
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<TABLE>
<CAPTION>
UNION CARBIDE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Millions of dollars
Six Months Ended June 30,
2000 1999
Increase (decrease) in
Cash and cash equivalents
<S> <C> <C>
OPERATIONS
-----------
Income before cumulative effect of change in
accounting principle $ 227 $ 140
Noncash charges (credits) to net income:
Depreciation and amortization 204 199
Deferred income taxes 58 81
Equity in (earnings) losses of joint
ventures, net of cash received (57) 68
Other (45) 21
Decrease (increase) in working capital(a) (101) (228)
Long-term assets and liabilities (27) (33)
----- -----
Cash Flow From Operations 259 248
----- -----
INVESTING
---------
Capital expenditures (322) (381)
Investments, advances and acquisitions (135) (62)
Proceeds from the sale of
available-for-sale securities 65 18
Purchase of available-for-sale securities (38) (28)
Sale of fixed and other assets 8 19
----- -----
Cash Flow Used for Investing (422) (434)
----- -----
FINANCING
---------
Change in short-term debt (3 months or less) 340 20
Proceeds from short-term debt 3 2
Repayments of short-term debt (13) (8)
Proceeds from long-term debt - 285
Repayments of long-term debt (114) (52)
Issuance of common stock 20 30
Purchase of common stock - (50)
Payment of dividends (61) (60)
Other 5 11
----- -----
Cash Flow From Financing 180 178
----- -----
Effect of exchange rate changes on cash and
cash equivalents 1 -
Change in cash and cash equivalents 18 (8)
Cash and cash equivalents, beginning-of-period 41 49
----- -----
Cash and cash equivalents, end-of-period $ 59 $ 41
===== =====
Cash (received) paid for interest and income taxes
Interest (net of amount capitalized) $ 96 $ 72
Income taxes $ (33) $ 18
(a) Net change in certain components of working
capital (excluding noncash transactions):
(Increase) decrease in current assets
Notes and accounts receivable $ (24) $(146)
Inventories (63) 71
Other current assets (4) (20)
(Decrease) increase in payables and accruals (10) (133)
----- -----
(Increase) decrease in working capital $(101) $(228)
===== =====
The Notes to Condensed Consolidated Financial Statements on Pages 7
through 13 should be read in conjunction with this statement.
</TABLE>
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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 1999 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.
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<CAPTION>
2. Comprehensive Income
The following summary presents the components of
comprehensive income:
Quarter Ended Six Months Ended
June 30, June 30,
Millions of dollars, 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $130 $63 $227 $120
Other comprehensive income:
Unrealized gains and losses on
available-for-sale securities,
net of reclassification
adjustments and net of tax - 2 4 2
Foreign currency translation
adjustments (25) (2) (35) (55)
--- -- ---- ----
Comprehensive income $105 $63 $196 $ 67
==== === ==== ====
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<CAPTION>
3. Inventories
June 30, Dec. 31,
Millions of dollars, 2000 1999
---- ----
<S> <C> <C>
Raw materials and supplies $170 $152
Work in process 58 45
Finished goods 515 483
---- ----
$743 $680
==== ====
</TABLE>
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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, 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").
<TABLE>
<CAPTION>
S&I BC&P Other Total
--- ---- ----- -----
Millions of dollars,
for the three months ended
<S> <C> <C> <C> <C>
June 30, 2000
-------------
Net sales $1,125 $ 549 $ - $1,674
Intersegment revenues - 106 - 106
Segment revenues 1,125 655 - 1,780
Depreciation and
amortization 67 35 - 102
Partnership income (loss) 8 1 - 9
Operating profit (loss) 92 74 (3) 163
Interest expense - - 45 45
Income (loss) from
corporate investments
carried at equity (2) 45 - 43
</TABLE>
<TABLE>
<CAPTION>
S&I BC&P Other Total
--- ---- ----- -----
Millions of dollars,
for the three months ended
<S> <C> <C> <C> <C>
June 30, 1999
-------------
Net sales $1,036 $382 $ - $1,418
Intersegment revenues - 54 - 54
Segment revenues 1,036 436 - 1,472
Depreciation and
amortization 62 33 - 95
Partnership income (loss) (2) (2) - (4)
Operating profit (loss) 188 (42) (1) 145
Interest expense - - 35 35
Income (loss) from
corporate investments
carried at equity - (18) - (18)
</TABLE>
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<TABLE>
<CAPTION>
S&I BC&P Other Total
--- ---- ----- -----
Millions of dollars,
for the six months ended
<S> <C> <C> <C> <C>
June 30, 2000
-------------
Net sales $2,233 $1,058 $ - $3,291
Intersegment revenues - 205 - 205
Segment revenues 2,233 1,263 - 3,496
Depreciation and
amortization 134 70 - 204
Partnership income (loss) 10 2 - 12
Operating profit (loss) 174 104 1 279
Interest expense - - 82 82
Income (loss) from
corporate investments
carried at equity (1) 83 - 82
</TABLE>
<TABLE>
<CAPTION>
S&I BC&P Other Total
--- ---- ----- -----
Millions of dollars,
for the six months ended
<S> <C> <C> <C> <C>
June 30, 1999
-------------
Net sales $2,070 $750 $ - $2,820
Intersegment revenues - 107 - 107
Segment revenues 2,070 857 - 2,927
Depreciation and
amortization 125 74 - 199
Partnership income (loss) 2 - - 2
Operating profit (loss) 396 (75) 3 324
Interest expense - - 66 66
Income (loss) from
corporate investments
carried at equity 4 (54) - (50)
</TABLE>
Operating profit for the three and six month periods ended June
30, 2000 includes an $18 million gain on shares received and sold
in connection with the demutalization of Metropolitan Life
Insurance Company, a provider of certain employee benefit
programs for the corporation, of which $12 million and $6 million
was recognized by the S&I and BC&P segment, respectively.
The operating profit of the S&I segment for the three and six
month periods ended June 30, 1999 includes a $12 million net gain
from a litigation settlement.
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<TABLE>
<CAPTION>
5. Earnings Per Share
Millions of dollars, Quarter Ended June 30, Six Months Ended June 30,
except per share amounts 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income before cumulative effect of change
in accounting principle $ 130 $ 63 $ 227 $ 140
Cumulative effect of change in accounting
principle - - - (20)
----- ----- ----- ------
Net income $ 130 $ 63 $ 227 $ 120
===== ===== ===== ======
Basic -
Weighted average number of shares
outstanding for basic calculation 134,745,740 133,088,173 134,575,898 132,968,994
=========== =========== =========== ===========
Earnings per share -
Income before cumulative effect of change
in accounting principle $0.96 $0.47 $1.68 $ 1.05
Cumulative effect of change in accounting
principle - - - (0.15)
----- ----- ----- ------
Net income $0.96 $0.47 $1.68 $ 0.90
===== ===== ===== ======
Diluted -
Weighted average number of shares
outstanding for basic calculation 134,745,740 133,088,173 134,575,898 132,968,994
Add: Effect of stock options 3,173,330 3,365,490 3,165,604 3,113,510
----------- ----------- ----------- -----------
Weighted average number of shares
outstanding for diluted calculation 137,919,070 136,453,663 137,741,502 136,082,504
=========== =========== =========== ===========
Earnings per share -
Income before cumulative effect of change
in accounting principle $0.94 $0.46 $1.65 $ 1.02
Cumulative effect of change in accounting
principle - - - (0.14)
----- ----- ----- ------
Net income $0.94 $0.46 $1.65 $ 0.88
===== ===== ===== ======
</TABLE>
6. Commitments and Contingencies
The corporation has 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 obligations under these
purchase commitments at June 30, 2000 totaled $194 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.
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<PAGE>
At June 30, 2000, the corporation had established environmental
remediation accruals in the amount of $192 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 $96 million.
The corporation has sole responsibility for the remediation
of approximately 40 percent of its environmental sites for
which accruals have been established. These sites are well
advanced in the investigation and cleanup stage. The
corporation's environmental accruals at June 30, 2000
included $153 million for these sites, of which $40 million
was for estimated future expenditures for site investigation
and cleanup and $113 million was for estimated future
expenditures for closure and postclosure activities. In
addition, $61 million of the corporation's environmental loss
contingencies related to these sites. The three sites with
the largest total potential cost to the corporation are
nonoperating sites. Of the above accruals, these sites
accounted for $56 million, of which $16 million was for
estimated future expenditures for site investigation and
cleanup and $40 million was for estimated future expenditures
for closure and postclosure activities. In addition,
$41 million of the above environmental loss contingencies
related to these sites.
The corporation does not have sole responsibility at the
remainder of its environmental sites for which accruals have
been established. All of these sites are in the
investigation and cleanup stage. The corporation's
environmental accruals at June 30, 2000 included $39 million
for estimated future expenditures for site investigation and
cleanup at these sites. In addition, $35 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 $13 million for estimated future expenditures
for site investigation and cleanup. In addition, $18 million
of the above environmental loss contingencies related to
these sites.
In 1999, worldwide expenses related to environmental
protection for compliance with Federal, state and local laws
regulating solid and hazardous wastes and discharge of
materials to air and water, as well as for waste site
remedial activities, totaled $118 million. Expenses in 1998
and 1997 were $91 million and $100 million, respectively.
While estimates of the costs of environmental protection for
2000 are necessarily imprecise, the corporation estimates
that these expenses will approximate the average of the last
three years.
The corporation severally guaranteed up to approximately
$167 million at June 30, 2000 of EQUATE Petrochemical
Company's ("EQUATE") debt and working capital financing
needs. The corporation has also severally guaranteed certain
sales volume targets until EQUATE's sales capabilities are
proved. In addition, the corporation has pledged its shares
in EQUATE as security for EQUATE's debt. The corporation has
political risk insurance coverage for its equity investment
and a majority of its guarantee of EQUATE's debt.
The corporation had additional contingent obligations at June
30, 2000 totaling $107 million, of which $30 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
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<PAGE>
parties. These cover a wide range of matters, including, but
not limited to: product liability; trade regulation;
governmental regulatory proceedings; health, safety and
environmental matters; employment; patents; contracts; taxes;
and commercial disputes. In some of these legal proceedings
and claims, the cost of remedies that may be sought or
damages claimed is substantial.
The corporation has recorded nonenvironmental litigation
accruals of $131 million and related insurance recovery
receivables of $117 million. At June 30, 2000, the
corporation had nonenvironmental litigation loss
contingencies of $70 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.
7. Accounting Changes
Effective January 1, 1999, the corporation adopted the
provisions of the American Institute of Certified Public
Accountants' Statement of Position ("SOP") 98-5, "Reporting on
the Costs of Start-Up Activities." This SOP requires the
expensing of certain costs, such as preoperating 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.
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," and Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an
amendment of FASB Statement No. 133," is effective for all
fiscal quarters of fiscal years beginning after June 15,
2000. The corporation is currently evaluating the effect
Statement No. 133 will have on its financial position and
results of operations in the period of adoption.
In 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in
Financial Statements," which summarizes the staff's views
regarding the application of generally accepted accounting
principles to selected revenue recognition issues. The
corporation is evaluating whether SAB 101 will cause any
change in its revenue recognition policies and procedures.
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<PAGE>
8. The Dow Merger
On August 3, 1999, the corporation and The Dow Chemical
Company ("Dow") entered an Agreement and Plan of Merger
providing for the merger of a subsidiary of Dow with and into
the corporation. As a result of the merger, the corporation
will become a wholly-owned subsidiary of Dow and the
corporation's shareholders will receive 1.611 shares of Dow
common stock for each share of UCC common stock they own as of
the date of the merger. On December 1, 1999, the
corporation's shareholders approved the merger. On May 3,
2000, the European Commission approved the merger subject to
the divestiture of certain assets and the licensing of certain
technology. The merger is still subject to certain additional
conditions including review by antitrust regulatory
authorities in the United States.
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<PAGE>
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 with 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 noncore 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 second quarter net income of $130
million, or $0.94 per diluted share ($0.96 per basic share).
For the same quarter in 1999, the corporation reported net
income of $63 million, or $0.46 per diluted share ($0.47 per
basic share). Net income for the six months ended June 30, 2000
was $227 million, or $1.65 per diluted share ($1.68 per basic
share) compared with net income of $140 million, or $1.02 per
diluted share ($1.05 per basic share), before the cumulative
effect of a change in accounting principle of $20 million, or
$0.14 per diluted share ($0.15 per basic share), for the same
six months of 1999.
Consolidated net sales increased 18.1 percent from $1,418
million for the second quarter of 1999 to $1,674 million for the
second quarter of 2000. This increase reflects a 20.1 percent
increase in average customer selling prices slightly offset by a
1.7 percent decline in customer volume. Consolidated net sales
for the first six months of 2000, compared with the same six
months of 1999, increased 16.7 percent from $2,820 million to
$3,291 million, representing a 17.2 percent increase in average
customer selling prices and a slight decline in customer volume.
Increases in average customer selling prices occurred in both
segments, however, the majority of the increase came from
products in the BC&P segment.
The corporation's unit variable margin (revenues less variable
manufacturing and distribution costs divided by customer volume)
was 15.5 cents per pound in the second quarter of 2000 compared
with 14.6 cents per pound for the same quarter in 1999.
Consolidated unit variable margin for the first half of 2000 was
15.0 cents per pound compared with 15.4 cents per pound in the
first half of 1999. Although the S&I segment benefited from
rising average selling prices for the three and six month
periods ended June 30, 2000, this benefit did not fully
offset significant increases in purchased material and energy
costs, which have continued to rise over the past several
quarters. In contrast, unit variable margin of the BC&P segment
for the three and six
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<PAGE>
month periods reflected significant improvements as increases in
average customer selling prices more than offset increases in
raw material and energy costs. Increases in raw material costs
were partially offset by the corporation's increased production
of ethylene at a lower cost than if purchased.
Fixed cost per pound of product sold (fixed manufacturing and
distribution costs, plus research and development and selling,
administrative and other expenses, divided by customer volume)
increased from 9.5 cents per pound for the second quarter of
1999 to 10.1 cents per pound for the same quarter of 2000. For
the first half of 2000, fixed cost per pound of products sold
was 10.1 cents compared with 9.7 cents for the same period of
1999.
Partnership income increased by $13 million and $10 million for
the quarter and six month period ended June 30, 2000,
respectively, as compared with the same periods in 1999. These
increases primarily reflect higher earnings for the
corporation's UOP and Petromont ventures. Additionally, for the
second quarter of 2000, compared with the same quarter in 1999,
the corporation's Aspell partnership showed some improvement
from a cost-savings program completed in the first quarter of
2000. Income from corporate investments carried at equity
increased substantially from a loss of $18 million in the second
quarter of 1999 to income of $43 million for the same quarter in
2000 and from a loss of $50 million in the first half of 1999 to
income of $82 million in the same half of 2000. The majority of
the increase during these periods related to better performance
of the corporation's EQUATE and Polimeri Europa joint ventures.
Other income for the three and six month periods ended June 30,
2000 included an $18 million ($11 million after-tax) gain on
shares received and sold in connection with the demutualization
of Metropolitan Life Insurance Company ("Met Life"), a provider
of certain employee benefit programs for the corporation. Other
income for the three and six month periods ended June 30, 1999
included a $12 million net gain ($9 million after-tax) from a
litigation settlement.
Operating profit was increased by a reduction in pension expense
of $22 million and $46 million for the three and six month
periods ended June 30, 2000, respectively, as compared with the
same periods in 1999, the result of amortization of investment
gains and changes in actuarial assumptions reflecting long-term
investment returns on pension plan assets.
Interest expense increased $10 million and $16 million for the
three and six month periods ended June 30, 2000, respectively,
as compared with the similar three and six month periods of
1999. These increases are the result of higher interest rates
and additional short-term debt, partly offset by an increase in
capitalized interest related to the corporation's current
capital projects.
The corporation's effective tax rate for the three and six month
periods ended June 30, 2000 and 1999 was approximately 25
percent.
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 interest rates. The corporation does
not hold derivative financial instruments for trading purposes.
-15-
<PAGE>
At June 30, 2000, the corporation held open foreign currency
forward contracts with net notional amounts of $97 million and
an unrecognized net loss of less than $1 million. At June 30,
2000, the corporation did not hold any derivatives related to
its interest rate exposure.
The corporation uses 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 $10.4 million net loss at June 30, 2000.
Alternatively, a hypothetical 10 percent strengthening in the
U.S. dollar across all currencies would have resulted in a $9.1
million net gain at June 30, 2000. These gains and losses would
generally be offset by fluctuations in the underlying currency
transactions.
At June 30, 2000, the corporation had long-term debt of $1,759
million, of which $15 million was variable-rate debt. A 10
percent increase in market interest rates would have decreased
the net fair market value of fixed-rate debt instruments by $102
million at June 30, 2000, and a 10 percent decrease in market
interest rates would have increased the net fair market value of
fixed-rate debt instruments by $115 million at June 30, 2000.
Outlook - Corporate
--------------------
On August 3, 1999, the corporation and The Dow Chemical Company
("Dow") entered an Agreement and Plan of Merger providing for the
merger of a subsidiary of Dow with and into the corporation. As
a result of the merger, the corporation will become a wholly-
owned subsidiary of Dow and the corporation's shareholders will
receive 1.611 shares of Dow common stock for each share of UCC
common stock they own as of the date of the merger. On December
1, 1999, the corporation's shareholders approved the merger. On
May 3, 2000, the European Commission approved the merger subject
to the divestiture of certain assets and the licensing of certain
technology. The merger is still subject to certain additional
conditions including review by antitrust regulatory authorities
in the United States. 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-
interests method of accounting.
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<PAGE>
<TABLE>
<CAPTION>
Specialties and Intermediates
-----------------------------
Quarter Ended Six Months Ended
Millions of dollars, June 30, June 30, June 30, June 30,
except as indicated 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Segment revenues $1,125 $1,036 $2,233 $2,070
Depreciation and amortization 67 62 134 125
Partnership income (loss) 8 (2) 10 2
Operating profit 92 188 174 396
Income (loss) from corporate
investments carried at equity (2) - (1) 4
Unit variable margin (cents/pound) 18.6 22.7 18.8 24.3
Fixed cost per pound of products
sold (cents/pound) 13.3 13.0 13.1 13.5
Capital expenditures 47 93 116 162
</TABLE>
S&I segment revenues increased 8.6 percent for the quarter ended
June 30, 2000 compared with the same quarter in 1999, the result
of a 10.4 percent increase in average selling prices partially
offset by a 1.6 percent decline in volume. Revenues of the S&I
segment for the first half of 2000, compared with the same half
of 1999, increased 7.9 percent on a 6.1 percent increase in
average selling prices and a 1.7 percent increase in volume.
Although average selling prices increased from the prior year's
second quarter and first half, the increases were insufficient to offset
the continuing increases in purchased material and energy costs
and the impact of the strong United States dollar on competitive
international pricing.
Increases in partnership income for the three and six month
periods ended June 30, 2000 compared with the same periods in
1999, reflected better results from the UOP and Petromont
partnerships. The second quarter of 2000 reflected lower losses
from Aspell, resulting from a cost-savings program completed in
the beginning of 2000.
Operating profit for the quarter and six month periods ended June
30, 2000 includes a $12 million gain on shares received and sold
in connection with the demutalization of Met Life, a provider of
certain employee benefit programs. Operating profit for the
quarter and six month period ended June 30, 1999 includes a $12
million net gain from a litigation settlement.
Outlook - Specialties & Intermediates
-------------------------------------
Looking ahead to the third quarter, it is anticipated that the
S&I segment will benefit from increases in average selling prices
and volumes, somewhat offset by continued high purchased material and
energy costs.
-17-
<PAGE>
<TABLE>
<CAPTION>
Basic Chemicals & Polymers
--------------------------
Quarter Ended Six Months Ended
Millions of dollars, June 30, June 30, June 30, June 30,
except as indicated 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Segment revenues $ 655 $436 $1,263 $ 857
Depreciation and amortization 35 33 70 74
Partnership income (loss) 1 (2) 2 -
Operating profit (loss) 74 (42) 104 (75)
Income (loss) from corporate
investments carried at equity 45 (18) 83 (54)
Unit variable margin (cents/pound) 11.6 4.7 10.5 5.2
Fixed cost per pound of products
sold (cents/pound) 6.3 5.2 6.2 5.2
Capital expenditures 80 115 206 219
</TABLE>
Revenues of the BC&P segment for the second quarter of 2000
increased over the same quarter of 1999 as the result of a 46.0
percent increase in average customer selling prices, slightly
offset by a 1.7 percent decline in customer volume. BC&P segment
revenues for the first half of 2000 increased over the same period
in 1999 on a 45.1 percent increase in average customer selling prices
and a 2.8 percent decline in customer volume. Unit variable margin
was positively affected by the strong increase in average customer
selling prices, which more than offset the increasing cost of raw
materials and energy. Declines in customer volume for the quarter
and six month comparative periods reflected the reduction in ethylene
oxide/glycol volume, which is now being produced and sold by
EQUATE, the corporation's joint venture in Kuwait.
Income from corporate investments carried at equity increased
substantially from a loss in the three and six month periods
ended June 30, 1999 to income for the same periods of 2000. This
increase represents better performance at EQUATE and Polimeri
Europa, where demand was strong and increases in average selling
prices were experienced. Additionally, the corporation's EQUATE
joint venture benefits from advantaged raw material supply
contracts.
Operating profit for the quarter and six month period ended June
30, 2000 includes a $6 million gain on shares received and sold
in connection with the demutalization of Met Life, a provider of
certain employee benefit programs.
Outlook - Basic Chemicals & Polymers
------------------------------------
The corporation anticipates that results for the third quarter
will reflect a reduction in average customer selling prices
and the continued high cost of raw materials and energy,
which may be partially offset by higher customer volumes. Income
from corporate investments carried at equity are expected to be
lower than second quarter 2000 levels.
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<PAGE>
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, 1999. 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 10 through 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'
Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities." This SOP requires the expensing of certain
costs, such as preoperating 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.
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," and
Statement No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an amendment of
FASB Statement No. 133," is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The corporation is
currently evaluating the effect Statement No. 133 will have on
its financial position and results of operations in the period
of adoption.
In 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in
Financial Statements," which summarizes the staff's views
regarding the application of generally accepted accounting
principles to selected revenue recognition issues. The
corporation is evaluating whether SAB 101 will cause any change
in its revenue recognition policies and procedures.
Financial Condition - June 30, 2000
------------------------------------
Cash flow from operations for the first six months of 2000 was
$259 million, an increase of $11 million from the same period in
1999. This increase is principally the result of a decrease in
working capital requirements and an increase in income before the
cumulative effect of change in accounting principle, partly offset by a
decrease in net noncash charges to income, principally resulting from
increases in undistributed earnings of the corporation's joint
ventures and the reduction in pension expense.
Cash flow used for investing totaled $422 million, a decrease of
$12 million from $434 million in the comparable period of 1999. This
decrease is principally due to a decrease in capital expenditures
and an increase in the sale of available-for-sale securities partially
offset by an increase in
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<PAGE>
investments, advances and acquisitions. Funding of major capital
projects in the first half of 2000 and 1999 included a new olefins
facility, being built jointly with NOVA Chemicals Corporation,
and a polyolefins project, both in Canada. The increase in investments,
advances and acquisitions relates principally to the corporation's
funding of its share of the cost of the Malaysian joint ventures.
At June 30, 2000, the corporation had approximately $217 million
in commitments related to authorized construction projects and
investments. These commitments are anticipated to be sourced
through operating cash flows.
Cash flow from financing was $180 million for the first half of
2000, as compared with $178 million for the same half of 1999.
The first half of 2000 primarily included cash received for
issuances of common stock of $20 million and net borrowings of
$216 million offset by cash paid for dividends of $61 million.
The first half of 1999 included net proceeds of $250 million
from the April issuance of 6.70 percent Public Notes, common
stock repurchases of $50 million, cash dividends totaling
$60 million and net repayments of debt, excluding the April 1999
issuance of 6.70 percent Public Notes, of $3 million.
The corporation's ratio of debt to total capital was
50.3 percent at June 30, 2000 as compared with 49.9 percent at
December 31, 1999. At June 30, 2000 there were no borrowings
outstanding under the existing major bank credit agreement
aggregating $1 billion.
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<PAGE>
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings
-----------------
See Note 6 to the corporation's consolidated financial
statements on pages 10 through 12 of this report on Form 10-Q.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
(c) On May 16, 2000, the corporation issued 662 shares
of Union Carbide Corporation common stock to a participant
under the Union Carbide Non-Employee Director's Compensation
Deferral Plan pursuant to the terms of the plan in reliance
on Section 4(2) of the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits.
The following exhibit is filed as part of this report:
27 Financial Data Schedule
(b) The corporation filed the following current reports on Form
8-K for the three months ended June 30, 2000:
1. Form 8-K dated April 26, 2000, contained the corporation's
press release dated April 26, 2000.
2. Form 8-K dated May 1, 2000, contained the corporation's
press release dated May 1, 2000.
3. Form 8-K dated June 14, 2000, contained a joint press
release issued by the corporation and The Dow Chemical
Company dated June 14, 2000.
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<PAGE>
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 4, 2000 By: /s/ John K. Wulff
-------------- JOHN K. WULFF
Vice-President, Chief
Financial Officer and
Controller
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<PAGE>
EXHIBIT INDEX
-------------
Exhibit Page
No. Exhibit No.
------- --------------------------------------------- -----
27 Financial Data Schedule 24
-23-
<PAGE>
EXHIBIT 27
