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FORM 10-Q/A No. 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ....... to ...........
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Commission file number: (1-13888)
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UCAR INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1385548
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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3102 West End Avenue
Suite 1100 37203
Nashville, Tennessee (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (615) 760-8227
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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 [ ]
As of March 31, 1999, 45,082,530 shares of common stock, par value $.01 per
share, were outstanding.
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<PAGE>
EXPLANATORY NOTE
This Amendment No. 1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999 is filed to correct certain
information contained in the Consolidated Financial Statements, the Notes to
Consolidated Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations and, therefore, only contains Part
I, Items 1 and 2 and Part II, Item 6. The error and correct information were
first disclosed in the Registrant's earnings release for the third quarter of
1999 which was filed on October 27, 1999 in a Current Report on Form 8-K.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets as of December 31, 1998
and March 31, 1999............................................ Page 3
Consolidated Statements of Operations for the Three Months
ended March 31, 1998 and 1999................................. Page 4
Consolidated Statements of Cash Flows for the Three Months
ended March 31, 1998 and 1999................................. Page 5
Consolidated Statement of Stockholders' Equity (Deficit) for the
Three Months ended March 31, 1999............................. Page 6
Notes to Consolidated Financial Statements..................... Page 7
Introduction to Part I, Items 2 and 3, and Part II, Item 1....... Page 18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ Page 21
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K.......................... Page 31
SIGNATURE.......................................................... Page 32
INDEX TO EXHIBITS.................................................. Page E-1
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share data)
December 31, March 31,
ASSETS 1998 1999
---- ----
Current assets: (Unaudited)
Cash and cash equivalents....................... $ 58 $ 68
Short-term investments.......................... 11 7
Notes and accounts receivable................... 198 211
Inventories:
Raw materials and supplies................... 58 58
Work in process.............................. 150 135
Finished goods............................... 56 61
------- -------
264 254
Prepaid expenses................................ 47 46
------- -------
Total current assets.................. 578 586
------- -------
Property, plant and equipment..................... 1,220 1,160
Less: accumulated depreciation.................... 752 727
------- -------
Net fixed assets...................... 468 433
Other assets...................................... 91 91
------- -------
Total assets.......................... $ 1,137 $ 1,110
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................ $ 67 $ 63
Short-term debt................................. 19 15
Payments due within one year on long-term debt.. 63 64
Accrued income and other taxes.................. 28 24
Other accrued liabilities....................... 198 172
------- -------
Total current liabilities............. 375 338
------- -------
Long-term debt.................................... 722 761
Other long-term obligations....................... 266 263
Deferred income taxes............................. 48 49
Minority stockholders' equity in consolidated
entities........................................ 13 13
Stockholders' equity (deficit):
Preferred stock, par value $.01, 10,000,000
shares authorized, none issued................ - -
Common stock, par value $.01, 100,000,000
shares authorized, 47,411,296 shares issued
at December 31, 1998, 47,425,836 shares
issued at March 31, 1999...................... - -
Additional paid-in capital...................... 521 523
Accumulated other comprehensive income (loss)... (157) (198)
Retained earnings (deficit)..................... (566) (552)
Less: cost of common stock held in treasury,
2,226,498 shares at December 31, 1998,
2,343,306 shares at March 31, 1999............ (85) (87)
------- -------
Total stockholders' equity (deficit).. (287) (314)
------- -------
Total liabilities and stockholders'
equity (deficit).................... $ 1,137 $ 1,110
======= =======
See accompanying Notes to Consolidated Financial Statements
3
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
(Unaudited)
Three Months
Ended March 31,
1998 1999
---- ----
Net sales.......................................... $ 244 $ 202
Cost of sales...................................... 151 139
------- -------
Gross profit................................ 93 63
Research and development........................... 2 2
Selling, administrative and other expenses......... 26 22
Other (income) expense (net)....................... 4 (3)
------- -------
Operating profit............................ 61 42
Interest expense................................... 16 22
------- -------
Income before provision for income taxes.... 45 20
Provision for income taxes......................... 10 5
------- -------
Income of consolidated entities............. 35 15
Less: minority stockholders' share of income....... - 1
------- -------
Net income.................................. $ 35 $ 14
======= =======
Basic earnings per common share:
Basic net income per share..................... $ 0.77 $ 0.30
Weighted average common shares outstanding
(in thousands)............................... 44,940 45,192
======= =======
Diluted earnings per common share:
Diluted net income per share................... $ 0.74 $ 0.30
Weighted average common shares outstanding
(in thousands)............................... 46,670 46,501
======= =======
See accompanying Notes to Consolidated Financial Statements
4
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Three Months
Ended March 31,
Cash flow from operating activities: 1998 1999
---- ----
Net income.......................................... $ 35 $ 14
Non-cash charges to net income:
Depreciation and amortization..................... 14 12
Deferred income taxes............................. 1 4
Other non-cash charges............................ 7 5
Working capital *................................... (65) (50)
Long-term assets and liabilities.................... 3 2
------- ------
Net cash used in operating activities......... (5) (13)
------- ------
Cash flow from investing activities:
Capital expenditures................................ (13) (12)
Purchases of short-term investments................. (19) (13)
Maturity of short-term investments.................. 4 16
------- ------
Net cash used in investing activities......... (28) (9)
------- ------
Cash flow from financing activities:
Short-term debt borrowings (reductions), net........ 5 (5)
Long-term debt borrowings........................... 45 42
Long-term debt reductions........................... (24) -
------- ------
Net cash provided by financing activities..... 26 37
------- ------
Net increase (decrease) in cash and cash equivalents.. (7) 15
Effect of exchange rate changes on cash and cash
equivalents.......................................... - (5)
Cash and cash equivalents at beginning of period....... 58 58
------- ------
Cash and cash equivalents at end of period............. $ 51 $ 68
======= ======
Supplemental disclosures of cash flow information:
Net cash paid during the period for:
Interest expense............................... $ 20 $ 23
Income taxes................................... 13 8
* Net change in working capital due to the following
components:
(Increase) decrease in current assets:
Notes and accounts receivable.................. $ 6 $ (19)
Inventories.................................... (25) (4)
Prepaid expenses............................... 1 (2)
Decrease in accounts payable and accruals............ (47) (2)
Antitrust investigations and related lawsuits
and claims......................................... - (18)
Restructuring payments............................... - (5)
------- ------
Working capital................................ $ (65) $ (50)
======= =======
See accompanying Notes to Consolidated Financial Statements
5
<PAGE>
<TABLE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in millions)
(Unaudited)
<CAPTION>
Accumulated
Other
Additional Comprehensive Retained Total
Common Paid-in Income Earnings Treasury Stockholders'
Stock Capital (Loss) (Deficit) Stock Equity (Deficit)
----- ------- ------ --------- ----- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998................ $ - $ 521 $ (157) $ (566) $ (85) $ (287)
Comprehensive income (loss):
Net income............................... - - - 14 - 14
Foreign currency translation adjustments - - (41) - - (41)
------- ------- ------- ------- ------- -------
Total comprehensive income (loss)........... - - (41) 14 - (27)
Acquisition of treasury shares.............. - 2 - - (2) -
------- ------- ------- ------- ------- -------
Balance at March 31, 1999............. $ - $ 523 $ (198) $ (552) $ (87) $ (314)
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
6
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
(1) Interim Financial Presentation
The interim Consolidated Financial Statements are unaudited; however,
in the opinion of management, they have been prepared in accordance with Rule
10-01 of Regulation S-X adopted by the Securities and Exchange Commission and
reflect all adjustments (all of which are of a normal, recurring nature) which
are necessary for a fair presentation of financial position, results of
operations and cash flows for the periods presented. Results of operations for
the three months ended March 31, 1999 are not necessarily indicative of the
results of operations that may be expected for the entire year ending December
31, 1999.
Important Terms
The following terms are used to identify various companies or groups of
companies, markets or other matters in the Consolidated Financial Statements.
"UCAR" refers to UCAR International Inc. only. UCAR is the issuer of the
publicly traded common stock mentioned in the Consolidated Financial Statements.
"UCAR Global" refers to UCAR Global Enterprises Inc. only. UCAR Global
is a holding company and a direct wholly-owned subsidiary of UCAR. UCAR Global
is the only subsidiary directly owned by UCAR. UCAR Global is the issuer of the
outstanding 12% senior subordinated notes due 2005 (the "Subordinated Notes")
and is the primary borrower under the senior secured bank credit facilities (the
"Senior Bank Facilities").
"UCAR Group," "we," "us" or "our" refers collectively to UCAR, its
subsidiaries and its and their predecessors to the extent those predecessors'
activities related to the graphite and carbon business.
"Subsidiaries" refers to those companies which, at the relevant time,
were majority-owned or wholly-owned directly or indirectly by UCAR or its
predecessors. All of UCAR's subsidiaries have been wholly-owned (with immaterial
exceptions in the case of certain foreign subsidiaries) from at least January 1,
1996 through March 31, 1999, except for its German subsidiary and Carbone Savoie
S.A.S., both of which were acquired in early 1997 and have been 70% owned, and
except for its South African subsidiary, which was 50% owned until April 1997,
when it became 100% owned.
7
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
(1) Interim Financial Presentation (Cont.)
Business and Structure
The UCAR Group operates in two business segments: graphite electrodes,
and graphite and carbon products. We develop, manufacture and market graphite
and carbon products, including electrodes, for the steel, ferroalloy, aluminum,
chemical, aerospace and transportation industries. Our principal products are
graphite electrodes, graphite and carbon cathodes, graphite and carbon
specialties (including carbon electrodes) and flexible graphite.
Foreign Currency Translation
Generally, except for operations in Russia and Mexico in 1998 and
Russia in 1999, unrealized gains and losses resulting from translating foreign
subsidiaries' assets and liabilities into U.S. dollars are accumulated in other
comprehensive income on the Consolidated Balance Sheet until such time as the
operations are sold or substantially or completely liquidated. Translation gains
and losses relating to operations where high inflation exists are included in
income in the Consolidated Financial Statements.
Since 1997, the Mexican economy has been considered highly
inflationary, defined as cumulative inflation of 100% or more over a three-year
period. Accordingly, the financial statements of our Mexican subsidiary have
been remeasured as if its functional currency were the U.S. dollar. In 1999, we
began to account for our Mexican subsidiary using the U.S. dollar as its
functional currency, irrespective of Mexico's inflationary status, because its
sales and purchases are predominantly U.S. dollar-denominated.
Inventories
Inventories are stated at cost or market, whichever is lower. Cost is
determined generally on the "first-in first-out" method ("FIFO") in the United
States. The "average cost" method is used elsewhere.
8
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
(1) Interim Financial Presentation (Cont.)
Accounting Changes
In 1998, we changed our method of accounting for the cost of certain
U.S. inventories from the "last-in first-out" method ("LIFO") to the "first-in
first-out" method ("FIFO"). We believe the new method to be preferable because
it provides improved consistency in accounting for worldwide inventories and
avoids potential distortion of future profits from anticipated decrements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. We are currently evaluating the
impact of SFAS 133 on our financial position, results of operations and cash
flows.
(2) UCAR Global Enterprises Inc.
UCAR has no material assets, liabilities or operations other than those
that result from its ownership of 100% of the outstanding common stock of UCAR
Global and intercompany debt. Separate consolidated financial statements of UCAR
Global are not presented because they would not be materially different than the
Consolidated Financial Statements.
The following is a summary of the consolidated assets and liabilities
of UCAR Global and its subsidiaries and their consolidated results of
operations:
December 31, March 31,
1998 1999
---- ----
(Dollars in millions)
Assets:
Current assets........................ $ 578 $ 586
Non-current assets.......... 559 524
-------- ---------
Total assets............ $ 1,137 $ 1,110
======== =========
Liabilities:
Current liabilities................... $ 375 $ 338
Non-current liabilities............... 1,036 1,073
-------- ---------
Total liabilities....... $ 1,411 $ 1,411
======== =========
Minority stockholders' equity in
consolidated entities.................. $ 13 $ 13
======== =========
9
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
(2) UCAR Global Enterprises Inc. (Cont.)
Three Months
Ended March 31,
1998 1999
---- ----
(Dollars in millions)
Net sales................................ $ 244 $ 202
Gross profit............................. $ 93 $ 63
Net income .............................. $ 35 $ 14
(3) Earnings Per Share
Basic and diluted earnings per share are calculated based upon the
provisions of SFAS 128, using the following data:
Three Months
Ended March 31,
1998 1999
---- ----
Weighted average common shares outstanding
for basic calculation..................... 44,939,545 45,192,295
Add: Effect of stock options............. 1,730,726 1,308,443
---------- ----------
Weighted average common shares outstanding,
adjusted for diluted calculation......... 46,670,271 46,500,738
========== ==========
The calculation of weighted average common shares outstanding for the
diluted calculation excludes the consideration of stock options for 774,240 and
2,122,778 shares in the three months ended March 31, 1998 and 1999,
respectively, because the exercise of these options would not have been dilutive
for that period.
(4) Segment Reporting
The UCAR Group has two reportable operating segments: graphite
electrodes, and graphite and carbon products. The graphite electrode segment
produces and markets graphite electrodes to electric arc furnace and ladle
furnace steelmakers. The graphite and carbon products segment produces and
markets carbon electrodes, flexible graphite, graphite and carbon cathodes, and
graphite and carbon specialties. These reportable segments are managed
separately because of the different products and markets they serve.
10
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
(4) Segment Reporting (Cont.)
We evaluate the performance of our operating segments based on gross
profit. Intersegment sales and transfers are not material. The following tables
summarize financial information concerning our reportable segments.
Three Months Ended March 31,
1998 1999
---- ----
(Dollars in millions)
Net sales to external customers:
Graphite electrodes......................... $ 167 $ 132
Graphite and carbon products................ 77 70
------ ------
Consolidated net sales.................... $ 244 $ 202
====== ======
Gross profit:
Graphite electrodes......................... $ 67 $ 44
Graphite and carbon products................ 26 19
----- ------
Consolidated gross profit.............. $ 93 $ 63
===== ======
(5) Restructuring Plan
In September 1998, we recorded a restructuring charge of $86 million in
connection with a global restructuring and rationalization plan to reduce costs
and improve operating efficiencies. The principal actions of the plan involve
the closure of manufacturing operations in Welland, Canada and Berlin, Germany,
and the centralization and consolidation of administrative and financial
functions. These actions, which will result in the elimination of approximately
430 administrative and manufacturing positions, are expected to be completed in
1999.
The following is a summary of activity relating to the accrued liabilities
associated with the restructuring plan:
<TABLE>
Balance at 1999 Balance at
December 31, 1998 Payments March 31, 1999
<S> <C> <C> <C>
Severance and related costs...................... $ 30 $ 4 $ 26
Plant shut down and related costs................ 18 1 17
Postmonitoring and environmental.............. 9 - 9
----- ----- -----
$ 57 $ 5 $ 52
===== ===== =====
</TABLE>
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
(5) Restructuring Plan (Cont.)
Our Berlin facility ceased production activities in 1998. Our Welland plant
ceased production efforts in April 1999. In addition, the relocation of our
corporate headquarters to Nashville, Tennessee was completed during the 1999
first quarter.
Cash payments of $5 million were made in the 1999 first quarter. Payments
of $1 million were associated with our Berlin facility, and payments of $4
million were associated with our Welland plant. Approximately 135 positions were
eliminated in the 1999 first quarter. The restructuring accrual is included in
other accrued liabilities on the Consolidated Balance Sheets.
(6) Contingencies
Antitrust Investigations
On June 5, 1997, we were served with subpoenas to produce documents to a
grand jury convened by the U.S. Department of Justice (the "DOJ") and a related
search warrant in connection with a criminal investigation as to whether there
has been any violation of U.S. federal antitrust laws by producers of graphite
electrodes. Concurrently, the antitrust enforcement authority of the European
Union (the "EU authority") visited offices of one of our French subsidiaries for
purposes of gathering information in connection with an investigation as to
whether there has been any violation of the antitrust law of the European Union
by those producers. In October 1997, we were served with subpoenas by the DOJ to
produce documents relating to, among other things, our carbon electrode and bulk
graphite businesses.
In December 1997, UCAR's Board of Directors appointed a special committee
of outside directors to exercise its power and authority in connection with
antitrust investigations and related lawsuits and claims. On March 13, 1998, the
then Chairman of the Board, President and Chief Executive Officer and the then
Senior Vice President and Chief Operating Officer retired and resigned from all
positions with us.
On April 7, 1998, pursuant to a plea agreement between the DOJ and UCAR,
the DOJ charged UCAR and unnamed co-conspirators with participating from at
least July 1992 until at least June 1997 in an international conspiracy
involving meetings and conversations in the Far East, Europe and the United
States resulting in agreements to fix prices and allocate market shares in the
United States and elsewhere, to restrict co-conspirators' capacity and to
restrict non-conspiring producers' access to manufacturing technology for
graphite electrodes. On April 24, 1998, pursuant to the plea agreement, UCAR
pled guilty to a one count charge of violating U.S. federal antitrust laws in
connection with the sale of graphite electrodes and was sentenced to pay a
non-interest-bearing fine in the aggregate amount of $110 million. The fine is
payable in six annual installments of $20 million, $15 million, $15 million, $18
million, $21 million and $21 million, commencing 1998. The plea agreement was
approved by the court and, as a result, we will not be subject to prosecution by
the DOJ with respect to any other violations of the U.S.
12
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
(6) Contingencies (Cont.)
federal antitrust laws occurring prior to April 24, 1998. The payments due in
1998 and 1999 were timely made. The next installment payment of $15 million is
due in April 2000.
In April 1998, we became aware that the Canadian Competition Bureau (the
"Competition Bureau") had commenced a criminal investigation as to whether there
has been any violation of Canadian antitrust laws by producers of graphite
electrodes. In March 1999, pursuant to a plea agreement with the Competition
Bureau, our Canadian subsidiary pled guilty to a one count charge of violating
Canadian antitrust laws in connection with the sale of graphite electrodes and
was sentenced to pay a fine of Cdn. $11 million. The plea agreement was approved
by the court and, as a result, we will not be subject to prosecution by the
Competition Bureau with respect to any antitrust violations occurring prior to
the date of the plea agreement. The fine was timely paid.
The guilty pleas have made it more difficult for us to defend against other
investigations as well as civil lawsuits and claims.
In June 1998, we became aware that the Japanese Fair Trade Commission (the
"JFTC") had commenced an investigation as to whether there has been any
violation of Japanese antitrust laws by producers and distributors of graphite
electrodes. In January 1999, UCAR received a request from the JFTC to explain,
among other things, the purpose of various alleged meetings which took place
between us and other producers of graphite electrodes. We believe that, among
other things, we have good defenses to any claim that we are subject to the
jurisdiction of the JFTC and we do not intend to comply with this request. The
independent distributor of our products in Japan has been required to produce
documents and witnesses to the JFTC. In March 1999, the JFTC issued a "warning"
letter to the four Japanese graphite electrode producers. While the JFTC did not
issue a "warning" letter to us, the "warning" letter issued to the Japanese
producers did reference us as a member of an alleged cartel.
We have been vigorously protecting, and intend to continue to vigorously
protect, our interests in connection with the investigations described above. We
may, however, at any time settle any possible unresolved charges. We are
cooperating with the EU authority in its investigation and with the DOJ and the
Competition Bureau in their continuing investigations of others. It is possible
that antitrust investigations seeking, among other things, to impose fines and
penalties against us could be initiated by authorities in other jurisdictions.
Antitrust Lawsuits
In 1997, UCAR and other producers of graphite electrodes were served with
complaints commencing various antitrust class action lawsuits. Subsequently, the
complaints were either withdrawn without prejudice to refile or consolidated
into a single complaint (the "antitrust class
13
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
(6) Contingencies (Cont.)
action lawsuit"). The plaintiffs allege that the defendants violated U.S.
federal antitrust laws in connection with the sale of graphite electrodes and
seek, among other things, an award of treble damages resulting from such alleged
violations. In August 1998, the court certified a class of plaintiffs consisting
of all persons who purchased graphite electrodes in the United States (the
"class") directly from the defendants during the period from July 1, 1992
through June 30, 1997 (the "class period").
In 1998, UCAR and other producers of graphite electrodes were served with a
complaint by 27 steelmakers in the United States commencing a separate civil
antitrust lawsuit (the "opt-out lawsuit"). The plaintiffs allege that the
defendants violated U.S. federal antitrust laws in connection with the sale of
graphite electrodes and seek, among other things, an award of treble damages
resulting from such alleged antitrust violations.
In 1998, the UCAR Group, other producers of graphite electrodes, Union
Carbide Corporation ("Union Carbide") and Mitsubishi Corporation ("Mitsubishi")
were served with a complaint by Nucor Corporation and an affiliate commencing a
civil antitrust and fraudulent transfer lawsuit (the "Nucor lawsuit"). The
plaintiffs allege that the UCAR Group and certain other defendants violated U.S.
federal antitrust laws in connection with the sale of graphite electrodes and
that payments to Union Carbide and Mitsubishi in connection with our leveraged
recapitalization in January 1995 violated applicable state fraudulent transfer
laws. The plaintiffs seek, among other things, an award of treble damages
resulting from such alleged antitrust violations and an order to have payments
made by UCAR to Union Carbide and Mitsubishi in connection with the
recapitalization returned to UCAR for purposes of enabling UCAR to satisfy any
judgments resulting from such alleged antitrust violations.
In 1998, the UCAR Group and other producers of graphite electrodes were
served with a petition by Chaparral Steel Company and two affiliates commencing
a separate civil antitrust lawsuit (the "Texas lawsuit"). The plaintiffs allege
that the defendants violated Texas antitrust laws in connection with the sale of
graphite electrodes and seek, among other things, an award of treble damages
resulting from such alleged violations.
In 1998, certain other steelmakers in the United States and Canada also
served us and other producers of graphite electrodes with complaints commencing
five separate civil antitrust lawsuits (four in the United States and one in
Canada) in various courts (the "other lawsuits"). The plaintiffs allege that the
defendants violated applicable antitrust laws (and applicable conspiracy laws,
in the case of the lawsuit in Canada) in connection with the sale of graphite
electrodes and seek, among other things, an award of treble damages (in the case
of lawsuits in the United States) or actual and punitive damages (in the case of
the lawsuit in Canada) resulting from such alleged violations.
14
<PAGE>
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
(6) Contingencies (Cont.)
In 1999, the UCAR Group and other producers of graphite electrodes were
served with a complaint by 26 steelmakers and related parties, all but one of
whom is located outside the United States, commencing a separate civil antitrust
lawsuit in the United States (the "foreign customer lawsuit"). The plaintiffs
allege that the defendants violated U.S. federal antitrust laws in connection
with the sale of graphite electrodes sold or sourced from the United States and
those sold and sourced outside the United States. The plaintiffs seek, among
other things, an award of treble damages resulting from such alleged antitrust
violations. We believe that, among other things, we have strong defenses against
claims alleging that purchases of graphite electrodes outside the United States
are actionable under U.S. federal antitrust laws.
In April 1999, the UCAR Group and other producers of graphite electrodes
were served with a complaint by Bayou Steel Corporation and an affiliate
commencing a separate civil antitrust lawsuit (the "Bayou lawsuit"). The
plaintiffs allege that the defendants violated U.S. federal antitrust laws in
connection with the sale of graphite electrodes and seek, among other things, an
award of treble damages resulting from such alleged violations.
Certain steelmakers in other countries who purchased graphite electrodes
from us, and certain customers who purchased other products from us, have
threatened to commence civil antitrust lawsuits against us in the United States
and other jurisdictions.
Through May 7, 1999, we have settled the antitrust class action lawsuit,
the opt-out lawsuit, the Nucor lawsuit, all of the other lawsuits (in Canada as
well as in the United States), certain of the threatened civil antitrust
lawsuits and certain possible civil antitrust claims by customers who negotiated
directly with us. The settlements cover, among other things, virtually all of
the actual and potential claims against us (but not other defendants) by
steelmakers in the United States and Canada arising out of alleged antitrust
violations occurring prior to the date of the respective settlements in
connection with the sale of graphite electrodes. The only material exceptions
are the Texas lawsuit, the foreign customer lawsuit, the Bayou lawsuit and
possible claims by steelmakers in the United States and Canada whose aggregate
purchases of graphite electrodes do not constitute a material portion of our
sales of graphite electrodes in the United States and Canada. Although each
settlement is unique, in the aggregate the settlements consist primarily of
current and deferred cash payments with some product credits and discounts.
Through March 31, 1999, all payments due, an aggregate of $163 million, have
been timely made. As of March 31, 1999 and based on information known to us at
May 7, 1999, the aggregate amount remaining due under the settlements was
approximately $24 million, most of which is payable in 1999. Amounts due under
the settlement of the antitrust class action may be increased if additional
claims are filed by members of the class or if it is determined that steelmakers
outside the United States who purchased graphite electrodes sourced within the
United States are members of the class and such steelmakers file claims
thereunder.
15
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PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
(6) Contingencies (Cont.)
The Texas lawsuit, the foreign customer lawsuit and the Bayou lawsuit have
not been settled and are still in their early stages. We have been vigorously
defending, and intend to continue to vigorously defend, against the Texas
lawsuit, the foreign customer lawsuit and the Bayou lawsuit as well as all
threatened civil antitrust lawsuits and possible civil antitrust claims,
including those mentioned above. We may at any time, however, settle the Texas
lawsuit, the foreign customer lawsuit and the Bayou lawsuit as well as any
threatened lawsuits and possible claims and are actively negotiating settlements
with certain customers or their counsel.
We recorded a charge of $340 million against results of operations for 1997
as a reserve for potential liabilities and expenses in connection with antitrust
investigations and related lawsuits and claims. Actual liabilities and expenses
could be materially higher than $340 million. To the extent that these
liabilities and expenses are reasonably estimable, at May 7, 1999, $340 million
continues to represent our estimate of these liabilities and expenses. In the
aggregate, the fines and settlements described above are within the amounts we
used to evaluate the $340 million charge.
It is possible that additional civil antitrust lawsuits seeking, among
other things, to recover damages could be commenced against us in the United
States and other jurisdictions.
Shareholder Derivative Lawsuit
In March 1998, UCAR was served with a complaint commencing a shareholder
derivative lawsuit. Certain former and current directors and officers are named
as defendants. UCAR is named as a nominal defendant. The plaintiff alleges that
the defendants breached their fiduciary duties in connection with alleged
non-compliance by the UCAR Group and our employees with antitrust laws and that
certain of the defendants sold common stock while in possession of materially
adverse non-public information relating to such non-compliance with antitrust
laws and seeks recovery for UCAR of damages to the UCAR Group resulting from
these alleged breaches and sales. In May 1998, UCAR and the individual
defendants filed a motion to dismiss the complaint on the grounds that plaintiff
failed to make a demand upon UCAR's Board of Directors prior to commencing the
lawsuit and to sufficiently allege that such a demand would have been futile. In
response to the motion, plaintiff obtained court permission to file an amended
complaint. The amended complaint was served in July 1998. In August 1998, UCAR
and the individual defendants moved to dismiss the complaint on the same
grounds. The motion has been fully briefed.
This lawsuit is still in its early stages. This lawsuit is being pursued
for recovery from the individual defendants on behalf of (and payable to) UCAR
and any indemnification obligations which UCAR may have to the individual
defendants would result from judgments or settlements in favor of UCAR. As a
result, we believe that UCAR's ultimate exposure in this lawsuit is
16
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PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
(6) Contingencies (Cont.)
limited to defense costs and possibly reimbursement of certain of plaintiff's
attorneys' fees and expenses.
This lawsuit is still in its early stages. This lawsuit is being pursued
for recovery from the individual defendants on behalf of (and payable to) UCAR
and any indemnification obligations which UCAR may have to the individual
defendants would result from judgments or settlements in favor of UCAR. As a
result, we believe that UCAR's ultimate exposure in this lawsuit is limited to
defense costs and possibly reimbursement of certain of plaintiff's attorneys'
fees and expenses.
Securities Class Action Lawsuit
In April and May 1998, UCAR was served with complaints commencing
securities class actions. The complaints have been consolidated into a single
complaint and a consolidated amended complaint was served in September 1998. The
defendants named in the consolidated amended complaint are UCAR and certain
former and current directors and officers. The proposed class consists of all
persons (other than the defendants) who purchased common stock during the period
from August 1995 through March 1998. The plaintiffs allege that, during such
period, the defendants violated U.S. federal securities laws in connection with
purchases and sales of common stock by making material misrepresentations and
omissions regarding alleged violations of antitrust laws and seek, among other
things, to recover damages resulting from such alleged violations. UCAR and each
of the individual defendants has filed a motion to dismiss the complaint.
This lawsuit is still in its early stages and no evaluation of liability or
exposure related to this lawsuit can yet be made. As mentioned above, the guilty
pleas have made it more difficult for UCAR to defend against claims asserted
against it.
17
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PART II (Cont.)
UCAR INTERNATIONAL INC.
Introduction to Part I, Items 2 and 3, and Part II, Item 1
Important Terms
We use the following terms to identify various companies or groups of
companies, markets or other matters. These terms help to simplify the
presentation of information in this Report.
UCAR refers to UCAR International Inc. only. UCAR is the issuer of the
publicly traded common stock covered by this Report.
UCAR Global refers to UCAR Global Enterprises Inc. only. UCAR Global is a
holding company and a direct wholly-owned subsidiary of UCAR. UCAR Global is the
only subsidiary directly owned by UCAR. UCAR Global is the issuer of our
outstanding 12% senior subordinated notes due 2005 (the "Subordinated Notes")
and is the primary borrower under the senior secured bank credit facilities (the
"Senior Bank Facilities").
UCAR Group, we, us or our refers collectively to UCAR, its subsidiaries and
its and their predecessors to the extent those predecessors' activities related
to the graphite and carbon business.
Subsidiaries refers to those companies which, at the relevant time, were
majority-owned or wholly-owned directly or indirectly by UCAR or its
predecessors. All of UCAR's subsidiaries have been wholly-owned (with immaterial
exceptions in the case of certain foreign subsidiaries) from at least January 1,
1996 through March 31, 1999, except for our German subsidiary and Carbone Savoie
S.A.S. ("Carbone Savoie"), both of which were acquired in early 1997 and have
been 70% owned, and except for our South African subsidiary, which was 50% owned
until April 1997, when it became 100% owned.
Presentation of Financial, Market and Legal Data
Separate consolidated financial statements of UCAR Global are not presented
in this Report because they would not be materially different than the
Consolidated Financial Statements.
We present financial information for the UCAR Group on a consolidated
basis. We use the equity method to account for 50% or less-owned interests and
we do not restate financial information for periods prior to the acquisition of
subsidiaries. This means that, prior to April 1997, financial information of our
South African subsidiary is only reflected on the single line in the
consolidated financial statements entitled "UCAR share of net income from
company carried at equity." For the same reason, financial information for our
German subsidiary and Carbone Savoie is consolidated on each line of the
Consolidated Financial Statements and the equity of the other 30% owners in
those subsidiaries is reflected on the single line entitled "minority
stockholders' share of income."
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PART II (Cont.)
UCAR INTERNATIONAL INC.
References to cost in the context of our low-cost supplier strategy do not
include the unusual or non-recurring charges identified in the Consolidated
Financial Statements on the lines entitled "antitrust investigations and related
lawsuits and claims," "restructuring charge" or "impairment loss on Russian
assets" or the impact of accounting changes.
Unless otherwise noted, all cost savings and reductions described in this
Report are estimates based on a comparison to costs in 1998 and on the
assumption that net sales and other operating conditions are substantially the
same in 1999 as they were in 1998.
Neither any statements in this Report nor any charge taken by the UCAR
Group relating to any legal proceedings constitute an admission as to any
wrongdoing or liability.
Reference is made to our Annual Report on Form 10-K for the year ended
December 31, 1998 (the "Annual Report") for background information on various
contingencies and other matters related to circumstances affecting us and our
industry.
Forward Looking Statements
This Report contains forward looking statements. These include statements
about such matters as future production of steel in electric arc furnaces,
future prices and sales of and demand for graphite electrodes and other
products, future operational and financial performance of various businesses,
plans and programs relating to strategies and divestiture, joint venture,
operating, global integration and capital projects, legal matters and related
fees and costs, consulting fees and related projects, and future costs, cost
savings and reductions, margins and earnings. Except as otherwise required to be
disclosed in periodic reports required to be filed by public companies with the
SEC pursuant to the SEC's rules, we have no duty to update these statements.
Actual future events and circumstances (including future performance,
results and trends) could differ materially from those set forth in these
statements due to various factors. These factors include:
o the possibility that announced additions to capacity for producing steel
in electric arc furnaces or announced reductions in graphite electrode
manufacturing capacity may not occur
o the possibility that increased production of steel in electric arc
furnaces may not result in increased demand for or prices or sales of
graphite electrodes
o the occurrence of unanticipated events or circumstances relating to
pending antitrust investigations or pending antitrust, shareholder
derivative or securities lawsuits
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PART II (Cont.)
UCAR INTERNATIONAL INC.
o the commencement of investigations or lawsuits relating to the same subject
matter as these pending investigations or lawsuits
o the occurrence of unanticipated events or circumstances relating to our
plans or projects
o changes in currency exchange rates, changes in economic or competitive
conditions, technological developments, and other risks and uncertainties,
including those described in this Report and the Annual Report.
No assurance can be given that any future strategic alliances or
divestitures described in this Report or the Annual Report will be completed or
as to the timing or terms of any such transaction.
20
<PAGE>
PART II (Cont.)
UCAR INTERNATIONAL INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
We are the largest manufacturer of graphite and carbon electrodes and
cathodes in the world, with sales in more than 80 countries and manufacturing
facilities on four continents.
Graphite electrodes, our principal product, are consumed primarily in the
production of steel in electric arc furnaces, the steelmaking technology used by
all "mini-mills," which constitute the growth sector of the steel industry.
Graphite electrodes are also used for refining steel in ladle furnaces and in
other refining processes. Carbon electrodes are used primarily in the production
of silicon metal, which is used in the manufacture of aluminum. Cathodes are
used as lining for furnaces that smelt aluminum. We also manufacture other
graphite and carbon products as well as flexible graphite products. Our
non-electrode businesses contribute about one-third of our net sales. In
addition to the steel and metals industries, we sell our products to the
semiconductor, automotive, aerospace, chemical, and transportation industries.
Our strategic goal is to be the best global manufacturer and customer
service-driven company in the graphite and carbon industry. We are focused on
providing our customers with exceptional commercial and technical service along
with the best product performance in the industry. We seek to be the lowest cost
supplier in the industry and to use that to our competitive advantage.
We believe our strengths include our multiple low cost locations and fully
integrated state-of-the-art manufacturing facilities, our record of innovative
product and process developments and our exceptional customer technical service.
We seek to build on these strengths to leverage earnings growth within existing
product lines and through new product innovation and penetration of related new
and niche markets.
Global Restructuring and Rationalization Plan and Other Initiatives. In
September 1998, UCAR's Board of Directors adopted a global restructuring and
rationalization plan. The plan is intended to enhance stockholder value by
focusing on optimizing margins, maximizing cash flow, generating growth in
earnings and strengthening competitiveness through operating and overhead cost
reduction and plant rationalization. The plan is also intended, over the long
term, to strengthen our position as a low cost supplier to the steel and metals
industries and, over the near term, to respond to global economic conditions
that have been adversely impacting our customers.
The plan had a positive impact on earnings in the 1999 first quarter and we
believe that, under current conditions, the plan will continue to have a
positive impact on earnings, particularly in the second half of 1999. We
estimate that the plan will generate annual cost savings at a rate of
21
<PAGE>
PART II (Cont.)
UCAR INTERNATIONAL INC.
about $80 million by the end of 1999, $111 million by the end of 2000 and $135
million by the end of 2001 and thereafter. We also believe that the plan will
reduce working capital needs and improve efficiencies.
Planned plant rationalization activities are on or ahead of schedule.
Savings under the plan were on target for the 1999 first quarter, aggregating
$10 million as compared to the 1998 measurement bases. We achieved $4 million of
savings in cost of sales, including a $50 per metric ton reduction in cost of
sales for graphite electrodes, as well as $6 million in total overhead savings.
We anticipate achieving about $64 million of savings in 1999.
Consistent with our strategic goals and cost reduction plans, we are
seeking strategic alliances to enhance our strengths and growth in existing
product lines and related new and niche markets as well as through new product
innovation. Our relationship with Aluminium Pechiney S.A. in the cathode
business is an example of a successful strategic alliance. Current areas of
focus include our graphite and carbon specialties business and our flexible
graphite business, where we see possible applications in the fuel cell,
semiconductor and flame retardant industries. Alliances may be structured as
joint ventures, licensing, supply or other arrangements. We may also divest
parts of certain businesses in our graphite and carbon products business
segment.
Global Economic Conditions. We are a global company and serve every
geographic market worldwide. Accordingly, we are always impacted in varying
degrees, both positively and negatively, as country or regional conditions
affecting the markets for our products fluctuate.
In 1998, the economic downturn in the Asia Pacific region directly or
indirectly affected most of the worldwide markets for our products. This
downturn directly affected demand for steel and other metals in the Asia Pacific
region. To the extent that certain regions (such as Eastern Europe, Africa,
South America and the Middle East) were major exporters of steel and other
metals to the Asia Pacific region, this downturn also affected demand for their
products. In some instances, those exporters sought to sell their products in
other regions (such as North America and Western Europe), thereby adversely
affecting demand for steel and other metals produced in those other regions. All
of these factors resulted in a reduction in global demand for and production of
steel and other metals. As a result, our customers sought to reduce their
inventories of supplies (such as inventories of electrodes) as well as reduce
their production rates. All of these circumstances adversely affected demand for
graphite electrodes and some of our other products. We experienced downward
pressure in certain markets on pricing of graphite electrodes and some of our
other products beginning in early 1998. These circumstances negatively impacted
our results of operations in 1998 and in the 1999 first quarter.
We saw some signs of a possible improvement in the end of the 1999 first
quarter, which have continued into the first part of the 1999 second quarter.
These signs include increased demand and orders for graphite electrodes from the
steel industry and for graphite specialties from the semiconductor industry.
Demand for graphite specialties from the transportation industry and for
cathodes from aluminum industry has remained healthy. The silicon metals
industry and demand for products sold to that industry have, however, remained
weak. Pricing
22
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PART II (Cont.)
UCAR INTERNATIONAL INC.
for most of our products has also remained weak. We do not yet know whether this
improvement will be significant or sustained. In any event, in light of typical
order patterns for graphite electrodes, we would not expect to see a significant
improvement before the second half of 1999.
Refinancing and Plans to Manage Liquidity. In November 1998, the Senior
Bank Facilities were refinanced and the indenture governing the Subordinated
Notes (the "Subordinated Note Indenture") was amended. In connection with the
refinancing, we obtained additional term debt of $210 million.
Following the refinancing, the covenants under the Senior Bank Facilities
are more restrictive than they had been. The covenants do, however, allow us to
implement our global restructuring and rationalization plan. Further, the
covenants do not restrict our ability to draw on our revolving credit facility
unless payments and reserves with respect to the litigation matters described
below exceed $400 million (adjusted for certain imputed interest expense).
We expect to continue to manage our liquidity as described in the Annual
Report. Global economic conditions negatively impacted our results of operations
in the 1999 first quarter as described above and, correspondingly, negatively
impacted cash flow and other measures of liquidity and financial strength. This
negative impact on cash flow was partially offset by savings under our global
restructuring and rationalization plan and other projects described in the
Annual Report. We believe that, under current economic and other factors and
conditions affecting us and our industry, we will be able to successfully
continue to implement our plans to manage liquidity.
Litigation Matters. Since 1997, we have been served with subpoenas, search
warrants and information requests by antitrust authorities in the United States
and elsewhere in connection with antitrust investigations. In addition, civil
antitrust lawsuits have been commenced and threatened against us and other
producers and distributors of graphite electrodes in the United States and
elsewhere. We recorded a charge against results of operations for 1997 in the
amount of $340 million as a reserve for estimated potential liabilities and
expenses in connection with antitrust investigations and related lawsuits and
claims. In April 1998, UCAR pled guilty to a one-count charge of violating U.S.
federal antitrust laws in connection with the sale of graphite electrodes and
was sentenced to pay a non-interest-bearing fine in the aggregate amount of $110
million, payable in six annual installments. In March 1999, our Canadian
subsidiary pled guilty to a one-count charge of violating Canadian antitrust
laws in connection with the sale of graphite electrodes and was sentenced to pay
a fine of Cdn. $11 million. We have settled virtually all of the graphite
electrode antitrust claims by steelmakers in the United States and Canada as
well as antitrust claims by certain other customers. In the aggregate, the fines
and settlements are within the amounts we used for purposes of evaluating the
$340 million charge. Actual liabilities and expenses could be materially higher
than such charge.
UCAR has been named as a nominal defendant in a shareholder derivative
lawsuit and is a defendant in a securities class action lawsuit, each of which
is based, in part, on the subject
23
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PART II (Cont.)
UCAR INTERNATIONAL INC.
matter of the antitrust investigations, lawsuits and claims. We do not believe
that the outcome of the shareholder derivative lawsuit will have a material
adverse effect on us. The securities class action is still in its early stages
and no evaluation of potential liability can yet be made. The guilty pleas have
made it more difficult to defend against other investigations, lawsuits and
claims.
Currency Matters. We produce and sell our products in multiple currencies.
As a result, in general, our results of operations are affected by changes in
currency exchange rates. During the 1999 first quarter, many of the currencies
in which we manufacture and sell our products weakened against the U.S. dollar.
The most significant fluctuation occurred in Brazil, where the Brazilian
currency devalued about 40% against the U.S. dollar during the 1999 first
quarter. In the 1999 first quarter, we recorded unrealized currency transaction
gains of $3 million associated with the U.S. dollar-denominated assets and
liabilities of our Brazilian subsidiary. This unrealized gain is included in
other (income) expense (net) in the Consolidated Statements of Operations.
We account for our non-U.S. subsidiaries under the provisions of Statement
of Financial Accounting Standards ("SFAS") 52, "Foreign Currency Translation,"
and accordingly, their assets and liabilities are translated into U.S. dollars
for consolidation and reporting purposes. Foreign currency translation
adjustments are generally recorded as part of stockholders' equity and
identified as accumulated other comprehensive income (loss) in the Consolidated
Balance Sheets. In the 1999 first quarter, stockholders' equity decreased by $41
million as a result of cumulative translation adjustments, including $30 million
associated with our Brazilian subsidiary.
In both 1998 and 1999, the Russian economy was considered highly
inflationary, defined as cumulative inflation of approximately 100% or more over
a 3-year period. Accordingly, translation gains and losses relating to
operations of our Russian subsidiary are included in other (income) expense
(net) in the Consolidated Statements of Operations rather than as part of
stockholders' equity.
Since 1997, the Mexican economy has also been considered highly
inflationary. Accordingly, the financial statements of our Mexican subsidiary
have been remeasured as if its functional currency were the U.S. dollar. In
1999, we began to account for our Mexican subsidiary using the U.S. dollar as
its functional currency, irrespective of Mexico's inflationary status, because
its sales and purchases are predominantly U.S. dollar-denominated.
Results of Operations
Three Months Ended March 31, 1999 as Compared to Three Months Ended March
31, 1998. Net sales of $202 million in the 1999 first quarter represented a 17%
decrease from net sales of $244 million in the 1998 first quarter. Gross profit
of $63 million in the 1999 first quarter represented a 32% decrease from gross
profit of $93 million in the 1998 first quarter.
24
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PART II (Cont.)
UCAR INTERNATIONAL INC.
Gross profit margin was 31.2% in the 1999 first quarter as compared to 38.1% in
the 1998 first quarter.
The decrease in net sales and gross profit was primarily due to lower
volumes and sales revenue per metric ton and the impact of currency exchange
rate changes. The lower volumes and sales revenue per metric ton were due
primarily to changes in global economic conditions which reduced demand for
steel and other metals. This, in turn, reduced demand for most of our products,
particularly graphite electrodes. The decrease in gross profit margin was
primarily due to the fact that the percentage decrease in net sales was greater
than a corresponding decrease in cost of sales.
Graphite Electrode Business Segment. Net sales of graphite electrodes
decreased 21%, or $35 million, to $132 million in the 1999 first quarter from
$167 million in the 1998 first quarter. The decrease in net sales of graphite
electrodes was primarily attributable to a reduction of 6,000 metric tons, or
11%, in the volume of graphite electrodes sold to 46,600 metric tons in the 1999
first quarter from 52,600 metric tons in the 1998 first quarter. The reduced
volume of graphite electrodes sold represented about $18 million of the $35
million reduction in net sales.
The average sales revenue per metric ton (in U.S. dollars and net of
changes in currency exchange rates) of our graphite electrodes was $2,757 in the
1999 first quarter as compared to $3,058 in the 1998 first quarter. The reduced
average sales revenue per metric ton and, to a lesser extent, changes in product
mix represented about $17 million of the $35 million reduction in net sales. The
reduction in average sales revenue per metric ton was primarily due to the
lowering of prices by our Brazilian subsidiary because of cost advantages
resulting from the Brazilian currency devaluation. This accounted for about $8
million of the reduction in net sales. Other currency exchange rate changes
accounted for an additional $2 million of the reduction in net sales.
Cost of sales for graphite electrodes decreased 12% to $88 million in the
1999 first quarter from $100 million in the 1998 first quarter. The reduction in
cost of sales was primarily due to lower volumes. The impact of cost increases
was partially offset by cost reduction programs. Gross profit margin for
graphite electrodes decreased to 33.3% in the 1999 first quarter from 40.1% in
the 1998 first quarter. The decrease in gross profit margin was primarily due to
the fact that the percentage decrease in net sales was greater than a
corresponding decrease in cost of sales, a portion of which is essentially
fixed.
Graphite and Carbon Products Business Segment. This business segment
includes graphite and carbon cathodes, graphite and carbon specialties
(including carbon electrodes) and flexible graphite.
Net sales of graphite and carbon products decreased 9% to $70 million
in the 1999 first quarter from $77 million in the 1998 first quarter. The
decrease was primarily due to the global economic conditions which resulted in
lower demand and lower prices for carbon electrodes sold to the silicon metals
industry and for graphite specialties sold to the semiconductor, aerospace
25
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PART II (Cont.)
UCAR INTERNATIONAL INC.
and aircraft industries. The decreases were partially offset by increased demand
for graphite cathodes sold to the aluminum industry. Demand for and prices of
other products remained relatively stable.
Cost of sales for graphite and carbon products was $51 million in both the
1999 first quarter and the 1998 first quarter. The impact of lower overall
operating levels on cost of sales was largely offset by changes in product mix.
Gross profit margin for graphite and carbon products decreased to 27.1% in the
1999 first quarter from 33.8% in the 1998 first quarter. The decrease in gross
profit margin was primarily due to the fact that the decrease in net sales was
not accompanied by a decrease in cost of sales.
Operating Profit of the UCAR Group. Operating profit in the 1999 first
quarter was $42 million, or 20.8% of net sales, as compared to $61 million, or
25.0% of net sales, in the 1998 first quarter. The decrease in operating profit
was primarily due to lower gross profit.
Selling, administrative and other expenses decreased to $22 million in the
1999 first quarter from $26 million in the 1998 first quarter primarily due to
lower corporate administration expenses resulting from cost savings under our
global rationalization and restructuring plan and reduced variable compensation
expense.
Other (income) expense (net) was income of $3 million in the 1999 first
quarter as compared to expense of $4 million in the 1998 first quarter. The
change was primarily due to a reduction in consulting fees and exchange rate
translation and transaction gains.
Other Items Affecting the UCAR Group. Interest expense increased to $22
million in the 1999 first quarter from $16 million in the 1998 first quarter.
The increase resulted from both imputed interest expense of $1 million
associated with the $110 million antitrust fine payable in six annual
installments and higher interest expense of $5 million associated with increased
debt levels and higher interest rates. Average outstanding total debt was $834
million in the 1999 first quarter as compared to $747 million in the 1998 first
quarter. The average annual interest rate was 9.99% in the 1999 first quarter as
compared to 8.53% in the 1998 first quarter. These average annual interest rates
exclude the imputed interest on the antitrust fine. The increase in the average
annual interest rate was due to an increase in the margin over LIBOR which we
pay under the Senior Bank Facilities as a result of the refinancing completed in
November 1998. The impact of this increase in the margin was slightly offset by
lower LIBOR. We incurred additional debt in 1998 and in the 1999 first quarter
to finance a portion of the fines and settlements paid in connection with
antitrust investigations and related lawsuits and claims.
Provision for income taxes was $5 million for the 1999 first quarter as
compared to $10 million for the 1998 first quarter. For the 1999 first quarter,
provision for income taxes reflected a 27% effective rate, which was lower than
the U.S. federal income tax rate of 35%, primarily due to earnings resulting
from consolidated entities with lower effective tax rates. For the 1998 first
quarter, provision for income taxes reflected a 22% effective rate. The lower
rate in the 1998 first quarter was a result of certain one-time foreign tax
benefits and incentives.
26
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PART II (Cont.)
UCAR INTERNATIONAL INC.
As a result of the changes described above, net income was $14 million in
the 1999 first quarter, a decrease of 60% from net income of $35 million in the
1998 first quarter.
Liquidity and Capital Resources
Our sources of funds have consisted principally of invested capital, cash
flow from operations, and debt financing. Our uses of those funds (other than
for operations) have consisted principally of debt reduction, capital
expenditures, and payment of fines, liabilities and expenses in connection with
antitrust investigations and related lawsuits and claims.
We are highly leveraged and have substantial obligations in connection with
antitrust investigations and antitrust and securities lawsuits and claims. We
had total debt of $840 million and a stockholders' deficit of $314 million at
March 31, 1999 as compared to total debt of $804 million and a stockholders'
deficit of $287 million at December 31, 1998. Cash, cash equivalents and
short-term investments were $75 million at March 31, 1999 as compared to $69
million at December 31, 1998.
Debt (net of cash, cash equivalents and short-term investments and
excluding the $340 million reserve) was $765 million at March 31, 1999 as
compared to $735 million at December 31, 1999.
Cash Flow
Cash Flow Used in Operating Activities. Cash flow used in operating
activities was $13 million in the 1999 first quarter as compared to $5 million
in the 1998 first quarter. The increased use of cash of $8 million resulted
primarily from lower net income of approximately $22 million, partially offset
primarily by a lower use of cash flow for working capital of approximately $15
million.
Use of cash flow for working capital was $50 million in the 1999 first
quarter, an improvement of $15 million from a use of $65 million in the 1998
first quarter. The improvement occurred despite the use of $18 million for
payment of settlements and fines in connection with antitrust investigations and
related lawsuits and claims and the use of $5 million for restructuring payments
during the 1999 first quarter. The improvement was due primarily to a reduction
of $21 million in the use of cash flow for inventories and a reduction of $45
million in the use of cash flow for payables, mainly as a result of lower
production levels attributable to global economic conditions. This was partially
offset by an increase of $25 million in receivables resulting from stronger net
sales in the latter part of the 1999 first quarter and an increase in days sales
outstanding due to slower collection rates when compared to the 1998 first
quarter.
Cash Flow Used in Investing Activities. We used $9 million of cash flow in
investing activities during the 1999 first quarter as compared to $28 million
during the 1998 first quarter.
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PART II (Cont.)
UCAR INTERNATIONAL INC.
This $19 million improvement resulted primarily from reduced investment activity
by our Brazilian subsidiary. Cash flow used for capital expenditures was $1
million lower in the 1999 first quarter than in the 1998 first quarter.
Cash Flow Provided by Financing Activities. Cash flow provided by financing
activities was $37 million in the 1999 first quarter as compared to $26 million
in the 1998 first quarter. Financing activities consisted of $42 million of
long-term debt borrowings under the Senior Bank Facilities in the 1999 first
quarter as compared to $21 million of net borrowings in the 1998 first quarter.
The increased borrowings were used primarily to fund payment of settlements and
fines associated with antitrust investigations and related lawsuits and claims.
Increased net long-term debt borrowings were partially offset by a $5 million
net reduction in short-term debt in the 1999 first quarter as compared to $5
million net increase in short-term debt in the 1998 first quarter. This $10
million improvement in the 1999 first quarter as compared to the 1998 first
quarter resulted from reduced short-term debt levels at our Brazilian
subsidiary.
Accounting Changes
In 1998, we changed our method of accounting for the cost of certain U.S.
inventories from the "last-in first-out" method ("LIFO") to the "first-in
first-out" method ("FIFO"). We believe the new method to be preferable because
it provides improved consistency in accounting for worldwide inventories and
avoids potential distortion of future profits from anticipated decrements.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
We are currently evaluating the impact of SFAS 133 on our financial position,
results of operations and cash flows.
Year 2000 Issue
The Year 2000 issue results from the fact that many computer programs were
written using two rather than four digits to define the applicable year. Any
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in processing
errors, miscalculations or failures causing disruptions of operations,
including, among other things, temporary inability to process transactions or
otherwise engage in similar normal business activities.
In 1996, we decided to upgrade and integrate substantially all of our
systems, both domestic and foreign. As part of this process, for the past three
years, we have been remediating our existing systems so that they are Year 2000
compliant. Remediation consists of identifying, analyzing, replacing or
modifying, and testing our existing systems so that they are Year 2000
compliant. Testing includes documentation review. In addition, since 1996, when
we have installed or plan to install new systems, whether installed as part of
this upgrade and integration,
28
<PAGE>
PART II (Cont.)
UCAR INTERNATIONAL INC.
as part of process improvement or cost reduction projects or otherwise, we
believe that they have been, or will be at the time of installation, Year 2000
compliant.
We identified the following systems that required analysis for Year 2000
compliance: finance and control systems; local and wide area networks;
production process systems and instrumentation; stand-alone and networked
personal computers; and other business equipment and site systems.
Substantially all of our personal computers have been analyzed, modified or
replaced, tested and are Year 2000 compliant. Substantially all of our finance
and control systems have been analyzed and modified or replaced and most have
been tested and are Year 2000 compliant. Testing of the remaining finance and
control systems will be substantially complete by the end of the 1999 second
quarter. Plant-by-plant remediation of production process systems and
instrumentation, local and wide-area networks, and other business equipment and
site systems continues with substantial completion expected by the end of the
1999 second quarter.
Independent verification of our Year 2000 compliance efforts is ongoing
with substantial completion expected for critical application systems by the end
of the 1999 second quarter.
We have conducted surveys of customers, suppliers and service providers to
determine whether they have any Year 2000 issues which, if not addressed, could
have a material impact on us. Based on responses which we have received from
these surveys, we believe that customers and critical suppliers and service
providers representing about 85% of our business activities involving third
parties will be Year 2000 compliant on a timely basis. The critical suppliers
and service providers who responded negatively to our surveys do not represent
sole suppliers or service providers where an interruption in supply or service
would materially impair continued normal business activities. No utility
provider responded negatively to our survey. Follow up is ongoing with
customers, suppliers and service providers that have not responded to our
surveys. On-site visits are planned to evaluate the compliance status of
critical suppliers and service providers.
We are continuing the development of contingency plans that respond to
risks of either one or more of our systems not becoming Year 2000 compliant or
our customers or critical suppliers or service providers not becoming Year 2000
compliant on a timely basis. We expect to have these plans finalized and in
place by the end of the 1999 third quarter. Our contingency plans will place
particular emphasis on the completion of remediation by our manufacturing
operations and the ability of certain electric utility providers that supply
electric power to our manufacturing operations to become Year 2000 compliant on
a timely basis. Contingency plans will include consideration of alternative
sources of supply or service, customer communication plans and plant and
business response plans.
The failure to sufficiently remediate Year 2000 issues in a timely fashion
could pose substantial risks for us. These risks include possible manufacturing
system malfunctions, including shutdowns. The extent of these risks to us is
uncertain at this time.
30
<PAGE>
PART II (Cont.)
UCAR INTERNATIONAL INC.
Since 1996, we estimate that we have incurred and will incur an aggregate
incremental cost of about $3 million for internal and external services in
connection with Year 2000 issues, of which management estimates about $2 million
has been incurred prior to 1999. Internal costs consist principally of payroll
costs for our information systems group.
30
<PAGE>
PART II (Cont.)
UCAR INTERNATIONAL INC.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed in the following table have been filed as part of
this Report.
Exhibit
Number Description of Exhibit
------ ----------------------
27.1 Financial Data Schedule for the quarter ended
March 31, 1999 (for Commission use only)
(Incorporated by reference to the Company's 10-Q
filed on May 14, 1999)
27.2 Financial Data Schedule restated for the quarters
ended March 31, 1997 and 1998 (for Commission
use only) (Incorporated by reference to the
Company's 10-Q filed on May 14, 1999)
27.2A Restated Financial Data Schedule for the quarter
ended March 31, 1999 (for Commission use only)
27.3 Financial Data Schedule restated for the quarters
ended June 30, 1997 and 1998 (for Commission
use only) (Incorporated by reference to the
Company's 10-Q filed on May 14, 1999)
27.4 Financial Data Schedule restated for the quarters
ended September 30, 1997 and 1998 (for
Commission use only)(Incorporated by reference
to the Company's 10-Q filed on May 14, 1999)
(b) Reports on Form 8-K
No Report on Form 8-K was filed during the quarter for which this Report
is filed.
31
<PAGE>
UCAR INTERNATIONAL INC.
SIGNATURE
Pursuant to the requirement 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.
UCAR INTERNATIONAL INC.
Date: November 15, 1999 By: /s/ Corrado F. DeGasperis
-------------------------
Corrado F. DeGasperis
Controller
(Principal Accounting Officer)
32
<PAGE>
UCAR INTERNATIONAL INC.
INDEX TO EXHIBITS
Exhibit No. Description Page No.
27.2A Restated Financial Data Schedule for the quarter ended
March 31, 1999 (for Commission use only)
E-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary consolidated financial information extracted
from the Consolidated Financial Statements of UCAR International, Inc.,
included in its form 10-Q for the quarter ended March 31, 1999 and is qualified
in its entirety by reference to such Consolidated Financial Statements.
</LEGEND>
<CIK> 0000931148
<NAME> UCAR INTERNATIONAL INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Mar-31-1999
<CASH> 68
<SECURITIES> 7
<RECEIVABLES> 179
<ALLOWANCES> 5
<INVENTORY> 254
<CURRENT-ASSETS> 586
<PP&E> 1160
<DEPRECIATION> 727
<TOTAL-ASSETS> 1110
<CURRENT-LIABILITIES> 338 <F1>
<BONDS> 761
0
0
<COMMON> 0
<OTHER-SE> (314)<F1>
<TOTAL-LIABILITY-AND-EQUITY> 1110
<SALES> 202
<TOTAL-REVENUES> 202
<CGS> 139
<TOTAL-COSTS> 139
<OTHER-EXPENSES> 2
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22 <F1>
<INCOME-PRETAX> 20 <F1>
<INCOME-TAX> 5 <F1>
<INCOME-CONTINUING> 15 <F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14 <F1>
<EPS-BASIC> 0.3 <F1>
<EPS-DILUTED> 0.3 <F1>
<FN>
<F1> Restated for computational error in interest accrual.
</FN>
</TABLE>
