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FORM 10-Q
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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 Forfor the quarterly period ended September 30, 19961997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 Forfor 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)
DELAWAREDelaware 06-1385548
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
Identification No.)
incorporation or organization) Identification Number)
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39 OLD RIDGEBURY ROAD, J-4, DANBURY, CONNECTICUTOld Ridgebury Road 06817-0001
- ------------------------------------------------ ----------Danbury, Connecticut (Zip Code)
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 207-7700
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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 September 30, 1996, 46,497,9151997, 45,920,429 shares of common stock, par value $.01 per
share, were outstanding.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
------------------------------------------------------------
Consolidated Balance Sheets as of September 30, 19961997
and December 31, 1995............................................1996........................................ Page 3
Consolidated Statements of Operations for the Three Months
Endedended September 30, 19961997 and 19951996 and for the Nine Months
Endedended September 30, 19961997 and 1995......................................1996............................ Page 4
Consolidated Statements of Cash Flows for the Nine Months
Endedended September 30, 19961997 and 1995................................1996............................ Page 5
Consolidated Statement of Stockholders' Equity (Deficit) for the
Nine Months Endedended September 30, 1996.............................1997......................... Page 76
Notes to Consolidated Financial Statements........................Statements..................... Page 87
Item 2. Management's Discussion and Analysis of Financial Condition
----------------------------------------------------------------------------------------------------------------------------------------
and Results of Operations...................................Operations.............................. Page 1211
-------------------------
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings...................................... Page 18
---------------------------
Item 6. Exhibits and Reports on Form 8-K.......................... Page 18
------------------------------------------
SIGNATURE..............................................................8-K....................... Page 19
------------------------------------------
SIGNATURE.......................................................... Page 20
INDEX TO EXHIBITS......................................................EXHIBITS.................................................. Page E-1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Balance SheetsCONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share data )data)
September 30, December 31,
ASSETS 1997 1996 1995
---- ----
CURRENT ASSETS: (Unaudited)
Current assets:
Cash and cash equivalents.........................equivalents........................... $ 9172 $ 5395
Short-term investments.............................. 15 -
Notes and accounts receivable..................... 176 180receivable....................... 233 185
Inventories:
Raw materials and supplies..................... 35 28supplies....................... 49 39
Work in process................................ 97 78process.................................. 126 100
Finished goods................................. 39 30
-------goods................................... 31 37
------ 171 136-----
206 176
Prepaid expenses.................................. 37 34
-------expenses.................................... 23 27
------ -----
Total current assets...................... 475 403
-------assets....................... 549 483
------ -----
Property, plant and equipment....................... 1,036 1,013equipment......................... 1,269 1,087
Less: accumulated depreciation...................... 656 635
-------depreciation........................ 720 653
------ -----
Net fixed assets.......................... 380 378
-------assets........................... 549 434
------ -----
Company carried at equity........................... 16equity............................. - 18
Other assets........................................ 42 65
-------assets.......................................... 87 53
------ -----
Total assets..............................assets............................... $ 9131,185 $ 864
=======988
====== =====
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:CURRENT LIABILITIES:
Accounts payable..................................payable.................................... $ 4659 $ 5667
Short-term debt................................... 37 31debt..................................... 71 53
Payments due within one year on long-term debt.... 1debt...... 31 1
Accrued income and other taxes.................... 42 50taxes...................... 38 37
Other accrued liabilities......................... 78 90
-------liabilities........................... 85 91
------ -----
Total current liabilities................. 204 228
-------liabilities.................. 284 249
------ -----
Long-term debt...................................... 596 636debt........................................ 629 581
Other long-term obligations......................... 132 137obligations........................... 149 138
Deferred income taxes............................... 17 20taxes................................. 48 16
Minority stockholders' equity in consolidated entities.......................................... 4 5
Common stock subject to "puts"...................... - 8
Less: related loans to management.................. - (3)
-------entities 13 6
------ Stockholders' equity (deficit)-----
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, - par value $.01;$.01, 10,000,000 shares
authorized, - 10,000,000 shares; issued - none.............none issued........................... - -
Common stock, - par value $.01;$.01, 100,000,000 shares
authorized, - 100,000,000 shares;47,322,179 shares issued - 46,497,915
shares.......................................at
September 30, 1997, 46,614,724 shares issued at
December 31, 1996................................. - -
Additional paid-in capital.......................... 496 485508 498
Cumulative foreign currency translation adjustment.. (115)(126) (116)
Retained earnings (deficit)......................... (421) (536)
-------(268) (384)
------ -----
114 (2)
Less cost of common stock held in treasury,
1,401,750 shares ................................. (52) -
------ -----
Total stockholders' equity (deficit)........ (40) (167)
-------.... 62 (2)
------ -----
Total liabilities and stockholders' equity
(deficit)...................................................... $ 9131,185 $ 864
=======988
====== =====
See accompanying Notes to Consolidated Financial Statements.
3
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of OperationsCONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 19951997 1996 1995
---- ---- ---- ----
Net sales ....................................................................sales.............................................................. $ 278 $ 227 $ 220806 $ 711
$ 657
Cost of sales ................................................................sales.......................................................... 174 141 136504 436
411
-------- -------- -------- -------------- ------ ------ ------
Gross profit .................................................................profit........................................................... 104 86 84302 275 246
Research and development .....................................................development............................................... 3 2 27 6 5
Selling, administrative and other expenses ...................................expenses............................. 25 21 3975 66 87
Restructuring costs .......................................................... - - - 30
Other (income) expense (net) ............................................................................................ 5 - (2)6 1
(4)
-------- -------- -------- -------------- ------ ------ ------
Operating profit ........................................................profit................................................ 71 63 45214 202
128
Interest expense .............................................................expense....................................................... 17 16 2648 47
75
-------- -------- -------- -------------- ------ ------ ------
Income before provision for income taxes ................................taxes........................ 54 47 19166 155 53
Provision for income taxes ...................................................taxes............................................. 17 14 851 52
60
-------- -------- -------- -------------- ------ ------ ------
Income (loss) of consolidated entities ..................................entities................................. 37 33 11115 103 (7)
Less: minority stockholders' share of income .................................income........................... - - 1 - 4
Plus: UCAR share of net income from company carried at equity ................equity.......... - 2 32 5
5
-------- -------- -------- -------------- ------ ------ ------
Income (loss) before extraordinary charge and cumulative
effect of change in accounting principles ............................. 35 13 108 (6)
Extraordinary charge, net of tax ............................................. - 16 - 18
-------- -------- -------- --------
Income (loss) before cumulative effect of change in
accounting principles .................................................principle.......................................... 37 35 (3)116 108 (24)
Cumulative effect on prior years of change in
accounting for inventories .....inventories......................................... - - - 7
-
-------- -------- -------- -------------- ------ ------ ------
Net income (loss) .....................................................income...................................................... $ 37 $ 35 $ (3)116 $ 115
$ (24)
======== ======== ======== ========
Primary net income per common share (Note 7) (Pro forma in 1995):====== ====== ====== ======
PRIMARY NET INCOME PER COMMON SHARE:
Income before cumulative effect of change in
accounting principles ........principle............................................ $ 0.77 $ 0.72 $ 0.582.42 $ 2.22 $ 1.22
Cumulative effect on prior years of change in
accounting for inventories...inventories...................................... - - - 0.15
-
-------- -------- -------- -------------- ------ ------ ------
Primary net income per share ..........................................share................................ $ 0.77 $ 0.72 $ 0.582.42 $ 2.37
$ 1.22
======== ======== ======== ============== ====== ====== ======
Weighted average common shares outstanding
(Pro forma in 1995) (in thousands) ................................................................................ 47,711 48,619 48,75948,074 48,405
48,693
======== ======== ======== ============== ====== ====== ======
See accompanying Notes to Consolidated Financial Statements.
4
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash FlowsCONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Dollars in millions)
(Unaudited)
Nine Months
Ended September 30,
-------------------
1997 1996 1995
---- ----
Cash flow from operating activities:CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) ........................................................................................ $ 115116 $ (24)
Extraordinary charge, net of tax ......................... - 18115
Cumulative effect on prior years of change in
accounting for inventories ............................inventories................................ - (7)
-
Non-cash (credits) charges to net income (loss):
Depreciation ...........................................income:
Depreciation.and amortization........................... 38 28 30
Deferred income taxes ..................................taxes................................... (8) 17 (8)
Restructuring costs .................................... - 30
Vesting of performance stock options ................... - 19
Other non-cash charges .................................charges.................................. 5 10
1
Working capital * ........................................capital*........................................... (48) (53) (12)
Long-term assets and liabilities .........................liabilities........................... 6 (5)
9
----- -----
Net cash provided by operating activities ............---- ----
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 109 105
63
----- -----
Cash flow from investing activities:---- ----
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures .....................................expenditures....................................... (46) (37) (44)
Purchase of minority shares in subsidiary ................subsidiaries, net of cash acquired............. (124) (3)
(53)Purchases of short-term investments........................ (15) -
Redemption/sale of assets ................................assets.................................. 1 2
----- -----
Net cash used in investing activities ................1
---- ----
NET CASH USED IN INVESTING ACTIVITIES................. (184) (39)
(95)
----- -----
Cash flow from financing activities:---- ----
CASH FLOW FROM FINANCING ACTIVITIES:
Short-term debt ..........................................debt............................................ 18 6 (13)
Long-term debt borrowings ................................borrowings.................................. 168 2 960
Long-term debt reductions ................................reductions.................................. (90) (42) (477)
Financing costs .......................................... (1) (64)
Sale of common stock....................................... 5 3
Financing costs............................................ (2) -
Purchase of treasury stock................................. (52) -
Tax benefit arising from exercise of employee stock net of loans to management ......... 7 427
Cash distribution to stockholders ........................ - (756)
----- -----
Net cash (used in) provided by financing activities ..options 5 3
---- ----
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES... 52 (28)
77
----- --------- ----
Net increase (decrease) in cash and cash equivalents .................equivalents........ (23) 38 45
Effect of exchange rate changes on
cash and cash equivalents ............................... - (3)
Cash and cash equivalents at beginning of period ..........period............ 95 53
60
----- -----
Cash and cash equivalents at end of period ................---- ----
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 72 $ 91
$ 102
===== =====
(Continued)
5
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Nine Months
Ended September 30,
-------------------
1996 1995
---- ----
Supplemental disclosures of cash flow information:==== ====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid during the periods for:
Interest expense .......................................expense......................................... $ 50 $ 46
$ 60
Income taxes ...........................................taxes............................................. 53 39 26
*Net change in working capital by component (excluding
cash and cash equivalents, short-term investments,
deferred income taxes and short-term debt):
(Increase) decrease in current assets:
Notes and accounts receivable:
Sale of receivables ..............................receivables............................... $ (1) $ 3
$ -
Other changes ....................................changes..................................... (22) (2)
(11)
Inventories ..........................................Inventories........................................... 7 (25) (11)
Prepaid expenses and other current assets ............assets............. (1) 4
-
Increase (decrease)Decrease in payables and accruals ............accruals....................... (31) (33) 10
---- ----
Working capital .................................. $(53) $(12)WORKING CAPITAL................................... $ (48) $ (53)
==== ====
See accompanying Notes to Consolidated Financial Statements.
65
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity (Deficit)
Nine Months Ended September 30, 1996CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in millions)
(Unaudited)
Cumulative
Foreign
Additional Currency Retained Total
Common Paid-in Translation Earnings Treasury Stockholders'
Stock Capital Adjustment (Deficit) Stock Equity (Deficit)
----- ------- ---------- --------- ----- ----------------
Balance at December
BALANCE AT DECEMBER 31, 1995...................1996........... $ - $ 485498 $ (116) $ (536)(384) $ (167)- $ (2)
Exercise of employee stock options.............options..... - 46 - - 4- 6
Tax benefit arising from exercise
of employee stock options...................options........... - 35 - - 3
Reclassification of:
Common stock subject to "puts"............. - 85
Purchase of treasury stock............. - - 8
Related loans to management................ - (3) - - (3)
Registration cost(52) (52)
Cost of offering.................secondary offering............. - (1) - - - (1)
Translation adjustments.......................adjustments................ - - 1(10) - 1- (10)
Net income....................................income............................. - - - 115 115116 - 116
----- ------ ------- ----- -------
Balance at September----- ----- ----- -----
BALANCE AT SEPTEMBER 30, 1996.................1997.......... $ - $ 496508 $ (115)(126) $ (421)(268) $ (40)(52) $ 62
===== ====== ======= ======= ============ ===== ===== ===== =====
See accompanying Notes to Consolidated Financial Statements.
76
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 ("Commission") and reflect all adjustments (all of which are
of a normal, recurring nature) which are necessary for a fair statement
of the financial condition, results of operations, cash flows and changes in
stockholders' equity (deficit) for the periods presented. Results of
operations for the nine months ended September 30, 19961997 are not
necessarily indicative of the results that may be expected for the entire
fiscal year ending December 31, 1996.1997.
As used in these Notes, references to "UCAR" mean UCAR International
Inc., to "Global" mean UCAR Global Enterprises Inc., a direct,
wholly-owned subsidiary of UCAR, and to the "Company" mean UCAR and its
subsidiaries (including Global), collectively. Separate financial
statements of Global are not presented because they would not be material
to holders of senior subordinated notes.
The Company's investment in EMSA
(Pty.) Ltd. ("EMSA"), a 50%-owned company, is carried on the equity basis
and its proportional share of the net income of EMSA is reported under
the caption "UCAR share of net income from company carried at equity". At
September 30, 1996, retained earnings (deficit) included $37 million
representing UCAR's share of the undistributed earnings (prior to foreign
currency translation adjustment) of EMSA.
(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
Global.
The following is a summary of the consolidated assets and liabilities of
Global and its subsidiaries at September 30, 1996 and December 31, 1995
and their consolidated results of operations for the three month and nine
month periods ended September 30, 1996 and 1995:operations:
September 30, December 31,
1997 1996 1995
---- ----
Assets: (Dollars in millions)
Assets:
Current assets ............................assets................ $ 475549 $ 403483
Non-current assets ........................ 438 461assets............ 636 505
------ ------
Total assets ...........................assets............... $ 9131,185 $ 864988
====== ======
Liabilities:
Current liabilities .......................liabilities........... $ 204 228284 $ 249
Non-current liabilities ................... 745 793liabilities....... 826 735
------ ------
Total liabilities ......................liabilities.......... $ 949 $1,0211,110 $ 984
====== ======
Minority stockholders' equity in
consolidated entities ..................entities............ $ 413 $ 56
====== ======
87
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------1997 1996 19951997 1996 1995
---- ---- ---- ----
(Dollars in millions)
Net sales ............................sales............................. $ 278 $ 227 $ 220806 $ 711
$ 657
Gross profit .........................profit.......................... 104 86 84302 275
246
Income (loss) before extraordinary
charge and cumulative effect of
change in accounting principles ....principles..... 37 35 13116 108 (6)
Net income (loss) ............................................... 37 35 (3)116 115 (24)
(3) CHANGE IN ACCOUNTING FOR INVENTORIES
Effective January 1, 1996, the Company changed its method of determining
LIFO inventories. The new methodology provides specifically identified
parameters for defining new items within the LIFO pool which the Company
believes improves the accuracy of costing those items.
The Company recorded income of $7 million (after related income taxes of
$4 million) as the cumulative effect on prior years of this change in
accounting for inventories. The Company believes this change will not
materially impact the Company's ongoingon-going results of operations.
(4) INCOME TAXES
In connectionAMENDMENTS TO CREDIT FACILITIES
On March 19, 1997, the Company's senior secured bank credit facilities
(the "Senior Bank Facilities") were amended to reduce the interest rates
on amounts outstanding thereunder, to increase the amount available under
its revolving credit facility to $250 million from $100 million and to
change the covenants to allow more flexibility in uses of free cash flow
for acquisitions, capital expenditures and stock repurchases. The
interest rates applicable to the Senior Bank Facilities were reduced from
an adjusted LIBOR plus a margin ranging from 1.00% - 2.00% to an adjusted
LIBOR plus a margin ranging from 0.75% - 1.50%.
(5) STOCK REPURCHASE PROGRAM
On February 10, 1997, UCAR's Board of Directors authorized a program to
repurchase up to $100 million of common stock at prevailing prices from
time to time in the open market or otherwise depending on market
conditions and other factors, without any established minimum or maximum
time period or number of shares. On April 8, 1997, concurrent with the
leveraged recapitalization1997 Secondary Offering (as defined below) and as part of the Company in
January 1995 ("Recapitalization"this program,
UCAR repurchased 1,300,000 shares of common stock from Blackstone (as
defined below) for $47.5 million (the "Blackstone Share Repurchase"), certain foreign subsidiaries borrowed
and repatriated funds to the United States.. In
the three months ended March 31, 1995,September 30, 1997, the Company recorded a tax liabilityrepurchased
101,750 shares of $37common stock for $4.5 million in
connection therewith.
(5) RESTRUCTURING COSTS
The Company recorded restructuring costs of $30 million in the three
months ended March 31, 1995 to write-off fixed assets of $22 million and
accrue $8 million of related shutdown costs in connection with a project
to close certain high cost manufacturing operations and to add modern
lower cost manufacturing operations at the Company's North American
graphite electrode plants.
9under this program.
8
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
(6) OTHER (INCOME) EXPENSE - NET
The following is an analysisSECONDARY OFFERING
On April 8, 1997, 6,411,227 shares of other (income) expense (net):
Three Months Nine Months
Endedcommon stock were sold by
Blackstone Capital Partners II Merchant Banking Fund L.P. and its
affiliates (collectively, "Blackstone") in a secondary public offering
(the "1997 Secondary Offering"). After the 1997 Secondary Offering and
the Blackstone Share Repurchase, Blackstone ceased to be a principal
stockholder of UCAR. UCAR did not sell any shares in, or receive any
proceeds from, the 1997 Secondary Offering.
(7) INCOME TAXES
In the nine months ended September 30, Ended1997 and 1996, the Company paid
$53 million and $39 million, respectively, to various taxing authorities
and provided $51 million and $52 million, respectively, for income tax
expense. In the nine months ended September 30, ------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in millions)
Foreign currency adjustments........... $ - $ 3 $ 1 $ (1)
Interest1997, income ....................... (2) (6) (7) (19)
Loss on sales and disposals of assets.. - - 1 1
Brazilian monetary correction ......... - - - 2
Bank feestax expense
was lower than the amount computed by applying the United States Federal
income tax rate primarily due to Recapitalization ..... 1 - 1 7
Other ................................. 1 1 5 6
---- ---- ---- ----
$ - $ (2) $ 1 $ (4)
==== ===== ==== ====
(7)tax credits recognized in the United
States associated with research and development expenses and tax benefits
recognized in Italy and Spain associated with capital expenditures and
fixed asset revaluations, respectively.
(8) EARNINGS PER SHARE
Primary Net Income Per Share
Primary net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period.
The weighted average number of common shares outstanding includes common
stock equivalents calculated in accordance with the "treasury stock
method," wherein the net proceeds from the exercise thereof are assumed
to be used to repurchase outstanding shares of common stock at the
average market price for the period. Fully diluted earnings per share is
not significantly different than primary net income per share and,
therefore, has not been presented.
Pro Forma Net Income Per Share
For(9) CONTINGENCIES
On June 5, 1997, the unaudited pro forma net income per share data presented onCompany was served with subpoenas issued by the
Consolidated Statements of Operations, historical net lossUnited States District Court for the three
monthEastern District of Pennsylvania to
produce documents to a grand jury convened by attorneys for the Antitrust
Division of the United States Department of Justice ("DOJ") and nine month periods ended September 30, 1995a related
search warrant. Counsel for the Company has been adjusted
as ifinformed by the Recapitalization andDOJ that
the grand jury is investigating whether there has been any violation of
Federal antitrust laws by producers of graphite electrodes. Concurrently,
the antitrust enforcement authorities of the European Union ("EU
authorities") visited offices of the Company's initial public offering
("Initial Offering"), redemptionFrench subsidiary for
purposes of senior subordinated notes
("Redemption") and refinancinggathering information to determine whether there has been any
violation by producers of credit facilities ("Refinancing") had
occurred as of January 1, 1995 and to exclude the extraordinary charge
and the non-recurring effectsgraphite electrodes of the Recapitalizationantitrust laws of
the European Union. Subsequently, the Company was served with subpoenas
in the United States to produce documents relating to carbon electrodes
and the Initial
Offering. The weighted average number of common shares outstanding
reflects shares of common stock outstanding after the Initial Offering,
including common stock equivalents calculated in accordance with the
"treasury stock method," wherein the net proceeds from the exercise
thereof are assumed to be used to repurchase outstanding shares of common
stock at $25.80 (the average price for the three
10bulk
9
PART I (Cont.)
UCAR INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont.)
(Unaudited)
months ended Septembergraphite. The Company, through its counsel, is cooperating with the DOJ
and the EU authorities. At this time, as far as the Company is aware, no
governmental authority has made a finding or allegation that any person
or company violated any antitrust law. No provision for any liability
related to such matters has been made in the Consolidated Financial
Statements.
On June 17, 1997, UCAR was served with a complaint commencing a putative
class action lawsuit alleging violations of Federal antitrust laws.
Subsequently through October 30, 1995)1997, UCAR has been served with four
additional complaints commencing similar lawsuits. UCAR and $24.42 (the average price for the
nine months ended September 30, 1995).
The following table is a summaryother
graphite electrode producers are named as defendants in each complaint.
None of the pro forma adjustmentscomplaints contains any specific allegations of the factual
basis underlying such violations, and all of the complaints appear to net lossbe
based on the existence of the previously announced grand jury
investigation. In each complaint, the proposed class consists of all
persons who purchased graphite electrodes in the United States directly
from the defendants during the period from 1992 through the present. Each
complaint seeks, among other things, an award of treble damages resulting
from the alleged antitrust violations. Subsequently, one of the lawsuits
was withdrawn without prejudice to re-file and all of the other lawsuits
were consolidated into a single action. The Company has filed a motion to
dismiss the consolidated complaint. On October 10, 1997, the District
Court ordered a nine month stay of certain formal discovery proceedings.
Since the consolidated lawsuit is still in its early stages no
determination of potential liability has been made. The Company intends
to vigorously defend against these lawsuits. No provision for any
liability related to such matters has been made in the periods presented:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1995 1995
---- ----
(Dollars in millions)
Net loss as reported in the Consolidated Financial Statements ............ $ (3) $(24)
Pro forma effects of the Recapitalization (after tax):
Compensation expense related to the Company's long
term incentive compensation plan................................. - 1
Senior subordinated credit facility expense.......................... - 4
Net adjustment to interest........................................... - (3)
Taxes due to Recapitalization ....................................... - 37
Pro forma effects of the Initial Offering and Redemption (after tax):
Accelerated vesting of performance stock options
and matching shares.............................................. 12 12
Net adjustment to interest........................................... 2 9
Extraordinary charge................................................. 16 18
Pro forma effects of the Refinancing (after tax):
Net adjustment to interest........................................... 2 6
---- ----
Pro forma net income...................................................... $ 29 $ 60
==== ====
11Consolidated
Financial Statements.
10
PART I (Cont.)
UCAR INTERNATIONAL INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
GENERALThis Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results,
events and circumstances could differ materially from those set forth in such
statements due to various factors. Such factors include the possibility that
announced additions to electric arc furnace steel production capacity may not
occur, that increased electric arc furnace steel production may not occur or
result in increased demand or higher prices for graphite electrodes, that
acquired manufacturing capacity may not be fully utilized, that technological
advances expected by the Company (as defined herein) may not be achieved or that
unanticipated events or difficulties relating to the recent acquisitions and the
investigation and related lawsuit described below may occur, the impact of
changes in currency exchange rates, changes in economic and competitive
conditions and technological developments, and other risks and uncertainties,
including those set forth in the Company's other filings with the Securities and
Exchange Commission.
As used herein, references to "UCAR" mean UCAR International Inc., to "Global"
mean UCAR Global Enterprises Inc., a direct, wholly-owned subsidiary of UCAR,
and to the "Company" mean UCAR and its subsidiaries (including Global),
collectively.
On January 26,GENERAL
In 1995, the Company consummated (i) a leveraged recapitalization ("Recapitalization"as a result of
which Blackstone Capital Partners II Merchant Banking Fund L.P. and its
affiliates (collectively, "Blackstone"). On August 15, 1995, UCAR completed became the owners of approximately 69%
of the then outstanding shares of common stock (the "Recapitalization"), (ii) an
initial public offering ("Initial Offering") of its common stock par value $.01 per share
("Common Stock"(the "Initial Offering"). On September 11, 1995, the Company acquired substantially all, (iii) a
redemption of the outstanding common stock of its Brazilian subsidiary, UCAR Carbon S.A.,
held by public shareholders in Brazil. On September 15, 1995, the Company
redeemed $175 million aggregate principal amount of Senior Subordinated Notes
("Subordinatedsenior subordinated notes (the
"Subordinated Notes") at a redemption price equal to 110% of the aggregate
principal amount thereof, plus accrued interest thereon of approximately $4 million
("Redemption"thereon (the "Redemption"). On October 19, 1995, the Company refinanced, (iv) a refinancing of its then existing
recapitalization credit facilities ("Recapitalization(the "Recapitalization Bank Facilities") and entered intowith
new credit facilities ("Senior(the "Senior Bank Facilities") at more favorable interest
rates and with more favorable covenants.covenants and (v) the acquisition of substantially
all of the shares of its Brazilian subsidiary owned by public shareholders in
Brazil for an aggregate purchase price of $52 million, plus expenses of $3
million. Subsequent to 1995, the Company acquired additional shares from such
Brazilian shareholders for $3 million. The acquisitions were accounted for as
purchases.
In March 1996, Blackstone and certain other stockholders of UCAR sold an aggregate of 16,675,000certain shares of
Common Stockcommon stock in a secondary public offering ("(the "1996 Secondary Offering").
InAfter the Secondary Offering, Blackstone Capital Partners II Merchant Banking Fund
L.P. and its affiliates (collectively, "Blackstone"), Chemical Equity Associates
and certain members of management sold approximately 15,449,000 shares, 826,000
shares and 400,000 shares, respectively. After the1996 Secondary Offering, Blackstone owned approximately 20% of the
then outstanding shares of Common Stock.common stock. UCAR did not sell any shares in, the Secondary Offering and did notor
receive any proceeds from, the 1996 Secondary Offering.
In November 1996, the Company acquired 90% of the equity of UCAR Grafit OAO
("UCAR Grafit") in Vyazma, Russia. The aggregate investment was $50 million.
Subsequently, the Company increased its investment in UCAR Grafit by $7 million.
In the three months ended March 31, 1997, the Company
11
PART I (Cont.)
UCAR INTERNATIONAL INC.
acquired 70% of the equity of Carbone Savoie S.A.S. ("Carbone Savoie") for a
purchase price of $33 million and, through a newly-formed 70%-owned subsidiary,
UCAR Elektroden GmbH ("UCAR Elektroden"), acquired the graphite electrode
business of Elektrokohle Lichtenberg AG ("EKL") in Berlin, Germany, for an
aggregate purchase price of $15 million. In April 1997, the Company acquired the
outstanding shares soldof EMSA (Pty.) Ltd., its 50%-owned affiliate ("EMSA"), held
by the selling stockholders. Approximately 193,000Company's joint venture partner in South Africa, for a purchase price of
$75 million. The acquisition of these businesses and companies (collectively,
the "Recently Acquired Businesses"), which were financed from existing cash
balances, cash flow from operations, short-term borrowings and borrowings under
the Company's revolving credit facility, were accounted for as purchases.
On February 10, 1997, UCAR's Board of Directors authorized a program to
repurchase up to $100 million of common stock at prevailing prices from time to
time in the open market or otherwise depending on market conditions and other
factors, without any established minimum or maximum time period or number of
shares. On April 8, 1997, Blackstone sold shares sold by management consisted of shares issued upon the exercise of
vestedcommon stock options concurrentlyin a secondary
public offering (the "1997 Secondary Offering"). Concurrently with the 1997
Secondary Offering and as part of this program, the Company repurchased
1,300,000 shares of common stock from Blackstone for $47.5 million (the
"Blackstone Share Repurchase"). After the 1997 Secondary Offering and the
Company
receivedBlackstone Share Repurchase, Blackstone ceased to be a principal stockholder of
UCAR. UCAR did not sell any shares in, or receive any proceeds of approximately $1.5 million from, the exercise1997
Secondary Offering. In the three months ended September 30, 1997, the Company
repurchased 101,750 shares of common stock for $4.5 million under this program.
UCAR financed and intends to finance such options.repurchases from existing cash
balances, cash flow from operations, short-term borrowings and borrowings under
the Company's revolving credit facility.
RESULTS OF OPERATIONS
Three Month and Nine Month Periods Endedended September 30, 19961997 as Compared to Three
Month and Nine Month Periods Endedended September 30, 19951996
Net sales of $278 million in the third quarter of 1997 ("1997 Third Quarter")
represented a 22% increase over net sales of $227 million in the third quarter
of 1996 ("1996 Third Quarter")
represent a 3%. The increase overwas largely attributable to an
increase in net sales of $220graphite electrodes and aluminum industry products,
partially offset by the impact of a stronger dollar on net sales (in dollar
terms) in certain countries. Net sales of graphite electrodes increased 23% to
$204 million in the third quarter of
1995 ("19951997 Third Quarter"). Graphite electrode sales wereQuarter from $166 million in the 1996 Third
Quarter as compared to $165 millionQuarter. The increase in the 1995 Third Quarter. While net sales of graphite electrodes remained flat,was attributable to an
increase of 14,400 metric tons, or 29%, in the volume of graphite electrodes
sold declined 6% to 63,400 metric tons in the 1997 Third Quarter from 49,000 metric tons in
the 1996 Third Quarter from
52,000 metric tons in the 1995 Third Quarter. This decline was primarily due to
a reduction in shipments in Western Europe and in some export markets as
customers drew down on inventories previously built-up as a result of a
reduction in steel shipments. The average selling price (in dollars and net of
changes in currency exchange rates) for
12
PART I (Cont.)
UCAR INTERNATIONAL INC.
the Company'sExcluding graphite electrodes rosesold by 4% per metric ton in the 1996 Third
Quarter as compared toRecently
Acquired Businesses, the 1995 Third Quarter. Net sales of graphite specialty
products in the 1996 Third Quarter increased 15% to $30 million from $26 million
in the 1995 Third Quarter. This increase was primarily due to strong demand in
all its product lines and a 6% price increase (in dollars) which became
effective on January 1, 1996. Net sales of carbon specialty products were $22
million in the 1996 Third Quarter as compared to $21 million in the 1995 Third
Quarter. Net sales of Grafoil(Registered) were $9 million in the 1996 Third
Quarter as compared to $7 million in the 1995 Third Quarter. Strong demand for
Grafoil(Registered) gaskets in the transportation industry was the main reason
for the increase.
Net sales in the nine months ended September 30, 1996 (the "1996 Period") were
$711 million, an increase of 8% over net sales of $657 million in the nine
months ended September 30, 1995 (the "1995 Period"). Net sales of graphite
electrodes were $519 million in the 1996 Period as compared to $492 million in
the 1995 Period. The volume of graphite electrodes sold declinedincreased by 5,70010% to
54,100 metric tons. The Recently Acquired Businesses added $27 million of
graphite electrode net sales on volume of approximately 9,000 metric tons orof
graphite electrodes sold. The Company currently believes that total electric arc
furnace steel production will increase at least at the historical trend line
growth rate of 4%, in the 1996 Period as compared to the 1995 Period, primarily per year for the reason described above.next several years under current economic and
industry conditions. With that growth, the Company currently believes that
graphite electrode demand, net of any decline in
12
specific consumption, should grow at approximately 2% per year. The average
selling price per metric ton (in dollars and net of changes in currency exchange
rates) for the Company's graphite electrodes rose
by 7%was $3,081 in the 1997 Third
Quarter as compared to $3,111 in the 1996 Third Quarter (after taking into
account the average selling price per metric ton of graphite electrodes sold by
the Recently Acquired Businesses in the 1997 Third Quarter and including EMSA in
the 1996 Third Quarter). The average selling price per metric ton (in dollars)
of the Company's graphite electrodes was lower in the 1997 Third Quarter than in
the 1996 Third Quarter as a result of the continued strengthening of the dollar
as compared to other currencies, particularly Western European currencies, and
the impact of the Recently Acquired Businesses. The Recently Acquired Businesses
currently have average selling prices below the company-wide average of the
Company's graphite electrodes business. The Company has already informed
customers in certain markets of local currency price increases to take effect in
the second half of 1997 and first quarter of 1998 in effort to minimize the
impact of the strengthening dollar. Primarily due to the recent acquisition of
Carbone Savoie, net sales of aluminum industry products increased approximately
$13 million to $18 million in the 1997 Third Quarter. Net sales of $56 million
of carbon and graphite specialties and Grafoil(R) in the 1997 Third Quarter were
comparable to those in the 1996 Third Quarter.
Net sales in the nine months ended September 30, 1997 (the "1997 Period") were
$806 million, an increase of 13% over net sales of $711 million in the nine
months ended September 30, 1996 (the "1996 Period"). The increase was largely
attributable to an increase in net sales of graphite electrodes and aluminum
industry products, partially offset by the impact of a stronger dollar on net
sales (in dollar terms) in certain countries. Net sales of graphite electrodes
were $574 million in the 1997 Period as compared to the 1995 Period. Net
sales of graphite specialty products in the 1996 Period increased 19% to $94
million from $79 million in the 1995 Period, due to both increased demand and
selling price. Net sales of carbon specialty products increased 20% to $71$519 million in the 1996
Period, from $59 millionan increase of 11%. The increase in net sales of graphite electrodes was
attributable to an increase of 21,600 metric tons, or 14%, in the 1995volume of
graphite electrodes sold to 175,400 metric tons in the 1997 Period from 153,800
metric tons in the 1996 Period. This increaseExcluding graphite electrodes sold by the
Recently Acquired Businesses, the volume of graphite electrodes sold increased
by 2.5% to 157,700 metric tons. The Recently Acquired Businesses added $55
million of graphite electrode net sales in the 1997 Period on volume of
approximately 17,700 metric tons of graphite electrodes sold. The average
selling price per metric ton (in dollars and net of changes in currency exchange
rates) for the Company's graphite electrodes was due primarily$3,105 in the 1997 Period as
compared to the 6% price increase described above. Net sales of
Grafoil(Registered) were $27 million$3,082 in the 1996 Period as compared(after taking into account the average
selling price per metric ton of graphite electrodes sold by the Recently
Acquired Businesses in the 1997 Period and including EMSA in the 1996 Period).
Primarily due to $26the recent acquisition of Carbone Savoie, net sales of aluminum
industry products increased approximately $46 million to $62 million in the 19951997
Period. Net sales of $170 million of carbon and graphite specialties and
Grafoil(R) in the 1997 Period were comparable to those in the 1996 Period.
Cost of sales increased 4%23% to $174 million in the 1997 Third Quarter from $141
million in the 1996 Third Quarter from $136
million in the 1995 Third Quarter. This increase was primarily due to the impact
of the Recently Acquired Businesses and the increased volume of carbon specialty and graphite
specialty productselectrodes sold. The Recently Acquired Businesses currently have margins below
the company-wide average of the Company's pre-existing businesses. In the 19961997
Period, cost of sales increased 6%16% to $436$504 million from $411$436 million in the
19951996 Period, also due
13
PART I (Cont.)
UCAR INTERNATIONAL INC.
primarily to the impact of the Recently Acquired Businesses and the increased
volume of carbon specialty
and graphite specialty productselectrodes sold.
As a result of the changes described above, the Company's gross profit margin
decreased to 37.4% in the 1997 Third Quarter from 37.9% in the 1996 Third
Quarter from 38.2%and to 37.5% in the 1995 Third
Quarter. In1997 Period from 38.7% in the 1996 Period,Period. Excluding
the impact of the Recently Acquired Businesses, the gross profit margin would have
increased to 38.7% from 37.4%39.2% in the 19951997 Third Quarter and 39.3% in the 1997 Period.
Selling, administrative and other expenses decreasedincreased to $25 million in the 1997
Third Quarter from $21 million in the 1996 Third Quarter from $39 million in the 1995 Third Quarter. For the 19961997 Period,
selling, administrative and other expenses decreasedincreased to $66$75 million from $87$66
million in the 1995 Period. These decreases are primarily due to the fact that
there was an $18 million expense in the 1995 Third Quarter as a result of the
accelerated vesting of performance stock options and restricted matching stock
while there was no such charge in the 1996 Period. Restructuring costsExcluding the impact of $30the Recently Acquired
Businesses, selling, administrative and other expenses would have been virtually
unchanged at $21 million were incurred in the 1995 Period in
connection with a project, approved by UCAR's Board of Directors in January
1995, which involved the closure of certain high cost manufacturing operations1997 Third Quarter and the addition of modern lower cost manufacturing operations at the Company's
North American graphite electrode plants ("Rationalization Project"). The
Rationalization
13
PART I (Cont.)
UCAR INTERNATIONAL INC.
Project is expected to yield approximately $23$64 million in annual cost savings,
with approximately $20 million expected to be realized in 1996 and the full $23
million expected to be realized in 1997 (in each case, as compared to 1994).
These restructuring costs include fixed asset write-offs of $22 million and $8
million of facility closing expenses and environmental clean-up costs. Except
for the Rationalization Project, no restructuring costs were incurred in the
1995 Period or the 1996
Period.
Other (income) expense (net) was nil$5 million of expense in the 19961997 Third Quarter
as compared to income of $2 millionnil in the 19951996 Third Quarter. This change was primarily due to
(i) a $4$2 million decreaseexpense as a result of legal fees and other costs associated
with the investigation and related lawsuit described in interest income andItem 1. Legal
Proceedings below, (ii) a $3$2 million increase in exchange
gains on transactions denominated in foreign currencies. Certain hedge
transactions have been implemented to mitigate the currency exposure forexpense as a result of consulting fees
associated with projects that the Company onis evaluating and undertaking to
further improve operating efficiency, integrate worldwide operations and
generate earnings growth and (iii) a global basis. Other (income) expense (net) for the 1996 Period was $1 million of expense as compareda result of
amortization of cost in excess of fair value of net assets of Recently Acquired
Businesses. The Company currently anticipates that the expenditures relating to
incomethe investigation and lawsuit will continue at an average rate of $4approximately
$1.5 million forper quarter through 1998. The rate of expenditure will be dependent
on the 1995 Period.
The major changes betweenpace at which the 1996 Periodgovernmental authorities pursue the investigation and
the 1995 Period were a $12plaintiffs pursue the lawsuits. The Company currently anticipates that
consulting fees will be approximately $2 million
decrease in interest income and a $6 million expense in the 1995 Period
associated with a back-up senior subordinated credit facility provided by
Chemical Bank in connection withfourth quarter of 1997
and will continue to be approximately the Recapitalization.same amount through each quarter of
1998. The Company currently anticipates that such projects will have cost pay
back periods of one to two years.
Operating profit in the 19961997 Third Quarter was $71 million (25.5% of net sales)
as compared to $63 million (27.8% of net sales) as compared to $45 million (20.5% of net sales) in the 19951996 Third Quarter. In
the 19961997 Period, operating profit was $214 million (26.6% of net sales) as
compared to $202 million (28.4% of net sales) as
compared to $128 million (19.5% of net sales) in the 19951996 Period. Excluding the
restructuring costsimpact of $30 million,Recently Acquired Businesses, operating profit margins for the nonrecurring expense of $6 million
associated with the senior subordinated credit facility, the $18 million
included in selling, administrative and other expenses as result of accelerated
vesting of performance stock options and restricted matching stock1997
Third Quarter and the $2
million included in other expenses due to accelerated payments under the
Company's long term incentive compensation plan which were accelerated as a
result of the Recapitalization, operating profit in the 19951997 Period would have been $184 million (28.0% of net sales).27.6% and 28.9%, respectively.
Interest expense decreasedwas stable at $17 million in the 1997 Third Quarter as compared
to $16 million in the 1996 Third Quarter from $26
million in the 1995 Third Quarter. The average outstanding total debt
balance in the 19961997 Third Quarter was $634$753 million as compared to $866$634 million
in the 19951996 Third Quarter, and the average annual interest rate in the 19961997
Third Quarter was 9.7%9.0% as compared to 11.3% in the 1995 Third Quarter. Interest expense
decreased to $47 million9.7% in the 1996 Period as compared to $75 million in the
1995 Period.Third Quarter. The
average outstanding total debt balance was $649$725 million and the average annual
interest rate was 9.6%8.9% in the 19961997 Period as compared to an average outstanding
total debt balance of $855$649 million and an average annual interest rate of 10.8% in the 1995 Period.
The provision for income taxes was $14 million9.6%
in the 1996 Third Quarter as
compared to $8 million in the 1995 Third Quarter. The increase was primarily due
to higher pre-tax income, partially offset by reductions of deferred tax
valuation allowances. The provision for income taxes was $52 million in the 1996
Period as compared to $60 million in the 1995 Period. The decrease was primarily
due to the fact that there were taxes of approximately $37 million in the 1995
Period associated with the Recapitalization which were not incurred in the 1996
Period, partially offset by the effect of higher pre-tax income.
14
PART I (Cont.)
UCAR INTERNATIONAL INC.
The provision for income taxes was $17 million in the 1997 Third Quarter as
compared to $14 million in the 1996 Third Quarter. The provision for income
taxes was $51 million in the 1997 Period as compared to $52 million in the 1996
Period. In the 1997 Period, the provision for income taxes was lower than the
amount computed by applying the United States Federal income tax rate primarily
due to tax credits recognized in the United States associated with research and
development expenses and tax benefits recognized in Italy and Spain associated
with capital expenditures and fixed asset revaluations, respectively.
As a result of the changes described above, net income for the 1997 Third
Quarter was $37 million, an increase of 6% from net income of $35 million in the
1996 Third Quarter. The increase includes the effect of a combined net loss of
$2.5 million in the 1997 Third Quarter for UCAR Grafit and UCAR Elektroden, a
portion of which is reflected in the margins discussed above. The net loss was
primarily due to local economic conditions which made it difficult to sell
products for currency and to a historical lack of proper accounting systems
which has fostered an environment where product pricing is not necessarily in
line with costs. The Company is developing third party barter relationships and
implementing cost savings measures for these companies. The Company currently
anticipates that these companies will generate net losses in 1998 and will be
profitable and have margins in line with the company-wide averages of the
Company's pre-existing businesses within three to five years. Net income for the
1997 Period was $116 million, an increase of 7% from net income of $108 million
(excluding a gain of $7 million for a change in accounting for inventories) in
the 1996 Period. The increase includes the effect of a combined net loss of $4
million in the 1997 Period for UCAR Grafit and UCAR Elektroden.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of funds have consisted principally of invested capital,
operating cash flow and debt financing from banks and institutional investors.
The Company's uses of those funds (other than for operations) have consisted
principally of debt reduction, capital expenditures, distributions to or
repurchases of equity from stockholders (in connection with the Recapitalization
and the Blackstone Share Repurchase), acquisition of controlling interests in
new companies or businesses and acquisition of minority stockholders' shares of
consolidated subsidiaries. Acquisitions and repurchases under UCAR's stock
repurchase program have been and are expected to be financed from existing cash
balances, cash flow from operations, short-term borrowings and borrowings under
the Company's revolving credit facility.
Debt Financing and Amendments to Credit Facilities
At September 30, 1996,1997, the Company had total debt of $634$731 million and
stockholders' equity of $62 million as compared to $668total debt of $635 million
and a stockholders' deficit of $2 million at December 31, 1995. The Company had a stockholders' deficit of
$40 million at1996. At September 30,
19961997, cash, cash equivalents and short-term investments were $87 million as
compared to $167$95 million at December 31, 1995.1996. The additional borrowings were
made and cash and cash equivalents were used primarily to finance the Blackstone
Share Repurchase and the acquisition of the Recently Acquired Businesses.
15
PART I (Cont.)
UCAR INTERNATIONAL INC.
On March 19, 1997, the Senior Bank Facilities were amended to reduce the
interest rates on amounts outstanding thereunder, to increase the amount
available under the revolving credit facility to $250 million from $100 million
and to change the covenants to allow more flexibility in uses of free cash flow
for acquisitions, capital expenditures and stock repurchases.
Inventory Levels and Working Capital
During the 1997 Period, working capital increased by $31 million. Excluding the
impact of the Recently Acquired Businesses, working capital decreased by $13
million during the 1997 Period. Notes and accounts receivable increased $11
million mainly due to increased net sales. The increase was due to net sales
which were partially offset by foreign currency translation adjustments
resulting from the continued strengthening of the dollar as compared to other
currencies. Accounts payable, accrued income taxes and other accrued liabilities
decreased by $52 million primarily as a result of foreign currency translation
adjustments as well as decreases in tax liabilities and accrued liabilities and
accounts payable of the Recently Acquired Businesses. Short-term debt and
payments due within one year on long-term debt increased by $18 million and $30
million, respectively. These increases were the result of increased short-term
borrowings by certain foreign subsidiaries to meet local cash needs and current
installment payments due in 1998 under the Senior Bank Facilities, respectively.
Inventory levels declined by $18 million partially as a result of foreign
currency translation adjustments. Inventory levels at any specified date are
affected by increases in inventories of raw materials to meet anticipated
increases in sales of finished products, customer buy-ins and other factors
affecting net sales from quarter to quarter. Inventory levels increased to $171Cash, cash equivalents and
short-term investments were $8 million lower at September 30, 1996 from $136
million1997 than at
December 31, 1995. This increase was primarily due to an $11 million
LIFO accounting method change, a $4 million temporary build-up of inventory in
North America due to the Rationalization Project and a $20 million increase of
inventory in Europe as a result of a reduction in graphite electrode shipments
in Western Europe and some export markets described above.
The Company's working capital increased to $271 million at September 30, 1996
from $175 million at December 31, 1995. The increase was primarily due to the
increase in inventory described above, a decrease of $24 million in current
liabilities and a $38 million increase in cash and cash equivalents. Cash and
cash equivalents at September 30, 1996 included $40 million held by the
Company's Brazilian subsidiary.1996.
Capital Expenditures
Capital expenditures aggregated $37$46 million (including $4 million for the
Rationalization Project) in the 19961997 Period as compared to
$44$37 million in the 1996 Period. The Company expects capital expenditures in 1997
to total between approximately $75 million and $80 million (including
$19approximately $15 million for capital improvements relating to facilities held
by Recently Acquired Businesses). Most of the Rationalization Project) in the 1995 Period.
CapitalCompany's capital expenditures
have been, and willare expected to be, made during 1996 to maintain existing facilities and
equipment, to achieve cost savings and to improve operating efficiency (including the Rationalization Project and other restructuring and
reengineering projects). The Company expects capital expenditures in 1996 to
total approximately $60 million (including expenditures relating to the
Rationalization Project which were pre-funded as part of the Recapitalization).
Capital expenditures for environmental protection have not been and are not
expected to be a significant factor with respect to the Company's capital
expenditures as a whole.
Acquisitions
On September 11, 1996, the Company announced its intention to pursue the
purchase of a controlling interest in Graphite PLC, which operates a graphite
electrode business in Viazma, Russia. The Company intends to purchase Graphite
PLC through a tender offer to its major shareholders, which include members of
the board of directors and employees of Graphite PLC. It is anticipated that the
transaction will be completed by December 31, 1996. The total estimated
investment is $50 million and includes
15
PART I (Cont.)
UCAR INTERNATIONAL INC.
the purchase of shares, a working capital infusion, the assumption of certain
short-term debt and other expenses.
On May 21, 1996, the Company announced its intention to pursue the purchase of
70% of the outstanding shares of Carbone Savoie, S.A., a wholly-owned subsidiary
of a competitor and a manufacturer of carbon cathode blocks. While the final
purchase price will not be determined until after satisfactory completion of due
diligence, it is estimated that the purchase price will not exceed 200 million
French Francs.
Both acquisitions are subject to satisfaction of a number of conditions,
including receipt of governmental approvals. The Company intends to finance both
acquisitions from existing cash, cash flow from operations and borrowings under
its revolving credit facility.efficiencies.
Restrictions on Dividends and Distributions
Under the Senior Bank Facilities, UCARas amended on March 19, 1997, Global and GlobalUCAR
are generally permitted to pay dividends to their respective stockholders and
repurchase common stock only in an annualaggregate cumulative amount upsubsequent to
the
greaterMarch 19, 1997 equal to a percentage, ranging from 50% to 65% based on certain
financial tests, of $15 million or a specified percentage ofcumulative adjusted consolidated net income.
The indenture relatingincome subsequent to
December 31, 1996 (provided that (i) in any event, dividends and repurchases
aggregating up to $15 million are permitted in any twelve-month period and (ii)
dividends and repurchases that were permitted during the Subordinated Notes restricts the payment ofperiod from October 19,
1995 through December 31, 1996 but not paid or made (not
16
PART I (Cont.)
UCAR INTERNATIONAL INC.
exceeding $45,000,000) may be paid or made during 1997 in addition to dividends
by Global to UCARand repurchasesotherwise permitted in 1997). In addition, if (a) at the time of such proposed dividend,certain financial
tests are not met, total dividends and repurchases in any year may not exceed
$65,000,000. In addition, Global is unablepermitted to meet certain indebtedness incurrence and income tests or (b) the
total amount of the dividend paid exceeds specified aggregate limits based on
consolidated net income and net proceeds from asset and stock sales and certain
other transactions. Such restrictions are not applicablepay dividends to dividendsUCAR (i) in
respect of UCAR's administrative fees and expenses and (ii) for the specific
purpose of the purchase or redemption by UCAR of capital stock held by present
or former officers of the Company up to $5 million per year or $25 million in
the aggregate. In general, amounts which are permitted to be paid as dividends
in a year but are not so paid may be paid in subsequent years. The indenture
relating to the Subordinated Notes also limits the payment of dividends by
Global to UCAR.
CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1996, the Company changed its method of determining LIFO
inventories. The new methodology provides specifically identified parameters for
defining new items within the LIFO pool which the Company believes improves the
accuracy of costing those items. The Company recorded income of $7 million
(after related income taxes of $4 million) as the cumulative effect on prior
years of this change in accounting for inventories. The Company believes this
change will not materially impact the Company's ongoingon-going results of operations.
Prior to the acquisition of the outstanding shares of EMSA on April 22, 1997,
the Company's investment in EMSA was carried on the equity basis and its
proportional share of the net income was reported in income under the caption
"UCAR share of net income from company carried at equity." The Consolidated
Financial Statements have not been restated to reflect the increased ownership
of EMSA at any date or for any period prior to the date of acquisition.
In October 1995,February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 123, "Accounting for Stock-Based
Compensation"128, "Earnings per Share", which is
effective for years beginningfinancial statements for both interim and annual periods ending
after December 15, 1995.1997. SFAS 123 permits a fair value based method128 requires presentation of accounting for employee stock
compensation plans. It also allows a company to continue to use the intrinsic
value method of accounting prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"). Companies electing to
continue to use the accounting prescribed by
16
PART I (Cont.)
UCAR INTERNATIONAL INC.
APB 25 must make pro forma disclosures of net incomebasic and net incomediluted per
share as
if the fair value based method of accounting defined in SFAS 123 had been
applied.amounts for income from continuing operations and for net income. The
Company intends to continue the method of accounting for
stock-based compensation prescribed by APB 25; accordingly,does not expect the adoption of SFAS 123 will have no effect on the Company with the exception of expanded
disclosures required under SFAS 123.128 to materially impact earnings
per share.
17
PART II. OTHER INFORMATION
UCAR INTERNATIONAL INC.
ITEM 1. LEGAL PROCEEDINGS
- ---------------------------
On June 5, 1997, the Company was served with subpoenas issued by the United
States District Court for the Eastern District of Pennsylvania (the "District
Court") to produce documents to a grand jury convened by attorneys for the
Antitrust Division of the United States Department of Justice ("DOJ") and a
related search warrant. Counsel for the Company has been informed by the DOJ
that the grand jury is investigating whether there has been any violation of
Federal antitrust laws by producers of graphite electrodes. Concurrently,
representatives of the European Union Directorate General IV, the antitrust
enforcement authorities of the European Union (the "EU authorities"), visited
the offices of the Company's French subsidiary for purposes of gathering
information to determine whether there has been any violation by producers of
graphite electrodes of Article 85-1 of the Treaty of Rome, the antitrust law of
the European Union. Subsequently, the Company was served with subpoenas in the
United States to Produce documents relating to carbon electrodes and bulk
graphite. The Company, through its counsel, is cooperating with the DOJ and the
EU authorities. At this time, as far as the Company is aware, no governmental
authority has made a finding or allegation that any person or company violated
any antitrust law. No provision for any liability related to such matters has
been made in the Consolidated Financial Statements.
On June 17, 1997, the Company was served with a complaint commencing a putative
class action lawsuit in the United States District Court for the Western
District of Pennsylvania. Subsequently through October 30, 1997, the Company has
been served with four additional complaints commencing similar lawsuits in the
District Court. UCAR, SGL Carbon Corporation and The Carbide/Graphite Group,
Inc. are named as defendants in each complaint. SGL Carbon AG is named as a
defendant in each of the four subsequently served complaints. The plaintiff
named in the first served complaint is Erie Forge and Steel, Inc., and the
plaintiffs named in the other complaints respectively are: Kentucky Electric
Steel Corporation, Koppel Steel Corporation and Newport Steel Corporation; Al
Tech Specialty Steel Corporation; Caparo Steel Company; and Cascade Steel
Rolling Mills, Inc. In each complaint, the plaintiffs allege that the defendants
violated Federal antitrust laws. None of the complaints contains any specific
allegations of the factual basis underlying such violations, and all of the
complaints appear to be based on the existence of the previously announced grand
jury investigation. In each complaint, the proposed class consists of all
persons who purchased graphite electrodes in the United States directly from the
defendants during the period from 1992 through the present. Each complaint
seeks, among other things, an award of treble damages resulting from the alleged
antitrust violations. On August 5, 1997, the four lawsuits filed in the District
Court were consolidated into a single action in the District Court entitled In
re: Graphite Electrodes Antitrust Litigation. On August 21, 1997, the first
served complaint was withdrawn without prejudice to re-file. On October 10,
1997, the District Court ordered a nine-month stay of certain formal discovery
proceedings. The Company has filed a motion to dismiss the consolidated
complaint. Since the consolidated lawsuit is still in its early stages, no
determination of potential liability has been made. The Company intends to
vigorously defend against these lawsuits. No provision for any liability related
to such matters has been made in the Consolidated Financial Statements.
18
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
Quarterly Report on Form 10-Q.
Exhibit
Number Description of Exhibit
------ ----------------------
10.28(a) Third Amendment to10.22 UCAR International Inc. Compensation Deferral
ProgramAmended and Restated Management Stock
Option Plan, effective as of January 1, 1996
10.41(b) First Amendment26, 1997 (restated to The UCAR Carbon Retirement Plan effective
February 25, 1991
10.41(c) Third Amendmentdelete
provisions which have ceased to such Retirement Plan effective, as to
paragraph 2, as of January 26, 1995 and as to paragraphs 1 and
3-5, as of January 1, 1997
10.50(a) Second Amendment to UCAR International Inc. Benefits Protection
Trust effective as of January 1, 1996be operative)
11 Statement re: computation of per share earnings
27 Financial Data Schedule
(b) Reports on FormREPORTS ON FORM 8-K
No Report on Form 8-K was filed during the quarter for which this Quarterly
Report on Form 10-Q is filed.
1819
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: October 31, 19961997 By: /s/ William P. Wiemels
----------------------
William P. Wiemels
Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
1920
UCAR INTERNATIONAL INC.
INDEX TO EXHIBITS
Exhibit No. Description Page
10.28(a) Third Amendment toEXHIBIT NO. DESCRIPTION
10.22 UCAR International Inc. Compensation
Deferral ProgramAmended and Restated Management Stock
Option Plan, effective as of January 1, 1996............ E-2
10.41(b) First Amendment26, 1997 (restated to
The UCAR Carbon Retirement Plan
effective February 25, 1991................................. E-4
10.41(c) Third Amendmentdelete provisions which have ceased to such Retirement Plan effective, as to
paragraph 2, as of January 26, 1995 and as to paragraphs 1
and 3-5, as of January 1, 1997.............................. E-6
10.50(a) Second Amendment to UCAR International Inc. Benefits
Protection Trust effective as of January 1, 1996............ E-8be operative)
11 Statement re: computation of per share earnings............. E-11earnings
27 Financial Data Schedule..................................... E-12Schedule
E-1