UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTER ENDED September 30, 2004March 31, 2005
Commission file number1-1463
UNION CARBIDE CORPORATION
(Exact name of registrant as specified in its charter)
New York (State or other jurisdiction of incorporation or organization) | 13-1421730 (I.R.S. Employer Identification No.) | |||
400 West Sam Houston Parkway South, Houston, Texas 77042 (Address of principal executive offices) (Zip Code) | ||||
(Registrant's telephone number, including area code:) | ||||
Not applicable (Former name, former address and former fiscal year, if changed since last report) | ||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No ý.
At September 30, 2004,March 31, 2005, 1,000 shares of common stock were outstanding, all of which were held by the registrant's parent, The Dow Chemical Company.
The registrant meets the conditions set forth in General Instructions H(1)(a) and (b) for Form 10-Q and is therefore filing this form with a reduced disclosure format.
Union Carbide Corporation
Table of Contents
| PAGE | |||
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PART I—FINANCIAL INFORMATION | ||||
Item 1. Financial Statements | 3 | |||
Consolidated Statements of Income | 3 | |||
Consolidated Balance Sheets | 4 | |||
Consolidated Statements of Cash Flows | 6 | |||
Consolidated Statements of Comprehensive Income | ||||
Notes to the Consolidated Financial Statements | ||||
Item 2. Management's Discussion and Analysis of Financial Condition and Results of | ||||
Disclosure Regarding Forward-Looking Information | ||||
Results of Operations | ||||
Other Matters | ||||
Item 3. Quantitative and Qualitative Disclosures About Market | 22 | |||
Item 4. Controls and | 22 | |||
PART | ||||
Item 1. Legal | ||||
Item 6. | ||||
SIGNATURES | ||||
EXHIBIT INDEX |
Union Carbide Corporation and Subsidiaries
Consolidated Statements of Income
| | Three Months Ended | Nine Months Ended | | Three Months Ended | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions (Unaudited) | In millions (Unaudited) | Sept. 30, 2004 | Sept. 30, 2003 | Sept. 30, 2004 | Sept. 30, 2003 | In millions (Unaudited) | March 31, 2005 | March 31, 2004 | |||||||||||||
Net trade sales | $ | 75 | $ | 79 | $ | 238 | $ | 270 | Net trade sales | $ | 72 | $ | 79 | ||||||||
Net sales to related companies | 1,427 | 1,185 | 3,934 | 3,556 | Net sales to related companies | 1,612 | 1,232 | ||||||||||||||
Total Net Sales | Total Net Sales | 1,502 | 1,264 | 4,172 | 3,826 | Total Net Sales | 1,684 | 1,311 | |||||||||||||
Cost of sales | 1,331 | 1,147 | 3,732 | 3,636 | Cost of sales | 1,441 | 1,164 | ||||||||||||||
Research and development expenses | 21 | 24 | 68 | 72 | Research and development expenses | 21 | 24 | ||||||||||||||
Selling, general and administrative expenses | 5 | 3 | 15 | 23 | Selling, general and administrative expenses | 5 | 6 | ||||||||||||||
Amortization of intangibles | 1 | 1 | 3 | 3 | Amortization of intangibles | — | 1 | ||||||||||||||
Restructuring charges | — | — | 48 | — | Equity in earnings of nonconsolidated affiliates | 153 | 85 | ||||||||||||||
Equity in earnings of nonconsolidated affiliates | 133 | 61 | 427 | 132 | Sundry income (expense) — net | 52 | (38 | ) | |||||||||||||
Sundry income (expense)—net | (23 | ) | 35 | (78 | ) | 11 | Interest income | 4 | 1 | ||||||||||||
Interest income | 2 | 4 | 5 | 9 | Interest expense and amortization of debt discount | 23 | 23 | ||||||||||||||
Interest expense and amortization of debt discount | 24 | 27 | 70 | 89 | |||||||||||||||||
Income before Income Taxes and Minority Interests | 232 | 162 | 590 | 155 | |||||||||||||||||
Income before Income Taxes | Income before Income Taxes | 403 | 141 | ||||||||||||||||||
Provision for income taxes | 64 | 41 | 193 | 39 | Provision for income taxes | 123 | 50 | ||||||||||||||
Net Income Available for Common Stockholder | Net Income Available for Common Stockholder | $ | 168 | $ | 121 | $ | 397 | $ | 116 | Net Income Available for Common Stockholder | $ | 280 | $ | 91 | |||||||
Depreciation | Depreciation | $ | 81 | $ | 77 | $ | 241 | $ | 233 | Depreciation | $ | 67 | $ | 78 | |||||||
Capital Expenditures | Capital Expenditures | $ | 32 | $ | 32 | $ | 91 | $ | 76 | Capital Expenditures | $ | 43 | $ | 26 | |||||||
See Notes to the Consolidated Financial Statements.
Union Carbide Corporation and Subsidiaries
Consolidated Balance Sheets
In millions (Unaudited) | In millions (Unaudited) | Sept. 30, 2004 | Dec. 31, 2003 | In millions (Unaudited) | March 31, 2005 | Dec. 31, 2004 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Assets | Assets | Assets | ||||||||||||||
Current Assets | Current Assets | Current Assets | ||||||||||||||
Cash and cash equivalents | $ | 23 | $ | 21 | Cash and cash equivalents | $ | 23 | $ | 22 | |||||||
Accounts receivable: | Accounts receivable: | |||||||||||||||
Trade (net of allowance for doubtful receivables—2004: $4; 2003: $4) | 54 | 59 | Trade (net of allowance for doubtful receivables — 2005: $4; 2004: $4) | 61 | 58 | |||||||||||
Related companies | 341 | 279 | Related companies | 338 | 504 | |||||||||||
Other | 193 | 120 | Other | 181 | 191 | |||||||||||
Notes receivable from related companies | 46 | 124 | Notes receivable from related companies | 526 | 53 | |||||||||||
Inventories | 190 | 182 | Inventories | 194 | 186 | |||||||||||
Deferred income tax assets—current | 46 | 56 | Deferred income tax assets — current | 65 | 71 | |||||||||||
Asbestos-related insurance receivables—current | 150 | 200 | Asbestos-related insurance receivables — current | 164 | 175 | |||||||||||
Total current assets | 1,043 | 1,041 | Total current assets | 1,552 | 1,260 | |||||||||||
Investments | Investments | Investments | ||||||||||||||
Investments in related companies | 461 | 461 | Investments in related companies | 462 | 462 | |||||||||||
Investments in nonconsolidated affiliates | 907 | 626 | Investments in nonconsolidated affiliates | 868 | 1,041 | |||||||||||
Other investments | 23 | 35 | Other investments | 23 | 23 | |||||||||||
Noncurrent receivables | 14 | 17 | Noncurrent receivables | 10 | 13 | |||||||||||
Noncurrent receivable from related company | 195 | — | Noncurrent receivable from related company | 223 | 222 | |||||||||||
Total investments | 1,600 | 1,139 | Total investments | 1,586 | 1,761 | |||||||||||
Property | Property | Property | ||||||||||||||
Property | 7,294 | 7,375 | Property | 7,343 | 7,304 | |||||||||||
Less accumulated depreciation | 5,193 | 5,132 | Less accumulated depreciation | 5,290 | 5,227 | |||||||||||
Net property | 2,101 | 2,243 | Net property | 2,053 | 2,077 | |||||||||||
Other Assets | Other Assets | Other Assets | ||||||||||||||
Goodwill | 26 | 26 | Goodwill | 26 | 26 | |||||||||||
Other intangible assets (net of accumulated amortization—2004: $122; 2003: $118) | 14 | 23 | Other intangible assets (net of accumulated amortization — 2005: $125; 2004: $124) | 20 | 20 | |||||||||||
Deferred income tax assets—noncurrent | 674 | 783 | Deferred income tax assets — noncurrent | 322 | 452 | |||||||||||
Asbestos-related insurance receivables—noncurrent | 1,145 | 1,176 | Asbestos-related insurance receivables — noncurrent | 972 | 1,028 | |||||||||||
Deferred charges and other assets | 144 | 73 | Prepaid pension expense | 682 | 655 | |||||||||||
Deferred charges and other assets | 64 | 52 | ||||||||||||||
Total other assets | 2,003 | 2,081 | ||||||||||||||
Total other assets | 2,086 | 2,233 | ||||||||||||||
Total Assets | Total Assets | $ | 6,747 | $ | 6,504 | Total Assets | $ | 7,277 | $ | 7,331 | ||||||
See Notes to the Consolidated Financial Statements.
Union Carbide Corporation and Subsidiaries
Consolidated Balance Sheets
In millions (Unaudited) | In millions (Unaudited) | Sept. 30, 2004 | Dec. 31, 2003 | In millions (Unaudited) | March 31, 2005 | Dec. 31, 2004 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Liabilities and Stockholder's Equity | Liabilities and Stockholder's Equity | Liabilities and Stockholder's Equity | ||||||||||||||||
Current Liabilities | Current Liabilities | Current Liabilities | ||||||||||||||||
Notes payable: | Notes payable: | |||||||||||||||||
Related companies | $ | 87 | $ | 23 | Related companies | $ | 7 | $ | 139 | |||||||||
Other | 4 | 2 | Other | 4 | 4 | |||||||||||||
Long-term debt due within one year | 15 | 16 | Long-term debt due within one year | 266 | 266 | |||||||||||||
Accounts payable: | Accounts payable: | |||||||||||||||||
Trade | 226 | 245 | Trade | 250 | 260 | |||||||||||||
Related companies | 232 | 287 | Related companies | 266 | 270 | |||||||||||||
Other | 34 | 32 | Other | 48 | 40 | |||||||||||||
Income taxes payable | 185 | 77 | Income taxes payable | 123 | 116 | |||||||||||||
Asbestos-related liabilities—current | 109 | 122 | Asbestos-related liabilities — current | 109 | 92 | |||||||||||||
Accrued and other current liabilities | 279 | 245 | Accrued and other current liabilities | 233 | 360 | |||||||||||||
Total current liabilities | 1,171 | 1,049 | Total current liabilities | 1,306 | 1,547 | |||||||||||||
Long-Term Debt | Long-Term Debt | 1,257 | 1,272 | Long-Term Debt | 1,006 | 1,006 | ||||||||||||
Other Noncurrent Liabilities | Other Noncurrent Liabilities | Other Noncurrent Liabilities | ||||||||||||||||
Pension and other postretirement benefits—noncurrent | 512 | 524 | Pension and other postretirement benefits — noncurrent | 468 | 470 | |||||||||||||
Asbestos-related liabilities—noncurrent | 1,586 | 1,791 | Asbestos-related liabilities — noncurrent | 1,467 | 1,549 | |||||||||||||
Other noncurrent obligations | 439 | 477 | Other noncurrent obligations | 419 | 433 | |||||||||||||
Total other noncurrent liabilities | 2,537 | 2,792 | Total other noncurrent liabilities | 2,354 | 2,452 | |||||||||||||
Minority Interest in Subsidiaries | Minority Interest in Subsidiaries | 3 | 3 | Minority Interest in Subsidiaries | 4 | 4 | ||||||||||||
Stockholder's Equity | Stockholder's Equity | Stockholder's Equity | ||||||||||||||||
Common stock (1,000 shares authorized and issued) | — | — | Common stock (1,000 shares authorized and issued) | — | — | |||||||||||||
Additional paid-in capital | — | — | Additional paid-in capital | — | — | |||||||||||||
Retained earnings | 2,143 | 1,746 | Retained earnings | 2,713 | 2,433 | |||||||||||||
Accumulated other comprehensive loss | (364 | ) | (358 | ) | Accumulated other comprehensive loss | (106 | ) | (111 | ) | |||||||||
Net stockholder's equity | 1,779 | 1,388 | Net stockholder's equity | 2,607 | 2,322 | |||||||||||||
Total Liabilities and Stockholder's Equity | Total Liabilities and Stockholder's Equity | $ | 6,747 | $ | 6,504 | Total Liabilities and Stockholder's Equity | $ | 7,277 | $ | 7,331 | ||||||||
See Notes to the Consolidated Financial Statements.
Union Carbide Corporation and Subsidiaries
Consolidated Statements of Cash Flows
| | Nine Months Ended | | Three Months Ended | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions (Unaudited) | In millions (Unaudited) | Sept. 30, 2004 | Sept. 30, 2003 | In millions (Unaudited) | March 31, 2005 | March 31, 2004 | ||||||||||||
Operating Activities | ||||||||||||||||||
Net Income Available for Common Stockholder | $ | 397 | $ | 116 | ||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||
Depreciation and amortization | 258 | 250 | Net Income Available for Common Stockholder | $ | 280 | $ | 91 | |||||||||||
Provision (Credit) for deferred income tax | 177 | (2 | ) | Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
Earnings/losses of nonconsolidated affiliates in excess of dividends received | (285 | ) | (69 | ) | Depreciation and amortization | 73 | 83 | |||||||||||
Net gain on sales of investments | (1 | ) | — | Provision for deferred income tax | 122 | �� | 39 | |||||||||||
Net gain on sales of property | (7 | ) | (35 | ) | Earnings/losses of nonconsolidated affiliates less than dividends received | 104 | 34 | |||||||||||
Other net loss | 1 | 1 | Gain on sales of property, net | — | (1 | ) | ||||||||||||
Net gain on sales of nonconsolidated affiliates | (1 | ) | (20 | ) | Other gain, net | — | (1 | ) | ||||||||||
Restructuring charges | 37 | — | Gain on sale of ownership interest in nonconsolidated affiliate | (70 | ) | — | ||||||||||||
Changes in assets and liabilities that provided (used) cash: | Changes in assets and liabilities that provided (used) cash: | |||||||||||||||||
Accounts and notes receivable | 5 | (61 | ) | Accounts and notes receivable | 6 | 46 | ||||||||||||
Related company receivables | 16 | 438 | Related company receivables | (307 | ) | (129 | ) | |||||||||||
Inventories | (8 | ) | 17 | Inventories | (8 | ) | (28 | ) | ||||||||||
Accounts payable | 4 | (35 | ) | Accounts payable | 17 | 11 | ||||||||||||
Related company payables | 9 | (194 | ) | Related company payables | (136 | ) | 28 | |||||||||||
Other assets and liabilities | (319 | ) | (99 | ) | Other assets and liabilities | (77 | ) | (152 | ) | |||||||||
Cash provided by operating activities | 283 | 307 | Cash provided by operating activities | 4 | 21 | |||||||||||||
Investing Activities | ||||||||||||||||||
Capital expenditures | (91 | ) | (76 | ) | Capital expenditures | (43 | ) | (26 | ) | |||||||||
Proceeds from sales of property | 10 | 87 | Proceeds from sales of property | — | 2 | |||||||||||||
Proceeds from sale of consolidated company | — | 1 | Investments in nonconsolidated affiliates | — | (1 | ) | ||||||||||||
Investments in nonconsolidated affiliates | (1 | ) | (13 | ) | Distributions from nonconsolidated affiliates | 41 | — | |||||||||||
Increase in noncurrent receivable from related company | (195 | ) | — | Increase in noncurrent receivable from related company | (1 | ) | — | |||||||||||
Collection of noncurrent notes receivable from related company | — | 17 | Proceeds from sales of investments | — | 3 | |||||||||||||
Proceeds from sales of nonconsolidated affiliates | 1 | 27 | ||||||||||||||||
Purchases of investments | — | (1 | ) | Cash used in investing activities | (3 | ) | (22 | ) | ||||||||||
Proceeds from sales of investments | 9 | 29 | ||||||||||||||||
Cash provided by (used in) investing activities | (267 | ) | 71 | |||||||||||||||
Financing Activities | ||||||||||||||||||
Changes in short-term notes payable | 2 | — | ||||||||||||||||
Payments on long-term debt | (16 | ) | (380 | ) | ||||||||||||||
Distributions to minority interests | — | (1 | ) | Changes in short-term notes payable | — | 2 | ||||||||||||
Cash used in financing activities | (14 | ) | (381 | ) | Cash provided by financing activities | — | 2 | |||||||||||
Summary | ||||||||||||||||||
Increase (Decrease) in cash and cash equivalents | 2 | (3 | ) | Increase in cash and cash equivalents | 1 | 1 | ||||||||||||
Cash and cash equivalents at beginning of year | 21 | 25 | Cash and cash equivalents at beginning of year | 22 | 21 | |||||||||||||
Cash and cash equivalents at end of period | $ | 23 | $ | 22 | Cash and cash equivalents at end of period | $ | 23 | $ | 22 | |||||||||
See Notes to the Consolidated Financial Statements.
Union Carbide Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
| Three Months Ended | ||||||
---|---|---|---|---|---|---|---|
In millions (Unaudited) | March 31, 2005 | March 31, 2004 | |||||
Net Income Available for Common Stockholder | $ | 280 | $ | 91 | |||
Other Comprehensive Income (Loss), Net of Tax | |||||||
Translation adjustments | (4 | ) | 3 | ||||
Minimum pension liability adjustment | 7 | — | |||||
Net gain on cash flow hedging derivative instruments | 2 | — | |||||
Total other comprehensive income | 5 | 3 | |||||
Comprehensive Income | $ | 285 | $ | 94 | |||
See Notes to the Consolidated Financial Statements.
Union Carbide Corporation and SubsidiariesConsolidated Statements of Comprehensive Income
| Three Months Ended | Nine Months Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions (Unaudited) | Sept. 30, 2004 | Sept. 30, 2003 | Sept. 30, 2004 | Sept. 30, 2003 | |||||||||
Net Income Available for Common Stockholder | $ | 168 | $ | 121 | $ | 397 | $ | 116 | |||||
Other Comprehensive Income (Loss), Net of Tax | |||||||||||||
Unrealized gains on investments | — | — | — | 3 | |||||||||
Translation adjustments | (7 | ) | 6 | (8 | ) | 12 | |||||||
Net gain on cash flow hedging derivative instruments | 1 | — | 2 | — | |||||||||
Total other comprehensive income (loss) | (6 | ) | 6 | (6 | ) | 15 | |||||||
Comprehensive Income | $ | 162 | $ | 127 | $ | 391 | $ | 131 | |||||
See Notes to the Consolidated Financial Statements.
Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
NOTE A CONSOLIDATED FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements of Union Carbide Corporation and its subsidiaries (the "Corporation" or "UCC") were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and reflect all adjustments (consisting of normal recurring accruals) which, in the opinion of management, are considered necessary for the fair presentation of the results for the periods presented.
The Corporation is a wholly owned subsidiary of The Dow Chemical Company ("Dow"). In accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings perPer Share," the presentation of earnings per share is not required in financial statements of wholly owned subsidiaries.
The Corporation's business activities comprise components of Dow's global operations rather than stand-alone operations. Dow conducts its worldwide operations through global businesses. Because there are no separable reportable business segments for UCC under SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," and no detailed business information is provided to a chief operating decision maker regarding the Corporation's stand-alone operations, the Corporation's results are reported as a single operating segment.
Intercompany transactions and balances are eliminated in consolidation. Transactions with the Corporation's parent company, Dow, or other Dow subsidiaries have been reflected as related company transactions in the consolidated financial statements. See Note IH for further discussion.
Certain reclassifications of prior year's amounts have been made to conform to the presentation adopted for 2004.2005. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003.2004.
NOTE B ACCOUNTING CHANGES
In December 2003,November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151, "Inventory Costs—an amendment of ARB No. 43, Chapter 4," which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) and also requires that the allocation of fixed production overhead be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Corporation is currently evaluating the impact of adopting this statement.
In December 2004, the FASB issued revised SFAS No. 132, "Employers' Disclosures about Pensions123 ("SFAS No. 123R"), "Share-Based Payment" which replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and Other Postretirement Benefits.supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The revised standardThis statement, which requires new disclosures in addition to those required by the original standard about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plansall share-based payment transactions be recognized in the financial statements, establishes fair value as the measurement objective and other defined benefit postretirement plans.requires entities to apply a fair-value-based measurement method in accounting for share-based payment transactions. As revised,issued, the statement applies to all awards granted, modified, repurchased or cancelled after July 1, 2005. In March 2005, the U.S. Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin ("SAB") No. 107, which expresses views of the SEC staff regarding the interaction between SFAS No. 132 was effective123R and certain SEC rules and regulations, and provides the staff's views regarding the valuation of share-based payment arrangements for financial statements withpublic companies. Dow will consider the guidance of this SAB as it adopts SFAS No. 123R. On April 14, 2005, the SEC announced the adoption of a new rule that amends the compliance date for SFAS No. 123R, allowing companies to implement the statement at the beginning of their next fiscal years endingyear that begins after DecemberJune 15, 2003.2005, which is January 1, 2006 for Dow. The interim-period disclosures required by this standard are effective for interim periods beginning after December 15, 2003. See Note H forCorporation will continue to be allocated the required disclosures.portion of expense relating to its employees who receive stock-based compensation.
In MarchDecember 2004, the FASB ratifiedissued SFAS No. 153, "Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29." The statement addresses the consensus reached bymeasurement of exchanges of nonmonetary assets and eliminates the Emerging Issues Task Force ("EITF")exception from fair value measurement for nonmonetary exchanges of similar productive assets and replaces it with respect to EITF Issuean exception for exchanges that do not have commercial substance. SFAS No. 03-16, "Accounting for Investments in Limited Liability Companies." According to EITF Issue No. 03-16, a limited liability company ("LLC") that maintains a "specific ownership account" for each investor should be viewed similar to a limited partnership for determining whether a noncontrolling investment in an LLC should be accounted for using the cost or equity method. The consensus applies to all investments in LLCs (except those required to be accounted for as debt securities) and153 is effective for reportingnonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2004.2005. The Corporation has reviewed its investments in LLCs and has determined that UCC's current accounting treatment for these investments is consistent withcurrently evaluating the guidance in EITF Issue No. 03-16.impact of adopting this statement.
In MayDecember 2004, the FASB issued FASB Staff Position ("FSP") No. 106-2,FAS 109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004," indicating that this deduction should be accounted for as a special deduction in accordance with the provisions of SFAS No. 109. Beginning in 2005, the Corporation recognizes the allowable deductions as qualifying activity occurs.
In December 2004, the FASB issued FSP No. FAS 109-2, "Accounting and Disclosure Requirements RelatedGuidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004," which provides a practical exception to the Medicare Prescription Drug, Improvement and ModernizationSFAS No. 109 requirement to reflect the effect of a new tax law in the period of enactment by allowing additional time beyond the financial reporting period to evaluate the effects on plans for reinvestment or repatriation of unremitted foreign earnings. The American Jobs Creation Act of 2003." The FSP provides accounting guidance for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 20032004 (the "Act") introduced a special one-time dividends received deduction on the repatriation of certain foreign earnings to a sponsorU.S. taxpayer, provided certain criteria are met. Although the Act was signed into law in October 2004, the practical application of a postretirement health care plan that has concluded that prescription drug benefits available under the plan are "actuarially equivalent" and thus qualify for a subsidy under the Act. The Corporation adoptednumber of the provisions of FSPthe repatriation provision remain unclear. Tax authorities are expected to provide clarifying language on key elements of the repatriation provision. The clarifying language is expected to affect the Corporation's evaluation of the economic value of implementing any individual opportunity and its ability to meet the overall qualifying criteria. As a result, the Corporation will be unable to complete a final determination of the Act's effect on its plan for reinvestment or repatriation of foreign earnings until the clarifying language is released. Based on preliminary identification of potential repatriation and reinvestment opportunities, the Corporation expects that adoption of the repatriation provision of the Act will have an immaterial effect on the consolidated financial statements.
In March 2005, the FASB issued FASB Interpretation ("FIN") No. 106-247, "Accounting for Conditional Asset Retirement Obligations," which clarifies the termconditional asset retirement obligation as used in SFAS No. 143, "Accounting for Asset Retirement Obligations," as a legal obligation to perform an asset retirement activity in which the third quartertiming and/or method of 2004. See Note H regardingsettlement are conditional on a future event that may or may not be within the control of the Corporation. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Corporation is currently evaluating the impact of adoption in the third quarter of 2004 and the required disclosures.
In July 2004, the FASB ratified the consensuses reached by the EITF with respect to EITF Issue No. 02-14, "Whether Investors Should Apply the Equity Method of Accounting to Investments Other Than Common Stock." According to EITF Issue No. 02-14, when an investor has the ability to exercise significant influence over the operating and financial policies of an investee, the equity method of accounting should be applied to investments in common stock and in-substance common stock. EITF Issue No. 02-14 addresses the determination of whether an investment is in-substance common stock and when to perform that evaluation, but does not address the determination of whether an investor has the ability to exercise significant influence over the operating and financial policies of the investee. The consensuses inadopting this Issue apply to reporting periods beginning after September 15, 2004. The Corporation has reviewed its investments and has determined that its current accounting treatment for these investments is consistent with the guidance in EITF Issue No. 02-14.interpretation.
NOTE C IMPAIRMENT OF LONG-LIVED ASSETSRESTRUCTURING
In the first quarter of 2003, certain studies regarding non-strategic or under-performing assets were completed and management made decisions relative to certain assets. These decisions resulted in the write-off of the net book value of three manufacturing facilities totaling $24 million and included in "Cost of sales" (the largest of which was $16 million associated with the impairment of the ethylene production facilities in Seadrift, Texas, which was shut down in the third quarter of 2003), and the impairment of a chemical transport vessel (sold in the second quarter of 2003) of $11 million included in "Sundry income (expense)—net."
NOTE D RESTRUCTURING2004 Restructuring
In the second quarter of 2004, the Corporation recorded restructuring charges totaling $48 million resulting from decisions made by management in the second quarter relative to employment levels as Dow restructured its business organization and as the Corporation finalized plans for additional plant shutdowns and divestitures. The charges included severance of $21 million for a workforce reduction of approximately 360 people, most of whom were expected to endended their employment with UCC by the end of the third quarter of 2004, and curtailment costs of $9 million associated with UCC's defined benefit plans. The charges also included asset impairments totaling $18 million related to the shutdown of a latex manufacturing facility ($8 million) and the pending sale of a marine terminal ($10 million).
As of September 30, 2004,March 31, 2005, the Corporation's workforce had been reduced by 249330 people due to this restructuring. Severance of $10 million was paid to 200 former employees;restructuring and severance of $4$18 million was deferred untilhas been paid. At March 31, 2005, by 49 former employees. At September 30, 2004, an accrual of $7$3 million (excluding the deferred severance) remained for approximately 12035 employees most of whomwho will end their employment with UCC by the end of 2004.in 2005.
NOTE ED INVENTORIES
The following table provides a breakdown of inventories at September 30, 2004March 31, 2005 and December 31, 2003:2004:
Inventories In millions | Sept. 30, 2004 | Dec. 31, 2003 | March 31, 2005 | Dec. 31, 2004 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Finished goods | $ | 67 | $ | 59 | $ | 53 | $ | 60 | ||||
Work in process | 22 | 25 | 29 | 25 | ||||||||
Raw materials | 32 | 25 | 34 | 32 | ||||||||
Supplies | 69 | 73 | 78 | 69 | ||||||||
Total inventories | $ | 190 | $ | 182 | $ | 194 | $ | 186 | ||||
The reserves reducing inventories from the first-in, first-out ("FIFO") basis to the last-in, first-out ("LIFO") basis amounted to $131$156 million at September 30, 2004March 31, 2005 and $96$139 million at December 31, 2003.2004.
NOTE FE GOODWILL AND OTHER INTANGIBLE ASSETS
The following table provides information regarding the Corporation's other intangible assets:
| At September 30, 2004 | At December 31, 2003 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||
Intangible assets with finite lives: | |||||||||||||||||||
Licenses and intellectual property | $ | 36 | $ | (34 | ) | $ | 2 | $ | 36 | $ | (31 | ) | $ | 5 | |||||
Patents | 5 | (3 | ) | 2 | 5 | (3 | ) | 2 | |||||||||||
Software | 94 | (84 | ) | 10 | 99 | (83 | ) | 16 | |||||||||||
Other | 1 | (1 | ) | — | 1 | (1 | ) | — | |||||||||||
Total | $ | 136 | $ | (122 | ) | $ | 14 | $ | 141 | $ | (118 | ) | $ | 23 | |||||
Amortization expense for other intangible assets (not including software) was $1 million in the third quarters of 2004 and 2003. Year to date, amortization expense for other intangible assets (not including software) was $3 million in 2004 and 2003. Amortization expense for software, which is included in "Cost of sales," totaled $0.5 million in the third quarter of 2004, compared with $0.4 million in the third quarter of last year. Year to date, amortization expense for software was $1.2 million in 2004 and 2003.
Other Intangible Assets | | | | | | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| At March 31, 2005 | At December 31, 2004 | |||||||||||||||||
In millions | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||
Intangible assets with finite lives: | |||||||||||||||||||
Licenses and intellectual property | $ | 36 | $ | (35 | ) | $ | 1 | $ | 36 | $ | (35 | ) | $ | 1 | |||||
Patents | 4 | (2 | ) | 2 | 4 | (2 | ) | 2 | |||||||||||
Software | 104 | (87 | ) | 17 | 103 | (86 | ) | 17 | |||||||||||
Other | 1 | (1 | ) | — | 1 | (1 | ) | — | |||||||||||
Total | $ | 145 | $ | (125 | ) | $ | 20 | $ | 144 | $ | (124 | ) | $ | 20 | |||||
Total estimated amortization expense for 20042005 and the next five succeeding fiscal years is as follows:
In millions | Estimated Amortization Expense | ||
---|---|---|---|
2004 | $ | 5.5 | |
2005 | 2.5 | ||
2006 | 2.1 | ||
2007 | 2.0 | ||
2008 | 2.0 | ||
2009 | 2.0 |
Estimated Amortization Expense for Next Five Years In millions | |||
---|---|---|---|
2005 | $ | 4 | |
2006 | 4 | ||
2007 | 4 | ||
2008 | 3 | ||
2009 | 3 | ||
2010 | 2 | ||
| |
NOTE GF COMMITMENTS AND CONTINGENT LIABILITIES
Environmental Matters
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. The Corporation had accrued obligations of $109$104 million at December 31, 20032004 for environmental remediation and restoration costs, including $33$39 million for the remediation of Superfund sites. At September 30, 2004,March 31, 2005, the Corporation had accrued obligations of $105 million for environmental remediation and restoration costs, including $28$38 million for the remediation of Superfund sites. This is management's best estimate of the costs for remediation and restoration with respect to environmental matters for which the Corporation has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to twice that amount. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and evolving technologies for handling site remediation and restoration. It is the opinion of the Corporation's management that the possibility is remote that costs in excess of those accrued or disclosed will have a material adverse impact on the Corporation's consolidated financial statements.
Litigation
The following disclosure should be read in conjunction with the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003.
The Corporation and its subsidiaries are involved in a number of legal proceedings and claims with both private and governmental parties. These cover a wide range of matters, including, but not limited to: product liability; trade regulation; governmental regulatory proceedings; health, safety and environmental matters; employment; patents; contracts; taxes; and commercial disputes.
Separately, the Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that UCC sold in the past, alleged exposure to asbestos-containing products located on UCC's premises, and UCC's responsibility for asbestos suits filed against a former subsidiary, Amchem Products, Inc. ("Amchem"). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to the Corporation's products.
Influenced by the bankruptcy filings of numerous defendants in asbestos-related litigation and the prospects of various forms of state and national legislative reform, the rate at which plaintiffs filed asbestos-related suits against various companies, including the Corporation and Amchem, increased in 2001, 2002 and the first half of 2003. TheSince then, the rate of filing has significantly abated in the second half of 2003 and the first nine months of 2004.abated. The Corporation expects more asbestos-related suits to be filed against it and Amchem in the future, and will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.
At the end of 2001 and throughThrough the third quarter of 2002, the Corporation had concluded it was not possible to estimate its cost of disposing of asbestos-related claims that might be filed against it and Amchem in the future due to a number of reasons. During the third and fourth quarters of 2002, the Corporation worked with Analysis, Research & Planning Corporation ("ARPC"), a consulting firm with broad experience in estimating resolution costs associated with mass tort litigation, including asbestos, to explore whether it would be possible to estimate the cost of disposing of pending and future asbestos-related claims that have been, and could reasonably be expected to be, filed against the Corporation and Amchem. ARPC concluded that it was not possible to estimate the full range of the cost of resolving future asbestos-related claims against UCC and Amchem because of various uncertainties associated with the litigation of those claims. Despite its inability to estimate the full range of the cost of resolving future asbestos-related claims, ARPC advised the Corporation that it would be possible to determine an estimate of a reasonable forecast of the cost of resolving pending and future asbestos-related claims likely to face UCC and Amchem if certain assumptions were made. As a result, the following assumptions were made:made and then used by ARPC:
Based on the resulting study completed by ARPC in January 2003, the Corporation increased its December 31, 2002 asbestos-related liability for pending and future claims for the 15-year period ending in 2017 to $2.2 billion, excluding future defense and processing costs. Approximately 28 percent of the recorded liability related to pending claims and approximately 72 percent related to future claims.
At each balance sheet date, the Corporation compares current asbestos claim and resolution activity to the assumptions in the ARPC study to determine whether the accrual continues to be appropriate. In addition, in November 2003, the Corporation requested ARPC to review the Corporation's asbestos claim and resolution activity during 2003 and determine the appropriateness of updating itsthe study. In response to that request, ARPC reviewed and analyzed data through November 25, 2003 to determine the number of asbestos-related filings and costs associated with 2003 activity. In January 2004, ARPC stated that an update at that time would not provide a more likely estimate of future events than that reflected in its study of the previous year and, therefore, the estimate in that study remained applicable. Based on the Corporation's own review of the asbestos claim and resolution activity and ARPC's response, the Corporation determined that no change to the accrual was required at December 31, 2003.
In November 2004, the Corporation again requested ARPC to review the Corporation's historical asbestos claim and resolution activity and determine the appropriateness of updating the January 2003 study. In response to this request, ARPC reviewed and analyzed data through November 14, 2004, and again concluded that time. Management noted,it was not possible to estimate the full range of the cost of resolving future asbestos-related claims against UCC and Amchem because of various uncertainties associated with the litigation of those claims. ARPC did advise, however, that it was reasonable and feasible to construct a new estimate of the totalcost of resolving current and future asbestos-related claims using the same two widely used forecasting methodologies used by ARPC in its January 2003 study, if certain assumptions were made. As a result, the following assumptions were made and then used by ARPC:
The resulting study completed by ARPC in January 2005 stated that the undiscounted cost of resolving pending and future asbestos-related claims against UCC and Amchem, excluding future defense and processing costs, through 2017 was
estimated to be between approximately $1.5 billion and $2.0 billion, depending on which of two accepted methodologies was used. At December 31, 2004, the recorded asbestos-related liability for pending and future claims was $1.6 billion. Based on the low end of the range in the January 2005 study, the recorded asbestos-related liability for pending and future claims at December 31, 2004 would be sufficient to resolve asbestos-related claims against UCC and Amchem into 2019. As in its January 2003 study, ARPC study. After consultation with outside counseldid provide estimates for a longer period of time in its January 2005 study, but also reaffirmed its prior advice that forecasts for shorter periods of time are more accurate than those for longer periods of time.
Based on ARPC's January 2003 and other consultants, management believes this factJanuary 2005 studies, the Corporation's recent asbestos litigation experience, and the uncertainties surrounding asbestos litigation and legislative reform efforts, the Corporation determined that no change to the accrual was strongly influenced byrequired at December 31, 2004.
At each balance sheet date, the pending national legislationCorporation compares current asbestos claim and tort reform initiatives in key states. The total number of claims filed and receivedresolution activity to the assumptions in the first nine months of 2004 was in line withmost recent ARPC study to determine whether the number of claims assumedaccrual continues to be filed in the ARPC study.appropriate. Based on the Corporation's review of 20042005 activity, the Corporation determined that no change to the accrual was required at September 30, 2004.March 31, 2005.
The asbestos-related liability for pending and future claims was $1.7$1.6 billion at September 30, 2004March 31, 2005 and $1.9 billion at December 31, 2003.2004. At September 30,March 31, 2005, approximately 38 percent of the recorded liability related to pending claims and approximately 62 percent related to future claims. At December 31, 2004, approximately 37 percent of the recorded liability related to pending claims and approximately 63 percent related to future claims. At December 31, 2003, approximately 33 percent of the recorded liability related to pending claims and approximately 67 percent related to future claims.
At December 31, 2002, the Corporation increased the receivable for insurance recoveries related to its asbestos liability to $1.35 billion, substantially exhausting its asbestos product liability coverage. Combined with the previously mentioned increase in the asbestos-related liability at December 31, 2002, this resulted in a net income statement impactcharge of $828 million, $522 million on an after-tax basis, in the fourth quarter of 2002.
The insurance receivable related to the asbestos liability was determined after a thorough review of applicable insurance policies and the 1985 Wellington Agreement, to which the Corporation and many of its liability insurers are signatory parties, as well as other insurance settlements, with due consideration given to applicable deductibles, retentions and policy limits, and taking into account the solvency and historical payment experience of various insurance carriers.
The Corporation's receivable for insurance recoveries related to its asbestos liability was $749$636 million at September 30, 2004March 31, 2005 and $1.0 billion$712 million at December 31, 2003.2004. At September 30, 2004, $505March 31, 2005, $463 million ($464 million at December 31, 2004) of the receivable for insurance recoveries was due fromrelated to insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place regarding their asbestos-related insurance coverage.
In addition, the Corporation had receivables for defense and resolution costs submitted to insurance carriers for reimbursement as follows:
Receivables for Costs Submitted to Insurance Carriers | | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | September 30, 2004 | December 31, 2003 | ||||||||||
Receivables for Costs Submitted to Insurance Carriers In millions | March 31, 2005 | December 31, 2004 | ||||||||||
Receivables for defense costs | $ | 98 | $ | 94 | $ | 90 | $ | 85 | ||||
Receivables for resolution costs | 448 | 255 | 410 | 406 | ||||||||
Total | $ | 546 | $ | 349 | $ | 500 | $ | 491 | ||||
The Corporation's insurance policies generally provide coverage for asbestos liability costs, including coverage for both resolution and defense costs. As previously noted, the Corporation increased its receivable for insurance recoveries related to its asbestos liability at December 31, 2002, thereby recording the full favorable income statement impact of its insurance coverage in 2002. Accordingly, defense and resolution costs recovered from insurers reduce the insurance receivable. Prior to increasing the insurance receivable related to the asbestos liability at December 31, 2002, the impact on results of operations for defense costs was the amount of those costs not covered by insurance. Since the Corporation expenses defense costs as incurred, defense costs for asbestos-related litigation (net of insurance) have impacted, and will continue to impact, results of operations. The pretax impact for defense and resolution costs, net of insurance, was $19 million in the third quarter of 2004 ($30 million in the third quarter of 2003) and $92$18 million in the first nine monthsquarter of 2004 ($782005 and $25 million in the first nine monthsquarter of 2003),2004, and was reflected in "Cost of sales."
In September 2003, the Corporation filed a comprehensive insurance coverage case in the Circuit Court for Kanawha County in Charleston, West Virginia, seeking to confirm its rights to insurance for various asbestos claims (the "West Virginia action"). Although the Corporation already has settlements in place concerning coverage for asbestos claims with many of its insurers, including those covered by the 1985 Wellington Agreement, this lawsuit was filed against insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place with the Corporation regarding their asbestos-related insurance coverage. The Corporation continues to believe that its recorded receivable for
insurance recoveries from all insurance carriers is collectible. The Corporation reached this conclusion after a further review of its insurance policies, with due consideration given to applicable deductibles, retentions and policy limits, after taking into account the solvency and historical payment experience of various insurance carriers; existing insurance settlements; and the advice of outside counsel with respect to the applicable insurance coverage law relating to the terms and conditions of its insurance policies. In early 2004, several of the defendant insurers in the West Virginia action filed a competing action in the Supreme Court of the State of New York, County of New York. As a result of motion practice, the West Virginia action was dismissed in August 2004 on the basis offorum non conveniens (i.e., West Virginia is an inconvenient location for the parties). The comprehensive insurance coverage litigation is now proceeding in the New York courts.
The amounts recorded for the asbestos-related liability and related insurance receivable described above were based upon currentlycurrent, known facts. However, projecting future events, such as the number of new claims to be filed and/or received each year, the average cost of disposing of each such claim, coverage issues among insurers, and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries to be higher or lower than those projected or those recorded.
Because of the uncertainties described above, management cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing the Corporation and Amchem. Management believes that it is reasonably possible that the cost of disposing of the Corporation's asbestos-related claims, including future defense costs, could have a material adverse impact on the results of operations and cash flows for a particular period and on the consolidated financial position of the Corporation.
While it is not possible at this time to determine with certainty the ultimate outcome of any of the legal proceedings and claims referred to in this filing, management believes that adequate provisions have been made for probable losses with respect to pending claims and proceedings, and that, except for the asbestos-related matters described above, the ultimate outcome of all known and future claims, after provisions for insurance, will not have a material adverse impact on the results of operations, cash flows and consolidated financial position of the Corporation. Should any losses be sustained in connection with any of such legal proceedings and claims in excess of provisions provided and available insurance, they will be charged to income when determinable.
Purchase Commitments
The Corporation has various purchase agreements. InAt December 2003,31, 2004, the Corporation assigned its rights and obligations under a purchase agreementhad various outstanding commitments for ethylene-related productstake or pay agreements, with terms extending from one to a wholly owned subsidiarysix years. Such commitments were not in excess of Dow. Total purchases under the ethylene-related agreement were $93 million in 2003.
current market prices. The fixed and determinable portion of obligations under take or pay and throughput agreementspurchase commitments at December 31, 20032004 is presented in the following table:
Fixed and Determinable Portion of Take or Pay and Throughput Obligations at December 31, 2003 In millions | ||||||
2004 | $ | 17 | ||||
Fixed and Determinable Portion of Take or Pay Obligations at December 31, 2004 In millions | Fixed and Determinable Portion of Take or Pay Obligations at December 31, 2004 In millions | |||||
---|---|---|---|---|---|---|
2005 | 16 | $ | 10 | |||
2006 | 16 | 10 | ||||
2007 | 14 | 10 | ||||
2008 | 14 | 8 | ||||
2009 through expiration of contracts | 45 | |||||
2009 | 5 | |||||
2010 through expiration of contracts | 5 | |||||
Total | $ | 122 | $ | 48 | ||
Guarantees
The Corporation has undertaken obligations to guarantee the performance of certain nonconsolidated affiliates (including the OPTIMAL Group and Nippon Unicar Company Limited) and a former subsidiary of the Corporation (via delivery of cash or other assets) if specified triggering events occur. Non-performance under a contract for commercial and/or financial obligations by the guaranteed party triggerswould trigger the obligation of the Corporation.Corporation to make payments to the beneficiary of the guarantees. Financial obligations include debt and lease arrangements.
The following table providestables provide a summary of the aggregate terms,final expiration, maximum future payments, and associatedrecorded liability reflected in the consolidated balance sheet for these guarantees.
Guarantees at September 30, 2004 | | | ||||||
---|---|---|---|---|---|---|---|---|
In millions | Final Expiration | Maximum Future Payments | Recorded Liability | |||||
Guarantees | 2014 | $ | 114 | $ | 2 |
Guarantees at December 31, 2003
In millions | Final Expiration | Maximum Future Payments | Recorded Liability | ||||
---|---|---|---|---|---|---|---|
Guarantees | 2007 | $ | 11 | — |
Guarantees at March 31, 2005 In millions | Final Expiration | Maximum Future Payments | Recorded Liability | |||||
---|---|---|---|---|---|---|---|---|
Guarantees | 2014 | $ | 109 | $ | 2 | |||
Guarantees at December 31, 2004 In millions | Final Expiration | Maximum Future Payments | Recorded Liability | |||||
---|---|---|---|---|---|---|---|---|
Guarantees | 2014 | $ | 114 | $ | 2 | |||
NOTE HG PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Net Periodic Benefit Credit for All Significant Plans | | | | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Defined Benefit Pension Plans | ||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||
In millions | September 30, 2004 | September 30, 2003 | September 30, 2004 | September 30, 2003 | |||||||||
Service cost | $ | 6 | $ | 7 | $ | 20 | $ | 21 | |||||
Interest cost | 56 | 58 | 168 | 174 | |||||||||
Expected return on plan assets | (89 | ) | (93 | ) | (265 | ) | (279 | ) | |||||
Amortization of prior service cost | 1 | 1 | 3 | 3 | |||||||||
Special termination/curtailment cost | — | — | 2 | — | |||||||||
Net periodic benefit credit | $ | (26 | ) | $ | (27 | ) | $ | (72 | ) | $ | (81 | ) | |
Net Periodic Benefit Cost for All Significant Plans | | | | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net Periodic Benefit Cost (Credit) for All Significant Plans | Net Periodic Benefit Cost (Credit) for All Significant Plans | | | | ||||||||||||||||||||||
| Other Postretirement Benefits | Defined Benefit Pension Plans | Other Postretirement Benefits | |||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | Three Months Ended | Three Months Ended | ||||||||||||||||||||||
In millions | September 30, 2004 | September 30, 2003 | September 30, 2004 | September 30, 2003 | March 31, 2005 | March 31, 2004 | March 31, 2005 | March 31, 2004 | ||||||||||||||||||
Service cost | $ | 1 | $ | 3 | $ | 3 | $ | 9 | $ | 7 | $ | 7 | $ | 1 | $ | 1 | ||||||||||
Interest cost | 9 | 10 | 29 | 30 | 54 | 56 | 9 | 10 | ||||||||||||||||||
Amortization of prior service credit | (1 | ) | (2 | ) | (5 | ) | (6 | ) | ||||||||||||||||||
Expected return on plan assets | (85 | ) | (88 | ) | — | — | ||||||||||||||||||||
Amortization of prior service cost (credit) | — | 1 | (1 | ) | (2 | ) | ||||||||||||||||||||
Amortization of net loss | 1 | 1 | 3 | 3 | 1 | — | 1 | 1 | ||||||||||||||||||
Special termination/curtailment cost | — | — | 9 | — | ||||||||||||||||||||||
Net periodic benefit cost | $ | 10 | $ | 12 | $ | 39 | $ | 36 | ||||||||||||||||||
Net periodic benefit cost (credit) | $ | (23 | ) | $ | (24 | ) | $ | 10 | $ | 10 | ||||||||||||||||
Employer Contributions
Pension Plans
The Corporation has a defined benefit pension plan that covers substantially all employees in the United States. Benefits are based on length of service and the employee's three highest consecutive years of compensation.
The Corporation's funding policy is to contribute to the plan when pension laws and economics either require or encourage funding. As previously disclosed in the Corporation's financial statementsAnnual Report on Form 10-K for the year ended December 31, 2003,2004, UCC does not expect to contribute assets to its qualified pension plan trust in 2004.2005. No contributions were made in the first nine monthsquarter of 2004.2005. The Corporation also has a non-qualified supplemental pension plan. Benefit payments to retirees under this plan are expected to be $10$6 million in 2004.2005. In the first nine monthsquarter of 2004,2005, benefit payments of $8$1 million were made.
Other Postretirement Benefits
The Corporation provides certain health care and life insurance benefits to retired U.S. employees. The plan provides health care benefits, including hospital, physicians' services, drug and major medical expense coverage, and life insurance benefits. The Corporation and the retiree share the cost of these benefits, with the Corporation portion increasing as the retiree has increased years of credited service. There is a cap on the Corporation portion. These benefits are subject to change at any time.
The Corporation funds most of the cost of these health care and life insurance benefits as incurred. As previously disclosed in the Corporation's financial statementsAnnual Report on Form 10-K for the year ended December 31, 2003,2004, UCC does not expect to contribute assets to its other postretirement benefit plans in 2004.2005. Consistent with that expectation, no contributions were made in the first nine monthsquarter of 2004.2005. Benefit payments to retirees under these plans are expected to be $72$63 million in 2004.2005. In the first nine monthsquarter of 2004,2005, benefit payments of $62$11 million were made.
Impact of Remeasurement in the Third Quarter of 2004
In the third quarter of 2004, an expense remeasurement of the Corporation's pension and other postretirement benefit plans was completed as of June 30, 2004, due to a curtailment as defined in SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," related to a workforce reduction (see Note D). The remeasurement resulted in a $3 million increase in net periodic postretirement benefit cost for 2004 and a $3 million decrease in net periodic pension expense for 2004.
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") was signed into law. The Act expanded Medicare to include, for the first time, coverage for prescription drugs. The Act also provides for a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Based on newly issued regulations, in the third quarter of 2004, the Corporation determined that the benefits provided by its retiree medical plans are actuarially equivalent to Medicare Part D under the Act. In the third quarter of 2004, the Corporation's net periodic cost for other postretirement benefit plans was remeasured for the effect of the Act. The impact of this remeasurement was a reduction of $12.5 million in the accumulated postretirement benefit obligation as of January 1, 2004, for actuarial purposes only, and a reduction in net periodic postretirement benefit cost of $1 million for the third quarter of 2004.
NOTE IH RELATED PARTY TRANSACTIONS
The Corporation sells products to Dow to simplify the customer interface process. Products are sold to and purchased from Dow in accordance with the terms of Dow's longstandinglong-standing intercompany pricing policies. The application of these policies results in products being sold to and purchased from Dow at market-based prices. The Corporation also procures certain commodities and raw materials through a Dow subsidiary and pays a commission to that Dow subsidiary based on the volume and type of commodities and raw materials purchased. The commission expense is included in "Sundry income (expense)—net" in the consolidated statements of income. Purchases from that Dow subsidiary were approximately $570 million in the third quarter of 2004 ($381 million in the third quarter of 2003) and $1,459$603 million in the first nine monthsquarter of 2004 ($1,1822005 and $442 million in the first nine monthsquarter of 2003).2004.
The Corporation has a master services agreement with Dow whereby Dow provides services, including, but not limited to, accounting, legal, treasury (investments, cash management, risk management, insurance), procurement, human resources, environmental, health and safety, and business management for UCC. Under the master services agreement with Dow, for general administrative and overhead type services that Dow routinely allocates to various businesses, UCC is charged the cost of those services based on the Corporation's and Dow's relative manufacturing conversion costs. This arrangement results in a quarterly charge of approximately $5$4 million (included in "Sundry income (expense)—net").
For services that Dow routinely charges based on effort, UCC is charged the cost of such services on a fully absorbed basis, which includes direct and indirect costs. Additionally, certain Dow employees are contracted to UCC and Dow is reimbursed for all direct employment costs of such employees. Management believes the method used for determining expenses charged by Dow is reasonable. Dow provides these services by leveraging its centralized functional service centers to provide services at a cost that management believes provides an advantage to the Corporation.
The monitoring and execution of risk management policies related to interest rate and foreign currency and equity price risks, which are based on Dow's risk management philosophy, are provided as a service to UCC.
As part of Dow's cash management process, UCC is a party to revolving loans with Dow that have LIBOR-based interest rates with varying maturities. TheAt March 31, 2005, the Corporation had a note receivable of $100$463 million from Dow under a revolving loan agreement at December 31, 2003.agreement. A separate revolving loancredit agreement with Dow that allows the Corporation to borrow or obtain credit enhancements up to an aggregate of $1 billion was amended and restated on May 28, 2004 to include cash collateral provisions and to extend the maturity date to May 28, 2005; however, Dow may demand repayment with a 30-day written notice to the Corporation. The related collateral agreement was also amended and restated on May 28, 2004 to provide for the replacement of certain existing pledged assets, primarily equity interests in various subsidiaries and joint ventures, with cash collateral. At SeptemberA subsequent amendment to the revolving credit agreement, effective as of December 30, 2004, therefurther extended the maturity date to December 30, 2005 and modified the repayment terms. At March 31, 2005, $795 million was $512 million available under the revolving loancredit agreement. The cash collateral was reported as "Noncurrent receivable from related company" in the consolidated balance sheets at September 30, 2004.sheets.
Union Carbide Corporation and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOPERATIONS.
Pursuant to General Instruction H of Form 10-Q "Omission of Information by Certain Wholly OwnedWholly-Owned Subsidiaries," this section includes only management's narrative analysis of the results of operations for the three and nine month periodsthree-month period ended September 30, 2004,March 31, 2005, the most recent periods,period, compared with the three and nine month periodsthree-month period ended September 30, 2003,March 31, 2004, the corresponding periodsperiod in the preceding fiscal year.
References below to "Dow" refer to The Dow Chemical Company and its consolidated subsidiaries.subsidiaries, except as the context otherwise requires.
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements made by or on behalf of Union Carbide Corporation (the "Corporation" or "UCC"). This section covers the current performance and outlook of the Corporation. The forward-looking statements contained in this section and in other parts of this document involve risks and uncertainties that may affect the Corporation's operations, markets, products, services, prices and other factors as more fully discussed elsewhere and in filings with the U.S. Securities and Exchange Commission (SEC). These risks and uncertainties include, but are not limited to, economic, competitive, legal, governmental and technological factors. Accordingly, there is no assurance that the Corporation's expectations will be realized. The Corporation assumes no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws.
RESULTS OF OPERATIONS
The Corporation reported net income of $168 million for the third quarter of 2004 compared with $121 million for the third quarter of 2003. Net income for the first nine months of 2004 was $397 million compared with $116$280 million for the first nine monthsquarter of 2003. Year2005 compared with $91 million for the first quarter of 2004. The substantial improvement was due to date,higher selling prices, a significant increase in earnings from the Corporation's joint ventures improved operating rates and improved operating margins more than offset higher feedstock and energy costscompared with last year, and a restructuring chargegain on the sale of $48 million recordeda portion of the Corporation's ownership interest in the second quarter of 2004.EQUATE Petrochemical Company K.S.C ("EQUATE").
Total net sales for the thirdfirst quarter of 2005 were $1,684 million compared with $1,311 million for the first quarter of 2004, were $1,502 million compared with $1,264 million for the third quarter of 2003, an increase of 1928 percent. Selling prices to Dow are based on market prices for the related products. Average selling prices were substantially higher in the thirdfirst quarter of 2005 compared with the first quarter of 2004 due to improved industry fundamentals and the continuing increase in feedstock and energy costs. Volume gains in polyethylene were offset by lower ethanol sales volume (due to the Corporation's exit of the industrial ethanol business in the second quarter of 2004), and a decline in ethylene glycol volume (due to scheduled plant turnarounds), resulting in a decrease in overall volume compared with last year.
Cost of sales increased 24 percent in the first quarter of 2005 compared with the first quarter of 2004 principally due to higher raw material costs. However, gross margin as a percent of sales for the first quarter of 2005 was 14.4 percent compared with 11.2 percent for the first quarter of last year, (led by ethylene glycol, polyethylene and polypropylene), reflecting efforts toas higher selling prices more than offset the impact of higher feedstock costs, and improving supply/demand balances. Volume overall was up modestly in the third quarter of 2004 compared with last year, with strong volume growth for most products partially offset by reduced ethanol sales volume. Year to date, total net sales increased 9 percent to $4,172 million from $3,826 million for the first nine months of 2003 as strong price increases (led by ethylene glycol and oxo products) and volume growth more than offset the impact of restructured ethylene glycol contracts in Canada and the loss of by-product sales related to ethylene crackers shut down in 2003.
Cost of sales increased $184 million (16 percent) in the third quarter of 2004 compared with the third quarter of 2003 due to improved volumes and higher feedstock and energy costs. Year to date, cost of sales increased $96 million (3 percent) compared with 2003. However, gross margin improved in the third quarter of 2004 and on a year-to-date basis, as higher selling prices and volume growth more than offset the increase in feedstock and energy costs.
Operating expenses (research and development, and selling, general and administrative expenses) were $26 millionEquity in the third quarter of 2004 compared with $27 million in the third quarter of last year. For the first nine months of 2004, operating expenses were $83 million, down 13 percent from $95 million for the same period of last year. The decline in third quarter and year-to-date operating expenses reflects a sustained effort to reduce expenses.
UCC's share of the earnings of nonconsolidated affiliates was $133increased to $153 million in the thirdfirst quarter of 2004 compared with $612005 from $85 million in the thirdfirst quarter of 2003. Year to date,2004. The increase of $68 million in first quarter equity earnings increased to $427 million from $132 million for the first nine months of 2003. Equity earnings increasedwas due to strong results reported by EQUATE Petrochemical Company K.S.C.,and UOP LLC, Univation and the OPTIMAL Group. Equity earnings this year also included the favorable impact of the recognition of investment tax allowances by one of the Corporation's joint ventures in the second quarter of 2004.LLC.
In the second quarter of 2004, the Corporation recorded a restructuring charge totaling $48 million. The charge included severance of $21 million for a workforce reduction of approximately 360 people, curtailment costs of $9 million associated with UCC's defined benefit plans, an asset write off of $8 million associated with the shutdown of a latex manufacturing facility and a write-down of the net book value of a marine terminal (sold in the third quarter of 2004) of $10 million.
Sundry income (expense)—net includes a variety of income and expense items such as the gain or loss on foreign currency exchange, dividends from investments, commissions, charges for management services provided by Dow, and gains and losses on sales of investments and assets. Sundry income (expense) for the thirdfirst quarter of 20042005 was net expenseincome of $23$52 million compared with net incomeexpense of $35$38 million for the thirdfirst quarter of 2003. Sundrylast year. Net sundry income for the thirdfirst quarter this year included a $70 million pretax gain on the sale of a portion of the Corporation's interest in EQUATE. In November 2004, the Corporation sold a 2.5 percent interest in EQUATE to National Bank of Kuwait for $104 million. In March 2005, these shares were sold to private Kuwaiti investors thereby completing the restricted transfer, which resulted in the first quarter gain and reduced the Corporation's ownership interest from 45 percent to 42.5 percent. Sundry expense for the first quarter of 20032004 included gainsthe unfavorable impact of $68 million associated with sales of non-strategic assets, including certain product lines of Amerchol Corporation, a wholly owned subsidiary. Year to date, sundry income (expense) was net expense of $78 million compared with net income of $11 million last year. Sundry income (expense) for 2004 was lower than last year primarily due to an unfavorable litigation settlement related to one of the Corporation's joint ventures in the first quarter of 2004, higher commission expense on feedstock purchases due to commission rate changes implemented in the second half of 2003, and last year's net gains of approximately $57 million associated with the sales of non-strategic assets, including those noted above.
Interest income for the third quarter of 2004 was $2 million compared with $4 million for the third quarter of last year. Interest income for the first nine months of 2004 was $5 million compared with $9 million in the first nine months of last year.
Interest expense and amortization of debt discount for the third quarter of 2004 was $24 million compared with $27 million in the third quarter of last year. Year to date, interest expense and amortization of debt discount decreased 21 percent from $89 million to $70 million. Compared with last year, interest expense declined primarily due to a reduction in total debt.ventures.
The effective tax rate for the thirdfirst quarter of 20042005 was 27.630.5 percent compared with 25.335.5 percent for the same quarter of last year. Year to date, the effective tax rate was 32.7 percent versus 25.2 percent last year. The effective tax rate fluctuates based on, among other factors, where income is earned, the level of after-tax income from joint ventures, and the level of income relative to tax credits available.
OTHER MATTERS
Asbestos-Related MattersAccounting Changes
See Note B to the Consolidated Financial Statements for a discussion of accounting changes and recently issued accounting pronouncements.
Critical Accounting Policies
The following disclosure should be readpreparation of financial statements and related disclosures in conjunctionconformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note A to the Consolidated Financial Statements in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003.2004, describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Following are the Corporation's critical accounting policies impacted by judgments, assumptions and estimates:
Litigation
The Corporation is subject to legal proceedings and claims arising out of the normal course of business. The Corporation routinely assesses the likelihood of any adverse judgments or outcomes to these matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after thoughtful analysis of each known issue and an actuarial analysis of historical claims experience for incurred but not reported matters. The Corporation has an active risk management program consisting of numerous insurance policies secured from many carriers. These policies provide coverage that is utilized to minimize the impact, if any, of the legal proceedings. The required reserves may change in the future due to new developments in each matter. For further discussion, see Note F to the Consolidated Financial Statements.
Asbestos-Related Matters
The Corporation, and a former subsidiary, Amchem Products, Inc. ("Amchem"), are and have been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. Based on a study completed by Analysis, Research & Planning Corporation ("ARPC") in January 2003, the Corporation increased its December 31, 2002 asbestos-related liability for pending and future claims for the 15-year period ending in 2017 to $2.2 billion, excluding future defense and processing costs. The Corporation also increased the receivable for insurance recoveries related to its asbestos liability to $1.35 billion at December 31, 2002.
In November 2004, the Corporation requested ARPC to review the Corporation's historical asbestos claim and resolution activity and determine the appropriateness of updating its January 2003 study. In January 2005, ARPC provided the Corporation with a report summarizing the results of its study.
Based on ARPC's January 2003 and January 2005 studies, the Corporation's recent asbestos litigation experience, and the uncertainties surrounding asbestos litigation and legislative reform efforts, management determined that no change to the accrual was required at December 31, 2004. Furthermore, based on the low end of the range in the January 2005 study, the recorded asbestos-related liability for pending and future claims at December 31, 2004 would be sufficient to resolve asbestos-related claims against UCC and Amchem into 2019.
At each balance sheet date, the Corporation compares current asbestos claim and resolution activity to the assumptions in the most recent ARPC study to determine whether the accrual continues to be appropriate. Based on the Corporation's review of 2005 activity, the Corporation determined that no change to the accrual was required at March 31, 2005.
The Corporation's asbestos-related liability for pending and future claims was $1.6 billion at March 31, 2005 and December 31, 2004. The Corporation's receivable for insurance recoveries related to its asbestos liability was $636 million at March 31, 2005 and $712 million at December 31, 2004. In addition, the Corporation had receivables of $500 million at March 31, 2005 and $491 million at December 31, 2004 for insurance recoveries for defense and resolution costs.
The amounts recorded by the Corporation for the asbestos-related liability and related insurance receivable were based upon current, known facts. However, projecting future events, such as the number of new claims to be filed and/or received each year, the average cost of disposing of each such claim, coverage issues among insurers, and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries for the Corporation to be higher or lower than those projected or those recorded.
For additional information, see Asbestos-Related Matters in Management's Discussion and Analysis of Financial Condition and Results of Operations and Note F to the Consolidated Financial Statements.
Environmental Matters
The Corporation determines the costs of environmental remediation of its facilities and formerly owned facilities based on evaluations of current law and existing technologies. Inherent uncertainties exist in such evaluations primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and evolving technologies. The recorded liabilities are adjusted periodically as remediation efforts progress or as additional technical or legal information becomes available. The Corporation had accrued obligations of $104 million at December 31, 2004, for environmental remediation and restoration costs, including $39 million for the remediation of Superfund sites. At March 31, 2005, the Corporation had accrued obligations of $105 million for environmental remediation and restoration costs, including $38 million for the remediation of Superfund sites. This is management's best estimate of the costs for remediation and restoration with respect to environmental matters for which the Corporation has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to twice that amount. For further discussion, see Note F to the Consolidated Financial Statements in this filing and Environmental Matters in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2004.
Pension and Other Postretirement Benefits
The amounts recognized in the consolidated financial statements related to pension and other postretirement benefits are determined from actuarial valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates at which the liabilities could be settled at December 31, 2004, rate of increase in future compensation levels, mortality rates and health care cost trend rates. These assumptions are updated annually and are disclosed in Note L to the Consolidated Financial Statements in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2004. In accordance with GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, affect expense recognized and obligations recorded in future periods.
The Corporation determined the expected long-term rate of return on assets by performing a bottom-up analysis of historical and expected returns based on the strategic asset allocation and the underlying return fundamentals of each asset class. The Corporation's historical experience with the pension fund asset performance and comparisons to expected returns of peer companies with similar fund assets are also considered. The long-term rate of return assumption used for determining net periodic pension expense for 2004 was 9 percent. This assumption was reduced to 8.75 percent for determining 2005 net periodic pension expense. The actual rate of return in 2004 was 12 percent. Future actual pension income will depend on future investment performance, changes in future discount rates and various other factors related to the population of participants in the Corporation's pension plans. A 25 basis point adjustment in the long-term return on assets assumption changes total pension expense for 2005 by approximately $10 million.
The Corporation bases the determination of pension expense or income on a market-related valuation of plan assets, which reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose represent the difference between the expected return calculated using the market-related value of plan assets and the actual return based on the market value of plan assets. Since the market-related value of plan assets recognizes gains or losses over a five-year period, the future value of plan assets will be impacted when previously deferred gains or losses are recorded. Over the life of the plan, both gains and losses have been recognized and amortized. For the year ended December 31, 2004, $196 million of net losses remain to be recognized in the calculation of the market-related value of plan assets. These net losses will result in increases in future pension expense as they are recognized in the market-related value of assets. The increase or decrease in the market-related value of assets due to the recognition of prior gains and losses is presented in the following table:
| Increase (Decrease) in Market-Related Asset Value due to Recognition of Prior Asset Gains and Losses In millions | |||||
---|---|---|---|---|---|---|
2005 | $ | (200 | ) | |||
2006 | (67 | ) | ||||
2007 | 60 | |||||
2008 | 11 | |||||
Total | $ | (196 | ) | |||
The discount rate utilized for determining future pension obligations is based on a broad-based index of high quality bonds receiving an AA- or better rating by a recognized rating agency and matched to the future expected cash flows by half-year periods by plan. The resulting discount rate decreased from 6.25 percent at December 31, 2003, to
5.875 percent at December 31, 2004. A 25 basis point adjustment in the discount rate assumption changes total pension expense for 2005 by approximately $3 million, with an immaterial change on the other postretirement benefit expense due to defined dollar limits (caps).
For 2005, the Corporation maintained its assumption for the long-term rate of increase in compensation levels of 4.5 percent. Since 2002, the Corporation has used a generation mortality table to determine the duration of its pension and other postretirement obligation.
Based on the revised pension assumptions and changes in the market-related value of assets due to the recognition of prior asset gains and losses, the Corporation expects to record $3 million less in income for pension and other postretirement benefits in 2005 than it did in 2004.
The value of the qualified plan assets increased from $3.7 billion at December 31, 2003, to $3.9 billion at December 31, 2004. The investment performance increased the funded status of the qualified plans, net of benefit obligations, by $92 million from December 31, 2003 to December 31, 2004. This increase was somewhat offset by a decline in the assumed discount rate. For 2005, the Corporation does not expect to make cash contributions to its pension and other postretirement benefit plans.
Income Taxes
Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. Based on the evaluation of available evidence, both positive and negative, the Corporation recognizes future tax benefits, such as net operating loss carryforwards and tax credit carryforwards, to the extent that realizing these benefits is considered more likely than not.
At March 31, 2005, the Corporation had a net deferred tax asset balance of $387 million ($523 million at December 31, 2004) and no valuation allowance at either date. In evaluating the ability to realize its deferred tax assets, the Corporation relied principally on forecasted taxable income using historical and projected future operating results, the reversal of existing temporary differences and the availability of tax planning strategies.
At December 31, 2004, the Corporation had deferred tax assets for tax loss and tax credit carryforwards of $547 million, $1 million of which is subject to expiration in the years 2005-2009. In order to realize these deferred tax assets for tax loss and tax credit carryforwards, the Corporation needs taxable income of approximately $1.5 billion across multiple jurisdictions. The taxable income needed to realize the deferred tax assets for tax loss and tax credit carryforwards that are subject to expiration between 2005-2009 is approximately $5 million.
The Corporation accrues for tax contingencies when it is probable that a liability to a taxing authority has been incurred and the amount of the contingency can be reasonably estimated, based on past experience. The tax contingency reserve is adjusted for changes in circumstances and additional uncertainties, such as significant amendments to existing tax law. At March 31, 2005, the Corporation had a tax contingency reserve for both domestic and foreign issues of $198 million ($221 million at December 31, 2004). For additional information, see Note Q to the Consolidated Financial Statements in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2004.
Asbestos-Related Matters
Introduction
The Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that UCC sold in the past, alleged exposure to asbestos-containing products located on UCC's premises, and UCC's responsibility for asbestos suits filed against a former subsidiary, Amchem Products, Inc. ("Amchem"). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to the Corporation's products.
Influenced by the bankruptcy filings of numerous defendants in asbestos-related litigation and the prospects of various forms of state and national legislative reform, the rate at which plaintiffs filed asbestos-related suits against various companies, including the Corporation and Amchem, increased in 2001, 2002 and the first half of 2003. TheSince then, the rate of filing has significantly abated in the second half of 2003 and the first nine months of 2004.abated. The Corporation expects more asbestos-related suits to be filed against it and Amchem in the future, and will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.
The table below provides information regarding asbestos-related claims filed against the Corporation and Amchem:Amchem for the three months ended March 31, 2005 and 2004:
| Nine Months Ended September 30, 2004 | Twelve Months Ended December 31, 2003 | |||
---|---|---|---|---|---|
Claims unresolved at beginning of period | 193,891 | 200,882 | |||
Claims filed | 45,324 | 122,586 | |||
Claims settled, dismissed or otherwise resolved | (37,110 | ) | (129,577 | ) | |
Claims unresolved at end of period | 202,105 | 193,891 | |||
Claimants with claims against both Union Carbide and Amchem | 72,302 | 66,656 | |||
Individual claimants at end of period | 129,803 | 127,235 | |||
| 2005 | 2004 | |||
---|---|---|---|---|---|
Claims unresolved at January 1 | 203,416 | 193,891 | |||
Claims filed | 10,084 | 12,034 | |||
Claims settled, dismissed or otherwise resolved | (14,818 | ) | (7,688 | ) | |
Claims unresolved at March 31 | 198,682 | 198,237 | |||
Claimants with claims against both UCC and Amchem | 68,278 | 68,198 | |||
Individual claimants at March 31 | 130,404 | 130,039 | |||
A review of a representative sample of cases outstanding at December 31, 2003,2004 showed that in more than 98 percent of the cases filed against the Corporation and Amchem, no specific amount of damages is alleged or, if an amount is alleged, it merely represents jurisdictional amounts or amounts to be proven at trial. This percentage increased with the more recently filed cases included in the review. Even in those situations where specific damages are alleged, the claims frequently seek the
same amount of damages, irrespective of the disease or injury. Plaintiffs' lawyers often sue dozens or even hundreds of defendants in individual lawsuits on behalf of hundreds or even thousands of claimants. As a result, even when specific damages are alleged with respect to a specific disease or injury, those damages are not expressly identified as to UCC, Amchem or any other particular defendant. In fact, there are no personal injury cases in which only the Corporation and/or Amchem are the sole named defendants. For these reasons and based upon the Corporation's litigation and settlement experience, the Corporation does not consider the damages alleged against it and Amchem to be a meaningful factor in its determination of any potential asbestos liability.
AtEstimating the end of 2001 and throughLiability
Through the third quarter of 2002, the Corporation had concluded it was not possible to estimate its cost of disposing of asbestos-related claims that might be filed against it and Amchem in the future due to a number of reasons. During the third and fourth quarters of 2002, the Corporation worked with Analysis, Research & Planning Corporation ("ARPC"), a consulting firm with broad experience in estimating resolution costs associated with mass tort litigation, including asbestos, to explore whether it would be possible to estimate the cost of disposing of pending and future asbestos-related claims that have been, and could reasonably be expected to be, filed against the Corporation and Amchem. ARPC concluded that it was not possible to estimate the full range of the cost of resolving future asbestos-related claims against UCC and Amchem because of various uncertainties associated with the litigation of those claims. Despite its inability to estimate the full range of the cost of resolving future asbestos-related claims, ARPC advised the Corporation that it would be possible to determine an estimate of a reasonable forecast of the cost of resolving pending and future asbestos-related claims likely to face UCC and Amchem if certain assumptions were made. As a result, the following assumptions were made:made and then used by ARPC:
Based on the resulting study completed by ARPC in January 2003, the Corporation increased its December 31, 2002 asbestos-related liability for pending and future claims for the 15-year period ending in 2017 to $2.2 billion, excluding future defense and processing costs. Approximately 28 percent of the recorded liability related to pending claims and approximately 72 percent related to future claims.
At each balance sheet date, the Corporation compares current asbestos claim and resolution activity to the assumptions in the ARPC study to determine whether the accrual continues to be appropriate. In addition, in November 2003, the Corporation requested ARPC to review the Corporation's asbestos claim and resolution activity during 2003 and determine the appropriateness of updating itsthe study. In response to that request, ARPC reviewed and analyzed data through November 25, 2003 to determine the number of asbestos-related filings and costs associated with 2003 activity. In January 2004, ARPC stated that an update at that time would not provide a more likely estimate of future events than that reflected in its study of the previous year and, therefore, the estimate in that study remained applicable. Based on the Corporation's own review of the asbestos claim and resolution activity and ARPC's response, the Corporation determined that no change to the accrual was required at December 31, 2003.
In November 2004, the Corporation again requested ARPC to review the Corporation's historical asbestos claim and resolution activity and determine the appropriateness of updating the January 2003 study. In response to this request, ARPC reviewed and analyzed data through November 14, 2004, and again concluded that time. Management noted,it was not possible to estimate the full range of the cost of resolving future asbestos-related claims against UCC and Amchem because of various uncertainties associated with the litigation of those claims. ARPC did advise, however, that it was reasonable and feasible to construct a new estimate of the totalcost of resolving current and future asbestos-related claims using the same two widely used forecasting methodologies used by ARPC in its January 2003 study, if certain assumptions were made. As a result, the following assumptions were made and then used by ARPC:
The resulting study completed by ARPC in January 2005 stated that the undiscounted cost of resolving pending and future asbestos-related claims against UCC and Amchem, excluding future defense and processing costs, through 2017 was estimated to be between approximately $1.5 billion and $2.0 billion, depending on which of two accepted methodologies was used. At December 31, 2004, the recorded asbestos-related liability for pending and future claims was $1.6 billion. Based on the low end of the range in the January 2005 study, the recorded asbestos-related liability for pending and future claims at December 31, 2004 would be sufficient to resolve asbestos-related claims against UCC and Amchem into 2019. As in its January 2003 study, ARPC study. After consultation with outside counseldid provide estimates for a longer period of time in its January 2005 study, but also reaffirmed its prior advice that forecasts for shorter periods of time are more accurate than those for longer periods of time.
Based on ARPC's January 2003 and other consultants, management believes this factJanuary 2005 studies, the Corporation's recent asbestos litigation experience, and the uncertainties surrounding asbestos litigation and legislative reform efforts, the Corporation determined that no change to the accrual was strongly influenced byrequired at December 31, 2004.
At each balance sheet date, the pending national legislationCorporation compares current asbestos claim and tort reform initiatives in key states. The total number of claims filed and receivedresolution activity to the assumptions in the first nine months of 2004 was in line withmost recent ARPC study to determine whether the number of claims assumedaccrual continues to be filed in the ARPC study.appropriate. Based on the Corporation's review of 20042005 activity, the Corporation determined that no change to the accrual was required at September 30, 2004.March 31, 2005.
The annualasbestos-related liability for pending and future claims was $1.6 billion at March 31, 2005 and December 31, 2004. At March 31, 2005, approximately 38 percent of the recorded liability related to pending claims and approximately 62 percent related to future claims. At December 31, 2004, approximately 37 percent of the recorded liability related to pending claims and approximately 63 percent related to future claims.
Defense and Resolution Costs
The following table provides information regarding defense and resolution costs related to asbestos-related claims filed against the Corporation and Amchem:
Defense and Resolution Costs at March 31 In millions | 2005 | 2004 | ||||
---|---|---|---|---|---|---|
Defense costs for the period | $ | 18 | $ | 24 | ||
Aggregate defense costs to date | 362 | 282 | ||||
Resolution costs for the period | 67 | 59 | ||||
Aggregate resolution costs to date | 993 | 685 |
The average resolution payment per asbestos claimant and the rate of new claim filings has fluctuated both up and down since the beginning of 2001. Union Carbide's management expects such fluctuations to continue in the future based upon the number and type of claims settled in a particular period, the jurisdictions in which such claims arose, and the extent to which any proposed legislative reform related to asbestos litigation is being considered.
The asbestos-related liability for pending and future claims was $1.7 billion at September 30, 2004 and $1.9 billion at December 31, 2003. At September 30, 2004, approximately 37 percent of the recorded liability related to pending claims and approximately 63 percent related to future claims. At December 31, 2003, approximately 33 percent of the recorded liability related to pending claims and approximately 67 percent related to future claims.Insurance Receivables
At December 31, 2002, the Corporation increased the receivable for insurance recoveries related to its asbestos liability to $1.35 billion, substantially exhausting its asbestos product liability coverage. Combined with the previously mentioned increase in the asbestos-related liability at December 31, 2002, this resulted in a net income statement impactcharge of $828 million, $522 million on an after-tax basis, in the fourth quarter of 2002.
The insurance receivable related to the asbestos liability was determined after a thorough review of applicable insurance policies and the 1985 Wellington Agreement, to which the
Corporation and many of its liability insurers are signatory parties, as well as other insurance settlements, with due consideration given to applicable deductibles, retentions and policy limits, and taking into account the solvency and historical payment experience of various insurance carriers. Union Carbide's
The Corporation's receivable for insurance recoveries related to its asbestos liability was $749$636 million at September 30, 2004March 31, 2005 and $1.0 billion$712 million at December 31, 2003.2004. At September 30, 2004, $505March 31, 2005, $463 million ($464 million at December 31, 2004) of the receivable for insurance recoveries is due fromwas related to insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place regarding their asbestos-related insurance.insurance coverage.
In addition, the Corporation had receivables for defense and resolution costs submitted to insurance carriers for reimbursement as follows:
Receivables for Costs Submitted to Insurance Carriers | | |||||
---|---|---|---|---|---|---|
In millions | September 30, 2004 | December 31, 2003 | ||||
Receivables for defense costs | $ | 98 | $ | 94 | ||
Receivables for resolution costs | 448 | 255 | ||||
Total | $ | 546 | $ | 349 | ||
The following table provides information regarding defense and resolution costs related to asbestos-related claims filed against the Corporation and Amchem:
Defense and Resolution Costs | | |||||
---|---|---|---|---|---|---|
In millions | Nine Months Ended September 30, 2004 | Twelve Months Ended December 31, 2003 | ||||
Defense costs for the period | $ | 66 | $ | 110 | ||
Aggregate defense costs to date | 324 | 258 | ||||
Resolution costs for the period | 250 | 293 | ||||
Aggregate resolution costs to date | 876 | 626 | ||||
Receivables for Costs Submitted to Insurance Carriers In millions | March 31, 2005 | December 31, 2004 | ||||
---|---|---|---|---|---|---|
Receivables for defense costs | $ | 90 | $ | 85 | ||
Receivables for resolution costs | 410 | 406 | ||||
Total | $ | 500 | $ | 491 | ||
The Corporation's insurance policies generally provide coverage for asbestos liability costs, including coverage for both resolution and defense costs. As previously noted, the Corporation increased its receivable for insurance recoveries related to its asbestos liability at December 31, 2002, thereby recording the full favorable income statement impact of its insurance coverage in 2002. Accordingly, defense and resolution costs recovered from insurers reduce the insurance receivable. Prior to increasing the insurance receivable related to the asbestos liability at December 31, 2002, the impact on results of operations for defense costs was the amount of those costs not covered by insurance. Since the Corporation expenses defense costs as incurred, defense costs for asbestos-related litigation (net of insurance) have impacted, and will continue to impact, results of operations. The pretax impact for defense and resolution costs, net of insurance, was $19 million in the third quarter of 2004 ($30 million in the third quarter of 2003) and $92$18 million in the first nine monthsquarter of 2004 ($782005 and $25 million in the first nine monthsquarter of 2003),2004, and was reflected in "Cost of sales."
In September 2003, the Corporation filed a comprehensive insurance coverage case in the Circuit Court for Kanawha County in Charleston, West Virginia, seeking to confirm its rights to insurance for various asbestos claims (the "West Virginia action"). Although the Corporation already has settlements in place concerning coverage for asbestos claims with many of its insurers, including those covered by the 1985 Wellington Agreement, this lawsuit was filed against insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place with the Corporation regarding their asbestos-related insurance coverage. The Corporation continues to believe that its recorded receivable for insurance recoveries from all insurance carriers is collectible. The Corporation reached this conclusion after a further review of its insurance policies, with due consideration given to applicable deductibles, retentions and policy limits, after taking into account the solvency and historical payment experience of various insurance carriers; existing insurance settlements; and the advice of outside counsel with respect to the applicable insurance coverage law relating to the terms and conditions of its insurance policies. In early 2004, several of the defendant insurers in the West Virginia action filed a competing action in the Supreme Court of the State of New York, County of New York. As a result of motion practice, the West Virginia action was dismissed in August 2004 on the basis offorum non conveniens (i.e., West Virginia is an inconvenient location for the parties). The comprehensive insurance coverage litigation is now proceeding in the New York courts.
Summary
The amounts recorded for the asbestos-related liability and related insurance receivable described above were based upon currentlycurrent, known facts. However, projecting future events, such as the number of new claims to be filed and/or received each year, the average cost of disposing of each such claim, coverage issues among insurers, and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries to be higher or lower than those projected or those recorded.
Because of the uncertainties described above, management cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing the Corporation and Amchem. Management believes that it is reasonably possible
that the cost of disposing of the Corporation's asbestos-related claims, including future defense costs, could have a material adverse impact on the results of operations and cash flows for a particular period and on the consolidated financial position of the Corporation.
Accounting Changes
See Note B to the Consolidated Financial Statements for a discussion of accounting changes and recently issued accounting pronouncements.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note A to the Consolidated Financial Statements in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003, describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Following are the Corporation's critical accounting policies impacted by judgments, assumptions and estimates:
Litigation
The Corporation is subject to legal proceedings and claims arising out of the normal course of business. The Corporation routinely assesses the likelihood of any adverse judgments or outcomes to these matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after thoughtful analysis of each known issue and an actuarial analysis of historical claims experience for incurred but not reported matters. The Corporation has an active risk management program consisting of numerous insurance policies secured from many carriers. These policies provide coverage that is utilized to minimize the impact, if any, of the legal proceedings. The required reserves may change in the future due to new developments in each matter. For further discussion, see Note G to the Consolidated Financial Statements.
Asbestos-Related Matters
The Corporation, and a former subsidiary, Amchem Products, Inc. ("Amchem"), are and have been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. Based on a study completed by Analysis, Research & Planning Corporation ("ARPC") in January 2003, the Corporation increased its December 31, 2002 asbestos-related liability for pending and future claims for the 15-year period ending in 2017 to $2.2 billion, excluding future defense and processing costs. The Corporation also increased the receivable for insurance recoveries related to its asbestos liability to $1.35 billion at December 31, 2002.
At each balance sheet date, the Corporation compares current asbestos claim and resolution activity to the assumptions used in the ARPC study to determine whether the accrual continues to be appropriate. Based on the Corporation's review of 2004 activity, the Corporation determined that no change to the accrual was required at September 30, 2004.
The Corporation's asbestos-related liability for pending and future claims was $1.7 billion at September 30, 2004 and $1.9 billion at December 31, 2003. The Corporation's receivable for insurance recoveries related to its asbestos liability was $749 million at September 30, 2004 and $1.0 billion at December 31, 2003. In addition, the Corporation had receivables of $546 million at September 30, 2004 and $349 million at December 31, 2003 for insurance recoveries for defense and resolution costs.
The amounts recorded by the Corporation for the asbestos-related liability and related insurance receivable were based upon currently known facts. However, projecting future events, such as the number of new claims to be filed and/or received each year, the average cost of disposing of each such claim, coverage issues among insurers, and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries for the Corporation to be higher or lower than those projected or those recorded.
For additional information, see Asbestos-Related Matters in Management's Discussion and Analysis of Financial Condition and Results of Operations and Note G to the Consolidated Financial Statements.
Environmental Matters
The Corporation determines the costs of environmental remediation of its facilities and formerly owned facilities based on evaluations of current law and existing technologies. Inherent uncertainties exist in such evaluations primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and evolving technologies. The recorded liabilities are adjusted periodically as remediation efforts progress or as additional technical or legal information becomes available. The Corporation had accrued obligations of $109 million at December 31, 2003, for environmental remediation and restoration costs, including $33 million for the remediation of Superfund sites. At September 30, 2004, the Corporation had accrued obligations of $105 million for environmental remediation and restoration costs, including $28 million for the remediation of Superfund sites. This is management's best estimate of the costs for remediation and restoration with respect to environmental matters for which the Corporation has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to twice that amount. For further discussion, see Note G to the Consolidated Financial Statements in this filing and Environmental Matters in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003.
Pension and Other Postretirement Benefits
The amounts recognized in the consolidated financial statements related to pension and other postretirement benefits are determined from actuarial valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates at which the liabilities could be settled at December 31, 2003, rate of increase in future compensation levels, mortality rates and health care cost trend rates. These assumptions are updated annually and are disclosed in Note L to the Consolidated Financial Statements in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003. In accordance with GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, affect expense recognized and obligations recorded in future periods.
The expected long-term rate of return on assets is developed with input from the Corporation's actuarial firm, which includes the actuary's review of the asset class return expectations of several respected consultants and economists, based on broad equity and bond indices. The Corporation's historical experience with the pension fund asset performance and comparisons to expected returns of peer companies with similar fund assets is also considered. The long-term rate of return assumption used for determining net periodic pension expense for 2003 was 9 percent. This assumption was maintained at 9 percent for determining 2004 net periodic pension expense. The actual rate of return in 2003 was 17 percent. Future actual pension income will depend on future investment performance, changes in future discount rates and various other factors related to the population of participants in the Corporation's pension plans.
The Corporation bases the determination of pension expense or income on a market-related valuation of plan assets, which reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose represent the difference between the expected return calculated using the market-related value of plan assets and the actual return based on the market value of plan assets. Since the market-related value of plan assets recognizes gains or losses over a five-year period, the future value of plan assets will be impacted when previously deferred gains or losses are recorded. Over the life of the plan, both gains and losses have been recognized and amortized. For the year ended December 31, 2003, $492 million of net losses remain to be recognized in the calculation of the market-related value of plan assets. These net losses will result in increases in future pension expense as they are recognized in the market-related value of assets. The increase or decrease in the market-related value of assets due to the recognition of prior gains and losses is presented in the following table:
| Increase (Decrease) in Market-Related Asset Value due to Recognition of Prior Asset Gains and Losses In millions | |||||
---|---|---|---|---|---|---|
2004 | $ | (231 | ) | |||
2005 | (218 | ) | ||||
2006 | (85 | ) | ||||
2007 | 42 | |||||
Total | $ | (492 | ) | |||
The discount rate utilized for determining future pension obligations is based on long-term bonds receiving an AA- or better rating by a recognized rating agency. The resulting discount rate decreased from 6.75 percent at December 31, 2002, to 6.25 percent at December 31, 2003.
For 2004, the Corporation decreased its assumption for the long-term rate of increase in compensation levels from 5 percent for 2003 to 4.5 percent.
Based on the revised pension assumptions and changes in the market-related value of assets due to the recognition of prior asset gains and losses, the Corporation expects to record $1 million more in income for pension and other postretirement benefits in 2004 than it did in 2003.
The value of the qualified plan assets increased from $3.4 billion at December 31, 2002, to $3.7 billion at December 31, 2003. The investment performance increased the funded status of the qualified plans, net of benefit obligations, by $148 million from December 31, 2002 to December 31, 2003. This increase was somewhat mitigated by a decline in the discount rate assumption. For 2004, the Corporation expects to make cash contributions of approximately $82 million for the pension and other postretirement benefit plans.
In the third quarter of 2004, an expense remeasurement of the Corporation's other postretirement benefit plans was completed due to a curtailment related to a workforce reduction. The effect of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 was included in this remeasurement. For additional information, see Note H to the Consolidated Financial Statements.
Income Taxes
Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. Based on the evaluation of available evidence, both positive and negative, the Corporation recognizes future tax benefits, such as net operating loss carryforwards and tax credit carryforwards, to the extent that realizing these benefits is considered more likely than not.
At September 30, 2004, the Corporation had a net deferred tax asset balance of $720 million and no valuation allowance. In evaluating the ability to realize its deferred tax assets, the Corporation relied principally on forecasted taxable income using historical and projected future operating results, the reversal of existing temporary differences and the availability of tax planning strategies.
At December 31, 2003, the Corporation had deferred tax assets for tax loss and tax credit carryforwards of $575 million, $39 million of which is subject to expiration in the years 2004-2008. In order to realize these deferred tax assets for tax loss and tax credit carryforwards, the Corporation needs taxable income of approximately $1.6 billion across multiple jurisdictions. The taxable income needed to realize the deferred tax assets for tax loss and tax credit carryforwards that are subject to expiration between 2004-2008 is approximately $110 million.
For additional information, see Note R to the Consolidated Financial Statements in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKRISK.
Omitted pursuant to General Instruction H of Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURESPROCEDURES.
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation's Disclosure Committee and the Corporation's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures pursuant to Exchange Act Rule 15d-15(e)15d-15(b); and whether any change has occurred in the Corporation's internal control over financial reporting pursuant to Exchange Act Rule 15d-15(d). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Corporation's disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in the Corporation's periodic SEC filings. Noand that no change in the Corporation's internal control over financial reporting occurred during the Corporation's most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGSPROCEEDINGS.
No material developments in any legal proceedings, including asbestos-related matters, occurred during the thirdfirst quarter of 2004.2005. For a summary of the history and current status of legal proceedings, including asbestos-related matters, see Management's Discussion and Analysis of Financial Condition and Results of Operations, Asbestos-Related Matters; and Note GF to the Consolidated Financial Statements.
Effective September 16, 2004, the Corporation entered into a Consent Agreement and Final Order (the "CA/FO") with the United States Environmental Protection Agency to resolve violations of the Resource Conservation and Recovery Act alleged to have occurred over the five-year period ended on July 1, 2004, relative to management of accumulated process solvent residue in tanker trailers at its catalyst plant in Norco, Louisiana. Under the CA/FO, UCC will pay a civil penalty of $49,323 and will fund and complete a Supplemental Environmental Project costing no less than $174,617.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-KEXHIBITS.
Exhibit No. | Exhibit Description | ||||||
---|---|---|---|---|---|---|---|
23 | Analysis, Research & Planning Corporation's Consent. | ||||||
31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||||
31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||||
32.1 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||||
32.2 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
No Current Reports on Form 8-K were filed by the Corporation during the third quarter of 2004.
Union Carbide Corporation and Subsidiaries
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNION CARBIDE CORPORATION Registrant | ||||
Date: | ||||
By: | /s/ FRANK H. BROD Frank H. Brod Corporate Vice President and Controller The Dow Chemical Company Authorized Representative of Union Carbide Corporation | |||
By: | /s/ EDWARD W. RICH Edward W. Rich Vice President, Treasurer and |
Union Carbide Corporation and SubsidiariesExhibit Index
(Unaudited)
EXHIBIT NO. | DESCRIPTION | |||
---|---|---|---|---|
Analysis, Research & Planning Corporation's Consent. | ||||
31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
32.1 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||
32.2 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |