Exhibit 13
Union Carbide Corporation
1997 Annual Report
(The cover) "Now, more than ever, our customers know they can count on
Carbide people to deliver products, services and chemical expertise that add
up to more value."
(Inside Front Cover)
Contents
Financial Highlights
Summary comparison of 1997 and 1996 results 1
Chairman's Letter
Bill Joyce on performance in 1997, strategic objectives and
long-term outlook 2
Chemical Glossary
Chemicals and polymers central to Carbide's businesses 5
Principal Products & Services
Description of Specialties & Intermediates and Basic Chemicals &
Polymers segments, including major competitors and manufacturing
locations 6
Partnerships & Joint Ventures 8
Management's Discussion & Analysis
Results of Operations 9
Liquidity, Capital Resources and Other Financial Data 16
Selected Financial Data 18
Quarterly Data 20
Financial Statements
Consolidated Balance Sheet 21
Consolidated Statement of Income 22
Consolidated Statement of Cash Flows 23
Consolidated Statement of Stockholders' Equity 24
Notes to Financial Statements 25
Management's Statement of Responsibility for Financial Statements 41
Independent Auditors' Report 41
Corporate Information
Important dates, names, addresses, telephone numbers and other
information 42
Directors and Corporate Officers
List of directors, corporate officers and other senior management 43
Union Carbide Around the World
List of worldwide locations 44
Definition of Terms
Definition of nonchemical terms 44
Cautionary statement for the purposes of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995: All statements in this
annual report that do not reflect historical information are forward looking
statements. These include statements about the chemical markets in 1998; cost
reduction targets; the corporation's share price; earnings and profitability
targets; development, production and acceptance of new products and process
technologies; ongoing and planned capacity additions and expansions; joint
ventures, and Management's Discussion & Analysis. Important factors that could
cause actual results to differ materially from those discussed in such forward
looking statements include the supply/demand balance for the corporation's
products; customer inventory levels; competitive pricing pressures; feedstock
costs; changes in industry production capacities and operating rates; currency
exchange rates; global economic conditions, particularly in Southeast Asia;
disruption in railroad and other transportation facilities; competitive
technology positions; failure to achieve technology objectives; and failure to
achieve the corporation's cost reduction targets or to complete
construction projects on schedule.
Financial Highlights
Dollar amounts in millions
(except per share figures) 1997 1996 % Change
For the Year
Net sales $ 6,502 $ 6,106 6
Operating profit 1,045 921 13
Income before cumulative effect of
change in accounting principle 676 593 14
Per common share - basic 5.02 4.43 13
Per common share - diluted 4.53 3.90 16
Cumulative effect of change in
accounting principle (17) - -
Per common share - basic (0.13) - -
Per common share - diluted (0.12) - -
Net income - common stockholders 652 583 12
Per common share - basic 4.89 4.43 10
Per common share - diluted 4.41 3.90 13
Cash dividends on common stock 100 99 1
Per common share 0.7875 0.75 5
Capital expenditures 755 721 5
At Year-End
Total assets $ 6,964 $ 6,546 6
Total debt 1,887 1,599 18
Stockholders' equity 2,348 2,114 11
Per common share 17.15 16.72 3
Common shares outstanding (thousands) 136,944 126,440 8
Common stockholders of record 47,713 51,023 (6)
Employees 11,813 11,745 1
At a Glance
Union Carbide Corporation is a worldwide chemicals and polymers company. The
company possesses many of the industry's most advanced process and catalyst
technologies and some of the most cost efficient, large-scale production
facilities in the world. In addition to its consolidated operations, the
corporation participates in partnerships and joint ventures whose combined net
sales totaled more than $4.3 billion in 1997.
Union Carbide operates two business segments:
Specialties & Intermediates, which accounted for 68 percent of customer
revenues and 64 percent of operating profit in 1997, produces a broad range of
products, including specialty polyolefins used in wire and cable insulation;
surfactants for industrial cleaners; catalysts for the manufacture of
polymers; acrolein and derivatives; water-soluble polymers; cellulose-,
glucose- and lanolin-based materials for personal care products; specialty
coatings; acrylic and vinyl acrylic latex used in paints and adhesives;
solvents; vinyl acetate monomer, and ethylene oxide derivatives. This segment
also licenses olefins-based technologies and offers other specialized
technology licensing and services.
Basic Chemicals & Polymers converts various hydrocarbon feedstocks,
principally liquefied petroleum gases and naphtha, into the basic building-
block chemicals ethylene and propylene (also known as olefins), which are in
turn converted to polyethylene (the world's most widely used plastic),
polypropylene (one of the world's fastest-growing plastics), and ethylene
oxide and ethylene glycol (used to make polyester fiber, film and resin, and
automotive antifreeze). This segment provides ethylene, propylene, ethylene
oxide and ethylene glycol to the Specialties & Intermediates segment.
Union Carbide's leading end markets as a percentage of sales are:
Packaging and consumer plastics 24
Paints, coatings and adhesives 21
Wire and cable 11
Textile 9
Household and personal care 6
Automotive, including antifreeze 5
Agriculture and food 4
Oil and gas 3
Industrial cleaners 3
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Chairman's Letter
(Contained in the left hand margin is a picture of William H. Joyce, Chairman,
President and Chief Executive Officer.)
I am pleased to report that Carbide had another good year in 1997, surpassing
the prior year and posting the third highest net income available to common
stockholders of the past 10 years.
Worldwide sales rose 6.5 percent, to $6.5 billion. Income available to
common stockholders from continuing operations (before the effect of a change
in accounting principle) rose 14.8 percent from the prior year, to $669
million, and diluted per-share income increased 16.2 percent, to $4.53, before
the change in accounting principle.
Despite improved earnings, our 1997 common stock performance was
disappointing. We increased the quarterly dividend 20 percent, to 22.5 cents,
and repurchased 7 million shares during the year, but our share price
increased only 5 percent by year-end.
It seems clear that investors were looking past improved earnings in 1997
and focusing instead on the 1999/2000 cyclical trough anticipated by most
experts, and on the widely held expectation that overcapacity in the chemical
industry will depress the earnings of companies like Carbide until the cycle
turns up.
Adding to investor concerns was the inability of our Specialties &
Intermediates (S&I) segment, for the second year in a row, to deliver the
strong double-digit earnings growth of prior years, causing investors to doubt
that its recovery could occur in time to meet our earnings target in the
trough.
And as the year ended, the Asian economic crisis appeared to make the next
few years even more difficult for companies such as Carbide with significant
sales in the region. Since the Far East region accounts for 14 percent of our
sales, mainly exports, we are also concerned. Yet we're confident that Carbide
can cope and that our company will be well positioned to participate when the
region's growth resumes.
As for 1997 performance, although we posted significant earnings growth, we
should have done much better in light of our improvements over the past
several years.
Increases of 5.1 percent in volume and 3.7 percent in productivity for the
corporation (based on actual fixed cost per pound of product sold, adjusted
for inflation) were good, but below target. And some of our product lines,
notably our solvents, monomers and industrial performance chemicals, were
unable to deliver targeted results.
Why did we not do better in 1997? And what are we doing to improve and to
accelerate profitable growth over the longer term as well?
Management's Discussion & Analysis, beginning on page 9, covers operations
in detail. To summarize: The performance of solvents, monomers and industrial
performance chemicals products suffered from price declines; abnormally low
margins, particularly for solvents and monomers, and the impact of a strong
dollar on exports.
Although the strong dollar affected our Basic Chemicals & Polymers (BC&P)
segment, as did problems with certain production units, segment earnings were
much improved compared to 1996.
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Startup costs for our huge new petrochemical joint venture in Kuwait also
reduced earnings, as did costs associated with the delayed startup of a new
facility for producing ethylene/propylene rubber (EPR).
The Kuwait plant is in the final stage of startup at this writing, with both
ethylene glycol and polyethylene already shipped to customers in Europe and
Asia. And the EPR plant, which uses proprietary new technology to achieve
vastly lower production costs, is scheduled for restarting in the fourth
quarter of 1998, although further modification is required before that can
happen.
On the plus side, the drain on 1997 earnings was partly offset by improved
pricing for ethylene glycol, and for polyethylene early in the year, and by
the continuing, substantial benefit derived from our work process improvement
and cost reduction programs over the past several years.
To say that Carbide has few peers when it comes to improving work processes
and reducing costs is only repeating what's often been said by others who
follow our progress. Since 1992, total fixed costs have dropped by nearly $8
million, notwithstanding a $1.6 billion increase in revenues and a 27 percent
increase in volume. Fixed cost per pound of product sold has dropped by 4.7
cents since the beginning of the decade, a 30 percent decrease. In 1997, costs
associated with the Kuwait and EPR startups and other unusual growth
expenses reduced earnings by $0.72 per diluted share. Those expenses aside,
the fixed cost improvements mean that, given margin conditions no better than
the ones faced by BC&P in 1993, Carbide could have earned about three times as
much per diluted share in 1997 as we earned in the 1993 trough.
Over the past seven years, we have learned that productivity improvement
requires relentless focus on cost reduction throughout the entire enterprise.
During this period, virtually every unit within Carbide has established
savings initiatives with specific, quantifiable targets. More often than not,
as Carbiders have progressed with these efforts, new opportunities have been
identified.
In 1990 we embarked on a $200 million savings program. Less than three years
into that effort, it was clear that far more significant savings were
possible, and a $575 million target was established. That program, dubbed
EQAI, was largely completed by the end of 1994, after we had achieved
substantially all of the targeted savings. In 1995 we unveiled a new series of
initiatives with targeted savings of $637 million, compared to 1993, to be
achieved by the year 2000. Last October, after having attained a substantial
portion of these targets, we increased the savings goal to $1.1 billion by the
year 2000.
Carbiders have time and again shown themselves dedicated to creating value
by reducing costs. I am confident that over the next three years they will
extend the progress they've made since early in the decade. They have become
as skilled as any workforce anywhere at finding ways to improve work processes
and reduce costs while delivering the service that our customers expect.
On that score: We track customer evaluations of Carbide very closely, and
it's clear that now, more than ever, our customers know they can count on
Carbide people to deliver products, services and chemical expertise that add
up to more value.
Carbiders take a great deal of pride in those evaluations and in our profit
improvement work. And, not incidentally, they also benefit financially as
shareholders and profit sharing participants when our company does well.
Beyond participation in the profit sharing program, most of our managers,
including all senior managers, receive variable compensation based in large
part upon our ability to realize returns on capital in excess of our
competitors'.
While there can be no assurances, if we are successful in achieving our
savings targets, we believe that it will be possible also to earn
at least $4.00 per diluted share in both 1999 and 2000, the anticipated trough
years of the current commodity chemical cycle.
To leave no doubt about management's own commitment to doing what it takes
to reach these earnings levels, we have bet a large part of our pay on
reaching them. If we fail in 2000, I will forfeit the equivalent of a year's
salary, and 16 members of our senior management team each will forfeit the
equivalent of 65 percent of a year's base pay. If we succeed, the plan, which
investors have encouraged us to implement, has a substantial upside
opportunity to go along with the risk.
In other words, Carbide management has real incentive to reach the target.
Although we are committed to our volume growth and savings targets, reaching
them will not be easy or assured. But work is under way across our worldwide
locations to improve operations, further streamline work processes and make
the most of our strong market and technology positions. And much has already
been accomplished.
To cite just a few examples: 1997 cost savings in our S&I segment of $336
million, and savings of $302 million for BC&P, kept
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us ahead of schedule toward our year-2000 cost reduction target.
Regarding programs designed to promote growth, we launched Univation
Technologies, our joint venture with Exxon Chemical Company, to develop and
license leading-edge polyethylene process and catalyst technologies. Companies
in South America and Europe recently selected its technology to build 1.8
billion pounds of capacity.
A major modernization of our UCON fluids manufacturing unit in 1997
increased capacity while cutting operating costs, and the fluids business was
named a "supplier of the year" by General Motors, whose cars use our UCON
brake fluids and UCON refrigeration lubricants.
At our Taft, La., plant, we completed a 200-million-pound-capacity
ethanolamines unit, strengthening our leading position as a supplier to the
gas treating and personal care markets. Also at Taft, we are scheduled to
complete by mid-1998 a new CARBOWAX polyethylene glycols (PEGs) facility to
support sales flowing from new PEG applications in pharmaceuticals and wood
treating.
Our polypropylene units ran at high rates during the year, with added
capacity, achieved through de-bottlenecking, that will help the
business meet its year-2000 growth targets.
Construction began at Taft on a new butanol facility, planned for startup in
mid-1999, that will bring Carbide's total butanol capacity to 1.2 billion
pounds, the world's largest. Butanol is a key raw material in the manufacture
of solvents and monomers used by the paints and coatings industries. Employing
our proprietary LP OXO Process technology, the 300-million-pounds-per-year
facility is designed to be among the world's most cost effective.
Dr. David Bryant, the Carbide scientist who played a key role in developing
OXO technology, has been named 1998 winner of the Perkin Medal - one of the
chemical industry's most prestigious honors - for his achievement.
In 1997 we expanded capacity for producing propionic acid, a key ingredient
in the production of feed and food additives, herbicides and chemical
intermediates.
We are completing modernization of our ethylene oxide and derivatives units
at Wilton in the United Kingdom, and a new glycol unit is on schedule for
second-quarter 1998 startup. And we are concluding new long-term glycol supply
agreements to support the added capacity represented by Wilton and our EQUATE
joint venture in Kuwait.
Work is also under way to expand capacity at Seadrift, Tex., and at Wilton,
for butyl glycol ethers, widely used in industrial coatings and as industrial
cleaners. In addition, we have just announced plans to build a world-scale
methylmercapto propionaldehyde (MMP) unit at Seadrift. This unit will supply
MMP, an amino acid precursor, to Novus International for the manufacture of a
feed supplement.
We are confident that these and many other projects undertaken in 1997 will
help to keep us on course toward our near-term growth and profitability
targets.
Our parallel agenda as a RESPONSIBLE CARE company is to keep improving
Carbide's environmental and safety performance. The year just ended marked six
years in a row without a major process incident. But there were
disappointments as well, chiefly a death that occurred in a forklift accident
- - at a latex plant of a Union Carbide affiliate company in China - after five
consecutive years without a fatality in any of our operations.
(For more information about our 1997 environmental and safety performance,
write to Carbide's Public Affairs Department for our RESPONSIBLE CARE progress
report.)
All of us were pleased and proud to have our TRITON surfactants business
receive two environmental awards in 1997. One, from the Environmental
Protection Agency (EPA), recognized Carbide's TRITON splittable surfactants as
an innovation in surfactant chemistry that greatly reduces risk to the aquatic
environment. The other, from the Office of the Vice President of the U.S.,
recognized the TRITON surfactant-based partnership we entered into with the
EPA to control environmental risk so that more regulation and its cost to
business and the public would become unnecessary. Finally, I wish to applaud
two of our directors - John Creedon and Bill Sneath - who, in accordance with
the board's retirement policy, will not stand for reelection. Both have given
outstanding service to the corporation, with Bill's tenure including 31 years
of service as an employee, five of those as Chairman and CEO. We will miss
their support and wise counsel.
William H. Joyce
Feb. 25, 1998
(Within the preceding section, the following three phrases are set in larger
type:
- - Despite improved earnings, our 1997 common stock performance was
disappointing.
- - Carbiders have time and again shown themselves dedicated to creating
value by reducing costs.
- - Our parallel agenda is to keep improving Carbide's environmental and
safety performance. )
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Chemical Glossary
Alcohols
Chemicals, such as butanol, ethanol and isopropanol, that serve as solvents
and intermediates for the manufacture of personal care products,
pharmaceuticals, esters, ketones, monomers for latexes, herbicides, petroleum
additives and synthetic lubricants.
Biocides
Chemicals used to control or inhibit the growth of bacteria, algae, fungi and
mold.
Chemical intermediates
Chemicals formed or introduced as an intermediate step between the starting
material and the final product in chemical processing. Examples include:
o Acrolein, used to make glutaraldehyde, animal feed supplements and coatings
resins.
o Esters, such as ethyl acetate and butyl acrylate, made by reacting alcohols
and acids and used primarily as paints and coatings
solvents.
o Ethanolamines, reaction products of ethylene oxide and ammonia, used in
detergents and other cleaning materials, in personal care products and for
removal of sulfur and other impurities from natural gases for consumer use.
o Ethyleneamines, made from ethylene oxide or ethylene dichloride and used in
a wide range of industrial products, including fuel, lubricant and motor oil
additives, adhesives, wet-strength paper resins and paints.
Ethylene glycol
Chemical made from ethylene oxide and water. It is used in the manufacture of
polyester resins, film and fiber, automotive antifreeze and engine coolants
and aircraft deicing/anti-icing fluids.
Ethylene oxide
Chemical made from ethylene and oxygen. It combines with other chemicals to
produce a wide range of products, such as ethylene glycol, water-soluble
polymers for personal care products and surfactants for detergents and
cleaning products.
Glutaraldehyde
An acrolein derivative predominantly used as a biocide for industrial water
treatment and in oil field applications, animal housing sanitizers, surgical
instrument sterilants and paper manufacturing.
Glycol ethers
Solvents used in higher-technology coating applications, such as waterborne
industrial finishes for the automotive market, and noncoating applications,
such as in hard surface cleaners, military jet fuels and brake fluids.
Ketones
Chemicals, such as acetone, used as solvents for vinyl resins, industrial
lacquers and pharmaceuticals, and as an intermediate for resins, dyes and
rubber chemicals.
Monomer
Reactive chemical that can be converted into a polymer. For example, ethylene
is a monomer that is made into polyethylene.
Olefins
Generic name for ethylene, propylene and other unsaturated hydrocarbons
(carbon atoms joined by double bonds) made from components of petroleum or
natural gas.
Examples include:
o Ethylene and propylene, chemicals derived from natural gases or petroleum
components, and the starting materials from which most
of Union Carbide's chemicals and polymers are made.
Oxo alcohols, aldehydes and acids
Chemicals Carbide manufactures via its LP OXO Process, such as butanol and
propionic acid, which are used as chemical intermediates
and industrial solvents.
Polymers
Chains or networks of linked monomers. All plastics are polymers. Examples
include:
o Polyethylene, the world's most widely used plastic, made by the reaction of
ethylene and other olefins. It is used in hundreds of
consumer and industrial products, including grocery and trash bags, waste
containers, housewares, bottles, drums, food packaging and
wire and cable insulation and jacketing. Union Carbide produces most of its
polyethylene via UNIPOL Process technology developed
by the company in the early 1970's, which is licensed to polyethylene makers
around the world.
o Polypropylene, a fast-growing, high-volume plastic made from the reaction of
propylene and other olefins. The broad range of
applications includes lawn furniture, carpet fiber and backing, food
containers, toys, appliance housings and binding materials. Much
of Union Carbide's production is via the UNIPOL PP Process, also licensed
around the world.
Solvents
Chemicals used to dissolve or absorb other chemicals. For example, ketones,
esters, alcohols and glycol ethers are effective solvents
commonly used in paints and coatings.
Surfactants
Chemicals that increase the cleaning and wetting properties of household and
industrial cleaners and detergents. They are used also in
textile and paper processing, paints and agricultural products. Surfactants
also are used in cosmetics, shampoos and other personal care
products. Carbide makes its surfactants primarily from ethylene oxide and
alcohols.
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Principal Products & Services
Major Competitors
Specialties & Intermediates
Air Products, AT Plastics, BASF, Borealis AS, British Petroleum, Clariant ,
DeGussa, Dow Chemical, Eastman Chemical, Equistar Chemicals, Hercules, Hoechst
Celanese, Huntsman, Mitsui Petrochemical, Montell Polyolefins, National Starch
& Chemical, Phillips Chemicals, Reichhold Chemicals, Rhone-Poulenc, Rohm &
Haas, Shell Chemical, Solvay, Ube Industries, Wacker
Basic Chemicals & Polymers
Amoco, Dow Chemical, Equistar Chemicals, Exxon Chemical, Fina, Huntsman, Mobil
Chemical, Montell Polyolefins, NOVA Chemicals, Occidental Chemical, Phillips
Chemicals, Saudi Basic Industries, Shell Chemical
Specialties & Intermediates Segment
Union Carbide's Specialty Polymers and Products group manufactures and markets
numerous specialty products. Many of its technologies are targeted for sharply
defined market segments.
o Specialty Industrial Products produces acrolein and derivatives, such as
methylmercapto propionaldehyde (MMP), for the manufacture of an amino acid
used in animal feed supplements; glutaraldehyde, a biocide; ethylidene
norbornene (ENB), used in the production of ethylene propylene rubber, and
specialty ketones.
o Performance Polymers produces POLYOX water-soluble resins, used in personal
care products, pharmaceuticals, inks and thermoplastics. It also produces
polyvinyl acetate resins, used in chewing-gum resins, low-profile additives,
NEULON polyester modifiers, fast-cure additives and pigmentable systems, and
UCURE reactive modifiers.
o Coating Materials reaches markets for paints, coatings, inks, substrates and
other materials for magnetic tape, food and beverage packaging, plastics and
orthopedic materials. Its products include CELLOSIZE hydroxyethyl cellulose
(HEC); UCAR solution vinyl
resins; TONE caprolactone-based materials; cycloaliphatic epoxides, including
CYRACURE ultraviolet-curing products, and FLEXOL plasticizers.
o Amerchol Corporation, a Union Carbide subsidiary, manufactures and sells a
wide variety of cellulose-, glucose-and lanolin-based materials for personal
care products.
Ucar Emulsion Systems makes products used in interior and exterior house
paints, adhesives and sealants. They include UCAR POLYPHOBE rheology
modifiers, used to thicken coatings, and UCAR latex products, used as binders
and to impart exterior durability, scrub and stain resistance, and adhesion.
Specialty Polyolefins manufactures and markets worldwide a variety of
performance polyolefin products. Chief among these are polyolefin-based
compounds for sophisticated insulation, semiconductives and jacketing systems
for power distribution, telecommunications and flame-retardant wire and cable.
Other Specialty Polyolefins products are used in adhesives, laminating film
and flexible tubing.
UNIPOL Systems owns and develops UNIPOL Process technology, the most versatile
method of manufacturing polyethylene and polypropylene, for producers of these
products worldwide. It also develops new process technology for the
manufacture of other olefins-based polymers, such as ethylene propylene
rubber, and sells catalysts to UNIPOL Process licensees worldwide. Licensing
of UNIPOL PE and PP Processes, as well as the development of new PE
technologies, such as metallocene catalysis and Super Condensed Mode
Technology, is handled through Univation Technologies, LLC, a Union
Carbide/Exxon Chemical Company joint venture.
Industrial Performance Chemicals manufactures and sells a broad range of
ethylene oxide derivatives and formulated glycol products for specialty
applications. These include CARBOWAX polyethylene glycols,
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with a wide range of applications in pharmaceutical, personal care, household
and industrial markets; ethanolamines, for detergents, personal care products
and natural gas conditioning and refining; ethyleneamines, for many industrial
uses; TERGITOL and TRITON specialty and commodity surfactants, for
institutional and household cleaning products and other industrial
applications; UCON fluids and lubricants, and alkyl alkanolamines for water-
treating chemicals. Formulated glycol products include UCAR and UCAR ULTRA+
deicing and anti-icing fluids for the aviation industry, UCARTHERM and NORKOOL
heat-transfer fluids, and gas-treating products, including UCARSOL and SELEXOL
solvents.
Solvents, Intermediates and Monomers (SIM) supplies one of the industry's
broadest product lines of solvents, intermediates and monomers. Its products
include aldehydes, acids and alcohols, including high-quality industrial-grade
synthetic and fermentation ethanol; esters; glycol ethers (brake fluids and
CARBITOL and CELLOSOLVE solvents); ketones, and monomers (vinyl acetate and
acrylics for waterborne coatings). Its principal customers are the paints and
coatings industries. Many of SIM's products are also used widely in cosmetics
and personal care preparations, adhesives, household and institutional
products, drugs and pharmaceuticals; as fuel and lube oil additives, and in
agricultural products. The UNICARB System is a pollution-reducing,
supercritical fluid technology that can cut costs and reduce volatile organic
compounds (VOCs) in spray-applied coatings by up to 80 percent.
Basic Chemicals & Polymers Segment
Union Carbide's Hydrocarbons group manufactures about two thirds of the
company's ethylene requirements and almost one third of its propylene
requirements. Ethylene and propylene are the key raw materials for many of
Union Carbide's businesses.
Union Carbide is the world's leading producer of ethylene oxide and ethylene
glycol, supplied by the Ethylene Oxide/Glycol group. Ethylene oxide is a
chemical intermediate primarily used in the manufacture of ethylene glycol,
polyethylene glycol, glycol ethers, ethanolamines, surfactants and other
performance chemicals and polymers. Ethylene glycol is used extensively in the
production of polyester fiber, resin and film, automotive antifreeze and
engine coolants, and aircraft anti-icing and deicing fluids. Other ethylene
oxide-based glycol products include di-, tri-, and tetraethylene glycols, used
as chemical intermediates and in dehydrating natural gas.
Union Carbide is a leading manufacturer of polyethylene, the world's most
widely used plastic. UNIPOL Polymers produces and markets linear low-, medium-
and high-density polyethylenes, used in high-volume applications such as
housewares, milk and water bottles, grocery sacks, trash bags, packaging,
water and gas pipe, and FLEXOMER very low-density resins, used as a polymer
modifier in other polyolefins and to produce flexible hose and tubing, frozen-
food bags and stretch wrap.
Carbide's Polypropylene Resins operations manufacture and sell polypropylene,
one of the world's largest-volume, fastest-growing plastics. End-use
applications include carpeting and upholstery, apparel, packaging films, food
containers, housewares and appliances, and automobile interior trim and
panels.
For a summary of business and geographic segment data, see note five to the
financial statements.
Manufacturing Locations
United States
Torrance, Calif., Tucker, Ga., Alsip, Ill., Greensburg, La., Norco, La.,
Taft, La., Bound Brook, N.J.. Edison, N.J., Somerset, N.J., Bayamon, P.R.,
Garland, Tex., Seadrift, Tex., Texas City, Tex., Washougal, Wash., Institute,
W.Va., South, Charleston, W.Va.
Canada
Prentiss, Alberta
Europe
Vilvoorde, Belgium, Zwijndrecht, Belgium, Wilton, U.K.
Latin America
Aratu, Brazil, Cabo, Brazil, Cubatao, Brazil,, Guayaquil, Equador
Far East & Other
Guangdong, China, Shanghai, China, Jakarta, Indonesia, Seremban, Malaysia,
Batangas, Philippines, Colombo, Sri Lanka, Nonthaburi, Thailand, Dubai, United
Arab Emirates
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Partnerships & Joint Ventures
The corporation has for many years participated in a number of businesses
through partnerships and joint ventures. These affiliations have enabled Union
Carbide to combine its competitive strengths in technology, project
engineering and operational know-how with the complementary strengths of its
partners.
The most significant partnerships and joint ventures of the Specialties &
Intermediates segment include:
UOP LLC o a leading worldwide supplier of process technology, catalysts,
molecular sieves and adsorbents to the petrochemical and gas-processing
industries, owned jointly with AlliedSignal Inc. UOP LLC has facilities in
Mobile, Ala.; Anaheim and Eldorado Hills, Calif.; Des Plaines and McCook,
Ill.; Shreveport, La.; Tonawanda, N.Y.; Shanghai, China; Reggio di Calabria,
Italy, and Brimsdown, U.K.
Nippon Unicar Company Limited o a Japan-based producer of commodity and
specialty polyethylene resins and specialty silicone products. This joint
venture with Tonen Corporation has a facility in Kawasaki, Japan.
Aspell Polymeres SNC o a France-based producer of specialty polyethylenes.
This partnership with Elf Atochem has a facility in Gonfreville, France.
World Ethanol Company o a U.S.-based partnership with Archer Daniels Midland
Company that supplies ethanol worldwide. World Ethanol has facilities in Texas
City, Tex. and Peoria, Ill.
Univation Technologies, LLC o a U.S.-based joint venture with Exxon Chemical
Company for the research, development, marketing and licensing of polyethylene
technology and metallocene catalysts. Univation has a facility in Mont
Belvieu, Tex.
Asian Acetyls Co., Ltd. o a South Korea-based producer of vinyl acetate
monomers used in the production of emulsion resins by customers in the
coatings and adhesives industries. This joint venture with BP Chemicals and
Samsung Fine Chemicals Company has a facility in Ulsan, South Korea.
The most significant partnerships and joint ventures of the Basic Chemicals &
Polymers segment include:
Polimeri Europa S.r.l. o a Europe-based producer of ethylene and
polyethylene resins. This joint venture with EniChem S.p.A. of Italy has
facilities at Dunkirk, France; Oberhausen, Germany; and Brindisi, Ferrara,
Gela, Priolo and Ragusa, Italy.
EQUATE Petrochemical Company K.S.C. o a joint venture with Petrochemical
Industries Company and Boubyan Petrochemical Company that manufactures
polyethylene and ethylene glycol at its world-scale petrochemicals complex in
Shuaiba, Kuwait.
Petromont and Company, Limited Partnership o a Canada-based olefins and
polyethylene resins producer owned jointly with Ethylec Inc. This partnership
has facilities at Montreal and Varennes, Quebec, Canada.
Alberta & Orient Glycol Company Limited o a joint venture with Mitsui & Co.,
Ltd., Japan, and Far Eastern Textile Ltd., Taiwan. This Canada-based producer
of ethylene glycol has a facility in Prentiss, Alberta, Canada.
For a summary of partnership and joint venture results for the past three
years, see pages 14, 15 and note eight to the financial statements.
(At the bottom of this section there is a picture of the world shown flat with
square boxes shown for all locations described above.)
- 8 -
Management's Discussion & Analysis
Results of Operations
Millions of dollars (except per share figures)
for the year ended December 31, 1997 1996 1995
Net sales $ 6,502 $6,106 $5,888
Operating profit(a) 1,045 921 1,348
Interest expense 79 76 89
Income before provision for income taxes 966 845 1,259
Income before cumulative effect of change in
accounting principle 676 593 925
Net income 659 593 925
Net income - common stockholders 652 583 915
Per share - basic -
income before cumulative effect of change in
accounting principle $ 5.02 $ 4.43 $ 6.65
Net income - common stockholders 4.89 4.43 6.65
Per share - diluted -
income before cumulative effect of change in
accounting principle 4.53 3.90 5.85
Net income - common stockholders 4.41 3.90 5.85
a) See note five to the financial statements for a discussion of the special
items included in operating profit.
Summary and Outlook
Union Carbide operates two business segments. Specialties & Intermediates
converts basic and intermediate chemicals into a diverse portfolio of
chemicals and polymers serving industrial customers in many markets. This
segment also provides technology services, including licensing, to the oil and
petrochemicals industries. Basic Chemicals & Polymers converts hydrocarbon
feedstocks, principally liquefied petroleum gas and naphtha, into ethylene or
propylene and then into polyethylene, polypropylene, ethylene oxide and
ethylene glycol for sale to third-party customers, as well as ethylene,
propylene, ethylene oxide and ethylene glycol for consumption by the
Specialties & Intermediates segment. In contrast to those of Specialties &
Intermediates, the revenues and operating profit of Basic Chemicals & Polymers
tend to be more cyclical and very sensitive to a number of external variables,
including overall economic demand, hydrocarbon feedstock costs, industry
capacity increases and plant operating rates.
Segment results were mixed in 1997 with Basic Chemicals & Polymers reporting
substantially improved operating profit as compared with 1996 while
Specialties & Intermediates operating profit decreased 10.1 percent. The Basic
Chemicals & Polymers business benefited from increased ethylene glycol prices
throughout the first three quarters of 1997 and improved polyethylene pricing
through the first half of the year. In addition, the segment experienced
reduced average feedstock costs versus 1996. Specialties & Intermediates
operating profit was adversely impacted by increased raw material costs, most
significantly ethylene oxide transferred from the Basic Chemicals & Polymers
segment at approximate market value, higher energy costs and shipment
disruptions associated with railroad problems in the U.S. Gulf Coast region.
Average selling prices for the Specialties & Intermediates segment were
negatively impacted by a much stronger U.S. dollar as well as by increased
competition, principally in the segment's solvents, intermediates and
monomers product lines. On a consolidated basis, sales volumes increased by
5.1 percent, while fixed cost per pound sold declined to 10.8 cents, the
lowest of this decade. Partnership income remained strong, excluding certain
costs, principally research and development, assumed by our new technology
venture, Univation Technologies, LLC. Additionally, the improved earnings from
our equity companies represented increases in earnings of Polimeri Europa
partially offset by increased preoperating expenses associated with EQUATE
Petrochemical Company.
In 1996 the corporation's earnings were adversely impacted by declines in
selling prices, particularly for ethylene glycol, polyethylene and vinyl
acetate monomer, and by high raw material and energy costs. These factors
significantly impacted Basic Chemicals & Polymers operating profit and limited
Specialties & Intermediates operating profit growth. Sales volumes experienced
their largest increase in the past decade, while productivity, as measured by
fixed cost per pound of product sold, also improved. Partnerships continued to
report strong profits, while equity company results declined due to the
preoperating costs of EQUATE and increased raw material costs for Polimeri
Europa.
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(Included within this section are three bar charts which provide the following
data:
(1) Volume - millions of pounds
S&I BC&P Total
1991 6,144 4,958 11,102
1992 6,458 5,510 11,968
1993 6,454 5,502 11,956
1994 7,093 5,680 12,773
1995 7,112 5,878 12,990
1996 7,743 6,706 14,449
1997 8,264 6,923 15,187
(2) Fixed Costs Per Pound - cents/pound
S&I BC&P
1991 20.6 9.2
1992 19.0 7.7
1993 17.5 7.5
1994 15.0 7.0
1995 15.8 7.2
1996 14.7 6.7
1997 14.2 6.8
(3) Employee Productivity
Number of 1,000s of pounds
Employees /employee
1991 16,705 665
1992 15,075 794
1993 13,051 916
1994 12,004 1,064
1995 11,521 1,128
1996 11,745 1,230
1997 11,813 1,286 )
In 1995 the corporation's profitability benefited from improved pricing in
virtually all product groups, with particular strength in polyethylene through
midyear and ethylene oxide and ethylene glycol throughout the year, modest
volume increases, lower average feedstock costs, continued benefits from
ongoing productivity improvement programs and strong partnership earnings. In
addition, 1995 net income was enhanced by a nonrecurring after-tax gain
associated with the sales of the corporation's investment in UCAR
International Inc., partially offset by a number of nonrecurring after-tax
losses.
Highlights of 1997 included:
o Completion of an ethanolamines unit at Taft, La.
o Startup of the EQUATE facility in Shuaiba, Kuwait
o Formation of Univation Technologies, LLC, a 50-50 joint venture with Exxon
Chemical Company to research, develop, market and license leading-edge
technologies and metallocene catalysts for the production of polyethylene
o Signing of a joint undertaking with NOVA Chemicals, Ltd., to construct, own
and operate a new 2.8-billion-pounds-per-year ethylene production facility in
Joffre, Alberta, Canada
o Increase in the quarterly dividend per common share from $0.1875 to $0.225
o Repurchase of 7.0 million common shares, bringing the total number of shares
repurchased since the beginning of 1993 to 49.3 million
o Conversion of preferred shares held by the Employee Stock Ownership Plan
(ESOP) into the corporation's common shares
o Announcement of a new plan to increase the target for annual net savings to
$1.1 billion by year-end 2000, as compared with 1993, and better-than-planned
progress toward achievement of this target
As 1998 progresses, pricing for Basic Chemicals & Polymers products is
expected to continue to decline. The pace and extent of the drop cannot be
predicted with any accuracy and is dependent in part on developments in Asian
Pacific economies, which are major markets for these products. Feedstock costs
are expected to decline at least modestly from fourth quarter 1997 levels.
Specialties & Intermediates operating profit in 1998 should benefit somewhat
from a decline in raw material and energy prices. Moreover, the corporation
expects continued strong performance from the Specialties & Intermediates
partnerships as a group, and from licensing activities. However, as is the
case with Basic Chemicals & Polymers, the ability to anticipate future results
with any accuracy is dependent on the resolution and stabilization of Asian
Pacific market conditions.
- 10 -
The corporation regularly reviews its assets with the objective of
maximizing the deployment of resources in core operations. In this regard, UCC
continues to consider strategies and/or transactions with respect to certain
noncore assets and other assets not essential to the operation of the business
that, if implemented, could result in material nonrecurring gains or losses.
Quantitative and Qualitative Disclosures About Market Risk
The corporation selectively uses derivative financial instruments to manage
its exposure to market risk related to changes in foreign currency exchange
rates and interest rates. The corporation does not hold derivatives for
trading purposes. The value of market sensitive derivative instruments is
subject to change as a result of movements in market rates and prices.
Sensitivity analysis is one technique used to evaluate these impacts. Based on
a hypothetical 10 percent weakening in the U.S. dollar across all currencies
or a 10 percent increase in interest rates, the potential losses in future
earnings, fair values and cash flows would not be material. This methodology
has limitations; for example, a weakening U.S. dollar would benefit future
earnings through favorable translation of non-U.S. operating results.
Foreign Operations
A portion of the financial results of each of the corporation's segments is
derived from activities conducted outside the U.S. and denominated in
currencies other than the U.S. dollar. Because the financial results of the
corporation are reported in U.S. dollars, they are affected by changes in the
value of the various foreign currencies in relation to the U.S. dollar.
Exchange rate risks are lessened, however, by the diversity of the
corporation's foreign operations and the fact that international activities
are not concentrated in any single non-U.S. currency. In addition, the effects
of a strengthening U.S. dollar could cause pricing pressures on worldwide
chemical markets which could result in declines in the corporation's sales
volumes.
The corporation is subject to other risks customarily associated with doing
business in foreign countries, including local labor and economic conditions,
unfavorable changes in foreign tax laws, and possible controls on repatriation
of earnings and capital. Future losses associated with such risks, if any,
cannot be predicted.
Specialties & Intermediates
Millions of dollars 1997 1996 1995
Sales $4,453 $4,286 $4,123
Depreciation and amortization 214 188 194
Operating profit 667 742 709
Capital expenditures 458 522 392
Identifiable assets 4,146 3,892 3,527
1997 Compared with 1996
Sales of the Specialties & Intermediates segment increased 3.9 percent, as a
result of a 6.7 percent increase in volume offset by lower average selling
prices. Average selling price reductions were due in part to a strengthening
of the U.S. dollar against currencies such as the German Deutschemark and
Japanese Yen, as well as by increased competition in solvents, intermediates
and monomers product lines. Additionally, shipments for this segment's
products were affected by rail problems in the U.S. Gulf Coast region.
Variable margin (revenues less variable manufacturing and distribution costs)
as a percentage of sales declined 2.2 percentage points, from 44.6 percent in
1996 to 42.4 percent in 1997, while gross margin (variable margin less fixed
manufacturing and distribution costs) as a percentage of sales declined 2.4
percentage points to 24.6 percent in 1997. Increases in the market-related
transfer cost of raw materials produced by the Basic Chemicals & Polymers
segment, as well as the increasing cost of natural gas, significantly affected
these margins. Fixed manufacturing and distribution costs for this segment
increased 5.3 percent, or $40 million, from the previous year's levels.
Selling, administration and other expenses (SA&O) for this segment decreased
$5 million, or 2.0 percent. Research and development expenditures decreased $2
million, to $126 million, mainly attributable to costs assumed by the
corporation's new technology venture, Univation Technologies.
Operating profit decreased $75 million, or 10.1 percent, to $667 million
from $742 million in 1996. The current year operating profit includes a charge
of $12 million for the write-off of certain equipment associated with the
corporation's ethylene propylene rubber project.
1996 Compared with 1995
Revenues of the Specialties & Intermediates segment increased 4.0 percent,
the result of an 8.9 percent increase in volume partially offset by a 4.7
percent decline in average selling prices. The reduction in average selling
prices reflected the combined effect of increases in
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sales of lower priced products and declines in prices of certain products from
the unusually high levels experienced in 1995. Variable margin as a percentage
of sales dropped by 1.6 percentage points, from 46.2 percent in 1995 to 44.6
percent in 1996, while gross margin as a percentage of sales declined by 0.8
percentage points, to 27.0 percent in 1996 from 27.8 percent in 1995. Fixed
manufacturing and distribution costs were held at 1995 levels.
The segment's 1996 SA&O decreased $45 million, or 15.1 percent, because of
the inclusion in 1995 SA&O of a nonrecurring $48 million charge for
postemployment benefits. Excluding this charge, SA&O increased $3 million, or
1.2 percent. Research and development expenditures increased $14 million, to
$128 million.
Operating profit increased in 1996 to $742 million from $709 million in
1995.
Basic Chemicals & Polymers
Millions of dollars 1997 1996 1995
Sales $2,420 $2,125 $2,080
Depreciation and amortization 126 124 112
Operating profit 386 162 444
Capital expenditures 297 199 150
Identifiable assets 2,540 2,328 2,095
1997 Compared with 1996
Sales of the Basic Chemicals & Polymers segment increased 13.9 percent,
largely as a result of a 9.2 percent increase in average customer selling
price coupled with a 3.2 percent increase in customer volume. The increase in
average customer selling price reflects the strong increase in ethylene glycol
pricing during the first three quarters of 1997 and improved polyethylene
pricing throughout the first half of the year. Variable margin as a percentage
of sales increased to 39.9 percent from 34.6 percent in 1996. Overall, this
segment benefited from an increase in gross margin as a percentage of sales to
25.0 percent, compared with only 18.2 percent in 1996. Fixed manufacturing and
distribution costs increased by 3.7 percent.
The segment's SA&O increased $8 million, or 11.9 percent, over the 1996
amount. Research and development expenditures were unchanged from the prior
year.
Operating profit of $386 million in 1997 represented an increase of over 100
percent from the prior year.
1996 Compared with 1995
Revenues of the Basic Chemicals & Polymers segment increased 2.2 percent,
due to a 14.1 percent increase in customer volume, 11.5 percent of which was
due to the January 1996 acquisition of the polypropylene business of Shell Oil
Company, offset by a 9.7 percent decrease in selling prices. Variable margin
as a percentage of sales declined from 46.4 percent in 1995 to 34.6 percent in
1996. Ethylene glycol selling prices declined throughout the first three
quarters of 1996. While polyethylene prices improved beginning in the second
quarter of 1996, they nonetheless averaged below 1995 levels for the full
year. Raw material and energy costs rose during 1996, especially in the fourth
quarter. Gross margin as a percentage of sales declined to 18.2 percent in
1996 as compared with 30.8 percent in 1995. Fixed manufacturing and
distribution costs increased $24 million, or 7.4 percent, from 1995 to 1996,
principally due to the acquisition of Shell's polypropylene assets and
business.
SA&O decreased $20 million, or 23.0 percent, versus 1995. Prior year SA&O
included a nonrecurring $20 million charge for postemployment benefits.
Research and development expenditures increased $1 million, to $31 million.
Operating profit declined to $162 million in 1996 from $444 million in 1995.
Other
Millions of dollars
for the year ended December 31, 1997 1996 1995
Operating profit (loss) $(8) $17 $195
The Other segment includes the operating profit (loss) of noncore activities
and financial transactions. The 1995 operating profit included a nonrecurring
pre-tax gain of $381 million from the sales of the corporation's remaining
interest in UCAR International Inc., partially offset by a $191 million charge
for unused office space, principally at the corporation's headquarters.
Costs Relating to Protection of the Environment
Worldwide costs relating to environmental protection continue to be
significant, due primarily to stringent laws and regulations and to
the corporation's commitment to industry initiatives such as RESPONSIBLE CARE,
as well as to its own internal standards. In 1997, worldwide expenses related
to environmental protection for compliance with Federal, state and local laws
regulating solid and hazardous wastes and discharge of materials to air and
water, as well as for waste site remedial activities, totaled $100 million.
Expenses in 1996 and 1995 were $110 million and $138 million, respectively.
Such expenses were material to operating results in 1997, 1996 and 1995, and
will be material to operating results in future years. In recent years, such
environmental expenses have decreased as the corporation has made progress
toward completing major remediation projects. In addition, worldwide capital
expenditures relating to
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environmental protection, including those for new capacity and cost reduction
and replacement, in 1997 totaled $68 million, compared with $43 million and
$49 million in 1996 and 1995, respectively.
The corporation, like other companies in the U.S., periodically receives
notices from the U.S. Environmental Protection Agency and from state
environmental agencies, as well as claims from other companies, alleging that
the corporation is a potentially responsible party (PRP) under the
Comprehensive Environmental Response, Compensation and Liability Act and
equivalent state laws (hereafter referred to collectively as Superfund) for
past and future cleanup costs at hazardous waste sites at which the
corporation is alleged to have disposed of, or arranged for treatment or
disposal of, hazardous substances. The corporation is also undertaking
environmental investigation and remediation projects at hazardous waste sites
located on property currently and formerly owned by the corporation pursuant
to Superfund, as well as to the Resource Conservation and Recovery Act and
equivalent state laws.
There are approximately 117 hazardous waste sites at which management
believes it is probable or reasonably possible that the corporation will incur
liability for investigation and/or remediation costs. The corporation has
established accruals for those hazardous waste sites where it is probable that
a loss has been incurred and the amount of the loss can reasonably be
estimated. The reliability and precision of the loss estimates are affected by
numerous factors, such as the stage of site evaluation, the allocation of
responsibility among PRPs and the assertion of additional claims. The
corporation adjusts its accruals as new remediation requirements are defined,
as information becomes available permitting reasonable estimates to be made,
and to reflect new and changing facts.
At Dec. 31, 1997, the corporation's accruals for environmental remediation
totaled $264 million ($310 million in 1996). Approximately 55 percent of the
accrual (58 percent in 1996) pertains to estimated future expenditures for
site investigation and cleanup, and approximately 45 percent (42 percent in
1996) pertains to estimated expenditures for closure and postclosure
activities. See note seventeen to the financial statements for a discussion of
the environmental sites for which the corporation has remediation
responsibility. In addition, the corporation had environmental loss
contingencies of $159 million at Dec. 31, 1997.
Estimates of future costs of environmental protection are necessarily
imprecise, due to numerous uncertainties. These include the impact of new laws
and regulations, the availability and application of new and diverse
technologies, the identification of new hazardous waste sites at which the
corporation may be a PRP and, in the case of Superfund sites, the ultimate
allocation of costs among PRPs and the final determination of the remedial
requirements. While estimating such future costs is inherently imprecise,
taking into consideration the corporation's experience to date regarding
environmental matters of a similar nature and facts currently known, the
corporation estimates that worldwide expenses related to environmental
protection, expressed in 1997 dollars, should average about $110 million
annually over the next five years. Worldwide capital expenditures for
environmental protection, also expressed in 1997 dollars, are expected to
average about $50 million annually over the same period. Management
anticipates that future annual costs for environmental protection after 2002
will continue at levels comparable to the five-year average estimates.
Subject to the inherent imprecision and uncertainties in estimating and
predicting future costs of environmental protection, it is management's
opinion that any future annual costs for environmental protection in excess of
the five-year average estimates stated here, plus those costs anticipated to
continue thereafter, would not have a material adverse effect on the
corporation's consolidated financial position.
Litigation
The corporation and its consolidated subsidiaries are involved in a number
of legal proceedings and claims with both private and governmental parties.
These cover a wide range of matters, including, but not limited to, product
liability; governmental regulatory proceedings; health, safety and
environmental matters; employment; patents; contracts, and taxes. In addition,
the corporation continues to be named as one of a number of defendants in
lawsuits involving silicone breast implants. The corporation supplied bulk
silicone materials to certain companies that at various times were involved in
the manufacture of breast implants. These cases are discussed in more detail
in note seventeen to the financial statements. In some of these legal
proceedings and claims, the cost of remedies that may be sought or damages
claimed is substantial. While it is impossible at this time to determine with
certainty the ultimate outcome of any such legal proceedings and claims,
management believes that adequate provisions have been made for probable
losses with respect thereto and that such ultimate outcome, after provisions
therefor, will not have a material adverse effect on the consolidated
financial position of the corporation but could have a material effect on
consolidated results of operations in a given quarter or year. Should any
losses be sustained in connection with any of such legal proceedings and
claims in excess of provisions therefor, they will be charged to income in
the future.
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Partnerships and Joint Ventures
As described on page 8, the corporation's most significant partnerships and
joint ventures are UOP, Nippon Unicar, Aspell Polymeres, World Ethanol,
Univation Technologies and Asian Acetyls within the Specialties &
Intermediates segment, and Polimeri Europa, EQUATE Petrochemical Company,
Petromont and Alberta & Orient Glycol within the Basic Chemicals & Polymers
segment.
The combined financial information of the partnerships and joint ventures in
each segment, and the corporation's proportionate share thereof, are presented
in the following tables.
Specialties & Intermediates
Combined UCC's Proportionate
Share(a)
Millions of dollars 1997 1996 1995 1997 1996 1995
Net sales $2,246 $2,238 $2,311 $1,109 $1,082 $1,114
Cost of sales 1,395 1,456 1,486 567 680 720
Depreciation 90 86 67 51 39 35
Income from operations 340 322 338 175 187 175
Interest expense 42 31 32 15 12 15
Provision for income taxes 76 63 54 38 32 27
Net Income $ 224 $ 227 $ 257 $ 122 $ 143 $ 137
UCC share of dividends and
distributions $ 107 $ 101 $ 92
Total assets $1,837 $1,769 $ 820 $ 757
Total third party debt 588 577 249 212
Net Assets $ 451 $ 561 $ 277 $ 263
Basic Chemicals & Polymers
Combined UCC's Proportionate
Share(a)
Millions of dollars 1997 1996 1995 1997 1996 1995
Net sales $2,078 $1,930 $1,512 $1,038 $ 965 $ 756
Cost of sales 1,661 1,575 1,014 855 798 507
Depreciation 102 126 115 46 51 58
Income from operations 219 96 209 68 30 105
Interest expense 70 67 61 35 34 30
Provision for income taxes 49 20 36 18 11 17
Net Income (Loss) $ 100 $ 9 $ 114 $ 14 $ (15) $ 58
UCC share of dividends and
distributions $ 19 $ 40 $ 0
Total assets $3,980 $3,536 $1,797 $1,650
Total third party debt 1,595 1,197 744 561
Net Assets $ 985 $ 972 $ 413 $ 432
a) Includes U.S. GAAP adjustments made by the corporation, such as goodwill
and related amortization, and adjustments needed to conform the accounting
policies of the partnerships and joint ventures to those of UCC.
- 14 -
Specialties & Intermediates
The corporation's share of the net income of Specialties & Intermediates
partnerships and joint ventures decreased $21 million in 1997. This decline
resulted from the assumption of certain costs, principally research and
development, by the corporation's new technology venture, Univation
Technologies, and decreased earnings of World Ethanol, mainly attributable to
lower prices and volumes caused by a different mix of ethanol sales in 1997.
Increased earnings in 1996, as compared with 1995, resulted from increased
earnings from UOP being partially offset by the elimination of earnings of the
polypropylene partnership with Shell Oil Company. The 1996 and 1997 earnings
from the polypropylene business were included in the consolidated results.
Basic Chemicals & Polymers
The corporation's share of the net income of Basic Chemicals & Polymers
partnerships and joint ventures increased $29 million from 1996 to 1997, due
to significant improvement in Polimeri Europa and Petromont earnings, offset
by increased preoperating expenses EQUATE. Strong results of our polyolefins
partnerships in 1997 were the result of increases in worldwide polymer pricing
over the prior year. The decrease from 1995 to 1996 reflected losses from
Polimeri Europa and decreased earnings from Petromont, caused by lower
polyethylene prices and higher raw material costs, and the recognition of
preoperating expenses of EQUATE.
EQUATE Petrochemical Company commenced operations in the fourth quarter of
1997. Losses of $43 million for development of this world-scale petrochemical
complex were recognized by the corporation in 1997 ($23 million and $3 million
in 1996 and 1995, respectively). The corporation has severally guaranteed 45
percent (approximately $606 million at Dec. 31, 1997) of EQUATE's debt and
working capital financing needs until certain completion and financial tests
are achieved. If these tests are met, a $54 million several guarantee will
provide ongoing support thereafter. The corporation also severally guaranteed
certain sales volume targets until EQUATE's sales capabilities are proved. In
addition, the corporation has pledged its shares in EQUATE as security for
EQUATE's debt. The corporation has political risk insurance coverage for its
equity investment and, through Sept. 30, 1998, substantially all of its
several guarantee of EQUATE's debt.
Other
The corporation's remaining interest in UCAR International Inc., a
manufacturer of carbon and graphite products, was sold in 1995. Income (loss)
from corporate investments carried at equity included $4 million in 1995,
representing the corporation's share of UCAR's earnings in that year.
Additionally, the corporation's share of dividends and distributions from UCAR
was $5 million in 1995.
Interest Expense
Interest expense increased $3 million, from $76 million in 1996 to $79
million in 1997. This increase reflects the effect of a full year's interest
expense associated with the 7.75 percent debentures due in 2096 and an
increase in short-term debt, partially offset by an increase in capitalized
interest associated with the corporation's capital program. Interest expense
decreased $13 million from 1995 to 1996 as a result of increased capitalized
interest.
Provision for Income Taxes
The effective tax rate was 28.9 percent in 1997 compared with 27.9 percent
and 30.2 percent in 1996 and 1995, respectively. The corporation's effective
tax rate was reduced in each of these years as a result of foreign sales
corporation income taxed at a preferential rate and research and
experimentation tax credits. The 1995 effective tax rate was increased as a
result of taxes provided on the sale of UCAR International Inc.
Accounting Changes
1995 through 1997
In November 1997, the Emerging Issues Task Force reached consensus on Issue
97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract
or an Internal Project That Combines Business Process Reengineering and
Information Technology Transformation," requiring companies to expense as
incurred costs associated with business process reengineering activities.
Effective Oct. 1, 1997, the corporation adopted the provisions of Issue 97-13
as a cumulative effect of a change in accounting principle, reversing
$28 million ($17 million, after-tax) of costs previously capitalized from 1995
through the third quarter of 1997.
Additionally in 1997, the corporation adopted Statement of Financial
Accounting Standards (SFAS) 128, "Earnings Per Share", and SFAS 129,
"Disclosure of Information About Capital Structure." In 1996, the corporation
adopted SFAS 123, "Accounting for Stock-Based Compensation," under which the
corporation elected to continue following Accounting Principles Board Opinion
25. In 1995, the corporation adopted SFAS 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the effect
of which was not material.
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1998
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income," and SFAS 131, "Disclosures About Segments of
an Enterprise and Related Information," for fiscal years beginning after Dec.
15, 1997. These statements address presentation and disclosure matters and
will have no impact on the corporation's financial position or results of
operations. The corporation does not anticipate a change in the identification
of its business segments.
Effective Jan. 1, 1998, Brazil was no longer considered to be a highly
inflationary economy. Had this change occurred effective Jan. 1, 1997, the
effect on results of operations and financial position would not have been
material.
Year 2000 Issue
Most of the corporation's computer and process control systems were designed
to use only two digits to represent years. Thus they may not recognize "00" as
representing the year 2000, but rather 1900, which could result in errors or
system failures. These systems must be corrected in a timely manner to remain
functional.
The corporation is addressing the year 2000 issue in several ways. Since
1995, the corporation has expended significant funds to upgrade the bulk of
its commercial computer systems to enhance the information available to the
corporation. This upgrade will correct the year 2000 issue for the computer
systems it replaces. The upgrade will be implemented in three parts, the first
of which commenced operation in 1998. The remaining parts are scheduled for
operation by year-end. The corporation is reviewing the balance of its
domestic and international internal processes, including hardware, software
and control systems, and is assessing its external relationships to address
potential impacts arising from interfaces with customers, suppliers and
service providers. Priorities are being set and required system modifications
are progressing. The corporation estimates its worldwide expenses related to
the year 2000 project could range between $20 and $50 million over the next
two years. The corporation believes the year 2000 project will be completed
prior to the year 2000. However, considerable work remains to be accomplished
in a limited period of time and unforeseen difficulties may arise which could
adversely affect the corporation's ability to complete its systems
modifications correctly, completely, on time and/or within its cost estimate.
In addition, there can be no assurance that customers, suppliers and service
providers on which the corporation relies will resolve their year 2000 issues
accurately, thoroughly and on time. Failure to complete the year 2000 project
by the year 2000 could have a material adverse effect on future operating
results or financial condition.
Liquidity, Capital Resources and Other Financial Data
Cash Flow From Operations
Cash flow from operations increased by $55 million to $917 million in 1997,
as compared with $862 million in 1996. Increased earnings for the year were
offset by increases in working capital, principally the result of an increase
in inventory partially offset by a decrease in notes and accounts receivable.
Cash Flow Used for Investing
Cash flow used for investing includes capital expenditures, investments,
advances and acquisitions, and proceeds from the sale of investments and
assets.
Capital expenditures increased to $755 million in 1997, from $721 million in
1996 and $542 million in 1995. Major capital projects funded during 1997
included a new CARBOWAX polyethylene glycol and TERGITOL surfactants facility,
an ethanolamines unit and olefins expansion, all at Taft, La., as well as a
continuing upgrade of the information technology infrastructure. Major capital
projects funded during 1996 included an ethylene propylene rubber facility at
Seadrift, Tex., expansion of ethylene production units at Taft, La., as well
as new cogeneration facilities at Texas City, Tex. and Taft, La., and new
information technology infrastructure. Major capital projects funded during
1995 included a new butanol unit at Taft, La., an energy systems upgrade at
Texas City, Tex., new TRITON surfactants production facilities at South
Charleston, W.Va. and a new UNIPOL II polyethylene production facility at
Taft, La.
Over the past three years 52 percent of capital expenditures was directed to
new capacity, 44 percent to cost reduction and replacement, and 4 percent to
environmental, safety and health facilities. Of these expenditures, 92 percent
was in the U.S. and Puerto Rico.
Investments and acquisitions in 1996 included the purchases of Shell's
polypropylene assets and business and of 95 percent of the outstanding shares
of Companhia Alcoolquimica Nacional, a Brazilian producer of vinyl acetate
monomer. Investments and acquisitions during 1995 included the $216 million
acquisition of a 50 percent interest in Polimeri Europa, a $134 million
investment in the EQUATE joint venture, and the $71 million purchase of
certain ethylene oxide derivative businesses in the U.K.
Net proceeds from the sale of investments in 1995 included $542 million from
the sales of the corporation's remaining interest in UCAR International Inc.
- 16 -
At Dec. 31, 1997, the cost of completing authorized construction projects
was estimated to be $1.375 billion, of which $50 million is covered by firm
commitments. Future construction expenditures are anticipated to be sourced
through operating cash flows and borrowings.
Cash Flow Used for Financing
Cash flow used for financing includes stockholder and minority interest
dividends and funds used to buy back common stock, offset in part by net
proceeds from short- and long-term debt and sales of common stock pursuant to
the corporation's dividend reinvestment plan and its employee savings and
investment programs.
Cash flow used for financing in 1997 totaled $132 million, compared with
$254 million in 1996 and $57 million in 1995. Net borrowings totaled $306
million, while cash dividends totaled $134 million.
In January 1997, a newly formed real estate investment trust (REIT)
subsidiary issued $250 million of preferred stock bearing a current dividend
yield of 14 percent for 10 years and 1 percent thereafter. In October 1997,
the corporation paid $240 million in cash to redeem the preferred stock
shares. Cash dividends paid to preferred shareholders of the REIT during 1997
totaled $25 million.
In September 1997, the board of directors declared an increase in the
quarterly common stock dividend to $0.225 per share. In October 1997, the
trustee of the Employee Stock Ownership Plan (ESOP) exercised its right to
convert all shares of the corporation's preferred stock held by the ESOP into
the corporation's common stock. This noncash conversion increased the
corporation's common stock outstanding at that time by 15.4 million shares.
In 1996, the corporation issued $200 million of 7.75 percent debentures
maturing in 2096, the proceeds of which were used to finance ongoing share
repurchases and to pay down existing short-term debt. In 1995 the corporation
completed a $400 million, two-part public offering of debt securities.
On July 23, 1997, the corporation's board of directors authorized an
increase in the number of shares that may be repurchased under the existing
common stock repurchase program by 10 million shares, to an aggregate of 60
million shares since inception of the program. During 1997, pursuant to the
share repurchase program, the corporation repurchased 7.0 million shares of
its common stock for $337 million, at an average effective price of $47.62 per
share, bringing the total amount repurchased since the beginning of 1993 to
49.3 million shares for $1.713 billion, at an average effective price of
$34.69 per share. The corporation intends to acquire additional shares from
time to time at prevailing market prices, at a rate consistent with the
combination of corporate cash flow and market conditions.
At Dec. 31, 1997, there were no outstanding borrowings under either the
corporation's existing $1 billion bank credit agreement or its $500 million
medium-term note program.
Debt Ratios
Total debt outstanding at year-end for the past three years was:
Millions of dollars 1997 1996 1995
Domestic $1,719 $1,492 $1,254
International 168 107 69
Total $1,887 $1,599 $1,323
Year-end ratios of total debt to total capital were:
1997 1996 1995
Debt ratio 44.2% 42.7% 39.0%
Total debt consists of short-term debt, long-term debt and the current
portion of long-term debt. Total capital consists of total debt plus minority
stockholders' equity in consolidated subsidiaries and stockholders' equity.
(Included within this section is one bar chart which provides the following
data:
(1) Shares Repurchased - millions
Net of
Reissuances Total
1993 1.4 3.8
1994 6.1 11.6
1995 9.3 14.1
1996 8.7 12.8
1997 4.9(a) 7.0
(a) Does not include 15.4 million shares issued in connection
with the ESOP preferred share conversion. )
- 17 -
Page 18 and 19
Selected Financial Data
Union Carbide Corporation and Subsidiaries
Millions of dollars
(except per share figures) 1997 1996 1995 1994
From the Income Statement
Net sales $ 6,502 $ 6,106 $ 5,888 $ 4,865
Cost of sales, exclusive of depreciation
and amortization 4,806 4,568 4,100 3,673
Research and development 157 159 144 136
Selling, administration and
other expenses 324 321 387(a) 290
Depreciation and amortization 340 312 306 274
Partnership income (loss) 133 144 152 98
Other income (expense) - net 37 31 245 (39)
Income before interest expense and
provision for income taxes 1,045 921 1,348 551
Interest expense 79 76 89 80
Income (loss) before provision for
income taxes - continuing operations 966 845 1,259 471
Provision (credit) for income taxes 279 236 380 137
Income (loss) from corporate
investments carried at equity 3 (16) 47 55
Income (loss) from continuing operations 676 593 925 389
Cumulative effect of change in
accounting principle (17) - - -
Net income (loss) - common stockholders 652 583 915 379
Per common share
Basic - Income (loss) from
continuing operations $ 5.02 $ 4.43 $ 6.65 $ 2.51
- Net income (loss) 4.89 4.43 6.65 2.51
Diluted - Income (loss) from
continuing operations 4.53 3.90 5.85 2.27
- Net income (loss) 4.41 3.90 5.85 2.27
From the Balance Sheet
Net current assets of continuing
operations $ 362 $ 595 $ 858 $ 329
Total assets 6,964 6,546 6,256 5,028
Long-term debt 1,458 1,487 1,285 899
Other long-term obligations 738 811 834 537
Total capital(b) 4,268 3,742 3,392 2,479
Stockholders' equity 2,348 2,114 2,045 1,509
Stockholders' equity per common share 17.15 16.72 15.14 10.45
Other Data
Cash dividends on common stock $ 100 $ 99 $ 103 $ 113
Cash dividends per common share 0.7875 0.75 0.75 0.75
Special distribution per common share - - - -
Market price per common share - high(c) 56.81 49.88 42.75 35.88
Market price per common share - low(c) 40.50 36.38 25.50 21.50
Common shares outstanding (thousands) 136,944 126,440 135,108 144,412
Capital expenditures 755 721 542 409
Employees - continuing operations 11,813 11,745 11,521 12,004
Selected Financial Ratios
Total debt/total capital 44.2% 42.7% 39.0% 38.2%
Return on capital(b) 19.6% 18.6% 39.2% 18.0%
Return on equity(e) 30.8% 28.5% 60.6% 26.5%
Income from continuing operations/average
stockholders' equity 30.3% 28.5% 52.1% 26.5%
Cash dividends on common stock/income
from continuing operations 14.8% 16.7% 11.1% 29.0%
Millions of dollars
(except per share figures) 1993 1992 1991
From the Income Statement
Net sales $ 4,640 $ 4,872 $ 4,877
Cost of sales, exclusive of depreciation
and amortization 3,589 3,764 3,787
Research and development 139 155 157
Selling, administration and
other expenses 340 383 408
Depreciation and amortization 276 293 287
Partnership income (loss) 67 60 (22)
Other income (expense) - net (66) (13) (135)
Income before interest expense and
provision for income taxes 297 324 81
Interest expense 70 146 228
Income (loss) before provision for
income taxes - continuing operations 227 178 (147)
Provision (credit) for income taxes 78 45 (50)
Income (loss) from corporate
investments carried at equity 16 (14) (21)
Income (loss) from continuing operations 165 119 (116)
Cumulative effect of change in
accounting principle (97) (361) -
Net income (loss) - common stockholders 58 (187) (28)
Per common share
Basic - Income (loss) from
continuing operations $ 1.03 $ 0.79 $ (1.07)
- Net income (loss) 0.37 (1.48) (0.22)
Diluted - Income (loss) from
continuing operations 0.97 0.76 (1.07)
- Net income (loss) 0.41 (1.24) (0.22)
From the Balance Sheet
Net current assets of continuing
operations $ 233 $ 66 $ 209
Total assets 4,689 4,941 6,826
Long-term debt 931 1,113 1,160
Other long-term obligations 378 277 428
Total capital(b) 2,395 2,710 4,694
Stockholders' equity 1,428 1,238 2,239
Stockholders' equity per common share 9.49 9.32 17.55
Other Data
Cash dividends on common stock $ 110 $ 114 $ 126
Cash dividends per common share 0.75 0.875 1.00
Special distribution per common share - 15.875 -
Market price per common share - high(c) 23.13 17.13(d) 22.63
Market price per common share - low(c) 16.00 10.88(d) 15.13
Common shares outstanding (thousands) 150,548 132,865 127,607
Capital expenditures 395 359 400
Employees - continuing operations 13,051 15,075 16,705
Selected Financial Ratios
Total debt/total capital 40.3% 54.3% 52.0%
Return on capital(b) 7.7% 6.9% -
Return on equity(e) 4.7% (8.4)% (1.2)%
Income from continuing operations/average
stockholders' equity 12.4% 6.8% -
Cash dividends on common stock/income
from continuing operations 66.7% 95.8% -
Millions of dollars
(except per share figures) 1990 1989 1988
From the Income Statement
Net sales $ 5,238 $ 5,613 $ 5,525
Cost of sales, exclusive of depreciation
and amortization 3,876 3,909 3,696
Research and development 157 143 124
Selling, administration and
other expenses 466 442 394
Depreciation and amortization 278 261 255
Partnership income (loss) 70 82 95
Other income (expense) - net 103 108 (1)
Income before interest expense and
provision for income taxes 634 1,048 1,150
Interest expense 269 268 172
Income (loss) before provision for
income taxes - continuing operations 365 780 978
Provision (credit) for income taxes 130 257 381
Income (loss) from corporate
investments carried at equity (42) 27 33
Income (loss) from continuing operations 188 530 608
Cumulative effect of change in
accounting principle - - -
Net income (loss) - common stockholders 308 573 662
Per common share
Basic - Income (loss) from
continuing operations $ 1.34 $ 3.79 $ 4.52
- Net income (loss) 2.19 4.10 4.92
Diluted - Income (loss) from
continuing operations 1.32 3.63 4.30
- Net income (loss) 2.16 3.92 4.67
From the Balance Sheet
Net current assets of continuing
operations $ 7 $ 22 $ 14
Total assets 7,389 7,355 7,327
Long-term debt 2,058 2,060 2,271
Other long-term obligations 357 572 594
Total capital(b) 5,338 5,319 4,805
Stockholders' equity 2,373 2,383 1,836
Stockholders' equity per common share 18.88 16.83 13.34
Other Data
Cash dividends on common stock $ 138 $ 140 $ 155
Cash dividends per common share 1.00 1.00 1.15
Special distribution per common share - - -
Market price per common share - high(c) 24.88 33.25 28.38
Market price per common share - low(c) 14.13 22.75 17.00
Common shares outstanding (thousands) 125,674 141,578 137,602
Capital expenditures 381 483 380
Employees - continuing operations 17,722 18,032 17,258
Selected Financial Ratios
Total debt/total capital 54.0% 49.9% 56.1%
Return on capital(b) 8.4% 21.2% 24.5%
Return on equity(e) 12.9% 31.2% 53.1%
Income from continuing operations/average
stockholders' equity 7.9% 25.1% 39.4%
Cash dividends on common stock/income
from continuing operations 73.4% 26.4% 25.5%
<FN>
a) Selling, administration and other expenses in 1995 include a charge of $68
million for postemployment benefits.
b) Return on capital is computed by dividing income by beginning-of-year
capital. Income consists of income from continuing operations, less
preferred dividends, plus after-tax interest cost (net of interest income
received from Praxair), plus income attributable to minority interests.
Capital consists of total debt plus minority stockholders' equity in
consolidated subsidiaries and stockholders' equity, adjusted for the
corporation's Praxair-related assets and the cumulative effect of changes
in accounting principles. Total debt consists of short-term debt, long-term
debt and the current portion of long-term debt.
c) Prices are based on New York Stock Exchange Composite Transactions.
d) In 1992 the corporation spun off Praxair, Inc. The high and low presented
in the table for 1992 represent the value of the common stock after the
spin-off. The high and low for 1992 before the spin-off were $29.63 and
$20.13, respectively.
e) Return on equity is computed by dividing net income (loss)-common
stockholders by beginning-of-year stockholders' equity.
- 18 - and - 19 -
Quarterly Data
Union Carbide Corporation and Subsidiaries
Millions of dollars 1Q 2Q 3Q 4Q Year
1997
Net sales $1,638 $1,666 $1,659 $1,539 $6,502
Cost of sales 1,231 1,220 1,199 1,156 4,806
Gross profit 407 446 460 383 1,696
Depreciation and amortization 82 87 87 84 340
Operating profit 247 291 291 216 1,045
Income before cumulative effect of
change in accounting principle 157 191 181 147 676
Cumulative effect of change in
accounting principle - - - (17) (17)
Net income 157 191 181 130 659
Net income - common stockholders 155 188 179 130 652
1996
Net sales $1,501 $1,559 $1,538 $1,508 $6,106
Cost of sales 1,099 1,150 1,145 1,174 4,568
Gross profit 402 409 393 334 1,538
Depreciation and amortization 75 79 81 77 312
Operating profit 259 245 242 175 921
Net income 157 173 161 102 593
Net income - common stockholders 155 170 159 99 583
Dollars per common share 1Q 2Q 3Q 4Q Year
1997
Basic -
Income before cumulative effect of
change in accounting principle $ 1.17 $ 1.46 $ 1.34 $ 1.07 $ 5.02
Cumulative effect of change in
accounting principle - - - (0.13) (0.13)
Net income - common stockholders 1.17 1.46 1.34 0.94 4.89
Diluted -
Income before cumulative effect of
change in accounting principle 1.03 1.28 1.18 1.04 4.53
Cumulative effect of change in
accounting principle - - - (0.12) (0.12)
Net income - common stockholders 1.03 1.28 1.18 0.92 4.41
Cash dividends declared 0.1875 0.1875 0.4125 - 0.7875
Market price - high(a) 49.38 50.63 56.81 50.13 56.81
Market price - low(a) 40.50 42.50 46.69 41.44 40.50
1996
Basic -
Net income - common stockholders $ 1.15 $ 1.27 $ 1.22 $ 0.77 $ 4.43
Diluted -
Net income - common stockholders 1.01 1.12 1.08 0.68 3.90
Cash dividends declared 0.1875 0.1875 0.1875 0.1875 0.75
Market price - high(a) 49.88 49.63 46.25 47.00 49.88
Market price - low(a) 36.63 39.00 36.38 39.00 36.38
a) Prices are based on New York Stock Exchange Composite Transactions.
- 20 -
Consolidated Balance Sheet
Union Carbide Corporation and Subsidiaries
Millions of dollars at December 31, 1997 1996
Assets
Cash and cash equivalents $ 68 $ 94
Notes and accounts receivable 993 1,047
Inventories 604 541
Other current assets 201 191
Total Current Assets 1,866 1,873
Property, plant and equipment 7,707 7,159
Less: Accumulated depreciation 3,927 3,750
Net Fixed Assets 3,780 3,409
Companies carried at equity 690 695
Other investments and advances 73 77
Total Investments and Advances 763 772
Other assets 555 492
Total Assets $6,964 $6,546
Liabilities and Stockholders' Equity
Accounts payable $ 273 $ 268
Short-term debt and current portion of long-term debt 429 112
Accrued income and other taxes 75 133
Other accrued liabilities 727 765
Total Current Liabilities 1,504 1,278
Long-term debt 1,458 1,487
Postretirement benefit obligation 464 473
Other long-term obligations 738 811
Deferred credits 419 301
Minority stockholders' equity in consolidated subsidiaries 33 29
Convertible preferred stock - ESOP - 144
Unearned employee compensation - ESOP - (91)
Stockholders' equity
Common stock
Authorized - 500,000,000 shares
Issued - 154,609,669 shares 155 155
Additional paid-in capital 47 370
Translation and other equity adjustments (104) (33)
Retained earnings 3,074 2,629
Unearned employee compensation - ESOP (80) -
Less: Treasury stock, at cost - 17,666,164 shares
(28,169,324 in 1996) 744 1,007
Total Stockholders' Equity 2,348 2,114
Total Liabilities and Stockholders' Equity $6,964 $6,546
<FN>
The Notes to Financial Statements on pages 25 through 40 should be read in
conjunction with this statement.
- 21 -
Consolidated Statement of Income
Union Carbide Corporation and Subsidiaries
Millions of dollars (except per share figures),
year ended December 31, 1997 1996 1995
Net Sales $6,502 $6,106 $5,888
Cost of sales, exclusive of
depreciation and amortization 4,806 4,568 4,100
Research and development 157 159 144
Selling, administration and other expenses 324 321 387
Depreciation and amortization 340 312 306
Partnership income 133 144 152
Other income - net 37 31 245
Income Before Interest Expense and
Provision for Income Taxes 1,045 921 1,348
Interest expense 79 76 89
Income Before Provision for Income Taxes 966 845 1,259
Provision for income taxes 279 236 380
Income of Consolidated Companies and Partnerships 687 609 879
Minority interest 14 - 1
Income (loss) from corporate investments
carried at equity 3 (16) 47
Income Before Cumulative Effect of Change in
Accounting Principle 676 593 925
Cumulative effect of change in accounting principle (17) - -
Net Income 659 593 925
Preferred stock dividends, net of income taxes 7 10 10
Net Income - Common Stockholders $ 652 $ 583 $ 915
Earnings per Common Share
Basic -
Income before cumulative effect of change in
accounting principle $ 5.02 $ 4.43 $ 6.65
Cumulative effect of change in accounting
principle (0.13) - -
Net income - common stockholders $ 4.89 $ 4.43 $ 6.65
Diluted -
Income before cumulative effect of change in
accounting principle 4.53 3.90 5.85
Cumulative effect of change in accounting
principle (0.12) - -
Net income - common stockholders $ 4.41 $ 3.90 $ 5.85
Cash Dividends Declared per Common Share $ 0.7875 $ 0.75 $ 0.75
<FN>
The Notes to Financial Statements on pages 25 through 40 should be read in
conjunction with this statement.
- 22 -
Consolidated Statement of Cash Flows
Union Carbide Corporation and Subsidiaries
Increase (decrease) in cash and cash equivalents
Millions of dollars, year ended December 31, 1997 1996 1995
Operations
Income before cumulative effect of change
in accounting principle $ 676 $ 593 $ 925
Noncash charges (credits) to net income
Depreciation and amortization 340 312 306
Deferred income taxes 86 82 (29)
Net gains on investing transactions - (3) (379)
Other 6 16 186
Increase in working capital(a) (144) (92) (242)
Long-term assets and liabilities (47) (46) (4)
Cash Flow From Operations 917 862 763
Investing
Capital expenditures (755) (721) (542)
Investments, advances and acquisitions
(excluding cash acquired) (68) (263) (431)
Sale of investments - - 552
Sale of fixed and other assets 13 22 54
Cash Flow Used for Investing (810) (962) (367)
Financing
Change in short-term debt (3 months or less) 271 96 (11)
Proceeds from short-term debt 51 21 6
Repayment of short-term debt - (37) -
Proceeds from long-term debt 14 203 402
Repayment of long-term debt (30) (10) (22)
Issuance of common stock 44 129 116
Purchase of common stock (337) (544) (425)
Proceeds from subsidiary preferred stock 250 - -
Purchase of subsidiary preferred stock (240) - -
Payment of dividends (134) (111) (116)
Other (21) (1) (7)
Cash Flow Used for Financing (132) (254) (57)
Effect of exchange rate changes on cash
and cash equivalents (1) (1) 1
Change in cash and cash equivalents (26) (355) 340
Cash and cash equivalents beginning-of-year 94 449 109
Cash and Cash Equivalents End-of-Year $ 68 $ 94 $ 449
Cash paid for interest and income taxes
Interest (net of amount capitalized) $ 77 $ 66 $ 68
Income Taxes 121 169 329
<FN>
a) Net change in certain components of working capital
(excluding noncash transactions):
(Increase) decrease in current assets
Notes and accounts receivable $ 53 $ (26) $ (111)
Inventories (63) 43 (144)
Other current assets - 25 8
Increase (decrease) in payables and accruals (134) (134) 5
(Increase) in working capital $(144) $ (92) $(242)
The Notes to Financial Statements on pages 25 through 40 should be read in
conjunction with this statement.
- 23 -
Consolidated Statement of Stockholders' Equity
Union Carbide Corporation and Subsidiaries
1997
Shares Millions
(in thousands) of dollars
Common Stock
Balance at December 31 154,610 $ 155
Additional Paid-In Capital
Balance at January 1 $ 370
Put options, net 26
Issued:
For the Dividend Reinvestment
and Stock Purchase Plan 2
For employee savings and
incentive plans (66)
Effect of conversion of preferred
shares held by the ESOP (285)
Balance at December 31 $ 47
Translation and Other
Equity Adjustments
Balance at January 1 $ (33)
Translation and other adjustments (71)
Sale of businesses -
Balance at December 31 $ (104)
Retained Earnings
Balance at January 1 $ 2,629
Net income - common stockholders 652
Effect of conversion of preferred
shares held by the ESOP (107)
Cash dividends on common stock (100)
Balance at December 31 $ 3,074
Unearned Employee Compensation - ESOP
Balance at January 1 $ -
Reclassification due to conversion of
preferred shares held by the ESOP (81)
Shares allocated to ESOP participants 1
Balance at December 31 $ (80)
Treasury Stock
Balance at January 1 28,169 $ 1,007
Common stock repurchase program 7,071 340
Issued:
For the Dividend Reinvestment
and Stock Purchase Plan (189) (7)
Effect of conversion of preferred
shares held by the ESOP (15,406) (530)
For employee savings and
incentive plans (1,979) (66)
Balance at December 31 17,666 $ 744
Total Stockholders' Equity $ 2,348
1996
Shares Millions
(in thousands) of dollars
Common Stock
Balance at December 31 154,610 $ 155
Additional Paid-In Capital
Balance at January 1 $ 343
Put options, net 8
Issued:
For the Dividend Reinvestment
and Stock Purchase Plan 2
For employee savings and
incentive plans 17
Effect of conversion of preferred
shares held by the ESOP -
Balance at December 31 $ 370
Translation and Other
Equity Adjustments
Balance at January 1 $ (15)
Translation and other adjustments (18)
Sale of businesses -
Balance at December 31 $ (33)
Retained Earnings
Balance at January 1 $ 2,145
Net income - common stockholders 583
Effect of conversion of preferred
shares held by the ESOP -
Cash dividends on common stock (99)
Balance at December 31 $ 2,629
Unearned Employee Compensation - ESOP
Balance at January 1 $ -
Reclassification due to conversion of
preferred shares held by the ESOP -
Shares allocated to ESOP participants -
Balance at December 31 $ -
Treasury Stock
Balance at January 1 19,502 $ 583
Common stock repurchase program 12,821 550
Issued:
For the Dividend Reinvestment
and Stock Purchase Plan (212) (7)
Effect of conversion of preferred
shares held by the ESOP - -
For employee savings and
incentive plans (3,942) (119)
Balance at December 31 28,169 $ 1,007
Total Stockholders' Equity $ 2,114
1995
Shares Millions
(in thousands) of dollars
Common Stock
Balance at December 31 154,610 $ 155
Additional Paid-In Capital
Balance at January 1 $ 369
Put options, net (19)
Issued:
For the Dividend Reinvestment
and Stock Purchase Plan 1
For employee savings and
incentive plans (8)
Effect of conversion of preferred
shares held by the ESOP -
Balance at December 31 $ 343
Translation and Other
Equity Adjustments
Balance at January 1 $ (59)
Translation and other adjustments (11)
Sale of businesses 55
Balance at December 31 $ (15)
Retained Earnings
Balance at January 1 $ 1,333
Net income - common stockholders 915
Effect of conversion of preferred
shares held by the ESOP -
Cash dividends on common stock (103)
Balance at December 31 $ 2,145
Unearned Employee Compensation - ESOP
Balance at January 1 $ -
Reclassification due to conversion of
preferred shares held by the ESOP -
Shares allocated to ESOP participants -
Balance at December 31 $ -
Treasury Stock
Balance at January 1 10,197 $ 289
Common stock repurchase program 14,127 426
Issued:
For the Dividend Reinvestment
and Stock Purchase Plan (322) (9)
Effect of conversion of preferred
shares held by the ESOP - -
For employee savings and
incentive plans (4,500) (123)
Balance at December 31 19,502 $ 583
Total Stockholders' Equity $ 2,045
<FN>
The Notes to Financial Statements on pages 25 through 40 should be read in
conjunction with this statement.
- 24 -
Notes to Financial Statements
Index PAGE
ONE Summary of Significant Accounting Policies 25
TWO Financial Instruments 26
THREE Supplementary Balance Sheet Detail 27
FOUR Supplementary Income Statement Detail 28
FIVE Business and Geographic Segment Information 28
SIX Acquisitions and Divestitures 29
SEVEN Income Taxes 30
EIGHT Partnerships and Joint Ventures 31
NINE Long-Term Debt 32
TEN Minority Interest 32
ELEVEN Earnings per Share 33
TWELVE Retirement Programs 34
THIRTEEN Employee Stock Ownership Plan 36
FOURTEEN Incentive Plans 36
FIFTEEN Stockholders' Equity 38
SIXTEEN Leases 38
SEVENTEEN Commitments and Contingencies 39
ONE
Summary of Significant Accounting Policies
Nature of Operations o Union Carbide Corporation is engaged in two segments
of the chemicals and plastics industry, Specialties & Intermediates and Basic
Chemicals & Polymers. See note five.
Principles of Consolidation o The consolidated financial statements include
the accounts of all significant subsidiaries. All significant intercompany
transactions have been eliminated in consolidation. Investments in 20 percent-
to 50 percent-owned companies and partnerships are carried at equity in net
assets. Other investments are carried generally at cost.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles, which require the corporation to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Accounting Changes o In November 1997, the Emerging Issues Task Force
reached consensus on Issue 97-13, "Accounting for Costs Incurred in Connection
with a Consulting Contract or an Internal Project That Combines Business
Process Reengineering and Information Technology Transformation," requiring
companies to expense as incurred costs associated with business process
reengineering activities. Effective Oct. 1, 1997, the corporation adopted the
provisions of Issue 97-13 as a cumulative effect of a change in accounting
principle, reversing $28 million ($17 million, after tax) of costs previously
capitalized from 1995 through the third quarter of 1997.
Additionally in 1997, the corporation adopted Statement of Financial
Accounting Standards (SFAS) 128, "Earnings Per Share," and SFAS 129,
"Disclosure of Information About Capital Structure." In 1996, the corporation
adopted SFAS 123, "Accounting for Stock-Based Compensation," under which the
corporation elected to continue following Accounting Principles Board (APB)
Opinion 25. In 1995, the corporation adopted SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
the effect of which was not material.
Foreign Currency Translation o Unrealized gains and losses resulting from
translating foreign subsidiaries' assets and liabilities into U.S. dollars
generally are accumulated in an equity account on the balance sheet until such
time as the subsidiary is sold or substantially or completely liquidated.
Translation gains and losses relating to operations located in Latin American
countries, where hyperinflation exists, and to international operations using
the U.S. dollar as their functional currency are included in the income
statement.
- 25 -
Financial Instruments o Financial instruments are used to hedge financial
risk caused by fluctuating interest and currency rates. The amounts to be paid
or received on interest rate risk instruments that hedge debt, accrue and are
recognized over the lives of the instruments. Gains and losses on foreign
currency risk instruments used to hedge firm commitments are deferred and
recognized as part of the related foreign currency transactions.
Foreign currency instruments that are designated to offset fluctuations in
the dollar value of foreign currency accounts receivable and payable and from
earnings fluctuations in anticipated foreign currency cash flows are marked to
market and the results recognized immediately as other income or other
expense.
Cash Equivalents o The corporation considers as cash equivalents all highly
liquid investments that are readily convertible to known amounts of cash and
are so near their maturity that they present insignificant risk of changes in
value because of changes in interest rates.
Inventories o Inventories are stated at cost or market, whichever is lower.
These amounts do not include depreciation and amortization, the impact of
which is not significant to the financial statements.
Approximately 67 percent of inventory amounts before application of the LIFO
method at Dec. 31, 1997 (66 percent at Dec. 31, 1996) have been valued on the
LIFO basis; the "average cost" method is used for the balance. It is estimated
that if inventories had been valued at current costs, they would have been
approximately $348 million and $329 million higher than reported at Dec. 31,
1997 and 1996, respectively.
Fixed Assets o Fixed assets are carried at cost. Expenditures for
replacements are capitalized, and the replaced items are retired. Gains and
losses from the sale of property are included in income.
Depreciation is calculated on a straight-line basis. The corporation and its
subsidiaries generally use accelerated depreciation methods for tax purposes
where appropriate.
Patents, Trademarks and Goodwill o Amounts paid for purchased patents and
newly acquired businesses in excess of the fair value of the net assets of
such businesses have been charged to patents, trademarks and goodwill. The
portion of such amounts determined to be attributable to patents is amortized
over their remaining lives, while trademarks and goodwill are amortized over
the estimated period of benefit, generally 5 to 20 years.
Research and Development o Research and development costs are charged to
expense as incurred. Depreciation expense applicable to research and
development facilities and equipment is included in Depreciation and
amortization in the Consolidated Statement of Income ($12 million in 1997, $11
million in 1996 and $14 million in 1995).
Income Taxes o Provisions have been made for deferred income taxes based on
differences between financial statement and tax bases of assets and
liabilities using currently enacted tax rates and regulations.
Environmental Costs o Environmental expenditures are expensed or capitalized
as appropriate, depending on their future economic benefit. Expenditures
relating to an existing condition caused by past operations and having no
future economic benefits are expensed. Environmental expenditures include site
investigation, physical remediation, operation and maintenance, and legal and
administrative costs. Environmental accruals are established for sites where
it is probable that a loss has been incurred and the amount of the loss can
reasonably be estimated. Where the estimate is a range and no amount within
the range is a better estimate than any other amount, the corporation accrues
the minimum amount in the range and includes the balance of the range in its
reported contingencies.
Retirement Programs o The cost of pension benefits under the U.S. Retirement
Program is determined by an independent actuarial firm using the projected
unit credit actuarial cost method, with an unrecognized net asset at Jan. 1,
1986, amortized over 15 years. Contributions to this program are made in
accordance with the regulations of the Employee Retirement Income Security Act
of 1974.
The cost of postretirement benefits is recognized on the accrual basis over
the period in which employees become eligible for benefits.
Incentive Plans o The corporation applies APB Opinion 25 in accounting for
the stock purchase plan and the stock option portion of its employee
compensation plan. Compensation expense is recognized for other stock-based
incentives issued under the long-term incentive plan.
Reclassifications o Certain prior year amounts have been reclassified to
conform with the current year's presentation.
TWO
Financial Instruments
Fair values of financial instruments are estimated by using a method that
indicates the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation
sale. The fair values of the financial instruments included on the
Consolidated Balance Sheet were estimated as follows:
Cash, Short-Term Receivables and Accounts Payable o At Dec. 31, 1997 and
1996, the carrying amounts approximate fair values because of the short
maturity of these instruments. The corporation did not
- 26 -
have any foreign currency forward contracts outstanding at Dec. 31, 1997 ($38
million at Dec. 31, 1996) to hedge fluctuations in the dollar value of short-
term foreign currency receivables and payables.
Outstanding foreign currency forward contracts and options used as a means
of offsetting fluctuations in the dollar value of other foreign currency
accounts receivable and payable and earnings fluctuations from anticipated
foreign currency cash flows totaled $185 million at Dec. 31, 1997 ($188
million at Dec. 31, 1996). During 1997 and 1996, the average fair values of,
and the resultant gains and losses associated with, these contracts were not
material.
Investments o The corporation's investments in equity companies,
partnerships and other businesses generally involve joint ventures for which
it is not practicable to determine fair values.
Long-Term Receivables o The fair values of long-term receivables are
calculated using current interest rates and consideration of underlying
collateral where appropriate. The fair value, which approximate the carrying
values of $85 million and $51 million, are included in Other assets in the
Consolidated Balance Sheet at Dec. 31, 1997 and 1996, respectively.
Debt o The corporation uses various types of financial instruments,
including interest rate swaps and forward rate agreements, to manage exposure
to financial market risk caused by interest rate fluctuations. An interest
rate swap held at Dec. 31, 1997 and 1996, had a nominal carrying amount and
fair value.
Carrying and Fair Values o The carrying values and fair values of the
corporation's investments, long-term receivables and debt financial
instruments at Dec. 31, 1997 and 1996, are summarized in the table below. Fair
values are based on quoted market values, where available, or discounted cash
flows (principally long-term debt).
Millions of dollars
at December 31, 1997 1996
Carrying Fair Carrying Fair
Assets (Liabilities) Amount Value Amount Value
Investments and
receivables $ 158 $ 158 $ 128 $ 128
Short- and
long-term debt (1,887) (1,956) (1,599) (1,619)
THREE
Supplementary Balance Sheet Detail
Millions of dollars at December 31, 1997 1996
Notes and Accounts Receivable
Trade $ 826 $ 846
Other 178 211
1,004 1,057
Less: Allowance for doubtful accounts 11 10
$ 993 $1,047
Inventories
Raw materials and supplies $ 135 $ 114
Work in process 62 54
Finished goods 407 373
$ 604 $ 541
Property, Plant and Equipment
Land and improvements $ 328 $ 326
Buildings 407 393
Machinery and equipment 6,230 5,795
Construction in progress and other 742 645
$7,707 $7,159
Other Assets
Deferred charges $ 227 $ 193
Insurance recovery receivables 147 135
Long-term receivables 85 51
Patents, trademarks and goodwill 96 113
$ 555 $ 492
Other Accrued liabilities
Accrued accounts payable $ 301 $ 335
Payrolls 55 56
Environmental remediation costs 68 58
Postretirement benefit obligation 34 33
Employee profit sharing 55 51
Other 214 232
$ 727 $ 765
Other Long-Term Obligations
Environmental remediation costs $ 196 $ 252
Product liability costs 174 170
Impairment of unused office space 136 151
Postemployment benefits 72 83
Other 160 155
$ 738 $ 811
Translation and Other
Equity Adjustments
Canada $ (54) $ (44)
Europe (7) 18
Far East & Other (43) (7)
$ (104) $ (33)
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FOUR
Supplementary Income Statement Detail
Millions of dollars
for the year ended December 31, 1997 1996 1995
Selling, Administration and Other Expenses
Selling $124 $130 $128
Administration(a) 126 121 186
Other expenses 74 70 73
$324 $321 $387
Other Income (Expense) - Net
Gains on sales and disposals of
business and other assets(b) $ - $ - $387
Investment and interest income 27 32 19
Foreign currency adjustments (8) (7) (6)
Unused space charge(c) - - (191)
Other 18 6 36
$ 37 $ 31 $245
Interest Expense
Interest incurred(d) $ 130 $121 $119
Less: interest capitalized and
other adjustments 51 45 30
$ 79 $ 76 $ 89
a) Includes a charge of $68 million for postemployment benefits in 1995.
b) Includes for 1995 a $381 million gain from the sales of the corporation's
remaining interest in UCAR International Inc.
c) See note sixteen.
d) Includes $12 million in 1997, 1996 and 1995, representing the interest
component of certain leases.
FIVE
Business and Geographic Segment Information
The company's operations are classified into two business segments. The
Specialties & Intermediates segment includes the corporation's specialty
chemicals and polymers product lines, licensing, and solvents and chemical
intermediates. The Basic Chemicals & Polymers segment includes the
corporation's ethylene and propylene manufacturing operations as well as the
production of first-level ethylene and propylene derivatives - polyethylene,
polypropylene, ethylene oxide and ethylene glycol. The corporation's noncore
operations and financial transactions are included in the Other segment.
Millions of dollars 1997 1996 1995
Net Sales
Specialties & Intermediates $ 4,453 $4,286 $4,123
Basic Chemicals & Polymers 2,420 2,125 2,080
Intersegment eliminations (371) (305) (315)
$6,502 $6,106 $5,888
Partnership Income
Specialties & Intermediates $ 116 $ 134 $ 130
Basic Chemicals & Polymers 17 10 22
$ 133 $ 144 $ 152
Depreciation and Amortization
Specialties & Intermediates $ 214 $ 188 $ 194
Basic Chemicals & Polymers 126 124 112
$ 340 $ 312 $ 306
Operating Profit (Loss)
Specialties & Intermediates $ 667 $ 742 $ 709
Basic Chemicals & Polymers 386 162 444
Other (8) 17 195
$1,045 $ 921 $1,348
Capital Expenditures
Specialties & Intermediates $ 458 $ 522 $ 392
Basic Chemicals & Polymers 297 199 150
$ 755 $ 721 $ 542
Identifiable Assets
Specialties & Intermediates $4,146 $3,892 $3,527
Basic Chemicals & Polymers 2,540 2,328 2,095
Other 278 326 634
$6,964 $6,546 $6,256
Sales of the Basic Chemicals & Polymers segment include intersegment sales,
principally ethylene oxide, which are made at the estimated market value of
the products transferred. Operating profit is Income Before Interest Expense
and Provision for Income Taxes.
The operating profit of the Specialties & Intermediates segment for 1997
includes a $12 million charge for the write-off certain equipment associated
with the corporation's ethylene propylene rubber project.
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The operating profit of the Specialties & Intermediates segment for 1995
includes a $48 million charge for postemployment benefits and an increase of
$12 million in depreciation expense related to a reduction in the depreciable
lives of certain computer equipment. The operating profit of the Basic
Chemicals & Polymers segment for 1995 includes a $20 million charge for
postemployment benefits. Other operating profit for 1995 includes a gain of
$381 million on the sales of the corporation's interest in UCAR International
Inc. and a charge of $191 million for future lease costs on unused office
space, primarily at the corporation's headquarters.
Net sales, operating profit (loss) and identifiable assets by geographic
area were as follows:
Millions of dollars 1997 1996 1995
Net Sales
United States & Puerto Rico(a) $4,634 $4,336 $4,071
Canada 172 147 142
Europe 685 664 719
Latin America 255 228 227
Far East & Other 756 731 729
International operations 1,868 1,770 1,817
$6,502 $6,106 $5,888
Operating Profit (Loss)
United States & Puerto Rico $ 957 $ 820 $1,228
Canada 29 28 36
Europe(b) 7 41 50
Latin America 12 (11) 12
Far East & Other 41 37 29
International operations 89 95 127
Intersegment eliminations (1) 6 (7)
$1,045 $ 921 $1,348
Identifiable Assets
United States & Puerto Rico $5,501 $4,977 $4,433
Canada 302 305 277
Europe 378 408 404
Latin America 232 224 191
Far East & Other 279 312 322
International operations 1,191 1,249 1,194
Intersegment eliminations (6) (6) (5)
Other 278 326 634
$6,964 $6,546 $6,256
a) Includes export sales of $894 million in 1997 ($743 million in 1996 and
$732 million in 1995).
b) Included in 1997 are higher costs associated with expansion and maintenance
of the corporation's Wilton, U.K. facility.
SIX
Acquisitions and Divestitures
In April 1997, the corporation and Exxon Chemical Company formed Univation
Technologies, LLC, a 50-50 joint venture for the research, development,
marketing and licensing of polyethylene technology and metallocene catalysts.
In January 1996, the corporation purchased the polypropylene assets and
business of Shell Oil Company. The purchased assets, located in the U.S.,
consist of Shell's polypropylene technology and manufacturing facilities and
polypropylene assets previously held jointly by both companies.
In February 1996, the corporation purchased 95 percent of the outstanding
shares of Companhia Alcoolquimica Nacional, a Brazilian producer of vinyl
acetate monomer.
In July 1995, the corporation and two Kuwaiti corporations, Petrochemical
Industries Company and Boubyan Petrochemical Company, formed EQUATE
Petrochemical Company, a joint venture for development of a world-scale
petrochemical complex in Kuwait. EQUATE commenced operations in 1997.
In March 1995, the corporation acquired 50 percent of the equity of Polimeri
Europa S.r.l., a producer of ethylene and polyethylene resins, from EniChem
S.p.A. for $216 million. EniChem retained the other 50 percent.
In February 1995, the corporation purchased certain ethylene oxide
derivative businesses from Imperial Chemical Industries of London for $71
million.
In January 1995, the corporation and Mitsubishi Corporation concluded the
sale of newly issued common stock of UCAR International Inc. to a new company
formed by Blackstone Capital Partners II Merchant Banking Fund L.P. and a
repurchase of certain shares by UCAR that resulted in Blackstone acquiring a
75 percent interest in UCAR. The corporation received $343 million in net cash
proceeds and retained a 25 percent equity interest in UCAR. This transaction
resulted in a gain of $220 million ($154 million after-tax). In August 1995,
the corporation joined in UCAR's initial public offering to sell its remaining
equity interest in UCAR for net cash proceeds of $199 million. This sale
resulted in a gain of $161 million ($99 million after-tax).
- 29 -
SEVEN
Income Taxes
The following is a summary of the U.S. and non-U.S. components of Income
Before Provision for Income Taxes:
Millions of dollars
for the year ended December 31, 1997 1996 1995
U.S. $897 $766 $1,137
Non-U.S. 69 79 122
$966 $845 $1,259
The following is an analysis of income tax expense:
1997 1996
Millions of dollars
for the year ended December 31, Current Deferred Current Deferred
U.S. Federal income taxes $154 $80 $107 $79
U.S. business and research and
experimentation tax credits (14) - (8) -
U.S. state and local taxes
based on income 1 4 1 2
Non-U.S. income taxes 52 2 54 1
193 86 154 82
Provision for Income Taxes $279 $236
1995
Millions of dollars
for the year ended December 31, Current Deferred
U.S. Federal income taxes $332 $(24)
U.S. business and research and
experimentation tax credits (17) -
U.S. state and local taxes
based on income 47 (7)
Non-U.S. income taxes 47 2
409 (29)
Provision for Income Taxes $380
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
1997 1996
Millions of dollars Deferred Deferred Deferred Deferred
at December 31, Assets Liabilities Assets Liabilities
Depreciation and amortization $ - $495 $ - $435
Postretirement and
postemployment benefits 226 - 229 -
Environmental and litigation costs 113 - 133 -
Sale/leaseback and related deferrals 101 - 103 -
Other 174 242 199 246
Gross deferred tax assets and
liabilities 614 737 664 681
Net Deferred Tax Liability $123 $17
Net noncurrent deferred tax liabilities of $263 million ($142 million in
1996) are included in Deferred credits in the Consolidated Balance Sheet. Net
current deferred tax assets of $135 million ($118 million in 1996) are
included in Other current assets. Net noncurrent deferred tax assets of $5
million ($7 million in 1996) are included in Other assets. In 1997 and 1996
there were $2 million in non-U.S. net operating loss carryforwards included in
the deferred tax assets above.
Undistributed earnings of affiliates intended to be reinvested indefinitely
amounted to approximately $469 million at Dec. 31, 1997 ($403 million at Dec.
31, 1996). Determination of deferred taxes related to these earnings is not
practicable.
- 30 -
An analysis of the difference between Provision for income taxes and the
amount computed by applying the statutory Federal income tax rate to Income
Before Provision for Income Taxes is as follows:
Percentage of
Pre-Tax Income
Year ended December 31, 1997 1996 1995
Tax at statutory Federal rate 35.0% 35.0% 35.0%
Taxes related to operations
outside the U.S. (0.7) (1.0) 0.1
U.S. state and local taxes
based on income 0.3 0.3 1.0
Foreign sales corporation (2.9) (3.0) (1.4)
Business credits (1.5) (0.9) (1.4)
Other, net (1.3) (2.5) (3.1)
Consolidated effective
income tax rate 28.9% 27.9% 30.2%
EIGHT
Partnerships and Joint Ventures
The following are financial summaries of 33 percent- to 50 percent-owned
Companies carried at equity. The corporation's most significant companies
carried at equity, classified as partnerships, include UOP LLC, Petromont and
Company, Limited Partnership, Aspell Polymeres SNC, World Ethanol Company and
Univation Technologies, LLC. The corporation purchased the balance of the
Union Carbide/Shell polypropylene partnership in January 1996 (see note six).
Partnerships
Millions of dollars 1997 1996 1995
Net Sales(a) $2,076 $2,109 $2,146
Cost of sales 1,242 1,338 1,312
Depreciation 83 83 66
Partnership income 249 242 283
UCC Share of Partnership Income $ 133 $ 144 $ 152
Current assets $ 746 $ 704
Noncurrent assets 886 806
Total assets 1,632 1,510
Current liabilities 451 608
Noncurrent liabilities 711 385
Total liabilities 1,162 993
Net assets 470 517
UCC Equity $ 278 $ 251
a) Includes $208 million net sales to the corporation in 1997 ($159 million in
1996 and $177 million in 1995).
The corporation's companies earned at equity, classified as corporate
investments, include Polimeri Europa S.r.l., EQUATE Petrochemical Company
K.S.C., Nippon Unicar Company Limited, Alberta & Orient Glycol Company
Limited, Asian Acetyls Co., Ltd., several smaller entities and, in 1995, UCAR
International Inc.
Corporate Investments
Millions of dollars 1997 1996 1995
Net Sales(a) $2,248 $2,059 $1,731
Cost of sales 1,814 1,693 1,221
Depreciation 109 129 119
Net income (loss) 75 (6) 96
UCC Share of Net Income (Loss) $ 3 $ (16) $ 47
Current assets $ 933 $ 877
Noncurrent assets 3,252 2,918
Total assets 4,185 3,795
Current liabilities 872 888
Noncurrent liabilities 2,347 1,891
Total liabilities 3,219 2,779
Net assets 966 1,016
UCC Equity $ 412 $ 444
a) Includes $156 million net sales to the corporation in 1997 ($153 million in
1996 and $167 million in 1995).
Dividends and distributions received from joint ventures and partnerships
aggregated $126 million in 1997 ($141 million in 1996 and $97 million in
1995).
- 31 -
NINE
Long-Term Debt
Millions of dollars at December 31, 1997 1996
6.75% Notes due 2003 $ 125 $ 125
6.79% Debentures due 2025(a) 250 250
7.00% Notes due 1999 175 175
7.50% Debentures due 2025 150 150
7.75% Debentures due 2096 200 200
7.875% Debentures due 2023 175 175
8.75% Debentures due 2022(b) 117 125
Pollution control and other facility obligations 242 243
Other debt - various maturities and
interest rates 29 54
1,463 1,497
Less: payments to be made within 1 year 5 10
$1,458 $1,487
a) Holders may request redemption of these debentures from the corporation on
June 1, 2005.
b) Redeemable at the option of the corporation on or after Aug. 1, 2002.
The corporation has a credit agreement with a group of banks providing the
corporation with $1 billion in credit through January 2002, but with the
option, subject to certain conditions, to increase the available credit by
$250 million and to extend the maturity date of the agreement by one year on a
rolling basis. Several options are available to borrow at floating interest
rates based on LIBOR (London Interbank Offered Rate) or Certificate of Deposit
Rate on a revolving basis.
In 1997, the corporation established a medium-term note program that allows
for borrowings of up to $500 million. Notes issued under the program will have
a maturity of nine months or longer and will bear interest at either a fixed
or floating rate determined by reference to interest rate formulas.
At Dec. 31, 1997, there were no outstanding borrowings under either the
corporation's credit agreement or its medium-term note program.
In 1996, the corporation issued $200 million of 7.75 percent debentures
maturing in 2096. The maturity of the debentures may be shortened under
certain circumstances to preserve the deductibility of interest payments for
Federal income tax purposes.
The corporation's credit agreement and the indentures under which notes and
debentures are issued contain covenants normal for these types of instruments.
These covenants place certain limits on the corporation's ability to merge
with another entity, sell assets, engage in sale-leaseback transactions, incur
debt or create liens on assets. In addition, the credit agreement requires the
corporation to meet leverage and interest coverage tests.
Pollution control and other facility obligations represent state,
commonwealth and local governmental bond financing of pollution control and
other facilities, and are treated for accounting and tax purposes as debt of
the corporation. These tax-exempt obligations mature at various dates from
1998 through 2023 and had an average annual effective interest rate of 7.2
percent in 1997.
The weighted average and effective interest rates in 1997 on the
corporation's fixed-rate debt, other than pollution control and other facility
obligations, were 7.7 percent. The corporation's weighted average interest
rate on short-term borrowings outstanding as of Dec. 31, 1997 was 6.4 percent
(6.3 percent at Dec. 31, 1996).
Payments due on long-term debt in the four years following 1998 are: 1999,
$182 million; 2000, $21 million; 2001, $23 million, and 2002, $16 million.
TEN
Minority Interest
In January 1997, a newly formed real estate investment trust subsidiary
issued $250 million of preferred stock bearing a current dividend yield of 14
percent for 10 years and 1 percent thereafter. In October 1997, the preferred
shares were redeemed for $240 million.
- 32 -
ELEVEN
Earnings Per Share
Basic and diluted earnings per share (EPS) are calculated based upon the
provisions of SFAS 128, adopted in 1997:
In millions
(except share and per share amounts) 1997 1996 1995
Basic -
Income before cumulative effect of
change in accounting principle $ 676 $ 593 $ 925
Less: Dividends on ESOP shares,
pre-tax (9) (13) (13)
Appreciation on ESOP
shares redeemed for cash (23) - -
Income before cumulative effect of
change in accounting principle
adjusted for basic calculation 644 580 912
Cumulative effect of change
in accounting principle (17) - -
Net income-common stockholders,
adjusted for basic calculation $ 627 $ 580 $ 912
Weighted average shares outstanding
for basic calculation 128,185,093 131,029,621 137,219,676
Earnings per share -
Income before cumulative effect of
change in accounting principle $ 5.02 $4.43 $6.65
Cumulative effect of change in
accounting principle (0.13) - -
Net income-common stockholders $ 4.89 $ 4.43 $ 6.65
Diluted -
Income before cumulative effect of
change in accounting principle,
adjusted for basic calculation $ 644 $ 580 $ 912
Plus: Dividends on ESOP shares,
pre-tax 9 13 13
Less: Additional ESOP contribution
resulting from assumed
conversion of ESOP shares (1) (1) (1)
Income before cumulative effect of
change in accounting principle,
adjusted for diluted calculation 652 592 924
Cumulative effect of change in
accounting principle (17) - -
Net income-common stockholders,
adjusted for diluted calculation $ 635 $ 592 $ 924
Weighted average shares outstanding
for basic calculation 128,185,093 131,029,621 137,219,676
Add: Effect of stock options 4,034,969 4,495,656 4,367,153
Effect of equity put options - 403 -
Shares issuable upon conversion of the
corporation's convertible ESOP shares 11,739,036 16,120,754 16,341,367
Weighted average shares outstanding,
adjusted for diluted calculation 143,959,098 151,646,434 157,928,196
Earnings per share -
Income before cumulative effect of
change in accounting principle,
adjusted for diluted calculation $ 4.53 $ 3.90 $ 5.85
Cumulative effect of change in
accounting principle (0.12) - -
Net income-common stockholders,
adjusted for diluted calculation $ 4.41 $ 3.90 $ 5.85
- 33 -
TWELVE
Retirement Programs
Pension Benefits o The noncontributory defined benefit retirement program of
Union Carbide Corporation ("U.S. Retirement Program") covers substantially all
U.S. employees and certain employees in other countries. Pension benefits are
based primarily on years of service and compensation levels prior to
retirement. Pension coverage for employees of the corporation's non-U.S.
consolidated subsidiaries is provided through separate plans, to the extent
deemed appropriate. Obligations under such plans are principally provided for
by depositing funds with trustees.
The components of net periodic pension cost for the plans combined are as
follows:
Millions of dollars
for the year ended December 31, 1997 1996 1995
(Gain) loss on plan assets
Actual $(827) $(190) $(904)
Deferred 588 (31) 692
(239) (221) (212)
Service cost - benefits earned
during the period 56 54 44
Interest cost on projected
benefit obligation 208 196 197
Amortization (8) (3) (6)
Net Periodic Pension Cost $ 17 $ 26 $ 23
The funded status of the plans combined is as follows:
Millions of dollars at December 31, 1997 1996
Actuarial present value of plan benefits
Accumulated benefit obligation
Vested $2,905 $2,599
Nonvested 138 132
3,043 2,731
Projected benefit obligation 3,324 3,001
Fair value of plan assets, primarily
invested in common stocks and
fixed-income securities 3,820 3,180
Plan assets in excess of projected
benefit obligation 496 179
Unamortized net asset at transition (49) (64)
Unamortized prior service cost 15 19
Unrecognized gains - net (457) (127)
Prepaid Pension Cost $ 5 $ 7
Pension obligations are valued using the 1994 Uninsured Pensioner Mortality
Table. Prior to 1997, these obligations were valued using the 1983 Group
Annuity Mortality Table. The actuarial assumptions used were as
follows:
At December 31, 1997 1996
Discount rate for determining
projected benefit obligation 6.50% 7.25%
Rate of increase in compensation levels 3.75% 4.50%
Expected long-term rate of return
on plan assets 8.00% 8.50%
- 34 -
Postretirement Benefits Other Than Pensions o The corporation provides
health care and life insurance benefits for eligible retired employees and
their eligible dependents. These benefits are provided through various
insurance companies and health care providers.
The obligation is determined by application of the terms of health and life
insurance plans, together with relevant actuarial assumptions and health care
cost trends projected to increase annually at rates of 8.0 percent in 1998 and
7.5 percent in 1999, falling incrementally to a 5.0 percent annual increase in
2004 and thereafter.
The effect of a 1 percent annual increase in the assumed health care cost
trend rates would increase the accumulated postretirement benefit obligation
at Dec. 31, 1997 by $33 million, and the aggregate of service and interest
cost components of net periodic postretirement benefit costs by $4 million.
Measurement of the accumulated postretirement benefit obligation was based on
the same actuarial assumptions used in the pension calculations.
The corporation has funded postretirement benefits for certain retirees who
retired prior to Dec. 31, 1988. The funds are invested primarily in common
stocks.
The components of net periodic postretirement benefit cost are as follows:
Millions of dollars
for the year ended December 31, 1997 1996 1995
(Gain) loss on plan assets
Actual $ (9) $ (4) $ (8)
Deferred 7 2 6
(2) (2) (2)
Service cost - benefits earned
during the period 14 13 11
Interest cost 33 31 35
Amortization (21) (21) (21)
Net Periodic Postretirement Benefit Cost $ 24 $ 21 $ 23
The funded status of the postretirement benefit obligation is as follows:
Millions of dollars at December 31, 1997 1996
Accumulated postretirement
benefit obligations
Retirees $382 $366
Fully eligible active plan participants 90 79
Other active plan participants 31 27
503 472
Fair value of plan assets 17 17
Accumulated postretirement benefits
in excess of plan assets 486 455
Unrecognized gains - net 12 51
Accrued Unfunded Postretirement
Benefit Obligations $498 $506
The accumulated postretirement benefit obligation for retirees is net of
$131 million at Dec. 31, 1997 ($130 million at Dec. 31, 1996), which is
reimbursed to the corporation in part by previously owned businesses under
ongoing benefit-sharing agreements.
Deferred Compensation Plan o Since Jan. 1, 1995, the corporation has
provided an unfunded, nonqualified deferred compensation plan to certain key
employees, offering them an election to defer a portion of their gross pay.
The corporation's obligation to employees is adjusted to reflect changes in
the market values of employees' investment choices. With limited exceptions,
participants' deferred account balances are scheduled for payment at or after
full retirement.
Postemployment Benefits o During 1995 the corporation recorded a charge of
$68 million ($49 million after-tax) for postemployment benefits. The charge
included severance costs relating to future staff reductions associated with
work process simplification efforts and changes in the corporation's severance
benefits.
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THIRTEEN
Employee Stock Ownership Plan
The Union Carbide Corporation Employee Stock Ownership Plan (ESOP) is an
integral part of the Savings and Investment Program (the Program) for
employees. Prior to October 1997, each share of the corporation's preferred
stock held by the ESOP (ESOP shares) was convertible into and had the same
voting rights as one share of the corporation's common stock. The annual
preferred dividend was $0.794 per share. In October 1997 the trustee of the
ESOP exercised its right to convert all outstanding ESOP shares into the
corporation's common stock. As a result of the conversion, the corporation's
common stock outstanding at that date was increased by 15.4 million shares.
Substantially all full-time employees in the U.S. are eligible to
participate in the ESOP through the allocation of ESOP shares equivalent to
the corporation's matching contribution of 75 percent of eligible employee
contributions to the Program. In addition, in 1997, eligible employees
received the equivalent of up to twenty days pay in ESOP shares through the
corporation's ESOP profit sharing plan.
Common shares held by the ESOP generally are sold in the open market when
employees make withdrawals or sell ESOP shares within their account.
The cost of the ESOP is recognized as incurred and was $7 million in 1997
($2 million and $4 million in 1996 and 1995, respectively). The increase in
1997 costs was principally due to the allocation of more shares to
participants through the corporation's ESOP profit sharing plan. Continued
reductions in ESOP costs are due primarily to appreciation in the
corporation's common stock. At Dec. 31, 1997, 15.4 million common shares held
by the ESOP were outstanding, 6.5 million of which were allocated to
employees' accounts. During 1997, 1.3 million ESOP shares were allocated to
employees' accounts.
FOURTEEN
Incentive Plans
On April 27, 1997, stockholders approved the 1997 Union Carbide Long-Term
Incentive Plan for key employees. The Plan provides for granting incentive and
nonqualified stock options; exercise payment rights; grants of stock,
including restricted stock, and performance awards. Holders of options may be
granted the right to receive payments of amounts equal to the regular cash
dividends paid to holders of the corporation's common stock during the period
an option is outstanding. The number of shares granted or subject to options
generally cannot exceed 2 million under the Plan. However, up to 4 million
additional shares may be granted or subject to options to the extent the
corporation acquires shares after April 27, 1997. Option prices are equal to
the closing price of the corporation's common stock on the date of the grant,
as listed on the New York Stock Exchange Composite Transactions. Options
generally become exercisable two years after such date. Options may not have a
duration of more than ten years. The option price may be settled in cash,
common shares of the corporation currently owned by a participant, withholding
stock shares from the exercise or a combination of these alternatives.
Restricted stock award shares are entitled to vote and dividends are credited
to the holder's account, but these shares are generally nontransferable for
varying periods after the grant date. Once the vesting conditions are met, the
shares become fully transferable. Performance awards may be paid in common
stock, cash or other forms of property. No dividend-equivalent payment rights
or performance awards were granted in 1997.
No awards were made in 1997, and no further awards can be made, under
previous plans. Prior plans still have options outstanding and restricted
stock not yet vested, whose terms are generally similar to nonqualified stock
options and restricted stock grants under the 1997 plan.
- 36 -
Changes in outstanding fixed price options were as follows:
1997 1996
Weighted Weighted
Average Average
Shares in thousands Shares Exercise Price Shares Exercise Price
Outstanding at January 1 12,782 $21.45 13,350 $18.54
Granted 1,508 46.31 1,166 45.55
Exercised (1,717) 13.45 (1,569) 13.05
Canceled or expired (40) 38.47 (165) 36.00
Outstanding at December 31 12,533 25.48 12,782 21.45
Options exercisable
at December 31 9,889 10,460
1995
Weighted
Average
Shares in thousands Shares Exercise Price
Outstanding at January 1 13,807 $15.70
Granted 1,270 40.38
Exercised (1,667) 11.37
Canceled or expired (60) 27.25
Outstanding at December 31 13,350 $18.54
Options exercisable
at December 31 10,200
Options were exercised during 1997 at prices ranging from $6.70 to $45.63 per
share ($6.70 to $28.63 per share during 1996 and $1.00 to $21.63 per share
during 1995).
The following table summarizes information about fixed price option shares
outstanding at Dec. 31, 1997:
Weighted Average
Shares Remaining Weighted Average
Shares in thousands Outstanding Contractual life Exercise Price
Range of Exercise Prices
$ 6.70 to $ 9.69 2,635 3.3 years $ 8.40
$11.37 to $16.75 2,439 4.3 years $15.76
$21.63 to $28.63 3,666 6.4 years $24.78
$39.88 to $46.31 3,793(a) 9.0 years $44.28
12,533
a) At Dec. 31, 1997, 1.149 million options were exercisable at a price of
$40.38.
Had compensation cost related to the fixed price options been recorded at
fair value on the dates of grant in accordance with SFAS 123, the effect on
the corporation's net income and EPS amounts would have been as follows:
Millions of dollars (except per share figures),
for the year ended December 31, 1997 1996 1995
Net income-
common stockholders As reported $ 652 $ 583 $ 915
Pro forma $ 639 $ 576 $ 913
Basic EPS As reported $4.89 $4.43 $6.65
Pro forma $4.79 $4.37 $6.63
Diluted EPS As reported $4.41 $3.90 $5.85
Pro forma $4.32 $3.86 $5.84
The Black-Scholes Option Pricing Model was used to estimate the fair values
of options granted during 1997, 1996 and 1995. The assumptions used for these
grants included a 6-year average expected life for all years, and zero-coupon
U.S. government risk free interest rates of 5.92%, 5.95%, and 5.70%, current
dividend yields of 1.73%, 1.78%, and 1.75%, and volatility of 28.77%, 28.00%,
and 28.78% for the years ended 1997, 1996 and 1995, respectively. The weighted
average fair values of options granted during the years 1997, 1996, and 1995
were $15.54, $15.31 and $13.43, respectively.
On Sept. 24, 1997, the board approved the 1997 Union Carbide Corporation EPS
Incentive Plan for a limited number of senior managers. It is designed to
grant awards if the corporation achieves $4.00 or more diluted earnings per
share performance during 1999 and 2000. The plan requires these senior
managers to put an amount equivalent to a portion of their annual base pay at
risk, up to 100 percent, should diluted earnings per share not equal or exceed
$4.00 in the year 2000. The amount at risk will be deducted from compensation
over three years and is converted to units equivalent to common stock using a
$47.75 share price, the closing price of the corporation's common stock on the
date the plan was approved by the board of directors. Participants could be
awarded up to four times the number of units at risk for each of the years
1999 and 2000, depending on the extent to which the goals of the plan are
exceeded. Participants will also be credited with dividend-equivalents in the
form of additional units. Payments under the plan will be in cash and are
scheduled for 2002, 2003 and 2004. Failure to meet the requirements of the
plan will result in forfeiture of the amounts at risk.
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FIFTEEN
Stockholders' Equity
Subject to the following discussion, each outstanding share of common stock
has identical rights in voting on corporate matters, dividends when declared,
liquidation and other corporate matters.
Each outstanding share of common stock bears one Right entitling its holder,
under certain circumstances, to buy a share of common stock at a purchase
price of $37.67 (subject to adjustment). The Rights may not be exercised until
10 days after a person or group acquires 20 percent or more of UCC's common
stock, or until a date determined by the board of directors following
announcement of a tender offer that, if consummated, would result in 20
percent or more ownership of the common stock. Until then, separate Rights
certificates will not be issued, nor will the Rights be traded separately from
the stock.
Should an acquirer become the beneficial owner of 20 percent of the common
stock, and under certain additional circumstances, the corporation's
stockholders (other than the acquirer) would have the right to buy common
stock in Union Carbide Corporation, or in the surviving enterprise if the
corporation is acquired, having a value equal to two times the purchase price
of the Right then in effect.
The Rights will expire on Aug. 31, 1999, unless redeemed prior to that date.
The redemption price is $0.01 per Right.
On July 23, 1997, the board of directors of the corporation increased the
number of shares that may be repurchased under the existing common stock
repurchase program to 60 million shares.
Through Dec. 31, 1997, the corporation had repurchased 49.3 million shares
since inception of the program in 1993 (7.0 million during 1997) at an average
effective price of $34.69 per share. The corporation will continue to acquire
additional shares from time to time at prevailing market prices, at a rate
consistent with the combination of corporate cash flow and market conditions.
In conjunction with the corporation's common stock buyback program, put
options were sold in a series of private placements entitling the holders to
sell 12.9 million shares of common stock to UCC at specified prices upon
exercise of the options. Since inception of this program through Dec. 31,
1997, options representing 9.8 million common shares have expired unexercised,
while options representing 3.1 million shares were exercised for $129 million,
or an average price of $40.94 per share. No options were outstanding at Dec.
31, 1997. Premiums received since inception of the program, which are recorded
as Additional paid-in capital, have reduced the average price of repurchased
shares to $34.69 per share from $34.97.
SIXTEEN
Leases
Leases that meet the criteria for capitalization have been classified and
accounted for as capital leases. For operating leases, primarily involving
facilities and distribution equipment, the future minimum rental payments
under leases with remaining noncancelable terms in excess of one year are:
Millions of dollars,
year ending December 31,
1998 $ 62
1999 58
2000 53
2001 50
2002 58
Subsequent to 2002 186
Total minimum payments 467
Future sublease rentals 81
Net Minimum Rental Commitments $386
The present value of the net minimum rental payments amounts to $303
million, of which $214 million pertains to the corporation's headquarters
lease. Total lease and rental payments (net of sublease rental of $21 million
in 1997 and $20 million in 1996 and 1995) were $54 million, $53 million and
$67 million for 1997, 1996 and 1995, respectively.
During 1995 the corporation recognized a nonrecurring, noncash charge of
$191 million ($134 million after-tax) for future minimum lease payments on
unused office space, primarily at the corporation's headquarters. The
headquarters charge reflects the pro rata costs of unused office space over
the remaining term of the lease, which runs to 2006, less anticipated net
sublease income. Neither the expected future costs nor expected net sublease
revenues were discounted.
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SEVENTEEN
Commitments and Contingencies
Purchase Agreements o The corporation has three major agreements for the
purchase of ethylene-related products and two other purchase agreements in the
U.S. and Canada. Total purchases under these agreements were $245 million,
$233 million and $251 million in 1997, 1996 and 1995, respectively. The net
present value of the fixed and determinable portion of obligations under these
purchase commitments at Dec. 31, 1997 (at current exchange rates, where
applicable) is presented in the following table.
Millions of dollars,
year ending December 31,
1998 $ 69
1999 60
2000 31
2001 23
2002 20
2003 to expiration of contracts 88
Total $291
Environmental o The corporation is subject to loss contingencies resulting
from environmental laws and regulations, which include obligations to remove
or remediate the effects on the environment of the disposal or release of
certain wastes and substances at various sites. The corporation has
established accruals in current dollars for those hazardous waste sites where
it is probable that a loss has been incurred and the amount of the loss can
reasonably be estimated. The reliability and precision of the loss estimates
are affected by numerous factors, such as different stages of site evaluation,
the allocation of responsibility among potentially responsible parties and the
assertion of additional claims. The corporation adjusts its accruals as new
remediation requirements are defined, as information becomes available
permitting reasonable estimates to be made, and to reflect new and changing
facts.
At Dec. 31, 1997, the corporation had established environmental remediation
accruals in the amount of $264 million ($310 million in 1996). These accruals
have two components, estimated future expenditures for site investigation and
cleanup and estimated future expenditures for closure and postclosure
activities. In addition, the corporation had environmental loss contingencies
of $159 million at Dec. 31, 1997.
The corporation has sole responsibility for the remediation of approximately
36 percent of its environmental sites for which accruals have been
established. These sites are well advanced in the investigation and cleanup
stage. The corporation's environmental accruals at Dec. 31, 1997, included
$197 million for these sites ($222 million at Dec. 31, 1996), of which $79
million ($92 million at Dec. 31, 1996) was for estimated future expenditures
for site investigation and cleanup and $118 million ($130 million at Dec. 31,
1996) was for estimated future expenditures for closure and postclosure
activities. In addition, $87 million of the corporation's environmental loss
contingencies at Dec. 31, 1997, related to these sites. The site with the
largest total potential cost to the corporation is a nonoperating site. Of the
above accruals, this site accounted for $31 million ($32 million at Dec. 31,
1996), of which $17 million ($18 million at Dec. 31, 1996) was for estimated
future expenditures for site investigation and cleanup and $14 million ($14
million at Dec. 31, 1996) was for estimated future expenditures for closure
and postclosure activities. In addition, $20 million of the above
environmental loss contingencies related to this site.
The corporation does not have sole responsibility at the remainder of its
environmental sites for which accruals have been established. All of these
sites are in the investigation and cleanup stage. The corporation's
environmental accruals at Dec. 31, 1997, included $67 million for estimated
future expenditures for site investigation and cleanup at these sites ($88
million at Dec. 31, 1996). In addition, $72 million of the corporation's
environmental loss contingencies related to these sites. The largest two of
these sites are also nonoperating sites. Of the above accruals, these sites
accounted for $29 million ($37 million at Dec. 31, 1996) for estimated future
expenditures for site investigation and cleanup. In addition, $20 million of
the above environmental loss contingencies related to these sites.
Worldwide expenses related to environmental protection for compliance with
Federal, state and local laws regulating solid and hazardous wastes and
discharge of materials to air and water, as well as for waste site remedial
activities, totaled $100 million in 1997, $110 million in 1996 and $138
million in 1995.
- 39 -
Other o The corporation has severally guaranteed 45 percent (approximately
$606 million at Dec. 31, 1997) of EQUATE Petrochemical Company's debt and
working capital financing needs until certain completion and financial tests
are achieved. If these tests are met, a $54 million several guarantee will
provide ongoing support thereafter. The corporation also severally guaranteed
certain sales volume targets until EQUATE's sales capabilities are proved. In
addition, the corporation has pledged its shares in EQUATE as security for
EQUATE's debt. The corporation has political risk insurance coverage for its
equity investment and, through Sept. 30, 1998, substantially all of its
several guarantee of EQUATE's debt.
The corporation and its consolidated subsidiaries had additional contingent
obligations at Dec. 31, 1997, totaling $63 million, of which $31 million
related to guarantees of debt.
Litigation o The corporation is one of a number of defendants named in
approximately 4,900 lawsuits in both Federal and state courts, some of which
have more than one plaintiff, involving silicone breast implants. The
corporation was not a manufacturer of breast implants but did supply generic
bulk silicone materials to certain manufacturers. Also, the corporation in
1990 acquired and in 1992 divested the stock of a small specialty silicones
company that, among other things, supplied silicone gel intermediates and
silicone dispersions for breast implants. In 1993 most of the suits that were
brought in Federal courts were consolidated for pretrial purposes in the
United States District Court, Northern District of Alabama.
In 1995, the District Court approved a settlement program proposed by
certain defendants, including the corporation. In August 1997, the court ruled
that all claims based solely on the supply of generic bulk silicone materials
should be dismissed against the corporation. That decision is final with
respect to cases in Federal courts, but does not affect the corporation's
participation in the settlement program. Based on the corporation's
understanding of the number of claims that were properly filed under the
settlement, the corporation estimates that its maximum expenditures under the
program should not exceed $100 million prior to insurance recovery. Although
insurance coverage is subject to issues as to scope and application of
policies, retention limits, exclusions and policy limits, and the insurers
have reserved their right to deny coverage, the corporation believes that
after probable insurance recoveries neither the settlement nor litigation
outside the settlement will have a material adverse effect on the consolidated
financial position of the corporation.
In addition to the above, the corporation and its consolidated subsidiaries
are involved in a number of legal proceedings and claims with both private and
governmental parties. These cover a wide range of matters, including, but not
limited to, product liability; trade regulation; governmental regulatory
proceedings; health, safety and environmental matters; employment; patents;
contracts, and taxes. In some of these legal proceedings and claims, the cost
of remedies that may be sought or damages claimed is substantial.
The corporation has recorded nonenvironmental litigation accruals of $184
million, and related insurance recovery receivables of $147 million. At Dec.
31, 1997, the corporation had nonenvironmental litigation loss contingencies
of $57 million.
While it is impossible at this time to determine with certainty the ultimate
outcome of any legal proceedings and claims referred to in this note,
management believes that adequate provisions have been made for probable
losses with respect thereto and that such ultimate outcome, after provisions
therefor, will not have a material adverse effect on the consolidated
financial position of the corporation, but could have a material effect on
consolidated results of operations in a given quarter or year. Should any
losses be sustained in connection with any of such legal proceedings and
claims in excess of provisions therefor, they will be charged to income in the
future.
- 40 -
Management's Statement of Responsibility for Financial Statements
Union Carbide Corporation's financial statements are prepared by management,
which is responsible for their fairness, integrity and objectivity. The
accompanying financial statements have been prepared in conformity with
generally accepted accounting principles and, accordingly, include amounts
that are estimates and judgments. All historical financial information in this
annual report is consistent with the accompanying financial statements.
The corporation maintains accounting systems, including internal accounting
controls monitored by a staff of internal auditors, that are designed to
provide reasonable assurance of the reliability of financial records and the
protection of assets. The concept of reasonable assurance is based on
recognition that the cost of a system must not exceed the related benefits.
The effectiveness of those systems depends primarily upon the careful
selection of financial and other managers, clear delegation of authority and
assignment of accountability, inculcation of high business ethics and
conflict-of-interest standards, policies and procedures for coordinating the
management of corporate resources and the leadership and commitment of top
management.
The corporation's financial statements are audited by KPMG Peat Marwick LLP,
independent certified public accountants, in accordance with generally
accepted auditing standards. These standards provide for the auditors to
consider the corporation's internal control structure to the extent they deem
necessary in order to issue their opinion on the financial statements.
The Audit Committee of the board of directors, which consists solely of
nonemployee directors, is responsible for overseeing the functioning of the
accounting system and related controls and the preparation of annual financial
statements. The Audit Committee recommends to the board of directors the
selection of the independent auditors, which is submitted to the stockholders
for ratification. The Audit Committee periodically meets with the independent
auditors, management and internal auditors to review and evaluate their
accounting, auditing and financial reporting activities and responsibilities.
The independent and internal auditors have full and free access to the Audit
Committee and meet with the committee, with and without management present.
William H. Joyce John K. Wulff
Chairman, President and Vice-President, Chief Financial
Chief Executive Officer Officer and Controller
Danbury, Conn.
Jan. 16, 1998
Independent Auditors' Report
To the Stockholders and Board of Directors of
Union Carbide Corporation:
We have audited the accompanying consolidated balance sheet of Union Carbide
Corporation and subsidiaries as of Dec. 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the years in the three-year period ended Dec. 31, 1997. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Union
Carbide Corporation and subsidiaries at Dec. 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended Dec. 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Stamford, Conn.
Jan. 16, 1998
- 41 -
Corporate Information
1998 Annual Meeting
The 1998 annual meeting of stockholders will be held on Wednesday, April 22,
at the John C. Creasy Health Education Center, 24 Hospital Ave., Danbury, CT
06810, beginning at 10 A.M.
A notice of the annual meeting, a proxy statement and a proxy voting card
will be mailed to each stockholder in March, together with a copy of the
current annual report.
General Offices
The general offices of Union Carbide Corporation are located at 39 Old
Ridgebury Road, Danbury, CT 06817-0001 (Telephone: 203-794-2000).
Stock Exchanges
Union Carbide stock is traded primarily on the New York Stock Exchange
(ticker symbol: UK). The stock is also listed on the Chicago and Pacific Stock
Exchanges in the U.S.
Stock Records and Transfer
The corporation acts as its own stock transfer agent through its Shareholder
Services Department, which maintains stockholder records, transfers stock and
answers questions regarding stockholders' accounts, including dividend
reinvestment accounts. Stockholders wishing to transfer stock to someone else
or to change the name on a stock certificate should contact Shareholder
Services for assistance. The Registrar is Chase Mellon Shareholder Services.
Dividend Reinvestment
Stockholders of record may purchase shares directly through Union Carbide's
Dividend Reinvestment and Stock Purchase Plan. Under the plan, shares may be
purchased from Union Carbide free of commissions and service charges.
Requests for a prospectus that explains the plan in detail should be
directed to the Shareholder Services Department (Telephone: 800-934-3350).
Form 10-K
A Form 10-K report for the year ended Dec. 31, 1997, will be available in
April 1998. A copy without exhibits may be obtained without charge by writing
to Union Carbide Corporation, Joseph E. Geoghan, secretary, 39 Old Ridgebury
Road, Danbury, CT 06817-0001.
Charitable Contributions Booklet
Union Carbide annually publishes a booklet that lists organizations
receiving charitable, educational, cultural or similar grants of $250 or more
from the corporation. The booklet is available on written request to the
secretary.
RESPONSIBLE CARE Progress Report
This report covers health, safety and environmental progress at Union
Carbide. Information includes performance data for U.S. and other worldwide
locations, RESPONSIBLE CARE goals, and progress Carbide made in 1997 as it
completed implementation of RESPONSIBLE CARE management practices. To obtain a
copy, write to Union Carbide Corporation, Public Affairs Department, Section
L-4505, 39 Old Ridgebury Road, Danbury, CT 06817-0001 (Telephone: 800-552-
5272).
Inquiries
o Inquiries from the public about Union Carbide and its products and services
should be directed to the Corporate Information Center, Union Carbide
Corporation, Section N-0, 39 Old Ridgebury Road, Danbury, CT 06817-0001
(Telephone: 203-794-5300).
o Inquiries about stockholder accounts and dividend reinvestment should be
directed to Union Carbide Corporation, William H. Smith, manager, Shareholder
Services Department, Section G-1328, 39 Old Ridgebury Road, Danbury, CT 06817-
0001 (Telephone: 203-794-3350).
o Institutional investors, financial analysts and portfolio managers should
direct questions about Union Carbide to Union Carbide Corporation, D. Nicholas
Thold, director of investor relations, Investor Relations Department, Section
E-4286, 39 Old Ridgebury Road, Danbury, CT 06817-0001 (Telephone: 203-794-
6440).
o Financial journalists should direct questions to Union Carbide Corporation,
David N. Kernis, assistant director, communications, Public Affairs
Department, Section L-4502, 39 Old Ridgebury Road, Danbury, CT 06817-0001
(Telephone: 203-794-6929).
o Information about Union Carbide also may be found on the company's home page
on the Internet at www.unioncarbide.com. Union Carbide's site provides
information in five categories: general, financial, business, RESPONSIBLE CARE
and recruitment.
- 42 -
Directors and Corporate Officers
Directors
John J. Creedon is retired president and chief executive officer of
Metropolitan Life Insurance Company. A Carbide director since 1984, he chairs
the Audit Committee and serves on the Compensation & Management Development,
Executive and Health, Safety and Environmental Affairs (HS&EA) Committees.
C. Fred Fetterolf is a retired director, president and chief operating officer
of Aluminum Company of America. A UCC director since 1987, he chairs the HS&EA
Committee and serves on the Audit, Compensation & Management Development
and Nominating Committees.
Joseph E. Geoghan is vice-president, general counsel and secretary of Union
Carbide Corporation and has been a director since 1990. He serves on the
Executive and Public Policy Committees.
Rainer E. Gut is chairman of Credit Suisse Group, Zurich, Switzerland, Credit
Suisse First Boston and Credit Suisse. A UCC board member since 1994, he is a
member of the Compensation & Management Development, Finance & Pension
and Nominating Committees.
Vernon E. Jordan, Jr. is a senior partner of Akin, Gump, Strauss, Hauer & Feld
LLP. He is chairman of the Nominating Committee and a member of the Executive,
Finance & Pension and Public Policy Committees. He has been a board
member since 1987.
William H. Joyce is chairman, president and chief executive officer of Union
Carbide Corporation. A director since 1992, he is chairman of the Executive
Committee.
Robert D. Kennedy is retired chairman and chief executive officer of Union
Carbide Corporation and has been a director since 1985. He serves on the
Audit, Executive, Nominating and Public Policy Committees.
Ronald L. Kuehn, Jr. is a director and chairman, president and chief executive
officer of Sonat, Inc. A UCC board member since 1984, he chairs the
Compensation & Management Development Committee and serves on the Finance &
Pension and HS&EA Committees.
Rozanne L. Ridgway is former assistant secretary of state for Europe and
Canada. A director since 1990, she chairs the Public Policy Committee and is a
member of the Audit, HS&EA and Nominating Committees.
James M. Ringler is a director and chairman, president and chief executive
officer of Premark International, Inc. Elected a director in 1996, he is a
member of the Compensation & Management Development and the Finance & Pension
Committees.
William S. Sneath is a director of various corporations and retired chairman
and chief executive officer of Union Carbide Corporation. He chairs the
Finance & Pension Committee and serves on the Executive, HS&EA and Nominating
Committees. He has been a director since 1969.
Corporate Officers
William H. Joyce
Chairman of the Board, President and Chief Executive Officer
Joseph S. Byck
Vice-President, Strategic Planning, Investor Relations and Public Affairs
James F. Flynn
Vice-President, General Manager, Solvents, Intermediates and Monomers
Joseph E. Geoghan
Vice-President, General Counsel and Secretary
Malcolm A. Kessinger
Vice-President, Human Resources
Lee P. McMaster
Vice-President, General Manager, Ethylene Oxide/Glycol
Joseph C. Soviero
Vice-President, Corporate Ventures
Roger B. Staub
Vice-President, General Manager, UNIPOL Systems
John K. Wulff
Vice-President, Chief Financial Officer and Controller
Other Senior Management
Eugene J. Boros
Vice-President, General Manager, Specialty Polymers and Products, UCAR
Emulsion Systems
David L. Brucker
Vice-President, Engineering and Operations
Ron J. Cottle
Vice-President, Health, Safety and Environment
John L. Gigerich
Vice-President, Information Systems
Kevin P. Lynch
Vice-President, General Manager, UNIPOL Polymers
Philip F. McGovern
Vice-President, Tax
Gordon D. Mounts
Vice-President, General Manager, Industrial Performance Chemicals
F. Don Ryan
Vice-President, General Manager, Specialty Polyolefins and Vice-President,
Purchasing
Lee C. Stewart
Vice-President and Treasurer
Vince F. Villani
Vice-President, General Manager, Olefins
Donald R. Wood
Vice-President, Polypropylene Resins
John P. Yimoyines
Vice-President, Venture Management
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Union Carbide Around the World
(Excluding partnership or corporate joint venture locations)
United States &
Puerto Rico
California
Colorado
Connecticut
District of Columbia
Georgia
Illinois
Louisiana
New Jersey
New York
North Carolina
Texas
Vermont
Washington
West Virginia
Puerto Rico
Canada
Alberta
Ontario
Quebec
Europe
Austria
Belgium
France
Germany
Italy
Russia
Spain
Sweden
Switzerland
Turkey
United Kingdom
Latin America
Argentina
Brazil
Chile
Colombia
Costa Rica
Ecuador
Guatemala
Mexico
Peru
Venezuela
Far East & Other
Australia
China
Egypt
Hong Kong
Indonesia
Japan
Jordan
Malaysia
Morocco
Philippines
Singapore
South Africa
South Korea
Sri Lanka
Taiwan
Thailand
United Arab Emirates
Definition of Terms
Unless the context otherwise requires, the terms below refer to the following:
Union Carbide Corporation, Union Carbide Corporation,
Union Carbide, Carbide, the parent company, and its
the corporation, we, our, consolidated subsidiaries
the company, UCC
Domestic United States and Puerto Rico
Domestic operations Operations of Union Carbide in this area,
including exports
International operations Operations of Union Carbide in areas of the
world other than the United States and Puerto
Rico
The use of these terms is for convenience of reference only. The consolidated
subsidiaries are separate legal entities that are managed by, and accountable
to, their respective boards of directors.
CARBITOL, CARBOWAX, CELLOSIZE, CELLOSOLVE, CYRACURE, FLEXOL, FLEXOMER, NEULON,
NORKOOL, LP OXO, POLYOX, POLYPHOBE, SELEXOL, TERGITOL, TONE, TRITON, TUFLIN,
UCAR, UCARSOL, UCARTHERM, UCON, UCURE, UNICARB, UNIPOL, and UNION CARBIDE are
registered trademarks of Union Carbide Corporation.
RESPONSIBLE CARE is a registered service mark of the Canadian Chemical
Producers Association and the Chemical Manufacturers Association.
EQUATE is a trademark of EQUATE Petrochemical Company K.S.C. of Kuwait.
(Inside back cover)
Printed on Recycled, Recyclable Paper.
Printed in U.S.A.
(Back cover)
(The back cover depicts a hexagon containing the words "Union Carbide".)
Union Carbide Corporation
39 Old Ridgebury Road
Danbury, Connecticut 06817-0001
UC-1389