<Page>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D C 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-1463
UNION CARBIDE CORPORATION
A SUBSIDIARY OF THE DOW CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
New York 13-1421730
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
39 Old Ridgebury Road, Danbury, CT 06817-0001
(Address of principal executive offices) (Zip Code)
203-794-2000
Registrant's telephone number, including area code
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
At October 31, 2001, 1,000 shares of common stock were outstanding, all of which
were held by the registrant's parent, The Dow Chemical Company.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(A)
AND (B) FOR FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH A REDUCED
DISCLOSURE FORMAT.
Total number of sequentially numbered pages in this filing,
including exhibits thereto: 21
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UNION CARBIDE CORPORATION
(A SUBSIDIARY OF THE DOW CHEMICAL COMPANY)
Table of Contents
<Table>
<Caption>
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PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 6
Consolidated Statements of Comprehensive Income 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURE 21
</Table>
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2
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PART I. FINANCIAL INFORMATION
--------------------------------------------------------------------------------
ITEM 1: FINANCIAL STATEMENTS:
--------------------------------------------------------------------------------
UNION CARBIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
Three Months Ended Nine Months Ended
-------------------- -------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
In Millions (Unaudited) 2001 2000 2001 2000
----------------------------------------------------- -------- -------- -------- --------
Net trade sales $ 827 $ 1,637 $ 3,529 $ 4,928
Net sales to related companies 350 - 880 -
------- ------- ------- -------
Total Net Sales $ 1,177 $ 1,637 $ 4,409 $ 4,928
Cost of sales 1,114 1,494 4,139 4,332
Research and development expenses 32 51 112 167
Selling, general and administrative expenses 31 57 138 180
Amortization of intangibles 1 4 8 11
Merger-related expenses and restructuring - - 1,262 -
Insurance and finance company
operations, pretax income (loss) (2) 10 (3) 15
Equity in earnings of nonconsolidated affiliates 19 27 42 121
Sundry income (expense) - net 7 (4) 31 32
------- ------- ------- -------
Earnings (Loss) Before Interest, Income Taxes, and
Minority Interests 23 64 (1,180) 406
------- ------- ------- --------
Interest income 3 3 7 22
Interest expense and amortization of debt discount 45 35 143 117
------- ------- ------- --------
Income (Loss) Before Income Taxes and Minority Interests (19) 32 (1,316) 311
Provision (benefit) for income taxes (8) - (476) 49
Minority interests' share in income 1 3 4 6
------- ------- ------- --------
Net Income (Loss) $ (12) $ 29 $ (844) $ 256
======= ======= ======= ========
Depreciation $ 91 $ 96 $ 302 $ 293
======= ======= ======= ========
Capital Expenditures $ 16 $ 75 $ 75 $ 397
======= ======= ======= ========
</Table>
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See Notes to Consolidated Financial Statements.
3
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UNION CARBIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
Sept. 30, Dec. 31,
In Millions (Unaudited) 2001 2000
--------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 30 $ 63
Marketable securities -- 74
Accounts and notes receivable:
Trade (net of allowance for doubtful receivables -
2001: $13; 2000: $11) 317 897
Related companies 824 --
Other 614 137
Inventories:
Finished and work in process 284 557
Materials and supplies 152 193
Deferred income tax assets - current 348 142
Other current assets -- 113
------ ------
Total current assets 2,569 2,176
------ ------
Investments
Investment in nonconsolidated affiliates 595 1,008
Other investments 298 97
Noncurrent receivables 527 154
------ ------
Total investments 1,420 1,259
------ ------
Property
Property 8,736 9,361
Less accumulated depreciation 5,110 4,840
------ ------
Net property 3,626 4,521
Other Assets
Goodwill (net of accumulated amortization -
2001: $49; 2000: $54) 28 41
Deferred charges and other assets 371 349
------ ------
Total other assets 399 390
------ ------
Total assets $8,014 $8,346
====== ======
</Table>
--------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
4
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UNION CARBIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
Sept. 30, Dec. 31,
In Millions (Unaudited) 2001 2000
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable:
Related companies $ 1,214 $ --
Other 21 1,171
Long-term debt due within one year 2 7
Accounts payable:
Trade 327 703
Related companies 537 --
Other 46 67
Income taxes payable 63 --
Deferred income tax liabilities - current 5 --
Accrued and other current liabilities 249 352
------- --------
Total current liabilities 2,464 2,300
------- --------
Long-Term Debt 1,744 1,748
------- --------
Other Noncurrent Liabilities
Deferred income tax liabilities - noncurrent 261 278
Pension and other postretirement benefits -
noncurrent 693 492
Other noncurrent obligations 1,063 834
------- --------
Total other noncurrent liabilities 2,017 1,604
------- --------
Minority Interest in Subsidiaries 9 40
------- --------
Stockholders' Equity
Common stock - issued - 1,000 shares
(158,994,683 shares in 2000) -- 159
Additional paid-in capital -- 217
Unearned ESOP shares (50) (50)
Retained earnings 2,067 3,572
Accumulated other comprehensive loss (237) (224)
Treasury stock, at cost - no shares
(23,431,939 shares in 2000) -- (1,020)
------- --------
Total stockholders' equity 1,780 2,654
------- --------
Total Liabilities and Stockholders' Equity $ 8,014 $ 8,346
======= ========
</Table>
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See Notes to Consolidated Financial Statements.
5
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UNION CARBIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
Nine Months Ended Sept. 30,
In Millions (Unaudited) 2001 2000
------------------------- ------ ------
OPERATING ACTIVITIES
Net income (loss) $ (844) $ 256
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 299 304
Provision (credit) for deferred income taxes (225) 41
Undistributed earnings of nonconsolidated affiliates (33) (84)
Minority interests' share in income 4 6
Other net gain (26) (84)
Merger-related expenses and restructuring 951 --
Tax benefit-nonqualified stock options exercises 4 6
Changes in assets and liabilities that provided
(used) cash:
Accounts and notes receivable 277 24
Related company receivables (965) --
Inventories 220 (21)
Accounts payable (443) 51
Related company payables 722 --
Other assets and liabilities (268) (114)
------- -------
Cash provided by (used in) operating activities (327) 385
------- -------
INVESTING ACTIVITIES
Capital expenditures (75) (397)
Proceeds from sales of property 4 8
Investments in nonconsolidated affiliates (92) (184)
Proceeds from sale of nonconsolidated affiliate 180 --
Proceeds from the sale of investments 165 143
Purchase of investments (122) (84)
------- -------
Cash provided by (used in) investing activities 60 (514)
------- -------
FINANCING ACTIVITIES
Change in short-term notes payable (952) 331
Change in notes payable to related companies 1,214 --
Repayments of long-term debt (5) (114)
Purchases of treasury stock (1) --
Proceeds from sales of common stock 6 25
Dividends paid to stockholders (28) (91)
------- -------
Cash provided by financing activities 234 151
------- -------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents -- --
------- -------
Summary
Increase (decrease) in cash and cash equivalents (33) 22
Cash and cash equivalents, beginning-of-period 63 41
------- -------
CASH AND CASH EQUIVALENTS, END-OF-PERIOD $ 30 $ 63
======= =======
</Table>
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See Notes to Consolidated Financial Statements.
6
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UNION CARBIDE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<Table>
<Caption>
Three Months Ended Nine Months Ended
-------------------- --------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
In Millions (Unaudited) 2001 2000 2001 2000
----------------------- ------- -------- -------- ---------
Net income (loss) $ (12) $ 29 $ (844) $ 256
Other comprehensive income (loss), net of tax:
Unrealized gains and losses on investments (4) (3) (7) 1
Cumulative translation adjustments 32 (23) (6) (58)
------- -------- --------- --------
Comprehensive income (loss) $ 16 $ 3 $ (857) $ 199
======= ======= ========= =======
</Table>
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See Notes to Consolidated Financial Statements.
7
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UNION CARBIDE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - CONSOLIDATED FINANCIAL STATEMENTS
The unaudited interim financial statements reflect all adjustments
(consisting of normal recurring accruals) which, in the opinion of
management, are considered necessary for a fair presentation of the results
for the periods covered. Certain reclassifications of prior period amounts
have been made to conform to the current period's presentation. These
statements should be read in conjunction with the audited Notes to
Financial Statements of Union Carbide Corporation and Subsidiaries (the
"corporation" or "UCC") in the 2000 Annual Report on Form 10-K.
CONDENSED SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
----------------------------------------------------
BUSINESS AND GEOGRAPHIC SEGMENT INFORMATION - Effective with the merger of
the corporation into a wholly owned subsidiary of The Dow Chemical Company
("Dow", and with regard to the merger, the "Dow Merger"), the corporation's
business activities were fully integrated with those of Dow and are no
longer operated as separate business units. Dow conducts its worldwide
operations through global businesses which extend beyond the boundaries of
both geography and legal entities. This results in the corporation's
business activities comprising fully integrated components of Dow's global
businesses rather than stand-alone operations. Because there are no
separable reportable business segments for the corporation under Statement
of Financial Accounting Standards ("Statement") No. 131, "Disclosures about
Segments of an Enterprise and Related Information," and the information
used by the chief operating decision maker regarding the corporation's
operations relates to the corporation in its entirety, the corporation's
results are reported as a single operating segment. Prior to the Dow
Merger, the corporation was managed as two separate business segments,
Specialties and Intermediates and Basic Chemicals and Polymers, as well as
a nonoperating segment ("Other"). Prior periods have been restated to
conform to the current period's presentation.
RESEARCH AND DEVELOPMENT - Research and development costs are charged to
expense as incurred. Depreciation expense applicable to research and
development facilities and equipment is included in "Research and
development expenses" in the Consolidated Statements of Income.
RELATED COMPANIES - Significant transactions with the corporation's parent
company, Dow, or other Dow subsidiaries have been characterized as related
company transactions in the consolidated financial statements.
EARNINGS PER SHARE - In accordance with Statement No. 128, "Earnings Per
Share," the presentation of earnings per share is not required in financial
statements of wholly owned subsidiaries.
8
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NOTE B - ACCOUNTING CHANGES
In 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities." It
requires that an entity recognize all derivative instruments as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. Changes in the fair value of those
derivatives will be reported in earnings or accumulated other comprehensive
loss, depending on the uses of the derivatives and whether they qualify for
hedge accounting. This Statement, as amended by Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133," and Statement No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133," is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The
corporation adopted the provisions of Statement No. 133, as amended, on
January 1, 2001. Due to the corporation's limited use of financial
instruments to manage its exposure to market risks, primarily related only
to changes in foreign currency exchange rates, the adoption of Statement
No. 133 on January 1, 2001 did not have a material effect on the
corporation's financial position or results of operations.
In 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements," which
summarizes the staff's views regarding the application of generally
accepted accounting principles to selected revenue recognition issues. The
corporation adopted the provisions of SAB 101 on October 1, 2000, the
effect of which was not material to the corporation's financial position or
results of operations.
In July 2001, the FASB issued Statement No. 141, "Business Combinations,"
and Statement No. 142, "Goodwill and Other Intangible Assets." These
Statements replace Accounting Principles Board ("APB") Opinion No. 16,
"Business Combinations," and APB Opinion No. 17, "Intangible Assets,"
respectively. Under Statement No. 141 all business combinations initiated
after June 30, 2001 are accounted for using only the purchase method.
Statement No. 142 is effective for fiscal years beginning after December
15, 2001. Under this Statement, goodwill will not be amortized, but will be
subject to impairment testing. The corporation is currently assessing the
impact of adopting these Statements.
In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations," which requires an entity to record the fair value
of a liability for an asset retirement obligation in the period in which it
is incurred and a corresponding increase in the related long-lived asset.
The liability is adjusted to its present value each period and the asset is
depreciated over its useful life. A gain or loss may be incurred upon
settlement of the liability. Statement No. 143 is effective for fiscal
years beginning after June 15, 2002. The corporation is currently assessing
the impact of adopting this Statement.
9
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In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which replaces Statement No.
121 and provisions of APB Opinion No.30 for the disposal of segments of a
business. The statement creates one accounting model, based on the
framework established in Statement No. 121, to be applied to all long-lived
assets including discontinued operations. Statement No. 144 is effective
for fiscal years beginning after December 15, 2001. The corporation is
currently assessing the impact of adopting this Statement.
NOTE C - THE DOW MERGER AND MERGER-RELATED EXPENSES AND RESTRUCTURING
On February 6, 2001, the corporation merged with a wholly owned subsidiary
of Dow. As a result of the merger, each share of Union Carbide common stock
outstanding immediately prior to the merger was exchanged for 1.611 shares
of Dow common stock, and Union Carbide became a wholly owned subsidiary of
Dow.
Contemporaneous with the merger, certain rights vested and stock units
equivalent of Union Carbide common stock were converted into stock units
equivalent of Dow common stock under various employee benefit and incentive
plans, such as the ESOP Plan, the 1997 Union Carbide Long-Term Incentive
Plan and the deferred compensation plan.
On February 23, 2001, the corporation cancelled its unused $1 billion major
bank credit agreement.
In order to satisfy the European Commission's condition for approval of the
merger, the corporation divested its 50-percent interest in Polimeri Europa
S.r.l. ("Polimeri Europa") to EniChem S.p.A. in April 2001.
On March 29, 2001, Dow's management made certain decisions relative to
employment levels, duplicate assets and facilities and excess capacity
resulting from the Dow Merger. These decisions were based on Dow
management's assessment of the actions necessary to achieve synergies as
the result of the merger. The economic effects of these decisions, combined
with merger-related transaction costs and certain asset impairments,
resulted in a pretax special charge in the first quarter of $1,275 million
which was reduced by $13 million in the second quarter. The following table
shows the major components of the special charge:
<Table>
<Caption>
In millions
-----------
Transaction costs $ 41
Labor-related costs 616
Write-down of assets and facilities 605
-------
Total $1,262
-------
</Table>
Transaction costs of $41 million consisted primarily of investment banking,
legal and accounting fees, all of which had been paid at March 31, 2001.
10
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Employee-related costs consisted predominantly of provisions for employee
severance, change of control obligations, medical and retirement benefits,
and outplacement services. Dow's integration plans include a workforce
reduction of approximately 4,500 people, primarily from the corporation's
administrative, marketing, purchasing, research and development, and
manufacturing workforce. The charge for severance was based upon the
severance plan provisions communicated to employees. Headcount reductions
began in the second quarter of 2001. As planned, more than one-half of the
reductions were completed by the end of September; approximately 80 percent
will be completed by the end of the first 12 months following the merger.
The corporation expects that approximately 66 percent of the
employee-related costs will be expended in cash within the next two years,
though the timing of severance payments is dependent upon employee
elections. Expenditures with respect to employee-related costs associated
with pension and postretirement benefit plans will occur over a much more
extended period that is not currently determinable.
The special charge included $605 million for the write-down of duplicate
assets and facilities directly related to the merger, the loss on
divestitures required to obtain regulatory approval for the merger, asset
impairments and lease abandonment reserves. Duplicate assets consist
principally of capitalized software costs, information technology equipment
and research and development facilities and equipment, all of which were
written off during the first quarter. The fair values of the impaired
assets, which include production facilities and transportation equipment,
were determined based on discounted cash flows and an appraisal,
respectively. At September 30, 2001, $101 million of the reserve remained
for the abandonment of leased facilities. These components of the special
charge will require limited future cash outlays, and will result in a
decrease in annual depreciation of approximately $65 million.
As of September 30, 2001, severance of approximately $282 million had been
paid to approximately 2,400 former employees.
The following table summarizes the activity in the special charge reserve
for the year by quarter:
<Table>
<Caption>
In millions
-------------
Opening Additions Charges Against Balance at
Quarter Balance To Reserve Reserve Period End
-------- --------- ------------ ---------------- -----------
1Q01 $ - $1,275 $ 646 $ 629
2Q01 629 (13) 158 458
3Q01 458 - 23 435
</Table>
11
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NOTE D - COMMITMENTS AND CONTINGENCIES
The corporation has two major agreements for the purchase of
ethylene-related products and two other purchase agreements in the U.S. and
Canada. The net present value of the fixed and determinable portion of
obligations under these purchase commitments at September 30, 2001 totaled
$162 million including one contract for the purchase of ethylene from Dow
representing $127 million of this obligation.
The corporation is subject to loss contingencies resulting from
environmental laws and regulations, which include obligations to remove or
remediate the effects on the environment of the disposal or release of
certain wastes and substances at various sites. The corporation has
established accruals in current dollars for those hazardous waste sites
where it is probable that a loss has been incurred and the amount of the
loss can be reasonably estimated. The reliability and precision of the loss
estimates are affected by numerous factors, such as different stages of
site evaluation, the allocation of responsibility among potentially
responsible parties and the assertion of additional claims. The corporation
adjusts its accruals as new remediation requirements are defined, as
information becomes available permitting reasonable estimates to be made,
and to reflect new and changing facts.
At September 30, 2001, the corporation had established environmental
remediation accruals in the amount of $157 million. These accruals have two
components, estimated future expenditures for site investigation and
cleanup and estimated future expenditures for closure and postclosure
activities. In addition, the corporation had environmental loss
contingencies of $59 million.
The corporation has sole responsibility for the remediation of
approximately 40 percent of its environmental sites for which accruals have
been established. These sites are well advanced in the investigation and
cleanup stage. The corporation's environmental accruals at September 30,
2001 included $132 million for these sites, of which $30 million was for
estimated future expenditures for site investigation and cleanup and $102
million was for estimated future expenditures for closure and postclosure
activities. In addition, $44 million of the corporation's environmental
loss contingencies related to these sites. The three sites with the largest
total potential cost to the corporation are nonoperating sites. Of the
above accruals, these sites accounted for $39 million, of which $8 million
was for estimated future expenditures for site investigation and cleanup
and $31 million was for estimated future expenditures for closure and
postclosure activities. In addition, $30 million of the above environmental
loss contingencies related to these sites.
The corporation does not have sole responsibility at the remainder of its
environmental sites for which accruals have been established. All of these
sites are in the investigation and cleanup stage. The corporation's
environmental accruals at September 30, 2001 included $25 million for
estimated future expenditures for site investigation and cleanup at these
sites. In addition, $15 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
$10 million for estimated future expenditures for site investigation and
cleanup. In addition, $2 million of the above environmental loss
contingencies related to these sites.
12
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In 2000, 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 $104 million. Expenses in 1999
and 1998 were $118 million and $91 million, respectively.
The corporation severally guaranteed up to approximately $54 million at
September 30, 2001 of EQUATE Petrochemical Company K.S.C.'s ("EQUATE") debt
and working capital financing needs. The corporation has also severally
guaranteed certain sales volume targets until EQUATE's sales capabilities
are proved. In addition, the corporation has pledged its shares in EQUATE
as security for EQUATE's debt. The corporation has political risk insurance
coverage for its equity investment and a majority of its guarantee of
EQUATE's debt.
The corporation had additional contingent obligations at September 30, 2001
totaling $68 million, of which $25 million related to guarantees of debt.
The corporation and its consolidated subsidiaries are involved in a number
of legal proceedings and claims with both private and governmental parties.
These cover a wide range of matters, including, but not limited to: product
liability; trade regulation; governmental regulatory proceedings; health,
safety and environmental matters; employment; patents; contracts; taxes;
and commercial disputes. In some of these legal proceedings and claims, the
cost of remedies that may be sought or damages claimed is substantial.
The corporation has recorded nonenvironmental litigation accruals of $175
million and related insurance recovery receivables of $146 million. At
September 30, 2001, the corporation had nonenvironmental litigation loss
contingencies of $58 million.
While it is not possible at this time to determine with certainty the
ultimate outcome of any of the legal proceedings and claims referred to in
this note, management believes that adequate provisions have been made for
probable losses with respect thereto and that such ultimate outcome, after
provisions therefor, will not have a material adverse effect on the
consolidated financial position of the corporation, but could have a
material effect on consolidated results of operations in a given quarter or
year. Should any losses be sustained in connection with any of such legal
proceedings and claims in excess of provisions therefor, they will be
charged to income when determinable.
13
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NOTE E - EXCHANGE OF ASSETS WITH RELATED COMPANIES
Effective June 30, 2001, the corporation contributed all of its ownership
interests in several wholly owned entities in Europe and Latin America to
wholly owned subsidiaries of Dow. In return for the contribution of
interests, the corporation received stock in the acquiring company equal to
the book value of the net assets that the corporation contributed. The
corporation's percentage ownership in these entities ranges from 10 to 15
percent. These investments have been accounted for using the cost method of
accounting and have been included in "Other investments" on the balance
sheet. The following chart reflects the combined book value of these
entities on the effective date of transfer and the amounts included in the
corporation's consolidated results for the six months ended June 30, 2001:
<Table>
<Caption>
In millions
--------------------------------------------------------------------------
BALANCE SHEET DATA
Current assets $496
Non-current assets 123
----
Total assets $619
Current liabilities $454
Non-current liabilities 5
----
Total liabilities $459
Net assets $160
====
INCOME STATEMENT DATA
Sales $455
====
EBIT $147
====
Net Income $138
====
</Table>
Effective on September 30, 2001, the corporation contributed all of its
ownership interests in several wholly owned entities in Latin America to a
Brazilian subsidiary of Modeland International Holdings Inc. ("Modeland"),
a wholly owned subsidiary of Dow. In return for the contribution of
interests, the corporation received stock in Modeland equal to the book
value of the net assets that the corporation contributed, which represents
41 percent of Modeland's stock outstanding. This investment has been
accounted for using the cost method of accounting and has been included in
"Other investments" on the balance sheet. The following chart reflects the
combined book value of these entities on September 30, 2001 and the amounts
included in the corporation's consolidated results for the nine months
ended September 30, 2001:
14
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<Table>
<Caption>
In millions
--------------------------------------------------------------------------------
BALANCE SHEET DATA
Current assets $ 71
Non-current assets 56
-----
Total assets $127
Current liabilities $ 36
Non-current liabilities (33)
-----
Total liabilities $ 3
Net assets $124
=====
INCOME STATEMENT DATA
Sales $139
=====
EBIT $ 3
=====
Net Income $ 6
=====
</Table>
The corporation will continue to integrate into the Dow organization over
the next several months in order to realize synergies of the merger.
NOTE F - LOAN RECEIVABLE
During the third quarter of 2001, the corporation, Petroliam Nasional
Berhad (Petronas) and Polifin International Investments (PTY) Ltd. entered
into agreements with the OPTIMAL Group (consisting of OPTIMAL Chemicals
(Malaysia) Sdn Bhd, OPTIMAL Olefins (Malaysia) Sdn Bhd and OPTIMAL Glycols
(Malaysia) Sdn Bhn), to provide loans and drawing facilities to the OPTIMAL
Group with the terms expiring between September 2007 and September 2009.
The loans and drawing facilities bear floating rates based on the six month
LIBOR, and are payable by the respective OPTIMAL Group members. At
September 30, 2001, $313 million of previously funded amounts by the
corporation to the OPTIMAL Group were converted into loans. Previously
funded amounts were recorded as part of the corporation's investment in the
OPTIMAL Group and presented in "Investments in nonconsolidated affiliates"
on the balance sheet. Subsequent to this conversion, this amount has been
recorded and presented in "Noncurrent receivables".
NOTE G - SALE OF RECEIVABLES
During the second quarter of 2001, the corporation entered into an
agreement under which certain qualifying trade accounts receivables are
sold to a third party. For those sales, Dow will provide servicing
responsibilities. The third party has no recourse against the corporation
for receivables that are in default. The average quarterly amount sold and
the average quarterly discount on sales during the quarter ended September
30, 2001 were approximately $400 million and $1.2 million, respectively.
NOTE H - LIQUIDATION OF LIFO INVENTORY
During the quarter ended June 30, 2001, certain inventory quantities were
reduced which resulted in a liquidation of certain LIFO inventory layers
carried at lower costs that prevailed in prior years. The effect of the
liquidation was to decrease cost of goods sold by $51 million and increase
after-tax earnings by $33 million.
15
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
Pursuant to General Instruction H of Form 10-Q, this section includes only
management's narrative analysis of the results of operations for the three and
nine month periods ended September 30, 2001, the most recent periods, and the
three and nine month periods ended September 30, 2000, the same periods in the
year immediately preceding it.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements made by or on behalf of Union Carbide Corporation
(Union Carbide or the corporation). This section covers the current performance
of the corporation. The forward-looking statements contained in this section and
in other parts of this document involve risks and uncertainties that may affect
the corporation's operations, markets, products, services, prices and other
factors as more fully discussed elsewhere and in filings with the U.S.
Securities and Exchange Commission (SEC). These risks and uncertainties include,
but are not limited to, economic, competitive, legal, governmental and
technological factors. Accordingly, there is no assurance that the corporation's
expectations will be realized. The corporation has no obligation to provide
revisions to any forward-looking statements should circumstances change.
INTRODUCTORY NOTES TO READERS
On February 6, 2001, the corporation merged with a wholly owned subsidiary of
Dow. As a result of the merger, each share of Union Carbide common stock
outstanding immediately prior to the merger was exchanged for 1.611 shares of
Dow common stock and Union Carbide became a wholly owned subsidiary of Dow. The
merger received clearance from the U.S. Federal Trade Commission, the European
Commission and the Canadian Competition Bureau, subject to the divestiture of
certain assets and the contribution of UNIPOL (trademark symbol) polyethylene
technology licensing and polyethylene conventional catalyst businesses of the
corporation to its joint venture Univation Technologies, LLC. The transaction is
intended to qualify as a tax-free reorganization for U.S. federal income tax
purposes and has been accounted for under the pooling-of-interests method of
accounting.
In order to realize synergies of the merger, the corporation entered into
several agreements with Dow to combine legal entities. On June 30, 2001, the
corporation contributed all of its ownership interests in several wholly owned
entities in Europe and Latin America to wholly owned subsidiaries of Dow. In
return for the contribution of interests, the corporation received stock in each
acquiring company equal to the book value of the net assets that the corporation
contributed. The corporation's percentage ownership in these entities ranges
from 10 to 15 percent. Additionally, on September 30, 2001, the corporation
contributed all of its ownership interests in several other wholly owned
entities in Latin America to a Brazilian subsidiary of Modeland International
Holdings Inc. ("Modeland"), a wholly owned subsidiary of Dow. In return for the
contribution of interests, the corporation received stock in Modeland equal to
the book value of the net assets that the corporation contributed, which
represents 41 percent of Modeland's stock outstanding. For further details, see
Note E to the corporation's consolidated financial statements included in this
Quarterly Report on Form 10-Q. Further integration of the corporation with and
into the Dow organization is expected to occur over the next several months.
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RESULTS OF OPERATIONS
The corporation reported net loss of $12 million for the third quarter of 2001,
compared with net income of $29 million for the same quarter of 2000. Net loss
for the first nine months of 2001 was $844 million, compared with net income of
$256 million for the same nine months of 2000. In the first half of 2001,
results of operations were impacted by a special charge of $1,262 million ($829
million after tax) related to the merger of the corporation into a subsidiary of
Dow (see Note C to the corporation's consolidated financial statements included
in this Quarterly Report on Form 10-Q).
Like other companies in the chemical industry, throughout 2001 the corporation
has experienced the most difficult industry conditions in years. While
hydrocarbon and energy costs declined during the quarter from unusually high
levels, selling prices fell more sharply, compressing margins. The tragic events
that began on September 11 have further eroded consumer confidence and dampened
the outlook for the global economy. This year's macroeconomic and industry
conditions have resulted in a significant negative impact on the corporation.
Total net sales for the third quarter of 2001 decreased 28 percent to $1,177
million from $1,637 million in the same quarter of 2000. Net trade sales for the
third quarter of 2001 declined 49 percent to $827 million from $1,637 million in
the third quarter of 2000. Total net sales for the first nine months of 2001,
compared with the same period of 2000, declined 11 percent from $4,928 million
to $4,409 million. Net trade sales for the first nine months of 2001 declined 28
percent to $3,529 million from $4,928 million in the same nine months of 2000.
In the second quarter of 2001, the corporation commenced selling product to its
parent company, Dow. The effect of the related company sales accounted for a
portion of the decline in trade sales for both the quarterly and year-to-date
periods. Further declines in net trade sales represented a significant decline
in average selling prices coupled with smaller decline in volume. Declines in
average selling prices occurred in almost all products for both the three and
nine month periods ended September 30, 2001, as compared with the same periods
in 2000, although greater declines occurred in the third quarter of 2001.
Eroding average selling prices reflect the market's response to declines in raw
materials and energy costs and coupled with declines due to competitive market
pressures. Volume declines were most significant in oxide derivatives, core
chemicals, polyethylene and ethylene oxide/glycol. While most of these declines
related to market demand, especially in ethylene oxide/glycol, polyethylene, and
organic intermediates, solvents and monomers ("OISM"), other declines reflected
the corporation's decision to forego lower margin sales. This was apparent by
the shutdown of the corporation's Prentiss, Alberta, Canada plant for the first
half of 2001. Although the plant restarted in mid-July, operating rates for
ethylene glycol on the U.S. Gulf Coast were reduced.
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Cost of sales declined $380 million (25 percent) and $193 million (4 percent)
for the three and nine month periods ended September 30, 2001, respectively, as
compared with the same periods in 2000. The cost of oil and natural gas-related
raw materials and energy continued to drop from the high levels experienced in
2000 and the beginning of 2001. However, these declines did not occur as quickly
as declines in average selling prices thereby causing a decrease in the
corporation's gross margins in 2001. Additional declines in gross margins
occurred as sales to Dow in 2001 were made at cost-to-produce thereby realizing
no profit. For the nine month period, competitive pressures in the beginning of
2001, for most products, prevented the corporation from raising average selling
prices enough to totally offset the increase in raw material costs that the
corporation experienced throughout 2000 and the beginning of 2001. These
declines were offset by some margin improvement, in 2001, which was obtained by
producing a greater volume of polyethylene at the corporation's new Canadian
plant, where raw material cost is advantaged.
Research and development, and selling, general and administrative expenses
declined $19 million and $26 million, respectively, for the third quarter of
2001 compared with the same quarter of 2000. For the nine month period ended
September 30, 2001, compared with the same period of 2000, research and
development, and selling, general and administrative expenses declined $55
million and $42 million, respectively. These declines are primarily the result
of synergies associated with the integration of the corporation into Dow.
In the first half of 2001, pretax costs of $1,262 million were recorded for
merger-related expenses and restructuring. These costs, the majority of which
were recorded in the first quarter, included transaction costs, employee
severance, and the write-down of duplicate assets and facilities. For further
details, see Note C to the corporation's consolidated financial statements
included in this Quarterly Report on Form 10-Q.
Insurance and finance company operations, pretax income (loss) declined from
pretax income of $10 million in the third quarter of 2000 to a pretax loss of $2
million for the same quarter of 2001. Operations for the nine months ended
September 30, declined from pretax income of $15 million in 2000 to a pretax
loss of $3 million in 2001. Decline for the three and nine month periods
represent a reduction in investment income related to poor economic conditions
coupled with a decline in policy income as the corporation's insurance company
novates its policies to an insurance company of Dow.
Equity in earnings of nonconsolidated affiliates decreased from $27 million in
the third quarter of 2000 to $19 million in the same quarter of 2001 while
earnings for the first nine months of 2001 declined from $121 million in 2000 to
$42 million in 2001. These declines principally reflect the absence of earnings
from Polimeri Europa, which was required to be divested as part of the merger
clearance from the European Union. Additional declines in the nine month period
reflected a decrease in earnings at UOP LLC ("UOP") and EQUATE which were partly
offset by lower losses related to Aspell Polymeres SNC. UOP's earnings continue
to be negatively impacted by the slowdown of projects in the oil and gas
industry which the venture services. EQUATE's earnings reflect weaker market
conditions, primarily declines in selling prices, for ethylene derivatives as
compared with the same periods last year.
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Sundry income (expense) for the quarter and nine-month period ended September
30, 2001 included a gain of $8 million from the sale of certain
available-for-sale securities. The nine month period ended September 30, 2000
included an $18 million ($11 million after tax) gain on shares received and
sold in connection with the demutualization of Metropolitan Life Insurance
Company a provider of certain employee benefit programs for the corporation.
Interest income for the third quarter of 2001 remained flat with third quarter
of 2000. However, interest income for the nine months ended September 30, 2001
declined to $7 million from the $22 million reported for the same nine months of
2000. The decline in the nine-month amount is primarily the result of $15
million in interest income associated with a tax refund that was received in the
first quarter of 2000.
Interest expense and amortization of debt discount for the three month and nine
month periods ended September 30, 2001 increased $10 million and $26 million,
respectively, compared with the same periods of 2000. The majority of these
increases are related to a decline in capitalized interest from the prior year's
comparable periods. Capitalized interest for the first nine months of 2000
related primarily to the corporation's olefins and polyethylene projects in
Canada, both of which were completed in the second half of 2000.
ENVIRONMENTAL
Estimates of future expenses related to environmental protection for compliance
with federal, state and local laws regulating solid and hazardous wastes and
discharge of materials to air and water, as well as for waste site remedial
activities, have not changed materially since December 31, 2000. The reliability
and precision of the loss estimates are affected by numerous factors, such as
different stages of site evaluation, the allocation of responsibility among
potentially responsible parties and the assertion of additional claims. The
corporation's environmental exposures are discussed in more detail in Note D to
the consolidated financial statements included in this Quarterly Report on Form
10-Q.
ACCOUNTING CHANGES
See Note B to the consolidated financial statements included in this Quarterly
Report on Form 10-Q.
ITEM 3: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------------------
Omitted pursuant to General Instruction H of Form 10-Q.
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PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
See Note D to the corporation's consolidated financial statements
included in this Quarterly Report on Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed during this period.
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SIGNATURE
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Union Carbide Corporation
(Registrant)
Date: November 6, 2001 By: /s/ Frank H. Brod
Frank H. Brod
Vice President & Controller
The Dow Chemical Company
Authorized Representative of
Union Carbide Corporation
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