Attached files
| file | filename |
|---|---|
| EX-32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - UNION CARBIDE CORP /NEW/ | ucc-9302018xq3xex321.htm |
| EX-32.2 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - UNION CARBIDE CORP /NEW/ | ucc-9302018xq3xex322.htm |
| EX-31.2 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - UNION CARBIDE CORP /NEW/ | ucc-9302018xq3xex312.htm |
| EX-31.1 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - UNION CARBIDE CORP /NEW/ | ucc-9302018xq3xex311.htm |
| EX-23 - ANKURA CONSULTING GROUP, LLC - UNION CARBIDE CORP /NEW/ | ucc-9302018xq3xex23.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2018
or
o 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
(Exact name of registrant as specified in its charter)
New York (State or other jurisdiction of incorporation or organization) | 13-1421730 (I.R.S. Employer Identification No.) | |
7501 STATE HIGHWAY 185 NORTH, SEADRIFT, TEXAS 77983
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 361-553-2997
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.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | o | Accelerated filer | o | |
Non-accelerated filer | þ | Smaller reporting company | o | |
Emerging growth company | o | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
At September 30, 2018, 935.51 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 Instruction H(1)(a) and (b) for Form 10-Q and is therefore filing this form with a reduced disclosure format.
Union Carbide Corporation
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended September 30, 2018
TABLE OF CONTENTS
PAGE | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 4. | ||
Item 6. | ||
2
Union Carbide Corporation and Subsidiaries |
Throughout this Quarterly Report on Form 10-Q, except as otherwise indicated by the context, the terms "Corporation" or "UCC" as used herein mean Union Carbide Corporation and its subsidiaries.
FORWARD-LOOKING STATEMENTS
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements may appear throughout this report, including without limitation, the section "Management's Discussion and Analysis." These forward-looking statements often address expected future business and financial performance and financial condition, and often contain words or phrases such as "anticipate," "believe," "estimate," "expect," "future," "intend," "may," "opportunity," "outlook," "plan," "project," "see," "seek," "should," "strategy," "target," "will," "would," "will be," "will continue," "will likely result" and similar expressions and variations or negatives of these words. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements.
A detailed discussion of principal risks and uncertainties which may cause actual results and events to differ materially from such forward-looking statements is included in the section titled "Risk Factors" (see Part I, Item 1A of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2017). UCC undertakes no obligation to update or revise publicly any forward-looking statements whether because of new information, future events, or otherwise, except as required by securities and other applicable laws.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Union Carbide Corporation and Subsidiaries
Consolidated Statements of Income
Three Months Ended | Nine Months Ended | |||||||||||
In millions (Unaudited) | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Net trade sales | $ | 39 | $ | 31 | $ | 105 | $ | 113 | ||||
Net sales to related companies | 1,385 | 1,184 | 3,998 | 3,722 | ||||||||
Total net sales | 1,424 | 1,215 | 4,103 | 3,835 | ||||||||
Cost of sales | 1,062 | 994 | 3,102 | 3,061 | ||||||||
Research and development expenses | 4 | 4 | 14 | 14 | ||||||||
Selling, general and administrative expenses | 1 | 1 | 5 | 4 | ||||||||
Restructuring and asset related charges - net | 1 | 8 | 3 | 10 | ||||||||
Integration and separation costs | 1 | 1 | 2 | 1 | ||||||||
Sundry income (expense) - net | (12 | ) | (5 | ) | (28 | ) | 11 | |||||
Interest expense and amortization of debt discount | 9 | 6 | 22 | 20 | ||||||||
Income before income taxes | 334 | 196 | 927 | 736 | ||||||||
Provision for income taxes | 62 | 152 | 184 | 337 | ||||||||
Net income attributable to Union Carbide Corporation | $ | 272 | $ | 44 | $ | 743 | $ | 399 | ||||
Depreciation | $ | 49 | $ | 45 | $ | 137 | $ | 132 | ||||
Capital expenditures | $ | 73 | $ | 47 | $ | 174 | $ | 145 | ||||
See Notes to the Consolidated Financial Statements.
4
Union Carbide Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
Three Months Ended | Nine Months Ended | |||||||||||
In millions (Unaudited) | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Net income attributable to Union Carbide Corporation | $ | 272 | $ | 44 | $ | 743 | $ | 399 | ||||
Other comprehensive income, net of tax | ||||||||||||
Cumulative translation adjustments | 1 | 1 | 2 | 4 | ||||||||
Pension and other postretirement benefit plans | 16 | 12 | 49 | 36 | ||||||||
Total other comprehensive income | 17 | 13 | 51 | 40 | ||||||||
Comprehensive income attributable to Union Carbide Corporation | $ | 289 | $ | 57 | $ | 794 | $ | 439 | ||||
See Notes to the Consolidated Financial Statements.
5
Union Carbide Corporation and Subsidiaries
Consolidated Balance Sheets
In millions, except share amounts (Unaudited) | Sep 30, 2018 | Dec 31, 2017 | ||||
Assets | ||||||
Current Assets | ||||||
Cash and cash equivalents | $ | 13 | $ | 13 | ||
Accounts receivable: | ||||||
Trade (net of allowance for doubtful receivables 2018: $-; 2017: $-) | 25 | 21 | ||||
Related companies | 1,019 | 972 | ||||
Other | 25 | 50 | ||||
Income taxes receivable | 326 | 281 | ||||
Notes receivable from related companies | 1,277 | 1,238 | ||||
Inventories | 303 | 278 | ||||
Other current assets | 13 | 35 | ||||
Total current assets | 3,001 | 2,888 | ||||
Investments | ||||||
Investments in related companies | 639 | 639 | ||||
Other investments | 25 | 25 | ||||
Noncurrent receivables | 65 | 62 | ||||
Noncurrent receivables from related companies | 54 | 54 | ||||
Total investments | 783 | 780 | ||||
Property | ||||||
Property | 7,353 | 7,309 | ||||
Less accumulated depreciation | 5,940 | 5,930 | ||||
Net property | 1,413 | 1,379 | ||||
Other Assets | ||||||
Intangible assets (net of accumulated amortization 2018: $85; 2017: $82) | 27 | 25 | ||||
Deferred income tax assets | 468 | 511 | ||||
Deferred charges and other assets | 33 | 36 | ||||
Total other assets | 528 | 572 | ||||
Total Assets | $ | 5,725 | $ | 5,619 | ||
Liabilities and Equity | ||||||
Current Liabilities | ||||||
Notes payable to related companies | $ | 29 | $ | 28 | ||
Notes payable - other | 4 | — | ||||
Long-term debt due within one year | 1 | 1 | ||||
Accounts payable: | ||||||
Trade | 265 | 270 | ||||
Related companies | 571 | 684 | ||||
Other | 37 | 22 | ||||
Income taxes payable | 22 | 24 | ||||
Asbestos-related liabilities - current | 126 | 132 | ||||
Accrued and other current liabilities | 193 | 174 | ||||
Total current liabilities | 1,248 | 1,335 | ||||
Long-Term Debt | 474 | 474 | ||||
Other Noncurrent Liabilities | ||||||
Pension and other postretirement benefits - noncurrent | 966 | 1,054 | ||||
Asbestos-related liabilities - noncurrent | 1,164 | 1,237 | ||||
Other noncurrent obligations | 134 | 151 | ||||
Total other noncurrent liabilities | 2,264 | 2,442 | ||||
Stockholder's Equity | ||||||
Common stock (authorized: 1,000 shares of $0.01 par value each; issued: 935.51 shares) | — | — | ||||
Additional paid-in capital | 138 | 138 | ||||
Retained earnings | 3,156 | 2,582 | ||||
Accumulated other comprehensive loss | (1,555 | ) | (1,352 | ) | ||
Union Carbide Corporation's stockholder's equity | 1,739 | 1,368 | ||||
Total Liabilities and Equity | $ | 5,725 | $ | 5,619 | ||
See Notes to the Consolidated Financial Statements.
6
Union Carbide Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended | ||||||
In millions (Unaudited) | Sep 30, 2018 | Sep 30, 2017 | ||||
Operating Activities | ||||||
Net income attributable to Union Carbide Corporation | $ | 743 | $ | 399 | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Depreciation and amortization | 157 | 148 | ||||
Provision for deferred income tax | 28 | 109 | ||||
Net gain on sales of property and investments | — | (26 | ) | |||
Net gain on sale of ownership interest in nonconsolidated affiliate | — | (4 | ) | |||
Restructuring and asset related charges - net | 3 | 10 | ||||
Net periodic pension benefit cost | 33 | 21 | ||||
Pension contributions | (42 | ) | (162 | ) | ||
Changes in assets and liabilities: | ||||||
Accounts and notes receivable | 25 | 10 | ||||
Related company receivables | (86 | ) | 104 | |||
Inventories | (25 | ) | 8 | |||
Accounts payable | 12 | 15 | ||||
Related company payables | (112 | ) | 18 | |||
Asbestos-related payments | (79 | ) | (92 | ) | ||
Other assets and liabilities | (63 | ) | 67 | |||
Cash provided by operating activities | 594 | 625 | ||||
Investing Activities | ||||||
Capital expenditures | (174 | ) | (145 | ) | ||
Change in noncurrent receivable from related company | — | 3 | ||||
Proceeds from sale of ownership interest in nonconsolidated affiliate | — | 22 | ||||
Proceeds from sales of property | — | 18 | ||||
Proceeds from sales of investments | — | 9 | ||||
Cash used for investing activities | (174 | ) | (93 | ) | ||
Financing Activities | ||||||
Dividends paid to parent | (423 | ) | (531 | ) | ||
Changes in short-term notes payable | 4 | 2 | ||||
Payments on long-term debt | (1 | ) | (1 | ) | ||
Cash used for financing activities | (420 | ) | (530 | ) | ||
Summary | ||||||
Increase in cash and cash equivalents | — | 2 | ||||
Cash and cash equivalents at beginning of year | 13 | 11 | ||||
Cash and cash equivalents at end of period | $ | 13 | $ | 13 | ||
See Notes to the Consolidated Financial Statements.
7
Union Carbide Corporation and Subsidiaries
Consolidated Statements of Equity
In millions (Unaudited) | Common Stock | Additional Paid-in Capital | Retained Earnings | Accum. Other Comp Loss | Total Equity | ||||||||||
2017 | |||||||||||||||
Balance at Jan 1, 2017 | $ | — | $ | 138 | $ | 2,980 | $ | (1,320 | ) | $ | 1,798 | ||||
Net income attributable to Union Carbide Corporation | — | — | 399 | — | 399 | ||||||||||
Other comprehensive income | — | — | — | 40 | 40 | ||||||||||
Dividends declared | — | — | (531 | ) | — | (531 | ) | ||||||||
Balance at Sep 30, 2017 | $ | — | $ | 138 | $ | 2,848 | $ | (1,280 | ) | $ | 1,706 | ||||
2018 | |||||||||||||||
Balance at Jan 1, 2018 | $ | — | $ | 138 | $ | 2,582 | $ | (1,352 | ) | $ | 1,368 | ||||
Adoption of accounting standard (Note 1) | — | — | 254 | (254 | ) | — | |||||||||
Net income attributable to Union Carbide Corporation | — | — | 743 | — | 743 | ||||||||||
Other comprehensive income | — | — | — | 51 | 51 | ||||||||||
Dividends declared | — | — | (423 | ) | — | (423 | ) | ||||||||
Balance at Sep 30, 2018 | $ | — | $ | 138 | $ | 3,156 | $ | (1,555 | ) | $ | 1,739 | ||||
See Notes to the Consolidated Financial Statements.
8
Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited) | ||
Table of Contents
Note | Page | |
1 | ||
2 | ||
3 | ||
4 | ||
5 | ||
6 | ||
7 | ||
8 | ||
9 | ||
10 | ||
11 | ||
12 | ||
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The unaudited interim consolidated financial statements of Union Carbide Corporation and its subsidiaries (the "Corporation" or "UCC") were prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and reflect all adjustments (including normal recurring accruals) which, in the opinion of management, are considered necessary for the fair presentation of the results for the periods presented. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017.
The Corporation is a wholly owned subsidiary of The Dow Chemical Company ("Dow"). In accordance with the accounting guidance for earnings per share, the presentation of earnings per share is not required in financial statements of wholly owned subsidiaries.
The Corporation’s business activities comprise components of Dow’s global operations rather than stand-alone operations. Dow conducts its worldwide operations through principal product groups. Because there are no separable reportable business segments for UCC under the accounting guidance related to segment reporting and no detailed business information is provided to a chief operating decision maker regarding the Corporation’s stand-alone operations, the Corporation’s results are reported as a single operating segment.
Effective August 31, 2017, pursuant to the merger of equals transaction contemplated by the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017, Dow and E. I. du Pont de Nemours and Company ("DuPont") each merged with subsidiaries of DowDuPont Inc. ("DowDuPont") and, as a result, Dow and DuPont became subsidiaries of DowDuPont (the "Merger"). Following the Merger, Dow and DuPont intend to pursue, subject to approval by the board of directors of DowDuPont, the separation of the combined company's agriculture business, specialty products business and materials science business through one or more tax-efficient transactions.
Intercompany transactions and balances are eliminated in consolidation. Transactions with the Corporation’s parent company, Dow, and other subsidiaries of Dow and DowDuPont, have been reflected as related company transactions in the consolidated financial statements. See Note 12 for additional information.
9
Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited) | ||
Significant Accounting Policy Updates
In the first quarter of 2018, the Corporation adopted Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)" and the associated ASUs (collectively, "Topic 606"). See Notes 2 and 3 for additional information. The Corporation's significant accounting policy for Revenue was updated as a result of the adoption of Topic 606:
Revenue
Substantially all of the Corporation's revenues are generated by sales to Dow. Revenue for product sales to related companies is recognized when the related company obtains control of the product, which occurs either at the time that production is complete or shipped free on board ("FOB") from UCC's manufacturing facility, in accordance with the sales agreement between the Corporation and Dow.
The Corporation recognizes revenue for product sales to trade customers when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Corporation expects to receive in exchange for those goods or services. To determine revenue recognition for the arrangements that the Corporation determines are within the scope of Topic 606, the Corporation performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
Changes in Financial Statement Presentation
Consolidated Statements of Income
In the first quarter of 2018, the Corporation adopted ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which required retrospective application for the reclassification of net periodic benefit costs, other than the service cost component, from "Cost of sales" to "Sundry income (expense) - net." See Note 2 for additional information.
The changes to the consolidated statements of income as a result of the retrospective adoption of ASU 2017-07 are summarized below:
Summary of Changes to the Consolidated Statements of Income | Three Months Ended Sep 30, 2017 | Nine Months Ended Sep 30, 2017 | ||||||||||
In millions | As Filed | Updated | As Filed | Updated | ||||||||
Cost of sales | $ | 991 | $ | 994 | $ | 3,056 | $ | 3,061 | ||||
Sundry income (expense) - net | $ | (8 | ) | $ | (5 | ) | $ | 6 | $ | 11 | ||
Consolidated Statements of Equity
In the second quarter of 2018, the Corporation adopted ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which resulted in a $254 million increase to retained earnings due to the reclassification from accumulated other comprehensive loss for the effect of the federal corporate income tax rate change as a result of the Tax Cuts and Jobs Act of 2017 ("The Act") on the Corporation's pension plans. This reclassification is reflected in the "Adoption of accounting standard" line in the consolidated statements of equity. The Corporation's significant accounting policy for Income Taxes was updated as a result of the adoption of ASU 2018-02 to indicate the Corporation uses the portfolio approach for releasing income tax effects from accumulated other comprehensive loss. See Note 2 for additional information.
NOTE 2 - RECENT ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
In the second quarter of 2018, the Corporation early adopted ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from The Act, which was enacted on December 22, 2017, and requires certain disclosures about stranded tax effects. An entity has the option of applying the new guidance at the beginning of the period of adoption or retrospectively to each period (or periods) in which the tax effects related to items remaining in accumulated other comprehensive income are recognized. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and early adoption is permitted,
10
Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited) | ||
including adoption in an interim period for reporting periods in which the financial statements have not yet been issued. The Corporation's adoption of the new standard was applied prospectively at the beginning of the second quarter of 2018, with a reclassification of the stranded tax effects as a result of The Act from accumulated other comprehensive loss to retained earnings. See Note 1 for additional information.
In the first quarter of 2018, the Corporation adopted ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is the new comprehensive revenue recognition standard that supersedes the revenue recognition requirements in Topic 605, "Revenue Recognition," and most industry specific guidance. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In 2015 and 2016, the Financial Accounting Standards Board ("FASB") issued additional ASUs related to Topic 606 that delayed the effective date of the guidance and clarified various aspects of the new revenue guidance, including principal versus agent considerations, identification of performance obligations, and accounting for licenses, and included other improvements and practical expedients. The new guidance was effective for annual and interim periods beginning after December 15, 2017. The Corporation elected to adopt the new guidance using the modified retrospective transition method for all contracts not completed as of the date of adoption, which requires the cumulative effect of applying the new revenue standard as an adjustment to the opening balance of retained earnings in the first period of adoption. As a result of adopting the new guidance, there were no adjustments required to retained earnings at the beginning of the first quarter of 2018 and there was no impact on the consolidated financial statements. The comparative periods have not been restated and continue to be accounted for under Topic 605. See Notes 1 and 3 for additional disclosures regarding the Corporation's contracts with customers as well as the impact of adopting Topic 606.
In the first quarter of 2018, the Corporation adopted ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory," which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption. The adoption of this guidance did not have an impact on the consolidated financial statements.
In the first quarter of 2018, the Corporation adopted ASU 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which amends the requirements related to the income statement presentation of the components of net periodic benefit cost for employer sponsored defined benefit pension and other postretirement benefit plans. Under the new guidance, an entity must disaggregate and present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period, and only the service cost component will be eligible for capitalization. Other components of net periodic benefit cost must be presented separately from the line item(s) that includes the service cost. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Entities were required to use a retrospective transition method to adopt the requirement for separate income statement presentation of the service cost and other components, and a prospective transition method to adopt the requirement to limit the capitalization of benefit cost to the service component. In the first quarter of 2018, the Corporation used a retrospective transition method to reclassify net periodic benefit cost, other than the service component, from "Cost of sales" to "Sundry income (expense) - net" in the consolidated statements of income. See Note 1 for additional information.
Accounting Guidance Issued But Not Adopted at September 30, 2018
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," and associated ASUs for Topic 842, which requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The new guidance requires that a lessee recognize assets and liabilities for leases with lease terms of more than twelve months and recognition, presentation and measurement in the financial statements will depend on its classification as a finance or operating lease. In addition, the new guidance will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. Lessor accounting remains largely unchanged from current U.S. GAAP but does contain some targeted improvements to align with the new revenue recognition guidance issued in 2014 (ASU 2014-09). The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, using a modified retrospective approach, and early adoption is permitted. The Corporation has a cross-functional team in place to evaluate and implement the new guidance. The team continues to review existing lease arrangements and has engaged a third party to assist with the collection of lease data. The Corporation will elect the optional transition method that allows for a cumulative-effect adjustment in the period of adoption, and prior periods will not be restated. The impact of
11
Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited) | ||
applying the other practical expedients and accounting policy elections has been evaluated and the Corporation is in the process of documenting the related considerations and decisions. The Corporation is currently implementing a third-party software solution in connection with the adoption of the ASU; however, the system is still being modified to comply with the new guidance. The Corporation continues to enhance accounting systems and update business processes and controls related to the new guidance for leases. Collectively, these activities are expected to facilitate the Corporation's ability to meet the new accounting and disclosure requirements upon adoption in the first quarter of 2019. The Corporation is working to quantify the impact and anticipates that the adoption of the new standard will result in a material increase in lease-related assets and liabilities in the consolidated balance sheets. The impact to the Corporation's consolidated statements of income and cash flows is not expected to be material.
In August 2018, the FASB issued ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans," which, as part of the FASB disclosure framework project, removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of certain disclosures and adds new disclosure requirements that are considered relevant for employers that sponsor defined benefit pension and/or other postretirement benefit plans. The new standard is effective for fiscal years ending after December 15, 2020, and early adoption is permitted. The new guidance should be applied on a retrospective basis for all periods presented. The Corporation is currently evaluating the impact of adopting this guidance.
NOTE 3 - REVENUE
Substantially all of the Corporation's revenues are generated by intercompany sales to Dow. Products are sold to and purchased from Dow at market-based prices in accordance with the terms of Dow’s intercompany pricing policies. Approximately 99 percent of the Corporation's sales for the three and nine months ended September 30, 2018, related to sales of product (99 percent in the three and nine months ended September 30, 2017); the remaining 1 percent related to the licensing of patents and technology. The Corporation sells its products to Dow to simplify the customer interface process.
Substantially all product sale contracts are short-term in nature and have original expected durations of one year or less. Revenue from product sales is recognized when Dow or the customer obtains control of the Corporation’s product, which occurs at a point in time, typically at the time production is complete or product is shipped FOB from UCC’s manufacturing facility for sales to Dow, or upon shipment for sales to trade customers. The Corporation’s payment terms are on average 40 to 60 days after invoicing. All shipping and handling activities that occur after control transfers to the customer are considered fulfillment activities. Certain long-term contracts include a series of distinct goods that are delivered continuously to the customer through a pipeline. For these types of product sales, the Corporation invoices the customer in an amount that directly corresponds with the value to the customer of the Corporation’s performance to date. As a result, revenue is recognized based on the amount billable to the customer in accordance with the right to invoice practical expedient.
The transaction price for product sales includes estimates for the most likely amount of consideration to which the Corporation will be entitled based on historical award experience and the Corporation’s best judgment at the time. Taxes collected and remitted to governmental authorities are excluded from the transaction price. For contracts with multiple performance obligations, the Corporation allocates the transaction price to each performance obligation on the basis of relative standalone selling price, which is based on the price charged to customers or estimated using the expected cost plus margin method.
Revenue related to the initial licensing of patents and technology is recognized when the performance obligation is satisfied. Revenue related to sales-based royalties to which the Corporation expects to be entitled is estimated based on historical sales.
The Corporation’s contract liabilities include payments received in advance of performance under long-term contracts for product sales and royalties, and are realized when the associated revenue is recognized under the contract with remaining contract terms that range up to 22 years. The Corporation will have rights to future consideration for revenue recognized when product is delivered to the customer. The balance of contract liabilities was $42 million at September 30, 2018 ($43 million at December 31, 2017) and was included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the consolidated balance sheets.
The Corporation disaggregates its revenue from contracts with customers by type of customer (sales to related parties and sales to trade customers) as presented in the consolidated statements of income and believes this disaggregation best depicts the nature, amount, timing and uncertainty of its revenue and cash flows. Substantially all of the product sales are made to the parent entity, Dow, and there are no unique economic factors that affect revenue recognition and cash flows associated with these product sales.
12
Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited) | ||
NOTE 4 - RESTRUCTURING AND ASSET RELATED CHARGES - NET
In September 2017, the Corporation approved restructuring actions that are aligned with DowDuPont’s synergy targets. As a result of these actions, the Corporation recorded a pretax restructuring charge for severance and related benefit costs of $8 million in the third quarter of 2017. In November 2017, the Corporation approved additional restructuring actions in connection with the restructuring program. A pretax restructuring charge for severance and related benefit costs of $2 million was recorded in the fourth quarter of 2017, as well as charges of $62 million for the write-off and write-down of manufacturing and facility related assets at multiple UCC sites, including a steam unit in Institute, West Virginia.
In addition to actions taken in 2017, the Corporation recorded pretax charges of $1 million in the third quarter of 2018 ($3 million for the first nine months of 2018) for additional restructuring charges for severance and related benefit costs. At September 30, 2018, severance of $8 million had been paid, leaving a liability of $5 million. The impact of this charge was shown as “Restructuring and asset related charges - net” in the consolidated statements of income. These actions are expected to be substantially completed by September 30, 2019.
The Corporation expects to incur additional costs in the future related to restructuring activities, as UCC continually looks for ways to enhance the efficiency and cost effectiveness of its operations. The Corporation expects to incur additional employee-related costs, including involuntary termination benefits, related to its other optimization activities. These costs cannot be reasonably estimated at this time.
NOTE 5 - INCOME TAXES
On December 22, 2017, The Act was enacted. The Act reduces the U.S. federal corporate income tax rate from 35 percent to 21 percent, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred, creates new provisions related to foreign sourced earnings, eliminates the domestic manufacturing deduction and moves towards a territorial system. At September 30, 2018, the Corporation had not completed its accounting for the tax effects of The Act; however, as described below, the Corporation made reasonable estimates of the effects on its existing deferred tax balances and the one-time transition tax. In accordance with Staff Accounting Bulletin 118, income tax effects of The Act may be refined upon obtaining, preparing, or analyzing additional information during the measurement period and such changes could be material. During the measurement period, provisional amounts may also be adjusted for the effects, if any, of interpretative guidance issued after December 31, 2017, by U.S. regulatory and standard-setting bodies.
• | As a result of The Act, the Corporation remeasured its U.S. federal deferred tax assets and liabilities based on the income tax rates at which they are expected to reverse in the future, which is generally 21 percent. However, the Corporation is still analyzing certain aspects of The Act and refining its calculations. Adjustments for the three and nine months ended September 30, 2018 were $5 million, recorded as a benefit to "Provision for income taxes" in the consolidated statements of income. To date, the provisional amount recorded related to the remeasurement of the Corporation’s deferred tax balance was $245 million, recorded as a charge to “Provision for income taxes." |
• | The Act requires a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits (“E&P”), which results in a one-time transition tax. As a result, the provisional amount recorded for the transition tax liability for its foreign subsidiaries was insignificant at September 30, 2018. The Corporation has not yet completed its calculation of the total post-1986 foreign E&P for its foreign subsidiaries as E&P will not be finalized until the fourth quarter of 2018, after the DowDuPont federal income tax return is filed. |
• | The Corporation recorded an indirect impact of The Act related to prepaid tax on intercompany sales of inventory. The amount related to the inventory was $2 million, recorded as a charge to "Provision for income taxes" in the first quarter of 2018. |
• | For tax years beginning after December 31, 2017, The Act introduces new provisions for U.S. taxation of certain global intangible low-taxed income ("GILTI"). The Corporation is evaluating the policy election on whether the additional liability will be recorded in the period in which it is incurred or recognized for the basis differences that would be expected to reverse in future years. |
In the first quarter of 2018, a settlement was reached for a tax matter regarding fees paid to the Corporation by a foreign nonconsolidated affiliate. As a result, the Corporation recorded an increase of $40 million to "Income taxes receivable" and "Income
13
Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited) | ||
taxes payable" in the consolidated balance sheets. There was no impact to the consolidated statements of income. In the second quarter of 2018, a payment of $40 million was made for the settlement of the tax matter.
A transaction for the sale of stock between the Corporation and Dow in 2014 created a gain that was initially deferred for tax purposes. This deferred gain became taxable as a result of activities executed in anticipation of the intended separation of DowDuPont into three publicly traded companies. As a result, in the third quarter of 2017, the Corporation increased "Income taxes payable" in the consolidated balance sheets and recorded a charge to "Provision for income taxes" in the consolidated statements of income of $97 million.
The Corporation is included in Dow's consolidated federal income tax group and DowDuPont's consolidated tax return. Current and deferred tax expenses are calculated for the Corporation as a stand-alone group and are allocated to the group from the consolidated totals, consistent with the Dow-UCC Tax Sharing Agreement. UCC is currently under examination in a number of tax jurisdictions, including the U.S. federal and various state jurisdictions. It is reasonably possible that these examinations may be resolved in the next twelve months. The impact on the Corporation’s results of operations is not expected to be material.
NOTE 6 - INVENTORIES
The following table provides a breakdown of inventories:
Inventories | Sep 30, 2018 | Dec 31, 2017 | ||||
In millions | ||||||
Finished goods | $ | 262 | $ | 222 | ||
Work in process | 65 | 47 | ||||
Raw materials | 46 | 48 | ||||
Supplies | 80 | 73 | ||||
Total | $ | 453 | $ | 390 | ||
Adjustment of inventories to a LIFO basis | (150 | ) | (112 | ) | ||
Total inventories | $ | 303 | $ | 278 | ||
NOTE 7 - INTANGIBLE ASSETS
The following table provides information regarding the Corporation’s intangible assets:
Intangible Assets | Sep 30, 2018 | Dec 31, 2017 | ||||||||||||||||
In millions | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||
Intangible assets with finite lives: | ||||||||||||||||||
Licenses and developed technology | $ | 33 | $ | (33 | ) | $ | — | $ | 33 | $ | (33 | ) | $ | — | ||||
Software | 79 | (52 | ) | 27 | 74 | (49 | ) | 25 | ||||||||||
Total intangible assets | $ | 112 | $ | (85 | ) | $ | 27 | $ | 107 | $ | (82 | ) | $ | 25 | ||||
14
Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited) | ||
Total estimated amortization expense for 2018 and the five succeeding fiscal years is as follows:
Estimated Amortization Expense | |||
In millions | |||
2018 | $ | 7 | |
2019 | $ | 7 | |
2020 | $ | 7 | |
2021 | $ | 5 | |
2022 | $ | 4 | |
2023 | $ | 1 | |
NOTE 8 - COMMITMENTS AND CONTINGENT LIABILITIES
Environmental Matters
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies.
At September 30, 2018, the Corporation had accrued obligations of $102 million for probable environmental remediation and restoration costs, including $17 million for the remediation of Superfund sites. These obligations are included in "Accrued and other current liabilities" and "Other noncurrent obligations" in the consolidated balance sheets. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Corporation has accrued liabilities, although it is reasonably possible that the ultimate cost with respect to these particular matters could range up to approximately three times that amount. Consequently, it is reasonably possible that environmental remediation and restoration costs in excess of amounts accrued could have a material impact on the Corporation's results of operations, financial condition and cash flows. It is the opinion of the Corporation’s management that the possibility is remote that costs in excess of the range disclosed will have a material impact on the Corporation’s results of operations, financial condition and cash flows. Inherent uncertainties exist in these estimates primarily due to unknown environmental conditions, changing governmental regulations and legal standards regarding liability, and emerging remediation technologies for handling site remediation and restoration. At December 31, 2017, the Corporation had accrued obligations of $114 million for probable environmental remediation and restoration costs, including $19 million for the remediation of Superfund sites.
Litigation
The Corporation is 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.
Asbestos-Related Matters
A summary of asbestos-related matters can be found in Note 14 to the Consolidated Financial Statements included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2017.
Introduction
The Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that UCC sold in the past, alleged exposure to asbestos-containing products located on UCC’s premises and UCC’s responsibility for asbestos suits filed against a former UCC subsidiary, Amchem Products, Inc. ("Amchem"). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to the Corporation’s products.
The Corporation expects more asbestos-related suits to be filed against UCC and Amchem in the future, and will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.
15
Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited) | ||
Estimating the Asbestos-Related Liability
Since 2003, the Corporation has engaged Ankura Consulting Group, LLC ("Ankura"), a third party actuarial specialist, to review the Corporation's historical asbestos-related claim and resolution activity in order to assist UCC management in estimating the Corporation's asbestos-related liability. Each year, Ankura has reviewed the claim and resolution activity to determine the appropriateness of updating the most recent Ankura study.
Based on the December 2017 Ankura review and the Corporation's own review of the data, the Corporation's total asbestos-related liability through the terminal year of 2049, including asbestos-related defense and processing costs, was $1,369 million at December 31, 2017, and was included in “Asbestos-related liabilities - current” and “Asbestos-related liabilities - noncurrent” in the consolidated balance sheets.
Each quarter, the Corporation reviews claims filed, settled and dismissed, as well as average settlement and resolution costs by disease category. The Corporation also considers additional quantitative and qualitative factors such as the nature of pending claims, trial experience of the Corporation and other asbestos defendants, current spending for defense and processing costs, significant appellate rulings and legislative developments, trends in the tort system, and their respective effects on expected future resolution costs. UCC management considers all these factors in conjunction with the most recent Ankura study and determines whether a change in the estimate is warranted. Based on the Corporation's review of 2018 activity, it was determined that no adjustment to the accrual was required at September 30, 2018.
The Corporation’s asbestos-related liability for pending and future claims and defense and processing costs was $1,290 million at September 30, 2018, and approximately 16 percent of the recorded liability related to pending claims and approximately 84 percent related to future claims.
Summary
The Corporation's management believes the amounts recorded for the asbestos-related liability (including defense and processing costs) reflect reasonable and probable estimates of the liability based on current, known facts. However, future events, such as the number of new claims to be filed and/or received each year and the average cost of defending and disposing of each such claim, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs for the Corporation to be higher or lower than those projected or those recorded. Any such event could result in an increase or decrease in the recorded liability.
Because of the uncertainties described above, the Corporation cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing UCC and Amchem. As a result, it is reasonably possible that an additional cost of disposing of asbestos-related claims, including future defense and processing costs, could have a material impact on the Corporation's results of operations and cash flows for a particular period and on the consolidated financial position.
Other Litigation
While it is not possible at this time to determine with certainty the ultimate outcome of any of the legal proceedings and claims referred to in this filing, management believes that the possibility is remote that the aggregate of all such other claims and lawsuits will have a material adverse impact on the results of operations, cash flows and financial position of the Corporation.
16
Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited) | ||
NOTE 9 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table summarizes the changes and after-tax balances of each component of accumulated other comprehensive loss ("AOCL") for the nine months ended September 30, 2018 and 2017:
Accumulated Other Comprehensive Loss | Cumulative Translation Adj | Pension and Other Postretire Benefits | Total Accum Other Comp Loss | ||||||
In millions | |||||||||
Balance at Jan 1, 2017 | $ | (62 | ) | $ | (1,258 | ) | $ | (1,320 | ) |
Other comprehensive income before reclassifications | 1 | — | 1 | ||||||
Amounts reclassified from accumulated other comprehensive loss | 3 | 36 | 39 | ||||||
Net other comprehensive income | $ | 4 | $ | 36 | $ | 40 | |||
Balance at Sep 30, 2017 | $ | (58 | ) | $ | (1,222 | ) | $ | (1,280 | ) |
Balance at Jan 1, 2018 | $ | (59 | ) | $ | (1,293 | ) | $ | (1,352 | ) |
Other comprehensive income before reclassifications | 2 | — | 2 | ||||||
Amounts reclassified from accumulated other comprehensive loss | — | 49 | 49 | ||||||
Net other comprehensive income | $ | 2 | $ | 49 | $ | 51 | |||
Reclassification of stranded tax effects 1 | — | (254 | ) | (254 | ) | ||||
Balance at Sep 30, 2018 | $ | (57 | ) | $ | (1,498 | ) | $ | (1,555 | ) |
1. | Amounts reclassified to retained earnings as a result of the adoption of ASU 2018-02. See Notes 1 and 2 for additional information. |
The tax effects on the net activity related to each component of other comprehensive loss for the three and nine months ended September 30, 2018 and 2017 were as follows:
Tax Expense 1 | Three Months Ended | Nine Months Ended | ||||||||||
In millions | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Pension and other postretirement benefit plans | $ | (5 | ) | $ | (6 | ) | $ | (15 | ) | $ | (22 | ) |
1. | Prior period amounts were updated to conform with the current year presentation. |
A summary of the reclassifications out of AOCL for the three and nine months ended September 30, 2018 and 2017 is provided as follows:
Reclassifications Out of Accumulated Other Comprehensive Loss | Three Months Ended | Nine Months Ended | Consolidated Statements of Income Classification | ||||||||||
Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||||
In millions | |||||||||||||
Cumulative translation adjustments | $ | — | $ | — | $ | — | $ | 3 | See (1) below | ||||
Pension and other postretirement benefit plans | $ | 21 | $ | 18 | $ | 64 | $ | 58 | See (2) below | ||||
Tax benefit | $ | (5 | ) | $ | (6 | ) | $ | (15 | ) | $ | (22 | ) | See (3) below |
After tax | $ | 16 | $ | 12 | $ | 49 | $ | 36 | |||||
Total reclassifications for the period, after tax | $ | 16 | $ | 12 | $ | 49 | $ | 39 | |||||
1. | "Sundry income (expense) - net." |
2. | These AOCL components are included in the computation of net periodic benefit cost of the Corporation's defined benefit pension and other postretirement benefit plans. See Note 10 for additional information. |
3. | "Provision for income taxes." |
17
Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited) | ||
NOTE 10 - PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
A summary of the Corporation's pension plans and other postretirement benefits can be found in Note 16 to the Consolidated Financial Statements included in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2017. The following table provides the components of the Corporation's net periodic benefit cost for all significant plans:
Net Periodic Benefit Cost (Credit) for All Significant Plans | Three Months Ended | Nine Months Ended | ||||||||||
In millions | Sep 30, 2018 | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2017 | ||||||||
Defined Benefit Pension Plans: | ||||||||||||
Service cost | $ | 10 | $ | 10 | $ | 30 | $ | 28 | ||||
Interest cost | 32 | 33 | 96 | 97 | ||||||||
Expected return on plan assets | (55 | ) | (56 | ) | (164 | ) | (166 | ) | ||||
Amortization of net loss | 24 | 20 | 71 | 62 | ||||||||
Net periodic benefit cost | $ | 11 | $ | 7 | $ | 33 | $ | 21 | ||||
Other Postretirement Benefits: | ||||||||||||
Interest cost | $ | 2 | $ | 2 | $ | 5 | $ | 6 | ||||
Amortization of net gain | (3 | ) | (2 | ) | (7 | ) | (4 | ) | ||||
Net periodic benefit cost (credit) | $ | (1 | ) | $ | — | $ | (2 | ) | $ | 2 | ||
On January 1, 2018, the Corporation adopted ASU 2017-07, which impacted the presentation of the components of net periodic benefit cost in the consolidated statements of income. Net periodic benefit cost, other than the service cost component, was retrospectively reclassified to "Sundry income (expense) - net" in the consolidated statements of income. See Notes 1 and 2 for additional information.
NOTE 11 - FAIR VALUE MEASUREMENTS
The Corporation's financial instruments are classified as Level 2 measurements. For assets and liabilities classified as Level 2 measurements, where the security is frequently traded in less active markets, fair value is based on the closing price at the end of the period; where the security is less frequently traded, fair value is based on the price a dealer would pay for the security or similar securities, adjusted for any terms specific to that asset or liability, or by using observable market data points of similar, more liquid securities to imply the price. Market inputs are obtained from well-established and recognized vendors of market data and subjected to tolerance/quality checks.
The following table summarizes the fair value of the Corporation's financial instruments at September 30, 2018 and December 31, 2017:
Fair Value of Financial Instruments | Sep 30, 2018 | Dec 31, 2017 | ||||||||||||||||||||||
In millions | Cost | Gain | Loss | Fair Value | Cost | Gain | Loss | Fair Value | ||||||||||||||||
Cash equivalents 1 | $ | 9 | $ | — | $ | — | $ | 9 | $ | 9 | $ | — | $ | — | $ | 9 | ||||||||
Long-term debt including debt due within one year | $ | (475 | ) | $ | — | $ | (88 | ) | $ | (563 | ) | $ | (475 | ) | $ | — | $ | (129 | ) | $ | (604 | ) | ||
1. Money market fund is included in "Cash and cash equivalents" in the consolidated balance sheets and held at amortized cost, which approximates fair value.
Cost approximates fair value for all other financial instruments.
18
Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited) | ||
NOTE 12 - RELATED PARTY TRANSACTIONS
The Corporation sells its products to Dow to simplify the customer interface process. Products are sold to and purchased from Dow at market-based prices in accordance with the terms of Dow’s intercompany pricing policies. After each quarter, the Corporation and Dow analyze the pricing used for the sales in that quarter and reach agreement on any necessary adjustments, at which point the prices are final. The Corporation also procures certain commodities and raw materials through a Dow subsidiary and pays a commission to that Dow subsidiary based on the volume and type of commodities and raw materials purchased. The commission expense is included in "Sundry income (expense) - net" in the consolidated statements of income. Purchases from that Dow subsidiary were $407 million in the third quarter of 2018 ($377 million in the third quarter of 2017) and $1,219 million during the first nine months of 2018 ($1,213 million during the first nine months of 2017).
The Corporation has a master services agreement with Dow whereby Dow provides services including, but not limited to, accounting, legal, treasury (investments, cash management, risk management, insurance), procurement, human resources, environmental, health and safety and business management for UCC. Under the master services agreement with Dow, general administrative and overhead type services that Dow routinely allocates to various businesses are charged to UCC. The master services agreement cost allocation basis is headcount and includes a 10 percent service fee. This agreement resulted in expense of $8 million in the third quarter of 2018 ($8 million in the third quarter of 2017) and $22 million for the first nine months of 2018 ($24 million for the first nine months of 2017) for general administrative and overhead type services and the 10 percent service fee, included in "Sundry income (expense) - net" in the consolidated statements of income. The remaining activity-based costs were $23 million in the third quarter of 2018 ($20 million in the third quarter of 2017) and $67 million in the first nine months of 2018 ($60 million in the first nine months of 2017), and were included in "Cost of sales" in the consolidated statements of income.
Management believes the method used for determining expenses charged by Dow is reasonable. Dow provides these services by leveraging its centralized functional service centers to provide services at a cost that management believes provides an advantage to the Corporation.
The monitoring and execution of risk management policies related to interest rate and foreign currency risks, which are based on Dow’s risk management philosophy, are provided as a service to UCC.
As part of Dow’s cash management process, UCC is a party to revolving loans with Dow that have interest rates based on LIBOR (London Interbank Offered Rate) with varying maturities. At September 30, 2018, the Corporation had a note receivable of $1.3 billion ($1.2 billion at December 31, 2017) from Dow under a revolving loan agreement. The Corporation may draw from this note receivable in support of its daily working capital requirements and, as such, the net effect of cash inflows and outflows under this revolving loan agreement is presented in the consolidated statements of cash flows as an operating activity.
The Corporation also has a separate revolving credit agreement with Dow that allows the Corporation to borrow or obtain credit enhancements up to an aggregate of $1 billion that matures December 30, 2018. Dow may demand repayment with a 30-day written notice to the Corporation, subject to certain restrictions. A related collateral agreement provides for the replacement of certain existing pledged assets, primarily equity interests in various subsidiaries, with cash collateral. At September 30, 2018, $948 million was available under the revolving credit agreement ($949 million at December 31, 2017). The cash collateral is reported as “Noncurrent receivables from related companies” in the consolidated balance sheets.
On a quarterly basis, the Corporation's board of directors reviews and determines if there will be a dividend distribution to its parent company and sole shareholder, Dow. The Board takes into consideration the level of earnings and cash flows, among other factors, in determining the amount of the dividend distribution. In the third quarter of 2018, the Corporation declared and paid a cash dividend of $177 million to Dow; dividends to Dow totaled $423 million in the first nine months of 2018. In the third quarter of 2017, the Corporation declared and paid a cash dividend of $181 million to Dow; dividends to Dow totaled $531 million for the first nine months of 2017.
19
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Pursuant to General Instruction H(1)(a) and (b) for Form 10-Q "Omission of Information by Certain Wholly-Owned Subsidiaries," the Corporation is filing this Form 10-Q with a reduced disclosure format.
References to "Dow" refer to The Dow Chemical Company and its consolidated subsidiaries, except as otherwise indicated by the context. Effective August 31, 2017, pursuant to the merger of equals transaction contemplated by the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017, Dow and E. I. du Pont de Nemours and Company ("DuPont") each merged with subsidiaries of DowDuPont Inc. ("DowDuPont") and, as a result, Dow and DuPont became subsidiaries of DowDuPont (the "Merger").
Dow conducts its worldwide operations through principal product groups. Union Carbide Corporation’s (the "Corporation" or "UCC") business activities comprise components of Dow’s principal product groups rather than stand-alone operations. Because there are no separable reportable business segments for UCC and no detailed business information is provided to a chief operating decision maker regarding the Corporation’s stand-alone operations, the Corporation’s results are reported as a single operating segment.
RESULTS OF OPERATIONS
Net Sales
Total net sales were $1,424 million in the third quarter of 2018 compared with $1,215 million in the third quarter of 2017, an increase of 17 percent. Total net sales were $4,103 million for the first nine months of 2018 compared with $3,835 million for the first nine months of 2017, an increase of 7 percent. Net sales to related companies, principally to Dow, and based on market prices for the related products, were $1,385 million in the third quarter of 2018 compared with $1,184 million in the third quarter of 2017, an increase of 17 percent. Net sales to related companies were $3,998 million in the first nine months of 2018 compared with $3,722 million for the first nine months of 2017, an increase of 7 percent.
Average selling prices increased 6 percent in the third quarter of 2018 compared with the same quarter last year. Price increased across most products primarily in response to higher feedstock and other raw material costs and market demand, with the largest price increases in oxo alcohols, ethylene oxide/ethylene glycol ("EO/EG"), glycol ethers and polyethylene. Volume was up 11 percent in the third quarter of 2018 compared with the third quarter of 2017, which was impacted by hurricane-related supply disruptions and planned maintenance turnarounds. Volume increases in electrical and telecommunications, ethanolamines, glycol ethers, EO/EG and oxo alcohols more than offset volume declines in glutaraldehydes, polyethylene and vinyl acetate monomers.
For the first nine months of 2018, average selling prices increased 6 percent compared with the first nine months of 2017, with price increases across most products in response to higher feedstock and other raw material costs, with the largest increases in polyethylene, oxo alcohols, glycol ethers and electrical and telecommunications. Volume for the first nine months of 2018 increased 1 percent compared with the first nine months of 2017. Sales volume was negatively impacted by hurricane-related supply disruptions in the third quarter of 2017, as well as higher planned maintenance turnaround activity in the first nine months of 2017.
Certain countries where the Corporation's products are distributed or sold, principally through sales to Dow, have recently enacted tariffs on certain products, including those manufactured at UCC production facilities. Currently enacted tariffs are not expected to have a material impact on the Corporation's results of operations in 2018.
Cost of Sales
Cost of sales were $1,062 million in the third quarter of 2018 compared with $994 million in the third quarter of 2017, an increase of 7 percent. Cost of sales increased 1 percent from $3,061 million in the first nine months of 2017 to $3,102 million for the first nine months of 2018. Increases in cost of sales for the three- and nine-month periods ended September 30, 2018, were driven by increased sales volume and increased feedstock and other raw material costs which more than offset lower planned maintenance turnaround spending when compared with the same periods last year.
Research and Development ("R&D"), Selling, General and Administrative ("SG&A") Expenses
R&D expenses were $4 million in the third quarter of 2018 and $14 million for the first nine months of 2018, flat compared with the same periods last year. SG&A expenses were $1 million in the third quarter of 2018, flat compared with the third quarter of 2017. For the first nine months of 2018, SG&A expenses were $5 million compared with $4 million in the first nine months of 2017.
20
Restructuring and Asset Related Charges - Net
In the third quarter of 2017, the Corporation approved restructuring actions that are aligned with DowDuPont's synergy targets. As a result of these actions, the Corporation recorded a pretax restructuring charge for severance and related benefit costs of $8 million in the third quarter of 2017. In the third quarter of 2018, the Corporation recorded a pretax charge of $1 million ($3 million for the first nine months of 2018) for additional severance and related benefit costs, aligned with the DowDuPont synergy targets. See Note 4 to the Consolidated Financial Statements for additional information on the Corporation's restructuring activities.
Sundry Income (Expense) - Net
Sundry income (expense) – net includes a variety of income and expense items such as the gains or losses on foreign currency exchange, commissions, charges for management services provided by Dow, interest income, non-operating pension and other postretirement benefit plan credits or costs, and gains and losses on sales of investments and assets. Sundry income (expense) - net in the third quarter of 2018 was expense of $12 million compared with expense of $5 million in the same quarter last year.
For the first nine months of 2018, sundry income (expense) - net was expense of $28 million compared with income of $11 million in the same period last year. In the second quarter of 2017, UCC completed the sale of a parcel of land, which also included terminal assets and ancillary agreements for the supply of energy and site and terminal services, at the Texas City, Texas, manufacturing facility and recorded a pretax gain of $23 million. In the second quarter of 2017, UCC also completed the sale of its ownership interest in Asian Acetyls Co., LTD. ("ASACCO"), a nonconsolidated affiliate accounted for under the equity method of accounting. ASACCO agreed to purchase all of the shares of registered common stock owned by the Corporation and UCC recorded a pretax gain of $4 million on the sale.
Interest Expense and Amortization of Debt Discount
Interest expense and amortization of debt discount was $9 million in the third quarter of 2018 compared with $6 million in the third quarter of 2017. For the first nine months of 2018, interest expense and amortization of debt discount was $22 million compared with $20 million in the first nine months of 2017.
Provision for Income Taxes
The Corporation reported a tax provision of $62 million in the third quarter of 2018, which resulted in an effective tax rate of 18.6 percent. This compared with a tax provision of $152 million in the third quarter of 2017, which resulted in an effective tax rate of 77.6 percent. The effective tax rate for the third quarter of 2017 was unfavorably impacted by a deferred gain related to the sale of stock between UCC and Dow in 2014. The gain on the transaction was deferred for tax purposes, but with the restructuring activities that occurred in anticipation of the intended separation of Dow and DuPont into three publicly traded companies, the gain became taxable, resulting in a charge to the tax provision of $97 million. For the first nine months of 2018, the Corporation reported a tax provision of $184 million, which resulted in an effective tax rate of 19.8 percent. This compared with a tax provision of $337 million for the first nine months of 2017, which resulted in an effective tax rate of 45.8 percent. The effective tax rate fluctuates based on, among other factors, where income is earned. The tax rate in the first nine months of 2018 reflects the change in the U.S. federal corporate income tax rate as a result of the Tax Cuts and Jobs Act that was enacted on December 22, 2017, which reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent, as well as a deduction in the U.S. related to certain sales to foreign customers.
Net Income Attributable to UCC
The Corporation reported net income of $272 million in the third quarter of 2018 compared with $44 million in the third quarter of 2017. Net income for the first nine months of 2018 was $743 million compared with $399 million for the first nine months of 2017.
Capital Expenditures
Capital spending in the third quarter of 2018 was $73 million ($174 million for the first nine months of 2018) compared with $47 million in the third quarter of 2017 ($145 million for the first nine months of 2017), reflecting increased spending for U.S. Gulf Coast projects and site infrastructure projects.
21
OTHER MATTERS
Recent Accounting Guidance
See Note 2 to the Consolidated Financial Statements for a summary of recent accounting guidance.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 1 to the Consolidated Financial Statements in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017 ("2017 10-K") describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. The Corporation’s critical accounting policies that are impacted by judgments, assumptions and estimates are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Corporation’s 2017 10-K. Since December 31, 2017, there have been no material changes in the Corporation’s accounting policies that are impacted by judgments, assumptions and estimates.
Asbestos-Related Matters
The Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that UCC sold in the past, alleged exposure to asbestos-containing products located on UCC’s premises, and UCC’s responsibility for asbestos suits filed against a former UCC subsidiary, Amchem Products, Inc. ("Amchem"). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to UCC’s products.
The table below provides information regarding asbestos-related claims pending against the Corporation and Amchem based on criteria developed by UCC and its external consultants.
Asbestos-Related Claim Activity | 2018 | 2017 | ||
Claims unresolved at Jan 1 | 15,427 | 16,141 | ||
Claims filed | 5,279 | 5,598 | ||
Claims settled, dismissed or otherwise resolved | (7,861 | ) | (6,560 | ) |
Claims unresolved at Sep 30 | 12,845 | 15,179 | ||
Claimants with claims against both UCC and Amchem | (4,778 | ) | (5,544 | ) |
Individual claimants at Sep 30 | 8,067 | 9,635 | ||
Plaintiffs' lawyers often sue numerous defendants in individual lawsuits or on behalf of numerous claimants. As a result, the damages alleged are not expressly identified as to UCC, Amchem or any other particular defendant, even when specific damages are alleged with respect to a specific disease or injury. In fact, there are no personal injury cases in which only the Corporation and/or Amchem are the sole named defendants. For these reasons and based upon the Corporation's litigation and settlement experience, the Corporation does not consider the damages alleged against it and Amchem to be a meaningful factor in its determination of any potential asbestos-related liability.
For additional information see Asbestos-Related Matters in Note 8 to the Consolidated Financial Statements and Part II, Item 1. Legal Proceedings.
Debt Covenants and Default Provisions
The Corporation’s outstanding public debt has been issued under indentures which contain, among other provisions, covenants that the Corporation must comply with while the underlying notes are outstanding. Such covenants are typically based on the Corporation’s size and financial position and include, subject to the exceptions and qualifications contained in the indentures, obligations not to (i) allow liens on principal U.S. manufacturing facilities, (ii) enter into sale and lease-back transactions with respect to principal U.S. manufacturing facilities, or (iii) merge into or consolidate with any other entity or sell or convey all or substantially all of its assets. Failure of the Corporation to comply with any of these covenants could, after the passage of any applicable grace period, result in a default under the applicable indenture which would allow the note holders to accelerate the due date of the outstanding principal and accrued interest on the subject notes. Management believes the Corporation was in compliance with the covenants referred to above at September 30, 2018.
22
Dividends
On a quarterly basis, the Corporation's board of directors reviews and determines if there will be a dividend distribution to its parent company and sole shareholder, Dow. The Board takes into consideration the level of earnings and cash flows, among other factors, in determining the amount of the dividend distribution.
In the third quarter of 2018, the Corporation declared and paid a cash dividend of $177 million to Dow; dividends paid to Dow totaled $423 million for the first nine months of 2018. In the third quarter of 2017, the Corporation declared and paid a cash dividend of $181 million to Dow; dividends paid to Dow totaled $531 million for the first nine months of 2017. On November 1, 2018, the UCC Board of Directors approved a dividend to Dow of $130 million, payable on December 21, 2018.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted pursuant to General Instruction H of Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation's Disclosure Committee and the Corporation's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures pursuant to paragraph (b) of Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Corporation's disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in the Corporation's internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 and 15d-15 that was conducted during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting.
23
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Litigation
No material developments in asbestos-related matters occurred in the third quarter of 2018. For a current status of asbestos-related matters, see Note 8 to the Consolidated Financial Statements.
ITEM 1A. RISK FACTORS
There were no material changes in the Corporation's risk factors in the third quarter of 2018.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 6. EXHIBITS
EXHIBIT NO. | DESCRIPTION | ||
23 * | Ankura Consulting Group, LLC's Consent. | ||
31.1 * | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 * | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32.1 * | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32.2 * | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
101.INS | XBRL Instance Document. | ||
101.SCH | XBRL Taxonomy Extension Schema Document. | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | ||
* Filed herewith
24
Union Carbide Corporation and Subsidiaries Signatures |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
UNION CARBIDE CORPORATION
Registrant
Date: November 2, 2018 | ||
By: | /s/ RONALD C. EDMONDS | |
Ronald C. Edmonds | ||
Controller and Vice President | ||
of Controllers and Tax | ||
The Dow Chemical Company | ||
Authorized Representative of | ||
Union Carbide Corporation | ||
By: | /s/ IGNACIO MOLINA | |
Ignacio Molina | ||
Vice President, Treasurer and | ||
Chief Financial Officer | ||
25