ITEM 1. BUSINESS.
THE CORPORATION
Union Carbide Corporation (the “Corporation” or “UCC”) is a chemicals and polymers company that has been a wholly owned subsidiary of The Dow Chemical Company (“Dow”) since 2001. In addition to its consolidated operations, the Corporation participates in partnerships and joint ventures (together, “nonconsolidated affiliates”). Except as otherwise indicated by the context, the terms “Corporation” or “UCC” as used herein mean Union Carbide Corporation and its consolidated subsidiaries.
Dow conducts its worldwide operations through global businesses, and the Corporation's business activities comprise components of Dow's global businesses 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. In addition, in order to simplify the customer interface process, the Corporation sells substantially all its products to Dow. Products are sold to Dow at market-based prices, in accordance with the terms of Dow's long-standing intercompany pricing policies.
BUSINESS AND PRODUCTS
The following is a description of the Corporation's principal products.
Ethylene Oxide/Ethylene Glycol (“EO/EG”) - ethylene oxide (“EO”), a chemical intermediate primarily used in the manufacture of monoethylene glycol (“MEG”), polyethylene glycol, glycol ethers, ethanolamines, surfactants and other performance chemicals and polymers; di- and triethylene glycol, used in a variety of applications, including boat construction, shoe manufacturing, natural gas-drying and other moisture-removing applications, and plasticizers for safety glasses; and tetraethylene glycol, used predominantly in the production of plasticizers for automotive windows. MEG is used extensively in the production of polyester fiber, resin and film, automotive antifreeze and engine coolants, and aircraft anti-icing and deicing fluids.
Industrial Chemicals and Polymers - broad range of products for specialty applications, including pharmaceutical, animal food supplements, personal care, industrial and household cleaning, coatings for beverage and food cans, industrial coatings and many other industrial uses. Product lines include acrolein and derivatives, CARBOWAX™ and CARBOWAX™ SENTRY™ polyethylene glycols and methoxypolyethylene glycols, TERGITOL™ and TRITON™ surfactants, UCAR™ deicing fluids, UCARTHERM™ heat transfer fluids and UCON™ fluids.
Polyethylene - includes FLEXOMER™ very low density polyethylene resins used as impact modifiers in other polymers and to produce flexible hose and tubing, frozen-food bags and stretch wrap; TUFLIN™ linear low density and UNIVAL™ high density polyethylene resins used in high-volume applications such as housewares; milk, water, bleach and detergent bottles; grocery sacks; trash bags; packaging; and water and gas pipe.
Polypropylene - end-use applications include upholstery; hygiene articles; packaging films; thin wall food containers and serviceware; industrial containers; housewares and appliances; heavy-duty tapes and ropes; and automobile interior panels and trim. See "Divestitures" discussion below.
Solvents and Intermediates - includes oxo aldehydes, acids and alcohols used as chemical intermediates and industrial solvents and in herbicides, plasticizers, paint dryers, jet-turbine lubricants, lube oil additives, and food and feed preservatives; and esters, which serve as solvents in industrial coatings and printing inks and in the manufacturing processes for pharmaceuticals and polymers.
Technology Licensing and Catalysts - includes licensing and supply of related catalysts for the UNIPOL™ polypropylene process, catalysts supply for the METEOR™ process for EO/EG and the LP OXO™ process for oxo alcohols; licensing of the UNIPOL™ polyethylene process and sale of related catalysts (including metallocene catalysts) through Univation Technologies, LLC, a 50:50 joint venture with ExxonMobil; and licensing of the METEOR™ process for EO/EG and the LP OXO™ process for oxo alcohols through Dow Technology Investments LLC, a 50:50 joint venture with Dow Global Technologies LLC, a Dow subsidiary.
Vinyl Acetate Monomer - a building block for the manufacture of a variety of polymers used in water-based emulsion paints, adhesives, paper coatings, textiles, safety glass and acrylic fibers.
Water Soluble Polymers - polymers used to enhance the physical and sensory properties of end-use products in a wide range of applications including food, paints and coatings, pharmaceuticals, oil and gas, personal care, building and construction, and other specialty applications. Key product lines include CELLOSIZE™ hydroxyethyl cellulose, POLYOX™ water-soluble resins, and products for hair and skin manufactured by Amerchol Corporation, a wholly owned subsidiary.
Electrical and Telecommunications - polyolefin-based compounds for high-performance insulation, semiconductives and jacketing systems for power distribution, telecommunications, and flame-retardant wire and cable. Key product lines include: REDI-LINK™ polyethylene-based wire and cable compounds, SI-LINK™ polyethylene-based low voltage insulation compounds, UNIGARD™ HP high-performance flame-retardant compounds, UNIGARD™ RE reduced emissions flame-retardant compounds, and UNIPURGE™ purging compounds.
On July 27, 2011, Dow entered into a definitive agreement to sell Dow's global Polypropylene business which included the following Corporation assets: polypropylene manufacturing facility at Seadrift, Texas; railcars; inventory; business know-how; and certain product and process technology. The Corporation's Polypropylene Licensing and Catalyst business and related catalyst facilities were excluded from the scope of this transaction. The sale was completed on September 30, 2011. See Note D to the Consolidated Financial Statements for additional information.
On July 31, 2009, Dow entered into a definitive agreement that included the sale of certain specialty latex assets of the Corporation located in the United States, Canada, Puerto Rico and Mexico. The divestiture of these assets was completed on January 25, 2010. See Notes C and D to the Consolidated Financial Statements for additional information.
Competition
The chemical industry has been historically competitive and this competitive environment is expected to continue. The chemical divisions of the major international oil companies also provide substantial competition both in the United States and abroad.
Research and Development
The Corporation is engaged in a continuous program of basic and applied research to develop new products and processes, to improve and refine existing products and processes, and to develop new applications for existing products. Research and development expenses were $47 million in 2011, $43 million in 2010 and $48 million in 2009. In addition, certain of the Corporation's nonconsolidated affiliates conduct research and development within their business fields.
Patents, Licenses and Trademarks
The Corporation continually applies for and obtains U.S. and foreign patents that relate to a wide variety of products and processes, has a substantial number of pending patent applications throughout the world, and is licensed under a number of patents. At December 31, 2011 the Corporation owned 206 active U.S. patents and 792 active foreign patents related to a wide variety of products and processes. These patents expire as follows:
Remaining Life of Patents Owned at December 31, 2011
United States
Foreign
Within 5 years
93
202
6 to 10 years
88
404
11 to 15 years
22
186
16 to 20 years
3
—
Total
206
792
The Corporation also has a large number of trademarks. Although the Corporation considers that its patents, licenses and trademarks in the aggregate constitute a valuable asset, it does not regard its business as being materially dependent on any single or group of related patents, licenses or trademarks.
Principal Partly Owned Companies
UCC's principal nonconsolidated affiliates at December 31, 2011 and the Corporation's ownership interest in each are listed below:
Financial Information about Foreign and Domestic Operations and Export Sales
In 2011, the Corporation derived 32 percent of its trade sales to external customers from customers outside the United States and had 2 percent of its property investment located outside the United States. See Note R to the Consolidated Financial Statements for information on sales to external customers and long-lived assets by geographic area.
Protection of the Environment
Matters pertaining to the environment are discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations, and Notes A and L to the Consolidated Financial Statements.
ITEM 1A. RISK FACTORS.
The factors described below represent the Corporation's principal risks.
Global Economic Conditions: The Corporation operates in a global, competitive environment, which gives rise to operating and market risk.
The Corporation sells substantially all of its products to Dow, which operates in a competitive, global environment, and competes worldwide for sales. Increased levels of competition could result in lower prices or lower sales volumes, which could have a negative impact on the Corporation's operations.
Economic conditions around the world and in certain industries in which the Corporation does business also impact sales price and volume. As a result, an economic downturn in the geographic areas or industries in which UCC sells its products could reduce demand for these products and result in decreased sales volume, which could have a negative impact on UCC's results of operations.
In addition, the economic environment impacts the fair value of pension assets, which could trigger increased future funding requirements of the pension trust.
Raw Materials: Volatility in purchased feedstock and energy costs impacts the Corporation's operating costs and adds variability to earnings.
Purchased feedstock and energy costs account for a substantial portion of the Corporation's total production costs and operating expenses. When these costs increase, the Corporation is not always able to immediately raise selling prices; and ultimately, the ability to pass on underlying cost increases is greatly dependent on market conditions. Conversely, when these costs decline, selling prices decline as well. As a result, volatility in these costs could negatively impact the Corporation's results of operations.
Supply/Demand Balance: Earnings generated by the Corporation vary based in part on the balance of supply relative to demand within the industry.
The balance of supply relative to demand within the industry may be significantly impacted by the addition of new capacity, especially for basic commodities where capacity is generally added in large increments as world-scale facilities are built. This may disrupt industry balances and result in downward pressure on prices due to the increase in supply, which could negatively impact the Corporation's results of operations.
Financial Flexibility: Market conditions could reduce Dow's financial flexibility, which could impact the financial flexibility of the Corporation.
Dow's interest and dividend payments could increase Dow's vulnerability to adverse economic conditions and reduce Dow's flexibility to respond to changing business and economic conditions. In addition, the economic environment could result in a contraction in the availability of credit in the marketplace and reduce sources of liquidity for Dow. Since Dow is a service provider, material debtor, and the major customer of the Corporation, reduced financial flexibility for Dow could potentially impact the financial flexibility of the Corporation.