<PAGE> 1
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, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 2-15299
RAYCHEM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-1369731
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
300 Constitution Drive, Menlo Park, CA 94025-1164
(Address of principal executive offices) (Zip code)
(415) 361-4180
(Registrant's telephone number, including area code)
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
As of October 30, 1995, the registrant had outstanding 44,117,816 shares of
Common Stock, $1.00 par value.
<PAGE> 2
RAYCHEM CORPORATION
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page Number
-----------
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1: Financial Information
Consolidated Condensed Statements of Operations -
Three Months Ended September 30, 1995 and 1994 1
Consolidated Condensed Balance Sheets -
September 30, 1995, and June 30, 1995 2
Consolidated Condensed Statements of Cash
Flows - Three Months Ended September 30, 1995 and 1994 3
Notes to Consolidated Condensed Financial
Statements 4-8
Item 2: Management's Discussion and Analysis 9-13
of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 14
Item 5: Other Information 14
Item 6: Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
<PAGE> 3
RAYCHEM CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------ ------------
1995 1994*
------------ ------------
<S> <C> <C>
Revenues $ 410,515 $ 368,145
Cost of goods sold 194,914 182,859
Research and development expense 30,044 27,229
Selling, general, and administrative expense 122,460 115,193
Provision for restructuring and divestitures -- 23,900
Loss on formation of Ericsson Raynet joint venture
and other Raynet items -- 31,723
Equity in net losses of affiliated companies 10,626 24,373
Interest expense, net 3,300 4,594
Other expense, net 3,731 3,912
------------ ------------
Income (loss) before income taxes, extraordinary
item, and change in accounting principle 45,440 (45,638)
Provision for income taxes 13,010 2,690
------------ ------------
Income (loss) before extraordinary item
and change in accounting principle 32,430 (48,328)
Extraordinary item - loss from early retirement of
debt, net of $0 income taxes -- (7,074)
Cumulative effect of change in accounting
principle, net of $0 income taxes -- (1,477)
------------ ------------
Net income (loss) $ 32,430 $ (56,879)
============ ============
Average number of common shares
and equivalents outstanding 44,905,775 43,241,149
============ ============
Earnings (loss) per common share:
Income (loss) before extraordinary item
and change in accounting principle $ 0.72 $ (1.12)
Extraordinary item -- (0.16)
Change in accounting principle -- (0.04)
------------ ------------
Net income (loss) $ 0.72 $ (1.32)
============ ============
Dividends per common share $ 0.08 $ 0.08
============ ============
</TABLE>
* Reflects restatement of Raynet Corporation and subsidiaries' results to the
equity basis of accounting.
See accompanying notes to consolidated condensed financial statements.
1
<PAGE> 4
RAYCHEM CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, 1995 June 30, 1995
------------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 146,978 $ 118,067
Accounts receivable, net 316,329 304,819
Inventories:
Raw materials 70,967 76,862
Work in process 56,700 53,632
Finished goods 99,553 103,206
----------- -----------
Total inventories 227,220 233,700
Prepaid taxes 46,904 60,661
Other current assets 71,335 62,361
----------- -----------
Total current assets 808,766 779,608
Property, plant, and equipment 1,119,829 1,117,939
Less accumulated depreciation and amortization 602,782 590,520
----------- -----------
Net property, plant, and equipment 517,047 527,419
Other assets 123,658 147,718
----------- -----------
TOTAL ASSETS $ 1,449,471 $ 1,454,745
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 33,381 $ 28,632
Accounts payable 57,351 67,102
Other accrued liabilities 165,115 183,479
Income taxes 27,970 22,943
Current maturities of long-term debt 1,332 1,042
----------- -----------
Total current liabilities 285,149 303,198
Long-term debt 258,391 263,552
Deferred income taxes 24,994 35,002
Other long-term liabilities 99,935 98,215
Minority interests 5,238 5,120
Commitments and contingencies (See notes)
Stockholders' equity:
Preferred Stock, $1.00 par value
Authorized: 15,000,000 shares; Issued: none -- --
Common Stock, $1.00 par value
Authorized: 72,150,000 shares
Issued: 44,089,893 and 43,897,275 shares, respectively 44,090 43,897
Additional contributed capital 385,679 380,127
Retained earnings 299,416 272,657
Currency translation 48,350 61,946
Treasury Stock, at cost (31,314 and 226,640 shares,
respectively) (1,392) (8,330)
Notes receivable from sale of stock (379) (639)
----------- -----------
Total stockholders' equity 775,764 749,658
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,449,471 $ 1,454,745
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE> 5
RAYCHEM CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30 (IN THOUSANDS) 1995 1994*
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 32,430 $ (56,879)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for restructuring and divestitures, net of payments (717) 22,053
Loss on formation of Ericsson Raynet joint venture -- 28,130
Equity in net losses of affiliated companies 10,626 --
Extraordinary loss related to early retirement of debt -- 7,074
Change in accounting principle -- 1,477
Net loss on disposal of other property, plant, and equipment 214 --
Depreciation and amortization 21,983 22,398
Deferred income tax provision 474 800
Changes in certain assets and liabilities, net of effects from
restructuring and divestitures, joint venture formation, extraordinary
item, and change in accounting principle:
Accounts receivable (17,584) (3,769)
Inventories 1,892 5,359
Accounts payable and accrued liabilities (13,172) (28,321)
Income taxes 6,310 1,535
Other assets and liabilities 9,127 3,695
--------- ---------
Net cash provided by operating activities 51,583 3,552
--------- ---------
Cash flows from investing activities:
Investment in property, plant, and equipment (20,002) (27,413)
Disposition of property, plant, and equipment 850 2,385
Advances to affiliated companies (13,669) --
Purchase of investment -- (1,000)
--------- ---------
Net cash used in investing activities (32,821) (26,028)
--------- ---------
Cash flows from financing activities:
Net proceeds from short-term debt 5,601 5,686
Proceeds from long-term debt -- 358
Payments of long-term debt (568) (872)
Common Stock issued under employee
benefit plans 14,941 10,334
Common Stock repurchased (4,411) --
Proceeds from repayments of stockholder notes receivable 260 162
Cash dividends (3,518) (3,465)
--------- ---------
Net cash provided by financing activities 12,305 12,203
--------- ---------
Effect of exchange rate changes on cash
and cash equivalents (2,156) 929
--------- ---------
Increase (decrease) in cash and cash equivalents 28,911 (9,344)
Cash and cash equivalents at beginning
of period 118,067 78,090
--------- ---------
Cash and cash equivalents at end of period $146,978 $68,746
========= =========
SUPPLEMENTAL DISCLOSURES
- ------------------------
Cash paid for:
Interest (net of amounts capitalized) $ 5,590 $ 4,088
Income taxes (net of refunds) 686 72
</TABLE>
* Amounts have not been restated to give effect to the formation of the
Ericsson Raynet joint venture on November 16, 1994, and the change of Raynet
Corporation and subsidiaries' results to the equity basis of accounting.
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 6
RAYCHEM CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
STATEMENT OF ACCOUNTING PRESENTATION
In the opinion of management, the accompanying unaudited consolidated condensed
financial statements include all adjustments, including normal recurring
accruals, necessary to present fairly the results of operations for the three
months ended September 30, 1995 and 1994, the financial position as of September
30, 1995, and the cash flows for the three months ended September 30, 1995 and
1994. The June 30, 1995, balance sheet included is derived from the consolidated
financial statements included in the company's Annual Report on Form 10-K for
the year ended June 30, 1995. Certain prior-period amounts have been
reclassified to conform with the fiscal 1996 financial statement presentation.
BUSINESS SEGMENTS
Revenues and operating income (loss) by business segment are as follows:
<TABLE>
<CAPTION>
(In thousands)
Three months ended
September 30,
1995 1994
--------- ---------
<S> <C> <C>
Revenues
Electronics $ 157,855 $ 140,099
Industrial 139,819 121,862
Telecommunications 112,841 106,184
--------- ---------
Total revenues $ 410,515 $ 368,145
========= =========
Operating income (loss)
before provision for
restructuring and loss on
formation of JV
Electronics $ 32,480 $ 22,502
Industrial 32,027 23,429
Telecommunications 24,655 17,267
Corporate (26,065) (20,334)
--------- ---------
Total $ 63,097 $ 42,864
========= =========
Operating income (loss)
including provision for
restructuring and loss on
formation of JV
Electronics $ 32,480 $ 22,502
Industrial 32,027 23,429
Telecommunications 24,655 (6,633)
Corporate (26,065) (52,057)
--------- ---------
Total operating income (loss) $ 63,097 $ (12,759)
========= =========
</TABLE>
4
<PAGE> 7
RAYNET
Raynet Corporation and subsidiaries (Raynet) was consolidated in prior years
when it was wholly owned by the company. On November 16, 1994, the company
formed a joint venture, Ericsson Raynet, with LM Ericsson, a Swedish
telecommunications company. Consequently, Raychem changed its Raynet accounting
in 1995 from consolidation to the equity method. Raychem revenues and expenses
for the first quarter of 1995 have been restated to account for Raynet in
accordance with the equity method of accounting. The equity in Ericsson Raynet
net loss for the quarter ended September 30, 1994, reflects the results of
Raynet Corporation and subsidiaries through that date. See "Investments" note
for summarized Ericsson Raynet financial information.
RECENT ACCOUNTING STANDARD
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The statement requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The statement also requires
that long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell, except
for assets that are covered by APB Opinion No. 30. The statement must be adopted
by the first quarter of 1997. The company has not yet fully determined the
impact of adoption, if any, on the company's results of operations or financial
condition.
FINANCIAL INSTRUMENTS
Gains and losses from forward exchange contracts used to hedge receivables and
payables and anticipated transactions totaled $2.7 million gain for the three
months ended September 30, 1995. The company incurred total foreign exchange
transaction losses of $1.0 million and $2.0 million for the three months ended
September 30, 1995 and 1994, respectively. The related realized and unrealized
gains and losses are included in "other expense, net." The total amount of
exposure hedged at September 30, 1995, was $168 million, reflecting hedging for
trade and intercompany receivables, payables (including anticipated
transactions), and loans in non-functional currencies.
The company has unhedged non-functional currency translation and transaction
exposures in countries whose currencies do not have a liquid, cost-effective
forward market available for hedging. Exposures, at September 30, 1995, included
$8.2 million in net intercompany payables in non-functional currencies and $5.6
million of net monetary assets in foreign countries with the U.S. dollar as
functional currency.
RESTRUCTURING AND DIVESTITURES
The core business incurred a pretax charge of $24 million in the first quarter
of 1995 for the restructuring of its telecommunications business segment. All
charges, excluding asset writedowns, were cash in nature, substantially incurred
in 1995, and funded through operating cash flows. The following table sets forth
the company's restructuring reserves as of September 30, 1995:
5
<PAGE> 8
<TABLE>
<CAPTION>
Restructuring Reserves
----------------------
Employee Asset
Severance Writedowns Leases Other Total
--------- ---------- ------ ----- -----
(in thousands)
<S> <C> <C> <C> <C> <C>
Reserve Balances, June 30, 1995: $ 2,162 $- $- $ 1,015 $ 3,177
Cash payments (397) - - (230) (627)
-------------------------------------------------------
Reserve Balances, September 30, 1995: $ 1,765 $- $- $ 785 $ 2,550
=======================================================
</TABLE>
INVESTMENTS
The financial position and results of operations of Ericsson Raynet, the only
significant equity investment of the company, are summarized below:
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
September 30,
--------------------
1995 1994(a)
-------- --------
<S> <C> <C>
Revenues $ 12,440 $ 22,556
======== ========
Gross profit (loss) $ (1,887) $ (2,969)
Research and development
expense 9,698 11,724
Selling, general, and
administrative expense 8,428 9,939
Interest and other expense 1,053 44
-------- --------
Pretax loss $(21,066) $(24,676)
======== ========
Raychem's equity in loss $(11,124) $(24,676)
======== ========
</TABLE>
<TABLE>
<CAPTION>
(Unaudited)
September 30, June 30,
1995 1995
-------- --------
<S> <C> <C>
Current assets $ 62,005 $ 62,864
Non-current assets 31,594 34,203
Current liabilities $ 83,560 $ 65,906
Non-current liabilities 550 495
</TABLE>
(a) Results for the three months ended September 30, 1994, are those of Raynet
Corporation and subsidiaries.
6
<PAGE> 9
REPURCHASE OF COMMON STOCK
In December 1994, the Board of Directors authorized the repurchase, at
management's discretion, of up to 1.5 million shares of the company's stock
during any one fiscal year. Shares repurchased under this authorization will be
used to offset the dilution caused by the company's employee stock plans. During
the three months ended September 30, 1995, the company repurchased 100,000
shares and subsequently reissued 295,326 shares, leaving 31,314 shares in
treasury stock at September 30, 1995.
CONTINGENCIES
The company has been named, among others, as a potentially responsible party
("PRP") in administrative proceedings alleging that it may be liable for the
costs of correcting environmental conditions at certain hazardous waste sites.
At all of the sites, the company is alleged to be a de minimis generator of
hazardous wastes, and the company believes that it has limited or no liability
for cleanup costs at these sites. The company has also been notified by a state
environmental agency that it may be required to investigate the need for
remedial work at one of its manufacturing sites. The company is currently
conducting such investigations on a voluntary basis. The company and its
subsidiaries have also been named as a defendant, along with sixteen other
corporate and governmental codefendants, in a private cost recovery for
environmental cleanup expenses at the West Contra Costa County Landfill in
Richmond, California. On August 4, 1995, the company's and other defendants'
motion for judgment on the pleadings was granted by the District Court striking
the plaintiff's claim that the company and the other defendants were jointly and
severally liable for response costs at the site. As a result, the company's
potential liability, if any, for response costs at the site would be based on
the company's disposal of wastes at the site. The company believes its wastes
constitute less than 2% of the total amount of wastes disposed of at the site.
Additionally, the company and its subsidiaries have been named as defendants in
lawsuits arising from various commercial matters, including product liability.
The principal product liability litigation involves a variety of claims arising
from the company's heat-tracing and freeze-protection products. The only such
action in which material damages are alleged seeks in excess of $25 million, but
the claim has not progressed sufficiently for the company to estimate a range of
possible loss, if any. The company intends to defend itself vigorously in these
matters. The company's experience to date is that losses, if any, from such
claims have not had, nor are they expected to have, a material effect on the
company's financial position or results of operations. The company maintains
insurance to cover product liability claims.
In the second quarter of 1992, the company and its insurer reached settlement
with the plaintiffs in a class action securities suit. The settlement totaled
$19.5 million, which was funded $8.25 million by the company and $11.25 million
by its insurer. The company expects to recover a portion of its funding, either
through litigation or when a definitive agreement is reached with its insurer,
and has filed suit against its insurer to resolve this issue. Recovery, if any,
will be recorded when received.
Legal proceedings tend to be unpredictable and costly. Based on currently
available information, however, management believes that the resolution of
pending claims, regulatory inquiries, and legal proceedings will not have a
material adverse effect on the company's operating results or financial
position.
7
<PAGE> 10
SUBSEQUENT EVENTS
On October 13, 1995, the company's Board of Directors declared a quarterly cash
dividend of $0.08 per share of Common Stock, payable on December 13, 1995, to
stockholders of record as of November 8, 1995.
8
<PAGE> 11
RAYCHEM CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The company reported net income of $32 million, or $0.72 per share, in the first
quarter of 1996 compared to a net loss of $57 million, or $1.32 per share, in
the comparable period of the prior year. Revenues for the quarter increased to
$411 million from $368 million in the prior year, a 7% increase over the
year-ago quarter on a constant currency basis (which assumes that foreign
currency exchange rates had remained constant from the prior period). During the
first quarter of 1996, the company benefited from favorable foreign currency
effects which, in part, contributed to the increase in net income.
Raychem's "ongoing" pretax income increased to $57 million from $35 million in
the first quarter of 1995. Raychem's results are summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PRETAX INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CHANGE IN ACCOUNTING
PRINCIPLE
THREE MONTHS ENDED SEPTEMBER 30 (in millions) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Core business:
"Ongoing" pretax income $ 56.6 $ 34.7
Provision for restructuring and divestitures - (23.9)
------ ------
Core business pretax income 56.6 10.8
Loss on formation of Ericsson Raynet joint venture and
other Raynet items - (31.7)
Equity in Ericsson Raynet net loss (11.1) (24.7)
------ ------
Consolidated $ 45.5 $(45.6)
====== ======
- --------------------------------------------------------------------------------
</TABLE>
Raynet Corporation and subsidiaries (Raynet) was consolidated in prior years
when it was wholly owned by the company. On November 16, 1994, the company
formed a joint venture, Ericsson Raynet, with LM Ericsson (Ericsson), a Swedish
telecommunications company. In the first quarter of 1995, the company recorded a
pre-tax charge of $28 million which was the estimate of the loss on formation of
the Ericsson Raynet joint venture. This amount is included in "Loss on formation
of Ericsson Raynet joint venture and other Raynet items." Subsequent to the
formation of the joint venture, Raychem changed its Raynet accounting in 1995
from consolidation to the equity method. Raychem revenues and expenses for the
first quarter of 1995 have been restated to account for Raynet in accordance
with the equity method of accounting. The equity in Ericsson Raynet net loss for
the quarter ended September 30, 1994, reflects the results of Raynet Corporation
and subsidiaries through that date.
In the first quarter of 1995, the company recorded an extraordinary loss of $7.1
million ($0.16 per share), for the early retirement of debt following delivery
by the company of irrevocable notice to the holders of its 9.55% privately
placed senior notes of its intention to prepay this debt. In addition, the
company adopted, effective July 1, 1994, Statement of Financial Accounting
Standards No. 112 "Employers Accounting for Postemployment Benefits." This
statement changed the method of accounting for certain postemployment
9
<PAGE> 12
benefits from a cash basis to an accrual basis. The cumulative effect of this
accounting change (a charge of $1.5 million, or $.04 per share) has been
reflected in the 1995 first quarter results.
The following discussion of the results of operations is based on the company's
business segments--electronics, industrial, and telecommunications (which, along
with the corporate groups, are referred to collectively as the "core business").
BUSINESS SEGMENT OPERATIONS
Revenues in the electronics business segment were $158 million in the
first quarter of 1996 compared to $140 million in the prior year quarter, a 9%
constant currency increase. The Electronics Division experienced strong Asian
and North American sales growth in the commercial electronics and automotive
markets partially offset by a continuing decline in the defense program
business. PolySwitch Division revenues rose over the prior year quarter with
continued increase in shipment volumes partially offset by planned unit price
reductions and inventory adjustments by distributors. Elo TouchSystems
revenues rose slightly over last year's first quarter due to soft demand for
point-of-sale products. Operating income for the segment was $32 million
compared to $23 million in the year-ago quarter driven primarily by improved
results in the Electronics Division.
Revenues in the industrial business segment for the three months ended September
30, 1995, increased to $140 million from $122 million in the comparable prior
year period. Revenues increased 8% in constant currency terms. The strong growth
was led by the segment's Electrical Products and Ultratec divisions. Electrical
Products experienced higher sales in the Asian and the North American markets.
The pipeline project business in the Ultratec division led to an increase of its
revenues in Latin America and Asia. Chemelex sales remained unchanged from the
prior year quarter due to weak sales in the U.S. market for freeze protection
products. Operating income in the industrial business segment was $32 million in
the first quarter of 1996, up $9 million from year-ago levels reflecting
substantial increases in Electrical Products' and, to a lesser extent,
Ultratec's operating income.
Revenues in the telecommunications business segment increased to $113 million
from $106 million in the first quarter of the prior year, an increase of 2% on a
constant currency basis. Revenue growth in North America, Latin America and Asia
was partially offset by declining sales in the European market. Operating income
in the telecommunications business segment increased $7 million from the
prior-year first quarter, excluding the effects of the $24 million restructuring
charge in the first quarter of 1995. A favorable geographic and product mix as
well as benefits from past restructuring actions contributed to the first
quarter's increase in operating income.
During the first quarter of 1996, incoming orders for the corporation were
approximately equal to shipments. Incoming orders were greater than shipments in
the electronics and industrial business segments, but less than shipments in the
telecommunications business segment. Backlog at September 30, 1995, was $280
million.
10
<PAGE> 13
EQUITY IN ERICSSON RAYNET NET LOSS
Ericsson Raynet's net loss for the first quarter of 1996 was $21 million. In
fiscal 1996, the first $19.6 million of losses will be allocated to Ericsson and
Raychem in a 51/49 ratio; the next $10 million of loss will be allocated 100% to
Raychem; and additional losses, if any, will again be allocated to Ericsson and
Raychem in a 51/49 ratio. In accordance with the loss allocation agreement, the
company's share of the Ericsson Raynet first quarter net loss was $11 million.
PROVISION FOR RESTRUCTURING AND DIVESTITURES
The core business incurred a pretax charge of $24 million in the first quarter
of 1995 for the restructuring of its telecommunications business segment. The
segment's restructuring charge included $13 million for severance costs related
to a net workforce reduction of 340 employees, resulting from the closure of
telecommunications' manufacturing operations in Germany and the restructuring of
its North American activities. The remaining charge of $11 million related to
plant consolidations and the shutdown of unprofitable product lines. The charge,
excluding $8 million of asset writedowns, was cash in nature and was primarily
incurred in fiscal 1995 and funded through operating cash flow. The
restructuring was substantially completed by June 30, 1995. The company expects
to receive approximately $24 million of annual savings, of which the company
realized approximately $6 million of savings in the first quarter of 1996.
Substantially all of the savings are cash related.
See "Restructuring and Divestitures" in the notes to consolidated condensed
financial statements for further details on the restructuring reserve.
RECENT ACCOUNTING STANDARD
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." For a description, see "Recent Accounting Standard"
in the notes to consolidated condensed financial statements. The statement must
be adopted by the first quarter of fiscal 1997. The company has not yet fully
determined the impact of adoption, if any, on the company's results of
operations or financial condition.
OUTLOOK
Over the past six months, supplies of certain raw materials the company uses
have been tightening. In response, the company has identified alternative
materials for some products, and they are currently undergoing qualification
testing. To date, the company has had no disruption of manufacturing.
The company has embarked on an "Operational Excellence" program to improve
operational efficiency in all areas of the company and to reduce selling,
general and administrative costs. The program focuses on vigorous process
improvements across organizational boundaries. While actions associated with the
program are expected to reduce ongoing costs in the future, they will result in
related charges to implement the changes.
11
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
CONSOLIDATED
Debt exceeded cash by $146 million at September 30, 1995, compared to $175
million at June 30, 1995. Debt net of cash decreased by $29 million in the first
quarter of 1996, compared to an increase in debt net of cash of $12 million in
the first quarter of 1995. The decrease in debt net of cash resulted primarily
from improved profitability and reduced funding requirements for Ericsson Raynet
losses.
On September 28, 1995, the company amended its syndicated loan agreements which
consisted of a five-year partially amortizing term loan of $225 million, and a
renewable 364-day revolving credit facility of $200 million. The revolving
credit facility was increased to $250 million and extended to a term of 4 years.
Variable pricing terms for both the term loan and revolving credit facility were
improved and certain restrictive covenants were relaxed.
In January 1995, the company entered into a revolving credit agreement with the
Ericsson Raynet joint venture. The company agreed to make available to the joint
venture a maximum of $50 million, due in full on December 20, 1995, or earlier
if the revolving credit arrangement is terminated at the company's discretion.
The credit agreement stipulates that borrowings under the arrangement will be
interest-free, and imposes no covenants on the joint venture. During the quarter
ended September 30, 1995, the company made advances to Ericsson Raynet of $4
million under this credit agreement, increasing the amount due to the company
to $8 million. The company expects to renew this facility upon expiration.
BellSouth Enterprises Inc. (BSE) had financed a portion of the software
development work at Raynet and held a royalty interest in the software related
revenues of Raynet. With the creation of the joint venture, this royalty payment
was reconfigured. Raychem paid BSE $10 million in 1994, and is required to make
two additional payments of $10 million each in November 1995 and 1996. Raychem
has agreed to make other royalty payments to BSE contingent upon the revenues
and earnings performance of the joint venture. At such time as the joint venture
achieves profitability, these royalty payments could approximate 36% of
Raychem's distributions from the joint venture.
The company has continued to repurchase shares of the company's stock as
previously authorized by the Board of Directors. During the three months ended
September 30, 1995, the company repurchased 100,000 shares at a cost of $4
million. In addition, the company received $15 million from the issuance of
Common Stock under various employee benefit plans.
Capital expenditures of $20 million during the quarter decreased $7 million
compared to the prior-year period, when the company had significant capital
expenditures for manufacturing facilities in Japan, the People's Republic of
China, and Mexico.
At September 30, 1995, the company had $147 million in cash and cash
equivalents, $290 million in committed credit facilities (of which $2 million
were utilized) and approximately $179 million in various uncommitted credit
facilities (of which $45 million were utilized).
The combination of cash and cash equivalents, available lines of credit, and
future cash flows from operations are expected to be sufficient to satisfy
substantially all of the
12
<PAGE> 15
company's needs for working capital, normal capital expenditures, Ericsson
Raynet funding requirements, scheduled debt repayments, and anticipated
dividends.
CORE BUSINESS
Inventory, as measured by the number of days of inventory on hand, improved to
106 days at September 30, 1995, compared to 112 days at September 30, 1994.
Receivables, as measured by the number of billing days outstanding, decreased to
64 days at September 30, 1995, compared to 65 days at September 30, 1994.
13
<PAGE> 16
RAYCHEM CORPORATION
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On September 5, 1995, a first amended complaint entitled All Alaskan Seafoods,
Inc., et al v. Raychem Corporation, Marine Electric, Inc., and Westinghouse
Electrical Supply Co. was filed in the United States District Court, Western
District of Washington at Seattle to add the latter two parties as third- and
fourth-party defendants, respectively. The original complaint in this lawsuit
was filed on March 7, 1995, asserting liability against the company for alleged
fire damage to a ship and its cargo and the death of one crew member.
Information about this lawsuit was disclosed in the company's annual report on
Form 10-K for the year ended June 30, 1995.
The administrative proceedings instituted by the United States Environmental
Protection Agency on March 23, 1989, and by the California Environmental
Protection Agency on September 1, 1992, have been settled during the quarter for
amounts which were not material. Information about the proceedings was disclosed
in the company's annual report on Form 10-K for the year ended June 30, 1995.
ITEM 5: OTHER INFORMATION
On October 1, 1995, Richard A. Kashnow was named President, CEO, and Chairman of
the Board of Directors of the company. He succeeded both Raychem President and
CEO Bob Saldich, and Raychem founder and Chairman of the Board of Directors Paul
Cook, who will continue as a director until his scheduled retirement in 1996.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Index to Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.r Employment letter between the company and Mr. Richard Kashnow
dated August 11, 1995
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
</TABLE>
14
<PAGE> 17
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.
RAYCHEM CORPORATION
-----------------------------
(Registrant)
Date: November 10, 1995 /s/ RAYMOND J. SIMS
----------------------------- -----------------------------
Raymond J. Sims
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ DEIDRA D. BARSOTTI
-----------------------------
Deidra D. Barsotti
Vice President and
Controller
(Principal Accounting Officer)
15
<PAGE> 18
EXHIBIT INDEX
10.r Employment letter between the company and Mr. Richard Kashnow
dated August 11, 1995
27 Financial Data Schedule
<PAGE> 1
Exhibit 10.r
August 11, 1995
Mr. Richard Kashnow
(home address deleted)
Dear Dick:
I am pleased to make this offer to you to join Raychem Corporation as its
President, Chief Executive Officer and Chairman of its Board of Directors. We
are assuming that you will commence employment on October 2, 1995. Your election
as a director and as Chairman of the Board will become effective as of the date
that you commence employment.
The terms of your employment are as follows:
1. Salary. Your base salary for fiscal 1996 will be $650,000 per year,
payable biweekly. It has been Raychem's practice to review executive
salaries annually.
2. Bonus. You will participate in Raychem's executive bonus program as in
effect from time to time. For fiscal 1996 that program is the Variable
Pay Program. Raychem will guarantee you a minimum bonus for fiscal 1996
equal to 40% of covered compensation relating to the period from
October 1, 1995 to June 30, 1996.
3. Special Transition Payment. Raychem will pay you a Special Transition
Payment of $475,000, adjusted as described below. The $475,000 amount
includes $375,000 as an estimate of the Schuller 1995 bonus proration
that you will receive. When the amount of that bonus proration becomes
known, the $375,000 estimate shall be adjusted as mutually agreed. In
addition, the Special Transition Payment will be increased
<PAGE> 2
Mr. Richard Kashnow
August 11, 1995 Page 2
by an amount equal to the value of your 30,000 restricted shares of
Manville Corporation which vest on December 31, 1995, less any amount
you receive in connection with such shares. The Special Transition
Payment will be made within 30 days after the date that both
adjustments have been made.
4. Severance. Employment for all Raychem employees is at will. Your
severance package is described in Raychem's Executive Termination
Compensation Policy ("Termination Policy"), except (a) that the "Full
Salary Period" described therein shall be two years instead of one
year, (b) there shall be no "Differential Salary Period" as described
therein, and (c) the Termination Policy is modified as described below
with respect to your housing loan, your restricted shares and certain
change in control events. The Termination Policy will not be changed
with respect to your employment without your consent.
Post-employment benefits relating to your housing loan, your restricted
shares and change in control events that are described in this letter
are deemed to be part of the Termination Policy and are subject to the
same requirements as the remainder of the Termination Policy,
including, for example, granting a release, providing consulting
services as specified in the Termination Policy, and complying with
noncompetition and nonsolicitation restrictions during the consulting
period.
You are not required to seek other employment in order to obtain
post-employment benefits.
In the event that (a) there is a change in control as defined in the
next paragraph, (b) within one year following such change in control
there is a material adverse change in your duties, responsibilities, or
reporting lines, or a reduction of more than 20% in your base
compensation, and (c) within the 30-day period immediately following
such material adverse change or reduction you elect to terminate your
employment voluntarily, then termination of your employment will be
treated as a Covered Termination of Employment (as defined in the
Termination Policy). In the
<PAGE> 3
Mr. Richard Kashnow
August 11, 1995 Page 3
event that (a) there is a change in control as defined in the next
paragraph and (b) within one year following such change in control your
employment is terminated in a Covered Termination of Employment (or is
deemed to have been so terminated by virtue of the preceding sentence),
then notwithstanding any other vesting or acceleration provisions set
forth in this letter, all of the options described in paragraph 5.
below shall vest in full immediately as of the date of your employment
termination and all restrictions on the restricted shares described in
paragraph 5. below shall lapse as of such date.
For purposes of the preceding paragraph, a change in control means the
occurrence of either of the following:
(a) any "person" (as used in Section 13(d) of the Securities
Exchange Act of 1934 and the rules promulgated thereunder)
other than Raychem, a subsidiary or affiliate of Raychem, or a
Raychem employee benefit plan, including any trustee of such a
plan, becomes the "beneficial owner" (as defined in Rule 13d-3)
of securities representing a majority of the voting power of
Raychem's then outstanding securities; or
(b) a sale of assets involving all or substantially all of the
assets of Raychem, or a merger or consolidation of Raychem in
which the holders of Raychem's securities immediately prior to
such event hold in the aggregate less than a majority of
Raychem's securities immediately after such event.
5. Equity. The Compensation Committee of the Board of Directors
has approved the grant to you of stock options and restricted stock
relating to 250,000 shares of Raychem common stock, as described below,
subject to the commencement of your employment. Although the
Compensation Committee reserves the right to grant additional options
or restricted stock to you, our current expectation is that you will
not be considered for additional equity grants during the first two
years of your employment.
<PAGE> 4
Mr. Richard Kashnow
August 11, 1995 Page 4
Stock Options. Subject to the commencement of your employment,
the Compensation Committee approved the grant to you of a nonstatutory
stock option covering 200,000 shares under Raychem's 1990 Incentive
Plan ("1990 Plan") and of a nonstatutory stock option covering 12,500
shares outside such plan. Both options will be deemed granted on the
date that you commence employment for payroll purposes, and the
exercise price of such options will be the closing price of Raychem
common stock on the New York Stock Exchange on that date. Both options
will be subject to the company's normal four year vesting program. The
option granted outside the 1990 Plan is not exercisable in any period
in which exercise would cause loss of deduction for Raychem under
Section 162(m) of the Internal Revenue Code, unless the option
otherwise would expire.
Restricted Stock. Subject to the commencement of your employment, the
Compensation Committee granted you 37,500 shares of Restricted Stock
under the 1990 Plan. Restrictions on the shares will lapse on the fifth
anniversary of commencement of your employment if you are employed by
Raychem at that date. Restrictions will lapse earlier as to 50% of the
shares of Restricted Stock if the average closing price of Raychem
Common Stock on the New York Stock Exchange as reported in the Wall
Street Journal over a period of 30 consecutive trading days exceeds $50
per share; and will lapse earlier as to the remaining 50% if the
average closing price of Raychem Common Stock on the New York Stock
Exchange as reported in the Wall Street Journal over a period of 30
consecutive trading days exceeds $60 per share.
If your employment is terminated by Raychem in a Covered Termination of
Employment as defined in the Termination Policy and you still hold
restricted shares, then (a) restrictions will lapse on the date of such
termination with respect to 20% of the original shares for each full
12-month period during the period beginning with commencement of your
employment and ending at the date of such termination and (b)
restrictions shall lapse with
<PAGE> 5
Mr. Richard Kashnow
August 11, 1995 Page 5
respect to an additional 20% of the original shares at each of the
first and second anniversary dates of such termination (i.e., if the
date of Covered Termination of Employment is six months after the
second anniversary of commencement of your employment, restrictions
will lapse with respect to 40% of the original shares on the date of
such termination, and restrictions will lapse with respect to an
additional 20% of the original shares on each of the first and second
anniversaries of such termination). Notwithstanding the foregoing, the
number of shares for which restrictions lapse under the preceding
sentence will be reduced by the number of shares for which restrictions
have previously lapsed under the stock price conditions provided above
(i.e., if the date of Covered Termination of Employment is six months
after the second anniversary of commencement of your employment, and
prior to the date of such termination restrictions have lapsed with
respect to 50% of the original shares due to stock price conditions,
then additional restrictions will not lapse until the first anniversary
of such termination, at which time restrictions will lapse with respect
to 10% of the original shares, and restrictions will lapse with respect
to an additional 20% of the original shares on the second anniversary
of such termination).
In the event of a Change In Control as defined in the 1990 Plan, the
Committee administering the 1990 Plan may, but is not required to,
accelerate the vesting of options and the lapse of restrictions on
Restricted Stock, as more fully described in those plans. Any such
acceleration shall not reduce any other vesting rights granted in this
letter.
6. Housing Assistance. You will be eligible to participate in
Raychem's standard executive housing relocation program. However, in
lieu of the mortgage differential aspect of such program, Raychem will
make available to you a loan in principal amount equal to 50% of the
purchase price of your new Bay Area home, up to a maximum principal
amount of $1 million. The loan will be interest free and will be
secured by a deed of trust second only to your primary lender. Unless
your employment is earlier terminated,
<PAGE> 6
Mr. Richard Kashnow
August 11, 1995 Page 6
twenty percent of the initial principal amount of this loan will be due
and payable on October 1 of each of 1996, 1997, 1998, 1999 and 2000.
Raychem will pay you a bonus equal to 20% of the initial principal
amount of this loan on September 19 of each of 1996, 1997, 1998, 1999
and 2000 if you are employed by Raychem at such date; such bonus will
be in addition to any bonus to which you may be entitled under
Raychem's executive bonus program as in effect at the time. It is
anticipated that you will use the bonus to repay installments of the
loan principal as they become due.
If your employment is terminated by Raychem in a Covered Termination of
Employment (as defined in the Termination Policy) or if your employment
is terminated because of your disability by reason of physical or
mental incapacity to perform your duties, unpaid principal shall
continue to be due and payable in installments as described above, but
all unpaid principal shall be due and payable 24 months from the date
of your employment termination; unpaid principal will bear interest
during such 24-month period at the prime rate as in effect from time to
time at Raychem's principal bank, and shall be due and payable with
each principal payment. In addition, under these circumstances Raychem
will continue the bonus payments during the Full Salary Period as if
you were employed during that period; it is anticipated that you will
use the bonus to repay installments of the loan principal as they
become due.
If you terminate your employment in a Voluntary Termination (as defined
in the Termination Policy), unpaid principal shall continue to be due
and payable in installments as described above, but all unpaid
principal shall be due and payable 12 months from the date of your
employment termination; unpaid principal will bear interest during such
12-month period at the prime rate, and shall be due and payable with
each principal payment. If your employment is terminated by Raychem in
a Termination for Cause (as defined in the Termination Policy), unpaid
principal shall continue to be due and payable in installments as
described above, but all unpaid principal shall be due and payable 24
months from the date of your employment termination; unpaid
<PAGE> 7
Mr. Richard Kashnow
August 11, 1995 Page 7
principal will bear interest during such 24-month period at the prime
rate, and interest shall be due and payable with each principal
payment.
7. Benefits. In addition to the benefits specifically described in
this letter, you will be entitled to Raychem's standard executive
benefits, which are summarized below. These benefits are more fully
described in the materials you have been provided, and are subject to
all of the terms and conditions stated in the plans.
a. You will be eligible to participate in the Employee Stock
Purchase Plan as of the first enrollment date following your date of
hire. This plan gives you the opportunity to invest from 1% to 15% of
your base salary towards the purchase of Raychem common stock at a
discount of at least 15%.
b. You will be eligible to participate in Raychem's Taxsaver
Investment Plan. This 401(k) plan allows you to invest a percentage of
your base salary commencing immediately while deferring taxes on the
principal and interest until time of withdrawal.
c. Raychem will reimburse you up to $5,000 per year for fees
paid to a personal financial adviser. In addition, Raychem will
reimburse you for fees reasonably incurred to obtain legal counsel with
respect to your offer of employment from Raychem.
d. You will have health coverage under the Raychem Group
Medical Plan or one of several Health Maintenance Organizations. You
may cover eligible dependents under these programs. Coverage will
commence on your payroll start date. You will be covered free of
charge, with a fee for dependent coverage.
e. You have coverage under a dental plan. You will be covered
free of charge, with a fee for dependent coverage. Coverage will
commence on your payroll start date.
<PAGE> 8
Mr. Richard Kashnow
August 11, 1995 Page 8
f. You will be covered under the Raychem Group Life Insurance
Program. Coverage will commence on your payroll start date.
g. You will be covered by the Raychem Long Term Disability
Plan. Coverage will commence on the first day of the month following 15
days of employment.
h. You will be eligible to participate in the qualified Raychem
Corporation Pension Plan and the nonqualified Raychem Corporation
Supplemental Executive Retirement Plan. In addition, your nonqualified
pension benefit will be augmented in an equitable fashion to compensate
for the loss of pension benefits associated with your departure from
Schuller at a time when you have not yet reached your maximum
compensation level.
i. Raychem will reimburse you for an annual physical
examination.
j. You will be eligible to participate in Raychem's 1995
Executive Deferred Compensation Plan and 1989 Bonus Deferral Plan.
k. You will be eligible to participate in Raychem's company car
program.
8. Proprietary Information. You will be required to sign Raychem's
standard employee proprietary information agreement.
9. Golden Parachute Determination. You shall be permitted to elect to
reduce or modify any amount that would, but for this paragraph, be a
"parachute payment" as defined in Section 280G of the Internal Revenue
Code in your sole discretion in order to reduce or eliminate any such
parachute payment in any manner that does not impose an additional cost
on Raychem.
10. Term. Unless your employment with Raychem is earlier terminated, the
provisions of this letter shall govern the
<PAGE> 9
Mr. Richard Kashnow
August 11, 1995 Page 9
first five years of your employment. Assuming you remain employed by
Raychem, a new arrangement shall be negotiated prior to expiration of
the five-year period to cover future periods.
11. Arbitration. In the event of any dispute arising out of or
relating to your employment relationship or its termination (including
without limitation claims for breach of contract, wrongful termination,
or age, race, sex, disability or other discrimination) that is not
resolved by good faith negotiations between the parties, you and
Raychem agree fully, finally and exclusively to arbitrate the dispute
in binding arbitration under the rules of the American Arbitration
Association in San Mateo County, California, rather than litigate the
dispute in court; provided that this arbitration provision shall not
apply to any dispute relating to or arising out of the alleged misuse
or misappropriation of Raychem's trade secrets or proprietary
information. In the event of arbitration, the arbitrator shall be
allowed to assess costs.
I am enthusiastic about your joining Raychem and look forward to working with
you.
Very truly yours,
/s/ Isaac Stein
-----------------------------
Isaac Stein
Chairman of the Executive Committee
of the Board of Directors
Accepted:
/s/ Richard Kashnow
- -----------------------------
Richard Kashnow
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> Exhibit 27
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE PERIOD
ENDED SEPTEMBER 30, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 146,978
<SECURITIES> 0
<RECEIVABLES> 327,064
<ALLOWANCES> 10,735
<INVENTORY> 227,220
<CURRENT-ASSETS> 808,766
<PP&E> 1,119,829
<DEPRECIATION> 602,782
<TOTAL-ASSETS> 1,449,471
<CURRENT-LIABILITIES> 285,149
<BONDS> 258,391
<COMMON> 44,090
0
0
<OTHER-SE> 731,674
<TOTAL-LIABILITY-AND-EQUITY> 1,449,471
<SALES> 409,889
<TOTAL-REVENUES> 410,515
<CGS> 194,411
<TOTAL-COSTS> 194,914
<OTHER-EXPENSES> 30,044
<LOSS-PROVISION> 562
<INTEREST-EXPENSE> 3,300
<INCOME-PRETAX> 45,440
<INCOME-TAX> 13,010
<INCOME-CONTINUING> 32,430
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,430
<EPS-PRIMARY> $0.72
<EPS-DILUTED> 0
</TABLE>
