<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 DECEMBER 31, 1996
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) 361-3333
(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 January 22, 1997, the registrant had outstanding 44,669,128 shares of
Common Stock, $1.00 par value.
<PAGE> 2
RAYCHEM CORPORATION
INDEX TO FORM 10-Q
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1: Financial Information
Consolidated Condensed Statements of Income -
Three and Six Months Ended December 31, 1996 and 1995 1
Consolidated Condensed Balance Sheets -
December 31, 1996, and June 30, 1996 2
Consolidated Condensed Statements of Cash
Flows - Six Months Ended December 31, 1996 and 1995 3
Notes to Consolidated Condensed Financial
Statements 4-6
Item 2: Management's Discussion and Analysis
of Financial Condition and Results of Operations 7-15
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 16
Item 4: Submission of Matters to a Vote of Security Holders 17-18
Item 5: Other Information 18
Item 6: Exhibits and Reports on Form 8-K 18
SIGNATURES 19
<PAGE> 3
RAYCHEM CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 441,047 $ 411,051 $ 871,358 $ 821,566
Cost of goods sold 215,681 196,661 424,757 391,575
Research and development expense 29,501 30,511 59,587 60,555
Selling, general, and administrative
expense 128,601 134,122 248,176 256,582
Equity in net losses of affiliated
companies -- 18,234 -- 28,860
Interest expense, net 256 2,716 2,185 6,016
Other expense (income), net 4,902 (6,504) (14,136) (2,773)
------------ ------------ ------------ ------------
Income before income taxes 62,106 35,311 150,789 80,751
Provision for income taxes 9,671 10,209 25,634 23,219
------------ ------------ ------------ ------------
Net income $ 52,435 $ 25,102 $ 125,155 $ 57,532
============ ============ ============ ============
Average number of common
shares and equivalents outstanding 46,119,060 45,856,806 46,106,229 45,381,290
============ ============ ============ ============
Earnings per common share $ 1.14 $ 0.55 $ 2.71 $ 1.27
============ ============ ============ ============
Dividends per common share $ 0.10 $ 0.08 $ 0.20 $ 0.16
============ ============ ============ ============
</TABLE>
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)
DECEMBER 31, 1996 June 30, 1996
----------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 136,943 $ 224,115
Accounts receivable, net 322,520 308,341
Inventories:
Raw materials 89,584 86,562
Work in process 53,475 50,965
Finished goods 105,341 91,796
----------- -----------
Total inventories 248,400 229,323
Prepaid taxes 55,520 50,312
Other current assets 76,910 95,765
----------- -----------
Total current assets 840,293 907,856
Property, plant, and equipment 1,123,687 1,104,646
Less accumulated depreciation and amortization 641,389 613,207
----------- -----------
Net property, plant, and equipment 482,298 491,439
Other assets 152,408 151,321
----------- -----------
TOTAL ASSETS $ 1,474,999 $ 1,550,616
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 34,336 $ 35,011
Accounts payable 78,811 69,230
Other accrued liabilities 158,793 199,172
Income taxes 28,432 27,721
Current maturities of long-term debt 6,547 119,618
----------- -----------
Total current liabilities 306,919 450,752
Long-term debt 147,607 148,352
Deferred income taxes 25,976 23,722
Other long-term liabilities 83,731 80,422
Minority interests 7,691 6,162
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: 44,951,611 and 44,890,881 shares, respectively 44,952 44,891
Additional contributed capital 410,820 408,866
Retained earnings 456,097 361,876
Currency translation 24,383 25,137
Treasury Stock, at cost (408,706 and 115,753 shares,
respectively) (33,889) (8,630)
Other 712 9,066
----------- -----------
Total stockholders' equity 903,075 841,206
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,474,999 $ 1,550,616
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE> 5
RAYCHEM CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
SIX MONTHS ENDED DECEMBER 31 (IN THOUSANDS) 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 125,155 $ 57,532
Adjustments to reconcile net income to net cash
provided by operating activities:
Payments for restructuring and divestitures (8,286) (1,833)
Equity in net losses of affiliated companies -- 28,860
Net loss on disposal of other property, plant, and equipment 1,022 750
Gain on sale of investment (23,601) (584)
Depreciation and amortization 40,481 39,429
Deferred income tax provision 2,551 63
Changes in certain assets and liabilities, net of effects from
restructuring and divestitures:
Accounts receivable (9,928) (4,172)
Inventories (17,184) (6,035)
Accounts payable and accrued liabilities (19,268) (9,092)
Income taxes (6,645) 6,298
Other assets and liabilities 7,394 8,517
--------- ---------
Net cash provided by operating activities 91,691 119,733
--------- ---------
Cash flows from investing activities:
Investment in property, plant, and equipment (32,483) (43,078)
Disposition of property, plant, and equipment 16,039 841
Advances to affiliated companies -- (26,400)
Proceeds from sale of investments and other 27,538 3,124
Purchase of investment (7,500) --
--------- ---------
Net cash provided by (used in) investing activities 3,594 (65,513)
--------- ---------
Cash flows from financing activities:
Net payment of short-term debt (8,639) (833)
Proceeds from long-term debt 11,384 --
Payments of long-term debt (124,403) (1,148)
Common Stock issued under employee
benefit plans 30,223 33,725
Common Stock repurchased (76,437) (25,047)
Proceeds from repayments of stockholder notes receivable 101 314
Cash dividends (8,971) (7,069)
--------- ---------
Net cash used in financing activities (176,742) (58)
--------- ---------
Effect of exchange rate changes on cash
and cash equivalents (5,715) (3,239)
--------- ---------
(Decrease) increase in cash and cash equivalents (87,172) 50,923
Cash and cash equivalents at beginning
of period 224,115 118,067
--------- ---------
Cash and cash equivalents at end of period $ 136,943 $ 168,990
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest (net of amounts capitalized) $ 5,594 $ 10,290
Income taxes (net of refunds) 24,857 12,401
</TABLE>
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
and six months ended December 31, 1996 and 1995, the financial position as of
December 31, 1996, and the cash flows for the six months ended December 31, 1996
and 1995. The June 30, 1996 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, 1996. The results of operations for the
three and six months ended December 31, 1996, are not necessarily indicative of
the results to be expected for the full year. Certain prior-period amounts have
been reclassified to conform with the fiscal 1997 financial statement
presentation.
BUSINESS SEGMENTS
Revenues and operating income (loss) by business segment are as follows:
<TABLE>
<CAPTION>
in thousands
--------------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- -----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Electronics $ 185,148 $ 158,835 $ 362,069 $ 316,690
Industrial 143,728 140,598 278,907 280,417
Telecommunications 112,171 111,618 230,382 224,459
--------- --------- --------- ---------
Total revenues $ 441,047 $ 411,051 $ 871,358 $ 821,566
========= ========= ========= =========
Operating income (loss)
Electronics $ 36,530 $ 26,206 $ 72,595 $ 57,372
Industrial 33,590 26,666 64,171 57,603
Telecommunications 18,118 21,782 44,591 45,367
Corporate (20,974) (24,897) (42,519) (47,488)
--------- --------- --------- ---------
Total operating income $ 67,264 $ 49,757 $ 138,838 $ 112,854
========= ========= ========= =========
</TABLE>
RECENT ACCOUNTING STANDARDS
In the first quarter of 1997, the company adopted the Financial Accounting
Standards Board 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. There was no impact on the company's results of operations or financial
condition upon adoption of Statement No. 121.
4
<PAGE> 7
FINANCIAL INSTRUMENTS
Gains and losses from forward exchange contracts used to hedge receivables and
payables and anticipated transactions totaled $0.1 million loss and $1.4 million
gain for the three months ended December 31, 1996 and 1995, respectively. Gains
and losses from forward exchange contracts totaled $0.4 million loss and $4.1
million gain for the six months ended December 31, 1996 and 1995, respectively.
The company incurred total foreign exchange transaction and translation losses
of $0.8 million and $0.6 million for the three months ended December 31, 1996
and 1995, respectively. Total foreign exchange transaction and translation
losses were $1.3 million and $1.7 million for the six months ended December 31,
1996 and 1995, respectively. These realized and unrealized gains and losses are
included in "Other expense (income), net." The total amount of foreign exchange
exposure hedged was $119 million at December 31, 1996. The company hedges
exposures that arise from trade and intercompany receivables and payables
(including anticipated transactions), loans in non-functional currencies, and
net monetary assets in certain foreign countries with the U.S. dollar as
functional currency.
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. Such exposures at December 31, 1996,
included $6 million in net intercompany payables in non-functional currencies
and $3 million in net monetary assets in foreign countries with the U.S. dollar
as functional currency.
RESTRUCTURING AND DIVESTITURES
The company incurred a pretax restructuring charge of $44 million in the third
quarter of 1996 as the company moved to simplify and lower the costs of its
operations. All of the charges, with the exception of net $4 million in asset
writedowns, are cash in nature and are expected to be substantially incurred in
1997 and funded through operating cash flows. Approximately 700 positions will
be eliminated, some portion of which may be replaced elsewhere. As of December
31, 1996, approximately 500 employees have separated from the company as a
result of the restructuring.
The following table sets forth the company's restructuring reserves as of
December 31, 1996:
<TABLE>
<CAPTION>
Restructuring Reserves
----------------------
Employee Asset
Severance Writedowns Leases Other Total
--------- --------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Reserve Balances,
June 30, 1996 (Audited): $ 23,733 $ 1,046 $ 827 $ 700 $ 26,306
Adjustment to reserve -- (246) (21) 267 --
Cash payments (7,886) -- (128) (272) (8,286)
Non-cash items (387) (79) -- -- (466)
-------- -------- -------- -------- --------
RESERVE BALANCES,
DECEMBER 31, 1996: $ 15,460 $ 721 $ 678 $ 695 $ 17,554
======== ======== ======== ======== ========
</TABLE>
5
<PAGE> 8
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale and carried at fair
value as determined by quoted market prices. The aggregate fair value of the
marketable securities held at December 31, 1996, was $5 million. Gross
unrealized holding gains were $3 million and are included in the "Other"
component of stockholder's equity.
REPURCHASE OF COMMON STOCK
In April 1996, as part of the company's continuing plan to purchase its shares
to meet employee benefit plan commitments, the Board of Directors authorized the
company's management, at its discretion, to repurchase up to 2.0 million shares
of the company's stock during any one fiscal year, effective July 1, 1996. An
authorization to repurchase an additional 0.5 million shares under unusual
circumstances was removed by the Board of Directors in December 1996. During the
three months ended December 31, 1996, the company repurchased 600,000 shares and
subsequently reissued 428,880 shares, leaving 408,705 shares in treasury stock
at December 31, 1996.
GAIN ON SALE OF ASSETS
In the first quarter of 1997, the company recorded a $23 million pretax gain
from the sale of a portfolio of patents and intellectual property, which gain is
included in "Other expense (income), net."
CONTINGENCIES
The company and its subsidiaries are parties to lawsuits or may in the future
become parties to lawsuits involving various types of commercial claims,
including, but not limited to, product liability, unfair competition, antitrust,
breach of contract, and intellectual property matters. Currently, the principal
product liability litigation involves a variety of claims arising from the
company's heat-tracing and freeze-protection products. 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 a material effect on the
company's financial position or results of operations. However, the company
sells its products into applications (including, for example, aerospace and
automotive) where product liability issues could be material. The company
maintains insurance to cover product liability and certain other claims in
excess of deductibles.
Additionally, the company has been named, among others, as a potentially
responsible party 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.
Legal proceedings tend to be unpredictable and costly and may be affected by
events outside the control of the company. There is no assurance that litigation
will not have an adverse effect on the company's financial position or results
of operations. The company vigorously defends itself against pending claims and
legal proceedings.
SUBSEQUENT EVENTS
On January 15, 1997, the company's Board of Directors increased the quarterly
cash dividend 40% to $0.14 per share of Common Stock, payable on March 12, 1997,
to stockholders of record as of February 12, 1997.
6
<PAGE> 9
RAYCHEM CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Three months ended Six months ended
December 31, December 31,
(in millions, except per share data) 1996 1995 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $441 $411 $871 $822
- -------------------------------------------------------------------------------
Constant currency revenue growth 9% 5% 8% 6%
- -------------------------------------------------------------------------------
Gross profit as a percent of revenues 51% 52% 51% 52%
- -------------------------------------------------------------------------------
Selling, general, and administrative (SG&A)
expense as a percent of revenues 29% 33% 28% 31%
- -------------------------------------------------------------------------------
Net income $ 52 $ 25 $125 $ 58
- -------------------------------------------------------------------------------
Net income per common share $1.14 $0.55 $2.71 $1.27
- -------------------------------------------------------------------------------
</TABLE>
Revenues for the second quarter of fiscal 1997 were $441 million, up 7% from
revenues of $411 million reported for the year-ago period. Revenue growth was 9%
on a constant currency basis (which assumes that foreign currency exchange rates
had remained constant from the prior period).
Gross profit was 51% for the second quarter of 1997, down slightly from a year
ago. SG&A expense as a percent of revenues declined to 29% in the second quarter
of 1997. The reduction in SG&A costs was largely the result of restructuring and
other actions taken in the prior year to reduce operating costs. Management is
focused on further reductions of SG&A costs as a percent of revenues.
Raychem's "ongoing" pretax income for the second quarter of 1997 increased to
$68 million from $59 million in the comparable prior-year period. Raychem's
results are summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Three months ended Six months ended
December 31, December 31,
(in millions) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Core business:
"Ongoing" pretax income $ 68 $ 59 $ 133 $ 116
- -------------------------------------------------------------------------------------
Severance and plant consolidation costs (6) (12) (6) (12)
- -------------------------------------------------------------------------------------
Gain on sale of assets -- -- 23 --
- -------------------------------------------------------------------------------------
Shareholder lawsuit insurance settlement -- 7 -- 7
- -------------------------------------------------------------------------------------
Core business pretax income 62 54 150 111
- -------------------------------------------------------------------------------------
Income taxes 10 10 25 23
- -------------------------------------------------------------------------------------
Core net income 52 44 125 88
- -------------------------------------------------------------------------------------
Equity in net loss of Ericsson Raynet -- (19) -- (30)
- -------------------------------------------------------------------------------------
Net income $ 52 $ 25 $ 125 $ 58
- -------------------------------------------------------------------------------------
</TABLE>
During the second quarter of 1997, the company incurred approximately $6 million
in severance and plant consolidation costs. The results for the year-ago quarter
included a
7
<PAGE> 10
net $5 million of nonrecurring charges, reflecting a $6.6 million gain (included
in "Other expense (income), net") from an insurance settlement arising from a
previous shareholder lawsuit, offset by $12 million of charges incurred from
severance and other related actions.
The results for the six months ended December 31, 1996, included a $23 million
pretax gain arising from the sale of a portfolio of patents and intellectual
property (included in "Other expense (income), net").
The estimated annual effective income tax rate was 17% for the six months ended
December 31, 1996, down from 18% in the prior quarter and 21% for the year-ago
period. The decrease from the prior year results primarily from anticipated
improvement in fiscal 1997 U.S. profitability enabling the utilization of prior
years' U.S. deferred deductions.
Through December 31, 1995, the company accounted for the Ericsson Raynet joint
venture under the equity method of accounting. Effective January 1, 1996, the
joint venture agreement was amended. As a result, the company's interest in the
joint venture is now accounted for using the cost basis of accounting and the
company no longer shares in the ongoing operating losses of the joint venture.
SEGMENT OPERATIONS
The following discussion of the results of operations is based on the company's
business segments--electronics, industrial, telecommunications, and corporate
(referred to collectively as the "core business"). Certain amounts previously
reported as corporate segment costs, notably certain legal and patents and
information technology costs, are now being allocated to the business segments.
Accordingly, previously reported operating income for the segments has been
restated to conform to the fiscal 1997 presentation.
Electronics
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Three months ended Six months ended
December 31, December 31,
(dollars in millions) 1996 1995 1996 1995
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $185 $159 $362 $317
- --------------------------------------------------------------------
Constant currency revenue growth 19% 8% 17% 9%
- --------------------------------------------------------------------
Operating income $ 37 $ 26 $ 73 $ 57
- --------------------------------------------------------------------
</TABLE>
During the second quarter, the company combined the leadership of the
Electronics and PolySwitch divisions to strengthen the company's presence in
growth markets and with the aim to lower ongoing costs. The electronics business
segment, including the Electronics, PolySwitch, and Elo TouchSystems businesses,
experienced strong revenue growth for the second quarter of 1997. Sales of
PolySwitch devices rose approximately 26% with strong growth across all product
families. Unit volume for PolySwitch devices increased approximately 50% over
the year-ago quarter, while prices declined approximately 8%. Electronics' sales
to other OEM customers grew 7% due to improved conditions in commercial markets;
sales were strong in North America, and were essentially flat in Europe. Elo
TouchSystems' revenues now include TouchPanel Systems, a Japanese joint venture,
previously accounted for under the equity method. Elo TouchSystems' revenues
increased 17% from the year-ago quarter on a comparable basis, led by
significant growth in North America. Operating income in the Electronics
business segment was $37 million in the second quarter of 1997, up $11 million
from the year-ago quarter. Revenues and operating income for the six months
ended December 31, 1996, increased from the year-ago period, reflecting
continued revenue growth and relatively lower costs.
8
<PAGE> 11
Industrial
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Three months ended Six months ended
December 31, December 31,
(dollars in millions) 1996 1995 1996 1995
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $144 $141 $279 $280
- --------------------------------------------------------------------
Constant currency revenue growth 4% 4% 2% 6%
- --------------------------------------------------------------------
Operating income $ 34 $ 27 $ 64 $ 58
- --------------------------------------------------------------------
</TABLE>
Revenues in the industrial business segment, including the Chemelex and
Electrical Products divisions, grew to $144 million in the second quarter of
1997, up 4% on a constant currency basis from the prior year's second quarter.
Chemelex Division sales grew 6% from the year-ago quarter. Sales of heat-tracing
products more than offset a slight decline in the division's
corrosion-protection business. Electrical Products Division revenues were down
slightly from a year ago. The division had sales growth across most of its
business, but these gains continue to be offset by lower surge arrester sales.
Industrial business segment operating income increased in the second quarter of
1997 to $34 million from $27 million in the prior-year quarter. These results
include approximately $2 million in severance and plant consolidation costs in
the current quarter and $6 million in such charges in the year-ago quarter.
Industrial segment revenues for the six months ended December 31, 1996, remain
essentially unchanged from the comparable prior-year period. Operating income
for the six months ended December 31, 1996, increased slightly reflecting lower
operating costs in the current period.
Telecommunications
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Three months ended Six months ended
December 31, December 31,
(dollars in millions) 1996 1995 1996 1995
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $112 $112 $230 $224
- --------------------------------------------------------------------
Constant currency revenue growth 1% 2% 3% 2%
- --------------------------------------------------------------------
Operating income $ 18 $ 22 $ 45 $ 45
- --------------------------------------------------------------------
</TABLE>
Telecommunications business segment revenues were $112 million, essentially
unchanged from year-ago levels. Sales of transmission electronics products and
fiber closures grew solidly in the second quarter of 1997. However, these gains
were offset by continued sales declines in copper closures and lower sales in
Latin America. Operating income declined to $18 million from $22 million in the
prior year. A mix shift to lower margin products and an adverse geographic mix
depressed the quarter's operating income. Revenues for the six months ended
December 31, 1996, increased due to strong sales of transmission electronics
products in the first quarter of 1997. Operating income for the six months ended
December 31, 1996, remained unchanged from the prior-year period.
9
<PAGE> 12
Corporate
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Three months ended Six months ended
December 31, December 31,
(dollars in millions) 1996 1995 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating loss $(21) $(25) $(43) $(47)
- ----------------------------------------------------------------------------
</TABLE>
Corporate segment operating loss for the second quarter of 1997 decreased to $21
million from $25 million in the year-ago quarter due to lower general and
administrative costs resulting, in part, from headcount reductions. These
results include approximately $3 million in severance costs in both the current
and the comparable year-ago quarter.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the company had $137 million in cash and cash equivalents,
$457 million in committed credit facilities (of which $9 million were utilized),
and $180 million in various uncommitted credit facilities (of which $58 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 the company's needs for working capital, normal capital expenditures,
and anticipated dividends.
The following table presents certain measures of liquidity and capital
resources:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
DECEMBER 31, June 30,
(dollars in millions) 1996 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Debt net of cash $ 52 $ 79
- -------------------------------------------------------------------------------
Debt net of cash as a percent of stockholders' equity 6% 9%
- -------------------------------------------------------------------------------
Days of sales outstanding 62 60
- -------------------------------------------------------------------------------
Days of inventory on hand 104 104
- -------------------------------------------------------------------------------
</TABLE>
Receivables as measured by the number of days of sales outstanding increased
slightly, but are within an acceptable range given the geographic mix of
countries involved.
Inventory as measured by the number of days of inventory on hand increased to
104 at December 31, 1996, from 101 at September 30, 1996, and remained unchanged
from June 30, 1996. The company will continue to focus its efforts on reducing
inventory levels.
10
<PAGE> 13
The table below summarizes the company's cash flows from operating, investing,
and financing activities:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
SIX MONTHS ENDED DECEMBER 31 (dollars in millions) 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
Cash provided by (used in):
Operating activities $ 92 $ 120
Investing activities 4 (66)
Financing activities (177) (0)
Effect of exchange rate changes on
cash and cash equivalents (6) (3)
- ---------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents $(87) $ 51
- ---------------------------------------------------------------------
</TABLE>
OPERATING ACTIVITIES
Cash flows from operating activities for the six months ended December 31, 1996,
decreased from the comparable period in the prior year. This resulted primarily
from improved profits, offset by increased cash payments made for accrued bonus,
income taxes and severance liability, and increases in inventory.
Bell South Enterprises Inc. (BSE) had financed a portion of the software
development work at Raynet, when Raynet was a wholly-owned subsidiary of
Raychem. In conjunction with the creation of the Ericsson Raynet joint venture,
the company made a final payment to BSE of $10 million in November 1996. In
addition, BSE is entitled to receive a portion of any distribution that Raychem
receives from the Ericsson Raynet joint venture.
INVESTING ACTIVITIES
Cash flows from investing activities increased significantly, becoming a
positive cash inflow for the six months ended December 31, 1996.
Investments in property, plant, and equipment totaled $32 million and $43
million in the six months ended December 31, 1996 and 1995, respectively.
Although capital expenditures were down during the first six months of 1997,
spending for the fiscal year is expected to be approximately $85-$90 million.
Cash flows from dispositions of property, plant, and equipment increased in the
six months ended December 31, 1996, principally due to the collection of
proceeds from the sale of the former Walter Rose land and buildings in Germany
and the sale of the plastic pipe coupling business assets.
The company had made advances to Ericsson Raynet of approximately $26 million in
the six-month period of the prior year. The Ericsson Raynet joint venture was
reconfigured effective January 1, 1996. As a result of the reorganization, the
company is no longer required to make advances for ongoing Ericsson Raynet
operating losses.
In early October 1996, the company received $25 million from the sale of a
portfolio of patents and related intellectual property.
The company invested $7.5 million in Superconducting Core Technologies, Inc.
(SCT) in the first quarter of 1997. The company is the exclusive distributor of
SCT's cryoelectronic receiver front-end products for wireless base stations.
11
<PAGE> 14
FINANCING ACTIVITIES
In the first quarter of 1997, the company prepaid the balance of the syndicated
term loan agreement, amounting to $118 million, which was classified as "Current
maturities of long-term debt" at June 30, 1996. In addition, the company
replaced its $250 million four-year revolving credit facility with a new $400
million five-year revolving credit facility. The new credit facility has more
favorable pricing and covenants than the previous facility.
In April 1996, as part of the company's continuing plan to purchase its shares
to meet employee benefit plan commitments, the Board of Directors authorized the
company's management, at its discretion, to repurchase up to 2.0 million shares
of the company's stock during any one fiscal year, effective July 1, 1996. An
authorization to repurchase an additional 0.5 million shares under unusual
circumstances was removed by the Board of Directors in December 1996. During the
six months ended December 31, 1996, the company repurchased 1 million shares at
a cost of $76 million. In addition, the company received $30 million from the
issuance of Common Stock to employees participating under various employee
benefit plans.
The company's Board of Directors has increased the quarterly dividend 40% to
$0.14 per share payable on March 12, 1997, to stockholders of record as of
February 12, 1997.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Statements made in this management's discussion and analysis or elsewhere in
this report, or other communications (including press releases and analyst
conference calls), that are not statements of historical fact are
forward-looking statements, including without limitation those relating to
anticipated reductions in SG&A rates, anticipated income tax rates and discrete
tax benefits, anticipated inventory levels, anticipated capital spending rates,
sufficiency of the company's cash and cash flows to meet expected needs,
litigation matters, productivity improvements, reorganization actions and cost
savings, future earnings, and other financial and growth commitments, targets or
goals. Forward-looking statements are subject to a number of risks and
uncertainties that could cause actual results to differ materially from the
statements made, including those discussed below.
The 1996 restructuring charges, excluding net asset writedowns of $4 million,
are cash in nature and are expected to be substantially incurred in fiscal 1997
and funded through operating cash flow. The company expects that the
restructuring charges will be recovered within 18 to 24 months through lower
operating costs. When fully implemented, the annual run-rate savings is expected
to be in the $35-$40 million range; substantially all of the savings are cash
related. These restructuring actions reflect complex changes that will affect
the company's worldwide operations. Timelines could be longer than anticipated
and implementation difficulties or market factors could alter the estimated
benefits.
The company continues to work to improve operational efficiency and
productivity, and to reduce costs, and is implementing organizational changes
in many areas of the company. For example, the company is redesigning worldwide
logistics operations and is examining manufacturing operations to achieve
efficiencies through sharing of "back-end" resources. The company is also in
the process of merging the management and certain operations of the former
Electronics and PolySwitch divisions and is also evaluating certain management,
operational and sales channel combinations between other divisions in order to
achieve operational efficiencies and to increase the opportunities for sales
growth. In addition, the company is engaged in an extensive review of its
research and development activities.
12
<PAGE> 15
These actions are likely to result in restructuring charges in the third
quarter. The company's operating results and financial condition could be
adversely affected by its ability to effectively manage the transition to the
new organizational and operating structures and to the outsourcing of some
activities. There can be no assurance that the company will be successful in
achieving its goals or that it will be able to do so without unintended adverse
consequences.
The company has historically achieved part of its revenue growth by developing
or acquiring new and innovative materials science technologies and products. The
company has initiated a review of its research and development activities.
The company remains committed to continued internal research and development
efforts, although the company will continue to pursue the acquisition of new or
compatible technologies and businesses as an important part of the company's
strategy. In addition, the company may enter into arrangements with other
companies to expand product offerings and to enhance its own manufacturing
capabilities. The success of the company's research and development efforts,
acquisitions of new technologies and products, or arrangements with third
parties is not always predictable and there is no assurance that the company
will be successful in realizing its objectives, or that realization may not take
longer than anticipated, or that there will not be unintended adverse
consequences from these actions.
As a result of the Ericsson Raynet reorganization, effective January 1, 1996,
Raychem no longer shares in the ongoing operating losses of the joint venture.
While there is the potential for some future charges related to warranty claims,
the company believes that Ericsson Raynet's existing warranty reserves are
adequate.
The income tax provision is determined by the level of profitability and the tax
jurisdiction in which profits are generated. The geographic distribution and
level of profitability are difficult to predict and may vary from forecasts,
which could result in changes in the estimated annual effective tax rate during
the fiscal year. In addition, the company has a deferred tax asset valuation
allowance that is primarily attributable to U.S. federal and state deferred tax
assets. Realization of the deferred tax assets is dependent on generating
sufficient future U.S. taxable income to utilize deductions and credits prior to
their expiration. Management believes sufficient uncertainty exists regarding
the realization of these deferred tax assets that a valuation allowance is
required. The amount of the valuation allowance is periodically reassessed and
may be adjusted depending on the company's outlook for future U.S. taxable
income. In the third quarter of the fiscal year, the company develops its
strategic plan and annual business plan. These plans will provide additional
insight into the outlook for the company's future U.S. taxable income and, when
combined with other factors (such as recent operating results), may serve as the
basis for a reduction of the valuation allowance. Such a reduction in the
valuation allowance would reduce the income tax provision by the reporting of a
discrete tax benefit and by a reduction of the company's estimated annual tax
rate.
The company has manufacturing facilities in many countries and is subject to
environmental regulations. These regulations, and any changes in them, can
affect the company's manufacturing processes as well as the cost, availability,
and use of raw materials. Although compliance with such environmental
regulations has not had a material effect on capital expenditures or operating
results in the past, there is no assurance that any such regulations, or changes
in regulations, will not have a material adverse effect on future capital
expenditures or operating results.
13
<PAGE> 16
In the past, supplies of certain raw materials the company uses have become
limited, and it is possible that this may occur again in the future. In
addition, certain components purchased by the company are presently available
from only one or a few sources of supply. In such cases, disruptions of
established supply channels could result in increased prices, rationing, and
shortages. In response, the company tries to identify alternative materials and
technologies for such raw materials and components and to develop alternative
sources of supply. Although disruptions in the supply of raw materials and
components have not been material in the past, such situations could adversely
affect financial results.
From time to time, the company and/or its subsidiaries become involved in
lawsuits arising from various types of commercial claims, including, but not
limited to, product liability, unfair competition, breach of contract, and
intellectual property matters. Currently, the principal product liability
litigation involves a variety of claims arising from the company's heat-tracing
and freeze-protection products. However, the company sells its products in
several markets where product liability issues could be material including, for
example, the aerospace and automotive markets. Litigation tends to be
unpredictable and costly. There is no assurance that litigation will not have an
adverse effect on the company's financial position or results of operations.
Approximately two-thirds of the company's revenues result from sales outside the
United States and the company also has several production facilities located
outside the United States. The company's financial results can be adversely
affected by changes in foreign currency rates, changes in worldwide economic
conditions, changes in trade policies or tariffs, changes in interest rates, and
political unrest overseas. These effects may be mitigated by the global nature
of both the company's sales and production activities.
The company has a substantial investment in intellectual properties--consisting
of patents, trademarks, copyrights, and trade secrets--and relies significantly
on the protection these intellectual property rights provide. Accordingly, the
company aggressively protects these rights and may become involved in issues of
infringement or theft by third parties from time to time and related
counterclaims including unfair competition claims, by such third parties. The
company has become involved as a defendant in intellectual property lawsuits and
could become involved in others in the future. Litigation can be unpredictable
and costly. It is possible that an unfavorable outcome in a suit related to
intellectual property could be material to the company's financial position or
results of operations.
The company maintains property, cargo, auto, product, general liability, and
directors and officers liability insurance to protect itself against potential
loss exposures. To the extent that losses occur, there could be an adverse
effect on the company's financial results depending on the nature of the loss,
and the type and level of insurance coverage maintained by the company. From
time to time, the company may reevaluate and change the types and levels of
insurance coverage that it purchases. There can be no assurance that insurance
coverage will continue to be available to the company under all circumstances at
commercially reasonable rates, or if available, will be adequate in amount.
A portion of the company's research and development activities, its corporate
headquarters, and other critical business operations are located near major
earthquake faults. The ultimate impact of a major earthquake on the company,
significant suppliers, and the general infrastructure is unknown, but operating
results could be materially affected. The company is predominantly not insured
for losses and interruptions caused by earthquakes.
14
<PAGE> 17
Many of the company's products are sold in competition with other products or
technologies. Actions of competitors could affect the company's operating
results. For example, several companies have begun marketing PPTC circuit
protection devices similar to certain PolySwitch devices. In addition, operating
results are subject to fluctuations in demand and the seasonal activity of
certain product lines. A shortfall in revenue could also result from a number of
other factors, including but not necessarily limited to, overall economic
conditions, lower than expected demand, or supply constraints. In addition,
changes in geographic or product mix may impact gross profits. A substantial
amount of the company's revenues are realized through orders and shipments
booked within a quarter, and the backlog at the end of any quarter may not be
predictive of the company's financial results for the following quarter.
The company from time to time identifies its expectations and commitments for
various financial and operating items, such as the company's growth,
profitability, cash flow, capital spending, or inventory levels. In addition,
the company periodically identifies financial targets for the company, for
specific divisions of the company, and, within divisions, for heartland and
growth platform businesses. These expectations, commitments, and targets
constitute goals, not projections or assured results. The ability to achieve
such expectations, commitments, and targets is subject to a variety of factors,
including, but not necessarily limited to, those identified above.
Because of the foregoing factors, in addition to other factors that affect the
company's operating results and financial position, past financial performance
or management's expectations should not be considered to be a reliable indicator
of future performance. Investors should not use historical trends to anticipate
results or trends in future periods. Further, the company's stock price is
subject to volatility. Any of the factors discussed above could have an adverse
impact on the company's stock price. In addition, failure of revenues or
earnings in any quarter to meet the investment community's expectations, as well
as broader market trends, could have an adverse impact on the company's stock
price.
The company does not undertake an obligation to update its forward-looking
statements or risk factors to reflect future events or circumstances.
15
<PAGE> 18
RAYCHEM CORPORATION
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On September 26, 1996, the Ninth Circuit Court of Appeals affirmed the dismissal
by the United States District, Northern District of California, of related
lawsuits filed against the company on August 19, 1993, Creole Engineering Co. v.
Raychem Corporation, et al., and on June 29, 1993, Unit Process Company, et al.
v. Raychem Corporation, et al. Four similar state actions brought by the
plaintiffs, which had previously been consolidated in the Superior Court of San
Mateo County, California, and the District Court of Jefferson County, Colorado,
had been stayed pending resolution of the Ninth Circuit appeal. The plaintiffs
have agreed to consolidate all of these state court actions in the Superior
Court of San Mateo County, California. The company has a motion pending to
dismiss this lawsuit. Information about this lawsuit was disclosed in the
company's annual report on Form 10-K for the year ended June 30, 1996.
On December 17, 1996, the International Chamber of Commerce in Paris issued a
decision in the arbitration proceeding initiated against the company on August
28, 1995, by Bourns AG, a subsidiary of Bourns, Inc. In this arbitration
proceeding, Bourns was seeking damages in excess of $2.8 million for alleged
breach of a private brand agreement. In the decision, the arbitrators awarded
Bourns an immaterial amount of damages on certain of Bourns' claims (plus
accrued interest on such amount), dismissed all other claims made by Bourns, and
required Bourns to pay two-thirds of the costs of the arbitration. Other
litigation between the company and Bourns, described in the company's annual
report on Form 10-K for the year ended June 30, 1996, remains pending.
In December 1996, all remaining defendants in West County Landfill, Inc., et al.
v. Raychem Corporation, et al. entered into a settlement agreement with the
plaintiffs ending this litigation. The executed settlement agreement will take
effect upon the satisfaction of three contingencies set forth in the agreement,
only one of which remains to be satisfied. The company believes that this
remaining contingency will be satisfied on the schedule set forth in the
settlement agreement. However, the possibility exists that this contingency will
not be satisfied and that the settlement agreement will become null and void.
Pursuant to the settlement agreement, Raychem will pay an immaterial amount
toward the post-closure costs of the hazardous waste portion of the West County
Landfill. Under the settlement agreement, both plaintiffs and defendants grant
mutual releases of all present and future claims related to the hazardous waste
portion of the West County Landfill. Additional information regarding this
litigation was previously disclosed in the company's annual report on Form 10-K
for the year ended June 30, 1996.
On January 16, 1997, a jury in St. Louis awarded a $2.9 million judgment against
the company in Crestwood Plaza v. Raychem Corporation, Case Number 674475,
Circuit Court of the County of St. Louis, Missouri. The case involved a product
liability claim related to the Ferex product, a product line divested by the
company in February 1989. The company intends to appeal the judgment. A portion
of the judgment is covered by insurance.
16
<PAGE> 19
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On November 1, 1996, the company held its Annual Meeting of the
Stockholders.
(b) The following Directors were elected:
Votes
Name Votes For Withheld
---- --------- --------
Richard Dulude 33,326,447 103,428
James F. Gibbons 33,326,512 103,363
Richard A. Kashnow 33,325,622 104,252
John P. McTague 33,326,512 103,363
Dean O. Morton 33,326,173 103,702
Isaac Stein 33,299,897 129,978
Chang-Lin Tien 33,310,605 119,270
Cyril J. Yansouni 33,326,485 103,390
(c) The following other matters were voted upon:
1. Approval of amendment to the company's Amended and Restated 1984
Employee Stock Purchase Plan and Amended and Restated 1985
Supplemental Employee Stock Purchase Plan to increase by 1,000,000
shares the aggregate number of shares issuable under each plan.
Affirmative Votes: 29,087,578
Negative Votes: 1,446,257
Abstentions: 65,128
2. Approval of amendment to the company's Amended and Restated 1984
Employee Stock Purchase Plan and Amended and Restated 1985
Supplemental Employee Stock Purchase Plan to modify the requisite
vote for stockholder approval to conform to the Company's other
employee benefit plans.
Affirmative Votes: 29,265,530
Negative Votes: 1,260,185
Abstentions: 73,248
3. Approval of an amendment to the company's Amended and Restated 1990
Incentive Plan to increase by 2,800,000 shares the aggregate number
of shares issuable under the plan.
Affirmative Votes: 18,071,555
Negative Votes: 12,458,899
Abstentions: 68,509
4. Approval of an amendment to the company's Amended and Restated 1990
Incentive Plan to increase the limit on the number of shares that
may be granted to any participant in any one-year period to 500,000,
and to include performance shares within that limit.
Affirmative Votes: 20,746,304
Negative Votes: 12,073,370
Abstentions: 65,732
17
<PAGE> 20
5. Approval of the adoption of the company's 1996 Directors Stock
Option Plan.
Affirmative Votes: 20,409,342
Negative Votes: 10,157,891
Abstentions: 113,133
6. Approval of the adoption of the company's Officer Variable Pay
Plan.
Affirmative Votes: 27,797,211
Negative Votes: 2,673,554
Abstentions: 123,198
7. Ratification of the appointment by the company's Board of
Directors of Price Waterhouse LLP to audit the accounts of the
company and its subsidiaries for the 1997 fiscal year.
Affirmative Votes: 33,304,052
Negative Votes: 73,312
Abstentions: 52,510
ITEM 5: OTHER INFORMATION
In December 1996, John McGraw, general manager of the newly merged Electronics
and PolySwitch division, was named senior vice president. Mark Thompson, manager
of development and advanced products for the new Electronics Division, was named
vice president. Additionally, Karen Cottle was elected as vice president,
general counsel and secretary. Peter Brooks, vice president, has now assumed
responsibility for managing the Telecom Division's transmission electronics
business. Separately, Christiane Midgley, vice president, left the company
during the quarter.
While the company continues its search for a new technology officer, Richard A.
Kashnow, President, CEO and Chairman of the Board, will take on the additional
role of acting Chief Technology Officer.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
10(aa) Consulting Agreement dated as of December 12,
1996, between the company and James F. Gibbons
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
18
<PAGE> 21
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: February 13, 1997 /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)
19
<PAGE> 22
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
10(aa) Consulting Agreement dated as of December 12,
1996, between the company and James F. Gibbons
27 Financial Data Schedule
<PAGE> 1
Exhibit 10(aa)
December 12, 1996
Dr. James F. Gibbons
Paul G Allen Center for Integrated Systems
Room #201, MS #4075
Stanford University
Stanford, CA 94305
Dear Jim:
As a Board member and in addition to your normal Board responsibilities, we have
agreed that you will from time to time provide additional consulting services to
the Board and the Chief Executive Officer. Such consulting services shall be
requested by the Chairman of the Board/Chief Executive Officer and the scope
shall be mutually agreed upon. Compensation shall be at a per diem rate of
$3,000.
Please sign and return the enclosed copy of this letter to confirm this
arrangement.
Very truly yours,
/s/ Dick
Richard A. Kashnow
Chairman of the Board,
President and Chief Executive Officer
RAK\tt
Enclosure
ACKNOWLEDGED AND ACCEPTED BY:
/s/ James F. Gibbons 21 December 1996
- ------------------------------------ --------------------------
James F. Gibbons Date
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AS AT AND FOR THE PERIOD ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
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<CASH> 136,943
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