<PAGE> 1
Filed pursuant to rule 424(b)(5)
Registration No. 333-31395
PROSPECTUS SUPPLEMENT
(To Prospectus dated September 24, 1998)
$400,000,000
LOGO
RAYCHEM CORPORATION
7.20% NOTES DUE 2008
------------------------
Interest payable April 15 and October 15
------------------------
THE NOTES WILL MATURE ON OCTOBER 15, 2008. RAYCHEM CORPORATION MAY AT ANY TIME
REDEEM, IN WHOLE OR IN PART, THE NOTES AT THE REDEMPTION PRICES DESCRIBED
HEREIN. THE NOTES WILL NOT BE SUBJECT TO ANY SINKING FUND. THE INTEREST RATE ON
THE NOTES MAY BE CHANGED UNDER CERTAIN CIRCUMSTANCES DESCRIBED HEREIN.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THE ACCOMPANYING PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS RELATING TO AN INVESTMENT IN THE NOTES.
------------------------
PRICE 99.674% AND ACCRUED INTEREST
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY
-------- ------------- -----------
<S> <C> <C> <C>
Per Note..................... 99.674% .650% 99.024%
Total........................ $398,696,000 $2,600,000 $396,096,000
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus
supplement or the accompanying prospectus are truthful or complete. Any
representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the Notes to purchasers on
October 23, 1998.
------------------------
MORGAN STANLEY DEAN WITTER
CHASE SECURITIES INC.
J.P. MORGAN & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
October 20, 1998
<PAGE> 2
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-Looking Statements.................................. S-3
The Company................................................. S-4
Recent Developments......................................... S-4
Use of Proceeds............................................. S-8
Capitalization.............................................. S-9
Selected Consolidated Financial Data........................ S-10
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. S-11
Description of Offered Securities........................... S-21
Underwriters................................................ S-25
Legal Matters............................................... S-26
PROSPECTUS
Available Information....................................... 2
Documents Incorporated by Reference......................... 2
The Company................................................. 4
Risk Factors................................................ 5
Use of Proceeds............................................. 9
Ratio of Earnings to Fixed Charges.......................... 9
Description of Debt Securities.............................. 9
Plan of Distribution........................................ 22
Legal Matters............................................... 23
Experts..................................................... 23
</TABLE>
------------------------
You should rely only on the information contained in, or incorporated by
reference into, this Prospectus Supplement and the accompanying Prospectus. We
have not authorized anyone to provide you with information different from that
contained in this Prospectus Supplement and the accompanying Prospectus. We are
offering to sell the Notes and seeking offers to buy the Notes only in
jurisdictions where offers and sales are permitted. The information contained in
this Prospectus Supplement and the accompanying Prospectus is accurate only as
of the dates of this Prospectus Supplement and the accompanying Prospectus,
regardless of the time of delivery of this Prospectus Supplement and the
accompanying Prospectus or any sale of the Notes.
S-2
<PAGE> 3
FORWARD-LOOKING STATEMENTS
Statements made in this Prospectus Supplement, the accompanying Prospectus
or in the documents incorporated or deemed to be incorporated therein by
reference that are not statements of historical fact are forward-looking
statements. These statements include, but are not necessarily limited to, those
relating to:
- anticipated product and alliance plans, acquisitions,
- litigation matters,
- restructuring actions,
- productivity improvements,
- Year 2000 readiness,
- expected tax position,
- currency and economic effects,
- dividends,
- profitability, and
- other financial, strategic, and growth-related commitments, targets,
trends, or goals.
A number of risks and uncertainties, including those discussed under the
caption "Risk Factors" in the accompanying Prospectus and under similar captions
in the documents incorporated or deemed to be incorporated therein by reference,
could affect such forward-looking statements and could cause actual results to
differ materially from the statements made.
S-3
<PAGE> 4
THE COMPANY
The Company, founded in 1957, is a broadly based materials science company
serving both domestic and international markets. The Company utilizes its
expertise in materials science, electronics and process engineering to develop,
manufacture and market a variety of high-performance products for electronics
original equipment manufacturers ("OEMs"), and telecommunications, energy and
industrial applications. During the quarter ended June 30, 1998, the Company
realigned its businesses by combining the former telecommunications and energy
networks segment and the commercial and industrial infrastructure segment into
the new telecommunications, energy and industrial ("TE&I") business segment.
This realignment allows the Company to offer a broader product line, more
efficient distribution, and services to respond to customers' changing buying
patterns. The Company's financial results are now reported as two business
segments described below, and the corporate group.
Electronics OEM Components Business Segment. The electronics OEM components
business segment serves OEMs in the aerospace, automotive, communications,
defense, information processing and other industries. Products offered by this
segment include circuit protection devices, wire and cable, heat-shrinkable
insulation and molded parts, and computer touchmonitors.
TE&I Business Segment. The TE&I business segment serves telephone operating
companies, utilities, industrial plants, and other customers who build and
maintain commercial and industrial infrastructures. Products offered by this
segment include telephone copper accessories, fiber-optic cable systems and
accessories, access network electronics, electric power cable accessories,
heat-tracing systems and corrosion protection products.
The Company's principal domestic facilities are located in Menlo Park and
Redwood City, California, and in Fuquay-Varina, North Carolina. Additional
facilities of significant size are located in Belgium, Germany, Ireland, Japan,
Mexico, the People's Republic of China, and the United Kingdom. The Company's
principal executive offices are located at 300 Constitution Drive, Menlo Park,
California 94025-1164, and its telephone number is (650) 361-3333. Unless
otherwise expressly stated or the context otherwise requires, the terms
"Company" and "Raychem" mean Raychem Corporation and its consolidated
subsidiaries.
RECENT DEVELOPMENTS
FIRST QUARTER FINANCIAL INFORMATION
On October 14, 1998, the Company announced the following unaudited
information for the quarter ended September 30, 1998.
The Company reported net income of $38 million ($0.47 per share on a
diluted basis) for the quarter ended September 30, 1998 compared to $62 million
($0.70 per share on a diluted basis) for the quarter ended September 30, 1997.
Revenues were $447 million for the quarter ended September 30, 1998 compared to
$455 million for the quarter ended September 30, 1997.
Revenues on a constant currency basis for the quarter ended September 30,
1998 remained essentially flat compared to the quarter ended September 30, 1997
and were up 4% from the quarter ended June 30, 1998. The Company reported
pre-tax earnings of $59 million for the quarter ended September 30, 1998
compared to $82 million for the quarter ended September 30, 1997 and $51 million
for the quarter ended June 30, 1998 (the pre-tax earnings of $51 million for the
quarter ended June 30, 1998 do not include a restructuring charge of $28
million). The Company's estimated annual tax rate increased to 35% for the
quarter ended September 30, 1998 from 25% for the quarter ended September 30,
1997. Regional sales volumes on a constant currency basis for the quarter ended
September 30, 1998 increased by 2% in North America, decreased by 4% in Europe
and by 1% in Asia, and increased by 9% in all other regions compared to the
quarter ended September 30, 1997.
Electronics OEM Components Segment. Revenues for the quarter ended
September 30, 1998 from the electronics OEM components business segment were
$203 million, up 5% on a constant currency basis from the quarter ended
September 30, 1997. Operating income was $30 million for the quarter ended
Septem-
S-4
<PAGE> 5
ber 30, 1998 compared to $42 million for the quarter ended September 30, 1997.
Operating income was affected by price reductions, a shift in the mix of
products sold and changes in currency exchange rates.
Revenues from sales of interconnection products, including wire, cable,
heat-shrinkable tubing and connectors, were $121 million for the quarter ended
September 30, 1998, up 8% on a constant currency basis from the quarter ended
September 30, 1997. Growth was strongest in North America due to revenue gains
of commercial products. Sales of interconnection products for rail and mass
transit, automotive and defense applications led growth in Europe. Revenue
growth in Europe and North America offset revenue declines in Japan and Asia
resulting from reductions in government defense spending.
Sales of circuit protection products were $54 million for the quarter ended
September 30, 1998, down 7% on a constant currency basis from the quarter ended
September 30, 1997, reflecting a worldwide slowdown and inventory correction in
electronics markets as price reductions more than offset an increase in unit
volumes.
Revenues from the sale of touchscreen products for the quarter ended
September 30, 1998 were $28 million, up 20% on a constant currency basis from
the quarter ended September 30, 1997. Strong sales of touchscreen products for
point of information and kiosk applications generated revenue growth in Europe
and North America. Sales rose in Japan as a result of demand for touchscreen
products in kiosks and amusement and gaming applications.
Telecommunications, Energy and Industrial Segment. Revenues for the quarter
ended September 30, 1998 for the telecommunications, energy and industrial
business segment were $243 million, down 4% on a constant currency basis from
the quarter ended September 30, 1997. Revenues fell largely because of slower
heat tracing sales in North America and weaker sales of telecommunications cable
accessories in Europe. Segment operating income was $49 million for the quarter
ended September 30, 1998 compared to $65 million in the quarter ended September
30, 1997.
Revenues for the quarter ended September 30, 1998 from sales of
telecommunications products were $95 million, down 6% on a constant currency
basis from the quarter ended September 30, 1997 as continuing declines in copper
cable accessories revenue offset revenue growth in fiber-optic products for
broadband networks. In addition, the Company completed the acquisition of the
telecommunications business of Plasticos Mondragon S.A. ("Mondragon") in Spain
on October 1, 1998 for a price of approximately $40 million, which will broaden
the Company's range of copper connection products for the worldwide
telecommunications market.
Revenues for the quarter ended September 30, 1998 for access network
electronics products were $23 million, up 13% on a constant currency basis from
the quarter ended September 30, 1997. Revenue growth was slower than expected
due to delayed deployment at some customer sites.
Sales of cable accessories and other insulation products for energy
networks totaled $69 million for the quarter ended September 30, 1998, up 2% on
a constant currency basis from the quarter ended September 30, 1997.
Revenues for the quarter ended September 30, 1998 from commercial and
industrial sales of electric heat-tracing systems, corrosion prevention products
and leak detection systems were $57 million, down 11% on a constant currency
basis from the quarter ended September 30, 1997. Sales of electric heat-tracing
systems declined due to the continuing lingering effects of last year's
unusually warm winter in certain regions of Europe and the United States and
underlying weakness in the project business within the oil, gas and chemical
processing industries.
Orders and Backlog. Incoming orders for the quarter ended September 30,
1998 were slightly more than shipments for the Company overall, with TE&I
segment orders slightly less than shipments and electronics OEM components
segment orders greater than shipments. Backlog at September 30, 1998 was $284
million.
Share Repurchase. During the quarter ended September 30, 1998, the Company
repurchased 4 million shares of its common stock at an average price of $31 per
share. The Company's Board of Directors has authorized up to $300 million for
share repurchases during the fiscal year beginning July 1, 1998.
S-5
<PAGE> 6
CONSOLIDATED CONDENSED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 JUNE 30, 1998
------------------ -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 164,103 $ 92,667
Accounts receivable, net.................................. 341,500 325,039
Inventories:
Raw materials.......................................... 87,011 90,874
Work in process........................................ 62,899 64,143
Finished goods......................................... 125,302 123,931
---------- ----------
Total inventories......................................... 275,212 278,948
Prepaid taxes............................................. 40,429 38,350
Other current assets...................................... 109,937 110,593
---------- ----------
Total current assets........................................ 931,181 845,597
Property, plant and equipment............................... 1,196,195 1,147,923
Less accumulated depreciation and amortization............ 700,923 668,737
---------- ----------
Net property, plant and equipment........................... 495,272 479,186
Deferred tax assets......................................... 186,940 186,595
Other assets................................................ 109,409 107,977
---------- ----------
Total assets................................................ $1,722,802 $1,619,355
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks.................................... $ 333,322 $ 181,284
Accounts payable.......................................... 73,388 82,901
Compensation and benefits................................. 67,199 56,878
Other accrued liabilities................................. 86,154 88,914
Income taxes.............................................. 74,260 62,871
Current maturities of long-term debt...................... 6,969 6,574
---------- ----------
Total current liabilities................................... 641,292 479,422
Long-term debt.............................................. 152,810 151,488
Deferred tax liabilities.................................... 27,413 27,762
Other long-term liabilities................................. 96,067 92,257
Minority interests.......................................... 9,763 8,784
Stockholders' equity
Preferred Stock, $1.00 par value; Authorized:
15,000,000 shares; Issued: none...................... -- --
Common Stock, $1.00 par value; Authorized: 150,000,000;
Issued: 90,028,103................................... 90,028 90,028
Additional contributed capital......................... 425,477 425,477
Retained earnings...................................... 694,555 665,753
Accumulated other comprehensive income................. (7,828) (26,778)
Treasury Stock, at cost (10,787,408 and 7,144,399
shares, respectively)................................ (401,938) (290,320)
Other.................................................. (4,837) (4,518)
---------- ----------
Total stockholders' equity.................................. 795,457 859,642
---------- ----------
Total liabilities and stockholders' equity.................. $1,722,802 $1,619,355
========== ==========
</TABLE>
S-6
<PAGE> 7
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues.................................................... $446,746 $455,031
Cost of goods sold.......................................... 239,331 226,948
Research and development expense............................ 24,473 27,363
Selling, general, and administrative expense................ 118,757 112,306
Interest expense, net....................................... 4,926 2,815
Other expense, net.......................................... 413 3,572
-------- --------
Income before income taxes.................................. 58,846 82,027
Provision for income taxes.................................. 20,595 20,506
-------- --------
Net income.................................................. $ 38,251 $ 61,521
======== ========
Earnings per share -- basic................................. $ 0.47 $ 0.72
======== ========
Average number of shares outstanding -- basic............... 80,651 85,551
======== ========
Earnings per share -- assuming dilution..................... $ 0.47 $ 0.70
======== ========
Average number of shares outstanding -- assuming dilution... 81,635 87,934
======== ========
Dividends per share......................................... $ 0.08 $ 0.07
======== ========
</TABLE>
RECENT LITIGATION VERDICT
On August 10, 1998, the trial of an antitrust lawsuit entitled Bourns Inc.
v. Raychem Corporation ended with a jury verdict that awarded the plaintiff $64
million in damages. Legal fees and expenses, including attorneys fees, are also
recoverable by the plaintiff under applicable U.S. antitrust law. The Company
has filed motions with the trial court to set aside the jury verdict and to ask
for a new trial on the grounds that the verdict is contrary to the evidence
presented at trial and is incorrect as a matter of law. If necessary, the
Company intends to appeal any adverse final judgment. Under applicable U.S.
antitrust law any final damage award against the Company will be trebled.
Because the Company intends to appeal any adverse final judgment in the trial
court, the Company has not accrued any liability with respect to this
litigation. See "Risk Factors -- Litigation is Unpredictable and Costly" in the
accompanying Prospectus.
S-7
<PAGE> 8
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the 7.20%
Notes due 2008 (the "Notes" or the "Offered Securities") are estimated to be
approximately $395.7 million. The Company intends to use such net proceeds to
repay indebtedness outstanding under the Company's $400 million revolving credit
facility (the "Credit Facility"). As of October 14, 1998, borrowings of
approximately $275 million were outstanding under the Credit Facility. In the
last twelve months, the Company has from time to time used proceeds from
borrowings under the Credit Facility to finance the Company's stock repurchase
program and recently used borrowings under the Credit Facility to finance a
portion of the acquisition of Mondragon's telecommunications business. See
"Recent Developments -- First Quarter Financial Information" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Core
Business Operations -- Acquisitions" and "-- Liquidity and Capital Resources."
Indebtedness under the Credit Facility accrues interest at variable spreads over
LIBOR and, at October 14, 1998, had an average interest rate of 5.74% per annum.
The Company intends to use the remaining portion of the net proceeds for general
corporate purposes, which may include financing the Company's current stock
repurchase program and possible acquisitions.
S-8
<PAGE> 9
CAPITALIZATION
The following table sets forth the consolidated short-term debt and the
consolidated capitalization of the Company as of September 30, 1998 and as
adjusted to give effect to the sale by the Company of the Offered Securities and
the application of a portion of the estimated net proceeds therefrom to repay
indebtedness outstanding under the Credit Facility (as if such sale and the
application of such net proceeds had occurred on such date). This table should
be read in conjunction with the Company's Consolidated Financial Statements,
including the related notes, incorporated by reference into the accompanying
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------------------
ACTUAL AS ADJUSTED
------------- --------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Short-term debt:
Credit Facility(1)........................................ $ 275,000 $ --
Other short-term debt, including current portion of
long-term debt......................................... 65,291 65,291
---------- ----------
Total short-term debt............................. $ 340,291 $ 65,291
========== ==========
Long-term debt:
Secured long-term debt, less current portion of
$4,976(2).............................................. $ 102,701 $ 102,701
Notes offered hereby...................................... -- 400,000
Other long-term debt, less current portion................ 50,109 50,109
---------- ----------
Total long-term debt.............................. 152,810 552,810
---------- ----------
Stockholders' equity:
Preferred Stock $1.00 par value;
Authorized: 15,000,000 shares; Issued: none............ -- --
Common Stock $1.00 par value;
Authorized: 150,000,000 shares; Issued:
90,028,103(3).......................................... 90,028 90,028
Additional contributed capital............................ 425,477 425,477
Retained earnings......................................... 694,555 694,555
Accumulated other comprehensive income.................... (7,828) (7,828)
Treasury Stock, at cost (10,787,408 shares)............... (401,938) (401,938)
Other..................................................... (4,837) (4,837)
---------- ----------
Total stockholders' equity........................ 795,457 795,457
---------- ----------
Total capitalization.............................. $ 948,267 $1,348,267
========== ==========
</TABLE>
- ------------
(1) See "Use of Proceeds" for information as to the amount of borrowings
outstanding under the Credit Facility as of a recent date.
(2) In April 1996, the Company entered into a lease financing covering the
majority of its manufacturing equipment in the United States. This
arrangement is accounted for as 10-year partially amortizing secured debt
requiring varying semiannual payments from January 1997 through December
2006.
(3) Excludes, as of September 30, 1998, approximately 11,245,946 shares of
Common Stock of the Company issuable upon exercise of outstanding options
under the Company's stock option and incentive plans.
S-9
<PAGE> 10
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data have been derived from the historical
financial statements of the Company and should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" below, the Consolidated Financial Statements and notes thereto
included in the Company's filings under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), incorporated by reference in the accompanying
Prospectus and the information included herein under "Recent
Developments -- First Quarter Financial Information." Financial data as of and
for each of the five fiscal years ended June 30, 1998 has been derived from
audited financial statements of the Company.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Revenues..................... $1,798,456 $1,764,706 $1,671,561 $1,530,573 $1,461,532
Costs of goods sold.......... 930,274 880,928 815,352 758,566 779,820
Research and development
expense.................... 108,234 119,336 122,137 118,762 136,619
Selling, general and
administrative expense..... 470,207 492,879 508,206 495,537 491,563
Provision for restructuring
and divestitures........... 27,591 52,812 43,571 23,900 --
Loss on minority
investment................. 11,973 -- -- -- --
Loss on reorganization/
formation of Ericsson
Raynet joint venture
("Ericsson Raynet") and
other Raynet items......... -- -- 2,103 32,032 --
Equity in net losses of
affiliated companies....... -- -- 27,280 84,758 109
Interest expense, net........ 12,488 4,651 9,631 13,046 12,762
Other expense (income),
net........................ 5,094 (13,640) (2,849) 4,242 6,914
---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes, extraordinary item
and change in accounting
principle.................. 232,595 227,740 146,130 (270) 33,745
Provision (benefit) for
income taxes............... 53,496 (25,604) (1,782) 21,178 32,066
---------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary item and
change in accounting
principle.................. 179,099 253,344 147,912 (21,448) 1,679
Extraordinary item -- loss
related to early retirement
of debt, net of $0 income
taxes...................... -- -- -- (6,318) --
Cumulative effect of change
in accounting principle,
net of $0 income taxes..... -- -- -- (1,477) --
---------- ---------- ---------- ---------- ----------
Net income (loss)............ $ 179,099 $ 253,344 $ 147,912 $ (29,243) $ 1,679
========== ========== ========== ========== ==========
BALANCE SHEET DATA
Total assets................. $1,619,355 $1,509,260 $1,550,616 $1,454,745 $1,399,015
Long-term obligations........ 271,507 275,848 252,496 396,769 337,739
Stockholders' equity......... 859,642 845,019 841,206 749,658 732,924
</TABLE>
S-10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations that are not statements of historical fact
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Exchange Act. A
number of risks and uncertainties, including those discussed under the caption
"Risk Factors" in the accompanying Prospectus and under similar captions in the
documents incorporated or deemed to be incorporated by reference therein could
affect such forward-looking statements and could cause actual results to differ
materially from the statements made. See "Forward-Looking Statements."
RESULTS OF OPERATIONS
OVERVIEW
The Company reported revenues of $1.798 billion for the year ended June 30,
1998, up 2% in reported currencies, and up 6% on a constant currency basis.
Strong results during the first half of the fiscal year were partially offset in
the second half due to the effects of the weak Asian economies and slow
heat-tracing sales, due in part to an unusually warm winter in certain regions
of Europe and the United States. Net income for the year ended June 30, 1998 was
$179 million, or $2.07 per share assuming dilution. Key components of the
Company's results are summarized in the table below.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
1998 1997 1996
--------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues.................................................... $1,798 $1,765 $1,672
====== ====== ======
Core business "ongoing" pretax income(a).................... $ 272 $ 263 $ 230
Unusual items:
Provision for restructuring and divestitures.............. (28) (53) (44)
Loss on minority investment............................... (12) -- --
Gain on sale of assets.................................... -- 23 3
Severance, plant consolidation, and other charges......... -- (6) (18)
Insurance settlement...................................... -- -- 7
------ ------ ------
Core business pretax income................................. 232 227 178
Provision (benefit) for income taxes........................ 53 (26) (2)
------ ------ ------
Core business net income.................................... 179 253 180
Loss on reorganization/formation of Ericsson Raynet and
other Raynet items........................................ -- -- (2)
Equity in net loss of Ericsson Raynet....................... -- -- (30)
------ ------ ------
Net income.................................................. $ 179 $ 253 $ 148
====== ====== ======
Earnings per share -- assuming dilution..................... $ 2.07 $ 2.77 $ 1.61
</TABLE>
- ------------
(a) "Core business" refers to the Company, excluding Ericsson Raynet; "ongoing"
refers to the core business, excluding unusual items.
The Company's core business "ongoing" pretax income was $272 million for
the year ended June 30, 1998, up 3% from the year ended June 30, 1997, which was
up 14% from the year ended June 30, 1996. As a percentage of core business
revenues, "ongoing" pretax income was 15% for the year ended June 30, 1998 and
the year ended June 30, 1997, and 14% for the year ended June 30, 1996.
The increase in "ongoing" pretax income for the year ended June 30, 1998
compared to the year ended June 30, 1997 was a result of higher sales volumes,
which was partially offset by price reductions, lower margins due to product mix
effects, and adverse currency movements. Additionally, as growth in "ongoing"
pretax income was below the Company's expectations there was no bonus expense in
the year ended June 30, 1998 as compared to $29 million in the prior year.
During the year ended June 30, 1998 the U.S. dollar appreciated significantly
against the Japanese yen, and also appreciated against most European currencies.
S-11
<PAGE> 12
"Ongoing" pretax income would have been $28 million higher if currency exchange
rates had remained constant.
The increase in "ongoing" pretax income for the year ended June 30, 1997
compared to the year ended June 30, 1996 was driven by higher sales volumes and
greater operating efficiency, partially offset by adverse currency effects.
During the second half of fiscal 1997, the U.S. dollar and the British pound
appreciated significantly against most European currencies compared to their
1996 levels. These currency movements reduced "ongoing" pretax income by
approximately $12 million in the second half of fiscal 1997.
The Company incurred pretax restructuring charges of $28 million for the
year ended June 30, 1998, $53 million for the year ended June 30, 1997, and $44
million for the year ended June 30, 1996. See "-- Provision for Restructuring
and Divestitures."
The results for the year ended June 30, 1998 also included a nonrecurring
charge of $12 million, reflecting the write-off of goodwill, cash advances, and
other assets related to the Company's minority investment in Superconducting
Core Technologies, Inc., which ceased commercial operations in March 1998.
The results for the year ended June 30, 1997 included a $23 million gain
from the sale of intellectual property and a $6 million charge for severance,
plant consolidation, and other charges. The results for the year ended June 30,
1996 included a gain of $3 million from the sale of the Company's shape memory
metals components business; a charge of $18 million for severance, plant
consolidation, and other charges; and proceeds from an insurance settlement of
$7 million in connection with a previously settled shareholder lawsuit.
INCOME TAXES
The Company recorded a tax provision of $53 million for the year ended June
30, 1998, compared to tax benefits of $26 million for the year ended June 30,
1997, and $2 million for the year ended June 30, 1996. The increase in the tax
provision for the year ended June 30, 1998 resulted from lower U.S. tax benefits
recognized for financial statement purposes. For the year ended June 30, 1997
and the year ended June 30, 1996, the Company reported discrete tax benefits of
$55 million and $25 million, respectively, resulting from a reassessment of the
valuation allowance related to U.S. federal and state deferred tax assets. For
the year ended June 30, 1998, the Company did not report a discrete tax benefit.
However, in the quarter ended June 30, 1998, approximately $45 million of the
reduction in the U.S. valuation allowance was reported as an increase to
additional contributed capital since the tax benefits were related to stock plan
deductions.
Commencing in 1999, the Company anticipates a normalized tax rate in the
mid-thirty percent range. In 1999 through 2001, the Company expects the U.S. tax
provision to exceed cash tax payments by an amount in the range of $30 to $50
million each year. This difference results from the tax benefits reported in the
financial statements in 1996, 1997, and 1998 that will be realized in cash
through reduced tax payments in 1999 and thereafter.
ERICSSON RAYNET
Results of operations for the year ended June 30, 1996 were adversely
impacted by losses related to Ericsson Raynet, a joint venture formed in 1995
with LM Ericsson. Effective January 1, 1996, the joint venture agreement was
amended to provide that the Company would no longer share in the ongoing
operating losses of the joint venture. Therefore, the Company now accounts for
the venture on the cost basis. For the year ended June 30, 1996, the Company's
equity in net losses of Ericsson Raynet through December 31, 1995, was $30
million and the Company incurred $2 million of charges in connection with the
reorganization of the joint venture.
The following discussion of the results of operations is based on the
Company's core business, including the impact of the previously mentioned
unusual items.
S-12
<PAGE> 13
CORE BUSINESS OPERATIONS
REVENUES AND REVENUE GROWTH
Core business revenues were $1.798 billion for the year ended June 30,
1998, up 2% from $1.765 billion for the year ended June 30, 1997, which were up
6% from $1.672 billion for the year ended June 30, 1996. Revenue growth would
have been 6% for the year ended June 30, 1998, 9% for the year ended June 30,
1997, and 8% for the year ended June 30, 1996, excluding the effect of changes
in foreign currency exchange rates in those years. On a year-over-year basis,
the Company expects continuing downward pressure on revenues during the first
half of 1999 if exchange rates remain at June 30, 1998 levels. Reported revenues
and revenue growth were also impacted by price reductions in most product lines
due to competitive pressures and volume discounts, as shown in the table below.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
1998 1997
------ ------
(PERCENTAGE CHANGE
OVER PRIOR YEAR)
<S> <C> <C>
Components of reported revenue growth:
Growth in unit volumes, net of product mix changes........ 11% 13%
Effect of price reductions(a)............................. (5)% (4)%
Constant currency revenue growth............................ 6% 9%
Effect of exchange rate changes........................... (4)% (3)%
Reported revenue growth..................................... 2% 6%
</TABLE>
- ------------
(a) A management estimate based on year-over-year changes in revenues at
constant volume and mix.
On a constant currency basis, revenues for the year ended June 30, 1998
grew 10% in North America, 4% in Europe, 4% in Asia, and 8% in the rest of the
world, as revenue growth in Latin America was offset by revenue declines in
other markets. Within Europe, revenues grew 8% in Eastern Europe and 3% in
Western Europe. As a result of the weak economic conditions in Asia, the Company
experienced revenue declines in the region during the second half of fiscal
1998, particularly in Korea. If these economic conditions persist, the Company
expects further downward pressure on revenues in Asia.
Revenues for the year ended June 30, 1997 compared to the year ended June
30, 1996 in constant currencies were up 22% in Asia, 8% in North America, and 5%
in Europe, and increased slightly in the rest of the world, as decreases in
Latin America were offset by increases in other markets. Within Europe, revenues
in Eastern Europe grew 47%, but were relatively flat in Western Europe.
GROSS PROFIT AND OPERATING EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
1998 1997 1996
------ ------ ------
(PERCENTAGE OF REVENUES)
<S> <C> <C> <C>
Gross profit................................................ 48% 50% 51%
Selling, general, and administrative expense................ 26% 28% 30%
Research and development expense............................ 6% 7% 7%
</TABLE>
Gross profit as a percentage of revenues declined to 48% in the year ended
June 30, 1998, compared to 50% in the year ended June 30, 1997. The decline was
due to price declines, unfavorable currency movements, and a continued shift in
mix toward product lines that have lower margins than the corporate average. In
the year ended June 30, 1997 gross profit as a percentage of revenues was 50%,
compared to 51% in the year ended June 30, 1996. The decline in gross profit
margin was primarily due to adverse currency movements and a mix shift to
product lines that had lower margins than the corporate average. The Company
expects the gross profit margin for the year ending June 30, 1999 to remain at
approximately the same level as compared to the year ended June 30, 1998, with
operating efficiencies and benefits from previous restructuring activities
offsetting pricing pressures and the continued shift toward lower-margin
products.
S-13
<PAGE> 14
Selling, general, and administrative ("SG&A") expense as a percentage of
revenues declined to 26% for the year ended June 30, 1998. The reduction in SG&A
expense for the year ended June 30, 1998 was the result of currency movements,
the absence of bonus expense in 1998 compared to the year ended June 30, 1997,
and benefits from prior restructuring actions. SG&A expense as a percentage of
revenues declined to 28% for the year ended June 30, 1997 from 30% for the year
ended June 30, 1996. The reduction in SG&A costs in 1997 was largely the result
of benefits from prior restructuring actions. For the years ended June 30, 1997
and 1996, SG&A expense included charges for severance and other costs of $6
million and $12 million, respectively.
BUSINESS SEGMENTS
During the quarter ended June 30, 1998, the Company realigned its
businesses by combining the former telecommunications and energy networks
segment and the commercial and industrial infrastructure segment into the new
TE&I business segment. This allows the Company to offer a broader product line,
more efficient distribution, and services to respond to customers' changing
buying patterns. The Company's financial results are now reported as two
business segments, described below, and the corporate group.
Electronics OEM Components
This business segment serves OEMs in transportation, defense, and a wide
range of commercial electronics industries.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Revenues.................................. $815 $758 $671
Constant currency revenue growth.......... 12% 16%(a) 10%
</TABLE>
- ---------------
(a) Includes TouchPanel Systems ("TPS"), a Japanese joint venture of Elo
TouchSystems, previously accounted for under the equity method. Excluding
TPS, segment growth was 12% in 1997.
For the year ended June 30, 1998, revenues in the electronics OEM
components business segment were $815 million, up 12% on a constant currency
basis, reflecting increased sales across all product divisions. Revenues from
the sale of circuit protection devices were up 17% on a constant currency basis
from 1997. The strong growth during the first three quarters of 1998 was
partially offset by a sharp decline in the fourth quarter, reflecting the
slowdown in worldwide demand for electronic components and continuing pricing
pressures. The average sales price of circuit protection devices declined 9% in
comparison to 1997, with a greater impact in the second half of fiscal 1998. As
a result of a slowdown in the worldwide demand for electronic components, the
Company expects slower revenue growth in sales of its circuit protection devices
during the first half of 1999. Revenues from interconnection products were up 9%
on a constant currency basis, reflecting growth in commercial, automotive and
aerospace markets, partially offset by a decline in defense markets. On a
constant currency basis, revenues from the sale of touchscreen products were up
18% from the previous year, with strong growth in the U.S. and Europe offsetting
sales declines in Japan. The segment's gross profit as a percentage of revenues
declined three percentage points for the year ended June 30, 1998 when compared
to the prior year, primarily because of price reductions in most of the
segment's product lines, as well as adverse currency movements.
For the year ended June 30, 1997, revenues for the electronics OEM
components business segment were $758 million, up 16% in constant currency terms
over 1996. Revenues in the segment increased significantly over the prior year,
with solid performance across all markets. Sales of circuit protection devices
were up 27% compared to 1996, reflecting an increase of 42% in unit volumes,
partially offset by an 8% price reduction and a shift in product mix toward
lower-priced devices. Sales of interconnection products were up 14% in
commercial markets and up slightly in defense markets. Revenues from the sale of
touchscreen products increased 19% for the year ended June 30, 1997. The
segment's gross profit as a percentage of revenues remained essentially
unchanged, as price declines were offset by improved manufacturing efficiencies.
S-14
<PAGE> 15
Telecommunications, Energy and Industrial
This business segment serves telecommunication operators; power, gas, and
water utilities; and industrial plants and pipelines.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
1998 1997 1996
---- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Revenues............................... $983 $1,007 $1,001
Constant currency revenue growth....... 2% 3% 7%
</TABLE>
For the year ended June 30, 1998, revenues for the telecommunications,
energy and industrial business segment were $983 million, up 2% on a constant
currency basis. Sales of access network electronics increased over 40% compared
to the prior year. The strong growth in sales of access network electronics and
fiber accessories offset continued declines in sales of copper cable
accessories, which declined 6%. Growth rates for sales in access network
electronics are expected to remain strong in North America during 1999, which
will be partially offset by the Company's decision to discontinue sales of
access network electronics internationally. Sales of electric heat-tracing
systems declined 11%, reflecting a sharp decline in the second half of fiscal
1998 due in part to the unusually warm winter in certain regions of Europe and
the United States. Gross profit as a percentage of revenues declined one
percentage point compared to 1997. This decline primarily reflected price
declines in most of the segment's markets, adverse currency movements, and the
continued shift in product mix away from copper cable accessories to
lower-margin products, particularly access network electronics.
For the year ended June 30, 1997, revenues for the telecommunications,
energy and industrial business segment were $1.007 billion, up 3% on a constant
currency basis. Strong sales growth of access network electronics and
fiber-optic products more than offset a 6% decline in sales of copper cable
accessories. Sales of electrical products declined due to lower surge arrester
sales, principally in Canada. Revenues from the sale of heat-tracing products
experienced strong growth, while sales of corrosion prevention products remained
essentially flat. The segment's gross profit as a percentage of revenues
declined two percentage points compared to 1996, primarily reflecting a shift in
product mix from copper cable accessories to access network electronics
products, which generally have lower margins.
PROVISION FOR RESTRUCTURING AND DIVESTITURES
Over the past several years, the Company has strengthened its core
businesses and improved its results of operations through a series of
initiatives. These actions were designed to streamline the Company's operations,
reduce operating costs, and position the Company for profitable growth.
During the quarter ended June 30, 1998, the Company incurred a pretax
restructuring charge of $28 million (the 1998 restructuring). The charge
impacted the operating income of the business segments as follows: electronics
OEM components -- $7 million; telecommunications, energy and industrial -- $15
million; and resulted in a charge to the corporate group of $6 million. The
restructuring actions included write-downs of inventory, reflecting the
Company's decision to discontinue sales of access network electronics products
internationally; write-downs of machinery and equipment related to the shutdown
of certain product lines and operations; severance costs related to the
consolidation of the telecommunications and energy networks segment and the
commercial and industrial infrastructure segment; and severance costs associated
with moving certain manufacturing facilities to lower-cost locations.
Approximately $12 million of the 1998 restructuring charge is cash in nature and
is expected to be funded through operating cash flow. The remaining $16 million
primarily represents write-downs of inventory and machinery and equipment. As a
result of the 1998 restructuring, approximately 130 positions will be
eliminated. The 1998 restructuring is expected to be substantially completed by
the end of 1999.
During the third quarter of 1997, the Company incurred a pretax
restructuring charge of $53 million to implement several streamlining programs
and eliminated approximately 500 positions (the 1997 restructuring). As of June
30, 1998, 382 employees have separated from the Company and 71 employees have
assumed other positions within the Company as a result of the 1997
restructuring. The charge impacted the operating
S-15
<PAGE> 16
income of the business segments as follows: electronics OEM components -- $12
million; telecommunications, energy and industrial -- $32 million; and resulted
in a charge to the corporate group of $9 million. A significant portion of the
restructuring expenses included severance costs and asset write-downs for
consolidating the Telecom and Electrical Products divisions to achieve greater
sales synergies and to improve manufacturing and product development
efficiencies in their cable accessories businesses. Additional one-time costs
were incurred to consolidate the Electronics and PolySwitch divisions,
streamline the worldwide operations of the commercial and industrial
infrastructure business segment, and restructure the research and development
organization in the United Kingdom. The 1997 restructuring was substantially
completed by June 30, 1998. Approximately $36 million of the 1997 restructuring
charge was cash in nature and was funded through operating cash flow.
During the third quarter of 1996, the core business incurred a pretax
restructuring charge of $44 million to simplify operations and reduce costs (the
1996 restructuring). The charge impacted operating income of the Company's
business segments as follows: electronics OEM components -- $14 million;
telecommunications, energy and industrial -- $28 million; and resulted in a
charge to the corporate group of $2 million. The restructuring charge included
$38 million for employee severance costs. As of June 30, 1998, 676 positions
have been eliminated. The bulk of these actions affected Raychem locations in
Europe where the Company's manufacturing and support operations in Belgium,
France, and the United Kingdom were reconfigured. In addition, a variety of
other restructuring actions at both divisional and corporate levels took place
throughout Raychem's worldwide organization. The 1996 restructuring was
substantially completed by June 30, 1997. The charge, excluding $4 million in
net asset write-downs, was cash in nature and was funded through operating cash
flow.
The Company expects each of the 1998 and 1997 restructuring charges to be
recovered over an 18- to 24-month period. Each restructuring action is expected
to result in an annual run-rate savings in the range of $30 to $35 million. The
1996 restructuring actions resulted in approximately $39 million of annualized
savings.
ACQUISITION
On October 1, 1998, the Company acquired the telecommunications business of
Mondragon for approximately $40 million. The Mondragon telecommunications
business, which has annual sales of about $17 million, manufactures and supplies
components for connecting, insulating, and protecting copper and fiber-optic
telephone networks.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position continues to be strong. At June 30, 1998,
the Company had $93 million in cash and cash equivalents and $424 million in
unused credit facilities, of which $307 million are committed facilities. The
combination of cash and cash equivalents, available lines of credit, proceeds
from the Offered Securities and future cash flows from operations is expected to
be sufficient to satisfy substantially all of the Company's needs for cash for
anticipated capital expenditures, working capital, dividends, share repurchases,
and potential acquisitions.
The following table presents certain measures of liquidity and capital
resources:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------
1998 1997 1996
----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Debt net of cash............................................ $247 $137 $ 79
Debt net of cash as a percentage of stockholders' equity.... 29% 16% 9%
Days' sales outstanding..................................... 62 59 60
Days' sales in inventory.................................... 104 99 104
</TABLE>
The increase in debt net of cash in 1998 was primarily the result of an
increase in short-term borrowings to repurchase shares of the Company's Common
Stock. During 1998, the Company repurchased 5.7 million shares for $239 million.
The $58 million increase in debt net of cash in 1997 was also primarily due to
increased share repurchases. From July 1 through August 26, 1998, the Company
repurchased 3.2 million shares for $100 million.
S-16
<PAGE> 17
Days' sales in inventory ("DSI") increased to 104 days for the year ended
June 30, 1998, caused in part by a decrease in sales in the fourth quarter and
higher inventory levels. In June 1998, the Company organized all key supply
chain activities and logistics resources into a single organization. Although
the Company expects only modest improvement in inventory levels in the short
term, the Company is focusing on improvements to supply chain management
together with the implementation of a fully integrated enterprisewide
information system to help reduce DSI in the longer term. In 1997, DSI decreased
to 99 days, reflecting ongoing efforts by the Company to reduce the number of
locations holding inventory and the levels of inventory being held.
The table below summarizes the Company's cash flows from operating,
investing, and financing activities:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------
1998 1997 1996
----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net cash provided by (used in):
Operating activities..................................... $ 208 $ 229 $ 224
Investing activities..................................... (114) (60) (101)
Financing activities..................................... (83) (296) (11)
Effect of exchange rate changes on cash and cash
equivalents.............................................. (5) (11) (6)
Increase (decrease) in cash and cash equivalents........... $ 6 $(138) $ 106
</TABLE>
OPERATING ACTIVITIES
The decrease in net cash provided by operating activities in 1998 was
primarily the result of increased levels of inventory, and decreased levels of
accounts payable and other accrued liabilities, partially offset by lower tax
payments. Net cash payments for restructuring and divestitures were $21 million
in 1998, $24 million in 1997, and $17 million in 1996. At June 30, 1998, $22
million of accrued severance liability remained, which is expected to be
substantially paid in cash in 1999. Also, in 1999 through 2001, the Company
expects the U.S. tax provision to exceed cash tax payments by an amount in the
range of $30 to $50 million each year. This difference results from tax benefits
that were reported in the financial statements in 1996, 1997, and 1998 that will
be realized in cash through reduced tax payments in 1999 and thereafter.
INVESTING ACTIVITIES
Net cash used in investing activities in 1998 was $114 million, compared to
$60 million in 1997 and $101 million in 1996. Capital expenditures were $105
million in 1998, $90 million in 1997, and $79 million in 1996. Capital
expenditures in 1999 are expected to be approximately $100 million. In 1998, the
Company made an investment of $10 million in cash related to an alliance with
Tadiran Telecommunications Ltd. In 1997, the Company received $25 million from
the sale of intellectual property and $8 million from liquidations of other
investments, and invested $10 million in Superconducting Core Technologies, Inc.
In 1996, the Company made a cash investment of $23 million in Ericsson Raynet.
Also, in 1996, the Company received $7 million in cash proceeds from the sale of
its shape memory metal components business.
FINANCING ACTIVITIES
Net cash used in financing activities decreased to $83 million in 1998 from
$296 million in 1997. During 1998, the Company repurchased 5.7 million shares of
the Company's Common Stock for $239 million. The Company repurchased 6.8 million
shares in 1997 for $247 million, and 3.0 million shares in 1996 for $95 million.
In July 1997, the board of directors authorized management to spend up to $300
million during any fiscal year, commencing with 1998, to repurchase the
Company's Common Stock. Spending on share repurchases in 1998 was funded in part
by increased borrowings under the Company's committed credit facilities. Net
proceeds from short-term debt were $131 million in 1998 compared to $10 million
in 1997. In addition, cash used in financing activities during 1997 included
$118 million used to prepay the balance of a syndicated term loan agreement.
S-17
<PAGE> 18
In September 1996, the Company entered into a syndicated five-year
revolving credit agreement for $400 million, replacing an existing $250 million
revolving credit facility. Borrowings under the revolving credit agreement bear
interest at variable spreads over LIBOR. The revolving credit agreement includes
covenants that, among other things, specify a maximum leverage limit and a
minimum fixed-charge coverage ratio.
In April 1996, the Company entered into a lease financing secured by the
majority of its manufacturing equipment in the United States. The Company has
the option of terminating the transaction for a fixed amount in 10 years. The
arrangement is accounted for as 10-year partially amortizing secured debt, with
interest that varies periodically with LIBOR. Cash proceeds from the financing
were approximately $113 million and were used in roughly equal proportions for
reduction of long-term debt and for other corporate purposes. The arrangement
lowered the Company's long-term borrowing costs.
Net interest expense was $12 million in 1998 compared to $5 million in 1997
and $10 million in 1996. The increase in 1998 was principally due to the
increased level of short-term borrowings. The decrease in 1997 was primarily the
result of lower average debt levels during the year and the prepayment of
higher-cost long-term debt.
The Company's quarterly cash dividend has been paid consistently since the
second quarter of 1978. In the third quarter of 1996, the quarterly dividend was
increased 25% to $0.05 per share. Effective in the third quarter of 1997, the
Company increased the quarterly dividend 40% to $0.07 per share. Effective in
the third quarter of 1998, the Company increased the quarterly dividend an
additional 14% to $0.08 per share. During 1998, the Company paid $25 million in
dividends to its stockholders, compared to $21 million in 1997 and $16 million
in 1996. The Company expects to continue to pay cash dividends in the
foreseeable future.
MARKET RISK DISCUSSION
The Company's cash flow and earnings are subject to fluctuations due to
exchange rate variation. The Company attempts to limit its exposure to changing
foreign currency exchange ("FX") rates through both operational and financial
market actions. The Company manufactures its products in a number of locations
around the world, and hence has a cost base that is well diversified over a
number of European and Asian currencies as well as the U.S. dollar ("USD"). This
diverse base of local currency costs serves to partially counterbalance the
earnings effect of potential changes in value of the Company's local
currency-denominated revenues. Also, the Company denominates its third-party
export sales in U.S. dollars, whenever possible.
Short-term exposures to changing FX rates are managed by financial market
transactions, principally through the purchase of forward FX contracts (with
maturities of six months or less) to offset the earnings and cash-flow impact of
the nonfunctional currency-denominated receivables and payables. Forward FX
contracts are denominated in the same currency as the receivable or payable
being covered, and the term of the forward FX contract matches the term of the
underlying receivable or payable. The Company covers all known and measurable
exposed receivables and payables denominated in currencies that have a liquid,
cost-effective forward foreign exchange market. The receivables and payables
being covered arise from trade and intercompany transactions, intercompany
loans, and other firm commitments affecting the Company.
The Company does not hedge its foreign currency exposure in a manner that
would entirely eliminate the effects of changes in FX rates on the Company's
operations. Accordingly, the Company's reported revenues and net income have
been, and in the future may be, affected by changes in FX rates.
The Company does not have significant exposure to changing interest rates
because of the low net levels of both marketable securities and debt on the
Company's balance sheet. The Company does not undertake any specific actions to
cover its exposure to interest rate risk and the Company is not a party to any
interest rate risk management transactions.
The Company does not purchase or hold any derivative financial instruments
for trading purposes.
S-18
<PAGE> 19
EXCHANGE RATE SENSITIVITY
The tables below provide information about the Company's derivative
financial instruments and related balance sheet items by currency and present
such information in USD equivalents. The tables summarize information on
instruments and related underlying transactions that are sensitive to FX rates,
including foreign currency forward exchange contracts and nonfunctional
currency-denominated receivables and payables. The net amount that is exposed to
changes in foreign currency rates is then subjected to a 10% change in the value
of the foreign currency versus the U.S. dollar. The Company believes it has no
material sensitivity to changes in foreign currency rates on its net exposed
derivative financial instrument position.
The tables below present the impact on the Company's earnings of a 10%
appreciation and a 10% depreciation of the U.S. dollar against the indicated
currencies.
<TABLE>
<CAPTION>
NET UNDERLYING NET FX FX
JUNE 30, 1998 USD FOREIGN EXPOSED GAIN (LOSS) GAIN (LOSS)
(DOLLARS IN VALUE OF CURRENCY LONG (SHORT) FROM 10% FROM 10%
MILLIONS) NET FX TRANSACTION CURRENCY APPRECIATION DEPRECIATION
CURRENCY CONTRACTS EXPOSURES POSITION OF USD OF USD
-------- --------- -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Belgian franc................... $ 16.5 $ 20.5 $ (4.1) $ 0.4 $(0.5)
German mark..................... 10.6 7.5 (3.1) 0.3 (0.3)
Spanish peseta.................. 36.2 35.7 0.5 -- 0.1
French franc.................... 16.9 15.7 (1.1) 0.1 (0.1)
British pound................... 3.1 5.2 2.1 (0.2) 0.2
Italian lira.................... 10.1 9.7 (0.3) -- --
Japanese yen.................... 40.3 26.9 (13.4) 1.2 (1.5)
Others.......................... 24.5 26.2 (1.4) 0.1 (0.2)
------ ------ ------ ----- -----
Total................. $158.2 $147.4 $(20.8) $ 1.9 $(2.3)
====== ====== ====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
NET UNDERLYING NET FX FX
JUNE 30, 1997 USD FOREIGN EXPOSED GAIN (LOSS) GAIN (LOSS)
(DOLLARS IN VALUE OF CURRENCY LONG (SHORT) FROM 10% FROM 10%
MILLIONS) NET FX TRANSACTION CURRENCY APPRECIATION DEPRECIATION
CURRENCY CONTRACTS EXPOSURES POSITION OF USD OF USD
-------- --------- -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Belgian franc................... $ 1.6 $ 8.1 $ (6.6) $0.6 $(0.7)
German mark..................... 9.0 9.4 0.4 -- --
French franc.................... 13.3 11.1 (2.2) 0.2 (0.3)
British pound................... 1.7 1.2 (0.4) -- --
Italian lira.................... 9.4 10.2 0.8 -- --
Japanese yen.................... 35.4 34.6 (0.9) -- --
Others.......................... 41.6 39.0 (2.8) 0.3 (0.3)
------ ------ ------ ---- -----
Total................. $112.0 $113.6 $(11.7) $1.1 $(1.3)
====== ====== ====== ==== =====
</TABLE>
INTEREST RATE SENSITIVITY
A 60-basis-point move in interest rates (10% of the Company's
weighted-average worldwide interest rate in 1998) affecting the Company's
floating-rate financial instruments as of June 30, 1998, including both debt
obligations and investments, would have an immaterial effect on the Company's
pretax earnings over the next fiscal year. A 60-basis-point move in interest
rates would also have an immaterial effect on the fair value of the Company's
fixed rate financial instruments as of June 30, 1998. In 1997, an assumed
55-basis-point move in interest rates (10% of the Company's weighted-average
worldwide interest rate in 1997) was also determined to have an immaterial
effect.
YEAR 2000
The Company has a comprehensive Year 2000 project designed to identify and
assess the risks associated with its information systems, products, operations
and infrastructure, suppliers, and customers that are not
S-19
<PAGE> 20
Year 2000 compliant, and to develop, implement, and test remediation and
contingency plans to mitigate these risks. The project comprises four phases:
(1) identification of risks, (2) assessment of risks, (3) development of
remediation and contingency plans, and (4) implementation and testing. See "Risk
Factors -- Problems associated with Year 2000" in the accompanying Prospectus.
INFORMATION SYSTEMS
As part of an enterprisewide process reengineering commenced in 1996, the
Company is replacing a substantial portion of its existing information systems
with a fully integrated, enterprisewide information system that it expects will
be Year 2000 compliant, and that will support the majority of the Company's
operations, including major plants in the United States and Europe. This project
was undertaken without regard to possible Year 2000 issues and has not been
accelerated as a result of Year 2000 issues. Therefore, the Company does not
expect to record Year 2000-related expenses in connection with the
implementation of this system. However, this system will not be fully
implemented in certain of the Company's locations by the year 2000. A review of
the Company's information systems for locations where this system will not have
been implemented prior to January 1, 2000 has been completed and the Company is
currently determining the work necessary for the existing systems in these
locations to become Year 2000 compliant.
The Company uses a standardized enterprise information system in its Asian,
Latin American, and certain other locations, and for sales-order and
supply-chain activity in certain plants in North America. The Company is
currently in the process of implementing an upgrade for this system, which is
expected to be Year 2000 compliant, and expects this upgrade to be completed by
mid-calendar year 1999. Testing of all information systems will be conducted
over the next year. The Company's Electronic Data Interchange applications
(through which the Company communicates business transactions with certain of
its customers and suppliers) will be converted to be Year 2000 compliant by the
end of calendar year 1998. The Company is also actively reviewing its hardware
and systems infrastructure, such as networks, to attempt to achieve Year 2000
compliance in order to support the activities described above.
PRODUCTS
The Company has assessed the capabilities of most of its products sold to
customers and is in the process of developing remediation plans for Year 2000
compliance. Based on the assessments made to date, only a small number of the
Company's products are affected by Year 2000 issues. The Company expects to make
the products that it will continue to sell Year 2000 compliant within the next
six months and to make upgrades available for certain other products.
OPERATIONS AND INFRASTRUCTURE
Machinery and equipment and other items used in the operations and
facilities of the Company are currently being assessed for Year 2000 compliance.
This assessment is in the beginning stage and is expected to be completed during
the first quarter of fiscal 1999.
SUPPLIERS
The Company is also in the process of evaluating its supplier base to
determine whether Year 2000 issues affecting suppliers will adversely impact the
Company's operations. To mitigate this risk, the Company has contacted its
suppliers to assess their Year 2000 readiness and will continue to monitor the
progress of its key suppliers. The Company has a limited number of key suppliers
and expects to have the assessment of these key suppliers completed during the
next six months.
CUSTOMERS
The Company established a Global Year 2000 Desk at its headquarters in
California to handle all customer requests for compliance, survey, and other
general information related to its Year 2000 Programs.
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<PAGE> 21
DESCRIPTION OF OFFERED SECURITIES
The Offered Securities are a series of "Debt Securities" as defined and
described in the accompanying Prospectus. The following description of certain
terms of the Offered Securities supplements and, to the extent inconsistent
therewith, replaces the description of the general terms and provisions of the
Debt Securities set forth in the accompanying Prospectus. The following
statements regarding certain provisions of the Offered Securities and the
Indenture (as defined below) are summaries and do not purport to be complete.
Such statements are qualified by reference to the provisions of the form of the
Offered Securities and the Indenture, copies of which may be obtained as
described under "Available Information" in the accompanying Prospectus. As used
under this caption "Description of Offered Securities", all references to the
"Company" mean Raychem Corporation excluding, unless the context otherwise
requires or unless otherwise expressly stated, its subsidiaries. Other
capitalized terms used under this caption but not otherwise defined in this
Prospectus Supplement have the meanings given to them in the accompanying
Prospectus or, if not defined in the Prospectus, in the Indenture.
The Offered Securities will be issued pursuant to an Indenture (the
"Indenture") between the Company and Chase Manhattan Bank and Trust Company,
National Association, as trustee (the "Trustee").
GENERAL
The Offered Securities will constitute a separate series of Debt Securities
under the Indenture, initially limited to $400 million aggregate principal
amount. The Offered Securities will mature on October 15, 2008. The Offered
Securities will bear interest at the rate of 7.20% per annum; provided that if,
on any date (a "Step-up Date") during the period (the "Four Year Period")
beginning on October 23, 1998 (the "Original Issue Date") and ending on the date
which is the fourth anniversary of the Original Issue Date, the rating on the
Offered Securities is decreased to below Investment Grade (as defined below) by
either of the Rating Agencies (as defined below), then the interest rate on the
Offered Securities shall be automatically increased, effective from and
including the Step-up Date, to a per annum rate (the "Step-up Rate") equal to
the sum of Original Interest Rate (as defined below) plus 100 basis points; and
provided, further, that if, on any date (a "Step-down Date") (whether during or
after the Four Year Period) when the interest rate on the Offered Securities is
the Step-up Rate, the rating on the Offered Securities shall be increased so
that the Offered Securities are rated as Investment Grade by both Rating
Agencies, then the interest rate on the Offered Securities shall be
automatically decreased, effective from and including the Step-down Date, to the
Original Interest Rate; it being understood that the interest rate on the
Offered Securities may from time to time be increased to the Step-up Rate (but
only during the Four Year Period) and, if so increased, thereafter decreased to
the Original Interest Rate (both during and after the Four Year Period) as set
forth in the provisos to this sentence. For purposes of the preceding sentence,
a change in the rating on the Offered Securities by any Rating Agency shall be
deemed to have occurred on such date as such Rating Agency shall have publicly
announced such change. The Company will covenant that, as promptly as
practicable after any increase or decrease in the interest rate on the Offered
Securities as described above, it will (a) send written notice to the Trustee
and the holders of the Offered Securities in the manner provided in the
Indenture and (b) issue a press release, each of which shall state (i) that a
change in the interest rate on the Offered Securities has occurred and the
reasons for such change in the interest rate, (ii) the interest rate per annum
before giving effect to such change, (iii) the interest rate per annum after
giving effect to such change, and (iv) the effective date of such change.
Interest on the Offered Securities will accrue from October 15, 1998 or
from the most recent date to which interest has been paid or duly provided for.
Interest on the Offered Securities will be payable semiannually in arrears on
April 15 and October 15 (each, an "Interest Payment Date") of each year,
commencing April 15, 1999, to the persons in whose names such Offered Securities
are registered at the close of business on the April 1 or October 1 (each, a
"Regular Record Date"), as the case may be, next preceding such Interest Payment
Date. Interest on the Offered Securities will be computed on the basis of a
360-day year of twelve 30-day months.
If any Interest Payment Date, Redemption Date (as defined below) or
maturity date of any of the Offered Securities is not a Business Day at any
Place of Payment, then payment of principal, premium, if any,
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<PAGE> 22
and interest need not be made at such Place of Payment on such date but may be
made on the next succeeding Business Day at such Place of Payment, and no
interest will accrue on the amount so payable for the period from and after such
Interest Payment Date, Redemption Date or maturity date, as the case may be.
The Offered Securities will be issued only in fully registered form without
coupons, in denominations of $1,000 and integral multiples thereof. The Offered
Securities will be represented by one or more permanent Global Securities in
book-entry form, except under the limited circumstances described in the
accompanying Prospectus under "Description of Debt Securities -- Global
Securities". The Global Securities will be registered in the name of a nominee
of The Depository Trust Company, as Depository for the Offered Securities. See
"Description of Debt Securities -- Global Securities" in the accompanying
Prospectus.
Notices and demands to or upon the Company in respect of the Offered
Securities and the Indenture may be served and, in the event that Offered
Securities are issued in definitive certificated form, the Offered Securities
may be surrendered for payment, registration of transfer or exchange, at the
office or agency of the Company maintained for that purpose in the Borough of
Manhattan, The City of New York, which will initially be the office of the
Trustee, which on the date of this Prospectus Supplement is located at Chase
Manhattan Bank and Trust Company, National Association c/o The Chase Manhattan
Bank, 55 Water Street, Room 234, Second Floor, North Building, New York, New
York 10041.
The Offered Securities will not be entitled to the benefit of any sinking
fund and will not be subject to repurchase by the Company at the option of the
holders. The Offered Securities will be subject to redemption at the option of
the Company as described below under "-- Redemption at the Option of the
Company".
The Indenture does not limit the aggregate amount of Debt Securities that
may be issued thereunder nor does it limit the incurrence or issuance of other
debt by the Company or any of its subsidiaries.
CERTAIN DEFINITIONS
"Investment Grade" means BBB- (or the equivalent) or higher by S&P or Baa3
(or the equivalent) or higher by Moody's or the equivalent of such ratings used
by any other Rating Agency selected as provided in the definition of the term
"Rating Agencies".
"S&P" means Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc., and its successors.
"Moody's" means Moody's Investor Services, Inc. and its successors.
"Original Interest Rate" means 7.20% per annum.
"Rating Agencies" means (i) S&P and Moody's or (ii) if S&P or Moody's or
both shall not make a rating of the Offered Securities publicly available, a
nationally recognized securities rating agency or agencies, as the case may be,
selected by the Company by notice to the Trustee, which shall be substituted for
S&P or Moody's or both, as the case may be; and "Rating Agency" shall mean
either of the Rating Agencies. The Company will covenant that it will use its
best efforts to cause two Rating Agencies to make publicly available a rating on
the Offered Securities at all times during the Four Year Period and at all times
thereafter when the interest rate on the Offered Securities is the Step-up Rate.
RANKING
The Offered Securities will be unsecured and unsubordinated obligations of
the Company and will rank on a parity in priority of payment with all other
unsecured and unsubordinated indebtedness of the Company. However, the Offered
Securities are obligations exclusively of the Company, and the cash flow and
consequent ability of the Company to service its debt, including the Offered
Securities, are in part dependent upon the results of operations of its
subsidiaries. In addition, the Offered Securities will be effectively
subordinated to all existing and future liabilities of the Company's
subsidiaries. See "Description of Debt Securities -- Ranking of Debt Securities;
Holding Company Structure" in the accompanying Prospectus.
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<PAGE> 23
The Offered Securities will rank junior in priority of payment to all
secured and unsubordinated obligations of the Company to the extent of the
collateral securing such obligations. In April 1996, the Company entered into a
lease financing covering the majority of its manufacturing equipment in the
United States. This arrangement is accounted for as 10-year partially amortizing
secured debt with an outstanding principal amount of $112 million (including $5
million current portion) as of June 30, 1998. See "Capitalization."
REDEMPTION AT THE OPTION OF THE COMPANY
The Offered Securities will be redeemable, in whole or from time to time in
part, at the option of the Company on any date (each, a "Redemption Date") at a
redemption price equal to the greater of (a) 100% of the principal amount of the
Offered Securities to be redeemed and (b) the sum of the present values of the
remaining scheduled payments of principal and interest thereon (exclusive of
interest accrued to such Redemption Date) discounted to such Redemption Date on
a semiannual basis (assuming a 360-day year consisting of twelve 30-day months)
at the Treasury Rate plus 35 basis points, plus, in either case, accrued and
unpaid interest on the principal amount being redeemed to such Redemption Date.
Notwithstanding the foregoing, installments of interest on Offered Securities
that are due and payable on an Interest Payment Date falling on or prior to the
relevant Redemption Date will be payable to the holders of such Offered
Securities registered as such at the close of business on the relevant Regular
Record Date according to their terms and the provisions of the Indenture.
"Treasury Rate" means, with respect to any Redemption Date for the Offered
Securities, (a) the yield, under the heading that represents the average for the
immediately preceding week, appearing in the most recently published statistical
release designated "H.15(519)" or any successor publication that is published
weekly by the Board of Governors of the Federal Reserve System and that
establishes yields on actively traded United States Treasury securities adjusted
to constant maturity under the caption "Treasury Constant Maturities," for the
maturity corresponding to the Comparable Treasury Issue (if no maturity is
within three months before or after the Final Maturity Date, yields for the two
published maturities most closely corresponding to the Comparable Treasury Issue
shall be determined and the Treasury Rate shall be interpolated or extrapolated
from such yields on a straight-line basis, rounding to the nearest month) or (b)
if such release (or any successor release) is not published during the week
preceding the calculation date or does not contain such yields, the rate per
annum equal to the semiannual equivalent yield to maturity of the Comparable
Treasury Issue, calculated using a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such Redemption Date. The Treasury Rate shall be calculated
on the third Business Day preceding the Redemption Date. As used in the
immediately preceding sentence and in the definition of "Reference Treasury
Dealer Quotations" below, the term "Business Day" means each Monday, Tuesday,
Wednesday, Thursday and Friday which is not a day on which banking institutions
in The City of New York are authorized or obligated by law or executive order to
close.
"Comparable Treasury Issue" means the United States Treasury security
selected by the Independent Investment Banker as having a maturity comparable to
the remaining term of the Offered Securities to be redeemed that would be
utilized, at the time of selection and in accordance with customary financial
practice, in pricing new issues of corporate debt securities of comparable
maturity to the remaining term of the Offered Securities.
"Independent Investment Banker" means Morgan Stanley & Co. Incorporated or,
if such firm is unwilling or unable to select the Comparable Treasury Issue, an
independent investment banking institution of national standing appointed by the
Trustee after consultation with the Company.
"Comparable Treasury Price" means, with respect to any Redemption Date for
the Offered Securities, (a) the average of four Reference Treasury Dealer
Quotations for such Redemption Date, after excluding the highest and lowest such
Reference Treasury Dealer Quotations, or (b) if the Trustee obtains fewer than
four such Reference Treasury Dealer Quotations, the average of all such
quotations.
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<PAGE> 24
"Reference Treasury Dealer" means each of Morgan Stanley & Co.
Incorporated, Chase Securities Inc., J.P. Morgan Securities Inc. and NationsBanc
Montgomery Securities LLC and their respective successors; provided, however,
that if any of the foregoing shall cease to be a primary U.S. Government
securities dealer in New York City (a "Primary Treasury Dealer"), the Company
will substitute therefor another Primary Treasury Dealer.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any Redemption Date, the average, as determined by
the Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. New York
City time, on the third Business Day preceding such Redemption Date.
"Final Maturity Date" means October 15, 2008.
Notice of any redemption by the Company will be mailed at least 30 days but
not more than 60 days before the relevant Redemption Date to each holder of
Offered Securities to be redeemed. If less than all the Offered Securities are
to be redeemed at the option of the Company, the Trustee will select, in such
manner as it deems fair and appropriate, the Offered Securities to be redeemed.
Unless the Company defaults in payment of the redemption price, on and
after the Redemption Date interest will cease to accrue on the Offered
Securities or portions thereof called for redemption.
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<PAGE> 25
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below have severally
agreed to purchase, and the Company has agreed to sell to them, severally, the
respective principal amounts of Offered Securities set forth opposite their
respective names below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF
NAME OFFERED SECURITIES
---- --------------------
<S> <C>
Morgan Stanley & Co. Incorporated.......................... $220,000,000
Chase Securities Inc....................................... 60,000,000
J. P. Morgan Securities Inc................................ 60,000,000
NationsBanc Montgomery Securities LLC...................... 60,000,000
------------
Total............................................ $400,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Offered Securities are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all of the
Offered Securities if any are taken.
The Underwriters initially propose to offer part of the Offered Securities
directly to the public at the public offering price set forth on the cover page
hereof and part to certain dealers at a price that represents a concession not
in excess of .40% of the principal amount of the Offered Securities. Any
Underwriter may allow, and any such dealer may reallow, a concession not in
excess of .25% of the principal amount of the Offered Securities to certain
other dealers. After the initial offering of the Offered Securities, the
offering price and other selling terms may from time to time be varied by the
Underwriters.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
The Company does not intend to apply for listing of the Offered Securities
on a national securities exchange, but has been advised by the Underwriters that
they presently intend to make a market in the Offered Securities as permitted by
applicable laws and regulations. The Underwriters are not obligated, however, to
make a market in the Offered Securities and any such market making may be
discontinued at any time at the sole discretion of the Underwriters.
Accordingly, no assurance can be given as to the liquidity of, or trading market
for, the Offered Securities.
In order to facilitate the offering of the Offered Securities, the
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Offered Securities. Specifically, the Underwriters may
overallot in connection with the offering, creating a short position in the
Offered Securities for their own account. In addition, to stabilize the price of
the Offered Securities, the Underwriters may bid for, and purchase, Offered
Securities in the open market. Finally, the Underwriters may reclaim selling
concessions allowed to an Underwriter or a dealer for distributing the Offered
Securities in the offering, if the Underwriters repurchase previously
distributed Offered Securities in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price for the Offered Securities above
independent market levels. The Underwriters are not required to engage in these
activities and may end any of these activities at any time.
As described under "Use of Proceeds", the Company intends to use a portion
of the net proceeds from the offering of the Offered Securities to repay
indebtedness outstanding under the Credit Facility. The lenders under the Credit
Facility include Bank of America, National Trust and Savings Association and The
Chase Manhattan Bank, which are affiliates of NationsBanc Montgomery Securities
LLC and Chase Securities Inc., respectively, two of the Underwriters. It is
expected that these two lenders will in the aggregate receive more than 10% of
the net proceeds from the offering of the Offered Securities in the form of
repayment of borrowings outstanding under the Credit Facility. Accordingly, the
offering of the Offered Securities is being made pursuant to Rule 2710(c)(8) of
the Conduct Rules of the National Association of Securities Dealers, Inc.
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<PAGE> 26
LEGAL MATTERS
The validity of the issuance of the Offered Securities offered hereby and
certain related matters will be passed upon for the Company by the Vice
President and General Counsel of the Company, and Heller Ehrman White &
McAuliffe, Palo Alto, California, the Company's counsel. Brown & Wood LLP, San
Francisco, California will act as counsel to the Underwriters.
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