<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, 1997
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)
(650) 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 20, 1998, the registrant had outstanding 84,847,437 shares of
Common Stock, $1.00 par value.
<PAGE> 2
RAYCHEM CORPORATION
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1: Financial Information
Consolidated Condensed Statement of Income for
the three and six months ended December 31, 1997 and 1996 1
Consolidated Condensed Balance Sheet at
December 31, 1997 and June 30, 1997 2
Consolidated Condensed Statement of Cash Flows for
the six months ended December 31, 1997 and 1996 3
Notes to Consolidated Condensed Financial
Statements 4
Item 2: Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 18
Item 4: Submission of Matters to a Vote 18
Item 5: Other Information 19
Item 6: Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
<PAGE> 3
RAYCHEM CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------------------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 467,117 $ 441,047 $ 922,148 $ 871,358
Cost of goods sold 237,134 215,681 464,082 424,757
Research and development expense 28,149 29,501 55,512 59,587
Selling, general, and administrative
expense 123,734 128,601 236,040 248,176
Interest expense, net 2,855 256 5,670 2,185
Other expense (income), net 630 4,902 4,202 (14,136)
--------- --------- --------- ---------
Income before income taxes 74,615 62,106 156,642 150,789
Provision for income taxes 18,654 9,671 39,160 25,634
--------- --------- --------- ---------
Net income $ 55,961 $ 52,435 $ 117,482 $ 125,155
========= ========= ========= =========
Earnings per share-basic(a) $ 0.66 $ 0.59 $ 1.38 $ 1.40
========= ========= ========= =========
Earnings per share-assuming dilution(a) $ 0.64 $ 0.57 $ 1.34 $ 1.36
========= ========= ========= =========
Dividends per share(a) $ 0.07 $ 0.05 $ 0.14 $ 0.10
========= ========= ========= =========
Average number of shares
outstanding-basic(a) 85,147 89,481 85,349 89,542
========= ========= ========= =========
Average number of shares
outstanding-assuming dilution(a) 87,085 92,205 87,510 92,236
========= ========= ========= =========
</TABLE>
(a) Adjusted for a two-for-one stock split effective November 17, 1997 and for
the adoption of FAS 128.
See accompanying notes to consolidated condensed financial statements.
1
<PAGE> 4
RAYCHEM CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands except share data)
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, June 30,
1997 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 78,872 $ 86,583
Accounts receivable, net 338,280 339,142
Inventories:
Raw materials 93,603 82,008
Work in process 60,759 54,677
Finished goods 109,551 111,154
----------- -----------
Total inventories 263,913 247,839
Prepaid taxes 50,109 42,998
Other current assets 95,078 89,541
----------- -----------
Total current assets 826,252 806,103
Property, plant, and equipment 1,139,783 1,118,677
Less accumulated depreciation and amortization 669,056 645,229
----------- -----------
Net property, plant, and equipment 470,727 473,448
Deferred tax assets 130,101 136,325
Other assets 97,871 93,384
----------- -----------
TOTAL ASSETS $ 1,524,951 $ 1,509,260
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 106,378 $ 54,063
Accounts payable 81,992 88,625
Other accrued liabilities 149,131 190,596
Income taxes 63,233 40,598
Current maturities of long-term debt 5,173 5,752
----------- -----------
Total current liabilities 405,907 379,634
Long-term debt 157,150 164,004
Deferred tax liabilities 25,392 25,827
Other long-term liabilities 87,739 86,017
Minority interests 9,112 8,759
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: 150,000,000 shares
Issued: 90,040,010 and 90,089,030 shares,
respectively 90,040 90,089
Additional contributed capital 366,017 368,164
Retained earnings 623,992 540,623
Currency translation (24,169) (9,336)
Treasury Stock, at cost (5,212,607 and 4,164,846
shares, respectively) (214,496) (143,106)
Other (1,733) (1,415)
----------- -----------
Total stockholders' equity 839,651 845,019
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,524,951 $ 1,509,260
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE> 5
RAYCHEM CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED DECEMBER 31, (in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 117,482 $ 125,155
Adjustments to reconcile net income to net cash
provided by operating activities:
Payments and non-cash items for restructurings and
divestitures (15,683) (8,752)
Net (gain) loss on disposal of property, plant, and equipment (1,199) 1,022
Gain on sale of investment -- (23,601)
Depreciation and amortization 41,160 40,481
Deferred income tax provision 457 2,551
Changes in certain assets and liabilities, net of effects
from restructuring and divestitures:
Accounts receivable (10,568) (10,654)
Inventories (21,336) (15,388)
Accounts payable and accrued liabilities (26,378) (27,321)
Income taxes 17,240 (6,645)
Other assets and liabilities 548 11,260
--------- ---------
Net cash provided by operating activities 101,723 88,108
--------- ---------
Cash flows from investing activities:
Investment in property, plant, and equipment (48,972) (32,483)
Disposition of property, plant, and equipment 8,329 16,039
Proceeds from sale of investments and other -- 27,538
Investment in, and advances to, investee (5,000) (7,500)
--------- ---------
Net cash (used in) provided by investing activities (45,643) 3,594
--------- ---------
Cash flows from financing activities:
Net proceeds from (payments of) short-term debt 55,019 (9,019)
Proceeds from long-term debt 1,691 11,384
Payments of long-term debt (6,458) (124,403)
Common Stock repurchased (135,964) (76,437)
Common Stock issued 36,734 30,223
Proceeds from repayments of stockholder notes receivable 336 101
Cash dividends (12,008) (8,971)
--------- ---------
Net cash used in financing activities (60,650) (177,122)
--------- ---------
Effect of exchange rate changes on cash
and cash equivalents (3,141) (1,752)
--------- ---------
Decrease in cash and cash equivalents (7,711) (87,172)
Cash and cash equivalents at beginning of period 86,583 224,115
--------- ---------
Cash and cash equivalents at end of period $ 78,872 $ 136,943
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest (net of amounts capitalized) $ 7,268 $ 5,594
Income taxes (net of refunds) 21,657 24,857
</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, 1997 and 1996, the financial position as of
December 31, 1997, and the cash flows for the six months ended December 31, 1997
and 1996. The June 30, 1997 balance sheet is derived from the consolidated
financial statements included in the company's Annual Report on Form 10-K for
the year ended June 30, 1997. The results of operations for the three and six
months ended December 31, 1997, 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 1998 financial statement presentation.
COMMON STOCK
On November 7, 1997, the stockholders approved an increase in the authorized
Common Stock to 150,000,000 shares and a two-for-one stock split of the
company's outstanding Common Stock. The record date of the stock split was the
close of business on November 17, 1997, and the distribution date was December
3, 1997. All share and per share data (including information regarding share
repurchases) in these consolidated condensed financial statements and notes have
been restated to reflect the stock split.
BUSINESS SEGMENTS
Revenues and operating income by business segment are as follows:
<TABLE>
<CAPTION>
(in thousands)
------------------------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------- --------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Electronics OEM components $ 203,334 $ 185,148 $ 403,237 $ 362,069
Telecommunications and
energy networks 191,691 184,721 382,927 374,668
Commercial and industrial
infrastructure 72,092 71,178 135,984 134,621
--------- --------- --------- ---------
Total revenues $ 467,117 $ 441,047 $ 922,148 $ 871,358
========= ========= ========= =========
Operating income
Electronics OEM components $ 38,218 $ 36,530 $ 79,907 $ 72,595
Telecommunications and
energy networks 41,404 35,224 91,594 79,402
Commercial and industrial
infrastructure 19,772 16,484 34,440 29,360
Corporate group expense (21,294) (20,974) (39,427) (42,519)
--------- --------- --------- ---------
Total operating income $ 78,100 $ 67,264 $ 166,514 $ 138,838
========= ========= ========= =========
</TABLE>
4
<PAGE> 7
EARNINGS PER SHARE
The company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (FAS 128) during the second quarter of 1998. The statement
simplifies the standards for computing earnings per share (EPS) previously
defined in Accounting Principles Board Opinion No. 15, "Earnings Per Share" (APB
15) and makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the financial
statements for all entities with complex capital structures. Basic EPS excludes
dilution and is computed by dividing net income available to common stockholders
(numerator) by the weighted-average number of common shares outstanding
(denominator) for the period. Diluted EPS is computed similarly to fully diluted
EPS under APB 15.
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
-----------------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- -----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income available to
stockholders (numerator) $ 55,961 $ 52,435 $117,482 $125,155
======== ======== ======== ========
Shares Calculation (denominator):
Average shares outstanding-basic 85,147 89,481 85,349 89,542
Effect of Dilutive Securities:
Potential Common Stock
relating to stock options and
employee stock purchase plan 1,938 2,724 2,161 2,694
-------- -------- -------- --------
Average shares outstanding-
assuming dilution 87,085 92,205 87,510 92,236
======== ======== ======== ========
Earnings per share-basic $ 0.66 $ 0.59 $ 1.38 $ 1.40
======== ======== ======== ========
Earnings per share-assuming dilution $ 0.64 $ 0.57 $ 1.34 $ 1.36
======== ======== ======== ========
</TABLE>
Options to purchase 1,965,000 shares of Common Stock ranging between $46 and $48
per share were outstanding during the quarter ended December 31, 1997 but were
not included in the computation of diluted EPS because the options' exercise
price was greater than the average market price of the common shares. The
options expire between August 2007 and December 2007.
FINANCIAL INSTRUMENTS
Net gains and losses from forward exchange contracts used to cover receivables
and payables totaled a $5.2 million gain and a $0.1 million loss for the three
months ended December 31, 1997 and 1996, respectively. Net gains and losses from
forward exchange contracts totaled a $7.2 million gain and a $0.4 million loss
for the six months ended December 31, 1997 and 1996, respectively. The company
incurred total net foreign exchange losses of $0.2 million and $0.8 million for
the three months ended December 31, 1997 and 1996, respectively. Total net
foreign exchange losses were $0.6 million and $1.3 million for the six months
ended December 31, 1997 and 1996, respectively. These realized and unrealized
gains and losses are included in
5
<PAGE> 8
"Other expense (income), net." The total amount of foreign exchange exposure
covered was $124 million at December 31, 1997. The company covers exposures that
arise from trade and intercompany receivables and payables, intercompany loans
in non-functional currencies, and net monetary assets in certain foreign
countries with the US dollar as functional currency. These exposures are
primarily in Japanese yen (24% of net contract value), Belgian francs (14%),
French francs (11%), and Italian lire (11%).
The company does not cover 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, 1997
included $5 million in net intercompany payables in non-functional currencies
and $6 million in net monetary assets in foreign countries with the US dollar as
functional currency.
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."
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, 1997 was $9 million. Gross unrealized
gains were $4 million as of December 31, 1997 and are included as a component of
"Stockholders' equity."
RESTRUCTURING AND DIVESTITURES
The company incurred a pretax restructuring charge of $53 million in the third
quarter of 1997 to implement several streamlining programs and eliminate
approximately 500 positions (the 1997 restructuring). Approximately $36 million
of the 1997 restructuring charge is cash in nature and is expected to be funded
through operating cash flow. The remaining $17 million represents asset
writedowns of inventory, facilities, and machinery and equipment related to
discontinued products and consolidation of manufacturing and distribution
activities. As a result of the 1997 restructuring, approximately 335 employees
have separated from the company as of December 31, 1997. The 1997 restructuring
is expected to be substantially completed by the end of the current fiscal year.
The following table, which includes the 1997 restructuring as well as prior
restructurings, sets forth the company's restructuring reserves as of December
31, 1997:
<TABLE>
<CAPTION>
(in thousands)
Restructuring Reserves
-----------------------------------------------------------------------
Employee Asset
Costs Writedowns Leases Other Total
--------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Reserve Balances,
June 30, 1997 $ 32,019 $ 1,836 $ 671 $ 305 $ 34,831
Cash payments (12,821) -- (646) (472) (13,939)
Non-cash items (1,886) -- (25) 167 (1,744)
-------- -------- -------- -------- --------
RESERVE BALANCES,
DECEMBER 31, 1997 $ 17,312 $ 1,836 $ 0 $ 0 $ 19,148
======== ======== ======== ======== ========
</TABLE>
6
<PAGE> 9
REPURCHASE OF COMMON STOCK
During the six months ended December 31, 1997, the company repurchased 2,900,000
shares of the company's Common Stock and reissued 1,852,239 shares, leaving
5,212,607 shares in treasury stock at December 31, 1997.
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. Legal proceedings tend to
be unpredictable and costly and may be affected by events outside the control of
the company. The company maintains various levels of insurance to apply to
certain product liability and other claims in excess of deductibles. There is no
assurance that litigation will not have an adverse effect on the company's
financial position or results of operations.
Currently, the company's principal product liability litigation involves a
variety of claims arising from the company's heat-tracing and freeze-protection
products. 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 also sells other products into
applications (including, for example, interconnection products such as wire,
cable, heat-shrinkable tubing, marking systems, connectors, and other devices
for aerospace and automotive markets) where product liability issues could be
material. Effective March 31, 1996, the company increased its insurance
deductible for heat-tracing products. The company's insurance deductible for
claims arising from events prior to March 31, 1996, and for non-heat-tracing
product liability claims, remains unchanged.
The company's major litigation matters as of December 31, 1997, are described
below. These and certain other litigation matters with which the company is
involved were more fully described in the company's annual report on Form 10-K
filed with the Securities and Exchange Commission (SEC), as updated in
subsequent reports filed with the SEC.
The company is a defendant in a product liability case in the United States
District Court in Seattle, All Alaskan Seafoods, Inc., et al. v. Raychem
Corporation, Minnesota Mining and Manufacturing Corporation and Marine Electric,
Inc., et al. The action arises out of a cargo vessel fire allegedly caused by a
heat-tracing product. The plaintiffs in this case are seeking in excess of $150
million in damages. On November 21, 1997, the District Court granted the
company's motion to limit damages claimed by the plaintiffs to the value of the
cargo lost or destroyed and certain other incidental claims of crew members (now
alleged to be approximately $4 million) on account of the incident giving rise
to the plaintiffs' claims. A motion for reconsideration filed by the plaintiffs
has been denied by the District Court. Plaintiff's motion for clarification on
the issue of what claimed damages remain in the case is pending before the
court. The company believes that it has meritorious defenses to the claims
asserted in this case and intends to defend itself vigorously in this matter.
Four separate state actions based on essentially the same facts, alleging
wrongful distributor termination and antitrust claims, have been consolidated in
the Superior Court of San Mateo County, California, Unit Process Company, et al.
v. Raychem Corporation, et al. The dismissal in the United States District
Court, Northern District of California, of an action alleging essentially the
same facts was affirmed by the Ninth Circuit Court of Appeals in 1996. A motion
to dismiss the state claims is pending. The company believes that it has
meritorious defenses to the claims asserted in this case and intends to defend
itself vigorously in this matter.
On December 19, 1994, the company filed an action, Raychem Corporation and
Thermacon, Inc. v. Steven D. Hogge, Bourns, Inc., et al. in the Superior Court
of the State of California, County of San Mateo, based on alleged
misappropriation of trade secrets by a former employee of the company and
Bourns. The company is seeking monetary damages from Bourns based on this claim
of trade secret misappropriation. On May 2, 1995, Bourns filed a responsive
action entitled Bourns, Inc. v. Raychem Corporation, in the
7
<PAGE> 10
United States District Court, Central District of California, which action
currently alleges antitrust and RICO claims against the company. Bourns claims
substantial monetary damages in amounts which would be material to the company.
The claims asserted in the company's trade secret misappropriation action will
be tried with the federal antitrust and RICO action in a trial currently
scheduled for May 1998. The company believes that it has meritorious claims and
defenses in these cases. The company intends to vigorously litigate this matter.
Additionally, the company has been named, among others, as a potentially
responsible party in an administrative proceeding alleging that it may be liable
for the costs of correcting environmental conditions at a certain hazardous
waste site. At this site, 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 this site.
SUBSEQUENT EVENTS
On January 15, 1998, the company's Board of Directors increased the regular
quarterly dividend to $0.08 per share payable on March 11, 1998, to stockholders
of record as of February 11, 1998.
In July 1997, the board of directors authorized company's management, at its
discretion, to repurchase up to $300 million of the company's stock during any
fiscal year. Shares repurchased under the board of director's authorization are
used to offset the dilution caused by the company's employee stock purchase and
stock option plans. Between January 1, 1998 and February 12, 1998, the company
has repurchased 1,110,000 shares of the company's Common Stock for $41 million.
The company has utilized a portion of its committed borrowing facilities to
partially finance these share repurchases.
8
<PAGE> 11
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) 1997 1996 1997 1996
=========================================================================================
<S> <C> <C> <C> <C>
Revenues $467 $441 $922 $871
- -----------------------------------------------------------------------------------------
"Ongoing" pretax income $ 75 $ 68 $157 $133
Severance and plant consolidation costs - (6) - (6)
Gain on sale of assets - - - 23
- -----------------------------------------------------------------------------------------
Pretax income $ 75 $ 62 $157 $151
Provision for income taxes 19 10 39 26
- -----------------------------------------------------------------------------------------
Net income $ 56 $ 52 $117 $125
- -----------------------------------------------------------------------------------------
</TABLE>
Revenues for the three months ended December 31, 1997 (second quarter of 1998)
were $467 million, up 6% from revenues of $441 million for the year-ago quarter.
Ongoing pretax income for the second quarter of 1998 was $75 million, up 10%
from $68 million in the prior year quarter, reflecting higher sales volume and
productivity improvements, which more than offset adverse impacts of currency
movements. Pretax income would have been $8 million higher if exchange rates had
remained unchanged from the prior year.
Net income for the second quarter of 1998 was $56 million, up 8% from $52
million in the prior year quarter. The increase in pretax income in the second
quarter of 1998 was partially offset by a higher estimated annual effective tax
rate of 25% in 1998 compared to 17% in 1997.
Ongoing pretax income for the six months ended December 31, 1997 (the first six
months of 1998) increased to $157 million, up 18% from $133 million for the six
months ended December 31, 1996 (the first six months of 1997). Net income for
the first six months of 1998 declined to $117 million from $125 million in the
comparable period in 1997. Net income in 1997 included a pre-tax gain of $23
million related to the sale of intellectual property. Additionally, the increase
in ongoing operating income in 1998 was partially offset by a higher estimated
annual effective tax rate of 25% in 1998 compared to 17% in 1997.
9
<PAGE> 12
REVENUES AND REVENUE GROWTH
Revenues for the second quarter of 1998 were $467 million, up 6% from revenues
of $441 million for the year-ago quarter. The revenue growth as reported was
adversely impacted by the continuing strength of the US Dollar, which
appreciated by approximately 10 to 15% against the Yen and most European
currencies between the second quarter of 1997 and the second quarter of 1998.
Revenue growth would have been 11% over the prior year quarter had exchange
rates remained unchanged.
Revenues were also impacted by price reductions in some product lines due to
volume discounts and competitive pressures, as shown in the table below.
<TABLE>
<CAPTION>
(percent change over prior year period)
=================================================================================================
Three months ended Six months ended
December 31, 1997 December 31, 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Components of reported revenue growth:
Growth in volumes,
net of product mix changes 14% 14%
Effect of price reductions(a) (3%) (3%)
- ------------------------------------------------------------------------------------------------
Constant currency revenue growth 11% 11%
Effect of exchange rate changes (5%) (5%)
- ------------------------------------------------------------------------------------------------
Total reported revenue growth 6% 6%
- -------------------------------------------------------------------------------------------------
</TABLE>
(a) A management estimate based on changes in revenues at constant volume and
mix
During the second quarter of 1998, revenues grew on a constant currency basis
across all major geographic regions with 15% growth in North America, 9% in
Europe, 5% in Asia and 18% growth in the rest of the world where strong
increases in revenues from sales in Latin America were partially offset by
revenue decreases in other markets. Shipments to Asian customers, as compared to
the year-ago quarter, were affected by weaker economic conditions, particularly
in Korea and Japan.
GROSS PROFIT AND OPERATING EXPENSES
<TABLE>
<CAPTION>
====================================================================================================
Three months ended Six months ended
December 31, December 31,
(percent of revenues) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross profit 49% 51% 50% 51%
- ----------------------------------------------------------------------------------------------------
Selling, general, and administrative
(SG&A) expense 27% 29% 26% 28%
- ----------------------------------------------------------------------------------------------------
Research and development
(R&D) expense 6% 7% 6% 7%
- ----------------------------------------------------------------------------------------------------
</TABLE>
Gross profit as a percent of revenues declined to 49% in the second quarter of
1998 from 51% in the prior year quarter. The decline was principally due to a
shift in mix to the company's newer product lines, some of which currently have
lower margins than the corporate average, and to unfavorable currency movements,
which more than offset the favorable impacts of manufacturing yield
improvements.
10
<PAGE> 13
SG&A expense as a percent of revenues declined to 27% in the second quarter of
1998 from 29% in the prior year quarter. The decrease in SG&A was a result of
the 1997 restructuring program to streamline the company's operations and to
reduce operating costs. Additionally, severance and plant consolidation costs in
the amount of $5 million were incurred in the second quarter of 1997.
PROVISION FOR INCOME TAXES
The estimated annual effective tax rate was 25% during the second quarter of
1998, up from 17% during the prior year quarter. The higher estimated annual
effective tax rate for 1998 is primarily attributable to lower US tax benefits
and a change in the geographic mix of the company's earnings.
SEGMENT OPERATIONS
The following discussion of the results of operations is based on the company's
business segments--electronics OEM components, telecommunications and energy
networks, and commercial and industrial infrastructure.
Electronics OEM components
<TABLE>
<CAPTION>
===========================================================================================
(dollars in millions) Three months ended Six months ended
December 31, December 31,
1997 1996 1997 1996
===========================================================================================
<S> <C> <C> <C> <C>
Revenues $203 $185 $403 $362
- -------------------------------------------------------------------------------------------
Constant currency revenue growth 15% 19% 16% 17%
- -------------------------------------------------------------------------------------------
Operating income $ 38 $ 37 $ 80 $ 73
- -------------------------------------------------------------------------------------------
</TABLE>
Second quarter revenues for the electronics OEM components segment were $203
million, up 15% on a constant currency basis from the year-ago quarter. Revenues
from the sale of interconnection products, including wire, cable,
heat-shrinkable tubing, marking systems, connectors, and other devices, grew to
$121 million, up 11% on a constant currency basis from the year-ago quarter.
Strong growth in automotive, transportation and commercial markets more than
offset declines in sales to defense customers. Revenues from the sale of circuit
protection products (PolySwitch(R) devices) were $58 million, up 23% on a
constant currency basis from the prior year quarter. Growth in the sales of
PolySwitch devices slowed in Japan, but was more than offset by increasing sales
in the rest of Asia and further penetration of the commercial electronics
markets in Europe. Revenues from the sale of touchscreen products grew to $24
million, up 12% on a constant currency basis, reflecting slower sales in Japan.
Operating income for the second quarter of 1998 was $38 million compared to $37
million in the prior year's second quarter. The increase in operating income was
mainly due to higher sales volume, which offset the effects of price reductions
in some of the segment's product lines and the adverse effects of currency
movements. This segment's operating income reflected the majority of the
company's negative pretax currency effect.
Revenues for the first six months of 1998 were $403 million, up 16% on a
constant currency basis from the first six months of 1997. Operating income for
the first six months of 1998 was $80 million compared to $73 million in the
first six months of 1997.
11
<PAGE> 14
Telecommunications and energy networks
<TABLE>
<CAPTION>
==========================================================================================
(dollars in millions) Three months ended Six months ended
December 31, December 31,
1997 1996 1997 1996
==========================================================================================
<S> <C> <C> <C> <C>
Revenues $192 $185 $383 $375
- ------------------------------------------------------------------------------------------
Constant currency revenue growth 9% 1% 8% 1%
- ------------------------------------------------------------------------------------------
Operating income $ 41 $ 35 $ 92 $ 79
- ------------------------------------------------------------------------------------------
</TABLE>
Second quarter revenues for the telecommunications and energy networks segment
were $192 million, up 9% on a constant currency basis from the year-ago quarter.
Revenues from the sale of telecommunications products, including copper- and
fiber-based network accessories and access network electronics products
(Miniplex(R) products), grew to $122 million, up 11% on a constant currency
basis from the year-ago quarter. Revenues from the sale of Miniplex products
grew sharply, driven by strong demand in North America. Copper-related product
sales declined as growth in North and Latin America was more than offset by
lower revenues elsewhere. Sales of energy network products were $70 million, up
5% on a constant currency basis. European sales levels improved, led by growing
demand in Eastern European countries that are upgrading their electrical
distribution systems.
Operating income for the second quarter of 1998 was $41 million, up from $35
million in the prior year quarter. The improvement in operating income was
mainly due to higher sales volume, which more than offset price reductions in
some of the segment's product lines.
Revenues for the first six months of 1998 were $383 million, up 8% on a constant
currency basis from the first six months of 1997. Operating income for the first
six months of 1998 was $92 million compared to $79 million in the first six
months of 1997, primarily reflecting higher sales volume and reduced spending,
which more than offset the effects of price reductions.
Commercial and industrial infrastructure
<TABLE>
<CAPTION>
==========================================================================================
(dollars in millions) Three months ended Six months ended
December 31, December 31,
1997 1996 1997 1996
==========================================================================================
<S> <C> <C> <C> <C>
Revenues $72 $71 $136 $135
- ------------------------------------------------------------------------------------------
Constant currency revenue growth 8% 8% 9% 6%
- ------------------------------------------------------------------------------------------
Operating income $20 $16 $ 34 $ 29
- ------------------------------------------------------------------------------------------
</TABLE>
Second quarter revenues from the sale of electric heat-tracing and corrosion
prevention products were $72 million, up 8% on a constant currency basis from
the year-ago quarter. The increase in revenues was primarily attributable to
strong project business and to continuing gains in expanded distribution
channels. Operating income for the second quarter of 1998 was $20 million
compared to $16 million in the same period in 1997. The improvement in operating
income was primarily driven by higher sales volume and reduced spending, which
more than offset the adverse impact of currency movements.
Revenues for the first six months of 1998 were $136 million, up 9% on a constant
currency basis from the first six months of 1997. Operating income for the first
six months of 1998 was $34 million compared to $29 million in the first six
months of 1997.
12
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
The company's financial position continues to be strong. At December 31, 1997
the company had $79 million in cash and cash equivalents and $501 million in
unused credit facilities, of which $377 million are committed facilities. The
company also has an effective shelf registration statement on file with the
Securities and Exchange Commission that enables it to issue up to $400 million
in debt securities. The combination of cash and cash equivalents, available
lines of credit, public debt issuance capabilities, and future cash flows from
operations is expected to be sufficient to satisfy substantially all of the
company's needs for anticipated capital expenditures, working capital, dividends
and share repurchases, and for potential acquisitions. The following table
presents certain measures of liquidity and capital resources:
<TABLE>
<CAPTION>
=========================================================================
(dollars in millions) DECEMBER 31, JUNE 30,
1997 1997
=========================================================================
<S> <C> <C>
Debt net of cash $190 $137
- -------------------------------------------------------------------------
Debt net of cash as a percent of
stockholders' equity 23% 16%
- -------------------------------------------------------------------------
Days sales outstanding (DSO) 63 59
- -------------------------------------------------------------------------
Days sales in inventory (DSI) 102 99
- -------------------------------------------------------------------------
</TABLE>
Debt net of cash was $190 million on December 31, 1997 up from $137 million on
June 30, 1997. The increase was primarily due to the repurchase of 2,900,000
shares of the company's Common Stock for $136 million, which more than offset
operating cash flow of $102 million.
The table below summarizes the company's cash flows from operating, investing,
and financing activities:
<TABLE>
<CAPTION>
============================================================================
(dollars in millions)
Six months ended December 31, 1997 1996
============================================================================
<S> <C> <C>
Cash provided by (used in):
Operating activities $102 $ 88
Investing activities (46) 4
Financing activities (61) (177)
Effect of exchange rate changes on cash
and cash equivalents (3) (2)
- ----------------------------------------------------------------------------
Decrease in cash and cash equivalents $ (8) $ (87)
- ----------------------------------------------------------------------------
</TABLE>
OPERATING ACTIVITIES
Cash provided by operating activities during the first six months of 1998
increased from the comparable period in the prior year, primarily due to
improved cash flows from ongoing pretax income, offset by increased payments for
severance liability, and increases in inventory.
INVESTING ACTIVITIES
Cash used in investing activities during the first six months of 1998 was $46
million, compared to $4 million of cash provided by investing activities in the
prior year period.
13
<PAGE> 16
Investments in property, plant and equipment were $49 million and $32 million
for the first six months of 1998 and 1997, respectively. Cash flows from
dispositions of property, plant and equipment were $8 million compared to $16
million in the prior year period.
In the second quarter of 1997, the company received $25 million from the sale of
a portfolio of patents and related intellectual property.
FINANCING ACTIVITIES
Cash used in financing activities decreased in comparison to the prior year
period. During the first six months of 1998, the company spent $136 million in
share repurchases compared to $76 million in the prior year period. Higher
spending on share repurchases was substantially offset by increased short-term
borrowings. Net proceeds from short-term debt were $55 million in the first six
months of 1998, compared to net payments of $9 million in the prior year period.
In the first quarter of 1997, the company prepaid the balance of a syndicated
term loan agreement, amounting to $118 million. In addition, in the first
quarter of 1997, the company replaced its $250 million four-year revolving
credit facility with a $400 million five-year revolving credit facility with
more favorable pricing and covenants than the previous facility.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Statements made in this management's discussion and analysis or elsewhere in
this quarterly report or other communications (including press releases and
analyst calls) that are not statements of historical fact are forward-looking
statements, including without limitation, those relating to anticipated product
and alliance plans, litigation matters, restructuring actions, expected tax
position, currency effects, dividends, profitability, and other financial,
economic, and growth-related commitments, targets, trends, 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 company is in the process of implementing a number of complex restructuring
actions. Implementation difficulties or market factors could reduce the
estimated benefit of these actions, and timelines could be longer than
anticipated. The company's revenues, operating results, and financial condition
could also be adversely affected by its ability to effectively manage the
transition to the new organizational structures, to continually improve
manufacturing processes and to outsource certain 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.
Approximately two-thirds of the company's revenues result from sales outside the
United States, a significant portion of which are denominated in foreign
currencies. In addition, the company has several production facilities located
outside the United States. The company's financial results therefore can be
affected by changes in foreign currency rates. To mitigate these effects, the
company hedges its transaction exposure (i.e., the effect on earnings and cash
flows of changes in foreign exchange rates on receivables and payables
denominated in foreign currencies). The company does not hedge its foreign
currency exposure in a manner that would entirely eliminate the effects of
changes in foreign exchange rates on the company's consolidated net income.
Accordingly, the company's reported revenue and net income have been and in the
future may be affected by changes in foreign exchange rates.
Although international markets provide the company with significant growth
opportunities, periodic economic downturns, changes in trade policies or
tariffs, political instability and fluctuations in exchange rates are all risks
which could adversely affect the company's financial results. During the second
quarter of 1998, revenues in Asia represented approximately 18% of total
revenues, which is consistent with prior period levels. With the current
deterioration of economic conditions in certain Asian countries, future results
in Asia will depend on the outcome of various efforts to stabilize these
economic conditions. Continuing economic
14
<PAGE> 17
recession in Asia may lead to the cancellation of orders, pricing pressures, the
increase of bad debts or other factors that might adversely affect the company's
overall performance in Asia.
In 1996, the company began an enterprisewide process reengineering and
information system implementation to redesign the company's supply chain and
other key business processes. This system will replace the company's core legacy
systems with a Year 2000 compliant fully integrated enterprisewide information
system. This project covers all of the company's major manufacturing sites and
sales locations and implementations are expected to continue for a number of
years. During the second half of 1998, the company is expected to complete the
implementation of the system for a major portion of its business in the US. The
change in systems and processes is substantial and therefore may cause initial
delays in order processing, shipments of products, invoicing and the
accumulation and analysis of financial data.
As outlined above, the company is in the process of replacing its existing core
legacy systems with a fully integrated enterprisewide information system that is
Year 2000 compliant. This system will not be fully implemented in all
geographies and divisions by the year 2000. However, the Company is taking steps
to adapt existing systems, as necessary, which will not be changed by the year
2000. Additionally, the company continues to conduct comprehensive reviews of
its remaining computer systems, products and infrastructure to determine the
work necessary to be Year 2000 compliant. The company intends to fund its effort
to become Year 2000 compliant through operating cash flows and is expensing
costs related to this transition as incurred. Although the company does not
expect that the Year 2000 problem will have a material adverse impact on its
financial position or results of operations, the risks associated with the Year
2000 problem are pervasive and complex. The company's vendors and customers may
also be affected by Year 2000 problems. Some risks may not be identified or
corrected in a timely manner to prevent adverse effects. The company will
continue to evaluate corrective actions to mitigate risks associated with the
Year 2000 problem.
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, 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 also sells other
products in markets where product liability issues could be material, for
example, interconnection products such as wire, cable, heat-shrinkable tubing,
marking systems, connectors, and other devices for aerospace and automotive
markets. Litigation tends to be unpredictable and costly and may be affected by
events outside the company's control. There is no assurance that litigation will
not have an adverse effect on the company's future financial position or results
of operations.
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 protects these rights and from time to time becomes involved in issues
of infringement or theft by third parties and related counterclaims, including
unfair competition or infringement claims, by such third parties. The company
has been involved, as both a defendant and a plaintiff, 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 future
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 certain
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 be available for all losses, will continue to be available to the
company under all circumstances at commercially reasonable rates or, if
available, will be adequate in amount.
15
<PAGE> 18
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 provision for income taxes is determined by the company's level of
profitability in each jurisdiction in which it is subject to tax. The geographic
distribution and level of profitability are difficult to predict and may vary
from forecasts, which could result in changes in estimates of the annual
effective tax rate and could cause the estimated annual effective tax rate in
interim quarters to vary from the actual annual effective tax rate for the 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 the likelihood of
generating sufficient future U.S. taxable income to utilize deductions and
credits prior to their expiration.
A portion of any future reduction in the valuation allowance would reduce the
income tax provision. A significant portion of the remaining valuation allowance
relates to deductions arising from the company's stock plans. Any reduction of
the valuation allowance related to stock plan deductions would be reported as an
increase to equity rather than as a reduction of the income tax provision.
The company anticipates an annual effective tax rate for 1998 in the mid-twenty
percent range, which reflects the elimination of the valuation allowance related
to U.S. deferred tax assets. The company does not expect to report a significant
discrete tax benefit in fiscal 1998 or thereafter. Commencing in fiscal 1999,
the company anticipates a normalized tax rate in the mid-thirty percent range.
The company has historically achieved part of its revenue growth by developing
or acquiring new and innovative materials science technologies and products. The
company remains committed to internal research and development efforts, and the
company will continue to pursue the acquisition of new or compatible
technologies and businesses as an important part of the company's growth
strategy. In addition, the company has entered, and in the future may enter,
into arrangements, including investments, 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 predictable and there can
be 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 financial or other consequences from these actions.
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.
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. Disruptions in the supply of raw materials and components can
adversely affect financial results.
The company's facilities are suitable for their respective uses and, in general,
are adequate to support the current and anticipated volume of business. In
recent quarters there have been occasional capacity constraints in a few of the
rapidly growing product lines. The company is reviewing various short- and
long-
16
<PAGE> 19
term measures to address these constraints. However, production constraints can
adversely affect the company's financial results.
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.
The company's products are sold in competition with other products or
technologies. The company's competitors include some of the largest companies in
the world, many of which have financial, technical, and other resources
substantially greater than the company's. Even when the company has strong
intellectual property protection for its products, its products face competition
from products based on other, sometimes lower cost, technologies. In some of the
company's markets, prices trend downward over time, requiring improvements in
manufacturing and design to remain competitive. In addition, operating results
are subject to fluctuations in demand and the seasonal activity of certain
product lines. The company also sells certain of its products to customers in
industries and countries that are experiencing periods of rapid change, which
can adversely affect demand for the company's products. For example, the
telecommunications industry is going through a period of rapid technological
change, and customers in this industry may delay purchases of the company's
products until technology issues are more clearly resolved. In addition, many
electric power utilities in foreign countries are being privatized, which may
affect the purchasing policies of these utility companies.
A shortfall in revenue could 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 the geographic or product
mix of sales 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. In addition, occurrences of any of
the foregoing risks discussed in this section could have an impact on cash flow.
From time to time the company identifies (for itself, its divisions, and its
strategic alliances) expectations, commitments, targets, trends, and goals
related to various product, financial, economic, and operating matters, such as
the company's growth, profitability, cash flow, capital spending, income
statement and balance sheet items, tax position, share repurchases and cash
dividends, currency movements, geographic trends, product plans, and alliances.
These expectations, commitments, targets, trends and goals are not projections
and there can be no assurance as to their accuracy. Whether these expectations,
commitments, targets, trends or goals will be fulfilled is subject to a variety
of factors including those listed above, and those appearing in documents filed
by the company with the Securities and Exchange Commission.
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, can 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.
17
<PAGE> 20
RAYCHEM CORPORATION
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On November 21, 1997, in the action entitled All Alaskan Seafoods, Inc., AAS-DMP
Management Partnership, L.P. by Kodiak Marine Protein, Inc., General Partner,
Holding Company Dalmoreproduct, Sandra Kegley, and Shin Nihon Global Co., Ltd.
v. Raychem Corporation, et al., currently pending in the United States District
Court, Western District of Washington, the District Court granted the company's
motion to limit damages claimed by the ship owner plaintiff to the value of the
cargo lost or destroyed and certain other incidental claims of crew members (now
alleged to be approximately $4 million) on account of the incident giving rise
to the plaintiffs' claims. The plaintiffs' motion for reconsideration was denied
by the District Court. A motion for clarification is presently pending before
the Court. Information about this lawsuit was disclosed in the company's annual
report on Form 10-K for the year ended June 30, 1997.
On December 18, 1997, in the action entitled Bow Valley, et al. v. Saint John
Shipbuiding and Raychem, the Supreme Court of Canada issued its decision on the
plaintiff's appeal from the decision of the Court of Appeal in this case. In its
decision, the Supreme Court upheld the lower court's dismissal of the
plaintiffs' claim for pure economic loss. The Supreme Court, however, also
absolved Saint John Shipbuilding of any liability, which increased the company's
share of liability for the plaintiffs' property damage claim from 20% to 40%, or
approximately $1.5 million in total. This amount is covered by insurance.
Information about this lawsuit was disclosed in the company's annual report on
Form 10-K for the year ended June 30, 1997.
In the private cost recovery action entitled Members of the GBF/Pittsburg
Landfill(s) Respondents Group v. Contra Costa Waste Service, Inc., et al.,
pending in the U.S. District Court for the Northern District of California, the
company and plaintiffs have entered into a settlement agreement providing for a
payment by the company in the amount of $15,000. This settlement is contingent
upon its approval by the District Court. Information about this lawsuit was
disclosed in the company's annual report on Form 10-K for the year ended June
30, 1997.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE
(a) On November 7, 1997, the company held its Annual Meeting of Stockholders.
(b) The following Directors were elected:
<TABLE>
<CAPTION>
Votes
Name Votes For Withheld
---- --------- --------
<S> <C> <C>
Richard Dulude 35,825,909 96,727
James F. Gibbons 35,825,670 96,965
Richard A. Kashnow 35,818,026 104,609
John P. McTague 35,819,901 102,735
Dean O. Morton 35,830,712 91,923
Isaac Stein 35,817,022 105,613
Chang-Lin Tien 35,815,876 106,759
Cyril J. Yansouni 35,823,677 98,959
</TABLE>
18
<PAGE> 21
(c) The following other matters were voted upon:
1. Approval of amendment to the company's Amended and Restated
Certificate of Incorporation to effect a two-for-one split of the
company's Common Stock and to increase the number of shares of
Common Stock authorized for issuance to 150,000,000.
<TABLE>
<S> <C>
Affirmative Votes: 35,833,715
Negative Votes: 47,786
Abstentions: 41,134
</TABLE>
2. 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 1998 fiscal year.
<TABLE>
<S> <C>
Affirmative Votes: 35,841,696
Negative Votes: 18,798
Abstentions: 62,141
</TABLE>
ITEM 5: OTHER INFORMATION
In the calculation of the ratio of earnings to fixed charges, "earnings" consist
of income before income taxes, adjusted to add back fixed charges (excluding
capitalized leases). "Fixed charges" consist of interest on all indebtedness,
including both amounts expensed and amounts capitalized. A table setting forth
the computation of the Ratio of Earnings to Fixed Charges for each of the five
years in the period ended June 30, 1997, and for the six months ended December
31, 1997, is included in this filing as Exhibit 12. The company's ratio of
earnings to fixed charges for the six months ended December 31, 1997, was 13.98.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
3(a) Certificate of Amendment of Amended and Restated
Certificate of Incorporation
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None.
19
<PAGE> 22
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, 1998 /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)
20
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
3 (a) Certificate of Amendment of Amended of Restated
Certificate of Incorporation
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 3(a)
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
Raychem Corporation, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, DOES
HEREBY CERTIFY:
FIRST, that at a meeting of the Board of Directors of Raychem
Corporation held on August 15, 1997, resolutions were duly adopted setting forth
a proposed amendment of the Amended and Restated Certificate of Incorporation of
the corporation, declaring the amendment to be advisable and authorizing the
corporation to submit such amendment to the stockholders of the corporation at
the next meeting of the stockholders of the corporation for consideration and
approval of the proposed amendment. The resolution setting forth the text of the
proposed amendment is as follows:
Article 4 of the Amended and Restated Certificate of
Incorporation is amended to read as follows:
Paragraph A shall be replaced and amended to read as follows:
A. Authorized capital. The Corporation is authorized to
issue one hundred sixty five million shares of stock
(165,000,000) divided into two classes of shares of stock,
one class designated "common," the other designated
"preferred." The total number of common shares authorized
is one hundred fifty million (150,000,000), each such
share to have par value of $1.00. The total number of
preferred shares authorized is fifteen million
(15,000,000), each such share to have par value of $1.00.
Upon the effectiveness of the Amendment of Amended and
Restated Certificate of Incorporation, including this
sentence, each share of Common Stock then outstanding
shall be subdivided into two shares of Common Stock.
Paragraph B, subparagraph (1) shall be replaced and amended to
read as follows:
(1) General. There is hereby authorized a series of common
shares which shall be designated and known as Common Stock
(the "Common Stock").
<PAGE> 2
The number of shares constituting Common Stock shall be
one hundred fifty million (150,000,000).
SECOND, that said Amendment of Amended and Restated Certificate
of Incorporation was duly adopted in accordance with the provisions of Section
242 of the General Corporation Law of the State of Delaware.
THIRD, the Amendment of the Amended and Restated Certificate of
Incorporation provided herein shall become effective at 5:00 p.m. Eastern
Standard Time on November 17, 1997.
IN WITNESS WHEREOF, Raychem Corporation has caused this
Certificate of Amendment to be signed by Richard A. Kashnow, its President,
Chief Executive Officer, and Chairman of the Board, this 7th day of November,
1997.
/s/ Richard A. Kashnow
---------------------------------------
Richard A. Kashnow
President, Chief Executive Officer, and
Chairman of the Board
<PAGE> 1
Exhibit 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
----------------- -------------------------------------------------------------------------
1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income before income taxes,
extraordinary item, and change
in accounting principle $ 156,642 $ 227,740 $ 146,130 $ (270) $ 33,745 $ 39,584
add:
Interest expense 8,063 12,455 19,216 20,434 22,318 26,991
Portion of rents representative
of interest factor (a) 3,979 9,804 11,550 11,550 12,870 12,870
Equity in net losses of Ericsson
Raynet joint venture -- -- 29,818 85,946 -- --
less:
Capitalized interest (338) (393) (660) (724) (1,172) (362)
--------- --------- --------- --------- --------- ---------
Income as adjusted $ 168,346 $ 249,606 $ 206,054 $ 116,936 $ 67,761 $ 79,083
========= ========= ========= ========= ========= =========
Fixed Charges:
Interest expense $ 8,063 $ 12,455 $ 19,216 $ 20,434 $ 22,318 $ 26,991
Portion of rents representative
of interest factor (a) 3,979 9,804 11,550 11,550 12,870 12,870
Debt prepayment penalty (b) -- -- -- 7,814 -- --
--------- --------- --------- --------- --------- ---------
Fixed Charges $ 12,042 $ 22,259 $ 30,766 $ 39,798 $ 35,188 $ 39,861
========= ========= ========= ========= ========= =========
Ratio of earnings to fixed charges 13.98 11.21 6.70 2.94 1.93 1.98
========= ========= ========= ========= ========= =========
</TABLE>
(a) Calculated as approximately one-third of rental expense, representing a
reasonable approximation of such rentals attributable to interest.
(b) Represents effective interest charged on the early retirement of debt.
Recorded as an extraordinary loss on the income statement.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AS OF AND FOR THE PERIOD ENDED
DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 78,872
<SECURITIES> 8,599
<RECEIVABLES> 347,842
<ALLOWANCES> 9,562
<INVENTORY> 263,913
<CURRENT-ASSETS> 826,252
<PP&E> 1,139,783
<DEPRECIATION> 669,056
<TOTAL-ASSETS> 1,524,951
<CURRENT-LIABILITIES> 405,907
<BONDS> 157,150
0
0
<COMMON> 90,040
<OTHER-SE> 749,611
<TOTAL-LIABILITY-AND-EQUITY> 1,524,951
<SALES> 919,049
<TOTAL-REVENUES> 922,148
<CGS> 462,622
<TOTAL-COSTS> 464,082
<OTHER-EXPENSES> 55,512
<LOSS-PROVISION> 1,654
<INTEREST-EXPENSE> 5,670
<INCOME-PRETAX> 156,642
<INCOME-TAX> 39,160
<INCOME-CONTINUING> 117,482
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 117,482
<EPS-PRIMARY> $1.38
<EPS-DILUTED> $1.34
</TABLE>
