<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 MARCH 31, 1998
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 April 21, 1998, the registrant had outstanding 83,834,984 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 nine months ended March 31, 1998 and 1997 1
Consolidated Condensed Balance Sheet at
March 31, 1998 and June 30, 1997 2
Consolidated Condensed Statement of Cash Flows for
the nine months ended March 31, 1998 and 1997 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 19
Item 5: Other Information 19
Item 6: Exhibits and Reports on Form 8-K 20
SIGNATURES 21
</TABLE>
<PAGE> 3
RAYCHEM CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ ------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $445,162 $427,878 $1,367,310 $1,299,236
Cost of goods sold 232,558 218,996 696,640 643,753
Research and development expense 26,091 28,905 81,603 88,492
Selling, general, and administrative
expense 117,776 117,762 353,816 365,938
Provision for restructuring and
divestitures -- 52,812 -- 52,812
Loss on minority investment 11,973 -- 11,973 --
Interest expense, net 3,831 675 9,501 2,860
Other expense (income), net 179 440 4,381 (13,696)
----------- ----------- ----------- -----------
Income before income taxes 52,754 8,288 209,396 159,077
Provision (benefit) for income taxes 13,189 (60,165) 52,349 (34,531)
----------- ----------- ----------- -----------
Net income $ 39,565 $ 68,453 $ 157,047 $ 193,608
=========== =========== =========== ===========
Earnings per share-basic(a) $ 0.47 $ 0.76 $ 1.85 $ 2.16
=========== =========== =========== ===========
Earnings per share-assuming
dilution(a) $ 0.46 $ 0.74 $ 1.81 $ 2.10
=========== =========== =========== ===========
Dividends per share(a) $ 0.08 $ 0.07 $ 0.22 $ 0.17
=========== =========== =========== ===========
Average number of shares
outstanding-basic(a) 84,143 89,488 84,952 89,524
=========== =========== =========== ===========
Average number of shares
outstanding-assuming dilution(a) 85,878 92,271 86,970 92,248
=========== =========== =========== ===========
</TABLE>
(a) Adjusted for a two-for-one stock split effective November 17, 1997.
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)
MARCH 31, 1998 June 30, 1997
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 96,903 $ 86,583
Accounts receivable, net 339,979 339,142
Inventories:
Raw materials 91,068 82,008
Work in process 61,883 54,677
Finished goods 125,764 111,154
----------- -----------
Total inventories 278,715 247,839
Prepaid taxes 59,083 42,998
Other current assets 86,787 89,541
----------- -----------
Total current assets 861,467 806,103
Property, plant, and equipment 1,146,869 1,118,677
Less accumulated depreciation and amortization 673,501 645,229
----------- -----------
Net property, plant, and equipment 473,368 473,448
Deferred tax assets 129,711 136,325
Other assets 107,330 93,384
----------- -----------
TOTAL ASSETS $1,571,876 $1,509,260
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 152,287 $ 54,063
Accounts payable 89,322 88,625
Other accrued liabilities 147,747 190,596
Income taxes 65,575 40,598
Current maturities of long-term debt 5,024 5,752
----------- -----------
Total current liabilities 459,955 379,634
Long-term debt 157,865 164,004
Deferred tax liabilities 27,343 25,827
Other long-term liabilities 95,632 86,017
Minority interests 9,298 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: 90,034,351 and 90,089,030 shares, respectively 90,034 90,089
Additional contributed capital 365,796 368,164
Retained earnings 653,153 540,623
Currency translation (30,036) (9,336)
Treasury Stock, at cost (6,245,013 and 4,164,846
shares, respectively) (255,745) (143,106)
Other (1,419) (1,415)
----------- -----------
Total stockholders' equity 821,783 845,019
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,571,876 $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>
- ----------------------------------------------------------------------------------------------------
NINE MONTHS ENDED MARCH 31, (in thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $157,047 $193,608
Adjustments to reconcile net income to net cash
provided by operating activities:
(Payments and non-cash items) provision, net of payments,
for restructurings and divestitures (20,295) 39,744
Loss on minority investment 11,973 --
Net gain on sale of intellectual property and other assets (896) (21,743)
Depreciation and amortization 61,049 58,757
Deferred income tax provision (credit) 3,243 (65,850)
Changes in certain assets and liabilities, net of effects
from restructuring and divestitures:
Accounts receivable (15,828) (18,972)
Inventories (38,563) (17,065)
Accounts payable and accrued liabilities (13,572) (16,803)
Income taxes 17,985 (7,009)
Other assets and liabilities 2,592 12,205
--------- ---------
Net cash provided by operating activities 164,735 156,872
--------- ---------
Cash flows from investing activities:
Investment in property, plant, and equipment (77,133) (57,945)
Disposition of property, plant, and equipment 8,347 16,428
Proceeds from sale of investments and other -- 27,538
Investment in, and advances to, investee (15,300) (7,500)
--------- ---------
Net cash used in investing activities (84,086) (21,479)
--------- ---------
Cash flows from financing activities:
Net proceeds from (payments of) short-term debt 101,367 (6,049)
Proceeds from long-term debt 2,450 11,611
Payments of long-term debt (6,651) (134,006)
Common Stock repurchased (192,033) (128,351)
Common Stock issued 47,348 52,577
Proceeds from repayments of stockholder notes receivable 431 374
Cash dividends (18,752) (15,270)
--------- ---------
Net cash used in financing activities (65,840) (219,114)
--------- ---------
Effect of exchange rate changes on cash
and cash equivalents (4,489) (6,739)
--------- ---------
Increase (decrease) in cash and cash equivalents 10,320 (90,460)
Cash and cash equivalents at beginning of period 86,583 224,115
--------- ---------
Cash and cash equivalents at end of period $ 96,903 $133,655
========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest (net of amounts capitalized) $ 13,162 $ 7,944
Income taxes (net of refunds) 31,232 31,795
</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 nine months ended March 31, 1998 and 1997, the financial position as of
March 31, 1998, and the cash flows for the nine months ended March 31, 1998 and
1997. 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 nine months
ended March 31, 1998, 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 were as follows:
<TABLE>
<CAPTION>
(in thousands)
-----------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------- -------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Electronics OEM components $208,441 $188,128 $ 611,678 $ 550,197
Telecommunications and
energy networks 183,765 176,087 566,692 550,755
Commercial and industrial
infrastructure 52,956 63,663 188,940 198,284
----------- ----------- ----------- -----------
Total revenues $445,162 $427,878 $1,367,310 $1,299,236
=========== =========== =========== ===========
Operating income
Electronics OEM components $ 37,032 $ 27,956 $ 116,939 $ 100,551
Telecommunications and
energy networks 39,298 134 130,892 79,536
Commercial and industrial
infrastructure 11,336 11,337 45,776 40,697
Corporate group expense (18,929) (30,024) (58,356) (72,543)
----------- ----------- ----------- -----------
Total operating income $ 68,737 $ 9,403 $ 235,251 $ 148,241
=========== =========== =========== ===========
</TABLE>
4
<PAGE> 7
EARNINGS PER SHARE
In the second quarter of 1998, the company adopted and retroactively applied the
requirements of Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (FAS 128) to all periods presented. The following table presents a
reconciliation of the numerators and denominators of earnings per common
share-basic, and -assuming dilution.
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
--------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income available to
stockholders (numerator) $39,565 $68,453 $157,047 $193,608
======== ======== ======== ========
Shares Calculation (denominator):
Average shares outstanding-basic 84,143 89,488 84,952 89,524
Effect of Dilutive Securities:
Potential Common Stock
relating to stock options and
employee stock purchase plan 1,735 2,783 2,018 2,724
-------- -------- -------- --------
Average shares outstanding-
assuming dilution 85,878 92,271 86,970 92,248
======== ======== ======== ========
Earnings per share-basic $ 0.47 $ 0.76 $ 1.85 $ 2.16
======== ======== ======== ========
Earnings per share-assuming dilution $ 0.46 $ 0.74 $ 1.81 $ 2.10
======== ======== ======== ========
</TABLE>
Options to purchase 2,388,539 shares of Common Stock ranging between $40.25 and
$47.94 per share were outstanding during the quarter ended March 31, 1998 but
were not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the common shares.
The options expire between January 2007 and March 2008.
FINANCIAL INSTRUMENTS
Net gains and losses from forward exchange contracts used to cover receivables
and payables totaled a $0.1 million gain and a $0.1 million loss for the three
months ended March 31, 1998 and 1997, respectively. Net gains and losses from
forward exchange contracts totaled a $7.3 million gain and a $0.5 million loss
for the nine months ended March 31, 1998 and 1997, respectively. The company
incurred total net foreign exchange losses of $0.1 million and $0.9 million for
the three months ended March 31, 1998 and 1997, respectively. Total net foreign
exchange losses were $0.7 million and $2.2 million for the nine months ended
March 31, 1998 and 1997, respectively. These realized and unrealized gains and
losses are included in "Other expense (income), net." The total amount of
foreign exchange exposure covered was $129 million at March 31, 1998. 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 U.S. dollar as functional currency.
These exposures are primarily in Japanese yen (38% of net contract value),
French francs (10%), Italian lira (10%), and Belgian francs (9%).
5
<PAGE> 8
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 March 31, 1998 included
$6 million in net intercompany payables in non-functional currencies and $8
million in net monetary assets in foreign countries with the U.S. dollar as
functional currency.
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 March 31, 1998 was $11 million. Gross unrealized
gains were $4 million as of March 31, 1998 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). As of March 31, 1998, 372
employees have separated from the company and 71 employees have assumed other
positions within the company as a result of the 1997 restructuring. 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 March 31,
1998:
<TABLE>
<CAPTION>
(in thousands)
---------------------------------------------------------------------------
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 (16,597) -- (646) (472) (17,715)
Non-cash items (2,722) -- (25) 167 (2,580)
-------- -------- -------- -------- --------
RESERVE BALANCES,
MARCH 31, 1998 $ 12,700 $1,836 $ 0 $ 0 $ 14,536
======== ======== ======== ======== ========
</TABLE>
LOSS ON MINORITY INVESTMENT
Operating income for the quarter ended March 31, 1998 includes a non-recurring,
non-cash charge of $12 million ($9 million after tax) reflecting the write-off
of goodwill, cash advances and other assets related to Raychem's investment in
Superconducting Core Technologies, Inc. (SCT). SCT ceased commercial operations
in early March 1998 due to delays in commercialization efforts and insufficient
funding to support future cash-flow needs.
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 is
included in "Other expense (income), net."
6
<PAGE> 9
REPURCHASE OF COMMON STOCK
During the nine months ended March 31, 1998, the company repurchased 4,400,000
shares of its Common Stock and reissued 2,319,833 shares, leaving 6,245,013
shares in treasury stock at March 31, 1998.
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
product liability and certain 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 sells its products into applications
(including, for example, electronic interconnect products 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, remains unchanged.
The company's major litigation matters as of March 31, 1998, 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. The plaintiffs subsequently filed motions with the
District Court for reconsideration and for clarification of the District Court's
order. The motion for reconsideration has been denied by the District Court. The
District Court has requested that the parties submit briefs with respect to the
motion for clarification on the issue of what claimed damages remain in the
case. 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. On
February 25, 1998, the Superior Court granted the company's motion to dismiss
this lawsuit, with leave to the plaintiffs to amend certain of their claims.
Plaintiffs have filed a motion with the Superior Court for reconsideration of
the Superior Court's order, which motion 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.
On December 19, 1994, the company filed a complaint entitled 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, which alleged, among
other claims, misappropriation of trade secrets. On May 2, 1995, a complaint
7
<PAGE> 10
entitled Bourns, Inc. v. Raychem Corporation was filed in the United States
District Court, Central District of California, alleging antitrust law
violations. Neither complaint specifies the amount of monetary damages claimed,
although Bourns has stated its damage claim in an amount which would be material
to the company. Many of the claims asserted in the company's state action will
be tried with the federal action. On September 26, 1997, in the action entitled
Bourns, Inc. v. Raychem Corporation, Bourns filed a RICO counterclaim against
Raychem. On March 3, 1998, the District Court granted Raychem's motion to
dismiss Bourns' RICO counterclaim against Raychem. On March 9, 1998, this case
was transferred by order of the court from the Eastern Division of the Central
District to the Western Division of the Central District and reassigned to a new
judge. The trial date for this action is presently set for June 16, 1998. The
company believes that it has meritorious claims and defenses in these cases and
intends to vigorously litigate this matter.
Additionally, the company has been named, among others, as a potentially
responsible party in administrative proceedings alleging that it may be liable
for the costs of correcting environmental conditions at certain hazardous waste
sites. At all of these sites, the company is alleged to be a de minimis
generator of hazardous wastes, and the company believes that it has limited or
no liability for cleanup costs at these sites.
SUBSEQUENT EVENTS
On April 15, 1998, the company's Board of Directors announced its regular
quarterly dividend of $0.08 per share, payable on June 10, 1998, to stockholders
of record as of May 13, 1998.
In July 1997, the board of directors authorized the 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 directors' authorization are
used to offset the dilution caused by the company's employee stock purchase and
stock option plans. Between April 1, 1998 and May 12, 1998, the company has
repurchased 500,000 shares of the company's Common Stock for $20 million. The
company has utilized a portion of its committed borrowing facilities to
partially finance share repurchases.
On May 15, 1998, the company announced the formation of a new
Telecommunications, Energy and Industrial (TE&I) group combining businesses in
its telecommunications and energy networks and commercial and industrial
infrastructure segments. As part of its growth strategy, the company is
realigning its businesses to meet customers' needs for broader product and
service offerings and more efficient global sales and distribution channels.
The company expects to take a non-recurring restructuring charge on the order
of $20 million during the fourth quarter of 1998. When fully implemented, these
actions are expected to allow the company to reduce operating expenses and
manufacturing costs by about $20 million per year.
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 Nine months ended
March 31, March 31,
(in millions) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 445 $ 428 $ 1,367 $ 1,299
- ----------------------------------------------------------------------------------------------------------------
"Ongoing" pretax income $ 65 $ 61 $ 221 $ 195
Loss on minority investment (12) -- (12) --
Provision for restructuring and divestitures -- (53) -- (53)
Gain on sale of assets -- -- -- 23
Severance, plant consolidation, and other charges -- -- -- (6)
- ----------------------------------------------------------------------------------------------------------------
Pretax income $ 53 $ 8 $ 209 $ 159
Provision (benefit) for income taxes 13 (60) 52 (35)
- ----------------------------------------------------------------------------------------------------------------
Net income $ 40 $ 68 $ 157 $ 194
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Revenues for the three months ended March 31, 1998 (third quarter of 1998) were
$445 million, up 4% from revenues of $428 million for the year-ago quarter.
Ongoing pretax income for the third quarter of 1998 was $65 million, up 7% from
$61 million in the prior year quarter. The increase in ongoing pretax income was
primarily the result of higher sales volume, partially offset by price
reductions, lower margins due to product mix effects and adverse currency
movements. Currency movements reduced ongoing pretax income by approximately $7
million.
As a result of the company's revised outlook for the current fiscal year, bonus
expense was reduced, increasing pretax income by $7 million as compared to the
prior year quarter.
Pretax income for the third quarter of 1998 included a non-recurring charge of
$12 million ($9 million after tax) reflecting the write-off of goodwill, cash
advances and other assets related to Raychem's investment in Superconducting
Core Technologies, Inc. (SCT), which ceased commercial operations in early March
1998. Pretax income for the third quarter of 1997 included a pretax
restructuring charge of $53 million, which impacted each of the business
segments.
The effect of income taxes on the company's results for the three and nine
months ended March 31, 1998 and 1997 is described in the section, Income Taxes.
Ongoing pretax income for the nine months ended March 31, 1998 increased to $221
million, up 14% from $195 million for the nine months ended March 31, 1997.
Pretax results for the first nine months of 1998 included a non-recurring charge
of $12 million reflecting the write-off of SCT-related assets. Pretax results
for the first nine months of 1997 included a restructuring charge of $53
million, a gain of $23 million from the sale of intellectual property and a
charge of $6 million for severance and plant consolidation costs.
9
<PAGE> 12
REVENUES AND REVENUE GROWTH
Revenues for the third quarter of 1998 were $445 million, up 4% from revenues of
$428 million for the year-ago quarter. Revenue growth as reported was adversely
impacted by the continued strengthening of the U.S. dollar, which appreciated by
approximately 7% to 11% against the Japanese yen and most European currencies
between the third quarter of 1997 and the third quarter of 1998. Revenue growth
would have been 9% over the prior year quarter had exchange rates remained
unchanged.
Revenues were also impacted by price reductions in several product lines due to
competitive pressures, as shown in the table below.
<TABLE>
<CAPTION>
(percent change over prior year period)
- --------------------------------------------------------------------------------------
Three months ended Nine months ended
March 31, 1998 March 31, 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Components of reported revenue growth:
Growth in volumes,
net of product mix changes 13% 14%
Effect of price reductions(a) (4%) (3%)
- --------------------------------------------------------------------------------------
Constant currency revenue growth 9% 11%
Effect of exchange rate changes (5%) (6%)
- --------------------------------------------------------------------------------------
Total reported revenue growth 4% 5%
- --------------------------------------------------------------------------------------
</TABLE>
(a) A management estimate based on changes in revenues at constant volume and
mix
On a constant currency basis, third quarter revenues grew 24% in North America
and 2% in Europe, were flat in Asia and declined by 1% in the rest of the world,
compared to the prior-year period. The strong sales growth in North America was
largely driven by sales increases in the telecommunications and energy networks
segment. The slow growth in Europe was mainly caused by a decline in sales in
the commercial and industrial infrastructure segment, primarily in Germany,
which offset sales increases in the electronics OEM components segment. Revenues
in Asia were flat due to the continuing weak economic conditions in Korea and
the ASEAN region, which offset sales increases in Taiwan. Revenues in the rest
of the world declined by 1%, as revenue growth of 13% in Latin America was
offset by revenue declines in other regions.
GROSS PROFIT AND OPERATING EXPENSES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
March 31, March 31,
(percent of revenues) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross profit 48% 49% 49% 50%
- ------------------------------------------------------------------------------------------------------------
Selling, general, and administrative
(SG&A) expense 27% 28% 26% 28%
- ------------------------------------------------------------------------------------------------------------
Research and development
(R&D) expense 6% 7% 6% 7%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Gross profit as a percent of revenues was 48% in the third quarter of 1998, down
slightly from the prior-year quarter. The decline was primarily due to
unfavorable currency movements and price reductions.
10
<PAGE> 13
SG&A expense as a percent of revenues declined to 27% in the third quarter of
1998, compared to 28% in the prior year quarter. The decrease in SG&A was in
part a result of the 1997 restructuring program to streamline the company's
operations and to reduce operating costs.
INCOME TAXES
The estimated annual effective tax rate in 1998 was 25% compared to 13% in the
year-ago quarter. The higher estimated annual effective tax rate for 1998 is
primarily attributable to lower U.S. tax benefits and a change in the geographic
mix of the company's earnings. Income taxes in the third quarter of 1998 were a
net provision of $13 million compared to a net benefit of $60 million in the
year-ago quarter. In the prior year period, the company recorded discrete tax
benefits of $55 million resulting from the company's reassessment of the
valuation allowance related to its deferred tax assets. In addition, the prior
year period also included a catch-up tax benefit of $6 million to reduce the
estimated 1997 effective tax rate to 13%.
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.
<TABLE>
<CAPTION>
ELECTRONICS OEM COMPONENTS
- ----------------------------------------------------------------------------------------------
(dollars in millions) Three months ended Nine months ended
March 31, March 31,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $208 $188 $612 $550
- ----------------------------------------------------------------------------------------------
Constant currency revenue growth 15% 12% 16% 15%
- ----------------------------------------------------------------------------------------------
Operating income $37 $28 $117 $101
- ----------------------------------------------------------------------------------------------
</TABLE>
Third quarter revenues for the electronics OEM components segment rose to $208
million, up 15% on a constant currency basis from the year-ago quarter. Revenues
from the sale of interconnect products, including wire, cable, heat-shrinkable
tubing, marking systems, connectors, and other devices, grew to $123 million, up
13% on a constant currency basis, mainly the result of continued growth in sales
of wire and cable products to the automotive, transportation and commercial
markets. Interconnect products had double digit growth rates in Europe and North
America and moderate growth rates in Asia and Latin America as compared to the
prior year quarter. Revenues from the sale of circuit protection products
(PolySwitch(R) devices) were $59 million, up 30% in unit volume and up 21% in
revenues on a constant currency basis. Growth was mainly driven by strong demand
from computer manufacturers for circuit protection products. Revenues from the
sale of touchscreen products grew to $27 million, up 16% on a constant currency
basis, as significant growth in Europe and North America offset sales declines
in Asia.
Operating income in the third quarter of 1998 was $37 million, compared to
ongoing operating income of $40 million in the prior year quarter (excluding
restructuring charges of $12 million incurred by the segment in 1997). The
current quarter's operating income declined primarily due to the adverse effects
of currency movements, price reductions in several of the segment's product
lines and increased interconnect product manufacturing costs, which offset
increased sales volumes.
11
<PAGE> 14
Revenues for the first nine months of 1998 were $612 million, up 16% on a
constant currency basis from the first nine months of 1997. Operating income for
the first nine months of 1998 was $117 million, compared to ongoing operating
income of $113 million in the first nine months of 1997 (excluding restructuring
charges of $12 million incurred by the segment in 1997).
<TABLE>
<CAPTION>
TELECOMMUNICATIONS AND ENERGY NETWORKS
- ----------------------------------------------------------------------------------------------
(dollars in millions) Three months ended Nine months ended
March 31, March 31,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $184 $176 $567 $551
- ----------------------------------------------------------------------------------------------
Constant currency revenue growth 9% (2%) 8% 0%
- ----------------------------------------------------------------------------------------------
Operating income $ 39 $ 0 $131 $ 80
- ----------------------------------------------------------------------------------------------
</TABLE>
Third quarter revenues for the telecommunications and energy networks segment
were $184 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, were
$121 million, up 11% on a constant currency basis. Strong growth in North
America, driven by robust access network electronics demand, offset sales
declines in other regions. Strong demand for gel-filled copper connector
products partially offset continued declines in copper cable closure sales.
Sales of energy network products were $62 million, up 4% on a constant currency
basis. Sales of energy network products improved in all regions except Asia,
where economic conditions contributed to sales declines.
Operating income in the third quarter of 1998 was $39 million, compared to
ongoing operating income of $29 million in the prior year quarter (excluding
restructuring charges of $29 million incurred by the segment in 1997). The
current quarter's operating income increased by 34% primarily due to higher
sales volume, improved manufacturing yields - especially for access network
electronic products - and positive currency translation effects. These positive
factors more than offset the effects of a shift in mix to the segment's newer
product lines, which currently have lower margins than the segment's average,
and of price reductions in some of the segment's product lines.
Revenues for the first nine months of 1998 were $567 million, up 8% on a
constant currency basis from the first nine months of 1997. Operating income for
the first nine months of 1998 was $131 million, compared to ongoing operating
income of $109 million in the first nine months of 1997 (excluding restructuring
charges of $29 million incurred by the segment in 1997).
12
<PAGE> 15
<TABLE>
<CAPTION>
COMMERCIAL AND INDUSTRIAL INFRASTRUCTURE
- ----------------------------------------------------------------------------------------------
(dollars in millions) Three months ended Nine months ended
March 31, March 31,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $53 $64 $189 $198
- ----------------------------------------------------------------------------------------------
Constant currency revenue growth (12%) 15% 2% 9%
- ----------------------------------------------------------------------------------------------
Operating income $11 $11 $ 46 $ 41
- ----------------------------------------------------------------------------------------------
</TABLE>
Revenues for the commercial and industrial infrastructure segment were $53
million in the third quarter of 1998, down 12% on a constant currency basis from
the same period in the prior year. Strong sales of corrosion prevention
products, up 12%, were more than offset by a decline in sales of heat tracing
products, down 25%. The decline in revenues occurred primarily in Europe, where
sales in Germany decreased significantly as compared to the prior year quarter,
largely due to a relatively mild winter.
Operating income in the third quarter of 1998 was $11 million, compared to
ongoing operating income of $14 million in the prior year quarter (excluding
restructuring charges of $3 million incurred by the segment in 1997). The
current quarter's operating income decline was primarily caused by the reduction
in sales volume and adverse currency impacts, which more than offset
manufacturing yield improvements during the quarter.
Revenues for the first nine months of 1998 were $189 million, up 2% on a
constant currency basis from the first nine months of 1997. Operating income for
the first nine months of 1998 was $46 million, compared to ongoing operating
income of $44 million in the first nine months of 1997 (excluding restructuring
charges of $3 million incurred by the segment in 1997). The strong results of
the first two quarters of 1998 were partially offset by a weak third quarter.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998 the company had $97 million in cash and cash equivalents and
$458 million in unused credit facilities, of which $332 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) MARCH 31, June 30,
1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Debt net of cash $218 $137
- -------------------------------------------------------------------------------------------------------
Debt net of cash as a percent of
stockholders' equity 27% 16%
- -------------------------------------------------------------------------------------------------------
Days sales outstanding (DSO) 62 59
- -------------------------------------------------------------------------------------------------------
Days sales in inventory (DSI) 102 99
- -------------------------------------------------------------------------------------------------------
</TABLE>
Debt net of cash was $218 million on March 31, 1998, up from $137 million on
June 30, 1997. The increase was primarily due to an increase in short-term
borrowings to repurchase shares of the company's
13
<PAGE> 16
Common Stock. During the first nine months of 1998, the company repurchased
4,400,000 shares for $192 million.
DSI was 102 days as of March 31, 1998, compared to 99 days as of June 30, 1997.
Although the company expects only modest improvement in inventory levels in the
short-term, the implementation of a fully integrated enterprisewide information
system should help reduce inventory levels over the next years.
The table below summarizes the company's cash flows from operating, investing,
and financing activities:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
(dollars in millions)
Nine months ended March 31, 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by (used in):
Operating activities $165 $ 157
Investing activities (84) (21)
Financing activities (66) (219)
Effect of exchange rate changes on cash
and cash equivalents (5) (7)
- ------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents $ 10 $ (90)
- ------------------------------------------------------------------------------------
</TABLE>
OPERATING ACTIVITIES
Cash provided by operating activities during the first nine months of 1998
increased from the comparable period in the prior year, primarily due to
improved cash flows from ongoing pretax income, offset by increases in inventory
and increased payments for severance liability.
INVESTING ACTIVITIES
Cash used in investing activities during the first nine months of 1998 was $84
million, compared to $21 million in the prior year period. The increase was
primarily due to increased investments in property, plant and equipment, which
were $77 million compared to $58 million during the comparable period in 1997.
In addition, cash used in investing activities during the first nine months of
1997 was partially offset by $25 million received from the sale of a portfolio
of patents and related intellectual property.
FINANCING ACTIVITIES
Cash used in financing activities decreased to $66 million from $219 million in
the prior year period. During the first nine months of 1998, the company spent
$192 million in share repurchases compared to $128 million in the prior year
period. Spending on share repurchases was substantially offset by increased
short-term borrowings. Net proceeds from short-term debt were $101 million in
the first nine months of 1998, compared to net payments of $6 million in the
prior year period. In addition, cash used in financing activities during the
first nine months of 1997 included $118 million used to prepay the balance of a
syndicated term loan agreement.
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 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.
14
<PAGE> 17
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 revenues 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 last
two quarters, revenues in Asia were below the company's expectations due to the
current deterioration of economic conditions in certain Asian countries. Future
results in Asia will continue to depend on the outcome of various efforts to
stabilize these economic conditions. Continuing economic recession in Asia may
lead to the cancellation of orders, pressure to reduce prices in the region,
difficulty in collecting receivables owed to the company or other factors that
may adversely affect the company's overall performance in Asia.
The company continues to implement 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.
In 1996, the company began an enterprisewide 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, that will not be changed by the year
2000. The company is conducting comprehensive reviews of its remaining computer
systems, products and infrastructure to determine the work necessary to become
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 therefore continue to evaluate
corrective actions to mitigate risks associated with the Year 2000 problem.
As outlined above, the company has begun 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, as noted above, is not expected to be fully implemented in
all geographies and divisions by the year 2000. The implementation of this
system for a major portion of the company's business in the United States is
expected to be completed by the end of 1998. 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. There can be no assurance that these delays, if they occur, will not have
an adverse affect on the company's operating results or financial position.
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,
15
<PAGE> 18
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, electronic interconnect 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.
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. In fiscal years 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 is due to the actual reduction of
16
<PAGE> 19
cash tax payments related to tax benefits reported in the financial statements
during fiscal years 1996, 1997 and 1998 in accordance with FAS 109.
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,
products or businesses, 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-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.
17
<PAGE> 20
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.
18
<PAGE> 21
RAYCHEM CORPORATION
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On March 3, 1998, in the action entitled Bourns, Inc. v. Raychem Corporation,
currently pending in the United States District Court, Central District of
California, the District Court granted Raychem's motion to dismiss Bourns' RICO
counterclaim against Raychem. On March 9, 1998, this case was transferred by
order of the court from the Eastern Division of the Central District to the
Western Division of the Central District and reassigned to a new judge. The
trial date for this action is presently set for June 16, 1998. Information about
this lawsuit was disclosed in the company's annual report on Form 10-K for the
year ended June 30, 1997.
On September 26, 1996, the Ninth Circuit Court of Appeals affirmed the dismissal
by the United States District, Northern District of California, of related
lawsuits filed against the company on August 19, 1993, Creole Engineering Co. v.
Raychem Corporation, et al., and on June 19, 1996, Unit Process company, et al.
v. Raychem Corporation, et al. Four similar state actions brought by the
plaintiffs based on essentially the same facts alleged in the federal action,
which had previously been consolidated in the Superior Court of San Mateo
County, California, and the District Court of Jefferson County, Colorado, had
been stayed pending resolution of the Ninth Circuit appeal. The plaintiffs
agreed to consolidate all of these state court actions in the Superior Court of
San Mateo County, California. The company filed a motion to dismiss this lawsuit
on the basis that the federal judgment is res judicata of the plaintiffs' state
law antitrust claims. During the last quarter of fiscal 1997, the Superior Court
denied the company's motion to dismiss this lawsuit, holding that state law is
broader than federal law and that the plaintiffs have adequately pled claims
under state law. At the company's request, the court agreed to hold another
hearing on the company's motion to dismiss this lawsuit. On February 25, 1998,
the Superior Court granted the company's motion to dismiss this lawsuit, with
leave to the plaintiffs to amend certain of their claims. Plaintiffs have filed
a motion with the Superior Court for reconsideration of the Superior Court's
order, which motion is 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.
ITEM 5: OTHER INFORMATION
On May 15, 1998, the company announced the appointment of Hus Tigli to the
position of senior vice president for the newly formed Telecommunications,
Energy and Industrial group.
Ralph Harnett, senior vice president for the former telecommunications and
energy networks segment announced his intention to leave the company in August
1998.
19
<PAGE> 22
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
3 (b) Amended and Restated Bylaws (1)
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The company filed a Current Report on Form 8-K dated April 17,
1998, the date on which the Board of Directors amended and
restated the Company's Bylaws (Bylaws). The amendments to the
Bylaws, among other things, add advance notice requirements and
procedures for the submission by stockholders of nominations for
the board of directors and other proposals to be presented at
annual stockholder meetings.
(1) Filed as an exhibit to the company's Form 8-K dated April 17, 1998, (File
No. 2-15299) and incorporated by reference.
20
<PAGE> 23
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: May 15, 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)
21
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
3 (b) Amended and Restated Bylaws (1)
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
</TABLE>
(1) Filed as an exhibit to the company's Form 8-K dated April 17, 1998, (File
No. 2-15299) and incorporated by reference.
<PAGE> 1
Exhibit 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN THOUSANDS)
(unaudited)
In the computation 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. The table below sets
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 nine months ended
March 31, 1998.
<TABLE>
<CAPTION>
Nine Months Ended
March 31, Year Ended June 30,
----------------- -------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income before income taxes,
extraordinary item, and change
in accounting principle $ 209,396 $ 227,740 $ 146,130 $ (270) $ 33,745 $ 39,584
add:
Interest expense 13,098 12,455 19,216 20,434 22,318 26,991
Portion of rents representative
of interest factor (a) 6,268 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 (602) (393) (660) (724) (1,172) (362)
--------- --------- --------- --------- --------- ---------
Income as adjusted $ 228,160 $ 249,606 $ 206,054 $ 116,936 $ 67,761 $ 79,083
========= ========= ========= ========= ========= =========
Fixed Charges:
Interest expense $ 13,098 $ 12,455 $ 19,216 $ 20,434 $ 22,318 $ 26,991
Portion of rents representative
of interest factor (a) 6,268 9,804 11,550 11,550 12,870 12,870
Debt prepayment penalty (b) -- -- -- 7,814 -- --
--------- --------- --------- --------- --------- ---------
Fixed Charges $ 19,366 $ 22,259 $ 30,766 $ 39,798 $ 35,188 $ 39,861
========= ========= ========= ========= ========= =========
Ratio of earnings to fixed charges 11.78 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 MARCH
31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 96,903
<SECURITIES> 11,291
<RECEIVABLES> 350,226
<ALLOWANCES> 10,247
<INVENTORY> 278,715
<CURRENT-ASSETS> 861,467
<PP&E> 1,146,869
<DEPRECIATION> 673,501
<TOTAL-ASSETS> 1,571,876
<CURRENT-LIABILITIES> 459,955
<BONDS> 157,865
0
0
<COMMON> 90,034
<OTHER-SE> 731,749
<TOTAL-LIABILITY-AND-EQUITY> 1,571,876
<SALES> 1,361,584
<TOTAL-REVENUES> 1,367,310
<CGS> 694,714
<TOTAL-COSTS> 696,640
<OTHER-EXPENSES> 81,603
<LOSS-PROVISION> 2,538
<INTEREST-EXPENSE> 9,501
<INCOME-PRETAX> 209,396
<INCOME-TAX> 52,349
<INCOME-CONTINUING> 209,396
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 157,047
<EPS-PRIMARY> 1.85
<EPS-DILUTED> 1.81
</TABLE>
