<PAGE> 1
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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, 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 361-3333
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 27, 1999, the registrant had outstanding 77,413,895 shares of
Common Stock, $1.00 par value.
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<PAGE> 2
RAYCHEM CORPORATION
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page Number
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1: Financial Information
Consolidated Condensed Statement of Income for
the three and six months ended December 31, 1998 and 1997 1
Consolidated Condensed Balance Sheet at
December 31, 1998 and June 30, 1998 2
Consolidated Condensed Statement of Cash Flows for
the six months ended December 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 10
PART II. OTHER INFORMATION
Item 4: Submission of Matters to a Vote 25
Item 5: Other Information 25
Item 6: Exhibits and Reports on Form 8-K 26
SIGNATURES 27
</TABLE>
<PAGE> 3
RAYCHEM CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
(in thousands except per share data) 1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $451,345 $467,117 $898,091 $922,148
Cost of goods sold 242,001 237,134 481,332 464,082
Research and development expense 24,430 28,149 48,903 55,512
Selling, general, and administrative expense 127,649 123,734 246,406 236,040
Interest expense, net 7,057 2,855 11,983 5,670
Other expense, net 1,577 630 1,990 4,202
-------- -------- -------- --------
Income before income taxes 48,631 74,615 107,477 156,642
Provision for income taxes 17,022 18,654 37,617 39,160
-------- -------- -------- --------
Net income $ 31,609 $ 55,961 $ 69,860 $117,482
-------- -------- -------- --------
Earnings per share--basic $ 0.40 $ 0.66 $ 0.88 $ 1.38
Average number of shares outstanding--basic 78,795 85,147 79,723 85,349
-------- -------- -------- --------
Earnings per share--assuming dilution $ 0.40 $ 0.64 $ 0.87 $ 1.34
Average number of shares outstanding--assuming dilution 79,836 87,085 80,736 87,510
-------- -------- -------- --------
Dividends per share $ 0.08 $ 0.07 $ 0.16 $ 0.14
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
1
<PAGE> 4
RAYCHEM CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
(UNAUDITED)
(in thousands except sharedata) DECEMBER 31, 1998 June 30, 1998
------------------------------- ----------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 227,301 $ 92,667
Accounts receivable, net 353,658 325,039
Inventories:
Raw materials 84,825 90,874
Work in process 55,335 64,143
Finished goods 131,389 123,931
----------- -----------
Total inventories 271,549 278,948
Prepaid taxes 50,356 38,350
Other current assets 105,125 110,593
----------- -----------
Total current assets 1,007,989 845,597
----------- -----------
Property, plant, and
equipment 1,215,780 1,147,923
Less accumulated depreciation and
amortization 708,497 668,737
----------- -----------
Net property, plant, and equipment 507,283 479,186
----------- -----------
Deferred tax assets 187,551 186,595
Other assets 147,875 107,977
----------- -----------
TOTAL ASSETS $ 1,850,698 $ 1,619,355
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Notes payable to banks $ 48,595 $ 181,284
Accounts payable 81,648 82,901
Compensation and benefits 62,279 56,878
Other accrued liabilities 91,285 88,914
Income taxes 84,398 62,871
Current maturities of long-term debt 9,266 6,574
----------- -----------
Total current liabilities 377,471 479,422
----------- -----------
Long-term debt 559,309 151,488
----------- -----------
Deferred tax liabilities 27,720 27,762
----------- -----------
Other long-term liabilities 101,433 92,257
----------- -----------
Minority interests 10,052 8,784
----------- -----------
Stockholders' equity:
Preferred Stock, $1.00 par value
Authorized: 15,000,000 shares; Issued: none -- --
Common Stock, $1.00 par value
Authorized: 150,000,000 shares
Issued: 90,016,461 and 90,028,103 shares,
respectively 90,016 90,028
Additional contributed capital 425,094 425,477
Retained earnings 715,030 665,753
Accumulated other comprehensive losses (1,338) (26,778)
Treasury Stock, at cost (12,305,051 and 7,144,399
shares, respectively) (449,600) (290,320)
Other (4,489) (4,518)
----------- -----------
Total stockholders' equity 774,713 859,642
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,850,698 $ 1,619,355
=========== ===========
</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, 1998 1997
(in thousands)
--------- ---------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 69,860 $ 117,482
Adjustments to reconcile net income to net cash
provided by operating activities:
Payments for restructurings and divestitures (8,572) (15,683)
Net loss (gain) on sale of intellectual property
and other assets 1,002 (1,199)
Depreciation and amortization 44,440 41,160
Deferred income tax provision 1,678 3,424
Changes in certain assets and liabilities, net of
effects from
acquisitions, restructurings and
divestitures:
Accounts receivable (6,692) (10,568)
Inventories 18,790 (21,336)
Accounts payable and accrued liabilities 4,541 (26,378)
Income taxes 7,015 14,273
Other assets and liabilities 6,929 548
--------- ---------
Net cash provided by operating activities 138,991 101,723
--------- ---------
Cash flows from investing activities:
Investment in property, plant, and equipment (51,148) (48,972)
Disposition of property, plant, and equipment 321 8,329
Cost of acquisitions, net of cash acquired (43,747) --
Investments in and advances to affiliated companies -- (5,000)
--------- ---------
Net cash used in investing activities (94,574) (45,643)
--------- ---------
Cash flows from financing activities:
Net (payments) proceeds from short-term debt (136,899) 55,019
Proceeds from long-term debt 410,493 1,691
Payments of long-term debt (11,185) (6,458)
Repurchases of Common Stock (185,255) (135,964)
Issuance of Common Stock under employee benefit plans 17,863 36,734
Proceeds from repayments of stockholder notes receivable 246 336
Cash dividends (12,760) (12,008)
--------- ---------
Net cash provided by (used in) financing activities 82,503 (60,650)
--------- ---------
Effect of exchange rate changes on cash
and cash equivalents 7,714 (3,141)
--------- ---------
Increase (decrease) in cash and cash equivalents 134,634 (7,711)
Cash and cash equivalents at beginning of period 92,667 86,583
--------- ---------
Cash and cash equivalents at end of period $ 227,301 $ 78,872
--------- ---------
Supplemental Disclosures
Cash paid for:
Interest (net of amounts capitalized) $ 10,877 $ 7,268
Income taxes (net of refunds) 28,840 21,657
========= =========
</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, 1998 and 1997, the financial position as of
December 31, 1998, and the cash flows for the six months ended December 31, 1998
and 1997. The June 30, 1998 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, 1998. The results of operations for the three and six
months ended December 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 1999 financial statement presentation.
BUSINESS SEGMENTS
Revenues and operating income by business segment are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
(in thousands) 1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Electronics OEM components $ 208,805 $ 203,334 $ 412,123 $ 403,237
Telecommunications, energy
and industrial 242,540 263,783 485,968 518,911
--------- --------- --------- ---------
Total revenues $ 451,345 $ 467,117 $ 898,091 $ 922,148
========= ========= ========= =========
OPERATING INCOME
Electronics OEM components $ 32,253 $ 38,218 $ 62,467 $ 79,907
Telecommunications,
energy and industrial 39,355 61,176 87,955 126,034
Corporate group expenses (14,343) (21,294) (28,972) (39,427)
--------- --------- --------- ---------
Total operating income $ 57,265 $ 78,100 $ 121,450 $ 166,514
========= ========= ========= =========
</TABLE>
4
<PAGE> 7
EARNINGS PER SHARE
The following table presents the computation of earnings per share--basic and
earnings per share--assuming dilution.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
(in thousands except per share data) 1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income available to stockholders (numerator) $ 31,609 $ 55,961 $ 69,860 $117,482
-------- -------- -------- --------
Shares calculation (denominator):
Average shares outstanding--basic 78,795 85,147 79,723 85,349
Effect of dilutive securities:
Potential Common Stock relating to stock
options and employee stock purchase plan 1,041 1,938 1,013 2,161
-------- -------- -------- --------
Average shares outstanding--assuming dilution 79,836 87,085 80,736 87,510
-------- -------- -------- --------
Earnings per share--basic $ 0.40 $ 0.66 $ 0.88 $ 1.38
Earnings per share--assuming dilution $ 0.40 $ 0.64 $ 0.87 $ 1.34
-------- -------- -------- --------
</TABLE>
Options to purchase 4,396,000 shares of Common Stock at prices ranging from
$30.63 to $47.94 per share were outstanding during the quarter ended December
31, 1998, but were not included in the computation of earnings per
share--assuming dilution because the options' exercise prices were greater than
the average market price of the common shares. These options expire between
April 2006 and December 2008.
FINANCIAL INSTRUMENTS
Net gains and losses from forward exchange contracts used to cover receivables
and payables totaled a $6.3 million loss and a $5.2 million gain for the three
months ended December 31, 1998 and 1997, respectively. Net gains and losses from
forward exchange contracts totaled a $2.0 million loss and a $7.2 million gain
for the six months ended December 31, 1998 and 1997, respectively. The company
incurred total net foreign exchange losses of $0.1 million and $0.2 million for
the three months ended December 31, 1998 and 1997, respectively. The company
incurred a total net foreign exchange gain of $0.4 million and a net loss of
$0.6 million for the six months ended December 31, 1998 and 1997, respectively.
These realized and unrealized gains and losses are included in "Other expense,
net." The total amount of foreign exchange exposure covered was $124 million at
December 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 US
dollar as functional currency. These exposures are primarily in Japanese yen
(35% of net contract value), Belgian francs (17%), German marks (8%), Italian
lire (7%), and Spanish pesetas (6%).
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<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, or where the company's exposed position
and the perceived currency environment render a hedge inadvisable. Such
exposures at December 31, 1998 included $4 million in net receivables and
payables in non-functional currencies and $6 million in net monetary assets in
foreign countries with the US 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
marketable securities held at December 31, 1998, was $8.5 million. Gross
unrealized holding gains were $3 million as of December 31, 1998, and are
included, net of tax, as a component of "Accumulated other comprehensive
losses."
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, June 30,
(in thousands) 1998 1998
-------- --------
<S> <C> <C>
7.20% notes due 2008 $398,723 $ --
1.48% to 9.66% notes payable to banks, and
other debt requiring payments in varying
amounts, through 2017 61,935 45,980
Secured debt requiring varying semiannual
payments from January 1997 through
December 2006 (interest rate fluctuates
semiannually and was 5.55% and 5.64%
at December 31, 1998 and June 30, 1998,
respectively) 107,917 112,082
-------- --------
Total long-term debt 568,575 158,062
Less current maturities 9,266 6,574
-------- --------
Long-term portion $559,309 $151,488
======== ========
</TABLE>
In October, 1998, the company issued notes in the amount of $400 million. The
notes mature on October 15, 2008 and bear interest at a rate of 7.20% per annum.
The interest rate on the notes may increase if, prior to October 23, 2002,
either Moody's Investor Services, Inc. or Standard & Poor's Rating Services
reduces the rating of the notes to below investment grade. The company used part
of the net proceeds from the sale of the notes to repay borrowings of $275
million outstanding under the company's $400 million revolving credit facility
and to finance the company's share repurchase program. The $400 million
revolving credit facility will remain available to the company until September
12, 2001. The company intends to use the remaining portion of the net proceeds
from the sale of the notes for general corporate purposes, which may include
further financing of the company's current share repurchase program and
additional acquisitions.
6
<PAGE> 9
RESTRUCTURING AND DIVESTITURES
The company incurred a pretax restructuring charge of $28 million in the fourth
quarter of 1998 (the 1998 restructuring). The restructuring actions included
write-downs of inventory and machinery and equipment related to discontinued
products and operations, severance costs for the reorganization of certain
business segments, and severance costs associated with moving certain
manufacturing facilities to lower-cost locations. As a result of the 1998
restructuring, approximately 130 positions will be eliminated. As of December
31, 1998, 93 employees have separated from the company due to the 1998
restructuring. The company expects the majority of the 1998 restructuring
actions to be completed by the end of the current fiscal year. Certain actions,
such as the relocation of manufacturing facilities, may extend to the following
fiscal year.
The following table, which includes the 1998 restructuring as well as prior
restructurings, presents the company's restructuring reserves as of December 31,
1998:
<TABLE>
<CAPTION>
EMPLOYEE ASSET
(in thousands) COSTS WRITE-DOWNS LEASES OTHER TOTAL
- -------------- -------- ----------- ------ ----- -----
<S> <C> <C> <C> <C> <C>
Reserve Balances,
June 30, 1998 $ 22,318 $ 13,062 $ 89 $ 3,348 $ 38,817
Cash payments (7,166) -- -- (1,406) (8,572)
Non-cash items -- (9,363) -- (380) (9,743)
-------- -------- -------- -------- --------
RESERVE BALANCES,
DECEMBER 31, 1998 $ 15,152 $ 3,699 $ 89 $ 1,562 $ 20,502
-------- -------- -------- -------- --------
</TABLE>
ACQUISITION
On October 1, 1998, the company completed the acquisition of the
telecommunications business of Plasticos Mondragon S. A. (Mondragon) in Spain
for a cash purchase price of approximately $41 million. The Mondragon
telecommunications business manufactures and supplies components for connecting,
insulating, and protecting copper and fiber-optic telephone networks. The
Mondragon acquisition was accounted for using the purchase method of accounting
for business combinations. The excess of purchase price over the fair value of
the net assets acquired (goodwill) was approximately $34 million and is being
amortized on a straight-line basis over 15 years. The results of Mondragon are
included in the company's financial statements beginning as of October 1, 1998.
Pro forma adjustments giving effect to the Mondragon acquisition as if it had
occurred at the beginning of fiscal 1998 and 1999 would not have had a material
effect on the company's consolidated financial statements.
REPURCHASE OF COMMON STOCK
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. During the six months ended December 31, 1998, the company
repurchased 5.9 million shares of its Common Stock for $185 million and reissued
0.8 million shares, leaving 12.3 million shares in treasury stock at December
31, 1998.
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<PAGE> 10
COMPREHENSIVE INCOME
In the first quarter of 1999, the company adopted and retroactively applied the
requirements of Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (FAS 130). FAS 130 establishes standards for reporting and
displaying comprehensive income and its components in an annual financial
statement that is displayed with the same prominence as other financial
statements.
The components of comprehensive income, net of tax, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
(in thousands) 1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 31,609 $ 55,961 $ 69,860 $ 117,482
Other comprehensive income:
Net change in unrealized gain (loss) on
available-for-sale securities 154 900 (2,121) 2,887
Foreign currency translation adjustment 6,336 (6,816) 27,561 (14,834)
--------- --------- --------- ---------
Comprehensive income $ 38,099 $ 50,045 $ 95,300 $ 105,535
--------- --------- --------- ---------
</TABLE>
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. The company's major litigation
matters as of December 31, 1998, are described below.
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
entitled Bourns, Inc. v. Raychem Corporation was filed in the United States
District Court, Central District of California, alleging antitrust law
violations. Many of the claims asserted in the company's state action were
consolidated with Bourns' federal action against the company. On March 9, 1998,
this case was transferred from the Eastern Division of the Central District to
the Western Division of the Central District and reassigned to a new judge. The
trial for Bourns' action against the company commenced on June 16, 1998. During
the sixth week of the trial, due to the length of the proceeding, the judge
bifurcated the company's trade secret action against Bourns for trial at a later
date. On August 10, 1998, the trial of Bourns' action against the company ended
with a jury verdict that awarded Bourns $64 million in damages. Legal fees and
expenses, including attorneys' fees, are also recoverable by Bourns under
applicable U.S. antitrust law. The company has filed motions with the court to
set aside the jury's verdict, to reduce the damages, and to ask for a new trial
on the grounds that the verdict is contrary to the evidence presented at trial
and is incorrect as a matter of law and that the jury's damage award bears no
relationship to the market segment to which the verdict was directed. If
necessary, the company intends to appeal this decision. Under applicable U.S.
antitrust law, any remaining damage award against the company will be trebled.
The company also intends to continue with its theft of trade secrets case
against Bourns. The new trial date for the trade secret action has not been set
by the court. Because the company
8
<PAGE> 11
intends to appeal any adverse final judgment in the trial court, the company has
not accrued any liability with respect to this litigation.
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
(such as electronic interconnection products for aerospace and automotive
markets) where product liability issues could be material.
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 parties have stipulated to a dismissal (without
prejudice) of the remaining claims, so that plaintiffs may appeal the District
Court's decision to the Ninth Circuit Court of Appeals. Plaintiffs filed their
Notice of Appeal on May 26, 1998. 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. The
company believes that it has meritorious defenses to the claims asserted in this
case and intends to defend itself vigorously in this matter.
Additionally, the company has been named, among others, as a potentially
responsible party in judicial and administrative proceedings alleging that it
may be liable for the costs of correcting environmental conditions at certain
hazardous waste sites. The company believes that it does not have material
liability for cleanup costs at these sites.
SUBSEQUENT EVENTS
On January 13, 1999, the company's board of directors increased its regular
quarterly dividend by 12.5% to $0.09 per share, payable on March 10, 1999, to
stockholders of record as of February 10, 1999.
Between January 1, 1999 and January 27, 1999, the company repurchased 0.9
million shares of the company's Common Stock for $25 million.
9
<PAGE> 12
RAYCHEM CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
(in millions except per share data) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 451 $ 467 $ 898 $ 922
----- ----- ----- -----
Pretax income $ 49 $ 75 $ 107 $156
Provision for income taxes 17 19 37 39
----- ----- ----- -----
Net income $ 32 $ 56 $ 70 $ 117
----- ----- ----- -----
Earnings per share--assuming dilution $0.40 $0.64 $0.87 $1.34
----- ----- ----- -----
Average number of shares outstanding--
assuming dilution 79.8 87.0 80.7 87.5
----- ----- ----- -----
</TABLE>
REVENUES
Revenues for the second quarter of 1999 were $451 million compared to $467
million in the year-ago quarter. On a constant currency basis, revenues declined
by 4%, primarily due to price reductions, slower volume growth, and the adverse
impact of product mix changes in several product lines, as shown in the table
below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(percentage change over prior-year period) DECEMBER 31, 1998 DECEMBER 31, 1998
- ------------------------------------------ ----------------- -----------------
<S> <C> <C>
Change in components of reported revenue:
Growth in volumes, net of
product mix changes 1% 3%
Effect of price reductions(a) (5%) (5%)
-- --
Change in constant currency revenue (4%) (2%)
Effect of exchange rate changes 1% (1%)
-- --
Change in reported revenue (3%) (3%)
-- --
</TABLE>
(a)A management estimate based on year-over-year changes in revenues at
constant volume and mix.
On a constant currency basis, second quarter revenues declined by 5% in North
America and by 9% in Europe, and increased by 4% in Asia and by 3% in the rest
of the world.
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<PAGE> 13
GROSS PROFIT, OPERATING EXPENSES, AND PRETAX INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
(percentage of revenues) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross profit 46% 49% 46% 50%
Selling, general, and administrative expense 28% 26% 27% 26%
Research and development expense 5% 6% 5% 6%
Interest and other expense, net 2% 1% 2% 1%
Pretax income 11% 16% 12% 17%
</TABLE>
Gross profit as a percentage of revenues for the second quarter of 1999
decreased to 46%, from 49% in the year-ago quarter. This decrease from 1998 was
primarily due to sales price reductions in several product lines and a continued
shift toward product lines with lower margins. Gross profit margins are expected
to remain at about this level for the second half of fiscal 1999.
Selling, general, and administrative expense (SG&A) for the second quarter of
1999 increased to 28% of revenues, from 26% in the prior-year quarter. The
increase was due in part to the lack of revenue growth.
Net interest expense for the second quarter of 1999 was $7 million compared to
$3 million in the prior-year quarter. The increase in 1999 was primarily due to
the increased level of borrowings outstanding during the period, including the
debt offering completed in October 1998.
Pretax income as a percentage of revenues for the second quarter of 1999
declined to 11%, from 16% in the prior-year quarter. The primary causes of this
decline were the decrease in gross profits and higher interest expense.
PROVISION FOR INCOME TAXES
The estimated annual effective tax rate for 1999 is 35% compared to 25% in the
year-ago quarter. The lower estimated annual effective tax rate in 1998 was
primarily attributable to recognition of a U.S.
deferred tax benefit.
NET INCOME AND EPS
Net income for the second quarter of 1999 was $32 million ($0.40 per
share--assuming dilution), compared to net income of $56 million ($0.64 per
share--assuming dilution) in the year-ago quarter. The average number of shares
outstanding--assuming dilution during the second quarter of 1999 decreased to
79.8 million from 87.0 million in the prior-year quarter, due to the company's
share repurchase program.
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<PAGE> 14
BUSINESS SEGMENTS
During the fourth quarter of 1998, the company realigned its businesses by
combining the former telecommunications and energy networks segment and the
commercial and industrial infrastructure segment into the new
telecommunications, energy and industrial business segment. The company's
financial results are now reported as two business segments, described below,
and the corporate group.
ELECTRONICS OEM COMPONENTS
This business segment serves original equipment manufacturers (OEMs) in
transportation, defense, and a wide range of commercial electronics industries.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
(dollars in millions) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $209 $203 $412 $403
Constant currency revenue growth 2% 15% 3% 16%
Operating income $ 32 $ 38 $ 62 $ 80
</TABLE>
Second quarter revenues for the electronics OEM components business segment were
$209 million, up 2% on a constant currency basis from the year-ago quarter.
Revenues from sales of interconnect products--including wire, cable,
heat-shrinkable tubing, marking systems, connectors, and other devices--were
$125 million for the quarter, up 1% on a constant currency basis from the
year-ago quarter. Sales to commercial aerospace, rail, and mass transit
customers improved slightly during the quarter, but sales to automotive
customers were essentially flat with year-ago levels.
Sales of circuit protection products were $55 million, down 4% on a constant
currency basis from the year-ago quarter. An increase in unit volumes of 12% was
offset by a 17% decline in average selling prices due to competitive pressures.
Second-quarter prices were significantly lower against year-ago levels, but were
essentially unchanged from the preceding two quarters. Growth in the computer
industry drove the moderately higher sales to original equipment manufacturers.
Despite continuing growth in the market for computers and electronic products;
sales to distributors were roughly flat due to inventory corrections. Sales for
battery applications were affected by the growth of rechargeable lithium
batteries, which have a lower average content of polymeric resettable fuses.
Elo TouchSystems' revenues grew to $29 million, up 16% on a constant currency
basis from the year-ago quarter, reflecting strong performance in Europe due to
growth in point-of-information, point-of-sales, and kiosk applications. Elo
TouchSystems also experienced strong growth in Japan as touch applications made
gains in kiosks and amusement and gaming markets, despite continuing weakness in
the Japanese economy.
The segment's operating income as a percentage of revenues in the second quarter
of 1999 was 15%, compared with 19% in the year-ago quarter. The reduction in
operating income as a percentage of
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<PAGE> 15
revenues was primarily caused by declines in gross profits attributable to price
declines, particularly in circuit protection products, and to product mix
changes.
Segment revenues for the six months ended December 31, 1998, were $412 million,
up 3% on a constant currency basis from the same period in the prior year.
Increased unit volumes were partially offset by reductions in average selling
prices. The year-to-date operating income as a percentage of revenues was 15%
compared with 20% in the prior year, primarily reflecting declines in gross
profits and increased SG&A expense.
TELECOMMUNICATIONS, ENERGY AND INDUSTRIAL
This business segment serves operators of telecommunications, power, gas, and
water utilities; and industrial plants and pipelines.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
(dollars in millions) 1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues $ 243 $ 264 $ 486 $ 519
Constant currency revenue (decline) growth (8%) 9% (6%) 8%
Operating income $ 39 $ 61 $ 88 $ 126
</TABLE>
Second quarter revenues for the telecommunications, energy and industrial
business segment were $243 million, down 8% on a constant currency basis from
the year-ago quarter.
Revenues from the sale of telecommunications products, including copper- and
fiber-based network accessories were $88 million, down 4% on a constant currency
basis from the year-ago quarter. Declines in sales of copper system accessories
were partially offset by double-digit growth of sales of fiber-related products.
Overall sales levels of telecommunications products were partially affected by
calendar year-end purchasing slowdowns at North American telephone operating
companies.
Total revenues for access network electronics (ANE) products were $20 million,
down 36% on a constant currency basis over the prior-year quarter. Revenue
growth, as compared to the prior-year quarter, was impacted by the company's
decision to discontinue sales of ANE products outside of North America, which
represented revenues of approximately $9.5 million for the second quarter of
1998. Revenues from sales of ANE products in North America declined 14% when
compared to those of the year-ago quarter, primarily due to calendar year-end
purchasing slowdowns at North American telephone operating companies. The
company expects strong revenue growth in North America in the second half of
fiscal 1999, resulting in an overall moderate growth rate for the year in this
region.
Revenues from sales of cable accessories for energy networks totaled $67
million, down 3% on a constant currency basis from the year-ago quarter. Sales
volume improved in North America, but was weak elsewhere, particularly in
emerging markets in Eastern Europe and Russia.
Revenues from commercial and industrial sales of electric heat-tracing systems
and corrosion prevention products were $68 million, down 6% on a constant
currency basis from the year-ago quarter. A modest
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<PAGE> 16
increase in sales of corrosion prevention products was more than offset by
declines in sales of electric heat-tracing systems, compared to a strong
prior-year quarter.
The segment's operating income as a percentage of revenues in the second quarter
of 1999 was 16% compared with 23% in the year-ago quarter. The reduction in
operating income as a percentage of revenues was primarily caused by price
reductions across most of the segment's product lines, a continued shift in
product mix toward products that have lower profit margins, and lower absorption
of fixed manufacturing costs resulting from lower production levels.
Segment revenues for the six months ended December 31, 1998, were $486 million,
down 6% on a constant currency basis from the same period in the prior year. The
primary causes of the decline in revenues were lower sales volumes and price
declines in most of the segment's product lines. The year-to-date operating
income as a percentage of revenues was 18% compared to 24% in the prior-year
period, primarily reflecting declines in gross profits.
ACQUISITION
On October 1, 1998, the company completed the acquisition of the
telecommunications business of Plasticos Mondragon S.A. (Mondragon) in Spain for
a cash purchase price of approximately $41 million. The Mondragon
telecommunications business manufactures and supplies components for connecting,
insulating, and protecting copper and fiber-optic telephone networks. The
Mondragon acquisition was accounted for using the purchase method of accounting
for business combinations. The excess of purchase price over the fair value of
the net assets acquired (goodwill) was approximately $34 million and is being
amortized on a straight-line basis over 15 years. The results of Mondragon are
included in the company's financial statements beginning as of October 1, 1998.
Pro forma adjustments giving effect to the Mondragon acquisition as if it had
occurred at the beginning of fiscal 1998 and 1999 would not have had a material
effect on the company's consolidated financial statements.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131). This statement establishes
standards for the way companies report information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The company is in the process of reassessing current business segment reporting
to determine if changes in reporting will be required in adopting this new
standard. The disclosures prescribed by FAS 131 will first be included in the
company's 1999 annual report.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133).
The new standard requires companies to record derivatives on the balance sheet
as assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives should be reported in the statement
of operations or as a deferred item, depending on the use of the derivatives and
whether they qualify for hedge accounting. The key criterion for hedge
accounting is that the derivative must be highly effective in achieving
offsetting changes in fair value or cash flows of the hedged items during the
term of the
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<PAGE> 17
hedge. The company plans to adopt FAS 133 in the first quarter of fiscal 2000
and has not yet determined the effect, if any, of adopting the new standard.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the company had $227 million in cash and cash equivalents
and $583 million in unused credit facilities, of which $455 million are
committed facilities. The combination of cash and cash equivalents, available
lines of credit, 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>
DECEMBER 31, June 30,
(dollars in millions) 1998 1998
---- ----
<S> <C> <C>
Debt net of cash $390 $247
Debt net of cash as a percent of stockholders' equity 50% 29%
Days' sales outstanding 68 62
Days' sales in inventory 103 104
</TABLE>
The increase in debt net of cash was primarily due to share repurchases. During
the first six months of 1999, the company repurchased 5.9 million shares of the
company's Common Stock for $185 million.
The table below summarizes the company's cash flows from operating, investing,
and financing activities:
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, 1998 1997
(dollars in millions)
<S> <C> <C>
Cash provided by (used in):
Operating activities $ 139 $ 102
Investing activities (95) (46)
Financing activities 83 (61)
Effect of exchange rate changes on cash
and cash equivalents 8 (3)
----- -----
Increase (decrease) in cash and cash equivalents $ 135 $ (8)
===== =====
</TABLE>
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<PAGE> 18
OPERATING ACTIVITIES
Cash provided by operating activities during the six months ended December 31,
1998, was $139 million. The increase from 1998 was primarily the result of the
absence of employee bonus payments in the first half of fiscal 1999, compared to
$29 million in the comparable prior-year period. In addition, the change
reflects improvements in inventory management as compared to the six months
ended December 31, 1997. In 1999, the company expects the U.S. tax provision to
exceed cash tax payments by an amount in the range of $15 to $30 million. The
difference results primarily from tax benefits that were reported in the
financial statements in 1996, 1997 and 1998, that will be realized in cash
through reduced payments in 1999 and thereafter.
INVESTING ACTIVITIES
Net cash used in investing activities during the six months ended December 31,
1998, was $95 million, of which $51 million was used for capital expenditures.
In addition, during the second quarter of 1999, the company completed the
Mondragon acquisition for a cash purchase price of $41 million. Cash used in
investing activities during the six months ended December 31, 1997 included $49
million of capital expenditures and $8 million in proceeds from the sale of
property.
FINANCING ACTIVITIES
Net cash provided by financing activities during the six months ended December
31, 1998, was $83 million. During the first six months of 1999, the company
repurchased 5.9 million shares of the company's Common Stock for $185 million.
During the comparable period in 1998, the company repurchased 2.9 million shares
for $136 million. Spending on share repurchases was partially funded by
increased borrowings.
In October, 1998, the company issued notes in the amount of $400 million. The
notes mature on October 15, 2008 and bear interest at a rate of 7.20% per annum.
The interest rate on the notes may increase if, prior to October 23, 2002,
either Moody's Investor Services, Inc. or Standard & Poor's Rating Services
reduces the rating of the notes to below investment grade. The company used part
of the net proceeds from the sale of the notes to repay borrowings of $275
million outstanding under the company's $400 million revolving credit facility
and to finance the company's share repurchase program. The $400 million
revolving credit facility will remain available to the company until September
12, 2001. The company intends to use the remaining portion of the net proceeds
from the sale of the notes for general corporate purposes, which may include
further financing of the company's current share repurchase program and
additional acquisitions.
YEAR 2000 DISCLOSURE
The company has a comprehensive Year 2000 project designed to identify and
assess the risks associated with its information systems, products, operations
and infrastructure, and suppliers that are not Year 2000 compliant, and to
develop, implement, and test remediation and contingency plans to mitigate these
risks. The project comprises four phases: (1) identification of risks, (2)
assessment of risks, (3) development of remediation and contingency plans, and
(4) implementation and testing. In addition, the company provides its customers
with information on the Year 2000 project and the progress made towards Year
2000 compliance.
INFORMATION SYSTEMS. As part of an enterprisewide process reengineering
commenced in fiscal 1996, the company is replacing a substantial portion of its
existing information systems with a fully integrated, enterprise information
system (supplied by SAP America, Inc.) which has been certified to be Year 2000
compliant.
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<PAGE> 19
The new system will support the majority of the company's operations, including
major plants in the United States and Europe. This project was undertaken
without regard to possible Year 2000 issues and has not been accelerated as a
result of Year 2000 issues. Therefore, the company does not expect to record
Year 2000-related expenses in connection with the implementation of this system.
However, this system will not be fully implemented in certain of the company's
locations by the calendar year 2000. A review of the company's information
systems for locations where this system will not have been implemented prior to
January 1, 2000, has been completed and the company is engaged in the work
necessary for the existing systems in these locations to become Year 2000
compliant.
In addition to the system described above, the company uses a different
standardized enterprise information system in its Asian, Latin American, and
certain other locations, and for sales-order and supply-chain activity in
certain plants in North America. The company is currently in the process of
implementing an upgrade for this system that the vendor (QAD Inc.) has confirmed
to be Year 2000 compliant. The company expects this upgrade to be completed by
the fourth quarter of fiscal 1999. Integrated testing of all critical
information systems will be conducted during the current fiscal year with
ongoing testing through calendar year 1999. The company's global electronic data
interchange applications (through which the company communicates business
transactions with certain of its customers and suppliers) is being modified to
be Year 2000 compliant. This is expected to be completed by the end of February
1999. The company is also actively reviewing its hardware and systems
infrastructure, such as networks, in order to support the activities described
above.
Based on the current status of the assessments and remediation plans made to
date, the company expects total Year 2000 related external costs pertaining to
its information systems to be between $5 million and $7 million.
PRODUCTS. The company has assessed the capabilities of most of its products sold
to customers and has developed remediation plans for most of its noncompliant
products. Based on the assessments made to date, only a small number of the
company's products are affected by Year 2000 issues. The company intends to make
the products that it will continue to sell Year 2000 compliant during the third
quarter of fiscal 1999 and to make upgrades available for certain other
products. Year 2000 costs related to the company's products are not expected to
be material.
OPERATIONS AND INFRASTRUCTURE. Machinery and equipment and other items used in
the operations and facilities of the company have been inventoried and are
currently being assessed for Year 2000 compliance. The assessment to date has
not yielded any major areas of concern. The assessment process is expected to be
completed by the end of February 1999. During the second quarter of fiscal 1999,
the company started to develop remediation plans. Based on the assessments and
remediation plans made to date, the company expects Year 2000 related external
costs pertaining to its operations and infrastructure to range between $3
million and $4 million.
SUPPLIERS. The company continues to evaluate its supplier base to determine
whether Year 2000 issues affecting suppliers will adversely impact the company's
operations. The company has recently completed an assessment of its key
suppliers. Although the company does not anticipate any business disruptions
based on the assurances made by these suppliers, the company will continue to
assess and monitor key suppliers through the year 2000 transition period.
CUSTOMERS. The company established a Global Year 2000 Desk at its headquarters
in California to handle all customer requests for compliance and survey
information, and for other general information related to the company's Year
2000 programs.
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<PAGE> 20
GENERAL AND RISK FACTORS. Although the company expects that the Year 2000
project will be completed in a timely manner to prevent any significant
disruptions of business, unforeseen risks and delays may cause disruption in
manufacturing, order processing and distribution services or lead to additional
costs. The company believes that its greatest potential risks for Year 2000
issues are associated with its information systems and systems embedded in its
operations and infrastructure, for which the company is reviewing the need of
contingency planning that may be required.
Based on the status of the assessments made and remediation plans developed to
date, the company is not in a position to state the total cost of remediation of
all Year 2000 issues. Internal costs incurred for the Year 2000 project are not
being tracked; they principally consist of payroll and related costs. The
company does not currently expect the total costs to be material, and it expects
to be able to fund the total costs through operating cash flows. However, the
company has not yet completed all of its assessments, developed remediation or
contingency plans for all problems, or completely implemented or tested its
remediation plans.
As the Year 2000 project continues, the company may discover additional Year
2000 problems; may not be able to develop, implement, or test remediation or
contingency plans; or may find that the costs of these activities exceed current
expectations and become material. In many cases, the company is relying on
assurances from suppliers that new and upgraded information systems and other
products will be Year 2000 compliant. The company plans to test certain
third-party products, but cannot be sure that its tests will be adequate or
that, if problems are identified, they will be addressed by the supplier in a
timely and satisfactory way.
Because the company uses a variety of information systems and has additional
systems embedded in its operations and infrastructure, the company cannot be
sure that all of its systems will work together in a Year 2000-compliant
fashion. Furthermore, the company cannot be sure that it will not suffer
business interruptions, either because of its own Year 2000 problems or those of
its customers or suppliers whose Year 2000 problems may make it difficult or
impossible for them to fulfill their commitments to the company. If the company
fails to satisfactorily resolve Year 2000 issues in a timely manner, it could be
exposed to claims by third parties.
The company is continuing to evaluate Year 2000-related risks and to design and
implement corrective actions. The risks associated with the Year 2000 problem
are pervasive and complex; they can be difficult to identify and to address and
can result in material adverse consequences to the company. Even if the company,
in a timely manner, completes all of its assessments, identifies and tests
remediation plans believed to be adequate, and develops contingency plans
believed to be adequate, some problems may not be identified or corrected in
time to prevent material adverse consequences to the company.
EURO DISCLOSURE
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and adopted the euro as their common legal currency.
The company is currently assessing the impact of the introduction of the euro on
its business and is taking steps to mitigate risks and to identify opportunities
related to the euro. These steps include reevaluating pricing and purchasing
strategies in the new economic environment and evaluating the
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<PAGE> 21
capability of the company's information systems to support the company's
operations with respect to euro transactions during the transition period from
January 1, 1999 through January 1, 2002. The company's existing information
systems are capable of processing transactions in euro, such as sales and order
activities. The company is in the process of implementing a fully euro-compliant
enterprise information system for the operations impacted.
The use of the euro has simplified the company's foreign exchange and hedging
activities. Although the company will continue to evaluate the impact of the
euro introduction, based on currently available information, management does not
believe that the introduction of the euro will have a material adverse impact on
the company's financial condition or results of operations. Total costs
associated with the introduction of the euro are not expected to be material and
will be expensed to operations as incurred. See also "Problems associated with
the euro conversion" under "Forward-looking statements and risk factors" in this
report on Form 10-Q.
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<PAGE> 22
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Statements in this quarterly report on Form 10-Q that are not statements of
historical fact, including statements regarding revenue; gross profit and
earnings trends; tax provisions, tax payments, and tax rates; financial goals;
litigation matters; acquisitions; restructuring actions; Year 2000 readiness;
euro compliance; currency fluctuations; economic trends; and the business
environment are forward-looking statements. Forward-looking statements are
subject to a number of risks and uncertainties that could cause actual results
to differ materially from the statements made. These risks and uncertainties
include those described below and elsewhere in this report on form 10-Q, as well
as risk factors included in the company's annual report on Form 10-K for the
year ended June 30, 1998, on file with the Securities and Exchange Commission.
FLUCTUATIONS IN FOREIGN EXCHANGE RATES MAY AFFECT THE COMPANY'S RESULTS.
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 exchange 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 currency exchange rates.
COMPETITION AND FAILURE TO ACHIEVE PRODUCTIVITY IMPROVEMENTS MAY REDUCE THE
PROFITABILITY OF THE COMPANY. The company sells its products in highly
competitive markets, and the company's competitors include some of the largest
companies in the world. Even when the company has strong intellectual property
protection for its products, other products, sometimes based on lower-cost
technologies, compete with the company's products. In some of the company's
markets, prices trend downward over time, such as the market for circuit
protection devices. Although the company has productivity improvement
initiatives to attain the improvements in manufacturing and design necessary to
remain competitive and to keep the company's gross profits from declining, there
can be no assurance that the company will be able to attain the productivity
improvements necessary to maintain or improve the company's gross profits. In
addition, these trends may be exacerbated by weaker demand for the company's
products caused by economic turmoil in many regions where the company sells its
products.
CONDITIONS IN INTERNATIONAL AND EMERGING MARKETS MAY AFFECT THE COMPANY'S
RESULTS. International and emerging markets provide the company with significant
growth opportunities. However, these markets are volatile and subject to events
which could adversely affect the company's financial results, such as:
- periodic economic downturns in different regions of the world,
- changes in trade policies or tariffs,
- political instability, and
- fluctuations in exchange rates.
The deterioration of economic conditions in certain Asian countries and emerging
markets in Russia, Eastern Europe and Latin America may increase pressure on the
company to reduce prices and reduce the ability of the company's customers to
purchase the company's products. Such conditions may therefore cause revenues or
gross profits to fall below the company's expectations. In addition, continuing
economic recession may lead to the cancellation of orders, further pressure to
reduce prices,
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<PAGE> 23
difficulty in collecting receivables owed to the company, or other factors that
may adversely affect the company's financial results.
RESTRUCTURING ACTIONS MAY NOT ACHIEVE INTENDED RESULTS. The company continues to
implement a number of complex restructuring actions. Delay or difficulty in
implementing these actions or market factors could reduce the anticipated
benefit of these actions. The company's revenues, operating results, and
financial condition could be adversely affected by the company's ability to
manage effectively 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 succeed in achieving
its goals or that it will do so without unintended adverse consequences.
PROBLEMS ASSOCIATED WITH YEAR 2000. As more fully described under "Year 2000
Disclosure", the company is continuing to evaluate Year 2000-related risks and
to design and implement corrective actions. The risks associated with the Year
2000 problem are pervasive and complex; they can be difficult to identify and to
address, and can result in material adverse consequences to the company. Even if
the company, in a timely manner, completes all of its assessments, identifies
and tests remediation plans believed to be adequate, and develops contingency
plans believed to be adequate, some problems may not be identified or corrected
in time to prevent material adverse consequences to the company. Additionally,
the company may acquire businesses that are not Year 2000 compliant, which may
cause disruptions to the company's operations or lead to additional costs.
PROBLEMS ASSOCIATED WITH THE EURO CONVERSION. As described under "Euro
Disclosure", the company is continuing to evaluate the impact of the
introduction of the euro. There can be no assurance that all problems will be
identified or corrected in time to prevent material adverse consequences to the
company's financial condition or results of operations. In addition, the
existence of a uniform currency across much of Europe may affect the company's
pricing policies, which may adversely impact the company's margins.
IMPLEMENTATION OF NEW INFORMATION SYSTEMS COULD CAUSE BUSINESS DISRUPTIONS. 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 data
and information systems with a fully integrated, enterprise information system.
It will cover most of the company's major manufacturing sites and sales
locations. The change in systems and processes is substantial. During
implementation of this new system, the change could cause 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 effect on the company's operating results or financial position.
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<PAGE> 24
LITIGATION IS UNPREDICTABLE AND COSTLY. From time to time the company or its
subsidiaries, or both, become involved in lawsuits arising from various types of
commercial claims, including:
- product liability,
- unfair competition,
- antitrust,
- breach of contract,
- environmental, and
- intellectual property matters.
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 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).
The company has a substantial investment in intellectual properties (consisting
of patents, trademarks, copyrights, and trade secrets). The company 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. The third parties
may assert related counterclaims against the company, including unfair
competition, antitrust or infringement claims. 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 tends to be unpredictable and costly. Events outside the company's
control may affect the results of litigation. There is no assurance that
litigation will not have a material adverse effect on the company's future
financial position or results of operations.
NEW PRODUCTS AND ACQUISITIONS MAY NOT PRODUCE ANTICIPATED BENEFITS. 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 will
continue to pursue the acquisition of new or compatible technologies and
businesses as an important part of the company's growth strategy. The company
also has entered into, and in the future may enter into, arrangements with other
companies to expand product offerings and to enhance its own manufacturing
capabilities. These arrangements may include minority equity investments in the
other companies. The company cannot predict success in its research and
development efforts, acquisitions of new technologies, products, or businesses,
or arrangements with third parties. Accordingly, there can be no assurance that:
- the company will successfully realize its objectives,
- the realization of these goals will not take longer or cost more
than anticipated, or
- there will not be unintended adverse financial or other
consequences from these actions.
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<PAGE> 25
OTHER MARKET FORCES CAN ADVERSELY AFFECT THE DEMAND FOR THE COMPANY'S PRODUCTS.
Changing market circumstances, such as fluctuations in demand and the
seasonality of certain product lines, may affect the company's operating
results. The company also sells certain of its products to customers in
industries and countries that are experiencing periods of rapid change. 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 they resolve
technology issues more clearly,
- foreign countries are privatizing many electric power utilities,
which may affect the purchasing policies of these utility
companies.
These types of market forces may adversely affect the company's operations and
financial performance.
CUSTOMER CONCENTRATION FOR ACCESS NETWORK ELECTRONICS PRODUCTS MAY AFFECT SALES
OF THOSE PRODUCTS. The company no longer pursues sales of its access network
electronics products outside of North America. Because these products are sold
to operators of large telecommunication systems, the customers and potential
customers for these products are now limited to the relatively few operators of
such systems in North America. A decision by one of these customers not to
purchase the company's access network electronics products, or to delay the
purchase of these products, could have a material impact on the company's sales
of these products or the growth rate of such sales.
GEOGRAPHIC AND PRODUCT MIX CHANGES AND PRICE REDUCTIONS MAY AFFECT THE COMPANY'S
RESULTS OF OPERATIONS. The company's results of operations vary by product line
and by geographic region. Changes in the company's geographic or product mix of
sales may therefore affect the company's gross profits. In addition, reductions
in pricing to end customers may also affect the company's gross profits.
THE COMPANY'S ANNUAL EFFECTIVE TAX RATE IS DIFFICULT TO ESTIMATE. The company
determines its provision for income taxes based on the company's level of
profitability in each jurisdiction in which it is subject to tax. It is
difficult for the company to predict the geographic distribution and level of
profitability in each jurisdiction. The company's geographic distribution and
level of profitability may therefore vary from forecasts. This type of variance
could cause the company's estimated annual effective tax rate in interim
quarters to vary from the actual annual effective tax rate for the year, or
could cause variances in projections of cash required for tax payments.
REALIZATION OF ANY OF THESE RISKS MAY AFFECT THE COMPANY'S PERFORMANCE. Because
of the foregoing risks, in addition to other risks that affect the company's
operating results and financial position, investors should:
- not consider past financial performance or management's
expectations a reliable indicator of future performance, and
- not use historical trends to anticipate results or trends in
future periods.
In that regard, the company's results of operations and financial condition
could be adversely affected by a number of risks in addition to those discussed
above, including overall economic conditions and lower than expected demand.
23
<PAGE> 26
Further, the company's stock price is subject to volatility. Any of the risks
previously discussed could have an adverse effect on the company's stock price.
In addition, the company's stock price could be adversely affected if the
company's revenues or earnings in any quarter fail to meet the investment
community's expectations, or if there are broader, negative market trends.
NO DUTY TO UPDATE. The company does not undertake an obligation to update its
forward-looking statements or risk factors to reflect changes in events or
circumstances.
24
<PAGE> 27
RAYCHEM CORPORATION
PART II - OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE
(a) The company held its Annual Meeting of Stockholders on November 6, 1998.
(b) The following directors were elected:
<TABLE>
<CAPTION>
Votes
Name Votes in favor withheld
---- -------------- --------
<S> <C> <C>
Richard Dulude 68,804,577 1,134,069
James F. Gibbons 68,801,899 1,136,746
Richard A. Kashnow 68,697,754 1,240,892
John P. McTague 68,833,669 1,104,977
Dean O. Morton 68,802,258 1,136,387
Isaac Stein 68,770,692 1,167,953
Chang-Lin Tien 68,826,118 1,112,527
Cyril J. Yansouni 68,833,861 1,104,785
</TABLE>
(c) The following other matter was voted upon:
Ratification of the appointment of PricewaterhouseCoopers LLP as
independent certified public accountants for the company and its
subsidiaries for fiscal year 1999.
<TABLE>
<S> <C>
Affirmative votes: 69,814,456
Negative votes: 82,218
Abstentions: 42,971
</TABLE>
ITEM 5: OTHER INFORMATION
On October 30, 1998, the company announced that its board of directors elected
Sanjay Kasturia and Emily Liggett as vice presidents. Kasturia, 38, is director
of advanced technology for Raychem's telecommunications, energy and industrial
business segment. Liggett, 43, serves Raychem as president of Elo TouchSystems,
Inc..
On December 17, 1998, the company announced that its board of directors elected
Mark S. Frey and Alan Clarke as vice presidents. Frey, 45, is the vice president
finance for Raychem's Electronics OEM components business segment. Clarke, 45,
is the vice president and general manager of Raychem's telecommunications
business in the telecommunications, energy and industrial business segment.
In December 1998, Deidra Barsotti, formerly vice president and corporate
controller, assumed the role of vice president finance for Raychem's
telecommunications, energy and industrial business segment. Raymond Sims, senior
vice president and chief financial officer has assumed the additional roles of
acting corporate controller and chief accounting officer.
25
<PAGE> 28
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
4(a) Rights Agreement, dated as of December 11, 1998(1)
10(z) Underwriting agreement between the company and Morgan
Stanley & Co. Incorporated, Chase Securities Inc., J.P.
Morgan Securities Inc., and NationsBanc Montgomery
Securities LLC. (2)
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The company filed two Current Reports on Form 8-K during the
quarter ended December 31, 1998.
The report filed on October 20, 1998, reported that the company
entered into an underwriting agreement with Morgan Stanley & Co.
Incorporated, Chase Securities Inc., J.P. Morgan Securities
Inc., and NationsBanc Montgomery Securities LLC for an
underwritten offering of $400,000,000 aggregate principal amount
of its 7.20% Notes due October 15, 2008.
The report filed on December 11, 1998, reported on the adoption
by the board of directors of a Stockholder Rights Plan to
replace the company's existing Stockholder Rights Plan, which
expires on February 13, 1999.
(1) Filed as an exhibit to the company's Current Report on Form 8-K dated
December 11, 1998, (File No 2-15299) and incorporated by reference.
(2) Filed as an exhibit to the company's Current Report on Form 8-K dated
October 20, 1998, (File No 2-15299) and incorporated by reference.
26
<PAGE> 29
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 5, 1999 /s/ RAYMOND J. SIMS
-------------------------------
Raymond J. Sims
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
27
<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit # Description
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE PERIOD ENDED DECEMBER 31,
1998, 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-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 227,301
<SECURITIES> 8,535
<RECEIVABLES> 363,268
<ALLOWANCES> 9,610
<INVENTORY> 271,549
<CURRENT-ASSETS> 1,007,989
<PP&E> 1,215,780
<DEPRECIATION> 708,497
<TOTAL-ASSETS> 1,850,698
<CURRENT-LIABILITIES> 377,471
<BONDS> 559,309
0
0
<COMMON> 90,016
<OTHER-SE> 684,697
<TOTAL-LIABILITY-AND-EQUITY> 1,850,698
<SALES> 896,607
<TOTAL-REVENUES> 898,091
<CGS> 480,027
<TOTAL-COSTS> 481,332
<OTHER-EXPENSES> 48,903
<LOSS-PROVISION> 350
<INTEREST-EXPENSE> 11,983
<INCOME-PRETAX> 107,477
<INCOME-TAX> 37,617
<INCOME-CONTINUING> 69,860
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,860
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.87
</TABLE>
