-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ij0dtUwX7MxexaNJ93mF9Tg/wkvq+IxcJL24HYl+yFd0pCCTLB+yGRMXbLmnruQZ lY+h04n4wkCj6YlzqB9SNg== 0000891618-97-000524.txt : 19970222 0000891618-97-000524.hdr.sgml : 19970222 ACCESSION NUMBER: 0000891618-97-000524 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970213 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAYCHEM CORP CENTRAL INDEX KEY: 0000082206 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 941369731 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08341 FILM NUMBER: 97531032 BUSINESS ADDRESS: STREET 1: 300 CONSTITUTION DR STREET 2: MS 120/8502 CITY: MENLO PARK STATE: CA ZIP: 94025-1164 BUSINESS PHONE: 4153613333 MAIL ADDRESS: STREET 1: 300 CONSTITUTION DRIVE STREET 2: MS 120/8502 CITY: MENLO PARK STATE: CA ZIP: 94025-1164 FORMER COMPANY: FORMER CONFORMED NAME: RAYTHERM CORP DATE OF NAME CHANGE: 19720526 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 2-15299 RAYCHEM CORPORATION (Exact name of registrant as specified in its charter) Delaware 94-1369731 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 300 Constitution Drive, Menlo Park, CA 94025-1164 (Address of principal executive offices) (Zip code) (415) 361-3333 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- As of January 22, 1997, the registrant had outstanding 44,669,128 shares of Common Stock, $1.00 par value. 2 RAYCHEM CORPORATION INDEX TO FORM 10-Q Page Number ----------- PART I. FINANCIAL INFORMATION Item 1: Financial Information Consolidated Condensed Statements of Income - Three and Six Months Ended December 31, 1996 and 1995 1 Consolidated Condensed Balance Sheets - December 31, 1996, and June 30, 1996 2 Consolidated Condensed Statements of Cash Flows - Six Months Ended December 31, 1996 and 1995 3 Notes to Consolidated Condensed Financial Statements 4-6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 7-15 PART II. OTHER INFORMATION Item 1: Legal Proceedings 16 Item 4: Submission of Matters to a Vote of Security Holders 17-18 Item 5: Other Information 18 Item 6: Exhibits and Reports on Form 8-K 18 SIGNATURES 19 3 RAYCHEM CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (IN THOUSANDS EXCEPT SHARE DATA) (UNAUDITED)
Three Months Ended Six Months Ended December 31, December 31, ---------------------------- ----------------------------- 1996 1995 1996 1995 ------------ ------------ ------------ ------------ Revenues $ 441,047 $ 411,051 $ 871,358 $ 821,566 Cost of goods sold 215,681 196,661 424,757 391,575 Research and development expense 29,501 30,511 59,587 60,555 Selling, general, and administrative expense 128,601 134,122 248,176 256,582 Equity in net losses of affiliated companies -- 18,234 -- 28,860 Interest expense, net 256 2,716 2,185 6,016 Other expense (income), net 4,902 (6,504) (14,136) (2,773) ------------ ------------ ------------ ------------ Income before income taxes 62,106 35,311 150,789 80,751 Provision for income taxes 9,671 10,209 25,634 23,219 ------------ ------------ ------------ ------------ Net income $ 52,435 $ 25,102 $ 125,155 $ 57,532 ============ ============ ============ ============ Average number of common shares and equivalents outstanding 46,119,060 45,856,806 46,106,229 45,381,290 ============ ============ ============ ============ Earnings per common share $ 1.14 $ 0.55 $ 2.71 $ 1.27 ============ ============ ============ ============ Dividends per common share $ 0.10 $ 0.08 $ 0.20 $ 0.16 ============ ============ ============ ============
See accompanying notes to consolidated condensed financial statements. 1 4 RAYCHEM CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED) DECEMBER 31, 1996 June 30, 1996 ----------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 136,943 $ 224,115 Accounts receivable, net 322,520 308,341 Inventories: Raw materials 89,584 86,562 Work in process 53,475 50,965 Finished goods 105,341 91,796 ----------- ----------- Total inventories 248,400 229,323 Prepaid taxes 55,520 50,312 Other current assets 76,910 95,765 ----------- ----------- Total current assets 840,293 907,856 Property, plant, and equipment 1,123,687 1,104,646 Less accumulated depreciation and amortization 641,389 613,207 ----------- ----------- Net property, plant, and equipment 482,298 491,439 Other assets 152,408 151,321 ----------- ----------- TOTAL ASSETS $ 1,474,999 $ 1,550,616 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to banks $ 34,336 $ 35,011 Accounts payable 78,811 69,230 Other accrued liabilities 158,793 199,172 Income taxes 28,432 27,721 Current maturities of long-term debt 6,547 119,618 ----------- ----------- Total current liabilities 306,919 450,752 Long-term debt 147,607 148,352 Deferred income taxes 25,976 23,722 Other long-term liabilities 83,731 80,422 Minority interests 7,691 6,162 Commitments and contingencies (See notes) Stockholders' equity: Preferred Stock, $1.00 par value Authorized: 15,000,000 shares; Issued: none -- -- Common Stock, $1.00 par value Authorized: 72,150,000 shares Issued: 44,951,611 and 44,890,881 shares, respectively 44,952 44,891 Additional contributed capital 410,820 408,866 Retained earnings 456,097 361,876 Currency translation 24,383 25,137 Treasury Stock, at cost (408,706 and 115,753 shares, respectively) (33,889) (8,630) Other 712 9,066 ----------- ----------- Total stockholders' equity 903,075 841,206 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,474,999 $ 1,550,616 =========== ===========
See accompanying notes to consolidated condensed financial statements. 2 5 RAYCHEM CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ----------------------------------------------------------------------------------------------- SIX MONTHS ENDED DECEMBER 31 (IN THOUSANDS) 1996 1995 - ----------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 125,155 $ 57,532 Adjustments to reconcile net income to net cash provided by operating activities: Payments for restructuring and divestitures (8,286) (1,833) Equity in net losses of affiliated companies -- 28,860 Net loss on disposal of other property, plant, and equipment 1,022 750 Gain on sale of investment (23,601) (584) Depreciation and amortization 40,481 39,429 Deferred income tax provision 2,551 63 Changes in certain assets and liabilities, net of effects from restructuring and divestitures: Accounts receivable (9,928) (4,172) Inventories (17,184) (6,035) Accounts payable and accrued liabilities (19,268) (9,092) Income taxes (6,645) 6,298 Other assets and liabilities 7,394 8,517 --------- --------- Net cash provided by operating activities 91,691 119,733 --------- --------- Cash flows from investing activities: Investment in property, plant, and equipment (32,483) (43,078) Disposition of property, plant, and equipment 16,039 841 Advances to affiliated companies -- (26,400) Proceeds from sale of investments and other 27,538 3,124 Purchase of investment (7,500) -- --------- --------- Net cash provided by (used in) investing activities 3,594 (65,513) --------- --------- Cash flows from financing activities: Net payment of short-term debt (8,639) (833) Proceeds from long-term debt 11,384 -- Payments of long-term debt (124,403) (1,148) Common Stock issued under employee benefit plans 30,223 33,725 Common Stock repurchased (76,437) (25,047) Proceeds from repayments of stockholder notes receivable 101 314 Cash dividends (8,971) (7,069) --------- --------- Net cash used in financing activities (176,742) (58) --------- --------- Effect of exchange rate changes on cash and cash equivalents (5,715) (3,239) --------- --------- (Decrease) increase in cash and cash equivalents (87,172) 50,923 Cash and cash equivalents at beginning of period 224,115 118,067 --------- --------- Cash and cash equivalents at end of period $ 136,943 $ 168,990 ========= ========= SUPPLEMENTAL DISCLOSURES Cash paid for: Interest (net of amounts capitalized) $ 5,594 $ 10,290 Income taxes (net of refunds) 24,857 12,401
See accompanying notes to consolidated condensed financial statements. 3 6 RAYCHEM CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) STATEMENT OF ACCOUNTING PRESENTATION In the opinion of management, the accompanying unaudited consolidated condensed financial statements include all adjustments, including normal recurring accruals, necessary to present fairly the results of operations for the three and six months ended December 31, 1996 and 1995, the financial position as of December 31, 1996, and the cash flows for the six months ended December 31, 1996 and 1995. The June 30, 1996 balance sheet included is derived from the consolidated financial statements included in the company's Annual Report on Form 10-K for the year ended June 30, 1996. The results of operations for the three and six months ended December 31, 1996, are not necessarily indicative of the results to be expected for the full year. Certain prior-period amounts have been reclassified to conform with the fiscal 1997 financial statement presentation. BUSINESS SEGMENTS Revenues and operating income (loss) by business segment are as follows:
in thousands -------------------------------------------------- Three Months Ended Six Months Ended December 31, December 31, ----------------------- ----------------------- 1996 1995 1996 1995 --------- --------- --------- --------- Revenues Electronics $ 185,148 $ 158,835 $ 362,069 $ 316,690 Industrial 143,728 140,598 278,907 280,417 Telecommunications 112,171 111,618 230,382 224,459 --------- --------- --------- --------- Total revenues $ 441,047 $ 411,051 $ 871,358 $ 821,566 ========= ========= ========= ========= Operating income (loss) Electronics $ 36,530 $ 26,206 $ 72,595 $ 57,372 Industrial 33,590 26,666 64,171 57,603 Telecommunications 18,118 21,782 44,591 45,367 Corporate (20,974) (24,897) (42,519) (47,488) --------- --------- --------- --------- Total operating income $ 67,264 $ 49,757 $ 138,838 $ 112,854 ========= ========= ========= =========
RECENT ACCOUNTING STANDARDS In the first quarter of 1997, the company adopted the Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The statement also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell, except for assets that are covered by APB Opinion No. 30. There was no impact on the company's results of operations or financial condition upon adoption of Statement No. 121. 4 7 FINANCIAL INSTRUMENTS Gains and losses from forward exchange contracts used to hedge receivables and payables and anticipated transactions totaled $0.1 million loss and $1.4 million gain for the three months ended December 31, 1996 and 1995, respectively. Gains and losses from forward exchange contracts totaled $0.4 million loss and $4.1 million gain for the six months ended December 31, 1996 and 1995, respectively. The company incurred total foreign exchange transaction and translation losses of $0.8 million and $0.6 million for the three months ended December 31, 1996 and 1995, respectively. Total foreign exchange transaction and translation losses were $1.3 million and $1.7 million for the six months ended December 31, 1996 and 1995, respectively. These realized and unrealized gains and losses are included in "Other expense (income), net." The total amount of foreign exchange exposure hedged was $119 million at December 31, 1996. The company hedges exposures that arise from trade and intercompany receivables and payables (including anticipated transactions), loans in non-functional currencies, and net monetary assets in certain foreign countries with the U.S. dollar as functional currency. The company has unhedged non-functional currency translation and transaction exposures in countries whose currencies do not have a liquid, cost-effective forward market available for hedging. Such exposures at December 31, 1996, included $6 million in net intercompany payables in non-functional currencies and $3 million in net monetary assets in foreign countries with the U.S. dollar as functional currency. RESTRUCTURING AND DIVESTITURES The company incurred a pretax restructuring charge of $44 million in the third quarter of 1996 as the company moved to simplify and lower the costs of its operations. All of the charges, with the exception of net $4 million in asset writedowns, are cash in nature and are expected to be substantially incurred in 1997 and funded through operating cash flows. Approximately 700 positions will be eliminated, some portion of which may be replaced elsewhere. As of December 31, 1996, approximately 500 employees have separated from the company as a result of the restructuring. The following table sets forth the company's restructuring reserves as of December 31, 1996:
Restructuring Reserves ---------------------- Employee Asset Severance Writedowns Leases Other Total --------- --------- -------- -------- -------- (in thousands) Reserve Balances, June 30, 1996 (Audited): $ 23,733 $ 1,046 $ 827 $ 700 $ 26,306 Adjustment to reserve -- (246) (21) 267 -- Cash payments (7,886) -- (128) (272) (8,286) Non-cash items (387) (79) -- -- (466) -------- -------- -------- -------- -------- RESERVE BALANCES, DECEMBER 31, 1996: $ 15,460 $ 721 $ 678 $ 695 $ 17,554 ======== ======== ======== ======== ========
5 8 MARKETABLE SECURITIES Marketable securities are classified as available-for-sale and carried at fair value as determined by quoted market prices. The aggregate fair value of the marketable securities held at December 31, 1996, was $5 million. Gross unrealized holding gains were $3 million and are included in the "Other" component of stockholder's equity. REPURCHASE OF COMMON STOCK In April 1996, as part of the company's continuing plan to purchase its shares to meet employee benefit plan commitments, the Board of Directors authorized the company's management, at its discretion, to repurchase up to 2.0 million shares of the company's stock during any one fiscal year, effective July 1, 1996. An authorization to repurchase an additional 0.5 million shares under unusual circumstances was removed by the Board of Directors in December 1996. During the three months ended December 31, 1996, the company repurchased 600,000 shares and subsequently reissued 428,880 shares, leaving 408,705 shares in treasury stock at December 31, 1996. GAIN ON SALE OF ASSETS In the first quarter of 1997, the company recorded a $23 million pretax gain from the sale of a portfolio of patents and intellectual property, which gain is included in "Other expense (income), net." CONTINGENCIES The company and its subsidiaries are parties to lawsuits or may in the future become parties to lawsuits involving various types of commercial claims, including, but not limited to, product liability, unfair competition, antitrust, breach of contract, and intellectual property matters. Currently, the principal product liability litigation involves a variety of claims arising from the company's heat-tracing and freeze-protection products. The company intends to defend itself vigorously in these matters. The company's experience to date is that losses, if any, from such claims have not had a material effect on the company's financial position or results of operations. However, the company sells its products into applications (including, for example, aerospace and automotive) where product liability issues could be material. The company maintains insurance to cover product liability and certain other claims in excess of deductibles. Additionally, the company has been named, among others, as a potentially responsible party in administrative proceedings alleging that it may be liable for the costs of correcting environmental conditions at certain hazardous waste sites. At all of the sites, the company is alleged to be a de minimis generator of hazardous wastes, and the company believes that it has limited or no liability for cleanup costs at these sites. Legal proceedings tend to be unpredictable and costly and may be affected by events outside the control of the company. There is no assurance that litigation will not have an adverse effect on the company's financial position or results of operations. The company vigorously defends itself against pending claims and legal proceedings. SUBSEQUENT EVENTS On January 15, 1997, the company's Board of Directors increased the quarterly cash dividend 40% to $0.14 per share of Common Stock, payable on March 12, 1997, to stockholders of record as of February 12, 1997. 6 9 RAYCHEM CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS OVERVIEW
- ------------------------------------------------------------------------------- Three months ended Six months ended December 31, December 31, (in millions, except per share data) 1996 1995 1996 1995 - ------------------------------------------------------------------------------- Revenues $441 $411 $871 $822 - ------------------------------------------------------------------------------- Constant currency revenue growth 9% 5% 8% 6% - ------------------------------------------------------------------------------- Gross profit as a percent of revenues 51% 52% 51% 52% - ------------------------------------------------------------------------------- Selling, general, and administrative (SG&A) expense as a percent of revenues 29% 33% 28% 31% - ------------------------------------------------------------------------------- Net income $ 52 $ 25 $125 $ 58 - ------------------------------------------------------------------------------- Net income per common share $1.14 $0.55 $2.71 $1.27 - -------------------------------------------------------------------------------
Revenues for the second quarter of fiscal 1997 were $441 million, up 7% from revenues of $411 million reported for the year-ago period. Revenue growth was 9% on a constant currency basis (which assumes that foreign currency exchange rates had remained constant from the prior period). Gross profit was 51% for the second quarter of 1997, down slightly from a year ago. SG&A expense as a percent of revenues declined to 29% in the second quarter of 1997. The reduction in SG&A costs was largely the result of restructuring and other actions taken in the prior year to reduce operating costs. Management is focused on further reductions of SG&A costs as a percent of revenues. Raychem's "ongoing" pretax income for the second quarter of 1997 increased to $68 million from $59 million in the comparable prior-year period. Raychem's results are summarized as follows:
- ------------------------------------------------------------------------------------- Three months ended Six months ended December 31, December 31, (in millions) 1996 1995 1996 1995 - ------------------------------------------------------------------------------------- Core business: "Ongoing" pretax income $ 68 $ 59 $ 133 $ 116 - ------------------------------------------------------------------------------------- Severance and plant consolidation costs (6) (12) (6) (12) - ------------------------------------------------------------------------------------- Gain on sale of assets -- -- 23 -- - ------------------------------------------------------------------------------------- Shareholder lawsuit insurance settlement -- 7 -- 7 - ------------------------------------------------------------------------------------- Core business pretax income 62 54 150 111 - ------------------------------------------------------------------------------------- Income taxes 10 10 25 23 - ------------------------------------------------------------------------------------- Core net income 52 44 125 88 - ------------------------------------------------------------------------------------- Equity in net loss of Ericsson Raynet -- (19) -- (30) - ------------------------------------------------------------------------------------- Net income $ 52 $ 25 $ 125 $ 58 - -------------------------------------------------------------------------------------
During the second quarter of 1997, the company incurred approximately $6 million in severance and plant consolidation costs. The results for the year-ago quarter included a 7 10 net $5 million of nonrecurring charges, reflecting a $6.6 million gain (included in "Other expense (income), net") from an insurance settlement arising from a previous shareholder lawsuit, offset by $12 million of charges incurred from severance and other related actions. The results for the six months ended December 31, 1996, included a $23 million pretax gain arising from the sale of a portfolio of patents and intellectual property (included in "Other expense (income), net"). The estimated annual effective income tax rate was 17% for the six months ended December 31, 1996, down from 18% in the prior quarter and 21% for the year-ago period. The decrease from the prior year results primarily from anticipated improvement in fiscal 1997 U.S. profitability enabling the utilization of prior years' U.S. deferred deductions. Through December 31, 1995, the company accounted for the Ericsson Raynet joint venture under the equity method of accounting. Effective January 1, 1996, the joint venture agreement was amended. As a result, the company's interest in the joint venture is now accounted for using the cost basis of accounting and the company no longer shares in the ongoing operating losses of the joint venture. SEGMENT OPERATIONS The following discussion of the results of operations is based on the company's business segments--electronics, industrial, telecommunications, and corporate (referred to collectively as the "core business"). Certain amounts previously reported as corporate segment costs, notably certain legal and patents and information technology costs, are now being allocated to the business segments. Accordingly, previously reported operating income for the segments has been restated to conform to the fiscal 1997 presentation. Electronics
- -------------------------------------------------------------------- Three months ended Six months ended December 31, December 31, (dollars in millions) 1996 1995 1996 1995 - -------------------------------------------------------------------- Revenues $185 $159 $362 $317 - -------------------------------------------------------------------- Constant currency revenue growth 19% 8% 17% 9% - -------------------------------------------------------------------- Operating income $ 37 $ 26 $ 73 $ 57 - --------------------------------------------------------------------
During the second quarter, the company combined the leadership of the Electronics and PolySwitch divisions to strengthen the company's presence in growth markets and with the aim to lower ongoing costs. The electronics business segment, including the Electronics, PolySwitch, and Elo TouchSystems businesses, experienced strong revenue growth for the second quarter of 1997. Sales of PolySwitch devices rose approximately 26% with strong growth across all product families. Unit volume for PolySwitch devices increased approximately 50% over the year-ago quarter, while prices declined approximately 8%. Electronics' sales to other OEM customers grew 7% due to improved conditions in commercial markets; sales were strong in North America, and were essentially flat in Europe. Elo TouchSystems' revenues now include TouchPanel Systems, a Japanese joint venture, previously accounted for under the equity method. Elo TouchSystems' revenues increased 17% from the year-ago quarter on a comparable basis, led by significant growth in North America. Operating income in the Electronics business segment was $37 million in the second quarter of 1997, up $11 million from the year-ago quarter. Revenues and operating income for the six months ended December 31, 1996, increased from the year-ago period, reflecting continued revenue growth and relatively lower costs. 8 11 Industrial
- -------------------------------------------------------------------- Three months ended Six months ended December 31, December 31, (dollars in millions) 1996 1995 1996 1995 - -------------------------------------------------------------------- Revenues $144 $141 $279 $280 - -------------------------------------------------------------------- Constant currency revenue growth 4% 4% 2% 6% - -------------------------------------------------------------------- Operating income $ 34 $ 27 $ 64 $ 58 - --------------------------------------------------------------------
Revenues in the industrial business segment, including the Chemelex and Electrical Products divisions, grew to $144 million in the second quarter of 1997, up 4% on a constant currency basis from the prior year's second quarter. Chemelex Division sales grew 6% from the year-ago quarter. Sales of heat-tracing products more than offset a slight decline in the division's corrosion-protection business. Electrical Products Division revenues were down slightly from a year ago. The division had sales growth across most of its business, but these gains continue to be offset by lower surge arrester sales. Industrial business segment operating income increased in the second quarter of 1997 to $34 million from $27 million in the prior-year quarter. These results include approximately $2 million in severance and plant consolidation costs in the current quarter and $6 million in such charges in the year-ago quarter. Industrial segment revenues for the six months ended December 31, 1996, remain essentially unchanged from the comparable prior-year period. Operating income for the six months ended December 31, 1996, increased slightly reflecting lower operating costs in the current period. Telecommunications
- -------------------------------------------------------------------- Three months ended Six months ended December 31, December 31, (dollars in millions) 1996 1995 1996 1995 - -------------------------------------------------------------------- Revenues $112 $112 $230 $224 - -------------------------------------------------------------------- Constant currency revenue growth 1% 2% 3% 2% - -------------------------------------------------------------------- Operating income $ 18 $ 22 $ 45 $ 45 - --------------------------------------------------------------------
Telecommunications business segment revenues were $112 million, essentially unchanged from year-ago levels. Sales of transmission electronics products and fiber closures grew solidly in the second quarter of 1997. However, these gains were offset by continued sales declines in copper closures and lower sales in Latin America. Operating income declined to $18 million from $22 million in the prior year. A mix shift to lower margin products and an adverse geographic mix depressed the quarter's operating income. Revenues for the six months ended December 31, 1996, increased due to strong sales of transmission electronics products in the first quarter of 1997. Operating income for the six months ended December 31, 1996, remained unchanged from the prior-year period. 9 12 Corporate
- ---------------------------------------------------------------------------- Three months ended Six months ended December 31, December 31, (dollars in millions) 1996 1995 1996 1995 - ---------------------------------------------------------------------------- Operating loss $(21) $(25) $(43) $(47) - ----------------------------------------------------------------------------
Corporate segment operating loss for the second quarter of 1997 decreased to $21 million from $25 million in the year-ago quarter due to lower general and administrative costs resulting, in part, from headcount reductions. These results include approximately $3 million in severance costs in both the current and the comparable year-ago quarter. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1996, the company had $137 million in cash and cash equivalents, $457 million in committed credit facilities (of which $9 million were utilized), and $180 million in various uncommitted credit facilities (of which $58 million were utilized). The combination of cash and cash equivalents, available lines of credit, and future cash flows from operations are expected to be sufficient to satisfy the company's needs for working capital, normal capital expenditures, and anticipated dividends. The following table presents certain measures of liquidity and capital resources:
- ------------------------------------------------------------------------------- DECEMBER 31, June 30, (dollars in millions) 1996 1996 - ------------------------------------------------------------------------------- Debt net of cash $ 52 $ 79 - ------------------------------------------------------------------------------- Debt net of cash as a percent of stockholders' equity 6% 9% - ------------------------------------------------------------------------------- Days of sales outstanding 62 60 - ------------------------------------------------------------------------------- Days of inventory on hand 104 104 - -------------------------------------------------------------------------------
Receivables as measured by the number of days of sales outstanding increased slightly, but are within an acceptable range given the geographic mix of countries involved. Inventory as measured by the number of days of inventory on hand increased to 104 at December 31, 1996, from 101 at September 30, 1996, and remained unchanged from June 30, 1996. The company will continue to focus its efforts on reducing inventory levels. 10 13 The table below summarizes the company's cash flows from operating, investing, and financing activities:
- --------------------------------------------------------------------- SIX MONTHS ENDED DECEMBER 31 (dollars in millions) 1996 1995 - --------------------------------------------------------------------- Cash provided by (used in): Operating activities $ 92 $ 120 Investing activities 4 (66) Financing activities (177) (0) Effect of exchange rate changes on cash and cash equivalents (6) (3) - --------------------------------------------------------------------- (Decrease) increase in cash and cash equivalents $(87) $ 51 - ---------------------------------------------------------------------
OPERATING ACTIVITIES Cash flows from operating activities for the six months ended December 31, 1996, decreased from the comparable period in the prior year. This resulted primarily from improved profits, offset by increased cash payments made for accrued bonus, income taxes and severance liability, and increases in inventory. Bell South Enterprises Inc. (BSE) had financed a portion of the software development work at Raynet, when Raynet was a wholly-owned subsidiary of Raychem. In conjunction with the creation of the Ericsson Raynet joint venture, the company made a final payment to BSE of $10 million in November 1996. In addition, BSE is entitled to receive a portion of any distribution that Raychem receives from the Ericsson Raynet joint venture. INVESTING ACTIVITIES Cash flows from investing activities increased significantly, becoming a positive cash inflow for the six months ended December 31, 1996. Investments in property, plant, and equipment totaled $32 million and $43 million in the six months ended December 31, 1996 and 1995, respectively. Although capital expenditures were down during the first six months of 1997, spending for the fiscal year is expected to be approximately $85-$90 million. Cash flows from dispositions of property, plant, and equipment increased in the six months ended December 31, 1996, principally due to the collection of proceeds from the sale of the former Walter Rose land and buildings in Germany and the sale of the plastic pipe coupling business assets. The company had made advances to Ericsson Raynet of approximately $26 million in the six-month period of the prior year. The Ericsson Raynet joint venture was reconfigured effective January 1, 1996. As a result of the reorganization, the company is no longer required to make advances for ongoing Ericsson Raynet operating losses. In early October 1996, the company received $25 million from the sale of a portfolio of patents and related intellectual property. The company invested $7.5 million in Superconducting Core Technologies, Inc. (SCT) in the first quarter of 1997. The company is the exclusive distributor of SCT's cryoelectronic receiver front-end products for wireless base stations. 11 14 FINANCING ACTIVITIES In the first quarter of 1997, the company prepaid the balance of the syndicated term loan agreement, amounting to $118 million, which was classified as "Current maturities of long-term debt" at June 30, 1996. In addition, the company replaced its $250 million four-year revolving credit facility with a new $400 million five-year revolving credit facility. The new credit facility has more favorable pricing and covenants than the previous facility. In April 1996, as part of the company's continuing plan to purchase its shares to meet employee benefit plan commitments, the Board of Directors authorized the company's management, at its discretion, to repurchase up to 2.0 million shares of the company's stock during any one fiscal year, effective July 1, 1996. An authorization to repurchase an additional 0.5 million shares under unusual circumstances was removed by the Board of Directors in December 1996. During the six months ended December 31, 1996, the company repurchased 1 million shares at a cost of $76 million. In addition, the company received $30 million from the issuance of Common Stock to employees participating under various employee benefit plans. The company's Board of Directors has increased the quarterly dividend 40% to $0.14 per share payable on March 12, 1997, to stockholders of record as of February 12, 1997. FORWARD-LOOKING STATEMENTS AND RISK FACTORS Statements made in this management's discussion and analysis or elsewhere in this report, or other communications (including press releases and analyst conference calls), that are not statements of historical fact are forward-looking statements, including without limitation those relating to anticipated reductions in SG&A rates, anticipated income tax rates and discrete tax benefits, anticipated inventory levels, anticipated capital spending rates, sufficiency of the company's cash and cash flows to meet expected needs, litigation matters, productivity improvements, reorganization actions and cost savings, future earnings, and other financial and growth commitments, targets or goals. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made, including those discussed below. The 1996 restructuring charges, excluding net asset writedowns of $4 million, are cash in nature and are expected to be substantially incurred in fiscal 1997 and funded through operating cash flow. The company expects that the restructuring charges will be recovered within 18 to 24 months through lower operating costs. When fully implemented, the annual run-rate savings is expected to be in the $35-$40 million range; substantially all of the savings are cash related. These restructuring actions reflect complex changes that will affect the company's worldwide operations. Timelines could be longer than anticipated and implementation difficulties or market factors could alter the estimated benefits. The company continues to work to improve operational efficiency and productivity, and to reduce costs, and is implementing organizational changes in many areas of the company. For example, the company is redesigning worldwide logistics operations and is examining manufacturing operations to achieve efficiencies through sharing of "back-end" resources. The company is also in the process of merging the management and certain operations of the former Electronics and PolySwitch divisions and is also evaluating certain management, operational and sales channel combinations between other divisions in order to achieve operational efficiencies and to increase the opportunities for sales growth. In addition, the company is engaged in an extensive review of its research and development activities. 12 15 These actions are likely to result in restructuring charges in the third quarter. The company's operating results and financial condition could be adversely affected by its ability to effectively manage the transition to the new organizational and operating structures and to the outsourcing of some activities. There can be no assurance that the company will be successful in achieving its goals or that it will be able to do so without unintended adverse consequences. The company has historically achieved part of its revenue growth by developing or acquiring new and innovative materials science technologies and products. The company has initiated a review of its research and development activities. The company remains committed to continued internal research and development efforts, although the company will continue to pursue the acquisition of new or compatible technologies and businesses as an important part of the company's strategy. In addition, the company may enter into arrangements with other companies to expand product offerings and to enhance its own manufacturing capabilities. The success of the company's research and development efforts, acquisitions of new technologies and products, or arrangements with third parties is not always predictable and there is no assurance that the company will be successful in realizing its objectives, or that realization may not take longer than anticipated, or that there will not be unintended adverse consequences from these actions. As a result of the Ericsson Raynet reorganization, effective January 1, 1996, Raychem no longer shares in the ongoing operating losses of the joint venture. While there is the potential for some future charges related to warranty claims, the company believes that Ericsson Raynet's existing warranty reserves are adequate. The income tax provision is determined by the level of profitability and the tax jurisdiction in which profits are generated. The geographic distribution and level of profitability are difficult to predict and may vary from forecasts, which could result in changes in the estimated annual effective tax rate during the fiscal year. In addition, the company has a deferred tax asset valuation allowance that is primarily attributable to U.S. federal and state deferred tax assets. Realization of the deferred tax assets is dependent on generating sufficient future U.S. taxable income to utilize deductions and credits prior to their expiration. Management believes sufficient uncertainty exists regarding the realization of these deferred tax assets that a valuation allowance is required. The amount of the valuation allowance is periodically reassessed and may be adjusted depending on the company's outlook for future U.S. taxable income. In the third quarter of the fiscal year, the company develops its strategic plan and annual business plan. These plans will provide additional insight into the outlook for the company's future U.S. taxable income and, when combined with other factors (such as recent operating results), may serve as the basis for a reduction of the valuation allowance. Such a reduction in the valuation allowance would reduce the income tax provision by the reporting of a discrete tax benefit and by a reduction of the company's estimated annual tax rate. The company has manufacturing facilities in many countries and is subject to environmental regulations. These regulations, and any changes in them, can affect the company's manufacturing processes as well as the cost, availability, and use of raw materials. Although compliance with such environmental regulations has not had a material effect on capital expenditures or operating results in the past, there is no assurance that any such regulations, or changes in regulations, will not have a material adverse effect on future capital expenditures or operating results. 13 16 In the past, supplies of certain raw materials the company uses have become limited, and it is possible that this may occur again in the future. In addition, certain components purchased by the company are presently available from only one or a few sources of supply. In such cases, disruptions of established supply channels could result in increased prices, rationing, and shortages. In response, the company tries to identify alternative materials and technologies for such raw materials and components and to develop alternative sources of supply. Although disruptions in the supply of raw materials and components have not been material in the past, such situations could adversely affect financial results. From time to time, the company and/or its subsidiaries become involved in lawsuits arising from various types of commercial claims, including, but not limited to, product liability, unfair competition, breach of contract, and intellectual property matters. Currently, the principal product liability litigation involves a variety of claims arising from the company's heat-tracing and freeze-protection products. However, the company sells its products in several markets where product liability issues could be material including, for example, the aerospace and automotive markets. Litigation tends to be unpredictable and costly. There is no assurance that litigation will not have an adverse effect on the company's financial position or results of operations. Approximately two-thirds of the company's revenues result from sales outside the United States and the company also has several production facilities located outside the United States. The company's financial results can be adversely affected by changes in foreign currency rates, changes in worldwide economic conditions, changes in trade policies or tariffs, changes in interest rates, and political unrest overseas. These effects may be mitigated by the global nature of both the company's sales and production activities. The company has a substantial investment in intellectual properties--consisting of patents, trademarks, copyrights, and trade secrets--and relies significantly on the protection these intellectual property rights provide. Accordingly, the company aggressively protects these rights and may become involved in issues of infringement or theft by third parties from time to time and related counterclaims including unfair competition claims, by such third parties. The company has become involved as a defendant in intellectual property lawsuits and could become involved in others in the future. Litigation can be unpredictable and costly. It is possible that an unfavorable outcome in a suit related to intellectual property could be material to the company's financial position or results of operations. The company maintains property, cargo, auto, product, general liability, and directors and officers liability insurance to protect itself against potential loss exposures. To the extent that losses occur, there could be an adverse effect on the company's financial results depending on the nature of the loss, and the type and level of insurance coverage maintained by the company. From time to time, the company may reevaluate and change the types and levels of insurance coverage that it purchases. There can be no assurance that insurance coverage will continue to be available to the company under all circumstances at commercially reasonable rates, or if available, will be adequate in amount. A portion of the company's research and development activities, its corporate headquarters, and other critical business operations are located near major earthquake faults. The ultimate impact of a major earthquake on the company, significant suppliers, and the general infrastructure is unknown, but operating results could be materially affected. The company is predominantly not insured for losses and interruptions caused by earthquakes. 14 17 Many of the company's products are sold in competition with other products or technologies. Actions of competitors could affect the company's operating results. For example, several companies have begun marketing PPTC circuit protection devices similar to certain PolySwitch devices. In addition, operating results are subject to fluctuations in demand and the seasonal activity of certain product lines. A shortfall in revenue could also result from a number of other factors, including but not necessarily limited to, overall economic conditions, lower than expected demand, or supply constraints. In addition, changes in geographic or product mix may impact gross profits. A substantial amount of the company's revenues are realized through orders and shipments booked within a quarter, and the backlog at the end of any quarter may not be predictive of the company's financial results for the following quarter. The company from time to time identifies its expectations and commitments for various financial and operating items, such as the company's growth, profitability, cash flow, capital spending, or inventory levels. In addition, the company periodically identifies financial targets for the company, for specific divisions of the company, and, within divisions, for heartland and growth platform businesses. These expectations, commitments, and targets constitute goals, not projections or assured results. The ability to achieve such expectations, commitments, and targets is subject to a variety of factors, including, but not necessarily limited to, those identified above. Because of the foregoing factors, in addition to other factors that affect the company's operating results and financial position, past financial performance or management's expectations should not be considered to be a reliable indicator of future performance. Investors should not use historical trends to anticipate results or trends in future periods. Further, the company's stock price is subject to volatility. Any of the factors discussed above could have an adverse impact on the company's stock price. In addition, failure of revenues or earnings in any quarter to meet the investment community's expectations, as well as broader market trends, could have an adverse impact on the company's stock price. The company does not undertake an obligation to update its forward-looking statements or risk factors to reflect future events or circumstances. 15 18 RAYCHEM CORPORATION PART II - OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS On September 26, 1996, the Ninth Circuit Court of Appeals affirmed the dismissal by the United States District, Northern District of California, of related lawsuits filed against the company on August 19, 1993, Creole Engineering Co. v. Raychem Corporation, et al., and on June 29, 1993, Unit Process Company, et al. v. Raychem Corporation, et al. Four similar state actions brought by the plaintiffs, which had previously been consolidated in the Superior Court of San Mateo County, California, and the District Court of Jefferson County, Colorado, had been stayed pending resolution of the Ninth Circuit appeal. The plaintiffs have agreed to consolidate all of these state court actions in the Superior Court of San Mateo County, California. The company has a motion pending to dismiss this lawsuit. Information about this lawsuit was disclosed in the company's annual report on Form 10-K for the year ended June 30, 1996. On December 17, 1996, the International Chamber of Commerce in Paris issued a decision in the arbitration proceeding initiated against the company on August 28, 1995, by Bourns AG, a subsidiary of Bourns, Inc. In this arbitration proceeding, Bourns was seeking damages in excess of $2.8 million for alleged breach of a private brand agreement. In the decision, the arbitrators awarded Bourns an immaterial amount of damages on certain of Bourns' claims (plus accrued interest on such amount), dismissed all other claims made by Bourns, and required Bourns to pay two-thirds of the costs of the arbitration. Other litigation between the company and Bourns, described in the company's annual report on Form 10-K for the year ended June 30, 1996, remains pending. In December 1996, all remaining defendants in West County Landfill, Inc., et al. v. Raychem Corporation, et al. entered into a settlement agreement with the plaintiffs ending this litigation. The executed settlement agreement will take effect upon the satisfaction of three contingencies set forth in the agreement, only one of which remains to be satisfied. The company believes that this remaining contingency will be satisfied on the schedule set forth in the settlement agreement. However, the possibility exists that this contingency will not be satisfied and that the settlement agreement will become null and void. Pursuant to the settlement agreement, Raychem will pay an immaterial amount toward the post-closure costs of the hazardous waste portion of the West County Landfill. Under the settlement agreement, both plaintiffs and defendants grant mutual releases of all present and future claims related to the hazardous waste portion of the West County Landfill. Additional information regarding this litigation was previously disclosed in the company's annual report on Form 10-K for the year ended June 30, 1996. On January 16, 1997, a jury in St. Louis awarded a $2.9 million judgment against the company in Crestwood Plaza v. Raychem Corporation, Case Number 674475, Circuit Court of the County of St. Louis, Missouri. The case involved a product liability claim related to the Ferex product, a product line divested by the company in February 1989. The company intends to appeal the judgment. A portion of the judgment is covered by insurance. 16 19 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) On November 1, 1996, the company held its Annual Meeting of the Stockholders. (b) The following Directors were elected: Votes Name Votes For Withheld ---- --------- -------- Richard Dulude 33,326,447 103,428 James F. Gibbons 33,326,512 103,363 Richard A. Kashnow 33,325,622 104,252 John P. McTague 33,326,512 103,363 Dean O. Morton 33,326,173 103,702 Isaac Stein 33,299,897 129,978 Chang-Lin Tien 33,310,605 119,270 Cyril J. Yansouni 33,326,485 103,390 (c) The following other matters were voted upon: 1. Approval of amendment to the company's Amended and Restated 1984 Employee Stock Purchase Plan and Amended and Restated 1985 Supplemental Employee Stock Purchase Plan to increase by 1,000,000 shares the aggregate number of shares issuable under each plan. Affirmative Votes: 29,087,578 Negative Votes: 1,446,257 Abstentions: 65,128 2. Approval of amendment to the company's Amended and Restated 1984 Employee Stock Purchase Plan and Amended and Restated 1985 Supplemental Employee Stock Purchase Plan to modify the requisite vote for stockholder approval to conform to the Company's other employee benefit plans. Affirmative Votes: 29,265,530 Negative Votes: 1,260,185 Abstentions: 73,248 3. Approval of an amendment to the company's Amended and Restated 1990 Incentive Plan to increase by 2,800,000 shares the aggregate number of shares issuable under the plan. Affirmative Votes: 18,071,555 Negative Votes: 12,458,899 Abstentions: 68,509 4. Approval of an amendment to the company's Amended and Restated 1990 Incentive Plan to increase the limit on the number of shares that may be granted to any participant in any one-year period to 500,000, and to include performance shares within that limit. Affirmative Votes: 20,746,304 Negative Votes: 12,073,370 Abstentions: 65,732 17 20 5. Approval of the adoption of the company's 1996 Directors Stock Option Plan. Affirmative Votes: 20,409,342 Negative Votes: 10,157,891 Abstentions: 113,133 6. Approval of the adoption of the company's Officer Variable Pay Plan. Affirmative Votes: 27,797,211 Negative Votes: 2,673,554 Abstentions: 123,198 7. Ratification of the appointment by the company's Board of Directors of Price Waterhouse LLP to audit the accounts of the company and its subsidiaries for the 1997 fiscal year. Affirmative Votes: 33,304,052 Negative Votes: 73,312 Abstentions: 52,510 ITEM 5: OTHER INFORMATION In December 1996, John McGraw, general manager of the newly merged Electronics and PolySwitch division, was named senior vice president. Mark Thompson, manager of development and advanced products for the new Electronics Division, was named vice president. Additionally, Karen Cottle was elected as vice president, general counsel and secretary. Peter Brooks, vice president, has now assumed responsibility for managing the Telecom Division's transmission electronics business. Separately, Christiane Midgley, vice president, left the company during the quarter. While the company continues its search for a new technology officer, Richard A. Kashnow, President, CEO and Chairman of the Board, will take on the additional role of acting Chief Technology Officer. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Index to Exhibits EXHIBIT NO. DESCRIPTION ----------- ----------- 10(aa) Consulting Agreement dated as of December 12, 1996, between the company and James F. Gibbons 27 Financial Data Schedule (b) Reports on Form 8-K None. 18 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RAYCHEM CORPORATION (Registrant) Date: February 13, 1997 /s/ RAYMOND J. SIMS ------------------- -------------------------------------- Raymond J. Sims Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ DEIDRA D. BARSOTTI --------------------------------------- Deidra D. Barsotti Vice President and Controller (Principal Accounting Officer) 19 22 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ----------- ----------- 10(aa) Consulting Agreement dated as of December 12, 1996, between the company and James F. Gibbons 27 Financial Data Schedule EX-10.AA 2 CONSULTING AGREEMENT WITH JAMES F. GIBBONS 1 Exhibit 10(aa) December 12, 1996 Dr. James F. Gibbons Paul G Allen Center for Integrated Systems Room #201, MS #4075 Stanford University Stanford, CA 94305 Dear Jim: As a Board member and in addition to your normal Board responsibilities, we have agreed that you will from time to time provide additional consulting services to the Board and the Chief Executive Officer. Such consulting services shall be requested by the Chairman of the Board/Chief Executive Officer and the scope shall be mutually agreed upon. Compensation shall be at a per diem rate of $3,000. Please sign and return the enclosed copy of this letter to confirm this arrangement. Very truly yours, /s/ Dick Richard A. Kashnow Chairman of the Board, President and Chief Executive Officer RAK\tt Enclosure ACKNOWLEDGED AND ACCEPTED BY: /s/ James F. Gibbons 21 December 1996 - ------------------------------------ -------------------------- James F. Gibbons Date EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AS AT AND FOR THE PERIOD ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 6-MOS JUN-30-1997 JUL-01-1996 DEC-31-1996 1 136,943 4,839 332,796 10,276 248,400 840,293 1,123,687 641,389 1,474,999 306,919 147,607 0 0 44,952 858,123 1,474,999 870,749 871,358 423,205 424,757 59,587 2,519 2,185 150,789 25,634 125,155 0 0 0 125,155 2.71 0
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