-----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, Au8eiazkhtBd6f+z6BFeO+C5XK4zXhk5z8u9armlJh57/8l+gAfqh/Kmt+EKeLWF 9fDhQ2k/mcl8to3T8ikToA== 0000891618-97-004597.txt : 19971113 0000891618-97-004597.hdr.sgml : 19971113 ACCESSION NUMBER: 0000891618-97-004597 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: SEC FILE NUMBER: 001-08341 FILM NUMBER: 97715889 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, PERIOD ENDED SEPTEMBER 30, 1997 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 SEPTEMBER 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 2-15299 RAYCHEM CORPORATION (Exact name of registrant as specified in its charter) Delaware 94-1369731 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 300 Constitution Drive, Menlo Park, CA 94025-1164 (Address of principal executive offices) (Zip code) (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 October 24, 1997, the registrant had outstanding 42,622,953 (a) shares of Common Stock, $1.00 par value. (a) Shares outstanding does not reflect the two-for-one stock split approved by shareholders on November 7, 1997. 2 RAYCHEM CORPORATION INDEX TO FORM 10-Q
Page Number ----------- PART I. FINANCIAL INFORMATION Item 1: Financial Information Consolidated Condensed Statement of Income for the three months ended September 30, 1997 and 1996 1 Consolidated Condensed Balance Sheet at September 30, 1997 and June 30, 1997 2 Consolidated Condensed Statement of Cash Flows for the three months ended September 30, 1997 and 1996 3 Notes to Consolidated Condensed Financial Statements 4 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 1: Legal Proceedings 19 Item 5: Other Information 19 Item 6: Exhibits and Reports on Form 8-K 19 SIGNATURES 20
3 RAYCHEM CORPORATION CONSOLIDATED CONDENSED STATEMENT OF INCOME (in thousands except per share amounts) (UNAUDITED)
Three Months Ended September 30, ------------------------ 1997 1996 --------- --------- Revenues $ 455,031 $ 430,311 Cost of goods sold 226,948 209,076 Research and development expense 27,363 30,086 Selling, general, and administrative expense 112,306 119,575 Interest expense, net 2,815 1,929 Other expense (income), net 3,572 (19,038) --------- --------- Income before income taxes 82,027 88,683 Provision for income taxes 20,506 15,963 --------- --------- Net income $ 61,521 $ 72,720 ========= ========= Average number of shares outstanding(a) 87,804 92,188 ========= ========= Earnings per share(a) $ 0.70 $ 0.79 ========= ========= Dividends per share(a) $ 0.07 $ 0.05 ========= =========
(a) Reflects the two-for-one stock split approved by shareholders on November 7, 1997. See accompanying notes to consolidated condensed financial statements. 1 4 RAYCHEM CORPORATION CONSOLIDATED CONDENSED BALANCE SHEET (in thousands except share data)
(UNAUDITED) SEPTEMBER 30, June 30, 1997 1997 ------------- ----------- ASSETS Current assets: Cash and cash equivalents $ 89,401 $ 86,583 Accounts receivable, net 350,327 339,142 Inventories: Raw materials 84,175 82,008 Work in process 57,964 54,677 Finished goods 109,010 111,154 ----------- ----------- Total inventories 251,149 247,839 Prepaid taxes 45,002 42,998 Other current assets 90,307 89,541 ----------- ----------- Total current assets 826,186 806,103 Property, plant, and equipment 1,124,976 1,118,677 Less accumulated depreciation and amortization 653,614 645,229 ----------- ----------- Net property, plant, and equipment 471,362 473,448 Deferred tax assets 130,488 136,325 Other assets 96,485 93,384 ----------- ----------- TOTAL ASSETS $ 1,524,521 $ 1,509,260 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to banks $ 122,903 $ 54,063 Accounts payable 82,522 88,625 Other accrued liabilities 160,073 190,596 Income taxes 50,984 40,598 Current maturities of long-term debt 5,348 5,752 ----------- ----------- Total current liabilities 421,830 379,634 Long-term debt 156,185 164,004 Deferred tax liabilities 24,732 25,827 Other long-term liabilities 88,276 86,017 Minority interests 9,174 8,759 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: 150,000,000 shares Issued: 90,057,826 and 90,089,030 shares, respectively 90,058 90,089 Additional contributed capital 367,035 368,164 Retained earnings 575,731 540,623 Currency translation (17,354) (9,336) Treasury Stock, at cost (4,923,150 and 4,164,846 shares, respectively) (191,898) (143,106) Other 752 (1,415) ----------- ----------- Total stockholders' equity 824,324 845,019 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,524,521 $ 1,509,260 =========== ===========
See accompanying notes to consolidated condensed financial statements. 2 5 RAYCHEM CORPORATION CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------------------------------------------------------- THREE MONTHS ENDED SEPTEMBER 30 (in thousands) 1997 1996 - -------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 61,521 $ 72,720 Adjustments to reconcile net income to net cash provided by operating activities: Payments for restructurings and divestitures (7,438) (4,918) Net (gain) loss on disposal of property, plant, and equipment (1,223) 89 Gain on sale of investment -- (23,601) Depreciation and amortization 20,533 19,303 Deferred income tax provision 1,320 618 Changes in certain assets and liabilities, net of effects from restructuring and divestitures: Accounts receivable (16,587) (21,607) Inventories (6,284) (77) Accounts payable and accrued liabilities (25,091) (21,590) Income taxes 8,652 613 Other assets and liabilities 14 10,316 --------- --------- Net cash provided by operating activities 35,417 31,866 --------- --------- Cash flows from investing activities: Investment in property, plant, and equipment (25,282) (15,108) Disposition of property, plant, and equipment 8,314 11,622 Advances to affiliated companies (2,500) -- Proceeds from sale of investments and other -- 958 Purchase of investments -- (7,500) --------- --------- Net cash used in investing activities (19,468) (10,028) --------- --------- Cash flows from financing activities: Net proceeds from (payments of) short-term debt 70,119 (3,811) Proceeds from long-term debt 222 10,451 Payments of long-term debt (6,253) (117,582) Common Stock repurchased (94,386) (27,173) Common Stock issued 23,897 11,589 Proceeds from repayments of stockholder notes receivable 320 26 Cash dividends (6,015) (4,480) --------- --------- Net cash used in financing activities (12,096) (130,980) --------- --------- Effect of exchange rate changes on cash and cash equivalents (1,035) 630 --------- --------- Increase (decrease) in cash and cash equivalents 2,818 (108,512) Cash and cash equivalents at beginning of period 86,583 224,115 --------- --------- Cash and cash equivalents at end of period $ 89,401 $ 115,603 ========= ========= SUPPLEMENTAL DISCLOSURES Cash paid for: Interest (net of amounts capitalized) $ 4,496 $ 4,097 Income taxes (net of refunds) 9,596 9,155
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 months ended September 30, 1997 and 1996, the financial position as of September 30, 1997, and the cash flows for the three months ended September 30, 1997 and 1996. The June 30, 1997 balance sheet is derived from the consolidated financial statements included in the company's Annual Report on Form 10-K for the year ended June 30, 1997. The results of operations for the three months ended September 30, 1997, are not necessarily indicative of the results to be expected for the full year. Certain prior-period amounts have been reclassified to conform with the fiscal 1998 financial statement presentation. COMMON STOCK On November 7, 1997, the shareholders approved an increase in the authorized Common Stock to 150,000,000 shares and a two-for-one stock split of the company's Common Stock. The record date of the stock split will be the close of business on November 17, 1997, with an anticipated distribution date on or around December 3, 1997. All share and per share data amounts (including information regarding share repurchases) in these consolidated condensed financial statements and notes have been restated to reflect the stock split. BUSINESS SEGMENTS Revenues and operating income by business segment are as follows:
(in thousands) Three months ended September 30, ------------------------- 1997 1996 --------- --------- Revenues Electronics OEM components $ 199,903 $ 176,921 Telecommunications and energy networks 191,236 189,947 Commercial and industrial infrastructure 63,892 63,443 --------- --------- Total revenues $ 455,031 $ 430,311 ========= ========= Operating income Electronics OEM components $ 41,689 $ 36,065 Telecommunications and energy networks 50,190 44,178 Commercial and industrial infrastructure 14,668 12,876 Corporate group expenses (18,133) (21,545) --------- --------- Total operating income $ 88,414 $ 71,574 ========= =========
4 7 RECENT ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" (FAS 128). The statement simplifies the standards for computing earnings per share (EPS) previously defined in APB Opinion No. 15, "Earnings Per Share," and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the financial statements for all entities with complex capital structures. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed similarly to fully diluted EPS under APB Opinion No. 15. FAS 128 must be adopted for the second quarter of fiscal 1998. The following table represents unaudited, pro forma disclosures of basic and diluted earnings per share in accordance with FAS 128 assuming the standard was applied during the periods presented below:
Three months ended September 30, 1997 1996 - ----------------------------------------------------------------------------- Earnings per share - as reported $0.70 $0.79 - ----------------------------------------------------------------------------- Basic earnings per share - pro forma $0.72 $0.81 - ----------------------------------------------------------------------------- Diluted earnings per share - pro forma $0.70 $0.79 - -----------------------------------------------------------------------------
FINANCIAL INSTRUMENTS Net gains and losses from forward exchange contracts used to cover receivables and payables totaled a $2.0 million gain and a $0.4 million loss for the three months ended September 30, 1997 and 1996, respectively. The company incurred total net foreign exchange losses of $0.4 million and $0.5 million for the three months ended September 30, 1997 and 1996, respectively. These realized and unrealized gains and losses are included in "Other expense (income), net." The total amount of foreign exchange exposure covered was $109 million at September 30, 1997. The company covers exposures that arise from trade and intercompany receivables and payables, intercompany loans in non-functional currencies, and net monetary assets in certain foreign countries with the US dollar as functional currency. These exposures are primarily in Japanese yen (28% of net contract value), French francs (10%), Italian lire (9%), and Belgian francs (9%). The company does not cover non-functional currency translation and transaction exposures in countries whose currencies do not have a liquid, cost-effective forward market available for hedging. Such exposures at September 30, 1997 included $8 million in net intercompany payables in non-functional currencies and $7 million in net monetary assets in foreign countries with the US dollar as functional currency. GAIN ON SALE OF ASSETS In the first quarter of 1997, the company recorded a $23 million pretax gain from the sale of a portfolio of patents and intellectual property, which gain is included in "Other expense (income), net." 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 September 30, 1997 was $ 8 million. Gross unrealized gains were $3 million as of September 30, 1997 and are included as a separate component of "Stockholders' equity." RESTRUCTURING AND DIVESTITURES The company incurred a pretax restructuring charge of $53 million in the third quarter of 1997 to implement several streamlining programs and eliminate approximately 500 positions (the 1997 restructuring). Approximately $36 million of the 1997 restructuring charge is cash in nature and is expected to be funded through operating cash flow. The remaining $17 million represents asset writedowns of inventory, facilities, and machinery and equipment related to discontinued products and consolidation of manufacturing and distribution activities. As a result of the 1997 restructuring, approximately 246 employees have separated from the company as of September 30, 1997. The 1997 restructuring is expected to be substantially completed by the end of the current fiscal year. The following table, which includes the 1997 restructuring as well as prior restructurings, sets forth the company's restructuring reserves as of September 30, 1997:
(in thousands) Restructuring Reserves ---------------------- Employee Asset Costs Writedowns Leases Other Total -------- ---------- -------- -------- -------- Reserve Balances, June 30, 1997 $ 32,019 $ 1,836 $ 671 $ 305 $ 34,831 Adjustment to reserves (73) 11 -- 62 -- Cash payments (6,320) -- (646) (472) (7,438) Non-cash items (176) -- -- (99) (275) -------- -------- -------- -------- -------- RESERVE BALANCES, SEPTEMBER 30, 1997 $ 25,450 $ 1,847 $ 25 $ (204) $ 27,118 ======== ======== ======== ======== ========
REPURCHASE OF COMMON STOCK During the three months ended September 30, 1997, the company repurchased 2,000,000 shares of the company's Common Stock and reissued 1,241,696 shares, leaving 4,923,150 shares in treasury stock at September 30, 1997. CONTINGENCIES The company and its subsidiaries are parties to lawsuits, or may in the future become parties to lawsuits, involving various types of commercial claims, including, but not limited to, product liability, unfair competition, antitrust, breach of contract, and intellectual property matters. Legal proceedings tend to be unpredictable and costly and may be affected by events outside the control of the company. The company maintains various 6 9 levels of insurance to apply to product liability and certain other claims in excess of deductibles. There is no assurance that litigation will not have an adverse effect on the company's financial position or results of operations. Currently, the company's principal product liability litigation involves a variety of claims arising from the company's heat-tracing and freeze-protection products. The company's experience to date is that losses, if any, from such claims have not had a material effect on the company's financial position or results of operations. However, the company sells its products into applications (including, for example, electronic interconnection products for aerospace and automotive markets) where product liability issues could be material. Effective March 31, 1996, the company increased its insurance deductible for heat-tracing products. The company's insurance deductible for claims arising from events prior to March 31, 1996, remains unchanged. The company's major litigation matters as of September 30, 1997, are described below. These and certain other litigation matters with which the company is involved were more fully described in the company's annual report on Form 10-K filed with the Securities and Exchange Commission (SEC), as updated in subsequent reports filed with the SEC. The company is a defendant in a product liability case in the United States District Court in Seattle, All Alaskan Seafoods, Inc., et al. v. Raychem Corporation, Minnesota Mining and Manufacturing Corporation and Marine Electric, Inc., et al. The action arises out of a cargo vessel fire allegedly caused by a heat-tracing product. Plaintiffs are seeking in excess of $150 million in damages. The company believes that it has meritorious defenses to the claims asserted in this case and intends to defend itself vigorously in this matter. Four separate state actions based on essentially the same facts, alleging wrongful distributor termination and antitrust claims, have been consolidated in the Superior Court of San Mateo County, California, Unit Process Company, et al. v. Raychem Corporation, et al. The dismissal in the United States District Court, Northern District of California, of an action alleging essentially the same facts was affirmed by the Ninth Circuit Court of Appeals in 1996. A motion to dismiss the state claims is pending. The company believes that it has meritorious defenses to the claims asserted in this case and intends to defend itself vigorously in this matter. On December 19, 1994, the company filed 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. Neither complaint specifies the amount of monetary damages claimed, although Bourns has stated its damage claim in an amount which would be material to the company. Many of the claims asserted in the company's state action will be tried with the federal action. On September 26, 1997, in the action entitled Bourns, Inc. v. Raychem Corporation, currently pending in the United States District Court, Central District of California, Bourns filed a RICO counterclaim against Raychem. On October 16, 1997, Raychem filed with the District Court a motion to dismiss this counterclaim, which motion is presently pending before the court. The company believes that it has meritorious claims and defenses in these cases and intends to vigorously litigate this matter. 7 10 Additionally, the company has been named, among others, as a potentially responsible party in administrative proceedings alleging that it may be liable for the costs of correcting environmental conditions at certain hazardous waste sites. At all of these sites, the company is alleged to be a de minimis generator of hazardous wastes, and the company believes that it has limited or no liability for cleanup costs at these sites. SUBSEQUENT EVENT On October 15, 1997, the company's Board of Directors announced its regular quarterly dividend of $0.07 per share payable on December 11, 1997, to stockholders of record as of November 12, 1997. 8 11 RAYCHEM CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS OVERVIEW
- ------------------------------------------------------------------ Three months ended September 30, (in millions) 1997 1996 - ------------------------------------------------------------------ Revenues $455 $430 - ------------------------------------------------------------------ "Ongoing" pretax income $82 $65 Gain on sale of assets - 23 - ------------------------------------------------------------------ Pretax income $82 $88 Provision for income taxes 20 15 - ------------------------------------------------------------------ Net income $62 $73 - ------------------------------------------------------------------
Revenues for the three months ended September 30, 1997 (first quarter of 1998) were $455 million, up 6% from the prior year quarter. Ongoing pretax income for the first quarter of 1998 was $82 million, up 26% from the prior year quarter, reflecting higher sales volume and productivity improvements, which more than offset adverse impacts of currency movements. Net income declined to $62 million in the first quarter of 1998 from $73 million in the first quarter of 1997. Net income in 1997 included a pre-tax gain of $23 million related to the sale of intellectual property. Additionally, the improvements in ongoing profitability in 1998 were partially offset by a higher estimated annual effective tax rate of 25% in 1998 compared to 18% in 1997. REVENUES AND REVENUE GROWTH Revenues of $455 million were up 6% from the prior year quarter. The revenue growth as reported was adversely impacted by the continuing strength of the US Dollar, which appreciated by approximately 10 to 20% against most European currencies between the first quarter of 1997 and the first quarter of 1998. Had exchange rates remained unchanged, Raychem's revenue growth would have been 12% over the prior year quarter. Revenues were also impacted by price reductions in some product lines due to volume discounts and competitive pressures as shown in the table below. 9 12 - -------------------------------------------------------------------------------- Revenue growth in first quarter of 1998 over prior year quarter (percent change over prior year quarter) - -------------------------------------------------------------------------------- Components of reported revenue growth: Growth in unit volumes, net of product mix changes 15% Effect of price reductions(a) (3%) - -------------------------------------------------------------------------------- Constant currency revenue growth 12% Effect of exchange rate changes (6%) - -------------------------------------------------------------------------------- Total reported revenue growth 6% - --------------------------------------------------------------------------------
(a) A management estimate based on changes in revenues at constant volume and mix On a regional basis, revenues in constant currencies compared to the prior year quarter were up 35% in Latin America, 20% in Asia, 8% in Europe, and 7% in North America. Within Europe, revenues were up 35% in Eastern Europe and 6% in Western Europe. GROSS PROFIT AND OPERATING EXPENSES
- -------------------------------------------------------------------------------- Three months ended September 30, (percent of revenues) 1997 1996 - -------------------------------------------------------------------------------- Gross profit 50% 51% - -------------------------------------------------------------------------------- Selling, general, and administrative (SG&A) expense 25% 28% - -------------------------------------------------------------------------------- Research and development (R&D) expense 6% 7% - --------------------------------------------------------------------------------
Gross profit as a percent of reported revenues declined from 51% to 50% in the first quarter of 1998. This decline was principally due to the unfavorable currency movements, which more than offset the favorable impacts of manufacturing yield improvements and higher volumes. SG&A expense as a percent of revenues declined from 28% in the first quarter of 1997 to 25% in 1998. The reduction in SG&A expense was largely the result of restructuring and other actions taken in prior years to reduce operating costs. R&D expense as a percent of revenues declined to 6% in the first quarter of 1998 compared to 7% in the prior year quarter. 10 13 PROVISION FOR INCOME TAXES The estimated annual effective tax rate was 25% for the first quarter of 1998, up from 18% for the prior year quarter. The higher estimated annual effective tax rate for 1998 is primarily attributable to lower US tax benefits and a change in the geographic mix of the company's earnings. SEGMENT OPERATIONS The following discussion of the results of operations is based on the company's business segments--electronics OEM components, telecommunications and energy networks, and commercial and industrial infrastructure.
Electronics OEM components - -------------------------------------------------------------------------- (dollars in millions) Three months ended September 30, 1997 1996 - -------------------------------------------------------------------------- Revenues $200 $177 - -------------------------------------------------------------------------- Constant currency revenue growth 18% 15% - -------------------------------------------------------------------------- Operating income $42 $36 - --------------------------------------------------------------------------
Revenues in the electronics OEM components business segment increased 18% on a constant currency basis to $200 million for the first quarter of 1998. Revenues from sales of interconnection products, including wire and cable, heat-shrinkable tubing, marking systems, connectors, and other devices, grew to $115 million, up 6% on a constant currency basis. Growth was strongest among commercial electronics and transportation customers, with a small decline in sales of products for defense applications. Sales of PolySwitch(R) circuit protection products reached $61 million, up 44% on a constant currency basis from the prior year quarter. Sales increased in all customer segments, led by continued rapid growth in MiniSMD(R) device business. Revenues for Elo TouchSystems grew to $24 million, up 26% on a constant currency basis, as touchscreen product sales continued to gain momentum. Prices declined by 2 to 5% in some of the segment's product lines. Operating income improved to $42 million due to the higher sales volume and productivity improvements, which more than offset the effects of price reductions and adverse currency movements. 11 14
Telecommunications and energy networks - --------------------------------------------------------------------------- (dollars in millions) Three months ended September 30, 1997 1996 - --------------------------------------------------------------------------- Revenues $191 $190 - --------------------------------------------------------------------------- Constant currency revenue growth 6% 2% - --------------------------------------------------------------------------- Operating income $50 $44 - ---------------------------------------------------------------------------
Revenues in the telecommunications and energy networks segment increased to $191 million for the first quarter of 1998, up 6% on a constant currency basis from the corresponding period in the prior year. Sales of transmission electronics products rose 39% on a constant currency basis from the prior year quarter. Sales of copper closures and related accessories were up 5% from the prior year quarter, driven by increased demand in North America and Europe. Operating income for the first quarter of 1998 was $50 million, up from $44 million in the prior year quarter, primarily reflecting higher sales volume and productivity improvements arising from prior restructuring actions.
Commercial and industrial infrastructure - -------------------------------------------------------------------------- (dollars in millions) Three months ended September 30, 1997 1996 - -------------------------------------------------------------------------- Revenues $64 $63 - -------------------------------------------------------------------------- Constant currency revenue growth 10% 4% - -------------------------------------------------------------------------- Operating income $15 $13 - --------------------------------------------------------------------------
Revenues from the sale of electrical heat-tracing and corrosion prevention products were $64 million in the first quarter of 1998, up 10% on a constant currency basis from the prior year quarter. The increase was primarily attributable to strong project business and to continuing gains in expanded distribution channels. Operating income was $15 million compared to $13 million in the prior year quarter due to productivity improvements, which more than offset the adverse impact of currency movements. 12 15 LIQUIDITY AND CAPITAL RESOURCES
Liquidity and capital resources - --------------------------------------------------------------------------------- (dollars in millions) SEPTEMBER 30, June 30, 1997 1997 - --------------------------------------------------------------------------------- Debt net of cash $195 $137 - --------------------------------------------------------------------------------- Debt net of cash as a percent of stockholders' equity 24% 16% - --------------------------------------------------------------------------------- Days sales outstanding (DSO) 65 59 - --------------------------------------------------------------------------------- Days sales in inventory (DSI) 98 99 - ---------------------------------------------------------------------------------
The company's financial position continues to be strong. At September 30, 1997 the company had $89 million in cash and cash equivalents and $489 million in unused credit facilities, of which $359 million are committed facilities. The company also has an effective shelf registration statement on file with the Securities and Exchange Commission that enables it to issue up to $400 million in debt securities. The combination of cash and cash equivalents, available lines of credit, public debt issuance capabilities, and future cash flows from operations is expected to be sufficient to satisfy substantially all of the company's needs for anticipated capital expenditures, working capital, dividends and share repurchases, and for potential acquisitions. Debt net of cash was $195 million on September 30, 1997 up from $137 million on June 30, 1997. The increase was primarily due to the repurchase of 1,000,000 (2,000,000 on a post-split basis) shares of the company's Common Stock for $94 million, which more than offset operating cash flow of $35 million.
Cash flows - --------------------------------------------------------------------------------- (dollars in millions) Three months ended September 30, 1997 1996 - --------------------------------------------------------------------------------- Cash provided by (used in): Operating activities $35 $ 32 Investing activities (19) (10) Financing activities (12) (131) Effect of exchange rate changes on cash and cash equivalents (1) 1 - --------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents $ 3 $(109) - ---------------------------------------------------------------------------------
Cash provided by operating activities in the first quarter of 1998 was $35 million, slightly higher than the operating cash flow in the prior year quarter. Cash used in investing activities increased $9 million compared to the prior year quarter, primarily due to higher spending on machinery and equipment. 13 16 Cash used in financing activities was down $119 million from the prior year quarter. The company spent $94 million for share repurchases in the first quarter of 1998 compared to $27 million in the prior year quarter. Higher spending on share repurchases was substantially offset by increased short term borrowings. In the first quarter of 1997, the company prepaid the balance of a syndicated term loan agreement, amounting to $118 million. In the first quarter of 1997, the company also replaced its $250 million four-year revolving credit facility with a $400 million five-year revolving credit facility with more favorable pricing and covenants than the previous facility. FORWARD-LOOKING STATEMENTS AND RISK FACTORS Statements made in this management's discussion and analysis or elsewhere in this quarterly report or other communications (including press releases and analyst calls) that are not statements of historical fact are forward-looking statements, including without limitation those relating to anticipated product and alliance plans, litigation matters, restructuring actions, expected tax position, currency effects, dividends, profitability, and other financial, economic, and growth-related commitments, targets, trends, or goals. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made, including those discussed below. The company is in the process of implementing a number of complex restructuring actions. Implementation difficulties or market factors could reduce the estimated benefit of these actions, and timelines could be longer than anticipated. The company's revenues, operating results, and financial condition could also be adversely affected by its ability to effectively manage the transition to the new organizational structures and to outsource certain activities. There can be no assurance that the company will be successful in achieving its goals or that it will be able to do so without unintended adverse consequences. The company has historically achieved part of its revenue growth by developing or acquiring new and innovative materials science technologies and products. The company remains committed to internal research and development efforts, and the company will continue to pursue the acquisition of new or compatible technologies and businesses as an important part of the company's growth strategy. In addition, the company has entered, and in the future may enter, into arrangements with other companies to expand product offerings and to enhance its own manufacturing capabilities. The success of the company's research and development efforts, acquisitions of new technologies and products, or arrangements with third parties, is not predictable and there can be no assurance that the company will be successful in realizing its objectives, or that realization may not take longer than anticipated, or that there will not be unintended adverse consequences from these actions. Approximately two-thirds of the company's revenues result from sales outside the United States, a significant portion of which are denominated in foreign currencies. In addition, the company has several production facilities located outside the United States. The company's financial results therefore can be affected by changes in foreign currency rates. To mitigate these effects, the company hedges its transaction exposure (i.e., the effect on 14 17 earnings and cash flows of changes in foreign exchange rates on receivables and payables denominated in foreign currencies). The company does not hedge its foreign currency exposure in a manner that would entirely eliminate the effects of changes in foreign exchange rates on the company's consolidated net income. Accordingly, the company's reported revenue and net income have been and in the future may be affected by changes in foreign exchange rates. In addition, because of the extensive nature of the company's foreign business activities, the company's financial results can also be adversely affected by changes in worldwide economic conditions, changes in trade policies or tariffs, changes in interest rates, and political unrest overseas. As a result of the Ericsson Raynet reorganization, effective January 1, 1996, Raychem no longer shares in the ongoing operating losses of the joint venture. While there is the potential for some future charges related to warranty claims, the company believes that Ericsson Raynet's existing warranty reserves are adequate. The provision for income taxes is determined by the company's level of profitability in each jurisdiction in which it is subject to tax. The geographic distribution and level of profitability are difficult to predict and may vary from forecasts, which could result in changes in estimates of the annual effective tax rate and could cause the estimated annual effective tax rate in interim quarters to vary from the actual annual effective tax rate for the year. In addition, the company has a deferred tax asset valuation allowance that is primarily attributable to U.S. federal and state deferred tax assets. Realization of the deferred tax assets is dependent on the likelihood of generating sufficient future U.S. taxable income to utilize deductions and credits prior to their expiration. Management believes sufficient uncertainty exists regarding the realization of a portion 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. During the latter half of the year, the company develops its strategic and annual business plans. These plans 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 future adjustment of the valuation allowance. A portion of any future reduction in the valuation allowance would reduce the income tax provision. A significant portion of the remaining valuation allowance relates to deductions arising from the company's stock plans. Any reduction of the valuation allowance related to stock plan deductions would be reported as an increase to equity rather than as a reduction of the income tax provision. The company anticipates an annual effective tax rate for 1998 in the mid-twenty percent range. The company does not expect to report a significant discrete tax benefit in fiscal 1998 or thereafter. Commencing in fiscal 1999, the company anticipates a normalized tax rate in the mid-thirty percent range. The company has 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 15 18 effect on capital expenditures or operating results in the past, there is no assurance that any such regulations, or changes in regulations, will not have a material adverse effect on future capital expenditures or operating results. In the past, supplies of certain raw materials the company uses have become limited, and it is possible that this may occur again in the future. In addition, certain components purchased by the company are presently available from only one or a few sources of supply. In such cases, disruptions of established supply channels could result in increased prices, rationing, and shortages. In response, the company tries to identify alternative materials and technologies for such raw materials and components and to develop alternative sources of supply. Disruptions in the supply of raw materials and components can adversely affect financial results. The company's facilities are suitable for their respective uses and, in general, are adequate to support the current and anticipated volume of business. In recent quarters there have been occasional capacity constraints in a few of the rapidly growing product lines. The company is reviewing various short- and long-term measures to address these constraints. However, production constraints can adversely affect the company's financial results. From time to time, the company and/or its subsidiaries become involved in lawsuits arising from various types of commercial claims, including, but not limited to, product liability, unfair competition, antitrust, breach of contract, and intellectual property matters. Currently, the principal product liability litigation involves a variety of claims arising from the company's heat-tracing and freeze-protection products. The company sells its products in several markets where product liability issues could be material, for example, electronic interconnection products for aerospace and automotive markets. Litigation tends to be unpredictable and costly and may be affected by events outside the company's control. There is no assurance that litigation will not have an adverse effect on the company's future financial position or results of operations. The company has a substantial investment in intellectual properties--consisting of patents, trademarks, copyrights, and trade secrets-and relies significantly on the protection these intellectual property rights provide. Accordingly, the company protects these rights and from time to time becomes involved in issues of infringement or theft by third parties and related counterclaims, including unfair competition or infringement claims, by such third parties. The company has been involved, as both a defendant and a plaintiff, in intellectual property lawsuits and could become involved in others in the future. Litigation can be unpredictable and costly. It is possible that an unfavorable outcome in a suit related to intellectual property could be material to the company's future financial position or results of operations. The company maintains property, cargo, auto, product, general liability, and directors and officers liability insurance to protect itself against 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. 16 19 A portion of the company's research and development activities, its corporate headquarters, and other critical business operations are located near major earthquake faults. The ultimate impact of a major earthquake on the company, significant suppliers, and the general infrastructure is unknown, but operating results could be materially affected. The company is predominantly not insured for losses and interruptions caused by earthquakes. The company's products are sold in competition with other products or technologies. The company's competitors include some of the largest companies in the world, many of which have financial, technical, and other resources substantially greater than the company's. Even when the company has strong intellectual property protection for its products, its products face competition from products based on other, sometimes lower cost, technologies. In some of the company's markets, prices trend downward over time, requiring improvements in manufacturing and design to remain competitive. In addition, operating results are subject to fluctuations in demand and the seasonal activity of certain product lines. The company also sells certain of its products to customers in industries and countries that are experiencing periods of rapid change, which can adversely affect demand for the company's products. For example, the telecommunications industry is going through a period of rapid technological change, and customers in this industry may delay purchases of the company's products until technology issues are more clearly resolved. In addition, many electric power utilities in foreign countries are being privatized, which may affect the purchasing policies of these utility companies. A shortfall in revenue could result from a number of other factors, including but not necessarily limited to, overall economic conditions, lower than expected demand, or supply constraints. In addition, changes in the geographic or product mix of sales may impact gross profits. A substantial amount of the company's revenues are realized through orders and shipments booked within a quarter, and the backlog at the end of any quarter may not be predictive of the company's financial results for the following quarter. In addition, occurrences of any of the foregoing risks discussed in this section could have an impact on cash flow. From time to time the company identifies (for itself, its divisions, and its strategic alliances) expectations, commitments, targets, trends, and goals related to various product, financial, economic, and operating matters, such as the company's growth, profitability, cash flow, capital spending, income statement and balance sheet items, tax position, share repurchases and cash dividends, currency movements, geographic trends, product plans, and alliances. These expectations, commitments, targets, trends and goals are not projections and there can be no assurance as to their accuracy. Whether these expectations, commitments, targets, trends or goals will be fulfilled is subject to a variety of factors including those listed above, and those appearing in all documents filed by the company with the Securities and Exchange Commission. Because of the foregoing factors, in addition to other factors that affect the company's operating results and financial position, past financial performance or management's expectations should not be considered to be a reliable indicator of future performance. Investors should not use historical trends to anticipate results or trends in future periods. Further, the company's stock price is subject to volatility. Any of the factors discussed 17 20 above could have an adverse impact on the company's stock price. In addition, failure of revenues or earnings in any quarter to meet the investment community's expectations, as well as broader market trends, can have an adverse impact on the company's stock price. The company does not undertake an obligation to update its forward-looking statements or risk factors to reflect future events or circumstances. 18 21 RAYCHEM CORPORATION PART II - OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS On September 26, 1997, in the action entitled Bourns, Inc. v. Raychem Corporation, currently pending in the United States District Court, Central District of California, Bourns filed a RICO counterclaim against Raychem. On October 16, 1997, Raychem filed with the District Court a motion to dismiss this counterclaim, which motion is presently pending before the court. Information about this lawsuit was disclosed in the company's annual report on Form 10-K for the year ended June 30, 1997. ITEM 5: OTHER INFORMATION In the calculation of the ratio of earnings to fixed charges, "earnings" consist of income before income taxes, adjusted to add back fixed charges (excluding capitalized leases). "Fixed charges" consist of interest on all indebtedness, including both amounts expensed and amounts capitalized. A table setting forth the computation of the Ratio of Earnings to Fixed Charges for each of the five years in the period ended June 30, 1997, and for the three months ended September 30, 1997, is included in this filing as Exhibit 12. The company's ratio of earnings to fixed charges for the three months ended September 30, 1997, was 14.90. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Index to Exhibits EXHIBIT NO. DESCRIPTION 12 Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule (b) Reports on Form 8-K None. 19 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RAYCHEM CORPORATION (Registrant) DATE November 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) 20 23 INDEX TO EXHIBITS
Exhibit Number Description - ------- ----------- 12 Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule
EX-12 2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 Exhibit 12 Computation of Ratio of Earnings to Fixed Charges (Dollar amounts in thousands) (Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, YEARS ENDED JUNE 30, --------- ------------------------------------------------------------- 1997 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- --------- Income before income taxes, extraordinary item, and change in accounting principle $ 82,027 $ 227,740 $ 146,130 $ (270) $ 33,745 $ 39,584 add: Interest expense 3,865 12,455 19,216 20,434 22,318 26,991 Portion of rents representative of interest factor(a) 2,028 9,804 11,550 11,550 12,870 12,870 Equity in net losses of Ericsson Raynet joint venture -- -- 29,818 85,946 -- -- less: Capitalized interest (131) (393) (660) (724) (1,172) (362) --------- --------- --------- --------- --------- --------- Income as adjusted $ 87,789 $ 249,606 $ 206,054 $ 116,936 $ 67,761 $ 79,083 ========= ========= ========= ========= ========= ========= Fixed Charges: Interest expense $ 3,865 $ 12,455 $ 19,216 $ 20,434 $ 22,318 $ 26,991 Portion of rents representative of interest factor(a) 2,028 9,804 11,550 11,550 12,870 12,870 Debt prepayment penalty (b) -- -- -- 7,814 -- -- --------- --------- --------- --------- --------- --------- Fixed Charges $ 5,893 $ 22,259 $ 30,766 $ 39,798 $ 35,188 $ 39,861 ========= ========= ========= ========= ========= ========= Ratio of earnings to fixed charges 14.90 11.21 6.70 2.94 1.93 1.98 ========= ========= ========= ========= ========= =========
(a) Calculated as approximately one-third of rental expense, representing a reasonable approximation of such rentals attributable to interest. (b) Represents effective interest charged on the early retirement of debt. Recorded as an extraordinary loss on the income statement. EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JUN-30-1998 JUL-01-1997 SEP-30-1997 89,401 7,699 359,484 9,156 251,149 826,186 1,124,976 653,614 1,524,521 421,830 156,185 0 0 90,058 734,266 1,524,521 454,324 455,031 226,447 226,948 27,363 767 2,815 82,027 20,506 61,521 0 0 0 61,521 0.70 0
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