=============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1993
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to _____________
Commission file number 1-5631
WATKINS-JOHNSON COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
California 94-1402710
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
3333 Hillview Avenue, Palo Alto, California 94304-1223
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(415) 493-4141
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------------- -------------------------
Common stock, no par value New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /.
AS OF FEBRUARY 4, 1994
----------------------
Aggregate market value of the voting
stock held by non-affiliates of the
registrant: .................................. $159,179,000
Number of shares outstanding: Common
stock, no par value........................... 7,209,000 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Watkins-Johnson Company Notice of Annual Meeting of
Shareowners--April 9, 1994 and Proxy Statement filed with the commission
pursuant to Regulation 14A are incorporated by reference into Part III.
=============================================================================
<PAGE>
PART I
ITEM 1. BUSINESS
(a) General Development of Business
The company has continued to conduct its business under the same corporate
structure. There have been no material reclassifications, mergers, or
consolidations of the company or its subsidiaries during the year. During
1990-1991, the company realigned and restructured its operations into
three principal elements which were renamed in 1993; semiconductor
equipment, electronics, and environmental services. There have been no
acquisitions or dispositions of material amounts of assets other than in
the ordinary course of business during 1993.
(b) Financial Information about Industry Segments
The company operates within three industry segments-semiconductor
equipment, electronics, and environmental services. Financial information
about industry segments is included in Note 10 to the consolidated
financial statements contained in Part II, Item 8 of this annual report on
Form 10-K.
(c) Narrative Description of Business
Semiconductor Equipment
The Semiconductor Equipment Group manufactures semiconductor processing
equipment, primarily chemical-vapor deposition (CVD) equipment. The
company's atmospheric-pressure CVD equipment is used by semiconductor
manufacturers worldwide in the production of memory devices (DRAMs) and
microprocessors.
Historically, the company's CVD systems have been used primarily for the
deposition of interlevel-dielectric films--the first dielectric layer on a
semiconductor wafer. The company's current principal product, the TEOS999
System, deposits both interlevel and intermetal layers of film on
sub-half-micron geometries. The addition of the intermetal capability
increased the potential market size for W-J's CVD equipment.
The company's next-generation product, the WJ-1000 System, is designed for
high-throughput CVD onto the 200-mm (8-inch) wafers currently entering
production in major fabrication facilities in the U.S. and overseas.
A variant of Watkins-Johnson's semiconductor-production tool is used for
manufacturing flat-panel displays for personal-communication, computing
and entertainment products.
Semiconductor equipment products are primarily marketed through
manufacturers' representatives and global distributor networks. Sales by
the segment were 28% of consolidated sales in 1993, 21% in 1992 and 24% in
1991.
Semiconductor equipment product customers are numerous. The majority
of the segment's sales are to manufacturers of semiconductor integrated
circuits. There are several domestic and international competitors and
competition is intense. In meeting the competition, emphasis is placed on
selling quality products having excellent reliability and performance and
a strong customer support network.
Electronics
The Electronics Group manufactures turnkey systems, integrated subsystems
and signal-processing components for a broad range of communications and
defense applications. The group is serving new customers who have
wireless-communication and "dual-use" requirements in addition to
supplying sophisticated electronic products for defense-intelligence,
missile-guidance and space-communications missions.
Recent commercial contracts include high-fidelity W-J cellular receivers
to monitor ongoing telephone traffic to ensure authorized use of the
system, transponder subsystems to enable ship traffic to navigate
treacherous waterways during inclement weather and signal-processing
components for a wide range of wireless-communications products.
Watkins-Johnson receivers, antennas and signal-analysis equipment are used
by both commercial and military governmental agencies to perform
range-monitoring, frequency-measurement, signal-localization and
interference-analysis functions, often in complex, high-signal-density
environments.
Key missile programs, such as the Advanced Medium-Range Air-to-Air Missile
(AMRAAM) and the High-speed Anti Radiation Missile (HARM) continue to
represent a substantial portion of the group's core defense-electronics
business.
Electronics products are marketed through direct sales efforts and
distributor networks. Sales by the electronics segment were 70% of
consolidated sales in 1993, 76% in 1992 and 72% in 1991. The majority of
the segment sales is made to government agencies and to customers engaged
in defense contracting. The principal customer for such sales is the U.S.
Department of Defense. Sales contracts with the government are customarily
subject to terms and conditions which provide for renegotiation of profits
or termination of the contract at the election of the government. The
right to terminate for convenience has not had any significant effect on
the company's financial position or results of operations.
The electronics segment has numerous competitors which include both large
diversified corporations and smaller specialty firms. Due to the various
industries in which the company and its competitors operate, a competitive
ranking cannot be reasonably established. However, the electronics segment
is a leading supplier in several of its product markets. In meeting its
competition the company offers quality products featuring excellent
reliability and performance at competitive prices.
Environmental Services
W-J Environmental (WJE) specializes in hydrogeology and offers services
from the remedial investigation of contaminated-water sites through the
remedial action necessary to eliminate the environmental problem.
The recent addition of an environmental engineering capability enabled WJE
to design and install an innovative wastewater-minimization system which
eliminates the discharge of heavy metals and cyanide into the public sewer
system. This system is being marketed to manufacturers and governmental
agencies charged with finding ways to cope with increasingly restrictive
environmental regulations.
The unit also markets its capabilities in chemistry, microbiology,
geophysics, toxicology, risk assessment and data management to customers
who do not require a full range of environmental services, but have a
serious requirement for one or two areas of expertise which our new group
can satisfy.
Other Business Items
Raw materials for the production of semiconductor equipment and
electronics products are obtained from numerous suppliers. Dependence on
any particular supplier is minimal. Business operations are not believed
to be seasonal. Except for negotiated advance or progress payments from
customers on long-term contracts in the defense-electronics business,
there are no special working capital practices in any of the three
segments.
The company has been increasingly active in securing patents and licensing
agreements to protect certain proprietary technologies and know-how
resulting from its on-going research and development efforts. Although the
company holds and has filings pending on numerous domestic and foreign
patents and technology licenses for the manufacture and sale of various
products, patents have not significantly affected the company's operations
or financial performance. Management believes the company's competitive
position is derived primarily from its core competence of engineering,
manufacturing and understanding of its customers and markets.
Total company backlog at December 31, 1993 was $222,628,000 compared to
$207,827,000 at December 31, 1992. The percentage of backlog attributable
to the semiconductor equipment and electronics segments were 22% and 77%
respectively in 1993, compared to 9% and 89% in 1992. Approximately 86% of
all backlog at year-end 1993 is expected to be shippable within 12 months
compared to 83% at year-end 1992.
Company-sponsored research and development expense was $27,163,000 in
1993, $27,210,000 in 1992, and $27,180,000 in 1991. Customer-sponsored
research and development was estimated to be approximately $18,000,000
in 1993, $25,000,000 in 1992, and $15,000,000 in 1991.
The company's employment on December 31, 1993 was 2,390. None of the
company's employees is covered by a collective bargaining agreement. The
company's relationship with its employees is good.
Environmental issues are discussed in Note 8 to the consolidated financial
statements contained in Part II, Item 8 of this annual report on Form
10-K.
(d) Financial Information about Foreign and Domestic Operations and Export
Sales.
Company foreign operation assets and sales are less than ten percent of
consolidated totals. Sales outside the United States accounted for 33% of
the company's sales in 1993, 25% in 1992, and 30% in 1991. The inherent
risks of foreign business are similar to those of domestic business but
with the additional risks of foreign government instability and export
license cancellation. A major portion of foreign product orders in the
electronics segment requires export licensing by the Department of State
prior to shipment. For international shipments of electronics and
semiconductor equipment, the company purchases forward exchange contracts
and/or obtains customer letters of credit to reduce foreign currency
fluctuation and credit risks. For further information on foreign sales,
see Note 7 and Note 10 to the consolidated financial statements contained
in Part II, Item 8 of this annual report on Form 10-K.
ITEM 2. PROPERTIES
Watkins-Johnson Company and subsidiaries conduct their main operations at
plants in Palo Alto, Scotts Valley and San Jose, California and
Gaithersburg, Maryland. Additional operations are conducted in Columbia,
Maryland, and Windsor, England. The company has nine field offices in the
United States and five offices overseas. As part of the company's cost
reduction efforts, the 56,000 square-foot facility located in North
Carolina was closed in 1991.
At December 31, 1993 there were approximately 732,000 square feet of plant
space in California, 225,000 square feet in Maryland, and 15,000 square
feet in England. Approximately 90% of the company's plant space is
occupied for the company's operations. The company is pursuing
opportunities to realize the market value of its properties while ensuring
efficient use of available space.
The electronics segment utilizes substantially all of the above named
facilities except for the Scotts Valley plant, which houses the
semiconductor equipment segment. In addition, the environmental services
division maintains leased field offices located in Palo Alto, California
and Denver, Colorado.
The Palo Alto and Columbia facilities are leased. Sales offices are also
leased. The San Jose plant is held subject to a long-term mortgage.
Information on long-term obligations is in Note 3 to the consolidated
financial statements contained in Part II, item 8 of this annual report on
Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
Information required under this item is contained in Note 6 and Note 8 to
the consolidated financial statements contained in Part II, Item 8 of this
annual report on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company submitted no matters to a vote of the shareowners during the
last quarter of the period covered by this report.
<TABLE>
EXECUTIVE OFFICERS OF THE REGISTRANT
<CAPTION>
OFFICER BUSINESS EXPERIENCE
NAME AGE OFFICE HELD SINCE LAST FIVE YEARS
---------- ---- ------------ -------- --------------------
<S> <C> <C> <C> <C>
Dr. Dean A. Watkins .................. 71 Chairman of the Board 1957 Chairman of the Board
Dr. H. Richard Johnson................ 67 Vice Chairman of the Board 1957 Vice Chairman of the Board
Dr. W. Keith Kennedy, Jr. ............ 50 President and Chief Executive 1977 President and Chief Executive Officer
Officer
Keith D. Gilbert...................... 52 Executive Vice President 1984 President, Electronics Group (formerly
Defense Group); Prior to 1993, Vice
President, Defense Group; Prior to
1990, Vice President, Devices Group
James L. Schram....................... 46 Executive Vice President 1989 President, Semiconductor Equipment
Group (formerly Commercial Group);
Prior to 1993, Vice President,
Commercial Group; Prior to 1992,
Vice President and Manager,
Components Division
Scott G. Buchanan..................... 42 Vice President and Chief Financial 1989 Vice President and Chief Financial
Officer Officer; Prior to 1993, Chief
Financial Officer and Treasurer; Prior
to 1991, Treasurer
Richard G. Bell....................... 46 Vice President and General Counsel 1990 Vice President and General Counsel;
Prior to 1990, General Counsel
Darryl T. Quan ....................... 39 Controller 1991 Controller; Prior to 1991, Manager,
Corporate Accounting
Carol H. Roosen ...................... 62 Secretary 1988 Secretary
Joan M. Varrone ...................... 42 Treasurer 1994 Treasurer; Prior to 1994, Assistant
Treasurer, Raychem Corporation
<FN>
Dr. Watkins and Dr. Johnson have been directors of the company since its
incorporation in 1957. Dr. Kennedy has been a Director since August 1987.
None of the above officers is related to any other officer at
Watkins-Johnson Company.
</TABLE>
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The company's common stock is principally traded on the New York and
Pacific stock exchanges. At December 31, 1993 there were approximately
4,600 shareowners, which included holders of record and beneficial owners.
The company expects that comparable cash dividends will continue in the
future.
DIVIDENDS AND STOCK PRICES
1993 QUARTERS 1ST 2ND 3RD 4TH
---------- ----------------------------------------------
Dividends Declared Per Share
(in cents)................... 12 12 12 12
Stock Price (NYSE--in dollars). High 15-1/2 18-1/2 24-1/2 26-1/4
Low 12 12-3/4 17-1/4 19-3/8
1992 QUARTERS 1ST 2ND 3RD 4TH
---------- --------------------------------------------------
Dividends Declared Per Share (in
cents)......................... 12 12 12 12
Stock Price (NYSE--in dollars)... High 12-5/8 12-1/8 10-7/8 15
Low 10-1/4 9-3/4 8-3/4 8-5/8
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Sales............. $ 286,290 $ 264,400 $ 277,540 $ 311,850 $ 310,701
Net Income ....... 11,596 10,401(a) (22,399)(b) 13,030 18,724
Net Income Per Share .. 1.45 1.38(a) (2.98)(b) 1.67 2.23
Dividends Per Share ... .48 .48 .48 .48 .46
Average Shares
Outstanding 7,999,000 7,551,000 7,527,000 7,791,000 8,404,000
FINANCIAL POSITION
Working Capital.........$ 108,497 $ 100,852 $ 90,363 $ 99,367 $ 114,042
Total Assets ........... 220,628 206,090 212,579 222,763 226,764
Long-Term Obligations . 26,463 28,644 31,630 19,459 22,469
Shareowners' Equity .... 133,888 125,055 118,126 143,975 149,147
Firm Backlog ........... 222,628 207,827 227,658 228,007 294,396
<FN>
- ----------
(a) Includes a tax benefit of $5,438, or 72 cents per share, due to the
cumulative effect of a change in accounting for income taxes.
(b) Includes pre-tax charges for restructuring, environmental remediation and
pending claims on government contracts totaling $29,751, or $3.08 loss per
share.
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition:
The company's financial condition remains strong while operations
continued to generate sufficient funds for growth. During 1993 cash and
equivalents decreased slightly from $49 million to $45 million as a result
of higher demands on working capital and increased business volume. The
company continues to be in excellent position to pursue investment
opportunities including additional product development, potential
acquisitions and stock repurchase. The company had no significant
commitments outstanding at the end of the year.
Current Operations:
Performance of the Semiconductor Equipment Group was excellent in 1993.
Sales and profit rebounded strongly from the poor conditions of the last
two years. Sales volume in the Asia/Pacific region and the U. S. increased
substantially. During 1993 Semiconductor Equipment Group facilities were
modified to improve production efficiency and capacity in keeping pace
with delivery commitments. The Semiconductor Equipment Group's record
backlog at year-end indicates that a similar level of business volume is
likely to continue through the first half of 1994.
Electronics Group sales were steady in 1993 while profits declined
slightly. Lower margins were attributable to the disruption of operations
resulting from the consolidation of a product line during the first half
of 1993. Persistent pricing pressures from customers and competitors also
contributed to the lower profitability. The Electronics Group is
positioning itself to achieve a better balance between commercial and
defense products. During 1993 the group was successful in capturing orders
for high-end microwave components, RF receiver opportunities and other
wireless communication products for commercial applications.
It must be recognized that the semiconductor equipment business is
cyclical and can change rapidly. Uncertainty increases significantly when
projecting demand for semiconductor equipment products more than six
months into the future. Over a longer horizon, uncertainty persists as to
how changes in worldwide defense spending may affect sales of the
company's Electronic Group products. Therefore, the performance and
results of 1993 may not be indicative of future performance.
Result of Operations:
1993 Compared to 1992 Semiconductor Equipment Group sales jumped 46%
while Electronics Group sales remained flat. Margins improved
significantly in the Semiconductor Equipment Group due to the higher
volume and operational efficiencies. This more than offset the slight
decline in profit margins experienced in the Electronics Group as
explained above. As a result, the combined gross margin improved from 34%
in 1992 to 35% in 1993. Selling and administrative expenses were higher as
expected due to the increase in volume and expenses associated with the
profitability of the company. In a percentage-of-sales comparison, selling
and administrative expenses were favorable relative to 1992 but may
increase in 1994 due to anticipated higher commissions and expenses
associated with certain international sales. Research and development
expenses decreased for the first three quarters of 1993 as activities
eased from the intense levels experienced in 1992. In the fourth quarter
1993, Semiconductor Equipment Group began to reemphasize research and
development activities to focus on the next generation of products to meet
the time-to-market window.
The higher level of research and development expenses incurred in the
fourth quarter is expected to continue for at least the first half of
1994. All other nonoperating income and expenses were within expectations.
Due to the combined effect of the above factors, 1993 net income of
$11,596,000 more than doubled the 1992 income of $4,963,000 before the
cumulative effect of an accounting change. A cumulative tax benefit of
$5,438,000 was added to the 1992 year-end results due to the adoption of
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes".
1992 Compared to 1991 Company sales decreased 5%, mostly attributable to
the continued softness in semiconductor-equipment business while
electronics sales were flat. The company was able to achieve a 34% gross
margin and an inventory turnover rate of more than four times a year by
maintaining minimum levels of inventory during 1992. Although 1992 gross
margins improved from the 32% in 1991, all elements of cost were under
substantial pressure because of the extremely competitive business
environment. The decline in selling and administrative expenses was
primarily attributable to the company's continual cost reduction efforts.
Research and development expenses were maintained at 10% of sales to
improve our competitive position in both the electronics and semiconductor
equipment markets. Intense R&D efforts resulted in several acceptances by
key customers of our TEOS-Ozone process, indicating increased order
opportunities for the Semiconductor Equipment Group. As discussed below,
certain nonrecurring provisions related to restructuring, environmental
remediation and government claims adversely affected 1991 results. The
provisions made in 1991 continued to appear adequate to meet the company's
obligations. Interest income was higher in 1992 resulting from additional
funds for investment. All other nonoperating income and expenses were
within expectations. The company adopted provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS 109) resulting in a cumulative tax benefit of $5,438,000. Income
before the cumulative adjustment was $.66 per share in 1992 compared to a
net loss of $2.98 per share in 1991.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
-----------------------------------
1993 1992 1991
------- -------- --------
Sales .......................... $286,290 $264,400 $277,540
---------- ---------- ----------
Costs and expenses:
Cost of goods sold ........... 184,749 173,816 188,275
Selling and administrative ... 57,452 55,648 60,180
Research and development ..... 27,163 27,210 27,180
Restructuring ................ 12,251
---------- ---------- ----------
269,364 256,674 287,886
---------- ---------- ----------
Income (loss) from operations .. 16,926 7,726 (10,346)
Other income (expense):
Interest income .............. 1,497 1,422 1,056
Interest expense ............. (1,293) (1,497) (1,519)
Other income (expense)--net .. (284) (438) (2,915)
Environmental remediation .... (15,000)
---------- ---------- ----------
Income (loss) before Federal and
foreign income taxes and
cumulative effect of
accounting change............. 16,846 7,213 (28,724)
Federal and foreign income taxes . (5,250) (2,250) 6,325
---------- ---------- ----------
Income (loss) before cumulative
effect of accounting change .... 11,596 4,963 (22,399)
Cumulative effect of change in
accounting for income taxes .. 5,438
---------- ---------- ----------
Net income (loss) ............ $ 11,596 $ 10,401 $ (22,399)
========== ========== ==========
Per share amounts:
Income (loss) before cumulative
effect of accounting change .. $1.45 $ .66 $(2.98)
Cumulative effect of change in
accounting for income taxes .72
---------- ---------- ----------
Net income (loss) ............ $1.45 $1.38 $(2.98)
========== ========== ==========
Average common and equivalent
shares......................... 7,999,000 7,551,000 7,527,000
See notes to consolidated financial statements.
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31
----------------------------------
1993 1992
---------- ---------
ASSETS
CURRENT ASSETS:
Cash and equivalents ................ $ 45,040 $ 49,081
Receivables ......................... 73,971 55,562
Inventories:.........................
Finished goods .................... 1,805 2,172
Work in process .................... 28,014 29,290
Raw materials and parts ............ 7,327 6,029
Deferred income taxes ............... 10,545 9,630
Other ............................... 2,072 1,479
---------- ---------
Total current assets .......... 168,774 153,243
---------- ---------
PROPERTY, PLANT AND
EQUIPMENT:
Land ................................ 4,130 4,130
Buildings and improvements .......... 31,250 28,881
Plant facilities, leased ............ 13,060 13,060
Machinery and equipment ............. 119,417 116,948
---------- ---------
167,857 163,019
Accumulated depreciation and
amortization ....................... (121,028) (115, 908)
---------- ---------
Property, plant and equipment--net .. 46,829 47,111
---------- ---------
OTHER ASSETS:
Deferred income taxes ............... 4,380 4,220
Other ............................... 645 1,516
---------- ---------
Total other assets ............. 5,025 5,736
---------- ---------
$ 220,628 $ 206,090
========== ==========
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................... $ 13,243 $ 10,950
Accrued expenses .................... 10,619 10,605
Advances on contracts ............... 11,820 10,559
Provision for warranties and losses on
contracts .......................... 5,984 6,964
Payroll and profit sharing .......... 13,217 11,693
Income taxes ........................ 5,394 1,620
---------- ---------
Total current liabilities ........... 60,277 52,391
---------- ---------
LONG-TERM OBLIGATIONS .......... 26,463 28,644
---------- ---------
SHAREOWNERS' EQUITY:
Preferred stock, $1.00 par value--
authorized and unissued, 500,000
shares .............................
Common stock, no par value--
authorized, 45,000,000 shares;
outstanding: 1993, 7,598,290
shares; 1992, 7,554,865 shares ..... 9,106 7,839
Retained earnings ................... 124,782 117,216
---------- ---------
Total shareowners' equity ..... 133,888 125,055
---------- ---------
$ 220,628 $ 206,090
========== ==========
See notes to consolidated financial statements.
<PAGE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COMMON STOCK TOTAL
----------------- RETAINED SHAREHOLDERS'
SHARES DOLLARS EARNINGS EQUITY
---------- ------ ---------- ----------
Balance, January 1, 1991 ...... 7,519,645 $ 7,521 $136,454 $ 143,975
Net loss for 1991 .......... (22,399) (22, 399)
Dividends declared--$.48 per
share ...................... (3,614) (3,614)
Sales under stock option plans 18,850 164 164
--------- ------ ---------- -------
Balance, December 31, 1991 ..... 7,538,495 7,685 110,441 118,126
Net income for 1992 .......... 10,401 10,401
Dividends declared--$.48
per share .................. (3,626) (3,626)
Sales under stock option plans 16,370 154 154
--------- ------ --------- -------
Balance, December 31, 1992....... 7,554,865 7,839 117,216 125,055
Net income for 1993 ........... 11,596 11,596
Repurchase of common stock .... (32,000) (27) (399) (426)
Dividends declared--$.48 per share (3,631) (3,631)
Sales under stock option plans .. 75,425 1,294 1,294
--------- ------- -------- --------
Balance, December 31, 1993.......... 7,598,290 $ 9,106 $124,782 $133,888
========= ======= ======== ========
See notes to consolidated financial statememts.
<PAGE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
YEAR ENDED DECEMBER 31
-------------------------------------
1993 1992 1991
--------- ---------- ---------
OPERATING ACTIVITIES:
Net income (loss) .................. $ 11,596 $ 10,401 $(22,399)
Adjustments to reconcile net income
(loss) to net cash provided
by operating activities:
Depreciation and amortization ..... 9,961 11,305 11,945
Write-down of assets related to
restructuring ................... 8,785
Deferred tax provisions including
accounting change ............... (1,075) (6,450) (3,660)
Changes net of restructuring:......
Receivables .................... (18,409) 13,527 21,708
Inventories .................... 345 (2,218) 8,880
Other assets .................... (556) 4,438 (4,347)
Accruals and payables .......... 8,878 1,318 (5,788)
Advances on contracts ........... 1,261 (12,037) 5,803
Provision for warranties and
losses on contracts ........... (980) 198 2,508
Environmental remediation ....... (1,676) (1,581) 15,000
-------- --------- --------
Net cash provided by
operating activities.......... 9,345 18,901 38,435
-------- --------- --------
INVESTING ACTIVITIES:
Additions of property, plant and
equipment ......................... (9,714) (5,206) (9,889)
Other .............................. 869 32 49
-------- ------- --------
Net cash used in investing
activities.................... (8,845) (5,174) (9,840)
-------- ------- --------
FINANCING ACTIVITIES:
Net borrowings (repayments) under
lines of credit..................... 204 (343) (371)
Payments on long-term obligations ... (1,982) (974) (918)
Proceeds from issuance of common
stock............................... 1,294 154 164
Repurchase of common stock .......... (426)
Dividends paid ..................... (3,631) (3,626) (4,517)
-------- -------- -------
Net cash used in financing
activities..................... (4,541) (4,789) (5,642)
-------- -------- -------
Net increase (decrease) in cash and
equivalents ......................... (4,041) 8,938 22,953
Cash and equivalents at beginning of
year................................. 49,081 40,143 17,190
--------- ------- -------
Cash and equivalents at end of
year .......................... $ 45,040 $49,081 $40,143
========= ======== =======
Other cash flow information:
Income taxes paid (refunded) . $ 3,808 $(2,638) $ 4,242
Interest expense paid .......... 1,324 1,522 1,503
See notes to consolidated financial statements.
<PAGE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The consolidated financial statements include those
of the company and its subsidiaries after elimination of intercompany balances
and transactions.
Cash Equivalents--Cash equivalents consist principally of U.S. Treasury bills
and commercial paper acquired with remaining maturity periods of ninety days or
less and are stated at cost plus accrued interest which approximates market
value. The company's investment guidelines limit holdings in commercial paper to
$1,000,000 per issuer.
Inventories--Inventories are stated at the lower of cost, using first-in,
first-out and average-cost basis, or market. Cost of inventory items is based on
purchase and production cost. Long-term contract costs and selling and
administrative expenses are excluded from inventory. Progress payments are not
netted against inventory.
Property, Plant and Equipment--Property, plant and equipment are stated at cost.
Leases which at inception assure the lessor full recovery of the fair market
value of the property over the lease term are capitalized. Provision for
depreciation and amortization is primarily based on the sum-of-the-years'-digits
and declining-balance methods.
Revenue Recognition--Revenue on fixed-price contracts other than long-term
contracts is recorded upon shipment or completion of tasks as specified in the
contract. Sales and allowable fees under cost-reimbursement contracts are
recorded as costs are incurred. Long-term contract sales and cost of goods sold
are recognized using the percentage-of-completion method based on the actual
physical completion of work performed and the ratio of costs incurred to total
estimated costs to complete the contract. Any anticipated losses on contracts
are charged to earnings when identified.
Income Taxes--In 1992 the company adopted Statement of Financial Accounting
Standard No. 109, "Accounting for Income Taxes" (SFAS 109); previously the
company had accounted for taxes under SFAS 96 (see Note 7). Under both SFAS 109
and 96, the consolidated statements of income include provisions (benefits) for
deferred income taxes using the "liability" method for transactions that are
reported in one period for financial accounting purposes and in another period
for income tax purposes. State and local income taxes are included in selling
and administrative expenses.
Per Share Information--Beginning in 1993 net income per share is computed using
the weighted average number of common and common equivalent shares (dilutive
stock options) outstanding during the year. The difference between fully diluted
earnings per share and primary earnings per share is not significant. Prior to
1993, the computation excluded outstanding stock options as their dilutive
effect was not material.
Reclassification--Certain amounts for 1992 and 1991 have been reclassified to
conform to the 1993 presentation.
2. RECEIVABLES
Receivables consist of the following (in thousands):
1993 1992
---------- ----------
U.S. Government long-term contracts:
Billed .............................. $ 2,936 $ 2,125
Unbilled ........................... 4,896 3,560
Commercial long-term contracts:
Billed .............................. 3,818 2,416
Unbilled ........................... 11,917 10,367
---------- ----------
Total long-term contract receivables .. 23,567 18,468
Other trade receivables ............... 50,404 37,094
---------- ----------
Total receivables less allowance of
$999 in 1993 and $982 in 1992 .... $73,971 $55,562
========== ==========
Unbilled receivables represent revenue recognized for long-term contracts not
yet billable based on the terms of the contract. These amounts are billable upon
shipment of the product, achievement of milestones, or completion of the
contract. Unbilled receivables are expected to be billed and collected within
one year. Receivables representing retainage not collectible within one year are
not material. There are no significant billed or unbilled receivables subject to
future negotiation.
Government contracts have provisions for audit, price redetermination and other
profit and cost limitations. Contracts may be terminated without prior notice at
the Government's convenience. In the event of such termination, the company
may be compensated for work performed, a reasonable allowance for profit, and
commitments at the time of termination. The right to terminate for convenience
has not had any significant effect on the company's financial position or
results of operations.
3. LONG-TERM OBLIGATIONS AND LINES OF CREDIT
Long-term obligations, excluding amounts due within one year, consist of (in
thousands):
1993 1992
---------- ----------
Mortgage ........................... $ 4,238 $ 5,508
Deferred compensation .............. 4,034 2,898
Environmental remediation .......... 10,257 11,933
Long-term leases ................... 7,934 8,305
---------- ----------
Total ........................... $26,463 $28,644
========== ==========
The current portion of long-term obligations is included in current liabilities.
The expected maturity amounts are as follows: 1994, $4,102,000; 1995,
$1,873,000; 1996, $1,917,000; 1997, $1,964,000, 1998, $2,016,000.
Mortgage--Primarily consists of a mortgage bearing 8-3/4% interest secured by
the San Jose, California plant. The annual payments totaling $710,000
continue into the year 2003 and are payable in monthly installments. Based
on the borrowing rates currently available to the company for loans with
similar terms, the carrying value of the mortgage approximates fair value.
Deferred Compensation--The company has deferred compensation plans covering
selected members of management and key technical employees. The purpose is to
reward and encourage talented employees to remain with the company.
Environmental Remediation--As discussed in Note 8, the company is obligated to
remediate groundwater contamination at the Scotts Valley and Palo Alto
facilities. The portion expected to be paid within one year is included in
current liabilities.
Leases--Certain long-term leases for plant facilities are treated as capital
leases for financial statement purposes. The leases expire during the years 1994
to 2014, however renewal options provide for lease extensions ranging from
fifteen to thirty-five years at revised rental terms. The company also has
noncancellable operating leases for plant facilities and equipment expiring
through 1996. The leases may be renewed for various periods after the initial
term. Payment obligations under these capitalized and operating leases as of
December 31, 1993 are as follows (in thousands):
CAPITAL OPERATING
LEASES LEASES
---------- ---------
Lease payments:
1994 .................... $ 1,156 $1,104
1995 .................... 848 839
1996 .................... 848 163
1997 .................... 848 36
1998 .................... 848
Remaining years ........ 16,568
---------- ---------
Total ...................... 21,116 $ 2,142
==========
Imputed interest ........... (12,811)
---------
Present value of lease payments
(current portion, $371) .. $ 8,305
=========
Rent expense for property and equipment relating to operating leases is as
follows (in thousands):
1993 1992 1991
--------- --------- --------
Real property ................ $ 1,033 $ 1,188 $1,234
Equipment .................... 865 830 929
-------- -------- -------
Total ................. $ 1,898 $ 2,018 $2,163
======== ======== =======
Lines of Credit--The company has arranged with certain banks to provide
unsecured revolving lines of credit totaling $23,500,000. These agreements
are generally renegotiated on an annual basis. No material compensating
balances are required or maintained. Borrowings under these facilities
generally bear interest at prime rate, which was 6 percent in 1993.
The lines of credit were substantially unused during the year. The
amount of outstanding letters of credit and other guarantees, which may
reduce the company's available lines, totaled $4,230,000
at December 31, 1993.
4. SHAREOWNERS' EQUITY
Stock Repurchase Program--The Board of Directors has authorized the company to
repurchase a maximum of 1,500,000 shares of company stock. Approximately 936,000
shares have been repurchased through December 31, 1993.
Common Share Purchase Rights--For each share of company common stock
outstanding, one Common Share Purchase Right is attached. The Rights expire
October 20, 1996, and may be redeemed by the company for $.01 per Right at any
time prior to 15 days after an entity acquires 20% or more of the company's
common stock. The Rights become exercisable if an entity acquires 20% or more of
the company's outstanding common stock, or announces an offer which would result
in such entity acquiring 30% or more of the company's common stock. When
exercisable, the Rights trade separately from the common stock and entitle a
holder to buy one share of the company's common stock for $160. If the company
is subsequently involved in a merger or other business combination, each Right
will entitle its holder to buy a number of shares of common stock of the
surviving company having a market value of twice the $160 exercise price. The
Rights also provide for protection against self-dealing transactions by a
controlling shareowner.
Stock Option Plans--The Employee Stock Option Plan provides for grants of
nonqualifying and incentive stock options to certain key employees and officers.
The options are granted at the market price on date of grant and expire at the
tenth anniversary date. One-third of the options granted are exercisable in each
of the third, fourth and fifth succeeding years. The Plan allows those employees
who are subject to the insider trading restrictions certain limited rights to
receive cash in the event of a change in control. Shares issued are net of
retirement of shares used in payment for options exercised. In addition, the
Plan permits the award of restricted stock rights subject to a fixed vesting
schedule. The holder of vested restricted stock has certain dividend, voting,
and other shareowner rights. No restricted stock awards have been made through
December 31, 1993.
The Nonemployee Directors Stock Option Plan provides for a fixed schedule of
options to be granted through 1998. Options granted are exercisable similarly to
the Employee Stock Option Plan. The total number of shares to be issued under
this plan may not exceed 200,000 shares. Included in the tables below, 17,640
option shares were granted at $12.88 in 1993 and 19,080 option shares were
granted at $10.00 in 1992.
1993 SHARES PRICE
- ---------- ---------- ----------
Granted ...................... 449,640 $12.38 to $24.50
Exercised .................... 87,945 $13.00 to $21.00
Terminated .................. 154,167
At December 31:
Outstanding ................ 1,869,412 $ 9.63 to $36.75
Exercisable ................ 1,058,700
Reserved for future grants . 1,657,230
1992 SHARES PRICE
- ---------- ---------- ------------
Granted ...................... 556,080 $ 9.25 to $10.75
Exercised .................... 19,270 $ 8.88 to $10.17
Terminated .................. 161,524
At December 31:
Outstanding ................ 1,661,884 $ 9.63 to $36.75
Exercisable ................ 711,046
Reserved for future grants . 1,952,703
5. RESTRUCTURING
During 1991, the company took actions resulting in restructuring charges
totaling $12,251,000 associated with the consolidation and closure of
facilities. Such actions included reductions in work force and consolidation of
product lines required to concentrate on core markets. Charges incurred were
primarily related to severance pay and write-down of assets.
6. OTHER INCOME (EXPENSE)--NET
In 1991 the company received and reviewed various audit reports and claims
asserted by the Defense Contract Audit Agency (DCAA) for contracts completed in
prior years. Although the company believes it has meritorious defenses,
provisions totaling $2,500,000 were recorded for these claims in 1991.
7. INCOME TAXES
In 1992 the company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109) which permits recognition of tax
benefits for certain temporary differences that could not be recognized under
SFAS 96. Under SFAS 109, deferred tax assets are recognized when management
believes realization of future tax benefits of temporary differences is more
likely than not. In estimating future tax consequences, SFAS 109 generally
considers all expected future events other than enactments of changes in the tax
law or rates, whereas SFAS 96 gave no recognition to future events other than
the recovery of assets and settlement of liabilities at their carrying amounts.
The cumulative effect of this accounting change increased deferred tax assets at
January 1, 1992 and first quarter 1992 net income by $5,438,000 or 72 cents per
share. As permitted by SFAS 109, the income tax provision for 1991 has not been
restated. The provision (benefit) for Federal and foreign income taxes consists
of the following (in thousands):
1993 1992 1991
---------- ---------- ----------
Current .................. $ 6,325 $ 3,262 $ (2,665)
Deferred ................. (1,075) (1,012) (3,660)
---------- ---------- ----------
Total ............. $ 5,250 $ 2,250 $ (6,325)
========== ========== ==========
Deferred tax assets (liabilities) are comprised of the following at December 31
(in thousands):
1993 1992 1991
---------- ---------- ----------
Capitalized leases ...................$ 675 $ 736 $ 786
Deferred compensation ................ 3,357 2,055 2,291
Loss accruals ....................... 5,423 5,919 4,762
Environmental remediation ............ 4,034 4,601 5,134
Uniform capitalization .............. 1,055 929 844
Vacation accrual ..................... 1,744 1,698 1,656
Unusable tax benefits under SFAS 96 .. (5,438)
Other ................................ 454 211 20
---------- ---------- ---------
Gross deferred tax assets......... 16,742 16,149 10,055
---------- ---------- ---------
Depreciation ....................... (1,413) (1,910) (2,267)
Other ............................... (404) (389) (388)
---------- ---------- ---------
Gross deferred tax liabilities.... (1,817) (2,299) (2,655)
---------- ---------- ---------
Net deferred tax asset .............. $14,925 $13,850 $ 7,400
========== ========== ==========
The differences between the effective income tax rate and the statutory Federal
income tax rate are as follows:
1993 1992 1991
---------- ---------- ----------
Statutory Federal tax rate ........... 35.0% 34.0% 34.0%
FSC ............................... (7.4) (7.8) 3.5
Deferred tax changes ............. (14.7)
Foreign subsidiary losses ........ 1.8 3.1
Other ............................. 1.8 1.9 (.8)
---------- ---------- ----------
Effective rate ..................... 31.2% 31.2% 22.0%
========== ========== ==========
Deferred tax changes in 1991 resulted primarily from loss provisions for which
no tax benefit was recognized under SFAS 96. Domestic state and local income
taxes included in selling and administrative expenses totaled $1,257,000 in
1993, $640,000 in 1992, and $265,000 in 1991. Foreign operation amounts
represent less than 5% of totals.
The Omnibus Budget Reconciliation Act of 1993 (the Act) became effective on
August 10, 1993. The provisions of the Act did not have a material effect on the
company's deferred taxes or its results of operations.
8. ENVIRONMENTAL REMEDIATION AND OTHER CONTINGENCIES
In 1991, the company completed negotiations with the Environmental Protection
Agency (EPA) for a consent decree, which was subsequently lodged in U.S.
District Court. The agreement requires the company to complete restoration and
thereafter maintain the groundwater quality at the Scotts Valley Plant. In a
separate action, the California Environmental Protection Agency issued a letter
challenging the company's position that the source of subsurface contamination
originated outside of company facilities in Palo Alto and directed the company
to revise its remedial investigation/feasibility study. The state further
directed the company to clean up certain contamination under the company
facilities irrespective of the origin thereof; and to coordinate remedial
efforts among the potential responsible parties cited in a 1988 regional
remedial action order. The company recorded a provision totaling $15,000,000 for
estimated costs to comply with the consent decree on the Scotts Valley Plant
site and for estimated costs necessary to fully investigate, develop, and
implement the remedial actions at the Palo Alto Plant site. The provision was
not reduced by any potential recoveries from insurers or other responsible
parties.
The ultimate cost of restoring the sites cannot be predicted with certainty.
Additional uncertainty exists with the Palo Alto site since the extent of the
contamination and the respective share of each potential responsible party has
not yet been conclusively determined. Technological advances and developments
may also affect the future costs of the restoration efforts. Moreover, the
company will continue to vigorously pursue recovery from its insurers and other
responsible parties. The company believes adequate provisions have been taken to
cover the expected expenditures associated with the known environmental actions
at this time.
In addition to the above environmental matters and pending government claims
discussed in Note 6, the company is involved in various legal actions which
arose in the ordinary course of its business activities. Except for the
provisions noted above and in Note 6, the company believes the final resolution
of these matters should not have a material impact on its results of operations
and financial position.
9. EMPLOYEE BENEFIT PLANS
Profit Sharing Investment Plan--The Watkins-Johnson Employees' Profit Sharing
Investment Plan conforms to the requirements of ERISA and the Internal Revenue
Code as a qualified defined contribution plan. The Plan covers substantially all
employees and provides that the company's contribution equal 9% of the net
pretax earnings and be funded each year. The amount charged to income was
$1,945,000 in 1993, $906,000 in 1992, and $0 in 1991.
Employee Stock Ownership Plan (ESOP)--To encourage employee participation and
long-term ownership of company stock, an ESOP was implemented on January 1,
1991. The Board determines each year's contribution depending on the performance
and financial condition of the company. The Board approved a contribution equal
to 1% of eligible employee compensation for 1993, 1992, and 1991, which resulted
in charges to income of $887,000, $900,000, and $910,000, respectively. The ESOP
is a qualified defined contribution plan under the similar employment and
regulatory requirements as the Profit Sharing Investment Plan.
10. BUSINESS SEGMENT REPORTING
The company operates in three industry segments. Operations in the Electronics
(formerly Defense) segment include the design, development, manufacture and sale
of advanced electronic systems and devices for military, space, and commercial
applications. Operations in the Semiconductor Equipment (formerly Commercial)
segment involve the development, production, sales and service of
chemical-vapor-deposition equipment for the manufacture of semiconductor
products and flat-panel displays. The Environmental Services operations provide
technical consulting services ranging from the exploration, development and
utilization of groundwater resources to the detection and remediation of
contaminated sites.
The U.S. Government is a significant customer for the Electronics and
Environmental Services segments. Hughes Aircraft Company is a significant
customer for the Electronics segment. Sales to U.S. Government agencies and
Hughes Aircraft Company totaled $63,000,000 and $41,000,000 in 1993; $70,000,000
and $28,000,000 in 1992; $71,000,000 and $25,000,000 in 1991, respectively.
<TABLE>
Operations by business segment are as follows (in thousands):
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
----------------------------------------------------------------
PRE-TAX YEAR-
INCOME END CAPITAL
SALES (LOSS) ASSETS ADDITIONS DEPRECIATION
-------- -------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Electronics ................... $201,410 $ 7,196 $108,030 $4,833 $6,661
Semiconductor Equipment ........ 80,725 10,591 49,012 4,299 2,786
Environmental Services.......... 5,536 (905) 3,923 84 228
Eliminations ................... (1,381) 44
Corporate ...................... 59,663 498 286
---------- -------- --------- ------ -------
Income from operations.......... 16,926
Other income (expense)--net .... (80)
---------- -------- --------- ------ -------
Total ...................... $286,290 $16,846 $220,628 $9,714 $9,961
========== ========= ========= ====== =======
<CAPTION>
YEAR ENDED DECEMBER 31, 1992
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Electronics ................... $200,279 $9,414 $112,097 $3,277 $8,035
Semiconductor Equipment ........ 55,206 (462) 24,829 1,798 3,011
Environmental Services ......... 10,490 (1,183) 5,633 91 166
Eliminations ................... (1,575) (43)
Corporate ...................... 63,531 40 93
---------- -------- --------- ------ -------
Income from operations ......... 7,726
Other income (expense)--net .... (513)
---------- -------- --------- ------ -------
Total ...................... $264,400 $ 7,213 $206,090 $5,206 $11,305
========== ========= ========= ====== =======
<CAPTION>
YEAR ENDED DECEMBER 31, 1991
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Electronics ................... $200,550 $ 2,954 $120,333 $5,566 $ 8,921
Semiconductor Equipment ........ 67,460 (11,459) 35,184 4,021 2,845
Environmental Services ......... 10,912 (1,707) 4,329 291 156
Eliminations ................... (1,382) (134)
Corporate ...................... 52,733 11 23
---------- -------- --------- ------ -------
Loss from operations ........... (10,346)
Other income (expense)--net .... (18,378)
---------- -------- --------- ------ -------
Total ...................... $277,540 $(28,724) $212,579 $9,889 $11,945
========== ========= ========= ====== =======
</TABLE>
Corporate assets consist primarily of cash and equivalents. Intersegment sales
were transferred based on negotiated prices.
Sales by geographic area are as follows (in thousands):
1993 1992 1991
---------- ---------- ----------
United States .................. $193,075 $199,611 $ 193,298
Export sales:
Europe ....................... 20,830 12,266 14,704
Far East ..................... 44,970 26,548 42,143
Other ........................ 15,652 11,311 14,294
European foreign operations .. 11,763 14,664 13,101
---------- ---------- ----------
Total ..................... $286,290 $264,400 $ 277,540
========== ========== ==========
Foreign operations' sales and identifiable assets are less than ten percent of
consolidated totals.
11. QUARTERLY FINANCIAL DATA-UNAUDITED
Unaudited quarterly financial data are as follows (in thousands, except per
share amounts):
YEAR ENDED DECEMBER 31
------------------------------------------
1993 QUARTERS 1ST 2ND 3RD 4TH
- -------------- -------- ------- -------- --------
Sales ...........................$67,083 $68,216 $72,708 $78,283
Gross profit ................... 22,147 23,250 25,462 30,682
Net income ...................... 1,370 2,652 3,512 4,062
Net income per share ............ $.18 $.33 $.42 $.52
1992 QUARTERS 1ST 2ND 3RD 4TH
- -------------- -------- ------- -------- --------
Sales .......................... $63,049 $66,984 $68,478 $65,889
Gross profit ................... 21,851 23,973 23,629 21,131
Net income ..................... 6,913(a) 754 1,368 1,366
Net income per share ........... $.92(a) $.10 $.18 $.18
- ----------
(a) The first quarter of 1992 includes a tax benefit of $5,438 or 72 cents per
share due to the cumulative effect of an accounting change (see Note 7).
<PAGE>
REPORT OF MANAGEMENT
The consolidated financial statements of Watkins-Johnson Company and
subsidiaries were prepared by management, which is responsible for their
integrity and objectivity. The statements were prepared in conformity with
generally accepted accounting principles and, as such, include amounts that are
based on the best judgments of management.
The system of internal controls of the company is designed to provide reasonable
assurance that assets are safeguarded and that transactions are executed in
accordance with management's authorization and are reported properly. Perhaps
the most important safeguard for shareowners is the company's emphasis in the
selection, training and development of professional accounting managers to
implement and oversee the proper application of its internal controls and the
reporting of management's stewardship of corporate assets and maintenance of
accounts in conformity with generally accepted accounting principles.
Deloitte & Touche, independent auditors, are retained to provide an objective,
independent review as to management's discharge of its responsibilities insofar
as they relate to the fairness of reported operating results and financial
position. They obtain and maintain an understanding of the company's accounting
and financial controls, and conduct such tests and related procedures as they
deem necessary to arrive at an opinion on the fairness of the financial
statements.
The Audit Committee of the Board of Directors, composed solely of Directors from
outside the company, meets periodically, separately and jointly, with the
independent auditors and representatives of management to review the work of
each. The functions of the Audit Committee include recommending the engagement
of the independent auditors, reviewing the scope and results of the audit and
reviewing management's evaluation of the system of internal controls.
W. Keith Kennedy Scott G. Buchanan
President and Vice President and
Chief Executive Officer Chief Financial Officer
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareowners and Board of Directors
of Watkins-Johnson Company:
We have audited the accompanying consolidated balance sheets of Watkins-Johnson
Company and subsidiaries as of December 31, 1993 and 1992, and the related
consolidated statements of operations, shareowners' equity, and cash flows for
each of the three years in the period ended December 31, 1993. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
materials respects, the financial position of Watkins-Johnson Company and
subsidiaries at December 31, 1993 and 1992, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1993 in conformity with generally accepted accounting principles.
In 1992, the company adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," as described in Note 7 to the consolidated
financial statements.
February 4, 1994
Deloitte & Touche
San Francisco, California
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the company's
directors is shown under the caption "Election of Directors" in the
company's definitive proxy statement filed with the Commission pursuant to
Regulation 14A.
The information relating to the company's executive officers is presented
in Part I of this Form 10-K under the caption "Executive Officers of the
Registrant".
ITEM 11. EXECUTIVE COMPENSATION
See this caption in the definitive proxy statement which the company has
filed with the Commission pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is shown under the captions "Security Ownership of
Certain Beneficial Owners & Management" in the company's definitive proxy
statement filed with the Commission pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain business relationships is shown under the
caption "Executive Compensation" in the definitive proxy statement which
the company has filed with the Commission pursuant to Regulation 14A.
There were no transactions with management for which disclosure would be
required by Item 404 of Regulation S-K.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE
----
(a)1. Consolidated Financial Statements
Consolidated Statements of Operations
For the Years Ended December 31, 1993, 1992 and 1991 7
Consolidated Balance Sheets
December 31, 1993 and 1992 8
Consolidated Statements of Shareowners' Equity
For the Years Ended December 31, 1993, 1992 and 1991 9
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1993, 1992 and 1991 10
Notes to Consolidated Financial Statements 11-18
Report of Management 19
Independent Auditors' Report 20
<PAGE>
2. Financial Statement Schedules
PAGE
----
Independent Auditors' Report........................................ 24
I Marketable Securities as of December 31, 1993................ 25
VIII Valuation and Qualifying Accounts and Reserves
For the Years Ended December 31, 1993, 1992 and 1991......... 26
IX Short-Term Borrowings For the Years Ended
December 31, 1993, 1992 and 1991.............................27
X Supplementary Income Statement Information For the
Years Ended December 31, 1993, 1992 and 1991.................28
Schedules not listed above are omitted because of the absence of conditions
under which they are required or because the required information is included in
the financial statements or in the notes thereto.
3. Exhibits
A list of the exhibits required to be filed as part of this report is set forth
in the Exhibit Index, which immediately precedes such exhibits. The exhibits are
numbered according to Item 601 of Regulation S-K. Exhibits incorporated by
reference to a prior filing are designated by an asterisk.
----------
(b) No reports on Form 8-K were required to be filed during the last
quarter of the period covered by this report.
(c) The exhibits required to be filed by Item 601 of Regulation S-K are
the same as Item 14(a)3 above.
(d) Financial statement schedules not included herein have been omitted
because of the absence of conditions under which they are required or
because the required information is included in the financial
statements or in the notes thereto.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this annual report to
be signed on its behalf by the undersigned, thereunto duly authorized.
WATKINS-JOHNSON COMPANY
-----------------------------------------
(Registrant)
Date: March 25, 1994 By /s/ DEAN A. WATKINS
-------------------------------------
DEAN A. WATKINS
CHAIRMAN OF THE BOARD
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<CAPTION>
SIGNATURE TITLE DATE
------------ ------- -----
<S> <C>
Principal Executive Officer: <C>
/s/ W. KEITH KENNEDY, JR. President and Chief Executive Officer March 25, 1994
----------------------------------
W. KEITH KENNEDY, JR.
Principal Financial and Accounting Officer:
/s/ SCOTT G. BUCHANAN Vice President and Chief Financial Officer March 25, 1994
----------------------------------
SCOTT G. BUCHANAN
/s/ H. RICHARD JOHNSON Director March 25, 1994
----------------------------------
H. RICHARD JOHNSON
/s/ JOHN J. HARTMANN Director March 25, 1994
-----------------------------------
JOHN J. HARTMANN
/s/ RITA RICARDO-CAMPBELL Director March 25, 1994
-----------------------------------
RITA RICARDO-CAMPBELL
/s/ JACK L. SHEPARD Director March 25, 1994
-----------------------------------
JACK L. SHEPARD
/s/ VON R. ESHLEMAN Director March 25, 1994
-----------------------------------
VON R. ESHLEMAN
/s/ RAYMOND F. O'BRIEN Director March 25, 1994
-----------------------------------
RAYMOND F. O'BRIEN
/s/ WILLIAM R. GRAHAM Director March 25, 1994
-----------------------------------
WILLIAM R. GRAHAM
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Watkins-Johnson Company:
We have audited the consolidated financial statements of Watkins-Johnson
Company and subsidiaries as of December 31, 1993 and 1992, and for each of
the three years in the period ended December 31, 1993, and have issued our
report thereon dated February 4, 1994, which report includes an explanatory
paragraph as to an accounting change in 1992 to adopt Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
such consolidated financial statements and report are included in Item 8 of
this annual report on Form 10-K. Our audits also included the consolidated
financial statement schedules of Watkins-Johnson Company and subsidiaries,
listed in Item 14. These consolidated financial statement schedules are the
responsibility of the company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
February 4, 1994
Deloitte & Touche
San Francisco, California
<PAGE>
<TABLE>
SCHEDULE I
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
MARKETABLE SECURITIES
AS OF DECEMBER 31, 1993
<CAPTION>
AMOUNT AT WHICH EACH
PORTFOLIO OF EQUITY
MARKET VALUE SECURITY ISSUES AND
PRINCIPAL OF EACH ISSUE EACH OTHER SECURITY
NAME OF ISSUER AND AMOUNT OF BONDS COST OF AT BALANCE ISSUE CARRIED IN THE
TITLE OF EACH ISSUE(1) AND NOTES EACH ISSUE(2) SHEET DATE BALANCE SHEET(2)
------------------------ --------------- ------------- -------------- ---------------------
<S> <C> <C> <C> <C>
United States Government Securities .........$ 8,000,000 $7,975,491 $7,975,491 $ 7,975,491
Banka CRT .................................. 1,000,000 999,550 999,550 999,550
Merrill Lynch ............................... 1,000,000 999,551 999,551 999,551
Bank of Nova Scotia ......................... 1,000,000 999,641 999,641 999,641
Alloman Funding ............................ 1,000,000 998,917 998,917 998,917
Premium Funding ............................. 1,000,000 999,368 999,368 999,368
WMC Finance, Ltd. ........................... 1,000,000 998,736 998,736 998,736
Beta Finance ................................ 1,000,000 998,736 998,736 998,736
New Center Asset Trust ...................... 1,000,000 998,736 998,736 998,736
Pacific Energy Fund ......................... 1,000,000 998,104 998,104 998,104
Receivables Capital ......................... 1,000,000 997,517 997,517 997,517
Hitachi America, Ltd......................... 1,000,000 997,067 997,067 997,067
Nissan Capital America ...................... 1,000,000 996,975 996,975 996,975
Premium Funding ............................. 1,000,000 997,067 997,067 997,067
AGA Capital, Inc. ........................... 1,000,000 996,723 996,723 996,723
A & Z Delaware .............................. 1,000,000 995,118 995,118 995,118
Mitsui Leasing .............................. 1,000,000 995,089 995,089 995,089
American Trading & Production................ 1,000,000 995,103 995,103 995,103
Creative Capital Corporation................. 1,000,000 994,461 994,461 994,461
Lehman Holdings ............................. 1,000,000 994,510 994,510 994,510
CIC Finance Delaware, Inc. .................. 1,000,000 994,417 994,417 994,417
JAL Capital Corporation ..................... 1,000,000 993,583 993,583 993,583
AIG Funding, Inc. ........................... 1,000,000 993,937 993,937 993,937
Frontier Funding Corporation................. 1,000,000 993,765 993,765 993,765
New Center Asset Trust ...................... 1,000,000 993,511 993,511 993,511
APRECO, Inc. ................................ 1,000,000 993,287 993,287 993,287
Old Republic Capital Corporation ............ 1,000,000 993,463 993,463 993,463
Abacus Funding Corporation ................. 1,000,000 992,417 992,417 992,417
Pioneer Electronics Capital, Inc............. 1,000,000 992,778 992,778 992,778
Sanwa Business Credit, Corp.................. 1,000,000 992,576 992,576 992,576
Mitsubishi International Corporation ........ 1,000,000 991,017 991,017 991,017
----------- ----------- ------------ ------------
Total ....................................$38,000,000 $37,851,211 $37,851,211 $37,851,211(3)
=========== =========== ============ ============
<FN>
- ----------
(1) Commercial securities listed are all short-term debt obligations.
(2) Stated at acquisition cost plus accrued interest as of December 31, 1993.
(3) Included in Cash and Equivalents on Consolidated Balance Sheet for the year
ended December 31, 1993.
</TABLE>
<PAGE>
Schedule VIII
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) PERIOD(2)
- ---------- ---------- ---------- ------------- ----------
1993
Allowance for
doubtful accounts ....$982,244 $ 21,420 $ 4,666 $ 998,998
========== ========== ======== ==========
1992
Allowance for
doubtful accounts ....$965,989 $ 24,550 $ 8,295 $ 982,244
========== ========== ======= ==========
1991
Allowance for
doubtful accounts ....$617,772 $351,817 $ 3,600 $ 965,989
========== ========== ======= =========
- ----------
(1) Write-off of uncollectible accounts.
(2) Reduction to accounts receivable.
<PAGE>
<TABLE>
SCHEDULE IX
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
SHORT-TERM BORROWINGS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<CAPTION>
WEIGHTED WEIGHTED
CATEGORY OF BALANCE AT AVERAGE MAXIMUM AMOUNT AVERAGE AMOUNT AVERAGE
SHORT-TERM AT END OF INTEREST RATE OUTSTANDING AT OUTSTANDING INTEREST RATE
BORROWINGS PERIOD AT YEAR END ANY MONTH END DURING THE YEAR(1) DURING THE YEAR(1)
----------- ------------ -------------- --------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
1993
Bank notes payable........ $204,000 8.5% $4,051,000 $ 372,000 4.8%
1992
Bank notes payable ....... $ -- -- $1,675,000 $1,048,000 16.6%
1991
Bank notes payable........ $343,000 11.7% $1,160,000 $ 675,000 13.5%
<FN>
- ----------
(1) The average amount outstanding during the year and the related weighted
average interest rate were computed based on the estimated daily balances.
Interest paid was primarily related to foreign loans.
</TABLE>
<PAGE>
SCHEDULE X
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
CHARGED TO COSTS AND EXPENSES
-------------------------------------
ITEM 1993 1992 1991
---------- ---------- ---------- ----------
1. Maintenance and repairs .............$3,788,406 $4,652,897 $6,553,973
2. Depreciation and amortization of
intangible assets ..................... (1) (1) (1)
3. Taxes, other than payroll and
income taxes .......................... (1) (1) (1)
4. Royalties ............................. (1) (1) (1)
5. Advertising costs ..................... (1) (1) (1)
- ----------
(1) Expense did not exceed 1% of sales.
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------
3-a ...... *Articles of Incorporation of Watkins-Johnson Company, as amended
May 8, 1989.
3-b ...... *By-Laws of Watkins-Johnson Company, as amended April 27, 1989
(Exhibit 3-b to Form 10-K for 1980, Commission File No. 1-5631).
10........ Material Contracts:
10-a...... *Lease and Agreement between Lindco Properties Company and
Watkins-Johnson Company commencing May 1, 1969 (Exhibit (b) I to
Form 10-K for 1969, Commission File No. 2-22436).
10-b ..... *Lease and Agreement between Morrco Properties Company and
Watkins-Johnson Company dated October 31, 1975 (Exhibit 2(c) to
Form 10-K for 1976, Commission File No. 1-5631).
10-c...... *Lease and Agreement between Danac Real Estate Investment
Corporation and Watkins-Johnson Company (Exhibit 6 to Form 10-K for
1972, Commission File No. 2-22436) and the amendments thereto
(Exhibit 1(b) to Form 10-K for 1976, Commission File No. 1-5631).
10-d...... *Building and Loan Agreement and Deed of Trust Note between
Danac Real Estate Investment Corporation and Watkins-Johnson
Company (Exhibit 7 to Form 10-K for 1972, Commission File No.
2-22436).
10-e ..... *Promissory Note and Deed of Trust Agreement
entered into between the New England Mutual Life Insurance Company
and Watkins-Johnson Company dated May, 1978 (Exhibit 2 to Form 10-K
for 1978, Commission File No. 1-5631).
10-f...... *Promissory Note and Deed of Trust entered into by the Wake County
Industrial Facilities and Pollution Control Financing Authority,
the NCNB National Bank of North Carolina and Watkins-Johnson
Company dated December 28, 1984 (Exhibit 10-f to Form 10-K for
1984, Commission File No. 1-5631).
10-g .......*Deferred Compensation Plan effective November 29, 1979 (Exhibit
10-g to Form 10-K for 1984, Commission File No. 1-5631).
10-h .......*Key Top-Management Incentive Bonus Plan Summary (Exhibit 10-h to
Form 10-K for 1985, Commission File No. 1-5631).
10-i .......*Employment Agreement Form, in effect for those employees listed in
the company's definitive proxy statement filed with the Commission
pursuant to Regulation 14A (Exhibit 10-i to Form 10-K for 1984,
Commission File No. 1-5631).
10-j .......*Deferred Compensation Plan effective November 29, 1979 as amended
March 31, 1986 (Exhibit 10-j to Form 10-K for 1986, Commission File
No. 1-5631).
10-k .......*Lease and Agreement between Seagate Technology and Watkins-Johnson
Company dated September 19, 1986 (Exhibit 10-k to Form 10-K for
1986, Commission File No. 1-5631).
10-k(1) ....*Termination of Lease and Agreement between Seagate Technology and
Watkins-Johnson Company dated September 22, 1987 (Exhibit 10-k(1)
to Form 10-K for 1987, Commission File No. 1-5631).
10-l .......*Severance Agreement Form, in effect for those employees listed in
the company's definitive proxy statement filed with the Commission
pursuant to Regulation 14A (Exhibit 10-l to Form 10-K for 1986,
Commission File No. 1-5631).
10-m .......*Form of Rights Agreement between Watkins-Johnson Company and Bank
of America National Trust and Savings Association (Exhibit 4 to the
1986 Third Quarter Form 10-Q, Commission File No. 1-5631).
10-n .......*Watkins-Johnson Company 1976 Stock Option Plan, as amended
September 28, 1987 (Appendix A to the company's definitive proxy
statement dated March 1, 1988 filed with the Commission pursuant to
Regulation 14A).
10-o .......*Watkins-Johnson Company 1989 Stock Option Plan for nonemployee
directors (Appendix A to the company's definitive proxy statement
dated February 28, 1990 filed with the Commission pursuant to
Regulation 14A).
10-p .......*Watkins-Johnson Company 1976 Stock Option Plan amended and renamed
as the 1991 Stock Option and Incentive Plan (Appendix A to the
company's definitive proxy statement dated February 28, 1991 filed
with the Commission pursuant to Regulation 14A).
11 .........Statement re Computation of Per Share Earnings.
21 .........Subsidiaries of Watkins-Johnson Company.
23 .........Consent of Independent Auditors.
<TABLE>
EXHIBIT 11
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992, 1991
The following table illustrates the potential dilution of outstanding stock
options on net income per share computations.
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
For primary net income per share:
Weighted average shares outstanding ..... 7,558,106 7,551,064 7,526,974
Equivalent shares--dilutive stock
options--based on treasury
stock method using average
market price ........................... 366,485 -- --
---------- ---------- ----------
Total ................................ 7,924,591 7,551,064 7,526,974
========== ========== ==========
For fully diluted net income per share:
Weighted average shares outstanding . 7,558,106 7,551,064 7,526,974
Equivalent shares--dilutive stock
options--based on treasury stock
method using greater of closing
market price or average price ....... 440,900 138,511 --
---------- ----------- ----------
Total ............................. 7,999,006 7,689,575 7,526,974
========== ========== ==========
Net income (loss) ...................... $11,596,000 $10,401,000 $(22,399,000)
========== ========== =============
Primary net income (loss) per share ..... $1.46 $1.38 $(2.98)
========== ========== ==========
Fully diluted net income (loss) per
share.................................. $1.45 $1.35 $(2.98)
========== ========== ==========
<FN>
This calculation is submitted in accordance with Regulation S-K, Item
601(b)(11).
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF WATKINS-JOHNSON COMPANY
JURISDICTION OF
SUBSIDIARY INCORPORATION
---------- ----------
Watkins-Johnson Associates ............ California
Watkins-Johnson Environmental, Inc. ... California
Watkins-Johnson FSC ................... Guam
Watkins-Johnson International ......... California
Watkins-Johnson International Korea,
Limited ............................ Korea
Watkins-Johnson Italiana, S.p.A. ...... Italy
Watkins-Johnson Limited ............... California
Watkins-Johnson (UK) Limited .......... United Kingdom
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
Watkins-Johnson Company:
We hereby consent to the incorporation by reference in Registration Statement
No. 33-21142 on Form S-8 of our reports dated February 4, 1994 appearing in your
Annual Report on Form 10-K for the year ended December 31, 1993.
March 8, 1994
Deloitte & Touche
San Francisco, California
