=============================================================================
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, 1994
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 OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
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. /X/
AS OF FEBRUARY 3, 1995
----------------------
Aggregate market value of the voting stock held
by non-affiliates of the registrant: ..........$242,959,000
Number of shares outstanding: Common stock,
no par value .................................. 7,587,000 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Watkins-Johnson Company Notice of Annual Meeting of
Shareowners--April 8, 1995 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's structure during 1994 was unchanged from the previous year.
Since Watkins-Johnson realigned its business between 1991 and 1993, it has
operated in three principal business segments: semiconductor equipment,
electronic products and environmental services.
At the end of 1994, the environmental services unit was divested. Including
that divestiture, there were no material reclassifications, mergers or
consolidations of the company or its subsidiaries during the year. There
were no acquisitions or dispositions of materials amounts of assets other
than in the ordinary course of business during 1994.
(b) Financial Information about Industry Segments
The company operated within three industry segments--semiconductor
equipment, electronics, and environmental services. The environmental
services segment was divested at the end of 1994. Financial information
about industry segments is included in Note 8 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 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 initial dielectric layer on
a semiconductor wafer. The company's current principal products, the
TEOS999 and WJ-1000 Systems, deposit both interlevel-dielectric (ILD) and
intermetal-dielectric (IMD) layers of film on sub-half-micron geometries.
The addition of an IMD capability to WJ's historic concentration on the ILD
process potentially doubles the market size for WJ's CVD equipment.
Changing wafer-processing requirements, involving the addition of multiple
layers of both ILD and IMD to advanced integrated circuits, are also
increasing the market for WJ systems. The WJ-1000 System, 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, has
been well accepted by the market.
A variant of Watkins-Johnson's semiconductor-production tool is used for
manufacturing flat-panel displays for personal-communication, computing
and entertainment products.
Sales by the segment were 43% of consolidated sales in 1994, 29% in 1993
and 22% in 1992. The company is changing its mode of selling semiconductor
equipment. In place of a network of manufacturers' representatives and
distributors, WJ is establishing direct sales and service offices
worldwide.
Customers of the Semiconductor Equipment Group are numerous. A majority of
the segment's sales is to manufacturers of semiconductor integrated
circuits. Marubeni Hytech, the company's Japanese distributor, is a
significant customer of the segment. There are several domestic and
international competitors and competition is intense. In meeting the
competition, emphasis is placed on selling quality products having both
reliability and performance and a strong customer- support network.
The Semiconductor Equipment Group's business depends upon the capital
expenditures of semiconductor manufacturers, and the current and
anticipated market demand for integrated circuits. It is recognized that
the semiconductor equipment business is cyclical and can change rapidly.
Uncertainty increases significantly when projecting demand for
semiconductor equipment products more than 6 months in the future.
1
<PAGE>
Electronics
The Electronics Group manufactures turnkey systems, integrated subsystems
and signal-processing components for a broad range of communications and
defense-electronics applications. The group is serving new customers with
wireless-communication requirements, in addition to supplying sophisticated
electronic products for defense-intelligence, missile-guidance and
space-communications missions.
Recent non-defense contracts include transceivers for cellular base
stations, receivers for locating emergency 911 callers and
high-dynamic-range mixers for the Japanese manufacturer of "personal
handi-phone" base stations.
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.
The company is a subcontractor for certain key missile programs, such as
the Advanced Medium-Range Air-to-Air Missile (AMRAAM), the High-speed
Anti-Radiation Missile (HARM) and the Standard Missile Block 4 which
continue to represent a substantial portion of the group's core
defense-electronics business.
Electronics Group products are marketed through direct selling efforts and
distributor networks. Sales by the electronics segment were 57% of
consolidated sales in 1994, 71% in 1993 and 78% in 1992. A majority of the
segment sales is made to government agencies and to customers, such as
Hughes Aircraft Company, engaged in defense contracting. The principal end
user 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. In addition to
pressures from competing companies, Watkins-Johnson's defense-electronics
business is influenced by political activity and national budgetary policy.
In recent years, Department of Defense budget cutbacks have required the
company to reduce its work force and restructure its organization to
address changing business opportunities. Ongoing reductions in U.S. defense
spending could limit future demand for the company's products.
Due to the various industries in which the company and its competitors
operate, a competitive ranking cannot be reasonably established. However,
WJ's Electronics Group is a leading supplier in several of its product
markets. In meeting its competition, the company offers quality products
featuring both reliability and performance at competitive prices.
Other Business Items
Raw materials for the production of semiconductor equipment and electronic
products are acquired from a broad range of suppliers. Because suppliers
are numerous, dependence on any one supplier is kept to a minimum. On
occasion, however, the failure of a supplier to deliver key parts can
jeopardize the on-time shipment of WJ products. 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.
The company has been active in securing patents and licensing agreements to
protect certain proprietary technologies and know-how resulting from its
ongoing research and development. The financial impact of the company's
efforts to protect its intellectual property are unknown. Management
believes that the company's competitive strength derives primarily from its
core competence in engineering, manufacturing and understanding its
customers and markets; therefore, aggressive steps to protect that
knowledge are considered justifiable.
2
<PAGE>
Total company backlog at December 31, 1994 was $235,942,000 compared to
$221,437,000 at December 31, 1993. The percentage of backlog attributable
to the semiconductor equipment and electronics segments were 39% and 61%,
respectively, in 1994, compared to 22% and 78% in 1993. Approximately 92%
of all backlog at year-end 1994 is shippable within 12 months, compared to
86% at year-end 1993.
Company-sponsored research and development expense was $34,436,000 in 1994,
$27,163,000 in 1993, and $27,210,000 in 1992. Customer-sponsored research
and development was estimated to be approximately $24,000,000 in 1994,
$18,000,000 in 1993, and $25,000,000 in 1992, and was performed by the
Electronics Group.
The company's employment at December 31, 1994 was 2,220. None of the
company's employees is covered by a collective-bargaining agreement. The
company's relationship with its employees is generally good.
Environmental issues are discussed in Note 6 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.
Assets and sales from foreign operations are less than ten percent of
consolidated totals. Export sales and sales from foreign operations
accounted for 45% of the company's sales in 1994, 33% in 1993, and 25% in
1992. The inherent risks of foreign business are similar to domestic
business, 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 for both electronics
and semiconductor equipment segments, 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 8 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 and Scotts Valley, California and Gaithersburg,
Maryland. Additional operations are conducted in Windsor, England. The
plant in San Jose, California, has been closed and is offered for sale. The
company plans to close its 50,000 square foot facility in Columbia
(Savage), Maryland, in the first quarter of 1995 and will return it to the
lessor.
At December 31, 1994, there were approximately 530,000 square feet of plant
space in California, 225,000 square feet in Maryland, and 15,000 square
feet in England. Approximately 95% 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 Palo Alto and
Gaithersburg facilities. The Scotts Valley plant houses the
semiconductor-equipment segment.
The Palo Alto facility and sales office locations are leased. 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 to the
consolidated financial statements contained in Part II, Item 8 of this
annual report on Form 10-K.
3
<PAGE>
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.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
OFFICER BUSINESS EXPERIENCE
NAME AGE OFFICE HELD SINCE LAST FIVE YEARS
- ------------------------- ----- ------------------------ --------- ------------------------------
<S> <C> <C> <C> <C>
Dr. Dean A. Watkins .....72 Chairman of the Board 1957 Chairman of the Board
Dr. H. Richard Johnson ..68 Vice Chairman of the 1957 Vice Chairman of the Board
Board
Dr. W. Keith Kennedy, Jr. 51 President and Chief 1977 President and Chief Executive
Executive Officer Officer
Keith D. Gilbert* ........53 Executive Vice President 1984 President, Electronics Group
(formerly Defense Group);
Prior to 1993, Vice President,
Defense Group
James L. Schram ..........47 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 ........43 Vice President and Chief 1989 Vice President and Chief
Financial Officer Financial Officer; Prior to
1993, Chief Financial Officer
and Treasurer; Prior to 1991,
Treasurer
Richard G. Bell ..........47 Vice President and 1990 Vice President and General
General Counsel Counsel
Darryl T. Quan ...........40 Controller 1991 Controller; Prior to 1991,
Manager, Corporate Accounting
Carol H. Roosen ..........63 Secretary 1988 Secretary
Joan M. Varrone ..........43 Treasurer 1994 Treasurer; Prior to 1994,
Assistant Treasurer, Raychem
Corporation
</TABLE>
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.
*In January 1995, Mr. Gilbert resigned as Executive Vice President of the
company.
4
<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, 1994 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
1994 QUARTERS 1ST 2ND 3RD 4TH
- --------------------------------------- ----- ----- ----- -----
Dividends Declared Per Share (in cents) 12 12 12 12
Stock Price (NYSE--in dollars) .........High 28-3/4 35-5/8 36-5/8 36
Low 19-5/8 24-7/8 26-1/8 28-1/2
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
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------------------------
1994 1993 1992 1991 1990
----------- ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Sales .....................$ 332,606 $ 282,134 $ 255,485 $ 268,010 $ 303,008
Net Income ................ 20,961 11,596 10,401(a) (22,399)(b) 13,030
Net Income Per Share ..... 2.56 1.45 1.38(a) (2.98)(b) 1.67
Dividends Per Share ....... .48 .48 .48 .48 .48
Average Shares Outstanding 8,200,000 7,999,000 7,551,000 7,527,000 7,791,000
FINANCIAL POSITION
Working Capital ...........$ 116,651 $ 108,497 $ 100,852 $ 90,363 $ 99,367
Total Assets .............. 235,030 220,628 206,090 212,579 222,763
Long-Term Obligations .... 22,583 26,463 28,644 31,630 19,459
Shareowners' Equity ....... 149,626 133,888 125,055 118,126 143,975
Firm Backlog ..............$ 235,942 $ 221,437 $ 203,717 $ 218,434 $ 223,762
<FN>
- -----------
(a) Includes a tax benefit of $5,438,000, 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 $29,751,000 or $3.08 loss
per share.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition:
The company's financial condition remains healthy. During 1994 cash and
equivalents decreased $11 million from $45 to $34 million. Although cash
flow from operations was positive, the decline in cash was attributable to
higher capital expenditures, repayment of a long-term mortgage, dividends,
and cash used for stock repurchases exceeding stock issuances. The company
expects its operations to generate sufficient funds to meet next year's
cash requirements. In addition, the company has the ability to augment any
unplanned cash needs with readily available external financing.
Current Operations:
The semiconductor-equipment business remained strong during 1994 as
semiconductor manufacturers continued to expand their plant capacity. The
Semiconductor Equipment Group increased its production capacity to keep
pace with demand. To better serve its international
5
<PAGE>
customers, in 1994 the group established subsidiary operations in Japan,
Singapore and Taiwan in addition to South Korea, which was established in
1993. Preparations are underway to open an office in Europe in early 1995.
Although the company remains cautious about the uncertainty and cyclical
nature of the semiconductor-equipment business, it is encouraged by the
group's record backlog at the end of 1994 and good order prospects in the
first half of 1995.
In contrast to the burgeoning semiconductor-equipment market, the
persistent weakness in the defense market prompted the Electronics Group to
further streamline its operations and reduce costs. During 1994, the group
consolidated its two Northern California operations into the company's Palo
Alto, California Plant. The group is also planning to consolidate its East
Coast operations into the Gaithersburg, Maryland Plant in early 1995. The
company believes these actions should help to improve its competitiveness
in the shrinking defense electronics market.
Furthermore, the company divested its Environmental business at the end of
the year. The divestiture did not have a significant impact on the
company's results of operation and financial position. The divestiture
should allow the company to focus its resources on high-growth areas such
as the already robust semiconductor-equipment segment and the
telecommunications market within the electronics segment.
Results of Operations:
1994 Compared to 1993: Sales in the semiconductor-equipment segment surged
78% and more than offset the 6% decline in the electronics segment
resulting in an overall company increase of 18%. The favorable shift
towards more profitable semiconductor-equipment products helped to improve
the company's gross margin to above 40% despite consolidation costs
incurred in the Electronics Group. Selling and administrative expenses grew
faster than revenues because of commissions on higher international
semiconductor-equipment sales. As previously discussed, to improve customer
service and better control international expenses, the company established
certain foreign operations. The offices will operate in parallel with the
current distributors during a transition period. Research and development
expenditures were expectedly higher than last year due to the company's
efforts in advancing high-density plasma technology and development of the
next generation of products for both business segments. The effective tax
rate declined from 31% to 30% primarily due to higher R&D credit. As a
result of the above factors, net income from continuing operations rose
78%.
1993 Compared to 1992: Semiconductor Equipment Group sales jumped 46% while
Electronics Group sales were 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 a result, the combined gross
margin improved from 35% in 1992 to 36% 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, the 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 more than doubled the 1992 income before the
cumulative effect of an accounting change.
6
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1994 1993 1992
----------- ----------- ----------
<S> <C> <C> <C>
Sales ..........................................$ 332,606 $ 282,134 $ 255,485
----------- ----------- ----------
Costs and expenses:
Cost of goods sold ............................. 195,558 181,557 166,371
Selling and administrative ..................... 72,033 55,627 52,952
Research and development ....................... 34,436 27,163 27,210
----------- ----------- ----------
302,027 264,347 246,533
----------- ----------- ----------
Income from operations ......................... 30,579 17,787 8,952
Other income (expense):
Interest income ................................ 1,562 1,497 1,422
Interest expense ............................... (1,141) (1,291) (1,497)
Other income (expense)--net .................... (149) (278) (423)
----------- ----------- ----------
Income from continuing operations before
Federal and foreign income taxes and
cumulative effect of accounting change ........ 30,851 17,715 8,454
Federal and foreign income taxes ............... (9,200) (5,550) (2,650)
----------- ----------- ----------
Income from continuing operations before
cumulative effect of accounting change ........ 21,651 12,165 5,804
Discontinued operations (Note 8):
Loss from discontinued operations, net of taxes (490) (569) (841)
Loss on disposition, net of taxes .............. (200)
----------- ----------- ----------
Income before cumulative effect of change in
accounting for income taxes .................... 20,961 11,596 4,963
Cumulative effect of change in accounting
for income taxes ............................... 5,438
----------- ----------- ----------
Net income .....................................$ 20,961 $ 11,596 $ 10,401
=========== =========== ==========
Fully diluted per share amounts (difference
between fully diluted and primary earnings
per share is not material):
Income from continuing operations before
cumulative effect of accounting change ........$ 2.64 $ 1.52 $ .77
Discontinued operations ........................ (.08) (.07) (.11)
Cumulative effect of change in accounting
for income taxes ............................... .72
----------- ----------- ----------
Net income .....................................$ 2.56 $ 1.45 $ 1.38
=========== =========== ==========
Average common and equivalent shares ........... 8,200,000 7,999,000 7,551,000
<FN>
See notes to consolidated financial statements.
</TABLE>
7
<PAGE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1994 1993
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents .......................................$ 34,469 $ 45,040
Receivables ................................................ 80,427 73,971
Inventories:
Finished goods ............................................. 1,680 1,805
Work in process ............................................ 37,682 28,014
Raw materials and parts .................................... 12,293 7,327
Deferred income taxes ...................................... 11,060 10,545
Other ...................................................... 1,861 2,072
----------- -----------
Total current assets ....................................... 179,472 168,774
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land ....................................................... 3,198 4,130
Buildings and improvements ................................. 24,617 31,250
Plant facilities, leased ................................... 13,060 13,060
Machinery and equipment .................................... 119,808 119,417
----------- -----------
160,683 167,857
Accumulated depreciation and amortization .................. (115,537) (121,028)
----------- -----------
Property, plant and equipment--net ......................... 45,146 46,829
----------- -----------
OTHER ASSETS:
Deferred income taxes ...................................... 4,560 4,380
Other ...................................................... 5,852 645
----------- -----------
Total other assets ......................................... 10,412 5,025
----------- -----------
$ 235,030 $ 220,628
=========== ===========
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ...........................................$ 15,045 $ 13,243
Accrued expenses ........................................... 11,466 10,619
Advances on contracts ...................................... 7,572 11,820
Provision for warranties and losses on contracts .......... 7,192 5,984
Payroll and profit sharing ................................. 16,074 13,217
Income taxes ............................................... 5,472 5,394
----------- -----------
Total current liabilities .................................. 62,821 60,277
----------- -----------
LONG-TERM OBLIGATIONS ...................................... 22,583 26,463
----------- -----------
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: 1994, 7,576,471 shares; 1993, 7,598,290 shares 20,279 9,106
Retained earnings .......................................... 129,347 124,782
----------- -----------
Total shareowners' equity .................................. 149,626 133,888
----------- -----------
$ 235,030 $ 220,628
=========== ===========
<FN>
See notes to consolidated financial statements.
</TABLE>
8
<PAGE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK RETAINED SHAREOWNERS'
SHARES DOLLARS EARNINGS EQUITY
----------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
Balance, January 1, 1992 ..........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
Net income for 1994 ............... 20,961 20,961
Repurchase of common stock ........ (564,200) (972) (12,833) (13,805)
Dividends declared--$.48 per share (3,563) (3,563)
Sales under stock option plans ... 542,381 12,145 12,145
----------- ---------- ----------- --------------
Balance, December 31, 1994 ........7,576,471 $20,279 $ 129,347 $ 149,626
=========== ========== =========== ==============
<FN>
See notes to consolidated financial statements.
</TABLE>
9
<PAGE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1994 1993 1992
---------- ---------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................$ 20,961 $ 11,596 $ 10,401
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ............................. 8,711 9,961 11,305
Deferred tax provisions including accounting change ...... (695) (1,075) (6,450)
Net changes in:
Receivables ............................................... (6,456) (18,409) 13,527
Inventories ............................................... (14,509) 345 (2,218)
Other assets .............................................. 27 (556) 4,438
Accruals and payables ..................................... 9,550 8,878 1,318
Advances on contracts ..................................... (4,248) 1,261 (12,037)
Provision for warranties and losses on contracts ......... 1,208 (980) 198
Environmental remediation ................................. (2,727) (1,676) (1,581)
---------- ---------- -----------
Net cash provided by operating activities ................. 11,822 9,345 18,901
---------- ---------- -----------
INVESTING ACTIVITIES:
Additions of property, plant and equipment ................ (12,526) (9,714) (5,206)
Other ..................................................... 476 869 32
---------- ---------- -----------
Net cash used in investing activities ..................... (12,050) (8,845) (5,174)
---------- ---------- -----------
FINANCING ACTIVITIES:
Payments on long-term obligations ......................... (4,916) (1,982) (974)
Proceeds from issuance of common stock .................... 12,145 1,294 154
Repurchase of common stock ................................ (13,805) (426)
Dividends paid ............................................ (3,563) (3,631) (3,626)
Other ..................................................... (204) 204 (343)
---------- ---------- -----------
Net cash used in financing activities ..................... (10,343) (4,541) (4,789)
---------- ---------- -----------
Net increase (decrease) in cash and equivalents .......... (10,571) (4,041) 8,938
Cash and equivalents at beginning of year ................. 45,040 49,081 40,143
---------- ---------- -----------
Cash and equivalents at end of year .......................$ 34,469 $ 45,040 $ 49,081
========== ========== ===========
Other cash flow information:
Income taxes paid (refunded) ..............................$ 9,003 $ 3,808 $ (2,638)
Interest expense paid ..................................... 1,143 1,324 1,522
Noncash investing and financing activities:
Reclassification of plant held for sale from "Property,
Plant and Equipment" to "Other Assets", at book value
which is below market (Note 3). ...........................$ 5,107
<FN>
See notes to consolidated financial statements.
</TABLE>
10
<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 commercial paper
acquired with remaining maturity periods of 90 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 straight-line 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.
Foreign Currency Translation--The functional currency for all foreign operations
is the U.S. dollar. Gains or losses, which result from the process of
remeasuring foreign currency financial statements and transactions into U.S.
dollars, are included in net income and are not material in any year presented.
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 5). Under SFAS 109, the
consolidated statements of income include provisions 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 1993 and 1992 have been reclassified to
conform to the 1994 presentation.
11
<PAGE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. RECEIVABLES
Receivables consist of the following (in thousands):
1994 1993
---------- ---------
U.S. Government long-term contracts:
Billed ....................................$ 2,613 $ 2,936
Unbilled .................................. 9,516 4,896
Commercial long-term contracts:
Billed .................................... 9,663 3,818
Unbilled .................................. 723 11,917
---------- ---------
Total long-term contract receivables ..... 22,515 23,567
Other trade receivables ................... 57,912 50,404
---------- ---------
Total receivables less allowance of $1,015
in 1994 and $999 in 1993 ..................$80,427 $ 73,971
========== =========
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):
1994 1993
---------- ---------
Mortgage ..................$ 0 $ 4,238
Deferred compensation .... 6,330 4,034
Environmental remediation 8,430 10,257
Long-term leases .......... 7,823 7,934
---------- ---------
Total .....................$22,583 $ 26,463
========== =========
The current portion of long-term obligations is included in current liabilities.
The expected maturity amounts are as follows: 1995, $2,947,000; 1996,
$2,072,000; 1997, $1,955,000; 1998, $1,948,000; 1999, $1,942,000.
Mortgage--Primarily consisted of a mortgage bearing 8 3/4 % interest secured by
the San Jose, California plant. During 1994, the mortgage was paid while the
property was offered for sale. Based on the borrowing rates available to the
company for loans with similar terms, the carrying value of the mortgage at
December 31, 1993 approximated fair value.
Deferred Compensation--The company has deferred compensation plans covering
selected members of management and key technical employees. The purpose is to
reward and encourage talented employees to remain with the company.
12
<PAGE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Environmental Remediation--As discussed in Note 6, the company is obligated to
remediate groundwater contamination at the Scotts Valley and Palo Alto
facilities. The portion expected to be paid within one year is included in
current liabilities.
Leases--Certain long-term leases for plant facilities are treated as capital
leases for financial statement purposes. The leases expire during the years 2014
to 2029, and renewal options do not provide for lease extensions beyond the year
2029. The company also has noncancellable operating leases for plant facilities
and equipment expiring through 1998. The leases may be renewed for various
periods after the initial term. Payment obligations under these capitalized and
operating leases as of December 31, 1994 are as follows (in thousands):
CAPITAL OPERATING
LEASES LEASES
---------- -----------
1995 ...........................$ 848 $1,176
1996 ........................... 848 357
1997 ........................... 848 319
1998 ........................... 848 115
1999 ........................... 848 0
Remaining years ................ 15,720 0
---------- -----------
Total .......................... 19,960 $1,967
===========
Imputed interest ............... (12,026)
----------
Present value of lease payments
(current portion, $111) ........$ 7,934
==========
Rent expense included in continuing operations for property and equipment
relating to operating leases is as follows (in thousands):
1994 1993 1992
--------- --------- --------
Real property $ 774 $ 822 $ 866
Equipment ..... 626 865 830
--------- --------- --------
Total .........$ 1,400 $ 1,687 $ 1,696
========= ========= ========
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 ranged from 6 to 8 1/2 percent in 1994. 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 $4,701,000 at December 31, 1994.
4. SHAREOWNERS' EQUITY
Stock Repurchase Program--During 1994, the Board of Directors increased its
common-stock-repurchase authorization from 1,500,000 to 2,500,000 shares.
Through December 31, 1994, 1,500,000 shares have been repurchased completing the
previous repurchase authorization. The new authorization enables the company to
continue to acquire its common stock from time to time when appropriate.
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
13
<PAGE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1994.
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, 16,320
option shares were granted at $29.00 in 1994 and 17,640 option shares were
granted at $12.88 in 1993.
Activity related to stock option plans is as follows:
1994 SHARES PRICE
- --------------------------- ----------- ----------------
Granted .................... 577,320 $22.75 to $35.88
Exercised .................. 573,842 $ 9.63 to $28.25
Terminated ................. 28,641
At December 31:
Outstanding ................1,844,249 $ 9.63 to $36.75
Exercisable ................ 865,146 $ 9.63 to $36.75
Reserved for future grants 1,108,551
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 $ 9.88 to $36.75
Reserved for future grants 1,657,230
Included in the Consolidated Statements of Shareowners' Equity are tax benefits
related to sales under stock option plans of $2,327,000, $123,000 and $9,000 for
1994, 1993 and 1992, respectively.
14
<PAGE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. 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 $5,438,000 or 72 cents per
share. The provision for Federal and foreign income taxes on income from
continuing operations consists of the following (in thousands):
1994 1993 1992
--------- --------- ---------
Current ....$ 9,895 $ 6,625 $ 3,662
Deferred .. (695) (1,075) (1,012)
--------- --------- ---------
Total ......$ 9,200 $ 5,550 $ 2,650
========= ========= =========
Deferred tax assets (liabilities) are comprised of the following at December 31
(in thousands):
1994 1993 1992
---------- --------- ---------
Capitalized leases .............$ 632 $ 675 $ 736
Deferred compensation .......... 3,251 3,357 2,055
Loss accruals .................. 6,295 5,423 5,919
Environmental remediation ..... 3,490 4,034 4,601
Uniform capitalization ......... 1,273 1,055 929
Vacation accrual ............... 1,724 1,744 1,698
Other .......................... 675 454 211
---------- --------- ---------
Gross deferred tax assets ..... 17,340 16,742 16,149
---------- --------- ---------
Depreciation ................... (1,562) (1,413) (1,910)
Other .......................... (158) (404) (389)
---------- --------- ---------
Gross deferred tax liabilities (1,720) (1,817) (2,299)
--------- --------- ---------
Net deferred tax asset .........$15,620 $ 14,925 $ 13,850
========== ========= =========
The differences between the effective income tax rate and the statutory Federal
income tax rate are as follows:
1994 1993 1992
------- ------- -------
Statutory Federal tax rate ...... 35.0% 35.0% 34.0%
Foreign sales corporation benefit (5.5) (7.0) (6.3)
Research credit .................. (2.3)
Foreign subsidiary losses ........ .2 1.7 2.5
Other ............................ 2.4 1.7 1.3
------- ------- -------
Effective rate ................... 29.8% 31.4% 31.5%
======= ======= =======
Domestic state and local income taxes included in selling and administrative
expenses totaled $1,813,000 in 1994, $1,257,000 in 1993, and $640,000 in 1992.
Foreign operation amounts represent less than 5% of totals.
15
<PAGE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
6. ENVIRONMENTAL REMEDIATION AND OTHER CONTINGENCIES
The company remains in compliance with the remedial action plans being monitored
by various regulatory agencies at its Scotts Valley and Palo Alto sites. In 1994
the company reached agreement with the other potential responsible parties
regarding allocations of the remediation costs at the Palo Alto site.
In 1991 the company recorded a $15 million charge for estimated remediation
actions and cleanup costs. No additional provision has been recorded since 1991.
Expenditures of $2,727,000, $1,676,000 and $1,581,000 were incurred for the
years 1994, 1993 and 1992, respectively. While the timing and ultimate amount of
expenditures of restoring the sites cannot be predicted with certainty, the
company believes that the provision taken is adequate based on facts known at
this time. Changes in environmental regulations, improvements in cleanup
technology and discovery of additional information concerning these sites and
other sites could affect the estimated costs in the future.
In addition to the above environmental matters, the company is involved in
various legal actions which arose in the ordinary course of its business
activities. Although the environmental provision was not reduced by any
potential recoveries from insurers or other responsible parties, the company
will continue to vigorously pursue such recoveries. Except for the environmental
provision noted above, the company believes the final resolution of these
matters should not have a material impact on its results of operations, cash
flows, and financial position.
7. 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
$3,190,000 in 1994, $1,945,000 in 1993, and $906,000 in 1992. During the fourth
quarter of 1994, the Board of Directors approved an amendment to the Plan which
provides for earnings contributions to be replaced with company matching of
employees' 401(k) salary deferrals effective January 1, 1995. Under the revised
plan, the company will match up to 3% of eligible employee compensation.
Employee Stock Ownership Plan (ESOP)--The ESOP was established to encourage
employee participation and long-term ownership of company stock. 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 1994, 1993, and 1992, which resulted in
charges to income of $894,000, $887,000, and $900,000, respectively. The ESOP
held 204,000 and 185,000 shares of common stock at December 31, 1994 and 1993,
respectively. The ESOP is a qualified defined contribution plan under ERISA and
the Internal Revenue Code.
8. BUSINESS SEGMENT REPORTING
The company had operated in three industry segments. Operations in the
Electronics 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 segment involve the
development, production, sales and service of chemical-vapor-deposition
equipment used in 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.
This business was divested at the end of 1994 and is reported as a discontinued
business in the financial statements.
16
<PAGE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The U.S. Government and Hughes Aircraft Company are significant customers for
the Electronics segment. Sales to U.S. Government agencies and Hughes Aircraft
Company totaled $57,000,000 and $35,000,000 in 1994; $60,000,000 and $41,000,000
in 1993; $62,000,000 and $28,000,000 in 1992, respectively. Marubeni Hytech, the
company's Japanese distributor, is a significant customer for the Semiconductor
Equipment Group. Sales to Marubeni Hytech totaled $39,000,000 in 1994;
$16,000,000 in 1993; and $7,000,000 in 1992.
Continuing operations by business segment are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
-------------------------------------------------------------
YEAR-
PRE-TAX END CAPITAL
SALES INCOME ASSETS ADDITIONS DEPRECIATION
----------- ---------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Electronics ................$189,070 $ 8,394 $ 108,656 $ 4,600 $ 5,272
Semiconductor Equipment ... 143,536 22,185 68,270 7,649 2,993
Corporate .................. 58,104 277 446
----------- ---------- ----------- ----------- --------------
Income from continuing
operations ................ 30,579
Other income (expense)--net 272
----------- ---------- ----------- ----------- --------------
Total ......................$332,606 $ 30,851 $ 235,030 $ 12,526 $ 8,711
=========== ========== =========== =========== ==============
YEAR ENDED DECEMBER 31, 1993
-------------------------------------------------------------
Electronics ................$201,410 $ 7,196 $ 108,030 $ 4,833 $ 6,661
Semiconductor Equipment ... 80,724 10,591 49,012 4,299 2,786
Corporate .................. 63,586 582 514
----------- ---------- ----------- ----------- --------------
Income from continuing
operations ................. 17,787
Other income (expense)--net (72)
----------- ---------- ----------- ----------- --------------
Total ......................$282,134 $ 17,715 $ 220,628 $ 9,714 $ 9,961
=========== ========== =========== =========== ==============
YEAR ENDED DECEMBER 31, 1992
-------------------------------------------------------------
Electronics ................$200,279 $ 9,414 $ 112,097 $ 3,277 $ 8,035
Semiconductor Equipment ... 55,206 (462) 24,829 1,798 3,011
Corporate .................. 69,164 131 259
----------- ---------- ----------- ----------- --------------
Income from continuing
operations ................. 8,952
Other income (expense)--net (498)
----------- ---------- ----------- ----------- --------------
Total ......................$255,485 $ 8,454 $ 206,090 $ 5,206 $ 11,305
=========== ========== =========== =========== ==============
</TABLE>
Corporate assets consist primarily of cash and equivalents. Also included, are
assets of discontinued operations which are not material for any year
represented.
17
<PAGE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized below are operating results and assets of the discontinued
Environmental Services business. Intersegment sales were transferred based on
negotiated prices (in thousands).
YEAR ENDED DECEMBER 31
------------------------------
1994 1993 1992
--------- --------- ----------
Sales ..........................$ 4,911 $ 5,536 $ 10,490
Intersegment sales ............. (1,294) (1,380) (1,575)
--------- --------- ----------
Net sales ...................... 3,617 4,156 8,915
--------- --------- ----------
Loss before income taxes ...... (690) (869) (1,241)
Income tax benefit ............. 200 300 400
Loss on disposition net of $100
income tax benefit ............ (200)
--------- --------- ----------
Net loss .......................$ (690) $ (569) $ (841)
========= ========= ==========
DECEMBER 31
----------------------------
1994 1993 1992
--------- --------- --------
Assets .........................$ 2,281 $ 3,923 $ 5,633
========= ========= ========
Sales from continuing operations by geographic area are as follows (in
thousands):
1994 1993 1992
----------- ----------- -----------
United States ...............$183,963 $ 188,919 $ 190,696
Export sales:
Europe ...................... 26,534 20,830 12,266
Far East .................... 98,924 44,970 26,548
Other ....................... 12,385 15,652 11,311
European foreign operations 10,800 11,763 14,664
----------- ----------- -----------
Total .......................$332,606 $ 282,134 $ 255,485
=========== =========== ===========
Foreign operations' sales and identifiable assets are less than ten percent of
consolidated totals.
9. QUARTERLY FINANCIAL DATA--UNAUDITED
Unaudited quarterly financial data are as follows (in thousands, except per
share amounts):
YEAR ENDED DECEMBER 31
---------------------------------------
1994 QUARTERS 1ST 2ND 3RD 4TH
- -------------------- --------- --------- --------- ---------
Sales ...............$80,526 $87,365 $83,174 $81,541
Gross profit ........ 29,476 37,585 34,776 35,211
Net income .......... 3,624 5,934 5,386 6,017
Net income per share $ .45 $ .73 $ .61 $ .77
1993 QUARTERS 1ST 2ND 3RD 4TH
- -------------------- --------- --------- --------- ---------
Sales ...............$65,443 $66,963 $71,804 $77,924
Gross profit ........ 21,821 22,762 25,352 30,642
Net income .......... 1,370 2,652 3,512 4,062
Net income per share $ .18 $ .33 $ .42 $ .52
Included in net income and net income per share are results from discontinued
operations which do not have a material impact on any individual quarter.
18
<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 LLP, 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, Jr. Scott G. Buchanan
President and Vice President and
Chief Executive Officer Chief Financial Officer
19
<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, 1994 and 1993, and the related
consolidated statements of operations, shareowners' equity, and cash flows for
each of the three years in the period ended December 31, 1994. 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
material respects, the financial position of Watkins-Johnson Company and
subsidiaries at December 31, 1994 and 1993, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1994 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 5 to the consolidated
financial statements.
February 3, 1995
Deloitte & Touche LLP
San Francisco, California
20
<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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
-------
<S> <C> <C>
(a)1. Consolidated Financial Statements
Consolidated Statements of Operations For the Years Ended
December 31, 1994, 1993 and 1992 7
Consolidated Balance Sheets December 31, 1994 and 1993 8
Consolidated Statements of Shareowners' Equity For the Years
Ended December 31, 1994, 1993 and 1992 9
Consolidated Statements of Cash Flows For the Years Ended
December 31, 1994, 1993 and 1992 10
Notes to Consolidated Financial Statements 11-18
Report of Management 19
Independent Auditors' Report 20
21
<PAGE>
PAGE
-------
2. Financial Statement Schedules
Independent Auditors' Report 24
II Valuation and Qualifying Accounts and Reserves For the Years
Ended December 31, 1994, 1993 and 1992 25
</TABLE>
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.
22
<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 1, 1995 By: /s/ DEAN A. WATKINS
-----------------------------------------
DEAN A. WATKINS
CHAIRMAN OF THE BOARD
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
- -------------------------------- ----------------------------------------- --------------------
Principal Executive Officer:
/s/ W. KEITH KENNEDY, JR.
--------------------------------
W. KEITH KENNEDY, JR. President and Chief Executive Officer March 1, 1995
Principal Financial and Accounting Officer:
/s/ SCOTT G. BUCHANAN
-------------------------------- Vice President and Chief Financial
SCOTT G. BUCHANAN Officer March 1, 1995
/s/ H. RICHARD JOHNSON
--------------------------------
H. RICHARD JOHNSON Director March 1, 1995
/s/ JOHN J. HARTMANN
--------------------------------
JOHN J. HARTMANN Director February 28, 1995
/s/ RITA RICARDO-CAMPBELL
--------------------------------
RITA RICARDO-CAMPBELL Director March 1, 1995
/s/ VON R. ESHLEMAN
--------------------------------
VON R. ESHLEMAN Director March 1, 1995
/s/ RAYMOND F. O'BRIEN
--------------------------------
RAYMOND F. O'BRIEN Director February 27, 1995
/s/ WILLIAM R. GRAHAM
--------------------------------
WILLIAM R. GRAHAM Director March 8, 1995
/s/ GARY M. CUSUMANO
--------------------------------
GARY M. CUSUMANO Director March 1, 1995
/s/ ROBERT L. PRESTEL
--------------------------------
ROBERT L. PRESTEL Director February 28, 1995
</TABLE>
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
Watkins-Johnson Company:
We have audited the consolidated financial statements of Watkins-Johnson Company
and subsidiaries as of December 31, 1994 and 1993, and for each of the three
years in the period ended December 31, 1994, and have issued our report thereon
dated February 3, 1995, 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 schedule of Watkins-Johnson
Company and subsidiaries, listed in Item 14. This consolidated financial
statement schedule is the responsibility of the company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement taken as a whole, present fairly in all
material respects the information set forth therein.
February 3, 1995
Deloitte & Touche LLP
San Francisco, California
24
<PAGE>
SCHEDULE II
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) PERIOD(2)
- -------------------------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
1994
Allowance for doubtful accounts $998,998 $16,900 $1,000 $ 1,014,898
============ ============ ============= =============
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
============ ============ ============= =============
<FN>
- ----------
(1) Write-off of uncollectible accounts.
(2) Reduction of accounts receivable.
</TABLE>
25
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------
<S> <C>
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).
10-1 *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).
26
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------
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>
27
EXHIBIT 11
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, 1992
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
-----------------------------------
1994 1993 *1992
----------- ----------- -----------
For primary net income per share:
Weighted average shares outstanding ...... 7,425,000 7,558,000 7,551,000
Equivalent shares--dilutive stock
options--
based on treasury stock method using
average market price ...................... 728,000 367,000 --
----------- ----------- -----------
Total ..................................... 8,153,000 7,925,000 7,551,000
=========== =========== ===========
For fully diluted net income per share:
Weighted average shares outstanding ...... 7,425,000 7,558,000 7,551,000
Equivalent shares--dilutive stock
options--
based on treasury stock method using
greater of average or ending market price 775,000 441,000 --
----------- ----------- -----------
Total ..................................... 8,200,000 7,999,000 7,551,000
=========== =========== ===========
Net income ................................$ 20,961 $ 11,596 $ 10,401
=========== =========== ===========
Primary net income per share ..............$ 2.57 $ 1.46 $ 1.38
=========== =========== ===========
Fully diluted net income per share .......$ 2.56 $ 1.45 $ 1.38
=========== =========== ===========
- ----------
* Computation excluded dilutive stock options, totaling 139,000 equivalent
shares, as their dilutive effect was not material in 1992.
This calculation is submitted in accordance with Regulation S-K, Item
601(b)(11).
28
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 (U.K.) Limited ...........................United Kingdom
Watkins-Johnson International Japan, K.K. ................Japan
Watkins-Johnson International Singapore PTE, Limited ....Singapore
Watkins-Johnson International Taiwan .....................Taiwan
29
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 3, 1995 appearing in your
Annual Report on Form 10-K for the year ended December 31, 1994.
March 7, 1995
Deloitte & Touche LLP
San Francisco, California
30
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 34469
<SECURITIES> 0
<RECEIVABLES> 80427
<ALLOWANCES> 0
<INVENTORY> 51655
<CURRENT-ASSETS> 179472
<PP&E> 160683
<DEPRECIATION> 115537
<TOTAL-ASSETS> 235030
<CURRENT-LIABILITIES> 62821
<BONDS> 22583
<COMMON> 20279
0
0
<OTHER-SE> 129347
<TOTAL-LIABILITY-AND-EQUITY> 149626
<SALES> 332606
<TOTAL-REVENUES> 332606
<CGS> 195558
<TOTAL-COSTS> 195558
<OTHER-EXPENSES> 105056
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1141
<INCOME-PRETAX> 30851
<INCOME-TAX> 9200
<INCOME-CONTINUING> 21651
<DISCONTINUED> (690)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20961
<EPS-PRIMARY> 2.57
<EPS-DILUTED> 2.56
</TABLE>
