FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 1995
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
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(Exact name of registrant as specified in its charter)
CALIFORNIA 94-1402710
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3333 Hillview Avenue, Palo Alto, California 94304-1223
- ------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(415) 493-4141
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X . No .
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Common stock, no par value, outstanding as of
September 29, 1995 8,092,000 shares
Page 1
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
The interim financial statements are unaudited; however,
Watkins-Johnson Company believes that all adjustments necessary to a
fair statement of results for such interim periods have been included
and all such adjustments are of a normal recurring nature. The results
for the nine months ended September 29, 1995, are not necessarily
indicative of the results for the full year 1995.
Supplementary information to the financial statements:
A dividend of twelve cents per share was declared and paid during
the third quarter of 1995 and 1994.
Net income per share is computed based on the weighted average
number of common and common equivalent shares (dilutive stock
options) outstanding during the period, see Exhibit 11.
The consolidated financial statements required by Rule 10-01 of
Regulation S-X are included in this report beginning on the next page.
Page 2
<PAGE>
<TABLE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS*
For the periods ended September 29, 1995 and September 30, 1994
<CAPTION>
Three Months Ended Nine Months Ended
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 1995 1994 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales .......................................... $ 95,550 $ 83,174 $ 290,537 $ 251,065
- -----------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of goods sold ........................ 54,978 48,398 168,439 149,228
Selling and administrative ................ 17,565 18,034 56,386 52,988
Research and development .................. 11,217 8,533 35,379 25,957
- -----------------------------------------------------------------------------------------------------------
83,760 74,965 260,204 228,173
- -----------------------------------------------------------------------------------------------------------
Income from operations ......................... 11,790 8,209 30,333 22,892
Interest and other income (expense)--net ....... 455 295 1,346 874
Interest expense ............................... (232) (291) (638) (894)
- -----------------------------------------------------------------------------------------------------------
Income from continuing operations before
Federal and foreign income taxes .............. 12,013 8,213 31,041 22,872
Federal and foreign income taxes ............... (3,103) (2,624) (9,002) (7,304)
- -----------------------------------------------------------------------------------------------------------
Income from continuing operations .............. 8,910 5,589 22,039 15,568
Loss from discontinued operations--net of
taxes ....................................... (208) (624)
- -----------------------------------------------------------------------------------------------------------
Net income ..................................... $ 8,910 $ 5,386 $ 22,039 $ 14,944
===========================================================================================================
Fully diluted net income per share
(difference between fully diluted and primary
earnings per share is not material) ........ $ .98 $ .61 $ 2.48 $ 1.79
Average common and equivalent shares
outstanding ................................. 9,083,000 8,344,000 8,881,000 8,344,000
*Unaudited
</TABLE>
Page 3
<PAGE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of September 29, 1995 and December 31, 1994
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(Dollars in thousands) 1995* 1994
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and equivalents ......................... $ 37,235 $ 34,469
Receivables .................................. 90,268 80,427
Inventories:
Raw materials and parts .................. 17,395 12,293
Work in process .......................... 42,925 37,682
Finished goods ........................... 1,690 1,680
Other ........................................ 15,971 12,921
- --------------------------------------------------------------------------------
Total current assets ......................... 205,484 179,472
- --------------------------------------------------------------------------------
Property, plant, and equipment ................... 170,480 160,683
Accumulated depreciation and amortization .... (114,153) (115,537)
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Property, plant, and equipment--net .......... 56,327 45,146
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Other assets ..................................... 10,643 10,412
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$ 272,454 $ 235,030
================================================================================
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Payables ................................. $ 16,046 $ 15,045
Accrued liabilities ...................... 51,567 47,776
- --------------------------------------------------------------------------------
Total current liabilities ................ 67,613 62,821
- --------------------------------------------------------------------------------
Long-term obligations ........................ 23,564 22,583
Shareowners' equity:
Common stock ............................. 32,746 20,279
Retained earnings ........................ 148,531 129,347
- --------------------------------------------------------------------------------
Total shareowners' equity ................ 181,277 149,626
- --------------------------------------------------------------------------------
$ 272,454 $ 235,030
================================================================================
*Unaudited
Page 4
<PAGE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS*
For the periods ended September 29,1995 and September 30, 1994
Nine Months
Ended
- --------------------------------------------------------------------------------
(Dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net Income ........................................ $ 22,039 $ 14,944
Reconciliation of net income to cash flows
Depreciation and amortization ................. 7,325 6,824
Net changes in:
Receivables ................................ (9,841) (5,452)
Inventories ................................ (10,355) (11,321)
Other assets ............................... (3,280) 695
Accruals and payables ...................... 5,227 530
- --------------------------------------------------------------------------------
Net cash provided by operating activities ......... 11,114 6,220
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INVESTING ACTIVITIES:
Additions of property, plant, and equipment ....... (19,186) (9,238)
Other ............................................. 680 62
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Net cash (used) in investing activities ........... (18,506) (9,176)
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FINANCING ACTIVITIES:
Proceeds from issuance of stock ................... 12,467 9,202
Repurchase of common stock ........................ (13,805)
Dividends paid .................................... (2,855) (2,654)
Other ............................................. 546 (391)
- --------------------------------------------------------------------------------
Net cash provided (used) by financing activities .. 10,158 (7,648)
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents ....... 2,766 (10,604)
Cash and equivalents at beginning of period ........... 34,469 45,040
- --------------------------------------------------------------------------------
Cash and equivalents at end of period ................. $ 37,235 $ 34,436
================================================================================
*Unaudited
Page 5
<PAGE>
PART I--FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition: The company's financial condition remains
healthy. During the first nine months of 1995, cash and equivalents
increased $2.7 million from $34.5 to $37.2 million as cash provided by
operations and stock issuances more than offset capital expenditures
and dividends paid. For the balance of 1995, the company expects cash
to decline slightly due to increased working capital needs and capital
expenditures. Growth expectations beyond 1995 are anticipated to
require use of external financing. The company is negotiating an
increase in its lines of credit to approximately $100 million.
Current Operations: Semiconductor Equipment Group orders for the third
quarter were more than 40% above the last year's quarterly average,
reaching a year-to-date total of $170 million. The Far East continues
to be a strong geographic area for new semiconductor equipment orders,
with 57% of new system orders coming from that region in the third
quarter. During the quarter, Semiconductor Equipment Group sales
accounted for nearly 60% of total company revenue. Prospects into 1996
appear positive with industry annual growth projections at about 30%.
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.
The business picture for the Electronics Group is improving as the
group advances in wireless telecommunication opportunities. Additional
orders for PCS to Cellular downconverters demonstrate acceptance of
the group's products in the growing wireless market. Within The
Electronics Group's core defense business, customer demand has
relatively stabilized for its missile guidance and intelligence
receiver products.
Backlog: The firm order backlog on September 29, 1995 was $211,283,000
compared to the $227,312,000 recorded on September 30, 1994. Included
in the 1994 figure was approximately $23 million of backlog related to
product lines divested during the second quarter of 1995 as previously
announced. The portion of the current backlog shippable within twelve
months is 94%, compared to 87% one year ago.
Third Quarter 1995 Compared to Third Quarter 1994: Semiconductor
Equipment Group sales increased 53% while Electronics Group sales were
down 16%, resulting in an overall company increase of 15%. The
decrease in Electronics Group sales was primarily due to the
divestiture of certain product lines in the second quarter of 1995
which accounted for approximately $7 million of sales in each quarter
of 1994. Gross margins remained at 42%. Selling and administrative
expenses decreased slightly due primarily to realization of some
benefits of selling direct overseas. Research and development spending
increased compared to the same period last year but has slowed from
the intense pace of the first half of 1995. During the third quarter,
the effective tax rate for federal and foreign income taxes decreased
from 31% to 29% compared to the 32% effective rate for the same period
last year. The tax rate decrease resulted mostly from tax benefits
related to higher export sales and the research tax credit. The
cumulative effect of the tax rate reduction in the third quarter was
$620 thousand, or about 7 cents per share. Due to the combined effect
of the above factors, net income for the third quarter of 1995
increased 65% over the same period in 1994.
Page 6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Third Quarter Year-to-Date 1995 Compared to Third Quarter Year-to-Date
1994: Semiconductor Equipment Group sales increased 55% while
Electronics Group sales were down 13%, resulting in an overall company
increase of 16%. The decrease in Electronics Group sales was partially
due to the divestiture of certain product lines in the second quarter
of 1995, as previously discussed. Gross margins increased from 41% to
42% due mostly to the revenue mix shifting towards more profitable
semiconductor equipment products and improved margins in the
Electronics Group. Although selling and administrative expenses as a
percentage of sales decreased slightly, expenses were up as expected
due to the increased volume. Research and development expenses
increased from 10.3% to 12.2% of sales due to the company's
substantial efforts in developing the next generation of products for
both business segments, but has slowed since the first half of 1995.
The effective tax rate for federal and foreign income taxes decreased
from 32% to 29% compared to the same period last year, as discussed
above. Due to the combined effect of the above factors, net income for
the first 9 months of 1995 increased 47% over the same period in 1994.
Page 7
<PAGE>
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. 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 number according to Item
601 of Regulation S-K.
b. No reports on Form 8-K were required to be filed during the
quarter.
Page 8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WATKINS-JOHNSON COMPANY
-----------------------
(Registrant)
Date: November 3, 1995 By: /s/ W. Keith Kennedy, Jr.
---------------------- -------------------------------------------
W. Keith Kennedy, Jr.
President and Chief Executive Officer
Date: November 3, 1995 By: /s/ Scott G.Buchanan
---------------------- -------------------------------------------
Scott G. Buchanan
Vice President and Chief Financial Officer
Page 9
<PAGE>
EXHIBIT INDEX
The Exhibits below are numbered according to Item 601 of Regulation S-K.
Exhibit
Number Exhibit
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11 Statement re Computation of Per Share
Earnings.
27 Financial Data Schedule.
Page 10
<TABLE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
The following table illustrates the potential dilution of outstanding stock
options on net income per share computations:
Three Months Ended Nine Months Ended
- ------------------------------------------------------------------------------------------------------------------------
Sept. 29, 1995 Sept. 30, 1994 Sept. 29, 1995 Sept. 30, 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FOR PRIMARY NET INCOME PER SHARE:
Weighted average shares outstanding ........... 8,079,000 7,450,000 7,877,000 7,450,000
Equivalent shares--dilutive stock
options--based on treasury stock
method using average market price
939,000 710,000 939,000 710,000
- ----------------------------------------------------------------------------------------------------------------------
Total ......................................... 9,018,000 8,160,000 8,816,000 8,160,000
FOR FULLY DILUTED NET INCOME PER SHARE:
Weighted average shares outstanding ........... 8,079,000 7,450,000 7,877,000 7,450,000
Equivalent shares--dilutive stock
options--based on treasury stock
method using greater of closing
market price or average price ............. 1,004,000 894,000 1,004,000 894,000
- ----------------------------------------------------------------------------------------------------------------------
Total ......................................... 9,083,000 8,344,000 8,881,000 8,344,000
======================================================================================================================
Net income ........................................ $ 8,910 $ 5,386 $ 22,039 $ 14,944
======================================================================================================================
Primary net income per share ...................... $ .99 $ .66 $ 2.50 $ 1.83
======================================================================================================================
Fully diluted net income per share ................ $ .98 $ *.61 $ 2.48 $ 1.79
======================================================================================================================
<FN>
*Reported $.61 instead of $.65 so cumulative earnings for all quarters total
year-to-date earnings of $1.79 per share.
This calculation is submitted in accordance with Regulation S-K, Item
601(b)(11).
</FN>
</TABLE>
Page 11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-29-1995
<CASH> 37,235
<SECURITIES> 0
<RECEIVABLES> 90,268
<ALLOWANCES> 0
<INVENTORY> 62,010
<CURRENT-ASSETS> 205,484
<PP&E> 170,480
<DEPRECIATION> 114,153
<TOTAL-ASSETS> 272,454
<CURRENT-LIABILITIES> 67,613
<BONDS> 23,564
<COMMON> 32,746
0
0
<OTHER-SE> 148,531
<TOTAL-LIABILITY-AND-EQUITY> 272,454
<SALES> 95,550
<TOTAL-REVENUES> 95,550
<CGS> 54,978
<TOTAL-COSTS> 83,760
<OTHER-EXPENSES> (455)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 232
<INCOME-PRETAX> 12,013
<INCOME-TAX> 3,103
<INCOME-CONTINUING> 8,910
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,910
<EPS-PRIMARY> .99
<EPS-DILUTED> .98
</TABLE>
