FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1996
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
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3333 Hillview Avenue, Palo Alto, California 94304-1223
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(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 .
----- -----
Common stock, no par value, outstanding as of June 28, 1996 8,311,000 shares
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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 six months ended
June 28, 1996, are not necessarily indicative of the results
for the full year 1996.
Supplementary information to the financial statements:
A dividend of twelve cents per share was declared and
paid during the second quarter of 1996 and 1995.
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.
2
<PAGE>
<TABLE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS*
For the periods ended June 28, 1996 and June 30, 1995
<CAPTION>
Three Months Ended Six Months Ended
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 126,447 $ 102,004 $ 249,189 $ 194,987
- ----------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of goods sold 84,959 60,355 161,791 113,461
Selling and administrative 23,392 18,898 45,893 38,821
Research and development 17,024 11,611 31,032 24,162
- ----------------------------------------------------------------------------------------------------------------------------
125,375 90,864 238,716 176,444
- ----------------------------------------------------------------------------------------------------------------------------
Income from operations 1,072 11,140 10,473 18,543
Interest and other income (expense)--net (169) 351 (16) 891
Interest expense (383) (221) (613) (406)
- ----------------------------------------------------------------------------------------------------------------------------
Income from operations before Federal and
foreign income taxes 520 11,270 9,844 19,028
Federal and foreign income taxes (162) (3,494) (3,052) (5,899)
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 358 $ 7,776 $ 6,792 $ 13,129
============================================================================================================================
Fully diluted net income per share
(difference between fully diluted and
primary earnings per share is not $ .04 $ .88 $ .79 $ 1.51
material)
Average common and equivalent shares
outstanding 8,577,000 8,822,000 8,593,000 8,687,000
<FN>
*Unaudited
</FN>
</TABLE>
3
<PAGE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 28, 1996 and December 31, 1995
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(Dollars in thousands) 1996* 1995
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ASSETS
Current assets:
Cash and equivalents $ 23,190 $ 34,556
Receivables 103,052 86,311
Inventories:
Finished goods 4,270 3,623
Work in process 49,687 45,092
Raw materials and parts 33,966 31,120
Other 15,308 16,263
- --------------------------------------------------------------------------------
Total current assets 229,473 216,965
- --------------------------------------------------------------------------------
Property, plant, and equipment 215,531 185,379
Accumulated depreciation and amortization (124,750) (120,243)
- --------------------------------------------------------------------------------
Property, plant, and equipment--net 90,781 65,136
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Other assets 5,618 5,573
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$ 325,872 $ 287,674
================================================================================
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Payables $ 30,552 $ 23,162
Accrued liabilities 68,049 51,590
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Total current liabilities 98,601 74,752
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Long-term obligations 28,392 21,669
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Shareowners' equity:
Common stock 37,630 34,307
Retained earnings 161,249 156,946
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Total shareowners' equity 198,879 191,253
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$ 325,872 $ 287,674
================================================================================
*Unaudited
4
<PAGE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS*
For the periods ended June 28,1996 and June 30, 1995
Six Months Ended
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(Dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net Income $ 6,792 $ 13,129
Reconciliation of net income to cash flows
Depreciation and amortization 6,743 5,252
Net changes in:
Receivables (16,741) (4,731)
Inventories (8,088) (2,316)
Other assets 908 (343)
Accruals and payables 11,177 1,725
- --------------------------------------------------------------------------------
Net cash provided by operating activities 791 12,716
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INVESTING ACTIVITIES:
Additions of property, plant, and equipment (32,511) (13,790)
Other 143 887
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Net cash (used) in investing activities (32,368) (12,903)
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FINANCING ACTIVITIES:
Long-term borrowing 9,149
Net borrowing under line-of-credit 9,966
Proceeds from issuance of stock 3,323 8,471
Dividends paid (1,974) (1,885)
Other (253) 404
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Net cash provided by financing activities 20,211 6,990
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Net increase (decrease) in cash and equivalents (11,366) 6,803
Cash and equivalents at beginning of period 34,556 34,469
- --------------------------------------------------------------------------------
Cash and equivalents at end of period $ 23,190 $ 41,272
================================================================================
*Unaudited
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 revenue growth during the first half of 1996
continued to require cash to finance strong working capital
needs and infrastructure expansion. During the first half,
cash and equivalents decreased $11.4 million from $34.6
million to $23.2 million. Although net income was $6.8
million, net cash provided by operations was only $790
thousand, reflecting the need to fund increases in working
capital, particularly inventory and receivables. Despite the
slowdown in business now anticipated for the second half of
1996, the company invested $32.5 million in new capital plant
and equipment in order to support long-term growth for
semiconductor equipment and wireless communications
operations. Due to the expansion, $10 million in net
borrowings was drawn down during the first half under the
company's current $100 million line-of-credit. Because of the
expected slowdown, working capital needs are anticipated to
decline slightly in the second half. The company is now
forecasting a drawdown on its credit line smaller than the $30
to $40 million projected at the end of the first quarter. In
addition, long-term financing up to about $30 million is being
negotiated from several sources for the construction of a new
facility and related capital equipment in Kawasaki, Japan, for
the Semiconductor Equipment Group. The total cost of the
project was initially projected to be $38 million, but due to
the slowdown in the chip market the amount of capital
equipment in the facility may be reduced. During the first
half on 1996, $24 million was secured for the land and
building of which over $9 million was funded during the first
quarter. The amount funded is denominated in Yen and is
amortizable over 15 years, bearing interest at 2.5%. The
additional secured funding, also denominated in Yen, calls for
a balloon payment in 10 years, bearing interest at 3.1%.
During the first half of 1996, $3.3 million was provided by
stock issuances from stock option exercises which more than
offset the $2 million in dividends paid.
Current Operations and Business Outlook
Semiconductor Equipment Group
The company achieved record shipments of semiconductor
equipment in the second quarter of 1996, with Semiconductor
Equipment Group sales accounting for nearly 71% of total
company revenue. However, orders fell well below planned
expectations, plus some customers delayed future deliveries of
systems already on order. In addition, the company experienced
some semiconductor equipment order cancellations this quarter.
Orders for the second quarter of 1996 were down 10% compared
to the same period last year.
Although the long range industry forecast for the
semiconductor industry remains bright, management sees a
continuing soft orders picture for semiconductor equipment for
the second half of the year and into 1997. With the current
oversupply and price declines in DRAMs, these customers have
been reviewing their capacity and capital spending plans. The
Semiconductor Equipment Group downsized its operations to
accommodate the expected lower level of business, resulting in
reduced profits. The company will continue to reduce costs if
the market slump deepens, but will maintain the core strength
needed to respond quickly to increased demand when the market
turns upward again. Although the company has taken steps to
reduce costs in line with the expected revenue stream, fixed
costs are at a point that does not permit the profitability
achieved last year on similar revenues.
The group is up to full management strength again under the
leadership of its new group president, Patrick J. Brady. The
top-level management team will keep its energies focused on
collective team goals for future success. In his previous
assignment as the group's vice-president, Design Engineering,
Dr. Brady led team-management efforts that achieved
exceptionally challenging goals in product development and
customer support, proving his ability as a successful leader.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
The group is on schedule with the construction of a new
36,000-square-foot facility in Japan which will serve
primarily as an applications laboratory for the cooperative
development of new deposition processes with all Asia-Pacific
customers. Management expects to be moving in some equipment
by the end of the year in preparation for 1997 occupancy.
However, the company is reviewing the planned personnel and
equipment growth rate in light of the chip slowdown.
The WJ-2000 high-density-plasma reactor (HDP) was first
introduced in July 1995. It is aimed at devices such as the
256 Megabit DRAM and 7th generation microprocessors expected
to enter production in the 1998-1999 timeframe. We are
positioning this tool to expand our overall semiconductor
equipment market. Our WJ-999 and WJ-1000 atmospheric-pressure
systems lead the market for premetal dielectric films while
the HDP systems are designed to compete in the market for
intermetal dielectric layer films, especially for the smaller
feature sizes expected for future chip designs. We have had
several successful sample runs for various customers and are
in the final stages of negotiating placement of the first of
two beta-site tools at the start of the fourth quarter 1996.
We expect customers to be placing small orders for their
engineering efforts for late 1997 delivery.
It is recognized that the semiconductor equipment business is
cyclical, and uncertainty increases significantly when
projecting demand for semiconductor equipment products more
than 6 months into the future. The semiconductor market may
slow more than currently anticipated, thus requiring
additional downsizing and associated reductions in profits. In
addition, inherent risks and uncertainties associated with the
development of the WJ-2000 could cause delays in its
availability for sale and expected revenues.
Wireless Communications
The company's technological leadership in microwave integrated
circuits, multifunction assembly integration and wideband
receiver design gives its products a clear edge in many
wireless communications applications. At the equipment level,
the company continues as a major provider of RF receiver
modules for cellular fraud-detection and prevention systems.
Over 1,300 receivers were ordered this quarter, bringing the
total to over 2,000 ordered in the last year. The company
booked additional orders in the second quarter for its
advanced converter assemblies used in personal communications
systems (PCS). We are encouraged by the broad interest in
similar technology by several customers worldwide. At the same
time, customer demand for components and subassemblies has
softened somewhat by the slower-than-projected build-out of
the PCS infrastructure. Slowness by certain customers to
obtain base station site permits from various municipalities
and to move existing users of PCS frequency bands to other
frequencies is preventing them form erecting base stations as
quickly as earlier predictions. A continued slowdown of the
telecom market will lead to lower-than-expected revenues and
disproportionately reduced profits because of the high
research and development spending associated with entering the
telecom market.
Government Electronics
The company's government electronics operations enjoyed a good
quarter for orders. Prime contractors for the Advanced
Medium-Range Air-to-Air Missile (AMRAAM) and the Standard
Missile 2, Block IV (SM2-Blk IV) placed orders for
Watkins-Johnson microwave subsystems amounting to more than
$35 million, further confirming the company's stature as the
leading merchant supplier of electronic subsystems for these
major weapon systems. These order wins will assist the
government electronics segment in maintaining nearly flat
sales this year versus 1995.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
Second Quarter 1996 Compared to Second Quarter 1995
Semiconductor Equipment Group sales and wireless
communications sales increased 49.1% and 40.9%, respectively,
while government electronics sales decreased 22.7%, resulting
in an overall company increase of 24%. Although government
electronics sales decreased, orders were higher due to some
large order wins discussed above. Gross margins decreased from
40.8% to 33.8% due in part to employee termination costs and
inventory write-offs in the Semiconductor Equipment Group, and
a shifting of warranty costs from selling and administrative
expense to overhead. Prior to establishing direct sales and
service offices and phasing out our distributor network,
warranty costs were included in selling and administrative
expenses where distributors were responsible for warranty
service as part of their sales commission. Although selling
and administrative expenses remained flat as a percentage of
sales, expenses were higher due to the increased volume and
some termination costs charged to G&A as well. Research and
development expenses increased from 11.4% to 13.5% of sales
due to continuing efforts to develop next-generation products,
particularly for the Semiconductor Equipment Group and
wireless communications segment. As business slows in the
second half we will need to review our research and
development projects and prioritize them. For many projects,
management believes that the long-term benefits outweigh the
short-term advantages of slowing down. Due to the above
factors, second quarter 1996 net income decreased by 95.4%
compared to the same period in 1995.
Second Quarter Year-to-Date 1996 Compared to Second Quarter
Year-to-Date 1995
Semiconductor Equipment Group sales and wireless
communications sales increased 62.2% and 17.6%, respectively,
while government electronics sales decreased 20.7%, resulting
in an overall company increase of 27.8%. The $14.9 million
decrease in government electronics sales was due in part to
the divestiture of certain product lines in the second quarter
of 1995. Gross margins decreased from 41.8% to 35.18% due in
part to termination costs and inventory write-offs discussed
above, first-quarter 1996 expansion efforts in anticipation of
increased business in the Semiconductor Equipment Group, and a
shifting of warranty costs from selling and administrative
expense to overhead. Prior to establishing direct sales and
service offices and phasing out our distributor network,
warranty costs were included in selling and administrative
expenses where distributors were responsible for warranty
service as part of their sales commission. Although selling
and administrative expenses decreased as a percentage of
sales, due in part to the warranty cost shift discussed above,
expenses were higher due to the increased volume and
infrastructure development for higher 1996 sales we had
projected earlier. Research and development expenses remained
at about 12.4% of sales. Due to the above factors, net income
for the first half of 1996 decreased 48.3% compared to the
same period in 1995.
Risks and Uncertainties That May Affect Future Results
Statements included in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" which are
not historical facts are forward-looking statements that
involve risks and uncertainties that may materially affect
future results, including but not limited to: product demand
and market acceptance risks, the effect of economic
conditions, the impact of competitive products and pricing,
product development, commercialization and technological
difficulties, capacity and supply constraints or difficulties,
business cycles, the results of financing efforts, actual
purchases under agreements, the effect of the company's
accounting policies, U.S. Government export policies,
geographic concentrations, natural disasters and other risks.
8
<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.
9
<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: August 8, 1996 By: /s/ W. Keith Kennedy, Jr.
------------------------ ------------------------------------------
W. Keith Kennedy, Jr.
President and Chief Executive Officer
Date: August 8, 1996 By: /s/ Scott G. Buchanan
------------------------ ------------------------------------------
Scott G. Buchanan
Vice President and Chief Financial Officer
10
<PAGE>
EXHIBIT INDEX
The Exhibits below are numbered according to Item 601 of Regulation S-K.
Exhibit
Number Exhibit
------ -------
11 Statement re Computation of Per Share Earnings.
27 Financial Data Schedule
11
<TABLE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
(Dollars in thousands, except per share amounts)
The following table illustrates the potential dilution of outstanding stock
options on net income per share computations:
<CAPTION>
Three Months Ended Six Months Ended
- ------------------------------------------------------------------------------------------------------------------------------
June 28, 1996 June 30, 1995 June 28, 1996 June 30, 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For primary net income per share:
Weighted average shares outstanding 8,268,000 7,911,000 8,203,000 7,776,000
Equivalent shares--dilutive stock
options--based on treasury stock
method using average market price 309,000 788,000 390,000 788,000
- ------------------------------------------------------------------------------------------------------------------------------
Total 8,577,000 8,699,000 8,593,000 8,564,000
==============================================================================================================================
For fully diluted net income per share:
Weighted average shares outstanding 8,268,000 7,911,000 8,203,000 7,776,000
Equivalent shares--dilutive stock
options--based on treasury stock
method using greater of closing
market price or average price 309,000 911,000 390,000 911,000
- ------------------------------------------------------------------------------------------------------------------------------
Total 8,577,000 8,822,000 8,593,000 8,687,000
==============================================================================================================================
Net income $ 358 $ 7,776 $ 6,792 $ 13,129
==============================================================================================================================
Primary net income per share $ .04 $ .89 $ .79 $ 1.53
==============================================================================================================================
Fully diluted net income per share $ .04 $ .88 $ .79 $ 1.51
==============================================================================================================================
<FN>
This calculation is submitted in accordance with Regulation S-K, Item
601(b)(11).
</FN>
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-30-1996
<PERIOD-END> JUN-28-1996
<CASH> 23,190
<SECURITIES> 0
<RECEIVABLES> 103,052
<ALLOWANCES> 0
<INVENTORY> 87,923
<CURRENT-ASSETS> 229,473
<PP&E> 215,531
<DEPRECIATION> 124,750
<TOTAL-ASSETS> 325,872
<CURRENT-LIABILITIES> 98,601
<BONDS> 28,392
<COMMON> 37,630
0
0
<OTHER-SE> 161,249
<TOTAL-LIABILITY-AND-EQUITY> 325,872
<SALES> 126,447
<TOTAL-REVENUES> 126,447
<CGS> 84,959
<TOTAL-COSTS> 125,375
<OTHER-EXPENSES> 169
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 383
<INCOME-PRETAX> 520
<INCOME-TAX> 162
<INCOME-CONTINUING> 358
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 358
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
