FORM 10-Q
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 March 29, 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
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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
incorporation 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 March 29, 1996 8,197,000 shares
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Page 1
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
The interim financial statements are unaudited; however, the
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 three months ended March 29, 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 first 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.
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Page 2
<PAGE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS*
For the periods ended March 29, 1996 and March 31, 1995
Three Months Ended
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(Dollars in thousands, except per share amounts) 1996 1995
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Sales $122,742 $ 92,983
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Costs and expenses:
Cost of goods sold 76,832 53,106
Selling and administrative 22,501 19,923
Research and development 14,008 12,551
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113,341 85,580
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Income from operations 9,401 7,403
Other income (expense) (77) 355
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Income before Federal and foreign income taxes 9,324 7,758
Federal and foreign income taxes (2,890) (2,405)
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Net income $ 6,434 $ 5,353
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Fully diluted net income per share (difference
between fully diluted and primary earnings
per share is not material) $ .75 $ .63
Year-to-date average common and equivalent
shares outstanding 8,583,000 8,541,000
*Unaudited
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<PAGE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 29, 1996 and December 31, 1995
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(Dollars in thousands) 1996* 1995
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ASSETS
Current assets:
Cash and equivalents $ 7,084 $ 34,556
Receivables 98,214 86,311
Inventories:
Finished goods 4,379 3,623
Work in process 53,017 45,092
Raw materials and parts 37,614 31,120
Other 15,935 16,263
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Total current assets 216,243 216,965
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Property, plant, and equipment 204,525 185,379
Accumulated depreciation and amortization (122,826) (120,243)
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Property, plant, and equipment--net 81,699 65,136
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Other assets 5,523 5,573
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$ 303,465 $287,674
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LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Payables $ 26,638 $ 23,162
Accrued liabilities 50,198 51,590
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Total current liabilities 76,836 74,752
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Long-term obligations 29,092 21,669
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Shareowners' equity:
Common stock 35,586 34,307
Retained earnings 161,951 156,946
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Total shareowners' equity 197,537 191,253
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$ 303,465 $287,674
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*Unaudited
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Page 4
<PAGE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS*
For the periods ended March 29, 1996 and March 31, 1995
Three Months Ended
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(Dollars in thousands) 1995 1994
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OPERATING ACTIVITIES:
Net income $ 6,434 $ 5,353
Reconciliation of net income to cash flows:
Depreciation and amortization 3,338 2,448
Net changes in:
Receivables (11,904) 3,243
Inventories (15,175) (5,927)
Other assets 678 501
Accruals and payables (534) (1,323)
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Net cash provided (used) by operating activities (17,163) 4,295
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INVESTING ACTIVITIES:
Additions of property, plant, and equipment (19,908) (4,292)
Other 29 1
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Net cash used in investing activities (19,879) (4,291)
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FINANCING ACTIVITIES:
Long-term borrowing 9,329
Net borrowings under line-of-credit 96
Proceeds from issuance of common stock 1,279 2,021
Dividends paid (978) (924)
Other (156) 70
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Net cash provided by financing activities 9,570 1,167
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Net increase (decrease) in cash and equivalents (27,472) 1,171
Cash and equivalents at beginning of period 34,556 34,469
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Cash and equivalents at end of period $ 7,084 $ 35,640
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*Unaudited
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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 rapid growth continues to
require cash to finance strong working capital needs and
infrastructure expansion. During the first quarter, cash and
equivalents decreased $27.5 million from $34.6 million to $7.1
million. Although first quarter net income was $6.4 million,
net cash used by operations approached $17.2 million,
reflecting the need to fund increases in working capital,
particularly inventory and receivables. During the quarter,
the company invested $19.9 million in new capital equipment in
order to support the growing semiconductor equipment and
wireless communications operations. Although the company is
investigating certain permanent financing options, it is
anticipating as much as a $30 million to $40 million draw down
on its $100 million credit line in 1996. In addition,
long-term financing up to about $30 million is being
negotiated for the construction of a new $38-million facility
in Kawasaki, Japan, for the Semiconductor Equipment Group.
During the quarter, $9.3 million was funded thus far by the
lender for the land purchase and commencement of construction.
Such borrowing is denominated in Yen and is amortizable over
15 years, bearing interest a 2.5 percent.
Current Operations and Business Outlook: First quarter
shipments and backlog for semiconductor equipment reached an
all-time high, with Semiconductor Equipment Group sales
accounting for 68% of total company revenue. However, rapid
expansion efforts by the Group contributed to a decrease in
gross margins during the quarter. As discussed above, the
Group began 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. In California, the
Semiconductor Equipment Group has begun to expand into the
company's renovated San Jose plant by relocating its
business-development and training operations into the site.
In July 1995, the company introduced the WJ-2000 high density
plasma reactor which is aimed at devices such as the 256
Megabit DRAM and 7th generation microprocessors expected to
enter production in the 1998-1999 timeframe. We have had
several successful sample runs for various customers. We are
currently working with two beta-site partners and are on
target to deliver two beta units in the third quarter. We
anticipate deliveries of the WJ-2000 beginning in 1997.
Despite current softening in semiconductor integrated circuit
demand, there has been no announced pullback by industry
analysts from their forecast of a roughly $350 billion
integrated circuit market by the year 2000. However, looking
forward, some customers are delaying delivery dates on new and
existing orders, which may result in lower-than-anticipated
orders and sales in the second half of the year. 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.
Market acceptance of wireless communications products, both at
the subassembly and equipment levels, has been encouraging.
Shipments for the recently announced $11 million Lucent
Technologies order for converter subassemblies will proceed in
1996. Orders for telecommunications equipment, including
low-cost, sensitive receivers for cellular telephone fraud
detection and wideband transceivers for cellular base-station
functions, exceeded the planned level for the first quarter of
1996. Looking forward, slowness by certain customers in
obtaining base station site permits from various
municipalities and moving existing users of frequency bands to
other frequencies is causing them not to erect base stations
as quickly as the earlier predictions. This has caused us to
slow down production on these orders and to expedite
deliveries on other orders as much as possible. As a result,
we expect 1996 sales to be short of the near doubling
anticipated upon entering the year. However, strong revenue
growth and orders prospects for 1996 and 1997 still appear
positive.
The company's government electronics operations are achieving
steady performance and are meeting expectations. Excluding $7
million of first quarter 1995 sales from certain government
electronics product lines divested in the second quarter of
1995, sales remain relatively flat. We continue to focus on
cost containment and expect government electronics sales to
remain flat to slightly down for the remainder of the year.
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Page 6
<PAGE>
First Quarter 1996 Compared to First Quarter 1995:
Semiconductor Equipment Group sales increased 79%, while
Wireless Communications and Government Electronics sales
decreased 1% and 19%, respectively, resulting in an overall
company increase of 32%. The $7 million decrease in Government
Electronics sales was primarily due to the divestiture of
certain product lines in the second quarter of 1995. Gross
margins decreased from 42.9% to 37.4% due mostly to rapid
expansion efforts 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 up due to the increased volume and
infrastructure development for higher 1996 sales efforts..
Research and development expenses remained within planned
levels as the company continues its efforts in developing next
generation products, particularly for the Semiconductor
Equipment Group and Wireless Communications segment. Due to
the above factors, first quarter 1996 net income increased 20%
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 affect future
results, including but not limited to: product demand and
market acceptance risks, the effect of economical 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, natural disasters
and other risks detailed in the company's 1995 Form 10-K filed
with the Securities and Exchange Commission.
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Page 7
<PAGE>
PART II--OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held April 13, 1996,
shareowners voted on the following:
Item 1: Election of Directors:
Nominee For Withheld
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Dean A. Watkins 6,189,956 277,720
H. Richard Johnson 6,190,958 276,718
W. Keith Kennedy 6,327,376 140,300
John J. Hartmann 6,465,906 1,770
Raymond F. O'Brien 6,465,856 1,820
William R. Graham 6,465,426 2,250
Robert L. Prestel 6,466,174 1,502
Gary M. Cusumano 6,465,524 2,152
Item 2: Proposal to ratify the appointment of Deloitte &
Touche as the independent auditors of the company for
accounting year ending December 31, 1996.
For 6,387,334 Against 7,621
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Abstain 75,452 Broker Non-Votes 12,600
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Item 3: Proposal to restate and amend the 1989 Stock
Option Plan for Nonemployee Directors to increase the
number of shares reserved for issuance thereunder by
150,000 shares and other amendments as detailed in
Appendix A to the company's definitive proxy
statement dated March 8, 1996 filed with the
commission pursuant to regulation 14A.
For 4,463,339 Against 1,958,333
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Abstain 44,935 Broker Non-Votes 16,400
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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 numbered according to Item 601 of
Regulation S-K.
b) No reports on Form 8-K were required to be filed
during the quarter.
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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 April 24, 1996 By: /s/ Scott G. Buchanan for W. Keith Kennedy, Jr.
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W. Keith Kennedy, Jr.
President and Chief Executive Officer
Date April 24, 1996 By: /s/ Scott G. Buchanan
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Scott G. Buchanan
Vice President and Chief Financial Officer
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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
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<TABLE>
EXHIBIT 11
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
<CAPTION>
For Three Months Ended
-----------------------------------------
March 29, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
For primary net income per share:
Weighted average shares
outstanding 8,136,000 7,639,000
Equivalent shares--dilutive
stock options--based on
treasury stock method using
average market price 447,000 807,000
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Total 8,583,000 8,446,000
========== ==========
For fully diluted net income per share:
Weighted average shares
outstanding 8,136,000 7,639,000
Equivalent shares--dilutive
stock options--based on
treasury stock method using
greater of closing market
price or average price 447,000 902,000
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Total 8,583,000 8,541,000
========== ==========
Net Income $6,434 $5,353
====== ======
Primary net income per share $.75 $.63
==== ====
Fully diluted net income per share $.75 $.63
==== ====
<FN>
This calculation is submitted in accordance with Regulation S-K, Item
601(b)(11).
</FN>
</TABLE>
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Page 11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Mar-29-1996
<CASH> 7,084
<SECURITIES> 0
<RECEIVABLES> 98,214
<ALLOWANCES> 0
<INVENTORY> 95,010
<CURRENT-ASSETS> 216,243
<PP&E> 204,525
<DEPRECIATION> 122,826
<TOTAL-ASSETS> 303,465
<CURRENT-LIABILITIES> 76,836
<BONDS> 29,092
<COMMON> 35,586
0
0
<OTHER-SE> 161,951
<TOTAL-LIABILITY-AND-EQUITY> 303,465
<SALES> 122,742
<TOTAL-REVENUES> 122,742
<CGS> 76,832
<TOTAL-COSTS> 113,341
<OTHER-EXPENSES> 77
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,324
<INCOME-TAX> 2,890
<INCOME-CONTINUING> 6,434
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,434
<EPS-PRIMARY> .75
<EPS-DILUTED> .75
</TABLE>
