FORM 10-Q
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 March 27, 1998
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 (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)
(650) 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 27, 1998 8,253,000 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 27, 1998,
are not necessarily indicative of the results for the full
year 1998.
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>
<TABLE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS*
For the periods ended March 27, 1998 and March 28, 1997
<CAPTION>
Three Months Ended
---------------------------------------------------------------- ---------- ------------------ ------------- ---------------
(Dollars in thousands, except per share amounts) 1998 1997
---------------------------------------------------------------- ---------- ------------------ ------------- ---------------
<S> <C> <C>
Sales $ 68,722 $ 67,216
---------------------------------------------------------------- ---------- ------------------ ------------- ---------------
Costs and expenses:
Cost of goods sold 42,546 44,311
Selling and administrative 15,821 13,096
Research and development 13,208 10,446
---------------------------------------------------------------- ---------- ------------------ ------------- ---------------
71,575 67,853
---------------------------------------------------------------- ---------- ------------------ ------------- ---------------
Loss from operations (2,853) (637)
Other income (expense)-net 1,929 129
Gain on real property 14,783
---------------------------------------------------------------- ---------- ------------------ ------------- ---------------
Income (loss) from continuing operations before federal, state
and foreign income taxes 13,859 (508)
Income tax (expense) benefit (4,158) 190
---------------------------------------------------------------- ---------- ------------------ ------------- ---------------
Income (loss) from continuing operations 9,701 (318)
Income from discontinued operations, net of taxes 2,796
---------------------------------------------------------------- ---------- ------------------ ------------- ---------------
Net income $ 9,701 $ 2,478
================================================================ ========== ================== ============= ===============
Basic per share amounts:
Income (loss) from continuing operations $ 1.17 $ (.04)
Income from discontinued operations .34
---------------------------------------------------------------- ---------- ------------------ ------------- ---------------
Net income $ 1.17 $ .30
================================================================ ========== ================== ============= ===============
Basic average common shares 8,262,000 8,298,000
Diluted per share amounts:
Income (loss) from continuing operations $ 1.15 $ (.04)
Income from discontinued operations .34
---------------------------------------------------------------- ---------- ------------------ ------------- ---------------
Net income $ 1.15 $ .30
================================================================ ========== ================== ============= ===============
Diluted average common shares 8,416,000 8,298,000
<FN>
*Unaudited
</FN>
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Page 3
</TABLE>
<PAGE>
<TABLE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME*
For the periods ended March 27, 1998 and March 28, 1997
<CAPTION>
Three Months Ended
---------------------------------------------------------------- ---------- ------------------ ------------- ---------------
(Dollars in thousands, except per share amounts) 1998 1997
---------------------------------------------------------------- ---------- ------------------ ------------- ---------------
<S> <C> <C>
Net income $ 9,701 $ 2,478
---------------------------------------------------------------- ---------- ------------------ ------------- ---------------
Other comprehensive income, net of tax:
Foreign currency translation adjustments (16) (301)
Net unrealized holding gains (losses) on securities, net
of reclassification adjustment of $0 (86)
---------------------------------------------------------------- ---------- ------------------ ------------- ---------------
Other comprehensive income (expense) (102) (301)
---------------------------------------------------------------- ---------- ------------------ ------------- ---------------
---------------------------------------------------------------- ---------- ------------------ ------------- ---------------
Comprehensive income $ 9,599 $ 2,177
================================================================ ========== ================== ============= ===============
<FN>
*Unaudited
</FN>
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</TABLE>
Page 4
<PAGE>
<TABLE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 27, 1998 and December 31, 1997
<CAPTION>
---------------------------------------------------------------- --------- ---------------- ---------------- ---------------
(Dollars in thousands) 1998* 1997
---------------------------------------------------------------- --------- ---------------- ---------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 78,154 $ 134,462
Short-term investments 34,554
Receivables 56,274 45,690
Inventories:
Finished goods 10,198 9,283
Work in process 22,210 18,519
Raw materials and parts 16,270 18,873
Other 30,986 31,366
---------------------------------------------------------------- --------- ---------------- ---------------- ---------------
Total current assets 248,646 258,193
---------------------------------------------------------------- --------- ---------------- ---------------- ---------------
Property, plant, and equipment 182,773 178,795
Accumulated depreciation and amortization (84,832) (82,382)
---------------------------------------------------------------- --------- ---------------- ---------------- ---------------
Property, plant, and equipment--net 97,941 96,413
---------------------------------------------------------------- --------- ---------------- ---------------- ---------------
Other assets 3,844 3,606
---------------------------------------------------------------- --------- ---------------- ---------------- ---------------
$ 350,431 $ 358,212
================================================================ ========= ================ ================ ===============
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Payables $ 13,353 $ 16,188
Accrued liabilities 74,919 88,398
---------------------------------------------------------------- --------- ---------------- ---------------- ---------------
Total current liabilities 88,272 104,586
---------------------------------------------------------------- --------- ---------------- ---------------- ---------------
Long-term obligations 33,666 33,234
---------------------------------------------------------------- --------- ---------------- ---------------- ---------------
Shareowners' equity:
Common stock 41,280 40,631
Retained earnings 187,910 180,356
Accumulated other comprehensive income (697) (595)
---------------------------------------------------------------- --------- ---------------- ---------------- ---------------
Total shareowners' equity 228,493 220,392
---------------------------------------------------------------- --------- ---------------- ---------------- ---------------
$ 350,431 $ 358,212
================================================================ ========= ================ ================ ===============
<FN>
*Unaudited
</FN>
</TABLE>
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Page 5
<PAGE>
<TABLE>
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS*
For the periods ended March 27, 1998 and March 28, 1997
<CAPTION>
Three Months Ended
-------------------------------------------------------------- ------------- --------------- --------------- ---------------
(Dollars in thousands) 1998 1997
-------------------------------------------------------------- ------------- --------------- --------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 9,701 $ 2,478
Reconciliation of net income to cash flows:
Depreciation and amortization 3,683 3,240
Gain on disposal of property, plant and equipment (14,783)
Results of discontinued operations (2,796)
Net changes in:
Receivables (10,588) 3,684
Inventories (1,993) 841
Other assets 137 2,012
Accruals and payables (17,225) (3,991)
---------------------------------------------------------------------------- --------------- --------------- ---------------
Net cash provided (used) by continuing operating activities (31,068) 5,468
Net cash used by discontinued operations (204)
---------------------------------------------------------------------------- --------------- --------------- ---------------
Net cash provided (used) by operating activities (31,068) 5,264
---------------------------------------------------------------------------- --------------- --------------- ---------------
INVESTING ACTIVITIES:
Additions of property, plant, and equipment (5,237) (3,451)
Restricted plant construction funds 3,738
Purchases of short-term investments (34,695)
Proceeds on asset retirements and other 15,873 25
---------------------------------------------------------------------------- --------------- --------------- ---------------
Net cash provided (used) by investing activities (24,059) 312
---------------------------------------------------------------------------- --------------- --------------- ---------------
FINANCING ACTIVITIES:
Payments on long-term borrowing (140)
Net borrowings (repayments) under line-of-credit 478 559
Proceeds from issuance of common stock 901 121
Repurchase of common stock (1,408) (2,009)
Dividends paid (991) (1,000)
Other 16 (43)
---------------------------------------------------------------------------- --------------- --------------- ---------------
Net cash used by financing activities (1,144) (2,372)
-------------------------------------------------------------- ------------- --------------- --------------- ---------------
-------------------------------------------------------------- ------------- --------------- --------------- ---------------
Effect of exchange rate changes on cash (37) 1,090
-------------------------------------------------------------- ------------- --------------- --------------- ---------------
Net increase (decrease) in cash and equivalents (56,308) 4,294
Cash and equivalents at beginning of period 134,462 15,702
-------------------------------------------------------------- ------------- --------------- --------------- ---------------
Cash and equivalents at end of period $ 78,154 $ 19,996
============================================================== ============= =============== =============== ===============
<FN>
*Unaudited
</FN>
</TABLE>
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Page 6
<PAGE>
Item 1. Financial Statements (continued)
Supplementary information to the financial statements:
A dividend of twelve cents per share was declared and paid
during the first quarter of 1998 and 1997.
<TABLE>
Per share amounts are computed based on the weighted average
number of basic and diluted (dilutive stock options) common
and common equivalent shares outstanding during the period.
Per share amounts from continuing operations were computed as
follows:
<CAPTION>
For Three Months Ended
----------------------
March 27, 1998 March 28, 1997
-------------- --------------
<S> <C> <C>
Denominator for basic per share:
Weighted average shares outstanding 8,262,000 8,298,000
---------- ----------
Denominator for diluted per share:
Weighted average shares
outstanding 8,262,000 8,298,000
Effect of dilutive stock options 154,000 0
---------- ----------
Diluted average common shares 8,416,000 8,298,000
========== ==========
Net income form continuing
operations (numerator) $9,701 $(318)
========== ==========
Basic net income (loss) per share $1.17 $(.04)
========== ==========
Diluted net income (loss) per share $1.15 $(.04)
========== ==========
</TABLE>
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<PAGE>
Item 1. Financial Statements (continued)
For the three months ended March 28, 1997 the incremental
shares from the assumed exercise of 189,000 stock options are
not included in computing the dilutive per share amounts
because continuing operations resulted in a loss and such
assumed conversion would be antidilutive. Additionally,
weighted average options outstanding to purchase 621,000 and
724,000 shares of common stock were not included in the
computation of diluted per share amounts for the three months
ended March 27, 1998 and March 28, 1997, respectively, because
the weighted average exercise prices were greater than the
average market prices of the common shares. Weighted average
exercise prices of $37.18 in 1998 and $37.45 in 1997 exceeded
the average market prices of $26.31 and $25.10, respectively.
This calculation is submitted in accordance with Regulation
S-K, Item 601(b)(11).
<TABLE>
Sales to external customers and pre-tax profit (loss) by
business segment for the three months ended March 27, 1998 and
March 28, 1997 are as follows:
<CAPTION>
Sales Pre-tax income
(in thousands) 1998 1997 1998 1997
- --------------------------------------------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Semiconductor Equipment $38,716 $44,162 $(3,398) $(132)
Wireless Communications 30,006 23,054 545 (505)
- --------------------------------------------- ------------ ----------- ------------ ------------
Income from continuing operations (2,853) (637)
Other income (expense)-net 16,712 129
- --------------------------------------------- ------------ ----------- ------------ ------------
Total $68,722 $67,216 $13,859 $(508)
============================================= ============ =========== ============ ============
</TABLE>
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Page 8
<PAGE>
PART I--FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition and Liquidity
The company's financial condition and liquidity at March 27,
1998 remains strong. During the first quarter of 1998, cash
and equivalents decreased by $56.3 million, from $134.5
million to $78.2 million. The decrease in cash and equivalents
resulted primarily from the purchase of short-term
investments, as discussed below. Net income for the first
quarter of 1998 was $9.7 million, while net cash used by
operations was $31.1 million. Net income was $2.5 million and
net cash provided by operations was $5.3 million in the first
quarter of 1997. For the first quarter of 1998, net cash used
by operating activities differed from net income for the
period primarily because of decreases for: a $14.8 million
gain on disposal of property, plant and equipment, a $10.6
million net change in receivables and a $17.2 million net
change in accruals and payables. The net change in accruals
and payables was primarily due to income tax payments related
to the fourth quarter 1997 gain on discontinued operations.
For the first quarter of 1997, net cash provided by operating
activities differed from net income for the period primarily
because of increases for: depreciation and amortization
charges of $3.2 million, net changes in receivables and other
assets of $3.7 million and $2.0 million, respectively; and
decreases for: $3.0 million for the net income and cash used
by discontinued operations and $4.0 million for a net change
in accruals and payables.
Net cash used in investing activities was $24.1 million in the
first quarter of 1998 compared to net cash provided by
investing activities of $0.3 million for the same period in
1997. In 1998, the company received proceeds of $15.9 million
from the sale of real property and asset retirements which was
offset by the purchase of $35.7 million in short-term
investments and purchase of $5.2 million in new capital
equipment. During the first quarter of 1998 the company
invested its excess cash and equivalents in securities with
maturities exceeding 90 days to take advantage of the higher
yields. These short-term investments, consisting mostly of
high grade commercial paper, are subject to interest rate risk
and will rise and fall in value if market interest rates
change. Cash provided by investing activities in 1997 was
primarily from the release of $3.7 million of restricted plant
construction funds offset by a similar amount for capital
expenditures.
The company used $1.1 million in financing activities in the
first quarter of 1998 compared to $2.4 million for the same
period last year. During 1998 the company repurchased 52,608
shares of its common stock for $1.4 million and paid
approximately $1.0 million in dividends which was offset in
part by proceeds from stock option exercises. During the first
quarter of 1997 the company repurchased 78,000 shares of its
common stock for $2.0 million and paid $1.0 million in
dividends.
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Page 9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
As of March 27, 1998, the company's principal source of
liquidity consisted of $78.2 million in cash and equivalents
and short-term investments valued at $34.6 million. The
company has arrangements with several banks to provide a $50
million unsecured credit facility. This facility expires on
December 8, 1998. During the first quarter of 1998, the
company incurred no borrowings under this credit facility. As
a result of the operating loss reported in the fourth quarter
of 1997 the company was not in compliance with certain terms
under this credit facility during the first quarter of 1998.
Negotiations have been completed with the banks and the
company has re-established a compliant condition. Management
does not anticipate any significant near term borrowing
requirements under this credit facility.
From time to time the company may enter into certain long-term
borrowing arrangements with financial lending institutions for
capital acquisitions of property, plant and equipment. As of
March 27, 1998, long-term borrowings of $18.5 million
consisted of two unsecured loans used for the company's land,
building and equipment located in Kawasaki, Japan, and are
payable through the year 2011 as fully disclosed in the
company's 1997 annual report filed on Form 10-K. At March 27,
1998, there were no material commitments for capital
expenditures.
Current Operations and Business Outlook
For the first quarter of 1998, the company reported sales of
$68.7 million and net income of $9.7 million, or $1.15 per
diluted share. In 1997, first-quarter sales from continuing
operations amounted to $67.2 million, with a net loss of $0.3
million, or a loss of $.04 cents per diluted share.
First-quarter 1998 results reflect the sale of approximately
14 acres of unused property at the company's San Jose, Calif.
site for a pre-tax gain of $14.8 million. New orders for the
first quarter of 1998 were $57 million or about 16% lower than
the $68 million of the fourth quarter continuing operations of
1997 and about 8% lower than the $62 million for the first
quarter of 1997. Firm backlog on March 27, 1998 stood at $82.2
million, compared to the March 28, 1997 backlog for continuing
operations of $147 million. The current period backlog is
reported net of the removal of $5 million from backlog because
of some order pushouts in the Semiconductor Equipment Group,
as discussed below.
Although long-term growth for the company appears bright, it
is clear that 1998 will be another very challenging year as
the semiconductor equipment industry remains in a down cycle.
The continued steep decline of the semiconductor equipment
business is expected to more than offset the growth and profit
anticipated in the wireless communications business. The
company believes the actions it has in place will set the
stage for future high growth and profitability when market
conditions improve. Operations and business outlook for each
of the company's business segments are discussed below.
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Page 10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Semiconductor Equipment Group
Sales of semiconductor equipment in the first quarter of 1998
amounted to $38.7 million, down 12% from the $44.2 million
recorded for the same period last year. New orders were $22
million during the first quarter of 1998, which were down 35%
compared to the $34 million of last year's first quarter.
These order rates mean that the company is able to service the
order requirements of its customers rapidly. Customers are
delaying orders as long as possible to take advantage of the
shorter lead time. This business segment is entering the
second quarter of 1998 with a backlog totaling approximately
$17 million compared to $81 million at March 28, 1997. As
discussed above, the current period backlog is reported net of
the removal of $5 million from backlog because of some order
pushouts. The orders were removed from the reported backlog
because the pushouts resulted in requested deliveries more
than 12 months into the future.
The company's orders for semiconductor equipment products were
weaker than previously expected. The company's computer-memory
customers face an overcapacity situation. Additionally,
several customers curtailed or discontinued construction of
new factories as a result of currency devaluations and other
financial problems in Asia. The company is working with a
principal Asian customer to preserve a significant sale,
originally slated for late 1997, but placed on hold by credit
problems related directly to the Asian financial crisis.
A large part of the orders and sales for each quarter right
now are the spares, service and training revenues. To a large
degree, these revenues are based on the installed base of our
equipment (nearly 800 systems) and are running between $10
million to $15 million per quarter. Most of these bookings are
delivered in less than 30 days after the order.
The company re-evaluated its sales prospects and is now
reducing the 1998 sales forecast for the Semiconductor
Equipment Group. The group is reviewing its worldwide
infrastructure to reduce cost while still maintaining quality
service to its customers. The group downsized by approximately
5% of its work force in February 1998 to a break-even cost of
roughly $40 million per quarter. Now the group is taking
further action to reduce expenditures to $35 million per
quarter. Achieving lower cost requires reduction of the group
research and development spending. The company will maintain
prudent levels of expense for the continuation and completion
of key projects. For example, the development and introduction
of the WJ-2000 cluster tool platform with its high-density
plasma (HDP) and advanced atmospheric-pressure (or AP Next)
chemical-vapor-deposition (CVD) process modules. In spite of
these actions, fixed costs and required development expenses
are expected to make the group unprofitable in 1998 with the
lower anticipated revenues.
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Page 11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The company has achieved encouraging results at our HDP beta
sites. The company believes that the equipment is performing
equivalent to or better than our competition. However, with
the present market conditions the company is finding it
difficult to predict when orders will occur. A few orders
prospects have been pushed out as a result of the Asian
financial situation.
Although the long-range industry forecasts for the
semiconductor industry remain bright, the current
semiconductor integrated circuit demand appears to be nearly
flat in dollar terms over last year. Many customers are
reducing capital equipment budgets with the industry in an
overcapacity situation. The company is confident of an upturn,
but it appears to be beyond 1998.
The Semiconductor Equipment Group's business depends upon the
planned and actual capital expenditures of the semiconductor
manufacturers, who react to the current and anticipated market
demand for integrated circuits. This demand had been growing
dramatically over the years from 1992 through 1995, however in
1996 its history of cyclical variations returned with a market
downturn. That downturn was exacerbated in the fourth quarter
of 1997 by financial-system collapses and currency
devaluations in Asia, the company's principal overseas market
region for capital equipment. Although the cyclical growth
trend of the semiconductor integrated circuits business is
expected to return, it is recognized that the semiconductor
equipment business can vary rapidly in response to customer
demand. Following placement of orders, customers frequently
seek either faster or delayed delivery, based on their
changing needs. Uncertainty increases significantly when
projecting product demand in the future. While the company
cannot predict what effect these various factors will have on
operating results, the effect of these and other factors could
significantly affect the company's future operating results
and stock market value.
Wireless Communications
Wireless-communications sales in the first quarter of 1998
totaled $30.0 million, a 30% increase over the prior year's
first quarter comparable $23.1 million for this segment (as
restated for the adoption of SFAS 131). Orders for the first
quarter of 1998 totaled approximately $35 million, compared to
$28 million for the same period last year. The business
segment is entering the second quarter of 1998 with a backlog
totaling approximately $65 million compared to $66 million at
March 28, 1997.
The company achieved substantial progress across its
wireless-infrastructure product lines during the quarter. At
the chip level, the company initiated operation of its
Milpitas, Calif. gallium-arsenide (GaAs) and thin-film
fabrication facility acquired at the close of 1997 as part of
the assets of Samsung Microwave Semiconductor. First-quarter
1998 orders for GaAs devices were encouraging, lending
credence to the company's decision to market proprietary
integrated-circuit technology outside the company.
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Page 12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The company booked two large-volume orders during the period
for wireless local-loop products. One order was for the
initial production run of 1000 systems. A larger order was the
second production release for over 11,000 terminal units.
Delivery will be in 1998 for both of these orders. Both orders
have excellent follow-on potential. The company's goal is to
drive our cost down significantly, encouraging the customers
to continue to place volume orders.
During the first quarter the demand was somewhat higher than
earlier expected for the CDMA and TDMA converter assemblies to
Lucent Technologies as part of the design of their PCS base
station. Part of this higher demand comes about because the
company is working with another Lucent vendor who is supplying
the complete CDMA assembly. Some inventory fill was requested
and supplied to this "partner." Thus the first quarter demand
may have been somewhat high, and it is anticipated that the
rate will drop a little to a more normal level in the second
quarter. For the longer term the company is bullish about the
business for the PCS CDMA/TDMA receiver assemblies. This
results from the improvement of Lucent's PCS market position
in recent months.
The company completed the work to develop and test the IS-136
TDMA, or Time Division Multiple Access, digital air interface
for the Base2TM base station. System tests are proceeding well
and the company is working with many customer inquiries. The
company decided last year to market the system primarily to
developing countries using system integrators for our
distribution channel. Telos Engineering has installed the
initial system in Dalian, China. The installation of the
analog, or AMPS, system was a success. Two full IS-136
capability systems are expected to be shipped to China in
April for replacement installation in May.
The company has now received the FCC certification for both
its outdoor and indoor PCS repeater. The nearer term business
opportunities lie with the indoor design and the company is
confident of 1998 repeater sales.
Looking forward, the company's outlook for growth expectations
in its Wireless Communications operations for 1998 remains at
roughly more than 20% over the $105 million of 1997. It is
estimated that the intelligence receiver business will stay
essentially flat with the $60 million of 1997 and the wireless
infrastructure business to continue to grow at about a 50%
rate. It is expected that the Wireless Communications segment
will be profitable in 1998.
Various regulatory agencies of federal, foreign, state and
local governments can affect the wireless communication market
dynamics, causing unforeseen ebb and flow of orders and
delivery requirements. Domestic and international competition
from a number of companies, some of which are much larger than
Watkins-Johnson, is intense. The effect of these and other
factors could significantly affect the company's future
operating results.
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Page 13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
First Quarter of 1998 Compared to First Quarter of 1997
Wireless Communications sales increased 30% while
Semiconductor Equipment Group sales decreased 12%, resulting
in an overall company increase from continuing operations of
2%. Gross margins improved from 34% to 38%. Gross margins
increased primarily due to a shift in the revenue mix in the
Semiconductor Equipment Group from system sales to higher
margin spare parts and service revenues.
Selling and administrative expenses increased to 23% of sales
compared with 19.5% for the same period last year. The higher
percentage for the first quarter of 1998 resulted primarily
from severance charges of $0.3 million and an additional
reserve of $1.6 million taken on receivables as a result of
the increased receivables balance.
Research and development expenses were $13.2 million during
the first quarter of 1998, 19.2% of sales, compared to $10.4
million, or 15.5% of sales, for the same period last year.
Research and development is budgeted at about 20% to 21% of
planned sales in 1998. With an anticipated drop in revenues
compared to plan and the high research and development
percentage the company had planned, research and development
expenditures will be held below plan.
The operating loss in the first quarter of 1998, before other
income and the real-property gain, was $2.9 million compared
with the $0.6 million loss for the same period last year.
Other income (net of other expenses) increased $1.8 million
over the prior year due mostly to interest income earned on
the increased cash balance and short-term investments. Also
included in other income for the first quarter of 1998 is $0.5
million of net income from two leases, the sub-lease of part
of our Palo Alto facility to Stellex and a lease of a portion
of our Japanese facility. In January 1998, the company
concluded the sale of vacant land adjacent to its San Jose,
California facility, resulting in a $14.8 million pre-tax gain
reflected as "Gain on real property" in the consolidated
financial statements.
For the first quarter of 1998, the effective tax rate for
federal, state and foreign income taxes was about 30% compared
to a 37% tax benefit rate on continuing operations for the
same period last year. The 30% tax rate in 1998 is below the
statutory rate mostly because of export sales benefits and
federal and state research tax credits. The 37% tax benefit
rate for 1997 resulted mostly from the effect of the operating
loss with positive benefits from export sales and research
credits, which were offset by taxes incurred by foreign
operations.
Net income from continuing operations increased from a $0.3
million loss in the first quarter of 1997 to $9.7 million of
net income for the same period this year. Including after tax
income of $2.8 million reported from discontinued operations
in the first quarter of 1997, net income increased from $2.5
million in the first quarter of 1997 to $9.7 million reported
for the current period.
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Page 14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Year 2000 Computer Software Conversion
The company regularly updates its information systems
capabilities, and has evaluated all significant computer
software applications for compatibility with the year 2000.
With the system changes implemented to date and other planned
changes, the company anticipates that its computer software
applications will be compatible with the year 2000.
Expenditures specifically related to software modifications
for year 2000 compatibility are not expected to have a
material effect on the company's operations or financial
position. However, the company is dependent on numerous
vendors and customers which may incur disruptions as a result
of year 2000 software issues. Accordingly, no assurance can be
given that the company's results of operations will not be
impacted by this industry-wide issue.
Risks and Uncertainties That May Affect Future Results
All statements in this report, other than statements of
historical facts, should be considered forward-looking
statements. By way of example only, those include statements
about the company's strategies, objectives, plans,
expectations and anticipated results, and expectations for the
economy generally or specific industries. The words "expect",
"anticipate", "looking forward" and other similar expressions
used in this report are intended to identify forward-looking
statements that involve risks and uncertainties that may cause
actual results and expectations to differ materially from
those expressed. Such risks and uncertainties include, but are
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 detailed in the company's 1997 Form 10-K filed
with the Securities and Exchange Commission. Investors and
prospective investors are cautioned not to place undue
reliance on these forward-looking statements. The company
undertakes no obligation to announce any revisions to its
forward-looking statements to reflect events or circumstances
as they actually develop or occur in the future.
- --------------------------------------------------------------------------------
Page 15
<PAGE>
PART II--OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held April 18, 1998,
shareowners voted on the following:
Item 1: Election of Directors:
Nominee For Withheld
------- --- --------
Dean A. Watkins 7,638,943 45,189
H. Richard Johnson 7,639,743 44,389
W. Keith Kennedy 7,639,463 44,669
John J. Hartmann 7,633,893 50,239
Raymond F. O'Brien 7,636,543 47,589
William R. Graham 7,643,357 40,775
Robert L. Prestel 7,642,522 41,610
Gary M. Cusumano 7,642,126 42,006
Item 2: Proposal to ratify the appointment of Deloitte &
Touche as the independent auditors of the company for
accounting year ending December 31, 1998.
For 7,629,483 Against 33,216
---------------------- ---------------------
Abstain 21,433 Broker Non-Votes 0
------------------ ------------
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.
- --------------------------------------------------------------------------------
Page 16
<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 28, 1998 By: /s/ W. Keith Kennedy, Jr.
------------------------ --------------------------------------
W. Keith Kennedy, Jr.
President and Chief Executive Officer
Date April 28, 1998 By: /s/ Scott G. Buchanan
------------------------ ------------------------------------
Scott G. Buchanan
Vice President and Chief Financial Officer
- --------------------------------------------------------------------------------
Page 17
<PAGE>
EXHIBIT INDEX
The Exhibits below are numbered according to Item 601 of Regulation S-K.
Exhibit
Number Exhibit
- ------ -------
27.1 Financial Data Schedule for the quarter ended March 27, 1998.
27.2 Financial Data Schedule for the year ended December 31, 1995.
27.3 Financial Data Schedule for the year ended December 31, 1996.
27.4 Financial Data Schedule for the quarter ended March 29, 1996.
27.5 Financial Data Schedule for the quarter ended June 28, 1996.
27.6 Financial Data Schedule for the quarter ended September 27, 1996.
27.7 Financial Data Schedule for the quarter ended March 28, 1997.
27.8 Financial Data Schedule for the quarter ended June 27, 1997.
27.9 Financial Data Schedule for the quarter ended September 26, 1997.
- --------------------------------------------------------------------------------
Page 18
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<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
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<TOTAL-COSTS> 153,080
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<PP&E> 186,818
<DEPRECIATION> 88,348
<TOTAL-ASSETS> 293,744
<CURRENT-LIABILITIES> 61,232
<BONDS> 37,801
0
0
<COMMON> 38,998
<OTHER-SE> 155,713
<TOTAL-LIABILITY-AND-EQUITY> 293,744
<SALES> 349,119
<TOTAL-REVENUES> 349,119
<CGS> 230,556
<TOTAL-COSTS> 230,556
<OTHER-EXPENSES> 119,085
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,574
<INCOME-PRETAX> (2,096)
<INCOME-TAX> (775)
<INCOME-CONTINUING> (1,321)
<DISCONTINUED> 4,355
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<NET-INCOME> 3,034
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<PERIOD-END> MAR-29-1996
<CASH> 7,084
<SECURITIES> 0
<RECEIVABLES> 78,187
<ALLOWANCES> 0
<INVENTORY> 79,894
<CURRENT-ASSETS> 202,460
<PP&E> 155,009
<DEPRECIATION> 84,197
<TOTAL-ASSETS> 284,368
<CURRENT-LIABILITIES> 59,351
<BONDS> 27,480
0
0
<COMMON> 35,586
<OTHER-SE> 161,951
<TOTAL-LIABILITY-AND-EQUITY> 284,368
<SALES> 99,642
<TOTAL-REVENUES> 99,642
<CGS> 59,532
<TOTAL-COSTS> 59,532
<OTHER-EXPENSES> 32,285
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 230
<INCOME-PRETAX> 7,595
<INCOME-TAX> 2,375
<INCOME-CONTINUING> 5,220
<DISCONTINUED> 1,214
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<PERIOD-START> APR-30-1996
<PERIOD-END> JUN-28-1996
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<SECURITIES> 0
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<PP&E> 170,158
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0
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<PP&E> 182,379
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0
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