-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FBDTh2QtuHz2WJRUbeDt42xY7WrV/bv7ExdVbH2LJp72jvQ5sAxx4osH1LoyJhYO uwah98OYY2jec5wJXroh0A== 0000950005-98-000411.txt : 19980504 0000950005-98-000411.hdr.sgml : 19980504 ACCESSION NUMBER: 0000950005-98-000411 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980327 FILED AS OF DATE: 19980430 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WATKINS JOHNSON CO CENTRAL INDEX KEY: 0000105006 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 941402710 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05631 FILM NUMBER: 98604793 BUSINESS ADDRESS: STREET 1: 3333 HILLVIEW AVE CITY: PALO ALTO STATE: CA ZIP: 94304-1223 BUSINESS PHONE: 4154934141 MAIL ADDRESS: STREET 1: 3333 HILLVIEW AVENUE CITY: PALO ALTO STATE: CA ZIP: 94304-1223 10-Q 1 FORM 10-Q 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 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3333 Hillview Avenue, Palo Alto, California 94304-1223 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (650) 493-4141 -------------------------------------------------- (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 - -------------------------------------------------------------------------------- Page 1 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. - -------------------------------------------------------------------------------- Page 2 WATKINS-JOHNSON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS* For the periods ended March 27, 1998 and March 28, 1997
Three Months Ended ---------------------------------------------------------------- ---------- ------------------ ------------- --------------- (Dollars in thousands, except per share amounts) 1998 1997 ---------------------------------------------------------------- ---------- ------------------ ------------- --------------- 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 *Unaudited - ----------------------------------------------------------------------------------------------------------------------------- Page 3
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME* For the periods ended March 27, 1998 and March 28, 1997
Three Months Ended ---------------------------------------------------------------- ---------- ------------------ ------------- --------------- (Dollars in thousands, except per share amounts) 1998 1997 ---------------------------------------------------------------- ---------- ------------------ ------------- --------------- 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 ================================================================ ========== ================== ============= =============== *Unaudited - -----------------------------------------------------------------------------------------------------------------------------
Page 4 WATKINS-JOHNSON COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of March 27, 1998 and December 31, 1997
---------------------------------------------------------------- --------- ---------------- ---------------- --------------- (Dollars in thousands) 1998* 1997 ---------------------------------------------------------------- --------- ---------------- ---------------- --------------- 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 ================================================================ ========= ================ ================ =============== *Unaudited
- -------------------------------------------------------------------------------- Page 5 WATKINS-JOHNSON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS* For the periods ended March 27, 1998 and March 28, 1997
Three Months Ended -------------------------------------------------------------- ------------- --------------- --------------- --------------- (Dollars in thousands) 1998 1997 -------------------------------------------------------------- ------------- --------------- --------------- --------------- 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 ============================================================== ============= =============== =============== =============== *Unaudited
- -------------------------------------------------------------------------------- Page 6 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. 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:
For Three Months Ended ---------------------- March 27, 1998 March 28, 1997 -------------- -------------- 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) ========== ==========
- -------------------------------------------------------------------------------- Page 7 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). 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:
Sales Pre-tax income (in thousands) 1998 1997 1998 1997 - --------------------------------------------- ------------ ----------- ------------ ------------ 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) ============================================= ============ =========== ============ ============
- -------------------------------------------------------------------------------- Page 8 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. - -------------------------------------------------------------------------------- Page 9 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. - -------------------------------------------------------------------------------- Page 10 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. - -------------------------------------------------------------------------------- Page 11 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. - -------------------------------------------------------------------------------- Page 12 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. - -------------------------------------------------------------------------------- Page 13 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. - -------------------------------------------------------------------------------- Page 14 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 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 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 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 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1000 3-MOS DEC-31-1998 JAN-1-1998 MAR-27-1998 78,154 34,554 56,274 0 48,678 248,646 182,773 84,832 350,431 88,272 33,666 0 0 41,280 187,213 350,431 68,722 68,722 42,546 42,546 12,011 0 306 13,859 4,158 9,701 0 0 0 9,701 1.17 1.15
EX-27.2 3 FINANCIAL DATA SCHEDULE
5 1000 12-MOS DEC-31-1995 JAN-1-1995 DEC-31-1995 34,556 0 68,711 0 67,135 182,639 140,505 82,433 269,565 57,843 20,469 0 0 34,307 156,946 269,565 284,335 284,335 153,080 153,080 99,818 0 873 30,564 8,710 21,854 9,574 0 0 31,428 3.96 3.58
EX-27.3 4 FINANCIAL DATA SCHEDULE
5 1000 12-MOS DEC-31-1996 JAN-1-1996 DEC-31-1996 15,702 0 73,217 0 50,258 184,214 186,818 88,348 293,744 61,232 37,801 0 0 38,998 155,713 293,744 349,119 349,119 230,556 230,556 119,085 0 1,574 (2,096) (775) (1,321) 4,355 0 0 3,034 .37 .37
EX-27.4 5 FINANCIAL DATA SCHEDULE
5 1000 3-MOS DEC-31-1996 JAN-1-1996 MAR-29-1996 7,084 0 78,187 0 79,894 202,460 155,009 84,197 284,368 59,351 27,480 0 0 35,586 161,951 284,368 99,642 99,642 59,532 59,532 32,285 0 230 7,595 2,375 5,220 1,214 0 0 6,434 .79 .75
EX-27.5 6 FINANCIAL DATA SCHEDULE
5 1000 6-MOS DEC-31-1996 APR-30-1996 JUN-28-1996 23,190 0 85,252 0 68,723 204,285 170,158 85,642 299,879 73,408 27,592 0 0 37,630 161,249 299,879 107,047 107,047 71,159 71,159 36,551 0 383 (1,046) (285) (761) 1,119 0 0 358 .04 .04
EX-27.6 7 FINANCIAL DATA SCHEDULE
5 1000 9-MOS DEC-31-1996 JUN-29-1996 SEP-27-1996 14,772 0 83,163 0 64,364 194,186 182,379 87,521 308,699 68,600 39,254 0 0 37,788 163,057 308,699 76,162 76,162 46,621 46,621 25,935 0 556 3,050 934 2,116 716 0 0 2,832 .34 .33
EX-27.7 8 FINANCIAL DATA SCHEDULE
5 1000 3-MOS DEC-31-1997 JAN-1-1997 MAR-28-1997 19,996 0 69,030 0 49,320 185,593 188,324 91,138 289,814 60,727 34,932 0 0 38,718 155,437 289,814 67,216 67,216 44,311 44,311 23,084 0 329 (508) (190) (318) 2,796 0 0 2,478 .30 .30
EX-27.8 9 FINANCIAL DATA SCHEDULE
5 1000 6-MOS DEC-31-1997 MAR-29-1997 JUN-27-1997 28,388 0 63,559 0 53,855 186,516 191,337 91,779 292,474 60,602 37,178 0 0 39,197 155,497 292,474 72,679 72,679 46,611 46,611 24,471 0 361 1,236 350 886 2,196 0 0 3,082 .37 .36
EX-27.9 10 FINANCIAL DATA SCHEDULE
5 1000 9-MOS DEC-31-1997 JUN-28-1997 SEP-26-1997 43,418 0 56,195 0 53,367 191,737 183,438 84,787 297,153 63,909 35,858 0 0 40,191 157,195 297,153 79,176 79,176 48,741 48,741 27,570 0 358 2,507 745 1,762 1,828 0 0 3,590 .44 .42
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