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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ---------- to ----------
Commission file number 1-5631
WATKINS-JOHNSON COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
California 94-1402710
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
3333 Hillview Avenue, Palo Alto, California 94304-1223
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(415) 493-4141
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- -------------------------
Common stock, no par value New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not con- tained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
AS OF FEBRUARY 2, 1996
----------------------
Aggregate market value of the voting stock held
by non-affiliates of the registrant: .......... $317,338,000
Number of shares outstanding: Common stock,
no par value .................................. 8,124,000 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Watkins-Johnson Company Notice of Annual Meeting of
Shareowners--April 13, 1996 and Proxy Statement filed with the commission
pursuant to Regulation 14A are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
(A) General Development of Business
In 1995 Watkins-Johnson decided to divide its Electronics Group,
recognizing the two major markets that it served, into the Wireless
Communication segment and the Government Electronics segment for
reporting purposes. Other than this split into two reporting segments,
the company's structure during 1995 was unchanged from the previous year.
Since the company realigned its business between 1991 and 1993,
operations had been reported as three business segments: semiconductor
equipment, electronics products and environmental services. At the end of
1994, the environmental services unit was divested.
No material reclassifications, mergers or consolidations of the company
or its subsidiaries occurred during 1995. Other than in the ordinary
course of business, there were no acquisitions or dispositions of
material amounts of assets during the year.
(b) Financial Information about Industry Segments
The company operates in three industry segments--semiconductor equipment,
wireless communications, and government electronics. The previously
reported environmental services segment was divested at the end of 1994.
Financial information covering these industry segments is included in
Note 8 to the consolidated financial statements contained in Part II,
Item 8 of this annual report on form 10-K.
(c) Narrative Description of Business
Watkins-Johnson Company is a high-technology corporation specializing in
semiconductor-manufacturing equipment, subassemblies and transceivers for
wireless communications, and radio-frequency electronics for government
applications.
Semiconductor Equipment
The company's Semiconductor Equipment Group designs, develops and
manufactures equipment to deposit thin dielectric films by chemical vapor
deposition (CVD), using two fundamental CVD processes. The earlier
process, atmospheric-pressure CVD (APCVD), accounted for all of the
equipment sold in 1995. This equipment functions by injecting the gases
needed for the reaction over the substrate material. The substrates are
transported under the injectors on a continuously moving conveyor belt
through a resistance heated muffle. This approach allows high deposition
rates with a simpler reactor design yielding higher reliability operation
and high wafer throughput.
The major market for the APCVD equipment is the semiconductor industry
where the equipment is used to deposit thin films of doped and undoped
silicon dioxide used in the making of integrated circuits. The company's
APCVD process is highly productive and offers an attractive cost of
ownership. The equipment is sold world-wide to most of the major
semiconductor manufacturers, especially to those engaged in high volume
integrated circuit manufacture. Customers include both firms that
manufacture and sell their own products and semiconductor foundry firms
that contract manufacturing services to "fabless" companies. As such the
company's equipment is used in the manufacture of all types of integrated
circuits from logic circuits to semiconductor memory chips.
The newer process, high density plasma CVD (HDP), was first introduced to
the customers in July 1995 at the important SEMICON West exposition as
the WJ-2000. High density plasma is a variant of plasma-enhanced CVD
which uses an RF-induced glow discharge to transfer energy into the
reactant gases. This allows the substrate to remain at a lower
temperature than in the APCVD process. Improved generators allow higher
density of plasmas which the semiconductor industry expects to use for
future integrated circuits with smaller feature size transistors and
conductors. These smaller (0.25 micron and below) features are needed to
fabricate devices such
1
as the 256 megabit dynamic random access memory (256 Meg DRAM) and the
seventh generation of microprocessors. Using the philosophy developed
with its APCVD equipment, WJ's HDP equipment is designed for high
productivity. Following the July introduction, the company has
concentrated on a series of tests in its Scotts Valley laboratory to
verify the production capabilities of the equipment with wafers provided
by WJ and customers. Additional tests for the equipment at selected
customer facilities (beta test sites) will be performed in 1996 prior to
accepting orders.
The company markets the APCVD systems as the WJ-999 and the WJ-1000. The
WJ-999 and WJ-TEOS999 systems are for production lines using 150 mm
(6-inch) semiconductor wafers; they are capable of simultaneous
processing of two wafers in parallel. The WJ-1000 is also offered with
either hydride or TEOS reactant processes and is specifically designed
for high productivity processing on 200 mm (8-inch) semiconductor
processing lines. The company's APCVD process is mostly used in
depositing doped oxide films, boro-phosphoro-silicate glass (BPSG) and
phosphoro-silicate-glass (PSG), for the initial dielectric layers
deposited on the wafers. These initial layers, sometimes termed the
interlevel dielectric (ILD), are deposited prior to the metal layers
which are used to connect the transistors and provide the circuit action.
BPSG is a useful dielectric layer since it self-planarizes, offering a
smoother surface for the following metal and dielectric layers. The
equipment market for the pre-metal dielectric depositions (PMD) for 1995
was estimated by Dataquest, a high technology market research firm, to be
$475 million. The WJ APCVD equipment is well suited for these
applications and the company believes it is the PMD equipment market
leader. This market has grown more rapidly than the semiconductor
equipment market in general since the increased chip complexity is
leading semiconductor manufacturers to use more dielectric layers.
As chip complexity increases, more than one metal layer is required to
provide the circuit connections. Another growing market for dielectric
deposition equipment is inter-metal dielectric deposition (IMD). The
development of the new WJ-2000 HDP equipment is aimed specifically at
this market. Dataquest estimated the 1995 IMD equipment market to exceed
$600 million. The IMD equipment market is forecast to grow more rapidly
than the PMD equipment market; Dataquest forecast the total dielectric
equipment market to approach $3 billion in the year 2000.
The APCVD process equipment is easily scaleable. It has thus been adapted
for the manufacture of the active matrix liquid crystal displays used in
personal communication, computing and entertainment products.
Sales in the Semiconductor Equipment segment were 57% of consolidated
sales in 1995, 43% in 1994 and 29% in 1993. The company is changing its
mode of selling semiconductor equipment. In place of a network of
manufacturers' representatives and distributors, the company is
establishing a direct sales and service force world-wide to better serve
its customers and reduce international expenses. Currently, the company
has direct offices in the United States, Korea, Taiwan, Singapore and
Europe (added in 1995). The business plans for the direct office in Japan
have been initiated with a phase-over agreement with the distributor,
Marubeni Hytech, and the purchase of a site for the office and
applications laboratory. Office and lab construction will be initiated in
1996.
The company sells capital equipment to a majority of the global
semiconductor manufacturers. Most of the sales are to makers of
semiconductor integrated circuits. Although there are many such
customers, a majority of the integrated circuits world-wide are produced
by approximately 20 companies, with roughly two-thirds of the business
outside the United States. NEC (through Marubeni Hytech, the company's
Japanese distributor), Hyundai Electronics Ind. Co. Ltd. and Samsung
Pacific International Inc. are significant customers of the segment.
There are several domestic and international competitors (some of whom
are larger than the company) and competition is intense. In meeting the
competition, emphasis is placed on selling quality products with good
technical performance and reliability with a competitive cost of
ownership. The company's growing global customer-support network is a
possible competitive advantage.
2
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.
Although this demand has been growing over the past few years, it has a
history of cyclical variations. 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 more than 6 months in the
future.
Wireless Communications
This newly recognized segment serves original equipment manufacturers in
the rapidly growing market for wireless communication equipment. The
company's long time leadership as a microwave-electronics manufacturer
and its historic strength in space communication components provide a
competitive advantage in offering unique solutions to requirements for
wireless network communications and satellite systems.
The company has entered two wireless communication business areas
paralleling the skills it had developed as a defense-electronics
supplier. In the Palo Alto facility the company is producing components
and subassemblies for cellular, personal communication services (PCS) and
space applications. At the Gaithersburg facility the company is
successfully adapting its communications-intelligence equipment
technology to the design and production of low-cost, sensitive receivers
for cellular telephone fraud detection and wideband transceivers for base
station applications.
Both of these operations take advantage of the processes, devices and
monolithic microwave integrated circuits (MMIC) developed and
manufactured in the company's gallium-arsenide (GaAs) foundry. These
proprietary devices and circuits perform highly reliable
signal-processing functions in the various equipment and have enabled the
company to capture programs over its competition. Other strengths the
company brings to this marketplace are derived from the skills and
technology developed over many years of providing microwave components
and communications receivers for defense-electronics applications. The
company is mining this technology to take advantage of expected market
growth in the wireless communications sector. Substantial research and
development efforts are being expended in an attempt to take advantage of
projected growth opportunities.
Sales by the Wireless Communications segment were 8% of consolidated
sales in 1995, 7% in 1994 and 7% in 1993. Although the business is
international in scope, present selling efforts are concentrated in the
United States. Marketing and sales are performed by company direct sales
personnel and distributors. Major accounts are handled by direct company
sales and service. Components, subassemblies, receivers and transceivers
are primarily sold to companies which manufacture base station equipment
for various wireless communication carriers. Although the customer
community represents a large business opportunity, the number of
individual customer companies is not large.
The telecommunications bill recently enacted reorganizes the business
opportunities for the telecommunications industry. Although the company
believes the results of this reorganization will be positive for its
wireless communication business, its full effects are not clear. Various
regulatory agencies of federal, state and local governments can also
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 company seeks to win competitions
by excellent service and superior technical performance. It seeks to
protect its intellectual property by an aggressive patent and trade
secret program as indicated below.
3
Government Electronics
The Government Electronics segment designs, develops and manufactures
microwave components, subsystems, and receivers for a broad range of
applications. The segment supplies sophisticated electronic products for
defense-intelligence, missile-guidance, electronic-warfare and
space-communications missions.
Watkins-Johnson receivers and signal-analysis equipment are used by
military and other governmental agencies to perform range-monitoring,
frequency-measurement, signal localization and interference-analysis
functions, often in complex, high-signal-density environments. The
company continues to sustain its technological and marketing leadership
in communications intelligence equipment. Company funded design and
development efforts are producing advanced receivers and related
equipment featuring the small-size, light-weight and low-power-
consumption characteristics demanded by its customers at competitive
prices. This design effort is also serving the demand by government
customers for "commercial-off-the-shelf" (COTS) equipment.
The company is the largest merchant supplier of integrated microwave
subsystems to guided missile prime contractors. The company's integrated
capability provides a technological advantage, while its microwave hybrid
assembly and test capabilities give it a manufacturing edge over
competing suppliers (including the internal capabilities of customer
companies). The company is a subcontractor for certain key missile
programs, such as the Advanced Medium-Range Air-to-Air Missile (AMRAAM),
the High-speed Anti-Radiation Missile (HARM) and the Standard Missile
Block IV which continue to represent a substantial portion of the
segment's core defense-electronics business.
Government Electronics products are marketed through direct selling
efforts and distributor networks domestically and overseas. A small
portion of the sector's business is exported to customers similar to
those in the U.S. Such sales are generally subject to U.S. Government
export control procedures.
Sales by the Government Electronics segment were 35% of consolidated
sales in 1995, 50% in 1994 and 64% in 1993. A majority of segment sales
are to government agencies and government prime contractors, such as
Hughes Aircraft Company, engaged in defense contracting. The principal
end user for such sales is the U.S. Department of Defense. Sales
contracts with the government are customarily subject to terms and
conditions which provide for renegotiation of profits and termination of
the contract at the election of the government. The right to terminate
for convenience has not had any significant effect on the company's
financial position or results of operations.
The Government Electronics segment has numerous competitors which include
large, diversified corporations and smaller specialty firms. In addition
to pressures from competing companies, the company's defense electronics
business is influenced by U.S. and foreign political activity and
national budgetary policies. In recent years, Department of Defense
budget cutbacks have had direct and indirect impact on the company. The
indirect impacts had come about as large diversified customers retained
within their companies work which WJ had previously performed. The
company has reduced its work force and restructured its organization to
better address the changing business opportunities. Continued reductions
in defense spending could limit the demand for the company's products.
Other Business Items
Raw materials for the production of semiconductor equipment, wireless
communications and government electronic products are acquired from a
broad range of suppliers. Because suppliers are numerous, dependence on
any one supplier is kept to a minimum. On occasion, however, the failure
of a supplier to deliver key parts can jeopardize the on-time shipment of
WJ products.
4
Business operations are not believed to be seasonal. Except for
negotiated advance or progress payments from customers on long-term
contracts in the defense-electronics business, there are no special
working capital practices.
The company has been active in securing patents and licensing agreements
to protect certain proprietary technologies and know-how resulting from
its ongoing research and development. The financial impact of the
company's efforts to protect its intellectual property are unknown.
Management believes that the company's competitive strength derives
primarily from its core competence in engineering, manufacturing and
understanding its customers and markets; therefore, aggressive steps to
protect that knowledge are considered justifiable.
Total company backlog at December 31, 1995 was $250,276,000 compared to
$235,942,000 at December 31, 1994. The percentage of backlog attributable
to the Semiconductor Equipment, Wireless Communications and Government
Electronics segments were 49%, 11% and 40%, respectively, in 1995,
compared to 39%, 6% and 55% in 1994. Approximately 97% of all backlog at
year-end 1995 is shippable within 12 months, compared to 92% at year-end
1994.
Company-sponsored research and development expense was $47,629,000 in
1995, $34,436,000 in 1994, and $27,163,000 in 1993. Customer-sponsored
research and development was estimated to be approximately $20,000,000 in
1995, $24,000,000 in 1994, and $18,000,000 in 1993, and was performed
mostly by the Government Electronics segment.
The company's employment at December 31, 1995 was 2,180. None of the
company's employees is covered by a collective-bargaining agreement. The
company's relationship with its employees is generally good.
Environmental issues are discussed in Note 6 to the consolidated
financial statements contained in Part II, Item 8 of this annual report
on Form 10-K.
(d) Financial Information about Foreign and Domestic Operations and Export
Sales.
Combined export sales and sales from foreign operations accounted for 47%
of the company's sales in 1995, 45% in 1994, and 33% in 1993. Assets and
sales from foreign operations are less than ten percent of consolidated
totals. The inherent risks of foreign business are similar to domestic
business, with the additional risks of foreign government instability and
export license cancellation. A major portion of foreign product orders in
the Government Electronics segment requires export licensing by the
Department of State prior to shipment. For international shipments for
all company business segments, the company purchases forward exchange
contracts and/or obtains customer letters of credit to reduce foreign
currency fluctuation and credit risks. For further information on foreign
sales, see Note 8 to the consolidated financial statements contained in
Part II, Item 8 of this annual report on Form 10-K.
ITEM 2. PROPERTIES
Watkins-Johnson Company and subsidiaries conduct their main operations at
plants in Palo Alto and Scotts Valley, California and Gaithersburg,
Maryland. During 1995, the company divested its switch-matrix business
operations conducted in Windsor, England, and the facility is offered for
sale. The plant in San Jose, California, which had been closed at the end
of 1994 and offered for sale, has been taken off the market. Space
limitations at the Semiconductor Equipment Group's headquarters in Scotts
Valley prompted the company to reopen the San Jose facility in order to
accommodate the Group's rapid expansion. Adjacent undeveloped land at the
San Jose site is still offered for sale. The company closed its 50,000
square foot facility in Columbia (Savage), Maryland, in the first quarter
of 1995 and returned it to the lessor.
At December 31, 1995, there were approximately 725,000 square feet of
plant space in California, and 175,000 square feet in Maryland.
Approximately 75% of the company's plant space is occupied for the
company's operations. The company is pursuing opportunities to realize
the market value of its properties while ensuring efficient use of
available space.
5
The Government Electronics and Wireless Communications segments utilize
substantially all of the Palo Alto and Gaithersburg facilities. The
Scotts Valley plant houses the Semiconductor Equipment Group, with the
Group expanding into the San Jose facility.
The Palo Alto facility and sales office locations are leased. Information
on long-term obligations is in Note 3 to the consolidated financial
statements contained in Part II, Item 8 of this annual report on Form
10-K.
ITEM 3. LEGAL PROCEEDINGS
Information required under this item is contained in Note 6 to the
consolidated financial statements contained in Part II, Item 8 of this
annual report on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company submitted no matters to a vote of the shareowners during the
last quarter of the period covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
OFFICER BUSINESS EXPERIENCE
NAME AGE OFFICE HELD SINCE LAST FIVE YEARS
- ------------------------- ----- ------------------------ --------- -------------------------------
Dr. Dean A. Watkins .....73 Chairman of the Board 1957 Chairman of the Board
Dr. H. Richard Johnson....69 Vice Chairman of the 1957 Vice Chairman of the Board
Board
Dr. W. Keith Kennedy, Jr. 52 President and Chief 1989 President and Chief Executive
Executive Officer Officer
Scott G. Buchanan........ 44 Vice President and Chief 1989 Vice President and Chief
Financial Officer Financial Officer; Prior to
1993, Chief Financial Officer
and Treasurer
Keith D. Gilbert......... 54 Executive Vice President 1984* Executive Vice President; Prior
to 1995, President, Electronics
Group (formerly Defense
Group); Prior to 1993, Vice
President, Defense Group
Richard G. Bell.......... 48 Vice President and 1990 Vice President and General
General Counsel General Counsel
Marc C. Elgaway.......... 41 Vice President 1995 President, Telecommunications
Group
Darryl T. Quan........... 41 Controller 1991 Controller
Carol H. Roosen.......... 64 Secretary 1988 Secretary
Joan M. Varrone.......... 44 Treasurer 1994 Treasurer; Prior to 1994,
Assistant Treasurer, Raychem
Corporation
Dr. Watkins and Dr. Johnson have been directors of the company since its
incorporation in 1957. Dr. Kennedy has been a Director since August 1987.
None of the above officers is related to any other officer at
Watkins-Johnson Company.
*From January 1995 until November 1995, Keith D. Gilbert served as a
consultant for the company, reporting to the President and Chief
Executive Officer. He was reappointed as Executive Vice President by the
Board of Directors in November 1995.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The company's common stock is principally traded on the New York and
Pacific stock exchanges. At December 31, 1995 there were approximately
4,900 shareowners, which included holders of record and beneficial
owners. The company expects that comparable cash dividends will continue
in the future.
DIVIDENDS AND STOCK PRICES
1995 QUARTERS 1ST 2ND 3RD 4TH
- --------------------------------------- ------ ----- ----- -----
Dividends Declared Per Share (in cents) 12 12 12 12
Stock Price (NYSE-in dollars) ..........High 40-1/4 48-3/8 57 54-7/8
Low 29-3/4 38-5/8 43-1/2 40-1/2
1994 QUARTERS 1ST 2ND 3RD 4TH
- ------------------------------------------- ----- ----- ----- -----
Dividends Declared Per Share (in cents) 12 12 12 12
Stock Price (NYSE-in dollars) ...........High 28-3/4 35-5/8 36-5/8 36
Low 19-5/8 24-7/8 26-1/8 28-1/2
ITEM 6. SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ------------ --------------
OPERATING RESULTS
Sales ...................... $ 387,031 $ 332,606 $ 282,134 $ 255,485 $ 268,010
Net Income ................. 31,428 20,961 11,596 10,401(a) (22,399)(b)
Net Income Per Share ....... 3.54 2.56 1.45 1.38(a) (2.98)(b)
Dividends Per Share ........ .48 .48 .48 .48 .48
Average Shares Outstanding 8,875,000 8,200,000 7,999,000 7,551,000 7,527,000
FINANCIAL POSITION
Working Capital ............ $ 142,213 $ 116,651 $ 108,497 $ 100,852 $ 90,363
Total Assets ............... 287,674 235,030 220,628 206,090 212,579
Long-Term Obligations ..... 21,669 22,583 26,463 28,644 31,630
Shareowners' Equity ........ 191,253 149,626 133,888 125,055 118,126
Firm Backlog ............... $ 250,276 $ 235,942 $ 221,437 $ 203,717 $ 218,434
- ----------
(a) Includes a tax benefit of $5,438,000, or 72 cents per share, due to the
cumulative effect of a change in accounting for income taxes.
(b) Includes pre-tax charges for restructuring, environmental remediation and
pending claims on government contracts totaling $29,751,000 or $3.08 loss
per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition
The company's financial condition remains healthy. Net income has
increased from $21 million in 1994 to $31.4 million in 1995. During the
same periods, cash provided by operations increased from $11.8 million in
1994 to $14.2 million in 1995, reflecting the need to fund increases in
working capital items to support the company's growth. In 1995, purchases
of capital equipment grew to $25.5 million from $12.5 million in 1994, in
order to support the company's growing semiconductor equipment and
wireless communications operations. Cash provided by operations and stock
option exercises were sufficient to fund these capital expenditures as
well as the 1995 dividend payments. Cash and equivalents at December 31,
1995 were virtually unchanged from
7
the prior year. For 1996, growth expectations are anticipated to require
the use of external financing. The company has established a $100 million
unsecured credit facility with several banks. The company has not had any
borrowings under its credit facility during 1995.
Current Operations and Business Outlook
Semiconductor Equipment Group orders for 1995 were 34% above last year,
reaching a total of $252 million. Semiconductor Equipment Group sales
accounted for 57% of total company revenue. The mainstay of the group's
product line in 1995 was the WJ-1000 atmospheric-pressure
chemical-vapor-deposition (APCVD) system which was produced specifically
to process 200-mm (8-inch) wafers. The group is continuing to increase
its international presence. A sales and service office was established in
Europe and progress is currently underway for the construction of an
applications laboratory in Japan. Space limitations at the group's
headquarters in Scotts Valley, California, prompted the company to reopen
its San Jose, California, facility to accommodate rapid expansion.
Training, marketing, sales, and spares functions will relocate to San
Jose in the first half of 1996, followed in 1997 by the group's
engineering organization. The outlook for 1996 appears positive as the
group enters the year with record backlog and strong orders prospects.
The group expects 1996 profit margins to be at about the 1995 level.
Although Wireless Communications is Watkins-Johnson's newest and smallest
business segment today, representing nearly 10 percent of 1995 revenue,
its growth rate is expected to be higher than the rest of the company's
businesses. The segment enters 1996 with a strong backlog for wireless
subassemblies which coupled with good orders prospects from a few key
customers should allow wireless revenues to nearly double. Industry
analysts forecast healthy expansion for the wireless industry at about
25% to 30% revenue growth per year through the end of the century. The
company's longtime leadership as a microwave-electronics manufacturer and
historic strength in space communication provide a competitive advantage
in providing unique solutions to the increasing requirements placed on
network communications and satellite systems. Although revenues for the
wireless market is expected to grow strongly, such growth will require
continued high research and development spending by the group in 1996 to
capitalize on the opportunities. It is expected this business segment
will continue to operate at a slight loss in 1996.
While revenue from the Government Electronics segment declined in 1995,
due in part to the divestiture of certain product lines, profitability
increased 35% as a result of aggressive management action. The company
maintained tight control of costs, consolidated its Savage and
Gaithersburg, Maryland, operations into its Gaithersburg plant, divested
its California-based microwave surveillance systems operation and sold
its Windsor, England, switch-matrix business. These actions enable the
segment to concentrate on its long-term technical strengths and focus on
those opportunities in which it can be most competitive. For 1996, the
segment expects flat sales with improved profitability.
Results of Operations
1995 Compared to 1994: Semiconductor Equipment Group sales and Wireless
Communications sales increased 55% and 31%, respectively, while
Government Electronics sales were down 19%, resulting in an overall
company increase of 16%. The $31.5 million decrease in Government
Electronics sales was due in part to the divestiture of certain product
lines in the second quarter of 1995 which accounted for approximately $28
million of sales in 1994. Gross margins increased from 41% to 43% due
mostly to the revenue mix shifting towards more profitable semiconductor
equipment products and improved margins in the Government Electronics
segment. Although selling and administrative expenses as a percentage of
sales decreased slightly, expenses were up 5% due to the increased
volume. Research and development expenses increased from 10% to 12% of
sales due to the company's substantial efforts in developing next
generation products, particularly for the Semiconductor Equipment Group
and the development and commercialization of products for the Wireless
Communications segment. The effective tax rate for federal and foreign
income taxes decreased from 30% to 29% compared to the same period last
year. The tax
8
rate decrease resulted mostly from tax benefits related to higher export
sales. Due to the combined effect of the above factors, net income
increased 50% over 1994.
1994 Compared to 1993: Sales by the Semiconductor Equipment Group and
Wireless Communications segment increased 78% and 16%, respectively, more
than offsetting the 9% decline in Government Electronics, resulting in an
overall company increase of 18%. The favorable shift towards more
profitable semiconductor-equipment products helped to improve the
company's gross margin to above 40% despite consolidation costs incurred
in the Government Electronics segment. Selling and administrative
expenses grew faster than revenues because of commissions on higher
international semiconductor-equipment sales. To improve customer service
and better control international expenses, the company moved to establish
certain foreign operations and phase out its international distributors.
The offices will operate in parallel with the current distributors during
a transition period. Research and development expenditures were
expectedly higher than last year due to the company's efforts in
advancing high-density plasma technology and the development of next
generation products for all business segments. The effective tax rate
declined from 31% to 30% primarily due to higher R&D credit. As a result
of the above factors, net income from continuing operations rose 78%.
Factors 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 and other risks
detailed in the company's Security and Exchange Commission filings.
9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
----------------------------------
1995 1994 1993
--------- --------- --------
Sales ...........................................$387,031 $332,606 $282,134
-------- -------- --------
Costs and expenses:
Cost of goods sold ............................ 221,792 195,558 181,557
Selling and administrative .................... 75,738 72,033 55,627
Research and development ...................... 47,629 34,436 27,163
-------- -------- --------
345,159 302,027 264,347
-------- -------- --------
Income from operations .......................... 41,872 30,579 17,787
Other income (expense):
Interest income ............................... 2,400 1,562 1,497
Interest expense .............................. (873) (1,141) (1,291)
Other income (expense)--net ................... 618 (149) (278)
-------- -------- --------
Income from continuing operations before
Federal and foreign income taxes .............. 44,017 30,851 17,715
Federal and foreign income taxes ................ (12,589) (9,200) (5,550)
-------- -------- --------
Income from continuing operations ............... 31,428 21,651 12,165
Discontinued operations (Note 8):
Loss from discontinued operations, net of taxes (490) (569)
Loss on disposition, net of taxes ............. (200)
-------- -------- --------
Net income ......................................$ 31,428 $ 20,961 $ 11,596
======== ======== ========
Fully diluted per share amounts (difference
between fully diluted and primary earnings
per share is not material):
Income from continuing operations ............. $3.54 $2.64 $1.52
Discontinued operations ....................... (.08) (.07)
-------- -------- --------
Net income ...................................... $3.54 $2.56 $1.45
===== ===== =====
Average common and equivalent shares ...........8,875,000 8,200,000 7,999,000
See notes to consolidated financial statements.
10
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31
-----------------------
1995 1994
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and equivalents ......................................... $ 34,556 $ 34,469
Receivables .................................................. 86,311 80,427
Inventories:
Finished goods ............................................. 3,623 1,680
Work in process ............................................ 45,092 37,682
Raw materials and parts .................................... 31,120 12,293
Deferred income taxes ........................................ 11,725 11,060
Other ........................................................ 4,538 1,861
--------- ---------
Total current assets ................................... 216,965 179,472
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land ......................................................... 4,130 3,198
Buildings and improvements ................................... 37,046 24,617
Plant facilities, leased ..................................... 13,060 13,060
Machinery and equipment ...................................... 131,143 119,808
--------- ---------
185,379 160,683
Accumulated depreciation and amortization .................. (120,243) (115,537)
--------- ---------
Property, plant and equipment--net ......................... 65,136 45,146
--------- ---------
OTHER ASSETS:
Deferred income taxes ........................................ 4,880 4,560
Other ........................................................ 693 5,852
--------- ---------
Total other assets ......................................... 5,573 10,412
--------- ---------
$ 287,674 $ 235,030
========= =========
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .............................................$ 23,162 $ 15,045
Accrued expenses ............................................. 11,899 11,466
Advances on contracts ........................................ 4,446 7,572
Provision for warranties and losses on contracts ............ 10,490 7,192
Payroll and profit sharing ................................... 14,602 16,074
Income taxes ................................................. 10,153 5,472
--------- ---------
Total current liabilities .................................. 74,752 62,821
--------- ---------
LONG-TERM OBLIGATIONS ........................................ 21,669 22,583
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 3 and 6)
SHAREOWNERS' EQUITY:
Preferred stock, $1.00 par value--authorized and unissued,
500,000 shares
Common stock, no par value--authorized, 45,000,000 shares;
outstanding: 1995, 8,124,055 shares; 1994, 7,576,471 shares 34,307 20,279
Retained earnings ............................................ 156,946 129,347
--------- ---------
Total shareowners' equity .................................. 191,253 149,626
--------- ---------
$ 287,674 $ 235,030
========= =========
See notes to consolidated financial statements.
11
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
COMMON STOCK TOTAL
--------------------- RETAINED SHAREOWNERS
SHARES DOLLARS EARNINGS EQUITY
----------- --------- ----------- --------------
Balance, January 1, 1993 .......... 7,554,865 $ 7,839 $117,216 $125,055
Net income for 1993 ............... 11,596 11,596
Repurchase of common stock ........ (32,000) (27) (399) (426)
Dividends declared--$.48 per share (3,631) (3,631)
Stock option transactions ......... 75,425 1,294 1,294
--------- ------- --------- --------
Balance, December 31, 1993 ........ 7,598,290 9,106 124,782 133,888
Net income for 1994 ............... 20,961 20,961
Repurchase of common stock ........ (564,200) (972) (12,833) (13,805)
Dividends declared--$.48 per share (3,563) (3,563)
Stock option transactions ......... 542,381 12,145 12,145
--------- ------- --------- --------
Balance, December 31, 1994 ........ 7,576,471 20,279 129,347 149,626
Net income for 1995 ............... 31,428 31,428
Dividends declared--$.48 per share (3,829) (3,829)
Stock option transactions ......... 547,584 14,028 14,028
--------- ------- --------- --------
Balance, December 31, 1995 ........ 8,124,055 $34,307 $156,946 $191,253
========= ======= ========= ========
See notes to consolidated financial statements.
12
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31
--------------------------------
1995 1994 1993
----------- ---------- ----------
OPERATING ACTIVITIES:
Net income ................................................ $ 31,428 $ 20,961 $ 11,596
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................. 9,941 8,711 9,961
Deferred tax provisions ................................... (985) (695) (1,075)
Net changes in:
Receivables ............................................. (5,884) (6,456) (18,409)
Inventories ............................................. (28,180) (14,509) 345
Other assets ............................................ (2,625) 27 (556)
Accruals and payables ................................... 11,148 9,550 8,878
Advances on contracts ................................... (3,126) (4,248) 1,261
Provision for warranties and losses on contracts ....... 3,298 1,208 (980)
Environmental remediation ............................... (817) (2,727) (1,676)
--------- -------- --------
Net cash provided by operating activities ............. 14,198 11,822 9,345
--------- -------- --------
INVESTING ACTIVITIES:
Additions of property, plant and equipment .................. (25,566) (12,526) (9,714)
Other ....................................................... 741 476 869
--------- -------- --------
Net cash used in investing activities ................. (24,825) (12,050) (8,845)
--------- -------- --------
FINANCING ACTIVITIES:
Payments on long-term obligations ........................... (112) (4,916) (1,982)
Proceeds from issuance of common stock ...................... 14,028 12,145 1,294
Repurchase of common stock .................................. (13,805) (426)
Dividends paid .............................................. (3,829) (3,563) (3,631)
Other ....................................................... 627 (204) 204
--------- -------- --------
Net cash provided (used) by financing activities ...... 10,714 (10,343) (4,541)
--------- -------- --------
Net increase (decrease) in cash and equivalents .............. 87 (10,571) (4,041)
Cash and equivalents at beginning of year ..................... 34,469 45,040 49,081
--------- -------- --------
Cash and equivalents at end of year ........................... $ 34,556 $ 34,469 $ 45,040
========= ========= ========
Other cash flow information:
Income taxes paid-net of refunds ........................ $ 5,828 $ 9,003 $ 3,808
Interest expense paid ................................... 872 1,143 1,324
Noncash investing and financing activities:
Noncash effect on "Property, Plant and Equipment"
and "Other Assets" due to a plant held for sale
in 1994 and returned to service in 1995. Plant
transferred at book value which is below market ....... $ (5,107) $ 5,107
See notes to consolidated financial statements.
13
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The consolidated financial statements include those
of the company and its subsidiaries after elimination of intercompany balances
and transactions.
Cash Equivalents--Cash equivalents consist principally of municipal bond funds
and commercial paper acquired with remaining maturity periods of 90 days or less
and are stated at cost plus accrued interest which approximates market value.
The company's investment guidelines limit holdings in commercial paper to
$1,000,000 per issuer.
Inventories--Inventories are stated at the lower of cost, using first-in,
first-out and average-cost basis, or market. Cost of inventory items is based on
purchase and production cost. Long-term contract costs and selling and
administrative expenses are excluded from inventory. Progress payments are not
netted against inventory.
Property, Plant and Equipment--Property, plant and equipment are stated at cost.
Leases which at inception assure the lessor full recovery of the fair market
value of the property over the lease term are capitalized. Provision for
depreciation and amortization is primarily based on the sum-of-the-years'-digits
and straight-line methods.
Revenue Recognition--Revenue on fixed-price contracts other than long-term
contracts is recorded upon shipment or completion of tasks as specified in the
contract. Estimated product warranty costs are accrued at the time of shipment.
Sales and allowable fees under cost-reimbursement contracts are recorded as
costs are incurred. Long-term contract sales and cost of goods sold are
recognized using the percentage- of-completion method based on the actual
physical completion of work performed and the ratio of costs incurred to total
estimated costs to complete the contract. Any anticipated losses on contracts
are charged to earnings when identified.
Foreign Currency Translation--The functional currency for all foreign operations
is the U.S. dollar with the exception of the company's subsidiary located in
Japan which uses the local functional currency. Gains or losses, which result
from the process of remeasuring foreign currency financial statements and
transactions into U.S. dollars, are generally included in net income. For Japan,
the cumulative translation adjustments are recorded directly in shareowners'
equity. Translation gains or losses are not material in any year presented.
Income Taxes--The consolidated statements of operations include provisions for
deferred income taxes using the liability method for transactions that are
reported in one period for financial accounting purposes and in another period
for income tax purposes. State and local income taxes are included in selling
and administrative expenses.
Per Share Information--Net income per share is computed using the weighted
average number of common and common equivalent shares (dilutive stock options)
outstanding during the year. The difference between fully diluted earnings per
share and primary earnings per share is not significant.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates. The December 31, 1995
consolidated balance sheet includes approximately $6.5 million of inventories
for recently introduced products. Such inventory may be subject to a higher risk
of technological obsolescence than the company's other inventory.
Recently Issued Accounting Standard--Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," (SFAS 123) defines a fair
value method of accounting for stock- based compensation whereby compensation
cost is measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
Pursuant to SFAS
14
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
123, companies are encouraged, but are not required, to adopt the fair value
method no later than fiscal years beginning after December 15, 1995 for all
employee awards granted after the beginning of such year. Companies are
permitted to continue to account for such transactions under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
(APB 25) but would be required to disclose in a note to the financial statements
proforma net income and earnings per share as if the company had applied SFAS
123. The company has determined it will not adopt the fair value method and
therefore will continue to account for stock-based compensation under APB 25,
reporting the required footnote disclosures pursuant to SFAS 123 in 1996.
Reclassification--Certain amounts for 1994 and 1993 have been reclassified to
conform to the 1995 presentation.
2. RECEIVABLES
Receivables consist of the following (in thousands):
1995 1994
--------- ---------
U.S. Government long-term contracts:
Billed ..................................... $ 617 $ 2,613
Unbilled ................................... 213 9,516
Commercial long-term contracts:
Billed ..................................... 258 9,663
Unbilled ................................... 919 723
--------- ---------
Total long-term contract receivables ...... 2,007 22,515
Other trade receivables .................... 84,304 57,912
--------- ---------
Total receivables, less allowance of $1,034
in 1995 and $1,015 in 1994 ................. $ 86,311 $ 80,427
========= =========
Unbilled receivables represent revenue recognized for long-term contracts not
yet billable based on the terms of the contract. These amounts are billable upon
shipment of the product, achievement of milestones, or completion of the
contract. Unbilled receivables are expected to be billed and collected within
one year. Receivables representing retainage not collectible within one year are
not material. There are no significant billed or unbilled receivables subject to
future negotiation.
Government contracts have provisions for audit, price redetermination and other
profit and cost limitations. Contracts may be terminated without prior notice at
the Government's convenience. In the event of such termination, the company may
be compensated for work performed, a reasonable allowance for profit, and
commitments at the time of termination. The right to terminate for convenience
has not had any significant effect on the company's financial position or
results of operations.
3. LONG-TERM OBLIGATIONS AND LINES OF CREDIT
Long-term obligations, excluding amounts due within one year, consist of (in
thousands):
1995 1994
--------- --------
Deferred compensation ... $ 6,356 $ 6,330
Environmental remediation 7,613 8,430
Long-term leases ......... 7,700 7,823
--------- --------
Total ................ $21,669 $22,583
========= ========
15
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The current portion of long-term obligations is included in current liabilities.
The expected maturity amounts are as follows: 1996, $2,786,000; 1997,
$1,798,000; 1998, $1,812,000; 1999, $1,827,000; 2000, $1,834,000.
Deferred Compensation--The company has deferred compensation plans covering
selected members of management and key technical employees. The purpose is to
reward and encourage talented employees to remain with the company.
Environmental Remediation--As discussed in Note 6, the company is obligated to
remediate groundwater contamination at the Scotts Valley and Palo Alto
facilities. The portion expected to be paid within one year is included in
current liabilities.
Leases--Certain long-term leases for plant facilities are treated as capital
leases for financial statement purposes. The leases expire during the years 2014
to 2029, and renewal options do not provide for lease extensions beyond the year
2029. The company also has noncancellable operating leases for plant facilities
and equipment expiring through the year 2000. The leases may be renewed for
various periods after the initial term. Payment obligations under these capital
and operating leases as of December 31, 1995 are as follows (in thousands):
CAPITAL OPERATING
LEASES LEASES
--------- ----------
Lease payments:
1996 ........................ $ 848 $1,716
1997 ........................ 848 1,525
1998 ........................ 848 620
1999 ........................ 848 340
2000 ........................ 848 286
Remaining years ............. 14,872
---------- ---------
Total .......................... 19,112 $4,487
=========
Imputed interest ............... (11,289)
----------
Present value of lease payments
(current portion, $123)...... $ 7,823
==========
Rent expense included in continuing operations for property and equipment
relating to operating leases is as follows (in thousands):
1995 1994 1993
--------- --------- -------
Real property... $ 1,202 $ 774 $ 822
Equipment ...... 665 626 865
--------- -------- -------
Total ...... $ 1,867 $ 1,400 $1,687
========= ======== =======
Lines of Credit--During 1995, the company terminated its unsecured revolving
lines of credit totaling $23,500,000 and established a $100,000,000 unsecured
credit facility with several banks. This facility expires on December 8, 1998.
No material compensating balances are required or maintained. Borrowings under
this facility generally bear interest at the lower of prime rate or London
Interbank Offered Rates (LIBOR) plus .75%. Although the lines of credit and new
credit facility were unused during the year, interest rates applicable to these
facilities ranged from 5.7 to 6.9 percent in 1995. The amount of outstanding
letters of credit and other guarantees was not material at December 31, 1995.
16
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. SHAREOWNERS' EQUITY
Stock Repurchase Program--The Board of Directors has authorized the company to
repurchase a maximum of 2,500,000 shares of company stock. Through December 31,
1994, 1,500,000 shares have been repurchased. No repurchases were made during
1995. The program enables the company to acquire its common stock from time to
time when appropriate.
Common Share Purchase Rights--For each share of company common stock
outstanding, one Common Share Purchase Right is attached. If not renewed, the
Rights expire October 20, 1996. The Rights may be redeemed by the company for
$.01 per Right at any time prior to 15 days after an entity acquires 20% or more
of the company's common stock. The Rights become exercisable if an entity
acquires 20% or more of the company's outstanding common stock, or announces an
offer which would result in such entity acquiring 30% or more of the company's
common stock. When exercisable, the Rights trade separately from the common
stock and entitle a holder to buy one share of the company's common stock for
$160. If the company is subsequently involved in a merger or other business
combination, each Right will entitle its holder to buy a number of shares of
common stock of the surviving company having a market value of twice the $160
exercise price. The Rights also provide for protection against self-dealing
transactions by a controlling shareowner.
Stock Option Plans--The Employee Stock Option Plan provides for grants of
nonqualifying and incentive stock options to certain key employees and officers.
The options are granted at the market price on date of grant and expire at the
tenth anniversary date. One-third of the options granted are exercisable in each
of the third, fourth and fifth succeeding years. The Plan allows those employees
who are subject to the insider trading restrictions certain limited rights to
receive cash in the event of a change in control. Shares issued are net of
retirement of shares used in payment for options exercised. In addition, the
Plan permits the award of restricted stock rights subject to a fixed vesting
schedule. The holder of vested restricted stock has certain dividend, voting,
and other shareowner rights. No restricted stock awards have been made through
December 31, 1995.
The Nonemployee Directors Stock Option Plan provides for a fixed schedule of
options to be granted through 1998. Options granted are exercisable similarly to
the Employee Stock Option Plan. The total number of shares to be issued under
this plan may not exceed 200,000 shares. Included in the tables below, 12,600
and 5,440 option shares were granted at $39.75 and $39.88, respectively, in 1995
and 16,320 option shares were granted at $29.00 in 1994.
17
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Activity related to stock option plans is as follows:
1995 SHARES PRICE
--------------------------- ----------- ----------------
Granted ...................... 680,290 $31.88 to $55.00
Exercised .................... 566,198 $ 9.63 to $36.75
Terminated ................... 83,184
At December 31:
Outstanding ................ 1,875,157 $ 9.63 to $55.00
Exercisable ................ 668,457 $ 9.63 to $36.75
Reserved for future grants.. 511,446
1994 SHARES PRICE
------------------------------ ----------- ----------------
Granted ...................... 577,320 $22.75 to $35.88
Exercised .................... 573,842 $ 9.63 to $28.25
Terminated ................... 28,641
At December 31:
Outstanding ................ 1,844,249 $ 9.63 to $36.75
Exercisable ................ 865,146 $ 9.63 to $36.75
Reserved for future grants.. 1,108,551
Included in the Consolidated Statements of Shareowners' Equity are tax benefits
related to sales under stock option plans of $4,735,000, $2,327,000 and $123,000
for 1995, 1994 and 1993, respectively.
5. INCOME TAXES
The provision for income taxes includes deferred taxes reflecting the net tax
effects of temporary differences that are reported in one period for financial
accounting purposes and in another period for income tax purposes. Deferred tax
assets are recognized when management believes realization of future tax
benefits of temporary differences is more likely than not. In estimating future
tax consequences, generally all expected future events are considered other than
enactments of changes in the tax law or rates. The provision for Federal and
foreign income taxes on income from continuing operations consists of the
following (in thousands):
1995 1994 1993
--------- --------- --------
Current ....... $13,574 $ 9,895 $ 6,625
Deferred ...... (985) (695) (1,075)
--------- --------- --------
Total ..... $12,589 $ 9,200 $ 5,550
========= ========= ========
18
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred tax assets (liabilities) are comprised of the following at December 31
(in thousands):
1995 1994 1993
-------- -------- --------
Deferred compensation .............. $ 3,259 $ 3,251 $ 3,357
Loss accruals ...................... 6,753 6,295 5,423
Environmental remediation ......... 3,298 3,490 4,034
Uniform capitalization ............. 1,456 1,273 1,055
Vacation accrual ................... 1,794 1,724 1,744
Other .............................. 2,426 1,307 1,129
-------- -------- --------
Gross deferred tax assets....... 18,986 17,340 16,742
-------- -------- --------
Depreciation ....................... (2,297) (1,562) (1,413)
Other .............................. (84) (158) (404)
-------- -------- -------
Gross deferred tax liabilities.. (2,381) (1,720) (1,817)
-------- -------- -------
Net deferred tax asset ........... $16,605 $15,620 $14,925
======== ======== =======
The differences between the effective income tax rate and the statutory Federal
income tax rate are as follows:
1995 1994 1993
------- ------- -------
Statutory Federal tax rate ....... 35.0% 35.0% 35.0%
Export sales benefit ........... (6.0) (5.5) (7.0)
Research credit ................ (1.4) (2.3)
Foreign subsidiary earnings and
losses ....................... (.7) .2 1.7
Other .......................... 1.7 2.4 1.7
------- ------- -------
Effective rate ................... 28.6% 29.8% 31.4%
======= ======= =======
Domestic state and local income taxes included in selling and administrative
expenses totaled $1,670,000 in 1995, $1,813,000 in 1994, and $1,257,000 in 1993.
Foreign operation amounts represent less than 5% of totals.
6. ENVIRONMENTAL REMEDIATION AND OTHER CONTINGENCIES
The company remains in compliance with the remedial action plans being monitored
by various regulatory agencies at its Scotts Valley and Palo Alto sites. In 1991
the company recorded a $15 million charge for estimated remediation actions and
cleanup costs. No additional provision has been recorded since 1991. In 1994 the
company reached agreement with the other potentially responsible parties
regarding allocations of the remediation costs at the Palo Alto site. Included
in other income for 1995 are recoveries from insurers totaling $1,331,000.
Expenditures of $778,000, $2,727,000 and $1,676,000 were incurred for the years
1995, 1994 and 1993, respectively. While the timing and ultimate amount of
expenditures of restoring the sites cannot be predicted with certainty,
management believes that the provision taken is adequate based on facts known at
this time. The company will continue to vigorously pursue any potential
recoveries from insurers or other responsible parties. Changes in environmental
regulations, improvements in cleanup technology and discovery of additional
information concerning these sites and other sites could affect the estimated
costs in the future.
In addition to the above environmental matters, the company is involved in
various legal actions which arose in the ordinary course of its business
activities. Except for the environmental provision noted above, management
believes the final resolution of these matters should not have a material impact
on its results of operations, cash flows, and financial position.
19
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. EMPLOYEE BENEFIT PLANS
Employees' Investment Plan--The Watkins-Johnson Employees' Investment Plan
conforms to the requirements of the Employee Retirement Income Security Act of
1974 (ERISA) and the Internal Revenue Code as a qualified defined contribution
plan. The Plan covers substantially all employees and for 1995 provided that the
company match employees' 401(k) salary deferrals up to 3% of eligible employee
compensation. Prior to 1995, the plan provided for company contributions equal
to 9% of the net pretax earnings and be funded each year. The amount charged to
income was $2,577,000 in 1995, $3,190,000 in 1994, and $1,945,000 in 1993.
Employee Stock Ownership Plan (ESOP)--The ESOP was established to encourage
employee participation and long-term ownership of company stock. The Board
determines each year's contribution depending on the performance and financial
condition of the company. The Board approved a contribution equal to 1% of
eligible employee compensation for 1995, 1994, and 1993, which resulted in
charges to income of $839,000, $894,000, and $887,000, respectively. The ESOP
held 197,000 and 204,000 shares of common stock at December 31, 1995 and 1994,
respectively. The ESOP is a qualified defined contribution plan under ERISA and
the Internal Revenue Code.
8. BUSINESS SEGMENT REPORTING
The company operates in three industry segments. Operations in the Semiconductor
Equipment segment involve the development, production, sales and service of
chemical-vapor-deposition equipment used in the manufacture of semiconductor
products and flat-panel displays. In 1995, the company established its wireless
communications business as a new reporting business segment, separate and apart
from the Electronics Group. The Electronics Group was renamed "Government
Electronics" for segment reporting purposes. Amounts reported for prior years
have been restated to reflect the split of the former Electronics Group as two
reporting segments. Operations in the Wireless Communications segment involve
the design, development, manufacture and sale of advanced wireless
telecommunication products for cellular service providers, personal
communication systems, and other wireless product manufacturers. Operations in
the Government Electronics segment include the design, development, manufacture
and sale of advanced electronic systems and devices for guided-missile programs,
communications intelligence, and other government agency applications. The
environmental services business was divested at the end of 1994 and is reported
as a discontinued business in the financial statements.
20
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Continuing operations by business segment are as follows (in thousands):
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------------
YEAR-
PRE-TAX END CAPITAL
SALES INCOME ASSETS ADDITIONS DEPRECIATION
-------- --------- --------- ---------- -------------
Semiconductor Equipment ....... $ 222,212 $33,062 $147,051 $18,518 $4,687
Wireless Communications ....... 30,446 (1,796) 19,530 1,258 436
Government Electronics ........ 134,373 10,919 64,504 5,464 4,417
Corporate ...................... (313) 56,589 326 401
----------- --------- --------- ---------- ---------
Income from continuing
operations .................... 41,872
Other income (expense)--net .... 2,145
----------- --------- --------- ---------- ---------
Total ...................... $387,031 $44,017 $287,674 $25,566 $9,941
=========== ========= ========= ========== =========
YEAR ENDED DECEMBER 31, 1994
---------------------------------------------------------
Semiconductor Equipment ....... $ 143,536 $22,185 $ 68,270 $ 7,649 $2,993
Wireless Communications ....... 23,196 307 10,365 135 273
Government Electronics ........ 165,874 8,087 98,291 4,465 4,999
Corporate ...................... 58,104 277 446
----------- --------- --------- ---------- ---------
Income from continuing
operations .................. 30,579
Other income (expense)--net ... 272
----------- --------- --------- ---------- ---------
Total ..................... $332,606 $30,851 $235,030 $12,526 $8,711
=========== ========= ========= ========== =========
YEAR ENDED DECEMBER 31, 1993
------------------------------------------------------
Semiconductor Equipment ...... $ 80,724 $10,591 $ 49,012 $ 4,299 $2,786
Wireless Communications ...... 19,985 (605) 9,981 147 404
Government Electronics ....... 181,425 7,801 98,049 4,686 6,257
Corporate ..................... 63,586 582 514
----------- --------- --------- ---------- ---------
Income from continuing
operations .................. 17,787
Other income (expense)--net ... (72)
----------- --------- --------- ---------- ---------
Total ..................... $282,134 $17,715 $220,628 $ 9,714 $9,961
=========== ========= ========= ========== =========
Corporate assets consist primarily of cash and equivalents, and included in 1994
and 1993 balances are assets of discontinued operations which are not material
for any year presented.
21
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The U.S. Government and Hughes Aircraft Company are significant customers for
the Government Electronics segment. Marubeni Hytech (the company's Japanese
distributor), Hyundai Electronics Ind. Co. Ltd., and Samsung Pacific Int'l
Inc. are significant customers for the Semiconductor Equipment Group. Sales
to significant customers are as follows (in thousands):
1995 1994 1993
------- ------- -------
United States Government ................... $42,000 $57,000 $60,000
Hughes Aircraft Company .................... 40,000 35,000 41,000
Marubeni Hytech ............................ 61,000 39,000 16,000
Hyundai Electronics Ind. Co. Ltd. .......... 28,000 11,000 4,000
Samsung Pacific Int'l Inc. ................. 22,000 17,000 10,000
Sales from continuing operations by geographic area are as follows (in
thousands):
1995 1994 1993
-------- -------- --------
United States ............................. $203,460 $183,963 $188,919
Export sales:
Europe ..................................... 19,958 26,534 20,830
Japan ...................................... 60,674 43,544 19,447
Korea ...................................... 53,470 32,292 14,307
Other Asia-Pacific countries ............... 30,388 23,088 11,216
Other ...................................... 9,975 12,385 15,652
Foreign operations ........................... 9,106 10,800 11,763
-------- -------- --------
Total ................................... $387,031 $332,606 $282,134
======== ======== ========
Foreign operations' sales and identifiable assets are less than ten percent of
consolidated totals.
Summarized below are operating results and assets of the discontinued
Environmental Services business. Intersegment sales were transferred based on
negotiated prices (in thousands).
YEAR ENDED DECEMBER 31
-------------------------
1994 1993
------- -------
Sales ............................................ $ 4,911 $ 5,536
Intersegment sales ............................... (1,294) (1,380)
------- -------
Net sales ........................................ 3,617 4,156
------- -------
Loss before income taxes ......................... (690) (869)
Income tax benefit ............................... 200 300
Loss on disposition net of $100
income tax benefit .............................. (200)
------- -------
Net loss ......................................... $ (690) $ (569)
======= =======
DECEMBER 31
--------------------
1994 1993
------- --------
ASSETS .......................................... $ 2,281 $ 3,923
======= ========
22
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. QUARTERLY FINANCIAL DATA--UNAUDITED
Unaudited quarterly financial data are as follows (in thousands, except per
share amounts):
1995 QUARTERS 1ST 2ND 3RD 4TH
- ------------------------------------ -------- -------- -------- --------
Sales .............................. $92,983 $102,004 $ 95,550 $ 96,494
Gross profit ....................... 39,877 41,649 40,572 43,141
Net income ......................... 5,353 7,776 8,910 9,389
Net income per share ............... $.63 $.88 $.98 $1.04
1994 QUARTERS 1ST 2ND 3RD 4TH
- ------------------------------------ -------- -------- -------- --------
Sales .............................. $80,526 $ 87,365 $ 83,174 $ 81,541
Gross profit ....................... 29,476 37,585 34,776 35,211
Net income ......................... 3,624 5,934 5,386 6,017
Net income per share ............... $.45 $.73 $.61 $.77
The total of quarterly amounts for net income per share will not necessarily
equal the annual amount, since the computations are based on the average number
of common and common equivalent shares outstanding during each period.
Included in 1994 net income and net income per share are results from
discontinued operations which do not have a material impact on any individual
quarter.
23
REPORT OF MANAGEMENT
The consolidated financial statements of Watkins-Johnson Company and
subsidiaries were prepared by management, which is responsible for their
integrity and objectivity. The statements were prepared in conformity with
generally accepted accounting principles and, as such, include amounts that are
based on the best judgments of management.
The system of internal controls of the company is designed to provide reasonable
assurance that assets are safeguarded and that transactions are executed in
accordance with management's authorization and are reported properly. The most
important safeguard for shareowners is the company's emphasis in the selection,
training and development of professional accounting managers to implement and
oversee the proper application of its internal controls and the reporting of
management's stewardship of corporate assets and maintenance of accounts in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP, independent auditors, are retained to provide an
objective, independent review as to management's discharge of its
responsibilities insofar as they relate to the fairness of reported operating
results and financial position. They obtain and maintain an understanding of the
company's accounting and financial controls, and conduct such tests and related
procedures as they deem necessary to arrive at an opinion on the fairness of the
financial statements.
The Audit Committee of the Board of Directors, composed solely of Directors
from outside the company, meets periodically, separately and jointly, with
the independent auditors and representatives of management to review the work
of each. The functions of the Audit Committee include recommending the
engagement of the independent auditors, reviewing the scope and results of
the audit and reviewing management's evaluation of the system of internal
controls.
W. Keith Kennedy, Jr. Scott G. Buchanan
President and Vice President and
Chief Executive Officer Chief Financial Officer
24
INDEPENDENT AUDITORS' REPORT
The Shareowners and Board of Directors
of Watkins-Johnson Company:
We have audited the accompanying consolidated balance sheets of Watkins-Johnson
Company and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, shareowners' equity, and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Watkins-Johnson Company and
subsidiaries at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Francisco, California
February 2, 1996
25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the company's
directors is shown under the caption "Election of Directors" in the
company's definitive proxy statement filed with the Commission pursuant
to Regulation 14A.
The information relating to the company's executive officers is
presented in Part I of this Form 10-K under the caption "Executive
Officers of the Registrant".
ITEM 11. EXECUTIVE COMPENSATION
See this caption in the definitive proxy statement which the company
has filed with the Commission pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is shown under the captions "Security Ownership of
Certain Beneficial Owners & Management" in the company's definitive
proxy statement filed with the Commission pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain business relationships is shown under
the caption "Executive Compensation" in the definitive proxy statement
which the company has filed with the Commission pursuant to Regulation
14A. There were no transactions with management for which disclosure
would be required by Item 404 of Regulation S-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE
-------
(a)1. Consolidated Financial Statements
Consolidated Statements of Operations
For the Years Ended December 31, 1995, 1994 and 1993 10
Consolidated Balance Sheets
December 31, 1995 and 1994 11
Consolidated Statements of Shareowners' Equity
For the Years Ended December 31, 1995, 1994 and 1993 12
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1995, 1994 and 1993 13
Notes to Consolidated Financial Statements 14-23
Report of Management 24
Independent Auditors' Report 25
26
PAGE
-------
2. Financial Statement Schedules
Independent Auditors' Report 29
II Valuation and Qualifying Accounts and Reserves
For the Years Ended December 31, 1995, 1994 and
1993 30
Schedules not listed above are omitted because of the absence of
conditions under which they are required or because the required
information is included in the financial statements or in the notes
thereto.
3. Exhibits
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. Exhibits incorporated by reference to a prior filing are designated
by an asterisk.
- ----------
(b) No reports on Form 8-K were required to be filed during the last quarter of
the period covered by this report.
(c) The exhibits required to be filed by Item 601 of Regulation S-K are the same
as Item 14(a)3 above.
(d) Financial statement schedules not included herein have been omitted because
of the absence of conditions under which they are required or because the
required information is included in the financial statements or in the notes
thereto.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.
WATKINS-JOHNSON COMPANY
----------------------------------------------
(Registrant)
Date: February 26, 1996 By /s/ DEAN A. WATKINS
----------------------------------------------
DEAN A. WATKINS
CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- -------------------------------- ------------------------- ---------------------
Principal Executive Officer:
/s/ W. KEITH KENNEDY, JR. President and Chief Executive Officer February 26, 1996
--------------------------------
W. KEITH KENNEDY, JR.
Principal Financial and Accounting Officer:
/s/ SCOTT G. BUCHANAN Vice President and February 26, 1996
-------------------------------- Chief Financial Officer
SCOTT G. BUCHANAN
/s/ H. RICHARD JOHNSON Director February 26, 1996
--------------------------------
H. RICHARD JOHNSON
/s/ JOHN J. HARTMANN Director February 26, 1996
--------------------------------
JOHN J. HARTMANN
/s/ RAYMOND F. O'BRIEN Director February 26, 1996
--------------------------------
RAYMOND F. O'BRIEN
/s/ WILLIAM R. GRAHAM Director February 26, 1996
--------------------------------
WILLIAM R. GRAHAM
/s/ GARY M. CUSUMANO Director February 26, 1996
--------------------------------
GARY M. CUSUMANO
/s/ ROBERT L. PRESTEL Director February 26, 1996
--------------------------------
ROBERT L. PRESTEL
28
INDEPENDENT AUDITORS' REPORT
Watkins-Johnson Company:
We have audited the consolidated financial statements of Watkins-Johnson Company
and subsidiaries as of December 31, 1995 and 1994, and for each of the three
years in the period ended December 31, 1995, and have issued our report thereon
dated February 2, 1996; such consolidated financial statements and report are
included in Item 8 of this annual report on Form 10-K. Our audits also included
the consolidated financial statement schedule of Watkins-Johnson Company and
subsidiaries, listed in Item 14. This consolidated financial statement schedule
is the responsibility of the company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such consolidated
financial statement schedule taken as a whole, presents fairly in all material
respects the information set forth therein.
Deloitte & Touche LLP
San Francisco, California
February 2, 1996
29
SCHEDULE II
WATKINS-JOHNSON COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) PERIOD(2)
- ------------------------------- ------------ ------------ ------------- -------------
1995
Allowance for doubtful accounts $1,014,898 $18,900 $ 0 $1,033,798
=========== ========== ========== ==========
1994
Allowance for doubtful accounts $ 998,998 $16,900 $1,000 $1,014,898
=========== ========== ========== ==========
1993
Allowance for doubtful accounts $ 982,244 $21,420 $4,666 $ 998,998
=========== ========== ========== ==========
- ----------
(1) Write-off of uncollectible accounts.
(2) Reduction of accounts receivable.
30
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------
3-a *Articles of Incorporation of Watkins-Johnson Company, as amended
May 8, 1989.
3-b *By-Laws of Watkins-Johnson Company, as amended April 27, 1989
(Exhibit 3-b to Form 10-K for 1980, Commission File No. 1-5631).
10 Material Contracts
10-a *Lease and Agreement between Lindco Properties Company and
Watkins-Johnson Company commencing May 1, 1969 (Exhibit (b) I to
Form 10-K for 1969, Commission File No. 2-22436).
10-b *Lease and Agreement between Morrco Properties Company and
Watkins-Johnson Company dated October 31, 1975 (Exhibit 2(c) to Form
10-K for 1976, Commission File No. 1-5631).
10-c *Lease and Agreement between Danac Real Estate Investment
Corporation and Watkins-Johnson Company (Exhibit 6 to Form 10-K for
1972, Commission File No. 2-22436) and the amendments thereto
(Exhibit 1(b) to Form 10-K for 1976, Commission File No. 1-5631).
10-d *Building and Loan Agreement and Deed of Trust Note between Danac
Real Estate Investment Corporation and Watkins-Johnson Company
(Exhibit 7 to Form 10-K for 1972, Commission File No. 2-22436).
10-e *Promissory Note and Deed of Trust Agreement entered into between
the New England Mutual Life Insurance Company and Watkins-Johnson
Company dated May, 1978 (Exhibit 2 to Form 10-K for 1978, Commission
File No. 1-5631).
10-f *Promissory Note and Deed of Trust entered into by the Wake County
Industrial Facilities and Pollution Control Financing Authority, the
NCNB National Bank of North Carolina and Watkins-Johnson Company
dated December 28, 1984 (Exhibit 10-f to Form 10-K for 1984,
Commission File No. 1-5631).
10-g *Deferred Compensation Plan effective November 29, 1979 (Exhibit
10-g to Form 10-K for 1984, Commission File No. 1-5631).
10-h *Key Top-Management Incentive Bonus Plan Summary (Exhibit 10-h to
Form 10-K for 1985, Commission File No. 1-5631).
10-i *Employment Agreement Form, in effect for those employees listed in
the company's definitive proxy statement filed with the Commission
pursuant to Regulation 14A (Exhibit 10-i to Form 10-K for 1984,
Commission File No. 1-5631).
10-j *Deferred Compensation Plan effective November 29, 1979 as amended
March 31, 1986 (Exhibit 10-j to Form 10-K for 1986, Commission File
No. 1-5631).
10-k *Lease and Agreement between Seagate Technology and Watkins-Johnson
Company dated September 19, 1986 (Exhibit 10-k to Form 10-K for
1986, Commission File No. 1-5631).
10-k(1) *Termination of Lease and Agreement between Seagate Technology and
Watkins-Johnson Company dated September 22, 1987 (Exhibit 10-k(1) to
Form 10-K for 1987, Commission File No. 1-5631).
10-l *Severance Agreement Form, in effect for those employees listed in
the company's definitive proxy statement filed with the Commission
pursuant to Regulation 14A (Exhibit 10-l to Form 10-K for 1986,
Commission File No. 1-5631).
10-m *Form of Rights Agreement between Watkins-Johnson Company and Bank
of America National Trust and Savings Association (Exhibit 4 to the
1986 Third Quarter Form 10-Q, Commission File No. 1-5631).
31
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------
10-n *Watkins-Johnson Company 1976 Stock Option Plan, as amended
September 28, 1987 (Appendix A to the company's definitive proxy
statement dated March 1, 1988 filed with the Commission pursuant to
Regulation 14A).
10-o *Watkins-Johnson Company 1989 Stock Option Plan for nonemployee
directors (Appendix A to the company's definitive proxy statement
dated February 28, 1990 filed with the Commission pursuant to
Regulation 14A).
10-p *Watkins-Johnson Company 1976 Stock Option Plan amended and renamed
as the 1991 Stock Option and Incentive plan (Appendix A to the
company's definitive proxy statement dated February 28, 1991 filed
with the commission pursuant to Regulation 14A).
11 Statement re Computation of Per Share Earnings.
21 Subsidiaries of Watkins-Johnson Company.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
32