<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 1-5097
JOHNSON CONTROLS, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-0380010
(State of Incorporation) (I.R.S. Employer
Identification No.)
5757 North Green Bay Avenue, P.O. Box 591, Milwaukee, WI 53201
(Address of principal executive office)
Registrant's telephone number, including area code: (414) 228-1200
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 31, 1998
Common Stock $.16 2/3 Par Value 84,605,206
<PAGE> 2
JOHNSON CONTROLS, INC.
FORM 10-Q
March 31, 1998
REPORT INDEX
<TABLE>
<CAPTION>
Page No.
PART I - FINANCIAL INFORMATION: --------
<S> <C>
Consolidated Statement of Financial Position at March 31, 1998,
September 30, 1997 and March 31, 1997 ................................. 3
Consolidated Statement of Income for the Three- and Six-Month
Periods Ended March 31, 1998 and 1997................................... 4
Consolidated Statement of Cash Flows for the Six-Month Periods
Ended March 31, 1998 and 1997 ......................................... 5
Notes to Consolidated Financial Statements .............................. 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................. 9
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings ............................................... 15
Item 4. Results of Votes of Security Holders.............................. 15
Item 6. Exhibits and Reports on Form 8-K ................................ 15
SIGNATURES ............................................................... 16
</TABLE>
2
<PAGE> 3
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions)
<TABLE>
<CAPTION>
March 31, September 30, March 31,
1998 1997 1997
------------------- -------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $161.7 $111.8 $176.6
Accounts receivable - net 1,645.1 1,467.4 1,532.9
Costs and earnings in excess of billings
on uncompleted contracts 191.8 217.2 210.2
Inventories 389.2 373.4 378.0
Other current assets 437.1 359.5 335.5
---------- --------------- ------------
Current assets 2,824.9 2,529.3 2,633.2
Property, plant and equipment - net 1,564.1 1,533.0 1,464.0
Goodwill - net 1,543.0 1,560.3 1,590.3
Investments in partially-owned affiliates 170.3 144.6 146.5
Other noncurrent assets 273.3 281.4 258.2
------------ -------------- ------------
Total assets $6,375.6 $6,048.6 $6,092.2
============ =============== ============
LIABILITIES AND EQUITY
Short-term debt $552.5 $537.8 $917.1
Current portion of long-term debt 28.1 118.4 124.5
Accounts payable 1,486.5 1,341.9 1,263.2
Accrued compensation and benefits 325.9 303.3 303.7
Accrued income taxes 30.7 78.8 93.3
Billings in excess of costs and earnings
on uncompleted contracts 126.4 107.6 110.9
Other current liabilities 503.3 484.9 453.5
------------ -------------- ------------
Current liabilities 3,053.4 2,972.7 3,266.2
Long-term debt 962.6 806.4 666.7
Postretirement health and other benefits 167.7 167.2 168.1
Other noncurrent liabilities 412.4 414.4 411.4
Shareholders' equity 1,779.5 1,687.9 1,579.8
------------ -------------- ------------
Total liabilities and equity $6,375.6 $6,048.6 $6,092.2
============ ============== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share data; unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended March 31, Ended March 31,
------------------------ ----------------------------
1998 1997 1998 1997
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 3,007.3 $ 2,743.6 $ 6,063.6 $ 5,504.9
Cost of sales 2,591.0 2,368.3 5,213.1 4,722.9
----------- --------- --------- ---------
Gross profit 416.3 375.3 850.5 782.0
Selling, general and administrative expenses 289.6 264.0 575.4 540.8
Restructuring charge -- 70.0 -- 70.0
--------- --------- --------- ---------
Operating income 126.7 41.3 275.1 171.2
Interest income 2.5 1.6 4.8 3.6
Interest expense (28.9) (33.5) (59.0) (66.0)
Miscellaneous - net (0.9) 0.3 0.8 5.9
--------- --------- --------- ---------
Other income (expense) (27.3) (31.6) (53.4) (56.5)
--------- --------- --------- ---------
Income before income taxes and minority interests 99.4 9.7 221.7 114.7
Provision for income taxes 41.2 4.1 92.0 48.7
Minority interests in net earnings of subsidiaries 5.7 7.2 11.9 12.7
--------- --------- --------- ---------
Income from continuing operations 52.5 (1.6) 117.8 53.3
Discontinued operations
Income (loss) from discontinued operations, adjusted
for applicable income tax provision (benefit) of $0.5
and ($1.0), respectively, and minority interests -- 0.7 -- (1.1)
Gain on sale of discontinued operations, net of $66.0
of income taxes -- 69.0 -- 69.0
-------- --------- --------- ---------
Net income $ 52.5 $ 68.1 $ 117.8 $ 121.2
======== ========= ========= =========
Earnings available for common shareholders $ 50.1 $ 65.6 $ 113.1 $ 116.4
======== ========= ========= =========
Earnings (loss) per share from continuing operations
Basic $ 0.59 ($ 0.06) $ 1.34 $ 0.58
======== ========= ========= =========
Diluted $ 0.56 ($ 0.03) $ 1.26 $ 0.56
======== ========= ========= =========
Earnings per share
Basic $ 0.59 $ 0.78 $ 1.34 $ 1.40
======== ========= ========= =========
Diluted $ 0.56 $ 0.74 $ 1.26 $ 1.31
======== ========= ========= =========
</TABLE>
The accompanying notes are an intergral part of the financial statements
4
<PAGE> 5
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions; unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended March 31,
--------------------------------
1998 1997
---------------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations $117.8 $53.3
Adjustments to reconcile income from continuing operations to
cash provided by operating activities of continuing operations
Depreciation 152.0 142.9
Amortization of intangibles 33.4 35.4
Equity in earnings of partially-owned affiliates (7.8) (10.7)
Deferred income taxes 3.4 (20.4)
Restructuring charge - 70.0
Other (14.2) 1.8
Changes in working capital, excluding acquisition of businesses
Receivables (151.6) (92.0)
Inventories (15.0) (36.1)
Other current assets (76.4) (21.0)
Accounts payable and accrued liabilities 197.3 18.5
Accrued income taxes (48.3) (17.0)
Billings in excess of costs and earnings on uncompleted contracts 19.0 28.3
-------------- --------------
Cash provided by operating activities of continuing operations 209.6 153.0
Cash used by operating activities of discontinued operations - (8.4)
-------------- --------------
Cash provided by operating activities 209.6 144.6
-------------- --------------
INVESTING ACTIVITIES
Capital expenditures (196.8) (145.8)
Sale of property, plant and equipment - net 3.6 7.3
Acquisition of businesses, net of cash acquired - (1,230.4)
Divestiture of businesses - 645.6
Additions of long-term investments (19.5) (15.4)
Investing activities of discontinued operations - (19.5)
-------------- --------------
Cash used by investing activities (212.7) (758.2)
-------------- --------------
FINANCING ACTIVITIES
Increase in short-term debt 2.1 666.5
Issuance of long-term debt 181.2 3.6
Repayment of long-term debt (93.4) (31.0)
Payment of cash dividends (44.3) (41.9)
Net financing activities of discontinued operations - 16.5
Other 7.4 11.3
-------------- --------------
Cash provided by financing activities 53.0 625.0
-------------- --------------
Increase in cash and cash equivalents $49.9 $11.4
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statments.
5
<PAGE> 6
JOHNSON CONTROLS, INC.
Form 10-Q, March 31, 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statements
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position,
results of operations, and cash flows for the periods presented. These
financial statements should be read in conjunction with the audited
financial statements and notes thereto contained in the Company's Annual
Report to Shareholders for the year ended September 30, 1997. The results
of operations for the three and six months ended March 31, 1998 are not
necessarily indicative of the results which may be expected for the
Company's 1998 fiscal year because of seasonal and other factors.
2. Cash Flow
For purposes of the Consolidated Statement of Cash Flows, the Company
considers all investments with a maturity of three months or less at the
time of purchase to be cash equivalents.
Income taxes paid during the six months ended March 31, 1998 and 1997 (net
of income tax refunds) totaled approximately $140 million and $139
million, respectively. Total interest paid was $67 million and $66 million
for the six months ended March 31, 1998 and 1997, respectively.
3. Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method for most inventories at
domestic locations. The cost of other inventories is determined on the
first-in, first-out (FIFO) method.
Inventories were comprised of the following:
<TABLE>
<CAPTION>
March 31,
(in millions) 1998 1997
---- ----
<S> <C> <C>
Raw materials and supplies $ 180.0 $ 163.5
Work-in-process 96.6 96.3
Finished goods 151.3 159.5
------- -------
FIFO inventories 427.9 419.3
LIFO reserve (38.7) (41.3)
------- -------
LIFO inventories $ 389.2 $ 378.0
======= =======
</TABLE>
6
<PAGE> 7
4. Income Taxes
The provision for income taxes is determined by applying an estimated
annual effective income tax rate to income before income taxes. The
estimated annual effective income tax rate is based on the most recent
annualized forecast of pretax income, permanent book/tax differences, and
tax credits. It also includes the effect of any valuation allowance
expected to be necessary at the end of the year.
5. Earnings Per Share
Effective October 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share," which establishes
revised standards for computing and presenting earnings per share. Prior
period earnings per share have been restated. The following reconciles the
numerators and denominators used to calculate basic and diluted earnings
per share from continuing operations for the three- and six-month periods
ended March 31, 1998 and 1997:
Income Available to Common Shareholders (in millions)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended March 31, Ended March 31,
1998 1997 1998 1997
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Income from continuing operations $52.5 ($1.6) $117.8 $53.3
Less: Preferred stock dividends, net of tax
benefit (2.4) (2.5) (4.7) (4.8)
----- ----- ------ -----
Basic income available to common stockholders $50.1 ($4.1) $113.1 $48.5
----- ----- ------ -----
Effect of Dilutive Securities:
Preferred stock dividends, net of tax benefit 2.4 2.5 4.7 4.8
Less: Compensation expense, net of tax, arising
from assumed conversion of preferred stock
(1.3) (1.4) (2.6) (2.7)
----- ----- ----- -----
Diluted income available to common stockholders
after assumed conversions $51.2 ($3.0) $115.2 $50.6
===== ====== ====== =====
</TABLE>
Weighted Average Shares Outstanding (in millions)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended March 31, Ended March 31,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic weighted average shares outstanding 84.4 83.6 84.2 83.2
------ ------ ------ ------
Effect of Dilutive Securities:
Stock options 1.7 1.4 1.7 1.4
Convertible preferred stock 5.5 5.9 5.5 5.9
------ ------ ------ ------
Diluted weighted average shares outstanding 91.6 90.9 91.4 90.5
====== ====== ====== ======
</TABLE>
7
<PAGE> 8
6. Acquisition and Divestiture of Businesses
Effective October 1, 1996, the Company completed the acquisition of Prince
Holding Corporation (Prince) for approximately $1.3 billion. Prince, based
in Holland, Michigan, supplies automotive interior systems and components
including overhead systems and consoles, door panels and floor consoles.
The acquisition was accounted for as a purchase. The excess of the
purchase price over the fair value of the acquired net assets, which
approximated $1.1 billion, was recorded as goodwill. The Company used the
after-tax proceeds from the sale of its Plastic Container division (PCD)
and debt securities to finance the purchase.
On February 28, 1997, the Company completed the sale of PCD to
Schmalbach-Lubeca AG/Continental Can Europe (a member of the VIAG Group)
for approximately $650 million, with a portion of the proceeds deferred.
The Company recorded a gain on the sale of $135 million ($69 million,
after-tax). Accordingly, prior year consolidated financial statements
reflect PCD as a discontinued operation. The results of discontinued
operations do not reflect any interest expense or management fees
allocated by the Company. Revenues of PCD were $242 million for the five
months ended February 28, 1997 and are not included in sales as reported
in the Consolidated Statement of Income. Earnings (loss) per basic and
diluted share from discontinued operations were $.01 for the three months
ended March 31, 1997 and ($.01) for the six months ended March 31, 1997.
Earnings per basic and diluted share from the gain on sale of discontinued
operations were $.83 and $.76, respectively, for both the three- and
six-month periods ended March 31, 1997.
7. Restructuring Charge
In the second quarter of fiscal 1997, the Company recorded a restructuring
charge, including related asset writedowns, of $70.0 million ($40.3
million or $0.48 per basic share and $0.44 per diluted share, after-tax)
involving the Company's automotive and controls segments. During the
second quarter of fiscal 1998, $2.5 million of employee severance and
termination benefits and related costs associated with automotive and
controls segment restructuring actions were incurred, reducing the reserve
balance to $8.7 million at March 31, 1998. As part of these actions,
approximately 75 employees separated from the Company. It is expected that
the restructuring initiatives will be completed by fiscal year-end.
8. Contingencies
The Company is involved in a number of proceedings and potential
proceedings relating to environmental matters. Although it is difficult to
estimate the liability of the Company related to these environmental
matters, the Company believes that these matters will not have a
materially adverse effect upon its capital expenditures, earnings or
competitive position.
8
<PAGE> 9
Additionally, the Company is involved in a number of product liability and
various other suits incident to the operation of its businesses. Insurance
coverages are maintained and estimated costs are recorded for claims and
suits of this nature. It is management's opinion that none of these will
have a materially adverse effect on the Company's financial position,
results of operations or cash flows.
9. Subsequent Events
The Company announced on April 27, 1998 that it will acquire Becker Group,
a privately held automotive interiors supplier, for approximately
$550-$600 million, plus the assumption of Becker Group's debt, which is
expected to approximate $300-$350 million. Becker Group is based in
Sterling Heights, Michigan and Wuppertal, Germany. It is a major supplier
of interior systems, particularly door systems and instrument panels. The
acquisition, subject to certain conditions including regulatory approvals,
is expected to be completed in the fourth quarter of fiscal 1998 and will
be accounted for as a purchase.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1998
AND MARCH 31, 1997
CONTINUING OPERATIONS
Consolidated net sales grew by 10% in the second quarter of fiscal 1998,
improving to $3,007 million from $2,744 million for the prior year quarter.
Automotive segment sales of $2,184 million for the quarter were 10% higher than
the prior year's $1,980 million. The growth was primarily attributable to
increased seating and interior system sales in North America, resulting from new
automotive contracts and continuing strong demand for the vehicles the Company
supplies. The segment's strong presence in the sport utility and light truck
markets, including programs with the General Motors minivan and Jimmy/Blazer,
the Ford Ranger and Expedition and the Chrysler Jeep, helped the segment's sales
outpace the modest increase in the North American vehicle production level.
European seating sales for the quarter increased over the prior year period
before the effect of lower currency exchange rates, due to the launch of new
seating platforms and higher production levels. Seating sales in South America
also improved as the Company continues to successfully launch new seating
programs in that market. Automotive battery sales declined slightly from the
prior year period due to lower unit shipments resulting from the unusually warm
winter temperatures.
Controls segment sales improved to $823 million for the second quarter, an 8%
increase from the prior period's $764 million. The increase was led by higher
integrated facilities management sales in the commercial buildings market
worldwide, reflecting the start of a number of significant new contracts and the
expansion of existing contracts. Sales of
9
<PAGE> 10
installed control systems and services to the North American new construction
and existing building markets also increased from the prior year quarter.
Control systems orders received in the quarter were higher than the prior year's
quarter, due principally to order growth in North America for performance
contracting and retrofit control systems.
Consolidated operating income for the second quarter of fiscal 1998 rose to $127
million, 14% higher than the prior year's $111 million (before $70 million
restructuring charge; see the discussion that follows). Both of the Company's
operating segments displayed operating income growth during the second quarter.
The automotive segment's operating income increased from the prior year period
as a result of higher seating and interior system sales, operating improvements,
and the absence of prior period strike related costs. Operating income
improvements were partially offset by start-up costs associated with the
segment's seating operations in South America as the segment continues to build
a leading position as a seating supplier in that region.
Controls segment operating income for the second quarter improved from the prior
year due to higher volumes, improved gross margins, and lower overhead by the
domestic control systems installation and services business and integrated
facilities management operations worldwide.
The $70 million ($40 million or $.44 per diluted share, after-tax) restructuring
charge recorded in the second quarter of fiscal 1997 involved the automotive and
controls segments. The automotive initiatives primarily related to European
operations where certain manufacturing capacity was realigned with future
customer sourcing requirements, and product development resources were
consolidated. The charge associated with the controls segment principally
addressed the Company's decision to restructure certain low-margin service
activities that were outside its core controls and facilities management
businesses which serve the commercial and government markets.
Net interest expense decreased $6 million from the comparable prior year
quarter. The decrease resulted from the Company's use of the proceeds from the
sale of the discontinued Plastic Container division (see "Discontinued
Operations") and its operating cash flows to reduce short-term debt and related
interest expense.
The effective income tax rate associated with continuing operations was 41.5%
for the three-month period ended March 31, 1998 compared with 42.5% for the
comparable quarter last year. The effective rate declined due to improved
performance by certain of the Company's European operations, partially offset by
the losses of start-up operations in emerging markets.
10
<PAGE> 11
Income from continuing operations of $53 million for the second quarter was 36%
higher than the prior year's income of $39 million (before restructuring
charge). The current quarter's growth was due to improvements in operating
income and reduced interest expense, as noted previously. Diluted earnings per
share from continuing operations for the quarter ended March 31, 1998 were $.56,
up from the prior year's $.41 (before restructuring charge).
DISCONTINUED OPERATIONS
On February 28, 1997, the Company completed the sale of its Plastic Container
division (PCD) to Schmalbach-Lubeca AG/Continental Can Europe (a member of the
VIAG Group) for approximately $650 million, with a portion of the proceeds
deferred. The Company recorded a gain on the sale of $135 million ($69 million,
after-tax). Accordingly, operating results, net assets and cash flows of PCD
have been segregated as discontinued operations in the accompanying consolidated
financial statements. Earnings (loss) per basic and diluted share from
discontinued operations were $.01 for the three months ended March 31, 1997 and
($.01) for the six months ended March 31, 1997. Earnings per basic and diluted
share from the gain on sale of discontinued operations were $.83 and $.76,
respectively, for both the three- and six-month periods ended March 31, 1997.
COMPARISON OF OPERATING RESULTS FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 1998
AND MARCH 31, 1997
CONTINUING OPERATIONS
Consolidated net sales totaled $6,064 million for the six months ended March 31,
1998, an increase of 10% from the same period one year ago. Automotive segment
growth was the principal source of the sales increase.
Automotive segment sales for the first half of fiscal 1998 improved 13% to
$4,513 million, up from $4,010 in the prior year. Higher seating and interior
system sales in North America were the primary source of the current year's
increase. Seating and interior system sales increased at a faster rate than the
North American vehicle production level due to new contracts and the continuing
strong demand for vehicles that the Company supplies. European seating sales
increased over the prior year before the effect of lower currency exchange
rates. Seating sales in South America improved as the Company continues to
successfully launch new seating programs in that market. Automotive battery
sales also improved over the prior year period.
Controls segment sales grew to $1,551 million for the first six months of the
year, a 4% improvement from the prior period's $1,495 million. The integrated
facilities management business demonstrated strong growth in the commercial
buildings market worldwide, reflecting the start of a number of significant new
contracts and the expansion of existing contracts. North American sales of
installed control systems and services to the new construction and existing
building markets also increased from the prior year period. Control systems
orders for the first half of the year were higher than the prior
11
<PAGE> 12
year, due principally to domestic order growth for performance contracting and
retrofit control systems.
The overall sales growth experienced in the first half of fiscal 1998 is
expected to continue during the remainder of the year. Management expects the
automotive segment's sales to increase approximately 8% to 13% for the full
year. The projected increase is due to the launch of new seating programs
worldwide and the expected strength of vehicle production levels in North
America and Europe. Controls segment sales for the year are expected to improve
by 5% to 10%. Continued growth in integrated facilities management in the
domestic commercial market and higher systems retrofit and service activities
are expected to be the primary sources of the increased sales.
Consolidated operating income for the first half of 1998 was $275 million, a 14%
increase from the prior year's $241 million (before the $70 million
restructuring charge).
Automotive segment operating income increased from the prior year period, led by
higher income from the segment's European seating systems business, due to
reduced engineering and operating costs as newer seating programs continue to
mature. This increase, coupled with improvements in domestic seating and
interior systems operating income, more than offset start-up costs associated
with the segment's seating operations in South America and the Asia/Pacific
region.
Controls segment operating income for the first half of fiscal 1998 improved
from the prior year period due to higher volumes, improved gross margins, and
lower overhead in the domestic systems installation and services business and
integrated facilities management operations worldwide.
Other expense for the first half of 1998 decreased $3 million compared to the
prior year. Net interest expense decreased $8 million resulting from the
Company's use of the proceeds from the sale of PCD and its operating cash flows
to reduce short-term debt and related interest expense. Miscellaneous income-net
decreased approximately $5 million, due mostly to reduced equity income.
The effective income tax rate on continuing operations was 41.5% for the first
half of 1998 compared to 42.5% for the same period last year. The effective rate
declined due to improved performance by certain of the Company's European
operations, partially offset by the losses of start-up operations in emerging
markets.
The Company's income from continuing operations for the first six months of
fiscal 1998 was $118 million, an increase of 26% from the prior year's total of
$94 million (before $40 million restructuring charge, after-tax). This increase
was due to the improvements in operating income and reduced net interest
expense, as noted above. Diluted earnings per share from continuing operations
were $1.26, up from $1.00 per diluted share (before restructuring charge of $.44
per diluted share) in the prior year.
12
<PAGE> 13
COMPARISON OF FINANCIAL CONDITION
Working Capital and Cash Flow
The Company's negative working capital was $229 million at March 31, 1998,
compared with negative $443 million and negative $633 million at September 30,
1997 and March 31, 1997, respectively. The level of negative working capital has
steadily decreased since the first quarter of fiscal 1997, when working capital
was significantly affected by the Company's issuance of short-term debt to
finance the acquisition of Prince Holding Corporation. Since that time, the
Company has used the proceeds from the sale of PCD and its operating cash flows
to reduce short-term debt and improve working capital. Working capital,
excluding cash and debt, increased from fiscal year-end mostly as the result of
higher accounts receivable, but declined compared with the prior year period,
due largely to increased accounts payable.
Operating activities of continuing operations provided cash of $210 million
during the first half of the year compared to $153 million in the prior year
period. The increased cash flow was primarily attributable to higher income and
increased accounts payable, partially offset by the non-cash effect of the prior
period's restructuring charge.
Capital Expenditures and Other Investments
Capital expenditures for property, plant and equipment related to continuing
operations were approximately $197 million for the first six months of fiscal
1998, an increase of $51 million from the amount incurred during the first half
of fiscal 1997. Management projects that capital spending for the full year will
be approximately $375-$400 million. The majority of the spending has been, and
will continue to be, for new automotive seating and interior product lines and
facilities. Cost reduction projects in both the automotive and controls segments
have been initiated during the first half of the fiscal year and are planned to
continue during the rest of the year.
Investments in partially-owned affiliates of $170 million at March 31, 1998 were
$26 million higher than the balance at fiscal year-end. The increase was due
mostly to the recording of equity income, principally from automotive segment
affiliates, and the formation of a number of new joint ventures by both the
automotive and controls segments in the United States and abroad.
Capitalization
The Company's total capitalization at March 31, 1998 of $3,323 million included
short-term debt of $552 million, long-term debt, including current portion, of
$991 million and shareholders' equity of $1,780 million. Total capitalization at
September 30, 1997 and March 31, 1997 was $3,151 million and $3,288 million,
respectively. Total debt as a percentage of total capitalization was 46% at
March 31, 1998, unchanged from the percentage at fiscal year-end and less than
the 52% level one year ago. The decline from the prior year period reflects the
Company's use of the after-tax proceeds from the sale of PCD and operating cash
flows to reduce its short-term debt.
13
<PAGE> 14
On February 3, 1998, the Company refinanced a portion of its commercial paper
borrowings by issuing $175 million of notes. The 6.3% notes, due in 2008, were
issued under the $1.5 billion shelf registration statement on file with the
Securities and Exchange Commission.
The Company believes its capital resources and liquidity position at March 31,
1998 are adequate to meet projected needs. Requirements for working capital,
capital expenditures, dividends and debt maturities in fiscal 1998 will continue
to be funded from operations, supplemented by short-term borrowings, if
required, to meet peak seasonal needs.
Backlog
The Company's backlog relates to the controls segment's systems installation and
services business, which derives a significant portion of its revenues from
long-term contracts that are accounted for using the percentage-of-completion
method. The unearned backlog of commercial building systems and services
contracts (excluding integrated facilities management) to be executed within the
next year at March 31, 1998 was $838 million, compared with $760 million at
September 30, 1997 and $777 million at March 31, 1997. The increase from
September 30 and the prior year primarily represents higher performance
contracting and systems retrofit activity in North America.
Pending Acquisition
The Company announced on April 27, 1998 that it will acquire Becker Group, a
privately held automotive interiors supplier, for approximately $550-$600
million, plus the assumption of Becker Group's debt, which is expected to
approximate $300-$350 million. Becker Group is based in Sterling Heights,
Michigan and Wuppertal, Germany. It is a major supplier of interior systems,
particularly door systems and instrument panels. Becker Group is expected to
have 1998 sales of approximately $1.3 billion. The acquisition, subject to
certain conditions including regulatory approvals, is expected to be completed
in the fourth quarter of fiscal 1998 and will be accounted for as a purchase. It
is anticipated that the acquisition will be financed with debt.
Other Matters
The Company has established an ongoing process to identify and resolve the
business issues associated with the Year 2000. A global team of professionals
has been assigned responsibility for addressing the business issues and
monitoring progress toward their resolution. The Company is also participating
in industry-wide efforts on Year 2000 issues that involve its customers and
suppliers. In addition, executive management regularly monitors the status of
the Company's Year 2000 remediation plans. The Company has not identified any
remediation costs that are expected to be material to its operating results or
financial condition. However, if the Company, its customers or vendors are
unable to complete critical Year 2000 readiness efforts in a timely manner, it
could result in a material financial risk. Management believes it is devoting
the necessary resources to resolve all significant Year 2000 issues in a timely
manner.
14
<PAGE> 15
Cautionary Statements for Forward-Looking Information
The Company has made forward-looking statements in this document that are
subject to risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future risks preceded by, following
or that include the words "believes," "expects," "anticipates" or similar
expressions. For those statements, the Company cautions that the numerous
important factors discussed elsewhere in this document and in the Company's Form
8-K filing (dated October 30, 1997), could affect the Company's actual results
and could cause its actual consolidated results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, the
Company.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
There have been no significant changes in status since the last Report.
Item 4. Results of Votes of Security Holders
Reference is made to Item 4 of the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1997 for a description of the results of votes of
security holders at the Annual Meeting of Shareholders held January 28, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12 Statement regarding the computation of the ratio of earnings
to fixed charges.
27 Financial Data Schedule (electronic filing only).
(b) There were no reports on Form 8-K filed during the three months
ended March 31, 1998.
15
<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.
JOHNSON CONTROLS, INC.
Date: May 15 , 1998 By: Stephen A. Roell
Vice President and
Chief Financial Officer
16
<PAGE> 1
EXHIBIT 12
JOHNSON CONTROLS, INC.
COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES
(Dollars in millions)
<TABLE>
<CAPTION>
For the Six Months
Ended March 31, 1998
--------------------
<S> <C>
Net income $117.8
Provision for income taxes 92.0
Undistributed earnings of partially-owned affiliates (3.3)
Minority interests in net earnings of subsidiaries 11.9
Amortization of previously capitalized interest 1.5
--------
219.9
--------
Fixed charges:
Interest incurred and amortization of debt expense 65.8
Estimated portion of rent expense 17.8
--------
Fixed charges 83.6
Less: Interest capitalized during the period (3.5)
--------
80.1
--------
Earnings $300.0
========
Ratio of earnings to fixed charges 3.6
========
</TABLE>
For the purpose of computing this ratio, "earnings" consist of (a)
income from continuing operations before income taxes (adjusted for
undistributed earnings or recognized losses of partially-owned
affiliates which are less than 50% owned, minority interests in net
earnings of subsidiaries, and amortization of previously capitalized
interest), plus (b) fixed charges, minus (c) interest capitalized
during the period. "Fixed charges" consist of (a) interest incurred
and amortization of debt expense plus (b) the portion of rent expense
representative of the interest factor.
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 161,700
<SECURITIES> 0
<RECEIVABLES> 1,855,800
<ALLOWANCES> 18,900
<INVENTORY> 389,200
<CURRENT-ASSETS> 2,824,900
<PP&E> 3,254,300
<DEPRECIATION> 1,690,200
<TOTAL-ASSETS> 6,375,600
<CURRENT-LIABILITIES> 3,053,400
<BONDS> 962,600
0
141,900
<COMMON> 14,400
<OTHER-SE> 1,623,200
<TOTAL-LIABILITY-AND-EQUITY> 6,375,600
<SALES> 6,063,600
<TOTAL-REVENUES> 6,063,600
<CGS> 5,213,100
<TOTAL-COSTS> 5,213,100
<OTHER-EXPENSES> 567,500
<LOSS-PROVISION> 2,300
<INTEREST-EXPENSE> 59,000
<INCOME-PRETAX> 221,700
<INCOME-TAX> 92,000
<INCOME-CONTINUING> 117,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 117,800
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.26
</TABLE>
