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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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, 1999
----- -----------------------------
Common Stock $.16 2/3 Par Value 85,191,289
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JOHNSON CONTROLS, INC.
----------------------
FORM 10-Q
MARCH 31, 1999
REPORT INDEX
------------
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I - FINANCIAL INFORMATION:
Consolidated Statement of Financial Position at March 31, 1999,
September 30, 1998 and March 31, 1998 ................................. 3
Consolidated Statement of Income for the Three- and Six-Month
Periods Ended March 31, 1999 and 1998................................... 4
Consolidated Statement of Cash Flows for the Six-Month Periods
Ended March 31, 1999 and 1998 ......................................... 5
Notes to Consolidated Financial Statements .............................. 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................. 9
Quantitative and Qualitative Disclosures About Market Risk................ 16
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings ............................................... 17
Item 4. Results of Votes of Security Holders.............................. 17
Item 6. Exhibits and Reports on Form 8-K ................................ 17
SIGNATURES ............................................................... 18
</TABLE>
2
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JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30, MARCH 31,
1999 1998 1998
----------------- ------------------- -----------------
(unaudited) (unaudited)
ASSETS
<S> <C> <C> <C>
Cash and cash equivalents $268.8 $134.0 $161.7
Accounts receivable - net 2,008.0 1,821.1 1,645.1
Costs and earnings in excess of billings
on uncompleted contracts 207.7 191.7 191.8
Inventories 469.3 428.2 389.2
Net assets held for sale 46.8 231.9 -
Other current assets 597.3 597.3 437.1
----------------- ------------------- -----------------
Current assets 3,597.9 3,404.2 2,824.9
Property, plant and equipment - net 1,981.0 1,882.9 1,564.1
Goodwill - net 2,126.5 2,084.5 1,543.0
Investments in partially-owned affiliates 219.0 166.2 170.3
Other noncurrent assets 447.7 404.3 273.3
----------------- ------------------- -----------------
Total assets $8,372.1 $7,942.1 $6,375.6
================= =================== =================
LIABILITIES AND EQUITY
Short-term debt $630.1 $1,289.5 $552.5
Current portion of long-term debt 91.7 39.4 28.1
Accounts payable 1,935.7 1,625.2 1,486.5
Accrued compensation and benefits 377.9 376.1 325.9
Accrued income taxes 108.2 119.6 30.7
Billings in excess of costs and earnings
on uncompleted contracts 150.3 127.5 126.4
Other current liabilities 878.3 711.1 503.3
----------------- ------------------- -----------------
Current liabilities 4,172.2 4,288.4 3,053.4
Long-term debt 1,292.3 997.5 962.6
Postretirement health and other benefits 166.8 166.7 167.7
Other noncurrent liabilities 600.7 548.1 412.4
Shareholders' equity 2,140.1 1,941.4 1,779.5
----------------- ------------------- -----------------
Total liabilities and equity $8,372.1 $7,942.1 $6,375.6
================= =================== =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
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JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share data; unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
-------------------------------------- -------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales $3,880.3 $3,007.3 $7,753.4 $6,063.6
Cost of sales 3,352.4 2,591.0 6,697.0 5,213.1
----------------- ----------------- ----------------- -----------------
Gross profit 527.9 416.3 1,056.4 850.5
Selling, general and administrative
expenses 368.2 289.6 713.5 575.4
----------------- ----------------- ----------------- -----------------
Operating income 159.7 126.7 342.9 275.1
Interest income 4.8 2.5 7.9 4.8
Interest expense (41.3) (28.9) (82.4) (59.0)
Gain on sale of businesses 54.6 - 54.6 -
Miscellaneous - net 2.5 (0.9) 1.3 0.8
----------------- ----------------- ----------------- -----------------
Other income (expense) 20.6 (27.3) (18.6) (53.4)
----------------- ----------------- ----------------- -----------------
Income before income taxes and
minority interests 180.3 99.4 324.3 221.7
Provision for income taxes 73.1 41.2 131.4 92.0
Minority interests in net earnings of
subsidiaries 8.9 5.7 14.9 11.9
----------------- ----------------- ----------------- -----------------
Net income $98.3 $52.5 $178.0 $117.8
================= ================= ================= =================
Earnings available for common
shareholders $95.9 $50.1 $173.3 $113.1
================= ================= ================= =================
Earnings per share
Basic $1.13 $0.59 $2.04 $1.34
================= ================= ================= =================
Diluted $1.05 $0.56 $1.91 $1.26
================= ================= ================= =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
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JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions, unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MARCH 31,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $178.0 $117.8
Adjustments to reconcile net income to cash provided by operating activities
Depreciation 189.4 152.0
Amortization of intangibles 40.0 33.4
Equity in earnings of partially-owned affiliates, net of dividends received 12.2 (4.7)
Deferred income taxes (0.9) 3.4
Gain on sale of businesses (54.6) -
Other 5.6 (14.2)
Changes in working capital, excluding acquisition and divestiture of businesses
Receivables (46.2) (151.6)
Inventories (39.3) (15.0)
Other current assets 32.2 (76.4)
Accounts payable and accrued liabilities 313.7 197.3
Accrued income taxes (33.7) (48.3)
Billings in excess of costs and earnings on uncompleted contracts 21.1 19.0
------------- -------------
Cash provided by operating activities 617.5 212.7
------------- -------------
INVESTING ACTIVITIES
Capital expenditures (240.5) (196.8)
Sale of property, plant and equipment - net 26.0 3.6
Acquisition of businesses, net of cash acquired (94.7) -
Divestiture of businesses 287.1 -
Additions of long-term investments (67.9) (22.6)
------------- -------------
Cash used by investing activities (90.0) (215.8)
------------- -------------
FINANCING ACTIVITIES
(Decrease) increase in short-term debt - net (662.9) 2.1
Issuance of long-term debt 324.8 181.2
Repayment of long-term debt (22.2) (93.4)
Payment of cash dividends (48.1) (44.3)
Other 15.7 7.4
------------- -------------
Cash (used) provided by financing activities (392.7) 53.0
------------- -------------
Increase in cash and cash equivalents $134.8 $49.9
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
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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, 1998. The results
of operations for the three and six months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the
Company's 1999 fiscal year because of seasonal and other factors. Certain
amounts in the Consolidated Statement of Cash Flows have been reclassified
to conform to the current year's presentation.
2. ACQUISITION OF BUSINESS
Effective July 1, 1998, the Company completed the acquisition of Becker
Group for approximately $548 million, plus the assumption of approximately
$372 million of debt. Becker Group, based in Michigan and Germany, is a
major supplier of automotive interior systems. The acquisition was
accounted for as a purchase. The excess of the purchase price over the
estimated fair value of the acquired net assets, which approximated $500
million, was recorded as goodwill.
As part of the Becker Group acquisition, the Company recorded a
restructuring reserve of $48 million. The reserve was established for
anticipated costs associated with consolidating certain of Becker Group's
European and domestic manufacturing, engineering and administrative
operations with existing capacity of the Company. The majority of the
reserve was attributable to expected employee severance and termination
benefit costs and plant closure costs. During the first half of fiscal
1999, approximately $1 million of employee severance and termination costs
associated with the consolidation of domestic operations was incurred. In
addition, reserves of approximately $7 million were reversed during the
second quarter of fiscal 1999, with a corresponding reduction to goodwill
and prepaid taxes. Accordingly, the reserve balance at March 31, 1999
totaled approximately $40 million.
Certain businesses acquired in the Becker Group purchase have been
classified as net assets held for sale in the Consolidated Statement of
Financial Position. At the date of acquisition, the Company identified
three businesses of Becker Group that were outside of the Company's core
operations and, as such, would be sold. The net assets of the businesses
were valued at fair value less estimated costs to sell, including cash
flows during the holding period. The Company completed the sale of two of
these businesses during the first six months of fiscal 1999 for
approximately $184 million and expects to complete the sale of the final
business within the current year. The operating results of these
businesses, which were not material for the first half of fiscal 1999,
were excluded from consolidated operating results and no gain or loss was
recorded upon sale of the two divested businesses.
6
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3. DIVESTITURE OF BUSINESSES
On March 1, 1999, the Company completed the sale of the Automotive Systems
Group's Industrial Battery Division for approximately $135 million. The
Industrial Battery Division had sales of approximately $87 million for the
fiscal year ended September 30, 1998. The Company also recorded a loss
related to the disposal of a small Controls Group operation in the United
Kingdom. The net gain on these transactions was $54.6 million ($32.5
million or $.38 per basic share and $.35 per diluted share, after-tax).
4. 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, 1999 and 1998 (net
of income tax refunds) totaled approximately $121 million and $140
million, respectively. Total interest paid was $83 million and $67 million
for the six months ended March 31, 1999 and 1998, respectively. The
increase was principally due to financing costs associated with the
acquisition of Becker Group.
5. 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) 1999 1998
---------- ----------
<S> <C> <C>
Raw materials and supplies $232.4 $180.0
Work-in-process 86.0 96.6
Finished goods 187.5 151.3
----- -----
FIFO inventories 505.9 427.9
LIFO reserve (36.6) (38.7)
----- -----
LIFO inventories $469.3 $389.2
====== ======
</TABLE>
6. LONG-TERM DEBT
In January 1999, the Company borrowed a total of 258 million euro from
five banks to refinance on a long-term basis a portion of its commercial
paper associated with the Becker Group acquisition in July 1998. The
euro-denominated loans, equivalent to $282 million at the respective loan
inception dates, generally mature in five years. Interest, based on the
floating Euribor rate, is due at periodic intervals ranging from one to
six months. At the Company's option, the loans may be converted from
floating to fixed rates of interest at any interest payment date.
7
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7. INCOME TAXES
The provision for income taxes is determined by applying an estimated
annual effective income tax rate to income before income taxes. The 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.
8. COMPREHENSIVE INCOME
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
which establishes new standards for reporting and display of comprehensive
income and its components. Comprehensive income is defined as the sum of
net income and all other non-owner changes in equity, such as foreign
currency translation adjustments. Comprehensive income for the three
months ended March 31, 1999 and 1998 was $78 million and $40 million,
respectively. Comprehensive income for the six months ended March 31, 1999
and 1998 was $217 million and $109 million, respectively. The differences
between comprehensive income and net income for all periods reported
represent foreign currency translation adjustments.
9. EARNINGS PER SHARE
The following table reconciles the numerators and denominators used to
calculate basic and diluted earnings per share for the three- and
six-month periods ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Six Months
Ended March 31, Ended March 31,
(in millions) 1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income Available to Common Shareholders
Net Income $98.3 $52.5 $178.0 $117.8
Preferred stock dividends, net of tax benefit (2.4) (2.4) (4.7) (4.7)
---------- ---------- ---------- ----------
Basic income available to common shareholders $95.9 $50.1 $173.3 $113.1
Net Income $98.3 $52.5 $178.0 $117.8
Effect of Dilutive Securities:
Compensation expense, net of tax, arising from
assumed conversion of preferred stock (1.3) (1.3) (2.4) (2.6)
---------- ---------- ---------- ----------
Diluted income available to common shareholders $97.0 $51.2 $175.6 $115.2
========== ========== ========== ==========
Weighted Average Shares Outstanding
Basic weighted average shares outstanding 85.1 84.4 84.9 84.2
Effect of Dilutive Securities:
Stock options 1.8 1.7 1.7 1.7
Convertible preferred stock 5.3 5.5 5.3 5.5
---------- ---------- ---------- ----------
Diluted weighted average shares outstanding 92.2 91.6 91.9 91.4
========== ========== ========== ==========
</TABLE>
8
<PAGE> 9
10. 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.
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.
11. FUTURE ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement will be effective October 1, 1999 for the Company. It requires
all derivative instruments to be recorded in the statement of financial
position at fair value. The change in fair value of a derivative is
required to be recorded each period in current earnings or other
comprehensive income, depending on whether the derivative is designated as
part of a hedge transaction and if so, the type of hedge transaction. The
effect of adoption of this statement on the Company's earnings or
statement of financial position has not yet been determined.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1999
AND MARCH 31, 1998
Consolidated net sales increased to $3.9 billion in the second quarter of fiscal
1999, rising 29% from the prior year's sales of $3.0 billion.
The Automotive Systems Group's sales were $2.9 billion for the quarter, 31%
higher than the prior year's $2.2 billion. Automotive seating and interior
systems sales grew as a result of strong demand in Europe and North America,
with sales in both markets bolstered by higher vehicle production levels. Sales
of seating systems in Europe rose sharply due to new and newly redesigned
programs and as a result of the success of vehicles for which the Company has
existing supply contracts. Sales growth in Europe also resulted from the
addition of Becker Group, the interior systems supplier acquired in July 1998.
Seating and interior systems sales in North America were higher, with volume
increasing at a faster rate than the North American vehicle production level due
to the Company's programs with top-selling vehicles. Sales of automotive
batteries also increased due to higher unit shipments, primarily reflecting
market share growth with aftermarket customers.
9
<PAGE> 10
Controls Group sales reached $1.0 billion, a 24% increase from the prior
period's $824 million. Integrated facilities management sales increased in North
America, as the business continues to add significant new accounts and expand
existing contracts. Control systems and services sales increased, experiencing
growth in the North American existing buildings market. Controls Group results
also benefited from the segment's expanded position in the Japanese
nonresidential buildings market. This includes the current year consolidation of
Yokogawa Johnson Controls (YJC) Corporation, a Japanese control systems and
services affiliate that is now majority-owned. In addition, the Controls Group
acquired a controlling management interest in Tokyo Biso Kogyo (TBK), a leading
Japanese facilities management provider. The quarter's increased sales also
reflect the addition of Cardkey (Cardkey) Systems, a provider of electronic
access controls and security management systems acquired in December 1998.
Orders for control systems in the quarter exceeded the prior year period,
stemming from the addition of YJC and Cardkey, as well as from organic growth.
Consolidated operating income for the second quarter of fiscal 1999 increased to
$160 million, up 26% from the prior year's $127 million. Both of the Company's
operating segments demonstrated strong operating income growth in the second
quarter.
Automotive Systems Group operating income increased from the prior year period.
Higher sales volume of seating and interior systems in Europe, aided by the
addition of Becker Group, was the primary contributor to the increase. Higher
seating sales in North America also contributed to the segment's increased
operating income. The current quarter's operating income growth was lower than
segment sales growth due to the higher proportion of lower-margin European sales
and participation in newer seating platforms.
Controls Group operating income for the second quarter increased compared to the
prior year period. Increased domestic control systems and services volume and
improved productivity contributed to the increase. The business' productivity
gains were associated with continued cost control efforts and improved contract
execution. Segment operating income also benefited from the consolidation of
YJC.
Net interest expense increased $10 million from the comparable prior year
quarter. The increase is due primarily to the financing associated with the
Becker Group acquisition.
The $54.6 million gain on the sale of businesses primarily resulted from the
sale of the Automotive Systems Group's Industrial Battery Division for
approximately $135 million on March 1, 1999. The Industrial Battery Division had
sales of approximately $87 million for the fiscal year ended September 30, 1998.
The Company also recorded a loss related to the disposal of a small Controls
Group operation in the United Kingdom. The net gain on these transactions was
$54.6 million ($32.5 million or $.38 per basic share and $.35 per diluted share,
after-tax).
The effective income tax rate was 40.5% for the three-month period ended March
31, 1999 compared to 41.5% for the comparable quarter last year. The effective
rate declined due to improved performance by certain of the Company's European
operations and the related use of tax loss carryforwards, partially offset by
losses of start-up operations in emerging markets.
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Net income for the second quarter of fiscal 1999 rose to $98 million, or $1.05
per diluted share. The Company's current quarter net income before the $32
million after-tax gain on sale of businesses was $66 million, up 25% from the
prior period's $53 million. The current quarter's growth reflects increased
operating income, partially offset by higher interest expense. Diluted earnings
per share for the current quarter (before the gain on sale of businesses of $.35
per diluted share, after-tax) were $0.70, up from $0.56 in the prior year.
COMPARISON OF OPERATING RESULTS FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 1999
AND MARCH 31, 1998
Consolidated net sales reached $7.8 billion for the six months ended March 31,
1999, a 28% increase from sales of $6.1 billion for the prior year period.
Automotive Systems Group sales totaled $5.9 billion for the first half of fiscal
1999, increasing 30% from prior year sales of $4.5 billion. The segment's sales
growth was attributable to higher seating and interior systems volume in Europe
and North America. Sales in Europe grew substantially compared to the prior year
period, reflecting new programs, increased production levels and the addition of
Becker Group. Seating and interior systems sales in North America were higher,
with volume increasing at a faster rate than the North American vehicle
production level due to the Company's programs with top-selling vehicles.
Seating sales in South America were flat, reflecting the region's depressed
economic condition. Sales of automotive batteries were up over the prior year
period due to higher unit shipments to aftermarket customers.
Controls segment sales of $1.9 billion for the first six months of the year were
22% higher than the prior period's $1.6 billion. Integrated facilities
management sales increased worldwide, resulting from the addition of significant
new accounts and the expansion of existing contracts. Sales of control systems
and services also increased, led by growth in the North American existing
buildings market and the acquisition of Cardkey. Controls Group results also
benefited from the segment's expanded presence in Japan, including the current
year consolidation of YJC and the acquisition of a controlling management
interest in TBK, as previously described. Control systems orders for the first
half of the year exceeded the prior year, due principally to the addition of YJC
and Cardkey and organic growth.
Strong overall sales growth is expected to continue during the remainder of the
fiscal year. Automotive Systems Group sales are expected to increase
approximately 20% to 25% for the full year. Contracts to supply seating and
interior systems for top-selling new vehicles, the addition of Becker Group and
continued growth in automotive battery sales are expected to propel the
segment's growth. Management anticipates that Controls Group sales will rise 15%
to 20%. Growth in integrated facilities management in the North American and
European commercial markets, higher domestic systems and services sales to the
existing buildings market and an expanded presence in the Japanese
nonresidential buildings market are expected to be the primary sources of the
increased sales.
11
<PAGE> 12
Consolidated operating income for the first six months of fiscal 1999 was $343
million, 25% higher than the prior year's $275 million. The Automotive Systems
and Controls Groups each achieved double-digit growth in the first half of the
fiscal year.
Automotive Systems Group operating income increased from the prior year period.
Higher sales volume of seating and interior systems in Europe and North America,
the addition of Becker Group and strong automotive battery sales were the
primary factors contributing to the increase. Operating income growth was lower
than segment sales growth due to the current year's higher proportion of
lower-margin European sales and participation in newer seating platforms.
Operating losses in South America associated with the segment's seating
operations were approximately level with the prior year period. The Company
currently expects losses in South America for the entire year to approximate
last year's level, due to the depressed economic condition in that market and
the associated decline in vehicle production levels.
Controls Group operating income for the first half of fiscal 1999 increased
compared to the prior year period. Higher volumes and improved productivity
associated with the segment's domestic control systems and services business, as
well as the consolidation of YJC, contributed to the increase.
Net interest expense increased $20 million due primarily to the financing
associated with the Becker Group acquisition. The net gain of $54.6 million on
the sale of businesses was primarily the result of the Company's sale of the
Industrial Battery Division, as previously described.
The effective income tax rate was 40.5% for the six-month period ended March 31,
1999 compared to 41.5% for the comparable period last year. The effective rate
declined due to improved performance by certain of the Company's European
operations and the related use of tax loss carryforwards, partially offset by
losses of start-up operations in emerging markets.
Net income for the first six months of fiscal 1999 increased to $178 million, or
$1.91 per diluted share. The Company's current period net income before the $32
million after-tax gain on sale of businesses was $146 million, up 24% from the
prior period's $118 million. The current period's growth is attributable to
increased operating income, partially offset by higher interest expense. Diluted
earnings per share for the period ended March 31, 1999 (before the gain on sale
of businesses of $.35 per diluted share, after-tax) were $1.56, up from $1.26 in
the prior year.
COMPARISON OF FINANCIAL CONDITION
Working Capital and Cash Flow
The Company's working capital was a negative $574 million at March 31, 1999,
compared with a negative $884 million and a negative $229 million at September
30, 1998 and March 31, 1998, respectively. The decrease in working capital
compared to last year is attributable to the issuance of commercial paper used
to finance the acquisition of Becker Group in July 1998. The increase in working
capital compared to fiscal year-end primarily reflects a reduction in short-term
debt, as the Company used the proceeds from
12
<PAGE> 13
the divestitures of the Industrial Battery Division and the Becker Group
businesses previously classified as held for sale (see below), and a
euro-denominated refinancing (see "Capitalization"), to reduce short-term debt.
The Company's operating activities provided cash of $618 million during the
first six months of the year compared to $213 million in the prior year period.
The current period's higher income and a favorable change in working capital,
adjusted for the net gain on sale of businesses and other non-cash items,
combined to increase cash provided by operations.
Capital Expenditures and Other Investments
Capital expenditures for property, plant and equipment totaled $241 million for
the first half of fiscal 1999, $44 million higher than the amount expended in
the first half of fiscal 1998. Management anticipates that capital spending for
the full year will be approximately $475 to $500 million. The majority of the
spending has been, and will continue to be, associated with automotive seating
and interior systems expansion. Controls Group spending will be focused on
information and building systems technology and the construction of a controls
technology center.
Certain businesses acquired in the Becker Group purchase have been classified as
net assets held for sale in the Consolidated Statement of Financial Position. At
the date of acquisition, the Company identified three businesses of Becker Group
that were outside of the Company's core operations and, as such, would be sold.
The net assets of the businesses were valued at fair value less estimated costs
to sell, including cash flows during the holding period. The Company completed
the sale of two of these businesses during the first six months of fiscal 1999
for approximately $184 million and expects to complete the sale of the final
business within the current year. The operating results of these businesses,
which were not material for the first half of fiscal 1999, were excluded from
consolidated operating results and no gain or loss was recorded upon sale of the
two divested businesses.
Goodwill of $2.1 billion at March 31, 1999 was $584 million higher than the
prior year balance. The increase is primarily attributable to the acquisition of
Becker Group.
Investments in partially-owned affiliates of $219 million increased by $49
million compared to the balance at March 31, 1998. The increase is primarily
associated with two joint ventures formed during the first quarter of fiscal
1999 to manufacture automotive batteries in Mexico and South America. The
increase was partially offset by the sale of two Automotive Systems Group
affiliates.
As previously noted, the Company completed several business acquisitions during
the first half of fiscal 1999 that, net of cash acquired, affected cash flow.
Notable among these acquisitions was the purchase of Cardkey in December 1998,
which is being integrated with the Controls Group's systems and services
business. In addition, the Company acquired a controlling management interest in
TBK in November 1998 to expand its integrated facilities management business in
the Japanese nonresidential buildings market.
13
<PAGE> 14
Capitalization
The Company's total capitalization at March 31, 1999 of $4.1 billion included
short-term debt of $600 million, long-term debt (including the current portion)
of $1.4 billion and shareholders' equity of $2.1 billion. Total capitalization
at September 30, 1998 and March 31, 1998 was $4.3 billion and $3.3 billion,
respectively. Total debt as a percentage of total capitalization of 48% at March
31, 1999 was slightly higher than the 46% level one year ago but significantly
lower than the 55% level at fiscal year-end. The year-over-year increase is due
to the issuance of commercial paper to finance the Becker Group acquisition. The
decline in the debt-to-capitalization ratio from fiscal year-end reflects the
Company's use of the proceeds from the divestitures of the Industrial Battery
Division and the Becker Group businesses previously classified as held for sale,
as well as the result of strong management of working capital.
In January 1999, the Company borrowed a total of 258 million euro from five
banks to refinance on a long-term basis a portion of its commercial paper
associated with the Becker Group acquisition. The euro-denominated loans,
equivalent to $282 million at the respective loan inception dates, generally
mature in five years. Interest, based on the floating Euribor rate, is due at
periodic intervals ranging from one to six months. At the Company's option, the
loans may be converted from floating to fixed rates of interest at any interest
payment date.
The Company believes its capital resources and liquidity position at March 31,
1999 are adequate to meet projected needs. Requirements for working capital,
capital expenditures, dividends and debt maturities in fiscal 1999 will continue
to be funded from operations, supplemented by short-term borrowings, if
required, to meet peak seasonal needs.
Restructuring Activities
As part of the Becker Group acquisition, the Company recorded a restructuring
reserve of $48 million. The reserve was established for anticipated costs
associated with consolidating certain of Becker Group's European and domestic
manufacturing, engineering and administrative operations with existing capacity
of the Company. The majority of the reserve was attributable to expected
employee severance and termination benefit costs and plant closure costs. During
the first half of fiscal 1999, approximately $1 million of employee severance
and termination costs associated with the consolidation of domestic operations
was incurred. In addition, reserves of approximately $7 million were reversed
during the second quarter of fiscal 1999, with a corresponding reduction to
goodwill and prepaid taxes. Accordingly, the reserve balance at March 31, 1999
totaled approximately $40 million.
BACKLOG
The Company's backlog relates to the Controls Group's systems 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, 1999 was $1.0 billion,
14
<PAGE> 15
compared with $836 million at September 30, 1998 and $838 million at March 31,
1998. The increase from fiscal year-end and the prior year is associated with
the consolidation of YJC and increased new orders in the new and existing
buildings markets worldwide.
FUTURE ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." See footnote 11
to the consolidated financial statements for a description of this statement.
OTHER MATTERS
Year 2000
The Company has established a process to identify and resolve the business
issues associated with the Year 2000. A global team has been assigned
responsibility for addressing the business issues and monitoring progress toward
their resolution. The team has conducted surveys of the Company's information
systems, products, infrastructure and manufacturing systems to identify,
prioritize and remediate potential problems related to the Year 2000.
Many of the Company's systems are currently Year 2000 ready. The balance of the
systems are currently being modified or replaced, with all significant systems
targeted for Year 2000 readiness status by September 30, 1999. In most
instances, older software has been replaced, or is in the process of being
replaced, with new programs and systems, rather than modifying existing systems
solely to become Year 2000 ready. Replacing these systems results in a
significant upgrade in systems and capabilities, as well as providing the
ability to properly interpret Year 2000 data. Although the timing of the system
replacements is influenced by the Year 2000, in most instances these systems
would have been replaced in the normal course of business. The Company has spent
approximately $35 million during the last two and one-half years to upgrade and
replace its systems to ensure Year 2000 readiness. The Company estimates it will
incur additional costs of approximately $13 to $18 million to upgrade and
replace its systems, the majority of which will be incurred in the current
fiscal year.
Contingency plans are currently being developed, and may include activities such
as dual source contracts, development of back-up systems or manual processes,
inventory accumulation and other potential actions necessary to minimize the
risk of business disruption. The plans will continue to be refined as systems
are implemented and tested, with all plans expected to be finalized by September
30, 1999.
Management believes it continues to appropriately reduce the risks of not being
Year 2000 ready through the identification and remediation process described
above. The Company's three largest customers, which account for a significant
portion of consolidated sales, have assessed the Company' internal systems as
having a "low" risk of not being Year 2000 ready.
15
<PAGE> 16
Management does not anticipate any material business disruptions due to the Year
2000 that would be associated with its own systems, products or services and
believes the most significant risks are external to its operations. A material
financial risk exists if customers or suppliers are unable to complete critical
Year 2000 readiness efforts in a timely manner. The Company is currently working
with its customers and suppliers to evaluate Year 2000 readiness, identify
material risks and develop solutions so that all critical processes needed to
conduct its business are Year 2000 ready. On-site audits of key suppliers are
currently being performed to independently verify Year 2000 readiness. Exposure
to these external risks is partially mitigated by the size and sophistication of
the Company's primary customers, as well as by the diversity of its products,
suppliers and geographic locations.
Euro Conversion
On January 1, 1999, member countries of the European Monetary Union (EMU) began
a three-year transition from their national currencies to a new common currency,
the "euro." In the first phase, the permanent rates of exchange between the
members' national currency and the euro were established and monetary, capital,
foreign exchange, and interbank markets were converted to the euro. National
currencies will continue to exist as legal tender and may continue to be used in
commercial transactions. By January 2002, euro currency will be issued and by
July 2002, the respective national currencies will be withdrawn. The Company has
significant operations in member countries of the EMU and its action plans are
being implemented to address the euro's impact on information systems, currency
exchange rate risk and commercial contracts. Costs of the euro conversion to
date have not been material and management believes that future conversion costs
will not have a material impact on the operations, cash flows or financial
condition of the Company.
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 November 13, 1998), 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period ended March 31, 1999, the Company did not experience any material
changes in market risk exposures that affect the quantitative and qualitative
disclosures presented in the Company's Annual Report to Shareholders for the
year ended September 30, 1998.
16
<PAGE> 17
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, 1998 for a description of the results of votes of
security holders at the Annual Meeting of Shareholders held January 27, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(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, 1999.
</TABLE>
17
<PAGE> 18
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 14, 1999 By: Stephen A. Roell
Senior Vice President and
Chief Financial Officer
18
<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, 1999
--------------------------------
<S> <C>
Net income $178.0
Provision for income taxes 131.4
Undistributed earnings of partially-owned affiliates (3.9)
Minority interests in net earnings of subsidiaries 14.9
Amortization of previously capitalized interest 1.6
------------
322.0
------------
Fixed charges:
Interest incurred and amortization of debt expense 89.0
Estimated portion of rent expense 21.1
------------
Fixed charges 110.1
Less: Interest capitalized during the period (3.2)
------------
106.9
------------
Earnings $428.9
============
Ratio of earnings to fixed charges (1) 3.9
============
</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, minority interest in earnings or losses of consolidated
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.
(1) Included in earnings is a $54.6 million pre-tax net gain on sale of
businesses, as disclosed in Note 3 to the Company's consolidated financial
statements. Excluding this gain, the ratio of earnings to fixed charges
would be 3.4.
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 268,800
<SECURITIES> 0
<RECEIVABLES> 2,244,600
<ALLOWANCES> 28,900
<INVENTORY> 469,300
<CURRENT-ASSETS> 3,597,900
<PP&E> 3,902,200
<DEPRECIATION> 1,921,200
<TOTAL-ASSETS> 8,372,100
<CURRENT-LIABILITIES> 4,172,200
<BONDS> 1,292,300
0
136,500
<COMMON> 14,600
<OTHER-SE> 1,989,000
<TOTAL-LIABILITY-AND-EQUITY> 8,372,100
<SALES> 7,753,400
<TOTAL-REVENUES> 7,753,400
<CGS> 6,697,000
<TOTAL-COSTS> 6,697,000
<OTHER-EXPENSES> 642,500
<LOSS-PROVISION> 7,200
<INTEREST-EXPENSE> 82,400
<INCOME-PRETAX> 324,300
<INCOME-TAX> 131,400
<INCOME-CONTINUING> 178,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 178,000
<EPS-PRIMARY> 2.04
<EPS-DILUTED> 1.91
</TABLE>
