<PAGE> 1
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 June 30, 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 June 30, 1999
----- ----------------------------
Common Stock $.16 2/3 Par Value 85,324,777
<PAGE> 2
JOHNSON CONTROLS, INC.
FORM 10-Q
JUNE 30, 1999
REPORT INDEX
<TABLE>
<CAPTION>
Page No.
--------
PART I - FINANCIAL INFORMATION:
<S> <C>
Consolidated Statement of Financial Position at June 30, 1999,
September 30, 1998 and June 30, 1998 ............................................... 3
Consolidated Statement of Income for the Three- and Nine-Month
Periods Ended June 30, 1999 and 1998 ............................................... 4
Consolidated Statement of Cash Flows for the Nine-Month Periods
Ended June 30, 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 ........................... 17
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
<PAGE> 3
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions)
<TABLE>
<CAPTION>
June 30, September 30, June 30,
1999 1998 1998
---------- -------------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 248.6 $ 134.0 $ 139.1
Accounts receivable - net 2,122.3 1,821.1 1,653.2
Costs and earnings in excess of billings
on uncompleted contracts 182.6 191.7 181.7
Inventories 474.2 428.2 389.0
Net assets held for sale -- 231.9 --
Other current assets 619.8 597.3 445.8
---------- ---------- ----------
Current assets 3,647.5 3,404.2 2,808.8
Property, plant and equipment - net 1,929.2 1,882.9 1,596.7
Goodwill - net 2,086.2 2,084.5 1,532.6
Investments in partially-owned affiliates 212.2 166.2 172.4
Other noncurrent assets 425.5 404.3 275.0
---------- ---------- ----------
Total assets $ 8,300.6 $ 7,942.1 $ 6,385.5
========== ========== ==========
LIABILITIES AND EQUITY
Short-term debt $ 432.1 $ 1,289.5 $ 425.6
Current portion of long-term debt 89.9 39.4 27.3
Accounts payable 1,945.7 1,625.2 1,480.5
Accrued compensation and benefits 415.7 376.1 339.9
Accrued income taxes 119.7 119.6 48.9
Billings in excess of costs and earnings
on uncompleted contracts 167.3 127.5 129.9
Other current liabilities 889.8 711.1 533.4
---------- ---------- ----------
Current liabilities 4,060.2 4,288.4 2,985.5
Long-term debt 1,293.9 997.5 963.3
Postretirement health and other benefits 161.9 166.7 167.6
Other noncurrent liabilities 574.2 548.1 423.0
Shareholders' equity 2,210.4 1,941.4 1,846.1
---------- ---------- ----------
Total liabilities and equity $ 8,300.6 $ 7,942.1 $ 6,385.5
========== ========== ==========
</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>
Three Months Ended June 30, Nine Months Ended June 30,
---------------------------------- -------------------------------
1999 1998 1999 1998
----------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 4,191.0 $ 3,189.5 $ 11,944.4 $ 9,253.1
Cost of sales 3,574.9 2,719.1 10,271.9 7,932.2
------------ -------------- -------------- -------------
Gross profit 616.1 470.4 1,672.5 1,320.9
Selling, general and administrative expenses 377.2 289.3 1,090.7 864.7
------------ -------------- -------------- -------------
Operating income 238.9 181.1 581.8 456.2
Interest income 4.1 4.3 12.0 9.1
Interest expense (33.9) (33.5) (116.3) (92.5)
Gain on sale of businesses - - 54.6 -
Miscellaneous - net (3.5) 0.9 (2.2) 1.7
------------ -------------- -------------- -------------
Other income (expense) (33.3) (28.3) (51.9) (81.7)
------------ -------------- -------------- -------------
Income before income taxes and minority interests 205.6 152.8 529.9 374.5
Provision for income taxes 83.2 63.4 214.6 155.4
Minority interests in net earnings of subsidiaries 11.3 5.5 26.2 17.4
------------ -------------- -------------- -------------
Net income $ 111.1 $ 83.9 $ 289.1 $ 201.7
============ ============== ============== =============
Earnings available for common shareholders $ 108.6 $ 81.5 $ 281.9 $ 194.6
============ ============== ============== =============
Earnings per share
Basic $ 1.27 $ 0.97 $ 3.31 $ 2.31
============ ============== ============== =============
Diluted $ 1.19 $ 0.90 $ 3.10 $ 2.16
============ ============== ============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions; unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended June 30,
--------------------------------
1999 1998
------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 289.1 $ 201.7
Adjustments to reconcile net income to cash provided by operating activities
Depreciation 272.7 228.6
Amortization of intangibles 59.1 50.4
Equity in earnings of partially-owned affiliates, net of dividends received 15.1 (3.2)
Deferred income taxes (12.9) (1.2)
Gain on sale of businesses (54.6) -
Other 12.8 (1.3)
Changes in working capital, excluding acquisition and divestiture of businesses
Receivables (156.3) (146.8)
Inventories (48.4) (13.0)
Other current assets 5.7 (84.8)
Accounts payable and accrued liabilities 457.5 219.2
Accrued income taxes (21.3) (30.3)
Billings in excess of costs and earnings on uncompleted contracts 38.0 23.0
------------ ------------
Cash provided by operating activities 856.5 442.3
------------ ------------
INVESTING ACTIVITIES
Capital expenditures (329.6) (303.3)
Sale of property, plant and equipment - net 31.8 13.5
Acquisition of businesses, net of cash acquired (139.2) (6.7)
Divestiture of businesses 315.1 -
Additions of long-term investments (17.8) (23.9)
------------ ------------
Cash used by investing activities (139.7) (320.4)
------------ ------------
FINANCING ACTIVITIES
Decrease in short-term debt - net (863.2) (122.8)
Issuance of long-term debt 346.0 183.9
Repayment of long-term debt (26.9) (96.3)
Payment of cash dividends (72.0) (66.6)
Other 13.9 7.2
------------ ------------
Cash used by financing activities (602.2) (94.6)
------------ ------------
Increase in cash and cash equivalents $ 114.6 $ 27.3
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
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 nine months ended June 30, 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 at the date of acquisition, 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 nine months of
fiscal 1999, approximately $8 million of employee severance and
termination costs associated with the consolidation of European and
domestic operations was incurred, and approximately 125 employees
separated from the Company. In addition, $9 million of reserves were
reversed during fiscal 1999, with corresponding reductions of goodwill and
prepaid taxes. Accordingly, the reserve balance at June 30, 1999 totaled
approximately $31 million. The restructuring activities are expected to be
completed by the end of fiscal 2000.
Certain businesses acquired in the Becker Group purchase were 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 these
businesses for approximately $212 million during the first nine months of
fiscal 1999. The operating results of these businesses, which were not
material for the
6
<PAGE> 7
period, were excluded from consolidated operating results and no gain or
loss was recorded upon their sale.
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 nine months ended June 30, 1999 and 1998 (net
of income tax refunds) totaled approximately $193 million and $181
million, respectively. Total interest paid was $114 million and $101
million for the nine months ended June 30, 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>
June 30,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
(in millions)
Raw materials and supplies $245.4 $187.7
Work-in-process 85.1 92.9
Finished goods 179.5 147.1
------ ------
FIFO inventories 510.0 427.7
LIFO reserve (35.8) (38.7)
------ ------
LIFO inventories $474.2 $389.0
====== ======
</TABLE>
6. 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.
7
<PAGE> 8
7. 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 June 30, 1999 and 1998 was $92 million and $87 million,
respectively. Comprehensive income for the nine months ended June 30, 1999
and 1998 was $309 million and $196 million, respectively. The differences
between comprehensive income and net income for all periods reported
represent foreign currency translation adjustments.
8. EARNINGS PER SHARE
The following table reconciles the numerators and denominators used to
calculate basic and diluted earnings per share for the three- and
nine-month periods ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
------------------- --------------------
1999 1998 1999 1998
(in millions) ---------- -------- ---------- ---------
Income Available to Common Shareholders
<S> <C> <C> <C> <C>
Net Income $ 111.1 $ 83.9 $ 289.1 $ 201.7
Preferred stock dividends, net of tax benefit (2.5) (2.4) (7.2) (7.1)
--------- --------- --------- ---------
Basic income available to common shareholders $ 108.6 $ 81.5 $ 281.9 $ 194.6
========= ========= ========= =========
Net Income $ 111.1 $ 83.9 $ 289.1 $ 201.7
Effect of Dilutive Securities:
Compensation expense, net of tax, arising from
assumed conversion of preferred stock (1.2) (1.3) (3.6) (3.9)
--------- --------- --------- ---------
Diluted income available to common shareholders $ 109.9 $ 82.6 $ 285.5 $ 197.8
========= ========= ========= =========
Weighted Average Shares Outstanding
Basic weighted average shares outstanding 85.3 84.7 85.1 84.4
Effect of Dilutive Securities:
Stock options 1.8 1.9 1.7 1.7
Convertible preferred stock 5.3 5.5 5.3 5.5
--------- --------- --------- ---------
Diluted weighted average shares outstanding 92.4 92.1 92.1 91.6
========= ========= ========= =========
</TABLE>
9. 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
8
<PAGE> 9
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.
10. FUTURE ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." 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. In
June 1999, the statement's effective date was delayed by one year, and it
will be effective October 1, 2000 for the Company. 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 JUNE 30, 1999
AND JUNE 30, 1998
Consolidated net sales grew by 31% in the third quarter of fiscal 1999,
increasing to $4.2 billion from the prior year's sales of $3.2 billion.
Automotive Systems Group sales of $3.2 billion for the quarter were 34% higher
than the prior year's $2.4 billion. Automotive seating and interior systems
sales were significantly higher, reflecting strong demand in North America and
Europe, with sales in both markets aided by robust vehicle production levels.
Seating and interior systems sales in North America grew substantially, 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 seating
systems in Europe increased due to new and recently redesigned programs and 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. South American seating sales, which
represent less than 2% of total segment sales, declined as a result of the
depressed economic condition in that region. Sales of automotive batteries
increased, reflecting a record level of batteries shipped to aftermarket
customers.
Controls Group sales totaled $1.0 billion, up 23% from the prior period's $819
million. Integrated facilities management sales increased worldwide, as the
business continues to
9
<PAGE> 10
add significant new accounts and expand existing contracts with major customers.
Sales of control systems and services increased, with growth occurring primarily
in the existing buildings market in North America. Controls Group results also
benefited from the segment's expanded position in the Japanese non-residential
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. Orders for control systems in the quarter
exceeded the prior year period, stemming from the addition of YJC, as well as
from organic growth in the Americas.
Third quarter consolidated operating income reached $239 million, 32% higher
than the prior year's $181 million. Both of the Company's segments achieved
significant operating income growth in the period.
Automotive Systems Group operating income increased from the prior year period,
at a rate in line with sales. Increased seating and interior systems volume in
North America was a major factor in the increase. Higher seating and interior
systems sales in Europe, aided by the addition of Becker Group, also contributed
to the segment's increased operating income. Operating losses from the segment's
seating operations in South America were slightly higher than the prior year
period. The segment's year-over-year increase in operating income was modified
by the absence of income associated with the divestiture of the Plastics
Machinery and Industrial Battery divisions, in September 1998 and March 1999,
respectively.
Third quarter operating income for the Controls Group exceeded the prior year
period, rising at a slightly higher rate than sales. Integrated facilities
management operating income was higher, reflecting the volume increases noted
previously. Higher control systems and services volume and improved productivity
also contributed to the segment's increase. The business' productivity gains
were associated with continued cost control efforts and improved contract
execution.
Net interest expense for the current year quarter was approximately equal to the
prior year amount. Interest expense, which had increased as a result of the
financing associated with the Becker Group acquisition in July 1998, has
steadily declined during the current fiscal year. The declining level of expense
reflects the Company's use of the proceeds from the divestitures of the
Industrial Battery Division and certain non-core Becker Group businesses (see
"Capital Expenditures and Other Investments"), and its strong operating cash
flow, to reduce debt, as well as lower borrowing rates.
Miscellaneous expense (net) increased approximately $4 million due, in part, to
reduced equity income. The reduced year-over-year equity earnings were primarily
attributable to start-up expenses associated with a new automotive joint venture
and consolidation of a Mexican automotive seating affiliate.
The effective income tax rate was 40.5% for the three-month period ended June
30, 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
10
<PAGE> 11
related use of tax loss carryforwards, partially offset by losses of start-up
operations in emerging markets.
Minority interests in net earnings of subsidiaries were $11 million in the
current quarter, compared to approximately $6 million in the prior year period.
The increase is primarily attributable to higher earnings from the Company's
North American automotive seating subsidiaries.
The Company's third quarter net income of $111 million was 32% higher than the
prior year's quarter. The current period's growth chiefly reflects increased
operating income. On a diluted basis, earnings per share for the current quarter
increased to $1.19, compared to $.90 in the prior year.
COMPARISON OF OPERATING RESULTS FOR THE NINE-MONTH PERIODS ENDED JUNE 30, 1999
AND JUNE 30, 1998
Consolidated net sales increased to $11.9 billion for the nine months ended
June 30, 1999, up 29% from the prior year's $9.3 billion.
Automotive Systems Group sales for the first nine months of fiscal 1999 reached
$9.0 billion, a 31% increase from prior year sales of $6.9 billion. Sales growth
was primarily attributable to higher seating and interior systems volume in
Europe and North America. Sales in Europe rose sharply 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
also rose, 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 lower than the prior year period
due to the region's continued economic difficulties. Sales of automotive
batteries increased, with a record level of batteries shipped to aftermarket
customers.
Controls Group sales of $2.9 billion for the period ended June 30, 1999
increased 22% from the prior period's $2.4 billion. Integrated facilities
management sales were higher worldwide, resulting from the addition of
significant new accounts and the expansion of existing contracts with major
customers. Sales of control systems and services increased, keyed by growth in
the North American existing buildings market and in Europe. 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. Current year control
systems orders exceeded the prior year, due principally to the addition of YJC
and organic growth in the Americas and Europe.
Strong overall sales growth is expected to continue during the final quarter of
the fiscal year. Automotive Systems Group sales are expected to increase by over
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 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
11
<PAGE> 12
buildings market and an expanded presence in the Japanese non-residential
buildings market are expected to be the primary sources of the increased sales.
Consolidated operating income of $582 million for the first nine months of
fiscal 1999 represents a 28% increase over the prior year's $456 million. The
Automotive Systems and Controls Groups each attained double-digit growth during
this period.
Automotive Systems Group operating income increased from the prior year period,
reflecting the higher sales volume of seating and interior systems in Europe and
North America and the addition of Becker Group. Operating income growth was
slightly 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 slightly higher than the prior year period. The Company
currently expects losses in South America for the entire year to slightly exceed
last year's level, due to the depressed economic condition in that market and
the associated decline in vehicle production levels. The segment's
year-over-year increase in operating income was modified by the absence of
income associated with the divestiture of the Plastics Machinery and Industrial
Battery divisions, in September 1998 and March 1999, respectively.
Controls Group operating income for the first nine months of fiscal 1999
exceeded the prior year period. Integrated facilities management operating
income increased, reflecting the sales growth noted previously. Higher volumes
and improved productivity associated with the segment's domestic control systems
and services business, as well as the consolidation of YJC, also contributed to
the Controls Group's overall increase.
Net interest expense was $21 million higher than the prior year 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).
Miscellaneous expense (net) increased approximately $4 million due, in part, to
reduced equity income. The reduced year-over-year equity earnings were primarily
attributable to start-up expenses associated with a new automotive joint venture
and consolidation of a Mexican automotive seating affiliate.
The effective income tax rate was 40.5% for the nine-month period ended June 30,
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.
12
<PAGE> 13
Minority interests in net earnings of subsidiaries of $26 million was
approximately $9 million higher than the prior year period. The increase is
primarily attributable to higher earnings from the Company's Automotive Systems
Group subsidiaries.
The Company's net income for the first nine months of fiscal 1999 increased to
$289 million, or $3.10 per diluted share. Net income before the $32 million
after-tax gain on sale of businesses was $257 million, an increase of 27% from
the prior period's $202 million. The current period's growth is attributable to
increased operating income, partially offset by higher interest expense. On a
diluted basis, earnings per share for the current year-to-date (before the gain
on sale of businesses of $.35 per diluted share, after-tax) rose to $2.75, up
from $2.16 in the prior year.
COMPARISON OF FINANCIAL CONDITION
Working Capital and Cash Flow
Working capital was a negative $413 million at June 30, 1999, compared to a
negative $884 million and a negative $177 million at September 30, 1998 and June
30, 1998, respectively. The level of working capital has increased during the
first nine months of fiscal 1999, reflecting the Company's use of the proceeds
from divestitures and a euro-denominated refinancing (see "Capitalization") to
reduce short-term debt.
Cash provided by operating activities increased to $857 million for the first
nine months of the year, compared to $442 million generated in the prior year
period. The current period's higher income and effective management of 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 were approximately $330
million for the first nine months of fiscal 1999, 9% higher than the $303
million incurred in the prior year period. Management anticipates 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 were 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 these businesses for approximately $212 million during the first
nine months of fiscal 1999. The operating results of these businesses, which
were not material for the period, were excluded from consolidated operating
results and no gain or loss was recorded upon their sale.
13
<PAGE> 14
Goodwill of $2.1 billion at June 30, 1999 was $554 million higher than the prior
year balance. The increase is primarily attributable to the acquisition of
Becker Group in July 1998.
Investments in partially-owned affiliates of $212 million increased by $46
million compared to the balance at fiscal year-end. 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 and the consolidation of YJC.
As previously noted, the Company completed several business acquisitions during
fiscal 1999 that, net of cash acquired, affected cash flow. In addition to YJC
and TBK, another notable acquisition was the December 1998 purchase of Cardkey
Systems, an electronic access control and security management system provider
that is being integrated with the Controls Group's systems and services
business.
Capitalization
The Company's total capitalization at June 30, 1999, September 30, 1998 and
June 30, 1998 was $4.0 billion, $4.3 billion and $3.3 billion, respectively.
Total capitalization at June 30, 1999 was comprised of short-term debt of $432
million, long-term debt (including the current portion) of $1.4 billion and
shareholders' equity of $2.2 billion. Total debt as a percentage of total
capitalization of 45% at June 30, 1999 was slightly higher than the 43% level
one year ago but significantly lower than the 55% level at fiscal year-end. The
decline in the debt-to-capitalization ratio from fiscal year-end reflects the
repayment of debt incurred to finance the Becker Group acquisition. The Company
used the proceeds from the divestitures of the Industrial Battery Division and
the Becker Group businesses previously classified as held for sale, and strong
cash flow from operations, to reduce 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. 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. During the third quarter of fiscal 1999, two of the loans were
converted to fixed rates of interest.
The Company believes its capital resources and liquidity position at June 30,
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
14
<PAGE> 15
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 nine months
of fiscal 1999, approximately $8 million of employee severance and termination
costs associated with the consolidation of European and domestic operations was
incurred, and approximately 125 employees separated from the Company. In
addition, $9 million of reserves were reversed during fiscal 1999, with
corresponding reductions of goodwill and prepaid taxes. Accordingly, the reserve
balance at June 30, 1999 totaled approximately $31 million. The restructuring
activities are expected to be completed by the end of fiscal 2000.
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 June 30, 1999 was $1.1 billion, compared with $836 million at September 30,
1998 and $835 million at June 30, 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 10
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.
The majority of the Company's systems are currently Year 2000 ready. The
remaining 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 estimates
the
15
<PAGE> 16
total costs of upgrading and replacing its systems to ensure Year 2000 readiness
will total approximately $55 million, with approximately $5 million of this
amount yet to be incurred.
Contingency plans specific to each of the Company's businesses 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.
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. The
Company's greatest exposure is the potential failure of some of its suppliers,
including utility suppliers, to be ready. This could cause a temporary
interruption of materials or services that the Company needs to make its
products, which could result in delayed shipments to customers and lost sales
and profits. 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.
16
<PAGE> 17
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 June 30, 1999, the Company did not experience any adverse
changes in market risk exposures that materially affect the quantitative and
qualitative disclosures presented in the Company's Annual Report to Shareholders
for the year ended September 30, 1998.
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
(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
June 30, 1999.
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: August 13, 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 Nine Months
Ended June 30, 1999
-----------------------
<S> <C>
Net income $ 289.1
Provision for income taxes 214.6
Undistributed earnings of partially-owned affiliates (5.8)
Minority interests in net earnings of subsidiaries 26.2
Amortization of previously capitalized interest 2.3
----------
526.4
----------
Fixed charges:
Interest incurred and amortization of debt expense 126.3
Estimated portion of rent expense 31.6
----------
Fixed charges 157.9
Less: Interest capitalized during the period (5.2)
----------
152.7
----------
Earnings $ 679.1
==========
Ratio of earnings to fixed charges (1) 4.3
==========
</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 4.0.
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 248,600
<SECURITIES> 0
<RECEIVABLES> 2,333,900
<ALLOWANCES> 29,000
<INVENTORY> 474,200
<CURRENT-ASSETS> 3,647,500
<PP&E> 3,920,800
<DEPRECIATION> 1,991,600
<TOTAL-ASSETS> 8,300,600
<CURRENT-LIABILITIES> 4,060,200
<BONDS> 1,293,900
0
135,800
<COMMON> 14,600
<OTHER-SE> 2,060,000
<TOTAL-LIABILITY-AND-EQUITY> 8,300,600
<SALES> 11,944,400
<TOTAL-REVENUES> 11,944,400
<CGS> 10,271,900
<TOTAL-COSTS> 10,271,900
<OTHER-EXPENSES> 1,018,900
<LOSS-PROVISION> 7,400
<INTEREST-EXPENSE> 116,300
<INCOME-PRETAX> 529,900
<INCOME-TAX> 214,600
<INCOME-CONTINUING> 289,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 289,100
<EPS-BASIC> 3.31
<EPS-DILUTED> 3.10
</TABLE>
