<PAGE> 1
MANAGEMENT'S DISCUSSION AND ANALYSIS
20
INTRODUCTION
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity of the Company for the
three-year period ended September 30, 2000. This discussion should be read in
conjunction with the Letter to Shareholders, Consolidated Financial Statements
and Notes to Consolidated Financial Statements included elsewhere in this annual
report.
Comparability of results between the years presented is affected by the
divestitures of several non-core businesses that occurred during the three-year
period. In 1999, the Company recorded a net gain on the sale of businesses,
primarily the Industrial Battery Division. Fiscal 1998 included a similar gain
from the sale of the Plastics Machinery Division. Management believes operating
results from continuing operations, before the effect of these items, provide
the most meaningful indicators of the Company's performance.
RESULTS OF OPERATIONS
Fiscal 2000 Compared to Fiscal 1999
SALES Consolidated net sales rose to a record $17.2 billion for the year ended
September 30, 2000, six percent higher than the prior year's $16.1 billion. The
effect of currency translation, primarily associated with the euro, reduced the
current year's consolidated net sales by three percent, or approximately $480
million.
Automotive Systems Group sales of $12.7 billion for the current fiscal year
increased five percent from the prior year's $12.1 billion. Demand in North
America for automotive seating and interior systems propelled the segment's
growth, with approximately 80 percent of the increase attributable to this
market. Seating and interior systems sales growth in both North America and
Europe (before the negative effect of currency translation) exceeded the modest
vehicle production level increases in each of those markets. Sales of automotive
batteries reached a record level, reflecting growth from existing customers as
well as the full-year impact of last year's new contract to supply all of Sears,
Roebuck & Co.'s branded automotive batteries.
Controls Group sales of $4.4 billion for the year ended September 30, 2000, rose
nine percent over the prior year's $4.1 billion. The current year's increase was
primarily due to growth in the segment's North American and Asian markets. New
and expanded integrated facility management and installed control systems
contracts in North America increased sales by over ten percent compared with the
prior year. Sales in Asia were approximately 25 percent higher than last year,
reflecting the segment's expanded position in the Japanese non-residential
buildings market (see discussion that follows in "Fiscal 1999 Compared to Fiscal
1998"). European sales of facility management services and control systems were
lower year-over-year, due in part to unfavorable exchange rate changes.
The Company expects Automotive Systems Group sales to increase 10 to 15 percent
in the coming year. Growth resulting from the integration of Ikeda Bussan Co.
Ltd. (Ikeda), the Japanese automotive seating supplier acquired in September
2000 (see "Acquisitions"), and the launch of new seating and interiors programs
are expected to more than offset the effects of a projected slight decline in
overall vehicle production levels and continued weakness in the euro. At
September 30, 2000, the Automotive Systems Group had an incremental backlog of
new orders for its seating and interior systems to be executed within the next
fiscal year of approximately $1.2 billion. The automotive backlog is generally
subject to a number of risks and uncertainties, such as the actual volume and
timing of vehicle production upon which the orders are based.
Fiscal 2001 sales for the Controls Group are also projected to increase 10 to 15
percent. The expected growth is based on continued expansion of integrated
facility management activity worldwide and higher installed control systems
sales, particularly in North America. At September 30, 2000, the unearned
backlog of installed control systems contracts (excluding integrated facility
management) to be executed within the next fiscal year was $1.3 billion. The
increase from the prior year's $1.1 billion primarily stems from increased
orders in the North American new construction and existing buildings markets.
<TABLE>
<CAPTION>
Common Stock Price Range Dividends
------------------------------------------------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $49 - 70 13/16 $40 1/2 - 61 $ .28 $ .25
Second Quarter 46 7/8 - 63 7/16 57 5/16 - 65 9/16 .28 .25
Third Quarter 49 7/8 - 65 1/8 61 7/16 - 76 11/16 .28 .25
Fourth Quarter 45 13/16 - 58 5/8 64 3/4 - 73 7/8 .28 .25
------------------------------------------------------------------------------------------------
Year $45 13/16 - 70 13/16 $40 1/2 - 76 11/16 $1.12 $1.00
================================================================================================
</TABLE>
<PAGE> 2
JOHNSON CONTROLS, INC.
21
The projected sales increases assume an average euro/U.S. dollar exchange rate
of $.90 for fiscal 2001; sales may differ from the projected range if the actual
exchange rate varies significantly from this rate.
OPERATING INCOME Consolidated operating income for fiscal 2000 increased 13
percent to $965.0 million compared with the prior year's $854.9 million. Both of
the Company's business segments recorded double-digit increases in income during
the year.
Automotive Systems Group operating income rose to $765.2 million, up 12 percent
from the prior year's $682.4 million. The segment's operating margin also
increased compared with the prior year, the result of ongoing quality
improvement and cost reduction efforts. The segment achieved operating income
growth in all of its primary geographic markets, led by increased volume of
seating systems, interior systems and batteries and higher gross and operating
margins in North America. Operating income in Europe increased for the year,
overcoming the negative effect of currency translation, as reduced start-up
costs and maturing programs resulted in lower selling, general and
administrative expenses as a percentage of sales. In the segment's other global
markets, losses in South America were approximately one-third lower than the
prior year, with operations benefiting from the region's improving economy,
while operating losses in Asia increased as the Company establishes its
technological presence there.
Controls Group operating income reached $199.8 million for the current period,
rising 16 percent from the prior year's $172.5 million. The growth was
attributable to increased operating income and operating margins associated with
both facility management and installed control systems contracts. The increases
reflect the segment's higher volume and gross margins recorded during the
period. Margin enhancement has resulted from the segment's investments in
automated tools and training to improve contract execution and efficiency,
including project estimation, management and systems installation.
Increased sales and additional efficiencies are expected to result in higher
consolidated operating income for fiscal 2001. The Automotive Systems Group's
operating income is expected to increase due to new seating and interior systems
business worldwide, including the integration of Ikeda, and involvement in
successful, maturing vehicle programs. The Company also anticipates reduced
operating losses associated with seating operations in South America as the
region's economy continues to recover, and higher unit shipments of automotive
batteries.
The Automotive Systems Group has supply agreements with certain of its customers
that provide for annual productivity price reductions and, in some instances,
for the recovery of material and labor cost increases. The segment has been, and
anticipates it will continue to be, able to significantly offset any sales price
changes with cost reductions from design changes, productivity improvements and
similar programs with its own suppliers.
[BAR GRAPH]
Operating income for the Controls Group is expected to rise in fiscal 2001, with
increases in a broad range of the segment's systems, services and facility
management markets, particularly in North America. Projected growth is due to
higher volume in these markets and continued quality improvement and cost
control initiatives.
OTHER INCOME/EXPENSE Net interest expense (interest expense less interest
income) of $111.5 million for the year fell by $24.5 million, or 18 percent,
compared with the prior year. The reduced expense reflects the Company's use of
its strong operating cash flows and the proceeds from prior year divestitures to
reduce debt.
Fiscal 1999's gain on 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).
PROVISION FOR INCOME TAXES The effective income tax rate for 2000 was 39.6
percent compared with 40.5 percent for the prior year. The effective rate for
the fiscal year approximated the combined domestic federal and state statutory
rate of approximately 39 percent, as nondeductible goodwill amortization
associated with acquisitions and higher foreign effective rates were largely
offset by the effects of global tax reduction initiatives.
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
22
MINORITY INTERESTS IN NET EARNINGS OF SUBSIDIARIES Minority interests in net
earnings of subsidiaries were $44.4 million at September 30, 2000, increasing
$5.8 million from the prior year. Approximately one-half of the increase was
attributable to higher earnings from affiliates in the Japanese non-residential
buildings market. The automotive segment also recorded increased earnings from
its domestic subsidiaries.
NET INCOME Net income for fiscal 2000 reached $472.4 million, 22 percent higher
than the prior year's $387.1 million (before the prior year gain on sale of
businesses of $32.5 million, after-tax). The current year's growth in net
income resulted from increased operating income, reduced interest expense and a
lower effective income tax rate. On a diluted basis, earnings per share for the
current fiscal year were $5.09, rising from $4.13 in the prior year (before the
prior year gain on sale of businesses of $.35 per diluted share, after-tax).
Current year earnings per share rose despite the effect of currency translation,
which reduced earnings by $.12 per diluted share.
Fiscal 1999 Compared to Fiscal 1998
SALES Consolidated net sales increased to $16.1 billion for the year ended
September 30, 1999, up 28 percent from the prior year's $12.6 billion. Each of
the Company's operating segments reported significant sales growth during the
year.
Automotive Systems Group sales for fiscal 1999 reached $12.1 billion, a 30
percent increase from prior year sales of $9.3 billion. Sales growth was
primarily attributable to higher seating and interior systems volume in North
America and Europe. In North America, sales rose at a faster rate than industry
vehicle production due to the Company's significant proportion of sales to the
faster-growing light truck market and its programs with top-selling vehicles.
Sales in Europe were significantly higher than the prior year, the result of new
programs and increased production levels. Segment sales for 1999 also included
full-year results of Becker Group, the interior systems supplier acquired in
July 1998 (see "Acquisitions"), which accounted for approximately one-third of
the segment's growth. South American seating sales, which represented less than
two percent of total segment sales, declined due to the region's depressed
economy. Sales of automotive batteries increased, reflecting a double-digit
increase in shipments to customers.
Controls Group sales of $4.1 billion for the year ended September 30, 1999,
increased 22 percent from the prior year's $3.3 billion. Higher sales of control
systems and services were led by growth in the North American existing buildings
market. Integrated facility management sales to the commercial market were
higher worldwide, resulting from the addition of significant new accounts and
the expansion of existing contracts with major customers. Controls Group results
also benefited from the segment's expanded position in the Japanese
non-residential buildings market. This includes the fiscal 1999 consolidation of
Yokogawa Johnson Controls (YJC) Corporation, a Japanese control systems and
services provider 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. Excluding these entities, Controls
Group sales were approximately ten percent higher than fiscal 1998.
OPERATING INCOME Consolidated operating income of $854.9 million for fiscal
1999 represented a 29 percent increase over the prior year's $664.0 million. The
Automotive Systems and Controls groups each achieved strong growth during the
year.
Automotive Systems Group operating income increased to $682.4 million, 29
percent higher than the prior year's $529.7 million. Segment growth reflected
the increased sales volume of seating and interior systems in North America and
Europe, higher operating margins in Europe and the addition of Becker Group.
Operating losses in South America associated with the segment's seating
operations were slightly above the prior year's level. The segment's operating
margins were negatively affected 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 rose by 28 percent for the year to $172.5
million. Higher control systems and services volume and improved productivity
contributed to the segment's increase. Productivity gains were associated with
continued cost control efforts and improved contract execution. Increased
integrated facility management activity in the commercial market also
contributed to the increase, reflecting the sales growth noted previously and
higher margins on certain contracts. Segment operating income also benefited
from the fiscal 1999 consolidation of YJC and TBK.
OTHER INCOME/EXPENSE Net interest expense for the year was $136.0 million,
$17.3 million higher than the prior year. The increased debt levels resulting
from financing the July 1998 Becker Group acquisition were partially offset by
the cash flows from the year's business divestitures, primarily the sale of the
Automotive Systems Group's Industrial Battery Division, as previously described.
<PAGE> 4
JOHNSON CONTROLS, INC.
23
Fiscal 1998's $59.9 million pre-tax gain on sale of business related to the
Company's sale of its Plastics Machinery Division for approximately $190 million
on September 30, 1998. Annual sales of the Plastics Machinery Division were
approximately $190 million. The Company used the after-tax proceeds from the
sale to reduce debt.
The Company recorded miscellaneous expense (net) of $3.6 million during fiscal
1999, compared with miscellaneous income (net) of $11.6 million in 1998. The
year-over-year change was due primarily to reduced equity income, attributable,
in part, to start-up expenses associated with a new automotive joint venture and
the consolidation of YJC.
PROVISION FOR INCOME TAXES The effective income tax rate for 1999 was 40.5
percent compared with 41.5 percent for the prior 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 from operations in several foreign markets. The effective rate for the
fiscal year was higher than the combined domestic federal and state statutory
rate of approximately 39 percent due mostly to nondeductible goodwill
amortization associated with recent acquisitions and higher foreign effective
rates.
MINORITY INTERESTS IN NET EARNINGS OF SUBSIDIARIES Minority interests in net
earnings of subsidiaries for 1999 totaled $38.6 million compared with $23.1
million recorded in the prior year. The increase reflected the fiscal 1999
consolidation of several affiliates that had previously been accounted for by
the equity method, including YJC; the addition of TBK; and higher earnings from
the Company's Automotive Systems Group joint ventures.
NET INCOME The Company's net income for fiscal 1999 increased to $419.6
million, or $4.48 per diluted share, compared with the prior year's $337.7
million, or $3.63 per diluted share. Net income before the current year gain on
sale of businesses ($32.5 million, after-tax) reached $387.1 million, a 28
percent increase over the prior year's $302.7 million (before $35.0 million gain
on sale of business, after-tax). Fiscal 1999's growth was attributable to
increased operating income, partially offset by higher interest expense and the
deduction for minority interests. On a diluted basis, earnings per share for
fiscal 1999 (before the gain on sale of businesses of $.35 per diluted share,
after-tax) rose to $4.13, up from the prior year's $3.25 (before the gain on
sale of business of $.38 per diluted share, after-tax).
[BAR GRAPH]
ACQUISITIONS
Effective September 1, 2000, the Company completed the acquisition of a
controlling interest in Ikeda, a Japanese supplier of automotive seating. Ikeda
is the primary supplier of seating to Nissan and had consolidated net sales in
1999 of approximately $1.2 billion. The closing followed the expiration of a
tender offer for Ikeda's shares, with the Company paying approximately $70
million (net of cash acquired), plus the assumption of $115 million of debt, for
approximately 90 percent of the outstanding shares. The acquisition was
accounted for as a purchase in the Statement of Financial Position at September
30, 2000. The excess of the purchase price over the estimated fair value of the
acquired net assets, which approximated $160 million at the date of acquisition,
was recorded as goodwill. The operating results of Ikeda for September 2000,
which were not material, have not been included in the Consolidated Statement of
Income. The acquisition has been financed with yen-denominated long-term debt
(see "Capitalization").
In July 1998, the Company acquired Becker Group, a major supplier of automotive
interior systems, for approximately $548 million, plus the assumption of
approximately $372 million of debt. 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. At the date of acquisition, the Company identified
three businesses of Becker Group that were outside of its core operations and,
as such, were classified as net assets held for sale. The Company completed the
sale of these businesses for approximately $212 million during fiscal 1999 and
used the after-tax proceeds to reduce debt. 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.
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 other termination costs and plant closure costs. Through
September 30, 2000, approximately $25 million of employee severance and other
termination costs associated with the consolidation of European and
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
24
domestic operations were incurred. In addition, $9 million of reserves were
reversed during fiscal 1999, with corresponding reductions of goodwill and
prepaid taxes. Accordingly, the reserve balance at September 30, 2000, totaled
approximately $14 million. The majority of the restructuring activities are
expected to be completed by the end of fiscal 2001.
CAPITAL EXPENDITURES AND OTHER INVESTMENTS
Capital expenditures for property, plant and equipment of $546.7 million for the
year ended September 30, 2000, increased from capital spending of $514.0 million
and $468.3 million in 1999 and 1998, respectively. Automotive Systems Group
projects accounted for the majority of total capital expenditures in all three
years. Most of the segment's spending in 2000 was for new and expanded
automotive seating and interior systems facilities and product lines worldwide,
cost reduction projects, as well as battery manufacturing automation projects.
Controls Group spending was primarily for projects relating to information
technology. Capital spending of approximately $575 to $600 million is projected
for fiscal 2001, with the majority expected to be associated with automotive
segment expansion. Controls Group expenditures are expected to be focused on
information and building systems technology.
Investments in partially-owned affiliates of $254.7 million at fiscal year-end
were $39.6 million higher compared with the prior year total. The increase
primarily reflects equity income earned by Automotive System Group joint
ventures.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL AND CASH FLOW The Company's working capital was a negative
$232.8 million at September 30, 2000, compared with a negative $418.1 million
one year ago. The increase in working capital compared with the prior year
period primarily reflects lower accrued income taxes and higher receivables
related to automotive tooling programs, partially offset by higher accounts
payable.
The Company's operating activities provided cash of $745.9 million during fiscal
2000, compared with $1.0 billion in the prior year period. Working capital
changes, primarily changes in accounts payable and accrued income taxes,
accounted for the majority of the difference in cash provided between periods.
As previously noted, the Company used the after-tax proceeds from the fiscal
1998 and 1999 sales of several non-core businesses to reduce debt. Additionally,
in May 2000, the Company received $75 million, representing the deferred portion
of the proceeds from the fiscal 1997 sale of its Plastic Container Division,
again using the proceeds to reduce debt.
The Company completed several key business acquisitions during the three-year
period ended September 30, 2000, that, net of cash acquired, affected cash flow.
In addition to the investments in Ikeda, YJC, TBK and Becker Group, both
business segments also completed a number of relatively small, strategic
acquisitions during this period.
[BAR GRAPH]
CAPITALIZATION The Company's total capitalization of $4.4 billion at September
30, 2000, was comprised of short-term debt of $.5 billion, long-term debt
(including the current portion) of $1.3 billion and shareholders' equity of $2.6
billion. Capitalization at September 30, 1999, was $4.1 billion. Strong
operating cash flows enabled the Company to reduce debt as a percentage of total
capitalization to 41 percent at September 30, 2000, compared with the 45 percent
level one year ago.
In October 2000, the Company borrowed approximately 10 billion yen from three
banks to refinance on a long-term basis its short-term commercial paper
borrowings associated with the Ikeda acquisition. The yen-denominated loans,
equivalent to approximately $93 million at the respective loan inception dates,
mature in five years. One loan, with a principal balance of 6.5 billion yen, has
a fixed interest rate of 1.7 percent. Interest on the other two loans is based
on the variable yen-LIBOR rate. At the Company's option, the variable rate loans
may be converted to fixed rates of interest at any interest payment date. At
September 30, 2000, $93 million of short-term debt was classified as long-term
debt to reflect this long-term refinancing.
In January 1999, the Company borrowed a total of approximately 258 million euro
from five banks to finance the Becker Group acquisition. The euro-denominated
loans, each with approximately equal principal balances and equivalent to
approximately $226 million at September 30, 2000, generally mature in five
years. Two of the loans have fixed rates of interest averaging 3.8 percent.
Interest on the other three loans is based on the variable Euribor rate. At the
Company's option, the loans may be converted to fixed rates of interest at any
interest payment date.
<PAGE> 6
JOHNSON CONTROLS, INC.
25
In June 2000, the Company renewed its existing one-year $300 million revolving
credit facility for an additional year. Also in June 2000, the Company reduced
its five-year $600 million revolving credit facility to $400 million. The
five-year facility matures May 2002.
The Company has approximately $1.2 billion available under its shelf
registration statement on file with the Securities and Exchange Commission
through which a variety of debt and equity instruments may be issued.
High credit ratings from Moody's (A2), Fitch (A), and Standard & Poor's (A-)
have been maintained on the Company's long-term debt.
Management believes its capital resources and liquidity position are sufficient
to meet projected needs. Requirements for working capital, capital expenditures,
dividends and debt maturities in fiscal 2001 are expected to be funded from
operations, supplemented by short-term borrowings, if required.
[BAR GRAPH]
RISK MANAGEMENT
The Company selectively uses financial instruments to reduce market risk
associated with changes in foreign exchange and interest rates and, to a lesser
extent, commodity prices. All hedging transactions are authorized and executed
pursuant to clearly defined policies and procedures, which strictly prohibit the
use of financial instruments for trading purposes. Analytical techniques used to
manage and monitor foreign exchange and interest rate risk include market
valuation and sensitivity analysis.
A discussion of the Company's accounting policies for derivative financial
instruments is included in the Summary of Significant Accounting Policies in the
Notes to Consolidated Financial Statements, and further disclosure relating to
financial instruments is included in Note 8 - Financial Instruments.
FOREIGN EXCHANGE The Company has manufacturing, sales and distribution
facilities around the world and thus makes investments and enters into
transactions denominated in various foreign currencies. In order to maintain
strict control and achieve the benefits of the Company's global diversification,
foreign exchange exposures for each currency are netted internally so that only
its net foreign exchange exposures are, as appropriate, hedged with financial
instruments. The Company primarily enters into forward exchange contracts to
reduce the earnings and cash flow impact of non-functional currency denominated
receivables and payables, predominately intercompany transactions. Gains and
losses resulting from hedging instruments offset the gains or losses on the
underlying assets, liabilities and investments being hedged. The maturities of
the forward exchange contracts generally coincide with the settlement dates of
the related transactions. Realized and unrealized gains and losses on these
contracts are recognized in the same period as gains and losses on the hedged
items.
The Company has entered into foreign-denominated debt obligations and a
cross-currency interest rate swap to hedge portions of its net investments in
Germany and Japan. The currency effects of the debt obligations and swap are
reflected in the accumulated other comprehensive income (loss) account within
shareholders' equity where they offset gains and losses on the net investments
in Germany and Japan.
SENSITIVITY ANALYSIS The following table indicates the U.S. dollar equivalents
of the non-functional currency denominated debt, net foreign exchange contracts
and the cross-currency interest rate swap outstanding by currency and the
corresponding impact on the value of these instruments assuming both a ten
percent appreciation and depreciation of the respective currencies. The
resulting functional currency gains and losses are translated at the U.S. dollar
spot rate on September 30, 2000.
As noted previously, the Company's policy prohibits the trading of financial
instruments for profit. It is important to note that gains and losses indicated
in the sensitivity analysis would be offset by gains and losses on underlying
payables, receivables and net investments in foreign subsidiaries.
<TABLE>
<CAPTION>
September 30, 2000
--------------------------------------------------------------------------------------
Foreign Exchange Gain/(Loss) from:
----------------------------------------
Net Amount 10% Appreciation 10% Depreciation
of Instruments of the Functional of the Functional
Currency Long/(Short) Currency Currency
--------------------------------------------------------------------------------------
(dollars in millions)
<S> <C> <C> <C>
euro $(306) $31 $(31)
Japanese yen (231) 23 (23)
Canadian dollar (38) 4 (4)
Mexican peso 30 (3) 3
British pound 20 (2) 2
Czech Republican koruna 19 (2) 2
Other (10) 1 (1)
--------------------------------------------------------------------------------------
TOTAL $(516) $52 $(52)
======================================================================================
</TABLE>
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
26
INTEREST RATES The Company, as needed, uses interest rate swaps to modify the
Company's exposure to interest rate movements. In addition, the Company has one
cross-currency interest rate swap designated as a hedge of its related foreign
net investment exposure. Net interest payments or receipts from interest rate
swaps are recorded as adjustments to interest expense in the Consolidated
Statement of Income on a current basis. The Company's earnings exposure related
to adverse movements in interest rates is primarily derived from outstanding
floating rate debt instruments that are indexed to short-term money market
rates. A ten percent increase or decrease in the average cost of the Company's
variable rate debt would result in a change in pre-tax interest expense of
approximately $4 million.
COMMODITIES The Company's exposure to commodity price changes relates to
certain manufacturing operations that utilize raw commodities. The Company
manages its exposure to changes in those prices primarily through the terms of
its supply and procurement contracts. This exposure is not material to the
Company.
FUTURE ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (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. The statement, as amended by SFAS No. 137 and No. 138, will be
effective October 1, 2000 for the Company. The initial adoption of this
statement is not expected to have a material effect on the Company's net
earnings or statement of financial position.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
The Company's U.S. operations are governed by federal environmental laws,
principally the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act, the Clean Air Act, and
the Clean Water Act, as well as state counterparts ("Environmental Laws"), and
by federal and state laws addressing worker safety and health ("Worker Safety
Laws"). These laws govern ongoing operations and the remediation of sites
associated with current and past operations. Under certain circumstances these
laws provide for civil and criminal penalties and fines, as well as injunctive
and remedial relief, for noncompliance.
The Company has expended substantial resources, both financial and managerial,
to comply with applicable Environmental Laws and Worker Safety Laws and for
measures designed to protect the environment and maximize worker protection and
safety.
The Company believes it is in substantial compliance with such laws, and
maintains procedures designed to foster and ensure compliance. However, the
Company has been, and in the future may become, the subject of formal or
informal enforcement actions or proceedings. Such matters typically are resolved
by negotiation with regulatory authorities resulting in commitments to
compliance or abatement programs and payment of penalties. Historically, neither
such commitments nor penalties imposed on the Company have been material.
Environmental Laws require that certain parties fund remedial actions regardless
of fault. The Company is currently participating in environmental assessment
and remediation at a number of sites under these laws, and it is likely that in
the future the Company will be involved in additional environmental assessments
and remediations.
Future remediation expenses at these sites are subject to a number of
uncertainties, including the method and extent of remediation, the amount and
type of material attributable to the Company, the financial viability of site
owners and the other parties, and the availability of insurance coverage. A
charge to earnings is recorded when it is probable that a liability has been
incurred and the cost can be reasonably estimated.
Environmental considerations are a part of all significant capital expenditure
decisions; however, expenditures in 2000 related solely to environmental
compliance were not material. Environmental remediation, compliance and
management expenses incurred by the Company were approximately $11 million and
$18 million in 2000 and 1999, respectively. An accrued liability of
approximately $41 million and $46 million relating to environmental matters was
maintained at September 30, 2000 and 1999, respectively. The Company's
environmental liabilities do not take into consideration any possible
recoveries of future insurance proceeds. Because of the uncertainties associated
with environmental assessment and remediation activities, future expenses to
remediate the currently identified sites could be considerably higher than the
accrued liability. However, while neither the timing nor the amount of ultimate
costs associated with known environmental assessment and remediation matters can
be determined at this time, the
<PAGE> 8
JOHNSON CONTROLS, INC.
27
Company does not expect that these matters will have a material adverse effect
on its financial position, results of operations or cash flows.
If future Environmental and Worker Safety Laws contain more stringent
requirements than currently anticipated, expenditures could have a more
significant effect on the Company's financial position, results of operations or
cash flows. In general, the Company's competitors face the same laws, and,
accordingly, the Company should not be placed at a competitive disadvantage.
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 in the "Risk Management"
section of this document and those preceded by, following or that include the
words "believes," "expects," "anticipates," "projects" 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 26, 2000), 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.
QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
First Second Third Fourth Full
Year ended September 30, Quarter Quarter (1) Quarter Quarter Year(1)
------------------------------------------------------------------------------------------------------------------------------------
(in millions, except per share data; unaudited)
<S> <C> <C> <C> <C> <C>
2000
Net sales $4,318.3 $4,358.3 $4,389.3 $4,088.7 $17,154.6
Gross profit 625.1 612.0 676.2 681.2 2,594.5
Net income 99.0 88.8 133.4 151.2 472.4
Earnings per share
Basic 1.13 1.01 1.53 1.73 5.40
Diluted 1.06 .95 1.45 1.63 5.09
------------------------------------------------------------------------------------------------------------------------------------
1999
Net sales $3,873.1 $3,880.3 $4,191.0 $4,195.0 $16,139.4
Gross profit 528.5 527.9 616.1 651.4 2,323.9
Net income 79.7 98.3 111.1 130.5 419.6
Earnings per share
Basic .91 1.13 1.27 1.47 4.78
Diluted .86 1.05 1.19 1.38 4.48
====================================================================================================================================
</TABLE>
(1) Second quarter and full year earnings for 1999 include a gain on the sale of
the Automotive Systems Group's Industrial Battery Division, net of a loss
related to the disposal of a small Controls Group operation in the United
Kingdom, of $.35 per diluted share. Excluding the gain would result in
earnings per diluted share of $.70 for the second quarter and $4.13 for the
year.
<PAGE> 9
CONSOLIDATED STATEMENT OF INCOME
28
JOHNSON CONTROLS, INC.
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------------------------------------------------------------------------------------------------------
(in millions, except per share data) 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $17,154.6 $16,139.4 $12,586.8
Cost of sales 14,560.1 13,815.5 10,776.2
------------------------------------------------------------------------------------------------------------------------------------
Gross profit 2,594.5 2,323.9 1,810.6
Selling, general and administrative expenses 1,629.5 1,469.0 1,146.6
------------------------------------------------------------------------------------------------------------------------------------
Operating income 965.0 854.9 664.0
------------------------------------------------------------------------------------------------------------------------------------
Interest income 16.1 17.3 14.8
Interest expense (127.6) (153.3) (133.5)
Gain on sale of businesses - 54.6 59.9
Miscellaneous - net 2.2 (3.6) 11.6
------------------------------------------------------------------------------------------------------------------------------------
Other income (expense) (109.3) (85.0) (47.2)
------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interests 855.7 769.9 616.8
Provision for income taxes 338.9 311.7 256.0
Minority interests in net earnings of subsidiaries 44.4 38.6 23.1
------------------------------------------------------------------------------------------------------------------------------------
Net income $ 472.4 $ 419.6 $ 337.7
====================================================================================================================================
Earnings available for common shareholders $ 462.6 $ 406.6 $ 328.2
====================================================================================================================================
Earnings per share
Basic $ 5.40 $ 4.78 $ 3.88
Diluted $ 5.09 $ 4.48 $ 3.63
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 10
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
29
JOHNSON CONTROLS, INC.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------------------------------------------------------------
(in millions, except par value and share data) 2000 1999
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 275.6 $ 276.2
Accounts receivable, less allowance for doubtful accounts of $31.9 and $26.9, respectively 2,355.3 2,147.5
Costs and earnings in excess of billings on uncompleted contracts 222.4 208.7
Inventories 569.5 524.6
Other current assets 854.4 691.5
----------------------------------------------------------------------------------------------------------------------------
Current assets 4,277.2 3,848.5
----------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment - net 2,305.0 1,996.0
Goodwill, less accumulated amortization of $329.5 and $280.0, respectively 2,133.3 2,096.9
Investments in partially-owned affiliates 254.7 215.1
Other noncurrent assets 457.8 457.7
----------------------------------------------------------------------------------------------------------------------------
Total assets $9,428.0 $8,614.2
============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt $ 471.4 $ 477.0
Current portion of long-term debt 36.1 94.8
Accounts payable 2,308.8 1,998.5
Accrued compensation and benefits 452.4 446.9
Accrued income taxes 140.0 231.2
Billings in excess of costs and earnings on uncompleted contracts 167.8 159.2
Other current liabilities 933.5 859.0
----------------------------------------------------------------------------------------------------------------------------
Current liabilities 4,510.0 4,266.6
----------------------------------------------------------------------------------------------------------------------------
Long-term debt 1,315.3 1,283.3
Postretirement health and other benefits 168.1 166.4
Other noncurrent liabilities 858.5 627.9
----------------------------------------------------------------------------------------------------------------------------
Long-term liabilities 2,341.9 2,077.6
----------------------------------------------------------------------------------------------------------------------------
Preferred stock, $1.00 par value
shares authorized: 2,000,000
shares issued and outstanding: 2000 - 251.898; 1999 - 263.057 129.0 134.7
Common stock, $.16 2/3 par value
shares authorized: 300,000,000
shares issued: 2000 - 88,046,019; 1999 - 87,788,051 14.7 14.6
Capital in excess of par value 593.1 576.1
Retained earnings 2,159.5 1,793.1
Treasury stock, at cost (2000 - 2,056,976 shares; 1999 - 2,393,446 shares) (33.2) (38.5)
Employee stock ownership plan - unearned compensation (80.0) (94.8)
Accumulated other comprehensive loss (207.0) (115.2)
----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 2,576.1 2,270.0
----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $9,428.0 $8,614.2
============================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 11
CONSOLIDATED STATEMENT OF CASH FLOWS
30
JOHNSON CONTROLS, INC.
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------------------------------------------------------------------------------------------------------
(in millions) 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 472.4 $ 419.6 $ 337.7
Adjustments to reconcile net income to cash provided by operating activities
Depreciation 385.3 363.2 311.2
Amortization of intangibles 76.5 82.4 73.0
Equity in earnings of partially-owned affiliates, net of dividends received (12.8) 23.9 (4.4)
Deferred income taxes 56.3 (110.7) (41.3)
Gain on sale of businesses - (54.6) (59.9)
Other (11.7) 21.0 (1.8)
Changes in working capital, excluding acquisition and divestiture of businesses
Receivables (199.9) (216.1) (229.8)
Inventories (39.3) (93.4) (34.8)
Other current assets (69.3) (13.7) (77.2)
Accounts payable and accrued liabilities 173.9 436.8 247.2
Accrued income taxes (98.7) 121.3 33.0
Billings in excess of costs and earnings on uncompleted contracts 13.2 32.2 20.2
------------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 745.9 1,011.9 573.1
------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (546.7) (514.0) (468.3)
Sale of property, plant and equipment - net 42.5 74.7 26.2
Acquisition of businesses, net of cash acquired (80.9) (161.1) (546.0)
Divestiture of businesses 75.0 344.8 212.0
Additions of long-term investments (40.0) (23.7) (41.4)
------------------------------------------------------------------------------------------------------------------------------------
Cash used by investing activities (550.1) (279.3) (817.5)
------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
(Decrease) increase in short-term debt - net (39.6) (807.9) 271.0
Issuance of long-term debt 125.9 351.4 188.3
Repayment of long-term debt (168.0) (42.2) (102.8)
Payment of cash dividends (106.2) (95.8) (88.8)
Other 7.6 7.0 4.7
------------------------------------------------------------------------------------------------------------------------------------
Cash (used) provided by financing activities (180.3) (587.5) 272.4
------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (16.1) (2.9) (5.8)
------------------------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ (0.6) $ 142.2 $ 22.2
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 12
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
31
JOHNSON CONTROLS, INC.
<TABLE>
<CAPTION>
Employee Stock Accumulated
Ownership Plan - Capital in Treasury Other
Preferred Unearned Common Excess of Retained Stock, Comprehensive
(in millions) Total Stock Compensation Stock Par Value Earnings at Cost Income (Loss)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AT SEPTEMBER 30, 1997 $1,687.9 $143.4 $(119.4) $14.4 $552.6 $1,217.9 $(41.8) $ (79.2)
Comprehensive income:
Net income 337.7 - - - - 337.7 - -
Foreign currency translation
adjustments (19.7) - - - - - - (19.7)
-------
Comprehensive income 318.0
Reduction of guaranteed ESOP debt 11.6 - 11.6 - - - - -
Cash dividends
Series D preferred ($3.97 per
one ten-thousandth of a share),
net of $1.5 million tax benefit (9.5) - - - - (9.5) - -
Common ($.92 per share) (77.8) - - - - (77.8) - -
Other, including options exercised 11.2 (3.3) - 0.1 17.3 (5.0) 2.1 -
====================================================================================================================================
AT SEPTEMBER 30, 1998 1,941.4 140.1 (107.8) 14.5 569.9 1,463.3 (39.7) (98.9)
Comprehensive income:
Net income 419.6 - - - - 419.6 - -
Foreign currency translation
adjustments (12.9) - - - - - - (12.9)
Minimum pension liability
adjustment (3.4) - - - - - - (3.4)
-------
Other comprehensive loss (16.3)
-------
Comprehensive income 403.3
Reduction of guaranteed ESOP debt 13.0 - 13.0 - - - - -
Cash dividends
Series D preferred ($3.97 per
one ten-thousandth of a share),
net of $1.0 million tax benefit (9.6) - - - - (9.6) - -
Common ($1.00 per share) (85.2) - - - - (85.2) - -
Other, including options exercised 7.1 (5.4) - 0.1 6.2 5.0 1.2 -
====================================================================================================================================
AT SEPTEMBER 30, 1999 2,270.0 134.7 (94.8) 14.6 576.1 1,793.1 (38.5) (115.2)
Comprehensive income:
Net income 472.4 - - - - 472.4 - -
Foreign currency translation
adjustments (89.8) - - - - - - (89.8)
Minimum pension liability
adjustment (2.0) - - - - - - (2.0)
-------
Other comprehensive loss (91.8)
-------
Comprehensive income 380.6
Reduction of guaranteed ESOP debt 14.8 - 14.8 - - - - -
Cash dividends
Series D preferred ($3.97 per
one ten-thousandth of a share),
net of $0.4 million tax benefit (9.8) - - - - (9.8) - -
Common ($1.12 per share) (96.0) - - - - (96.0) - -
Other, including options exercised 16.5 (5.7) - 0.1 17.0 (0.2) 5.3 -
====================================================================================================================================
AT SEPTEMBER 30, 2000 $2,576.1 $129.0 $ (80.0) $14.7 $593.1 $2,159.5 $(33.2) $(207.0)
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
32
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of Johnson Controls, Inc. and its majority-owned domestic and foreign
subsidiaries. All significant inter-company transactions have been eliminated.
Investments in partially-owned affiliates are accounted for by the equity method
when the Company's interest exceeds 20 percent. Gains and losses from the
translation of most foreign currency financial statements are recorded in the
accumulated other comprehensive income (loss) account within shareholders'
equity. Certain prior year amounts have been reclassified to conform to the
current year's presentation.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts and related disclosures. Actual
results could differ from those estimates.
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. Cost of other inventories is determined on the first-in,
first-out (FIFO) method. Finished goods and work-in-process inventories include
material, labor and manufacturing overhead costs.
PRE-PRODUCTION COSTS RELATED TO LONG-TERM SUPPLY ARRANGEMENTS Effective January
1, 2000, the Company adopted on a prospective basis the guidance provided in
Emerging Issues Task Force (EITF) Issue 99-5, "Accounting for Pre-Production
Costs Related to Long-Term Supply Arrangements." EITF Issue 99-5 addresses
whether design and development costs related to long-term supply arrangements
should be expensed or capitalized. Consistent with past practice, the Company's
policy for engineering, research and development, and other design and
development costs related to products that will be sold under long-term supply
arrangements requires such costs to be expensed as incurred. Costs for molds,
dies, and other tools used to make products that will be sold under long-term
supply arrangements are capitalized if the Company has title to the assets or
has the non-cancelable right to use the assets during the term of the supply
arrangement. Capitalized items, if specifically designed for a supply
arrangement, are amortized over the term of the arrangement; otherwise, amounts
are amortized over the estimated useful lives of the assets. The carrying values
of assets capitalized in accordance with the foregoing policy are periodically
reviewed for evidence of impairment. As of September 30, 2000, approximately $65
million of costs for molds, dies and other tools were capitalized, of which the
Company had title to approximately $37 million of these assets. The balance of
capitalized costs were incurred prior to the effective date of EITF Issue 99-5
and will be amortized over the applicable useful lives. In addition, at
September 30, 2000, the Company has recorded as a current asset approximately
$280 million of costs for molds, dies and other tools for which customer
reimbursement is assured.
PROPERTY, PLANT AND EQUIPMENT The Company uses the straight-line method of
depreciation for financial reporting purposes and accelerated methods for income
tax purposes. The general range of useful lives for financial reporting is 10 to
50 years for buildings and improvements and 3 to 20 years for machinery and
equipment.
INTANGIBLES Goodwill arising from business acquisitions is amortized using the
straight-line method over periods of 15 to 40 years. Patents and other
intangibles are amortized over their estimated lives. The Company reviews the
carrying value of goodwill for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. An
impairment would be determined based on a comparison of the undiscounted future
operating cash flows anticipated to be generated during the remaining life of
the goodwill to the carrying value. Measurement of any impairment loss would be
based on discounted operating cash flows.
DERIVATIVE FINANCIAL INSTRUMENTS The Company has written policies and
procedures that place all financial instruments under the direction of corporate
treasury and restrict all derivative transactions to those intended for hedging
purposes. The use of financial instruments for trading purposes is strictly
prohibited. The Company uses financial instruments to manage the market risk
from changes in foreign exchange rates and interest rates.
The Company has global operations and enters into forward exchange contracts to
hedge certain of its foreign currency commitments. Forward points on forward
exchange contracts are amortized to income over the life of the contracts. Gains
and losses derived from the change in the spot rate on these contracts that
hedge assets and liabilities are recognized in the same period as the hedged
commitments. Gains and losses on forward contracts that hedge net foreign
investments are deferred in the accumulated other comprehensive income (loss)
account within shareholders' equity. The criteria for hedge accounting are met
by designating the hedging instrument to an existing non-functional currency
asset or liability or net foreign
<PAGE> 14
JOHNSON CONTROLS, INC.
33
investment position after demonstrating that the hedging instrument is effective
in offsetting changes in underlying foreign exchange exposure. The Company
ensures the effectiveness of all hedges by not engaging in proxy hedging.
The Company, as needed, uses interest rate swap agreements to modify its
exposure to interest rate movements and reduce borrowing costs. In addition, the
Company, as needed, uses cross-currency interest rate swaps to hedge a portion
of its net investments in foreign subsidiaries (see Note 8). Related foreign
exchange gains and losses on the notional principal value of the cross-currency
swap are deferred in accumulated other comprehensive income (loss). Net interest
payments or receipts from interest rate swaps and the interest component of
cross-currency interest rate swaps are recorded as adjustments to interest
expense in the Consolidated Statement of Income on a current basis. In
evaluating the appropriate accounting for an interest rate swap, the terms of
the swap are compared to the related asset or liability to which the swap is
designated.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (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. The statement, as amended by SFAS No. 137 and No. 138, will be
effective October 1, 2000 for the Company. The initial adoption of this
statement is not expected to have a material effect on the Company's net
earnings or statement of financial position.
REVENUE RECOGNITION The Company recognizes revenue from long-term systems
installation contracts of the Controls Group over the contractual period under
the percentage-of-completion method of accounting (see "Long-Term Contracts").
In all other cases, the Company recognizes revenue at the time products are
shipped or as services are performed.
LONG-TERM CONTRACTS Under the percentage-of-completion method of accounting
used for long-term contracts, sales and gross profit are recognized as work is
performed based on the relationship between actual costs incurred and total
estimated costs at completion. Sales and gross profit are adjusted prospectively
for revisions in estimated total contract costs and contract values. Estimated
losses are recorded when identified. Claims against customers are recognized as
revenue upon settlement. The amount of accounts receivable due after one year is
not significant.
EARNINGS PER SHARE Basic earnings per share are computed by dividing net
income, after deducting dividend requirements on the Series D Convertible
Preferred Stock, by the weighted average number of common shares outstanding.
Diluted earnings per share are computed by dividing net income, after deducting
the after-tax compensation expense that would arise from the assumed conversion
of the Series D Convertible Preferred Stock, by diluted weighted average shares
outstanding. Diluted weighted average shares assume the conversion of the Series
D Convertible Preferred Stock, if dilutive, plus the dilutive effect of common
stock equivalents which would arise from the exercise of stock options.
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.
COMPREHENSIVE INCOME Comprehensive income is defined as the sum of net income
and all other non-owner changes in equity. The components of accumulated other
comprehensive loss were as follows:
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------------
(in millions) 2000 1999
----------------------------------------------------------------------------
<S> <C> <C>
Foreign currency translation adjustments,
net of tax $(201.6) $(111.8)
Minimum pension liability adjustments,
net of tax (5.4) (3.4)
----------------------------------------------------------------------------
Accumulated other comprehensive loss $(207.0) $(115.2)
============================================================================
</TABLE>
1 Acquisitions
Effective September 1, 2000, the Company completed the acquisition of a
controlling interest in Ikeda Bussan Co., Ltd. (Ikeda), a Japanese supplier of
automotive seating. Ikeda is the primary supplier of seating to Nissan and had
consolidated net sales in 1999 of approximately $1.2 billion. The closing
followed the expiration of a tender offer for Ikeda's shares, with the Company
paying approximately $70 million (net of cash acquired), plus the assumption of
$115 million of debt, for approximately 90 percent of the outstanding shares.
The acquisition was accounted for as a purchase in the Statement of Financial
Position at September 30, 2000. The excess of the
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
34
purchase price over the estimated fair value of the acquired net assets, which
approximated $160 million at the date of acquisition, was recorded as goodwill.
The operating results of Ikeda for September 2000, which were not material, have
not been included in the Consolidated Statement of Income. The acquisition was
financed with yen-denominated long-term debt.
Effective July 1, 1998, the Company acquired Becker Group, a major supplier of
automotive interior systems, for approximately $548 million, plus the assumption
of approximately $372 million of debt. 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. Becker Group's results have been included in the
Company's consolidated financial statements from the date of acquisition. The
Company identified three businesses at the date of acquisition of Becker Group
that were outside of its core operations and, as such, were classified as net
assets held for sale. These businesses were sold for approximately $212 million
during fiscal 1999 and the after-tax proceeds were used to reduce debt. 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.
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 other termination costs and plant closure costs. Through
September 30, 2000, approximately $25 million of employee severance and other
termination costs associated with the consolidation of European and domestic
operations were incurred. In addition, $9 million of reserves were reversed
during fiscal 1999, with corresponding reductions of goodwill and prepaid taxes.
Accordingly, the reserve balance at September 30, 2000 totaled approximately $14
million. The majority of the restructuring activities are expected to be
completed by the end of fiscal 2001.
2 Divestitures
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).
On September 30, 1998, the Company completed the sale of its Plastics Machinery
Division for approximately $190 million. The Plastics Machinery Division had
annual sales of approximately $190 million. The Company recorded a gain on the
sale of $59.9 million ($35.0 million or $.41 per basic share and $.38 per
diluted share, after-tax).
3 Inventories
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------
(in millions) 2000 1999
--------------------------------------------------------------------------
<S> <C> <C>
Raw materials and supplies $323.9 $312.1
Work-in-process 98.8 71.7
Finished goods 177.4 174.5
--------------------------------------------------------------------------
FIFO inventories 600.1 558.3
LIFO reserve (30.6) (33.7)
--------------------------------------------------------------------------
LIFO inventories $569.5 $524.6
==========================================================================
</TABLE>
Inventories valued by the LIFO method of accounting were approximately 50
percent and 46 percent of total inventories at September 30, 2000 and 1999,
respectively.
4 Property, Plant and Equipment
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------
(in millions) 2000 1999
--------------------------------------------------------------------------
<S> <C> <C>
Buildings and improvements $1,144.2 $1,007.0
Machinery and equipment 2,904.7 2,607.5
Construction in progress 301.2 304.2
--------------------------------------------------------------------------
4,350.1 3,918.7
Land 223.7 114.3
--------------------------------------------------------------------------
4,573.8 4,033.0
Less accumulated depreciation (2,268.8) (2,037.0)
--------------------------------------------------------------------------
Property, plant and equipment - net $2,305.0 $1,996.0
==========================================================================
</TABLE>
Interest costs capitalized during 2000, 1999 and 1998 were $10.0 million, $7.2
million and $11.1 million, respectively.
<PAGE> 16
JOHNSON CONTROLS, INC.
35
5 Leases
Certain administrative and production facilities and equipment are leased under
long-term agreements. Most leases contain renewal options for varying periods,
and certain leases include options to purchase the leased property during or at
the end of the lease term. Leases generally require the Company to pay for
insurance, taxes and maintenance of the property. Leased capital assets included
in net property, plant and equipment, primarily buildings and improvements, were
$58 million and $74 million at September 30, 2000 and 1999, respectively.
Other facilities and equipment are leased under arrangements that are accounted
for as operating leases. Total rental expense was $167 million in 2000, $141
million in 1999 and $115 million in 1998.
Future minimum capital and operating lease payments and the related present
value of capital lease payments at September 30, 2000 were as follows:
<TABLE>
<CAPTION>
Capital Operating
(in millions) Leases Leases
----------------------------------------------------------------------
<S> <C> <C>
2001 $12.5 $ 87.8
2002 13.6 66.5
2003 12.6 49.8
2004 13.8 40.0
2005 8.3 34.4
After 2005 29.4 94.8
----------------------------------------------------------------------
Total minimum lease payments 90.2 $373.3
======================================================================
Interest 21.4
-------------------------------------------------------
Present value of net minimum lease payments $68.8
=======================================================
</TABLE>
6 Short-term Debt and Credit Agreements
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------
(in millions) 2000 1999
----------------------------------------------------------------------
<S> <C> <C>
Commercial paper $375.0 $ 423.0
Bank borrowings 96.4 54.0
----------------------------------------------------------------------
Short-term debt $471.4 $ 477.0
Weighted average short-term debt outstanding $787.3 $1,210.0
Weighted average interest rate on
short-term debt outstanding 5.18% 5.98%
======================================================================
</TABLE>
At September 30, 2000, the Company had unsecured lines of credit available from
banks totaling $1,275 million. The lines of credit are subject to the usual
terms and conditions applied by banks. Domestic lines of credit available for
support of outstanding commercial paper averaged $850 million during the year
and were $700 million at September 30, 2000. Total interest paid on both
long-term and short-term debt was $137 million, $154 million and $146 million in
2000, 1999 and 1998, respectively. The Company also uses financial instruments
(see Note 8) to manage its interest rate exposure that affect the weighted
average interest rate of its debt and interest expense.
7 Long-term Debt
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------
(in millions) 2000 1999
----------------------------------------------------------------------
<S> <C> <C>
Unsecured notes
6.06% due in 2002 $ 17.2 $ 22.9
6.3% due in 2008 175.0 175.0
7.7% due in 2015 124.8 124.8
7.125% due in 2017 149.1 149.1
8.2% due in 2024 125.0 125.0
6.95% due in 2045 125.0 125.0
Industrial revenue bonds due through 2006,
net of unamortized discount of $1.3 million
in 2000 and $1.6 million in 1999 43.2 43.4
Medium-term notes due in 2000 at
an average interest rate of 7.6% - 50.0
Guaranteed ESOP debt due in increasing annual
installments through 2004 at an average
interest rate of 7.86% (tied in part to LIBOR) 80.0 94.8
Capital lease obligations 68.8 82.0
Foreign-denominated debt:
euro 225.5 271.5
yen 201.2 28.6
Other 16.6 86.0
----------------------------------------------------------------------
Gross long-term debt 1,351.4 1,378.1
Less current portion 36.1 94.8
----------------------------------------------------------------------
Net long-term debt $1,315.3 $1,283.3
======================================================================
</TABLE>
In October 2000, the Company borrowed 10 billion yen from three banks to
refinance on a long-term basis its commercial paper associated with the Ikeda
acquisition. The yen-denominated loans, equivalent to approximately $93 million
at the respective loan inception dates, mature in five years. One loan, with a
principal balance of 6.5 billion yen, has a fixed interest rate of 1.7 percent.
Interest on the other two loans is based on the variable yen-LIBOR rate. At the
Company's option, the variable rate loans may be converted to fixed rates of
interest at any interest payment date. At September 30, 2000, $93 million of
short-term debt was classified as long-term debt to reflect the long-term
refinancing.
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
36
Including the Ikeda financing, the Company had yen-denominated long-term debt
totaling approximately $201 million at September 30, 2000. Fixed rate debt was
equivalent to approximately $168 million with a weighted average interest rate
of 1.86 percent at September 30, 2000. Variable rate debt was equivalent to
approximately $33 million with a weighted average interest rate of 0.77
percent at September 30, 2000.
During the second quarter of fiscal 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 five
euro-denominated loans, each with approximately equal principal balances,
generally mature in five years. At September 30, 2000, two of the loans had
fixed rates of interest at 3.70 percent and 3.84 percent, respectively.
Interest for the other three loans is based on the variable Euribor rate, with
an average rate of 4.87 percent.
The Company's employee stock ownership plan (ESOP) was financed with debt issued
by the ESOP. The ESOP debt is guaranteed by the Company and, therefore, the
unpaid balance has been recorded as long-term debt. The dividends on the Series
D Preferred Stock held by the ESOP plus Company contributions to the ESOP are
used by the ESOP to service the debt. Therefore, interest incurred on the ESOP
debt of $6 million in 2000, $7 million in 1999 and $8 million in 1998 has not
been reflected as interest expense in the Company's Consolidated Statement of
Income.
The installments of long-term debt maturing in each of the next five years
(including the guaranteed ESOP debt) are: 2001 - $36 million, 2002 - $91
million, 2003 - $81 million, 2004 - $276 million and 2005 - $70 million. The
indentures for the unsecured notes and the guaranteed ESOP debt include various
financial covenants, none of which are expected to restrict future operations.
8 Financial Instruments
The fair values of cash and cash equivalents and short-term debt approximate
their carrying values. The fair value of net long-term debt, which was $1,259
million and $1,278 million at September 30, 2000 and 1999, respectively, was
determined using market interest rates and discounted future cash flows. The
fair values of hedging instruments, discussed below, were obtained from dealer
quotes and published foreign currency exchange rates.
HEDGING TRANSACTIONS The Company has global operations and participates in the
foreign exchange markets to minimize its risk of loss from fluctuations in
exchange rates. The Company enters into forward exchange contracts to hedge
certain of its foreign currency commitments. Realized and unrealized gains and
losses on these contracts are recognized in the same period as the hedged
commitments. The Company's forward exchange contracts generally have maturities
that do not exceed 12 months, and are designed to coincide with settlement dates
of the related transactions.
In September 1998, the Company entered into a five-year Japanese yen
cross-currency interest rate swap to hedge a portion of its net investment in
its Japanese subsidiaries. Under the swap, the Company receives interest based
on a fixed U.S. dollar rate of 5.35 percent and pays interest based on a fixed
Japanese yen rate of 0.74 percent on the outstanding notional principal amounts
in dollars and yen, respectively. At maturity, the Company will pay 1.5 billion
yen in exchange for $11.2 million. The fair value of this contract approximated
its carrying value at September 30, 2000 and 1999.
During fiscal 2000, the Company settled its remaining interest rate and
cross-currency interest rate swap agreements. Two interest rate swaps had
previously established fixed rates of interest on $325 million of outstanding
commercial paper. Gains and losses realized upon their settlement were not
significant. Two cross-currency interest rate swaps had been used to hedge
portions of the Company's net investments in Germany and France. Gains and
losses realized upon settlement of these swaps were recorded in the other
comprehensive income (loss) account within shareholders' equity.
The following forward contracts, executed with major financial institutions,
were outstanding at September 30, 2000:
<TABLE>
<CAPTION>
Currency Sold Currency Purchased Contract Amount
--------------------------------------------------------------------------
(in millions) (U.S. dollar equivalent)
--------------------------------------------------------------------------
<S> <C> <C>
U.S. dollar euro $ 89
euro British pound 51
euro U.S. dollar 42
euro Czech koruna 38
Canadian dollar U.S. dollar 38
British pound euro 37
U.S. dollar Mexican peso 27
Czech koruna euro 19
Hong Kong dollar U.S. dollar 12
Others 40
--------------------------------------------------------------------------
$393
==========================================================================
</TABLE>
<PAGE> 18
JOHNSON CONTROLS, INC.
37
The fair values of these forward contracts approximated their carrying values at
September 30, 2000.
9 Shareholders' Equity
The Company originally issued 341.7969 shares of its 7.75 percent Series D
Convertible Preferred Stock to its ESOP. The Preferred Stock was issued in
fractional amounts representing one ten-thousandth of a share each or 3.4
million Preferred Stock units in total. Each Preferred Stock unit has a
liquidation value of $51.20. The ESOP financed its purchase of the Preferred
Stock units by issuing debt. An amount representing unearned employee
compensation, equivalent in value to the unpaid balance of the ESOP debt, has
been recorded as a deduction from shareholders' equity. The net increase in
shareholders' equity at September 30, 2000 and 1999 resulting from the above
transactions was $49 million and $40 million, respectively.
Preferred Stock units are allocated to participating employees over the term of
the ESOP debt based on the annual ESOP debt service payments and are held in
trust for the employees until their retirement, death, or vested termination.
Each allocated unit may be converted into two shares of common stock or redeemed
for $51.20 in cash, at the election of the employee or beneficiary, upon
retirement, death or vested termination. As of September 30, 2000, approximately
2.4 million Preferred Stock units had been allocated to employees. The Company,
at its option, may issue shares of its common stock or distribute cash to the
ESOP to redeem the Preferred Stock units. Employees may vote allocated units,
and the plan trustee is to vote unallocated units in the same proportion as the
allocated units are voted.
Dividends on the Preferred Stock are deductible for income tax purposes and
enter into the determination of earnings available for common shareholders, net
of their tax benefit.
Options to purchase common stock of the Company, at prices equal to or higher
than market values on dates of grant, are granted to key employees under stock
option plans. Stock appreciation rights (SARs) may be granted in conjunction
with the stock option grants under one plan. Options or SARs are exercisable
between one and ten years after date of grant. Shares available for future grant
under stock option plans were 9.0 million at September 30, 2000.
Following is a summary of activity in the stock option plans for 2000, 1999 and
1998:
<TABLE>
<CAPTION>
Weighted Shares
Average Subject to
Option Price Option SARs
----------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding,
September 30, 1997 $30.31 4,300,622 1,290,229
Granted 45.09 1,186,150 484,550
Exercised 26.21 (585,747) (193,740)
Cancelled 32.65 (410,793) (85,450)
----------------------------------------------------------------------------
Outstanding,
September 30, 1998 $34.53 4,490,232 1,495,589
Granted 57.78 967,790 890,865
Exercised 29.86 (675,762) (266,826)
Cancelled 34.18 (352,146) (363,685)
----------------------------------------------------------------------------
Outstanding,
September 30, 1999 $40.35 4,430,114 1,755,943
Granted 58.41 1,228,800 83,315
Exercised 35.91 (344,908) (88,288)
Cancelled 53.81 (294,974) (122,020)
----------------------------------------------------------------------------
Outstanding,
September 30, 2000 $44.28 5,019,032 1,628,950
============================================================================
</TABLE>
Options outstanding at September 30, 2000:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Outstanding at Remaining Exercise
September 30, Contractual Price
Range of Exercise Prices 2000 Life (years) per Share
------------------------------------------------------------------------------
<S> <C> <C> <C>
$10.00 - $21.99 207,764 1.6 $18.97
$22.00 - $33.99 1,061,275 4.0 $28.64
$34.00 - $45.99 1,767,153 6.4 $41.12
$46.00 - $58.99 1,982,840 8.6 $58.13
==============================================================================
</TABLE>
Options exercisable:
<TABLE>
<CAPTION>
Weighted
Exercisable Average Exercise
Range of Exercise Prices Shares Price per Share
-----------------------------------------------------------------------
<S> <C> <C>
At September 30, 2000
$10.00 - $21.99 207,764 $18.97
$22.00 - $33.99 1,061,275 $28.64
$34.00 - $45.99 1,308,277 $39.72
$46.00 - $58.99 16,200 $58.05
-----------------------------------------------------------------------
At September 30, 1999 1,863,359 $29.70
-----------------------------------------------------------------------
At September 30, 1998 1,600,441 $26.15
=======================================================================
</TABLE>
<PAGE> 19
Notes to Consolidated Financial Statements (CONTINUED)
38
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," to account for employee stock options. Accordingly,
no compensation expense has been recognized for stock option plans.
Pro forma net income and earnings per share information, as required by SFAS No.
123, "Accounting for Stock-Based Compensation," has been determined as if the
Company had accounted for employee stock options under the fair value method
described by SFAS No. 123.
The weighted average option fair values and the assumptions used to estimate
these values were as follows:
<TABLE>
<CAPTION>
Grants Issued in Year ended September 30,
---------------------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------
<S> <C> <C> <C>
Expected life of option (years) 6 6 6
Risk-free interest rate 6.18% 4.78% 5.84%
Expected volatility of the
Company's stock 19.94% 21.15% 19.75%
Expected dividend yield on the
Company's stock 2.11% 2.24% 2.42%
Fair value of each option $15 $14 $11
===========================================================================
</TABLE>
For the purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the three-year vesting period of the
options. The Company's pro forma information follows:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------------------------------------------------
(in millions, except per share data) 2000 1999(1) 1998(2)
------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $466.4 $415.0 $333.6
Earnings per share
Basic $ 5.33 $ 4.72 $ 3.83
Diluted $ 5.03 $ 4.43 $ 3.59
==============================================================================
</TABLE>
(1) Amounts include a gain on the sale of businesses of $32.5 million or $.38
per basic share and $.35 per diluted share, after-tax.
(2) Amounts include a gain on the sale of a business of $35.0 million or $.41
per basic share and $.38 per diluted share, after-tax.
Under the terms of a Rights Agreement, as amended effective November 16, 1994,
each share of the Company's common stock entitles its holder to one Right. The
Rights Agreement provides that if 20 percent or more of the Company's common
stock is acquired, the Rights become exercisable. Further, upon the occurrence
of certain defined events, the Rights entitle the holder to purchase common
stock of the Company or common stock of an "acquiring company" having a market
value equivalent to two times the Right's exercise price of $87.50. In addition,
the Rights Agreement permits the Company's board of directors, in certain
circumstances, to exchange the Rights for shares of common stock. The Rights are
subject to redemption by the board of directors for $.005 per Right. The Rights
have no voting power and expire November 30, 2004.
Approximately $70 million of consolidated retained earnings at September 30,
2000 represents undistributed earnings of the Company's partially-owned
affiliates accounted for by the equity method.
10 Earnings per Share
The following table reconciles the numerators and denominators used to calculate
basic and diluted earnings per share for the years ended September 30, 2000,
1999 and 1998:
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------------------------------------------------------
(in millions) 2000 1999 1998
---------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME AVAILABLE TO
COMMON SHAREHOLDERS
Net income $472.4 $419.6 $337.7
Preferred stock dividends,
net of tax benefit(1) (9.8) (13.0) (9.5)
---------------------------------------------------------------------------
Basic income available to
common shareholders $462.6 $406.6 $328.2
---------------------------------------------------------------------------
Net income $472.4 $419.6 $337.7
Effect of dilutive securities:
Compensation expense,
net of tax, arising from assumed
conversion of preferred stock(1) (4.4) (6.9) (5.2)
---------------------------------------------------------------------------
Diluted income available to
common shareholders $468.0 $412.7 $332.5
===========================================================================
WEIGHTED AVERAGE
SHARES OUTSTANDING
Basic weighted average
shares outstanding 85.7 85.1 84.5
Effect of dilutive securities:
Stock options 1.2 1.7 1.6
Convertible preferred stock 5.0 5.3 5.5
---------------------------------------------------------------------------
Diluted weighted average
shares outstanding 91.9 92.1 91.6
===========================================================================
</TABLE>
(1) Preferred stock dividends for 1999 include $3.3 million associated with
certain cash redemptions of preferred stock. Compensation expense, net of
tax, arising from assumed conversion of preferred stock includes $2.0
million for the preferred stock redemptions.
<PAGE> 20
JOHNSON CONTROLS, INC.
39
11 Retirement Plans
PENSION BENEFITS The Company has noncontributory defined benefit pension plans
covering most domestic and certain foreign employees. The benefits provided are
based primarily on years of service and average compensation or a monthly
retirement benefit amount. Funding for domestic pension plans equals or exceeds
the minimum requirements of the Employee Retirement Income Security Act of 1974
(ERISA). Also, the Company makes contributions to union-trusteed pension funds
for construction and service personnel.
The majority of plan assets are comprised of common stocks, with the remainder
primarily in fixed income investments. At the measurement dates of June 30, 2000
and 1999, plan assets included approximately 888,000 and 873,000 shares,
respectively, of Johnson Controls, Inc. common stock with total market values
of $46 million and $61 million at the respective dates.
For pension plans with accumulated benefit obligations that exceed plan assets,
the projected benefit obligation, accumulated benefit obligation and fair value
of plan assets of those plans were $385 million, $271 million and $52 million,
respectively, as of September 30, 2000 and $145 million, $132 million and $21
million, respectively, as of September 30, 1999.
SAVINGS AND INVESTMENT PLANS The Company sponsors numerous defined contribution
savings plans which allow employees to contribute a portion of their pre-tax
and/or after-tax income in accordance with plan specified guidelines. Several of
the plans require the Company to match a percentage of the employee
contributions up to certain limits. Excluding the ESOP, matching contributions
charged to expense amounted to $22 million, $21 million and $19 million for the
years ended 2000, 1999 and 1998, respectively.
The Company established an ESOP (see Note 9) as part of its existing savings and
investment (401K) plan, which is available to eligible domestic employees. The
Company's annual contributions to the ESOP, when combined with the Preferred
Stock dividends, are of an amount which will allow the ESOP to meet its debt
service requirements. This contribution amount was $13 million in 2000, $18
million in 1999 and $12 million in 1998. Total compensation expense recorded by
the Company was $30 million in 2000, $9 million in 1999 and $18 million in 1998.
POSTRETIREMENT HEALTH AND OTHER BENEFITS The Company provides certain
healthcare and life insurance benefits for eligible retirees and their
dependents. These benefits are not funded, but are paid as incurred. Eligibility
for coverage is based on meeting certain years of service and retirement age
qualifications. These benefits may be subject to deductibles, copayment
provisions and other limitations, and the Company has reserved the right to
modify these benefits. Effective January 31, 1994, the Company modified certain
salaried plans to place a limit on the Company's cost of future annual retiree
medical benefits at no more than 150 percent of the 1993 cost. Most
international employees are covered by government sponsored programs, and the
cost to the Company is not significant.
The September 30, 2000 accumulated postretirement benefit obligation was
determined using assumed healthcare cost trend rates of 7 percent and 6 percent
for pre-65 and post-65 years of age employees, respectively. The September 30,
1999 accumulated postretirement benefit obligation was determined using
assumed healthcare cost trend rates of 8 percent and 6 percent for pre-65 and
post-65 years of age employees, respectively. These rates decrease 1 percent per
year to an ultimate rate of 6 percent. The healthcare cost trend rate assumption
has a significant effect on the amounts reported. To illustrate, a one
percentage point change in the assumed healthcare cost trend rate would have
changed the accumulated benefit obligation by $5 million at September 30, 2000
and the sum of the service and interest costs in 2000 by $1 million.
No change in the Company's practice of funding these benefits on a pay-as-you-go
basis is anticipated.
The table that follows contains a reconciliation of the changes in the benefit
obligation, the changes in plan assets and the funded status as of September 30,
2000 and 1999, respectively. Acquisition-related changes presented in the table
relate primarily to the acquisition of Ikeda in September 2000 (see Note 1).
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
40
<TABLE>
<CAPTION>
Postretirement
Pension Health and Other
------------------------------------------------------------------------------
(in millions) 2000 1999 2000 1999
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at
beginning of year $1,004.8 $ 954.2 $ 152.3 $ 150.9
Service cost 41.9 40.9 4.4 4.1
Interest cost 70.4 66.6 10.8 10.6
Amendments made
during the year 5.3 2.8 2.0 -
Acquisitions 253.0 - - -
Actuarial gain (9.2) (7.1) (7.3) (4.2)
Benefits paid (41.1) (40.4) (11.2) (9.6)
Curtailment gain - (2.7) - (0.1)
Currency translation
adjustment (20.8) (9.5) (0.3) 0.6
------------------------------------------------------------------------------
Benefit obligation
at end of year $1,304.3 $1,004.8 $ 150.7 $ 152.3
==============================================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets
at beginning of year $1,049.3 $ 944.4 $ - $ -
Actual return on plan assets 87.3 131.0 - -
Acquisitions 35.1 - - -
Employer contributions 13.6 14.5 11.2 9.6
Benefits paid (41.1) (40.4) (11.2) (9.6)
Currency translation
adjustment (6.5) (0.2) - -
------------------------------------------------------------------------------
Fair value of plan assets
at end of year $1,137.7 $1,049.3 $ - $ -
==============================================================================
Funded status $ (166.6) $ 44.5 $(150.7) $(152.3)
Unrecognized net
transition asset (14.5) (19.2) - -
Unrecognized net
actuarial gain (127.8) (127.9) (11.7) (4.1)
Unrecognized prior
service cost 16.5 12.2 (26.0) (30.4)
Employer contributions
paid between July 1
and September 30 1.0 0.9 - -
------------------------------------------------------------------------------
Net accrued benefit cost
recognized at end of year $ (291.4) $ (89.5) $(188.4) $(186.8)
------------------------------------------------------------------------------
Amounts recognized in the
Statement of Financial
Position consist of:
Prepaid benefit cost $ 42.6 $ 33.2 $ - $ -
Accrued benefit liability (350.9) (133.1) (188.4) (186.8)
Intangible asset 7.7 4.8 - -
Accumulated other
comprehensive loss 9.2 5.6 - -
------------------------------------------------------------------------------
Net amount recognized $ (291.4) $ (89.5) $(188.4) $(186.8)
------------------------------------------------------------------------------
WEIGHTED-AVERAGE
ASSUMPTIONS AS OF JUNE 30,
Discount rate 7.50% 7.25% 7.50% 7.25%
Expected return
on plan assets 9.75% 9.75% N/A N/A
Rate of compensation increase 6.00% 6.00% N/A N/A
==============================================================================
</TABLE>
The table that follows contains the components of net periodic benefit cost for
the years ended September 30, 2000, 1999 and 1998.
<TABLE>
<CAPTION>
Postretirement
Pension Health and Other
----------------------------------------------------------------------------------------------------
(in millions) 2000 1999 1998 2000 1999 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET
PERIODIC BENEFIT COST
Service cost $41.9 $ 40.9 $ 35.0 $ 4.4 $ 4.1 $ 3.7
Interest cost 70.4 66.6 59.4 10.8 10.6 10.9
Expected return on
plan assets (95.5) (83.7) (73.4) - - -
Amortization of
transitional asset (2.7) (2.7) (2.7) - - -
Amortization of net
actuarial loss 0.5 0.2 0.5 0.2 0.4 -
Amortization of
prior service cost 1.7 1.5 1.6 (2.5) (2.7) (2.4)
Curtailment gain - (2.7) - - (0.1) -
----------------------------------------------------------------------------------------------------
Net periodic benefit cost $16.3 $ 20.1 $ 20.4 $12.9 $12.3 $12.2
====================================================================================================
</TABLE>
12 Research and Development
Expenditures for research activities relating to product development and
improvement are charged against income as incurred. Such expenditures amounted
to $404 million in 2000, $346 million in 1999 and $246 million in 1998.
13 Income Taxes
An analysis of effective income tax rates is shown below:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 3.5 2.9 2.8
Foreign tax expense at different
rates and foreign losses
without tax benefits 2.6 1.3 3.7
Goodwill 1.4 1.5 1.9
Other (2.9) (0.2) (1.9)
------------------------------------------------------------------
39.6% 40.5% 41.5%
==================================================================
</TABLE>
Deferred taxes were classified in the Consolidated Statement of Financial
Position as follows:
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------
(in millions) 2000 1999
------------------------------------------------------------------
<S> <C> <C>
Other current assets $216.2 $221.4
Other noncurrent assets 181.9 120.4
Accrued income taxes (8.5) (5.2)
Other noncurrent liabilities (26.4) (33.0)
------------------------------------------------------------------
Net deferred tax asset $363.2 $303.6
==================================================================
</TABLE>
<PAGE> 22
JOHNSON CONTROLS, INC.
41
Temporary differences and carryforwards which gave rise to deferred tax assets
and liabilities included:
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------
(in millions) 2000 1999
----------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS
Accrued expenses and reserves $320.9 $349.4
Employee benefits 178.4 74.8
Net operating loss carryforwards 62.7 64.5
Other 36.0 16.1
----------------------------------------------------------------
598.0 504.8
Valuation allowance (61.4) (65.2)
----------------------------------------------------------------
536.6 439.6
----------------------------------------------------------------
DEFERRED TAX LIABILITIES
Property, plant and equipment 34.7 41.2
Inventories 2.0 2.9
Long-term contracts 19.5 19.6
Joint ventures 9.8 7.8
Intangible assets 47.6 43.7
Other 59.8 20.8
----------------------------------------------------------------
173.4 136.0
----------------------------------------------------------------
Net deferred tax asset $363.2 $303.6
----------------------------------------------------------------
</TABLE>
The valuation allowance represents foreign operating loss carryforwards for
which utilization is uncertain. The utilization of foreign operating loss
carryforwards is uncertain because it is unlikely that the losses will be
utilized within the carryforward periods prescribed by the applicable foreign
taxing jurisdictions. Cumulative tax losses in recent years (particularly in
emerging market countries), and limited carryforward periods in certain
countries are factors considered in making this determination.
Components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------------------------------------
(in millions) 2000 1999 1998
------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $166.0 $280.0 $215.6
State 33.5 44.2 31.7
Foreign 83.1 98.2 50.0
------------------------------------------------------------------
282.6 422.4 297.3
------------------------------------------------------------------
Deferred
Federal 49.6 (75.2) (34.6)
State 6.4 (9.9) (4.5)
Foreign 0.3 (25.6) (2.2)
------------------------------------------------------------------
56.3 (110.7) (41.3)
------------------------------------------------------------------
Provision for income taxes $338.9 $311.7 $256.0
==================================================================
</TABLE>
Consolidated domestic income before income taxes and minority interests was
$680.0 million in 2000, $590.4 million in 1999 and $545.3 million in 1998. The
corresponding amounts for foreign operations were $175.7 million in 2000, $179.5
million in 1999 and $71.5 million in 1998.
Income taxes paid during 2000, 1999 and 1998 were $328 million, $279 million and
$246 million, respectively.
Domestic income taxes have not been provided on undistributed earnings of
foreign subsidiaries of $563 million which are considered to be permanently
invested. If undistributed earnings were remitted, foreign tax credits would
substantially offset any resulting domestic tax liability.
14 Contingencies
The Company is involved in a number of proceedings and potential proceedings
relating to environmental matters. At September 30, 2000, the Company had an
accrued liability of approximately $41 million relating to environmental
matters. The Company's environmental liabilities are undiscounted and do not
take into consideration any possible recoveries of future insurance proceeds.
Because of the uncertainties associated with environmental assessment and
remediation activities, the Company's future expenses to remediate the currently
identified sites could be considerably higher than the accrued liability.
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.
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
42
15 Segment Information
BUSINESS SEGMENTS The Company has two operating segments, the Automotive
Systems Group and the Controls Group, which also constitute its reportable
segments. The Automotive Systems Group designs and manufactures products for
motorized vehicles. The segment supplies seating, interior systems and batteries
for cars, light trucks and vans. The Controls Group installs and services
facility control systems and provides broad-based management services for the
non-residential buildings market.
The accounting policies applicable to the reportable segments are the same as
those described in the Summary of Significant Accounting Policies. Management
evaluates the performance of the segments based primarily on operating income.
Operating revenues and expenses are allocated to business segments in
determining segment operating income. Items excluded from the determination of
segment operating income include interest income and expense, equity in earnings
of partially-owned affiliates, gains and losses from sales of businesses and
long-term assets, foreign currency gains and losses, and other miscellaneous
expense. Unallocated assets are corporate cash and cash equivalents, investments
in partially-owned affiliates and other non-operating assets.
Financial information relating to the Company's reportable segments was as
follows:
<TABLE>
<CAPTION>
Year ended September 30,
--------------------------------------------------------------------
(in millions) 2000 1999 1998
--------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES
Automotive Systems Group $12,738.5 $12,075.1 $ 9,263.9
Controls Group 4,416.1 4,064.3 3,322.9
--------------------------------------------------------------------
Total $17,154.6 $16,139.4 $12,586.8
====================================================================
OPERATING INCOME
Automotive Systems Group $ 765.2 $ 682.4 $ 529.7
Controls Group 199.8 172.5 134.3
--------------------------------------------------------------------
Total $ 965.0 $ 854.9 $ 664.0
====================================================================
ASSETS (YEAR-END)
Automotive Systems Group $ 7,309.9 $ 6,430.5 $ 6,232.6
Controls Group 1,621.0 1,610.2 1,219.0
Unallocated 497.1 573.5 490.5
--------------------------------------------------------------------
Total $ 9,428.0 $ 8,614.2 $ 7,942.1
====================================================================
DEPRECIATION/AMORTIZATION
Automotive Systems Group $ 400.1 $ 386.1 $ 327.2
Controls Group 61.7 59.5 57.0
--------------------------------------------------------------------
Total $ 461.8 $ 445.6 $ 384.2
====================================================================
CAPITAL EXPENDITURES
Automotive Systems Group $ 468.8 $ 438.0 $ 414.6
Controls Group 77.9 76.0 53.7
--------------------------------------------------------------------
Total $ 546.7 $ 514.0 $ 468.3
====================================================================
</TABLE>
The Company has significant sales to the automotive industry. DaimlerChrysler AG
accounted for 16 percent of the Company's net sales in 2000 and 1999 and 13
percent in 1998; Ford Motor Company accounted for 13 percent in 2000 and 1999
and 16 percent in 1998; and General Motors Corporation accounted for 14 percent
in 2000 and 13 percent in 1999 and 1998. Approximately 72 percent of the
Company's 2000 net sales to these customers were based in North America, 25
percent were European sales and 3 percent were attributable to sales in other
foreign markets. As of September 30, 2000, the Company had accounts receivable
totaling $725 million from these customers.
GEOGRAPHIC SEGMENTS Financial information relating to the Company's operations
by geographic area was as follows:
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------------------------------------------
(in millions) 2000 1999 1998
----------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES
North America $11,325.1 $10,465.4 $ 8,725.8
Europe 4,799.7 4,872.3 3,461.0
Other foreign 1,029.8 801.7 400.0
----------------------------------------------------------------------
Total $17,154.6 $16,139.4 $12,586.8
======================================================================
LONG-LIVED ASSETS (YEAR-END)
North America $ 1,389.1 $ 1,282.9 $ 1,205.0
Europe 565.5 589.1 597.5
Other foreign 350.4 124.0 80.4
----------------------------------------------------------------------
Total $ 2,305.0 $ 1,996.0 $ 1,882.9
======================================================================
</TABLE>
The Company's net sales and long-lived assets in Europe for 2000 were lower than
1999 due to the negative effect of currency translation, primarily associated
with the euro.
Net sales attributed to geographic locations are based on the location of the
assets producing the sales. Long-lived assets by geographic location consist of
net property, plant and equipment.
<PAGE> 24
REPORT OF MANAGEMENT
43
Johnson Controls management has primary responsibility for the consolidated
financial statements and other information included in this annual report and
for ascertaining that the data fairly reflect the Company's financial position
and results of operations. The Company prepared the consolidated financial
statements in accordance with generally accepted accounting principles
appropriate in the circumstances, and such statements necessarily include
amounts that are based on best estimates and judgements with appropriate
consideration given to materiality.
The Company's system of internal control is designed to provide reasonable
assurance that Company assets are safeguarded from loss or unauthorized use or
disposition and that transactions are executed in accordance with management's
authorization and are properly recorded to permit the preparation of financial
statements in accordance with generally accepted accounting principles. This
system is augmented by a careful selection and training of qualified personnel,
a proper division of responsibilities, and dissemination of written policies and
procedures. An internal audit program monitors the effectiveness of this control
system.
The Audit Committee of the Board of Directors consists entirely of directors who
are not employees of the Company. The Audit Committee reviews audit plans,
internal controls, financial reports and related matters and meets regularly
with the internal auditors and independent accountants, both of whom have open
access to the Committee.
PricewaterhouseCoopers LLP, independent accountants, audited the Company's
consolidated financial statements and issued the opinion below.
/s/ James H. Keyes
James H. Keyes
Chairman and Chief Executive Officer
/s/ John M. Barth
John M. Barth
President and Chief Operating Officer
/s/ Stephen A. Roell
Stephen A. Roell
Senior Vice President and Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Johnson
Controls, Inc.
In our opinion, the statements appearing on pages 28 through 42 of this report
present fairly, in all material respects, the financial position of Johnson
Controls, Inc. and its subsidiaries at September 30, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2000, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
October 17, 2000
<PAGE> 25
FIVE YEAR SUMMARY
JOHNSON CONTROLS, INC.
44
<TABLE>
<CAPTION>
Year ended September 30,
-------------------------------------------------------------------------------------------------------------------------------
(dollars in millions, except per share data) 2000(1) 1999(2) 1998(3) 1997(4) 1996(5,6)
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales $17,154.6 $16,139.4 $12,586.8 $11,145.4 $9,210.0
Operating income $ 965.0 $ 854.9 $ 664.0 $ 527.1 $ 478.9
Income from continuing operations $ 472.4 $ 419.6 $ 337.7 $ 220.6 $ 222.7
Net income $ 472.4 $ 419.6 $ 337.7 $ 288.5 $ 234.7
Earnings per share from continuing operations
Basic $ 5.40 $ 4.78 $ 3.88 $ 2.52 $ 2.58
Diluted $ 5.09 $ 4.48 $ 3.63 $ 2.37 $ 2.42
Earnings per share
Basic $ 5.40 $ 4.78 $ 3.88 $ 3.34 $ 2.72
Diluted $ 5.09 $ 4.48 $ 3.63 $ 3.12 $ 2.55
Return on average shareholders' equity(7) 20% 18% 17% 16% 16%
Capital expenditures $ 546.7 $ 514.0 $ 468.3 $ 370.9 $ 322.3
Depreciation $ 385.3 $ 363.2 $ 311.2 $ 283.6 $ 226.6
Number of employees 105,000 95,000 89,000 72,300 65,800
FINANCIAL POSITION
Working capital(8) $ (232.8) $ (418.1) $ (884.2) $ (443.4) $ 225.8
Total assets $ 9,428.0 $ 8,614.2 $ 7,942.1 $ 6,048.6 $4,991.2
Long-term debt $ 1,315.3 $ 1,283.3 $ 997.5 $ 806.4 $ 752.2
Total debt $ 1,822.8 $ 1,855.1 $ 2,326.4 $ 1,462.6 $1,033.5
Shareholders' equity $ 2,576.1 $ 2,270.0 $ 1,941.4 $ 1,687.9 $1,507.8
Total debt to total capitalization 41% 45% 55% 46% 41%
Book value per share $ 29.39 $ 26.12 $ 22.53 $ 19.80 $ 17.88
COMMON SHARE INFORMATION
Dividends per share $ 1.12 $ 1.00 $ .92 $ .86 $ .82
Market prices
High $70 13/16 $76 11/16 $ 61 7/8 $49 13/16 $ 38 1/4
Low $45 13/16 $ 40 1/2 $ 42 3/16 $ 35 3/8 $ 28 7/8
Weighted average shares (in millions)
Basic 85.7 85.1 84.5 83.5 82.6
Diluted 91.9 92.1 91.6 90.7 89.7
Number of shareholders 63,863 64,228 62,828 57,824 44,636
==============================================================================================================================
</TABLE>
(1) Amounts presented in the "Financial Position" section of the Five Year
Summary for 2000 include the effect of the September 1, 2000 acquisition of
Ikeda Bussan Co. Ltd. (Ikeda). Operating results of Ikeda for September
2000, which were not material, have not been included in the Consolidated
Statement of Income or in the amounts presented in the "Operating Results"
section.
(2) Results include a gain on the sale of the Automotive Systems Group's
Industrial Battery Division, net of a loss related to the disposal of a
small Controls Group operation in the United Kingdom, of $54.6 million
($32.5 million or $.38 per basic share and $.35 per diluted share,
after-tax).
(3) Results include a gain on the sale of the Plastics Machinery Division
of $59.9 million ($35.0 million or $.41 per basic share and $.38 per diluted
share, after-tax).
(4) Results include a restructuring charge of $70.0 million ($40.3 million or
$.48 per basic share and $.44 per diluted share, after-tax).
(5) Share and per share information has been restated to reflect a two-for-one
split of the Company's common stock effective March 7, 1997.
(6) Amounts have been restated to reflect the reclassification of the Plastic
Container Division as a discontinued operation.
(7) Return on average shareholders' equity (ROE) represents income from
continuing operations divided by average equity. In calculating ROE, income
from continuing operations for 1999 and 1998 exclude the gains on sales of
businesses and 1997 excludes the restructuring charge.
(8) Working capital for 1996 excludes net assets of discontinued operations.
