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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-5097
JOHNSON CONTROLS, INC.
(Exact name of registrant as specified in its charter)
<Table>
WISCONSIN 39-0380010
(State of Incorporation) (I.R.S. Employer Identification No.)
</Table>
5757 NORTH GREEN BAY AVENUE, P.O. BOX 591, MILWAUKEE, WI 53201
(Address of principal executive office)
Registrant's telephone number, including area code: (414) 524-1200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<Table>
<Caption>
CLASS OUTSTANDING AT DECEMBER 31, 2001
----- --------------------------------
Common Stock $.16 2/3 Par Value 87,652,738
</Table>
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JOHNSON CONTROLS, INC.
FORM 10-Q
December 31, 2001
REPORT INDEX
Page No.
PART I - FINANCIAL INFORMATION:
Consolidated Statement of Financial Position at December 31, 2001,
September 30, 2001 and December 31, 2000 ............................... 3
Consolidated Statement of Income for the Three Month
Periods Ended December 31, 2001 and 2000 (adjusted and actual) ......... 4
Consolidated Statement of Cash Flows for the Three Month
Periods Ended December 31, 2001 and 2000 ............................... 5
Notes to Consolidated Financial Statements ............................... 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................... 12
Quantitative and Qualitative Disclosures About Market Risk ............... 17
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings ................................................ 18
Item 4. Results of Votes of Security Holders ............................. 18
Item 5. Other Information ................................................ 18
Item 6. Exhibits and Reports on Form 8-K ................................. 18
SIGNATURES ................................................................ 19
2
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions)
December 31, September 30, December 31,
2001 2001 2000
------------ ------------- ------------
(unaudited) (unaudited)
ASSETS
Cash and cash equivalents $261.0 $374.6 $355.2
Accounts receivable - net 2,776.9 2,673.4 2,312.3
Costs and earnings in excess of billings on
uncompleted contracts 264.1 254.9 231.7
Inventories 659.7 577.6 585.1
Other current assets 636.9 663.5 753.2
------------------ ------------------- -----------------
Current assets 4,598.6 4,544.0 4,237.5
Property, plant and equipment - net 2,446.1 2,379.8 2,363.2
Goodwill - net 2,580.6 2,247.3 2,159.1
Other intangible assets - net 255.5 135.4 123.0
Investments in partially-owned affiliates 318.0 300.5 252.2
Other noncurrent assets 301.0 304.5 407.4
------------------ ------------------- -----------------
Total assets $10,499.8 $9,911.5 $9,542.4
================== =================== =================
LIABILITIES AND EQUITY
Short-term debt $354.4 $379.9 $663.9
Current portion of long-term debt 45.2 45.3 39.4
Accounts payable 2,417.4 2,437.3 2,095.4
Accrued compensation and benefits 363.2 436.3 350.1
Accrued income taxes 124.4 137.8 194.0
Billings in excess of costs and earnings
on uncompleted contracts 165.3 163.0 179.7
Other current liabilities 1,103.8 980.1 1,065.7
------------------ ------------------- -----------------
Current liabilities 4,573.7 4,579.7 4,588.2
Long-term debt 1,927.4 1,394.8 1,262.3
Postretirement health and other benefits 168.5 162.5 164.1
Minority interests in equity of subsidiaries 203.1 207.3 246.2
Other noncurrent liabilities 571.4 581.8 633.1
Shareholders' equity 3,055.7 2,985.4 2,648.5
------------------ ------------------- -----------------
Total liabilities and equity $10,499.8 $9,911.5 $9,542.4
================== =================== =================
The accompanying notes are an integral part of the financial statements.
3
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share data; unaudited)
Three Months Ended December 31,
--------------------------------------
Adjusted
2001 2000* 2000
----------- ----------- -----------
Net sales $ 4,817.7 $ 4,454.4 $ 4,454.4
Cost of sales 4,141.4 3,814.4 3,814.4
----------- ----------- -----------
Gross profit 676.3 640.0 640.0
Selling, general and administrative expenses 437.8 413.3 430.8
----------- ----------- -----------
Operating income 238.5 226.7 209.2
Interest income 3.2 5.9 5.9
Interest expense (32.1) (33.3) (33.3)
Equity income 4.1 7.5 7.5
Miscellaneous - net (3.4) (2.9) (2.9)
----------- ----------- -----------
Other income (expense) (28.2) (22.8) (22.8)
----------- ----------- -----------
Income before income taxes and minority interests 210.3 203.9 186.4
Provision for income taxes 75.5 73.9 72.1
Minority interests in net earnings of subsidiaries 14.9 11.8 11.8
----------- ----------- -----------
Net income $ 119.9 $ 118.2 $ 102.5
=========== =========== ===========
Earnings available for common shareholders $ 117.8 $ 115.7 $ 100.0
=========== =========== ===========
Earnings per share
Basic $ 1.35 $ 1.35 $ 1.16
=========== =========== ===========
Diluted $ 1.27 $ 1.27 $ 1.10
=========== =========== ===========
* The adjusted information for the three months ended December 31, 2000 is
presented as if SFAS No. 142 (see Note 4) had been adopted October 1, 2000.
Results have been adjusted to exclude goodwill amortization expense of $17.5
million and the related income tax effect.
The accompanying notes are an integral part of the financial statements.
4
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions; unaudited)
Three Months
Ended December 31,
------------------------------------
2001 2000
-------------- --------------
OPERATING ACTIVITIES
Net income $119.9 $102.5
Adjustments to reconcile net income to cash provided by operating activities
Depreciation 119.9 102.1
Amortization of intangibles 4.7 20.3
Equity in earnings of partially-owned affiliates, net of dividends received (3.1) (7.1)
Minority interests in net earnings of subsidiaries 14.9 11.8
Deferred income taxes 10.3 3.3
Other (4.8) 0.6
Changes in working capital, excluding acquisition of businesses
Receivables 73.4 57.6
Inventories 12.1 (9.8)
Other current assets 32.9 76.1
Accounts payable and accrued liabilities (258.9) (232.6)
Accrued income taxes (16.6) 46.8
Billings in excess of costs and earnings on uncompleted contracts 2.8 10.7
-------------- --------------
Cash provided by operating activities 107.5 182.3
-------------- --------------
INVESTING ACTIVITIES
Capital expenditures (94.0) (138.6)
Sale of property, plant and equipment 8.0 5.3
Acquisition of businesses, net of cash acquired (592.0) (60.3)
Changes in long-term investments - net (9.3) (32.4)
-------------- --------------
Cash used by investing activities (687.3) (226.0)
-------------- --------------
FINANCING ACTIVITIES
(Decrease) increase in short-term debt - net (48.0) 179.9
Increase in long-term debt 600.5 4.6
Repayment of long-term debt (43.7) (65.3)
Payment of cash dividends (31.3) (29.2)
Other (11.3) 33.3
-------------- --------------
Cash provided by financing activities 466.2 123.3
-------------- --------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ($113.6) $79.6
============== ==============
The accompanying notes are an integral part of the financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position,
results of operations, and cash flows for the periods presented. These
financial statements should be read in conjunction with the audited
financial statements and notes thereto contained in the Company's Annual
Report to Shareholders for the year ended September 30, 2001. The results
of operations for the three month period ended December 31, 2001 are not
necessarily indicative of the results which may be expected for the
Company's 2002 fiscal year because of seasonal and other factors. Adjusted
information for the three months ended December 31, 2000 is presented as
if Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill
and Other Intangible Assets" (see Note 4) had been adopted October 1,
2000. Certain prior year amounts have been reclassified to conform to the
current year's presentation.
2. EARNINGS PER SHARE
The following table reconciles the numerators and denominators used to
calculate basic and diluted earnings per share:
Three Months
Ended December 31
-------------------------------
(in millions) Adjusted
2001 2000* 2000
---------- ---------- ---------
Income Available to Common Shareholders
Net Income $119.9 $118.2 $102.5
Preferred stock dividends, net of tax benefit (2.1) (2.5) (2.5)
---------- ---------- ---------
Basic income available to common shareholders $117.8 $115.7 $100.0
========== ========== =========
Net Income $119.9 $118.2 $102.5
Effect of Dilutive Securities:
Compensation expense, net of tax benefit, arising
from assumed conversion of preferred stock (0.7) (0.9) (0.9)
---------- ---------- ---------
Diluted income available to common shareholders $119.2 $117.3 $101.6
========== ========== =========
Weighted Average Shares Outstanding
Basic weighted average shares outstanding 87.6 86.1 86.1
Effect of Dilutive Securities:
Stock options 1.6 1.0 1.0
Convertible preferred stock 4.8 5.0 5.0
---------- ---------- ---------
Diluted weighted average shares outstanding 94.0 92.1 92.1
========== ========== ========
* The adjusted information for the three months ended December 31, 2000 is
presented as if SFAS No. 142 (see Note 4) had been adopted October 1,
2000. Results have been adjusted to exclude goodwill amortization expense
of $17.5 million and the related income tax effect.
6
3. CASH FLOW
For purposes of the Consolidated Statement of Cash Flows, the Company
considers all investments with a maturity of three months or less at the
time of purchase to be cash equivalents.
Income taxes paid during the three months ended December 31, 2001 totaled
approximately $53 million, compared with a net cash receipt of $13 million
in the prior year period. A $30 million income tax refund was received in
the prior year first quarter. Total interest paid was approximately $28
million and $32 million for the three months ended December 31, 2001 and
2000, respectively.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective October 1, 2001, the Company adopted SFAS No. 142 "Goodwill and
Other Intangible Assets. Under SFAS No. 142 goodwill will no longer be
amortized; however, it must be tested for impairment at least annually.
Amortization will continue to be recorded for other intangible assets with
determinable lives. The Company's financial statements include comparative
adjusted information which assumes SFAS No. 142 had been adopted October
1, 2000.
The Company's other intangible assets primarily relate to acquired patents
associated with the Automotive Systems Group. Amortization of other
intangible assets was approximately $5 million and $3 million for the
three months ended December 31, 2001 and 2000, respectively. Excluding the
impact of any future acquisitions and any changes that may occur as a
result of the final purchase price allocation (see Note 5), the Company
anticipates that annual amortization of other intangible assets will
approximate $20 million for each of the next five years.
The changes in the carrying amount of goodwill for the year ended
September 30, 2001 and for the three months ended December 31, 2001 are as
follows:
Automotive Controls
(in millions) Systems Group Group Total
---------------- -------------- --------------
Balance as of September 30, 2000 $1,934.8 $198.5 $2,133.3
Goodwill from business acquisitions 42.4 152.7 195.1
Amortization (59.5) (11.3) (70.8)
Currency translation (7.6) (2.7) (10.3)
---------------- -------------- --------------
Balance as of September 30, 2001 $1,910.1 $337.2 $2,247.3
Goodwill from business acquisitions 341.0 14.2 355.2
Currency translation (13.8) (8.1) (21.9)
---------------- -------------- --------------
Balance as of December 31, 2001 $2,237.3 $343.3 $2,580.6
================ =============== ==============
See Note 5 for discussion of goodwill from business acquisitions during
the quarter.
7
5. ACQUISITION OF BUSINESSES
Effective October 1, 2001, the Company completed the acquisition of the
automotive electronics business of France-based Sagem SA and the German
automotive battery manufacturer Hoppecke Automotive GmbH & Co. KG. The
Sagem acquisition augments the Company's growth and capabilities in
vehicle cockpit electronics in Europe and North America. Hoppecke provides
new battery technologies that give the Company a leadership position in
the development of the evolving 36/42-volt automotive systems. Both
acquisitions were accounted for as purchases. The acquisitions, with an
initial combined purchase price of approximately $575 million, were
financed with long-term debt. The Company is obtaining independent
appraisals and performing other studies necessary to allocate the purchase
price to the acquired net assets. Pending completion of the appraisals and
studies, the excess of the purchase price over the estimated fair value of
the acquired net assets has been allocated between goodwill and other
intangible assets. The Company expects that such appraisals and studies
and the allocation of the purchase price will be completed by the end of
the fiscal year. Pro forma information to reflect these acquisitions has
not been disclosed as the impact on net income is not material.
Effective September 1, 2000, the Company completed the acquisition of
approximately 90% of the outstanding shares of Ikeda Bussan Co. Ltd.
(Ikeda), a Japanese supplier of automotive seating.
As part of this acquisition, a restructuring reserve of approximately $54
million was recorded. The reserve was established for expected employee
severance costs as the Company eliminates certain non-core activities to
focus on Ikeda's principal seating and interiors businesses. Seven plants
and facilities have been or will be closed as part of the restructuring
plan, with resulting workforce reductions of approximately 1,000
employees. Through December 31, 2001, approximately $20 million of
employee severance costs associated with the restructuring plan were paid
or incurred, and approximately 430 employees separated from the Company.
The reserve balance at December 31, 2001 totaled approximately $34 million
and the majority of the restructuring activities are expected to be
completed by the end of the fiscal year. A share exchange to acquire the
remaining shares of Ikeda was completed in the first quarter of fiscal
2002.
8
6. LONG-TERM DEBT
In November 2001, the Company refinanced its commercial paper borrowings
attributable to its recent acquisitions of Sagem and Hoppecke by issuing a
total of $600 million of variable and fixed rate notes under the Company's
shelf registration statement on file with the Securities and Exchange
Commission. $250 million of variable rate notes, with interest equal to
the three month LIBOR rate plus 60 basis points, mature in November 2003.
$350 million of five percent fixed rate notes are due in November 2006.
7. INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method for most inventories at
domestic locations. The cost of other inventories is determined on the
first-in, first-out (FIFO) method. Finished goods and work-in-process
inventories include material, labor and manufacturing overhead costs.
Inventories were comprised of the following:
December 31, September 30, December 31,
(in millions) 2001 2001 2000
------------ ------------- ------------
Raw materials and supplies $368.0 $331.3 $345.4
Work-in-process 104.4 77.2 83.5
Finished goods 222.6 203.8 186.9
------------ ------------- ------------
FIFO inventories 694.9 612.3 615.8
LIFO reserve (35.3) (34.7) (30.7)
------------ ------------- ------------
Inventories $659.7 $577.6 $585.1
============ ============= ============
8. COMPREHENSIVE INCOME
Comprehensive income is defined as the sum of net income and all other
non-owner changes in equity, such as foreign currency translation,
unrealized gains and losses on equity securities and realized and
unrealized gains and losses on derivatives. Comprehensive income for the
three months ended December 31, 2001 and 2000 was approximately $77
million and $86 million, respectively. The difference between
comprehensive income and net income for the periods presented principally
represent foreign currency translation adjustments.
The Company has foreign-denominated long-term debt and cross-currency
interest rate swaps which are designated as hedges of net investments in
foreign subsidiaries. Gains and losses, net of tax, attributable to these
hedges are deferred in the accumulated other comprehensive income (loss)
account within shareholders' equity. A net gain of approximately $11
million and a net loss of approximately $6 million were recorded for the
three month periods ending December 31, 2001 and 2000, respectively.
9
9. FUTURE ACCOUNTING CHANGES AND DEVELOPMENTS
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" and No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" SFAS No. 143 establishes accounting
standards for the recognition and measurement of an asset retirement
obligation. SFAS No. 144 addresses accounting and reporting for the
impairment or disposal of long-lived assets, superseding SFAS No. 121. The
statements are effective for the Company on October 1, 2002. The Company
is currently evaluating the impact of these statements.
The Securities and Exchange Commission recently issued an interpretive
financial reporting release entitled "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies (FR-60) and a companion
release "Commission Statement About Management's Discussion and Analysis
of Financial Condition and Results of Operations (FR-61). The Company is
presently reviewing the suggested disclosures as set forth therein. For a
summary of the Company's accounting policies see the Summary of
Significant Accounting Policies in the Company's Annual Report to
Shareholders for the year ended September 30, 2001. Other than the
issuance of $600 million of variable and fixed rate notes in November 2001
(see Note 6) which mature in 2003 and 2006, there were no changes in the
timing of the Company's anticipated payments surrounding long-term debt
obligations or future minimum capital and operating lease payments that
materially affect the disclosures presented in the Company's Annual
Report to Shareholders for the year ended September 30, 2001.
10. SEGMENT INFORMATION
The Company has two operating segments, the Automotive Systems Group and
the Controls Group, which also constitute its reportable segments.
Financial information relating to the Company's reportable segments was as
follows:
Three Months
Ended December 31,
--------------------------------------------
Adjusted
(in millions) 2001 2000* 2000
----------- ------------ -----------
Sales
Automotive Systems Group $3,656.2 $3,388.0 $3,388.0
Controls Group 1,161.5 1,066.4 1,066.4
----------- ------------ -----------
Total $4,817.7 $4,454.4 $4,454.4
=========== ============ ===========
Operating Income
Automotive Systems Group $190.7 $183.0 $168.1
Controls Group 47.8 43.7 41.1
----------- ------------ -----------
Total $238.5 $226.7 $209.2
=========== ============ ===========
* The adjusted information for the three months ended December 31, 2000 is
presented as if SFAS No. 142 (see Note 4) had been adopted October 1,
2000. Results have been adjusted to exclude goodwill amortization
expense of $17.5 million and the related income tax effect.
10
Total assets of the Automotive Systems Group increased by approximately
$715 million from the $7.4 billion balance at fiscal year end. The
increase was primarily attributable to the acquisitions of Sagem and
Hoppecke (see Note 5).
11. INCOME TAXES
The provision for income taxes is determined by applying an estimated
annual effective income tax rate to income before income taxes. The rate
is based on the most recent annualized forecast of pretax income,
permanent book/tax differences and tax credits. It also includes the
effect of any valuation allowance expected to be necessary at the end of
the year.
12. CONTINGENCIES
The Company is involved in a number of proceedings and potential
proceedings relating to environmental matters. Although it is difficult to
estimate the liability of the Company related to these environmental
matters, the Company believes that these matters will not have a
materially adverse effect upon its capital expenditures, earnings or
competitive position.
Additionally, the Company is involved in a number of product liability and
various other suits incident to the operation of its businesses. Insurance
coverages are maintained and estimated costs are recorded for claims and
suits of this nature. It is management's opinion that none of these will
have a materially adverse effect on the Company's financial position,
results of operations or cash flows.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTH PERIODS ENDED DECEMBER 31,
2001 AND DECEMBER 31, 2000
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142
"Goodwill and Other Intangible Assets" effective October 1, 2001. Accordingly,
all comparisons to the prior year assume SFAS No. 142 had been adopted October
1, 2000. See Note 4 to the consolidated financial statements.
First quarter consolidated net sales were $4.8 billion, 8% above the prior
year's $4.5 billion. Growth from both of the Company's segments contributed to
this increase.
Automotive Systems Group sales for the first quarter reached $3.7 billion, up 8%
compared with the prior year's $3.4 billion. Sales of automotive interior
systems in North America increased 4% over the prior year despite a 3% decline
in the light vehicle production level. The sales growth reflects the company's
increased market share and involvement in programs where demand year-over-year
was above the industry average. Battery shipments to new customers also
contributed to the increase in North American sales. Automotive segment sales in
Europe were 23% above the prior year reflecting the addition of an automotive
electronics business and a battery business acquired effective October 1, 2001
(see "Acquisitions"). European interior systems sales, excluding the electronics
business, increased 6% over the prior year whereas the European industry vehicle
production level was down slightly. New automotive interiors programs accounted
for the sales increase. Automotive segment sales in Asia and South America,
which represent less than 10% of total automotive segment revenues, declined
modestly as a result of negative currency translation and lower customer
production schedules.
Sales from the Controls Group were $1.2 billion, rising 9% from the prior year.
The growth was primarily attributable to higher European revenues associated
with integrated facility management contracts as well as the inclusion of MC
International, acquired in the third quarter of fiscal 2001. Excluding the
acquisition, European sales were above the prior year by approximately 35%.
North American sales increased 5%, a result of increased facility management and
systems installation activity. Sales in Asia declined approximately 40% due to
the deconsolidation of a joint venture in Japan during the fourth quarter of
fiscal 2001.
Management expects Automotive Systems Group current fiscal year sales to
increase approximately 5% over the prior fiscal year. Segment sales are
projected to benefit from the launch of new interior systems programs worldwide,
customer diversification, its recent acquisitions and higher unit shipments of
automotive batteries. These factors are expected to offset the anticipated
reduction in North American and European light vehicle production.
Controls Group sales are anticipated to rise 8% to 12% for the full year
compared to the prior year. Higher installed control systems activity worldwide
and expansion of
12
integrated facility management services in both the commercial and governmental
markets are anticipated to be the primary sources of the segment increase.
First quarter consolidated operating income of $239 million was 5% above the
prior year's $227 million. The increase is attributable to both the Automotive
Systems Group and the Controls Group.
Automotive Systems Group operating income for the first quarter was $191
million, 4% above the prior year's $183 million. The inclusion of Sagem and
Hoppecke and cost control efforts in North America and Europe more than offset
the negative effect of lower production levels of mature, more profitable
vehicle programs in North America, Japan and South America.
First quarter operating income for the Controls Group climbed to $48 million, a
9% increase from the prior year's $44 million. The rise in operating income was
primarily attributable to the segment's higher volume, better gross margins due
to improved contract execution and efficiency, as well as reduced selling,
general and administrative expenses, as a percentage of sales.
Net interest expense was up slightly, with higher debt due to acquisitions
offset by the current period's lower interest rates. Equity income was
approximately $3 million below the prior year amount. The decrease was related
to certain Automotive Systems Group joint ventures, including start-up expenses
associated with an Asian operation.
The effective income tax rate was 35.9% for the three month period ended
December 31, 2001 compared with 36.2% for the same period last year. The
effective rate was reduced due principally to global tax reduction initiatives.
Minority interests in net earnings of subsidiaries of $15 million for the
current year was $3 million higher than the comparable amount for the prior
year. The increase was primarily attributable to higher earnings at Automotive
Systems Group subsidiaries worldwide.
Net income of $120 million for the first quarter exceeded the prior year's $118
million. The increase is a result of higher operating income as well as a
reduced effective income tax rate. These items were partially offset by slightly
higher net interest expense, a decrease in equity income and a higher deduction
for the Company's minority interests in net earnings of its subsidiaries.
Diluted earnings per share of $1.27 were unchanged from the prior year due to a
higher number of weighted average shares outstanding. This reflects the exercise
of stock options and the effect of the company's increased stock price on common
stock equivalents.
13
COMPARISON OF FINANCIAL CONDITION
Working Capital and Cash Flow
Working capital was $25 million at December 31, 2001, compared with a negative
$36 million at September 30, 2001. Working capital, excluding cash and debt, of
$164 million increased by $149 million compared to fiscal year end. The increase
in working capital reflects the higher working capital associated with the
current year acquisitions partially offset by the timing of receipts and
payments at the calendar year end.
Cash provided by operating activities of $108 million during the first three
months of fiscal 2002 was $75 million less than the amount generated in the
prior year period. The decrease was primarily the result of the less favorable
change in working capital compared to the prior year period.
Capital Expenditures
Capital spending for property, plant and equipment during the current year was
$94 million, compared with the prior year's $139 million. The majority of the
spending was associated with the Automotive Systems Group. The lower first
quarter spending compared to the prior year period is due to timing. Management
expects capital expenditures for the full year to approximate $575 to $600
million, primarily related to new and expanded automotive systems facilities and
product lines worldwide and cost reduction projects. Controls Group expenditures
are expected to be focused on information and building systems technology.
Goodwill
Goodwill of $2.6 billion at December 31, 2001 was $0.3 billion higher than the
balance at September 30, 2001 and $0.4 billion higher than the balance one year
ago. The current year increase is primarily associated with the acquisitions of
Sagem and Hoppecke (see "Acquisitions"). The year-over-year increase also
includes goodwill attributable to the Company's acquisition of MC International
in the third quarter of fiscal 2001.
Capitalization
In November 2001, the Company refinanced its commercial paper borrowings
attributable to its recent acquisitions of Sagem and Hoppecke by issuing a total
of $600 million of variable and fixed rate notes under the Company's shelf
registration statement on file with the Securities and Exchange Commission. $250
million of variable rate notes, with interest equal to the three month LIBOR
rate plus 60 basis points, mature in November 2003. $350 million of five percent
fixed rate notes are due in November 2006.
Total capitalization of $5.4 billion at December 31, 2001 included short-term
debt of $0.3 billion, long-term debt (including the current portion) of $2.0
billion and shareholders' equity of $3.1 billion. The Company's total
capitalization was $4.8 billion and $4.6 billion at September 30, 2001 and
December 31, 2000, respectively. Total debt as a percentage of total
capitalization at the end of the most recent quarter was 43%, compared
14
with 38% at fiscal year end and the 43% level one year ago. The current
quarter's increase in the ratio of debt to total capitalization reflects the
debt used to finance acquisitions.
The Company believes its capital resources and liquidity position at December
31, 2001 are adequate to meet projected needs. Requirements for working capital,
capital expenditures, dividends, debt maturities and any acquisitions in fiscal
2002 will continue to be funded from operations, supplemented by short-term
borrowings, if required.
Backlog
The Company's backlog relates to the Controls Group's installed control systems
operations, which derive a significant portion of revenue from long-term
contracts that are accounted for using the percentage-of-completion method. At
December 31, 2001, the unearned backlog of installed control systems contracts
(excluding integrated facility management) to be executed within the next year
was $1.56 billion, compared with $1.34 billion at December 31, 2000. New order
growth in North America and Asia, both in the new and existing buildings
markets, were the primary sources of the 16% increase from the prior year
period. Orders for control systems in the current year were strongest from the
new non-residential construction market, particularly in the office, airport,
health care and government sectors.
Acquisitions
Effective October 1, 2001, the Company completed the acquisition of the
automotive electronics business of France-based Sagem SA and the German
automotive battery manufacturer Hoppecke Automotive GmbH & Co. KG. The Sagem
acquisition augments the Company's growth and capabilities in vehicle cockpit
electronics in Europe and North America. Hoppecke provides new battery
technologies that give the Company a leadership position in the development of
the evolving 36/42-volt automotive systems. Both acquisitions were accounted for
as purchases. The acquisitions, with an initial combined purchase price of
approximately $575 million, were financed with long-term debt. The Company is
obtaining independent appraisals and performing other studies necessary to
allocate the purchase price to the acquired net assets. Pending completion of
the appraisals and studies, the excess of the purchase price over the estimated
fair value of the acquired net assets has been allocated between goodwill and
other intangible assets. The Company expects that such appraisals and studies
and the allocation of the purchase price will be completed by the end of the
fiscal year.
Effective September 1, 2000, the Company completed the acquisition of
approximately 90% of the outstanding shares of Ikeda Bussan Co. Ltd. (Ikeda), a
Japanese supplier of automotive seating.
As part of this acquisition, a restructuring reserve of approximately $54
million was recorded. The reserve was established for expected employee
severance costs as the
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Company eliminates certain non-core activities to focus on Ikeda's principal
seating and interiors businesses. Seven plants and facilities have been or will
be closed as part of the restructuring plan, with resulting workforce reductions
of approximately 1,000 employees. Through December 31, 2001, approximately $20
million of employee severance costs associated with the restructuring plan were
paid or incurred, and approximately 430 employees separated from the Company.
The reserve balance at December 31, 2001 totaled approximately $34 million and
the majority of the restructuring activities are expected to be completed by the
end of the fiscal year. A share exchange to acquire the remaining shares of
Ikeda was completed in the first quarter of fiscal 2002.
FUTURE ACCOUNTING CHANGES AND DEVELOPMENTS
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" and No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". SFAS No. 143 establishes accounting standards for the
recognition and measurement of an asset retirement obligation. SFAS No. 144
addresses accounting and reporting for the impairment or disposal of long-lived
assets, superseding SFAS No. 121. The statements are effective for the Company
on October 1, 2002. The Company is currently evaluating the impact of these
statements.
The Securities and Exchange Commission recently issued an interpretive financial
reporting release entitled "Cautionary Advice Regarding Disclosure About
Critical Accounting Policies (FR-60) and a companion release "Commission
Statement About Management's Discussion and Analysis of Financial Condition and
Results of Operations (FR-61). The Company is presently reviewing the suggested
disclosures as set forth therein. For a summary of the Company's accounting
policies see the Summary of Significant Accounting Policies in the Company's
Annual Report to Shareholders for the year ended September 30, 2001. Other than
the issuance of $600 million of variable and fixed rate notes in November 2001
(see "Capitalization") which mature in 2003 and 2006, there were no changes in
the timing of the Company's anticipated payments surrounding long-term debt
obligations or future minimum capital and operating lease payments that
materially affect the disclosures presented in the Company's Annual Report to
Shareholders for the year ended September 30, 2001.
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. The euro
currency was fully implemented on January 1, 2002. National currencies will
continue to exist as legal tender and may continue to be used in commercial
transactions through June 30, 2002. After June 30, 2002, the euro will be the
sole legal tender for those countries and the respective national currencies
will be withdrawn. The Company has significant operations in member countries of
the EMU and it has taken required actions to fully convert its operations to the
new currency and has addressed the euro's impact on information systems,
currency
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exchange rate risk and commercial contracts. Costs of the euro conversion to
date have not been material and any remaining 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 and may include words
such as "believes," "expects," "anticipates," "projects or similar expressions.
For those statements, the Company cautions that numerous important factors,
including industry vehicle production levels, U.S. dollar exchange rates and
those discussed elsewhere in this document and in the Company's Form 8-K filing
(dated November 9, 2001), could affect the Company's actual results and could
cause its actual consolidated results to differ materially from those expressed
in any forward-looking statement made by, or on behalf of, the Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company adjusts its portfolio of financial instruments used to manage
foreign exchange exposure over time as its known exposures change. For the year
ended September 30, 2001, a sensitivity analysis of the Company's exposure to
changes in foreign currencies indicated that a 10% appreciation or depreciation
of the currencies being hedged would result in a hypothetical gain or loss,
respectively, of $39 million. 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 the
underlying payables, receivables and net investments in foreign subsidiaries
that are being hedged.
For the period ended December 31, 2001, a similar analysis indicates that a 10%
appreciation or depreciation would result in a hypothetical gain or loss,
respectively, of $93 million. The change in the current quarter is primarily
associated with a cross-currency interest rate swap that the Company entered
into in connection with its acquisition of Sagem. Under the swap, the Company
receives interest based on a variable U.S. dollar rate and pays interest based
on a variable euro interest rate on the outstanding notional principal amounts
in dollars and euro, respectively. In November 2003, the Company will pay 300
million euro in exchange for $271 million. This instrument is designated as a
hedge of a net investment hedge of a foreign subsidiary, and is a hedge of
translation exposure, which has no current impact on the Company's earnings.
There were no other changes in market risk exposures that materially affect the
quantitative and qualitative disclosures presented in the Company's Annual
Report to Shareholders for the year ended September 30, 2001.
17
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no significant changes in status since the last Report.
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
The registrant held its Annual Meeting of Shareholders on January 23, 2002.
Proxies for the meeting were solicited pursuant to Regulation 14; there was no
solicitation in opposition to management's nominees for directors as listed in
the Proxy Statement, and all such nominees (Natalie A. Black, Robert A. Cornog,
James H. Keyes and William H. Lacy) were elected. Of the 77,991,636 shares
voted, at least 77,183,924 shares granted authority to vote for these directors
and no more than 807,712 shares withheld such authority.
The retention of PricewaterhouseCoopers LLP as auditors was approved by the
shareholders with 76,965,874 shares voted for such appointment, 542,850 shares
voted against and 482,912 shares abstained.
ITEM 5. OTHER INFORMATION
(a) R. Bruce McDonald was appointed Corporate Controller in November
2001 and elected a Corporate Vice President in January 2002. Mr.
McDonald previously served as Vice President of Finance for the
automotive business of TRW Inc.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12 Statement regarding the computation of the
ratio of earnings to fixed charges.
(b) There were no reports on Form 8-K filed from the date of the
Company's Annual Report on Form 10-K, filed December 21, 2001,
through December 31, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
JOHNSON CONTROLS, INC.
Date: February 14, 2002 By: /s/ Stephen A. Roell
---------------------
Stephen A. Roell
Senior Vice President and
Chief Financial Officer
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