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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 MARCH 31, 2002
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 MARCH 31, 2002
----- -----------------------------
Common Stock $.16 2/3 Par Value 88,610,685
</Table>
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JOHNSON CONTROLS, INC.
FORM 10-Q
MARCH 31, 2002
REPORT INDEX
Page No.
PART I - FINANCIAL INFORMATION:
Consolidated Statement of Financial Position at March 31, 2002,
September 30, 2001 and March 31, 2001 ....................... 3
Consolidated Statement of Income for the Three- and Six-Month
Periods Ended March 31, 2002 and 2001 (adjusted and actual).. 4
Consolidated Statement of Cash Flows for the Six-Month
Periods Ended March 31, 2002 and 2001 ....................... 5
Notes to Consolidated Financial Statements .................. 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 13
Quantitative and Qualitative Disclosures About Market Risk .... 20
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings ..................................... 21
Item 4. Results of Votes of Security Holders .................. 21
Item 6. Exhibits and Reports on Form 8-K ...................... 21
SIGNATURES ..................................................... 22
2
PART I. - FINANCIAL INFORMATION
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions)
March 31, September 30, March 31,
2002 2001 2001
---------------- ---------------- -----------------
(unaudited) (unaudited)
ASSETS
Cash and cash equivalents $ 216.1 $ 374.6 $ 272.7
Accounts receivable - net 2,782.6 2,673.4 2,456.7
Costs and earnings in excess of billings on
uncompleted contracts 332.3 254.9 265.1
Inventories 634.5 577.6 569.8
Other current assets 633.9 663.5 748.6
--------- -------- --------
Current assets 4,599.4 4,544.0 4,312.9
Property, plant and equipment - net 2,407.2 2,379.8 2,366.2
Goodwill - net 2,518.7 2,247.3 2,134.0
Other intangible assets - net 243.3 135.4 119.1
Investments in partially-owned affiliates 324.9 300.5 256.8
Other noncurrent assets 298.5 304.5 401.0
--------- -------- --------
Total assets $10,392.0 $9,911.5 $9,590.0
========= ======== ========
LIABILITIES AND EQUITY
Short-term debt $ 202.6 $ 379.9 $ 321.6
Current portion of long-term debt 47.1 45.3 40.5
Accounts payable 2,491.2 2,437.3 2,265.2
Accrued compensation and benefits 412.0 436.3 405.5
Accrued income taxes 107.6 137.8 132.4
Billings in excess of costs and earnings
on uncompleted contracts 197.8 163.0 182.7
Other current liabilities 972.8 980.1 1,005.8
--------- -------- --------
Current liabilities 4,431.1 4,579.7 4,353.7
Long-term debt 1,908.7 1,394.8 1,464.9
Postretirement health and other benefits 164.7 162.5 162.3
Minority interests in equity of subsidiaries 201.6 207.3 263.3
Other noncurrent liabilities 551.6 581.8 624.8
Shareholders' equity 3,134.3 2,985.4 2,721.0
--------- -------- --------
Total liabilities and equity $10,392.0 $9,911.5 $9,590.0
========= ======== ========
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 March 31, Six Months Ended March 31,
----------------------------------- -----------------------------------
Adjusted Adjusted
2002 2001* 2001 2002 2001* 2001
--------- --------- --------- --------- --------- ---------
Net sales $ 4,810.5 $ 4,601.6 $ 4,601.6 $ 9,628.2 $ 9,056.0 $ 9,056.0
Cost of sales 4,166.4 3,980.4 3,980.4 8,307.8 7,794.8 7,794.8
--------- --------- --------- --------- --------- ---------
Gross profit 644.1 621.2 621.2 1,320.4 1,261.2 1,261.2
Selling, general and administrative expenses 425.4 412.7 430.6 863.2 826.0 861.4
--------- --------- --------- --------- --------- ---------
Operating income 218.7 208.5 190.6 457.2 435.2 399.8
Interest income 2.8 4.5 4.5 6.0 10.4 10.4
Interest expense (30.0) (34.6) (34.6) (62.1) (67.9) (67.9)
Equity income 10.3 2.3 2.3 14.4 9.8 9.8
Miscellaneous - net (11.8) (3.9) (3.9) (15.2) (6.8) (6.8)
--------- --------- --------- --------- --------- ---------
Other income (expense) (28.7) (31.7) (31.7) (56.9) (54.5) (54.5)
--------- --------- --------- --------- --------- ---------
Income before income taxes and minority interests 190.0 176.8 158.9 400.3 380.7 345.3
Provision for income taxes 63.8 63.5 61.6 139.3 137.4 133.7
Minority interests in net earnings of subsidiaries 11.4 14.3 14.3 26.3 26.1 26.1
--------- --------- --------- --------- --------- ---------
Net income $ 114.8 $ 99.0 $ 83.0 $ 234.7 $ 217.2 $ 185.5
========= ========= ========= ========= ========= =========
Earnings available for common shareholders $ 112.9 $ 96.9 $ 80.9 $ 230.7 $ 212.6 $ 180.9
========= ========= ========= ========= ========= =========
Earnings per share
Basic $ 1.27 $ 1.12 $ 0.94 $ 2.62 $ 2.47 $ 2.10
========= ========= ========= ========= ========= =========
Diluted $ 1.21 $ 1.06 $ 0.89 $ 2.48 $ 2.33 $ 1.99
========= ========= ========= ========= ========= =========
* The adjusted information for the three- and six-month periods ended March 31,
2001 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 ($17.9
million and $35.4 million in the three- and six-month periods ended March 31,
2001, respectively) 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)
Six Months
Ended March 31,
--------------------
2002 2001
-------- --------
OPERATING ACTIVITIES
Net income $ 234.7 $ 185.5
Adjustments to reconcile net income to cash provided by operating activities
Depreciation 241.3 211.8
Amortization of intangibles 9.7 41.1
Equity in earnings of partially-owned affiliates, net of dividends received (13.4) (4.7)
Minority interests in net earnings of subsidiaries 26.3 26.1
Deferred income taxes 25.1 20.2
Other (5.7) (13.4)
Changes in working capital, excluding acquisition of businesses
Receivables (78.8) (136.8)
Inventories 15.1 1.4
Other current assets 25.4 107.0
Accounts payable and accrued liabilities (161.1) (34.7)
Accrued income taxes (32.0) (13.4)
Billings in excess of costs and earnings on uncompleted contracts 36.8 15.4
-------- --------
Cash provided by operating activities 323.4 405.5
-------- --------
INVESTING ACTIVITIES
Capital expenditures (227.5) (281.1)
Sale of property, plant and equipment 26.5 13.4
Acquisition of businesses, net of cash acquired (580.8) (63.3)
Changes in long-term investments - net (17.5) (58.1)
-------- --------
Cash used by investing activities (799.3) (389.1)
-------- --------
FINANCING ACTIVITIES
Decrease in short-term debt - net (181.1) (155.5)
Increase in long-term debt 605.7 236.5
Repayment of long-term debt (49.8) (68.6)
Payment of cash dividends (62.7) (58.2)
Other 5.3 26.5
-------- --------
Cash provided (used) by financing activities 317.4 (19.3)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS $ (158.5) $ (2.9)
======== ========
The accompanying notes are an integral part of the financial statements
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
condensed 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- and six-month periods ended March 31,
2002 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- and six-month periods ended March 31,
2001 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. In addition, 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 Six Months
Ended March 31, Ended March 31,
--------------------------------- ----------------------------------
(in millions) Adjusted Adjusted
2002 2001* 2001 2002 2001* 2001
------ ------ ------ ------ ------ ------
Income Available to Common Shareholders
Net Income $114.8 $ 99.0 $ 83.0 $234.7 $217.2 $185.5
Preferred stock dividends, net of
tax benefit (1.9) (2.1) (2.1) (4.0) (4.6) (4.6)
------ ------ ------ ------ ------ ------
Basic income available to common
shareholders $112.9 $ 96.9 $ 80.9 $230.7 $212.6 $180.9
====== ====== ====== ====== ====== ======
Net Income $114.8 $ 99.0 $ 83.0 $234.7 $217.2 $185.5
Effect of Dilutive Securities:
Compensation expense, net of tax
benefit, arising from assumed
conversion of preferred
stock (0.8) (0.9) (0.9) (1.5) (1.8) (1.8)
------ ------ ------ ------ ------ ------
Diluted income available to common
shareholders $114.0 $ 98.1 $ 82.1 $233.3 $215.4 $183.7
====== ====== ====== ====== ====== ======
Weighted Average Shares Outstanding
Basic weighted average shares
outstanding 88.4 86.5 86.5 88.0 86.3 86.3
Effect of Dilutive Securities:
Stock options 1.8 1.4 1.4 1.7 1.2 1.2
Convertible preferred stock 4.2 4.9 4.9 4.2 4.9 4.9
------ ------ ------ ------ ------ ------
Diluted weighted average shares
outstanding 94.4 92.8 92.8 93.9 92.4 92.4
====== ====== ====== ====== ====== ======
6
(UNAUDITED)
* The adjusted information for the three- and six-month periods ended
March 31, 2001 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 ($17.9 million and $35.4 million in the three- and
six-month periods ended March 31, 2001, respectively) and the related
income tax effect.
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 six months ended March 31, 2002 and 2001
totaled approximately $107 million and $73 million, respectively. A $30
million income tax refund was received in the first quarter of the prior
year. Total interest paid was approximately $61 million and $72 million
for the six months ended March 31, 2002 and 2001, respectively.
4. GOODWILL
Effective October 1, 2001, the Company adopted SFAS No. 142 "Goodwill and
Other Intangible Assets." Under SFAS No. 142 goodwill is no longer
amortized; however, it must be tested for impairment at least annually.
The Company has completed the initial goodwill impairment testing required
by SFAS No. 142. The testing determined that the fair market value of each
respective reporting unit exceeds its carrying value. As such, the
impairment provisions of the statement currently do not have an impact on
the Company's financial position or results of operations. The Company's
financial statements include comparative adjusted information which
assumes SFAS No. 142 had been adopted October 1, 2000.
The changes in the carrying amount of goodwill for the six months ended
March 31, 2002 are as follows:
Automotive Controls
(in millions) Systems Group Group Total
---------------- ----------------- -----------------
Balance as of September 30, 2001 $1,910.1 $337.2 $2,247.3
Goodwill from business acquisitions 320.1 14.2 334.3
Currency translation (53.8) (9.1) (62.9)
---------------- ----------------- -----------------
Balance as of March 31, 2002 $2,176.4 $342.3 $2,518.7
================ ================= =================
The change in goodwill from currency translation associated with the
Automotive Systems Group primarily relates to the decline in the euro
from September 30, 2001 to March 31, 2002.
See Note 5 for discussion of goodwill from business acquisitions during
fiscal 2002.
5. ACQUISITION OF BUSINESSES
Effective October 1, 2001, the Company completed the acquisition of the
automotive electronics business of France-based Sagem SA (Sagem) and the
German automotive battery manufacturer Hoppecke Automotive GmbH & Co. KG
(Hoppecke). The Sagem acquisition augments the Company's growth and
7
(UNAUDITED)
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 March 31, 2002, 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 March 31, 2002 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.
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. Variable rate notes in the amount of $250 million,
with interest equal to the three-month LIBOR rate plus 60 basis points,
mature in November 2003. Five percent fixed rate notes in the amount of
$350 million are due in November 2006.
8
(UNAUDITED)
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:
March 31, September 30, March 31,
(in millions) 2002 2001 2001
---------------- ----------------- ---------------
Raw materials and supplies $340.8 $331.3 $316.9
Work-in-process 90.5 77.2 91.4
Finished goods 237.6 203.8 192.1
---------------- ----------------- ---------------
FIFO inventories 668.9 612.3 600.4
LIFO reserve (34.4) (34.7) (30.6)
---------------- ----------------- ---------------
Inventories $634.5 $577.6 $569.8
================ ================= ===============
8. COMPREHENSIVE INCOME
Comprehensive income is defined as the sum of net income and all other
non-owner changes in equity, including foreign currency translation,
unrealized gains and losses on equity securities, realized and unrealized
gains and losses on derivatives and minimum pension liability
adjustments. Comprehensive income for the three months ended March 31,
2002 and 2001 was approximately $92 million and $70 million,
respectively. Comprehensive income for the six months ended March 31,
2002 and 2001 was $168 million and $156 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. Net gains of approximately $12
million and $10 million were recorded for the three-month periods ending
March 31, 2002 and 2001, respectively. Net gains of approximately $28
million and $6 million were recorded for the six-month periods ended
March 31, 2002 and 2001, respectively.
9. FUTURE ACCOUNTING CHANGES
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, and the
Company is currently evaluating their impact.
9
(UNAUDITED)
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 Six Months
Ended March 31, Ended March 31,
---------------------------------------- ----------------------------------------
Adjusted Adjusted
(in millions) 2002 2001* 2001 2002 2001* 2001
-------- -------- -------- -------- -------- --------
Sales
Automotive Systems Group $3,570.5 $3,372.5 $3,372.5 $7,226.7 $6,760.5 $6,760.5
Controls Group 1,240.0 1,229.1 1,229.1 2,401.5 2,295.5 2,295.5
-------- -------- -------- -------- -------- --------
Total $4,810.5 $4,601.6 $4,601.6 $9,628.2 $9,056.0 $9,056.0
======== ======== ======== ======== ======== ========
Operating Income
Automotive Systems Group $ 158.0 $ 152.7 $ 137.4 $ 348.7 $ 335.7 $ 305.5
Controls Group 60.7 55.8 53.2 108.5 99.5 94.3
-------- -------- -------- -------- -------- --------
Total $ 218.7 $ 208.5 $ 190.6 $ 457.2 $ 435.2 $ 399.8
======== ======== ======== ======== ======== ========
* The adjusted information for the three- and six-month periods ended
March 31, 2001 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 ($17.9 million and $35.4 million in the three- and
six-month periods ended March 31, 2001, respectively) and the related
income tax effect.
Total assets of the Automotive Systems Group increased by approximately
$600 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. In the current quarter, the Company's estimated annual
effective income tax rate was reduced from 35.9% to 34.8%.
12. CONTINGENCIES
In the current quarter, an unfavorable verdict was rendered in a lawsuit
involving a Mexican lead supplier. After a jury trial, a Texas trial
court entered judgment against the Company in this matter and awarded
damages to the plaintiff in the amount of $21.8 million, plus interest
and attorney fees. The Company and its legal counsel believe that the
verdict against the Company in the trial court was incorrect and that it
will be reversed on appeal. Accordingly, the Company has not recorded any
liability in its financial statements associated with this judgment.
However, there can be no assurance that the Company will prevail in this
matter. In the event
10
(UNAUDITED)
of an unfavorable final judgment against the Company, management believes
that it will not have a material impact on the Company's financial
position or annual results of operations. It could have a material effect
on the Company's quarterly results of operations.
The Company is involved in a number of other 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
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Johnson Controls, Inc.:
We have reviewed the accompanying consolidated statement of financial
position of Johnson Controls, Inc. and its subsidiaries as of March 31,
2002 and 2001, and the related consolidated statement of income for each
of the three-month and six-month periods ended March 31, 2002 and 2001 and
the consolidated statement of cash flows for the six-month periods ended
March 31, 2002 and 2001. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated interim financial
statements for them to be in conformity with accounting principles
generally accepted in the United States of America.
We previously audited in accordance with auditing standards generally
accepted in the United States of America, the consolidated statement of
financial position as of September 30, 2001, and the related consolidated
statements of income, shareholders' equity, and of cash flows for the year
then ended (not presented herein), and in our report dated October 22,
2001 we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated statement of financial position as of September 30,
2001, is fairly stated in all material respects in relation to the
consolidated statement of financial position from which it has been
derived.
/s/ PricewaterhouseCoopers
--------------------------
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
April 16, 2002
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2002
AND MARCH 31, 2001
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.
Consolidated net sales grew by 5% in the second quarter of fiscal 2002 to $4.8
billion from the prior year's $4.6 billion.
Automotive Systems Group sales were $3.6 billion, 6% higher than the $3.4
billion for the prior year period. Sales in North America grew 7% in the second
quarter due to higher industry production, new automotive interiors programs and
higher shipments of automotive batteries. The new programs allowed North
American revenue to exceed the second quarter 4% increase in the industry light
vehicle production. Automotive battery sales in North America were up 15% in the
quarter, reflecting market share growth partially attributable to unit shipments
to new customers. Segment sales in Europe were 6% above the prior year
benefiting from the addition of an automotive electronics business and a battery
business acquired effective October 1, 2001 (see Note 5 to the consolidated
financial statements). Excluding the electronics business acquisition and the
negative effect of currency, automotive interior systems sales in Europe were
approximately level with the prior year. This compares favorably to the
approximate 9% decline in European industry vehicle production. Sales in Asia
and South America, which represent less than 10% of total segment revenue, were
lower in the current quarter compared to the prior year quarter as a result of
negative currency translation and a decline in customer production schedules.
Controls Group sales in the second quarter were $1.2 billion, up 1% from the
prior year. North American sales were up 4% compared to the prior year period
due to an increase in service and integrated facility management activity. Sales
of installed control systems in North America were comparable to last year.
During the second quarter, the Company experienced healthy growth in orders of
installed control systems, specifically in the North American new construction
market (see "Backlog"). European sales were above the prior year by
approximately 20% reflecting the addition of MC International, acquired in the
third quarter of fiscal 2001. Due to the deconsolidation of a joint venture in
Japan during the fourth quarter of fiscal 2001, sales in Asia, which represent
less than 10% of segment sales, were down approximately 40%.
Consolidated operating income for the second quarter of fiscal 2002 increased 5%
to $219 million from $209 million in the prior year period. Both of the
Company's business segments achieved operating income growth.
Operating income for the second quarter at Automotive Systems Group was $158
million, 3% above the prior year's $153 million. The segment benefited from
higher North American sales of both automotive interior systems and automotive
batteries and the
13
addition of the automotive electronics business acquired effective October 1,
2001 (see Note 5 to the consolidated financial statements). Operating
efficiencies resulting in improved gross margin and reduced selling, general and
administrative expenses also contributed to the higher results. The increase in
operating income in North America was partially offset by higher start-up and
engineering costs in support of new launches in Europe.
Controls Group operating income rose 9% to $61 million from the prior year's $56
million. The increase is a result of higher gross margins due to improved
contract execution and efficiency and the addition of MC International in the
third quarter of fiscal 2001.
Net interest expense in the second quarter declined $3 million compared with the
prior year as a result of the current period's lower interest rates. Second
quarter equity income was approximately $8 million above the prior year quarter.
The increase is attributable to earnings at certain Automotive Systems Group
joint ventures, including a new joint venture in China and higher earnings in
Europe. Miscellaneous - net in the second quarter was approximately $8 million
below the prior year period due in part to net losses on asset disposals in the
current quarter in contrast to net gains on asset disposals in the prior year
period.
The effective income tax rate was 33.6% for the three-month period ended March
31, 2002 compared with 35.9% for the same period last year. The current
quarter rate reflects a change in the estimated annual effective income tax rate
from 35.9% to 34.8%. The effective rate was reduced due principally to global
tax reduction initiatives.
Minority interests in net earnings of subsidiaries for the current quarter was
$11 million, down $3 million compared to the prior year quarter. The decrease
was due in part to the Company obtaining the remaining shares of Ikeda in the
first quarter of fiscal 2002 (see Note 5 to the consolidated financial
statements).
Second quarter net income of $115 million exceeded the prior year's $99 million
by 16%. The increase was a result of higher operating income, reduced net
interest expense, higher equity income, a lower effective income tax rate and a
decline in the deduction for the Company's minority interests in net earnings of
its subsidiaries. Diluted earnings per share for the current quarter were $1.21,
compared with $1.06 in the prior year.
COMPARISON OF OPERATING RESULTS FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2002
AND MARCH 31, 2001
Consolidated net sales for the first six months of fiscal 2002 were $9.6
billion, a 6% increase from the prior year's $9.1 billion.
Automotive Systems Group sales totaled $7.2 billion for the first half of fiscal
2002, 7% higher than sales of $6.8 billion for the prior year period. North
American sales of automotive interior systems grew 5% above the
prior year, exceeding the relatively flat industry light vehicle production
compared to the prior year. New seating and interiors programs and involvement
in programs where demand year-over-year was above the industry average
contributed to the North American growth. Sales of automotive batteries
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in North America increased approximately 11% over the prior year period. The
increase reflects market share growth partially attributable to unit shipments
to new customers. European Automotive Systems Group sales increased 12% over the
prior year period reflecting the addition of an automotive electronics business
and a battery business acquired effective October 1, 2001 (see Note 5 to the
consolidated financial statements). Excluding the electronics business and the
negative effect of currency translation, European interior systems sales were
approximately level with the prior year period whereas the European industry
vehicle production level declined. Segment sales in Asia and South America,
which represent less than 10% of total segment revenue, were low in the first
half of the year compared to last year due to the negative effect of currency
translation and lower customer production schedules.
Controls Group sales reached $2.4 billion for the first six months of the year,
an increase of 5% from the prior period's $2.3 billion. Excluding the
acquisition of MC International in the third quarter of fiscal 2001 (see Note 5
to the consolidated financial statements), European sales were up 15% compared
to the same period last year. Segment sales in North America grew 6%, a result
of increased integrated facility management, service and installed control
systems activity. Due to the deconsolidation of a joint venture in Japan during
the fourth quarter of fiscal 2001, sales in Asia, which represent less than 10%
of segment sales, were down approximately 40%.
Consolidated operating income was $457 million for the six months ended March
31, 2002, up 5% from the prior year's $435 million.
Automotive Systems Group operating income was $349 million, 4% above the prior
year's $336 million. The increase in operating income compared with the prior
year reflects higher volume in North America of both automotive interior systems
and automotive batteries and the addition of the automotive electronics business
acquired effective October 1, 2001 (see Note 5 to the consolidated financial
statements). The segment also benefited from operational efficiencies in North
America resulting in increased gross margins and reduced selling, general and
administrative expenses. The higher results in North America were partially
offset by the increased start-up and engineering costs in Europe as well as the
negative effect of lower production levels of mature, more profitable vehicle
programs.
Controls Group operating income for the first half of fiscal 2002 was $109
million, rising 9% from the prior year's $100 million. The increase in operating
income was attributable to the segment's higher volume, better gross margins due
to improved contract execution and efficiencies, reduced selling, general and
administrative expenses as a percentage of sales and the addition of MC
International in the third quarter of fiscal 2001.
Management currently expects the Automotive Segment's full year sales to exceed
the prior year by approximately 6%. Segment sales are projected to benefit from
the launch of new interior systems programs worldwide, customer diversification,
recent acquisitions and higher unit shipments of automotive batteries. The
projected sales increase assumes a North American production level of 15.7
million, a European production level of 15.3 million and lower year-over-year
production in South America and Japan. Management expects the segment's full
year operating margin to be approximately level with the prior
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year as a result of the higher than anticipated North American production
environment and effective quality and cost initiatives.
Management expects Controls Group sales to grow 6% to 10% for the full year. The
segment increase is anticipated to be driven by contributions from installed
control systems activity worldwide, based on the strong growth in the Company's
backlog, and expansion of integrated facility management services in both the
commercial and governmental markets. Management continues to expect modest
margin improvements in the segment for the year.
Net interest expense for the first six months of fiscal 2002 was slightly lower
than the prior year resulting from lower interest rates in the current year.
Equity income was $5 million above the prior year. The increase was primarily
attributable to higher earnings at certain Automotive Systems Group joint
ventures in Europe. Miscellaneous - net for the first six months of the current
year was approximately $8 million below the prior year period due in part to net
losses on asset disposals in the current year compared to net gains on asset
disposals in the prior year period.
The effective income tax rate was 34.8% for the six-month period ended March 31,
2002 compared with 36.1% for the comparable period last year. The Company's
estimated annual effective income tax rate for the current year was reduced in
the current quarter from 35.9% to 34.8%. The lower rate is due principally to
global tax reduction initiatives.
Minority interests in net earnings of subsidiaries for the first half of the
fiscal year was comparable to the prior year. Improved results at certain
Automotive Systems Group subsidiaries in the current fiscal year were offset by
the impacts of both the Company obtaining the remaining shares of Ikeda
in the first quarter of fiscal 2002 (see Note 5 to the consolidated financial
statements) and the deconsolidation of a joint venture in Japan during the
fourth quarter of fiscal 2001.
Net income of $235 million exceeded the prior year's $217 million by 8%. The
increase was a result of higher operating income, higher equity income and a
reduced effective income tax rate. Diluted earnings per share for the first half
of the fiscal year were $2.48 compared with $2.33 in the comparable prior year
period.
COMPARISON OF FINANCIAL CONDITION
Working Capital and Cash Flow
The Company's working capital was $168 million at March 31, 2002, compared with
a negative $36 million at September 30, 2001. Working capital, excluding cash
and debt, was $202 million, $187 million higher than the fiscal year end. The
increase primarily reflects lower accounts payable and other current
liabilities, as adjusted for current year acquisitions.
Cash provided by operating activities of $323 million during the first half of
fiscal 2002 was $82 million less than the amount generated in the prior year
period. The decrease was the result of lower accounts payable and other current
liabilities, as adjusted for current year acquisitions.
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Capital Expenditures
Capital spending for property, plant and equipment during the current year was
$228 million, compared with the prior year's $281 million. The majority of the
spending was associated with the Automotive Systems Group. The lower spending
compared to the prior year period was 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 $2.5 billion at March 31, 2002 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 was primarily associated with the acquisitions of
Sagem and Hoppecke (see Note 5 to the consolidated financial statements). 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.
Variable rate notes in the amount of $250 million, with interest equal to the
three-month LIBOR rate plus 60 basis points, mature in November 2003. Five
percent fixed rate notes in the amount of $350 million are due in November 2006.
Total capitalization of $5.3 billion at March 31, 2002 included short-term debt
of $0.2 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 $4.5 billion at September 30, 2001 and March 31, 2001,
respectively. Total debt as a percentage of total capitalization at the end of
the most recent quarter was 41%, compared with 38% at fiscal year end and the
40% level one year ago. The current year's increase in the ratio of debt to
total capitalization reflects the debt used to finance acquisitions.
The Company is party to certain synthetic leases which qualify as operating
leases for accounting purposes. The lease contracts are associated with the
financing of the Company's corporate aircraft whose total market value is not
material. The earliest of these leases matures in August 2006 and each is
renewable at the company's option.
The Company believes its capital resources and liquidity position at March 31,
2002 were 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 long- and
short-term borrowings, if required.
17
Johnson Controls is in compliance with all covenants and other requirements set
forth in its credit agreements and indentures. None of the Company's debt
agreements require accelerated repayment in the event of a decrease in credit
ratings. Currently, the Company has ample liquidity and full access to the U.S.
commercial paper and capital markets. Given Johnson Controls credit ratings from
Moody's (A2), Fitch (A), and Standard & Poors (A-), the Company believes
multiple downgrades, or a single downgrade over multiple levels, would be
necessary before its access to the commercial paper markets would be limited.
The Company has ample availability under its $1 billion revolving credit
facility to meet commercial paper maturities and operating needs.
Other than the issuance of $600 million of variable and fixed rate notes in
November 2001, 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.
As of March 31, 2002 the Company had guaranteed the debt of certain
unconsolidated affiliates of approximately $68 million maturing in 2002 and
2004.
CRITICAL ACCOUNTING POLICIES
The Company prepares its consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America (U.S.
GAAP). This requires management to make estimates and assumptions that affect
reported amounts and related disclosures. Actual results could differ from those
estimates. The following policies are considered to be the most critical in
understanding the judgements that are involved in the preparation of the
Company's consolidated financial statements and the uncertainties that could
impact the Company's results of operations, financial condition and cash flows.
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 (POC) method of accounting. Under this method of
accounting, sales and gross profit are recognized as work is performed based on
the relationship between actual costs incurred and total estimated costs at the
completion of the contract. Recognized revenues that will not be billed under
the terms of the contract until a later date are recorded as an asset captioned
"Cost and earnings in excess of billings on uncompleted contracts." Likewise,
contracts where billings to date have exceeded recognized revenues are recorded
as a liability captioned "Billings in excess of costs and earnings on
uncompleted contracts." Changes to the original estimates may be required during
the life of the contract. Estimates are reviewed monthly and the effect of any
change in the estimated gross margin percentage for a contract is reflected in
cost of sales in the period the change becomes known. The use of the POC method
of accounting involves considerable use of estimates in determining revenues,
costs and profits and in assigning the amounts to accounting periods. The
Company continually evaluates all of the issues related to the assumptions,
risks and uncertainties inherent with the application of the POC method of
18
accounting. In all other cases, the Company recognizes revenue at the time
products are shipped and title passes to the customer or as services are
performed.
Goodwill and Other Intangible Assets
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142
"Goodwill and Other Intangible Assets", effective October 1, 2001. Under SFAS
No. 142 goodwill is no longer amortized; however, it must be tested for
impairment at least annually. Amortization continues to be recorded for other
intangible assets with definite lives. The Company is subject to financial
statement risk to the extent that goodwill and indefinite lived intangible
assets become impaired.
Employee Benefit Plans
The Company provides a range of benefits to its employees and retired employees,
including pensions and postretirement health care. The Company records annual
amounts relating to these plans based on calculations specified by U.S. GAAP,
which include various actuarial assumptions, such as discount rates, assumed
rates of return, compensation increases, turnover rates and health care cost
trend rates. The Company reviews its actuarial assumptions on an annual basis
and makes modifications to the assumptions based on current rates and trends
when appropriate. As required by U.S. GAAP, the effect of the modifications is
recorded or amortized over future periods. Based on advice from its independent
actuaries, the Company believes that the assumptions utilized in recording its
obligations under its plans are reasonable.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The Company records a
valuation allowance that represents foreign operating loss carryforwards for
which utilization is uncertain. Management judgment is required in determining
the Company's provision for income taxes, deferred tax assets and liabilities
and the valuation allowance recorded against the Company's net deferred tax
assets. The valuation allowance would need to be adjusted in the event future
taxable income is materially different than amounts estimated. The Company does
not provide taxes on undistributed earnings of foreign subsidiaries which are
considered to be permanently invested. If undistributed earnings were remitted,
foreign tax credits would substantially offset any resulting domestic tax
liability.
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
March 31, 2002, the unearned backlog of installed control systems contracts
(excluding service and integrated
19
facility management) to be executed within the next year grew 18% from $1.37
billion at March 31, 2001 to $1.62 billion at March 31, 2002. This growth
primarily stems from new orders in North America and Asia, both in the new and
existing buildings markets and the addition of MC International. Orders for
control systems in the current year were strongest from the new non-residential
construction market, particularly in the office, airport, education, health care
and government sectors.
FUTURE ACCOUNTING CHANGES
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.
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 has fully converted its operations to the new currency. Costs of the
euro conversion did 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
20
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 six-month period ended March 31, 2002, a similar analysis indicates that
a 10% appreciation or depreciation would result in a hypothetical gain or loss,
respectively, of $108 million. The change in the period 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.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no significant changes in status since the last Report.
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
Reference is made to Item 4 of the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 2001 for a description of the results of votes of
security holders at the Annual Meeting of Shareholders held January 23, 2002.
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) The Company filed a Form 8-K on January 22, 2002 to disclose
its financial results for the first quarter of fiscal 2002.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
JOHNSON CONTROLS, INC.
Date: May 15, 2002 By: /s/ Stephen A. Roell
--------------------
Stephen A. Roell
Senior Vice President and
Chief Financial Officer
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