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1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
AMENDMENT NO. 1
TO
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended September 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number 1-5097
JOHNSON CONTROLS, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 39-0380010
(State of Incorporation) (I.R.S. Employer Identification No.)
5757 N. Green Bay Avenue
P.O. Box 591
Milwaukee, Wisconsin 53201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 228-1200
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
- --------------------------------- --------------------------
Common Stock, $.16-2/3 par value New York Stock Exchange
Rights to Purchase Common Stock New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
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 / /
Aggregate Market Value Number of Shares
of Nonaffiliates' Shares Outstanding at
Title of Each Class as of November 20, 1997 November 20, 1997
- ------------------------------- -------------------------- --------------------
Common Stock, $.16-2/3 par value $3,842,382,850 84,101,403
Series D Convertible Preferred Stock,
$1.00 par value, $512,000
liquidation value $255,529,274 279.649
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II and IV incorporate by reference portions of the Annual Report to
Shareholders for the year ended September 30, 1997.
Part III incorporates by reference portions of the Proxy Statement dated
December 5, 1997.
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The undersigned registrant hereby amends the following items of its Annual
Report on Form 10-K filed December 18, 1997:
PART II
ITEM 6 SELECTED FINANCIAL DATA
Five Year Summary
Year ended September 30,(1, 2)
- ------------------------------------------------------------------------------------------------------------
(dollars in millions,
except per share data) 1997(3) 1996 1995 1994 1993(4)
OPERATING RESULTS
Net sales $11,145.4 $9,210.0 $ 7,400.7 $6,111.7 $5,496.6
Operating income $ 527.1 $ 478.9 $ 395.1 $ 311.4 $ 268.5
Income from continuing
operations before
cumulative effect
of accounting changes $ 220.6 $ 222.7 $ 168.0 $ 134.8 $ 113.6
Net income $ 288.5 $ 234.7 $ 195.8 $ 165.2 $ 15.9
Earnings per share from
continuing operations
before cumulative effect
of accounting changes
Primary $ 2.48 $ 2.55 $ 1.93 $ 1.53 $ 1.28
Fully diluted $ 2.37 $ 2.42 $ 1.82 $ 1.46 $ 1.21
Earnings per share
Primary $ 3.29 $ 2.69 $ 2.26 $ 1.90 $ 0.08
Fully diluted $ 3.12 $ 2.55 $ 2.13 $ 1.80 $ 0.08(6)
Return on average
shareholders' equity(5) 16% 16% 13% 12% 11%
Capital expenditures $ 370.9 $ 322.3 $ 330.9 $ 261.7 $ 239.4
Depreciation $ 283.6 $ 226.6 $ 191.7 $ 169.3 $ 161.5
Number of employees 72,300 65,800 59,200 54,800 50,100
FINANCIAL POSITION
Working capital (excluding
"Net assets of
discontinued operations") $ (443.4) $ 225.8 $ 81.1 $ 226.9 $ 213.8
Total assets $ 6,048.6 $4,991.2 $ 4,147.6 $3,633.9 $3,062.7
Long-term debt $ 806.4 $ 752.2 $ 619.3 $ 661.6 $ 487.7
Total debt $ 1,462.6 $1,033.5 $ 814.8 $ 702.3 $ 527.6
Shareholders' equity $ 1,687.9 $1,507.8 $ 1,340.2 $1,202.8 $1,079.0
Total debt to total
capitalization 46% 41% 38% 37% 33%
Book value per share $ 19.80 $ 17.88 $ 16.05 $ 14.55 $ 13.15
COMMON SHARE INFORMATION
Dividends per share $ 0.86 $ 0.82 $ 0.78 $ 0.72 $ 0.68
Market prices
High $49-13/16 $ 38-1/4 $ 33 $ 30-5/8 $ 29-9/16
Low $ 35-3/8 $ 28-7/8 $ 22-7/8 $22-7/16 $ 19-5/16
Number of shareholders 57,824 44,636 37,971 33,227 30,483
Weighted average shares
(in millions)
Primary 84.8 83.6 82.3 82.1 81.5
Fully diluted 90.9 89.9 89.1 88.5 88.5
- ------------------------------------------------------------------------------------------------------------
(1) Share and per share information has been restated to reflect a
two-for-one split of the Company's common stock effective March 7, 1997.
(2) Historical amounts have been restated to reflect the
reclassification of the Plastic Container division as a discontinued operation.
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(3) Results include a restructuring charge of $70.0 million ($40.3
million or $.48 per primary share and $.44 per fully diluted share, after-tax).
(4) Results include the adoption of Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," No. 109, "Accounting for Income Taxes," and No. 112, "Employers'
Accounting for Postemployment Benefits." The combined cumulative effect of the
accounting changes was a one-time charge of $122 million or $1.50 per share on a
primary basis and $1.41 per share fully diluted, after taxes.
(5) Return on average shareholders' equity represents income from
continuing operations before the cumulative effect of accounting changes divided
by average equity. Income from continuing operations for 1997 excludes the
restructuring charge. Average equity for 1993 includes the cumulative effect of
accounting changes.
(6) Calculation is anti-dilutive.
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ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
DISCONTINUED OPERATIONS
On February 28, 1997, the Company completed the sale of its Plastic
Container division (PCD) to Schmalbach-Lubeca AG/Continental Can Europe (a
member of the VIAG Group) for approximately $650 million, with a portion of the
proceeds deferred. The Company recorded a gain on the sale of $135 million ($69
million or $.76 per fully diluted share, after-tax).
Operating results, net assets and cash flows of PCD have been
segregated as discontinued operations in the accompanying consolidated
financial statements. Net (loss) earnings of PCD were $(1.1) million ($(.01)
per fully diluted share) on sales of $242 million for the five months ended
February 28, 1997 and $12.0 million ($.13 per fully diluted share) on sales of
$799 million for the year ended September 30, 1996.
Common Stock Price Range Dividends
- ------------------------------------------------------------------------------------
1997 1996 1997 1996
First Quarter $35-3/4 - 42-11/16 $28-7/8 - 34-7/8 $0.215 $0.205
Second Quarter 39-3/8 - 45-11/16 32-5/16 - 37-13/16 0.215 0.205
Third Quarter 35-3/8 - 43-7/8 33-1/2 - 37-9/16 0.215 0.205
Fourth Quarter 41 - 49-13/16 31-1/4 - 38-1/4 0.215 0.205
- ------------------------------------------------------------------------------------
Year $35-3/8 - 49-13/16 $28-7/8 - 38-1/4 $0.86 $0.82
====================================================================================
Prior year results of operations, financial position and cash flows
noted in the following discussion have been restated to reflect the current
year's presentation of PCD as a discontinued operation.
CONTINUING OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
SALES
- -----
Consolidated net sales for 1997 reached a record $11,145 million,
representing a 21% increase over 1996 sales of $9,210 million. The Company's
automotive segment was the principal contributor to the year's increased sales.
Automotive segment sales for 1997 rose 28% to $8,022 million, up from
the prior year's $6,250 million. Approximately one-half of the increase is
attributable to the acquisition of Prince, the interior systems company acquired
in October 1996. North American seating sales were strong despite a slight
decline in industry vehicle production levels in 1997 compared with the prior
year. The sales growth reflects the Company's participation with new vehicle
models such as Ford's Expedition and F-150 light trucks and General Motors'
minivans. Seating sales in Europe were higher, despite the impact of lower
currency exchange rates, due to successful new programs with Ford, Chrysler and
Volkswagen.
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Sales of automotive batteries reached a record level due to higher unit
shipments to existing markets and the addition of a new customer, Sears' Western
Auto Parts America.
Controls segment sales increased 6% to $3,123 million from $2,960
million in 1996. Integrated facilities management activity in the commercial
market worldwide was the source of most of the segment's growth. Sales were also
higher in the non-residential building construction markets in the Asia/Pacific
region and the United States.
Looking to 1998, management expects consolidated net sales will exceed
the 1997 level. Automotive segment sales are expected to increase approximately
8% to 13%, reflecting the launch of new seating business in North America,
Europe, and South America; tempered by an expectation for slightly lower vehicle
production levels in North America. Sales of automotive batteries are also
expected to increase due to growth from existing customers and the Company's new
three-year contract to manufacture Sears DieHard Gold brand batteries.
Management expects controls segment sales to increase approximately 5%
to 10% in 1998. The expected increase is based on the continued expansion of
integrated facilities management activity in the commercial market and higher
systems retrofit activity, particularly for U.S. government facilities. At
September 30, 1997, the unearned backlog of commercial building systems and
services contracts (excluding integrated facilities management) to be executed
within the next fiscal year was $760 million. The increase from the prior year
amount of $746 million is primarily due to growth in orders in the
non-residential building construction market in the Asia/Pacific region.
OPERATING INCOME
- ----------------
Consolidated operating income for 1997 was $527 million, including a $70
million restructuring charge recorded in the second quarter (see discussion that
follows). Operating income before the restructuring charge was $597 million, a
25% increase over the prior year's $479 million.
The automotive segment's operating income, excluding the segment's
portion of the restructuring charge, rose to $478 million, a 32% increase from
the prior year's $361 million. The inclusion of earnings from Prince and higher
seating shipments in North America and Europe contributed to the segment's
increased operating income. Higher automotive battery volumes contributed to the
segment's operating income growth. Start-up and engineering investments related
to new seating programs worldwide, especially in Europe and South America, and
strikes at two of the Company's automotive facilities also affected segment
operating income.
Operating income for the controls segment, excluding the segment's
portion of the restructuring charge, increased 2% to $119 million. The
improvement was largely due to increased integrated facilities management
activity in the commercial market, both in North America and continental Europe.
This improvement was partially offset by lower operating margins in the North
American systems and services market as investments outpaced revenues.
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In the second quarter of 1997, the Company recorded a restructuring
charge, including related asset writedowns, of $70 million involving its
automotive and controls segments. The automotive initiatives primarily relate to
European operations where certain manufacturing capacity is being realigned with
anticipated future customer sourcing requirements, and product development
resources are being consolidated. The charge associated with the controls
business principally addresses the Company's decision to restructure certain
low-margin service activities which are outside its core controls and facilities
management businesses. At September 30, 1997, costs of $55 million had been
charged against the reserve, comprised of asset writedowns of $43 million,
employee severance and termination benefits of $6 million, and other costs
relating to the restructuring initiatives of $6 million. Restructuring actions
are expected to be completed during 1998.
Consolidated operating income is expected to increase in 1998, based
principally on higher sales projections and improved efficiencies. The
automotive segment's operating income is anticipated to grow as a result of new
seating business worldwide, continued involvement in successful vehicle
programs, and reduced start-up and engineering costs in Europe as new programs
move from start-up to production. The launch of new seating programs in South
America and the Asia/Pacific region, however, is expected to continue to reduce
operating income. The automotive segment has supply agreements with certain of
its customers that provide for annual productivity price reductions and, in some
instances, for the recovery of material and labor cost increases. The segment
has been, and anticipates it will continue to be, able to significantly offset
any sales price changes with cost reductions from design changes, productivity
improvements and similar programs with suppliers. Controls segment operating
income is expected to increase due to expansion of integrated facilities
management and systems retrofit activity in the commercial market. Performance
in the systems and services market is expected to improve as certain initiatives
started in 1997, including cost reduction and productivity improvement programs,
continue in 1998.
OTHER INCOME/EXPENSE
- --------------------
Net interest expense (interest expense net of interest income) in 1997
was $113 million, $47 million higher than the prior year. The increase was
primarily the result of the financing associated with the acquisition of Prince
for approximately $1.3 billion at the beginning of the Company's fiscal year.
Net interest expense in 1998 is expected to be slightly lower than in 1997.
Miscellaneous-net income of $11 million increased by $3 million over the
prior year. The improvement was primarily due to higher equity income, with
strong contributions from the automotive segment's partially-owned affiliates in
North America and Europe.
PROVISION FOR INCOME TAXES
- --------------------------
The effective income tax rate on continuing operations was 42.5% for
1997 compared with 40.8% for the prior year. The increase primarily reflects the
non-deductible goodwill amortization associated with the acquisition of Prince.
The effective rate for the fiscal year was higher than the combined federal and
state statutory rate of approximately 39%, due mostly to the non-deductible
goodwill amortization of Prince and higher foreign effective rates. No
significant change in the effective income tax rate is anticipated for 1998.
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INCOME FROM CONTINUING OPERATIONS
- ---------------------------------
The Company's income from continuing operations for 1997 was $221
million or $2.37 per fully diluted share. Before the restructuring charge ($40
million or $.44 per fully diluted share, after-tax), income from continuing
operations totaled $261 million, which represents a 17% increase from the prior
year's $223 million. The increase was attributable to improvements in operating
income, offset in part by higher net interest expense. Fully diluted earnings
per share from continuing operations (before the restructuring charge) were
$2.81, up from $2.42 in the prior year.
FISCAL 1996 COMPARED TO FISCAL 1995
- -----------------------------------
SALES
- -----
Consolidated net sales for 1996 were $9,210 million, representing a 24%
increase over 1995 sales of $7,401 million. Automotive segment sales rose 31% to
$6,250 million in 1996, principally due to the Company's participation in new
and successful vehicle seating programs worldwide and the acquisition of Roth
Freres (Roth) during the year. New seating programs launched in 1996 included
Ford's F-Series light truck in North America and Fiesta in Europe. Some of the
more successful vehicle programs in which the Company participates include
Ford's Explorer, Chrysler's Jeep Cherokee and General Motors' Jimmy/Blazer. In
December 1995, the Company completed the acquisition of approximately 75% of
Roth, a major supplier of seating and interior components to the European
automotive industry, which added approximately $500 million to 1996 sales. Sales
of automotive batteries increased as a result of the higher level of unit
shipments to both replacement and original equipment customers. Increased market
penetration by aftermarket battery customers and the colder winter weather were
key contributors to the increase in replacement battery demand. In addition,
higher lead costs, which are passed through to customers in pricing, increased
sales.
Controls segment sales for 1996 were $2,960 million, 13% greater than
1995. The increase was primarily generated by a higher level of activity in the
existing buildings market. Worldwide commercial integrated facilities
management sales improved substantially year-over-year. Sales of retrofit
control systems to the non-residential buildings market, primarily in the form
of performance contracts, also contributed to the increase. Construction sales
in Europe and the Asia/Pacific region were also higher than the year ago
period. Facilities management activity in the U.S. government market was lower
than the prior year.
OPERATING INCOME
- ----------------
Consolidated operating income for 1996 was $479 million, an increase of
21% over 1995. The automotive segment's operating income increased 24% to $361
million in 1996. The segment benefited from higher volumes in both North America
and Europe. Operating margin improvements in North America and Europe,
associated with established vehicle seating program efficiencies, were more than
offset by start-up costs in the segment's
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emerging South American and Asia/Pacific seating markets. Significant
reductions in battery operating costs benefited operating margins.
BUSINESS SEGMENTS(1)
Operating Assets Depreciation/ Capital
Net Sales Income(2) (Year End) Amortization Expenditures
Year ended September 30,
- --------------------------------------------------------------------------------------
(in millions)
1997
Automotive $ 8,022.1 $440.6 $4,456.2 $295.6 $309.7
Controls 3,123.3 86.5 1,143.4 59.3 61.2
Unallocated - - 449.0 - -
- --------------------------------------------------------------------------------------
Consolidated $11,145.4 $527.1 $6,048.6 $354.9 $370.9
======================================================================================
1996
Automotive $ 6,250.2 $361.2 $2,970.5 $209.1 $260.6
Controls 2,959.8 117.7 1,177.1 53.4 61.7
Unallocated - - 402.9 - -
Net assets of
discontinued
operations - - 440.7 - -
- --------------------------------------------------------------------------------------
Consolidated $ 9,210.0 $478.9 $4,991.2 $262.5 $322.3
======================================================================================
1995
Automotive $ 4,770.4 $291.1 $2,264.7 $172.2 $274.4
Controls 2,630.3 104.0 1,071.1 46.9 56.5
Unallocated - - 345.2 - -
Net assets of
discontinued
operations - - 466.6 - -
- --------------------------------------------------------------------------------------
Consolidated $ 7,400.7 $395.1 $4,147.6 $219.1 $330.9
======================================================================================
(1) Prior year segment information has been reclassified to conform to
the current year's presentation.
(2) Operating income for 1997 includes a restructuring charge (see Note 2)
of $70.0 million, with $37.0 million charged to the automotive segment and
$33.0 million charged to the controls segment.
Operating income of the controls segment was $118 million, an increase
of 13% over the prior year. Income grew in line with the higher sales and
primarily resulted from the increased activity in the worldwide existing
commercial buildings market.
OTHER INCOME/EXPENSE
- --------------------
Net interest expense (interest expense net of interest income) in 1996
was $66 million, $19 million higher than the prior year. The increase primarily
resulted from the financing associated with the Roth acquisition and the debt
assumed with the purchase.
Miscellaneous-net income of $8 million compares to an expense of $10
million in the prior year. The Company recorded $14 million more in equity
income in 1996 than in 1995. The majority of this improvement related to the
Company's Mexican affiliates, which benefited from both improved operating
results and the absence of prior year losses associated with
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the Mexican Peso devaluation. Other miscellaneous income items in 1996
included gains associated with the sale of certain assets and foreign currency
transactions.
PROVISION FOR INCOME TAXES
- --------------------------
The effective income tax rate on continuing operations for 1996 was
40.8%, lower than the 1995 rate of 42.3%. The effective rate declined due to
improved performance by certain of the Company's consolidated subsidiaries and
European operations, offset by start-up operations in emerging markets. The
effective rate for the fiscal year remained higher than the combined federal and
state statutory rate of approximately 39%, principally due to overall higher
foreign effective rates.
INCOME FROM CONTINUING OPERATIONS
- ---------------------------------
Income from continuing operations rose 33% in 1996 to $223 million as a
result of the improvements in operating and equity income, offset by the
increase in interest expense. Fully diluted earnings per share from continuing
operations were $2.42 for 1996, up from $1.82 in 1995.
CAPITAL EXPENDITURES AND OTHER INVESTMENTS
Capital expenditures associated with continuing operations were $371
million, $322 million and $331 million in 1997, 1996 and 1995, respectively.
Capital expenditures for the automotive segment accounted for approximately 80%
of the 1997 spending, and were related to the expansion of automotive seating
and interior facilities and product lines worldwide and cost reduction projects.
Controls segment spending was primarily for information technology and cost
reduction projects. Capital expenditures for 1998 are expected to approximate
$350-$375 million, with the majority anticipated to again focus on automotive
seating and interior systems expansion, with spending by the controls segment on
information technology and automated business systems. Cost reduction programs
related to both segments are expected to account for the majority of the
remainder of the expenditures.
Goodwill increased $1,012 million to $1,560 million at September 30,
1997. The increase is attributable to businesses acquired during 1997, most
notably the acquisition of Prince at the beginning of the Company's fiscal year.
All acquisitions were accounted for as purchases and, as such, operating results
are included from the respective acquisition dates.
Investments in partially-owned affiliates of $145 million were
approximately $16 million higher than the prior year. A notable increase during
1997 resulted from the formation of an automotive battery joint venture in
Brazil. Additionally, the Company earned approximately $20 million of equity
income for the year. The increases were partially offset by the impact of
currency translation and dividend distributions.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
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CASH FLOW
- ---------
Cash of $617 million was provided by operating activities of continuing
operations during 1997 compared with $403 million in 1996. This increase was
generated by a favorable change in the level of working capital. Total working
capital (excluding "Net assets of discontinued operations") decreased to a
negative $443 million at September 30, 1997 compared to $226 million at
September 30, 1996. The significant decrease in working capital relates to the
increase in short-term debt which was used to finance the acquisition of Prince.
Working capital, excluding debt and cash, was lower than the prior year largely
due to higher accounts payable and accrued liabilities.
CAPITALIZATION
- --------------
The Company's capitalization of $3,151 million at September 30, 1997
included short-term debt of $538 million; long-term debt, including the current
portion, of $925 million; and shareholders' equity of $1,688 million. Total debt
as a percentage of total capitalization increased to 46% from 41% at September
30, 1996. The increase is attributable to the issuance of short-term debt to
finance the acquisition of Prince. However, this represents a significant
decline from the 60% level that existed in the first quarter of fiscal 1997,
after Prince was acquired. The reduction is due to the Company's use of the
after-tax proceeds from the sale of PCD and strong operating cash flows during
the second half of 1997 to reduce short-term debt.
In September 1996, the Company entered into two revolving credit
facilities, one for $1.1 billion maturing in September 1997 and the other for
$500 million maturing in May 2001. In May 1997, the $500 million credit facility
was increased to $600 million, with an option to increase it to $1 billion, and
a maturity of May 2002. The Company's other credit facility was renegotiated in
September 1997, decreasing the facility to $250 million, with a maturity of
September 1998. The credit facilities support the issuance of commercial paper.
At September 30, 1997, $538 million of short-term borrowings were outstanding
compared with $248 million at 1996 fiscal year-end.
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QUARTERLY FINANCIAL DATA
First Second Third Fourth Full
Quarter Quarter(1) Quarter Quarter Year(1)
Year ended September 30,
- -----------------------------------------------------------------------------------------------
(in millions, except per share data; unaudited)
1997
Net sales $2,761.3 $2,743.6 $2,879.3 $2,761.2 $11,145.4
Gross profit $ 406.7 $ 375.3 $ 433.4 $ 444.4 $ 1,659.8
Income (loss)
from continuing
operations $ 54.9 $ (1.6) $ 74.4 $ 92.9 $ 220.6
Discontinued
operations,
net of tax $ (1.8) $ 69.7 - - $ 67.9
Net income $ 53.1 $ 68.1 $ 74.4 $ 92.9 $ 288.5
Earnings (loss)
per share from
continuing
operations
Primary $ 0.63 $ (0.06) $ 0.85 $ 1.06 $ 2.48
Fully diluted $ 0.59 $ (0.03) $ 0.81 $ 1.00 $ 2.37
Earnings per share
Primary $ 0.61 $ 0.77 $ 0.85 $ 1.06 $ 3.29
Fully diluted $ 0.57 $ 0.74 $ 0.81 $ 1.00 $ 3.12
- -----------------------------------------------------------------------------------------------
1996
Net sales $1,997.0 $2,245.5 $2,482.0 $2,485.5 $ 9,210.0
Gross profit $ 303.2 $ 299.3 $ 349.5 $ 379.7 $ 1,331.7
Income from
continuing
operations $ 45.3 $ 36.3 $ 63.5 $ 77.6 $ 222.7
Discontinued
operations,
net of tax $ 1.7 $ 0.1 $ 5.8 $ 4.4 $ 12.0
Net income $ 47.0 $ 36.4 $ 69.3 $ 82.0 $ 234.7
Earnings per
share from
continuing
operations
Primary $ 0.52 $ 0.40 $ 0.73 $ 0.90 $ 2.55
Fully diluted $ 0.49 $ 0.39 $ 0.69 $ 0.85 $ 2.42
Earnings per share
Primary $ 0.54 $ 0.40 $ 0.80 $ 0.95 $ 2.69
Fully diluted $ 0.51 $ 0.39 $ 0.76 $ 0.89 $ 2.55
- -----------------------------------------------------------------------------------------------
(1)Second quarter earnings include (per fully diluted share) the effects
of a restructuring charge equal to $(.44), earnings from discontinued operations
of $.01 and a gain on the sale of discontinued operations of $.76; full year
earnings include a loss from discontinued operations of $(.01). Excluding these
items would result in earnings per fully diluted share of $.41 for the second
quarter and $2.81 for the year.
In May 1997, the Company's $1.5 billion universal shelf registration
statement, under which the Company can issue a variety of debt and equity
instruments, was made effective by the Securities and Exchange Commission. In
July 1997, the Company refinanced a portion of its commercial paper borrowings
associated with the Prince acquisition by issuing $150 million of 7.125% notes
due in 2017. In November 1997, the shelf registration statement was amended to
provide the ability to offer a maximum of $500 million of medium term notes.
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High credit ratings from Moody's (A2), Fitch (A), and Standard & Poor's
(A) have been maintained on the Company's long-term debt.
The Company's capital resources and liquidity position are considered
sufficient to meet projected needs. Requirements for working capital, capital
expenditures, dividends and debt maturities in fiscal 1998 are expected to be
funded from operations, supplemented by short-term or long-term borrowings, if
required.
RISK MANAGEMENT
The Company is exposed to market risk from changes in foreign exchange
and interest rates and, to a lesser extent, commodities. To reduce such risks,
the Company selectively uses financial instruments. All hedging transactions are
authorized and executed pursuant to clearly defined policies and procedures,
which strictly prohibit the use of financial instruments for trading purposes.
Analytical techniques used to manage and monitor foreign exchange and interest
rate risk include market valuation and sensitivity analysis.
A discussion of the Company's accounting policies for derivative
financial instruments is included in the Summary of Significant Accounting
Policies in the Notes to the Consolidated Financial Statements, and further
disclosure relating to financial instruments is included in Note 8 - Financial
Instruments.
FOREIGN EXCHANGE
- ----------------
The Company has manufacturing, sales and distribution facilities around
the world and thus makes investments and enters into transactions denominated in
various foreign currencies. In order to maintain strict control and achieve the
benefits of the Company's global diversification, foreign exchange exposures are
first centralized and then netted internally so that only the Company's net
foreign exchange exposures are hedged with financial instruments. The Company
primarily enters into forward exchange contracts to reduce the earnings and cash
flow impact of non-functional currency denominated receivables and payables,
predominately intercompany transactions. Gains and losses resulting from hedging
instruments offset the gains or losses on the underlying assets, liabilities and
investments being hedged. The Company's forward exchange contracts generally
have maturities which do not exceed 12 months, and the maturities coincide with
the settlement dates of the related transactions. Realized and unrealized gains
and losses on these contracts are recognized in the same period as gains and
losses on the hedged items. The Company has entered into two cross-currency
interest rate swaps to hedge portions of its net investments in Germany and
France. The currency effects of these swaps are reflected in the cumulative
translation adjustments account within shareholders' equity where they offset
gains and losses on the net investments in Germany and France. The currencies
that the Company was primarily exposed to on September 30, 1997 were the British
Pound, French Franc, German Mark, Italian Lira, Hong Kong Dollar, Spanish
Peseta, Portuguese Escudo and Australian Dollar.
SENSITIVITY ANALYSIS: The following table indicates the U.S. dollar
equivalents of the net foreign exchange contracts and non-functional currency
denominated debt (instruments) outstanding by currency and the corresponding
impact on the value of these instruments
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assuming both a 10% appreciation and depreciation of the respective
currencies. The resulting functional currency gains and losses are translated at
the U.S. dollar spot rate on September 30, 1997. As noted above, the Company's
policy prohibits the trading of financial instruments for profit. It is
important to note that gains and losses indicated in the sensitivity analysis
would be offset by gains and losses on underlying payables, receivables and net
investments in foreign subsidiaries.
Foreign Exchange Gain/(Loss) from:
-------------------------------------
Net Amount of 10% Appreciation 10% Depreciation
Instruments of the Functional of the Functional
Currency Long/(Short) Currency Currency
- -----------------------------------------------------------------------------------------
(dollars in millions)
British Pounds $(146) $15 $(15)
French Francs (33) 3 (3)
German Marks (28) 3 (3)
Italian Lira 24 (2) 2
Hong Kong Dollars (21) 2 (2)
Spanish Pesetas (20) 2 (2)
Portuguese Escudos 15 (2) 2
Australian Dollars (9) 1 (1)
Other 37 (4) 4
- -----------------------------------------------------------------------------------------
Total $(181) $18 $(18)
=========================================================================================
INTEREST RATES
- --------------
The Company uses interest rate swaps to modify the Company's exposure to
interest rate movements. Certain cross-currency interest rate swaps are
designated as hedges of the Company's related foreign net investment exposures.
Net interest payments or receipts from interest rate swaps are recorded as
adjustments to interest expense in the consolidated statement of income on a
current basis. The Company's earnings exposure related to adverse movements in
interest rates is primarily derived from outstanding floating rate debt
instruments that are indexed to U.S. short-term money market rates. A 10%
increase/ decrease in the average cost of the Company's short-term debt would
result in an increase/decrease in pre-tax interest expense of approximately $3
million.
COMMODITIES
- -----------
The Company's exposure to commodity price changes relates to certain
manufacturing operations that utilize raw commodities. The Company manages its
exposure to changes in those prices primarily through its procurement and sales
practices. This exposure is not material to the Company.
FUTURE ACCOUNTING CHANGES
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In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings per Share." This
statement establishes revised standards for computing and presenting earnings
per share. The statement is effective for the Company's fiscal 1998 first
quarter. All prior periods are required to be restated. The adoption of this
standard will not have a material impact on the Company's reported earnings per
share.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
The Company's U.S. operations are governed by federal environmental
laws, principally the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA), the Clean Air
Act, and the Clean Water Act, as well as state counterparts ("Environmental
Laws"), and by federal and state laws addressing worker safety and health
("Worker Safety Laws"). These laws govern ongoing operations and the remediation
of sites associated with past operations. Under certain circumstances these laws
provide for civil and criminal penalties and fines, as well as injunctive and
remedial relief.
The Company's policy is to comply with applicable Environmental Laws and
Worker Safety Laws, and it has expended substantial resources, both financial
and managerial, to comply with such laws and for measures designed to protect
the environment and maximize worker protection and safety.
The Company believes it is in substantial compliance with such laws, and
maintains procedures designed to ensure compliance. However, the Company has
been, and in the future may become, the subject of formal or informal
enforcement actions or proceedings. Such matters typically are resolved by
negotiation with regulatory authorities resulting in commitments to compliance
or abatement programs and payment of penalties. Historically, neither such
commitments nor penalties imposed on the Company have been material.
Environmental Laws require that certain parties fund remedial actions
regardless of fault, legality of original disposal or ownership of the site. The
Company is currently participating in environmental assessment and remediation
at a number of sites under these laws, and it is likely that in the future the
Company will be involved in additional environmental assessments and
remediations. Such sites include facilities that had been engaged in the
recycling of lead batteries.
Future remediation expenses at these and other sites are subject to a
number of uncertainties, including the method and extent of remediation
(dependent, in part, on existing laws and technology), the percentage and type
of material attributable to the Company, the financial viability of site owners
and the other parties, and the availability of insurance coverage. A charge to
earnings is recorded for sites when it is probable that a liability has been
incurred and the cost can be reasonably estimated.
Environmental considerations are a part of all significant capital
expenditure decisions; however, expenditures in 1997 related solely to
environmental compliance were not material. Environmental remediation,
compliance and management expenses incurred by
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the Company in 1997 were approximately $9 million. At September 30,
1997, an accrued liability of approximately $36 million was maintained relating
to environmental matters. The Company's environmental liabilities are
undiscounted and do not take into consideration any possible recoveries of
future insurance proceeds. Because of the uncertainties associated with
environmental assessment and remediation activities, future expenses to
remediate the currently identified sites could be considerably higher than the
accrued liability. However, while neither the timing nor the amount of ultimate
costs associated with known environmental assessment and remediation matters can
be determined at this time, the Company does not expect that these matters will
have a material adverse effect on its financial position, results of operations
or cash flows.
On June 30, 1995, the Company appealed to the Wisconsin Court of Appeals
a Milwaukee County Circuit Court order granting summary judgment dismissing
Johnson Controls' complaint against Employers Insurance of Wausau and other
insurance companies seeking to recover environmental response costs at 21 sites.
The Circuit Court based its decision on a 1994 Wisconsin Supreme Court case that
held response costs incurred to remedy contamination were not "damages" as that
term was used in comprehensive general liability policies. On April 22, 1997,
the Wisconsin Supreme Court handed down decisions in two cases that held that
certain types of environmental payments may be "damages." Based on these cases,
the Company believes that the Court of Appeals will reverse the Circuit Court's
decision, at least in part. If so, the Company believes that at least certain of
its environmental costs should be reimbursed by the defendant insurance
companies. The Company further believes that the insurers will claim that the
costs are not recoverable on the theory that the damage was expected and
intended. The Company has not recorded any anticipated recoveries of future
insurance proceeds, and therefore, the outcome of this case should have no
significant adverse impact on the Company's consolidated financial statements.
If future Environmental and Worker Safety Laws contain more stringent
requirements than currently anticipated, expenditures could be expected to have
a more significant effect on the Company's financial position, results of
operations or cash flows. In general, the Company's competitors face the same
laws, and, accordingly, the Company should not be placed at a competitive
disadvantage.
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
The Company has made forward-looking statements in this document that
are subject to risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future risks in the "Risk Management"
section of this document and those preceded by, following or that include the
words "believes," "expects," "anticipates" or similar expressions. For those
statements, the Company cautions that the numerous important factors discussed
elsewhere in this document and in the Company's Form 8-K filing (dated October
30, 1997), 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.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has caused this amendment to this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
JOHNSON CONTROLS, INC.
BY Stephen A. Roell
Vice President and Chief
Financial Officer
Date: May 1, 1998
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