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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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 North Green Bay Avenue, P.O. Box 591, Milwaukee, WI 53201
(Address of principal executive office)
Registrant's telephone number, including area code (414) 228-1200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 30, 1998
- ----- ----------------------------
Common Stock $.16 2/3 Par Value 84,688,266
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JOHNSON CONTROLS, INC.
FORM 10-Q
June 30, 1998
REPORT INDEX
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Page No.
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PART I - FINANCIAL INFORMATION:
Consolidated Statement of Financial Position at June 30, 1998,
September 30, 1997 and June 30, 1997 ......................... 3
Consolidated Statement of Income for the Three- and Nine-Month
Periods Ended June 30, 1998 and 1997 ......................... 4
Consolidated Statement of Cash Flows for the Nine-Month Periods
Ended June 30, 1998 and 1997 ................................. 5
Notes to Consolidated Financial Statements ..................... 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 10
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings ...................................... 16
Item 4. Results of Votes of Security Holders ................... 16
Item 5. Other Information ...................................... 17
Item 6. Exhibits and Reports on Form 8-K ....................... 17
SIGNATURES ...................................................... 18
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JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions)
June 30, September 30, June 30,
1998 1997 1997
------------ ------------ ------------
(unaudited) (unaudited)
ASSETS
Cash and cash equivalents $ 139.1 $ 111.8 $ 200.5
Accounts receivable - net 1,653.2 1,467.4 1,466.6
Costs and earnings in excess of billings
on uncompleted contracts 181.7 217.2 216.0
Inventories 389.0 373.4 359.9
Other current assets 445.8 359.5 361.1
------------ ------------ ------------
Current assets 2,808.8 2,529.3 2,604.1
Property, plant and equipment - net 1,596.7 1,533.0 1,488.7
Goodwill - net 1,532.6 1,560.3 1,581.3
Investments in partially-owned affiliates 172.4 144.6 145.3
Other noncurrent assets 275.0 281.4 253.5
------------ ------------ ------------
Total assets $ 6,385.5 $ 6,048.6 $ 6,072.9
============ ============ ============
LIABILITIES AND EQUITY
Short-term debt $ 425.6 $ 537.8 $ 643.4
Current portion of long-term debt 27.3 118.4 125.3
Accounts payable 1,480.5 1,341.9 1,324.9
Accrued compensation and benefits 339.9 303.3 323.9
Accrued income taxes 48.9 78.8 92.5
Billings in excess of costs and earnings
on uncompleted contracts 129.9 107.6 107.6
Other current liabilities 533.4 484.9 487.5
------------ ------------ ------------
Current liabilities 2,985.5 2,972.7 3,105.1
Long-term debt 963.3 806.4 819.7
Postretirement health and other benefits 167.6 167.2 166.3
Other noncurrent liabilities 423.0 414.4 349.5
Shareholders' equity 1,846.1 1,687.9 1,632.3
------------ ------------ ------------
Total liabilities and equity $ 6,385.5 $ 6,048.6 $ 6,072.9
============ ============ ============
The accompanying notes are an integral part of the financial statements.
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JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share data; unaudited)
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net sales $ 3,189.5 $ 2,879.3 $ 9,253.1 $ 8,384.2
Cost of sales 2,719.1 2,445.9 7,932.2 7,168.8
------------ ------------ ------------ ------------
Gross profit 470.4 433.4 1,320.9 1,215.4
Selling, general and administrative expenses 289.3 271.0 864.7 811.8
Restructuring charge -- -- -- 70.0
------------ ------------ ------------ ------------
Operating income 181.1 162.4 456.2 333.6
Interest income 4.3 2.5 9.1 6.1
Interest expense (33.5) (28.5) (92.5) (94.5)
Miscellaneous - net 0.9 5.4 1.7 11.3
------------ ------------ ------------ ------------
Other income (expense) (28.3) (20.6) (81.7) (77.1)
------------ ------------ ------------ ------------
Income before income taxes and minority interests 152.8 141.8 374.5 256.5
Provision for income taxes 63.4 60.2 155.4 108.9
Minority interests in net earnings of subsidiaries 5.5 7.2 17.4 19.9
------------ ------------ ------------ ------------
Income from continuing operations 83.9 74.4 201.7 127.7
Discontinued operations
Loss from discontinued operations, adjusted for
income tax benefit of $1.0, and minority interests -- -- -- (1.1)
Gain on sale of discontinued operations, net of $66.0
of income taxes -- -- -- 69.0
------------ ------------ ------------ ------------
Net income $ 83.9 $ 74.4 $ 201.7 $ 195.6
============ ============ ============ ============
Earnings available for common shareholders $ 81.5 $ 72.1 $ 194.6 $ 188.5
============ ============ ============ ============
Earnings per share from continuing operations
Basic $ 0.97 $ 0.86 $ 2.31 $ 1.44
============ ============ ============ ============
Diluted $ 0.90 $ 0.81 $ 2.16 $ 1.37
============ ============ ============ ============
Earnings per share
Basic $ 0.97 $ 0.86 $ 2.31 $ 2.26
============ ============ ============ ============
Diluted $ 0.90 $ 0.81 $ 2.16 $ 2.12
============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
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JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions; unaudited)
For the Nine Months
Ended June 30,
----------------------------
1998 1997
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OPERATING ACTIVITIES
Income from continuing operations $ 201.7 $ 127.7
Adjustments to reconcile income from continuing operations to
cash provided by operating activities of continuing operations
Depreciation 228.6 212.2
Amortization of intangibles 50.4 51.2
Equity in earnings of partially-owned affiliates (12.3) (16.5)
Deferred income taxes (1.2) (58.3)
Restructuring charge -- 70.0
Other (1.3) (21.0)
Changes in working capital, excluding acquisition of businesses
Receivables (146.8) (44.3)
Inventories (13.0) (19.0)
Other current assets (84.8) (52.5)
Accounts payable and accrued liabilities 219.2 188.8
Accrued income taxes (30.3) (17.2)
Billings in excess of costs and earnings on uncompleted contracts 23.0 25.3
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Cash provided by operating activities of continuing operations 433.2 446.4
Cash used by operating activities of discontinued operations -- (8.4)
------------ ------------
Cash provided by operating activities 433.2 438.0
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INVESTING ACTIVITIES
Capital expenditures (303.3) (239.5)
Sale of property, plant and equipment - net 13.5 10.1
Acquisition of businesses, net of cash acquired (6.7) (1,261.9)
Divestiture of businesses -- 645.6
Additions of long-term investments (14.8) (12.5)
Investing activities of discontinued operations -- (19.5)
------------ ------------
Cash used by investing activities (311.3) (877.7)
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FINANCING ACTIVITIES
(Decrease) increase in short-term debt (122.8) 570.0
Issuance of long-term debt 183.9 6.5
Repayment of long-term debt (96.3) (29.3)
Payment of cash dividends (66.6) (62.9)
Net financing activities of discontinued operations -- 16.5
Other 7.2 (25.8)
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Cash (used) provided by financing activities (94.6) 475.0
------------ ------------
Increase in cash and cash equivalents $ 27.3 $ 35.3
============ ============
The accompanying notes are an integral part of the financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statements
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position,
results of operations, and cash flows for the periods presented. These
financial statements should be read in conjunction with the audited
financial statements and notes thereto contained in the Company's Annual
Report to Shareholders for the year ended September 30, 1997. The results
of operations for the three and nine months ended June 30, 1998 are not
necessarily indicative of the results which may be expected for the
Company's 1998 fiscal year because of seasonal and other factors.
2. Cash Flow
For purposes of the Consolidated Statement of Cash Flows, the Company
considers all investments with a maturity of three months or less at the
time of purchase to be cash equivalents.
Income taxes paid during the nine months ended June 30, 1998 and 1997 (net
of income tax refunds) totaled approximately $181 million and $240
million, respectively. The decrease primarily reflects taxes paid in the
third quarter of fiscal 1997 on the gain on the sale of the discontinued
Plastic Container division. Total interest paid was $101 million and $98
million for the nine months ended June 30, 1998 and 1997, respectively.
3. Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method for most inventories at
domestic locations. The cost of other inventories is determined on the
first-in, first-out (FIFO) method.
Inventories were comprised of the following:
June 30,
------------------------
(in millions) 1998 1997
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Raw materials and supplies $ 187.7 $ 153.2
Work-in-process 92.9 110.4
Finished goods 147.1 137.6
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FIFO inventories 427.7 401.2
LIFO reserve (38.7) (41.3)
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LIFO inventories $ 389.0 $ 359.9
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4. Income Taxes
The provision for income taxes is determined by applying an estimated
annual effective income tax rate to income before income taxes. The
estimated 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.
5. Earnings Per Share
Effective October 1, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share," which
establishes revised standards for computing and presenting earnings per
share. Prior period earnings per share have been restated. The following
reconciles the numerators and denominators used to calculate basic and
diluted earnings per share from continuing operations for the three- and
nine-month periods ended June 30, 1998 and 1997:
Income Available to Common Shareholders (in millions)
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
Income from continuing operations $ 83.9 $ 74.4 $ 201.7 $ 127.7
Less: Preferred stock dividends, net of tax
benefit (2.4) (2.3) (7.1) (7.1)
-------- -------- -------- --------
Basic income available to common stockholders $ 81.5 $ 72.1 $ 194.6 $ 120.6
-------- -------- -------- --------
Effect of Dilutive Securities:
Preferred stock dividends, net of tax benefit 2.4 2.3 7.1 7.1
Less: Compensation expense, net of tax, arising
from assumed conversion of preferred
stock (1.3) (1.4) (3.9) (4.1)
-------- -------- -------- --------
Diluted income available to common stockholders
after assumed conversions $ 82.6 $ 73.0 $ 197.8 $ 123.6
======== ======== ======== ========
Weighted Average Shares Outstanding (in millions)
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
--------------- ---------------
1998 1997 1998 1997
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Basic weighted average shares outstanding 84.7 83.8 84.4 83.4
----- ----- ----- -----
Effect of Dilutive Securities:
Stock options 1.9 1.1 1.7 1.4
Convertible preferred stock 5.5 5.8 5.5 5.8
----- ----- ----- -----
Diluted weighted average shares outstanding 92.1 90.7 91.6 90.6
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6. Acquisition and Divestiture of Businesses
Effective October 1, 1996, the Company completed the acquisition of Prince
Holding Corporation (Prince) for approximately $1.3 billion. Prince, based
in Holland, Michigan, supplies automotive interior systems and components
including overhead systems and consoles, door panels and floor consoles.
The acquisition was accounted for as a purchase. The excess of the
purchase price over the fair value of the acquired net assets, which
approximated $1.1 billion, was recorded as goodwill. The Company used the
after-tax proceeds from the sale of the Plastic Container division (PCD)
and debt securities to finance the purchase.
On February 28, 1997, the Company completed the sale of 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,
after-tax). Accordingly, prior year consolidated financial statements
reflect PCD as a discontinued operation. The results of discontinued
operations do not reflect any interest expense or management fees
allocated by the Company. Revenues of PCD were $242 million for the five
months ended February 28, 1997 and are not included in sales as reported
in the Consolidated Statement of Income. For the nine months ended June
30, 1997, the loss per basic and diluted share from discontinued
operations was $.01, with a gain on the sale of discontinued operations of
$.83 per basic share and $.76 per diluted share.
7. Restructuring Charge
In the second quarter of fiscal 1997, the Company recorded a restructuring
charge, including related asset writedowns, of $70.0 million ($40.3
million or $.48 per basic share and $.44 per diluted share, after-tax)
involving the Company's automotive and controls segments. The
restructuring reserve balance at June 30, 1998 was $8.3 million and it is
expected that the remaining restructuring activities will be completed by
fiscal year-end.
8. Contingencies
The Company is involved in a number of proceedings and potential
proceedings relating to environmental matters. Although it is difficult to
estimate the liability of the Company related to these environmental
matters, the Company believes that these matters will not have a
materially adverse effect upon its capital expenditures, earnings or
competitive position.
Additionally, the Company is involved in a number of product liability and
various other suits incident to the operation of its businesses. Insurance
coverages are maintained and estimated costs are recorded for claims and
suits of this nature. It is management's opinion that none of these will
have a materially adverse effect on the Company's financial position,
results of operations or cash flows.
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9. Future Accounting Changes
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement is effective October 1, 1999 for the Company. It requires
all derivative instruments to be recorded in the statement of financial
position at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether the derivative is designated as part of a hedge
transaction and if it is, the type of hedge transaction. For fair-value
hedge transactions that hedge changes in the fair value of an asset,
liability or firm commitment, changes in fair value of the derivative
instrument will generally be offset in the income statement by changes in
the hedged item's fair value. For cash flow hedge transactions, which
hedge the variability of cash flows related to a variable rate asset,
liability or forecasted transaction, changes in fair value of the
derivative instrument will be reported in other comprehensive income. The
gains and losses on the derivative instrument that are reported in other
comprehensive income will be reclassified as earnings in the periods in
which earnings are affected by the variability of the cash flows of the
hedged item. For hedges of net investment positions, changes in fair value
will continue to be recorded as a component of the cumulative translation
adjustments account. The ineffective portion of all hedges will be
recognized in current-period earnings.
10. Subsequent Events
The Company completed the acquisition of Becker Group, Inc. (Becker Group)
effective July 1, 1998 for approximately $548 million, plus the assumption
of approximately $372 million of debt. Becker Group, based in Michigan and
Germany, is a major supplier of automotive interior systems, particularly
door systems and instrument panels. The acquisition will be accounted for
as a purchase. As such, the excess of the purchase price over the
estimated fair value of the acquired net assets, which has not yet been
determined, will be recorded as goodwill. The acquisition was initially
financed with commercial paper and is anticipated to be subsequently
financed with long-term debt.
On August 4, 1998, the Company agreed to sell its plastics machinery
business to Cincinnati Milacron, Inc. for approximately $210 million. The
plastics machinery business has annual sales of approximately $190
million. The Company intends to use the after-tax proceeds from the sale
to reduce its debt. The transaction, subject to regulatory approval, is
expected to be completed in six to eight weeks.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE-MONTH PERIODS ENDED JUNE 30, 1998
AND JUNE 30, 1997
CONTINUING OPERATIONS
Consolidated net sales increased to $3,190 million for the third quarter of
fiscal 1998, an increase of 11% from the prior year's sales of $2,879 million.
Automotive segment sales for the quarter rose to $2,371 million, up 13% from the
prior year's $2,106 million. Seating and interior systems sales in North America
were higher due to new contracts and increased production levels, including
programs with Toyota, Ford and Mercedes. Third quarter European seating sales
improved, led by new programs and increased volume with Mercedes and Volkswagen.
Seating sales in South America were higher, reflecting the Company's continued
launches of seating programs in that market. Sales of automotive batteries also
increased as the business shipped a record level of batteries to the replacement
and original equipment markets. These improvements more than offset the effects
of the North American General Motors (GM) strike.
Controls segment sales improved to $819 million, 6% higher than the prior year
period sales of $774 million. The majority of the increase was attributable to
growth in the segment's integrated facilities management business, particularly
in the North American commercial buildings market, as demand for the Company's
management capabilities continued to grow. Worldwide sales of installed control
systems and services also increased from the prior year period. Systems and
services orders were slightly less than the prior period level on a worldwide
basis, as domestic orders trailed last year's record level.
Consolidated operating income for the third fiscal quarter of 1998 increased to
$181 million, up 12% from the prior year's $162 million. Both of the Company's
operating segments achieved double-digit growth compared to the prior year
period.
The automotive segment's operating income improved due to higher sales of
seating and interior systems and operating improvements, particularly in the
European market. The third quarter improvement was achieved despite the effect
of the GM strike, which reduced operating income by approximately $15 million
($.10 per diluted share, after-tax) and start-up costs associated with the
segment's seating operations in South America and the Asia/Pacific region.
Controls segment operating income exceeded the prior year due primarily to the
domestic control systems and services business' cost control efforts and
improved contract execution.
Net interest expense increased $3 million from the prior year period due to
higher interest costs attributable to the Company's start-up operations in South
America. Miscellaneous income-net decreased by approximately $5 million due, in
part, to reduced equity income.
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The effective income tax rate was 41.5% for the three-month period ended June
30, 1998 compared to 42.5% for the comparable quarter last year. The effective
rate declined due to improved performance by certain of the Company's European
operations, partially offset by the losses of start-up operations in emerging
markets.
The Company's third quarter net income rose to $84 million, an increase of 13%
over the prior quarter's net income of $74 million. The current quarter's growth
was due to the improvements in operating income, offset by higher net interest
expense as noted above. Diluted earnings per share for the quarter were $.90, up
from $.81 in the prior year.
COMPARISON OF OPERATING RESULTS FOR THE NINE-MONTH PERIODS ENDED JUNE 30, 1998
AND JUNE 30, 1997
CONTINUING OPERATIONS
Consolidated net sales reached $9,253 million for the nine months ended June 30,
1998, a 10% increase from sales of $8,384 million for the prior year period.
Automotive segment sales growth was the principal source of the sales increase.
Automotive segment sales totaled $6,883 million for the first nine months of
1998, a 13% improvement from the prior year's $6,116 million. Higher seating and
interior system sales in North America were the largest contributors to the
current year's increase. Seating and interior system sales increased at a faster
rate than the North American vehicle production level due to new contracts and
the continuing strong demand for vehicles that the Company supplies. European
seating sales increased over the prior year, led by new programs and increased
production levels with Mercedes and Volkswagen. Seating sales in South America
sharply increased as the Company continued to successfully launch new seating
programs in that market. Automotive battery sales also improved over the prior
year period due to higher unit shipments, primarily reflecting market share
increases with aftermarket customers.
Controls segment sales improved by 5%, increasing from $2,269 million in 1997 to
$2,370 million for the first nine months of 1998. The integrated facilities
management business demonstrated strong growth in the commercial buildings
market worldwide, reflecting the start of a number of significant new contracts
and the expansion of existing contracts. North American sales of installed
control systems and services to the new construction and existing building
markets also increased from the prior year period. Control systems orders for
the first nine months of the year were higher than the prior year, due
principally to domestic order growth for control systems for the existing
buildings market.
Consolidated operating income for the first nine months of 1998 was $456
million, 13% higher than the prior year's $404 million (before a $70 million
restructuring charge; see the discussion that follows).
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The automotive segment's operating income increased from the prior year period
due primarily to higher income from the European and North American seating and
interior systems businesses. European seating systems' profitability rose due to
reduced engineering and operating costs as its seating programs continue to
mature. These improvements more than offset start-up costs associated with the
segment's seating operations in South America and the Asia/Pacific region.
Controls segment operating income increased from the prior year period due to
the volume increases noted above and improved productivity associated with the
domestic control systems and services business' cost control efforts and
improved contract execution.
The $70 million ($40 million or $.44 per diluted share, after-tax) restructuring
charge recorded in the second quarter of fiscal 1997 involved the automotive and
controls segments. The automotive initiatives primarily related to European
operations where certain manufacturing capacity was realigned with future
customer sourcing requirements, and product development resources were
consolidated. The charge associated with the controls segment principally
addressed the Company's decision to restructure certain low-margin service
activities that were outside its core controls and facilities management
businesses which serve the commercial and government markets.
The overall sales growth experienced during the first nine months of fiscal 1998
is expected to continue during the remainder of the year. Management expects the
automotive segment's sales to increase approximately 8% to 13% for the full
year. The projected increase is due to the launch of new seating programs
worldwide and the expected strength of vehicle production levels in North
America and Europe. Controls segment sales for the year are expected to improve
by 5% to 10%, most likely within the lower end of that range. Continued growth
in integrated facilities management in the domestic commercial market and higher
systems retrofit and service activities are expected to be the primary sources
of the increased sales.
Other expense for the first nine months of 1998 increased $5 million compared to
the prior year. Net interest expense decreased $5 million resulting from the
Company's use of the proceeds from the sale of the Plastic Container division
(PCD; see "Discontinued Operations") and its operating cash flows to reduce
short-term debt and related interest expense. Miscellaneous income-net decreased
approximately $10 million due, in part, to reduced equity income, which reflects
the start-up of new business activity in Brazil and China.
The effective income tax rate associated with continuing operations was 41.5%
for the first nine months of 1998 compared to 42.5% for the prior year period.
The effective rate declined due to improved performance by certain of the
Company's European operations, partially offset by the losses of start-up
operations in emerging markets.
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The Company's income from continuing operations for the first nine months of
fiscal 1998 was $202 million, an increase of 20% from the prior year's total of
$168 million (before $40 million restructuring charge, after-tax). This increase
was due to the improvements in operating income and reduced net interest expense
and lower effective income tax rate, as noted above. Diluted earnings per share
from continuing operations were $2.16, up from $1.81 per diluted share (before
restructuring charge of $.44 per diluted share) in the prior year.
DISCONTINUED OPERATIONS
On February 28, 1997, the Company completed the sale of 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, after-tax). Accordingly, operating
results, net assets and cash flows of PCD have been segregated as discontinued
operations in the accompanying consolidated financial statements. For the nine
months ended June 30, 1997, the loss per basic and diluted share from
discontinued operations was $.01, with a gain on the sale of discontinued
operations of $.83 per basic share and $.76 per diluted share.
COMPARISON OF FINANCIAL CONDITION
Working Capital and Cash Flow
The Company's negative working capital was $177 million at June 30, 1998,
compared with negative $443 million and negative $501 million at September 30,
1997 and June 30, 1997, respectively. The level of negative working capital has
steadily decreased since the first quarter of fiscal 1997, when working capital
was significantly affected by the Company's issuance of short-term debt to
finance the acquisition of Prince Holding Corporation (Prince). Since that time,
the Company has used the proceeds from the sale of divested businesses and its
operating cash flows to reduce short-term debt and improve working capital.
Working capital, excluding cash and debt, was higher than comparable prior year
periods due primarily to increased receivables associated with the higher
current period sales volume.
Operating activities of continuing operations provided cash of $433 million for
the first nine months of the year compared to $446 million in the prior year.
Cash provided by continuing operations decreased slightly as the current
period's higher income, adjusted for non-cash items, was more than offset by
increased receivables and other changes in working capital.
Capital Expenditures and Other Investments
Capital expenditures for property, plant and equipment were approximately $303
million for the first nine months of fiscal 1998, an increase of $64 million
from the amount spent during the first nine months of fiscal 1997. Management
projects that capital spending for the full year will be approximately $375 to
$400 million. The majority of the spending will be for new automotive seating
and interior product lines and facilities. Both segments also allocated capital
spending to cost reduction projects during the first nine months of the fiscal
year and such spending is planned to continue during the final fiscal quarter.
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The Company's investments in partially-owned affiliates totaled $172 million at
June 30, 1998, compared to $145 million at fiscal year-end. The increase was
primarily due to the recording of equity income, principally from automotive
segment affiliates, and the formation of a number of new joint ventures by both
the automotive and controls segments in the United States and abroad.
Capitalization
Total capitalization at June 30, 1998 of $3,262 million included short-term debt
of $426 million, long-term debt, including the current portion, of $990 million
and shareholders' equity of $1,846 million. Total capitalization at September
30, 1997 and June 30, 1997 was $3,151 million and $3,220 million, respectively.
Total debt as a percentage of total capitalization was 43% at June 30, 1998,
representing a decrease from the 46% and 49% levels at fiscal year-end and one
year ago, respectively.
The Company has used its strong operating cash flows to lower short-term debt
and reduce the ratio of debt to capitalization. Short-term debt at June 30, 1998
also declined as a result of the Company's issuance in February 1998 of $175
million of ten-year 6.3% notes. The notes were used to refinance a portion of
commercial paper borrowings and were issued under the $1.5 billion shelf
registration statement on file with the Securities and Exchange Commission.
In July 1998, the Company entered into a new one-year $1.2 billion revolving
credit facility to support increased commercial paper balances associated with
the acquisition of Becker Group (see "Acquisition"). As a result of the Becker
Group acquisition and related financing, the Company expects its
debt-to-capitalization level to increase to approximately 55% at September 30,
1998.
The Company believes its capital resources and liquidity position at June 30,
1998 are adequate to meet projected needs. Requirements for working capital,
capital expenditures, dividends and debt maturities in fiscal 1998 will continue
to be funded from operations, supplemented by short-term borrowings, if
required, to meet peak seasonal needs.
BACKLOG
The Company's backlog relates to the controls segment's systems installation and
services business, which derives a significant portion of its revenues from
long-term contracts that are accounted for using the percentage-of-completion
method. The unearned backlog of commercial building systems and services
contracts (excluding integrated facilities management) to be executed within the
next year at June 30, 1998 was $835 million, compared to $760 million at
September 30, 1997 and $811 million at June 30, 1997. The increase from fiscal
year-end represents higher performance contracting and systems retrofit bookings
in North America, while the increase from the prior year period primarily
reflects a higher level of systems retrofit worldwide.
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ACQUISITION
The Company completed the acquisition of Becker Group, Inc. (Becker Group)
effective July 1, 1998 for approximately $548 million, plus the assumption of
approximately $372 million of debt. Becker Group, based in Michigan and Germany,
is a major supplier of automotive interior systems, particularly door systems
and instrument panels. Becker Group's sales for 1998 are expected to approximate
$1.3 billion, a portion of which will be reflected in the Company's consolidated
results for fiscal 1998. The acquisition will be accounted for as a purchase. As
such, the excess of the purchase price over the estimated fair value of the
acquired net assets, which has not yet been determined, will be recorded as
goodwill. The acquisition was initially financed with commercial paper and is
anticipated to be subsequently financed with long-term debt.
PENDING DIVESTITURE
On August 4, 1998, the Company agreed to sell its plastics machinery business to
Cincinnati Milacron, Inc. for approximately $210 million. The plastics machinery
business has annual sales of approximately $190 million. The Company intends to
use the after-tax proceeds from the sale to reduce its debt. The transaction,
subject to regulatory approval, is expected to be completed in six to eight
weeks.
FUTURE ACCOUNTING CHANGES
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." See footnote 9 to the consolidated
financial statements for a description of this statement.
OTHER MATTERS
The Company has established an ongoing process to identify and resolve the
business issues associated with the Year 2000. A global team of professionals
has been assigned responsibility for addressing the business issues and
monitoring progress toward their resolution. The team has conducted surveys of
the Company's information systems, products, infrastructure and manufacturing
systems to identify and remediate potential problems related to the Year 2000. A
risk-based method was used to identify the systems most critical to the
Company's operations and these systems were the first ones targeted for
conversion or replacement to become Year 2000 ready.
Many of the Company's systems are currently Year 2000 ready. The balance of the
Company's systems are currently being modified or replaced, with all significant
systems targeted for Year 2000 readiness status by September 30, 1999. The need
for contingency plans will be evaluated as this target date approaches. In most
instances, the Company has replaced, or is in the process of replacing, older
software with new programs and systems, rather than modifying existing systems
solely to become Year 2000 ready. Replacing these systems results in a
significant upgrade in systems and capabilities, as well as providing the
ability to properly interpret Year 2000 data. Although the timing of the system
replacements is influenced by the Year 2000, in most instances these systems
would have been replaced in the normal course of business. The Company estimates
total historical and future costs associated with upgrading and replacing its
systems to ensure
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Year 2000 readiness will approximate $40 to $50 million. This estimate does not
include costs related to the recently acquired Becker Group.
The Company believes it continues to appropriately reduce the risks of not being
Year 2000 ready through the identification and remediation process described
above. The three largest domestic automobile manufacturers, which accounted for
almost 40% of the Company's fiscal 1997 sales, have assessed the Company'
internal systems as having a "low" risk of not being Year 2000 ready. The
Company's information technology professionals are currently evaluating the Year
2000 readiness of the recently acquired Becker Group; the estimated costs to
ensure its readiness to process Year 2000 data are not yet estimable. Based on
the Year 2000 readiness process described above, the Company does not at present
anticipate any material business disruptions due to the Year 2000 that would be
associated with its internal systems, products or services.
The Company believes the most significant risks associated with the Year 2000
are external to its operations. The Company could face a material financial risk
if its customers or suppliers are unable to complete critical Year 2000
readiness efforts in a timely manner. The Company is currently working with its
customers and suppliers to evaluate Year 2000 readiness, identify material risks
and develop solutions so that all critical processes needed to conduct its
business are Year 2000 ready. In addition, the Company's exposure to these
external risks is partially mitigated by the size and sophistication of its
primary customers, as well as by the diversity of its products, suppliers and
geographic locations.
CAUTIONARY STATEMENTS FOR FORWARD LOOKING INFORMATION
The Company has made forward-looking statements in this document that are
subject to risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future risks preceded by, following
or that include the words "believes," "expects," "anticipates" or similar
expressions. For those statements, the Company cautions that the numerous
important factors discussed elsewhere in this document and in the Company's Form
8-K filing (dated 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.
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, 1997, for a description of the results of votes
of security holders at the Annual Meeting of Shareholders held January 22, 1998.
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Item 5. Other Information
(a) A shareholder who intends to present business at the 1999 annual
meeting, other than pursuant to rule 14a-8 must comply with the
requirements set forth in the Company's By-Laws. Among other
things, to bring business before an annual meeting, a shareholder
must give written notice thereof, complying with the By-Laws, to
the Secretary of the Company not less than 45 days and not more
than 75 days prior to the month and day in the current year
corresponding to the date on which the Corporation first mailed
its proxy materials for the prior year's annual meeting of
shareholders. Therefore, since the Company mailed its proxy
statement on December 5, 1997, the Company must receive notice of
a shareholder proposal submitted other than pursuant to Rule
14a-8 no sooner than September 21, 1998, and no later than
October 21, 1998. If the notice is received after October 21,
1998, the notice will be considered untimely and the Company is
not required to present such proposal at the 1999 annual meeting.
If the Board of Directors chooses to present an untimely proposal
at the 1999 annual meeting, then the persons named in proxies
solicited by the Board of Directors for the 1999 annual meeting
may exercise discretionary voting power with respect to such
proposal.
(b) Lou Kincaid was elected a Corporate Officer. Mr. Kincaid is Vice
President and General Manager of Product Engineering Worldwide,
with responsibility for both automotive and interior systems. Mr.
Kincaid previously served as Group Vice President of Technical
Operations for Prince, prior to the Company's acquisition of
Prince in fiscal 1997.
(c) Franklin H. Smith, Jr. left the Company. Mr. Smith previously was
Controller for the Controls Group.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12 Statement regarding the computation of the ratio of earnings to
fixed charges.
27 Financial Data Schedule (electronic filing only).
(b) The following Form 8-K was filed during the three months ended
June 30, 1998:
(1) On April 28, 1998, the Company filed a Form 8-K to announce its
agreement to acquire Becker Group, a privately held supplier of
interior systems based in Michigan and Germany.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
JOHNSON CONTROLS, INC.
Date: August 14, 1998 By: Stephen A. Roell
Vice President and
Chief Financial Officer
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