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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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
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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 December 31, 1998
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Common Stock $.16 2/3 Par Value 84,889,922
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JOHNSON CONTROLS, INC.
FORM 10-Q
DECEMBER 31, 1998
REPORT INDEX
Page No.
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PART I - FINANCIAL INFORMATION:
Consolidated Statement of Financial Position at December 31, 1998
September 30, 1998 and December 31, 1997................................. 3
Consolidated Statement of Income for the Three-Month
Periods Ended December 31, 1998 and 1997 ............................... 4
Consolidated Statement of Cash Flows for the Three-Month
Periods Ended December 31, 1998 and 1997 ............................... 5
Notes to Consolidated Financial Statements ............................... 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................... 9
Quantitative and Qualitative Disclosures About Market Risk................. 15
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings.................................................. 15
Item 4. Results of Votes of Security Holders............................... 15
Item 6. Exhibits and Reports on Form 8-K ................................. 16
SIGNATURES ............................................................... 17
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JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(In millions)
December 31, September 30, December 31,
1998 1998 1997
------------------- -------------------- -------------------
(unaudited) (unaudited)
ASSETS
Cash and cash equivalents $ 329.2 $ 134.0 $ 248.1
Accounts receivable - net 2,136.3 1,821.1 1,644.6
Costs and earnings in excess of billings on
uncompleted contracts 196.1 191.7 199.1
Inventories 470.5 428.2 390.0
Net assets held for sale 211.3 231.9 -
Other current assets 557.0 597.3 402.1
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Current assets 3,900.4 3,404.2 2,883.9
Property, plant and equipment - net 1,953.6 1,882.9 1,548.1
Goodwill - net 2,166.4 2,084.5 1,558.0
Investments in partially-owned affiliates 251.0 166.2 155.8
Other noncurrent assets 446.2 404.3 262.7
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Total assets $8,717.6 $7,942.1 $6,408.5
=================== ==================== ===================
LIABILITIES AND EQUITY
Short-term debt $1,486.8 $1,289.5 $ 614.5
Current portion of long-term debt 88.9 39.4 58.3
Accounts payable 1,863.0 1,625.2 1,428.1
Accrued compensation and benefits 379.9 376.1 282.4
Accrued income taxes 157.8 119.6 86.2
Billings in excess of costs and earnings
on uncompleted contracts 150.5 127.5 130.8
Other current liabilities 792.9 711.1 515.7
------------------- -------------------- -------------------
Current liabilities 4,919.8 4,288.4 3,116.0
Long-term debt 937.8 997.5 964.8
Postretirement health and other benefits 167.0 166.7 167.5
Other noncurrent liabilities 613.7 548.1 412.0
Shareholders' equity 2,079.3 1,941.4 1,748.2
------------------- -------------------- -------------------
Total liabilities and equity $8,717.6 $7,942.1 $6,408.5
=================== ==================== ===================
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
Ended December 31,
---------------------------------------------
1998 1997
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Net sales $3,873.1 $3,056.3
Cost of sales 3,344.6 2,622.1
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Gross profit 528.5 434.2
Selling, general and administrative expenses 345.3 285.8
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Operating income 183.2 148.4
Interest income 3.1 2.3
Interest expense (41.1) (30.1)
Miscellaneous - net (1.2) 1.7
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Other income (expense) (39.2) (26.1)
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Income before income taxes and minority interests 144.0 122.3
Provision for income taxes 58.3 50.8
Minority interests in net earnings of subsidiaries 6.0 6.2
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Net income $ 79.7 $ 65.3
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Earnings available for common shareholders $ 77.3 $ 63.0
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Earnings per share
Basic $ 0.91 $ 0.75
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Diluted $ 0.86 $ 0.70
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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 Three Months
Ended December 31,
--------------------------------
1998 1997
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OPERATING ACTIVITIES
Net income $ 79.7 $ 65.3
Adjustments to reconcile net income to cash provided by operating activities
Depreciation 94.4 76.0
Amortization of intangibles 20.8 16.9
Equity in earnings of partially-owned affiliates (5.8) (5.9)
Deferred income taxes 0.6 (0.2)
Other 18.1 (0.3)
Changes in working capital, excluding acquisition and divestiture of businesses
Receivables (182.8) (149.5)
Inventories (36.9) (13.4)
Other current assets 40.4 (40.5)
Accounts payable and accrued liabilities 220.3 80.1
Accrued income taxes 28.5 6.9
Billings in excess of costs and earnings on uncompleted contracts 22.5 23.5
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Cash provided by operating activities 299.8 58.9
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INVESTING ACTIVITIES
Capital expenditures (122.5) (86.0)
Sale of property, plant and equipment - net 20.0 0.4
Acquisition of businesses, net of cash acquired (82.7) -
Divestiture of businesses 15.0 -
Additions of long-term investments (86.8) (1.5)
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Cash used by investing activities (257.0) (87.1)
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FINANCING ACTIVITIES
Increase in short-term debt - net 183.2 239.8
Issuance of long-term debt - 5.9
Repayment of long-term debt (10.9) (60.8)
Payment of cash dividends (23.9) (22.1)
Other 4.0 1.7
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Cash provided by financing activities 152.4 164.5
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Increase in cash and cash equivalents $ 195.2 $ 136.3
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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, 1998. The results
of operations for the three months ended December 31, 1998 are not
necessarily indicative of the results which may be expected for the
Company's 1999 fiscal year because of seasonal and other factors.
2. Acquisition of Business
Effective July 1, 1998, the Company completed the acquisition of Becker
Group 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 was accounted for as a purchase.
The excess of the purchase price over the estimated fair value of the
acquired net assets, which approximated $500 million, was recorded as
goodwill. The purchase was initially financed with commercial paper and it
is anticipated that a portion will be refinanced with long-term debt.
As part of the Becker Group acquisition, the Company recorded a
restructuring reserve of $48 million. The reserve was established for
anticipated costs associated with consolidating certain of Becker Group's
European and domestic manufacturing, engineering and administrative
operations with existing capacity of the Company. The majority of the
reserve was attributable to expected employee severance and termination
benefit costs and plant closure costs. During the first quarter of fiscal
1999, approximately $1 million of employee severance and termination costs
associated with the consolidation of certain domestic operations were
charged against the reserve. The restructuring activities are expected to
be completed by the end of fiscal 1999.
Certain businesses acquired in the Becker Group purchase have been
classified as net assets held for sale in the Consolidated Statement of
Financial Position. At the date of acquisition, the Company identified
several operations of Becker Group that were outside of the Company's core
businesses and, as such, would be sold. The net assets of the businesses
were valued at fair value less estimated costs to sell, including cash
flows during the holding period. The operating results of the businesses,
which were not material for the first quarter of fiscal 1999, were
excluded from consolidated operating results. The Company sold one of
these businesses for approximately $30 million in the first quarter and
expects to sell the remaining businesses during the year.
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3. Cash Flow
For purposes of the Consolidated Statement of Cash Flows, the Company
considers all investments with a maturity of three months or less at the
time of purchase to be cash equivalents.
Income taxes paid during the three months ended December 31, 1998 and 1997
(net of income tax refunds) totaled approximately $19 million and $32
million, respectively. The decrease primarily reflects taxes paid in the
prior year quarter attributable to the gain on the sale of the
discontinued Plastic Container division. Total interest paid was $44
million and $35 million for the three months ended December 31, 1998 and
1997, respectively. The increase was principally due to financing costs
associated with the acquisition of Becker Group.
4. 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 at December 31, 1998 and
1997 were comprised of the following:
December 31,
(in millions) 1998 1997
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Raw materials and supplies $249.5 $183.4
Work-in-process 83.8 95.2
Finished goods 174.4 150.0
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FIFO inventories 507.7 428.6
LIFO reserve (37.2) (38.6)
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LIFO inventories $470.5 $390.0
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5. 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.
6. Comprehensive Income
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which
establishes new standards for reporting and display of comprehensive
income and its components. Comprehensive income is defined as the sum of
net income and all other non-owner changes in equity, such as foreign
currency translation adjustments. Comprehensive income for the three
months ended December 31, 1998 and 1997 was $139 million and $68 million,
respectively.
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7. Earnings Per Share
The following table reconciles the numerators and denominators used to
calculate basic and diluted earnings per share for the three-month periods
ended December 31, 1998 and 1997:
For the Three Months
Ended December 31,
(in millions) 1998 1997
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Income Available to Common Shareholders
Net Income $79.7 $65.3
Preferred stock dividends, net of tax benefit (2.4) (2.3)
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Basic income available to common shareholders $77.3 $63.0
Net Income $79.7 $65.3
Effect of Dilutive Securities:
Compensation expense, net of tax, arising from
assumed conversion of preferred stock (1.1) (1.3)
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Diluted income available to common shareholders $78.6 $64.0
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Weighted Average Shares Outstanding
Basic weighted average shares outstanding 84.8 84.1
Effect of Dilutive Securities:
Stock options 1.6 1.5
Convertible preferred stock 5.4 5.6
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Diluted weighted average shares outstanding 91.8 91.2
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8. Prior Year Restructuring Charge
In the second quarter of fiscal 1997, the Company recorded a restructuring
charge, including related asset writedowns, of $70 million involving the
Company's Automotive Systems and Controls Groups. During the first quarter
of fiscal 1999, the final activities of the restructuring plan were
completed and $7.7 million of employee severance and termination benefit
costs incurred to restructure an integrated facilities management business
in the United Kingdom were charged against the reserve.
9. 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.
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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.
10. Future Accounting Changes
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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 fair value of derivatives are required to be recorded each
period in current earnings or other comprehensive income, depending on
whether the derivative is designated as part of a hedge transaction and if
it is, the type of hedge transaction. The effect of adoption of this
statement on the Company's earnings or statement of financial position has
not yet been determined.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31,
1998 AND DECEMBER 31, 1997
Consolidated net sales grew by 27% in the first quarter of fiscal 1999,
increasing to $3.9 billion from $3.1 billion for the prior year quarter.
Automotive Systems Group sales of $3.0 billion for the quarter were 29% higher
than the prior year's $2.3 billion. The segment's seating and interior systems
business in Europe was a primary contributor to the increase. Approximately
one-half of the increase in sales in the European market was attributable to
Becker Group, the interior systems supplier acquired by the Company in July
1998. New European seating programs and increased production levels also
contributed to the sales increase. Seating and interior systems sales in North
America were higher, reflecting the market's strong vehicle production level in
the quarter. Sales of automotive batteries also increased, with a record level
of batteries shipped to aftermarket customers.
Controls Group sales were $873 million, up 20% from the prior period's $728
million. Integrated facilities management sales increased in North America and
Europe, as the business continues to add significant new contracts to its
portfolio. Control systems and services sales also increased, led by increases
in the European market. Controls Group results also benefited from the current
quarter consolidation of Yokogawa Johnson Controls (YJC) Corporation, a Japanese
control systems and services affiliate that is now majority-owned. Worldwide
orders for control systems in the quarter exceeded the prior year period,
stemming from order growth in Europe and the addition of YJC.
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Strong overall sales growth is expected to continue during the remainder of the
fiscal year. Automotive Systems Group sales are expected to increase
approximately 20% to 25% for the full year. Contracts to supply seating and
interior systems for top-selling new vehicles, the addition of Becker Group and
continued growth in automotive battery sales are expected to propel the
segment's growth. Management anticipates that Controls Group sales will grow 10%
to 15%. Continued growth in integrated facilities management in the North
American and European commercial markets, higher domestic systems and services
sales to the existing buildings market and the consolidation of YJC are expected
to be the primary sources of the increased sales.
Consolidated operating income for the first quarter of fiscal 1999 rose to $183
million, 23% higher than the prior year's $148 million. Both of the Company's
operating segments achieved double-digit growth in the first quarter.
Automotive Systems Group operating income increased from the prior year period.
Higher sales volume of seating and interior systems in North America and Europe,
the addition of Becker Group and strong automotive battery sales were the
primary factors contributing to the increase. Operating income growth was lower
than segment sales growth due to the current quarter's higher proportion of
lower-margin European sales. Operating losses in South America associated with
the segment's seating operations were slightly higher than the prior year
period. The Company currently expects to incur losses in South America for the
remainder of the year, at a level approximating last year's losses, due to the
depressed economic condition in that market and the associated decline in
vehicle production levels.
Controls Group operating income for the first quarter grew in line with sales.
Improved productivity associated with the segment's domestic control systems and
services business contributed to the increase, as the business continued to
benefit from its cost control efforts and improved contract execution. Segment
operating income was also aided by the consolidation of YJC.
Other expense for the first quarter was $13 million higher than the prior year
quarter. Net interest expense increased $10 million due primarily to the
financing associated with the Becker Group acquisition. Miscellaneous - net fell
from income of approximately $2 million in the prior year period to expense of
$1 million in the current quarter. A factor in the change was the additional
expense for certain of the Company's compensation plans resulting from
appreciation in the Company's stock price.
The effective income tax rate was 40.5% for the three-month period ended
December 31, 1998 compared to 41.5% for the comparable quarter last year. The
effective rate declined due to improved performance by certain of the Company's
European operations and the related use of tax loss carryforwards, partially
offset by losses of start-up operations in emerging markets.
The Company's first quarter net income of $80 million was 22% higher than the
prior year's quarter. The current quarter's growth was due to increased
operating income and the lower effective income tax rate, partially offset by
higher interest expense, as noted previously. Diluted earnings per share for the
quarter ended December 31, 1998 were $0.86, up from $0.70 in the prior year.
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COMPARISON OF FINANCIAL CONDITION
Working Capital and Cash Flow
The Company's working capital was a negative $1.0 billion at December 31, 1998,
compared with a negative $884 million and a negative $232 million at September
30, 1998 and December 31, 1997, respectively. The significant year-over-year
decrease in working capital was due to the increased level of short-term debt
used to finance the acquisition of Becker Group in July 1998. Management expects
to refinance a portion its short-term obligations with long-term debt.
Working capital, excluding cash and debt, of $227 million at December 31, 1998
increased compared to the prior year quarter-end but decreased from fiscal
year-end. The changes from prior periods reflect, in part, amounts classified as
net assets held for sale in the Consolidated Statement of Financial Position and
activity associated with those assets (see "Capitalization").
The Company's operating activities provided cash of $300 million during the
first three months of the year compared with $59 million in the prior year
quarter. The period's increased operating cash flow was primarily attributable
to higher accounts payable, stemming largely from the Automotive Systems Group's
European operations.
Capital Expenditures and Other Investments
Capital expenditures for property, plant and equipment were approximately $123
million for the first three months of fiscal 1999, an increase of $37 million
from the amount incurred during the first quarter of fiscal 1998. Management
anticipates that capital spending for the full year will be approximately $425
to $450 million. The majority of the spending has been, and will continue to be,
associated with automotive seating and interior systems expansion. Controls
Group spending will be focused on information and building systems technology
and the construction of a controls technology center.
Goodwill of $2.2 billion at December 31, 1998 was $608 million higher than the
balance one year ago. The increase is primarily attributable to the acquisition
of Becker Group.
Investments in partially-owned affiliates of $251 million were $85 million
higher than the balance at September 30, 1998 and $95 million higher than the
balance one year ago. The increase over the prior year periods is primarily
associated with two new joint ventures formed during the current quarter to
manufacture automotive batteries in Mexico and South America. In total, the
joint ventures will operate 10 manufacturing plants in those regions, enabling
the battery business to expand its global manufacturing, marketing and
distribution capabilities.
The Company completed several business acquisitions during the first quarter of
fiscal 1999 that, net of cash acquired, affected cash flow. Notable among these
purchases was the acquisition of Cardkey Systems in December 1998 for
approximately $41 million. Cardkey Systems provides electronic access controls
and security management systems worldwide and will be integrated with the
Company's control systems and services business.
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In addition, the Company acquired a controlling management interest in Tokyo
Biso Kogyo, a publicly traded, leading Japanese facilities management provider,
in November 1998 to expand its integrated facilities management business in that
market.
Capitalization
The Company's total capitalization at December 31, 1998 of $4.6 billion included
short-term debt of $1.5 billion, long-term debt (including the current portion)
of $1.0 billion and shareholders' equity of $2.1 billion. Total capitalization
at September 30, 1998 and December 31, 1997 was $4.3 billion and $3.4 billion,
respectively. Total debt as a percentage of total capitalization of 55% at
December 31, 1998 was unchanged from fiscal year-end and higher than the 48%
level one year ago. The increase from the prior year period reflects the
issuance of commercial paper to finance the Becker Group acquisition. The
percentage was unchanged from fiscal year-end as a result of the previously
discussed first quarter investments and acquisitions.
Certain businesses acquired in the Becker Group purchase have been classified as
net assets held for sale in the Consolidated Statement of Financial Position. At
the date of acquisition, the Company identified several operations of Becker
Group that were outside of the Company's core businesses and, as such, would be
sold. The net assets of the businesses were valued at fair value less estimated
costs to sell, including cash flows during the holding period. The operating
results of the businesses, which were not material for the first quarter of
fiscal 1999, were excluded from consolidated operating results. The Company sold
one of these businesses for approximately $30 million in the first quarter and
expects to sell the remaining businesses during the year.
In November 1998, the Company agreed to sell its industrial battery business for
approximately $135 million. The transaction, subject to regulatory approval, is
expected to be completed in the quarter ended March 1999.
The Company expects its total debt as a percentage of total capitalization to
decline by fiscal year-end. The Company anticipates using proceeds from the
sales of divested businesses, as described above, and its operating cash flows
to reduce short-term debt.
The Company believes its capital resources and liquidity position at December
31, 1998 are adequate to meet projected needs. Requirements for working capital,
capital expenditures, dividends and debt maturities in fiscal 1999 will continue
to be funded from operations, supplemented by short-term borrowings, if
required, to meet peak seasonal needs.
Restructuring Activities
As part of the Becker Group acquisition, the Company recorded a restructuring
reserve of $48 million. The reserve was established for anticipated costs
associated with consolidating certain of Becker Group's European and domestic
manufacturing, engineering and administrative operations with existing capacity
of the Company. The majority of the reserve was attributable to expected
employee severance and termination benefit costs and plant closure costs. During
the first quarter of fiscal 1999,
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approximately $1 million of employee severance and termination costs associated
with the consolidation of certain domestic operations were charged against the
reserve. The restructuring activities are expected to be completed by the end of
fiscal 1999.
In the second quarter of fiscal 1997, the Company recorded a restructuring
charge, including related asset writedowns, of $70 million involving the
Company's Automotive Systems and Controls Groups. During the first quarter of
fiscal 1999, the final activities of the restructuring plan were completed and
$7.7 million of employee severance and termination benefit costs incurred to
restructure an integrated facilities management business in the United Kingdom
were charged against the reserve.
BACKLOG
The Company's backlog relates to the Controls Group's systems 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 December 31, 1998 was $1.0 billion, compared with $836 million at September
30, 1998 and $803 million at December 31, 1997. The increase from fiscal
year-end and the prior year period was largely due to the consolidation of YJC,
as well as the result of increased new orders for existing buildings worldwide.
FUTURE ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." See footnote 10 to the consolidated financial
statements for a description of this statement.
OTHER MATTERS
Year 2000
The Company has established a process to identify and resolve the business
issues associated with the Year 2000. A global team 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,
prioritize and remediate potential problems related to the Year 2000.
Many of the Company's systems are currently Year 2000 ready. The balance of the
systems are currently being modified or replaced, with all significant systems
targeted for Year 2000 readiness status by September 30, 1999. In most
instances, older software has been replaced, or is in the process of being
replaced, 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
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would have been replaced in the normal course of business. The Company has spent
approximately $28 million during the last two years to upgrade and replace its
systems to ensure Year 2000 readiness. The Company estimates it will incur
additional costs of approximately $20 to $25 million to upgrade and replace its
systems, the majority of which will be incurred in the current fiscal year.
Contingency plans are currently being developed, and may include activities such
as dual source contracts, development of back-up systems or manual processes,
inventory accumulation and other potential actions necessary to minimize the
risk of business disruption. The plans will continue to be refined as systems
are implemented and tested, with all plans expected to be finalized by September
30, 1999.
Management believes it continues to appropriately reduce the risks of not being
Year 2000 ready through the identification and remediation process described
above. The Company's three largest customers, which account for a significant
portion of consolidated sales, have assessed the Company' internal systems as
having a "low" risk of not being Year 2000 ready.
Management does not anticipate any material business disruptions due to the Year
2000 that would be associated with its own systems, products or services and
believes the most significant risks are external to its operations. A material
financial risk exists if 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. On-site audits of key suppliers are
currently being performed to independently verify Year 2000 readiness. Exposure
to these external risks is partially mitigated by the size and sophistication of
the Company's primary customers, as well as by the diversity of its products,
suppliers and geographic locations.
Euro Conversion
On January 1, 1999, member countries of the European Monetary Union (EMU) began
a three-year transition from their national currencies to a new common currency,
the "euro." In the first phase, the permanent rates of exchange between the
members' national currency and the euro were established and monetary, capital,
foreign exchange, and interbank markets were converted to the euro. National
currencies will continue to exist as legal tender and may continue to be used in
commercial transactions. By January 2002, euro currency will be issued and by
July 2002, the respective national currencies will be withdrawn. The Company has
significant operations in member countries of the EMU and its action plans are
being implemented to address the euro's impact on information systems, currency
exchange rate risk and commercial contracts. Management believes that the costs
of the euro conversion will not have a material impact on the operations, cash
flows or financial condition of the Company.
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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 November 13, 1998), 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
For the period ended December 31, 1998, the Company did not experience any
material changes in market risk exposures that affect the quantitative and
qualitative disclosures presented in the Company's Annual Report to Shareholders
for the year ended September 30, 1998.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
There have been no significant changes in status since the last Report.
Item 4. Results of Votes of Security Holders
The registrant held its Annual Meeting of Shareholders on January 27, 1999.
Proxies for the meeting were solicited pursuant to Regulation 14; there was no
solicitation in opposition to management's nominees for directors as listed in
the Proxy Statement, and all such nominees (Natalie A. Black, Robert A. Cornog,
James H. Keyes and William H. Lacy) were elected. Of the 72,396,117 shares
voted, at least 70,919,923 granted authority to vote for these directors and no
more than 1,476,194 shares withheld such authority.
The retention of PricewaterhouseCoopers LLP as auditors was approved by the
shareholders with 71,776,667 shares voted for such appointment, 244,608 shares
voted against, and 374,842 shares abstained.
The Johnson Controls, Inc. Long Term Performance Plan was approved by the
shareholders with 69,051,545 voted for such approval, 2,554,945 voted against
such approval, and 789,627 shares abstained.
The Johnson Controls, Inc. Executive Incentive Compensation Plan was approved by
the shareholders with 67,712,822 voted for such approval, 3,682,455 voted
against such approval, and 1,000,840 shares abstained.
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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
December 31, 1998:
(1) On November 13, 1998, the Company filed a form 8-K in order to
take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and to provide updated
disclosure of the factors that could affect any forward-looking
statements made by, or on behalf of, the Company.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
JOHNSON CONTROLS, INC.
Date: February 12, 1999 By:Stephen A. Roell
Senior Vice President and
Chief Financial Officer
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