- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 June 30, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-5097
----------------
JOHNSON CONTROLS, INC.
(Exact name of registrant as specified in its charter)
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, 2000
----- ----------------------------
Common Stock $.16 2/3 Par Value 85,870,304
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
JOHNSON CONTROLS, INC.
FORM 10-Q
June 30, 2000
REPORT INDEX
Page No.
--------
PART I--FINANCIAL INFORMATION:
Consolidated Statement of Financial Position at June 30, 2000,
September 30, 1999 and June 30, 1999................................ 3
Consolidated Statement of Income for the Three- and Nine-Month
Periods Ended June 30, 2000 and 1999................................ 4
Consolidated Statement of Cash Flows for the Nine-Month Periods
Ended June 30, 2000 and 1999........................................ 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........... 14
PART II--OTHER INFORMATION:
Item 1. Legal Proceedings............................................ 14
Item 4. Results of Votes of Security Holders......................... 14
Item 6. Exhibits and Reports on Form 8-K............................. 14
SIGNATURES............................................................. 15
2
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions)
June 30, September 30, June 30,
2000 1999 1999
----------- ------------- -----------
(unaudited) (unaudited)
ASSETS
------
Cash and cash equivalents............... $ 234.1 $ 276.2 $ 248.6
Accounts receivable--net................ 2,281.5 2,147.5 2,122.3
Costs and earnings in excess of billings
on uncompleted contracts............... 220.4 208.7 182.6
Inventories............................. 505.4 524.6 474.2
Other current assets.................... 663.3 691.5 619.8
-------- -------- --------
Current assets........................ 3,904.7 3,848.5 3,647.5
Property, plant and equipment--net...... 2,029.9 1,996.0 1,929.2
Goodwill--net........................... 2,010.0 2,096.9 2,086.2
Investments in partially-owned
affiliates............................. 247.1 215.1 212.2
Other noncurrent assets................. 401.0 457.7 425.5
-------- -------- --------
Total assets.......................... $8,592.7 $8,614.2 $8,300.6
======== ======== ========
LIABILITIES AND EQUITY
----------------------
Short-term debt......................... $ 218.5 $ 477.0 $ 432.1
Current portion of long-term debt....... 40.5 94.8 89.9
Accounts payable........................ 2,130.3 1,998.5 1,945.7
Accrued compensation and benefits....... 446.6 446.9 415.7
Accrued income taxes.................... 146.1 231.2 119.7
Billings in excess of costs and earnings
on uncompleted contracts............... 182.8 159.2 167.3
Other current liabilities............... 933.0 859.0 889.8
-------- -------- --------
Current liabilities................... 4,097.8 4,266.6 4,060.2
Long-term debt.......................... 1,232.3 1,283.3 1,293.9
Postretirement health and other
benefits............................... 165.3 166.4 161.9
Other noncurrent liabilities............ 644.7 627.9 574.2
Shareholders' equity.................... 2,452.6 2,270.0 2,210.4
-------- -------- --------
Total liabilities and equity.......... $8,592.7 $8,614.2 $8,300.6
======== ======== ========
The accompanying notes are an integral part of the financial statements.
3
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share data; unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Net sales......................... $ 4,389.3 $ 4,191.0 $13,065.9 $11,944.4
Cost of sales..................... 3,713.1 3,574.9 11,152.6 10,271.9
--------- --------- --------- ---------
Gross profit.................... 676.2 616.1 1,913.3 1,672.5
Selling, general and
administrative expenses.......... 409.2 377.2 1,238.9 1,090.7
--------- --------- --------- ---------
Operating income................ 267.0 238.9 674.4 581.8
Interest income................... 3.8 4.1 11.6 12.0
Interest expense.................. (29.3) (33.9) (95.9) (116.3)
Gain on sale of businesses........ -- -- -- 54.6
Miscellaneous--net................ (0.5) (3.5) 0.1 (2.2)
--------- --------- --------- ---------
Other income (expense).......... (26.0) (33.3) (84.2) (51.9)
--------- --------- --------- ---------
Income before income taxes and
minority interests............... 241.0 205.6 590.2 529.9
Provision for income taxes........ 95.4 83.2 233.7 214.6
Minority interests in net earnings
of subsidiaries.................. 12.2 11.3 35.3 26.2
--------- --------- --------- ---------
Net income........................ $ 133.4 $ 111.1 $ 321.2 $ 289.1
========= ========= ========= =========
Earnings available for common
shareholders..................... $ 130.9 $ 108.6 $ 313.9 $ 281.9
========= ========= ========= =========
Earnings per share
Basic........................... $ 1.53 $ 1.27 $ 3.67 $ 3.31
========= ========= ========= =========
Diluted......................... $ 1.45 $ 1.19 $ 3.46 $ 3.10
========= ========= ========= =========
The accompanying notes are an integral part of the financial statements.
4
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions; unaudited)
Nine Months
Ended June 30,
----------------
2000 1999
------- -------
OPERATING ACTIVITIES
Net Income................................................... $ 321.2 $ 289.1
Adjustments to reconcile net income to cash provided by
operating activities
Depreciation............................................... 289.3 272.7
Amortization of intangibles................................ 57.9 59.1
Equity in earnings of partially-owned affiliates, net of
dividends received........................................ (7.1) 15.1
Deferred income taxes...................................... (14.3) (12.9)
Gain on sale of businesses................................. -- (54.6)
Other...................................................... (1.8) 12.8
Changes in working capital, excluding acquisition and
divestiture of businesses
Receivables.............................................. (194.5) (156.3)
Inventories.............................................. 5.5 (48.4)
Other current assets..................................... (45.5) 5.7
Accounts payable and accrued liabilities................. 257.3 457.5
Accrued income taxes..................................... (29.3) (21.3)
Billings in excess of costs and earnings on uncompleted
contracts............................................... 20.7 38.0
------- -------
Cash provided by operating activities.................. 659.4 856.5
------- -------
INVESTING ACTIVITIES
Capital expenditures......................................... (382.5) (329.6)
Sale of property, plant and equipment--net................... 11.8 31.8
Acquisition of businesses, net of cash acquired.............. (11.0) (139.2)
Divestiture of businesses.................................... 75.0 315.1
Additions of long-term investments........................... (12.8) (17.8)
------- -------
Cash used by investing activities...................... (319.5) (139.7)
------- -------
FINANCING ACTIVITIES
Decrease in short-term debt--net............................. (262.3) (863.2)
Issuance of long-term debt................................... 22.3 346.0
Repayment of long-term debt.................................. (78.8) (26.9)
Payment of cash dividends.................................... (79.7) (72.0)
Other........................................................ 16.5 13.9
------- -------
Cash used by financing activities...................... (382.0) (602.2)
------- -------
(Decrease) increase in cash and cash equivalents............. $ (42.1) $ 114.6
======= =======
The accompanying notes are an integral part of the financial statements.
5
JOHNSON CONTROLS INC.
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, 1999. The results of operations for the three and
nine months ended June 30, 2000 are not necessarily indicative of the results
that may be expected for the Company's 2000 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, 2000 and 1999 (net
of income tax refunds) totaled approximately $219 million and $193 million,
respectively. Total interest paid was $100 million and $114 million for the
nine months ended June 30, 2000 and 1999, respectively. The decrease reflects
the Company's use of its cash flows and proceeds from divestitures of non-core
businesses to reduce debt.
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. Finished goods and work-in-process inventories include
material, labor and manufacturing overhead costs. Inventories were comprised of
the following:
June 30, September 30, June 30,
2000 2000 1999
-------- ------------- --------
(in millions)
Raw materials and supplies................... $260.6 $312.1 $245.4
Work-in-process.............................. 76.5 71.7 85.1
Finished goods............................... 202.2 174.5 179.5
------ ------ ------
FIFO inventories........................... 539.3 558.3 510.0
LIFO reserve................................. (33.9) (33.7) (35.8)
------ ------ ------
LIFO inventories........................... $505.4 $524.6 $474.2
====== ====== ======
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 rate is based on
the most recent annualized forecast of pre-tax 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. Comprehensive Income
Comprehensive income is defined as the sum of net income and all other non-
owner changes in equity, such as foreign currency translation adjustments.
Comprehensive income for the three months ended June 30,
6
JOHNSON CONTROLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2000 and 1999 was $74 million and $92 million, respectively. Comprehensive
income for the nine months ended June 30, 2000 and 1999 was $232 million and
$309 million, respectively. The differences between comprehensive income and
net income for all periods presented represent foreign currency translation
adjustments. Comparability of income between nine-month periods is affected by
the prior year gain on sale of businesses of $32.5 million, after-tax, recorded
in March 1999 (see Note 10).
6. Earnings Per Share
The following table reconciles the numerators and denominators used to
calculate basic and diluted earnings per share for the three- and nine-month
periods ended June 30, 2000 and 1999:
Three Months Nine Months
Ended June Ended June
30, 30,
-------------- --------------
2000 1999 2000 1999
------ ------ ------ ------
(in millions)
Income Available to Common Shareholders
Net Income..................................... $133.4 $111.1 $321.2 $289.1
Preferred stock dividends, net of tax benefit.. (2.5) (2.5) (7.3) (7.2)
------ ------ ------ ------
Basic income available to common shareholders.. $130.9 $108.6 $313.9 $281.9
====== ====== ====== ======
Net Income..................................... $133.4 $111.1 $321.2 $289.1
Effect of Dilutive Securities:
Compensation expense, net of tax benefit,
arising from assumed conversion of preferred
stock....................................... (1.0) (1.2) (3.2) (3.6)
------ ------ ------ ------
Diluted income available to common
shareholders.................................. $132.4 $109.9 $318.0 $285.5
====== ====== ====== ======
Weighted Average Shares Outstanding
Basic weighted average shares outstanding...... 85.8 85.3 85.6 85.1
Effect of Dilutive Securities:
Stock options................................ 1.3 1.8 1.3 1.7
Convertible preferred stock.................. 5.1 5.3 5.1 5.3
------ ------ ------ ------
Diluted weighted average shares outstanding.... 92.2 92.4 92.0 92.1
====== ====== ====== ======
7. Segment Information
The Company has two operating segments, the Automotive Systems Group and the
Controls Group, which also constitute its reportable segments. Financial
information relating to the Company's reportable segments was as follows:
Three Months Nine Months
Ended June 30, Ended June 30,
----------------- -------------------
2000 1999 2000 1999
-------- -------- --------- ---------
(in millions)
Sales
Automotive Systems Group................. $3,285.6 $3,187.1 $ 9,840.4 $ 9,046.9
Controls Group........................... 1,103.7 1,003.9 3,225.5 2,897.5
-------- -------- --------- ---------
Total.................................. $4,389.3 $4,191.0 $13,065.9 $11,944.4
======== ======== ========= =========
Operating Income
Automotive Systems Group................. $ 220.0 $ 199.2 $ 544.9 $ 472.7
Controls Group........................... 47.0 39.7 129.5 109.1
-------- -------- --------- ---------
Total.................................. $ 267.0 $ 238.9 $ 674.4 $ 581.8
======== ======== ========= =========
7
JOHNSON CONTROLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Pre-Production Costs Related to Long-Term Supply Arrangements
Effective January 1, 2000, the Company adopted on a prospective basis the
guidance provided in Emerging Issues Task Force (EITF) Issue 99-5, "Accounting
for Pre-Production Costs Related to Long-Term Supply Arrangements." EITF Issue
99-5 addresses whether design and development costs related to long-term supply
arrangements should be expensed or capitalized. The Company's policy for
engineering, research and development, and other design and development costs
related to products that will be sold under long-term supply arrangements
requires such costs to be expensed as incurred. Costs for molds, dies, and
other tools used to make products that will be sold under long-term supply
arrangements are capitalized if the Company has title to the assets or has the
noncancelable right to use the assets during the term of the supply
arrangement. Capitalized items, if specifically designed for a supply
arrangement, are amortized over the term of the arrangement; if not, amounts
are amortized over the estimated useful lives of the assets. The carrying
values of assets capitalized in accordance with the foregoing policy are
periodically reviewed for evidence of impairment. Adoption of EITF Issue 99-5
did not materially affect the Company's results of operations.
9. Acquisition of Business
In July 1998, the Company acquired Becker Group, a major supplier of
automotive interior systems. As part of the 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. Through June 30, 2000, approximately $18 million of
employee severance and termination costs associated with the consolidation of
European and domestic operations were incurred. In addition, $9 million of
reserves were reversed during fiscal 1999, with corresponding reductions of
goodwill and prepaid taxes. Accordingly, the reserve balance at June 30, 2000
totaled approximately $21 million. The majority of the restructuring activities
are expected to be completed by the end of fiscal 2000.
10. Divestiture of Businesses
On March 1, 1999, the Company completed the sale of the Automotive Systems
Group's Industrial Battery Division for approximately $135 million. The
Industrial Battery Division had sales of approximately $87 million for the
fiscal year ended September 30, 1998. The Company also recorded a loss related
to the disposal of a small Controls Group operation in the United Kingdom. The
net gain on these transactions was $54.6 million ($32.5 million or $.38 per
basic share and $.35 per diluted share, after-tax).
11. 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.
8
JOHNSON CONTROLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Future Accounting Changes
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." It requires all derivative instruments to
be recorded in the statement of financial position at fair value. The change in
fair value of a derivative is 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 so, the type of hedge
transaction. The statement, as amended by SFAS No. 137 and No. 138, will be
effective October 1, 2000 for the Company. The effect of adoption of this
statement is not expected to have a material effect on the Company's net
earnings or statement of financial position.
13. Subsequent Events
On July 9, 2000, the Company announced its friendly tender offer for 100% of
the outstanding shares of Ikeda Bussan Co. Ltd. (Ikeda), a Japan-based
manufacturer of automotive seating. Ikeda is the primary supplier of seating to
the Nissan group and had consolidated net sales in 1999 of approximately $1.2
billion. The Company will pay approximately $1.12 per share to acquire Ikeda
and, based on its offer for 100% of the outstanding shares, the Company expects
to pay approximately $100 million, plus the assumption of approximately $85
million of debt. Ikeda has welcomed the offer and two of Ikeda's primary
shareholders, with holdings in excess of 50% of Ikeda's shares, have stated
that they will tender their shares. The acquisition is expected to be completed
in September 2000 and will be accounted for as a purchase.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comparison of Operating Results for the Three-Month Periods ended June 30, 2000
and June 30, 1999
Third quarter consolidated net sales of $4.4 billion increased 5% from the
prior year quarter's $4.2 billion. The effect of currency translation,
primarily associated with the euro, reduced consolidated net sales by 3%, or
$125 million.
Automotive Systems Group sales for the third quarter increased to $3.3
billion, 3% above the prior year's $3.2 billion. Sales of automotive seating
systems, interior systems and batteries in North America represented
approximately two-thirds of the segment's sales increase. Seating and interior
systems sales in North America were higher, in line with the quarter's 3% to 4%
increase in the industry vehicle production level. Increased volume
attributable to the segment's content on many fast-selling light trucks and
passenger cars was partially offset in the quarter by lower production levels
for certain programs and the timing of new product launches. Sales of
automotive batteries rose, due to higher unit shipments primarily to
aftermarket customers. Automotive seating and interior systems sales in Europe
were level with the prior year, as sales growth of approximately 13% in local
currency was negated by the effect of currency translation.
Controls Group sales reached $1.1 billion for the current quarter, a 10%
increase compared with the prior period's $1.0 billion. The period's increase
was attributable to activity in the segment's North American and Asian markets.
Sales in North America increased 16% compared with the prior year period, with
the region benefiting from significant new and expanded integrated facility
management contracts and increased installed control systems contracts in both
the new construction and existing buildings markets. Sales of facility
management services and control systems in Asia increased 15%, reflecting the
segment's expanded position in the Japanese non-residential buildings market.
European sales declined, primarily due to unfavorable exchange rates. Current
quarter orders for installed control systems exceeded the prior year, due
principally to growth in North America and Asia.
9
Consolidated operating income for the third quarter of fiscal 2000 rose to
$267 million, up 12% from the prior year's $239 million. The Company's two
operating segments each provided strong contributions to the quarter's growth.
Operating income for the Automotive Systems Group increased 10% to $220
million compared with the prior year's $199 million. Operating margins
increased in all of the segment's primary geographic markets. The margin growth
reflects the segment's ongoing quality improvement and cost reduction efforts.
North American operating income was higher, with increased volume and gross
margins partially offset by additional engineering costs for new programs and
proprietary research and development. European operations contributed
significantly to the quarter's increase, despite the negative effect of
currency translation, as reduced start-up costs and maturing programs resulted
in lower selling, general and administrative (SG&A) expenses, as a percentage
of sales. In other markets, operating losses associated with seating programs
in South America declined notably in the quarter, while losses in emerging
Asian markets increased as the Company establishes its technological presence
in that region.
Controls Group operating income for the quarter was $47 million, rising 18%
from the prior year's $40 million. The segment's increase in operating income
was attributable to growth in both its facility management and installed
control systems operations. The segment's strong earnings growth reflects
increased sales volume and higher gross margins. Margin enhancement has
resulted from the segment's investments in automated tools and training to
improve contract execution and efficiency, including project estimation,
management and installation.
Net interest expense of $25 million for the quarter decreased 14% from the
prior year's $30 million. Interest expense has declined over the past year and
one-half, as the Company has used its strong operating cash flows and the
proceeds from prior year divestitures of non-core businesses (see discussion
that follows) to reduce debt.
The effective income tax rate was 39.6% for the current quarter compared
with 40.5% for the comparable period last year. The effective rate declined due
principally to a reduction of taxes imposed on foreign earnings.
The Company's net income for the third quarter of fiscal 2000 rose 20% to
$133 million compared with the prior year's $111 million. The increase was
attributable to operating income growth, reduced interest expense and a lower
effective income tax rate. Earnings per share increased to $1.45 per diluted
share, up from $1.19 in the prior year. Current quarter earnings rose despite
the effect of currency translation, which reduced earnings by $.04 per diluted
share.
Comparison of Operating Results for the Nine-Month periods ended June 30, 2000
and June 30, 1999
Consolidated net sales increased to $13.1 billion for the nine months ended
June 30, 2000, 9% higher than the prior year's sales of $11.9 billion. The
effect of currency translation, primarily associated with the euro, reduced the
current period's consolidated net sales by 3%, or $360 million.
Automotive Systems Group sales rose to $9.8 billion for the first nine
months of the current fiscal year, a 9% increase from the prior year's $9.0
billion. Strong demand in North America for automotive seating systems,
interior systems and batteries propelled the segment's growth, with
approximately three-quarters of the increase due to the North American market.
Seating and interior systems in both North America and Europe (before the
negative effect of currency translation) achieved double-digit sales growth,
exceeding the more modest vehicle production levels in those markets. Sales of
automotive batteries were higher, with unit shipments increasing by over 10%
compared with last year. The increase reflects growth from existing customers
as well as last year's new contract with Sears, Roebuck & Co. to supply all of
its automotive batteries, which reached full production levels in the third
quarter of fiscal 1999.
10
Controls Group sales for the first nine months of fiscal 2000 totaled $3.2
billion, up 11% from the prior period's $2.9 billion. The current fiscal year's
increase was attributable to activity in the segment's North American and Asian
markets. New and expanded integrated facility management and installed control
systems contracts in North America increased sales by 14% compared with the
prior year. Sales in Asia were 33% higher than last year, reflecting the
segment's expanded position in the Japanese non-residential buildings market.
Sales of facility management services and control systems in Europe declined,
primarily due to unfavorable exchange rates. Orders for installed control
systems in the period exceeded the prior year, due to growth in North America.
Consolidated sales growth is expected to continue during the final quarter
of the fiscal year. Automotive Systems Group sales for the fourth quarter are
projected to be comparable with the prior year period's sales. Segment sales
should reflect continued weakness in the euro and a level North American
industry vehicle production build compared with last year's record volume. The
Controls Group is expected to achieve a strong single-digit increase in sales
for the final quarter of the fiscal year compared with the prior year period.
The fourth quarter year-over-year comparison will be affected by last year's
addition of its facilities management operations in Japan, which began
recording significant sales in the prior year's final quarter, and by the
uncommonly strong sales level attributable to domestic control systems and
services in the prior year.
Consolidated operating income rose 16% to $674 million for the first nine
months of fiscal 2000, increasing from the prior year's $582 million. Both of
the Company's operating segments achieved double-digit growth compared with the
prior fiscal year.
Automotive Systems Group operating income of $545 million was 15% higher
than the prior year's $473 million. Segment operating margin also increased
compared to the prior year, reflecting ongoing quality improvement and cost
reduction efforts. The segment achieved operating income growth in all of its
primary geographic markets, led by increased volume of seating systems,
interior systems and batteries and higher gross margins in North America.
Operating income in Europe increased despite the negative effect of currency
translation, as reduced start-up costs and maturing programs resulted in lower
SG&A expenses, as a percentage of sales. In the segment's other global markets,
losses in South America declined, while operating losses in emerging markets in
Asia increased as the Company establishes its technological presence in that
region.
Operating income for the Controls Group for the current period rose to $129
million, up 19% from the prior year's $109 million. Operating income and
margins associated with both facility management and installed control systems
contracts increased over the prior year period. The growth was due to increased
volume and higher gross margins. Margin enhancement has resulted from the
segment's investments in automated tools and training to improve contract
execution and efficiency, including project estimation, management and
installation.
Net interest expense fell by $20 million, or 19%, compared to the prior
year. The decline reflects the Company's use of its strong operating cash flows
and the proceeds from prior year divestitures of non-core businesses to reduce
debt.
Fiscal 1999's gain on sale of businesses primarily resulted from the sale of
the Automotive Systems Group's Industrial Battery Division for approximately
$135 million on March 1, 1999. The Industrial Battery Division had sales of
approximately $87 million for the fiscal year ended September 30, 1998. The
Company also recorded a loss related to the disposal of a small Controls Group
operation in the United Kingdom. The net gain on these transactions was $54.6
million ($32.5 million or $.38 per basic share and $.35 per diluted share,
after-tax).
The effective income tax rate was 39.6% for the nine-month period ended June
30, 2000 compared with 40.5% for the comparable period last year. The effective
rate declined due principally to a reduction of taxes imposed on foreign
earnings.
11
Minority interests in net earnings of subsidiaries were $35 million for the
current year-to-date period, compared with $26 million in the prior year.
Approximately two-thirds of the increase was attributable to higher earnings
from affiliates in the Japanese non-residential buildings market. The
automotive segment also recorded increased earnings from its domestic
subsidiaries.
Net income for the first nine months of fiscal 2000 reached $321 million,
25% higher than the prior year's $257 million (before the prior year gain on
sale of businesses of $32.5 million, after-tax). Current year net income growth
was due to increased operating income, reduced interest expense and a lower
effective income tax rate. On a diluted basis, earnings per share for the
current fiscal year were $3.46, rising from $2.75 in the prior year (before the
prior year gain on sale of businesses of $.35 per diluted share, after-tax).
Current year earnings per share rose despite the effect of currency
translation, which reduced earnings by $.09 per diluted share.
Comparison of Financial Condition
Working Capital and Cash Flow
Working capital at June 30, 2000 was a negative $193 million, compared with
a negative $418 million at fiscal year-end and a negative $413 million at June
30, 1999. The increase in working capital compared with the prior year periods
principally reflects the ongoing reduction of short-term debt. Working capital,
excluding cash and debt, of a negative $168 million was lower than the
comparable prior year period, with the decrease primarily associated with
higher accounts payable.
The Company's operating activities provided cash of $659 million during the
first nine months of the year compared to $857 million in the prior year
period. Working capital changes, primarily accounts payable, partially offset
by the adjustment for the gain on sale of businesses recorded in the prior year
period, account for the difference in cash provided between periods.
Capital Expenditures and Other Investments
Capital expenditures for property, plant and equipment of $383 million for
the nine months ended June 30, 2000 increased from last year's capital spending
of $330 million. The Company expects capital expenditures for the full year to
approximate $525 to $550 million. The majority of the spending is expected to
be associated with automotive seating and interior systems expansion, as well
as battery manufacturing automation projects. Controls Group spending will be
focused on information and building systems technology.
The Controls Group acquired two relatively small businesses during the
second quarter of fiscal 2000 to complement its facilities management and
control systems operations. The Company also completed several acquisitions in
the prior year. Notable among the prior year acquisitions was the purchase of
Cardkey Systems, a worldwide security management systems provider, in the first
quarter of fiscal 1999.
In July 1998, the Company acquired Becker Group, a major supplier of
automotive interior systems. At the date of acquisition, the Company identified
three businesses of Becker Group that were outside of its core operations and,
as such, were classified as net assets held for sale. The Company completed the
sale of these businesses for approximately $212 million during fiscal 1999 and
used the after-tax proceeds to reduce debt.
The Company completed the sale of the Automotive Systems Group's Industrial
Battery Division for approximately $135 million in March 1999 and used the
after-tax proceeds to reduce debt. Additionally, in May 2000, the Company
received the deferred portion of proceeds from the fiscal 1997 sale of its
Plastic Container Division, and used the $75 million proceeds to reduce debt.
12
Capitalization
The Company's total capitalization of $3.9 billion at June 30, 2000 was
comprised of short-term debt of $.2 billion, long-term debt (including the
current portion) of $1.3 billion and shareholders' equity of $2.4 billion.
Capitalization at September 30, 1999 and June 30, 1999 was $4.1 billion and
$4.0 billion, respectively. Total debt as a percentage of total capitalization
at June 30, 2000 declined to 38%, a significant decrease from the 45% level at
fiscal year-end and one year ago. The decline in the debt-to-capitalization
ratio reflects the Company's use of its strong cash flows from operations to
reduce debt.
The Company believes its capital resources and liquidity position at June
30, 2000 are adequate to meet projected needs. Requirements for working
capital, capital expenditures, dividends and debt maturities in fiscal 2000
will continue to be funded from operations, supplemented by short-term
borrowings, if required.
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. Through June 30, 2000, approximately $18 million of
employee severance and termination costs associated with the consolidation of
European and domestic operations were incurred. In addition, $9 million of
reserves were reversed during fiscal 1999, with corresponding reductions of
goodwill and prepaid taxes. Accordingly, the reserve balance at June 30, 2000
totaled approximately $21 million. The majority of the restructuring activities
are expected to be completed by the end of fiscal 2000.
Backlog
The Company's backlog relates to the Controls Group's installed control
systems operations, which derive a significant portion of revenue from long-
term contracts that are accounted for using the percentage-of-completion
method. At June 30, 2000, the unearned backlog of installed control systems
contracts (excluding integrated facility management) to be executed within the
next year was $1.26 billion, compared with $1.11 billion at June 30, 1999. The
$150 million year-over-year increase is primarily attributable to new order
growth in North America, both in the new construction and existing buildings
markets.
Pending Acquisition
On July 9, 2000, the Company announced its friendly tender offer for 100% of
the outstanding shares of Ikeda Bussan Co. Ltd. (Ikeda), a Japan-based
manufacturer of automotive seating. Ikeda is the primary supplier of seating to
the Nissan group and had consolidated net sales in 1999 of approximately $1.2
billion. The Company will pay approximately $1.12 per share to acquire Ikeda
and, based on its offer for 100% of the outstanding shares, the Company expects
to pay approximately $100 million, plus the assumption of approximately $85
million of debt. Ikeda has welcomed the offer and two of Ikeda's primary
shareholders, with holdings in excess of 50% of Ikeda's shares, have stated
that they will tender their shares. The acquisition is expected to be completed
in September 2000 and will be accounted for as a purchase. The acquisition is
anticipated to be financed with yen-denominated debt.
Future Accounting Changes
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." See Note 12 to
the consolidated financial statements for a description of this statement.
13
Other Matters
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. Costs of the
euro conversion to date have not been material and management believes that
future conversion costs will not have a material impact on the operations, cash
flows or financial condition of the Company.
Cautionary Statements for Forward Looking Information
The Company has made forward-looking statements in this document that are
subject to risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future risks 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 11, 1999), 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 June 30, 2000, the Company did not experience any
adverse changes in market risk exposures that materially affect the
quantitative and qualitative disclosures presented in the Company's Annual
Report to Shareholders for the year ended September 30, 1999.
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, 1999 for a description of the results of
votes of security holders at the Annual Meeting of Shareholders held January
26, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Statement regarding the computation of the ratio of earnings to fixed
12 charges.
27 Financial Data Schedule (electronic filing only).
(b) There were no reports on Form 8-K filed during the three months ended
June 30, 2000.
14
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.
By: /s/ David B. Mullen
----------------------------------
Senior Vice President and Chief
Financial Officer
Date: August 14, 2000
15