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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ---------
Commission File Number 1-5097
JOHNSON CONTROLS, INC.
(Exact name of registrant as specified in its charter)
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) 524-1200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 30, 2002
----- ----------------------------
Common Stock $.16 2/3 Par Value 88,768,240
JOHNSON CONTROLS, INC.
FORM 10-Q
JUNE 30, 2002
REPORT INDEX
Page No.
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PART I - FINANCIAL INFORMATION:
Consolidated Statement of Financial Position at June 30, 2002,
September 30, 2001 and June 30, 2001 ............................................... 3
Consolidated Statement of Income for the Three- and Nine-Month
Periods Ended June 30, 2002 and 2001 (adjusted and actual) ......................... 4
Consolidated Statement of Cash Flows for the Nine-Month
Periods Ended June 30, 2002 and 2001................................................ 5
Notes to Consolidated Financial Statements ........................................... 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................................ 14
Quantitative and Qualitative Disclosures About Market Risk ........................... 22
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings ............................................................ 23
Item 4. Results of Votes of Security Holders ......................................... 23
Item 5. Other Information ............................................................ 23
Item 6. Exhibits and Reports on Form 8-K ............................................. 24
SIGNATURES ............................................................................ 25
2
PART I. - FINANCIAL INFORMATION
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions)
June 30, September 30, June 30,
2002 2001 2001
---------------- ----------------- -----------------
(unaudited) (unaudited)
ASSETS
Cash and cash equivalents $ 206.8 $ 374.6 $ 298.8
Accounts receivable - net 3,000.2 2,673.4 2,523.7
Costs and earnings in excess of billings on
uncompleted contracts 330.7 254.9 213.4
Inventories 650.1 577.6 545.0
Other current assets 649.2 663.5 723.6
---------------- ----------------- -----------------
Current assets 4,837.0 4,544.0 4,304.5
Property, plant and equipment - net 2,435.9 2,379.8 2,411.7
Goodwill - net 2,707.5 2,247.3 2,235.7
Other intangible assets - net 247.7 135.4 132.6
Investments in partially-owned affiliates 337.8 300.5 252.3
Other noncurrent assets 348.3 304.5 392.8
---------------- ----------------- -----------------
Total assets $ 10,914.2 $ 9,911.5 $ 9,729.6
================ ================= =================
LIABILITIES AND EQUITY
Short-term debt $ 152.0 $ 379.9 $ 249.7
Current portion of long-term debt 37.9 45.3 47.4
Accounts payable 2,672.7 2,437.3 2,336.0
Accrued compensation and benefits 468.9 436.3 412.1
Accrued income taxes 101.3 137.8 119.5
Billings in excess of costs and earnings
on uncompleted contracts 209.8 163.0 181.7
Other current liabilities 1,007.0 980.1 1,031.8
---------------- ----------------- -----------------
Current liabilities 4,649.6 4,579.7 4,378.2
Long-term debt 1,936.3 1,394.8 1,443.3
Postretirement health and other benefits 163.6 162.5 161.7
Minority interests in equity of subsidiaries 196.7 207.3 280.1
Other noncurrent liabilities 623.0 581.8 660.5
Shareholders' equity 3,345.0 2,985.4 2,805.8
---------------- ----------------- -----------------
Total liabilities and equity $ 10,914.2 $ 9,911.5 $ 9,729.6
================ ================= =================
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 June 30, Nine Months Ended June 30,
---------------------------------- -------------------------------------
Adjusted Adjusted
2002 2001* 2001 2002 2001* 2001
---------- ---------- ---------- ---------- ---------- ----------
Net sales $ 5,257.0 $ 4,722.1 $ 4,722.1 $ 14,885.2 $ 13,778.1 $ 13,778.1
Cost of sales 4,509.0 4,046.0 4,046.0 12,816.8 11,840.8 11,840.8
---------- ---------- ---------- ---------- ---------- ----------
Gross profit 748.0 676.1 676.1 2,068.4 1,937.3 1,937.3
Selling, general and administrative expenses 427.6 387.8 405.8 1,290.8 1,213.8 1,267.2
---------- ---------- ---------- ---------- ---------- ----------
Operating income 320.4 288.3 270.3 777.6 723.5 670.1
Interest income 2.5 3.7 3.7 8.5 14.1 14.1
Interest expense (29.8) (31.1) (31.1) (91.9) (99.0) (99.0)
Equity income 11.3 9.4 9.4 25.7 19.2 19.2
Miscellaneous - net (11.3) (4.0) (4.0) (26.5) (10.8) (10.8)
---------- ---------- ---------- ---------- ---------- ----------
Other income (expense) (27.3) (22.0) (22.0) (84.2) (76.5) (76.5)
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and minority interests 293.1 266.3 248.3 693.4 647.0 593.6
Provision for income taxes 102.0 97.9 96.0 241.3 235.3 229.7
Minority interests in net earnings of subsidiaries 15.8 15.8 15.8 42.1 41.9 41.9
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 175.3 $ 152.6 $ 136.5 $ 410.0 $ 369.8 $ 322.0
========== ========== ========== ========== ========== ==========
Earnings available for common shareholders $ 173.4 $ 150.5 $ 134.4 $ 404.2 $ 363.1 $ 315.3
========== ========== ========== ========== ========== ==========
Earnings per share
Basic $ 1.96 $ 1.73 $ 1.54 $ 4.58 $ 4.20 $ 3.64
========== ========== ========== ========== ========== ==========
Diluted $ 1.85 $ 1.62 $ 1.45 $ 4.33 $ 3.95 $ 3.44
========== ========== ========== ========== ========== ==========
* The adjusted information for the three- and nine-month periods ended June 30,
2001 is presented as if SFAS No. 142 (see Note 4) had been adopted October 1,
2000. Results have been adjusted to exclude goodwill amortization expense ($18.0
million and $53.4 million in the three- and nine-month periods ended June 30,
2001, respectively) and the related income tax effect.
The accompanying notes are an integral part of the financial statements.
4
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions; unaudited)
Nine Months
Ended June 30,
--------------------------------------
2002 2001
---------------- -----------------
OPERATING ACTIVITIES
Net income $ 410.0 $ 322.0
Adjustments to reconcile net income to cash provided by operating activities
Depreciation 365.5 319.2
Amortization of intangibles 13.0 61.6
Equity in earnings of partially-owned affiliates, net of dividends received (16.1) (10.3)
Minority interests in net earnings of subsidiaries 42.1 41.9
Deferred income taxes 33.7 27.8
Other (3.8) (9.2)
Changes in working capital, excluding acquisition of businesses
Receivables (198.4) (117.4)
Inventories 15.2 28.4
Other current assets 13.9 95.6
Accounts payable and accrued liabilities (35.5) 70.9
Accrued income taxes (36.5) 6.6
Billings in excess of costs and earnings on uncompleted contracts 43.8 15.2
---------------- -----------------
Cash provided by operating activities 646.9 852.3
---------------- -----------------
INVESTING ACTIVITIES
Capital expenditures (333.1) (460.6)
Sale of property, plant and equipment 38.2 26.9
Acquisition of businesses, net of cash acquired (643.3) (207.3)
Changes in long-term investments - net (44.5) (72.0)
---------------- -----------------
Cash used by investing activities (982.7) (713.0)
---------------- -----------------
FINANCING ACTIVITIES
Decrease in short-term debt - net (251.8) (224.7)
Increase in long-term debt 606.2 241.9
Repayment of long-term debt (87.5) (75.1)
Payment of cash dividends (94.0) (88.1)
Other (4.9) 29.9
---------------- -----------------
Cash provided (used) by financing activities 168.0 (116.1)
---------------- -----------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ (167.8) $ 23.2
================ =================
The accompanying notes are an integral part of the financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL STATEMENTS
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position,
results of operations, and cash flows for the periods presented. These
condensed financial statements should be read in conjunction with the
audited financial statements and notes thereto contained in the Company's
Annual Report to Shareholders for the year ended September 30, 2001. The
results of operations for the three- and nine-month periods ended June 30,
2002 are not necessarily indicative of the results which may be expected
for the Company's 2002 fiscal year because of seasonal and other factors.
Adjusted information for the three- and nine-month periods ended June 30,
2001 is presented as if Statement of Financial Accounting Standards (SFAS)
No. 142 "Goodwill and Other Intangible Assets" (see Note 4) had been
adopted October 1, 2000. In addition, certain prior year amounts have been
reclassified to conform to the current year's presentation.
2. EARNINGS PER SHARE
The following table reconciles the numerators and denominators used to
calculate basic and diluted earnings per share:
Three Months Nine Months
Ended June 30, Ended June 30,
-------------------------------- --------------------------------
(in millions) Adjusted Adjusted
2002 2001* 2001 2002 2001* 2001
------ --------- ------ ------ -------- ------
Income Available to Common Shareholders
---------------------------------------
Net income $175.3 $152.6 $136.5 $410.0 $369.8 $322.0
Preferred stock dividends, net of tax
benefit (1.9) (2.1) (2.1) (5.8) (6.7) (6.7)
------ ------ ------ ------ ------ ------
Basic income available to common
shareholders $173.4 $150.5 $134.4 $404.2 $363.1 $315.3
====== ====== ====== ====== ====== ======
Net income $175.3 $152.6 $136.5 $410.0 $369.8 $322.0
Effect of dilutive securities:
Compensation expense, net of tax
benefit, arising from assumed
conversion of preferred
stock (0.6) (0.8) (0.8) (2.1) (2.6) (2.6)
------ ------ ------ ------ ------ ------
Diluted income available to common
shareholders $174.7 $151.8 $135.7 $407.9 $367.2 $319.4
====== ====== ====== ====== ====== ======
Weighted Average Shares Outstanding
-----------------------------------
Basic weighted average shares
outstanding 88.7 87.1 87.1 88.2 86.6 86.6
Effect of dilutive securities:
Stock options 1.9 1.5 1.5 1.8 1.3 1.3
Convertible preferred stock 4.1 4.9 4.9 4.1 4.9 4.9
------ ------ ------ ------ ------ ------
Diluted weighted average shares
outstanding 94.7 93.5 93.5 94.1 92.8 92.8
====== ====== ====== ====== ====== ======
*The adjusted information for the three-and nine-month periods ended
June 30, 2001 is presented as if SFAS No.142 (see Note 4) had been
adopted October 1, 2000. Results have been adjusted to exclude goodwill
amortization expense ($18.0 million and $53.4 million in the three- and
nine-month periods ended June 30, 2001, respectively) and the related
income tax effect.
6
(UNAUDITED)
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.
4. GOODWILL
Effective October 1, 2001, the Company adopted SFAS No. 142 "Goodwill and
Other Intangible Assets." Under SFAS No. 142 goodwill is no longer
amortized; however, it must be tested for impairment at least annually.
The Company has completed the initial goodwill impairment testing required
by SFAS No. 142. The testing determined that the fair market value of each
respective reporting unit exceeds its carrying value. As such, the
impairment provisions of the statement currently do not have an impact on
the Company's financial position or results of operations. The Company's
financial statements include comparative adjusted information which
assumes SFAS No. 142 had been adopted October 1, 2000.
The changes in the carrying amount of goodwill for the nine months ended
June 30, 2002 are as follows:
Automotive Controls
(in millions) Systems Group Group Total
--------------- --------------- ---------------
Balance as of September 30, 2001 $1,910.1 $337.2 $2,247.3
Goodwill from business acquisitions 363.8 58.8 422.6
Currency translation 37.9 (0.3) 37.6
--------------- --------------- ---------------
Balance as of June 30, 2002 $2,311.8 $395.7 $2,707.5
=============== =============== ===============
See Note 5 for discussion of goodwill from business acquisitions during
fiscal 2002.
5. ACQUISITION OF BUSINESSES
In April 2002, the Company acquired the remaining 45% interest in
Yokogawa Johnson Controls Corporation (Yokogawa Johnson), a Controls
Group joint venture in Japan. The Company paid approximately $60 million
for the remaining interest of which approximately $45 million has been
allocated to goodwill. Pro forma information to reflect the acquisition
has not been disclosed as the impact on net income is not material.
Effective October 1, 2001, the Company completed the acquisitions of the
automotive electronics business of France-based Sagem SA (Sagem) and the
German automotive battery manufacturer Hoppecke Automotive GmbH & Co. KG
(Hoppecke). The Sagem acquisition augments the Company's growth and
capabilities in vehicle cockpit electronics in Europe and North America.
Hoppecke provides new battery technologies that give the Company a
leadership position in
7
(UNAUDITED)
the development of the evolving 36/42-volt automotive systems. Both
acquisitions were accounted for as purchases. The acquisitions, with an
initial combined purchase price of approximately $575 million, were
financed with long-term debt. The Company is obtaining independent
appraisals and performing other studies necessary to allocate the
purchase price to the acquired net assets. Pending completion of the
appraisals and studies, the excess of the purchase price over the
estimated fair value of the acquired net assets has been allocated
between goodwill and other intangible assets. The Company expects that
such appraisals and studies and the allocation of the purchase price will
be completed by the end of the fiscal year. Pro forma information to
reflect these acquisitions has not been disclosed as the impact on net
income is not material.
Effective September 1, 2000, the Company completed the acquisition of
approximately 90% of the outstanding shares of Ikeda Bussan Co. Ltd.
(Ikeda), a Japanese supplier of automotive seating. As part of this
acquisition, a restructuring reserve of approximately $54 million was
recorded. The reserve was established for expected employee severance
costs as the Company eliminates certain non-core activities to focus on
Ikeda's principal seating and interiors businesses. Seven plants and
facilities have been or will be closed as part of the restructuring plan,
with resulting workforce reductions of approximately 1,000 employees.
Through June 30, 2002, approximately $22 million of employee severance
costs associated with the restructuring plan were paid or incurred, and
approximately 510 employees separated from the Company. The reserve
balance at June 30, 2002 totaled approximately $32 million and the
remaining restructuring activities are expected to be completed within
the next year. A share exchange to acquire the remaining shares of Ikeda
was completed in the first quarter of fiscal 2002.
6. LONG-TERM DEBT
In November 2001, the Company refinanced its commercial paper borrowings
attributable to the acquisitions of Sagem and Hoppecke by issuing a total
of $600 million of variable and fixed rate notes under the Company's
shelf registration statement on file with the Securities and Exchange
Commission. Variable rate notes in the amount of $250 million, with
interest equal to the three-month LIBOR rate plus 60 basis points, mature
in November 2003. Five percent fixed rate notes in the amount of $350
million are due in November 2006.
8
(UNAUDITED)
7. INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method for most inventories at
domestic locations. The cost of other inventories is determined on the
first-in, first-out (FIFO) method. Finished goods and work-in-process
inventories include material, labor and manufacturing overhead costs.
Inventories were comprised of the following:
June 30, September 30, June 30,
(in millions) 2002 2001 2001
------------ --------------- ------------
Raw materials and supplies $352.1 $331.3 $293.3
Work-in-process 102.0 77.2 80.4
Finished goods 231.3 203.8 201.7
------------ --------------- ------------
FIFO inventories 685.4 612.3 575.4
LIFO reserve (35.3) (34.7) (30.4)
------------ --------------- ------------
Inventories $650.1 $577.6 $545.0
============ =============== ============
8. COMPREHENSIVE INCOME
Comprehensive income is defined as the sum of net income and all other
non-owner changes in equity, including foreign currency translation,
unrealized gains and losses on equity securities, realized and unrealized
gains and losses on derivatives and minimum pension liability
adjustments. Comprehensive income for the three months ended June 30,
2002 and 2001 was approximately $239 million and $121 million,
respectively. Comprehensive income for the nine months ended June 30,
2002 and 2001 was $407 million and $308 million, respectively. The
difference between comprehensive income and net income for the periods
presented principally represents foreign currency translation adjustments
(CTA). Specifically, in the current quarter, the strengthening of the
euro resulted in $56 million of comprehensive income related to CTA
versus $31 million of a loss in the prior year. For the nine months,
comprehensive income related to CTA was a loss of $18 million versus $58
million of a loss in the prior year.
The Company has foreign-denominated long-term debt and cross-currency
interest rate swaps which are designated as hedges of net investments in
foreign subsidiaries. Gains and losses, net of tax, attributable to these
hedges are deferred in the accumulated other comprehensive income (loss)
account within shareholders' equity. A net loss of approximately $40
million and a net gain of approximately $8 million were recorded for the
three-month periods ending June 30, 2002 and 2001, respectively. Net
gains of approximately $5 million and $14 million were recorded for the
nine-month periods ended June 30, 2002 and 2001, respectively.
9
(UNAUDITED)
9. FUTURE ACCOUNTING CHANGES
In August 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 143, "Accounting for Asset Retirement Obligations" and No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 143 establishes accounting standards for the recognition and
measurement of an asset retirement obligation. SFAS No. 144 addresses
accounting and reporting for the impairment or disposal of long-lived
assets, superseding SFAS No. 121. The statements are effective for the
Company on October 1, 2002. The effects of adoption of these statements
are not expected to have a material effect on the Company's net earnings
or statement of financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections as of April 2002." SFAS No. 145 rescinds SFAS No.
4, "Reporting Gains and Losses from Extinguishment of Debt," SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements" and
SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." This
Statement also amends SFAS No. 13, "Accounting for Leases", to eliminate
an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings,
or describe their applicability under changed conditions. The provisions
of the statement related to the rescission of SFAS No. 4 are effective
for the Company on October 1, 2002. The provisions of the statement
related to SFAS No. 13 are effective for transactions occurring after May
15, 2002. All other provisions of this statement are effective for
financial statements issued on or after May 15, 2002. The adoption of
SFAS No. 145 had no impact on the Company's net earnings or statement of
financial position at June 30, 2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." Under SFAS No. 146, costs
associated with an exit or disposal activity shall be recognized and
measured at their fair value in the period in which the liability is
incurred rather than at the date of a commitment to an exit or disposal
plan. The provisions of the statement will be effective for exit or
disposal activities that are initiated after December 31, 2002. The
Company is currently evaluating the impact of the statement.
10
(UNAUDITED)
10. SEGMENT INFORMATION
The Company has two operating segments, the Automotive Systems Group and
the Controls Group, which also constitute its reportable segments.
Financial information relating to the Company's reportable segments was
as follows:
Three Months Nine Months
Ended June 30, Ended June 30,
---------------------------------- ----------------------------------
Adjusted Adjusted
(in millions) 2002 2001* 2001 2002 2001* 2001
--------- --------- ---------- --------- --------- ----------
Sales
-----
Automotive Systems Group $4,003.7 $3,529.4 $3,529.4 $11,230.4 $10,289.9 $10,289.9
Controls Group 1,253.3 1,192.7 1,192.7 3,654.8 3,488.2 3,488.2
--------- --------- ---------- --------- --------- ----------
Total $5,257.0 $4,722.1 $4,722.1 $14,885.2 $13,778.1 $13,778.1
========= ========= ========== ========= ========= ==========
Operating Income
----------------
Automotive Systems Group $253.5 $226.0 $211.0 $602.2 $561.7 $516.5
Controls Group 66.9 62.3 59.3 175.4 161.8 153.6
--------- --------- ---------- --------- --------- ----------
Total $320.4 $288.3 $270.3 $777.6 $723.5 $670.1
========= ========= ========== ========= ========= ==========
* The adjusted information for the three- and nine-month periods ended
June 30, 2001 is presented as if SFAS No. 142 (see Note 4) had been
adopted October 1, 2000. Results have been adjusted to exclude goodwill
amortization expense ($18.0 million and $53.4 million in the three- and
nine-month periods ended June 30, 2001, respectively) and the related
income tax effect.
Total assets of the Automotive Systems Group increased approximately $725
million from the $7.4 billion balance at fiscal year-end. The increase
was primarily attributable to the acquisitions of Sagem and Hoppecke (see
Note 5).
11. INCOME TAXES
The provision for income taxes is determined by applying an estimated
annual effective income tax rate to income before income taxes. The rate
is based on the most recent annualized forecast of pretax income,
permanent book/tax differences and tax credits. It also includes the
effect of any valuation allowance expected to be necessary at the end of
the year. In the second quarter of the current year, the Company's
estimated annual effective income tax rate was reduced from 35.9% to
34.8%.
12. CONTINGENCIES
In March 2002, an unfavorable verdict was rendered in a lawsuit involving
a Mexican lead supplier. After a jury trial, a Texas trial court entered
judgment against the Company in this matter and awarded damages to the
plaintiff in the amount of $21.8 million, plus interest and attorney
fees. The Company and its legal counsel believe that the verdict against
the Company in the trial court was incorrect and that it will be reversed
on appeal. Accordingly, the Company has not recorded
11
(UNAUDITED)
any liability in its financial statements associated with this judgment.
However, there can be no assurance that the Company will prevail in this
matter. In the event of an unfavorable final judgment against the
Company, management believes that it will not have a material impact on
the Company's financial position or annual results of operations. It
could have a material effect on the Company's quarterly results of
operations.
The Company is involved in a number of other proceedings and potential
proceedings relating to environmental matters. Although it is difficult
to estimate the liability 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.
13. SUBSEQUENT EVENTS
On August 6, 2002, the Company announced that it will acquire Varta
Automotive GmbH (Varta), a major European automotive battery manufacturer
headquartered in Germany for approximately euro 312.5 million, which is
subject to various adjustments. The acquisition, subject to customary
regulatory approvals is targeted to close near the end of the calendar
year and will be debt financed.
12
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Johnson Controls, Inc.
We have reviewed the accompanying consolidated statement of financial
position of Johnson Controls, Inc. and its subsidiaries as of June 30,
2002 and 2001, and the related consolidated statement of income for each
of the three-month and nine-month periods ended June 30, 2002 and 2001 and
the consolidated statement of cash flows for the nine-month periods ended
June 30, 2002 and 2001. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated interim financial
statements for them to be in conformity with accounting principles
generally accepted in the United States of America.
We previously audited in accordance with auditing standards generally
accepted in the United States of America, the consolidated statement of
financial position as of September 30, 2001, and the related consolidated
statements of income, shareholders' equity, and cash flows for the year
then ended (not presented herein), and in our report dated October 22,
2001 we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated statement of financial position as of September 30,
2001, is fairly stated in all material respects in relation to the
consolidated statement of financial position from which it has been
derived.
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
July 16, 2002
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE-MONTH PERIODS ENDED JUNE 30, 2002
AND JUNE 30, 2001
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142
"Goodwill and Other Intangible Assets" effective October 1, 2001. Accordingly,
all comparisons to the prior year assume SFAS No. 142 had been adopted October
1, 2000. See Note 4 to the consolidated financial statements.
Third quarter consolidated net sales of $5.3 billion were 11% above the prior
year quarter's $4.7 billion.
Automotive Systems Group sales for the third quarter grew 13% to $4.0 billion
compared to $3.5 billion for the prior year period. Segment sales in North
America were up 5% in the third quarter attributable to new interiors programs,
the increase in the domestic vehicle production level and higher automotive
battery shipments. Battery sales in North America were up in the period
reflecting new business and stronger demand from existing battery customers.
European Automotive Systems Group sales climbed 33% in the third quarter
primarily due to the addition of an automotive electronics business and a
battery business acquired effective October 1, 2001 (see Note 5 to the
consolidated financial statements) and positive effect of currency translation.
Excluding the positive effect of currency translation and the impact associated
with the acquisitions, automotive segment sales in Europe were above the prior
year period by 8%. The growth is a result of volume increases despite the modest
decline in European industry vehicle production due to the Company's involvement
in new and successful platforms. Sales in Asia and South America, which
represent less than 10% of total segment revenue, were lower in the current
quarter compared to the prior year quarter as a result of negative currency
translation and reduced customer production schedules.
Controls Group sales in the third quarter were $1.3 billion, rising 5% from the
prior year period. North American sales grew 11%, a result of higher control
services and additional facility management and systems installation contract
activity. European sales were above the prior year by approximately 15%
reflecting new facility management contract activity, the addition of MC
International, acquired late in the third quarter of fiscal 2001, and the
positive effect of currency translation. Sales in Asia, which represent less
than 10% of segment sales, declined 38% due to the effect of the deconsolidation
of a joint venture in Japan during the fourth quarter of fiscal 2001. Orders of
installed control systems in the quarter were strongest from the North American
new non-residential construction market (see "Backlog").
Consolidated operating income for the third quarter of fiscal 2002 was $320.4
million, up 11% from $288.3 million in the prior year period. Both of the
Company's operating segments demonstrated strong operating income growth in the
third quarter.
Automotive Systems Group operating income increased 12% over the prior year
period. Higher volumes in North America and Europe as well as the addition of
the automotive electronics business acquired effective October 1, 2001 (see Note
5 to the consolidated
14
financial statements) contributed to the increase. Operating income improvements
were partially offset by higher start-up and engineering costs incurred on new
program launches in Europe.
Controls Group operating income of $67 million exceeded the prior year by 7%.
This increase was achieved through higher gross margins due to improved contract
execution and efficiency in both North America and Europe, as well as reduced
selling, general and administrative expenses as a percentage of sales in North
America.
Despite the higher debt level in the current year, third quarter net interest
expense was comparable with the prior year due principally to lower interest
rates. Third quarter equity income was approximately $2 million above the prior
year quarter. The increase was attributable to earnings at certain Automotive
Systems Group joint ventures, including a new joint venture in China and higher
earnings in Europe. Miscellaneous - net expense in the third quarter was
approximately $7 million above the prior year period due primarily to
approximately $2 million of net losses on asset disposals in the current quarter
in contrast to approximately $2 million of net gains on asset disposals in the
prior year period. Also contributing to the decline in the miscellaneous - net
were higher foreign currency transaction losses in the current quarter.
The effective income tax rate was 34.8% for the three-month period ended June
30, 2002 compared with 36.8% for the same period last year. The effective rate
was reduced as a result of global tax reduction initiatives.
Minority interests in net earnings of subsidiaries for the current quarter was
comparable to the prior year quarter. Higher earnings at certain Automotive
Systems subsidiaries in North America were offset by the effect of the
deconsolidation of a Controls joint venture in Japan during the fourth quarter
of fiscal 2001 and the acquisition of the remaining interest in another Controls
Japan joint venture in the third quarter of fiscal 2002.
Third quarter net income of $175 million exceeded the prior year's $153
million by 15%. The increase was a result of higher operating income, higher
equity income and a lower effective income tax rate partially offset by higher
miscellaneous - net expense. Diluted earnings per share for the current quarter
were $1.85, compared with $1.62 in the prior year.
COMPARISON OF OPERATING RESULTS FOR THE NINE-MONTH PERIODS ENDED JUNE 30, 2002
AND JUNE 30, 2001
Consolidated net sales for the first nine months of fiscal 2002 reached $14.9
billion, 8% above the prior year's $13.8 billion.
Automotive Systems Group sales totaled $11.2 billion for the first nine months
of fiscal 2002, exceeding the prior year sales of $10.3 billion by 9%.
Automotive interior systems sales in North America were 5% above the prior year
which surpassed the approximate 3% increase in industry light vehicle production
compared to the prior year. The North American growth is attributable to new
interiors programs and involvement in programs where demand year-over-year was
above the industry average. Sales of automotive batteries in North America
increased approximately 11% over the prior year period. The
15
increase was generated by market share growth attributable to higher unit
shipments to new customers and increased demand from existing customers.
European Automotive Systems Group sales increased 19% over the prior year period
reflecting the addition of an automotive electronics business and a battery
business acquired effective October 1, 2001 (see Note 5 to the consolidated
financial statements) and the positive effect of currency translation. Excluding
the acquisitions and the positive effect of currency translation, European
automotive segment sales were approximately level with the prior year period
whereas the European industry vehicle production level declined. Segment sales
in Asia and South America, which represent less than 10% of total segment
revenue, were lower in the first nine months of the year compared to last year
due to the negative effect of currency translation and lower customer production
schedules.
Controls Group sales were $3.7 billion for the first nine months of the year, an
increase of 5% from the prior period's $3.5 billion. Sales in North America were
up 7%, due to increased integrated facility management, service and installed
control systems activity. Excluding the acquisition of MC International,
acquired late in the third quarter of fiscal 2001, European sales grew 11%
compared to the same period last year. This increase is primarily attributable
to higher revenues associated with integrated facility management contracts.
Sales in Asia, which represent less than 10% of segment sales, were down
approximately 39% due to the deconsolidation of a joint venture in Japan during
the fourth quarter of fiscal 2001.
Consolidated operating income was $778 million for the nine months ended June
30, 2002, up 7% from the prior year's $724 million.
Automotive segment operating income was $602 million, 7% above the prior year's
$562 million. The increase in operating income compared with the prior year
reflects higher volume in North America of both automotive interior systems and
batteries and the addition of the automotive electronics business acquired
effective October 1, 2001 (see Note 5 to the consolidated financial statements).
The segment also benefited from operational efficiencies in North America which
resulted in increased gross margins and reduced selling, general and
administrative expenses. The improved results in North America were partially
offset by increased start-up and engineering costs in Europe as well as the
negative effect of lower production levels of mature, more profitable vehicle
programs in Europe.
Controls segment operating income for the first nine months of fiscal 2002 was
$175 million, up 8% from $162 million one year ago. The increase was
attributable to the segment's higher volume, better gross margins due to
improved contract execution and efficiencies in North America and Europe as well
as reduced selling, general and administrative expenses as a percentage of sales
in North America.
Management currently expects the Automotive Segment's full year sales to exceed
the prior year by at least 6%. Segment sales are projected to benefit from the
launch of new interior systems programs worldwide, customer diversification,
recent acquisitions and higher unit shipments of automotive batteries.
Management expects the segment's full year operating margin to be approximately
level with the prior year as a result of the increased North American production
environment offset by lower results in Europe.
16
Management expects full year Controls Group sales to grow at the low end of a 6%
to 10% range. The segment increase is anticipated to be driven by contributions
from installed control systems activity worldwide, based on the strong growth in
the Company's backlog, and expansion of integrated facility management services
in both the commercial and governmental markets. Management continues to expect
modest margin improvement in the segment for the year.
Net interest expense for the first nine months of fiscal 2002 was slightly lower
than the prior year as a result of lower interest rates. Equity income was
approximately $7 million above the prior year. The increase was primarily
attributable to certain Automotive Systems Group joint ventures including higher
earnings in Europe and a new joint venture in China. Miscellaneous - net for
the first nine months of the current year reflected approximately $16 million
more expense than the prior year period due primarily to losses on both asset
disposals and foreign currency translation in the current year. Current year
miscellaneous-net includes $3 million of losses on asset disposals while the
prior year includes net gains of $5 million.
The effective income tax rate was 34.8% for the nine-month period ended June 30,
2002 compared with 36.4% for the comparable period last year. The Company's
estimated annual effective income tax rate for the current year was reduced in
the second quarter from 35.9% to 34.8%. The lower rate is a result of global tax
reduction initiatives.
Minority interests in net earnings of subsidiaries for the first nine months of
the fiscal year was comparable to the prior year. Improved results at certain
Automotive Systems Group subsidiaries in the current fiscal year were offset by
the impacts of both the deconsolidation of a joint venture in Japan during the
fourth quarter of fiscal 2001 and the Company acquiring the remaining interest
in another Japan joint venture in the current quarter.
Net income of $410 million exceeded the prior year's $370 million by 11%. The
increase was a result of higher operating income, higher equity income and a
reduced effective income tax rate offset by higher miscellaneous - net expense.
Diluted earnings per share for the first nine months of the fiscal year were
$4.33 compared with $3.95 in the comparable prior year period.
COMPARISON OF FINANCIAL CONDITION
Working Capital and Cash Flow
The Company's working capital was $187 million at June 30, 2002, compared with a
negative $36 million at September 30, 2001. Working capital, excluding cash and
debt, was $170 million at June 30, 2002, $156 million higher than the fiscal
year end. The increases primarily reflected higher accounts receivable partially
offset by the impact of higher accounts payable.
Cash provided by operating activities of $647 million during the first nine
months of fiscal 2002 was $205 million less than the amount generated in the
prior year period. The
17
decrease was primarily the result of lower accounts payable and other current
liabilities, as adjusted for current year acquisitions.
Capital Expenditures
Capital spending for property, plant and equipment during the first nine months
of the current year was $333 million, compared with the prior year's $461
million. The majority of the spending was associated with the Automotive Systems
Group. The lower spending compared to the prior year period was mainly due to
postponements of capital projects. Management expects capital expenditures for
the full year to approximate $575 to $600 million, primarily related to new
products, customer programs, product lines worldwide and cost reduction projects
at the Automotive Systems Group. Controls Group expenditures are expected to be
focused on information and building systems technology.
Goodwill
Goodwill of $2.7 billion at June 30, 2002 was $500 million higher than the
balance at September 30, 2001 and one year ago. Each respective increase was
primarily associated with the acquisitions of Sagem, Hoppecke and Yokogawa
Johnson (see Note 5 to the consolidated financial statements).
Capitalization
In November 2001, the Company refinanced its commercial paper borrowings
attributable to the acquisitions of Sagem and Hoppecke by issuing a total of
$600 million of variable and fixed rate notes under the Company's shelf
registration statement on file with the Securities and Exchange Commission.
Variable rate notes in the amount of $250 million, with interest equal to the
three-month LIBOR rate plus 60 basis points, mature in November 2003. Five
percent fixed rate notes in the amount of $350 million are due in November 2006.
Total capitalization of $5.5 billion at June 30, 2002 included short-term debt
of $200 million, long-term debt (including the current portion) of $2.0 billion
and shareholders' equity of $3.3 billion. The Company's total capitalization was
$4.8 billion and $4.5 billion at September 30, 2001 and June 30, 2001,
respectively. Total debt as a percentage of total capitalization at the end of
the most recent quarter was 39%, compared with 38% at both fiscal year-end and
one year ago. The current year's increase in the ratio of debt to total
capitalization reflects additional debt used to finance acquisitions.
The Company is party to certain synthetic leases which qualify as operating
leases for accounting purposes. The lease contracts are associated with the
financing of the Company's corporate aircraft whose total market value exceeds
the remaining lease obligation of approximately $80 million. The earliest of
these leases matures in August 2006 and each is renewable at the Company's
option.
The Company believes its capital resources and liquidity position at June 30,
2002 were adequate to meet projected needs. Requirements for working capital,
capital expenditures, dividends, debt maturities and any acquisitions in fiscal
2002 will continue to be funded from operations, supplemented by long- and
short-term borrowings, if required.
18
The Company is in compliance with all covenants and other requirements set forth
in its credit agreements and indentures. None of the Company's debt agreements
require accelerated repayment in the event of a decrease in credit ratings.
Currently, the Company has ample liquidity and full access to the U.S.
commercial paper and capital markets. Given the Company's credit ratings from
Moody's (A2), Fitch (A), and Standard & Poors (A-), the Company believes
multiple downgrades, or a single downgrade over multiple levels, would be
necessary before its access to the commercial paper markets would be limited.
The Company has ample availability under its $1 billion revolving credit
facility to meet commercial paper maturities and operating needs.
A summary of the Company's significant contractual obligations and commercial
commitments as of June 30, 2002 are as follows:
(in millions)
CONTRACTUAL REMAINING FY 2003 -- FY 2006 -- FY 2008
OBLIGATIONS TOTAL IN FY 2002 FY 2005 FY 2007 AND BEYOND
- ----------------------- ---------- ----------- ---------- ---------- -----------
Long-term debt
(including capital
lease obligations)* $1,974.2 $4.0 $726.7 $524.7 $718.9
Operating leases 527.7 33.4 271.2 181.2 41.9
Unconditional purchase
obligations** - - - - -
---------- ----------- ---------- ---------- -----------
Total contractual
cash obligations $2,501.9 $37.4 $997.9 $705.9 $760.8
========== =========== ========== ========== ===========
*See "Capitalization" for additional information related to the Company's
long-term debt.
** There were no unconditional purchase obligations other than inventory and
property, plant and equipment purchases in the ordinary course of business which
management believes are immaterial.
(in millions)
OTHER COMMERCIAL REMAINING FY 2003 -- FY 2006 -- FY 2008
COMMITMENTS TOTAL IN FY 2002 FY 2005 FY 2007 AND BEYOND
- ------------------------ ---------- ----------- ---------- ---------- -----------
Lines of credit* $ - $ - $ - $ - $ -
Standby letters of credit 43.2 42.7 0.5 - -
Guarantees** 54.0 3.5 21.5 18.3 10.7
---------- ----------- ---------- ---------- -----------
Total commercial
commitments $97.2 $46.2 $22.0 $18.3 $10.7
========== =========== ========== ========== ===========
*At June 30, 2002, the Company had $1.0 billion of committed lines of credit
available for support of outstanding commercial paper. There were no draws on
the lines as of June 30, 2002 and $1.0 billion remained available.
** Guarantees primarily represent guaranteed debt of certain unconsolidated
affiliates.
19
CRITICAL ACCOUNTING POLICIES
The Company prepares its consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America (U.S.
GAAP). This requires management to make estimates and assumptions that affect
reported amounts and related disclosures. Actual results could differ from those
estimates. The following policies are considered to be the most critical in
understanding the judgements that are involved in the preparation of the
Company's consolidated financial statements and the uncertainties that could
impact the Company's results of operations, financial condition and cash flows.
Revenue Recognition
The Company recognizes revenue from long-term systems installation contracts of
the Controls Group over the contractual period under the
percentage-of-completion (POC) method of accounting. Under this method of
accounting, sales and gross profit are recognized as work is performed based on
the relationship between actual costs incurred and total estimated costs at the
completion of the contract. Recognized revenues that will not be billed under
the terms of the contract until a later date are recorded as an asset captioned
"Cost and earnings in excess of billings on uncompleted contracts." Likewise,
contracts where billings to date have exceeded recognized revenues are recorded
as a liability captioned "Billings in excess of costs and earnings on
uncompleted contracts." Changes to the original estimates may be required during
the life of the contract. Estimates are reviewed monthly and the effect of any
change in the estimated gross margin percentage for a contract is reflected in
cost of sales in the period the change becomes known. The use of the POC method
of accounting involves considerable use of estimates in determining revenues,
costs and profits and in assigning the amounts to accounting periods. The
Company continually evaluates all of the issues related to the assumptions,
risks and uncertainties inherent with the application of the POC method of
accounting. In all other cases, the Company recognizes revenue at the time
products are shipped and title passes to the customer or as services are
performed.
Goodwill and Other Intangible Assets
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142
"Goodwill and Other Intangible Assets", effective October 1, 2001. Under SFAS
No. 142 goodwill is no longer amortized; however, it must be tested for
impairment at least annually. Amortization continues to be recorded for other
intangible assets with definite lives. The Company is subject to financial
statement risk to the extent that goodwill and indefinite lived intangible
assets become impaired.
Employee Benefit Plans
The Company provides a range of benefits to its employees and retired employees,
including pensions and postretirement health care. The Company records annual
amounts relating to these plans based on calculations specified by U.S. GAAP,
which include various actuarial assumptions, such as discount rates, assumed
rates of return, compensation increases, turnover rates and health care cost
trend rates. The Company reviews its actuarial assumptions on an annual basis
and makes modifications to the
20
assumptions based on current rates and trends when appropriate. As required by
U.S. GAAP, the effect of the modifications is recorded or amortized over future
periods. Based on advice from its independent actuaries, the Company believes
that the assumptions utilized in recording its obligations under its plans are
reasonable.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The Company records a
valuation allowance that represents foreign operating loss carryforwards for
which utilization is uncertain. Management judgment is required in determining
the Company's provision for income taxes, deferred tax assets and liabilities
and the valuation allowance recorded against the Company's net deferred tax
assets. The valuation allowance would need to be adjusted in the event future
taxable income is materially different than amounts estimated. The Company does
not provide taxes on undistributed earnings of foreign subsidiaries which are
considered to be permanently invested. If undistributed earnings were remitted,
foreign tax credits would substantially offset any resulting domestic tax
liability.
BACKLOG
The Company's backlog relates to the Controls Group's installed control systems
operations, which derive a significant portion of revenue from long-term
contracts that are accounted for using the percentage-of-completion method. At
June 30, 2002, the unearned backlog of installed control systems contracts
(excluding service and integrated facility management) to be executed within the
next year grew 13% from $1.44 billion at June 30, 2001 to $1.62 billion at June
30, 2002. This growth primarily stems from new orders in North America, in both
the new and existing buildings markets, and the addition of MC International
contracts. Orders for control systems in the current year were strongest from
the new non-residential construction market, particularly in the office,
education, health care and government sectors.
FUTURE ACCOUNTING CHANGES
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement Obligations" and No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 143 establishes
accounting standards for the recognition and measurement of an asset retirement
obligation. SFAS No. 144 addresses accounting and reporting for the impairment
or disposal of long-lived assets, superseding SFAS No. 121. The statements are
effective for the Company on October 1, 2002. The effects of adoption of these
statements are not expected to have a material effect on the Company's net
earnings or statement of financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as
of April
21
2002." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements" and SFAS No. 44, "Accounting for Intangible Assets of
Motor Carriers." This Statement also amends SFAS No. 13, "Accounting for
Leases", to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The provisions of the
statement related to the rescission of SFAS No. 4 are effective for the Company
on October 1, 2002. The provisions of the statement related to SFAS No. 13 are
effective for transactions occurring after May 15, 2002. All other provisions of
this statement are effective for financial statements issued on or after May 15,
2002. The adoption of SFAS No. 145 had no impact on the Company's net earnings
or statement of financial position at June 30, 2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." Under SFAS No. 146, costs associated with an
exit or disposal activity shall be recognized and measured at their fair value
in the period in which the liability is incurred rather than at the date of a
commitment to an exit or disposal plan. The provisions of the statement will be
effective for exit or disposal activities that are initiated after December 31,
2002. The Company is currently evaluating the impact of the statement.
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
The Company has made forward-looking statements in this document that are
subject to risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future risks and may include words
such as "believes," "expects," "anticipates," "projects" or similar expressions.
For those statements, the Company cautions that numerous important factors,
including industry vehicle production levels, U.S. dollar exchange rates and
those discussed elsewhere in this document and in the Company's Form 8-K filing
(dated November 9, 2001), could affect the Company's actual results and could
cause its actual consolidated results to differ materially from those expressed
in any forward-looking statement made by, or on behalf of, the Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company adjusts its portfolio of financial instruments used to manage
foreign exchange exposure over time as its known exposures change. At September
30, 2001, a sensitivity analysis of the Company's exposure to changes in foreign
currencies indicated that a 10% appreciation or depreciation of the currencies
being hedged would result in a hypothetical gain or loss, respectively, of $39
million. The Company's policy prohibits the trading of financial instruments for
profit. It is important to note that gains and losses indicated in the
sensitivity analysis would be offset by gains and losses on the underlying
payables, receivables and net investments in foreign subsidiaries that are being
hedged.
A similar analysis at June 30, 2002 indicates that a 10% appreciation or
depreciation would result in a hypothetical gain or loss, respectively, of $98
million. The change from
22
September 30, 2001 is primarily associated with a cross-currency interest rate
swap that the Company entered into in connection with its acquisition of Sagem.
Under the swap, the Company receives interest based on a variable U.S. dollar
rate and pays interest based on a variable euro interest rate on the outstanding
notional principal amounts in dollars and euro, respectively. In November 2003,
the Company will pay 300 million euro in exchange for $271 million. This
instrument is designated as a hedge of a net investment of a foreign subsidiary,
and is a hedge of translation exposure, and accordingly, has no current impact
on the Company's earnings.
In May 2002, the Company executed two U.S. dollar interest rate swaps to modify
the characteristics of the Company's U.S. dollar debt portfolio. Under the first
swap, the Company receives interest at a fixed rate of 5% and pays interest on a
variable U.S dollar rate based on the $250 million notional amount. The swap has
a final maturity of November 2006 and is accounted for as a fair value hedge on
a portion of the Company's $350 million 5% coupon note maturing in 2006. Under
the second swap, the Company receives interest on a variable U.S. dollar rate
and pays a fixed rate of 3.88% based on the $250 million notional amount. The
swap has a final maturity of November 2003 and is accounted for as a cash flow
hedge of the Company's $250 million floating rate note maturing in 2003.
There were no other changes in market risk exposures that materially affect the
quantitative and qualitative disclosures presented in the Company's Annual
Report to Shareholders for the year ended September 30, 2001.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no significant changes in status since the last Report.
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
Reference is made to Item 4 of the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 2001 for a description of the results of votes of
security holders at the Annual Meeting of Shareholders held January 23, 2002.
ITEM 5. OTHER INFORMATION
Johnson Controls, Inc. entered into a neutrality agreement with the
International Union, United Automobile, Aerospace & Agricultural Implement
Workers of America (UAW) covering 26 of the Company's Automotive Systems Group
manufacturing facilities with regard to organizing activities by the UAW at
certain of its U.S. automotive interiors manufacturing plants that supply UAW
represented customers of Johnson Controls. Johnson Controls said that this
agreement reflects its interests in accommodating the needs of those customers.
The agreement provides for accelerated card recognition and election procedures
at these plants, including Johnson Controls' agreement to remain neutral, in
consideration of the UAW's agreement not to strike and other commitments. The
agreement will expire on July 1, 2007.
23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12 Statement regarding the computation of the
ratio of earnings to fixed charges.
99.1 Registrant's Certification of Periodic Report
by the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Registrant's Certification of Periodic Report
by the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
(b) The following Form 8-K's were filed during the third quarter of
fiscal 2002 or thereafter through the date of this report:
(i) The Company filed a Form 8-K on August 7, 2002 to
announce that it will acquire Varta Automotive
GmbH, a major European automotive battery
manufacturer headquartered in Germany.
(ii) A Form 8-K was filed July 26, 2002 to announce
that the Company's Board of Directors elected
John M. Barth to replace James H. Keyes as its
President and Chief Executive Officer effective
October 1, 2002.
(iii) A Form 8-K was filed July 19, 2002 to disclose
the Company's financial results for the third
quarter of fiscal 2002.
(iv) A Form 8-K was filed April 17, 2002 to disclose
the Company's financial results for the second
quarter of fiscal 2002.
24
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 9, 2002 By: /s/ Stephen A. Roell
--------------------
Stephen A. Roell
Senior Vice President and
Chief Financial Officer
25