EXHIBIT 13
JOHNSON CONTROLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
This discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity of the Company for the
three-year period ended September 30, 2002. This discussion should be read in
conjunction with the Letter to Shareholders, Consolidated Financial Statements
and Notes to Consolidated Financial Statements included elsewhere in this annual
report.
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets," effective October 1, 2001. Accordingly,
all comparisons of the three-year period assume SFAS No. 142 had been adopted
October 1, 1999. See Note 4 to the Consolidated Financial Statements.
Common Stock Price Range Dividends
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2002 2001 2002 2001
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First Quarter $64.05-82.70 $46.44-60.00 $ .33 $ .31
Second Quarter 75.00-92.94 51.94-70.37 .33 .31
Third Quarter 75.75-93.20 61.51-75.80 .33 .31
Fourth Quarter 71.66-87.98 54.90-81.70 .33 .31
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Year $64.05-93.20 $46.44-81.70 $ 1.32 $ 1.24
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RESULTS OF OPERATIONS
Fiscal 2002 Compared to Fiscal 2001
SALES Consolidated net sales reached a record $20.1 billion in fiscal 2002, nine
percent higher than the prior year sales of $18.4 billion. Both of the Company's
business segments achieved sales growth over the prior year.
Automotive Systems Group sales were $15.0 billion for the year ended September
30, 2002, an increase of 10 percent compared to the prior year's sales of $13.6
billion. In North America, automotive interior systems sales grew four percent,
in line with the increase in industry vehicle production. Growth from new
business involving seating, instrument panel, overhead, door and electronic
systems was partially offset by lower pricing. Automotive battery sales in North
America exceeded the prior year by nine percent, due primarily to new business
and higher unit shipments to the Company's aftermarket customers who continue to
gain share in the battery replacement market. The segment's European sales rose
24 percent, benefiting from the October 1, 2001 acquisitions of an automotive
electronics business and a battery business (see Note 1 to the Consolidated
Financial Statements). Excluding the electronics business acquisition and the
favorable impact of currency translation, automotive interior systems sales in
Europe were four percent above the prior year, due primarily to the launch of
new business. This compares favorably to the slight year-over-year decline in
European industry vehicle production. Segment sales in other geographic markets,
which represent less than 10 percent of Automotive Systems Group sales,
increased modestly compared to the prior year.
Controls Group sales of $5.1 billion for the current fiscal year increased six
percent from the prior year's $4.8 billion. North American sales were eight
percent above the prior year, driven by new facility management and systems
installation contract activity. Controls Group sales in Europe rose 24 percent
over the prior year, reflecting the acquisition of a systems and services
business in Europe in the third quarter of fiscal 2001 (see Note 1 to the
Consolidated Financial Statements), new facility management contract activity
and the favorable effects of currency translation. Segment sales in other
geographic markets were down 31 percent compared to the prior year, due
primarily to the deconsolidation of a Japanese facility management services
joint venture in the fourth quarter of 2001 and the negative effects of currency
translation. Orders of installed control systems for the year ended September
30, 2002 exceeded the prior year and were strongest from the North American
education, healthcare and U.S. Federal Government sectors.
Management anticipates Automotive Systems Group sales in fiscal 2003 to exceed
fiscal 2002 by 5 to 10 percent, assuming automotive industry production in North
America declines slightly from the 2002 level of 16.3 million vehicles and
European automotive industry production increases slightly. The projected
segment results reflect new automotive interiors programs in North America and
Europe, continued growth in automotive battery sales and the Company's
acquisition of the automotive battery business of Varta AG in Europe (see Note
16 to the Consolidated Financial Statements). At September 30, 2002, the
Automotive Systems Group had an incremental backlog of new orders for its
interior systems to be executed within the
JOHNSON CONTROLS, INC.
next fiscal year of approximately $1.0 billion. The automotive backlog is
generally subject to a number of risks and uncertainties, such as related
vehicle production volumes and the timing of related production launches.
Fiscal 2003 sales for the Controls Group segment are expected to increase
approximately five percent compared to fiscal 2002. Higher sales of integrated
control systems and continued growth in systems installation and technical
service activity will be partially offset by lower facility management service
revenues. At September 30, 2002, the unearned backlog of installed control
systems contracts (excluding service contracts) was $1.65 billion, the majority
of which will be executed within the next fiscal year. The increase from the
prior year's $1.49 billion was primarily due to increased orders in the North
American new construction and existing buildings markets.
OPERATING INCOME Consolidated operating income of $1.1 billion for fiscal 2002
was nine percent above the prior year's $1.0 billion. Both of the Company's
segments contributed to the higher earnings, with the majority of the increase
attributable to the Automotive Systems Group.
The Automotive Systems Group's operating income rose to $863 million, 11 percent
above the prior year's $780 million. The majority of the segment's increase was
due to a higher gross profit percentage in North America, resulting from
operational efficiencies associated with quality improvements and cost
reductions including the benefits of the Company's continued Six Sigma projects.
In Europe, the increase in operating income associated with the current year's
automotive electronics business acquisition was more than offset by higher cost
of sales due to new program launches and higher selling, general and
administrative (SG&A) expenses resulting from additional engineering in the
current year. South American automotive operations incurred a small loss due to
reduced customer production schedules. Operating income in Asia was above the
prior year as a result of significant cost reduction initiatives in Japan.
Operating income for the Controls Group of $259 million was three percent above
the prior year amount of $252 million. The increase in operating income
resulting from higher sales in the current year was partially offset by the
resolution of scope issues on certain facility management contracts and
increased SG&A expenses involving higher systems integration and marketing
costs.
For 2003, the Automotive Systems Group's operating income as a percentage of
sales is expected to approximate the 2002 level. Improvements in operational
efficiencies are expected to be offset by increased healthcare, pension and
insurance costs. In addition, the Company anticipates higher launch costs and
expenses related to manufacturing facility changes. The Automotive Systems Group
has supply agreements with certain of its customers that provide for annual
productivity price reductions and, in some instances, for the recovery of
material and labor cost increases. The segment has historically been able to
significantly offset any sales price changes with cost reductions from design
changes, productivity improvements and similar programs with its own suppliers.
[NET SALES BARCHART]
Management anticipates Controls Group operating income as a percentage of sales
will increase slightly in fiscal 2003. This expectation is based on growth in
higher margin controls offerings which will more than offset increased
healthcare, pension and insurance costs.
OTHER INCOME/EXPENSE Interest expense less interest income of $110 million was
level with the prior year as the impact of slightly higher debt levels was
offset by the current year's lower rates. Equity income of $38 million was $6
million above the prior year. Higher earnings from automotive interior systems
joint ventures in Europe and Asia were partially offset by lower results at
certain North American interior systems joint ventures and Controls Group joint
ventures in Asia. Miscellaneous - net expense of $44 million increased from $16
million in the prior year. The additional expense in 2002 reflects the current
year's foreign currency related charges and a net loss on asset disposals.
PROVISION FOR INCOME TAXES The effective income tax rate for the year ended
September 30, 2002 was 34.6 percent compared with last year's 36.6 percent. The
effective rate for the fiscal year approximated the combined domestic federal
and state statutory rate reduced by lower foreign effective rates resulting from
the benefits of global tax planning initiatives. The Company expects the
effective tax rate in fiscal 2003 to decline to 31.0 percent as the Company
continues to benefit from global tax planning initiatives.
JOHNSON CONTROLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
CONTINUED
MINORITY INTERESTS IN NET EARNINGS OF SUBSIDIARIES Minority interests in net
earnings of subsidiaries were $58 million compared with the prior year's $53
million. Higher earnings from Automotive Systems Group subsidiaries in North
America and Europe were partially offset by the effects of the deconsolidation
of a Controls Group joint venture in Japan during the fourth quarter of fiscal
2001 and the acquisition of the remaining interest in Yokogawa Johnson Controls
Corporation (See Note 1 to the Consolidated Financial Statements) in the third
quarter of fiscal 2002.
NET INCOME Net income rose 11 percent in 2002 to $601 million as a result of
increased operating income and the reduced effective income tax rate, partially
offset by higher miscellaneous - net expense. Diluted earnings per share for
fiscal 2002 were $6.35, 10 percent above the prior year's $5.79.
Fiscal 2001 Compared to Fiscal 2000
SALES Consolidated net sales for fiscal 2001 rose to $18.4 billion, an increase
of seven percent compared with the prior year's $17.2 billion. The effect of
currency translation, primarily associated with the euro, reduced consolidated
net sales by four percent, or approximately $600 million.
Automotive Systems Group sales for the year ended September 30, 2001 were $13.6
billion, seven percent higher than the prior year's sales of $12.7 billion.
Automotive interior systems sales in North America declined by one percent, the
result of significantly lower vehicle production schedules in 2001. New
automotive interiors programs and customer diversification helped mitigate the
Company's exposure to the 11 percent decline in the North American industry's
light vehicle production. Sales of automotive batteries rose nine percent, with
growth generated by contracts with new aftermarket customers and increased
demand from existing customers in the battery replacement market. Automotive
interior systems sales in Europe were seven percent lower than the prior year
due to the negative effect of currency translation. In local currency terms,
European sales increased approximately five percent, reflecting new programs and
increased volume. The segment benefited from the acquisition of a seating
subsidiary in Japan in September 2000 (see Note 1 to the Consolidated Financial
Statements), which contributed sales of approximately $1.1 billion, and from
modestly higher seating sales in other geographic markets.
Controls Group sales of $4.8 billion for 2001 were nine percent higher than the
prior year's $4.4 billion. Before the negative effect of currency translation,
segment sales were 12 percent above the prior year. Segment sales in North
America increased approximately eight percent, attributable to additional demand
for installed control systems and facility management services. European sales
were approximately 23 percent higher, reflecting both the addition of a systems
and services business in Europe (see Note 1 to the Consolidated Financial
Statements) and new contracts for facility management services. Segment sales in
other geographic markets declined eight percent, the result of the
deconsolidation of a Japanese facility management services joint venture in the
fourth quarter of 2001. Installed control systems orders for the period ended
September 30, 2001 exceeded the prior year, attributable to growth in the North
American and Asian markets.
OPERATING INCOME Consolidated operating income of $1.0 billion for fiscal 2001
was level with the prior year as a decline in automotive results was offset by
an increase in Controls Group operating income.
Automotive Systems Group operating income was $780 million, declining five
percent from the prior year's $822 million. The segment decrease was
attributable to a reduced gross profit percentage in the North American market
for automotive interior systems. The decline was due to fiscal 2001's lower
light vehicle production level, which affected many of the Company's more mature
programs, and associated customer-dictated irregular production schedules. The
effect of the production cutback was partly alleviated by the Company's
aggressive cost control efforts. Initiatives such as plant closures and
consolidations, the expanded deployment of shared service centers and
implementation of Six Sigma processes, combined to significantly reduce SG&A
expenses. European operating income declined due to the negative effect of
currency translation and a slightly lower gross profit percentage attributable
to costs associated with new programs. These factors were partially offset by
increases in operating income associated with automotive battery sales in North
America, the addition of the Japanese seating manufacturer and the elimination
of losses associated with automotive interiors operations in South America.
JOHNSON CONTROLS, INC.
Operating income for the Controls Group reached $252 million, rising 20 percent
over the prior year's $209 million. This significant increase, and the improved
operating income percentage, reflects higher volume and ongoing cost control
efforts, which resulted in decreased SG&A expenses as a percentage of sales. The
majority of the year's increase was attributable to the segment's installed
control systems operations in North America.
OTHER INCOME/EXPENSE Net interest expense of $110 million was slightly lower
than the prior year, as the current year's lower interest rates offset the
effect of moderately higher debt levels. Equity income of $32 million exceeded
the prior year total by $5 million due, in part, to increased earnings from
Automotive Systems Group joint ventures, particularly those in the Asian
markets. Miscellaneous - net expense decreased $9 million in fiscal 2001
compared to the prior year, as the current period's miscellaneous expenses were
partially offset by a net gain on asset disposals.
PROVISION FOR INCOME TAXES The effective income tax rate was 36.6 percent for
the year ended September 30, 2001 compared with last year's 37.6 percent. The
effective rate for the fiscal year approximated the combined domestic federal
and state statutory rate, with the effects of higher foreign effective rates
largely offset by the benefits of global tax reduction initiatives.
MINORITY INTERESTS IN NET EARNINGS OF SUBSIDIARIES Minority interests in net
earnings of subsidiaries were $53 million compared with the prior year's $44
million. Approximately three-quarters of the increase was attributable to
improved results from Automotive Systems Group subsidiaries, including those in
Asia and Europe.
NET INCOME The Company's net income of $542 million for fiscal 2001 exceeded the
prior year's $531 million. Fiscal 2001's higher deduction for minority interests
in net earnings of subsidiaries was offset by increased equity earnings and the
reduced effective income tax rate. Diluted earnings per share increased to $5.79
compared with the prior year's $5.73. Fiscal 2001 results were reduced by $.12
per diluted share associated with unfavorable currency translation.
CAPITAL EXPENDITURES AND OTHER INVESTMENTS
Capital expenditures were $496 million in fiscal 2002, down from $621 million
and $547 million in 2001 and 2000, respectively. Consistent with the prior
years, the majority of the 2002 expenditures were associated with the Automotive
Systems Group. In fiscal 2002, capital expenditures associated with the
Automotive Systems Group related to new customer programs and cost reduction
projects. Controls Group spending was primarily focused on information and
building systems technology. The lower spending in 2002 was mainly due to the
timing of expenditures and spending efficiencies within the Automotive Systems
Group in North America and Europe. Management has projected capital expenditures
to approximate $550-$600 million in fiscal 2003. The majority of the spending is
again expected to be focused on the Automotive Systems Group.
[OPERATING INCOME BAR CHART]
Goodwill was $2.8 billion at September 30, 2002, $507 million higher than the
prior year. The increase was primarily associated with the acquisitions of the
automotive electronics business of Sagem, Hoppecke and the remaining interest in
Yokogawa Johnson Controls Corporation (see Note 1 to the Consolidated Financial
Statements).
Investments in partially-owned affiliates of $347 million were approximately $47
million greater than the prior year. The majority of the increase is
attributable to equity income earned by Automotive System Group joint ventures
and an additional automotive interiors investment in North America, partially
offset by dividend distributions.
JOHNSON CONTROLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL AND CASH FLOW The Company's working capital was $140 million at
September 30, 2002, compared with a negative $36 million one year ago. The
increase in working capital primarily reflects the net impact of the Company's
lower short-term debt levels at September 30, 2002 and a reduction in cash and
cash equivalents from the prior year. Working capital, excluding cash and debt,
of $23 million was approximately level with the prior year amount of $15
million. The Company continued to generate strong operating cash flows, with
operations providing cash of $989 million and $973 million in 2002 and 2001,
respectively.
CAPITALIZATION Total capitalization of $5.5 billion at September 30, 2002
included short-term debt of $0.1 billion, long-term debt (including the current
portion) of $1.9 billion and shareholders' equity of $3.5 billion. The Company's
total capitalization was $4.8 billion at September 30, 2001. Despite the
additional debt associated with the European acquisitions in fiscal 2002,
continued strong operating cash flows and lower capital spending allowed the
Company to reduce total debt as a percentage of total capitalization at the end
of fiscal 2002 to 36 percent from 38 percent one year ago. By the end of fiscal
2003, the Company expects total debt as a percentage of total capitalization to
further decline to approximately 31 percent.
In November 2001, the Company refinanced its commercial paper borrowings
attributable to the acquisitions of an automotive electronics business and a
battery business (See Note 1 to the Consolidated Financial Statements) by
issuing a total of $600 million of variable and five percent 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. The five percent fixed rate notes in the amount of $350 million
are due in November 2006.
Due to the strong operating cash flows, the Company prepaid long-term
euro-denominated bank debt totaling $184 million during the third and fourth
quarters of fiscal 2002. The euro-denominated bank debt was retired at book
value and without penalty.
In March 2002, the Company renewed its existing one-year $500 million revolving
credit facility for an additional year. The Company also has a five-year $500
million revolving credit facility which expires in March 2006.
At September 30, 2002, the Company had approximately $575 million available
under its shelf registration statement on file with the Securities and Exchange
Commission through which a variety of debt and equity instruments may be issued.
The Company is party to certain synthetic leases which qualify as operating
leases for accounting purposes. The lease contracts, totaling approximately $80
million, are associated with the financing of the Company's aircraft. The
Company believes the estimated fair market value is in excess of the remaining
lease obligations. The earliest maturity is September 2006, and each lease is
renewable at the Company's option.
The Company believes its capital resources and liquidity position at September
30, 2002 were adequate to meet projected needs. Requirements for working
capital, capital expenditures, dividends, pension fund contributions, debt
maturities and acquisitions in fiscal 2003 will continue to be funded from
operations, supplemented by short- and long-term borrowings, if required.
Financing for the acquisition of Varta (see Note 16 to the Consolidated
Financial Statements) will be with short-term debt.
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 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 a combined
availability of $1.0 billion under its revolving credit facilities to meet
commercial paper maturities and operating needs.
JOHNSON CONTROLS, INC.
A summary of the Company's significant contractual obligations and other
commercial commitments as of September 30, 2002 are as follows:
2004 2006 After
In millions Total 2003 -2005 -2007 2007
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CONTRACTUAL OBLIGATIONS
Long-term debt (including
capital lease obligations)* $1,867 $ 40 $561 $496 $770
Operating leases 486 116 165 156 49
Unconditional purchase
obligations** -- -- -- -- --
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Total contractual
cash obligations $2,353 $156 $726 $652 $819
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* See "Capitalization" for additional information related to the Company's
long-term debt.
** There were no unconditional purchase obligations other than those related
to inventory and property, plant and equipment purchases in the ordinary
course of business which management believes are immaterial.
2004 2006 After
In millions Total 2003 -2005 -2007 2007
- ------------------------------------------------------------------------------
OTHER COMMERCIAL COMMITMENTS
Lines of credit* $ -- $ -- $ -- $ -- $ --
Standby letters of credit 66 56 10 -- --
Guarantees** 52 19 6 -- 27
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Total commercial
commitments $ 118 $ 75 $ 16 $ -- $ 27
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* At September 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 September 30, 2002.
** Guarantees primarily represent the Company's portion of guaranteed debt of
certain unconsolidated affiliates.
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 by management to be the most
critical in understanding the judgments 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,
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.
[CASH FLOW FORM CONTINUING OPERATIONS BAR CHART]
GOODWILL AND OTHER INTANGIBLE ASSETS The Company adopted 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 healthcare. 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 healthcare cost trend rates. The expected return on plan assets is based on
the Company's expectation of the long-term average rate of return on assets in
the pension funds, which is reflective of the current and projected asset mix of
the funds and considers the historical returns earned on the funds. The Company
reviews its actuarial assumptions on an annual basis and makes modifications to
the
JOHNSON CONTROLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
CONTINUED
assumptions based on current rates and trends when appropriate. As required by
U.S. GAAP, the effects of the modifications are recorded currently or amortized
over future periods. Based on information provided by its independent actuaries
and other relevant sources, the Company believes that the assumptions used 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.
RISK MANAGEMENT
The Company selectively uses financial instruments to reduce market risk
associated with changes in foreign exchange and interest rates. All hedging
transactions are authorized and executed pursuant to clearly defined policies
and procedures, which strictly prohibit the use of financial instruments for
trading purposes. Analytical techniques used to manage and monitor foreign
exchange and interest rate risk include market valuation and sensitivity
analysis.
A discussion of the Company's accounting policies for derivative financial
instruments is included in the Summary of Significant Accounting Policies in the
Notes to Consolidated Financial Statements, and further disclosure relating to
financial instruments is included in Note 8 - Financial Instruments.
FOREIGN EXCHANGE The Company has manufacturing, sales and distribution
facilities around the world and thus makes investments and enters into
transactions denominated in various foreign currencies. In order to maintain
strict control and achieve the benefits of the Company's global diversification,
foreign exchange exposures for each currency are netted internally so that only
its net foreign exchange exposures are, as appropriate, hedged with financial
instruments.
The Company hedges 70 to 90 percent of its known foreign exchange transactional
exposures. The Company primarily enters into foreign currency exchange contracts
to reduce the earnings and cash flow impact of non-functional currency
denominated receivables and payables. Gains and losses resulting from hedging
instruments offset the foreign exchange gains or losses on the underlying assets
and liabilities being hedged. The maturities of the forward exchange contracts
generally coincide with the settlement dates of the related transactions.
Realized and unrealized gains and losses on these contracts are recognized in
the same period as gains and losses on the hedged items. The Company also
selectively hedges anticipated transactions that are subject to foreign exchange
exposure, primarily with foreign currency exchange contracts, which are
designated as cash flow hedges in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities."
The Company generally finances its foreign operations with local, non-U.S.
dollar debt. The foreign currency-denominated debt serves as a natural hedge of
the foreign operations' net asset positions. The Company has also entered into
several foreign currency-denominated debt obligations and cross-currency
interest rate swaps to hedge portions of its net investments in Europe and
Japan. The currency effects of the debt obligations are reflected in the
accumulated other comprehensive income (loss) account within shareholders'
equity where they offset gains and losses recorded on the net investments in
Europe and Japan.
SENSITIVITY ANALYSIS The following table indicates the total U.S. dollar
equivalents of net foreign exchange contracts (hedging transactional exposure)
and non-functional currency denominated debt and cross-currency interest rate
swaps (hedging translation exposure) outstanding by currency and the
corresponding impact on the value of these instruments assuming a 10 percent
appreciation/depreciation of the respective currencies. The resulting functional
currency gains and losses are translated at the U.S. dollar spot rate on
September 30, 2002.
JOHNSON CONTROLS, INC.
As previously noted, 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 receivables, payables and net investments in foreign subsidiaries
described above.
In millions September 30, 2002
- ------------------------------------------------------------------------------------------------
Financial Instruments Foreign Exchange
Designated as Hedges of: Gain/(Loss) from:
-------------------------- ---------------------------
Transactional Translation Net 10% 10%
Foreign Foreign Amount of Appreciation Depreciation
Exposure Exposure Instruments of the of the
Long/ Long/ Long/ Functional Functional
CURRENCY (Short) (Short) (Short) Currency Currency
- ------------------------------------------------------------------------------------------------
(U.S. DOLLAR EQUIVALENTS)
euro $(538) $(660) $(1,198) $(120) $120
Japanese yen 4 (192) (188) (19) 19
Mexican peso 143 -- 143 14 (14)
Czech Republican
koruna 51 -- 51 5 (5)
Swiss franc 23 -- 23 2 (2)
Swedish krona (17) -- (17) (2) 2
British pound (13) -- (13) (1) 1
Other (23) -- (23) (2) 2
- ------------------------------------------------------------------------------------------------
Total $(370) $(852) $(1,222) $(123) $123
- ------------------------------------------------------------------------------------------------
INTEREST RATES The Company's earnings exposure related to adverse movements in
interest rates is primarily derived from outstanding floating rate debt
instruments that are indexed to short-term money market rates. The Company, as
needed, uses interest rate swaps to modify its exposure to interest rate
movements. In accordance with SFAS No. 133, the swaps qualify and are designated
as cash flow hedges or fair value hedges. A 10 percent increase or decrease in
the average cost of the Company's variable rate debt, including outstanding
swaps, would result in a change in pre-tax interest expense of approximately $3
million.
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 impact of these statements
upon adoption is not expected to have a material effect on the Company's
financial position, results of operations or cash flows.
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 should 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 this statement.
[TOTAL DEBT TO TOTAL CAPITALIZATION BARCHART]
In fiscal 2003, the Company will voluntarily adopt the expense recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." As
required by the statement, expensing of options will be prospective, with
expense in 2003 relating only to options granted during the period. The adoption
is expected to reduce diluted earnings per share for fiscal 2003 by
approximately $.05, which represents the pro rata portion of the 2003 grant
earned during the three-year vesting period.
ENVIRONMENTAL, HEALTH AND SAFETY AND OTHER MATTERS
The Company's global operations are governed by laws addressing protection of
the environment ("Environmental Laws") and worker safety and health ("Worker
Safety Laws"). Under various circumstances, these laws impose civil and criminal
penalties and fines, as well as injunctive and remedial relief, for
noncompliance and require remediation at sites where Company-related substances
have been released into the environment.
The Company has expended substantial resources globally, both financial and
managerial, to comply with applicable Environmental Laws and Worker Safety Laws,
and to protect the environment and workers. The Company believes it is in
substantial compliance with such laws and maintains procedures designed to
foster and ensure compliance. However, the Company has been, and in the future
may become, the subject of formal or informal enforcement actions or proceedings
regarding noncompliance with such laws or the remediation of Company-related
substances released into the environment. Such matters typically are resolved by
negotiation with regulatory authorities resulting in commitments to compliance,
abatement or remediation programs and in some cases payment of penalties.
Historically, neither such commitments nor penalties imposed on the Company have
been material.
JOHNSON CONTROLS, INC.
MANAGEMENT 'S DISCUSSION AND ANALYSIS
CONTINUED
Environmental considerations are a part of all significant capital expenditure
decisions; however, expenditures in 2002 related solely to environmental
compliance were not material. Environmental remediation, compliance and
management expenses incurred by the Company were approximately $11 million and
$10 million in 2002 and 2001, respectively. The accrued liability of
approximately $32 million at September 30, 2002 relating to environmental
matters increased from $28 million one year ago. A charge to income is recorded
when it is probable that a liability has been incurred and the cost can be
reasonably estimated. The Company's environmental liabilities do not take into
consideration any possible recoveries of future insurance proceeds. Because of
the uncertainties associated with environmental remediation activities at sites
where the Company may be potentially liable, future expenses to remediate
identified sites could be considerably higher than the accrued liability.
However, while neither the timing nor the amount of ultimate costs associated
with known environmental remediation matters can be determined at this time, the
Company does not expect that these matters will have a material adverse effect
on its financial position, results of operations or cash flows.
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 approximately $22 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. While it
is not possible to ascertain the ultimate legal and financial liability with
respect to this lawsuit, the Company believes that the amount of such liability,
if any, in excess of amounts provided, will not have a material impact on the
Company's financial position, results of operations or cash flows.
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
The Company has made forward-looking statements in this document that are
subject to risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future risks in the "Risk Management"
section of this document and those preceded by, following or that include the
words "believes," "expects," "anticipates," "projects" or similar expressions.
For those statements, the Company cautions that the numerous important factors
discussed elsewhere in this document and in the Company's Form 8-K filing (dated
November 12, 2002), 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.
QUARTERLY FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------------------
In millions, except per share data; unaudited First Second Third Fourth Full
YEAR ENDED SEPTEMBER 30, Quarter Quarter Quarter Quarter Year
- ---------------------------------------------------------------------------------------------------------------------------------
2002
Net sales $ 4,817.7 $ 4,810.5 $ 5,257.0 $ 5,218.2 $ 20,103.4
Gross profit 676.3 644.1 748.0 778.5 2,846.9
Net income 119.9 114.8 175.3 190.5 600.5
Earnings per share
Basic 1.35 1.27 1.96 2.13 6.71
Diluted 1.27 1.21 1.85 2.02 6.35
- ---------------------------------------------------------------------------------------------------------------------------------
2001
Net sales $ 4,454.4 $ 4,601.6 $ 4,722.1 $ 4,649.1 $ 18,427.2
Gross profit 640.0 621.2 676.1 666.7 2,604.0
Net income (As Reported) 102.5 83.0 136.5 156.3 478.3
Net income (Adjusted)* 118.2 99.0 152.6 171.9 541.7
Earnings per share (As Reported)
Basic 1.16 0.94 1.54 1.77 5.41
Diluted 1.10 0.89 1.45 1.67 5.11
Earnings per share (Adjusted)*
Basic 1.35 1.12 1.73 1.94 6.14
Diluted 1.27 1.06 1.62 1.84 5.79
- ---------------------------------------------------------------------------------------------------------------------------------
* The adjusted information is presented as if SFAS No. 142, "Goodwill and
Other Intangible Assets," had been adopted October 1, 2000. Results have
been adjusted to exclude goodwill amortization expense and the related
income tax effect.
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF INCOME
In millions, except per share data
- ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 2001 2000
----------------------------------------------------------
2002 Adjusted* As Reported Adjusted* As Reported
-----------------------------------------------------------------------
Net sales $ 20,103.4 $ 18,427.2 $ 18,427.2 $ 17,154.6 $ 17,154.6
Cost of sales 17,256.5 15,823.2 15,823.2 14,560.1 14,560.1
-----------------------------------------------------------------------
Gross profit 2,846.9 2,604.0 2,604.0 2,594.5 2,594.5
Selling, general and administrative expenses 1,724.9 1,572.1 1,642.9 1,563.0 1,629.5
-----------------------------------------------------------------------
Operating income 1,122.0 1,031.9 961.1 1,031.5 965.0
-----------------------------------------------------------------------
Interest income 11.9 19.4 19.4 16.1 16.1
Interest expense (122.3) (129.4) (129.4) (127.6) (127.6)
Equity income 37.9 31.8 31.8 26.6 26.6
Miscellaneous - net (43.5) (15.8) (15.8) (24.4) (24.4)
-----------------------------------------------------------------------
Other income (expense) (116.0) (94.0) (94.0) (109.3) (109.3)
-----------------------------------------------------------------------
Income before income taxes and minority interests 1,006.0 937.9 867.1 922.2 855.7
Provision for income taxes 347.6 342.9 335.5 346.5 338.9
Minority interests in net earnings of subsidiaries 57.9 53.3 53.3 44.4 44.4
-----------------------------------------------------------------------
Net income $ 600.5 $ 541.7 $ 478.3 $ 531.3 $ 472.4
-----------------------------------------------------------------------
Earnings available for common shareholders $ 592.8 $ 532.9 $ 469.5 $ 521.5 $ 462.6
-----------------------------------------------------------------------
Earnings per share
Basic $ 6.71 $ 6.14 $ 5.41 $ 6.09 $ 5.40
Diluted $ 6.35 $ 5.79 $ 5.11 $ 5.73 $ 5.09
- ---------------------------------------------------------------------------------------------------------------------------
* The adjusted information is presented as if SFAS No. 142, "Goodwill and
Other Intangible Assets," had been adopted October 1, 1999. Results have
been adjusted to exclude goodwill amortization expense ($70.8 million and
$66.5 million in fiscal years 2001 and 2000, respectively) and the related
income tax effect.
The accompanying notes are an integral part of the financial statements.
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
In millions, except par value and share data
SEPTEMBER 30, 2002 2001
------------------------
ASSETS
Cash and cash equivalents $ 262.0 $ 374.6
Accounts receivable, less allowance for doubtful accounts
of $44.8 and $28.1, respectively 3,064.3 2,673.4
Costs and earnings in excess of billings on uncompleted contracts 333.4 254.9
Inventories 653.6 577.6
Other current assets 632.9 663.5
------------------------
Current assets 4,946.2 4,544.0
------------------------
Property, plant and equipment - net 2,445.5 2,379.8
Goodwill - net 2,754.6 2,247.3
Other intangible assets - net 243.5 135.9
Investments in partially-owned affiliates 347.4 300.5
Other noncurrent assets 428.1 304.0
------------------------
Total assets $11,165.3 $ 9,911.5
------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt $ 105.3 $ 379.9
Current portion of long-term debt 39.9 45.3
Accounts payable 2,789.1 2,437.3
Accrued compensation and benefits 506.6 436.3
Accrued income taxes 182.7 137.8
Billings in excess of costs and earnings on uncompleted contracts 190.8 163.0
Other current liabilities 991.8 980.1
------------------------
Current liabilities 4,806.2 4,579.7
------------------------
Long-term debt 1,826.6 1,394.8
Postretirement health and other benefits 170.5 162.5
Minority interests in equity of subsidiaries 189.0 207.3
Other noncurrent liabilities 673.3 581.8
------------------------
Long-term liabilities 2,859.4 2,346.4
------------------------
Preferred stock, $1.00 par value
shares authorized: 2,000,000
shares issued and outstanding: 2002 - 202.646; 2001 - 240.716 103.8 123.2
Common stock, $.16 2/3 par value
shares authorized: 300,000,000
shares issued: 2002 - 89,594,686; 2001 - 89,078,471 14.9 14.8
Capital in excess of par value 690.0 646.1
Retained earnings 2,994.0 2,517.9
Treasury stock, at cost (2002 - 714,637 shares; 2001 - 1,579,636 shares) (12.0) (25.6)
Employee stock ownership plan - unearned compensation (44.6) (63.3)
Accumulated other comprehensive loss (246.4) (227.7)
------------------------
Shareholders' equity 3,499.7 2,985.4
------------------------
Total liabilities and shareholders' equity $11,165.3 $ 9,911.5
------------------------
The accompanying notes are an integral part of the financial statements.
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
In millions
SEPTEMBER 30, 2002 2001 2000
---------------------------------
OPERATING ACTIVITIES
Net income $ 600.5 $ 478.3 $ 472.4
Adjustments to reconcile net income to cash provided by operating activities
Depreciation 499.4 433.7 385.3
Amortization of intangibles* 17.4 82.2 76.5
Equity in earnings of partially-owned affiliates, net of dividends received (17.1) (6.9) (12.8)
Deferred income taxes (7.4) 66.6 56.3
Minority interests in net earnings of subsidiaries 57.9 53.3 44.4
Other (39.1) (40.6) (11.7)
Changes in working capital, excluding acquisition and divestiture of businesses
Receivables (272.6) (298.6) (199.9)
Inventories 10.5 0.9 (39.3)
Other current assets 24.6 137.2 (69.3)
Accounts payable and accrued liabilities 56.3 73.5 173.9
Accrued income taxes 34.4 (1.1) (98.7)
Billings in excess of costs and earnings on uncompleted contracts 24.2 (5.5) 13.2
----------------------------------
Cash provided by operating activities 989.0 973.0 790.3
----------------------------------
INVESTING ACTIVITIES
Capital expenditures (496.2) (621.5) (546.7)
Sale of property, plant and equipment 54.1 141.0 42.5
Acquisition of businesses, net of cash acquired (644.7) (231.1) (80.9)
Divestiture of business -- -- 75.0
Changes in long-term investments - net 5.2 (48.8) (72.3)
----------------------------------
Cash used by investing activities (1,081.6) (760.4) (582.4)
----------------------------------
FINANCING ACTIVITIES
Decrease in short-term debt - net (304.9) (85.2) (39.6)
Increase in long-term debt 638.8 241.9 125.9
Repayment of long-term debt (249.0) (157.0) (168.0)
Payment of cash dividends (125.3) (117.6) (106.2)
Other 28.4 20.7 (4.5)
----------------------------------
Cash used by financing activities (12.0) (97.2) (192.4)
----------------------------------
Effect of exchange rate changes on cash and cash equivalents (8.0) (16.4) (16.1)
----------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ (112.6) $ 99.0 $ (0.6)
- ----------------------------------------------------------------------------------------------------------------------
* The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets,"
effective October 1, 2001 and accordingly no longer amortizes goodwill.
Goodwill amortization included in 2001 and 2000 was $70.8 million and $66.5
million, respectively.
The accompanying notes are an integral part of the financial statements.
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Employee
Stock
Ownership Capital Accumulated
Plan - in Treasury Other
Preferred Unearned Common Excess of Retained Stock, Comprehensive
In millions, except per share data Total Stock Compensation Stock Par Value Earnings at Cost Income (Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1999 $2,270.0 $ 134.7 $(94.8) $ 14.6 $576.1 $1,793.1 $(38.5) $(115.2)
Comprehensive income:
Net income 472.4 -- -- -- -- 472.4 -- --
Foreign currency translation adjustments (89.8) -- -- -- -- -- -- (89.8)
Minimum pension liability adjustment (2.0) -- -- -- -- -- -- (2.0)
--------
Other comprehensive loss (91.8)
--------
Comprehensive income 380.6
Reduction of guaranteed ESOP debt 14.8 -- 14.8 -- -- -- -- --
Cash dividends
Series D preferred ($3.97 per
one ten-thousandth of a share),
net of $0.4 million tax benefit (9.8) -- -- -- -- (9.8) -- --
Common ($1.12 per share) (96.0) -- -- -- -- (96.0) -- --
Other, including options exercised 16.5 (5.7) -- 0.1 17.0 (0.2) 5.3 --
- ------------------------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 2000 2,576.1 129.0 (80.0) 14.7 593.1 2,159.5 (33.2) (207.0)
Comprehensive income:
Net income 478.3 -- -- -- -- 478.3 -- --
Foreign currency translation adjustments (12.9) -- -- -- -- -- -- (12.9)
Realized and unrealized gains/losses
on derivatives (2.0) -- -- -- -- -- -- (2.0)
Minimum pension liability adjustment (5.8) -- -- -- -- -- -- (5.8)
--------
Other comprehensive loss (20.7)
--------
Comprehensive income 457.6
Reduction of guaranteed ESOP debt 16.7 -- 16.7 -- -- -- -- --
Cash dividends
Series D preferred ($3.97 per
one ten-thousandth of a share),
net of $1.0 million tax benefit (8.8) -- -- -- -- (8.8) -- --
Common ($1.24 per share) (107.8) -- -- -- -- (107.8) -- --
Other, including options exercised 51.6 (5.8) -- 0.1 53.0 (3.3) 7.6 --
- ------------------------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 2001 2,985.4 123.2 (63.3) 14.8 646.1 2,517.9 (25.6) (227.7)
Comprehensive income:
Net income 600.5 -- -- -- -- 600.5 -- --
Foreign currency translation adjustments (1.6) -- -- -- -- -- -- (1.6)
Unrealized gains/losses on
marketable securities 11.1 -- -- -- -- -- -- 11.1
Realized and unrealized gains/losses
on derivatives (10.9) -- -- -- -- -- -- (10.9)
Minimum pension liability adjustment (17.3) -- -- -- -- -- -- (17.3)
--------
Other comprehensive loss (18.7)
--------
Comprehensive income 581.8
Reduction of guaranteed ESOP debt 18.7 -- 18.7 -- -- -- -- --
Cash dividends
Series D preferred ($3.97 per
one ten-thousandth of a share),
net of $0.9 million tax benefit (7.7) -- -- -- -- (7.7) -- --
Common ($1.32 per share) (116.7) -- -- -- -- (116.7) -- --
Other, including options exercised 38.2 (19.4) -- 0.1 43.9 -- 13.6 --
- ------------------------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 2002 $3,499.7 $ 103.8 $(44.6) $ 14.9 $690.0 $2,994.0 $(12.0) $(246.4)
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
JOHNSON CONTROLS, INC.
NOTES TO CONSOLIDATED STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of Johnson Controls, Inc. and its majority-owned domestic and foreign
subsidiaries. All significant intercompany transactions have been eliminated.
Investments in partially-owned affiliates are accounted for by the equity method
when the Company's interest exceeds 20 percent. Gains and losses from the
translation of substantially all foreign currency financial statements are
recorded in the accumulated other comprehensive income (loss) account within
shareholders' equity. Certain prior year amounts have been reclassified to
conform to the current year's presentation.
USE OF ESTIMATES The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect reported
amounts and related disclosures. Actual results could differ from those
estimates.
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 method of accounting (see "Long-Term Contracts").
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.
LONG-TERM CONTRACTS Under the percentage-of-completion method of accounting used
for long-term contracts, sales and gross profit are recognized as work is
performed based on the relationship between actual costs incurred and total
estimated costs at completion. Sales and gross profit are adjusted prospectively
for revisions in estimated total contract costs and contract values. Estimated
losses are recorded when identified. Claims against customers are recognized as
revenue upon settlement. The amount of accounts receivable due after one year is
not significant.
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. 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.
PRE-PRODUCTION COSTS RELATED TO LONG-TERM SUPPLY ARRANGEMENTS 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. Customer
reimbursements are recorded as a reduction of expense when reimbursement from
the customer is contractually guaranteed. 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 non-cancelable
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; otherwise, 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. At September 30, 2002, approximately $66 million of costs for molds,
dies and other tools were capitalized, which represented assets to which the
Company had title. In addition, at September 30, 2002, the Company recorded as a
current asset approximately $162 million of costs for molds, dies and other
tools for which customer reimbursement is assured.
PROPERTY, PLANT AND EQUIPMENT The Company uses the straight-line method of
depreciation for financial reporting purposes and accelerated methods for income
tax purposes. The general range of useful lives for financial reporting is 10 to
50 years for buildings and improvements and 3 to 20 years for machinery and
equipment.
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 in the event that goodwill and
indefinite lived intangible assets become impaired.
DERIVATIVE FINANCIAL INSTRUMENTS The Company has written policies and procedures
that place all financial instruments under the direction of corporate treasury
and restrict all derivative transactions to those intended for hedging purposes.
The use of financial instruments for trading purposes is strictly prohibited.
The Company uses financial instruments to manage the market risk from changes in
foreign exchange rates and interest rates.
In the first quarter of fiscal 2001, the Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 137 and No. 138. The fair values of all derivatives are recorded in the
statement of financial position. The change in a derivative's fair value is
recorded each period in current earnings or accumulated other comprehensive
income (OCI), depending on whether the derivative is designated as part of a
hedge transaction and if so, the type of hedge transaction.
JOHNSON CONTROLS, INC.
NOTES TO CONSOLIDATED STATEMENTS
CONTINUED
The Company hedges 70 to 90 percent of its known foreign exchange transactional
exposures. The Company primarily enters into forward exchange contracts to
reduce the earnings and cash flow impact of non-functional currency denominated
receivables and payables, predominately intercompany transactions. Gains and
losses resulting from these contracts offset the foreign exchange gains or
losses on the underlying assets and liabilities being hedged. The maturities of
the forward exchange contracts generally coincide with the settlement dates of
the related transactions. Gains and losses on these contracts are recorded in
miscellaneous - net in the Consolidated Statement of Income as the changes in
the fair value of the contracts are recognized and generally offset the gains
and losses on the hedged items in the same period.
CASH FLOW HEDGES The Company selectively hedges anticipated transactions that
are subject to foreign exchange exposure, primarily using foreign currency
exchange contracts. These instruments are designated as cash flow hedges in
accordance with SFAS No. 133 and are recorded in the Consolidated Statement of
Financial Position at fair value. The effective portion of the contracts' gains
or losses due to changes in fair value are initially recorded as a component of
accumulated OCI and are subsequently reclassified into earnings when the hedged
transactions, typically sales and costs related to sales, occur and affect
earnings. These contracts are highly effective in hedging the variability in
future cash flows attributable to changes in currency exchange rates. The
Company also selectively uses interest rate swaps to modify its exposure to
interest rate movements and reduce borrowing costs. These swaps also qualify as
cash flow hedges, with changes in fair value recorded as a component of
accumulated OCI. Interest expense is recorded in earnings at the fixed rate set
forth in the swap agreement.
For the years ended September 30, 2002 and 2001, the net amounts recognized in
earnings due to ineffectiveness and amounts excluded from the assessment of
hedge effectiveness were not material. The amount reported as realized and
unrealized gains/losses on derivatives in the accumulated OCI account within
shareholders' equity represents the net gain/loss on derivatives designated as
cash flow hedges. The majority of the balance at September 30, 2002 will be
recognized within the subsequent 12 months as the anticipated transactions
occur.
FAIR VALUE HEDGES The Company had one interest rate swap outstanding at
September 30, 2002 designated as a hedge of the fair value of a portion of a
fixed-rate bond issued in connection with an October 2001 acquisition. Both the
swap and the hedged portion of the debt are recorded in the Consolidated
Statement of Financial Position. The change in fair value of the swap exactly
offsets the change in fair value of the hedged debt, with no net impact on
earnings.
NET INVESTMENT HEDGES The Company has cross-currency interest rate swaps and
foreign currency-denominated debt obligations that are designated as hedges of
the foreign currency exposure associated with its net investments in foreign
operations. The currency effects of the debt obligations are reflected in the
accumulated OCI account where they offset translation gains and losses recorded
on the Company's net investments in Europe and Japan. The cross-currency
interest rate swaps are recorded in the Consolidated Statement of Financial
Position at fair value, with changes in value attributable to changes in foreign
exchange rates recorded in the foreign currency translation adjustments
component of accumulated OCI. Net interest payments or receipts from the
interest rate swaps are recorded as adjustments to interest expense in earnings
on a current basis. Net losses of approximately $25 million and $8 million
associated with hedges of net investments in foreign operations were recorded in
the accumulated OCI account for the periods ended September 30, 2002 and 2001,
respectively.
EARNINGS PER SHARE Basic earnings per share are computed by dividing net income,
after deducting dividend requirements on the Series D Convertible Preferred
Stock, by the weighted average number of common shares outstanding. Diluted
earnings per share are computed by dividing net income, after deducting the
after-tax compensation expense that would arise from the assumed conversion of
the Series D Convertible Preferred Stock, by diluted weighted average shares
outstanding. Diluted weighted average shares assume the conversion of the Series
D Convertible Preferred Stock, if dilutive, plus the dilutive effect of common
stock equivalents which would arise from the exercise of stock options.
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.
FOREIGN CURRENCY TRANSLATION Substantially all of the Company's international
operations use the respective local currency as the functional currency. Assets
and liabilities of international entities have been translated at period-end
exchange rates, and income and expenses have been translated using average
exchange rates for the period.
COMPREHENSIVE INCOME Comprehensive income is defined as the sum of net income
and all other non-owner changes in equity. The components of the non-owner
changes in equity (or accumulated other comprehensive loss) were as follows (net
of tax):
In millions September 30, 2002 2001
- --------------------------------------------------------------------------
Foreign currency translation adjustments $(216.1) $(214.5)
Unrealized gains/losses on marketable securities 11.1 --
Realized and unrealized gains/losses on derivatives (12.9) (2.0)
Minimum pension liability adjustments (28.5) (11.2)
- --------------------------------------------------------------------------
Accumulated other comprehensive loss $(246.4) $(227.7)
==========================================================================
JOHNSON CONTROLS, INC.
1 ACQUISITIONS
In fiscal 2002, the Company acquired several new businesses and purchased the
remaining interests in certain businesses in which the Company previously held a
majority ownership. These acquisitions, with an initial combined purchase price
of approximately $645 million, were primarily financed with long-term debt (see
Note 7). The more significant of these acquisitions were as follows:
- - Effective October 1, 2001, the Company completed the acquisition of the
automotive electronics business of France-based Sagem SA (Sagem). The Sagem
acquisition augments the Company's capabilities in vehicle electronics.
- - Effective October 1, 2001, the Company completed the acquisition of the
German automotive battery manufacturer Hoppecke Automotive GmbH & Co. KG
(Hoppecke). Management believes Hoppecke provides new battery technologies
that give the Company a leadership position in the development of the
evolving 42-volt automotive electrical systems.
- - In April 2002, the Company acquired the remaining 45% interest in Yokogawa
Johnson Controls Corporation, a controls systems and services business in
Japan. This acquisition supports the Company's strategy to expand the
Controls Group business globally.
The following table summarizes the fair values of the assets acquired and
liabilities assumed at the dates of acquisition.
In millions
- ------------------------------------------------------------------
Current assets $271.9
Property, plant and equipment - net 107.8
Goodwill - net 444.3
Other intangible assets - net 117.9
Other noncurrent assets 35.2
- ------------------------------------------------------------------
Total assets 977.1
- ------------------------------------------------------------------
Current liabilities 318.9
Long-term liabilities 13.5
- ------------------------------------------------------------------
Total liabilities 332.4
- ------------------------------------------------------------------
Net assets acquired $644.7
==================================================================
Pro forma information to reflect these acquisitions has not been disclosed as
the impact on consolidated net income is not material.
Goodwill of $381 million and $63 million was assigned to the Automotive Systems
Group and the Controls Group segments, respectively. Approximately $235 million
of the total goodwill acquired is expected to be deductible for tax purposes.
Intangible assets of approximately $118 million having a weighted average useful
life of 25 years were recorded in fiscal 2002. Intangible assets of $87 million
and $31 million have been assigned to technology and customer relationships,
respectively, having weighted average useful lives of approximately 17 and 36
years, respectively. The purchase price allocation may be adjusted in certain
situations to reflect final appraisals and other studies.
The Company began formulating restructuring plans for Sagem and Hoppecke as of
the acquisition dates. Accordingly, restructuring reserves of approximately $20
million have been established, primarily for expected employee severance. Three
plants and facilities have been or will be closed or sold with expected
workforce reductions of approximately 430 employees. Through September 30, 2002,
approximately $3 million of employee severance costs associated with the
restructuring plans were incurred or paid, and approximately 170 employees have
been separated from the Company. The reserve balance at September 30, 2002 was
approximately $17 million, and the remaining restructuring activities are
expected to be completed within the next year.
In fiscal 2001, the Company acquired Gylling Optima Batteries AB, a manufacturer
of spiral-wound lead-acid batteries, and MC International, a leader in
refrigeration and air conditioning systems and services in Europe. These
acquisitions had a combined purchase price of approximately $200 million.
Effective September 1, 2000, the Company acquired approximately 90% of the
outstanding shares of Ikeda Bussan Co. Ltd. (Ikeda), a Japanese supplier of
automotive seating systems and the primary supplier of seating systems to Nissan
Motor Company. A share exchange to acquire the remaining shares of Ikeda was
completed in the first quarter of fiscal 2002. As part of the initial
acquisition, the Company paid approximately $70 million, plus the assumption of
$115 million of debt. The acquisition was accounted for as a purchase. The
excess of the purchase price over the estimated fair value of the acquired net
assets, which approximated $160 million at the date of acquisition, was recorded
as goodwill. The operating results of Ikeda have been included in the
Consolidated Statement of Income since October 1, 2000. 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
JOHNSON CONTROLS, INC.
NOTES TO CONSOLIDATED STATEMENTS
CONTINUED
Company eliminates certain non-core activities to focus on Ikeda's principal
seating systems 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. Approximately $12 million and $10 million of
employee severance costs associated with the restructuring plan were paid or
incurred in fiscal 2001 and 2002, respectively. Through September 30, 2002,
approximately 510 employees were separated from the Company. In fiscal 2002, the
Company recorded an adjustment to the restructuring reserve of approximately $10
million, which resulted in a decrease to the goodwill assigned to the Automotive
Systems Group of approximately $6 million. The reserve balance at September 30,
2002 totaled approximately $22 million, and the remaining restructuring
activities are expected to be completed within the next year.
2 INVENTORIES
In millions SEPTEMBER 30, 2002 2001
- -------------------------------------------------------------------
Raw materials and supplies $361.2 $331.3
Work-in-process 80.4 77.2
Finished goods 242.5 203.8
- -------------------------------------------------------------------
FIFO inventories 684.1 612.3
LIFO reserve (30.5) (34.7)
- -------------------------------------------------------------------
Inventories $653.6 $577.6
===================================================================
Inventories valued by the LIFO method of accounting were approximately 39% and
42% of total inventories at September 30, 2002 and 2001, respectively.
3 PROPERTY, PLANT AND EQUIPMENT
In millions SEPTEMBER 30, 2002 2001
- -------------------------------------------------------------------
Buildings and improvements $1,349.2 $ 1,242.9
Machinery and equipment 3,508.2 3,191.1
Construction in progress 267.9 310.7
- -------------------------------------------------------------------
5,125.3 4,744.7
Land 231.3 223.8
- -------------------------------------------------------------------
5,356.6 4,968.5
Less accumulated depreciation (2,911.1) (2,588.7)
- -------------------------------------------------------------------
Property, plant and equipment - net $2,445.5 $ 2,379.8
===================================================================
Interest costs capitalized during 2002, 2001 and 2000 were $10.0 million, $10.5
million and $10.0 million, respectively.
4 GOODWILL AND OTHER INTANGIBLE ASSETS
Effective October 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." Under SFAS No. 142, goodwill will no longer be amortized;
however, it must be tested for impairment at least annually. Amortization will
continue to be recorded for other intangible assets with determinable lives. The
Company's financial statements include comparative adjusted information which
assumes SFAS No. 142 had been adopted October 1, 1999.
The changes in the carrying amount of goodwill for the years ended September 30,
2001 and 2002 were as follows:
Automotive Controls
In millions Systems Group Group Total
- --------------------------------------------------------------------------------
Balance as of September 30, 2000 $ 1,934.8 $ 198.5 $ 2,133.3
Goodwill from business acquisitions 42.4 152.7 195.1
Amortization (59.5) (11.3) (70.8)
Currency translation (7.6) (2.7) (10.3)
- --------------------------------------------------------------------------------
Balance as of September 30, 2001 $ 1,910.1 $ 337.2 $ 2,247.3
Goodwill from business acquisitions 381.0 63.3 444.3
Currency translation 65.7 13.6 79.3
Other (16.3) -- (16.3)
- --------------------------------------------------------------------------------
Balance as of September 30, 2002 $ 2,340.5 $ 414.1 $ 2,754.6
================================================================================
See Note 1 for discussion of goodwill from business acquisitions during fiscal
2002.
The Company's other intangible assets, primarily from acquisitions, consisted
of:
In millions SEPTEMBER 30, 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
- ---------------------------------------------------------------------------------------------------------------
Amortized
intangible assets
Patented
technology $ 211.5 $ (58.4) $ 153.1 $ 164.7 $ (45.8) $ 118.9
Unpatented
technology 51.0 (4.0) 47.0 3.2 (1.0) 2.2
Customer
relationships 34.3 (1.3) 33.0 -- -- --
Miscellaneous 9.7 (5.4) 4.3 9.9 (3.4) 6.5
- ---------------------------------------------------------------------------------------------------------------
Total amortized
intangible assets 306.5 (69.1) 237.4 177.8 (50.2) 127.6
Unamortized
intangible assets
Pension asset 6.1 -- 6.1 8.3 -- 8.3
- ---------------------------------------------------------------------------------------------------------------
Total unamortized
intangible assets 6.1 -- 6.1 8.3 -- 8.3
- ---------------------------------------------------------------------------------------------------------------
Total intangible
assets $ 312.6 $ (69.1) $ 243.5 $ 186.1 $(50.2) $135.9
===============================================================================================================
See Note 1 for discussion of intangible assets acquired during fiscal 2002.
Amortization of other intangible assets was approximately $17 million and $13
million for the years ended September 30, 2002 and 2001, respectively. Excluding
the impact of any future acquisitions, the Company anticipates that annual
amortization of other intangible assets will approximate $20 million for each of
the next five years.
JOHNSON CONTROLS, INC.
5 LEASES
Certain administrative and production facilities and equipment are leased under
long-term agreements. Most leases contain renewal options for varying periods,
and certain leases include options to purchase the leased property during or at
the end of the lease term. Leases generally require the Company to pay for
insurance, taxes and maintenance of the property. Leased capital assets included
in net property, plant and equipment, primarily buildings and improvements, were
$83 million and $59 million at September 30, 2002 and 2001, respectively.
Other facilities and equipment are leased under arrangements that are accounted
for as operating leases. Total rental expense was $197 million in 2002, $186
million in 2001 and $167 million in 2000.
Future minimum capital and operating lease payments and the related present
value of capital lease payments at September 30, 2002 were as follows:
Capital Operating
In millions Leases Leases
- --------------------------------------------------------------------
2003 $17.4 $115.8
2004 16.4 94.2
2005 15.7 70.3
2006 12.2 123.7
2007 7.0 32.1
After 2007 52.0 49.5
- --------------------------------------------------------------------
Total minimum lease payments 120.7 $485.6
====================================================================
Interest 26.1
- --------------------------------------------------------
Present value of net minimum lease payments $94.6
========================================================
6 SHORT-TERM DEBT AND CREDIT AGREEMENTS
In millions SEPTEMBER 30, 2002 2001
- --------------------------------------------------------------------
Commercial paper $ -- $320.0
Bank borrowings 105.3 59.9
- --------------------------------------------------------------------
Short-term debt $105.3 $379.9
====================================================================
Weighted average interest rate on
short-term debt outstanding 3.98% 3.50%
====================================================================
At September 30, 2002, the Company had unsecured lines of credit available from
banks totaling $1.7 billion. The lines of credit are subject to the usual terms
and conditions applied by banks. Domestic lines of credit available for support
of outstanding commercial paper averaged $1.1 billion during the year and were
$1.0 billion at September 30, 2002.
7 LONG-TERM DEBT
In millions SEPTEMBER 30, 2002 2001
- --------------------------------------------------------------------------------
Unsecured notes
6.06% due in 2003 $ 5.8 $ 11.5
Floating rate note due in 2004 250.0 --
5% due in 2007 ($350 million par value) 371.8 --
6.3% due in 2008 175.0 175.0
7.7% due in 2015 124.8 124.8
7.125% due in 2017 149.1 149.1
8.2% due in 2024 125.0 125.0
6.95% due in 2046 125.0 125.0
Industrial revenue bonds due through 2015,
net of unamortized discount of $0.6 million
in 2002 and $0.9 million in 2001 36.5 50.2
Guaranteed ESOP debt due in increasing annual
installments through 2004 at an average
interest rate of 7.06% (tied in part to LIBOR) 44.6 63.3
Capital lease obligations 94.6 60.5
Foreign-denominated debt:
euro 214.1 368.1
yen 139.5 172.9
Other 10.7 14.7
- --------------------------------------------------------------------------------
Gross long-term debt 1,866.5 1,440.1
Less current portion 39.9 45.3
- --------------------------------------------------------------------------------
Net long-term debt $ 1,826.6 $ 1,394.8
================================================================================
At September 30, 2002, the Company's euro-denominated long-term debt was
comprised of $110 million of fixed rate debt and $104 million of variable rate
debt. The weighted average interest rate of the fixed and variable portions was
3.95 percent and 3.70 percent, respectively.
During the third and fourth quarters of fiscal 2002, the Company prepaid
long-term euro-denominated bank debt totaling $184 million. The euro-denominated
loans were retired at book value and without penalty.
The Company had yen-denominated long-term debt totaling $140 million at
September 30, 2002. Fixed rate yen debt was equivalent to $85 million with a
weighted average interest rate of 1.74 percent at September 30, 2002. Variable
rate debt was equivalent to $55 million with a weighted average interest rate of
0.45 percent at September 30, 2002.
In November 2001, the Company refinanced a portion of its commercial paper
borrowings attributable to the Sagem and Hoppecke acquisitions by issuing a
total of $600 million of variable and five percent 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
JOHNSON CONTROLS, INC.
NOTES TO CONSOLIDATED STATEMENTS
CONTINUED
plus 60 basis points, mature in November 2003. The five percent fixed rate notes
in the amount of $350 million are due in November 2006.
The Company's employee stock ownership plan (ESOP) was financed with debt issued
by the ESOP. The ESOP debt is guaranteed by the Company and, therefore, the
unpaid balance has been recorded as long-term debt. The dividends on the Series
D Preferred Stock held by the ESOP plus Company contributions to the ESOP are
used by the ESOP to service the debt. Therefore, interest incurred on the ESOP
debt of $4 million in 2002, $5 million in 2001, and $6 million in 2000 has not
been reflected as interest expense in the Company's Consolidated Statement of
Income.
The installments of long-term debt maturing in subsequent years (including the
guaranteed ESOP debt) are: 2003 - $40 million, 2004 - $540 million, 2005 - $21
million, 2006 - $119 million, 2007 - $377 million, 2008 and beyond - $770
million. The indentures for the unsecured notes, the foreign-denominated debt
and the guaranteed ESOP debt include various financial covenants, none of which
are expected to restrict future operations.
Total interest paid on both short- and long-term debt was $127 million in 2002
and $137 million in both 2001 and 2000. The Company uses financial instruments
(see Note 8) to manage its interest rate exposure. These instruments affect the
weighted average interest rate of the Company's debt and interest expense.
8 FINANCIAL INSTRUMENTS
The fair values of cash and cash equivalents, accounts receivable, short-term
debt and accounts payable approximate their carrying values. The fair value of
long-term debt, which was $1,958 million and $1,473 million at September 30,
2002 and 2001, respectively, was determined using market interest rates and
discounted future cash flows.
The Company selectively uses derivative instruments to reduce market risk
associated with changes in foreign currency and interest rates. The use of
derivatives is restricted to those intended for hedging purposes; the use of any
derivative instrument for trading purposes is strictly prohibited. See the
Summary of Significant Accounting Policies for additional information regarding
the Company's objectives for holding certain derivative instruments, its
strategies for achieving those objectives, and its risk management and
accounting policies applicable to these instruments.
The Company has global operations and participates in the foreign exchange
markets to minimize its risk of loss from fluctuations in currency exchange
rates. The Company primarily uses foreign currency exchange contracts to hedge
certain of its foreign currency exposure.
The Company selectively uses interest rate swaps to reduce market risk
associated with changes in interest rates (cash flow or fair value hedges). At
September 30, 2002, the Company had several interest rate swaps outstanding that
hedge against movements in interest rates or the fair value associated with
portions of its long-term debt.
The Company also selectively uses cross-currency interest rate swaps to hedge
the foreign currency exposure associated with its net investment in certain
foreign operations (net investment hedges). Under the swaps, the Company
receives interest based on a variable U.S. dollar rate and pays interest based
on variable yen and euro rates on the outstanding notional principal amounts in
dollars, yen and euro, respectively.
The Company's derivative instruments are recorded at fair value in the
Consolidated Statement of Financial Position as follows:
In millions SEPTEMBER 30, 2002 2001
- ------------------------------------------------------------------------------
Fair Value Fair Value
Notional Asset Notional Asset
(U.S. dollar equivalents) Amount (Liability) Amount (Liability)
- ------------------------------------------------------------------------------
OTHER NONCURRENT ASSETS
Interest rate swaps $ 250 $ 22 n/a n/a
OTHER CURRENT LIABILITIES
Foreign currency
exchange contracts 1,421 (2) 789 (3)
OTHER NONCURRENT LIABILITIES
Interest rate swaps 303 (8) n/a n/a
Cross-currency interest
rate swaps 509 (30) 32 (2)
- ------------------------------------------------------------------------------
Fair values noted as not applicable ("n/a") in the table above indicate the
Company had no derivative instruments of that type outstanding at September 30,
2001.
It is important to note that the Company's derivative instruments are hedges
protecting against underlying changes in foreign currency and interest rates.
Accordingly, the implied gains/losses associated with the fair values of foreign
currency exchange contracts and cross-currency interest rate swaps would be
offset by gains/losses on underlying payables, receivables and net investments
in foreign subsidiaries. Similarly, implied gains/losses associated with
interest rate swaps offset changes in interest rates and the fair value of
long-term debt.
The fair values of interest rate and cross-currency interest rate swaps were
determined using dealer quotes and market interest rates. The fair values of
foreign currency exchange contracts were determined using market exchange rates.
JOHNSON CONTROLS, INC.
The Company had an investment in a marketable security with a fair value of $40
million and $22 million at September 30, 2002 and 2001, respectively. The
investment, classified as an available-for-sale security, is included in the
Consolidated Statement of Financial Position at fair value. Based on the quoted
market price, the unrealized gain on the investment, recorded in the accumulated
OCI account within shareholders' equity, was approximately $18 million at
September 30, 2002, or $11 million net of tax. The unrealized gain will be
recognized in the Consolidated Statement of Income in the first quarter of
fiscal 2003.
9 SHAREHOLDERS' EQUITY
The Company originally issued 341.7969 shares of its 7.75 percent Series D
Convertible Preferred Stock to its ESOP. The Preferred Stock was issued in
fractional amounts representing one ten-thousandth of a share each or 3.4
million Preferred Stock units in total. Each Preferred Stock unit has a
liquidation value of $51.20. The ESOP financed its purchase of the Preferred
Stock units by issuing debt. An amount representing unearned employee
compensation, equivalent in value to the unpaid balance of the ESOP debt, has
been recorded as a deduction from shareholders' equity. The net increase in
shareholders' equity at September 30, 2002 and 2001 resulting from the above
transactions was $59 million and $60 million, respectively.
Preferred Stock units are allocated to participating employees over the term of
the ESOP debt based on the annual ESOP debt service payments and are held in
trust for the employees until their retirement, death or vested termination.
Each allocated unit may be converted into two shares of common stock or redeemed
for $51.20 in cash, at the election of the employee or beneficiary, upon
retirement, death or vested termination. As of September 30, 2002, approximately
2.9 million Preferred Stock units had been allocated to employees. The Company,
at its option, may issue shares of its common stock or distribute cash to the
ESOP to redeem the Preferred Stock units. Employees may vote allocated units,
and the plan trustee is to vote unallocated units in the same proportion as the
allocated units are voted.
Dividends on the Preferred Stock are deductible for income tax purposes and
enter into the determination of earnings available for common shareholders, net
of their tax benefit.
Options to purchase common stock of the Company, at prices equal to or higher
than market values on dates of grant, are granted to key employees under stock
option plans. Stock appreciation rights (SARs) may be granted in conjunction
with the stock option grants under one plan. Options or SARs are exercisable
between two and ten years after date of grant for current employees. Shares
available for future grant under stock option plans were 7.1 million at
September 30, 2002.
Following is a summary of activity in the stock option plans for the three-year
period ending September 30, 2002:
Weighted Shares
Average Subject to
Option Price Option SARs
- --------------------------------------------------------------------
Outstanding,
September 30, 1999 $ 40.35 4,430,114 1,755,943
Granted 58.41 1,228,800 83,315
Exercised 35.91 (344,908) (88,288)
Cancelled 53.81 (294,974) (122,020)
- --------------------------------------------------------------------
Outstanding,
September 30, 2000 $ 44.28 5,019,032 1,628,950
Granted 56.84 1,508,500 84,020
Exercised 34.64 (1,509,057) (578,885)
Cancelled 57.94 (164,261) (210,300)
- --------------------------------------------------------------------
Outstanding,
September 30, 2001 $ 50.72 4,854,214 923,785
Granted 80.23 1,384,140 164,250
Exercised 42.09 (796,967) (342,090)
Cancelled 63.77 (166,450) (20,800)
- --------------------------------------------------------------------
Outstanding,
September 30, 2002 $ 59.36 5,274,937 725,145
====================================================================
Options outstanding at September 30, 2002:
Weighted Weighted
Average Average
Outstanding at Remaining Exercise
September 30, Contractual Price
Range of Exercise Prices 2002 Life (years) per Share
- -------------------------------------------------------------------------
$22.00 - $33.99 324,738 2.6 $28.87
$34.00 - $45.99 703,514 4.7 $41.40
$46.00 - $57.99 1,977,575 7.5 $57.13
$58.00 - $69.99 936,070 7.0 $58.41
$70.00 - $81.99 1,333,040 9.1 $80.23
=========================================================================
Options exercisable:
Weighted
Exercisable Average Exercise
Range of Exercise Prices Shares Price per Share
- ------------------------------------------------------------------
AT SEPTEMBER 30, 2002
$22.00 - $33.99 324,738 $ 28.87
$34.00 - $45.99 703,514 $ 41.40
$46.00 - $57.99 614,720 $ 57.78
$58.00 - $69.99 440,320 $ 58.41
$70.00 - $81.99 8,200 $ 80.23
==================================================================
At September 30, 2001 1,949,618 $ 40.58
- ------------------------------------------------------------------
At September 30, 2000 2,593,516 $ 33.64
==================================================================
JOHNSON CONTROLS, INC.
NOTES TO CONSOLIDATED STATEMENTS
CONTINUED
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," to account for employee stock options. Accordingly,
no compensation expense has been recognized for stock option plans.
In fiscal 2003, the Company will voluntarily adopt the expense recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." As
required by the statement, expensing of options will be prospective, and the
expense in 2003 will represent the pro rata portion of the 2003 grant earned
during the three-year vesting period.
Pro forma net income and earnings per share information, as required by SFAS No.
123, "Accounting for Stock-Based Compensation," has been determined as if the
Company had accounted for employee stock options under the fair value method
described by SFAS No. 123.
The fair values of each option and the assumptions used to estimate these values
using the Black-Scholes option pricing model were as follows:
GRANTS ISSUED IN YEAR ENDED SEPTEMBER 30, 2002 2001 2000
- --------------------------------------------------------------------------------
Expected life of option (years) 6 5 6
Risk-free interest rate 3.97% 5.69% 6.18%
Expected volatility of the
Company's stock 22.89% 21.40% 19.94%
Expected dividend yield on the
Company's stock 1.84% 1.87% 2.11%
Fair value of each option $ 19 $ 14 $ 15
================================================================================
For the purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the three-year vesting period of the
options. The Company's pro forma information follows:
In millions, except per share data
- ----------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 2002 2001 2000
- ----------------------------------------------------------------------
Net income $ 588.2 $ 469.8 $ 466.4
Earnings per share
Basic $ 6.57 $ 5.31 $ 5.33
Diluted $ 6.22 $ 5.02 $ 5.03
======================================================================
Net income, basic and diluted earnings per share adjusted as if SFAS No. 142,
"Goodwill and Other Intangible Assets," had been adopted October 1, 1999 were
$533.0, $6.04 and $5.70 in 2001 and $525.2, $6.01 and $5.66 in 2000.
In 2002, the Company adopted a restricted stock plan which provides for the
award of restricted shares of common stock or restricted share units to certain
key employees. Awards under the plan are subject to certain vesting
requirements. There were 158,000 restricted shares or restricted share units
awarded in 2002 with an average fair market value of $80.99 per share.
Compensation expense related to restricted stock awards is based upon market
prices at dates of award and is charged to earnings over the vesting period.
Compensation expense related to the restricted stock plan was $2 million in
2002.
Under the terms of a Rights Agreement, as amended effective November 16, 1994,
each share of the Company's common stock entitles its holder to one Right. The
Rights Agreement provides that if 20 percent or more of the Company's common
stock is acquired, the Rights become exercisable. Further, upon the occurrence
of certain defined events, the Rights entitle the holder to purchase common
stock of the Company or common stock of an "acquiring company" having a market
value equivalent to two times the Right's exercise price of $87.50. In addition,
the Rights Agreement permits the Company's board of directors, in certain
circumstances, to exchange the Rights for shares of common stock. The Rights are
subject to redemption by the board of directors for $.005 per Right. The Rights
have no voting power and expire November 30, 2004.
Approximately $116 million of consolidated retained earnings at September 30,
2002 represents undistributed earnings of the Company's partially-owned
affiliates accounted for by the equity method.
10 EARNINGS PER SHARE
The following table reconciles the numerators and denominators used to calculate
basic and diluted earnings per share for the years ended September 30, 2002,
2001 and 2000:
In millions
- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 2002 2001 2000
- --------------------------------------------------------------------------------
INCOME AVAILABLE TO
COMMON SHAREHOLDERS
Net income $ 600.5 $ 478.3 $ 472.4
Preferred stock dividends,
net of tax benefit (7.7) (8.8) (9.8)
- --------------------------------------------------------------------------------
Basic income available to
common shareholders $ 592.8 $ 469.5 $ 462.6
================================================================================
Net income $ 600.5 $ 478.3 $ 472.4
Effect of dilutive securities:
Compensation expense, net of tax,
arising from assumed conversion
of preferred stock (2.8) (3.4) (4.4)
- --------------------------------------------------------------------------------
Diluted income available to
common shareholders $ 597.7 $ 474.9 $ 468.0
================================================================================
WEIGHTED AVERAGE
SHARES OUTSTANDING
Basic weighted average
shares outstanding 88.4 86.8 85.7
Effect of dilutive securities:
Stock options 1.6 1.4 1.2
Convertible preferred stock 4.1 4.8 5.0
- --------------------------------------------------------------------------------
Diluted weighted average
shares outstanding 94.1 93.0 91.9
================================================================================
Basic income available to common shareholders adjusted as if SFAS No. 142,
"Goodwill and Other Intangible Assets," had been adopted October 1, 1999 was
$532.9 and $521.5 for 2001 and 2000, respectively. Diluted income available to
common shareholders adjusted for SFAS No. 142 was $538.3 and $526.9,
respectively.
JOHNSON CONTROLS, INC.
11 RETIREMENT PLANS
PENSION BENEFITS The Company has noncontributory defined benefit pension plans
covering most domestic and certain foreign employees. The benefits provided are
based primarily on years of service and average compensation or a monthly
retirement benefit amount. Funding for domestic pension plans equals or exceeds
the minimum requirements of the Employee Retirement Income Security Act of 1974
(ERISA). Generally, non-U.S. plans are not subject to these or similar
requirements. Also, the Company makes contributions to union-trusteed pension
funds for construction and service personnel.
The majority of plan assets are comprised of equity securities, with the
remainder primarily in fixed income investments. At the measurement dates of
June 30, 2002 and 2001, plan assets included approximately 923,000 and 908,000
shares, respectively, of Johnson Controls, Inc. common stock with total market
values of $75 million and $66 million at the respective dates.
For pension plans with accumulated benefit obligations (ABO) that exceed plan
assets, the projected benefit obligation, ABO and fair value of plan assets of
those plans were $1,567 million, $1,334 million and $1,003 million,
respectively, as of September 30, 2002 and $526 million, $474 million and $211
million, respectively, as of September 30, 2001. The increase in amounts
compared to the prior year primarily reflects the inclusion this year of the
Company's largest U.S. pension plan as its plan assets were less than ABO. In
2001, this plan's assets were more than ABO.
Acquisition-related changes in the non-U.S. plans for 2001 presented in the
table on page 42 relate primarily to the assumption of a defined benefit pension
plan obligation associated with a facility management contract.
SAVINGS AND INVESTMENT PLANS The Company sponsors various defined contribution
savings plans primarily in the U.S. that allow employees to contribute a portion
of their pre-tax and/or after-tax income in accordance with plan specified
guidelines. Under specified conditions, the Company will match a percentage of
the employee contributions up to certain limits. Excluding the ESOP, matching
contributions charged to expense amounted to $26 million, $23 million and $22
million for the years ended 2002, 2001 and 2000, respectively.
The Company established an ESOP (see Note 9) as part of its existing savings and
investment (401(k)) plan, which is available to eligible domestic employees. The
Company's annual contributions to the ESOP, when combined with the Preferred
Stock dividends, are of an amount which will allow the ESOP to meet its debt
service requirements. This contribution amount was $14 million in 2002 and $13
million in 2001 and 2000. Total compensation expense recorded by the Company was
$12 million in 2002, $24 million in 2001 and $30 million in 2000.
POSTRETIREMENT HEALTH AND OTHER BENEFITS The Company provides certain healthcare
and life insurance benefits for eligible retirees and their dependents primarily
in the U.S. Most non-U.S. employees are covered by government sponsored
programs, and the cost to the Company is not significant. The U.S. benefits are
paid as incurred. No change in the Company's practice of funding these benefits
on a pay-as-you-go basis is anticipated.
Eligibility for coverage is based on meeting certain years of service and
retirement age qualifications. These benefits may be subject to deductibles,
co-payment provisions and other limitations, and the Company has reserved the
right to modify these benefits. Effective January 31, 1994, the Company modified
certain salaried plans to place a limit on the Company's cost of future annual
retiree medical benefits at no more than 150 percent of the 1993 cost.
The September 30, 2002 accumulated postretirement benefit obligation was
determined using assumed healthcare cost trend rates of 10 percent for both
pre-65 and post-65 years of age employees. The September 30, 2001 accumulated
postretirement benefit obligation was determined using assumed healthcare cost
trend rates of six percent for both pre-65 and post-65 years of age employees,
respectively. The healthcare cost trend rate assumption has a significant effect
on the amounts reported. To illustrate, a one percentage point change in the
assumed healthcare cost trend rate would have changed the accumulated benefit
obligation by $6 million at September 30, 2002 and the sum of the service and
interest costs in 2002 by $0.5 million.
The table that follows contains a reconciliation of the changes in the benefit
obligation, the changes in plan assets and the funded status.
JOHNSON CONTROLS, INC.
NOTES TO CONSOLIDATED STATEMENTS
CONTINUED
PENSION
- ------------------------------------------------------------------------------------------------------------------------------------
POSTRETIREMENT
In millions U.S. Plans Non-U.S. Plans HEALTH AND OTHER
- ------------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2002 2001 2002 2001 2002 2001
---------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 972.4 $ 869.8 $ 701.7 $ 577.0 $ 160.9 $ 150.7
Service cost 46.4 39.9 23.9 17.0 4.1 4.4
Interest cost 70.2 65.7 28.4 18.9 10.6 10.9
Amendments made during the year 1.4 0.9 -- -- -- (0.3)
Acquisitions 4.2 6.5 7.5 191.1 -- --
Actuarial loss (gain) 34.7 27.8 (25.8) (48.1) 1.4 7.7
Benefits paid (39.8) (38.2) (29.6) (25.7) (13.4) (12.2)
Currency translation adjustment -- -- 19.2 (28.5) (0.3) (0.3)
---------------------------------------------------------------------------
Benefit obligation at end of year $ 1,089.5 $ 972.4 $ 725.3 $ 701.7 $ 163.3 $ 160.9
===========================================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 952.7 $ 991.0 $ 417.8 $ 289.2 $ -- $ --
Actual return on plan assets (78.7) (9.6) (34.0) (34.6) -- --
Acquisitions 4.0 5.0 -- 166.6 -- --
Employer and employee contributions 1.9 4.5 36.4 27.6 13.4 12.2
Benefits paid (39.8) (38.2) (29.6) (25.7) (13.4) (12.2)
Currency translation adjustment -- -- 14.0 (5.3) -- --
---------------------------------------------------------------------------
Fair value of plan assets at end of year $ 840.1 $ 952.7 $ 404.6 $ 417.8 $ -- $ --
===========================================================================
Funded status $ (249.4) $ (19.7) $ (320.7) $ (283.9) $ (163.3) $ (160.9)
Unrecognized net transition (asset) obligation (11.2) (13.9) 0.5 1.7 -- --
Unrecognized net actuarial loss (gain) 223.2 8.4 64.8 66.8 3.1 (4.0)
Unrecognized prior service cost 10.9 11.5 1.0 3.9 (21.3) (23.8)
Employer contributions paid between
July 1 and September 30 0.7 0.6 0.8 0.9 -- --
---------------------------------------------------------------------------
Net accrued benefit cost recognized at end of year $ (25.8) $ (13.1) $ (253.6) $ (210.6) $ (181.5) $ (188.7)
===========================================================================
Amounts recognized in the
Statement of Financial Position consist of:
Prepaid benefit cost $ 44.4 $ 38.7 $ 8.3 $ 27.7 $ -- $ --
Accrued benefit liability (86.2) (68.1) (290.4) (248.6) (181.5) (188.7)
Intangible asset 5.0 7.3 1.1 1.0 -- --
Accumulated other comprehensive income 11.0 9.0 27.4 9.3 -- --
---------------------------------------------------------------------------
Net amount recognized $ (25.8) $ (13.1) $ (253.6) $ (210.6) $ (181.5) $ (188.7)
===========================================================================
WEIGHTED AVERAGE ASSUMPTIONS AS OF JUNE 30 (1)
Discount rate 7.00% 7.25% 4.00% 4.00% 7.00% 7.25%
Expected return on plan assets(2) 9.50% 9.75% 4.75% 5.25% N/A N/A
Rate of compensation increase 5.00% 5.00% 3.25% 3.50% N/A N/A
====================================================================================================================================
(1) Plan assets and obligations are determined based on a June 30 measurement
date utilizing assumptions as of that date. Measurements of net periodic
pension cost are based on the assumptions used for the previous year-end
measurements of assets and obligations.
(2) The expected return on plan assets is based on the Company's expectation of
the long-term average rate of return on assets in the pension funds, which
is reflective of the current and projected asset mix of the funds and
considers the historical returns earned on the funds.
JOHNSON CONTROLS, INC.
The table that follows contains the components of net periodic benefit cost.
PENSION
- ------------------------------------------------------------------------------------------------------------------------------------
POSTRETIREMENT
In millions U.S. Plans Non-U.S. Plans HEALTH AND OTHER
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 2002 2001 2000 2002 2001 2000 2002 2001 2000
--------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 46.4 $ 39.9 $ 37.1 $ 23.9 $ 17.0 $ 4.8 $ 4.1 $ 4.4 $ 4.4
Interest cost 70.2 65.7 59.5 28.4 18.9 10.9 10.6 10.9 10.8
Employee contributions -- -- -- (2.9) (0.6) -- -- -- --
Expected return on plan assets (100.2) (96.7) (87.0) (21.6) (13.4) (8.5) -- -- --
Amortization of transitional asset (2.7) (2.6) (2.6) (0.1) -- (0.1) -- -- --
Amortization of net actuarial loss (gain) 0.4 (2.9) (0.1) 1.5 -- 0.6 0.1 (0.2) 0.2
Amortization of prior service cost 1.8 1.7 1.5 0.2 0.4 0.2 (2.5) (2.5) (2.5)
Curtailment gain (0.8) -- -- -- -- -- (5.0) -- --
--------------------------------------------------------------------------------------
Net periodic benefit cost $ 15.1 $ 5.1 $ 8.4 $ 29.4 $ 22.3 $ 7.9 $ 7.3 $ 12.6 $ 12.9
====================================================================================================================================
12 RESEARCH AND DEVELOPMENT
Expenditures for research activities relating to product development and
improvement are charged against income as incurred. Such expenditures amounted
to $895 million in 2002, $644 million in 2001 and $611 million in 2000.
A portion of the costs associated with these activities is sponsored by
customers, and totaled $456 million in 2002, $303 million in 2001 and $207
million in 2000.
13 INCOME TAXES
An analysis of effective income tax rates is shown below:
YEAR ENDED SEPTEMBER 30, 2002 2001 2000
- --------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 2.4 2.7 3.5
Foreign tax expense at different
rates and foreign losses
without tax benefits (1.6) 1.4 2.0
Goodwill -- 2.1 2.0
Other (1.2) (2.5) (2.9)
- --------------------------------------------------------------------------------
Effective income tax rate 34.6% 38.7% 39.6%
================================================================================
The effective income tax rate, adjusted as if SFAS No. 142, "Goodwill and Other
Intangible Assets," had been adopted October 1, 1999, was 36.6% and 37.6% for
2001 and 2000, respectively. The rates are lower than those shown above due to
the elimination of non-deductible goodwill.
Deferred taxes were classified in the Consolidated Statement of Financial
Position as follows:
- --------------------------------------------------------------------------------
In millions SEPTEMBER 30, 2002 2001
- --------------------------------------------------------------------------------
Other current assets $173.9 $182.4
Other noncurrent assets 241.4 155.9
Accrued income taxes (4.6) (2.7)
Other noncurrent liabilities (110.1) (35.4)
- --------------------------------------------------------------------------------
Net deferred tax asset $300.6 $300.2
================================================================================
Temporary differences and carryforwards which gave rise to deferred tax assets
and liabilities included:
- --------------------------------------------------------------------------------
In millions SEPTEMBER 30, 2002 2001
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS
Accrued expenses and reserves $357.8 $321.5
Employee benefits 114.9 135.2
Net operating loss carryforwards 202.1 90.6
Other 17.7 19.0
- --------------------------------------------------------------------------------
692.5 566.3
Valuation allowance (133.3) (88.7)
- --------------------------------------------------------------------------------
559.2 477.6
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES
Property, plant and equipment 47.8 45.8
Long-term contracts 10.9 9.5
Joint ventures 11.8 11.0
Intangible assets 83.4 65.9
Other 104.7 45.2
- --------------------------------------------------------------------------------
258.6 177.4
- --------------------------------------------------------------------------------
Net deferred tax asset $300.6 $300.2
================================================================================
JOHNSON CONTROLS, INC.
NOTES TO CONSOLIDATED STATEMENTS
CONTINUED
At September 30, 2002, the Company had available foreign net operating loss
carryforwards of approximately $616 million, of which $411 million will expire
at various dates between 2003 and 2012, and the remainder will have an
indefinite carryforward period. The valuation allowance represents loss
carryforwards for which utilization is uncertain because it is unlikely that the
losses will be utilized given the lack of sustained profitability and limited
carryforward periods in certain countries.
Components of the provision for income taxes were as follows:
In millions
- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 2002 2001 2000
- --------------------------------------------------------------------------------
Current
Federal $ 239.9 $ 149.9 $ 166.0
State 28.7 24.3 33.5
Foreign 86.4 94.7 83.1
- --------------------------------------------------------------------------------
355.0 268.9 282.6
- --------------------------------------------------------------------------------
Deferred
Federal 39.5 45.6 49.6
State 4.9 6.5 6.4
Foreign (51.8) 14.5 0.3
- --------------------------------------------------------------------------------
(7.4) 66.6 56.3
- --------------------------------------------------------------------------------
Provision for income taxes $ 347.6 $ 335.5 $ 338.9
================================================================================
The provision for income taxes, adjusted as if SFAS No. 142, "Goodwill and Other
Intangible Assets," had been adopted October 1, 1999, was $342.9 and $346.5 for
2001 and 2000, respectively.
Consolidated domestic income before income taxes and minority interests was $862
million in 2002, $608 million in 2001 and $680 million in 2000. The
corresponding amounts for foreign operations were $144 million in 2002, $259
million in 2001 and $176 million in 2000.
Income taxes paid during 2002, 2001 and 2000 were $292 million, $205 million and
$328 million, respectively.
Domestic income taxes have not been provided on undistributed cumulative
earnings of foreign subsidiaries of $612 million which are considered to be
permanently invested. If undistributed earnings were remitted, foreign tax
credits would substantially offset any resulting domestic tax liability.
14 CONTINGENCIES
The Company is involved in a number of proceedings relating to environmental
matters. At September 30, 2002, the Company had an accrued liability of
approximately $32 million relating to environmental matters compared with $28
million one year ago. The Company's environmental liabilities do not take into
consideration any possible recoveries of future insurance proceeds. Because of
the uncertainties associated with environmental remediation activities, the
Company's future expenses to remediate the currently identified sites could be
considerably higher than the accrued liability. 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.
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 approximately $22 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. While it
is not possible to ascertain the ultimate legal and financial liability with
respect to this lawsuit, the Company believes that the amount of such liability,
if any, in excess of amounts provided, will not have a material impact on the
Company's financial position, results of operations or cash flows.
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.
15 SEGMENT INFORMATION
BUSINESS SEGMENTS The Company has two operating segments, the Automotive Systems
Group and the Controls Group, which also constitute its reportable segments. The
Automotive Systems Group designs and manufactures products for motorized
vehicles. The segment supplies interior systems and batteries for cars, light
trucks and vans. The Controls Group provides control systems and facility
services including comfort, energy and security management for the
non-residential buildings market.
The accounting policies applicable to the reportable segments are the same as
those described in the Summary of Significant Accounting Policies. Management
evaluates the performance of the segments based primarily on operating income.
JOHNSON CONTROLS, INC.
Operating revenues and expenses are allocated to business segments in
determining segment operating income. Items excluded from the determination of
segment operating income include interest income and expense, equity in earnings
of partially-owned affiliates, gains and losses from sales of businesses and
long-term assets, foreign currency gains and losses, and other miscellaneous
income and expense. Unallocated assets are corporate cash and cash equivalents,
investments in partially-owned affiliates and other non-operating assets.
Financial information relating to the Company's reportable segments is as
follows:
In millions
- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 2002 2001 2000
- --------------------------------------------------------------------------------
NET SALES
Automotive Systems Group $ 15,014.6 $ 13,620.5 $ 12,738.5
Controls Group 5,088.8 4,806.7 4,416.1
- --------------------------------------------------------------------------------
Total $ 20,103.4 $ 18,427.2 $ 17,154.6
================================================================================
OPERATING INCOME (AS REPORTED)
Automotive Systems Group $ 862.8 $ 720.5 $ 765.2
Controls Group 259.2 240.6 199.8
- --------------------------------------------------------------------------------
Total $ 1,122.0 $ 961.1 $ 965.0
================================================================================
OPERATING INCOME (ADJUSTED)*
Automotive Systems Group $ 862.8 $ 780.0 $ 822.3
Controls Group 259.2 251.9 209.2
- --------------------------------------------------------------------------------
Total $ 1,122.0 $ 1,031.9 $ 1,031.5
================================================================================
ASSETS (YEAR-END)
Automotive Systems Group $ 8,470.6 $ 7,429.1 $ 7,309.9
Controls Group 1,954.8 1,880.0 1,621.0
Unallocated 739.9 602.4 497.1
- --------------------------------------------------------------------------------
Total $ 11,165.3 $ 9,911.5 $ 9,428.0
================================================================================
DEPRECIATION/AMORTIZATION
(AS REPORTED)
Automotive Systems Group $ 457.6 $ 450.0 $ 400.1
Controls Group 59.2 65.9 61.7
- --------------------------------------------------------------------------------
Total $ 516.8 $ 515.9 $ 461.8
================================================================================
DEPRECIATION/AMORTIZATION
(ADJUSTED)*
Automotive Systems Group $ 457.6 $ 390.5 $ 343.0
Controls Group 59.2 54.6 52.3
- --------------------------------------------------------------------------------
Total $ 516.8 $ 445.1 $ 395.3
================================================================================
CAPITAL EXPENDITURES
Automotive Systems Group $ 451.6 $ 549.6 $ 468.8
Controls Group 44.6 71.9 77.9
- --------------------------------------------------------------------------------
Total $ 496.2 $ 621.5 $ 546.7
================================================================================
*The adjusted information is presented as if SFAS No. 142, "Goodwill and Other
Intangible Assets," had been adopted October 1, 1999. Results have been adjusted
to exclude goodwill amortization expense ($70.8 million and $66.5 million in
fiscal years 2001 and 2000, respectively).
The Company has significant sales to the automotive industry. DaimlerChrysler AG
accounted for 14 percent of the Company's net sales in 2002 and 2001 and 16
percent in 2000; Ford Motor Company accounted for 10 percent in 2002, 11 percent
in 2001 and 13 percent in 2000; and General Motors Corporation accounted for 15
percent in 2002 and 14 percent in 2001 and 2000. Approximately 71 percent of the
Company's 2002 net sales to these customers were in North America, 27 percent
were European sales and 2 percent were attributable to sales in other foreign
markets. As of September 30, 2002, the Company had accounts receivable totaling
approximately $1.0 billion from these customers.
GEOGRAPHIC SEGMENTS Financial information relating to the Company's operations
by geographic area is as follows:
In millions
- ------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 2002 2001 2000
- ------------------------------------------------------------------------------
NET SALES
North America $12,236.9 $11,584.1 $11,325.1
Europe 6,098.3 4,913.4 4,799.7
Other foreign 1,768.2 1,929.7 1,029.8
- ------------------------------------------------------------------------------
Total $20,103.4 $18,427.2 $17,154.6
==============================================================================
LONG-LIVED ASSETS (YEAR-END)
North America $ 1,378.5 $ 1,510.3 $ 1,389.1
Europe 826.7 633.6 565.5
Other foreign 240.3 235.9 350.4
- ------------------------------------------------------------------------------
Total $ 2,445.5 $ 2,379.8 $ 2,305.0
==============================================================================
Net sales attributed to geographic locations are based on the location of the
assets producing the sales. Long-lived assets by geographic location consist of
net property, plant and equipment.
16 SUBSEQUENT EVENT
On October 31, 2002, the Company acquired Varta AG's Automotive Battery
Division, a major European automotive battery manufacturer headquartered in
Germany. The Varta Automotive Battery Division (Varta) consists of VARTA
Automotive GmbH and the 80% majority ownership in VB Autobatterie GmbH. The
purchase price, which includes the assumption of debt, was approximately $310
million, subject to closing adjustments, and will be financed with short-term
debt. Management believes the acquisition of Varta gives the Company a leading
market position in Europe.
JOHNSON CONTROLS, INC.
REPORT OF MANAGEMENT
Johnson Controls management has primary responsibility for the Consolidated
Financial Statements and other information included in this annual report and
for ascertaining that the data fairly reflect the Company's financial position
and results of operations. The Company prepared the Consolidated Financial
Statements in accordance with generally accepted accounting principles
appropriate in the circumstances, and such statements necessarily include
amounts that are based on best estimates and judgments with appropriate
consideration given to materiality.
The Company's system of internal control is designated to provide reasonable
assurance that Company assets are safeguarded from loss or unauthorized use or
disposition and that transactions are executed in accordance with management's
authorization and are properly recorded to permit the preparation of financial
statements in accordance with generally accepted accounting principles. This
system is augmented by a careful selection and training of qualified personnel,
a proper division of responsibilities, and dissemination of written policies and
procedures. An internal audit program monitors the effectiveness of this control
system.
The Audit Committee of the Board of Directors consists entirely of directors who
are not employees of the Company. The Audit Committee reviews audit plans,
internal controls, financial reports and related matters and meets regularly
with the internal auditors and independent accountants, both of whom have open
access to the Committee.
PricewaterhouseCoopers LLP, independent accountants, audited the Company's
Consolidated Financial Statements and issued the opinion below.
/s/ John M. Barth
John M. Barth
President and Chief Executive Officer
/s/ Stephen A. Roell
Stephen A. Roell
Senior Vice President and Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Johnson Controls, Inc.
In our opinion, the statements appearing on pages 29 through 45 of this report
present fairly, in all material respects, the financial position of Johnson
Controls, Inc. and its subsidiaries at September 30, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2002, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 4 to the Consolidated Financial Statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," effective October 1, 2001.
/s/ PriceWaterhouseCoopers LLP
Milwaukee, Wisconsin
October 21, 2002
JOHNSON CONTROLS, INC.
FIVE YEAR SUMMARY
In millions, except per share data
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 2002 2001 2000(1) 1999(2) 1998(3)
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
Net sales $ 20,103.4 $ 18,427.2 $ 17,154.6 $ 16,139.4 $ 12,586.8
Operating income (As Reported) $ 1,122.0 $ 961.1 $ 965.0 $ 854.9 $ 664.0
Operating income (Adjusted)* $ 1,122.0 $ 1,031.9 $ 1,031.5 $ 923.3 $ 715.8
Net income (As Reported) $ 600.5 $ 478.3 $ 472.4 $ 419.6 $ 337.7
Net income (Adjusted)* $ 600.5 $ 541.7 $ 531.3 $ 479.6 $ 386.0
Earnings per share (As Reported)
Basic $ 6.71 $ 5.41 $ 5.40 $ 4.78 $ 3.88
Diluted $ 6.35 $ 5.11 $ 5.09 $ 4.48 $ 3.63
Earnings per share (Adjusted)*
Basic $ 6.71 $ 6.14 $ 6.09 $ 5.48 $ 4.46
Diluted $ 6.35 $ 5.79 $ 5.73 $ 5.13 $ 4.16
Return on average shareholders' equity(4) 19% 17% 20% 18% 17%
Capital expenditures $ 496.2 $ 621.5 $ 546.7 $ 514.0 $ 468.3
Depreciation $ 499.4 $ 433.7 $ 385.3 $ 363.2 $ 311.2
Number of employees 111,000 112,000 105,000 95,000 89,000
FINANCIAL POSITION
Working capital $ 140.0 $ (35.7) $ (232.8) $ (418.1) $ (884.2)
Total assets $ 11,165.3 $ 9,911.5 $ 9,428.0 $ 8,614.2 $ 7,942.1
Long-term debt $ 1,826.6 $ 1,394.8 $ 1,315.3 $ 1,283.3 $ 997.5
Total debt $ 1,971.8 $ 1,820.0 $ 1,822.8 $ 1,855.1 $ 2,326.4
Shareholders' equity $ 3,499.7 $ 2,985.4 $ 2,576.1 $ 2,270.0 $ 1,941.4
Total debt to total capitalization 36% 38% 41% 45% 55%
Book value per share $ 38.71 $ 33.43 $ 29.39 $ 26.12 $ 22.53
COMMON SHARE INFORMATION
Dividends per share $ 1.32 $ 1.24 $ 1.12 $ 1.00 $ .92
Market prices
High $ 93.20 $ 81.70 $ 70.81 $ 76.69 $ 61.88
Low $ 64.05 $ 46.44 $ 45.81 $ 40.50 $ 42.19
Weighted average shares (in millions)
Basic 88.4 86.8 85.7 85.1 84.5
Diluted 94.1 93.0 91.9 92.1 91.6
Number of shareholders 57,551 59,701 63,863 64,228 62,828
- ------------------------------------------------------------------------------------------------------------------------------------
* The adjusted information is presented as if SFAS No. 142, "Goodwill and
Other Intangible Assets," had been adopted October 1, 1997. Results have
been adjusted to exclude goodwill amortization expense ($70.8 million,
$66.5 million, $68.4 million and $51.8 million in fiscal years 2001, 2000,
1999 and 1998, respectively) and the related income tax effect, if
applicable.
(1) Amounts presented in the "Financial Position" section include the effect of
the September 1, 2000 acquisition of Ikeda Bussan Co. Ltd. (Ikeda).
Operating results of Ikeda for September 2000, which were not material,
have not been included in the Consolidated Statement of Income or in the
amounts presented in the "Operating Results" section.
(2) Results include a gain on the sale of the Automotive Systems Group's
Industrial Battery Division, net of a loss related to the disposal of a
small Controls Group operation in the United Kingdom, of $54.6 million
($32.5 million or $.38 per basic share and $.35 per diluted share,
after-tax).
(3) Results include a gain on the sale of the Plastics Machinery Division of
$59.9 million ($35.0 million or $.41 per basic share and $.38 per diluted
share, after-tax).
(4) Return on average shareholders' equity (ROE) represents income from
continuing operations divided by average equity. In calculating ROE, income
from continuing operations for 1999 and 1998 exclude the gains on sales of
businesses.
JOHNSON CONTROLS, INC.