- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<Table>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</Table>
COMMISSION FILE NUMBER 1-5097
---------------------
JOHNSON CONTROLS, INC.
(Exact name of registrant as specified in its charter)
<Table>
WISCONSIN 39-0380010
(State of Incorporation) (I.R.S. Employer Identification No.)
</Table>
5757 NORTH GREEN BAY AVENUE, P.O. BOX 591, MILWAUKEE, WI 53201
(Address of principal executive office)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(414) 524-1200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
---------------------
<Table>
<Caption>
CLASS OUTSTANDING AT DECEMBER 31, 2002
----- --------------------------------
Common Stock $.16 2/3 Par Value 88,987,684
</Table>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
JOHNSON CONTROLS, INC.
FORM 10-Q
DECEMBER 31, 2002
REPORT INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION:
Consolidated Statement of Financial Position at December 31, 2002,
September 30, 2002 and December 31, 2001 ............................................3
Consolidated Statement of Income for the Three Month
Periods Ended December 31, 2002 and 2001 ............................................4
Consolidated Statement of Cash Flows for the Three Month
Periods Ended December 31, 2002 and 2001 ............................................5
Notes to Consolidated Financial Statements ............................................6
Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................................15
Quantitative and Qualitative Disclosures About Market Risk ...........................19
Controls and Procedures ..............................................................20
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings ............................................................20
Item 4. Results of Votes of Security Holders .........................................20
Item 6. Exhibits and Reports on Form 8-K .............................................20
SIGNATURES ...............................................................................22
CERTIFICATIONS ........................................................................23-24
2
PART I. - FINANCIAL INFORMATION
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions; unaudited)
December 31, September 30, December 31,
2002 2002 2001
---------------- ----------------- -----------------
ASSETS
Cash and cash equivalents $ 351.6 $ 262.0 $ 261.0
Accounts receivable - net 3,026.3 3,064.3 2,776.9
Costs and earnings in excess of billings on
uncompleted contracts 311.7 333.4 264.1
Inventories 781.2 653.6 659.7
Other current assets 680.3 632.9 636.9
--------- --------- ---------
Current assets 5,151.1 4,946.2 4,598.6
Property, plant and equipment - net 2,613.9 2,445.5 2,446.1
Goodwill - net 2,980.2 2,754.6 2,580.6
Other intangible assets - net 271.4 243.5 255.0
Investments in partially-owned affiliates 366.0 347.4 318.0
Other noncurrent assets 393.4 428.1 301.5
--------- --------- ---------
Total assets $11,776.0 $11,165.3 $10,499.8
========= ========= =========
LIABILITIES AND EQUITY
Short-term debt $ 615.5 $ 105.3 $ 354.4
Current portion of long-term debt 327.9 39.9 45.2
Accounts payable 2,676.3 2,789.1 2,417.4
Accrued compensation and benefits 422.0 506.6 363.2
Accrued income taxes 158.0 182.7 124.4
Billings in excess of costs and earnings
on uncompleted contracts 197.0 190.8 165.3
Other current liabilities 1,092.3 991.8 1,103.8
--------- --------- ---------
Current liabilities 5,489.0 4,806.2 4,573.7
Long-term debt 1,526.5 1,826.6 1,927.4
Postretirement health and other benefits 166.4 170.5 168.5
Minority interests in equity of subsidiaries 212.0 189.0 203.1
Other noncurrent liabilities 718.4 673.3 571.4
Shareholders' equity 3,663.7 3,499.7 3,055.7
--------- --------- ---------
Total liabilities and equity $11,776.0 $11,165.3 $10,499.8
========= ========= =========
The accompanying notes are an integral part of the financial statements.
3
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share data; unaudited)
Three Months
Ended December 31,
-------------------------------------
2002 2001
----------------- -----------------
Net sales $ 5,183.3 $ 4,817.7
Cost of sales 4,433.9 4,141.4
----------- -----------
Gross profit 749.4 676.3
Selling, general and administrative expenses 501.5 437.8
----------- -----------
Operating income 247.9 238.5
Interest income 2.0 3.2
Interest expense (29.1) (32.1)
Equity income 8.3 4.1
Miscellaneous - net (2.4) (3.4)
----------- -----------
Other income (expense) (21.2) (28.2)
----------- -----------
Income before income taxes and minority interests 226.7 210.3
Provision for income taxes 70.4 75.5
Minority interests in net earnings of subsidiaries 15.9 14.9
----------- -----------
Net income $ 140.4 $ 119.9
=========== ===========
Earnings available for common shareholders $ 138.7 $ 117.8
=========== ===========
Earnings per share
Basic $ 1.56 $ 1.35
=========== ===========
Diluted $ 1.48 $ 1.27
=========== ===========
The accompanying notes are an integral part of the financial statements.
4
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions; unaudited)
Three Months
Ended December 31,
-------------------------------
2002 2001
------------- -------------
OPERATING ACTIVITIES
Net income $ 140.4 $ 119.9
Adjustments to reconcile net income to cash provided by operating activities
Depreciation 129.0 119.9
Amortization of intangibles 4.8 4.7
Equity in earnings of partially-owned affiliates, net of dividends received (8.2) (3.1)
Minority interests in net earnings of subsidiaries 15.9 14.9
Deferred income taxes 3.6 10.3
Gain on sale of long-term investment (16.6) -
Other 5.1 (4.8)
Changes in working capital, excluding acquisition of businesses
Receivables 249.8 73.4
Inventories (10.1) 12.1
Other current assets (32.3) 32.9
Accounts payable and accrued liabilities (442.6) (290.2)
Accrued income taxes (28.5) (16.6)
Billings in excess of costs and earnings on uncompleted contracts 3.8 2.8
-------- --------
Cash provided by operating activities 14.1 76.2
-------- --------
INVESTING ACTIVITIES
Capital expenditures (106.6) (94.0)
Sale of property, plant and equipment 6.0 8.0
Acquisition of businesses, net of cash acquired (218.9) (592.0)
Proceeds from sale of long-term investment 38.2 -
Changes in long-term investments - net (2.2) (9.3)
-------- --------
Cash used by investing activities (283.5) (687.3)
-------- --------
FINANCING ACTIVITIES
Increase (decrease) in short-term debt - net 509.6 (48.0)
Increase in long-term debt - 600.5
Repayment of long-term debt (150.3) (43.7)
Payment of cash dividends (5.2) -
Other 4.9 (11.3)
-------- --------
Cash provided by financing activities 359.0 497.5
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 89.6 $ (113.6)
======== ========
The accompanying notes are an integral part of the financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL STATEMENTS
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position,
results of operations, and cash flows for the periods presented. These
condensed financial statements should be read in conjunction with the
audited financial statements and notes thereto contained in the Company's
Annual Report to Shareholders for the year ended September 30, 2002. The
September 30, 2002 Consolidated Statement of Financial Position is
derived from the audited financial statements. The results of operations
for the three-month period ended December 31, 2002 are not necessarily
indicative of the results which may be expected for the Company's 2003
fiscal year because of seasonal and other factors. Certain prior year
amounts have been reclassified to conform to the current year's
presentation.
2. STOCK-BASED COMPENSATION
Effective October 1, 2002, the Company voluntarily adopted the fair value
recognition provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation" and adopted the
disclosure requirements of SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FAS 123." In
accordance with SFAS No. 123, the Company has adopted the fair value
recognition provisions on a prospective basis and accordingly, the
expense recognized in the three-month period ended December 31, 2002
represents a pro rata portion of the 2003 grant (granted November 20,
2002) which is earned over a three-year vesting period.
The following table illustrates the pro forma effect on net income and
earnings per share as if the fair value based method had been applied to
all outstanding and unvested awards in each period:
Three Months
Ended December 31,
-----------------------------
(in millions) 2002 2001
---------- ----------
Net income, as reported $ 140.4 $ 119.9
Add: Stock-based employee compensation
expense included in reported net income, net of related tax
effects 0.5 -
Deduct: Total stock-based employee compensation
expense determined under fair value based method for all awards,
net of related tax effects (3.4) (3.0)
--------- ---------
Pro forma net income $ 137.5 $ 116.9
========= =========
Earnings per share:
Basic - as reported $ 1.56 $ 1.35
========== ==========
Basic - pro forma $ 1.53 $ 1.31
========== ==========
Diluted - as reported $ 1.48 $ 1.27
========== ==========
Diluted - pro forma $ 1.45 $ 1.24
========== ==========
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. EARNINGS PER SHARE
The following table reconciles the numerators and denominators used to
calculate basic and diluted earnings per share:
Three Months
Ended December 31,
-------------------------
(in millions) 2002 2001
------------ ----------
INCOME AVAILABLE TO COMMON SHAREHOLDERS
Net income $140.4 $119.9
Preferred stock dividends, net of tax benefit (1.7) (2.1)
------ ------
Basic income available to common shareholders $138.7 $117.8
====== ======
Net income $140.4 $119.9
Effect of dilutive securities:
Preferred stock dividends, net of tax benefit, and
compensation expense, net of tax benefit, arising
from assumed conversion of preferred stock (0.5) (0.7)
------ ------
Diluted income available to common shareholders $139.9 $119.2
====== ======
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic weighted average shares outstanding 88.9 87.6
Effect of dilutive securities:
Stock options 1.5 1.6
Convertible preferred stock 4.0 4.8
------ ------
Diluted weighted average shares outstanding 94.4 94.0
====== ======
4. 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.
5. ACQUISITION OF BUSINESSES
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. Management believes the acquisition gives the Company a leading
market position in Europe. The purchase price of approximately $375
million, subject to final negotiations, includes the assumption of debt
and was financed with short-term debt. The Company is obtaining
independent appraisals and other valuation studies to allocate the
purchase price to the acquired net assets. Goodwill of $170.9 million has
been assigned to the Automotive Systems Group and may be adjusted as
appraisals and other valuation studies are completed. The Company expects
that the
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
allocation of the purchase price will be completed by the end of the
fiscal year. Pro forma information to reflect this acquisition has not
been disclosed as the impact on net income is not material.
Effective October 1, 2001, the Company completed the acquisitions of the
automotive electronics business of France-based Sagem SA (Sagem) and the
German automotive battery manufacturer Hoppecke Automotive GmbH & Co. KG
(Hoppecke). As part of these acquisitions, restructuring reserves of
approximately $20 million were 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 December 31, 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 December 31, 2002 was
approximately $17 million, and the remaining restructuring activities are
expected to be completed by the end of the fiscal year.
Effective September 1, 2000, the Company completed the acquisition of
approximately 90% of the outstanding shares of Ikeda Bussan Co. Ltd.
(Ikeda), a Japanese supplier of automotive seating. A share exchange to
acquire the remaining shares of Ikeda was completed in the first quarter
of fiscal 2002. As part of this acquisition, a restructuring reserve of
approximately $54 million was recorded. The reserve was established for
expected employee severance costs as the Company eliminates certain
non-core activities to focus on Ikeda's principal seating and interiors
businesses. Seven plants and facilities have been or will be closed as
part of the restructuring plan, with resulting workforce reductions of
approximately 1,000 employees. Through December 31, 2002, approximately
$23 million of employee severance costs associated with the restructuring
plan were paid or incurred, and approximately 510 employees 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 December 31, 2002
totaling approximately $21 million represents remaining severance
payments to be made in accordance with underlying agreements.
6. SALE OF A LONG-TERM INVESTMENT
In the three-month period ended December 31, 2002, the Company recorded a
gain of approximately $17 million related to the conversion and
subsequent sale of its investment in shares of Donnelly Corporation which
was merged with Magna International, effective October 1, 2002. Prior to
the sale, the investment was classified as an available-for-sale security
in the Consolidated Statement of Financial Position at fair value.
Changes in the fair market value were recorded in the other comprehensive
income component of shareholders' equity. As a result of the merger, the
Company's shares in Donnelly Corporation were converted into shares of
Magna International and the unrealized gain on the investment was
recognized in the Consolidated Statement of Income. The Company sold the
shares
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
in Magna International in the first quarter of fiscal 2003 and received
proceeds of approximately $38 million.
7. GOODWILL
The changes in the carrying amount of goodwill for the year ended
September 30, 2002 and for the three months ended December 31, 2002 are
as follows:
Automotive Controls
(in millions) Systems Group Group Total
---------------- ----------------- -----------------
Balance as of September 30, 2002 $2,340.5 $414.1 $2,754.6
Goodwill from a business acquisition 170.9 - 170.9
Currency translation 43.5 5.2 48.7
Other - 6.0 6.0
---------------- ----------------- -----------------
Balance as of December 31, 2002 $2,554.9 $425.3 $2,980.2
================ ================= =================
See Note 5 for discussion of goodwill from a business acquisition during
fiscal year 2003.
8. GUARANTEES
In November 2002, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN 45 requires that upon issuance of a
guarantee, the guarantor must recognize a liability for the fair value of
the obligation it assumes under that guarantee. In addition, FIN 45
requires additional disclosures about the guarantees that an entity has
issued, including a reconciliation of the changes in the entity's product
warranty liabilities (see Note 9) during the reporting period. The
initial recognition and measurement provisions of FIN 45 are applicable
on a prospective basis to guarantees issued or modified after December
31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure
requirements in FIN 45 are effective for financial statements of interim
or annual periods ending after December 15, 2002. The recognition and
measurement provisions of FIN 45 are not expected to have a material
effect on the Company's financial position, results of operations or cash
flows.
At December 31, 2002, the Company had guaranteed certain financial
liabilities, the majority of which relate to debt and lease obligations
of unconsolidated affiliates. The term of each of the guarantees is equal
to the remaining term of the underlying debt or lease, which ranges from
one to two years. Payment by the Company would be required upon default
by the unconsolidated affiliate. The maximum potential amount of future
payments which the Company could be required to make under these
guarantees at December 31, 2002 is $31 million. Additionally, the Company
had guaranteed the residual values of the Company's synthetic leases
associated with the financing of its aircraft. The guarantees extend
through the maturity of each respective underlying lease, the earliest of
which is September 2006. In the event the Company exercised its
option not to purchase the aircraft for the remaining obligations at
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the scheduled maturity of the leases, the Company has guaranteed the
majority of the residual values not to exceed $60 million in aggregate.
9. PRODUCT WARRANTIES
The Company offers warranties to its customers depending upon the
specific product and terms of the customer purchase agreement. The
majority of the Company's product warranties are customer specific. A
typical warranty program requires that the Company replace defective
products within a specified time period from the date of sale. The
Company records an estimate for future warranty related costs based on
actual historical return rates. Based on analysis of return rates and
other factors, the adequacy of the Company's warranty provisions are
adjusted as necessary. While the Company's warranty costs have
historically been within its calculated estimates, it is possible that
future warranty costs could exceed those estimates.
The changes in the carrying amount of the Company's total product
warranty liability for the three months ended December 31, 2002 were as
follows:
(in millions)
Balance at September 30, 2002 $ 57.9
Accruals for warranties issued during the period 7.3
Accruals from business acquisition 4.5
Accruals related to pre-existing warranties (0.7)
(including changes in estimates)
Settlements made (in cash or in kind) during the period (4.4)
Currency translation 0.2
-------
Balance at December 31, 2002 $ 64.8
=======
10. INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method for most inventories at
domestic locations. The cost of other inventories is determined on the
first-in, first-out (FIFO) method. Finished goods and work-in-process
inventories include material, labor and manufacturing overhead costs. The
overall increase in the current quarter is partially due to the inclusion
of Varta at December 31, 2002 (see Note 5). Inventories were comprised of
the following:
December 31, September 30, December 31,
(in millions) 2002 2002 2001
---------------- ----------------- ---------------
Raw materials and supplies $402.1 $361.2 $ 368.0
Work-in-process 105.5 80.4 104.4
Finished goods 303.7 242.5 222.6
---------------- ----------------- ---------------
FIFO inventories 811.3 684.1 695.0
LIFO reserve (30.1) (30.5) (35.3)
---------------- ----------------- ---------------
Inventories $781.2 $653.6 $ 659.7
================ ================= ===============
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. COMPREHENSIVE INCOME
Comprehensive income is defined as the sum of net income and all other
non-owner changes in equity, including foreign currency translation,
unrealized gains and losses on equity securities, realized and unrealized
gains and losses on derivatives and minimum pension liability
adjustments. Comprehensive income for the three months ended December 31,
2002 and 2001 was approximately $178 million and $77 million,
respectively. The difference between comprehensive income and net income
for the periods presented principally represents foreign currency
translation adjustments (CTA). Specifically, in the current quarter CTA
resulted in $45 million of comprehensive income versus a $46 million loss
in the prior year period. Partially offsetting this income in the current
quarter was $11 million related to the realization of a gain resulting
from the Company's investment in Donnelly Corporation, which was acquired
by Magna International on October 1, 2002 (see Note 6).
The Company has foreign-denominated long-term debt and cross-currency
interest rate swaps which are designated as hedges of net investments in
foreign subsidiaries. Gains and losses, net of tax, attributable to these
hedges are deferred in the accumulated other comprehensive income (loss)
account within shareholders' equity. A net loss of approximately $11
million and a net gain of approximately $16 million were recorded for the
three-month periods ending December 31, 2002 and 2001, respectively.
12. FUTURE ACCOUNTING CHANGES
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 this statement will be adopted by the Company for
exit or disposal activities initiated after December 31, 2002. The
Company does not expect that this statement will have a significant
impact on its financial position, result of operations or cash flows.
In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on EITF 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables." EITF 00-21 establishes criteria for whether
revenue on a deliverable can be recognized separately from other
deliverables in a multiple deliverable arrangement. The criteria
considers whether the delivered item has stand-alone value to the
customer, whether the fair value of the delivered item can be reliably
determined and the rights of returns for the delivered item. EITF 00-21
is effective for revenue agreements entered into in fiscal years
beginning after June 15, 2003 with early adoption permitted. The Company
is currently evaluating the impact of EITF 00-21 on its financial
position, results of operations and cash flows.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." This interpretation of Accounting Research Bulletin
No. 51,
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
"Consolidated Financial Statements," addresses consolidation by business
enterprises of variable interest entities. FIN 46 explains the concept of
a variable interest entity and requires consolidation where there is a
controlling financial interest in a variable interest entity or where the
variable interest entity does not have sufficient equity at risk to
finance its activities without additional subordinated financial support
from other parties. This interpretation applies immediately to variable
interest entities created after January 31, 2003, and applies in the
first year or interim period beginning after June 15, 2003 to variable
interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. It is reasonably possible that upon
adoption of FIN 46, certain variable interest entities could be required
to be included in the Company's Consolidated Financial Statements. The
Company is party to a variable interest entity related to the Company's
synthetic lease contracts associated with the financing of the Company's
aircraft. The Company believes the estimated fair market value of the
underlying assets is no less than the remaining lease obligations
totaling approximately $80 million at December 31, 2002. Additionally,
the Company has a variable interest in a partially-owned automotive
entity, currently accounted for under the equity method, for which the
Company had guaranteed debt obligations totaling $14 million at December
31, 2002.
13. SEGMENT INFORMATION
The Company has two operating segments, the Automotive Systems Group and
the Controls Group, which also constitute its reportable segments.
Financial information relating to the Company's reportable segments was
as follows:
Three Months
Ended December 31,
-----------------------------
(in millions) 2002 2001
------------- ------------
Sales
Automotive Systems Group $3,941.4 $3,656.2
Controls Group 1,241.9 1,161.5
-------- --------
Total $5,183.3 $4,817.7
======== ========
Operating Income
Automotive Systems Group $ 196.1 $ 190.7
Controls Group 51.8 47.8
-------- --------
Total $ 247.9 $ 238.5
======== ========
Total assets of the Automotive Systems Group increased by approximately
$700 million in the current quarter to $9.2 billion primarily due to the
acquisition of Varta (see Note 5).
14. INCOME TAXES
The provision for income taxes is determined by applying an estimated
annual effective income tax rate to income before income taxes. The rate
is based on the
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
most recent annualized forecast of pretax income, permanent book/tax
differences and tax credits. It also includes the effect of any valuation
allowance expected to be necessary at the end of the year. In the first
quarter of the current year, the Company's estimated annual effective
income tax rate was reduced to 31.0% from 35.9% in the first quarter of
fiscal 2002. The decline is a result of the Company's current year
implementation of various global tax planning initiatives.
15. CONTINGENCIES
The Company is involved in a number of proceedings and potential
proceedings relating to environmental matters. Although it is difficult
to estimate the liability 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.
13
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Johnson Controls, Inc.
We have reviewed the accompanying consolidated statement of financial position
of Johnson Controls, Inc. and its subsidiaries as of December 31, 2002 and 2001,
and the related consolidated statements of income and cash flows for each of the
three-month periods ended December 31, 2002 and 2001. These interim financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.
We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated statement of financial
position as of September 30, 2002, and the related consolidated statements of
income, shareholders' equity, and cash flows for the year then ended (not
presented herein), and in our report dated October 21, 2002 we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated statement
of financial position as of September 30, 2002, is fairly stated in all material
respects in relation to the consolidated statement of financial position from
which it has been derived.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
February 7, 2003
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31,
2002 AND DECEMBER 31, 2001
The Company achieved record consolidated net sales of $5.2 billion in the first
quarter of fiscal 2003, a rise of 8% over the prior year's $4.8 billion. The
increase is attributable to growth at both of the Company's operating segments
in the first quarter.
Sales from the Automotive Systems Group were up 8% in the first quarter to $3.9
billion compared to $3.7 billion for the same period of fiscal 2002. The
segment's North American sales were approximately level with the prior year.
Stronger demand from the segment's automotive battery customers was offset by
the comparative effect of a seating joint venture that was deconsolidated in the
third quarter of the prior year. European sales rose 25%, primarily due to the
effects of favorable currency translation and the acquisition of Varta effective
October 31, 2002 (see Note 5 to the Consolidated Financial Statements).
Excluding the positive effects of currency translation and the acquisition of
Varta, European sales in the quarter were 3% above the prior year, attributable
to volume increases associated with new and existing interior systems programs.
Automotive segment sales in the Asian and South American markets, which
represent less than 10% of total segment sales, were comparable with the prior
year.
Controls Group sales were $1.2 billion in the first quarter, 7% higher than the
prior year period. North American sales grew 6% reflecting higher volumes of
installed control systems for the new construction market and increased
technical and facility management services. European sales were 11% above the
prior year period primarily resulting from the positive effects of currency
translation and higher volumes. First quarter sales in Asia, which represent
less than 10% of segment revenue, increased 6% compared with the prior year
period, a result of higher technical and facility management services.
Orders for control systems and technical services in the quarter exceeded the
prior year level, primarily in North America and Europe. Specifically, North
American orders for technical services and control systems in the education and
federal government sectors of the existing buildings market were above the prior
year. In Europe, orders for retrofit controls contracts were significantly above
the prior year level, despite the weakness in the European construction market
(see "Backlog").
Consolidated operating income for the first quarter of fiscal 2003 was $248
million, 4% above the prior year's $239 million. Both of the Company's operating
segments reported higher operating earnings in the current quarter.
Automotive Systems Group operating income in the first quarter was $196 million,
a 3% increase over the prior year period. Strong operating performance in North
America and the addition of Varta increased gross profit. These positives were
partially offset by lower gross margins as a percentage of sales in Europe
resulting from additional new program launch costs incurred in the current
period. The segment's operating income was also impacted by higher selling,
general and administrative (SG&A) expenses as a percentage of sales in the first
quarter of fiscal 2003 due to the effects of foreign currency translation,
15
higher healthcare, pension and insurance costs and the increase in European
interiors engineering expenses associated with new vehicle programs.
Controls Group operating income in the first quarter of fiscal 2003 was $52
million, an 8% increase over the prior year quarter. Improved operating results
were achieved worldwide. Increased volumes in North America and Europe led to
improved gross profit percentages in those areas. Lower SG&A expenses as a
percentage of sales also contributed to the increase in earnings.
Management expects full year Automotive Systems Group sales to exceed the prior
year by 5-10%, assuming the North American light vehicle production declines
slightly from 16.3 million vehicles in fiscal 2002 and that European automotive
industry production increases slightly. Segment sales are projected to benefit
from new automotive interiors programs in North America and Europe, the recent
acquisition of Varta and continued growth in domestic automotive battery sales.
Management expects Automotive Systems Group operating margin in fiscal 2003 to
approximate the 2002 level of 5.7%. Operating improvements are expected to be
offset by higher launch costs and higher SG&A expenses reflecting increased
healthcare, pension and insurance costs.
Management anticipates full year Controls Group sales to increase approximately
5% over the prior year. The segment increase is anticipated to be driven by
higher sales of integrated control systems and technical services. Controls
Group operating margin is projected to increase slightly from the 5.1% level in
fiscal 2002.
Net interest expense in the current quarter was down $2 million from the prior
year period, a result of the current period's lower interest rates and lower
average debt levels. First quarter equity income of $8 million was $4 million
over the prior period, primarily attributable to the improvement in earnings at
certain Automotive Systems Group joint ventures in China, as well as in North
America and Europe. Miscellaneous - net expense for the three months ended
December 31, 2002 included a gain of approximately $17 million related to the
conversion and subsequent disposition of the Company's investment in Donnelly
Corporation, which was acquired by Magna International in October 2002 (see Note
6 to the Consolidated Financial Statements). In addition, non-operating legal
and environmental provisions were increased in the current quarter.
The Company's effective income tax rate for the three-month period ended
December 31, 2002 declined to 31.0% from 35.9% for the same period last year,
reflecting the Company's current year implementation of various global tax
planning initiatives.
Minority interests in net earnings of subsidiaries of $16 million was $1 million
more than the comparable amount for the prior year. The increase primarily
relates to the addition of the 80% majority ownership of VB Autobatterie GmbH
and higher earnings at certain Automotive Systems Group joint ventures in North
America.
The Company's first quarter net income of $140 million rose 17% over the prior
year period's net income of $120 million. These strong results were primarily
generated through higher operating income, reduced net interest expense,
increased equity income and a lower effective income tax rate. Diluted earnings
per share for the current quarter were $1.48, compared with $1.27 in the prior
year.
16
COMPARISON OF FINANCIAL CONDITION
Working Capital and Cash Flow
The Company's working capital was a negative $338 million at December 31, 2002,
down $478 million and $363 million compared with working capital at September
30, 2002 and December 31, 2001, respectively. The decreases from the comparable
periods largely reflect the increase in short-term debt and the current portion
of long-term debt at December 31, 2002. The higher short-term debt is due to the
financing of the Varta acquisition and the timing of cash receipts and payments
at the calendar year end. The increase in the current portion of long-term debt
reflects the Company's $250 million variable rate note, due in November 2003.
The Company expects short-term debt, in aggregate, to decline over the remainder
of its fiscal year. Working capital, excluding cash and debt, of $254 million
was $231 million higher than at fiscal year end and $90 million higher than one
year ago. These increases relate to the higher working capital associated with
the Varta acquisition.
Cash provided by operating activities was $14 million in the first quarter of
the current year, down approximately $60 million from the prior year period on a
comparable basis. The decrease was primarily the result of lower accounts
receivable which was more than offset by lower accounts payable and accrued
liabilities and higher other current assets as adjusted for currency translation
and the current year Varta acquisition.
Capital Expenditures
Current quarter capital spending for property, plant and equipment was $107
million compared to $94 million in the prior year's first quarter. The majority
of the spending was attributable to the Automotive Systems Group. Management
expects fiscal 2003 capital expenditures to approximate $550 to $600 million,
primarily related to new products, customer programs, product lines worldwide
and cost reduction projects at the Automotive Systems Group. Controls Group
expenditures are expected to be focused on information and building systems
technology.
Goodwill
Goodwill at December 31, 2002 was $226 million higher than goodwill at September
30, 2002 and $400 million higher than the balance one year ago. In the current
quarter, $170.9 million of goodwill associated with the acquisition of Varta was
recorded. The remainder of the quarter increase is primarily attributable to the
effects of currency translation (see Note 7 to the Consolidated Financial
Statements). The year-over-year increase also includes goodwill recorded in the
purchase of the remaining interest in Yokogawa Johnson Corporation in the third
quarter of fiscal 2002 and the effects from currency translation.
Capitalization
Total capitalization of $6.1 billion at December 31, 2002 included short-term
debt of $616 million, long-term debt (including the current portion) of $1.9
billion and shareholders'
17
equity of $3.7 billion. The Company's total capitalization at September 30, 2002
and December 31, 2001 was $5.5 billion and $5.4 billion, respectively. Total
debt as a percentage of total capitalization at December 31, 2002 was 40%,
compared with 36% at fiscal year-end and 43% one year ago. The current quarter's
increase in the ratio of debt to total capitalization reflects the additional
short-term debt incurred and assumed in financing the acquisition of Varta.
The Company believes its capital resources and liquidity position at December
31, 2002 are adequate to meet projected needs. Requirements for working capital,
capital expenditures, dividends, debt maturities and any acquisitions in fiscal
2003 will continue to be funded from operations, supplemented by long- and
short-term borrowings, if required.
BACKLOG
The Company's backlog relates to the Controls Group's installed control systems
operations, which derive a significant portion of revenue from long-term
contracts that are accounted for using the percentage-of-completion method. At
December 31, 2002, the unearned backlog of installed control systems contracts
(excluding service and integrated facility management) to be executed within the
next year was $1.65 billion, 6% above the one year ago amount of $1.56 billion.
The increase reflects new order growth for retrofit controls contracts in Europe
partially offset by a decline in orders from Japan due to that region's weak
construction market. Orders for installed control systems in North America were
strongest from the healthcare and federal government sectors in the new
construction market and the education and federal government sectors of the
existing buildings market.
FUTURE ACCOUNTING CHANGES
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 this statement will be
adopted by the Company for exit or disposal activities initiated after December
31, 2002. The Company does not expect that this statement will have a
significant impact on its financial position, results of operations or cash
flows.
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on
EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables."
EITF 00-21 establishes criteria for whether revenue on a deliverable can be
recognized separately from other deliverables in a multiple deliverable
arrangement. The criteria considers whether the delivered item has stand-alone
value to the customer, whether the fair value of the delivered item can be
reliably determined and the rights of returns for the delivered item. EITF 00-21
is effective for revenue agreements entered into in fiscal years beginning after
June 15, 2003 with early adoption permitted. The Company is currently evaluating
the impact of EITF 00-21 on its financial position, results of operations and
cash flows.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." This interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," addresses consolidation by business
enterprises of variable interest entities.
18
FIN 46 explains the concept of a variable interest entity and requires
consolidation where there is a controlling financial interest in a variable
interest entity or where the variable interest entity does not have sufficient
equity at risk to finance its activities without additional subordinated
financial support from other parties. This interpretation applies immediately to
variable interest entities created after January 31, 2003, and applies in the
first year or interim period beginning after June 15, 2003 to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. It is reasonably possible that upon adoption of FIN 46,
certain variable interest entities could be required to be included in the
Company's Consolidated Financial Statements. The Company is party to a variable
interest entity related to the Company's synthetic lease contracts associated
with the financing of the Company's aircraft. The Company believes the estimated
fair market value of the underlying assets is no less than the remaining lease
obligations totaling approximately $80 million at December 31, 2002.
Additionally, the Company has a variable interest in a partially-owned
automotive entity, currently accounted for under the equity method, for which
the Company had guaranteed debt obligations totaling $14 million at December 31,
2002.
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
The Company has made forward-looking statements in this document that are
subject to risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future risks and may include words
such as "believes," "expects," "anticipates," "projects" or similar expressions.
For those statements, the Company cautions that numerous important factors,
including industry vehicle production levels, U.S. dollar exchange rates and
those discussed elsewhere in this document and in the Company's Form 8-K filing
(dated November 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company adjusts its portfolio of financial instruments used to manage
foreign exchange exposure over time as its known exposures change. At September
30, 2002, a sensitivity analysis of the Company's exposure to changes in foreign
currencies indicated that a 10% appreciation or depreciation of the currencies
being hedged would result in a hypothetical gain or loss, respectively, of $123
million. The Company's policy prohibits the trading of financial instruments
solely for profit. It is important to note that gains and losses indicated in
the sensitivity analysis would be offset by gains and losses on the underlying
payables, receivables and net investments in foreign subsidiaries that are being
hedged.
A similar analysis at December 31, 2002 indicates that a 10% appreciation or
depreciation would result in a hypothetical gain or loss, respectively, of $160
million. The change from September 30, 2002 is primarily related to additional
foreign currency hedges associated with the Company's acquisition of Varta.
19
There were no other changes in market risk exposures that materially affect the
quantitative and qualitative disclosures presented in the Company's Annual
Report to Shareholders for the year ended September 30, 2002.
CONTROLS AND PROCEDURES
Within the 90 days prior to the filing of this report, the Company's management,
including the Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of disclosure controls and procedures. Based
upon that evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded that such disclosure controls and procedures were effective in
alerting them on a timely basis to material information relating to the Company
required to be included in the Company's periodic filings under the Exchange
Act.
There have been no significant changes in the Company's internal controls, or in
factors that could significantly affect internal controls, subsequent to the
date of the evaluation.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no significant changes in status since the last Report.
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
The registrant held its Annual Meeting of Shareholders on January 22, 2003.
Proxies for the meeting were solicited pursuant to Regulation 14; there was no
solicitation in opposition to management's nominees for directors as listed in
the Proxy Statement, and all such nominees (Dennis W. Archer, John M. Barth,
Paul A. Brunner and Southwood J. Morcott) were elected. Of the 76,401,500 shares
voted, at least 71,557,691 shares granted authority to vote for these directors
and no more than 4,843,809 shares withheld such authority.
The retention of PricewaterhouseCoopers LLP as auditors was approved by the
shareholders with 72,553,890 shares voted for such appointment, 3,209,707 shares
voted against and 637,903 abstained.
The proposal to issue a sustainability report was rejected by the shareholders
with 56,961,270 shares voted against approval, 6,324,216 shares voted for
approval, 3,741,159 shares abstained and a broker non-vote of 9,374,855 shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12 Statement regarding the computation of the ratio of
earnings to fixed charges.
20
99.1 Registrant's Certification of Periodic Report by the
Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Registrant's Certification of Periodic Report by the
Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) The following Form 8-K's were filed from the date of the Company's
Annual Report on Form 10-K, filed December 16, 2002, or thereafter
through the date of this report:
(i) The Company filed a Form 8-K on January 17, 2003 to
disclose the Company's financial results for the
first quarter of fiscal 2003.
(ii) A Form 8-K was filed January 9, 2003 reporting that
the Company confirmed its outlook for record results
for fiscal 2003.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
JOHNSON CONTROLS, INC.
Date: February 7, 2003 By: /s/ Stephen A. Roell
-----------------------
Stephen A. Roell
Senior Vice President and
Chief Financial Officer
22
CERTIFICATIONS
I, John M. Barth, President and Chief Executive Officer of Johnson Controls,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Johnson Controls,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 7, 2003
/s/ John M. Barth
------------------
John M. Barth
President and Chief Executive
Officer
23
CERTIFICATIONS
I, Stephen A. Roell, Senior Vice President and Chief Financial Officer of
Johnson Controls, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Johnson Controls,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 7, 2003
/s/ Stephen A. Roell
-------------------------
Stephen A. Roell
Senior Vice President and
Chief Financial Officer
24