e10vqza
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
10-Q/A
(Amendment No. 1)
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| þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2005
OR
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| o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission
File Number 1-5097
JOHNSON CONTROLS, INC.
(Exact name of registrant as specified in its charter)
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| Wisconsin
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39-0380010 |
| (State of Incorporation)
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|
(I.R.S. Employer Identification No.) |
5757 North Green Bay Avenue, P.O. Box 591, Milwaukee, WI 53201
(Address of principal executive office)
Registrant’s telephone number, including area code: (414) 524-1200
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes þ No o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
the latest practicable date.
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| Class
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Outstanding at March 31, 2005 |
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| Common Stock $.04 1/6 Par Value
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192,037,907 |
JOHNSON CONTROLS, INC.
FORM 10-Q/A
March 31, 2005
REPORT INDEX
2
EXPLANATORY NOTE
This Form 10-Q/A is being filed to amend and restate certain disclosure items related to
segment reporting in the Form 10-Q for the three and six month periods ended March 31, 2005
(the “2005 Second Quarter Form 10-Q”), which was originally filed with the Securities and
Exchange Commission on May 6, 2005. In response to comments raised by the Staff of the
Securities and Exchange Commission, Johnson Controls, Inc. (the Company) is hereby amending
its segment disclosure included in Part I — Financial Information of the Form 10-Q. Revising
the segment disclosure also requires the Company to update additional information that is
disclosed based on the Company’s reportable segments in the notes to the Consolidated
Financial Statements, primarily Note 9 — Goodwill and Other Intangible Assets. In addition,
Note 12 — Income Taxes, Note 13 — Restructuring Costs and Note 15 — Contingencies, were
amended to address additional comments from the Staff of the Securities and Exchange
Commission. Management’s Discussion and Analysis of Financial Condition and Results of
Operations was amended to reflect the revised reportable segments as well as comments from
the Staff requesting additional disclosures or clarification of previously filed disclosures.
The Company has also determined that a control deficiency related to the Company’s reportable
segments giving rise to the restatement constituted a material weakness in our internal
control over financial reporting. We have fully remediated that weakness as of the date of
this report. See Item 4. Controls and Procedures in Part I of this Form 10-Q/A for
additional information.
As the restatement only relates to the disclosure of the Company’s segment information and
certain other disclosures, the previously reported amounts in the Consolidated Statement of
Income, including Net Sales, Operating Income, Net Income and Earnings Per Share were
unchanged. This amendment presents the 2005 Second Quarter Form 10-Q, as amended, in its
entirety, but does not modify or update the disclosure in the 2005 Second Quarter Form 10-Q
in any way other than as required to reflect the changes discussed above and does not reflect
events occurring after the original filing of the 2005 Second Quarter Form 10-Q on May 6,
2005.
3
Part I — FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions, unaudited)
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March 31, |
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September 30, |
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March 31, |
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2005 |
|
2004 |
|
2004 |
ASSETS |
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|
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|
Cash and cash equivalents |
|
$ |
350.2 |
|
|
$ |
169.5 |
|
|
$ |
226.4 |
|
Accounts receivable — net |
|
|
4,346.3 |
|
|
|
3,992.1 |
|
|
|
3,607.4 |
|
Costs and earnings in excess of billings on
uncompleted contracts |
|
|
320.2 |
|
|
|
271.8 |
|
|
|
304.7 |
|
Inventories |
|
|
920.2 |
|
|
|
885.8 |
|
|
|
807.8 |
|
Assets of discontinued operations |
|
|
— |
|
|
|
579.8 |
|
|
|
566.2 |
|
Other current assets |
|
|
970.7 |
|
|
|
774.5 |
|
|
|
802.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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Current assets |
|
|
6,907.6 |
|
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|
6,673.5 |
|
|
|
6,315.4 |
|
|
|
|
|
|
|
|
|
|
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Property, plant and equipment — net |
|
|
3,511.4 |
|
|
|
3,463.5 |
|
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|
3,132.4 |
|
Goodwill — net |
|
|
3,686.9 |
|
|
|
3,578.7 |
|
|
|
3,179.1 |
|
Other intangible assets — net |
|
|
286.8 |
|
|
|
291.0 |
|
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|
264.0 |
|
Investments in partially-owned affiliates |
|
|
278.2 |
|
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|
314.9 |
|
|
|
450.6 |
|
Other noncurrent assets |
|
|
847.4 |
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|
769.2 |
|
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|
783.9 |
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|
|
|
|
|
|
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Total assets |
|
$ |
15,518.3 |
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|
$ |
15,090.8 |
|
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$ |
14,125.4 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
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Short-term debt |
|
$ |
382.4 |
|
|
$ |
813.3 |
|
|
$ |
657.9 |
|
Current portion of long-term debt |
|
|
219.0 |
|
|
|
226.8 |
|
|
|
32.2 |
|
Accounts payable |
|
|
3,731.4 |
|
|
|
3,608.4 |
|
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|
3,445.2 |
|
Accrued compensation and benefits |
|
|
687.8 |
|
|
|
606.2 |
|
|
|
531.5 |
|
Accrued income taxes |
|
|
— |
|
|
|
47.1 |
|
|
|
— |
|
Billings in excess of costs and earnings
on uncompleted contracts |
|
|
233.2 |
|
|
|
197.2 |
|
|
|
205.2 |
|
Liabilities of discontinued operations |
|
|
— |
|
|
|
228.5 |
|
|
|
197.4 |
|
Other current liabilities |
|
|
1,077.4 |
|
|
|
875.6 |
|
|
|
855.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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Current liabilities |
|
|
6,331.2 |
|
|
|
6,603.1 |
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|
5,924.6 |
|
|
|
|
|
|
|
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|
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Long-term debt |
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|
1,664.6 |
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1,630.6 |
|
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|
1,888.9 |
|
Postretirement health and other benefits |
|
|
153.6 |
|
|
|
164.1 |
|
|
|
166.6 |
|
Minority interests in equity of subsidiaries |
|
|
289.7 |
|
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|
267.2 |
|
|
|
242.5 |
|
Other noncurrent liabilities |
|
|
1,387.6 |
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1,219.5 |
|
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1,133.5 |
|
Shareholders’ equity |
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|
5,691.6 |
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5,206.3 |
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4,769.3 |
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Total liabilities and shareholders’ equity |
|
$ |
15,518.3 |
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$ |
15,090.8 |
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$ |
14,125.4 |
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The accompanying notes are an integral part of the financial statements.
4
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CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share data; unaudited) |
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Three Months |
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Six Months |
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Ended March 31, |
|
Ended March 31, |
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2005 |
|
2004 |
|
2005 |
|
2004 |
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Products and systems* |
|
$ |
6,289.8 |
|
|
$ |
5,549.2 |
|
|
$ |
12,306.2 |
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|
$ |
10,978.0 |
|
Services* |
|
|
810.8 |
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|
757.3 |
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|
1,614.8 |
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1,470.8 |
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|
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7,100.6 |
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6,306.5 |
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13,921.0 |
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12,448.8 |
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Cost of sales |
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Products and systems |
|
|
5,588.5 |
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|
4,859.6 |
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|
10,916.1 |
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9,586.2 |
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Services |
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|
661.2 |
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629.1 |
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1,322.8 |
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1,209.4 |
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|
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|
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|
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|
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|
6,249.7 |
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|
5,488.7 |
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|
|
12,238.9 |
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|
10,795.6 |
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Gross profit |
|
|
850.9 |
|
|
|
817.8 |
|
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|
1,682.1 |
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|
1,653.2 |
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|
|
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|
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|
|
|
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Selling, general and administrative expenses |
|
|
580.9 |
|
|
|
575.2 |
|
|
|
1,173.9 |
|
|
|
1,163.1 |
|
Restructuring costs |
|
|
210.0 |
|
|
|
82.4 |
|
|
|
210.0 |
|
|
|
82.4 |
|
Japanese pension gain |
|
|
— |
|
|
|
(84.4 |
) |
|
|
— |
|
|
|
(84.4 |
) |
|
|
|
|
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|
|
|
|
|
|
|
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|
Operating income |
|
|
60.0 |
|
|
|
244.6 |
|
|
|
298.2 |
|
|
|
492.1 |
|
|
|
|
|
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|
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Interest income |
|
|
3.1 |
|
|
|
3.8 |
|
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|
7.5 |
|
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|
5.7 |
|
Interest expense |
|
|
(30.7 |
) |
|
|
(26.8 |
) |
|
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(61.6 |
) |
|
|
(54.0 |
) |
Equity income |
|
|
12.5 |
|
|
|
16.3 |
|
|
|
28.3 |
|
|
|
34.1 |
|
Miscellaneous — net |
|
|
(10.9 |
) |
|
|
(6.2 |
) |
|
|
(15.5 |
) |
|
|
(30.9 |
) |
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Other income (expense) |
|
|
(26.0 |
) |
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(12.9 |
) |
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(41.3 |
) |
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(45.1 |
) |
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Income from continuing operations before income
taxes and minority interests |
|
|
34.0 |
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|
231.7 |
|
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|
256.9 |
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|
447.0 |
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Income tax (benefit) provision |
|
|
(31.9 |
) |
|
|
65.5 |
|
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|
13.8 |
|
|
|
109.8 |
|
Minority interests in net earnings of subsidiaries |
|
|
12.1 |
|
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|
18.7 |
|
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|
33.1 |
|
|
|
34.2 |
|
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|
|
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Income from continuing operations |
|
|
53.8 |
|
|
|
147.5 |
|
|
|
210.0 |
|
|
|
303.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income from discontinued operations, net
of income taxes |
|
|
3.9 |
|
|
|
10.2 |
|
|
|
16.1 |
|
|
|
19.2 |
|
Gain on sale of discontinued operations, net
of income taxes |
|
|
144.8 |
|
|
|
— |
|
|
|
144.8 |
|
|
|
— |
|
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Net income |
|
$ |
202.5 |
|
|
$ |
157.7 |
|
|
$ |
370.9 |
|
|
$ |
322.2 |
|
|
|
|
|
|
|
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|
|
|
|
|
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|
|
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|
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Earnings available for common shareholders |
|
$ |
202.5 |
|
|
$ |
157.7 |
|
|
$ |
370.9 |
|
|
$ |
320.4 |
|
|
|
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Earnings per share from continuing operations |
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Basic |
|
$ |
0.28 |
|
|
$ |
0.78 |
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|
$ |
1.10 |
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|
$ |
1.63 |
|
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Diluted |
|
$ |
0.28 |
|
|
$ |
0.77 |
|
|
$ |
1.08 |
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|
$ |
1.57 |
|
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Earnings per share |
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Basic |
|
$ |
1.06 |
|
|
$ |
0.83 |
|
|
$ |
1.94 |
|
|
$ |
1.73 |
|
|
|
|
|
|
|
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|
Diluted |
|
$ |
1.04 |
|
|
$ |
0.82 |
|
|
$ |
1.91 |
|
|
$ |
1.67 |
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| * |
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Products and systems consist of Seating & Interiors products and systems, Battery Group products and Controls Group
installed systems. Services are Controls Group technical and facility management services. |
| |
| The accompanying notes are an integral part of the financial statements. |
5
JOHNSON CONTROLS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions; unaudited)
| |
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| |
|
Three Months |
|
Six Months |
| |
|
Ended March 31, |
|
Ended March 31, |
| |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
202.5 |
|
|
$ |
157.7 |
|
|
$ |
370.9 |
|
|
$ |
322.2 |
|
Gain and income from discontinued operations |
|
|
(148.7 |
) |
|
|
(10.2 |
) |
|
|
(160.9 |
) |
|
|
(19.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
53.8 |
|
|
|
147.5 |
|
|
|
210.0 |
|
|
|
303.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile income from continuing operations to cash
provided by operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
162.4 |
|
|
|
141.8 |
|
|
|
320.4 |
|
|
|
281.2 |
|
Amortization of intangibles |
|
|
5.6 |
|
|
|
4.5 |
|
|
|
11.6 |
|
|
|
9.4 |
|
Equity in earnings of partially-owned affiliates, net of dividends received |
|
|
(10.6 |
) |
|
|
(16.0 |
) |
|
|
(26.0 |
) |
|
|
(20.4 |
) |
Minority interests in net earnings of subsidiaries |
|
|
12.1 |
|
|
|
18.7 |
|
|
|
33.1 |
|
|
|
34.2 |
|
Deferred income taxes |
|
|
(95.2 |
) |
|
|
45.5 |
|
|
|
(95.6 |
) |
|
|
52.7 |
|
Japanese pension settlement gain |
|
|
— |
|
|
|
(84.4 |
) |
|
|
— |
|
|
|
(84.4 |
) |
Non cash restructuring costs |
|
|
45.8 |
|
|
|
6.6 |
|
|
|
45.8 |
|
|
|
6.6 |
|
Other |
|
|
4.6 |
|
|
|
(14.0 |
) |
|
|
3.3 |
|
|
|
(11.3 |
) |
Changes in working capital, excluding acquisitions and divestitures of businesses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
(481.9 |
) |
|
|
(292.5 |
) |
|
|
(234.2 |
) |
|
|
(125.7 |
) |
Inventories |
|
|
13.9 |
|
|
|
3.3 |
|
|
|
(0.4 |
) |
|
|
13.1 |
|
Other current assets |
|
|
(24.9 |
) |
|
|
(26.6 |
) |
|
|
(65.7 |
) |
|
|
3.9 |
|
Restructuring reserves |
|
|
164.2 |
|
|
|
65.7 |
|
|
|
164.2 |
|
|
|
65.7 |
|
Accounts payable and accrued liabilities |
|
|
397.7 |
|
|
|
295.6 |
|
|
|
114.1 |
|
|
|
(74.8 |
) |
Accrued income taxes |
|
|
(81.9 |
) |
|
|
(10.0 |
) |
|
|
(65.2 |
) |
|
|
33.7 |
|
Billings in excess of costs and earnings on uncompleted contracts |
|
|
16.4 |
|
|
|
(1.4 |
) |
|
|
31.5 |
|
|
|
12.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
|
182.0 |
|
|
|
284.3 |
|
|
|
446.9 |
|
|
|
499.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(149.5 |
) |
|
|
(211.0 |
) |
|
|
(292.0 |
) |
|
|
(408.3 |
) |
Sale of property, plant and equipment |
|
|
3.7 |
|
|
|
9.6 |
|
|
|
7.9 |
|
|
|
18.5 |
|
Acquisition of business, net of cash acquired |
|
|
— |
|
|
|
— |
|
|
|
(33.1 |
) |
|
|
(36.6 |
) |
Proceeds from sale of discontinued operations |
|
|
687.2 |
|
|
|
— |
|
|
|
687.2 |
|
|
|
— |
|
Recoverable customer engineering expenditures |
|
|
(8.7 |
) |
|
|
5.4 |
|
|
|
(12.0 |
) |
|
|
(43.7 |
) |
Changes in long-term investments |
|
|
35.8 |
|
|
|
(7.2 |
) |
|
|
28.2 |
|
|
|
(2.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by investing activities |
|
|
568.5 |
|
|
|
(203.2 |
) |
|
|
386.2 |
|
|
|
(472.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in short-term debt — net |
|
|
(522.7 |
) |
|
|
(61.3 |
) |
|
|
(434.2 |
) |
|
|
506.0 |
|
Increase in long-term debt |
|
|
10.1 |
|
|
|
67.1 |
|
|
|
13.5 |
|
|
|
117.0 |
|
Repayment of long-term debt |
|
|
(21.6 |
) |
|
|
(106.7 |
) |
|
|
(98.3 |
) |
|
|
(530.6 |
) |
Payment of cash dividends |
|
|
(92.1 |
) |
|
|
(79.9 |
) |
|
|
(95.7 |
) |
|
|
(85.3 |
) |
Other |
|
|
8.3 |
|
|
|
23.3 |
|
|
|
19.5 |
|
|
|
30.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used) provided by financing activities |
|
|
(618.0 |
) |
|
|
(157.5 |
) |
|
|
(595.2 |
) |
|
|
37.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used) provided by discontinued operations |
|
|
(22.8 |
) |
|
|
0.2 |
|
|
|
(57.2 |
) |
|
|
26.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
$ |
109.7 |
|
|
|
($76.2 |
) |
|
$ |
180.7 |
|
|
$ |
90.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| 1. |
|
Financial Statements |
| |
| |
|
In the opinion of the Company, the accompanying unaudited condensed 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 Amended Annual
Report on Form 10-K/A for the year ended September 30, 2004. The September 30, 2004
Consolidated Statement of Financial Position is derived from the audited financial
statements, adjusted for discontinued operations (See Note 3). The results of operations for
the three and six month periods ended March 31, 2005 are not necessarily indicative of the
results which may be expected for the Company’s 2005 fiscal year because of seasonal and
other factors. Certain prior period amounts have been reclassified to conform to the current
period’s presentation. |
| |
| 2. |
|
Inventories |
| |
| |
|
Inventories are valued at the lower of cost or market. Cost is determined using the last-in,
first-out (LIFO) method for most inventories at domestic locations. The cost of other
inventories is determined on the first-in, first-out (FIFO) method. Finished goods and
work-in-process inventories include material, labor and manufacturing overhead costs.
Inventories were comprised of the following: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
September 30, |
|
March 31, |
| (in millions) |
|
2005 |
|
2004 |
|
2004 |
Raw materials and supplies |
|
$ |
497.3 |
|
|
$ |
483.8 |
|
|
$ |
449.4 |
|
Work-in-process |
|
|
144.5 |
|
|
|
137.0 |
|
|
|
116.8 |
|
Finished goods |
|
|
306.6 |
|
|
|
292.8 |
|
|
|
268.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIFO inventories |
|
|
948.4 |
|
|
|
913.6 |
|
|
|
834.4 |
|
LIFO reserve |
|
|
(28.2 |
) |
|
|
(27.8 |
) |
|
|
(26.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
$ |
920.2 |
|
|
$ |
885.8 |
|
|
$ |
807.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3. |
|
Discontinued Operations |
| |
| |
|
In February 2005, the Company completed the sale of its engine electronics business, included
in Seating & Interiors – Europe to Valeo for approximately €323 million, or about $427
million. This non-core business was acquired in fiscal 2002 from Sagem SA. The sale of the
engine electronics business resulted in a gain of approximately $90 million ($57 million
after tax), net of related costs. |
| |
| |
|
In March 2005, the Company completed the sale of its Johnson Controls World Services, Inc.
subsidiary (World Services), included in the Controls Group segment, to IAP Worldwide
Services, Inc. for approximately $268 million, of which $260 million was received in the
current period. The remaining proceeds of the sale are expected be received in the third
quarter of fiscal 2005. This non-strategic business was acquired in fiscal 1989 from Pan Am Corporation. The sale of World Services |
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| |
|
resulted in a gain of
approximately $144 million ($88 million after tax), net of related costs and subject to
certain adjustments. |
| |
| |
|
The following summarizes the revenues, expenses and related gain on sale of the discontinued
operations: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Engine Electronics (1) |
|
Johnson Controls World Services, Inc. (2) |
| |
|
Three Months |
|
Six Months |
|
Three Months |
|
Six Months |
| |
|
Ended March 31, |
|
Ended March 31, |
|
Ended March 31, |
|
Ended March 31, |
| (in millions) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net sales |
|
$ |
80.9 |
|
|
$ |
109.4 |
|
|
$ |
199.7 |
|
|
$ |
200.6 |
|
|
$ |
185.3 |
|
|
$ |
204.2 |
|
|
$ |
340.4 |
|
|
$ |
354.8 |
|
Cost of sales |
|
|
72.4 |
|
|
|
93.8 |
|
|
|
172.3 |
|
|
|
169.4 |
|
|
|
175.1 |
|
|
|
187.8 |
|
|
|
318.6 |
|
|
|
328.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
8.5 |
|
|
|
15.6 |
|
|
|
27.4 |
|
|
|
31.2 |
|
|
|
10.2 |
|
|
|
16.4 |
|
|
|
21.8 |
|
|
|
26.8 |
|
Selling, general and
administrative expenses |
|
|
10.1 |
|
|
|
11.5 |
|
|
|
16.8 |
|
|
|
18.8 |
|
|
|
3.7 |
|
|
|
4.2 |
|
|
|
8.1 |
|
|
|
8.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(1.6 |
) |
|
|
4.1 |
|
|
|
10.6 |
|
|
|
12.4 |
|
|
|
6.5 |
|
|
|
12.2 |
|
|
|
13.7 |
|
|
|
18.2 |
|
Miscellaneous — net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.2 |
|
|
|
1.3 |
|
|
|
1.4 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
taxes and minority interests |
|
|
(1.6 |
) |
|
|
4.1 |
|
|
|
10.6 |
|
|
|
12.4 |
|
|
|
7.7 |
|
|
|
13.5 |
|
|
|
15.1 |
|
|
|
19.6 |
|
Provision (benefit) for
income taxes |
|
|
(0.6 |
) |
|
|
1.4 |
|
|
|
3.7 |
|
|
|
4.4 |
|
|
|
3.0 |
|
|
|
5.3 |
|
|
|
5.8 |
|
|
|
7.7 |
|
Minority interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.2 |
) |
|
|
0.7 |
|
|
|
0.1 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
($ |
1.0 |
) |
|
$ |
2.7 |
|
|
$ |
6.9 |
|
|
$ |
8.0 |
|
|
$ |
4.9 |
|
|
$ |
7.5 |
|
|
$ |
9.2 |
|
|
$ |
11.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
($ |
0.01 |
) |
|
$ |
0.01 |
|
|
$ |
0.03 |
|
|
$ |
0.04 |
|
|
$ |
0.03 |
|
|
$ |
0.04 |
|
|
$ |
0.05 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
($ |
0.01 |
) |
|
$ |
0.01 |
|
|
$ |
0.03 |
|
|
$ |
0.04 |
|
|
$ |
0.03 |
|
|
$ |
0.04 |
|
|
$ |
0.05 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from gain on
sale of discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.30 |
|
|
|
— |
|
|
$ |
0.30 |
|
|
|
— |
|
|
$ |
0.46 |
|
|
|
— |
|
|
$ |
0.46 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.29 |
|
|
|
— |
|
|
$ |
0.30 |
|
|
|
— |
|
|
$ |
0.45 |
|
|
|
— |
|
|
$ |
0.45 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Engine Electronics includes revenues and expenses through February 28, 2005, the effective date of the disposition. |
| |
| (2) |
|
World Services includes revenues and expenses through March 30, 2005, the effective date of disposition. |
| |
|
Assets of the engine electronics business as of the disposal date totaled $427 million,
which consisted of goodwill ($154 million), accounts receivable ($100 million), property,
plant and equipment — net ($69 million), other intangible assets — net ($59 million) and
other miscellaneous assets ($45 million). Liabilities of the engine electronics business as
of the disposal date totaled $90 million, which consisted of accounts payable ($82 million)
and other miscellaneous liabilities ($8 million). |
| |
| |
|
Assets of World Services as of the disposal date totaled $178 million, which consisted of
accounts receivable ($127 million), goodwill ($30 million), property, plant and
equipment — net ($10 million) and other miscellaneous assets ($11 million). Liabilities of
World Services as of the disposal date totaled $54 million, which consisted of accounts
payable ($32 million) and other miscellaneous liabilities ($22 million). |
| |
| 4. |
|
Product Warranties |
| |
| |
|
The Company provides warranties to certain of its customers depending upon the specific
product and terms of the customer purchase agreement. Most of the Company’s product
warranties are customer specific. A typical warranty program requires replacement of
defective products within a specified time period from the |
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| |
|
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 warranty provisions are adjusted as
necessary. While warranty costs have historically been within calculated estimates, it is
possible that future warranty costs could exceed those estimates. The Company’s product
warranty liability is included in Other current liabilities in the Consolidated Statement of
Financial Position. |
| |
| |
|
The changes in the carrying amount of total product warranty liability for the six month
period ended March 31, 2005 were as follows: |
| |
|
|
|
|
| (in millions) |
|
|
|
|
Balance as of September 30, 2004 |
|
$ |
65.2 |
|
Accruals for warranties issued during the period |
|
|
21.3 |
|
Accruals related to pre-existing warranties
(including changes in estimates) |
|
|
(1.4 |
) |
Accruals from acquisition |
|
|
0.2 |
|
Settlements made (in cash or in kind) during the period |
|
|
(26.7 |
) |
Currency translation |
|
|
1.7 |
|
|
|
|
|
|
Balance as of March 31, 2005 |
|
$ |
60.3 |
|
|
|
|
|
|
| 5. |
|
Research and Development |
| |
| |
|
Expenditures for research activities relating to product development and improvement are
charged against income as incurred and included within Selling, general and administrative
expenses. Such expenditures amounted to approximately $218 million and $241 million for the
three months ended March 31, 2005 and 2004, respectively. Expenditures of approximately $436
million and $479 million were recorded for the six months ended March 31, 2005 and 2004,
respectively. The lower spending related to research and development is due to the
completion of expenditures associated with prior year launches. |
| |
| |
|
A portion of the costs associated with these activities is reimbursed by customers, and
totaled approximately $105 million and $92 million for the three months ended March 31, 2005
and 2004, respectively, and approximately $180 million and $164 million for the six months
ended March 31, 2005 and 2004, respectively. |
| |
| 6. |
|
Stock-Based Compensation — Stock Options |
| |
| |
|
Effective October 1, 2002, the Company voluntarily adopted the fair value recognition
provisions of 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. 148, the Company has
adopted the fair value recognition provisions on a prospective basis and, accordingly, the
expense recognized in the three and six month period ended March 31, 2005 represents a pro
rata portion of the fiscal 2005, 2004 and 2003 grants which are earned over a three-year
vesting period. |
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| |
|
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 |
|
Six Months |
| |
|
Ended March 31, |
|
Ended March 31, |
| (in millions) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net income, as reported |
|
$ |
202.5 |
|
|
$ |
157.7 |
|
|
$ |
370.9 |
|
|
$ |
322.2 |
|
Add: Stock-based employee
compensation expense
included in reported net income,
net of related tax effects |
|
|
3.3 |
|
|
|
3.7 |
|
|
|
6.7 |
|
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct: Total stock-based employee
compensation expense
determined under the fair value
based method for all
awards, net of related tax effects |
|
|
(3.3 |
) |
|
|
(5.3 |
) |
|
|
(7.5 |
) |
|
|
(10.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
202.5 |
|
|
$ |
156.1 |
|
|
$ |
370.1 |
|
|
$ |
318.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic — as reported |
|
$ |
1.06 |
|
|
$ |
0.83 |
|
|
$ |
1.94 |
|
|
$ |
1.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic — pro forma |
|
$ |
1.06 |
|
|
$ |
0.82 |
|
|
$ |
1.94 |
|
|
$ |
1.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted — as reported |
|
$ |
1.04 |
|
|
$ |
0.82 |
|
|
$ |
1.91 |
|
|
$ |
1.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted — pro forma |
|
$ |
1.04 |
|
|
$ |
0.81 |
|
|
$ |
1.91 |
|
|
$ |
1.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
During December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No.
123R, “Share-Based Payment” (SFAS 123R), which requires companies to measure and recognize
compensation expense for all stock-based payments at fair value. Stock-based payments include
stock option grants and certain transactions under other Company stock plans. The Company
grants options to purchase common stock to some of its employees and directors under various
plans at prices equal to the market value of the stock on the dates the options were granted.
In April 2005, the Securities and Exchange Commission amended the effective date of SFAS 123R
to the first interim period of the first fiscal year beginning after June 15, 2005. The
Company is currently evaluating the impact that the adoption of SFAS 123R will have on its
consolidated financial position, results of operations and cash flows. |
| |
| 7. |
|
Guarantees |
| |
| |
|
The Company has guaranteed the residual value related to the Company aircraft accounted for
as synthetic leases. The guarantees extend through the lease maturity dates of September
2006. In the event the Company exercised its option not to purchase the aircraft for the
remaining obligations at the scheduled maturity of the leases, the Company has guaranteed the
majority of the residual values, not to exceed $53 million in aggregate. The Company has
recorded a liability of approximately $3 million within Other noncurrent liabilities and a
corresponding amount within Other noncurrent assets in the Consolidated Statement of
Financial Position relating to the Company’s obligation under the guarantees. These amounts
are being amortized over the life of the guarantees. |
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| 8. |
|
Earnings Per Share |
| |
| |
|
The following table reconciles the numerators and denominators used to calculate basic and
diluted earnings per share: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months |
|
Six Months |
| |
|
Ended March 31, |
|
Ended March 31, |
| (in millions) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Income Available to Common Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
202.5 |
|
|
$ |
157.7 |
|
|
$ |
370.9 |
|
|
$ |
322.2 |
|
Preferred stock dividends, net of tax benefit |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income available to common shareholders |
|
$ |
202.5 |
|
|
$ |
157.7 |
|
|
$ |
370.9 |
|
|
$ |
320.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
202.5 |
|
|
$ |
157.7 |
|
|
$ |
370.9 |
|
|
$ |
322.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense, net of tax benefit, arising from
assumed conversion of preferred stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income available to common shareholders |
|
$ |
202.5 |
|
|
$ |
157.7 |
|
|
$ |
370.9 |
|
|
$ |
322.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
191.6 |
|
|
|
189.5 |
|
|
|
191.2 |
|
|
|
185.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
2.6 |
|
|
|
3.3 |
|
|
|
2.7 |
|
|
|
3.4 |
|
Convertible preferred stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
194.2 |
|
|
|
192.8 |
|
|
|
193.9 |
|
|
|
192.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common shares |
|
|
0.8 |
|
|
|
0.3 |
|
|
|
0.6 |
|
|
|
0.3 |
|
| 9. |
|
Goodwill and Other Intangible Assets |
| |
| |
|
The changes in the carrying amount of goodwill for the six month period ended September 30,
2004 and the six month period ended March 31, 2005 were as follows: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Seating and |
|
Seating and |
|
Seating and |
|
|
|
|
|
|
| |
|
Interiors |
|
Interiors |
|
Interiors |
|
Battery |
|
Controls |
|
|
| (in millions) |
|
N. America |
|
Europe |
|
Asia |
|
Group |
|
Group |
|
Total |
Balance as of March
31, 2004 |
|
$ |
1,188.8 |
|
|
$ |
1,021.4 |
|
|
$ |
220.1 |
|
|
$ |
311.8 |
|
|
$ |
437.0 |
|
|
$ |
3,179.1 |
|
Goodwill from
business
acquisitions |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
458.0 |
|
|
|
— |
|
|
|
458.0 |
|
Currency translation |
|
|
0.4 |
|
|
|
(1.0 |
) |
|
|
(4.8 |
) |
|
|
(4.7 |
) |
|
|
(0.8 |
) |
|
|
(10.9 |
) |
Other |
|
|
— |
|
|
|
4.3 |
|
|
|
(30.0 |
) |
|
|
(19.9 |
) |
|
|
(1.9 |
) |
|
|
(47.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
September 30, 2004 |
|
|
1,189.2 |
|
|
|
1,024.7 |
|
|
|
185.3 |
|
|
|
745.2 |
|
|
|
434.3 |
|
|
|
3,578.7 |
|
Goodwill from
business
acquisitions |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9.0 |
|
|
|
9.0 |
|
Currency translation |
|
|
0.4 |
|
|
|
59.6 |
|
|
|
13.5 |
|
|
|
13.4 |
|
|
|
14.1 |
|
|
|
101.0 |
|
Other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2.0 |
) |
|
|
0.2 |
|
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March
31, 2005 |
|
$ |
1,189.6 |
|
|
$ |
1,084.3 |
|
|
$ |
198.8 |
|
|
$ |
756.6 |
|
|
$ |
457.6 |
|
|
$ |
3,686.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| |
|
The Company’s other intangible assets, primarily from business acquisitions, are valued
based on independent appraisals and consisted of: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 31, 2005 |
|
September 30, 2004 |
|
March 31, 2004 |
| |
|
Gross |
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
| |
|
Carrying |
|
Accumulated |
|
|
|
|
|
Carrying |
|
Accumulated |
|
|
|
|
|
Carrying |
|
Accumulated |
|
|
| (in millions) |
|
Amount |
|
Amortization |
|
Net |
|
Amount |
|
Amortization |
|
Net |
|
Amount |
|
Amortization |
|
Net |
| |
|
|
|
|
|
|
Amortized intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patented technology |
|
$ |
234.6 |
|
|
$ |
(94.9 |
) |
|
$ |
139.7 |
|
|
$ |
224.5 |
|
|
$ |
(85.0 |
) |
|
$ |
139.5 |
|
|
$ |
219.7 |
|
|
$ |
(77.4 |
) |
|
$ |
142.3 |
|
Unpatented technology |
|
|
32.6 |
|
|
|
(6.0 |
) |
|
|
26.6 |
|
|
|
31.7 |
|
|
|
(4.9 |
) |
|
|
26.8 |
|
|
|
31.8 |
|
|
|
(3.8 |
) |
|
|
28.0 |
|
Customer relationships |
|
|
80.3 |
|
|
|
(6.8 |
) |
|
|
73.5 |
|
|
|
83.9 |
|
|
|
(5.6 |
) |
|
|
78.3 |
|
|
|
72.6 |
|
|
|
(4.2 |
) |
|
|
68.4 |
|
Miscellaneous |
|
|
10.4 |
|
|
|
(8.0 |
) |
|
|
2.4 |
|
|
|
10.8 |
|
|
|
(7.5 |
) |
|
|
3.3 |
|
|
|
10.8 |
|
|
|
(6.8 |
) |
|
|
4.0 |
|
| |
|
|
|
|
|
|
Total amortized
intangible assets |
|
|
357.9 |
|
|
|
(115.7 |
) |
|
|
242.2 |
|
|
|
350.9 |
|
|
|
(103.0 |
) |
|
|
247.9 |
|
|
|
334.9 |
|
|
|
(92.2 |
) |
|
|
242.7 |
|
Unamortized intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
38.4 |
|
|
|
— |
|
|
|
38.4 |
|
|
|
37.1 |
|
|
|
— |
|
|
|
37.1 |
|
|
|
12.4 |
|
|
|
— |
|
|
|
12.4 |
|
Pension asset |
|
|
6.2 |
|
|
|
— |
|
|
|
6.2 |
|
|
|
6.0 |
|
|
|
— |
|
|
|
6.0 |
|
|
|
8.9 |
|
|
|
— |
|
|
|
8.9 |
|
| |
|
|
|
|
|
|
Total unamortized
intangible assets |
|
|
44.6 |
|
|
|
— |
|
|
|
44.6 |
|
|
|
43.1 |
|
|
|
— |
|
|
|
43.1 |
|
|
|
21.3 |
|
|
|
— |
|
|
|
21.3 |
|
| |
|
|
|
|
|
|
Total intangible assets |
|
$ |
402.5 |
|
|
$ |
(115.7 |
) |
|
$ |
286.8 |
|
|
$ |
394.0 |
|
|
$ |
(103.0 |
) |
|
$ |
291.0 |
|
|
$ |
356.2 |
|
|
$ |
(92.2 |
) |
|
$ |
264.0 |
|
| |
|
|
|
|
|
|
| |
|
Amortization of other intangible assets for the six month periods ended March 31, 2005
and 2004 was $12 million and $9 million, respectively. Excluding the impact of any future
acquisitions, the Company anticipates annual amortization of other intangible assets will
average $21 million per year over the next five years. |
| |
| 10. |
|
Comprehensive Income |
| |
| |
|
A summary of comprehensive income is shown below: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months |
|
Six Months |
| |
|
Ended March 31, |
|
Ended March 31, |
| (in millions) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net income |
|
$ |
202.5 |
|
|
$ |
157.7 |
|
|
$ |
370.9 |
|
|
$ |
322.2 |
|
Realized and unrealized gains (losses) on derivatives |
|
|
0.4 |
|
|
|
1.9 |
|
|
|
(4.3 |
) |
|
|
3.1 |
|
Foreign currency translation adjustments |
|
|
(91.4 |
) |
|
|
35.4 |
|
|
|
107.9 |
|
|
|
183.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income |
|
|
(91.0 |
) |
|
|
37.3 |
|
|
|
103.6 |
|
|
|
186.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
111.5 |
|
|
$ |
195.0 |
|
|
$ |
474.5 |
|
|
$ |
508.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
The lower foreign currency translation adjustments (CTA) for the three months ended
March 31, 2005 was primarily due to the approximate 3% decrease in the euro compared to a
flat euro for the same period a year ago. CTA for the six months ended March 31, 2005 was
lower primarily due to the approximate 6% increase in the euro compared to an approximate 8%
increase in the euro for the same period a year ago. |
| |
| |
|
The Company has foreign currency-denominated debt obligations 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 as CTA within the
Accumulated other comprehensive income account. A net gain of approximately $12 million and
a net loss of approximately $6 million were recorded |
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| |
|
for the three month periods ending March
31, 2005 and 2004, respectively. Net losses of approximately $29 million and $45 million were
recorded for the six month periods ending March 31, 2005 and 2004, respectively. |
| |
| 11. |
|
Segment Information (Restated) |
| |
| |
|
In response to comments raised by the Staff of the Securities and Exchange Commission, the
Company is revising its segment disclosure. Revising the segment disclosure also requires
the Company to update additional information that is disclosed based on the Company’s
reportable segments in other notes to the Consolidated Financial Statements, primarily Note 9
— Goodwill and Other Intangible Assets. In addition, Note 12
— Income Taxes, Note 13 —
Restructuring Costs and Note 15 — Contingencies, were amended to address additional comments
from the Staff of the Securities and Exchange Commission. |
| |
| |
|
The Company operates in three primary businesses, the Controls Group, the Seating & Interiors
Group, and the Battery Group. The Controls Group provides facility systems and services
including comfort, energy and security management for the non-residential buildings market.
The Seating & Interiors Group designs and manufactures interior systems and products for
passenger cars and light trucks, including vans, pick-up trucks and sport/crossover vehicles.
The Battery Group designs and manufactures automotive batteries for the replacement and
original equipment markets. |
| |
| |
|
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” (SFAS
131) establishes the standards for reporting information about operating segments in
financial statements. In applying the criteria set forth in SFAS 131, the Company has
determined that it operates in six operating segments, two within the Battery Group are
aggregated under the accounting standard to arrive at the Company’s five reportable segments
for financial reporting purposes. |
| |
| |
|
Management’s evaluation of the performance of the Company’s reportable segments excludes
discontinued operations, significant restructuring costs and other significant non-recurring
gains or losses. Financial information relating to the Company’s reportable segments were as
follows: |
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months |
|
Six Months |
| |
|
Ended March 31, |
|
Ended March 31, |
| (in millions) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls Group |
|
$ |
1,432.5 |
|
|
$ |
1,315.6 |
|
|
$ |
2,809.8 |
|
|
$ |
2,571.9 |
|
Seating & Interiors — North America |
|
|
2,338.2 |
|
|
|
2,208.4 |
|
|
|
4,598.3 |
|
|
|
4,479.9 |
|
Seating & Interiors — Europe |
|
|
2,282.4 |
|
|
|
1,993.2 |
|
|
|
4,433.7 |
|
|
|
3,776.7 |
|
Seating & Interiors — Asia |
|
|
367.9 |
|
|
|
272.6 |
|
|
|
679.4 |
|
|
|
514.8 |
|
Battery Group |
|
|
679.6 |
|
|
|
516.7 |
|
|
|
1,399.8 |
|
|
|
1,105.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,100.6 |
|
|
$ |
6,306.5 |
|
|
$ |
13,921.0 |
|
|
$ |
12,448.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls Group (1) |
|
$ |
51.1 |
|
|
$ |
43.2 |
|
|
$ |
86.7 |
|
|
$ |
91.8 |
|
Seating & Interiors — North America (2) |
|
|
84.6 |
|
|
|
127.9 |
|
|
|
161.1 |
|
|
|
256.2 |
|
Seating & Interiors — Europe (3) |
|
|
59.4 |
|
|
|
18.4 |
|
|
|
85.1 |
|
|
|
14.4 |
|
Seating & Interiors — Asia (4) |
|
|
8.4 |
|
|
|
7.2 |
|
|
|
15.6 |
|
|
|
10.9 |
|
Battery Group (5) |
|
|
66.5 |
|
|
|
45.9 |
|
|
|
159.7 |
|
|
|
116.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
270.0 |
|
|
|
242.6 |
|
|
|
508.2 |
|
|
|
490.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs |
|
|
(210.0 |
) |
|
|
(82.4 |
) |
|
|
(210.0 |
) |
|
|
(82.4 |
) |
Japanese pension gain |
|
|
— |
|
|
|
84.4 |
|
|
|
— |
|
|
|
84.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Operating Income |
|
$ |
60.0 |
|
|
$ |
244.6 |
|
|
$ |
298.2 |
|
|
$ |
492.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Controls Group operating income excludes $51.3 and $13.3 million of
restructuring costs for the three and six months ended March 31, 2005 and 2004,
respectively. |
| |
| (2) |
|
Seating & Interiors — North America operating income excludes $11.9 and $5.1
million of restructuring costs for the three and six months ended March 31, 2005 and
2004, respectively. |
| |
| (3) |
|
Seating & Interiors — Europe operating income excludes $129.6 and $51.1
million of restructuring costs for the three and six months ended March 31, 2005 and
2004, respectively. |
| |
| (4) |
|
Seating & Interiors — Asia operating income excludes $0.4 million of
restructuring costs for the three and six months ended March 31, 2005 and a pension
gain of $84.4 million for the three and six months ended March 31, 2004. |
| |
| (5) |
|
Battery Group operating income excludes $16.8 and $12.9 million of
restructuring costs for the three and six months ended March 31, 2005 and 2004,
respectively. |
| 12. |
|
Income Taxes |
| |
| |
|
The Company’s estimated annualized base effective income tax rate for continuing and
discontinued operations for the three months ended March 31, 2005, declined to 26.5% from
29.0% for the prior year period due to continuing global tax planning initiatives. The
current quarter base effective tax rate benefited from a $69 million tax benefit due to a
change in tax status of a German subsidiary, partially offset by an increase in the tax
valuation allowance of $28 million related to the current period restructuring charges for
which no tax benefit will be received in certain countries (primarily Germany and the United
Kingdom) given the uncertainty of its realization due to restrictive
tax loss rules or a lack of sustained profitability in that country. The Company’s estimated base effective tax rate for the six months ended March 31,
2005, further benefited from an additional $11.5 million tax benefit due to a change in tax
status of a French subsidiary. The change in tax status resulted from a voluntary tax
election that produced a deemed liquidation of the French and German subsidiaries for US
federal income tax purposes. The US shareholder received a tax benefit for the loss from the
decrease in value from the original tax basis of these investments. This election changed the
tax status of the German and French entities from controlled foreign corporations (i.e.
taxable entities) to branches (i.e. flow through entities similar to a |
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| |
|
partnership) for US federal income tax purposes and is thereby reported as a discrete period tax benefit in
accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes”. The prior year
six month period ended March 31, 2004 benefited from a $17 million favorable tax settlement
related to prior periods. |
| |
| |
|
The estimated annualized effective tax rate for income from discontinued operations was 39%
and 35.4% for World Services and the engine electronics business, respectively. These
effective tax rates approximate the local statutory rate adjusted for permanent differences.
The Company’s income taxes for the gain on the sale of discontinued operations resulted in an
effective tax rate of 38.1%. |
| |
| |
|
The Company’s Federal income tax returns and certain foreign income tax returns for fiscal
years 1997-2003 are currently under various stages of audit by the Internal Revenue Service
(IRS) and respective foreign tax authorities. Although the outcome of tax audits is always
uncertain, management believes that its annual tax provisions included amounts sufficient to
pay assessments, if any, which may be proposed by the taxing authorities. Nonetheless, the
amounts ultimately paid, if any, upon resolution of the issues raised by the IRS may differ
materially from the amounts accrued for each year. Company management expects that final
resolution of certain tax audits will occur over the next twelve months. |
| |
| |
|
On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (Act). The
Act creates a temporary incentive for U.S. corporations to repatriate accumulated income
earned abroad by providing an 85 percent dividends received deduction for certain dividends
from controlled foreign operations. The deduction is subject to a number of limitations and,
as of today, uncertainty remains as to how to interpret numerous provisions in the Act. As
such, the Company is not yet in a position to decide on whether, and to what extent, the
Company might repatriate foreign earnings that have not yet been remitted to the U.S. The Act
allows the Company to repatriate an amount up to $560 million, which represents the cumulative
undistributed earnings of foreign subsidiaries subject to the Act. The respective tax
liability if the $560 million was repatriated would be approximately $60 million. The Company
expects to be in a position to finalize its assessment by September 2005. |
| |
| 13. |
|
Restructuring Costs |
| |
| |
|
In the second quarter of fiscal year 2005, the Company executed a restructuring plan (2005
Plan) involving cost structure reduction actions and recorded a $210 million restructuring
charge included in Restructuring costs in the Consolidated Statement of Income. These
restructuring charges include workforce reductions of approximately 3,100 employees within the
Seating & Interiors and the Battery Groups, and 800 employees in the Controls Group. The
charges associated with employee severance and termination benefits are paid over the
severance period granted to each employee and on a lump sum basis when required in accordance
with individual severance agreements. In addition, the 2005 Plan includes eight plant
closures within the Seating & Interiors and the Battery Groups, and four plant closures within
the Controls Group. The write downs of the long-lived assets associated with the plant
closures were determined using a discounted cash flow analysis. The Seating & |
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| |
|
Interiors and
the Battery Groups actions are primarily concentrated in Europe, while the Controls Group
restructuring actions involve activities in both North America and Europe. The Company expects
to incur other related and ancillary costs associated with some of these restructuring
initiatives. These costs are not expected to be material and will be expensed as incurred.
The majority of the restructuring activities are expected to be completed within one year. |
| |
| |
|
The Company recorded the restructuring charge as a result of management’s ongoing review of
the Company’s cost structure, the sharp increase in commodity costs, and the current economic
difficulties facing some of our most significant customers. Company management is continually
analyzing our businesses for opportunities to consolidate
current operations and to locate our facilities in low cost countries in close proximity to
our customers. This ongoing analysis includes the review of our manufacturing, engineering
and purchasing operations as well as our overall company footprint. As a result of the 2005
Plan, the Company anticipates annual savings of approximately $135 million beginning in fiscal
year 2006. |
| |
| |
|
The following table summarizes the Company’s 2005 Plan reserve, included within Other current
liabilities in the Consolidated Statement of Financial Position: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
| |
|
Original |
|
Utilized |
|
March 31, |
| (in millions) |
|
Reserve |
|
Cash |
|
Noncash |
|
2005 |
Employee severance and
termination benefits |
|
$ |
139.3 |
|
|
|
— |
|
|
|
— |
|
|
$ |
139.3 |
|
Write down of long-lived assets (1) |
|
|
45.8 |
|
|
|
— |
|
|
($ |
45.8 |
) |
|
|
— |
|
Other |
|
|
24.9 |
|
|
|
— |
|
|
|
— |
|
|
|
24.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
210.0 |
|
|
|
— |
|
|
($ |
45.8 |
) |
|
$ |
164.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Write down of long-lived assets includes $36.6 million related to the
Seating & Interiors — Europe, $7.1 million related to the Battery Group, and $2.1
million related to the Controls Group. |
| |
|
Included within Other are exit costs related to terminating supply contracts associated
with changes in the Company’s manufacturing footprint and strategies, lease termination costs
and other direct costs of the restructuring plan. |
| |
| |
|
In the second quarter of fiscal year 2004, the Company executed a restructuring plan (2004
Plan) involving cost structure improvement actions and recorded an $82.4 million restructuring
charge included in Restructuring costs in the Consolidated Statement of Income. These charges
primarily related to workforce reductions of approximately 1,500 employees in the Seating &
Interiors and Battery Groups and 470 employees in the Controls Group. In addition, the 2004
Plan called for four plants within the Seating & Interiors Group to be consolidated. Through
March 31, 2005, approximately 1,240 employees from the Seating & Interiors and Battery Groups
and all impacted employees from the Controls Group have been separated from the Company. A
significant portion of the Seating & Interiors and Battery Group actions were concentrated in
Europe. The Controls Group restructuring actions involved activities in both North America
and Europe. The remaining restructuring activities are expected to be completed during fiscal
year 2005. |
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| |
|
The following table summarizes the Company’s 2004 Plan reserve, included within Other current
liabilities in the Consolidated Statement of Financial Position: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at |
|
|
|
|
|
|
|
|
|
Balance at |
| |
|
September 30, |
|
Utilized |
|
March 31, |
| (in millions) |
|
2004 |
|
Cash |
|
Noncash |
|
2005 |
Employee severance and
termination benefits |
|
$ |
41.8 |
|
|
($ |
16.4 |
) |
|
|
— |
|
|
$ |
25.4 |
|
Currency translation |
|
|
(0.4 |
) |
|
|
— |
|
|
$ |
0.5 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
41.4 |
|
|
($ |
16.4 |
) |
|
$ |
0.5 |
|
|
$ |
25.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 14. |
|
Retirement Plans |
| |
| |
|
The components of the Company’s net periodic benefit costs associated with its defined benefit
pension plans and other postretirement health and other benefits are as follows: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Pension |
| |
|
U.S. Plans |
|
Non-U.S. Plans |
|
U.S. Plans |
|
Non-U.S. Plans |
| |
|
Three Months |
|
Three Months |
|
Six Months |
|
Six Months |
| |
|
Ended March 31, |
|
Ended March 31, |
|
Ended March 31, |
|
Ended March 31, |
| (in millions) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Service cost |
|
$ |
16.1 |
|
|
$ |
14.3 |
|
|
$ |
7.2 |
|
|
$ |
7.0 |
|
|
$ |
32.2 |
|
|
$ |
28.6 |
|
|
$ |
14.4 |
|
|
$ |
13.7 |
|
Interest cost |
|
|
22.3 |
|
|
|
20.5 |
|
|
|
9.8 |
|
|
|
9.9 |
|
|
|
44.6 |
|
|
|
41.0 |
|
|
|
19.6 |
|
|
|
19.7 |
|
Employee contributions |
|
|
— |
|
|
|
— |
|
|
|
(0.8 |
) |
|
|
(1.1 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1.6 |
) |
|
|
(2.1 |
) |
Expected return on plan assets |
|
|
(26.0 |
) |
|
|
(26.0 |
) |
|
|
(7.5 |
) |
|
|
(6.7 |
) |
|
|
(52.0 |
) |
|
|
(52.0 |
) |
|
|
(15.0 |
) |
|
|
(13.1 |
) |
Amortization of transitional obligation |
|
|
(0.5 |
) |
|
|
(0.7 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1.0 |
) |
|
|
(1.4 |
) |
|
|
— |
|
|
|
— |
|
Amortization of net actuarial loss |
|
|
4.9 |
|
|
|
2.6 |
|
|
|
1.7 |
|
|
|
0.9 |
|
|
|
9.8 |
|
|
|
5.2 |
|
|
|
3.4 |
|
|
|
1.7 |
|
Amortization of prior service cost |
|
|
0.3 |
|
|
|
0.3 |
|
|
|
(0.1 |
) |
|
|
— |
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
(0.2 |
) |
|
|
— |
|
Recognition of unrealized loss
associated with the transfer of
the Japanese pension obligation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13.9 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
17.1 |
|
|
$ |
11.0 |
|
|
$ |
10.3 |
|
|
$ |
23.9 |
|
|
$ |
34.2 |
|
|
$ |
22.0 |
|
|
$ |
20.6 |
|
|
$ |
33.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Postretirement Health and Other Benefits |
| |
|
Three Months |
|
Six Months |
| |
|
Ended March 31, |
|
Ended March 31, |
| (in millions) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Service cost |
|
$ |
1.4 |
|
|
$ |
1.3 |
|
|
$ |
2.8 |
|
|
$ |
2.6 |
|
Interest cost |
|
|
2.5 |
|
|
|
2.8 |
|
|
|
5.1 |
|
|
|
5.6 |
|
Amortization of net actuarial loss |
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
0.6 |
|
Amortization of prior service cost |
|
|
(0.6 |
) |
|
|
(0.6 |
) |
|
|
(1.2 |
) |
|
|
(1.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
3.5 |
|
|
$ |
3.8 |
|
|
$ |
7.1 |
|
|
$ |
7.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| 15. |
|
Contingencies |
| |
| |
|
The Company is involved in a number of 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. Costs related to such matters were not
material to the periods presented. |
| |
| |
|
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. Costs related to such matters were not material to the periods
presented. |
18
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of Johnson Controls, Inc.
We have reviewed the accompanying condensed consolidated statements of financial position of
Johnson Controls, Inc. and its subsidiaries as of March 31, 2005 and 2004, and the related
consolidated statements of income and cash flows for each of the three- and six-month periods ended
March 31, 2005 and 2004. These interim financial statements are the responsibility of the Company’s
management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight
Board (United States). 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 the
standards of the Public Company Accounting Oversight Board (United
States), 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 the standards of the Public Company Accounting Oversight
Board (United States), the consolidated statement of financial position as of September 30, 2004,
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 November 12, 2004, except for Note
20, as to which the date is August 9, 2005, 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, 2004, is fairly stated
in all material respects in relation to the consolidated statement of financial position from which
it has been derived.
As discussed in Note 11 to the condensed consolidated financial statements, the Company has
restated its segment disclosures for each of the three- and six-month periods ended March 31, 2005
and 2004 to reflect a revision of its reportable segments.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
May 6, 2005, except for Note 11, as to which the date is August 9, 2005
19
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In response to comments raised by the Staff of the Securities and
Exchange Commission, Johnson Controls, Inc. (the Company) has revised its
segment disclosure included in Note 11 to the Consolidated Financial
Statements. Revising the segment disclosure also requires the Company to
update additional information that is disclosed based on the Company’s
reportable segments and Management’s Discussion and Analysis of Financial
Condition and Results of Operations (MD&A). In addition, MD&A was revised
as the result of comments from the Staff requesting additional
disclosures or clarification of previously filed disclosures.
The following MD&A should be read in conjunction with the September 30,
2004 consolidated financial statements and notes thereto, along with the
MD&A included in the Company’s Amended 2004 Annual Report on Form 10-K/A.
Except where noted, the following MD&A excludes the discontinued
operations of the engine electronic business and the Johnson Controls
World Services, Inc. subsidiary (World Services), as discussed in Note 3
to the Consolidated Financial Statements.
Comparison of Operating Results for the Three Month Periods ended March
31, 2005 and 2004
Sales
The Company’s net sales for the three month periods ended March 31, 2005
and 2004 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
% |
| (in millions) |
|
2005 |
|
2004 |
|
change |
Controls Group |
|
$ |
1,432.5 |
|
|
$ |
1,315.6 |
|
|
|
9 |
% |
Seating & Interiors — North America |
|
|
2,338.2 |
|
|
|
2,208.4 |
|
|
|
6 |
% |
Seating & Interiors — Europe |
|
|
2,282.4 |
|
|
|
1,993.2 |
|
|
|
15 |
% |
Seating & Interiors — Asia |
|
|
367.9 |
|
|
|
272.6 |
|
|
|
35 |
% |
Battery Group |
|
|
679.6 |
|
|
|
516.7 |
|
|
|
32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,100.6 |
|
|
$ |
6,306.5 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales in the second quarter of fiscal 2005 were
$7.1 billion, increasing 13% above the prior year period sales of $6.3
billion. Growth was achieved by all segments.
Controls Group
Controls Group sales in the current period were $1.4 billion, 9% above
the $1.3 billion in the prior year period. Excluding the impact of
currency translation, segment sales were up 6% over the prior year.
North American sales were 10% above the prior year. Sales of installed
systems contracts grew 17%, with strong growth in both the systems
renovation and new construction
businesses. Service sales were up 4%, due to strong growth in technical
services volumes and a slight increase in facility management sales.
20
European sales were 8% higher than the prior year with increases in the
systems renovation and service and facility management businesses, but
continued to remain relatively flat in the new construction market.
Excluding the positive effects of currency translation, segment sales in
Europe were approximately 3% higher than the prior year.
Sales in the rest of the world, which represent less than 10% of segment
revenue, were slightly above the prior year, primarily attributable to
increases in Japan and the favorable impact of currency translation.
Seating & Interiors — North America
Seating & Interiors — North America sales in the second quarter of fiscal
2005 increased 6% to $2.3 billion in the current year versus the prior
year period of $2.2 billion due primarily to new business awards and a
favorable mix of vehicle sales compared to the estimated 1% decrease in
the industry’s domestic vehicle production.
Seating & Interiors — Europe
Seating & Interiors — Europe sales in the second quarter of fiscal 2005
increased 15% to $2.3 billion in the current year compared to the prior
year of $2.0 billion. Excluding the impact of currency translation,
European sales were up 9%. The growth was primarily attributable to new
contract awards in the current year. This increase was favorable to the
estimated slight decrease in the European industry vehicle production.
Seating & Interiors — Asia
Seating & Interiors — Asia sales increased 35% in comparison to the prior
year, due to higher volumes across all regions and the favorable impact
of currency translation. Excluding the impact of currency translation,
Asian sales were up 32% versus the prior year.
Battery Group
Automotive battery sales increased 32% compared to the second quarter of
the prior year primarily due to the acquisition of the remaining interest
in the Company’s Latin American battery joint venture in the fourth
quarter of fiscal 2004, which added sales of $74 million. Excluding the
impact of the acquisition and the positive effect of foreign currency
exchange, automotive battery sales increased 15% primarily due to the
pass through of higher lead costs and higher unit volumes.
21
Operating Income
The Company’s operating income for the three month periods ended March
31, 2005 and 2004 was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
% |
| (in millions) |
|
2005 |
|
2004 |
|
change |
Controls Group (1) |
|
$ |
51.1 |
|
|
$ |
43.2 |
|
|
|
18 |
% |
Seating & Interiors — North America (2) |
|
|
84.6 |
|
|
|
127.9 |
|
|
|
-34 |
% |
Seating & Interiors — Europe (3) |
|
|
59.4 |
|
|
|
18.4 |
|
|
|
223 |
% |
Seating & Interiors — Asia (4) |
|
|
8.4 |
|
|
|
7.2 |
|
|
|
17 |
% |
Battery Group (5) |
|
|
66.5 |
|
|
|
45.9 |
|
|
|
45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
270.0 |
|
|
$ |
242.6 |
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs |
|
|
(210.0 |
) |
|
|
(82.4 |
) |
|
|
|
|
Japanese pension gain |
|
|
— |
|
|
|
84.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income |
|
$ |
60.0 |
|
|
$ |
244.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Controls Group operating income excludes $51.3 and
$13.3 million of restructuring costs for the three months ended
March 31, 2005 and 2004, respectively. |
| |
| (2) |
|
Seating & Interiors — North America operating income
excludes $11.9 and $5.1 million of restructuring costs for the three
months ended March 31, 2005 and 2004, respectively. |
| |
| (3) |
|
Seating & Interiors — Europe operating income excludes
$129.6 and $51.1 million of restructuring costs for the three months
ended March 31, 2005 and 2004, respectively. |
| |
| (4) |
|
Seating & Interiors — Asia operating income excludes
$0.4 million of restructuring costs for the three months ended March
31, 2005 and a pension gain of $84.4 million for the three
months ended March 31, 2004. |
| |
| (5) |
|
Battery Group operating income excludes $16.8 and
$12.9 million of restructuring costs for the three months ended
March 31, 2005 and 2004, respectively. |
Consolidated operating income for the first quarter of fiscal 2005
was $60 million, down from the prior year’s operating income of $245
million. Impacting the current quarter’s operating income was $210
million of restructuring costs. The prior year period included $82
million of restructuring costs and an $84 million Japanese pension gain.
Excluding the restructuring costs and the Japanese pension gain,
consolidated operating income was $270 million up 11% from the prior year
amount of $243 million.
Controls Group
Controls Group operating income in the second quarter increased $8
million (excluding $51 million of restructuring costs) from the prior
period operating income of $43 million (excluding $13 million in
restructuring costs). The increase was due to higher gross profits in
both North America and Europe, which were partially offset by higher SG&A
expenses. North American gross profits increased primarily due to strong
growth in higher margin systems and services business compared to the
growth in lower margin facility management sales. Both North America and
European results benefited from operational and process efficiency
improvements within the branch network. SG&A increased primarily due to
an acquisition that added $8 million of expense to the period.
Seating & Interiors — North America
Seating & Interiors — North America operating income was $85 million
(excluding $12 million of restructuring costs), compared to the prior
period operating income of $128 million (excluding $5 million of
restructuring costs). The decrease was primarily due to continued price
reductions, material cost increases, and unfavorable mix compared to
22
industry production, partially offset by operational cost savings and
lower engineering expenses.
Lower sales mix of mature vehicle programs and sales price reductions
under long term agreements with the Company’s customers exceeded cost
reductions and operational efficiencies by $36 million in the period.
The lower sales mix of mature vehicle programs negatively impacted
results as these sales typically deliver more favorable margins due to
operational efficiencies and cost reductions that are implemented
throughout the vehicle life cycle. In contrast, new vehicle programs
require significant engineering and start up costs thereby reducing
margins at the onset of the program. Annual price reduction renewal
negotiations during the period yielded terms consistent with prior
agreements. It should be noted that price reduction commitments are
often made in the context of broader customer negotiations on several
factors, including volume, potential new business opportunities and
geographic expansion.
The segment experienced commodity cost increases, primarily steel, resin
and chemicals, of approximately $31 million compared to the prior year.
The Company continues to address the rising commodity costs in the region
through negotiations with both its customers and suppliers.
The Company expects the commodity cost pressures to continue in the third
and fourth quarter of 2005, with increased pressure from Tier 2 and Tier
3 suppliers partially offset by the Company’s direct purchase
initiatives. The Company intends to modify the duration and terms of its
direct buy material contracts to address potential future increases.
SG&A expenses decreased $24 million in the period primarily due to lower
net engineering expenses.
Seating & Interiors — Europe
Seating & Interiors — Europe operating income was $59 million (excluding
$130 million of restructuring costs), compared to the prior period
operating income of $18 million (excluding $51 million of restructuring
costs). The $41 million increase ($36 million increase excluding the
positive effects of foreign currency translation) was due to increased
volumes of higher margin interior systems and improved launch execution
and reduced engineering expense, partially offset by price reductions and
commodity cost increases. The current period also benefited from a lower
number of new vehicle launches compared to the prior year.
Implemented cost reductions, operational efficiencies and the higher
sales mix of mature vehicle programs exceeded incremental sales price
reductions by approximately $30 million in the period. Annual sales
price reduction renewal negotiations during the period yielded terms
consistent with prior agreements.
The incremental effect of commodity costs totaled approximately $7
million in the period. The increases were less than those incurred in
North America due to the timing of contract renewals and variations in
certain terms of the agreements and higher commercial recoveries. SG&A
expenses decreased approximately $13 million compared to the prior period
primarily due to lower net engineering expenses.
23
Seating & Interiors — Asia
Seating & Interiors — Asia operating income in the second quarter of
fiscal 2005 increased $1 million to $8 million from $7 million for the
prior period. The increase was primarily due to higher sales mix of
mature vehicle programs and currency translation.
Battery Group
Automotive battery operating income increased $21 million to $67 million,
a 45% compared to the second quarter of the prior year. The increase was
primarily due to the acquisition of the remaining interest in the
Company’s Latin American battery joint venture in the fourth quarter of
fiscal 2004, which added $7 million of operating income in the period,
offset by higher commodity costs of approximately $7 million.
Higher unit volume and the benefits of European integration activities
also contributed to the increased operating income experienced by the
segment.
Restructuring Costs
In the second quarter of fiscal year 2005, the Company executed a
restructuring plan (2005 Plan) involving cost structure reduction actions
and recorded a $210 million restructuring charge included in
Restructuring costs in the Consolidated Statement of Income. These
restructuring charges include workforce reductions of approximately 3,100
employees within the Seating & Interiors and the Battery Groups, and 800
employees in the Controls Group. The charges associated with employee
severance and termination benefits are paid over the severance period
granted to each employee and on a lump sum basis when required in
accordance with individual severance agreements. In addition, the 2005
Plan includes eight plant closures within the Seating & Interiors and the
Battery Groups, and four plant closures within the Controls Group. The
write downs of the long-lived assets associated with the plant closures
were determined using a discounted cash flow analysis. The Seating &
Interiors and the Battery Groups’ actions are primarily concentrated in
Europe, while the Controls Group restructuring actions involve activities
in both North America and Europe. The Company expects to incur other
related and ancillary costs associated with some of these restructuring
initiatives. These costs are not expected to be material and will be
expensed as incurred. The majority of the restructuring activities are
expected to be completed within one year.
The Company recorded the restructuring charge as a result of management’s
ongoing review of the Company’s cost structure, the sharp increase in
commodity costs, and the current economic difficulties facing some of our
most significant customers. Company management is continually analyzing
our businesses for opportunities to consolidate current operations and to
locate our facilities in low cost countries in close proximity to our
customers. This ongoing analysis includes the review of our
manufacturing, engineering and purchasing operations as well as our
overall company footprint. As a result of the 2005 Plan, the Company
anticipates annual savings of approximately $135 million beginning in
fiscal year 2006.
The following table summarizes the Company’s 2005 Plan reserve, included
within Other current liabilities in the Consolidated Statement of
Financial Position:
24
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
| |
|
Original |
|
Utilized |
|
March 31, |
| (in millions) |
|
Reserve |
|
Cash |
|
Noncash |
|
2005 |
Employee severance and
termination benefits |
|
$ |
139.3 |
|
|
|
— |
|
|
|
— |
|
|
$ |
139.3 |
|
Write down of long-lived assets (1) |
|
|
45.8 |
|
|
|
— |
|
|
($ |
45.8 |
) |
|
|
— |
|
Other |
|
|
24.9 |
|
|
|
— |
|
|
|
— |
|
|
|
24.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
210.0 |
|
|
|
— |
|
|
($ |
45.8 |
) |
|
$ |
164.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Write down of long-lived assets includes $36.6
million related to the Seating & Interiors — Europe, $7.1 million
related to the Battery Group, and $2.1 million related to the
Controls Group. |
Included within Other are exit costs related to terminating supply
contracts associated with changes in the Company’s manufacturing
footprint and strategies, lease termination costs and other direct costs
of the restructuring plan.
In the second quarter of fiscal year 2004, the Company executed a
restructuring plan (2004 Plan) involving cost structure improvement
actions and recorded an $82.4 million restructuring charge included in
Restructuring costs in the Consolidated Statement of Income. These
charges primarily related to workforce reductions of approximately 1,500
employees in the Seating & Interiors and Battery Groups and 470 employees
in the Controls Group. In addition, the 2004 Plan called for four plants
within the Seating & Interiors Group to be consolidated. Through March
31, 2005, approximately 1,240 employees from the Seating & Interiors and
Battery Groups and all impacted employees from the Controls Group have
been separated from the Company. A significant portion of the Seating &
Interiors and Battery Group actions were concentrated in Europe.
The Controls Group restructuring actions involved activities in both North
America and Europe. Approximately $10 million of the reserve was utilized in the
current quarter ended March 31,2005. The remaining restructuring activities are expected
to be completed during fiscal year 2005.
Other Income/Expense
Net interest expense increased from the prior year period primarily as a
result of higher interest rates in the current period. Equity income for
the three months ended March 31, 2005 decreased approximately $4 million
compared to the prior year period primarily due to lower earnings at
certain Seating & Interiors joint ventures in China. Miscellaneous – net
expense in the current quarter increased approximately $5 million from
the prior year period as a result of foreign currency losses in the
current period compared to foreign currency gains in the prior period.
Provision for Income Taxes
The Company’s estimated base effective income tax rate for continuing and
discontinued operations for the three month period ended March 31, 2005
declined to 26.5% from 29.0% for the prior year due to continuing global
tax planning initiatives. The Company benefited in the current quarter
from a $69 million tax benefit due to a change in tax status of a German
subsidiary, partially offset by an increase in the tax valuation
allowance of $28 million related to the current period restructuring
charges for which no tax benefit will be received in certain countries
(primarily German and the United Kingdom) given the uncertainty of
its realization due to restrictive tax loss rules or a lack of
sustained profitability in that country. The change in tax status
resulted from a voluntary tax election that produced a deemed liquidation
of the German subsidiary for US federal income tax purposes. The US
shareholder received a tax benefit for the loss from the decrease in
value from the original tax basis of this investment. This election
changed the tax status of the German
25
entity from a controlled foreign
corporation (i.e. taxable entity) to a branch (i.e. flow through entity
similar to a partnership) for US federal income tax purposes and is
thereby reported as a discrete period
tax benefit in accordance with the provisions of SFAS No. 109,
“Accounting
for Income Taxes”. The estimated annualized effective tax rate for income
from discontinued operations was 39% and 35.4% for World Services and the
engine electronics business, respectively. These effective tax rates
approximate the local statutory rate adjusted for permanent differences.
Minority Interests in Net Earnings of Subsidiaries
Minority interests in net earnings of subsidiaries in the current quarter
decreased from the prior year. The decrease was primarily due to lower
earnings at certain Seating & Interiors joint ventures in North America.
Income from Continuing Operations
Income from continuing operations for the three months ended March 31,
2005 was $54 million, $94 million lower than prior period’s $148 million.
The decreased earnings were a result of the current year restructuring
charge of $210 million compared to the prior year charge of $82 million
and an $84 million Japanese pension gain in the prior year period,
partially offset by higher gross profit and an income tax benefit in the
current year compared to a provision in the prior year period. The
income tax benefit includes a $69 million tax benefit associated with a
change in tax status of a foreign subsidiary in the current period,
partially offset by an increase in the tax valuation allowance of $28
million related to the current period restructuring charges for which no
tax benefit will be received in certain countries. Diluted earnings per
share from continuing operations for the three months ended March 31,
2005 were $0.28, compared to the prior year period of $0.77.
Comparison of Operating Results for the Six Month Periods ended March 31,
2005 and March 31, 2004
Sales
The Company’s consolidated net sales for the six month periods ended
March 31, 2005 and 2004 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
% |
| (in millions) |
|
2005 |
|
2004 |
|
change |
Controls Group |
|
$ |
2,809.8 |
|
|
$ |
2,571.9 |
|
|
|
9 |
% |
Seating & Interiors — North America |
|
|
4,598.3 |
|
|
|
4,479.9 |
|
|
|
3 |
% |
Seating & Interiors — Europe |
|
|
4,433.7 |
|
|
|
3,776.7 |
|
|
|
17 |
% |
Seating & Interiors — Asia |
|
|
679.4 |
|
|
|
514.8 |
|
|
|
32 |
% |
Battery Group |
|
|
1,399.8 |
|
|
|
1,105.5 |
|
|
|
27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
13,921.0 |
|
|
$ |
12,448.8 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales in the first six months of the current year
reached $13.9 billion, 12% higher than the prior year’s $12.4 billion.
Excluding the impact of currency translation, current year sales grew 9%
over the prior year.
26
Controls Group
Sales in the first six months of fiscal 2005 reached $2.8 billion, a 9%
increase over the prior year’s $2.6 billion. Sales grew 4% excluding the
positive impact of currency translation and acquisitions.
Sales in North America were up 9% over the first half of the prior year.
Sales growth was achieved across all major lines of business. Sales of
installed systems increased 10%, reflecting growth in both the new
construction and existing buildings markets. Sales of technical and
facility management services were up 8%, primarily due to growth in
technical services.
Excluding the positive effects of currency translation, sales in Europe
increased 4% in comparison to the prior year period. The increase is
primarily attributed to strength in the existing building and facility
management markets.
Sales in the rest of the world, which represent less than 10% of segment
revenue, were above the prior year, primarily attributable to higher
volumes in Japan and the favorable impact of currency translation.
Seating & Interiors — North America
Seating & Interiors — North America sales increased 3% above the prior
year, despite the decline in domestic vehicle production in the period.
The slight increase reflects new business and involvement in platforms
where demand year-over-year was above the industry average.
Seating & Interiors — Europe
Seating & Interiors— Europe sales increased 17% above the prior year
amount of $3.8 billion. Excluding the impact of currency translation,
European segment sales for the six months ended March 31, 2005 grew 10%
above the prior year period. Despite the slight decrease in the European
light vehicle production during the first half of fiscal 2005, sales
increased 10% due primarily to new contract awards.
Seating & Interiors — Asia
Seating & Interiors — Asia sales increased 32% percent to $679 million
from the prior years $515 million. The increase in sales is due to
higher volumes across all major regions and the favorable impact of
foreign currency translation.
Battery Group
Battery Group sales increased 27% to $1.4 billion from the prior years
$1.1 billion. North American battery sales increased 34% from the prior
year period, reflecting the acquisition of the Company’s remaining
interest in the Latin American battery joint venture in the fourth
quarter of fiscal year 2004. Excluding the effect of the acquisition
that added approximately $150 million, battery sales increased 13%
compared to the prior year period primarily due to the pass through of
higher lead costs and higher unit volumes. European battery sales,
excluding the favorable impact of foreign currency translation, increased
9% over the prior year period primarily due the pass through of higher
lead costs and higher unit volumes.
27
Operating Income
The Company’s operating income for the six month periods ended March 31,
2005 and 2004 was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
% |
| (in millions) |
|
2005 |
|
2004 |
|
change |
Controls
Group(1) |
|
$ |
86.7 |
|
|
$ |
91.8 |
|
|
|
-6 |
% |
Seating
& Interiors — North America(2) |
|
|
161.1 |
|
|
|
256.2 |
|
|
|
-37 |
% |
Seating
& Interiors — Europe(3) |
|
|
85.1 |
|
|
|
14.4 |
|
|
|
* |
|
Seating
& Interiors — Asia(4) |
|
|
15.6 |
|
|
|
10.9 |
|
|
|
43 |
% |
Battery
Group(5) |
|
|
159.7 |
|
|
|
116.8 |
|
|
|
37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
508.2 |
|
|
$ |
490.1 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs |
|
|
(210.0 |
) |
|
|
(82.4 |
) |
|
|
|
|
Japanese pension gain |
|
|
— |
|
|
|
84.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income |
|
$ |
298.2 |
|
|
$ |
492.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
|
Metric not meaningful. |
| |
| (1) |
|
Controls Group operating income excludes $51.3 and $13.3
million of restructuring costs for the six months ended March 31, 2005 and
2004, respectively. |
| |
| (2) |
|
Seating & Interiors — North America operating income
excludes $11.9 and $5.1 million of restructuring costs for the six
months ended March 31, 2005 and 2004, respectively. |
| |
| (3) |
|
Seating & Interiors — Europe operating income excludes
$129.6 and $51.1 million of restructuring costs for the six months
ended March 31, 2005 and 2004, respectively. |
| |
| (4) |
|
Seating & Interiors — Asia operating income excludes $0.4
million of restructuring costs for the six months ended March 31, 2005
and a pension gain of $84.4 million for the six months ended
March 31, 2004. |
| |
| (5) |
|
Battery Group operating income excludes $16.8 and $12.9
million of restructuring costs for the six months ended March 31, 2005
and 2004, respectively. |
Consolidated operating income for the first six months of fiscal
2005 was $298 million, down from the prior year’s $492 million. Included
in the current six month period’s operating income was $210 million of
restructuring costs, compared to the prior year six month period which
included $82 million of restructuring costs and an $84 million Japanese
pension gain.
Controls Group
Controls Group operating income was $87 million (excluding $51 million of
restructuring costs) for the first six months of fiscal 2005, down $5
million from the prior period operating income of $92 million (excluding
$13 million of restructuring costs). The decrease was due to North
American SG&A expenses, which were partially offset by higher gross
profits in both North America and Europe. North American gross profit
increased primarily due to strong growth in systems and technical
services business compared to the growth in lower margin facility
management sales and realization of benefits from operational and process
efficiency improvements within the branch network. European gross
profits were also higher due to cost reductions and higher facility
management sales. Higher SG&A expenses in North America were primarily
due to an acquisition in the first quarter of fiscal year 2005, which
added approximately $16 million in expense.
Seating & Interiors — North America
Seating & Interiors — North America operating income was $161 million
(excluding $12 million of restructuring costs), compared to the prior
period operating income of $256
28
million (excluding $5 million of
restructuring costs). The decrease of $95 million was primarily due to
continued price reductions, material cost increases, and unfavorable mix
compared to industry production, partially offset by operational cost
savings and lower engineering expenses.
Lower sales mix of mature vehicle programs and sales price reductions
under long term agreements with the Company’s customers exceeded cost
reductions and operational efficiencies by $79 million in the period.
The lower sales mix of mature vehicle programs negatively impacted
results as these sales typically deliver more favorable margins due to
operational efficiencies and cost reductions that are implemented
throughout the vehicle life cycle. In contrast, new vehicle programs
require significant engineering and start up costs thereby reducing
margins at the onset of the program. Annual price reduction renewal
negotiations during the period yielded terms consistent with prior
agreements. It should be noted that price reduction commitments are
often made in the context of broader customer negotiations on several
factors, including volume, potential new business opportunities and
geographic expansion.
The segment experienced commodity cost increases, primarily steel, resin
and chemicals, of approximately $67 million compared to the prior year.
The Company continues to address the rising commodity costs in the region
through negotiations with both its customers and suppliers. In order to
address future increases, the Company intends to modify the duration and
terms of its direct material buy contracts. The Company expects these
commodity cost pressures on gross profit to continue in the third and
fourth quarter of fiscal 2005, with increased pressure from Tier 2 and
Tier 3 suppliers partially offset by the Company’s direct purchase
initiatives.
SG&A expenses decreased $51 million in the period primarily due to lower
net engineering expenses.
Seating & Interiors — Europe
Seating & Interiors — Europe operating income was $85 million (excluding
$130 million of restructuring costs), compared to the prior period
operating income of $14 million (excluding $51 million of restructuring
costs) due to increased volumes of higher margin interior systems,
improved launch efficiencies, fewer overall launches, and operational
improvements that more than offset the price and commodity pressures.
Excluding the positive effects of currency translation, operating income
increased $64 million.
Implemented cost reductions, operational efficiencies and the higher
sales mix of mature vehicle programs exceeded the incremental sales price
reductions by approximately $48 million in the period. Annual sales
price reduction renewal negotiations during the period yielded terms
consistent with prior agreements.
The incremental effect of commodity costs totaled approximately $11
million in the period. The increases were less than those incurred in
North America due to the timing of the contract renewals and variations
in certain terms of the agreements. SG&A expenses declined approximately
$27 million primarily due to lower net engineering expenses.
Seating & Interiors — Asia
Seating & Interiors — Asia operating income increased 43 percent in
comparison to the prior year, due to higher volumes across all regions
and the favorable impact of currency translation.
29
Battery Group
Automotive battery operating income increased 37 percent compared to the
second quarter of the prior year primarily due to the acquisition of the
remaining interest in the Company’s Latin American battery joint venture
in the fourth quarter of fiscal 2004, which added $17 million, partially
offset by higher commodity costs of approximately $5 million. Higher
unit volume and the benefits of European integration activities also
contributed to the increased operating income experienced by the segment.
Other Income/Expense
Net interest expense increased from the prior year six month period
primarily as a result of higher interest rates in the current period.
Equity income for the six months ended March 31, 2005 decreased
approximately $6 million compared to the prior year period primarily due
to lower earnings at certain Seating & Interiors joint ventures in China,
partially offset by higher earnings at certain Seating & Interiors joint
ventures in North America. Miscellaneous — net expense in the current
six month period decreased approximately $15 million from the prior year
period. The decrease primarily reflects lower non-recurring litigation
expense, lower foreign currency losses and gains on the disposition of
assets in the current period compared to losses in the prior year period.
Provision for Income Taxes
The Company’s estimated base effective income tax rate for continuing and
discontinued operations for the six month period ended March 31, 2005
declined to 26.5%, from 29.0% for the prior year period due to continuing
global tax planning initiatives. The Company benefited in the current
six month period from an $80 million tax benefit due to a changes in the
tax status of a German and a French subsidiary, partially offset by an
increase in the tax valuation allowance of $28 million related to the
current period restructuring charges for which no tax benefit will be
received in certain countries (primarily Germany and the United
Kingdom) given the uncertainty of its realization due to restrictive
tax loss rules or a lack of sustained profitability in that country. The change in tax status resulted from a
voluntary tax election that produced a deemed liquidation of the French
and German subsidiaries for US federal income tax purposes. The US
shareholder received a tax benefit for the loss from the decrease in
value from the original tax basis of these investments. This election
changed the tax status of the German and French entities from controlled
foreign corporations (i.e. taxable entities) to branches (i.e. flow
through entities similar to a partnership) for US federal income tax
purposes and is thereby reported as a discrete period tax benefit in
accordance with the provisions of SFAS No. 109, “Accounting for Income
Taxes”. The prior year six month period benefited from a $17 million
favorable tax settlement.
The Company used an effective rate for income from discontinued
operations for all periods of 39% and 35.4% for World Services and the
engine electronics business, respectively. These effective tax rates
approximate the local statutory rate adjusted for permanent differences.
Minority Interests in Net Earnings of Subsidiaries
Minority interests in net earnings of subsidiaries in the first six
months of fiscal year 2005 decreased slightly from the prior year period.
The slight decrease was primarily due to lower earnings at certain
Seating & Interiors joint ventures in North America, partially offset by
higher earnings at certain Seating & Interiors joint ventures in Asia.
30
Management has not changed its full-year estimate for minority interests
in net earnings of subsidiaries of approximately $80 to $90 million.
Income from Continuing Operations
Income from continuing operations for the six months ended March 31, 2005
was $210 million, a decrease of $93 million compared to the prior year’s
$303 million. The decreased earnings were a result of the current year
restructuring charge of $210 million compared to the prior year charge of
$82 million, an $84 million Japanese pension gain in the prior year
period and slightly higher SG&A expenses, partially offset by higher
gross profit and a lower provision for income taxes. The income tax
provision included an $80 million tax benefit due to changes in the tax
status of two foreign subsidiaries, partially offset by an increase the
tax valuation allowance of $28 million related to the current period
restructuring charges for which no tax benefit will be received in
certain countries. Diluted earnings per share from continuing operations
for the six months ended March 31, 2005 were $1.08, compared to $1.57 in
the prior year period.
Full Year Outlook
The Company has increased its full year guidance for consolidated sales
growth, adjusted its guidance for operating margin and confirmed its
guidance for operating income and income from continuing operations. The
guidance focuses on the performance of ongoing operations of the
business, and therefore excludes special items such as restructuring
costs, gains from business divestitures, the 2005 tax credit and the 2004
Japanese pension gain. Management expects consolidated sales growth to
increase 10 to 12% for both the Automotive Group (which includes Seating
& Interiors and Battery Group) and the Controls Group, compared to
previously issued guidance of 8 to 10%. For the Automotive Group,
operating margin is expected to be flat compared to previously issued
guidance of improving slightly due to pricing pressures, higher commodity
costs and vehicle production uncertainties. These uncertainties could
cause the Company’s actual results to differ materially from the
forecasted amounts. For the Controls Group, operating margin is expected
to be flat compared to previously issued guidance of declining moderately
due to higher than expected system sales. Management’s estimate for
operating income remains unchanged and is projected to increase 10 to
12%. Income from continuing operations is expected to increase more than
operating income, consistent with previously issued guidance.
Orders for control systems in the first six months of fiscal year 2005
were above the prior year in both the domestic and European markets.
Strong domestic market sectors for new construction included health care,
office and industrial, while state and local government continued to show
strength in the systems renovation market. European operations showed
growth in the construction and services businesses.
The Controls Group backlog relates to its installed systems and technical
service activity, accounted for using the percentage-of-completion
method. At March 31, 2005, the
unearned backlog to be executed within the next year was $2.0 billion, 7%
above the prior year level of $1.8 billion.
31
Comparison of Financial Condition
Working Capital and Cash Flow
Working capital, excluding cash and debt, of $0.8 billion at March 31,
2005 was $0.1 billion lower than at fiscal year-end and comparable to one
year ago. The decrease from year-end was due to higher other current
liabilities, accounts payable and the disposition of the net assets of
the discontinued operations, partially offset by higher accounts
receivable and other current assets. Working capital was flat compared
to one year ago based on higher accounts receivable and other current
assets, which were completely offset by the disposition of the net assets
of the discontinued operations, higher accounts payable and higher other
current liabilities.
The Company’s days sales in accounts receivable for the three months
ended March 31, 2005 was 54, consistent with the period ended September
30, 2004, and an increase compared to the period ended March 31, 2004.
The increase from the prior year period primarily relates to the $219
million decrease in factored foreign currency trade account receivables
in foreign countries.
The Company’s inventory turnover ratio for the three months ended March
31, 2005, was 21, an increase compared to the turnover ratio of 19 for
the period ended September 30, 2004, and consistent with the ratio for
the period ended March 31, 2004. The increase from fiscal 2004 year end
primarily relates to the acquisition of the Latin American battery joint
venture.
Cash provided by operating activities of continuing operations was $182
million and $447 million for the three and six month period ended March
31, 2005, respectively. In comparison to the three and six month periods
in the prior year, the cash provided by operating activities decreased
$102 million and $52 million, respectively. The decrease primarily
relates to the decrease in factored foreign currency trade account
receivables in foreign countries.
Capital Expenditures
Capital spending for property, plant and equipment for the three month
period ended March 31, 2005 was $150 million, down $61 million from the
comparable prior year period. For the six month period ended March 31,
2005, capital spending was $292 million, down $116 million from the same
period in the prior year. The majority of the current year spending was
attributable to Seating & Interiors. Management has confirmed its
estimate for fiscal 2005 capital expenditures of $725 to $775 million.
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that its carrying amount may not be
recoverable. The Company has certain subsidiaries, mainly located in
Germany, Italy, Mexico, United Kingdom, Japan and Brazil, which have
generated operating losses and, in certain circumstances, have limited
loss carryforward periods. As a result, the Company has recorded
valuation allowances against tax assets for certain of these
subsidiaries. The Company’s long-lived asset impairment analyses
indicate that assets of these countries are not impaired based on
32
undiscounted cash flows. At March 31, 2005, the Company does not have
any material assets whose recovery is at risk.
Capitalization
Total capitalization of $8.0 billion at March 31, 2005 included
short-term debt of $0.4 billion, long-term debt (including the current
portion) of $1.9 billion and shareholders’ equity of $5.7 billion. The
Company’s total capitalization at September 30, 2004 and March 31, 2004
was $7.9 billion and $7.3 billion, respectively. Total debt as a
percentage of total capitalization at March 31, 2005 was 28.5%, compared
with 33.9% at fiscal year-end and 35.1% one year ago.
The Company is in compliance with all covenants and other requirements
set forth in its credit agreements and indentures. The Company believes
its capital resources and liquidity position at March 31, 2005 are
adequate to meet projected needs. Requirements for working capital,
capital expenditures, dividends, debt maturities and any potential
acquisitions in the remainder fiscal 2005 will continue to be funded from
operations, supplemented by short and long-term borrowings, if required.
Acquisitions and Dispositions
In February 2005, the Company completed the sale of its engine
electronics business to Valeo for approximately €323 million, or about
$427 million. This non-core business was acquired in fiscal 2002 from
Sagem SA. The sale of the engine electronics business resulted in a gain
of approximately $90 million ($57 million after tax), net of related
costs.
In March 2005, the Company completed the sale of its Johnson Controls
World Services, Inc. subsidiary (World Services) to IAP Worldwide
Services, Inc. for approximately $268 million, of which $260 million was
received in the current period. The sale of World Services resulted in a
gain of approximately $144 million ($88 million after tax), net of
related costs and subject to certain adjustments.
On March 22, 2005, the Company announced that it had signed a non-binding
letter of intent to acquire Delphi Corporation’s global automotive
battery business for approximately $213 million, subject to adjustments.
The acquisition is expected to close, subject to regulatory approvals, in
the second half of fiscal year 2005.
Financial Instruments
The Company selectively uses equity swaps to reduce market risk
associated with its stock-based compensation plans, such as its deferred
compensation plans and stock appreciation rights. In March 2004, the
Company entered into an equity swap agreement. In connection with the
swap agreement, a third party may purchase shares of the Company’s stock
in the market or in privately negotiated transactions up to an amount
equal to $135 million in aggregate. The swap agreement’s impact on the
Company’s earnings for the three months ended March 31, 2005 was not
material.
33
Off-Balance Sheet Arrangements
In the ordinary course of business, the Company utilizes accounts
receivable factoring arrangements in countries where programs of this
type are typical. Under these arrangements, the Company may sell certain
of its trade accounts receivable to financial institutions. The
arrangements, in virtually all cases, do not contain recourse provisions
against the Company for its customers’ failure to pay. The Company sold
approximately $55 million and $274 million of foreign currency trade
accounts receivable as of March 31, 2005 and 2004, respectively.
Recent Accounting Pronouncements
During December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123R, “Share-Based
Payment” (SFAS 123R), which requires companies to measure and recognize
compensation expense for all stock-based payments at fair value.
Stock-based payments include stock option grants and certain transactions
under other Company stock plans. The Company grants options to purchase
common stock to some of its employees and directors under various plans
at prices equal to the market value of the stock on the dates the options
were granted. In April 2005, the Securities and Exchange Commission
amended the effective date of SFAS 123R to the first interim period of
the first fiscal year beginning after June 15, 2005. The Company is
currently evaluating the impact that the adoption of SFAS 123R will have
on its consolidated financial position, results of operations and cash
flows.
Cautionary Statements for Forward-Looking Information
The Company has made forward-looking statements in this document
pertaining to its financial results for fiscal 2005 that are based on
preliminary data and 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,”
“outlook,” “forecasts” or similar expressions. For those statements, the
Company cautions that numerous important factors, such as automotive
vehicle production levels and schedules, the ability to increase prices
due to higher raw material costs, the strength of the U.S. or other
economies, currency exchange rates, cancellation of commercial contracts,
as well as those factors discussed in the company’s Form 8-K filing
(dated October 26, 2004), 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.
Other Financial Information
The interim financial information included in this 10-Q Report has not
been audited by PricewaterhouseCoopers LLP (PwC). In reviewing such
information, PwC has applied limited procedures in accordance with
professional standards for reviews of interim financial information.
Accordingly, you should restrict your reliance on their reports on such
information. PwC is not subject to the liability provisions of Section
11 of the Securities Act of 1933 for their reports on the interim
financial information because such reports do not constitute “reports” or
“parts” of the registration statements prepared or certified by PwC
within the meaning of Sections 7 and 11 of the Securities Act of 1933.
34
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the three month period ended March 31, 2005, the Company did not
experience any adverse changes in market risk exposures that materially
affect the quantitative and qualitative disclosures presented in the
Company’s Amended Annual Report on Form 10-K/A for the year ended
September 30, 2004.
ITEM 4. CONTROLS AND PROCEDURES
Restatement
On July 18, 2005, in response to a comment raised by the Staff of the
Securities and Exchange Commission concerning the Company’s segment
disclosure, the Audit Committee of the Board of Directors and management
of Johnson Controls, Inc. concluded that the Company’s financial
statements for the years ended September 30, 2004, 2003 and 2002 and as
of and for the three month periods ended December 31, 2004 and 2003 and
March 31, 2005 and 2004 and June 30, 2004 and for the six month periods ended March 31,
2005 and 2004 and the nine month period ended June 30, 2004, should be
restated and such financial statements should no longer be relied upon.
The restatement revised the segment information included in the
aforementioned financial statements.
As the restatement only related to the disclosure of the Company’s
segment information, the previously reported amounts in the Consolidated
Statement of Income, including Net Sales, Operating Income, Net Income
and Earnings Per Share were unchanged.
Evaluation of Disclosure Controls and Procedures
In connection with the restatement, under the direction of the Chief
Executive Officer and Chief Financial Officer, the Company reevaluated
its disclosure controls and procedures that were in effect as of March
31, 2005 and identified the following material weakness:
| |
• |
|
A failure to ensure the proper application of SFAS 131 when
identifying operating and reportable segments of the Company
resulting in a restatement of the Company’s previously issued
consolidated financial statements. |
Solely as a result of this material weakness, the Company concluded that
our disclosure controls and procedures were not effective as of September
30, 2004, December 31, 2004 or March 31, 2005.
The Company also determined that there was no resultant financial
statement effect of this material weakness as it relates to the
application of SFAS No. 142, “Goodwill and Other Intangible Assets” given
the revised operating and reportable segments.
Remediation of Material Weakness in Internal Control
The Company’s management believes that the following corrective actions
have remediated the identified deficiency in the Company’s disclosure
controls and procedures as of the date of this filing. The remedial
actions taken by the Company are as follows:
35
| |
• |
|
Key personnel involved in the financial reporting process have
enhanced the controls by which the SFAS No. 131 authoritative
guidance is monitored and applied on a regular basis. |
| |
| |
• |
|
The Company has revised its monthly reporting package used by
the Chief Operating Decision Maker. |
| |
| |
• |
|
The Company will now require the Company’s Disclosure
Committee to review its segment reporting on a quarterly basis. |
Under the direction of the Chief Executive Officer and Chief Financial
Officer, the Company has evaluated its disclosure controls and procedures
as currently in effect, including the remedial action discussed above,
and have concluded that, as of the date of this filing, our disclosure controls and
procedures are effective.
Changes in Internal Control over Financial Reporting
There were no significant changes in the Company’s internal control over
financial reporting during the quarter ended March 31, 2005, that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting. However, subsequent
to March 31, 2005, the Company took the remedial actions described above.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no significant changes in status since the last Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company entered into an Equity Swap Agreement, dated as of March 18,
2004 (the “Swap Agreement”), with Citibank, N.A. (“Citibank”). The
Company selectively uses equity swaps to reduce market risk associated
with its Company stock-based compensation plans, such as its deferred
compensation plans and stock appreciation rights. These equity
compensation liabilities increase as the Company’s stock price increases
and decrease as the Company’s stock price decreases. In contrast, the
value of the Swap Agreement moves in the opposite direction of these
liabilities, allowing the Company to fix a portion of the liabilities at
a stated amount.
Citibank has advised the Company that, in connection with the Swap
Agreement, Citibank may purchase shares of the Company’s stock in the
market or in privately negotiated transactions up to an amount equal to
$135 million in aggregate market value at any given time. The Company
disclaims that Citibank is an “affiliated purchaser” of the Company as
such term is defined in Rule 10b-18(a)(3) under the Securities Exchange
Act or that Citibank is purchasing any shares for the Company. Although
the Swap Agreement has a stated expiration date, the Company’s intention
is to continually renew the Swap Agreement with Citibank’s consent.
The following table presents information pursuant to Item 703(a) of
Regulation S-K regarding the repurchase of the Company’s common stock by
the Company and purchases of the Company’s common stock by Citibank in connection with the Swap
Agreement
36
during the three months ended March 31, 2005. The Swap
Agreement’s impact on the Company’s earnings for the three months ended
March 31, 2005 was not material. The repurchases of the Company’s common
stock by the Company relate solely to stock option and restricted stock
transactions that are treated as involving repurchases of Company common
stock for purposes of this disclosure.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Total Number |
|
|
| |
|
|
|
|
|
|
|
|
|
of Shares |
|
Approximate |
| |
|
|
|
|
|
|
|
|
|
Purchased as |
|
Dollar Value of |
| |
|
Total |
|
|
|
|
|
Part of the |
|
Shares that May |
| |
|
Number of |
|
Average |
|
Publicly |
|
Yet be Purchased |
| |
|
Shares |
|
Price Paid |
|
Announced |
|
under the |
| Period |
|
Purchased |
|
per Share |
|
Program |
|
Program(1) |
1/1/05 — 1/31/05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases by Company |
|
|
587 |
|
|
$ |
60.15 |
|
|
|
— |
|
|
|
— |
|
Purchases by Citibank |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
34,428,000 |
|
Total |
|
|
587 |
|
|
$ |
60.15 |
|
|
|
— |
|
|
$ |
34,428,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/1/05 — 2/28/05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases by Company |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Purchases by Citibank |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
34,530,000 |
|
Total |
|
|
|
|
|
|
|
|
|
|
— |
|
|
$ |
34,530,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/1/05 — 3/31/05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases by Company |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Purchases by Citibank |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
40,208,000 |
|
Total |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
40,208,000 |
|
|
|
|
| (1) |
|
The dollar amounts in this column relate solely to the
approximate dollar value of shares that may be purchased under the Swap
Agreement as of the end of the period in question. |
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
Reference is made to Item 4 of the Company’s Quarterly Report on Form
10-Q/A for the quarter ended December 31, 2004 for a description of the
results of votes of security holders at the Annual Meeting of
Shareholders held January 26, 2005.
ITEM 6. EXHIBITS
Reference is made to the separate exhibit index contained on page 39
filed herewith.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
| |
|
|
|
|
| |
JOHNSON CONTROLS, INC.
|
|
| Date: August 9, 2005 |
By: |
/s/ R. Bruce McDonald
|
|
| |
R. Bruce McDonald |
|
| |
Vice President and
Chief Financial Officer |
|
38
JOHNSON CONTROLS, INC.
INDEX TO EXHIBITS
| |
|
|
| Exhibit No. |
|
Description |
10.S
|
|
Letter agreement dated November 29, 2004, amending
Giovanni Fiori’s Executive Employment Agreement, relating to the
Johnson Controls, Inc. Executive Survivor Benefits Plan
(incorporated by reference to Exhibit 10.I to Johnson Controls,
Inc. Annual Report on Form 10-K for the year ended September 30,
2001).* |
|
|
|
10.T
|
|
Stock Purchase Agreement, as amended through February
11, 2005, between Johnson Controls, Inc. and IAP Worldwide
Services, Inc.* |
|
|
|
10.U
|
|
Share Purchase Agreement, dated January 10, 2005,
between Johnson Controls, Inc. and Valeo.* |
|
|
|
12
|
|
Statement Regarding Computation of Ratio of Earnings
to Fixed Charges for the Six Months Ended March 31, 2005. |
|
|
|
15
|
|
Letter of PricewaterhouseCoopers LLP, Independent
Registered Public Accounting Firm, dated August 9, 2005, relating
to Financial Information. |
|
|
|
31.1
|
|
Certification by the Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification by the Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32
|
|
Certification of Periodic Financial Report by the
Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
| * |
|
Exhibits were filed with the Form 10-Q as originally filed
on May 6, 2005. |
39