UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

 

Commission File Number: 1-5097

 

 

JOHNSON CONTROLS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

(414) 524-1200
(Registrant’s telephone number, including area code)

 

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

 

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

JOHNSON CONTROLS, INC.

Form 10-Q

Report Index

		Page
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Financial Position at March 31, 2007, September 30, 2006 and March 31, 2006			3
Consolidated Statements of Income for the Three and Six Month Periods Ended March 31, 2007 and 2006			4
Condensed Consolidated Statements of Cash Flows for the Three and Six Month Periods Ended March 31, 2007 and 2006			5
Notes to Condensed Consolidated Financial Statements			6
Report of Independent Registered Public Accounting Firm			21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			33
Item 4. Controls and Procedures			33
Part II. Other Information
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			35
Item 6. Exhibits			36
Signatures			37
2001 Restricted Stock Plan, as Amended
Letter of PricewaterhouseCoopers LLP
Certification by the CEO Pursuant to Section 302
Certification by the CFO Pursuant to Section 302
Certification by the CEO and CFO Pursuant to Section 906

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Johnson Controls, Inc.

(in millions, unaudited)

		March 31,				September 30,				March 31,
		2007				2006				2006
Assets
Cash and cash equivalents		$	172			$	293			$	154
Accounts receivable — net			5,933				5,697				5,671
Inventories			1,847				1,731				1,598
Other current assets			1,491				1,543				1,497
Current assets			9,443				9,264				8,920
Property, plant and equipment — net			4,056				3,968				3,950
Goodwill			6,019				5,910				5,672
Other intangible assets — net			783				799				784
Investments in partially-owned affiliates			600				463				470
Other noncurrent assets			1,586				1,517				1,396
Total assets		$	22,487			$	21,921			$	21,192
Liabilities and Shareholders’ Equity
Short-term debt		$	361			$	209			$	445
Current portion of long-term debt			696				368				583
Accounts payable			4,555				4,216				4,270
Accrued compensation and benefits			817				919				862
Accrued income taxes			128				229				216
Other current liabilities			2,220				2,205				2,100
Current liabilities			8,777				8,146				8,476
Commitments and contingencies (Note 16)
Long-term debt			3,564				4,166				4,185
Postretirement health and other benefits			327				349				263
Minority interests in equity of subsidiaries			142				129				138
Other noncurrent liabilities			1,862				1,776				1,735
Shareholders’ equity			7,815				7,355				6,395
Total liabilities and shareholders’ equity		$	22,487			$	21,921			$	21,192

The accompanying notes are an integral part of the financial statements.

Johnson Controls, Inc.

(in millions, except per share data; unaudited)

		Three Months								Six Months
		Ended March 31,								Ended March 31,
						Revised								Revised
		2007				2006				2007				2006
Net sales
Products and systems*		$	6,830			$	7,066			$	13,533			$	13,708
Services*			1,662				1,101				3,169				1,987
			8,492				8,167				16,702				15,695
Cost of sales
Products and systems			6,034				6,346				11,944				12,286
Services			1,265				773				2,491				1,439
			7,299				7,119				14,435				13,725
Gross profit			1,193				1,048				2,267				1,970
Selling, general and administrative expenses			(861	)			(784	)			(1,664	)			(1,465	)
Net financing charges			(69	)			(75	)			(138	)			(122	)
Equity income			19				20				48				44
Income from continuing operations before income taxes and minority interests			282				209				513				427
Provision for income taxes			17				36				70				74
Minority interests in net earnings of subsidiaries			3				11				13				24
Income from continuing operations			262				162				430				329
Income (loss) from discontinued operations, net of income taxes			(4	)			3				(10	)			1
Loss on sale of discontinued operations, net of income taxes			(30	)			—				(30	)			—
Net income		$	228			$	165			$	390			$	330
Earnings per share from continuing operations
Basic		$	1.33			$	0.83			$	2.19			$	1.70
Diluted		$	1.31			$	0.83			$	2.16			$	1.68
Earnings per share
Basic		$	1.16			$	0.85			$	1.99			$	1.70
Diluted		$	1.14			$	0.84			$	1.96			$	1.69

The accompanying notes are an integral part of the financial statements.

Johnson Controls, Inc.

(in millions; unaudited)

		Three Months								Six Months
		Ended March 31,								Ended March 31,
		2007				2006				2007				2006
Operating Activities
Net income		$	228			$	165			$	390			$	330
Adjustments to reconcile net income to cash provided by operating activities
Depreciation			176				169				350				326
Amortization of intangibles			12				12				24				20
Equity in earnings of partially-owned affiliates, net of dividends received			(15	)			(7	)			(32	)			1
Minority interests in net earnings of subsidiaries			3				11				13				24
Deferred income taxes			(54	)			(83	)			(49	)			(80	)
Loss on sale of discontinued operations			30				—				30				—
Other			28				15				41				18
Changes in working capital, excluding acquisitions and divestitures of businesses
Accounts receivable			(277	)			30				(128	)			(19	)
Inventories			(43	)			(53	)			(90	)			(41	)
Other current assets			44				30				43				26
Restructuring reserves			(30	)			(20	)			(63	)			(47	)
Accounts payable and accrued liabilities			395				(9	)			126				(390	)
Accrued income taxes			(42	)			111				(48	)			217
Cash provided by operating activities			455				371				607				385
Investing Activities
Capital expenditures			(211	)			(193	)			(441	)			(262	)
Sale of property, plant and equipment			9				7				17				13
Acquisition of businesses, net of cash acquired			—				(22	)			—				(2,586	)
Business divestitures			35				—				35				—
Settlement of cross-currency interest rate swaps			—				—				(57	)			66
Changes in long-term investments			2				(21	)			3				(1	)
Cash used by investing activities			(165	)			(229	)			(443	)			(2,770	)
Financing Activities
Increase (decrease) in short-term debt — net			(254	)			(287	)			68				(272	)
Increase in long-term debt			—				199				105				2,725
Repayment of long-term debt			(16	)			(26	)			(382	)			(101	)
Payment of cash dividends			(126	)			(105	)			(130	)			(109	)
Stock repurchases			(16	)			—				(23	)			—
Other			42				63				77				125
Cash provided (used) by financing activities			(370	)			(156	)			(285	)			2,368
Decrease in cash and cash equivalents		$	(80	)		$	(14	)		$	(121	)		$	(17	)

The accompanying notes are an integral part of the financial statements.

Johnson Controls, Inc.

1.		Financial Statements
		In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which include normal recurring adjustments except as disclosed herein) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Johnson Controls, Inc. (the “Company”) Annual Report on Form 10-K for the year ended September 30, 2006. The results of operations for the three and six month periods ended March 31, 2007 are not necessarily indicative of results for the Company’s 2007 fiscal year because of seasonal and other factors.
		Certain prior period amounts have been revised to conform to the current year’s presentation. Specifically, the Company has revised its consolidated statements of income for the three and six months ended March 31, 2006 to reclassify certain amounts previously reported within miscellaneous-net to cost of sales, selling, general and administrative expenses and net financing charges.
2.		New Accounting Standards
		In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment to FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 will be effective for the Company beginning in fiscal year 2009. The Company is assessing the potential impact that the adoption of SFAS No. 159 will have on its consolidated financial condition or results of operations.
		In September 2006, the FASB issued SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132 (R).” SFAS No. 158 requires that the Company recognize the overfunded or underfunded status of its defined benefit and retiree medical plans as an asset or liability in the fiscal year 2007 year-end balance sheet, with changes in the funded status recognized through other comprehensive income in the year in which they occur. Additionally, SFAS No. 158 requires the Company to measure the funded status of a plan as of the date of its fiscal year-end no later than fiscal year 2009. The Company is assessing the potential impact that the adoption of SFAS No. 158 will have on its consolidated financial condition.
		In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 also establishes a fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability. SFAS No. 157 will be effective for the Company beginning in fiscal year 2008. The Company is assessing the potential impact that the adoption of SFAS No. 157 will have on its consolidated financial condition or results of operations.
		In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be

Johnson Controls, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

		taken in a tax return. FIN No. 48 allows recognition of only those tax benefits that satisfy a greater than 50% probability threshold. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 is effective for the Company beginning October 1, 2007. The Company is assessing the potential impact that the adoption of FIN No. 48 will have on its previously established tax reserves, consolidated financial condition or results of operations.
3.		Acquisition of Business
		In December 2005, the Company completed its acquisition of York International Corporation (York). The Company paid $56.50 for each outstanding share of York common stock. The total cost of the acquisition, excluding cash acquired, was approximately $3.1 billion, including the assumption of $563 million of debt, change in control payments and direct costs of the transaction. The Company initially financed the acquisition by issuing unsecured commercial paper, which was refinanced with long-term debt on January 17, 2006. York’s results of operations have been included in the Company’s condensed consolidated financial statements since the date of acquisition.
		The acquisition of York enabled the Company to become a single source supplier of integrated products and services for building owners to optimize comfort and energy efficiency. The acquisition enhanced the Company’s heating, ventilating, and air conditioning (HVAC) equipment, controls, fire and security capabilities and positions the Company in a strategic leadership position in the global building environment industry which the Company believes offers significant growth potential.
		During the first quarter of fiscal year 2007, the Company completed its York purchase price allocation. The adjustments were primarily related to the finalization of the restructuring plans, fixed asset valuations and other immaterial adjustments.
		The following table summarizes the fair values of the York assets acquired and liabilities assumed at the date of acquisition (in millions):

Current assets, net of cash acquired		$	1,919
Property, plant and equipment			390
Goodwill			2,075
Other intangible assets			507
Other noncurrent assets			381
Total assets			5,272
Current liabilities			1,379
Noncurrent liabilities			1,360
Total liabilities			2,739
Net assets acquired		$	2,533

In conjunction with the York acquisition, the Company recorded goodwill of approximately $2.1 billion, none of which is tax deductible, with allocation to the building efficiency business reporting segments as follows: $427 million to North America Systems; $602 million to North America Service; $480 million to North America Unitary Products; $149 million to Europe; and $417 million to Rest of World. In addition, intangible assets subject to amortization were valued at $251 million with useful lives between 1.5 and 30 years, of which $199 million was assigned to customer relationships with useful lives between 20 and 30 years. Intangible assets not subject to amortization, primarily trademarks, were valued at $256 million.

Johnson Controls, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

		The Company recorded restructuring reserves of $161 million related to the York acquisition, including workforce reductions of approximately 3,150 building efficiency employees (850 for North America Systems, 300 for North America Service, 60 for North America Unitary Products, 1,150 for Europe and 790 for Rest of World), the closure of three manufacturing plants (two in North America Systems and one in Rest of World), the merging of other plants and branch offices with existing Company facilities and contract terminations. These restructuring activities were recorded as costs of the acquisition and were provided for in accordance with FASB Emerging Issues Task Force Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” The Company anticipates that substantially all of the restructuring actions will be completed by the end of fiscal year 2007.
		The following table summarizes the changes in the Company’s York restructuring reserves, included within other current liabilities in the condensed consolidated statement of financial position (in millions):

		Employee
		Severance and
		Termination								Currency
		Benefits				Other				Translation				Total
Balance at September 30, 2006		$	50			$	49			$	6			$	105
Adjustments			(3	)			6				—				3
Utilized — Cash			(6	)			(4	)			—				(10	)
Utilized — Noncash			—				—				1				1
Balance at December 31, 2006			41				51				7				99
Utilized — Cash			(6	)			(2	)			—				(8	)
Balance at March 31, 2007		$	35			$	49			$	7			$	91

		Included within the “other” category are exit costs for terminating supply contracts associated with changes in the Company’s manufacturing footprint and strategies, lease termination costs and other direct costs.
4.		Discontinued Operations
		In March 2007, the Company completed the sale of the Bristol Compressor business for approximately $45 million, of which $35 million was received in cash in the current period and an additional $10 million is pending final purchase price adjustments. The sale of the Bristol Compressor business, which was acquired in December 2005 as part of the York transaction (see Note 3), resulted in a loss of approximately $44 million ($27 million after-tax), including related costs.
		In the second quarter of fiscal year 2007, the Company settled a claim in the current fiscal quarter related to the February 2005 sale of the engine electronics business that resulted in a loss of approximately $4 million ($3 million after-tax).

Johnson Controls, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

The following summarizes the net sales, income (loss) before income taxes and minority interests, and income (loss) per share amounts for discontinued operations for the three and six months ended March 31, 2007 and 2006 (in millions, except per share amounts):

		Three Months								Six Months
		Ended March 31,								Ended March 31,
		2007				2006				2007				2006
Net sales		$	33			$	59			$	54			$	78
Income (loss) before income taxes and minority interests			(4	)			4				(13	)			1
Income (loss) per share from discontinued operations
Basic		$	(0.02	)		$	0.02			$	(0.05	)		$	—
Diluted		$	(0.02	)		$	0.01			$	(0.05	)		$	—
Loss per share on sale of discontinued operations
Basic		$	(0.15	)		$	—			$	(0.15	)		$	—
Diluted		$	(0.15	)		$	—			$	(0.15	)		$	—

		Net assets of the Bristol Compressor business at the disposal date totaled approximately $86 million, which consisted of current assets of $97 million, fixed assets of $6 million and liabilities of $17 million.
5.		Percentage-of-Completion Contracts
		The building efficiency business records certain long term contracts under the percentage-of-completion method of accounting. Under this method, sales and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. The Company records costs and earnings in excess of billings on uncompleted contracts within accounts receivable – net and billings in excess of costs and earnings on uncompleted contracts within other current liabilities in the condensed consolidated statements of financial position. Amounts included within accounts receivable – net related to these contracts were $525 million, $455 million and $382 million at March 31, 2007, September 30, 2006, and March 31, 2006, respectively. Amounts included within other current liabilities were $430 million, $314 million and $275 million at March 31, 2007, September 30, 2006, and March 31, 2006, respectively.
6.		Inventories
		Inventories consisted of the following (in millions):

		March 31,				September 30,				March 31,
		2007				2006				2006
Raw materials and supplies		$	730			$	655			$	626
Work-in-process			284				294				283
Finished goods			885				834				738
FIFO inventories			1,899				1,783				1,647
LIFO reserve			(52	)			(52	)			(49	)
Inventories		$	1,847			$	1,731			$	1,598

Johnson Controls, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

7.		Goodwill and Other Intangible Assets
		The changes in the carrying amount of goodwill in each of the Company’s reporting segments for the six month periods ended September 30, 2006 and March 31, 2007 were as follows (in millions):

										Currency
		March 31,				Business				Translation and				September 30,
		2006				Acquisitions				Other				2006
Building efficiency
North America Systems		$	45			$	451			$	—			$	496
North America Service			10				601				4				615
North America Unitary Products			—				473				—				473
Global Workplace Solutions			182				—				(16	)			166
Europe			207				147				16				370
Rest of World			71				411				5				487
York Acquisition			1,952				(1,952	)			—				—
Automotive experience
North America			1,176				—				—				1,176
Europe			1,008				—				58				1,066
Asia			191				7				2				200
Power solutions			830				1				30				861
Total		$	5,672			$	139			$	99			$	5,910

						Currency
		September 30,				Translation				March 31,
		2006				and Other				2007
Building efficiency
North America Systems		$	496			$	6			$	502
North America Service			615				5				620
North America Unitary Products			473				7				480
Global Workplace Solutions			166				2				168
Europe			370				17				387
Rest of World			487				21				508
Automotive experience
North America			1,176				4				1,180
Europe			1,066				43				1,109
Asia			200				(7	)			193
Power solutions			861				11				872
Total		$	5,910			$	109			$	6,019

Johnson Controls, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

The Company’s other intangible assets, primarily from business acquisitions, are valued based on independent appraisals and consisted of (in millions):

		March 31, 2007												September 30, 2006												March 31, 2006
		Gross												Gross												Gross
		Carrying				Accumulated								Carrying				Accumulated								Carrying				Accumulated
		Amount				Amortization				Net				Amount				Amortization				Net				Amount				Amortization				Net
Amortized intangible assets Patented technology		$	298			$	(133	)		$	165			$	300			$	(126	)		$	174			$	291			$	(113	)		$	178
Unpatented technology			33				(11	)			22				31				(9	)			22				31				(8	)			23
Customer relationships			311				(22	)			289				304				(15	)			289				260				(10	)			250
Miscellaneous			29				(23	)			6				33				(20	)			13				29				(12	)			17
Total amortized intangible assets			671				(189	)			482				668				(170	)			498				611				(143	)			468
Unamortized intangible assets Trademarks			295				—				295				295				—				295				309				—				309
Pension asset			6				—				6				6				—				6				7				—				7
Total unamortized intangible assets			301				—				301				301				—				301				316				—				316
Total intangible assets		$	972			$	(189	)		$	783			$	969			$	(170	)		$	799			$	927			$	(143	)		$	784

		Amortization of other intangible assets for the six month periods ended March 31, 2007 and 2006 was $24 million and $20 million, respectively. Excluding the impact of any future acquisitions, the Company anticipates amortization of other intangible assets will average approximately $36 million per year over the next five years.
8.		Product Warranties
		The Company offers warranties to its customers depending upon the specific product and terms of the customer purchase agreement. A typical warranty program requires that the Company replace defective products within a specified time period from the date of sale. The Company records an estimate for future warranty-related costs based on actual historical return rates. Based on analysis of return rates and other factors, the adequacy of the Company’s warranty provisions are adjusted as necessary. While the Company’s warranty costs have historically been within its calculated estimates, it is possible that future warranty costs could exceed those estimates. The Company’s product warranty liability is included in other current liabilities in the condensed consolidated statements of financial position.
		The change in the carrying amount of the Company’s total product warranty liability for the six months ended March 31, 2007 was as follows (in millions):

Balance as of September 30, 2006		$	189
Accruals for warranties issued during the period			61
Accruals related to pre-existing warranties (including changes in estimates)			2
Settlements made (in cash or in kind) during the period			(71	)
Currency translation			3
Balance as of March 31, 2007		$	184

Johnson Controls, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

9.		Restructuring Costs
		As part of its continuing efforts to reduce costs and improve the efficiency of its global operations, the Company committed to a restructuring plan (2006 Plan) in the third quarter of fiscal year 2006 and recorded a $197 million restructuring charge in that quarter. During the fourth quarter of fiscal year 2006, the Company increased its 2006 Plan restructuring charge by $8 million for additional employee severance and termination benefits. The 2006 Plan, which primarily includes workforce reductions and plant consolidations in the automotive experience and building efficiency businesses, is expected to be substantially completed by the end of fiscal year 2007. The automotive experience business related restructuring is focused on improving the profitability associated with the manufacturing and supply of instrument panels, headliners and other interior components in North America and increasing the efficiency of seating component operations in Europe. The charges associated with the building efficiency business mostly relate to Europe where the Company has launched a systems redesign initiative. The Company expects to incur other related and ancillary costs associated with some of these restructuring activities in future periods. These costs are not expected to be material and will be expensed as incurred.
		The 2006 Plan includes workforce reductions of approximately 5,000 employees (2,500 for automotive experience – North America, 1,400 for automotive experience – Europe, 200 for building efficiency – North America, 600 for building efficiency – Europe, 280 for building efficiency – Rest of World and 20 for power solutions). Restructuring charges associated with employee severance and termination benefits will be paid over the severance period granted to each employee and on a lump sum basis when required in accordance with individual severance agreements. As of March 31, 2007, approximately 2,200 employees have been separated from the Company. In addition, the 2006 Plan includes 15 plant closures (10 in automotive experience – North America, 3 in automotive experience – Europe, 1 in building efficiency – Europe and 1 in building efficiency – Rest of World). The restructuring charge for the impairment of the long-lived assets associated with the plant closures was determined using an undiscounted cash flow analysis.
		The following table summarizes the changes in the Company’s 2006 Plan reserve, included within other current liabilities in the condensed consolidated statement of financial position (in millions):

		Employee
		Severance and
		Termination								Currency
		Benefits				Other				Translation				Total
Balance at September 30, 2006		$	125			$	12			$	1			$	138
Utilized — Cash			(18	)			(1	)			—				(19	)
Utilized — Noncash			—				—				(1	)			(1	)
Balance at December 31, 2006			107				11				—				118
Utilized — Cash			(15	)			(1	)			—				(16	)
Utilized — Noncash			—				—				1				1
Balance at March 31, 2007		$	92			$	10			$	1			$	103

		Included within the “other” category are exit costs for terminating supply contracts associated with changes in the Company’s manufacturing footprint and strategies, lease termination costs and other direct costs.
		In the second quarter of fiscal year 2005, the Company committed to a restructuring plan (2005 Plan) involving cost reduction actions and recorded a $210 million restructuring charge in that quarter. During the fourth quarter of fiscal year 2006, the Company reversed $6 million of restructuring reserves that were not expected to be utilized. This restructuring charge included workforce reductions of approximately

Johnson Controls, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

		3,900 employees. Restructuring 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. As of March 31, 2007, approximately 3,300 employees have separated from the Company pursuant to the 2005 Plan. In addition, the 2005 Plan included 12 plant closures. The charge for the impairment of the long-lived assets associated with the plant closures was determined using an undiscounted cash flow analysis. The closures/restructuring activities are primarily concentrated in Europe and North America.
		The following table summarizes the 2005 Plan reserve, included within other current liabilities in the condensed consolidated statement of financial position (in millions):

		Employee
		Severance and
		Termination								Currency
		Benefits				Other				Translation				Total
Balance at September 30, 2006		$	33			$	2			$	(4	)		$	31
Utilized — Cash			(4	)			—				—				(4	)
Utilized — Noncash			—				—				(1	)			(1	)
Balance at December 31, 2006			29				2				(5	)			26
Utilized — Cash			(6	)			—				—				(6	)
Utilized — Noncash			—				—				3				3
Balance at March 31, 2007		$	23			$	2			$	(2	)		$	23

		Included within the “other” category were 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. The majority of the restructuring activities under the 2005 Plan are expected to be completed by June 2007.
		Company management closely monitors its overall cost structure and continually analyzes each of its businesses for opportunities to consolidate current operations, improve operating efficiencies and locate facilities in low cost countries in close proximity to customers. This ongoing analysis includes a review of its manufacturing, engineering and purchasing operations, as well as the overall global footprint for all its businesses. Because of the importance of new vehicle sales by major automotive manufacturers to operations, the Company is affected by the general business conditions in this industry. Future adverse developments in the automotive industry could impact the Company’s liquidity position and/or require additional restructuring of its operations.
10.		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. A portion of the costs associated with these activities is reimbursed by customers. Such expenditures amounted to $129 million and $135 million for the three months ended March 31, 2007 and 2006, respectively, and $270 million and $262 million for the six months ended March 31, 2007 and 2006. These expenditures are net of customer reimbursements of $63 million and $62 million for the three months ended March 31, 2007 and 2006, respectively, and $113 million and $153 million for the six months ended March 31, 2007 and 2006, respectively.

Johnson Controls, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

11.		Income Taxes
		The more significant discrete period items affecting the Company’s income tax provision from continuing operations are as follows (in millions):

		Three Months								Six Months
		Ended March 31,								Ended March 31,
		2007				2006				2007				2006
Federal, state and foreign income tax expense		$	59			$	44			$	107			$	90
Effective tax rate adjustment			(5	)			(7	)			—				—
Change in tax status of foreign subsidiary			(22	)			—				(22	)			(11	)
Audit resolutions			(15	)			—				(15	)			—
Valuation allowance adjustments			—				(32	)			—				(32	)
Foreign dividend repatriation			—				31				—				31
Disposition of a joint venture			—				—				—				(4	)
Provision for income taxes		$	17			$	36			$	70			$	74

		Effective Tax Rate Adjustment
		In calculating the provision for income taxes, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known at each interim period. On a quarterly basis, the actual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter. In the current fiscal quarter, the Company reduced its estimated annual effective income tax rate for continuing operations from 23.0% to 21.0%, primarily due to continuing tax planning initiatives.
		Change in Tax Status of Foreign Subsidiary
		For the three and six months ended March 31, 2007, the tax provision decreased as a result of a $22 million tax benefit realized by a change in tax status of an automotive experience subsidiary in the Netherlands. For the six months ended March 31, 2006, the tax provision decreased as a result of an $11 million tax benefit realized by a change in tax status of an automotive experience subsidiary in Hungary and a building efficiency subsidiary in the Netherlands.
		The change in tax status in each respective period resulted from a voluntary tax election that produced a deemed liquidation for U.S. federal income tax purposes. The Company received a tax benefit in the U.S. for the loss from the decrease in value from the original tax basis of these investments. This election changed the tax status of the respective subsidiaries from controlled foreign corporations (i.e., taxable entities) to branches (i.e., flow through entities similar to a partnership) for U.S. federal income tax purposes and is thereby reported as a discrete period tax benefit in accordance with the provisions of SFAS No. 109.
		Uncertain Tax Positions
		The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining its worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of the Company’s business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly under audit by tax authorities. Accruals for tax contingencies are provided for in accordance with the requirements of SFAS No. 5 “Accounting for Contingencies.” In the current fiscal quarter, the Company reduced its liability by $15 million due to the favorable resolution of certain tax audits. The Company’s federal income tax returns and certain foreign income tax returns for fiscal years 1999 through 2003 remain under various stages of

Johnson Controls, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

		audit by the Internal Revenue Service and respective foreign tax authorities. Although the outcome of tax audits is always uncertain, management believes that it has appropriate support for the positions taken on its tax returns and that its annual tax provisions included amounts sufficient to pay assessments, if any, which may be proposed by the taxing authorities. At March 31, 2007, the Company has recorded a liability for its best estimate of the probable loss on certain of its tax positions, the majority of which is included in other noncurrent liabilities in the condensed consolidated statements of financial position. Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.
		Valuation Allowance Release
		The Company reviews its deferred tax asset valuation allowances on a quarterly basis, or whenever events or changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred tax asset is considered, along with any other positive or negative evidence. Since future financial results may differ from previous estimates, periodic adjustments to the Company’s valuation allowances may be necessary.
		Based on the Company’s cumulative operating results through the six months ended March 31, 2006 and an assessment of expected future profitability in Mexico, the Company concluded that it was more likely than not that the tax benefits of its operating loss and tax credit carryforwards in Mexico would be utilized in the future. During the second quarter of fiscal year 2006, the Company completed a tax reorganization in Mexico which will allow operating loss and tax credit carryforwards to be offset against the future taxable income of the reorganized entities. As such, in the quarter ended March 31, 2006, the Company reversed the entire valuation allowance of $32 million attributable to these operating loss and tax credit carryforwards as a credit to income tax expense.
		Foreign Dividend Repatriation
		In October 2004, the President signed the American Jobs Creation Act of 2004 (AJCA). The AJCA 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. During the quarter ended March 31, 2006, the Company completed its evaluation of its repatriation plans and approximately $674 million of foreign earnings were designated for repatriation to the U.S. pursuant to the provisions of the AJCA. The increase in income tax liability related to the Company’s AJCA initiatives totaled $42 million. The Company recorded $31 million of net income tax expense in the prior fiscal year quarter as $11 million had been previously recorded by York prior to the acquisition in accordance with York’s approved repatriation plan.
		Other Discrete Period Items
		For the six months ended March 31, 2006, the tax provision also decreased due to a $4 million nonrecurring tax benefit related to a $9 million gain from the disposition of the Company’s interest in a German joint venture.
		Tax Law Changes
		In March 2007, the People’s National Congress in the People’s Republic of China approved a new tax reform law to align the tax regime applicable to foreign owned Chinese enterprises with those applicable to domestically-owned Chinese enterprises. The new law will be effective on January 1, 2008. The Company believes that the new tax reform law will not have a material impact on its consolidated financial condition, results of operations or cash flows.

Johnson Controls, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

		Discontinued Operations
		The Company utilized an effective tax rate for discontinued operations of approximately 38% for Bristol Compressors. This effective tax rate approximates the local statutory rate adjusted for permanent differences.
12.		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 shown in the tables below in accordance with SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits – an amendment of FASB Statements No. 87, 88 and 106” (in millions):

		U.S. Pension Plans
		Three Months								Six Months
		Ended March 31,								Ended March 31,
		2007				2006				2007				2006
Service cost		$	18			$	22			$	37			$	44
Interest cost			32				31				64				56
Expected return on plan assets			(38	)			(39	)			(76	)			(73	)
Amortization of transition obligation			—				—				(1	)			(1	)
Amortization of net actuarial loss			3				9				6				18
Amortization of prior service cost			—				—				1				1
Curtailment loss			—				—				—				2
Net periodic benefit cost		$	15			$	23			$	31			$	47

		Non-U.S. Pension Plans
		Three Months								Six Months
		Ended March 31,								Ended March 31,
		2007				2006				2007				2006
Service cost		$	10			$	10			$	19			$	18
Interest cost			15				13				30				24
Expected return on plan assets			(14	)			(11	)			(27	)			(19	)
Amortization of net actuarial loss			2				3				4				5
Net periodic benefit cost		$	13			$	15			$	26			$	28

		Postretirement Health and Other Benefits
		Three Months								Six Months
		Ended March 31,								Ended March 31,
		2007				2006				2007				2006
Service cost		$	2			$	2			$	3			$	3
Interest cost			4				4				9				8
Amortization of net actuarial loss			—				1				—				2
Amortization of prior service cost			(2	)			(2	)			(3	)			(4	)
Net periodic benefit cost		$	4			$	5			$	9			$	9

Johnson Controls, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

13.		Earnings Per Share
		The following table reconciles the denominators used to calculate basic and diluted earnings per share (in millions):

		Three Months								Six Months
		Ended March 31,								Ended March 31,
		2007				2006				2007				2006
Weighted Average Shares Outstanding
Basic weighted average shares outstanding			196.7				194.3				196.3				193.7
Effect of dilutive securities:
Stock options			2.6				2.0				2.4				2.1
Diluted weighted average shares outstanding			199.3				196.3				198.7				195.8
Antidilutive Securities
Options to purchase common shares			—				0.3				0.1				0.3

14.		Comprehensive Income
		A summary of comprehensive income is shown below (in millions):

		Three Months								Six Months
		Ended March 31,								Ended March 31,
		2007				2006				2007				2006
Net income		$	228			$	165			$	390			$	330
Realized and unrealized gains/losses on derivatives			(3	)			2				(21	)			11
Foreign currency translation adjustments			32				81				139				(18	)
Other comprehensive income (loss)			29				83				118				(7	)
Comprehensive income		$	257			$	248			$	508			$	323

		The Company selectively hedges anticipated transactions that are subject to foreign exchange exposure or commodity price exposure, primarily using foreign currency exchange contracts and commodity contracts, respectively. These instruments are designated as cash flow hedges in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137, No. 138 and No. 149 and are recorded in the condensed consolidated statement of financial position at fair value. The effective portion of the contracts’ gains or losses due to changes in fair value are initially recorded as unrealized gains/losses on derivatives, a component of other comprehensive income, and are subsequently reclassified into earnings when the hedged transactions, typically sales or costs related to sales, occur and affect earnings. These contracts are highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates or commodity price changes.
		The favorable foreign currency translation adjustments (CTA) for the six months ended March 31, 2007 were primarily due to the increase in the euro versus the U.S. dollar as compared with a slight decrease in the euro versus the U.S. dollar 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 until realized. A net loss of approximately $8 million and $3 million were recorded for the three month periods ended March 31, 2007 and 2006, respectively, and a net loss of approximately $34 million and a net gain of approximately $7 million were recorded for the six month periods ended March 31, 2007 and 2006, respectively.

Johnson Controls, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

15.		Segment Information
		SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes the standards for reporting information about operating segments in financial statements. In applying the criteria set forth in SFAS No. 131, the Company has determined that it has ten reportable segments for financial reporting purposes. Certain operating segments are aggregated or combined based on materiality within building efficiency — rest of world and power solutions in accordance with the standard. The Company’s ten reportable segments are presented in the context of its three primary businesses – building efficiency, automotive experience and power solutions.
		Building efficiency
		North America Systems designs, produces, markets and installs mechanical equipment that provides heating and cooling in North American non-residential buildings and industrial applications as well as control systems that integrate the operation of this equipment with other critical building systems.
		North America Service provides technical services including inspection, scheduled maintenance, repair and replacement of mechanical and control systems in North America, as well as the retrofit and service components of performance contracts and other solutions.
		North America Unitary Products designs and produces heating and air conditioning solutions for residential and light commercial applications and markets products to the replacement and new construction markets.
		Global Workplace Solutions provides consulting and on-site staff for complete real estate services, facility operation and management to improve the comfort, productivity, energy efficiency and cost effectiveness of corporate real estate around the globe.
		Europe provides HVAC, refrigeration and control systems and technical services to the European marketplace.
		Rest of World provides HVAC, refrigeration and control systems and technical services to markets in Asia, the Middle East and Latin America.
		Automotive experience
		Automotive experience designs and manufactures interior systems and products for passenger cars and light trucks, including vans, pick-up trucks and sport/crossover vehicles in North America, Europe and Asia. Automotive experience systems and products include complete seating systems and components; cockpit systems, including instrument clusters, information displays and body controllers; overhead systems, including headliners and electronic convenience features; floor consoles; and door systems.
		Power solutions
		Power solutions services both automotive original equipment manufacturers and the battery aftermarket by providing advanced battery technology, coupled with systems engineering, marketing and service expertise.
		Beginning in fiscal year 2007, Company management, including the chief operating decision maker, adjusted their measurement of business unit performance, changing from operating income to segment income, which represents income from continuing operations before income taxes and minority interests excluding net financing charges. The primary reason for the modification was to reflect equity income in earnings for each business operation given its growing significance to the Company’s global business

Johnson Controls, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

strategies. Segment income will continue to exclude restructuring costs and certain significant gains and losses. The amounts for the three and six month periods ended March 31, 2006 have been revised to conform to the current year presentation. Financial information relating to the Company’s reportable segments is as follows (in millions):

		Net Sales
		Three Months								Six Months
		Ended March 31,								Ended March 31,
		2007				2006				2007				2006
Building efficiency
North America Systems		$	484			$	407			$	928			$	719
North America Service			536				458				1,007				799
North America Unitary Products			187				215				392				286
Global Workplace Solutions			670				474				1,316				930
Europe			553				464				1,165				797
Rest of World			533				472				1,077				767
			2,963				2,490				5,885				4,298
Automotive experience
North America			1,825				2,129				3,561				4,305
Europe			2,347				2,280				4,455				4,467
Asia			369				394				745				776
			4,541				4,803				8,761				9,548
Power solutions			988				874				2,056				1,849
Total net sales		$	8,492			$	8,167			$	16,702			$	15,695