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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission File Number 1-5097

JOHNSON CONTROLS, INC.

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes     X       No ____

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

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JOHNSON CONTROLS, INC.

FORM 10-Q

March 31, 2003

REPORT INDEX

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PART I. — FINANCIAL INFORMATION

JOHNSON CONTROLS, INC.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in millions; unaudited)

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

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JOHNSON CONTROLS, INC.

CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share data; unaudited)

*

Products and systems consist of automotive group products and systems 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.

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JOHNSON CONTROLS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions; unaudited)

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

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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 Annual Report to Shareholders for the year ended September 30, 2002. The September 30, 2002 Consolidated Statement of Financial Position is derived from the audited financial statements. The results of operations for the three- and six-month periods ended March 31, 2003 are not necessarily indicative of the results which may be expected for the Company’s 2003 fiscal year because of seasonal and other factors. Certain prior year amounts have been reclassified to conform to the current year’s presentation.
2.		Stock-Based Compensation
		Effective October 1, 2002, the Company voluntarily adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” and adopted the disclosure requirements of SFAS No.148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FAS 123.” In accordance with SFAS No. 123, the Company has adopted the fair value recognition provisions on a prospective basis and accordingly, the expense recognized in the three- and six-month periods ended March 31, 2003 represents a pro rata portion of the 2003 grant (granted November 20, 2002) which is earned over a three-year vesting period.
		The following table illustrates the pro forma effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

3.		Earnings Per Share
		The following table reconciles the numerators and denominators used to calculate basic and diluted earnings per share:

4.		Cash Flow
		For purposes of the Consolidated Statement of Cash Flows, the Company considers all investments with a maturity of three months or less at the time of purchase to be cash equivalents.
5.		Acquisition of Businesses
		On October 31, 2002, the Company acquired VARTA AG’s Automotive Battery Division, a major European automotive battery manufacturer headquartered in Germany. The Varta Automotive Battery Division (Varta) consists of VARTA Automotive GmbH and the 80% majority ownership in VB Autobatterie GmbH. Management believes the acquisition gives the Company a leading market position in Europe. The purchase price of approximately $375 million, subject to final negotiations, includes the assumption of debt and was financed with short-term debt. The Company is obtaining independent appraisals and other valuation studies to allocate the purchase price to the acquired net assets. Goodwill of $170.9 million has been assigned to the Automotive Systems Group and may be adjusted as appraisals and other valuation studies are completed. The Company expects that the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

		allocation of the purchase price will be completed by the end of the fiscal year. Varta’s results have been included in the Company’s consolidated financial statements from the date of acquisition. Pro forma information to reflect this acquisition has not been disclosed as the impact on net income is not material.
		Effective October 1, 2001, the Company completed the acquisitions of the automotive electronics business of France-based Sagem SA (Sagem) and the German automotive battery manufacturer Hoppecke Automotive GmbH & Co. KG (Hoppecke). As part of these acquisitions, restructuring reserves of approximately $20 million were established, primarily for expected employee severance. Three plants and facilities have been or will be closed or sold with expected workforce reductions of approximately 430 employees. Through March 31, 2003, approximately $3 million of employee severance costs associated with the restructuring plans were incurred or paid, and approximately 170 employees have been separated from the Company. The reserve balance at March 31, 2003 was approximately $17 million. The remaining restructuring activities are associated with Hoppecke and are expected to be substantially complete by the end of the fiscal year.
		Effective September 1, 2000, the Company completed the acquisition of approximately 90% of the outstanding shares of Ikeda Bussan Co. Ltd. (Ikeda), a Japanese supplier of automotive seating. A share exchange to acquire the remaining shares of Ikeda was completed in the first quarter of fiscal 2002. As part of this acquisition, a restructuring reserve of approximately $54 million was recorded. The reserve was established for expected employee severance costs as the Company eliminates certain non-core activities to focus on Ikeda’s principal seating and interiors businesses. Seven plants and facilities have been or will be closed as part of the restructuring plan, with resulting workforce reductions of approximately 1,000 employees. Through March 31, 2003, approximately $23 million of employee severance costs associated with the restructuring plan were paid or incurred, and approximately 515 employees separated from the Company. In fiscal 2002, the Company recorded an adjustment to the restructuring reserve of approximately $10 million, which resulted in a decrease to the goodwill assigned to the Automotive Systems Group of approximately $6 million. The reserve balance at March 31, 2003 totaling, approximately $21 million, represents remaining severance payments to be made in accordance with underlying agreements.
		6. Sale of a Long-Term Investment
		In the three-month period ended December 31, 2002, the Company recorded a pre-tax gain of approximately $17 million related to the conversion and subsequent sale of its investment in shares of Donnelly Corporation, which merged with Magna International effective October 1, 2002. Prior to the sale, the investment was reported as an available-for-sale security in the Consolidated Statement of Financial Position at fair value. Changes in the fair market value were recorded in the other comprehensive income component of shareholders’ equity. As a result of the merger, the Company’s shares in Donnelly Corporation were converted into shares

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

		of Magna International and the unrealized gain on the investment was recognized in the Consolidated Statement of Income. The Company sold the shares in Magna International in the first quarter of fiscal 2003 and received proceeds of approximately $38 million.
7.		Goodwill and Other Intangible Assets
		The changes in the carrying amount of goodwill for the six-month periods ended September 30, 2002 and March 31, 2003 are as follows:

The Company’s other intangible assets, primarily from acquisitions, consisted of:

Amortization of other intangible assets for the three-month periods ended March 31, 2003 and 2002 was $6 million and $5 million, respectively. Amortization of other intangible assets was $10 million for each of the six-month periods ended March 31, 2003 and 2002. Excluding the impact of any future acquisitions, the Company anticipates annual amortization of other intangible assets to approximate $21 million for each of the next five years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

8.		Guarantees
		In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, FIN 45 requires additional disclosures about the guarantees that an entity has issued, including a reconciliation of the changes in the entity’s product warranty liabilities (see Note 9) during the reporting period. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirements in FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The recognition and measurement provisions of FIN 45 did not have a material effect on the Company’s financial position, results of operations or cash flows.
		At March 31, 2003, the Company had guaranteed certain financial liabilities, the majority of which relate to debt and lease obligations of unconsolidated affiliates. The term of each of the guarantees is equal to the remaining term of the underlying debt or lease, which ranges from one to two years. Payment by the Company would be required upon default by the unconsolidated affiliate. The maximum potential amount of future payments which the Company could be required to make under these guarantees at March 31, 2003 is $25 million.
		Additionally, the Company guarantees the residual values of the Company aircraft that are currently under synthetic leases. The guarantees extend through the maturity of each respective underlying lease, the earliest of which is September 2006. In the event the Company exercised its option not to purchase the aircraft for the remaining obligations at the scheduled maturity of the leases, the Company has guaranteed the majority of the residual values not to exceed $60 million in aggregate.
9.		Product Warranties
		The Company offers warranties to its customers depending upon the specific product and terms of the customer purchase agreement. The majority of the Company’s product warranties are customer specific. A typical warranty program requires that the Company replace defective products within a specified time period from the date of sale. The Company records an estimate for future warranty-related costs based on actual historical return rates. Based on analysis of return rates and other factors, the adequacy of the Company’s warranty provisions are adjusted as necessary. While the Company’s warranty costs have historically been within its calculated estimates, it is possible that future warranty costs could exceed those estimates. The Company’s product warranty liability is included in other current liabilities in the Consolidated Statement of Financial Position.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The changes in the carrying amount of the Company’s total product warranty liability for the six months ended March 31, 2003 were as follows:

		* Adjusted to conform to current account classifications.
10.		Inventories
		Inventories are valued at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO) method for most inventories at domestic locations. The cost of other inventories is determined on the first-in, first-out (FIFO) method. Finished goods and work-in-process inventories include material, labor and manufacturing overhead costs. Inventories were comprised of the following:

		The increase from September 30, 2002 and March 31, 2002 was partially due to the inclusion of Varta at March 31, 2003 (see Note 5).
11.		Comprehensive Income
		Comprehensive income is defined as the sum of net income and all other non-owner changes in equity, including foreign currency translation, unrealized gains and losses on equity securities, realized and unrealized gains and losses on derivatives and minimum pension liability adjustments. Comprehensive income for the three-month periods ended March 31, 2003 and 2002 was $171 million and $92 million, respectively. Comprehensive income for the six-month periods ended March 31, 2003 and 2002 was $349 million and $168 million, respectively. The difference between comprehensive income and net income for the periods presented principally represents foreign currency translation adjustments (CTA). Specifically, in the current quarter $45 million of comprehensive income was related to CTA versus a $28 million loss in the prior year period. For the six months ended March 31, 2003, comprehensive income related to CTA was $91 million versus a loss of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

		$74 million in the prior year. Partially offsetting the current year income was $11 million related to the realization of a gain resulting from the Company’s investment in Donnelly Corporation, which was merged with Magna International on October 1, 2002 (see Note 6).
		The Company has foreign-denominated long-term debt and cross-currency interest rate swaps which are designated as hedges of net investments in foreign subsidiaries. Gains and losses, net of tax, attributable to these hedges are deferred in CTA within the accumulated other comprehensive income (loss) account. A net loss of approximately $15 million and a net gain of approximately $12 million were recorded for the three-month periods ending March 31, 2003 and 2002, respectively. A net loss of approximately $26 million and a net gain of approximately $28 million were recorded for the six-month periods ended March 31, 2003 and 2002, respectively.
12.		Future Accounting Changes
		In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Under SFAS No. 146, costs associated with an exit or disposal activity should be recognized and measured at their fair value in the period in which the liability is incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of this statement have been adopted by the Company for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a significant impact on the Company’s financial position, results of operations or cash flows.
		In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” EITF 00-21 establishes criteria for whether revenue on a deliverable can be recognized separately from other deliverables in a multiple deliverable arrangement. The criteria considers whether the delivered item has stand-alone value to the customer, whether the fair value of the delivered item can be reliably determined and the rights of returns for the delivered item. EITF 00-21 is effective for revenue agreements entered into for periods beginning after June 15, 2003 with early adoption permitted. The Company is currently evaluating the impact of EITF 00-21 on its financial position, results of operations and cash flows.
		In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities.” This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities. FIN 46 explains the concept of a variable interest entity and requires consolidation where there is a controlling financial interest in a variable interest entity or where the variable interest entity does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties. This interpretation applies immediately to variable interest entities created after January 31, 2003, and applies in the first year or interim period beginning after June 15, 2003 to variable interest entities in which

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

		an enterprise holds a variable interest that it acquired before February 1, 2003. It is reasonably possible that upon adoption of FIN 46, certain variable interest entities could be required to be included in the Company’s consolidated financial statements.
		The Company currently leases its aircraft from a variable interest entity, created prior to February 1, 2003, under synthetic leases. The Company believes the estimated fair market value for financing the underlying assets is no less than the remaining lease obligations totaling approximately $80 million at March 31, 2003. Additionally, the Company holds a variable interest, acquired prior to February 1, 2003, in a partially-owned automotive entity currently accounted for under the equity method. The Company had guaranteed debt obligations of this partially-owned automotive entity totaling $14 million at March 31, 2003, which is included in the Company’s $25 million of financial liability guarantees of unconsolidated affiliates disclosed in Note 8.
13.		Segment Information
		The Company has two operating segments, the Automotive Systems Group and the Controls Group, which also constitute its reportable segments. The Automotive Systems Group designs and manufactures products and systems for motorized vehicles. The segment supplies interior systems and batteries for cars, light trucks and vans. The Controls Group provides installed systems and technical and facility management services including comfort, energy and security management for the non-residential buildings market. Financial information relating to the Company’s reportable segments was as follows: