JOHNSON CONTROLS, INC.

FORM 10-Q

March 31, 2005

REPORT INDEX

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Part I - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

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

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JOHNSON CONTROLS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

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, 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:

3.	Discontinued Operations
	In February 2005, the Company completed the sale of its engine electronics business, included in the Automotive Group segment, 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

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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:

	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

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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:

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.

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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:

	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.

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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:

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:

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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:

	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:

	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

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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
	The Company has two operating segments, the Automotive Group and the Controls Group, which also constitute its reportable segments. The Automotive Group designs and manufactures products for motorized vehicles. The segment supplies interior systems and batteries for cars, light trucks and vans. The Controls Group provides facility systems and services including comfort, energy and security management for the non-residential buildings market.
	Management’s evaluation of the performance of the Company’s 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:

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 foreign 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. 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

	in tax status of a foreign subsidiary. 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 in the Automotive Group 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 Automotive Group 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 Automotive Group actions are primarily concentrated in Europe, while the Controls Group restructuring actions involve activities in both North America

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

	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 following table summarizes the Company’s 2005 Plan reserve, included within Other current liabilities in the Consolidated Statement of Financial Position:

	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 Automotive Group and 470 employees in the Controls Group. In addition, the 2004 Plan called for four Automotive Group plants to be consolidated. Through March 31, 2005, all impacted employees from the Controls Group and approximately 1,240 employees from the Automotive Group have been separated from the Company. A significant portion of the Automotive 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.
	The following table summarizes the Company’s 2004 Plan reserve, included within Other current liabilities in the Consolidated Statement of Financial Position:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

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: