UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

JOHNSON CONTROLS, INC.

Wisconsin		39-0380010
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)
5757 North Green Bay Avenue
Milwaukee, Wisconsin		53201
(Address of principal executive offices)		(Zip Code)

(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).

     Large accelerated filer þ       Accelerated filer o       Non-accelerated filer o

     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.

Class				Shares Outstanding at June 30, 2006
Common Stock: $0.04 1/6 par value per share				195,565,351

 

 

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 June 30, 2006, September 30, 2005 and June 30, 2005			3
Consolidated Statements of Income for the Three and Nine Month Periods Ended June 30, 2006 and 2005			4
Condensed Consolidated Statements of Cash Flows for the Three and Nine Month Periods Ended June 30, 2006 and 2005			5
Notes to Condensed Consolidated Financial Statements			6
Report of Independent Registered Public Accounting Firm			27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			41
Item 4. Controls and Procedures			41
Part II. Other Information
Item 1. Legal Proceedings			42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			43
Item 6. Exhibits			44
Signatures			45
Letter of PricewaterhouseCoopers LLP
302 Certification of Chief Executive Officer
302 Certification of Chief Financial Officer
906 Certification of CEO and CFO

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

JOHNSON CONTROLS, INC.

Condensed Consolidated Statements of Financial Position

(in millions; unaudited)

		June 30,				September 30,				June 30,
		2006				2005				2005
ASSETS
Cash and cash equivalents		$	380			$	171			$	385
Accounts receivable — net			5,686				4,987				4,529
Inventories			1,740				983				915
Assets of discontinued operations			153				—				—
Other current assets			1,385				998				896
Current assets			9,344				7,139				6,725
Property, plant and equipment — net			3,970				3,581				3,294
Goodwill			5,758				3,733				3,670
Other intangible assets			779				289				274
Investments in partially-owned affiliates			488				445				420
Other noncurrent assets			1,717				957				778
Total assets		$	22,056			$	16,144			$	15,161
LIABILITIES AND SHAREHOLDERS’ EQUITY
Short-term debt		$	248			$	684			$	393
Current portion of long-term debt			585				81				221
Accounts payable			4,315				3,938				3,544
Accrued compensation and benefits			1,019				704				747
Accrued income taxes			239				44				27
Liabilities of discontinued operations			40				—				—
Other current liabilities			2,237				1,390				1,350
Current liabilities			8,683				6,841				6,282
Commitments and contingencies (Note 18)
Long-term debt			4,180				1,577				1,632
Postretirement health and other benefits			270				159				158
Minority interests in equity of subsidiaries			136				196				143
Other noncurrent liabilities			1,878				1,313				1,169
Shareholders’ equity			6,909				6,058				5,777
Total liabilities and shareholders’ equity		$	22,056			$	16,144			$	15,161

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

JOHNSON CONTROLS, INC.

Consolidated Statements of Income

(in millions, except per share data; unaudited)

		Three Months								Nine Months
		Ended June 30,								Ended June 30,
		2006				2005				2006				2005
Net sales
Products and systems		$	6,420			$	6,323			$	20,128			$	18,225
Services			1,970				739				3,957				2,354
			8,390				7,062				24,085				20,579
Cost of sales
Products and systems			5,818				5,571				18,100				16,132
Services			1,359				591				2,802				1,914
			7,177				6,162				20,902				18,046
Gross profit			1,213				900				3,183				2,533
Selling, general and administrative expenses			736				532				2,209				1,693
Restructuring costs			197				—				197				210
Operating income			280				368				777				630
Interest income			7				5				12				12
Interest expense			(72	)			(28	)			(191	)			(89	)
Equity income			28				19				72				59
Miscellaneous — net			(10	)			(8	)			(10	)			(24	)
Other income (expense)			(47	)			(12	)			(117	)			(42	)
Income from continuing operations before income taxes and minority interests			233				356				660				588
Provision for (benefit from) income taxes			(111	)			94				(37	)			95
Minority interests in net earnings of subsidiaries			8				7				32				28
Income from continuing operations			336				255				665				465
Income from discontinued operations, net of income taxes			2				—				3				16
Gain on sale of discontinued operations, net of income taxes			—				—				—				145
Net income		$	338			$	255			$	668			$	626
Earnings per share from continuing operations
Basic		$	1.72			$	1.33			$	3.43			$	2.43
Diluted		$	1.70			$	1.31			$	3.39			$	2.39
Earnings per share
Basic		$	1.73			$	1.33			$	3.44			$	3.27
Diluted		$	1.71			$	1.31			$	3.40			$	3.22

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

JOHNSON CONTROLS, INC.

Condensed Consolidated Statements of Cash Flows

(in millions; unaudited)

		Three Months								Nine Months
		Ended June 30,								Ended June 30,
										Revised
		2006				2005				2006				2005
Operating Activities
Net income		$	338			$	255			$	668			$	626
Adjustments to reconcile net income to cash provided by operating activities
Depreciation			168				145				494				454
Amortization of intangibles			10				6				30				18
Equity in earnings of partially-owned affiliates, net of dividends received			(10	)			(14	)			(9	)			(42	)
Minority interests in net earnings of subsidiaries			8				7				32				28
Gain on sale of discontinued operations			—				—				—				(145	)
Deferred income taxes			(263	)			84				(343	)			(13	)
Non cash restructuring costs			51				—				51				46
Other			20				29				38				24
Changes in working capital, excluding acquisitions and divestitures of businesses
Accounts receivable			93				(120	)			74				(369	)
Inventories			(119	)			(62	)			(160	)			(64	)
Other current assets			16				(11	)			42				(101	)
Restructuring reserves			138				(29	)			91				135
Accounts payable and accrued liabilities			288				7				(102	)			120
Accrued income taxes			(62	)			50				156				(15	)
Cash provided by operating activities			676				347				1,062				702
Investing Activities
Capital expenditures			(176	)			(104	)			(438	)			(387	)
Sale of property, plant and equipment			—				3				13				11
Acquisition of businesses, net of cash acquired			(11	)			(73	)			(2,597	)			(106	)
Proceeds from sale of discontinued operations			—				—				—				687
Settlement of cross-currency interest rate swaps			—				10				66				(62	)
Changes in long-term investments			(20	)			(29	)			(21	)			(16	)
Cash provided (used) by investing activities			(207	)			(193	)			(2,977	)			127
Financing Activities
Increase (decrease) in short-term debt — net			(208	)			20				(480	)			(414	)
Increase in long-term debt			4				3				2,729				16
Repayment of long-term debt			(17	)			(19	)			(118	)			(45	)
Payment of cash dividends			(54	)			(48	)			(163	)			(144	)
Other			32				30				156				44
Cash provided (used) by financing activities			(243	)			(14	)			2,124				(543	)
Increase in cash and cash equivalents		$	226			$	140			$	209			$	286

The accompanying notes are an integral part of these 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. 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, 2005. The results of operations for the three and nine month periods ended June 30, 2006 are not necessarily indicative of results for the Company’s 2006 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 Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2006 and 2005 to combine cash flows from discontinued operations with cash flows from continuing operations. The Company had previously separated these amounts from continuing operations and reported them as cash used by discontinued operations.
2.		New Accounting Standards
		Effective October 1, 2005, the Company adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share Based Payment,” using the modified prospective method. See Note 10 to the Condensed Consolidated Financial Statements for additional information regarding stock-based compensation.
		In July 2006, the FASB issued Interpretation (“FIN”) 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109.” FIN 48 clarifies how to recognize, measure, and disclose uncertain income tax positions in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. If there are changes in net assets as a result of the application of FIN 48, such changes will be accounted for as an adjustment to retained earnings. The Company is currently evaluating the impact the adoption of FIN 48 will have on its consolidated financial condition, results of operations and cash flows.
		In November 2005, the FASB issued Staff Position (“FSP”) SFAS 123(R)-3, “Transition Election to Accounting for the Tax Effects of Share-Based Payment Awards.” This FSP requires an entity to follow either the transition guidance for the additional paid in capital pool as prescribed in SFAS No. 123(R) or the alternative transition method as described in the FSP. An entity that adopts SFAS No. 123(R) using the modified prospective application may make a one-time election to adopt the transition method described in this FSP. An entity may take up to one year from the later of its initial adoption of SFAS No. 123(R) or the effective date of this FSP to evaluate its available transition alternatives and make its one-time election. This FSP became effective in November 2005. The Company does not expect the adoption of this FSP will have a material impact on its consolidated financial condition, results of operations and cash flows.
		In March 2005, the FASB issued FIN 47, “Accounting for Conditional Asset Retirement Obligations,” which clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the fair value of the obligation can be reasonably estimated. This interpretation further clarified conditional asset retirement obligations, as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” as a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The Company is required to adopt FIN 47 prior to the end of fiscal year

JOHNSON CONTROLS, INC.

		2006 and is currently evaluating the impact the adoption of FIN 47 will have on its consolidated financial condition, results of operations and cash flows.
3.		Acquisition of Business
		On December 9, 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 financed the acquisition with long-term debt (see Note 9).
		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, air conditioning and refrigeration (“HVAC&R”) equipment, controls, fire and security capabilities and positions the Company in a strategic leadership position in the global building environment industry which offers significant growth potential.
		The following table summarizes the preliminary fair values of the York assets acquired and liabilities assumed at the date of acquisition (in millions):

Current assets, net of cash acquired		$	1,786
Property, plant and equipment			570
Goodwill			1,950
Other intangible assets			502
Other noncurrent assets			586
Total assets			5,394
Current liabilities			1,563
Noncurrent liabilities			1,298
Total liabilities			2,861
Net assets acquired		$	2,533

		Goodwill of approximately $2 billion, none of which is tax deductible, has been recorded in conjunction with the York acquisition. Intangible assets of $246 million were recorded that are subject to amortization with useful lives between 1.5 and 30 years, of which $194 million was assigned to customer relationships with useful lives between 20 and 30 years. Trademarks of $256 million were recorded that are not subject to amortization. The purchase price allocation will be subsequently adjusted to reflect final appraisals and other valuation studies in the fourth quarter of fiscal year 2006.
		In connection with the acquisition of York, the Company has undertaken certain restructuring activities, including reductions in staffing levels, elimination of duplicate facilities and other costs associated with exiting certain activities of the acquired business. The estimated costs of 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 will finalize restructuring plans for York in the fourth quarter of fiscal year 2006 and expects the total costs for these activities to be approximately $200 million to $250 million. Restructuring activity during the current fiscal quarter was not significant.

JOHNSON CONTROLS, INC.

Had the York acquisition been completed on October 1, 2004, the Company’s unaudited pro forma consolidated results of operations would have been as follows (in millions, except per share amounts):

		Pro Forma								Pro Forma
		Three Months								Nine Months
		Ended June 30,								Ended June 30,
		2006				2005				2006				2005
Net sales		$	8,390			$	8,253			$	24,833			$	23,819
Income from continuing operations			336				271				666				400
Net income			338				275				669				567
Earnings per share from continuing operations
Basic		$	1.72			$	1.41			$	3.43			$	2.09
Diluted		$	1.70			$	1.39			$	3.39			$	2.06
Earnings per share
Basic		$	1.73			$	1.43			$	3.45			$	2.96
Diluted		$	1.71			$	1.41			$	3.41			$	2.92

		The pro forma information for the nine month period ended June 30, 2005 includes expense of approximately $53 million for the amortization of the inventory write-up. The pro forma information for the nine month period ended June 30, 2006 includes the reversal of approximately $53 million related to the amortization of the inventory write-up that was included in the Company’s consolidated operating results. The pro forma information does not purport to be indicative of the results that actually would have been achieved if the operations were combined during the periods presented and is not intended to be a projection of future results or trends.
4.		Discontinued Operations
		The Company acquired Bristol Compressors as part of its acquisition of York (see Note 3) and has engaged a firm to actively market the business. The Bristol Compressors business includes Scroll Technologies, Inc., an unconsolidated joint venture with Carrier Corporation for which the Company has guaranteed certain financial liabilities. The maximum amount of future payments for which the Company could be required to make under these guarantees was $18 million at June 30, 2006. On July 12, 2006, the Company announced an agreement to divest its 50% interest in Scroll Technologies, Inc. to Danfoss A/S, a Danish manufacturer of compressors and other refrigeration components.
		In March 2005, the Company completed the sale of its Johnson Controls World Services, Inc. subsidiary, which had been included in the Company’s former building efficiency segment, to IAP Worldwide Services, Inc. for $260 million. The sale resulted in a gain of approximately $139 million ($85 million after-tax), net of related costs.
		In February 2005, the Company completed the sale of its engine electronics business, which had been included in the interior experience — Europe segment, to Valeo for €316 million. This non-core business was acquired in fiscal year 2002 from Sagem SA. As part of the post-closing activities, in the fourth quarter of fiscal year 2005 the Company settled a claim with Valeo for $8 million ($5 million after-tax). The sale of the engine electronics business resulted in a gain of $81 million ($51 million after-tax), net of related costs.

JOHNSON CONTROLS, INC.

The following summarizes the net sales and income before income taxes of the discontinued operations for the three and nine month periods ended June 30, 2006 and 2005 (in millions):

		Three Months								Nine Months
		Ended June 30,								Ended June 30,
		2006				2005				2006				2005
Net sales			$57				—				$135				$540
Income before income taxes			4			—					5				26

		The Condensed Consolidated Statement of Financial Position at June 30, 2006 includes assets of discontinued operations of $153 million consisting of accounts receivable – net ($37 million), inventories ($52 million), property, plant and equipment – net ($61 million) and other current assets ($3 million). Liabilities of discontinued operations at June 30, 2006 totaled $40 million consisting of accounts payable ($32 million) and other current liabilities ($8 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 $393 million, $315 million and $300 million at June 30, 2006, September 30, 2005, and June 30, 2005, respectively. Amounts included within other current liabilities were $292 million, $226 million and $225 million at June 30, 2006, September 30, 2005, and June 30, 2005, respectively.
6.		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 (amounts in millions):

		June 30,				September 30,				June 30,
		2006				2005				2005
Raw materials and supplies		$	661			$	497			$	468
Work-in-process			303				158				146
Finished goods			825				378				336
FIFO inventories			1,789				1,033				950
LIFO reserve			(49	)			(50	)			(35	)
Inventories		$	1,740			$	983			$	915

JOHNSON CONTROLS, INC.

7.		Goodwill and Other Intangible Assets
		The changes in the carrying amount of goodwill in each of the Company’s businesses for the three month period ended September 30, 2005 and the nine month period ended June 30, 2006 were as follows (amounts in millions):

										Currency
		June 30,				Business				Translation				September 30,
		2005				Acquisitions				and Other				2005
Building efficiency
North America Systems		$	45			$	—			$	—			$	45
North America Service			12				—				(1	)			11
North America Unitary Products			—				—				—				—
Global Facilities Management			181				1				—				182
Europe			215				—				(8	)			207
Rest of World			73				—				(2	)			71
Interior experience
North America			1,185				—				1				1,186
Europe			1,012				—				1				1,013
Asia			198				—				(6	)			192
Power solutions			749				72				5				826
Total		$	3,670			$	73			$	(10	)		$	3,733

										Currency
		September 30,				Business				Translation				June 30,
		2005				Acquisitions				and Other				2006
Building efficiency (1)		$	516			$	1,960			$	15			$	2,491
Interior experience
North America			1,186				—				(7	)			1,179
Europe			1,013				6				30				1,049
Asia			192				6				—				198
Power solutions			826				7				8				841
Total		$	3,733			$	1,979			$	46			$	5,758

JOHNSON CONTROLS, INC.

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

		June 30, 2006												September 30, 2005												June 30, 2005
		Gross												Gross												Gross
		Carrying				Accumulated								Carrying				Accumulated								Carrying				Accumulated
		Amount				Amortization				Net				Amount				Amortization				Net				Amount				Amortization				Net
Amortized intangible assets
Patented technology		$	296			$	(119	)		$	177			$	231			$	(103	)		$	128			$	230			$	(97	)		$	133
Unpatented technology			33				(9	)			24				31				(7	)			24				31				(6	)			25
Customer relationships			260				(12	)			248				96				(8	)			88				76				(7	)			69
Miscellaneous			30				(16	)			14				10				(8	)			2				10				(8	)			2
Total amortized intangible assets			619				(156	)			463				368				(126	)			242				347				(118	)			229
Unamortized intangible assets
Trademarks			309				—				309				40				—				40				39				—				39
Pension asset			7				—				7				7				—				7				6				—				6
Total unamortized intangible assets			316				—				316				47				—				47				45				—				45
Total intangible assets		$	935			$	(156	)		$	779			$	415			$	(126	)		$	289			$	392			$	(118	)		$	274

		Amortization of other intangible assets for the nine month periods ended June 30, 2006 and 2005 was $30 million and $18 million, respectively. Excluding the impact of any future acquisitions, the Company anticipates amortization of other intangible assets will average approximately $35 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 replacement of 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 and specifically identifiable claims and include estimated costs for labor and parts. Certain of the Company’s warranty programs include standard warranties and may include extended warranty contracts sold to customers to increase the warranty period beyond the standard period. Extended warranty contracts sold are reflected as accruals for warranties issued and amortized revenue is reflected as settlements made in the table below. Based on an 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 Condensed Consolidated Statements of Financial Position.

JOHNSON CONTROLS, INC.

The changes in the carrying amount of the total product warranty liability for the nine month period ended June 30, 2006 were as follows (amounts in millions):

Balance as of September 30, 2005		$	61
Accruals for warranties issued during the period			79
Accruals from business acquisition			81
Accruals related to pre-existing warranties (including changes in estimates)			1
Settlements made (in cash or in kind) during the period			(70	)
Currency translation			2
Balance as of June 30, 2006		$	154

9.		Long-Term Debt
		In January 2006, the Company issued $2.5 billion in floating and fixed rate notes consisting of the following four series: $500 million floating rate notes due in fiscal year 2008, $800 million fixed rate notes due in fiscal year 2011, $800 million fixed rate notes due in fiscal year 2016 and $400 million fixed rate notes due in fiscal year 2036. The Company also entered into a 24 billion yen (approximately $210 million), three year, floating rate loan. The net proceeds of the offering and the bank loan were used to repay the unsecured commercial paper obligations that were used to initially finance the acquisition of York. Subsequent to the repayment of the commercial paper, the Company terminated its $2.8 billion credit facility which was set to expire in fiscal year 2007. The Company now operates a $1.6 billion commercial paper program backed by its $1.6 billion five-year revolving credit facility.
10.		Stock-Based Compensation
		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 SFAS 123.”
		Effective October 1, 2005, the Company adopted SFAS No. 123(R) using the modified prospective method. The modified prospective method requires compensation cost to be recognized beginning on the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date. As such, prior periods will not reflect restated amounts. The cumulative impact of adopting SFAS 123(R) was not significant to the Company’s operating results since the Company had previously adopted SFAS No. 123. Pro forma net income and basic and diluted earnings per share have not been disclosed as the impact of applying the fair value based method to all outstanding and unvested awards is not material to the Company’s consolidated results of operations.
		The Company has two share-based compensation plans, which are described below. The compensation cost charged against income for those plans was approximately $19 million and $11 million for the three months ended June 30, 2006 and 2005, respectively, and approximately $56 million and $26 million for the nine months ended June 30, 2006 and 2005, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was approximately $8 million and $4 million for the three months ended June 30, 2006 and 2005, respectively, and approximately $22 million and $10 million for the nine months ended June 30, 2006 and 2005, respectively.

JOHNSON CONTROLS, INC.

		Prior to the adoption of SFAS No. 123(R), the Company applied a nominal vesting approach for employee stock-based compensation awards with retirement eligible provisions. Under the nominal vesting approach, the Company recognized compensation cost over the vesting period and, if the employee retired before the end of the vesting period, the Company recognized any remaining unrecognized compensation cost at the date of retirement. For stock-based payments issued after the adoption of SFAS No. 123(R), the Company will apply a non-substantive vesting period approach whereby expense is accelerated for those employees that receive awards and are eligible to retire prior to the award vesting. Had the Company applied the non-substantive vesting period approach prior to the adoption of SFAS No. 123(R), an approximate $3 million and $1 million reduction of pre-tax compensation cost would have been recognized for the three month periods ended June 30, 2006 and 2005, respectively, and an approximate $9 million and $2 million reduction of pre-tax compensation cost would have been recognized for the nine month periods ended June 30, 2006 and 2005, respectively.
		Stock Option Plan
		Stock Options
		The Company’s 2000 Stock Option Plan, as amended (the “Plan”), which is shareholder-approved, permits the grant of stock options to its employees for up to approximately 13 million shares of common stock (approximately 5 million shares of common stock remain available to be granted at June 30, 2006). Option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those option awards vest between two and three years after the grant date and have 10-year contractual terms.
		The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on the historical volatility of the Company’s stock and other factors. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. The expected term of options represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods during the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

		Three Months								Nine Months
		Ended June 30,								Ended June 30,
		2006				2005				2006				2005
Expected life of option (years)			4.75				5.00				4.75				5.00
Risk-free interest rate			4.46	%			3.48	%			4.46	%			3.48	%
Expected volatility of the
Company’s stock			22.00	%			20.00	%			22.00	%			20.00	%
Expected dividend yield on the
Company’s stock			1.70	%			1.76	%			1.70	%			1.76	%
Expected forfeiture rate			12.75	%			8.00	%			12.75	%			8.00	%

JOHNSON CONTROLS, INC.

A summary of stock option activity at June 30, 2006, and changes for the three and nine month periods then ended, is presented below:

										Weighted
										Average				Aggregate
		Weighted				Shares				Remaining				Intrinsic
		Average				Subject to				Contractual				Value
		Option Price				Option				Life (years)				(in millions)
Outstanding, September 30, 2005		$	45.62				10,524,494
Granted			67.69				2,840,641
Exercised			33.82				(1,339,183	)
Forfeited or expired			52.35				(18,117	)
Outstanding, December 31, 2005		$	52.14				12,007,835				7.7			$	249
Granted			73.10				40,000
Exercised			38.72				(718,966	)
Forfeited or expired			57.28				(97,145	)
Outstanding, March 31, 2006		$	53.03				11,231,724				7.6			$	261
Exercised			36.60				(663,279	)
Forfeited or expired			60.84				(101,885	)
Outstanding, June 30, 2006		$	54.00				10,466,560				7.5			$	295
Exercisable, June 30, 2006		$	41.39				4,336,019				5.8			$	177

		The weighted-average grant-date fair value of options granted during the nine month periods ended June 30, 2006 and 2005 was $15.35 and $13.92, respectively. There were no options issued during the three month periods ended June 30, 2006 and 2005.
		The total intrinsic value of options exercised during the three month periods ended June 30, 2006 and 2005 was $30 million and $12 million, respectively, and the total intrinsic value of options exercised during the nine month periods ended June 30, 2006 and 2005 was $103 million and $48 million, respectively.
		In conjunction with the exercise of stock options granted, the Company received cash payments for the three months ended June 30, 2006 and 2005 of $23 million and $15 million, respectively, and for the nine months ended June 30, 2006 and 2005 of $90 million and $55 million, respectively.
		The tax benefit from the exercise of stock options, which is recorded in additional paid-in-capital, was $26 million and $28 million, respectively, for the nine month periods ended June 30, 2006 and 2005. The Company does not settle equity instruments granted under share-based payment arrangements for cash.
		At June 30, 2006, the Company had approximately $39 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 0.8 years.
		Stock Appreciation Rights (“SARs”)
		The Plan also permits SARs to be separately granted to certain employees. SARs vest under the same terms and conditions as option awards; however, they are settled in cash for the difference between the market price on the date of exercise and the exercise price. As a result, SARs are recorded in the Company’s Condensed Consolidated Statements of Financial Position as a liability until the date of exercise.

JOHNSON CONTROLS, INC.

		The fair value of each SAR award is estimated using a similar method described for option awards. In accordance with SFAS No. 123(R), the fair value of each SAR award is recalculated at the end of each reporting period and the liability and expense adjusted based on the new fair value. Prior to the effective date of SFAS No. 123(R), the SAR liability and expense was determined based on the intrinsic value of each award at the end of each reporting period. The difference between the fair value and intrinsic value of SAR awards on the date of adoption of SFAS No. 123(R) was not material to the Company’s consolidated results of operations.
		The assumptions used to determine the fair value of the SAR awards at June 30, 2006 were as follows:

Expected life of SAR (years)			0.5 - 3.3
Risk-free interest rate			5.13 - 5.24	%
Expected volatility of the Company’s stock			22.00	%
Expected dividend yield on the Company’s stock			1.70	%
Expected forfeiture rate			0-20	%

A summary of SAR activity at June 30, 2006, and changes for the three and nine months then ended, is presented below:

										Weighted
										Average				Aggregate
		Weighted				Shares				Remaining				Intrinsic
		Average				Subject to				Contractual				Value
		SAR Price				SAR				Life (years)				(in millions)
Outstanding, September 30, 2005		$	39.05				999,165
Granted			67.69				287,643
Exercised			36.55				(105,653	)
Forfeited or expired			—				—
Outstanding, December 31, 2005		$	52.29				1,181,155				7.6			$	24
Granted			—				—
Exercised			37.84				(89,839	)
Forfeited or expired			57.58				(11,635	)
Outstanding, March 31, 2006		$	53.43				1,079,681				7.6			$	24
Granted			—				—
Exercised			37.91				(53,680	)
Forfeited or expired			62.78				(17,850	)
Outstanding, June 30, 2006		$	54.09				1,008,151				7.4			$	28
Exerciseable, June 30, 2006		$	39.83				384,374				5.4			$	16

In conjunction with the exercise of SARs granted, the Company made payments of $3 million and $1 million during the three month periods ended June 30, 2006 and 2005, respectively, and $9 million and $5 million during the nine month periods ended June 30, 2006 and 2005, respectively.

JOHNSON CONTROLS, INC.

		Restricted (Nonvested) Stock
		In fiscal year 2002, the Company adopted a restricted stock plan that provides for the award of restricted shares of common stock or restricted share units to certain key employees. Awards under the restricted stock plan vest 50% at two years from the grant date and 50% at four years from the grant date.
		A summary of the status of the Company’s nonvested restricted shares at June 30, 2006, and changes for the three and nine month periods then ended, is presented below:

		Weighted				Shares
		Average				Subject to
		Price				Restriction
Nonvested, September 30, 2005		$	51.20				410,000
Granted			—				—
Vested			—				—
Forfeited or expired			—				—
Nonvested, December 31, 2005		$	51.20				410,000
Granted			74.10				283,000
Vested			48.71				(265,000	)
Forfeited or expired			—				—
Nonvested, March 31, 2006		$	67.88				428,000
Granted			90.00				2,000
Vested			44.16				(4,000	)
Forfeited or expired			—				—
Nonvested, June 30, 2006		$	68.21				426,000

		At June 30, 2006, the Company had approximately $22 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the restricted stock plan. That cost is expected to be recognized over a weighted-average period of one year.
11.		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 ($137 million after-tax) pursuant to actions taken under the 2006 Plan. The 2006 Plan, which primarily includes workforce reductions and plant consolidations in the interior experience and building efficiency businesses, is expected to be substantially completed over the next 12 months. The interior experience business restructuring is focused on improving the profitability associated with the manufacturing and supply of instrument panels, headliners and other interior components in North America. In Europe, the restructuring is focused on actions intended to increase the efficiency of its seating component operations. The charges associated with the building efficiency business mostly relate to Europe where the Company is launching its systems redesign initiative.
		This 2006 Plan includes workforce reductions of approximately 5,000 employees (2,200 for interior experience — North America, 1,450 for interior experience — Europe, 250 for interior experience — Asia, 200 for building efficiency — North America Service, 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

JOHNSON CONTROLS, INC.

		a lump sum basis when required in accordance with individual severance agreements. In addition, the 2006 Plan includes 16 plant closures (10 in interior experience - North America, 3 in interior experience — Europe, 1 in interior experience — Asia, 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 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 following table summarizes the Company’s 2006 Plan reserve, included within other current liabilities in the Condensed Consolidated Statements of Financial Position (amounts in millions):

		Employee
		Severance and
		Termination				Asset
		Benefits				Impairments				Other				Total
Original reserve		$	134			$	51			$	12			$	197
Utilized — Cash			—				—				—				—
Utilized — Noncash			—				(51	)			—				(51	)
Balance at June 30, 2006		$	134			$	—			$	12			$	146

		Included within the “other” category 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 2006 Plan. Asset impairments for the third quarter of fiscal year 2006 include $47 million related to interior experience and $4 million related to building efficiency.
		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. This restructuring charge included workforce reductions of approximately 3,900 employees. The restructuring charge associated with employee severance and termination benefits is paid over the severance period granted to each employee and on a lump sum basis when required in accordance with individual severance agreements. At June 30, 2006, approximately 2,900 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 majority of the restructuring activities under the 2005 Plan are expected to be completed by the end of fiscal year 2006.
		The following table summarizes the Company’s 2005 Plan reserve, included within other current liabilities in the Condensed Consolidated Statements of Financial Position (amounts in millions):

JOHNSON CONTROLS, INC.

		Employee
		Severance and
		Termination								Currency
		Benefits				Other				Translation				Total
Balance at September 30, 2005		$	88			$	14			$	(9	)		$	93
Utilized — Cash			(19	)			(5	)			—				(24	)
Utilized — Noncash			—				—				(1	)			(1	)
Balance at December 31, 2005			69				9				(10	)			68
Utilized — Cash			(14	)			(1	)			—				(15	)
Utilized — Noncash			—				—				(1	)			(1	)
Balance at March 31, 2006			55				8				(11	)			52
Utilized — Cash			(9	)			(1	)			—				(10	)
Utilized — Noncash			—				—				4				4
Balance at June 30, 2006		$	46			$	7			$	(7	)		$	46

		Included within the “other” category 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 2005 Plan.
		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.
12.		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 $223 million and $216 million for the three months ended June 30, 2006 and 2005, respectively, and $638 million and $633 million for the nine months ended June 30, 2006 and 2005, respectively.
		A portion of the costs associated with these activities is reimbursed by customers, and totaled $75 million and $101 million for the three months ended June 30, 2006 and 2005, respectively, and $228 million and $274 million for the nine months ended June 30, 2006 and 2005, respectively.

JOHNSON CONTROLS, INC.

13.		Income Taxes
		The more significant components of the Company’s income tax provision (benefit) from continuing operations are as follows (amounts in millions):

		Three Months								Nine Months
		Ended June 30,								Ended June 30,
		2006				2005				2006				2005
Federal, state and foreign income tax expense		$	49			$	94			$	139			$	148
Restructuring charge			(19	)			—				(19	)			—
Valuation allowance adjustments			(131	)			—				(163	)			28
Uncertain tax positions			(10	)			—				(10	)			—
Foreign dividend repatriation			—				—				31				—
Disposition of a joint venture			—				—				(4	)			—
Change in tax status of foreign subsidiary			—				—				(11	)			(81	)
Provision for (benefit from) income taxes		$	(111	)		$	94			$	(37	)		$	95

		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 second quarter of fiscal year 2006, the Company reduced its estimated annual effective income tax rate for continuing operations from 24.3% to 21.0%, primarily due to increased income in certain foreign jurisdictions with a rate of tax lower than the U.S. statutory tax rate, decreased income in higher-tax jurisdictions and certain tax planning initiatives.
		Restructuring Charge
		In the third quarter of fiscal year 2006, the Company recorded a $19 million discrete period tax benefit related to third quarter 2006 restructuring costs using a blended statutory tax rate of 30.6%.
		Valuation Allowance Adjustments
		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.
		In the third quarter of fiscal year 2006, the Company completed an analysis of its German operations and, based on cumulative income over a 36-month period, an assessment of expected future profitability in Germany and finalization of the 2006 Plan, determined that it was more likely than not that the tax benefits of certain operating loss and tax credit carryforwards in Germany would be utilized in the future. As such, the Company reversed $131 million attributable to these operating loss and tax credit carryforwards in the current quarter as a credit to income tax expense, net of remaining valuation allowances at certain German subsidiaries and tax reserve requirements.
		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

JOHNSON CONTROLS, INC.

		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 second quarter of fiscal year 2006 the Company reversed a valuation allowance of $32 million attributable to these operating loss and tax credit carryforwards as a credit to income tax expense.
		The Company’s remaining valuation allowances are related to operating loss carryforwards for which utilization is uncertain due to the lack of sustained profitability and/or limited carryforward periods in certain countries. The Company believes that if it continues to sustain profitable operating results in certain countries, it may have enough positive evidence to reverse a portion of its valuation allowances in accordance with SFAS No. 109, “Accounting for Income Taxes.” At June 30, 2006, the Company’s valuation allowances are primarily attributed to loss carryforwards in Italy and Canada for which sustainable taxable income has not been demonstrated. In addition, the Company has valuation allowances in the U.S. with regards to previously recorded capital losses for which future capital gains are uncertain at this time.
		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.” The Company’s federal income tax returns and certain foreign income tax returns for fiscal years 1997 through 2003 are currently under various stages of 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 June 30, 2006, 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.
		In the third quarter of fiscal year 2006, the Company recorded a $10 million tax benefit related to a favorable tax audit resolution in a foreign jurisdiction.
		Foreign Dividend Repatriation
		In October 2004, the President signed the American Jobs Creation Act of 2004 (the “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 second quarter of fiscal year 2006, as $11 million had been previously recorded by York prior to it becoming a subsidiary of the Company in accordance with York’s approved repatriation plan.

JOHNSON CONTROLS, INC.

		Other Discrete Period Items
		For the nine months ended June 30, 2006, the tax provision also decreased as a result of an $11 million tax benefit realized by a change in tax status of a subsidiary in Hungary and a subsidiary in the Netherlands and a $4 million non-recurring tax benefit related to a $9 million gain resulting from the disposition of the Company’s interest in a German joint venture.
		In the nine months ended June 30, 2005, the tax provision decreased as a result of a $12 million and $69 million tax benefit from a change in tax status of subsidiaries in France and Germany, respectively, partially offset by an increase in the tax valuation allowance of $28 million related to restructuring charges for which no tax benefit was 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 the country at that time.
		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.
		Discontinued Operations
		The Company utilized an effective tax rate for discontinued operations of approximately 38%, 39% and 35% for Bristol Compressors, World Services and its engine electronic business, respectively. These effective tax rates approximate the local statutory rate adjusted for permanent differences.
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 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” (amounts in millions):

		U.S. Pension Plans
		Three Months								Nine Months
		Ended June 30,								Ended June 30,
		2006				2005				2006				2005
Service cost		$	22			$	16			$	65			$	48
Interest cost			27				22				84				67
Expected return on plan assets			(35	)			(26	)			(108	)			(78	)
Amortization of transition obligation			—				—				(1	)			(2	)
Amortization of net actuarial loss			9				5				27				15
Amortization of prior service cost			—				—				1				1
Curtailment loss			—				—				2				—
Net periodic benefit costs		$	23			$	17			$	70			$	51