Since September 30, 2007, the Company has reduced its overall debt, exclusive of the impacts of foreign currency, by $522 million, decreasing its total debt to capitalization ratio to 30% at September 30, 2008 from 33% at September 30, 2007.
Outlook
The Company previously announced fiscal year 2009 guidance in its press release dated October 14, 2008 and first quarter guidance in its press release dated October 23, 2008. This forecasted information was largely based on assumptions regarding the automotive industry, commodity prices, foreign currency exchange rates and overall global economic conditions, which the Company disclosed when it released its guidance. The Company's key 2009 assumptions include:
• North American auto production of 12.3 million vehicles

• European production of 21.2 million vehicles

• North American institutional building construction spending up 3%

• International non-residential construction spending up 5%

• Flat North American residential HVAC market

• Relatively stable global demand for its aftermarket products and services

• Increase in commodity costs such as steel, chemical and resin

• Decrease in commodity costs such as lead, copper and diesel fuel

• Euro to U.S. dollar exchange rate of $1.40

There have been a number of events that have negatively impacted the global economic environment that make it likely that actual general economic conditions in 2009 will not match key assumptions on which the Company based its guidance. For example, commodity prices have been extremely volatile making it difficult to manage those costs, global credit markets have continued to deteriorate which has adversely affected business and consumer confidence and automotive sales have declined significantly. In addition, certain U.S. automakers have warned of their inability to meet their financial obligations in the short term without financial intervention from the U.S. government. To the extent actual general economic conditions in 2009 ultimately do not match key assumptions on which we based the October guidance, our actual results could differ, materially, from the financial guidance we have provided. Segment Analysis
Management historically evaluated the performance of its operating segments based primarily on operating income, excluding restructuring costs and other significant gains and losses. For this purpose, consolidated operating income also excluded interest income and expense, equity in earnings of partially-owned affiliates, gains and losses from sales of businesses, foreign currency gains and losses, and certain miscellaneous revenues and expenses.
Beginning in fiscal 2007, Company management, including the chief operating decision maker, adjusted their measurement of business unit performance, changing from operating income to segment income, which represents income from continuing operations before income taxes and minority interests excluding net financing charges and restructuring costs. The primary reason for the modification was to reflect equity income in earnings for each business operation given its growing significance to the Company's global business strategies.

FISCAL YEAR 2008 COMPARED TO FISCAL YEAR 2007
Summary

                                           Year Ended
                                          September 30,
                    (in millions)       2008         2007       Change
                    Net sales        $ 38,062     $ 34,624         10 %
                    Segment income      2,077        1,884         10 %

• Net sales increased $3.4 billion, primarily due to higher net sales in the power solutions business ($1.2 billion) related to higher unit prices resulting from significant increases in the cost of lead during the year, higher building efficiency net sales ($0.8 billion) and the favorable impact of foreign currency translation ($1.9 billion), partially offset by lower sales in the automotive experience business ($0.5 billion) reflecting weaker North American and European automotive markets.

• Excluding the favorable effects of foreign currency translation, consolidated net sales increased 4% as compared to the prior year.

• Segment income increased $193 million, primarily due to higher volumes and margins in the building efficiency business ($74 million), a favorable product mix in the power solutions segment despite increased lead costs ($12 million) and the favorable impact of foreign currency translation ($132 million), partially offset by the impact of lower North American and European automobile production ($25 million).

• Excluding the favorable effects of foreign currency translation, consolidated segment income increased 3% as compared to the prior year.

Building Efficiency

                                   Net Sales                                       Segment Income
                               for the Year Ended                                for the Year Ended
                                 September 30,                                      September 30,
(in millions)                 2008             2007           Change            2008               2007          Change
North America systems      $    2,282        $  2,027              13 %      $       256          $  216              19 %
North America service           2,409           2,273               6 %              224             197              14 %
North America unitary
products                          810             953             -15 %                2              65             -97 %
Global workplace
solutions                       3,197           2,677              19 %               59              79             -25 %
Europe                          2,710           2,406              13 %              114              77              48 %
Rest of world                   2,713           2,401              13 %              302             216              40 %

                           $   14,121        $ 12,737              11 %      $       957          $  850              13 %

Net Sales:
• The increase in North America systems was primarily due to higher systems product and equipment commercial volumes in the construction and replacement markets ($231 million), the impact of current year acquisitions ($10 million) and the favorable impact of foreign currency translation ($14 million).

• The increase in North America service was primarily due to growth in the truck-based and energy performance contracting businesses ($77 million), the impact of current year acquisitions ($42 million) and the favorable impact of foreign currency translation ($17 million).

• The decrease in North America unitary products was primarily due to a depressed U.S. residential market which has and continues to impact the need for HVAC equipment in new construction housing starts.

• The increase in global workplace solutions primarily reflects a higher volume of global pass-through contracts ($62 million), a net increase in services to existing customers ($283 million), new business ($12 million) and the favorable impact of foreign currency translation ($163 million).

• The increase in Europe reflects the favorable impact of foreign currency translation ($271 million) and market and penetration growth ($33 million).

• The increase in rest of world is due to volume increases mainly in Latin America, Asia and the Middle East ($183 million) and the favorable impact of foreign currency translation ($129 million).

Segment Income:
• The increases in North America systems and North America service were primarily due to higher sales volumes and improving gross margins through pricing and operational efficiencies net of increased commodities costs ($118 million), partially offset by additional SG&A expenses to support business growth initiatives ($45 million) and a nonrecurring contract benefit received in the prior year ($6 million).

• The decrease in North America unitary products was primarily due to the decline in sales volumes and increased commodities costs partially offset by pricing ($60 million) and purchase accounting adjustments related to a September 2007 equity investment in a joint venture ($3 million).

• The decrease in global workplace solutions was primarily due to less favorable margins and mix in North American contracts.

• The increase in Europe was primarily due to the favorable impact of foreign currency translation ($16 million) and continuing benefit from prior restructuring plans, branch office redesign and manufacturing footprint changes ($51

million), partially offset by increased SG&A expenses to support business growth and system implementations ($30 million).

• The increase in rest of world was primarily due to higher sales volumes and margin improvements in Asia, Latin America and the Middle East ($69 million) and the favorable impact of foreign currency translation ($17 million).

Automotive Experience

                            Net Sales                            Segment Income
                       for the Year Ended                      for the Year Ended
                          September 30,                           September 30,
     (in millions)      2008          2007       Change         2008           2007      Change
     North America   $    6,723     $  7,276          -8 %   $        79       $  72          10 %
     Europe               9,854        8,878          11 %           464         445           4 %
     Asia                 1,514        1,398           8 %            36           2           *

                     $   18,091     $ 17,552           3 %   $       579       $ 519          12 %

* Measure not meaningful.

Net Sales:
• The decrease in North America was primarily due to volume reductions with Ford Motor Company, General Motors Corporation, Chrysler LLP, Nissan Motor Company and Toyota Motor Corporation. Additionally, a strike at a U.S. supplier to one of our major customers had an unfavorable impact on net sales of $103 million. This was partially offset by the acquisition of the interior product assets of Plastech Engineered Products, Inc., in July 2008, which had a favorable impact of $85 million.

• The increase in Europe was primarily due to the favorable impact of foreign currency translation ($1.1 billion), partially offset by annual pricing adjustments ($113 million).

• The increase in Asia was primarily due to higher volumes with Nissan Motor Company in Japan and a consolidated joint venture in Korea ($155 million), partially offset by the unfavorable impact of foreign currency translation ($39 million).

Segment Income:
• The increase in North America was primarily due to favorable gross margins from purchasing savings ($57 million), operational efficiencies ($49 million) and commercial recoveries ($44 million), partially offset by lower production volumes ($98 million), a strike at a U.S. supplier to one of our major customers ($30 million) and the unfavorable impact of the acquisition of the interior product assets of Plastech Engineered Products, Inc., in July 2008 ($15 million).

• The increase in Europe was primarily due to the favorable impact of foreign currency translation ($85 million) and purchasing savings ($110 million), partially offset by lower platform pricing adjustments and lower economic recoveries of material cost increases ($142 million) and lower sales volumes ($34 million).

• The increase in Asia was primarily due to higher volumes ($31 million), purchasing savings ($9 million) and higher equity income from joint ventures in China ($14 million), partially offset by higher employee expenses to support market expansion ($20 million).

Power Solutions

                                           Year Ended
                                          September 30,
                     (in millions)      2008        2007       Change
                     Net sales        $ 5,850     $ 4,335         35 %
                     Segment income       541         515          5 %

• Net sales increased primarily due to the impact of higher lead costs on pricing ($863 million), improved price/product mix ($358 million), the favorable impact of foreign currency translation ($262 million) and higher sales volumes ($32 million).

• Segment income increased due to higher volumes and operational efficiencies ($44 million), higher equity income from joint ventures mainly in Asia ($19 million) and the favorable impact of foreign currency translation ($14 million), partially offset by higher lead costs not recovered through pricing ($51 million).

Restructuring Costs
To better align the Company's resources with its growth strategies while reducing the cost structure of its global operations, the Company committed to a restructuring plan (2008 Plan) in the fourth quarter of fiscal 2008 and recorded a $495 million restructuring charge. The restructuring charge relates to cost reduction initiatives in its automotive experience, building efficiency and power solutions businesses and includes workforce reductions and plant consolidations. The Company expects to substantially complete the initiative by early 2010. The automotive-related restructuring is in response to the fundamentals of the European and North American automotive markets. The actions target reductions in the Company's cost base by decreasing excess manufacturing capacity due to lower industry production and the continued movement of vehicle production to low-cost countries, especially in Europe. The restructuring actions in building efficiency are primarily in Europe where the Company is centralizing certain functions and rebalancing its resources to target the geographic markets with the greatest potential growth. Power solutions actions are focused on optimizing its regional manufacturing capacity.
The 2008 Plan included workforce reductions of approximately 9,400 employees (3,700 for automotive experience - North America, 3,400 for automotive experience - Europe, 300 for building efficiency - North America, 900 for building efficiency - Europe, 600 for building efficiency - rest of world, and 500 for power solutions). Restructuring charges associated with employee severance and termination benefits are paid over the severance period granted to each employee and on a lump sum basis when required in accordance with individual severance agreements. As of September 30, 2008, approximately 750 of the employees have been separated from the Company pursuant to the 2008 Plan. In addition, the 2008 Plan includes 21 plant closures (9 for automotive experience
- North America, 9 for automotive experience - Europe, 1 for building efficiency
- North America, and 2 for power solutions). As of September 30, 2008, none of the plants have been closed. The restructuring charge for the impairment of long-lived assets associated with the plant closures was determined using fair value based on a discounted cash flow analysis. Net Financing Charges

Year Ended September 30, (in millions) 2008 2007 Change Net financing charges $ 258 $ 277 -7 %

• Net financing charges decreased slightly primarily due to lower borrowing levels during fiscal 2008.

Provision for Income Taxes
The Company's base effective income tax rate for continuing operations for fiscal 2008 and 2007 was 21.0% (prior to certain discrete period items as outlined below).
The Company's base effective tax rate for fiscal 2008 increased due to the fourth quarter restructuring charge, which was recorded using a blended statutory rate of 12.4% resulting in a $43 million discrete period tax adjustment.
The Company's base effective tax rate for fiscal 2007 was reduced as a result of the favorable resolution of certain tax audits ($28 million), a change in tax status of an automotive experience subsidiary in the Netherlands ($22 million) and a nonrecurring tax benefit related to the use of a portion of the Company's capital loss carryforward valuation allowance ($7 million), partially offset by the impact from the reduction in the German federal income tax rate ($20 million).
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 are 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 fourth quarter of fiscal 2007, the tax provision decreased $7 million due to a nonrecurring tax benefit related to the use of a portion of the Company's capital loss carryforward valuation allowance.

Uncertain Tax Positions
The Company is subject to income taxes in the U.S. and numerous non-U.S. 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. In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109," which prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on a tax return. The Company adopted FIN 48 as of October 1, 2007. As such, accruals for tax contingencies are provided for in accordance with the requirements of FIN 48. In the second and fourth quarters of fiscal 2007, the Company reduced its income tax liability by $15 million and $13 million, respectively, due to the favorable resolution of certain tax audits.
The Company's federal income tax returns and certain non-U.S. income tax returns for various fiscal years remain under various stages of audit by the Internal Revenue Service and respective non-U.S. 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 September 30, 2008, the Company had 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 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.
Change in Statutory Tax Rates
In December 2007, Canada enacted a new tax law which effectively reduced the income tax rates from 35% to 32%. A Business Flat Tax (IETU) was enacted on October 1, 2007, in Mexico that provides for a tax rate of 16.5% to 17.5% on a modified tax base with a credit for corporate income tax paid. On December 28, 2007, Italy enacted reductions in regional taxes from 4.25% to 3.9% effective January 1, 2008. These tax law changes did not have a material impact on the Company's consolidated financial condition, results of operations or cash flows. The German Corporate Tax Reform Act was enacted on August 14, 2007, and resulted in a decrease of the combined Corporate Income Tax and Trade Tax rates. The new rates will apply to the Company's German entities effective October 1, 2007. The Company's tax provision increased $20 million in the fourth quarter of fiscal 2007 as a result of this German tax law change.
In March 2007, the People's National Congress in the People's Republic of China approved a new tax reform law to align the tax regime applicable to non-U.S.-owned Chinese enterprises with those applicable to domestically-owned Chinese enterprises. The new law was effective on January 1, 2008. The tax reform law did not have a material impact on the Company's consolidated financial condition, results of operations or cash flows.
On July 19, 2007, the U.K. enacted a new tax law, which reduced the main corporate income tax rate from 30% to 28%. The reduction went into effect on April 1, 2008. The U.K. tax rate change did not have a material impact on the Company's consolidated financial condition, results of operations or cash flows. Change in Tax Status of Non-U.S. Subsidiary In the second quarter of fiscal 2007, the tax provision decreased as a result of a $22 million tax benefit realized by a change in tax status of an automotive experience subsidiary in the Netherlands.
The change in tax status 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 this investment. This election changed the tax status of the subsidiary from a controlled non-U.S. corporation (i.e., taxable entity) to a branch (i.e., flow through entity 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
In fiscal 2007, the Company utilized an effective tax rate for discontinued operations of approximately 38% for Bristol Compressors and 35% for its engine electronics business, which approximates the local statutory rate adjusted for permanent differences.
Minority Interests in Net Earnings of Subsidiaries Minority interests in net earnings of subsidiaries were $24 million in fiscal 2008 compared with $12 million in the prior year primarily due to higher earnings at a power solutions joint venture, offset by losses at certain automotive experience North America joint ventures because of the decline in the North American automotive industry.
Net Income
Net income for fiscal 2008 was $979 million, 25% below the prior year's $1.3 billion, primarily due to a restructuring charge recorded in the fourth quarter ($434, net of tax) and lower volumes in automotive experience North America and Europe, partially offset by higher volumes and improved margins in the building efficiency and power solutions businesses. Fiscal 2008 diluted earnings per share from continuing operations were $1.63, a 25% decrease from the prior year's $2.16. Excluding the restructuring charge, net income for fiscal 2008 was $1.4 billion, 12% above the prior year's net income and diluted earnings per share from continuing operations were $2.33, an 8% increase from the prior year.

FISCAL YEAR 2007 COMPARED TO FISCAL YEAR 2006
Summary

                                           Year Ended
                                          September 30,
                    (in millions)       2007         2006       Change
                    Net sales        $ 34,624     $ 32,235          7 %
                    Segment income      1,884        1,608         17 %

• Net sales increased $2.4 billion, primarily due to growth in the building efficiency business ($2.0 billion) resulting from increased commercial market share gains, expansion into emerging markets, revenue synergies and the full year impact of the December 2005 York acquisition, the favorable impact of foreign currency translation ($1.5 billion) and higher power solutions net sales ($0.5 billion) related to higher unit prices resulting . . .