Summary of JOHNSON CONTROLS INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statements for Forward-Looking Information Unless otherwise indicated, references to "Johnson Controls," the "Company," "we," "our" and "us" in this Quarterly Report on Form 10-Q refer to Johnson Controls, Inc. and its consolidated subsidiaries.
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "forecast," "outlook," "intend," "strategy," "plan," "may," "should," "will," "would," "will be," "will continue," "will likely result," or the negative thereof or variations thereon or similar terminology generally intended to identify forward-looking statements. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled "Risk Factors" of our Annual Report on Form 10-K for the year ended September 30, 2008. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
Johnson Controls brings ingenuity to the places where people live, work and travel. By integrating technologies, products and services, we create smart environments that redefine the relationships between people and their surroundings. We strive to create a more comfortable, safe and sustainable world through our products and services to millions of vehicles, homes and commercial buildings. Johnson Controls provides innovative automotive interiors that help make driving more comfortable, safe and enjoyable. For buildings, we offer products and services that optimize energy use and improve comfort and security. We also provide batteries for automobiles and hybrid electric vehicles, along with related systems engineering, marketing and service expertise. Johnson Controls was originally incorporated in the state of Wisconsin in 1885 as Johnson Electric Service Company to manufacture, install and service automatic temperature regulation systems for buildings. The Company was renamed to Johnson Controls, Inc. in 1974. In 1978, we acquired Globe-Union, Inc., a Wisconsin-based manufacturer of automotive batteries for both the replacement and original equipment markets. We entered the automotive seating industry in 1985 with the acquisition of Michigan-based Hoover Universal, Inc. Our building efficiency business is a global market leader in designing, producing, marketing and installing integrated heating, ventilating and air conditioning (HVAC) systems, building management systems, controls, security and mechanical equipment. In addition, the building efficiency business provides technical services, energy management consulting and operations of entire real estate portfolios for the non-residential buildings market. We also provide residential air conditioning and heating systems.
Our automotive experience business is one of the world's largest automotive suppliers, providing innovative interior systems through our design and engineering expertise. Our technologies extend into virtually every area of the interior including seating and overhead systems, door systems, floor consoles, instrument panels, cockpits and integrated electronics. Customers include most of the world's major automakers.
Our power solutions business is a leading global supplier of lead-acid automotive batteries for virtually every type of passenger car, light truck and utility vehicle. We serve both automotive original equipment manufacturers and the general vehicle battery aftermarket. We offer Absorbent Glass Mat (AGM), nickel-metal-hydride and lithium-ion battery technologies to power hybrid vehicles.

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The following information should be read in conjunction with the September 30, 2008 consolidated financial statements and notes thereto, along with management's discussion and analysis of financial condition and results of operations included in the Company's 2008 Annual Report on Form 10-K. References in the following discussion and analysis to "Three Months" refer to the three months ended December 31, 2008 compared to the three months ended December 31, 2007.
Outlook
During the first quarter of fiscal 2009, the automotive industry saw further declines as the overall economic environment continued to worsen, and as a result, automotive manufacturers announced further production reductions and plant shut downs. Automotive production has declined by a double digit rate in every region, with virtually every automotive manufacturer affected, including our top four customers, General Motors Corporation, Ford Motor Company, Daimler AG and Toyota Motor Corporation.
In conjunction with the deteriorating economic outlook, residential and commercial construction activity declined in the first quarter of fiscal 2009. The softening in the commercial construction market is primarily concentrated in the office, retail and lodging sectors. Institutional buildings, however, such as government, healthcare and education, remained the strongest sectors of new construction and are the primary focus of the Company's building efficiency business. Our backlog continued to grow and we are well-positioned to benefit from future potential government energy efficiency programs.
The Company is working to reduce its variable and fixed costs in both automotive experience and power solutions in response to the decline in automotive production volumes. In the fourth quarter of fiscal 2008, the Company announced a restructuring plan intended to improve our cost structure and rebalance production within each regional footprint. Despite the decline in OEM production, we believe that power solutions is well positioned with its strong global market share in the historically more stable aftermarket sector. We continue to work on opportunities to grow with our existing customers, as well as win new accounts.
Additionally, in the first quarter of fiscal 2009, the Company recorded impairment charges in its automotive experience and building efficiency businesses and tax valuation allowances in certain jurisdictions due to the continued industry declines (see Long-Lived Assets in the MD&A below and Note 15 in Part I, Item I of this report). The Company will continue to monitor industry conditions in both the automotive and residential housing markets to assess the need for additional impairment charges or further restructuring actions. As a result of the global economic uncertainties and industry volatility, on December 16, 2008, the Company withdrew its quarterly and full year guidance for fiscal 2009, as it is difficult to provide meaningful guidance under these conditions. On January 16, 2009, the Company announced it is expecting a net loss in the second quarter of fiscal 2009 similar to the operating loss reported for the first quarter of fiscal 2009, although the Company said that it expected performance to improve in the building efficiency and power solutions businesses in the second quarter. However, the Company reaffirmed that it will not reinstate full year fiscal 2009 guidance due to continued industry volatility and economic uncertainties.
Liquidity and Capital Resources
The Company believes its capital resources and liquidity position at December 31, 2008, were adequate to meet projected needs. The Company believes requirements for working capital, capital expenditures, dividends, minimum pension contributions, debt maturities and any potential acquisitions in fiscal 2009 will continue to be funded from operations, supplemented by short- and long-term borrowings, if required. The Company currently manages its short-term debt position in the U.S. and euro commercial paper markets and bank loan markets. The Company has experienced uninterrupted access in the U.S. commercial paper market, while the euro market periodically closes for U.S. multinationals. The Company continues to adjust its commercial paper maturities and issuance levels given market reactions to industry events and changes in the Company's credit rating. Further downgrades in our credit rating could negatively impact our access to the commercial paper market. In the event the Company is unable to issue commercial paper, it would have the ability to draw on its $2.05 billion revolving credit facility, which extends until December 2011. The Company does not have any significant debt maturities until fiscal 2011. As such, the Company believes it has sufficient financial resources to fund operations and meet its obligations for the foreseeable future.

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The Company's debt financial covenants require a minimum consolidated stockholders' equity of at least $1.31 billion at all times and allow a maximum aggregated amount of 10% of consolidated stockholders' equity for liens and pledges. For purposes of calculating the Company's covenants, consolidated stockholders' equity is calculated without giving effect to (i) the application of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" or (ii) the cumulative foreign currency translation adjustment. As of December 31, 2008, consolidated stockholders' equity as defined per our covenants was $7.9 billion and there were no outstanding amounts for liens and pledges. The Company expects to be in compliance with all covenants and other requirements set forth in its credit agreements and indentures in the foreseeable future. None of the Company's debt agreements limit access to stated borrowing levels or require accelerated repayment in the event of a decrease in the Company's credit rating.
The key financial assumptions used in calculating the pension liability are determined annually, or whenever plan assets and liabilities are re-measured as required under accounting principles generally accepted in the U.S., including the expected rate of return on our plan assets. Our most recent actuarial valuation utilized an expected rate of return of 8.5% and 5.5% for U.S. and non-U.S. plans, respectively. Given the recent credit market crisis and losses in equity markets, the Company anticipates the actual rate of return will likely be well below this rate in fiscal 2009. However, we still believe the long-term rate of return will approximate 8.5% and 5.5% for U.S. and non-U.S. plans, respectively. Any differences between actual results and the expected long-term asset returns will be reflected in other comprehensive income and amortized to pension expense in future years. The Company's U.S. minimum funding requirement for the remainder of fiscal 2009, and through the first quarter of fiscal 2010, is approximately $21 million per quarter. The Company also monitors its non-U.S. plans' funded status and meets all minimum funding requirements. The Company is reviewing the annual incremental funding requirements for its non-U.S. plans resulting from the recent global equity market performance to determine if additional funding is required. During the first quarter of fiscal 2009, the Company made incremental discretionary pension contributions of approximately $75 million.
Segment Analysis
Management evaluates the performance of its business units based primarily on segment income, which is defined as income from continuing operations before income taxes and minority interests excluding net financing charges and restructuring costs.
Summary

                                        Three Months Ended
                                           December 31,
                    (in millions)        2008         2007       Change
                    Net sales         $  7,336      $ 9,484        -23 %
                    Segment income        (310 )        374            *

* Measure not meaningful Three Months:
� The $2.1 billion decrease in consolidated net sales was primarily due to lower sales in the automotive experience business ($1.2 billion) as a result of lower production levels at most original equipment manufacturer's (OEM's) in North America and Europe, the unfavorable effects of foreign currency translation ($525 million) and primarily the impact of lower lead costs on pricing and lower sales volumes in the power solutions business ($489 million).

� The $684 million decrease in segment income was primarily due to impairment charges recorded on an equity investment ($152 million) in the North American HVAC unitary products group in building

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efficiency and certain fixed assets in the automotive experience North America and Europe segments ($77 million and $33 million, respectively), lower volumes in automotive experience and building efficiency, lead costs not recovered through pricing, inventory revaluation of used batteries and lower volumes in power solutions and the unfavorable effects of foreign currency translation ($33 million).

Building Efficiency

                                   Net Sales                                       Segment Income
                                  Three Months                                      Three Months
                               Ended December 31,                                Ended December 31,
(in millions)                 2008             2007           Change             2008              2007          Change
North America systems      $      537         $   512               5 %      $         55         $   49              12 %
North America service             532             541              -2 %                34             26              31 %
North America unitary
products                          133             162             -18 %              (176 )           (9 )               *
Global workplace
solutions                         728             781              -7 %                 6             18             -67 %
Europe                            572             665             -14 %                12             26             -54 %
Rest of world                     585             583               0 %                48             53              -9 %

                           $    3,087         $ 3,244              -5 %      $        (21 )       $  163                 *

* Measure not meaningful

Net Sales:
� The increase in North America systems was primarily due to higher control systems and product commercial volumes in the construction and replacement markets ($27 million) and the impact of prior year acquisitions ($5 million), partially offset by the unfavorable impact from foreign currency translation ($7 million).

� The decrease in North America service was primarily due to the unfavorable impact of foreign currency translation ($8 million) and lower truck-based business ($1 million).

� The decrease in North America unitary products was primarily due to a depressed U.S. residential market, which impacts the demand for HVAC equipment in new construction housing starts.

� The decrease in global workplace solutions was primarily due to the unfavorable impact of foreign currency translation ($89 million), partially offset by higher volumes ($36 million).

� The decrease in Europe reflects the unfavorable impact of foreign currency translation ($87 million) and a reduction in specialty and service volumes ($6 million).

� The increase in rest of world is mainly due to volume increases in Asia, partially offset by lower volumes in the Middle East.

Segment Income:
� The increase in North America systems was primarily due to higher sales volumes and lower SG&A expenses.

� The increase in North America service was primarily due to lower SG&A expenses.

� The decrease in North America unitary products was primarily due to an equity investment impairment charge ($152 million) and the decline in sales volumes.

� The decrease in global workplace solutions was primarily due to higher bad debt expense due to a customer bankruptcy ($6 million), the unfavorable impact of foreign currency translation ($3 million) and unfavorable mix mainly in North America ($3 million).

� The decrease in Europe was primarily due to the unfavorable impact of foreign currency translation ($7 million) and lower volumes ($7 million).

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� The decrease in rest of world was primarily due to a gain on the sale of a business in the prior year ($6 million) and higher SG&A investments in growth initiatives ($4 million), partially offset by higher sales volumes and margin improvements mainly in Asia ($5 million).

Automotive Experience

                           Net Sales                              Segment Income
                         Three Months                              Three Months
                      Ended December 31,                        Ended December 31,
    (in millions)      2008          2007        Change          2008           2007       Change
    North America   $    1,403      $ 1,819          -23 %   $       (170 )     $  10              *
    Europe               1,439        2,401          -40 %           (147 )        75              *
    Asia                   289          369          -22 %            (12 )        (7 )        -71 %

                    $    3,131      $ 4,589          -32 %   $       (329 )     $  78            *

* Measure not meaningful

Net Sales:
� The decrease in North America was primarily due to the significantly reduced production volumes by all OEM's ($503 million), partially offset by the acquisition of the interior product assets of Plastech Engineered Products, Inc. in July 2008, which had a favorable impact of $87 million.

� The decrease in Europe was primarily due to the lower production volumes across all customers ($715 million), as well as the unfavorable impact of foreign currency translation ($247 million).

� The decrease in Asia was primarily due to lower volumes in Korea and Japan ($37 million) and the unfavorable impact of foreign currency translation ($43 million).

Segment Income:
� The decrease in North America was primarily due an impairment charge on fixed assets ($77 million), lower volumes ($106 million) and higher material economics net of recoveries ($34 million), partially offset by lower SG&A spending ($24 million) and commercial recoveries ($13 million).

� The decrease in Europe is primarily due to customer volume reductions ($124 million), an impairment charge on fixed assets ($33 million), inflexible plant labor costs ($38 million), lower economic recoveries of material costs ($10 million) and the unfavorable impact of foreign currency translation ($17 million).

� The decrease in Asia was primarily due to the unfavorable impact of foreign currency translation ($4 million) and lower volumes ($1 million).

Power Solutions

                                        Three Months
                                     Ended December 31,
                  (in millions)       2008          2007        Change
                  Net sales        $    1,118      $ 1,651          -32 %
                  Segment income           40          133          -70 %

� Net sales decreased primarily due to the impact of lower lead costs on pricing ($408 million), lower sales volumes ($160 million) and the unfavorable impact of foreign currency translation ($44 million), partially offset by improved price/product mix ($79 million).

� Segment income decreased primarily due to lower volumes ($37 million), the unfavorable impact of foreign currency translation ($2 million) and the negative impact of lead and other commodity costs not recovered through pricing ($66 million). The Company has pricing agreements with many of its customers to pass through changes in lead costs. However, due to the timing of the recent rapid decline in lead price levels and an increase in our inventory of used batteries caused primarily by a temporary

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reduction in internal and external lead recycling capacity, we were unable to recover all of our costs through our normal pricing agreements. We do not believe that an impact of this magnitude (approximately $50 million) will recur. These negative factors were partially offset by higher equity income from joint ventures ($9 million) and lower SG&A expenditures due to cost containment measures ($3 million).

Net Financing Charges

Three Months Ended December 31, (in millions) 2008 2007 Change Net financing charges $ 56 $ 69 -19 %

� Net financing charges are lower than the prior year period due to lower borrowing costs and net foreign currency gains.

Provision for Income Taxes

                                             Three Months Ended
                                                December 31,
                     (in millions)            2008          2007
                     Tax provision         $     242      $   64
                     Effective tax rate        -66.1 %      21.0 %

� 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 annual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter.

� In the current fiscal quarter, the Company increased its estimated annual effective income tax rate for continuing operations from 21% in the prior year to 24%, primarily due to losses in jurisdictions for which no tax benefit is recognized.

� In the first quarter of fiscal 2009, the Company performed an analysis of its worldwide deferred tax assets. As a result of the rapid deterioration of operating results in various jurisdictions around the world, it was determined that it was more likely than not that the deferred tax assets would not be utilized in several jurisdictions including France, Mexico, Spain and the United Kingdom. Therefore, the Company recorded a $300 million valuation allowance as income tax expense.

� In the first quarter of fiscal 2009, the Company recorded a $30 million discrete period tax adjustment related to first quarter 2009 impairment costs using a blended statutory tax rate of 12.6%.

Net Income

Three Months Ended December 31, (in millions) 2008 2007 Change Net income (loss) $ (608 ) $ 235 *

* Measure not meaningful
� The decrease in net income was primarily due to impairment charges recorded on an equity investment ($152 million) in building efficiency and certain fixed assets in the automotive experience North America and Europe segments ($77 million and $33 million, respectively), lower volumes in automotive experience and building efficiency, lead costs not recovered through pricing, inventory revaluation of used batteries and lower volumes in power solutions, the unfavorable effects of foreign currency and an increase in the provision for income taxes ($178 million), partially offset by lower net financing charges ($13 million) and lower minority interest earnings ($6 million).

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Backlog
Building efficiency's backlog relates to its control systems and service
activity. At December 31, 2008, the unearned backlog was $4.7 billion, compared
to $4.4 billion at December 31, 2007, a 7% increase.
Financial Condition
Working Capital

                          December 31,     September 30,                December 31,
   (in millions)              2008             2008          Change         2007         Change
   Working capital        $     1,411      $      1,225         15 %    $     1,645        -14 %

   Accounts receivable          5,063             6,472        -22 %          6,180        -18 %
   Inventories                  1,935             2,099         -8 %          2,070         -7 %
   Accounts payable             3,779             5,225        -28 %          4,933        -23 %

� The Company defines working capital as current assets less current liabilities, excluding cash, short-term debt, the current portion of long-term debt and net assets of discontinued operations. Management believes that this measure of working capital, which excludes financing-related items and discontinued activities, provides a more useful measurement of the Company's operating performance.

� The increase in working capital as compared to September 30, 2008 is primarily due to lower accounts payable from timing of supplier payments, partially offset by lower accounts receivable from lower sales volumes. Compared to December 31, 2007, the decrease is primarily due to the restructuring reserve recorded in the fourth quarter of fiscal 2008.

� The Company's days sales in accounts receivable (DSO) for the three months ended December 31, 2008 were 62, higher than 58 in the comparable period ended September 30, 2008 and 57 for the comparable period ended December 31, 2007. The increase in DSO is due to a decrease in sales at a greater rate than the decrease in accounts receivable. There has been no significant deterioration in the aging of accounts receivable at December 31, 2008 compared to September 30, 2008 and December 31, 2007, and there has been no significant change in the Company's revenue recognition policies. The decrease in accounts receivable compared to September 30, 2008 and December 31, 2007 is due to lower sales volumes.

� The Company's inventory turns for the three months ended December 31, 2008 were lower than the period ended September 30, 2008 due to the rapid decline in the automotive industry, whereby inventory levels could not be adjusted as quickly and some seasonality in the building efficiency business. Inventory turns were higher compared to December 31, 2007, due to improvements in inventory management.

� Days payable at December 31, 2008 decreased to 69 days from 73 days at September 30, 2008 and increased from 65 days at December 31, 2007 mainly due to the timing of payments.

Cash Flows

                                                            Three Months Ended
. . .