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Honeywell International 10-K 2012



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from        to
Commission file number 1-8974

Honeywell International Inc.
(Exact name of registrant as specified in its charter)

 

 

 

Delaware

 

22-2640650

 

 

 

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

101 Columbia Road

 

 

Morris Township, New Jersey

 

07962

 

 

 

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code (973) 455-2000
Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of Each Class

 

Name of Each Exchange
on Which Registered

 

 

 

Common Stock, par value $1 per share*

 

New York Stock Exchange

 

 

Chicago Stock Exchange

9½% Debentures due June 1, 2016

 

New York Stock Exchange

* The common stock is also listed on the London Stock Exchange.

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x

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 x No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

 

 

 

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

The aggregate market value of the voting stock held by nonaffiliates of the Registrant was approximately $47.1 billion at June 30, 2011.

There were 775,363,731 shares of Common Stock outstanding at January 31, 2012.

Documents Incorporated by Reference

Part III: Proxy Statement for Annual Meeting of Shareowners to be held April 23, 2012.



TABLE OF CONTENTS

 

 

 

 

 

 

 

Item

 

 

 

Page

 

 

 

 

 

 

 

 

 

 

 

 

Part I

1

 

Business

 

1

 

1A

 

Risk Factors

 

13

 

1B

 

Unresolved Staff Comments

 

19

 

2

 

Properties

 

19

 

3

 

Legal Proceedings

 

20

 

Executive Officers of the Registrant

 

21

 

 

 

 

 

 

Part II.

5

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

22

 

6

 

Selected Financial Data

 

24

 

7

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25

 

7A

 

Quantitative and Qualitative Disclosures About Market Risk

 

55

 

8

 

Financial Statements and Supplementary Data

 

56

 

9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

113

 

9A

 

Controls and Procedures

 

113

 

9B

 

Other Information

 

114

 

 

 

 

 

 

Part III.

10

 

Directors and Executive Officers of the Registrant

 

114

 

11

 

Executive Compensation

 

114

 

12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

114

 

13

 

Certain Relationships and Related Transactions

 

117

 

14

 

Principal Accounting Fees and Services

 

117

 

 

 

 

 

 

Part IV.

15

 

Exhibits and Financial Statement Schedules

 

118

Signatures

 

119



PART I.

 

 

Item 1.

Business

          Honeywell International Inc. (Honeywell) is a diversified technology and manufacturing company, serving customers worldwide with aerospace products and services, control, sensing and security technologies for buildings, homes and industry, turbochargers, automotive products, specialty chemicals, electronic and advanced materials, process technology for refining and petrochemicals, and energy efficient products and solutions for homes, business and transportation. Honeywell was incorporated in Delaware in 1985.

          We maintain an internet website at http://www.honeywell.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports, are available free of charge on our website under the heading “Investor Relations” (see “SEC Filings & Reports”) immediately after they are filed with, or furnished to, the Securities and Exchange Commission (SEC). In addition, in this Form 10-K, the Company incorporates by reference certain information from parts of its proxy statement for the 2012 Annual Meeting of Stockholders, which we expect to file with the SEC on or about March 8, 2012, and which will also be available free of charge on our website.

          Information relating to corporate governance at Honeywell, including Honeywell’s Code of Business Conduct, Corporate Governance Guidelines and Charters of the Committees of the Board of Directors are also available, free of charge, on our website under the heading “Investor Relations” (see “Corporate Governance”), or by writing to Honeywell, 101 Columbia Road, Morris Township, New Jersey 07962, c/o Vice President and Corporate Secretary. Honeywell’s Code of Business Conduct applies to all Honeywell directors, officers (including the Chief Executive Officer, Chief Financial Officer and Controller) and employees.

Major Businesses

          We globally manage our business operations through four businesses that are reported as operating segments: Aerospace, Automation and Control Solutions, Performance Materials and Technologies (formerly Specialty Materials), and Transportation Systems. Financial information related to our operating segments is included in Note 23 of Notes to Financial Statements in “Item 8. Financial Statements and Supplementary Data.”

          The major products/services, customers/uses and key competitors of each of our operating segments follows:

Aerospace

Our Aerospace segment is a leading global provider of integrated avionics, engines, systems and service solutions for aircraft manufacturers, airlines, business and general aviation, military, space and airport operations.

 

 

 

 

 

 

 

Product/Service Classes

Major Products/Services

Major Customers/Uses

Key Competitors

 

 

 

 

 

 

 

Turbine propulsion engines

 

TFE731 turbofan
TFE1042 turbofan
ATF3 turbofan
F125 turbofan
F124 turbofan
ALF502 turbofan
LF507 turbofan
CFE738 turbofan
HTF 7000 turbofan
T53 turboshaft
T55 turboshaft
CTS800 turboshaft
HTS900 turboshaft
LT101 turboshaft
TPE 331 turboprop
AGT1500 turboshaft
Repair, overhaul and spare
parts

 

Business, regional, and general
aviation
Commercial helicopters
Military vehicles
Military helicopters
Military trainer
 
Rolls Royce/Allison
Turbomeca
United Technologies
Williams

1



 

 

 

 

 

 

 

Product/Service Classes

Major Products/Services

Major Customers/Uses

Key Competitors

 

 

 

 

 

 

 
Auxiliary power units
(APU’S)
 
Airborne auxiliary power units
Jet fuel starters
Secondary power systems
Ground power units
Repair, overhaul and spare
parts
 
Commercial, regional, business
and military aircraft
Ground power
 
United Technologies
 
Environmental control
systems
 
Air management systems:
Air conditioning
Bleed air
Cabin pressure control
Air purification and treatment
Gas Processing
Heat Exchangers
Repair, overhaul and spare
parts
 
Commercial, regional and
general aviation aircraft
Military aircraft
Ground vehicles
Spacecraft
 
Auxilec
Barber Colman
Dukes
Eaton-Vickers
General Electric
Goodrich
Liebherr
Pacific Scientific
Parker Hannifin
TAT
United Technologies
 
Electric power systems
 
Generators
Power distribution & control
Power conditioning
Repair, overhaul and spare
parts
 
Commercial, regional, business
and military aircraft
Commercial and military
helicopters
Military vehicles
 
General Electric
Goodrich
Safran
United Technologies
 
Engine systems
accessories
Electronic and hydromechanical
fuel controls
Engine start systems
Electronic engine controls
Sensors
Valves
Electric and pneumatic power
generation systems
Thrust reverser actuation,
pneumatic and electric
Commercial, regional and
general aviation aircraft
Military aircraft
BAE Controls
Goodrich
Parker Hannifin
United Technologies
 
Avionics systems
 
Flight safety systems:
Enhanced Ground Proximity
Warning Systems (EGPWS)
Traffic Alert and Collision
Avoidance Systems (TCAS)
Windshear detection systems
Flight data and cockpit voice
recorders
Weather radar
Communication, navigation
and surveillance systems:
Navigation and guidance
 
Commercial, business and
general aviation aircraft
Government aviation
Military aircraft
 
BAE
Boeing/Jeppesen
Garmin
General Electric
Goodrich
Kaiser
L3
Lockheed Martin
Northrop Grumman
Rockwell Collins
Thales
Trimble/Terra

2



 

 

 

 

 

 

 

Product/Service Classes

Major Products/Services

Major Customers/Uses

Key Competitors

 

 

 

 

 

 

 

systems
Global positioning systems
Satellite systems
Integrated avionics systems
Flight management systems
Cockpit display systems
Data management and aircraft
performance monitoring
systems
Aircraft information systems
Network file servers
Wireless network transceivers
Weather information network
Navigation database
information
Cabin management systems
Vibration detection and
monitoring
Mission management systems
Tactical data management
systems
Maintenance and health
monitoring systems
 
 
Universal Avionics
Universal Weather
 
Aircraft lighting
 
Interior and exterior aircraft
lighting
 
Commercial, regional,
business, helicopter and
military aviation aircraft
(operators, OEMs, parts
distributors and MRO
service providers)
 
Hella/Goodrich
LSI
Luminator
Whelen
 
Inertial sensor
 
Inertial sensor systems for
guidance, stabilization,
navigation and control
Gyroscopes, accelerometers,
inertial measurement units
and thermal switches
Attitude and heading
reference systems
 
Military and commercial
vehicles
Commercial spacecraft and
launch vehicles
Transportation
Powered, guided munitions
Munitions
 
Astronautics
Kearfott
BAE
GEC
General Electric
Goodrich
L3 Com
KVH
Northrop Grumman
Rockwell
 
Control products
 
Radar altimeters
Pressure products
Air data products
Thermal switches
Magnetic sensors
 
Military aircraft
Powered, guided munitions, UAVs
Commercial applications
Commercial, regional, business
aircraft
 
BAE
Goodrich
Northrop Grumman
Rockwell Collins
Rosemount

3



 

 

 

 

 

 

 

Product/Service Classes

 

Major Products/Services

 

Major Customers/Uses

 

Key Competitors

 

 

 

 

 

 

 
Space products and
subsystems
Guidance subsystems
Control subsystems
Processing subsystems
Radiation hardened electronics
and integrated circuits
GPS-based range safety
systems
Gyroscopes
Commercial and military
spacecraft
DoD
FAA
NASA
BAE
Ithaco
L3
Northrop Grumman
Raytheon
 
Management and technical
services
Maintenance/operation and
provision of space systems,
services and facilities
Systems engineering and
integration
Information technology services
Logistics and sustainment
U.S. government space (NASA)
DoD (logistics and information
services)
FAA
DoE
Local governments
Commercial space ground
segment systems and
services
Bechtel
Boeing
Computer Sciences
Dyncorp
Exelis
Lockheed Martin
Raytheon
SAIC
The Washington
Group
United Space
Alliance
 
Landing systems
 
Wheels and brakes
Wheel and brake repair and
overhaul services
Commercial airline, regional,
business and military aircraft
USAF, DoD, DoE
Boeing, Airbus, Lockheed
Martin
Goodrich
Meggitt
Messier-Bugatti

4



 
 
 
 
 
 
 
Automation and Control Solutions
 
Our Automation and Control Solutions segment is a leading global provider of environmental and combustion controls, sensing controls, security and life safety products and services, scanning and mobility devices and process automation and building solutions and services for homes, buildings and industrial facilities.
 
 
 
 
 
 
 
Product/Service Classes
 
Major Products/Services
 
Major Customers/Uses
 
Key Competitors
 
 
 
 
 
 
 
Environmental and
combustion controls;
sensing controls
 
Heating, ventilating and air
conditioning controls and
components for homes and
buildings
Indoor air quality products
including zoning, air cleaners,
humidification, heat and
energy recovery ventilators
Controls plus integrated
electronic systems for
burners, boilers and
furnaces
Consumer household products
including humidifiers and
thermostats
Electrical devices and switches
Water controls
Sensors, measurement, control
and industrial components
Energy demand/response
management products and
services
 
Original equipment
manufacturers (OEMs)
Distributors
Contractors
Retailers
System integrators
Commercial customers and
homeowners served by
the distributor, wholesaler,
contractor, retail and utility
channels
Package and materials handling
operations
Appliance manufacturers
Transportation companies
Aviation companies
Food and beverage processors
Medical equipment
Heat treat processors
Computer and business
equipment manufacturers
 
Bosch
Cherry
Danfoss
Eaton
Emerson
Endress & Hauser
Freescale
Semiconductor
GE
Holmes
Invensys
Johnson Controls
Omron
Schneider
Siemens
United Technologies
Yamatake
Measurement
Specialties
             
Security and life safety
products and services
 
Security products and systems
Fire products and systems
Access controls and closed
circuit television
Home health monitoring and
nurse call systems
Gas detection products and
systems
Emergency lighting
Distribution
Personal protection equipment
 
OEMs
Retailers
Distributors
Commercial customers and
homeowners served by the
the distributor, wholesaler,
contractor, retail and utility
channels
Health care organizations
Security monitoring service
providers
Industrial, fire service, utility
distributors and U.S.
Government
 
Bosch
Draeger
GE
Hubbell Inc
Mine Safety
Appliances
Pelco
Phillips
Riken Keiki
Siemens
Tyco
United Technologies
3M
             
Scanning and mobility
 
Hand held and hands free
image and laser based bar
code scanners
Scan engines
Mobile and wireless computers
 
OEMs
Retailers
Distributors
Commercial customers served
by the transportation and
and logistics, manufacturing,
healthcare and retail
 
Datalogic
Intermec
Technologies
Iridium Vars
Motorola Solutions
Psion
Skywave

5



 
 
 
 
 
 
 
Product/Service Classes
 
Major Products/Services
 
Major Customers/Uses
 
Key Competitors
 
 
 
 
 
 
 
 
 
Satellite tracking hardware,
airtime services and
applications
Search & Rescue ground
stations and system
software
LXE Hand Held and Vehicle
Mounts
 
channels
Security, logistics, maritime
customers for:
the tracking of vehicles,
containers, ships, and
personnel in remote
environments
National organizations that
monitor distress signals
from aircraft, ships and
individuals, typically Military
branches and Coast Guards
Warehousing and Ports
 
Tsi
             
Process automation
products and solutions
 
Advanced control software and
industrial automation systems
for control and monitoring of
continuous, batch and hybrid
operations
Production management
software
Communications systems for
Industrial Control equipment
and systems
Consulting, networking
engineering and installation
Terminal automation solutions
Process control instrumentation
Field instrumentation
Analytical instrumentation
Recorders and controllers
Critical environment control
solutions and services
Aftermarket maintenance,
repair and upgrade
Gas control, measurement
and analyzing equipment
 
Refining and petrochemical
companies
Chemical manufacturers
Oil and gas producers
Food and beverage processors
Pharmaceutical companies
Utilities
Film and coated producers
Pulp and paper industry
Continuous web producers in
the paper, plastics, metals,
rubber, non-woverns and
printing industries
Mining and mineral industries
 
ABB
AspenTech
Emerson
Invensys
Siemens
Yokogawa
             
Building solutions and
services
 
HVAC and building control
solutions and services
Energy management solutions
and services, including
demand response and
automation
Security and asset
management solutions and
services
Enterprise building integration
solutions
Building information services
Airport lighting and systems,
visual docking guidance
systems
 
Building managers and owners
Contractors, architects and
developers
Consulting engineers
Security directors
Plant managers
Utilities
Large global corporations
Public school systems
Universities
Local governments
Public housing agencies
Airports
 
Ameresco
Chevron
GroupMac
Ingersoll Rand
Invensys
Johnson Controls
Local contractors
and utilities
Safegate
Schneider
Siemens
Trane
Thorn
United Technologies
             

6



 
 
 
 
 
 
 
Performance Materials and Technologies
 
Our Performance Materials and Technologies segment is a global leader in providing customers with leading technologies and high-performance materials, including hydrocarbon processing technologies, catalysts, adsorbents, equipment and services, fluorine products, specialty films and additives, advanced fibers and composites, intermediates, specialty chemicals, electronic materials and chemicals.
 
 
 
 
 
 
 
Product/Service Classes
 
Major Products/Services
 
Major Customers/Uses
 
Key Competitors
 
 
 
 
 
 
 
Resins & chemicals
 
Nylon 6 polymer
Caprolactam
Ammonium sulfate
Phenol
Acetone
Cyclohexanone
MEKO
 
Nylon for carpet fibers,
Engineered resins and
flexible packaging
Fertilizer ingredients
Resins - Phenolic, Epoxy,
Polycarbonate
Sovents
Chemical intermediates
Paints, Coatins, Laquers
 
BASF
DSM
Sinopec
UBE
INEOS
Mitsui
Shell
Polimeri
             
Hydrofluoric acid (HF)
 
Anhydrous and aqueous
hydrofluoric acid
 
 
Fluorocarbons
Metals processing
Oil refining
Chemical intermediates
Semiconductors Photovoltaics
 
Mexichem Fluor
Solvay
             
Fluorocarbons
 
Refrigerants, aerosol and
insulation foam blowing
agents
Genesolv®solvents
Oxyfume sterilant gases
Ennovate 3000 blowing agent
for refrigeration insulation
 
Refrigeration
Air conditioning
Polyurethane foam
Precision cleaning
Optical
Appliances
Hospitals
Medical equipment
Manufacturers
 
Arkema
Dupont
Solvay
Mexichem Fluor
Daikin
Sinochem
             
Nuclear services
 
UF6 conversion services
 
Nuclear fuel
Electric utilities
 
Cameco
Comurhex
Rosatom
             
Research and fine
chemicals
 
Oxime-based fine chemicals
Fluoroaromatics
High-purity solvents
 
Agrichemicals
Biotech
 
Avecia
Degussa
DSM
E. Merck
Thermo Fisher
Scientific
Lonza
Sigma-Aldrich
             
Performance chemicals
Imaging chemicals
Chemical processing
sealants
 
HF derivatives
Fluoroaromatics
Catalysts
Oxime-silanes
 
Diverse by product type
 
Atotech
BASF
DSM
             
Advanced fibers &
 
High modulus polyethylene
 
Bullet resistant vests, helmets
 
DuPont

7



 
 
 
 
 
 
 
Product/Service Classes
 
Major Products/Services
 
Major Customers/Uses
 
Key Competitors
 
 
 
 
 
 
 
composites
 
fiber and shield composites
Aramid shield composites
 
and other armor applications
Cut-resistant gloves
Rope & cordage
 
DSM
Teijin
             
Healthcare and packaging
 
Cast nylon film
Bi-axially oriented nylon film
Fluoropolymer film
 
Food and pharmaceutical
packaging
 
American Biaxis
CFP
Daikin
Kolon
Unitika
             
Specialty additives
 
Polyethylene waxes
Paraffin waxes and blends
PVC lubricant systems
Processing aids
Luminescent pigments Adhesives
 
Coatings and inks
PVC pipe, siding & profiles
Plastics
Reflective coatings
Safety & security applications
 
BASF
Clariant
Westlake
             
Electronic chemicals
 
Ultra high-purity HF
Inorganic acids
Hi-purity solvents
 
Semiconductors
Photovoltaics
 
KMG
BASF
             
Semiconductor materials
and services
 
Interconnect-dielectrics
Interconnect-metals
Semiconductor packaging
materials
Advanced polymers
Anti-reflective coatings
Thermo-couples
 
Semiconductors
Microelectronics
Telecommunications
LED
Photovoltaics
 
BASF
Brewer
Dow
Nikko
Praxair
Shinko
Tosoh
             
Catalysts, adsorbents and
specialties
 
Catalysts
Molecular sieves
Adsorbents
Customer catalyst
manufacturing
 
Petroleum, refining,
petrochemical, gas
processing, and
manufacturing industries
 
Axens
BASF
WR Grace
Haldor
Shell/Criterion
             
Process technology
and equipment
 
Technology licensing and
engineering design of
process units and systems
Engineered products
Proprietary equipment
Training and development of
technical personnel
Gas processing technology
 
Petroleum refining,
petrochemical and gas
processing
 
Axens
BP/Amoco
Exxon-Mobil
Chevron Lummus
Global
Chicago Bridge &
Iron
Koch Glitsch
Linde AG
Natco
Shaw Group
Shell/SGS
             
Renewable fuels and
chemicals
 
Technology licensing of
Process, catalysts, absorbents,
Refining equipment and
services for producing
renewable-based fuels
and chemicals
 
Military, refining, fuel oil,
power production
 
Neste Oy
Lurgi
Kior
Syntroleum
Dynamotive
             

8



 
 
 
 
 
 
 
Transportation Systems
 
Our Transportation Systems segment is one of the leading manufacturers of engine boosting systems for passenger cars and commercial vehicles, as well as a leading provider of braking products.
 
Product/Service Classes
 
Major Products/Services
 
Major Customers/Uses
 
Key Competitors
 
 
 
 
 
 
 
Charge-air systems
 
Turbochargers for gasoline
and diesel engines
 
Passenger car, truck and
off-highway OEMs
Engine manufacturers
Aftermarket distributors and
dealers
 
Borg-Warner
Holset
IHI
MHI
             
Thermal systems
 
Exhaust gas coolers
Charge-air coolers
Aluminum radiators
Aluminum cooling modules
 
Passenger car, truck and
off-highway OEMs
Engine manufacturers
Aftermarket distributors and
dealers
 
Behr
Modine
Valeo
             
Brake hard parts and other
friction materials
 
Disc brake pads and shoes
Drum brake linings
Brake blocks
Disc and drum brake
components
Brake hydraulic components
Brake fluid
Aircraft brake linings
Railway linings
 
Automotive and heavy vehicle
OEMs, OES, brake
manufacturers and
aftermarket channels
Installers
Railway and commercial/military
aircraft OEMs and brake
manufacturers
 
Advics
Akebono
Continental
Federal-Mogul
ITT Corp
JBI
Nisshinbo
TRW

Aerospace Sales

          Our sales to aerospace customers were 31, 33, and 36 percent of our total sales in 2011, 2010 and 2009, respectively. Our sales to commercial aerospace original equipment manufacturers were 6, 6 and 7 percent of our total sales in 2011, 2010 and 2009, respectively. In addition, our sales to commercial aftermarket customers of aerospace products and services were 11 percent of our total sales in each of 2011, 2010 and 2009. Our Aerospace results of operations can be impacted by various industry and economic conditions. See “Item 1A. Risk Factors.”

U.S. Government Sales

          Sales to the U.S. Government (principally by our Aerospace segment), acting through its various departments and agencies and through prime contractors, amounted to $4,276, $4,354 and $4,288 million in 2011, 2010 and 2009, respectively, which included sales to the U.S. Department of Defense, as a prime contractor and subcontractor, of $3,374, $3,500 and $3,455 million in 2011, 2010 and 2009, respectively. Base U.S. defense spending (excludes Overseas Contingent Operations) was essentially flat in 2011 compared to 2010. Although we expect a slight decline in our defense and space revenue in 2012 (see Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations), we do not expect our overall operating results to be significantly affected by any proposed changes in 2012 federal defense spending due principally to the varied mix of the government programs which impact us (OEM production, engineering development programs, aftermarket spares and repairs and overhaul programs) as well as our diversified commercial businesses. Our contracts with the U.S. Government are subject to audits, investigations, and termination by the government. See “Item 1A. Risk Factors.”

Backlog

9


          Our total backlog at December 31, 2011 and 2010 was $16,160 and $14,616 million, respectively. We anticipate that approximately $12,018 million of the 2011 backlog will be filled in 2012. We believe that backlog is not necessarily a reliable indicator of our future sales because a substantial portion of the orders constituting this backlog may be canceled at the customer’s option.

Competition

          We are subject to active competition in substantially all product and service areas. Competition is expected to continue in all geographic regions. Competitive conditions vary widely among the thousands of products and services provided by us, and vary by country. Our businesses compete on a variety of factors, such as price, quality, reliability, delivery, customer service, performance, applied technology, product innovation and product recognition. Brand identity, service to customers and quality are important competitive factors for our products and services, and there is considerable price competition. Other competitive factors include breadth of product line, research and development efforts and technical and managerial capability. While our competitive position varies among our products and services, we believe we are a significant competitor in each of our major product and service classes. A number of our products and services are sold in competition with those of a large number of other companies, some of which have substantial financial resources and significant technological capabilities. In addition, some of our products compete with the captive component divisions of original equipment manufacturers. See Item 1A “Risk Factors” for further discussion.

International Operations

          We are engaged in manufacturing, sales, service and research and development globally. U.S. exports and foreign manufactured products are significant to our operations. U.S. exports comprised 12, 11 and 12 percent of our total sales in 2011, 2010 and 2009, respectively. Foreign manufactured products and services, mainly in Europe and Asia, were 43, 42 and 40 percent of our total sales in 2011, 2010 and 2009, respectively.

          Approximately 18 percent of total 2011 sales of Aerospace-related products and services were exports of U.S. manufactured products and systems and performance of services such as aircraft repair and overhaul. Exports were principally made to Europe, Asia, Canada, and Latin America. Foreign manufactured products and systems and performance of services comprised approximately 15 percent of total 2011 Aerospace sales. The principal manufacturing facilities outside the U.S. are in Europe, with less significant operations in Canada and Asia.

          Approximately 3 percent of total 2011 sales of Automation and Control Solutions products and services were exports of U.S. manufactured products. Foreign manufactured products and performance of services accounted for 58 percent of total 2011 Automation and Control Solutions sales. The principal manufacturing facilities outside the U.S. are in Europe and Asia, with less significant operations in Canada and Australia.

          Approximately 34 percent of total 2011 sales of Performance Materials and Technologies products and services were exports of U.S. manufactured products. Exports were principally made to Asia and Latin America. Foreign manufactured products and performance of services comprised 25 percent of total 2011 Performance Materials and Technologies sales. The principal manufacturing facilities outside the U.S. are in Europe, with less significant operations in Asia.

          Approximately 3 percent of total 2011 sales of Transportation Systems products were exports of U.S. manufactured products. Foreign manufactured products accounted for 85 percent of total 2011 sales of Transportation Systems. The principal manufacturing facilities outside the U.S. are in Europe, with less significant operations in Asia and Latin America.

          Financial information including net sales and long-lived assets related to geographic areas is included in Note 24 of Notes to Financial Statements in “Item 8. Financial Statements and Supplementary Data”. Information regarding the economic, political, regulatory and other risks associated with international operations is included in “Item 1A. Risk Factors.”

Raw Materials

          The principal raw materials used in our operations are generally readily available. Although we occasionally experience disruption in raw materials supply, we experienced no significant problems in the purchase of key raw materials and commodities in 2011. We are not dependent on any one supplier for a material

10


amount of our raw materials, except related to R240 (a key component in foam blowing agents), a raw material used in our Performance Materials and Technologies segment.

          The costs of certain key raw materials, including cumene, fluorspar, perchloroethylene, R240, natural gas, sulfur and ethylene in our Performance Materials and Technologies business, nickel, steel and other metals in our Transportation Systems business, and nickel, titanium and other metals in our Aerospace business, are expected to remain volatile. We will continue to attempt to offset raw material cost increases with formula or long-term supply agreements, price increases and hedging activities where feasible. We do not presently anticipate that a shortage of raw materials will cause any material adverse impacts during 2012. See “Item 1A. Risk Factors” for further discussion.

Patents, Trademarks, Licenses and Distribution Rights

          Our segments are not dependent upon any single patent or related group of patents, or any licenses or distribution rights. We own, or are licensed under, a large number of patents, patent applications and trademarks acquired over a period of many years, which relate to many of our products or improvements to those products and which are of importance to our business. From time to time, new patents and trademarks are obtained, and patent and trademark licenses and rights are acquired from others. We also have distribution rights of varying terms for a number of products and services produced by other companies. In our judgment, those rights are adequate for the conduct of our business. We believe that, in the aggregate, the rights under our patents, trademarks and licenses are generally important to our operations, but we do not consider any patent, trademark or related group of patents, or any licensing or distribution rights related to a specific process or product, to be of material importance in relation to our total business. See “Item 1A. Risk Factors” for further discussion.

          We have registered trademarks for a number of our products and services, including Honeywell, Aclar, Ademco, Bendix, BW, Callidus, Enovate, Esser, Fire-Lite, Garrett, Genetron, Gent, Howard Leight, Jurid, Matrikon, Maxon, MK, North, Notifier, Novar, RMG, Silent Knight, Spectra, System Sensor, Trend, Tridium and UOP.

Research and Development

          Our research activities are directed toward the discovery and development of new products, technologies and processes, and the development of new uses for existing products and software applications. The Company’s principal research and development activities are in the U.S., India, Europe and China.

          Research and development (R&D) expense totaled $1,799, $1,450 and $1,321 million in 2011, 2010 and 2009, respectively. The increase in R&D expense of 24 percent in 2011 compared to 2010 was mainly due to increased expenditures on the development of new technologies to support existing and new aircraft platforms in our Aerospace segment, the development of turbocharging systems for new diesel and gas applications in our Transportation Systems segment and new product development in our Automation and Control Solutions segment. The increase in R&D expense of 10 percent in 2010 compared to 2009 was mainly due to additional product design and development costs in Automation and Control Solutions and increased expenditures on the development of products for new aircraft platforms. R&D as a percentage of sales was 4.9, 4.5 and 4.4 percent in 2011, 2010 and 2009, respectively. Customer-sponsored (principally the U.S. Government) R&D activities amounted to an additional $867, $874 and $852 million in 2011, 2010 and 2009, respectively.

Environment

          We are subject to various federal, state, local and foreign government requirements regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. It is our policy to comply with these requirements, and we believe that, as a general matter, our policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage, and of resulting financial liability, in connection with our business. Some risk of environmental damage is, however, inherent in some of our operations and products, as it is with other companies engaged in similar businesses.

          We are and have been engaged in the handling, manufacture, use and disposal of many substances classified as hazardous by one or more regulatory agencies. We believe that, as a general matter, our policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and personal injury, and that our handling, manufacture, use and disposal of these substances are in accord with environmental and safety laws and regulations. It is possible, however, that future knowledge or other developments, such as improved capability to detect substances in the environment or increasingly strict

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environmental laws and standards and enforcement policies, could bring into question our current or past handling, manufacture, use or disposal of these substances.

          Among other environmental requirements, we are subject to the federal superfund and similar state and foreign laws and regulations, under which we have been designated as a potentially responsible party that may be liable for cleanup costs associated with current and former operating sites and various hazardous waste sites, some of which are on the U.S. Environmental Protection Agency’s Superfund priority list. Although, under some court interpretations of these laws, there is a possibility that a responsible party might have to bear more than its proportional share of the cleanup costs if it is unable to obtain appropriate contribution from other responsible parties, we have not had to bear significantly more than our proportional share in multi-party situations taken as a whole.

          We do not believe that existing or pending climate change legislation, regulation, or international treaties or accords are reasonably likely to have a material effect in the foreseeable future on the Company’s business or markets that it serves, nor on its results of operations, capital expenditures or financial position. We will continue to monitor emerging developments in this area.

          Further information, including the current status of significant environmental matters and the financial impact incurred for remediation of such environmental matters, if any, is included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Note 21 of Notes to Financial Statements in “Item 8. Financial Statements and Supplementary Data,” and in “Item 1A. Risk Factors.”

Employees

          We have approximately 132,000 employees at December 31, 2011, of which approximately 53,000 were located in the United States.

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Item 1A.

Risk Factors

Cautionary Statement about Forward-Looking Statements

          We have described many of the trends and other factors that drive our business and future results in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, including the overview of the Company and each of our segments and the discussion of their respective economic and other factors and areas of focus for 2012. These sections and other parts of this report (including this Item 1A) contain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934.

          Forward-looking statements are those that address activities, events or developments that management intends, expects, projects, believes or anticipates will or may occur in the future. They are based on management’s assumptions and assessments in light of past experience and trends, current economic and industry conditions, expected future developments and other relevant factors. They are not guarantees of future performance, and actual results, developments and business decisions may differ significantly from those envisaged by our forward-looking statements. We do not undertake to update or revise any of our forward-looking statements. Our forward-looking statements are also subject to risks and uncertainties that can affect our performance in both the near-and long-term. These forward-looking statements should be considered in light of the information included in this Form 10-K, including, in particular, the factors discussed below.

Risk Factors

          Our business, operating results, cash flows and financial condition are subject to the risks and uncertainties set forth below, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results.

Industry and economic conditions may adversely affect the market and operating conditions of our customers, which in turn can affect demand for our products and services and our results of operations.

          The operating results of our segments are impacted by general global industry and economic conditions that can cause changes in spending and capital investment patterns, demand for our products and services and the level of our manufacturing and shipping costs. The operating results of our Aerospace segment, which generated 31 percent of our consolidated revenues in 2011, are directly tied to cyclical industry and economic conditions, including global demand for air travel as reflected in new aircraft production, the deferral or cancellation of orders for new aircraft, delays in launch schedules for new aircraft platforms, the retirement of aircraft, global flying hours, and business and general aviation aircraft utilization rates, as well as changes in customer buying patterns with respect to aftermarket parts, supplier consolidation, factory transitions, capacity constraints, and the level and mix of U.S. Government appropriations for defense and space programs (as further discussed in other risk factors below). The challenging operating environment faced by the commercial airline industry may be influenced by a wide variety of factors including global flying hours, aircraft fuel prices, labor issues, airline consolidation, airline insolvencies, terrorism and safety concerns as well as changes in regulations. Future terrorist actions or pandemic health issues could dramatically reduce both the demand for air travel and our Aerospace aftermarket sales and margins. The operating results of our Automation and Control Solutions (ACS) segment, which generated 43 percent of our consolidated revenues in 2011, are impacted by the level of global residential and commercial construction (including retrofits and upgrades), capital spending and operating expenditures on building and process automation, industrial plant capacity utilization and expansion, inventory levels in distribution channels, and global economic growth rates. Performance Materials and Technologies’ operating results, which generated 15 percent of our consolidated revenues in 2011, are impacted by global economic growth rates, capacity utilization for chemical, industrial, refining, petrochemical and semiconductor plants, our customers’ availability of capital for refinery construction and expansion, and raw material demand and supply volatility. Transportation Systems’ operating results, which generated 11 percent of our consolidated revenues in 2011, are impacted by global production and demand for automobiles and trucks equipped with turbochargers, and regulatory changes regarding automobile and truck emissions and fuel economy, delays in launch schedules for new automotive platforms, and consumer demand and spending for automotive aftermarket products. Demand of global automotive and truck manufacturers will continue to be influenced by a wide variety of factors, including ability of consumers to obtain financing, ability to reduce operating costs and overall consumer and business confidence. Each of the segments is impacted by volatility in raw material prices (as further described below) and non-material inflation.

Raw material price fluctuations, the ability of key suppliers to meet quality and delivery requirements, or catastrophic events can increase the cost of our products and services, impact our ability to meet commitments to customers, and cause us to incur significant liabilities.

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          The cost of raw materials is a key element in the cost of our products, particularly in our Performance Materials and Technologies (cumene, fluorspar, perchloroethylene, R240, natural gas, sulfur and ethylene), Transportation Systems (nickel, steel and other metals) and Aerospace (nickel, titanium and other metals) segments. Our inability to offset material price inflation through increased prices to customers, formula or long-term fixed price contracts with suppliers, productivity actions or through commodity hedges could adversely affect our results of operations.

          Our manufacturing operations are also highly dependent upon the delivery of materials (including raw materials) by outside suppliers and their assembly of major components, and subsystems used in our products in a timely manner and in full compliance with purchase order terms and conditions, quality standards, and applicable laws and regulations. In addition, many major components, product equipment items and raw materials are procured or subcontracted on a single-source basis with a number of domestic and foreign companies; in some circumstances these suppliers are the sole source of the component or equipment. Although we maintain a qualification and performance surveillance process to control risk associated with such reliance on third parties and we believe that sources of supply for raw materials and components are generally adequate, it is difficult to predict what effects shortages or price increases may have in the future. Our ability to manage inventory and meet delivery requirements may be constrained by our suppliers’ inability to scale production and adjust delivery of long-lead time products during times of volatile demand. Our suppliers may fail to perform according to specifications as and when required and we may be unable to identify alternate suppliers or to otherwise mitigate the consequences of their non-performance. The supply chains for our businesses could also be disrupted by suppliers’ decisions to exit certain businesses, bankruptcy and by external events such as natural disasters, extreme weather events, pandemic health issues, terrorist actions, labor disputes, governmental actions and legislative or regulatory changes (e.g., product certification or stewardship requirements, sourcing restrictions, product authenticity, climate change or greenhouse gas emission standards, etc.). Our inability to fill our supply needs would jeopardize our ability to fulfill obligations under commercial and government contracts, which could, in turn, result in reduced sales and profits, contract penalties or terminations, and damage to customer relationships. Transitions to new suppliers may result in significant costs and delays, including those related to the required recertification of parts obtained from new suppliers with our customers and/or regulatory agencies. In addition, because our businesses cannot always immediately adapt their cost structure to changing market conditions, our manufacturing capacity for certain products may at times exceed or fall short of our production requirements, which could adversely impact our operating costs, profitability and customer and supplier relationships.

          Our facilities, distribution systems and information technology systems are subject to catastrophic loss due to, among other things, fire, flood, terrorism or other natural or man-made disasters. If any of these facilities or systems were to experience a catastrophic loss, it could disrupt our operations, result in personal injury or property damage, damage relationships with our customers and result in large expenses to repair or replace the facilities or systems, as well as result in other liabilities and adverse impacts. The same risk can also arise from the failure of critical systems supplied by Honeywell to large industrial, refining and petrochemical customers.

Our future growth is largely dependent upon our ability to develop new technologies that achieve market acceptance with acceptable margins.

          Our businesses operate in global markets that are characterized by rapidly changing technologies and evolving industry standards. Accordingly, our future growth rate depends upon a number of factors, including our ability to (i) identify emerging technological trends in our target end-markets, (ii) develop and maintain competitive products, (iii) enhance our products by adding innovative features that differentiate our products from those of our competitors and prevent commoditization of our products, (iv) develop, manufacture and bring products to market quickly and cost-effectively, and (v) develop and retain individuals with the requisite expertise.

          Our ability to develop new products based on technological innovation can affect our competitive position and requires the investment of significant resources. These development efforts divert resources from other potential investments in our businesses, and they may not lead to the development of new technologies or products on a timely basis or that meet the needs of our customers as fully as competitive offerings. In addition, the markets for our products may not develop or grow as we currently anticipate. The failure of our technologies or products to gain market acceptance due to more attractive offerings by our competitors could significantly reduce our revenues and adversely affect our competitive standing and prospects.

Protecting our intellectual property is critical to our innovation efforts.

          We own or are licensed under a large number of U.S. and non-U.S. patents and patent applications, trademarks and copyrights. Our intellectual property rights may expire or be challenged, invalidated or infringed

14


upon by third parties or we may be unable to maintain, renew or enter into new licenses of third party proprietary intellectual property on commercially reasonable terms. In some non-U.S. countries, laws affecting intellectual property are uncertain in their application, which can affect the scope or enforceability of our patents and other intellectual property rights. Any of these events or factors could diminish or cause us to lose the competitive advantages associated with our intellectual property, subject us to judgments, penalties and significant litigation costs, and/or temporarily or permanently disrupt our sales and marketing of the affected products or services.

Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations.

          Global cybersecurity threats can range from uncoordinated individual attempts to gain unauthorized access to our information technology (IT) systems to sophisticated and targeted measures known as advanced persistent threats. While we employ comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, data encryption, vulnerability assessments, continuous monitoring of our IT networks and systems and maintenance of backup and protective systems), cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. The potential consequences of a material cybersecurity incident include reputational damage, litigation with third parties, diminution in the value of our investment in research, development and engineering, and increased cybersecurity protection and remediation costs, which in turn could adversely affect our competitiveness and results of operations.

An increasing percentage of our sales and operations is in non-U.S. jurisdictions and is subject to the economic, political, regulatory and other risks of international operations.

          Our international operations, including U.S. exports, comprise a growing proportion of our operating results. Our strategy calls for increasing sales to and operations in overseas markets, including developing markets such as China, India, the Middle East and other high growth regions.

          In 2011, approximately 55 percent of our total sales (including products manufactured in the U.S. and sold outside the U.S. as well as products manufactured in international locations) were outside of the U.S. including approximately 30 percent in Europe and approximately 12 percent in Asia. Risks related to international operations include exchange control regulations, wage and price controls, employment regulations, foreign investment laws, import, export and other trade restrictions (such as embargoes), changes in regulations regarding transactions with state-owned enterprises, nationalization of private enterprises, government instability, and our ability to hire and maintain qualified staff and maintain the safety of our employees in these regions. We are also subject to U.S. laws prohibiting companies from doing business in certain countries, or restricting the type of business that may be conducted in these countries. The cost of compliance with increasingly complex and often conflicting regulations worldwide can also impair our flexibility in modifying product, marketing, pricing or other strategies for growing our businesses, as well as our ability to improve productivity and maintain acceptable operating margins.

          Uncertain global economic conditions arising from circumstances such as sovereign debt issues and credit rating downgrades in certain European countries or speculation regarding changes to the composition or viability of the Euro zone could result in reduced customer confidence resulting in decreased demand for our products and services, disruption in payment patterns and higher default rates, a tightening of credit markets (see risk factor below regarding volatility of credit markets for further discussion), increased risk regarding supplier performance, increased counterparty risk with respect to the financial institutions with which we do business, and exchange rate fluctuations. While we employ comprehensive controls regarding global cash management to guard against cash or investment loss and to ensure our ability to fund our operations and commitments, a material disruption to the financial institutions with whom we transact business could expose Honeywell to financial loss.

          Sales and purchases in currencies other than the US dollar expose us to fluctuations in foreign currencies relative to the US dollar and may adversely affect our results of operations. Currency fluctuations may affect product demand and prices we pay for materials, as a result, our operating margins may be negatively impacted. Fluctuations in exchange rates may give rise to translation gains or losses when financial statements of our non-U.S. businesses are translated into U.S. dollars. While we monitor our exchange rate exposures and seek to reduce the risk of volatility through hedging activities, such activities bear a financial cost and may not always be available to us or successful in significantly mitigating such volatility.

Volatility of credit markets or macro-economic factors could adversely affect our business.

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          Changes in U.S. and global financial and equity markets, including market disruptions, limited liquidity, and interest rate volatility, may increase the cost of financing as well as the risks of refinancing maturing debt. In addition, our borrowing costs can be affected by short and long-term ratings assigned by independent rating agencies. A decrease in these ratings could increase our cost of borrowing.

          Delays in our customers’ ability to obtain financing, or the unavailability of financing to our customers, could adversely affect our results of operations and cash flow. The inability of our suppliers to obtain financing could result in the need to transition to alternate suppliers, which could result in significant incremental cost and delay, as discussed above. Lastly, disruptions in the U.S. and global financial markets could impact the financial institutions with which we do business.

We may be required to recognize impairment charges for our long-lived assets or available for sale investments.

          At December 31, 2011, the net carrying value of long-lived assets (property, plant and equipment, goodwill and other intangible assets) and available for sale securities totaled approximately $19.1 billion and $0.4 billion, respectively. In accordance with generally accepted accounting principles, we periodically assess these assets to determine if they are impaired. Significant negative industry or economic trends, disruptions to our business, unexpected significant changes or planned changes in use of the assets, divestitures and market capitalization declines may result in impairments to goodwill and other long-lived assets. An other than temporary decline in the market value of our available for sale securities may also result in an impairment charge. Future impairment charges could significantly affect our results of operations in the periods recognized. Impairment charges would also reduce our consolidated shareowners’ equity and increase our debt-to-total-capitalization ratio, which could negatively impact our credit rating and access to the public debt and equity markets.

A change in the level of U.S. Government defense and space funding or the mix of programs to which such funding is allocated could adversely impact Aerospace’s defense and space sales and results of operations.

          Sales of our defense and space-related products and services are largely dependent upon government budgets, particularly the U.S. defense budget. Sales as a prime contractor and subcontractor to the U.S. Department of Defense comprised approximately 29 and 9 percent of Aerospace and total sales, respectively, for the year ended December 31, 2011. We cannot predict the extent to which total funding and/or funding for individual programs will be included, increased or reduced as part of the 2012 and subsequent budgets ultimately approved by Congress, or be included in the scope of separate supplemental appropriations. We also cannot predict the impact of potential changes in priorities due to military transformation and planning and/or the nature of war-related activity on existing, follow-on or replacement programs. A shift in defense or space spending to programs in which we do not participate and/or reductions in funding for or termination of existing programs could adversely impact our results of operations.

As a supplier of military and other equipment to the U.S. Government, we are subject to unusual risks, such as the right of the U.S. Government to terminate contracts for convenience and to conduct audits and investigations of our operations and performance.

          In addition to normal business risks, companies like Honeywell that supply military and other equipment to the U.S. Government are subject to unusual risks, including dependence on Congressional appropriations and administrative allotment of funds, changes in governmental procurement legislation and regulations and other policies that reflect military and political developments, significant changes in contract requirements, complexity of designs and the rapidity with which they become obsolete, necessity for frequent design improvements, intense competition for U.S. Government business necessitating increases in time and investment for design and development, difficulty of forecasting costs and schedules when bidding on developmental and highly sophisticated technical work, and other factors characteristic of the industry, such as contract award protests and delays in the timing of contract approvals. Changes are customary over the life of U.S. Government contracts, particularly development contracts, and generally result in adjustments to contract prices and schedules.

          Our contracts with the U.S. Government are also subject to various government audits. Like many other government contractors, we have received audit reports that recommend downward price adjustments to certain contracts or changes to certain accounting systems or controls to comply with various government regulations. When appropriate and prudent, we have made adjustments and paid voluntary refunds in the past and may do so in the future.

          U.S. Government contracts are subject to termination by the government, either for the convenience of the government or for our failure to perform consistent with the terms of the applicable contract. In the case of a termination for convenience, we are typically entitled to reimbursement for our allowable costs incurred, plus

16


termination costs and a reasonable profit. If a contract is terminated by the government for our failure to perform we could be liable for reprocurement costs incurred by the government in acquiring undelivered goods or services from another source and for other damages suffered by the government as permitted under the contract.

          We are also subject to government investigations of business practices and compliance with government procurement regulations. If, as a result of any such investigation or other government investigations (including violations of certain environmental or export laws), Honeywell or one of its businesses were found to have violated applicable law, it could be suspended from bidding on or receiving awards of new government contracts, suspended from contract performance pending the completion of legal proceedings and/or have its export privileges suspended. The U.S. Government also reserves the right to debar a contractor from receiving new government contracts for fraudulent, criminal or other egregious misconduct. Debarment generally does not exceed three years.

Our reputation and ability to do business may be impacted by the improper conduct of employees, agents or business partners.

          We cannot ensure that our extensive compliance controls, policies and procedures will, in all instances, protect us from reckless or criminal acts committed by our employees, agents or business partners that would violate the laws of the jurisdictions in which the Company operates, including laws governing payments to government officials, competition and data privacy. Any improper actions could subject us to civil or criminal investigations, monetary and non-monetary penalties and could adversely impact our ability to conduct business, results of operations and reputation.

Changes in legislation or government regulations or policies can have a significant impact on our results of operations.

          The sales and margins of each of our segments are directly impacted by government regulations. Safety and performance regulations (including mandates of the Federal Aviation Administration and other similar international regulatory bodies requiring the installation of equipment on aircraft), product certification requirements and government procurement practices can impact Aerospace sales, research and development expenditures, operating costs and profitability. The demand for and cost of providing Automation and Control Solutions products, services and solutions can be impacted by fire, security, safety, health care, environmental and energy efficiency standards and regulations. Performance Materials and Technologies’ results of operations can be affected by environmental (e.g. government regulation of fluorocarbons), safety and energy efficiency standards and regulations, while emissions and energy efficiency standards and regulations can impact the demand for turbochargers in our Transportation Systems segment. Legislation or regulations regarding areas such as labor and employment, employee benefit plans, tax, health, safety and environmental matters, import, export and trade, intellectual property, product certification, and product liability may impact the results of each of our operating segments and our consolidated results.

Completed acquisitions may not perform as anticipated or be integrated as planned, and divestitures may not occur as planned.

          We regularly review our portfolio of businesses and pursue growth through acquisitions and seek to divest non-core businesses. We may not be able to complete transactions on favorable terms, on a timely basis or at all. In addition, our results of operations and cash flows may be adversely impacted by (i) the failure of acquired businesses to meet or exceed expected returns, (ii) the discovery of unanticipated issues or liabilities, (iii) the failure to integrate acquired businesses into Honeywell on schedule and/or to achieve synergies in the planned amount or within the expected timeframe, (iv) the inability to dispose of non-core assets and businesses on satisfactory terms and conditions and within the expected timeframe, and (v) the degree of protection provided by indemnities from sellers of acquired companies and the obligations under indemnities provided to purchasers of our divested businesses.

We cannot predict with certainty the outcome of litigation matters, government proceedings and other contingencies and uncertainties.

          We are subject to a number of lawsuits, investigations and disputes (some of which involve substantial amounts claimed) arising out of the conduct of our business, including matters relating to commercial transactions, government contracts, product liability (including asbestos), prior acquisitions and divestitures, employment, employee benefits plans, intellectual property, import and export matters and environmental, health and safety matters. Resolution of these matters can be prolonged and costly, and the ultimate results or judgments are uncertain due to the inherent uncertainty in litigation and other proceedings. Moreover, our potential liabilities are subject to change over time due to new developments, changes in settlement strategy or the impact of evidentiary requirements, and we may become subject to or be required to pay damage awards or

17


settlements that could have a material adverse effect on our results of operations, cash flows and financial condition. While we maintain insurance for certain risks, the amount of our insurance coverage may not be adequate to cover the total amount of all insured claims and liabilities. It also is not possible to obtain insurance to protect against all our operational risks and liabilities. The incurrence of significant liabilities for which there is no or insufficient insurance coverage could adversely affect our results of operations, cash flows, liquidity and financial condition.

Our operations and the prior operations of predecessor companies expose us to the risk of material environmental liabilities.

          Mainly because of past operations and operations of predecessor companies, we are subject to potentially material liabilities related to the remediation of environmental hazards and to claims of personal injuries or property damages that may be caused by hazardous substance releases and exposures. We have incurred remedial response and voluntary clean-up costs for site contamination and are a party to lawsuits and claims associated with environmental and safety matters, including past production of products containing hazardous substances. Additional lawsuits, claims and costs involving environmental matters are likely to continue to arise in the future. We are subject to various federal, state, local and foreign government requirements regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. These laws and regulations can impose substantial fines and criminal sanctions for violations, and require installation of costly equipment or operational changes to limit emissions and/or decrease the likelihood of accidental hazardous substance releases. We incur, and expect to continue to incur capital and operating costs to comply with these laws and regulations. In addition, changes in laws, regulations and enforcement of policies, the discovery of previously unknown contamination or new technology or information related to individual sites, the establishment of stricter state or federal toxicity standards with respect to certain contaminants, or the imposition of new clean-up requirements or remedial techniques could require us to incur costs in the future that would have a negative effect on our financial condition or results of operations.

Our expenses include significant costs related to employee and retiree health benefits.

          With approximately 132,000 employees, including approximately 53,000 in the U.S., our expenses relating to employee health and retiree health benefits are significant. In recent years, we have experienced significant increases in certain of these costs, largely as a result of economic factors beyond our control, in particular, ongoing increases in health care costs well in excess of the rate of inflation. Continued increasing health-care costs, legislative or regulatory changes, and volatility in discount rates, as well as changes in other assumptions used to calculate retiree health benefit expenses, may adversely affect our financial position and results of operations.

Risks related to our defined benefit pension plans may adversely impact our results of operations and cash flow.

          Significant changes in actual investment return on pension assets, discount rates, and other factors could adversely affect our results of operations and pension contributions in future periods. U.S. generally accepted accounting principles require that we calculate income or expense for the plans using actuarial valuations. These valuations reflect assumptions about financial markets and interest rates, which may change based on economic conditions. Funding requirements for our U.S. pension plans may become more significant. However, the ultimate amounts to be contributed are dependent upon, among other things, interest rates, underlying asset returns and the impact of legislative or regulatory changes related to pension funding obligations. For a discussion regarding the significant assumptions used to estimate pension expense, including discount rate and the expected long-term rate of return on plan assets, and how our financial statements can be affected by pension plan accounting policies, see “Critical Accounting Policies” included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Additional tax expense or additional tax exposures could affect our future profitability.

          We are subject to income taxes in both the United States and various non-U.S. jurisdictions, and our domestic and international tax liabilities are dependent upon the distribution of income among these different jurisdictions. In 2011, our tax expense represented 18.3 percent of our income before tax, and includes estimates of additional tax which may be incurred for tax exposures and reflects various estimates and assumptions, including assessments of future earnings of the Company that could impact the valuation of our deferred tax assets. Our future results of operations could be adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in the overall profitability of the Company, changes in tax legislation and rates, changes in generally accepted accounting principles, changes in the valuation of deferred tax assets and liabilities, changes in the amount of earnings permanently

18


reinvested offshore, the results of audits and examinations of previously filed tax returns and continuing assessments of our tax exposures.

 

 

Item 1B.

Unresolved Staff Comments

          Not Applicable

 

 

Item 2.

Properties

          We have approximately 1,300 locations consisting of plants, research laboratories, sales offices and other facilities. Our headquarters and administrative complex is located in Morris Township, New Jersey. Our plants are generally located to serve large marketing areas and to provide accessibility to raw materials and labor pools. Our properties are generally maintained in good operating condition. Utilization of these plants may vary with sales to customers and other business conditions; however, no major operating facility is significantly idle. We own or lease warehouses, railroad cars, barges, automobiles, trucks, airplanes and materials handling and data processing equipment. We also lease space for administrative and sales staffs. Our properties and equipment are in good operating condition and are adequate for our present needs. We do not anticipate difficulty in renewing existing leases as they expire or in finding alternative facilities.

          Our principal plants, which are owned in fee unless otherwise indicated, are as follows:

 

 

 

 

 

 

 

Aerospace

 

 

Anniston, AL (leased)

 

Olathe, KS

 

Toronto, Canada

Glendale, AZ (leased)

 

Minneapolis, MN (partially leased)

 

Olomouc, Czech Republic (leased)

Phoenix, AZ

 

Plymouth, MN

 

Raunheim, Germany

Tempe, AZ

 

Rocky Mount, NC

 

Penang, Malaysia

Tucson, AZ

 

Albuquerque, NM

 

Chihuahua, Mexico

Torrance, CA

 

Urbana, OH

 

Singapore (leased)

Clearwater, FL

 

Greer, SC

 

Yeovil, UK (leased)

South Bend, IN

 

 

 

 

 

 

 

 

 

 

 

Automation and Control Solutions

 

 

San Diego, CA (leased)

 

Pleasant Prairie, WI (leased)

 

Schonaich, Germany (leased)

Northford, CT

 

Shenzhen, China (leased)

 

Pune, India (leased)

Freeport, IL

 

Suzhou, China

 

Chihuahua, Mexico

St. Charles, IL (leased)

 

Tianjin, China (leased)

 

Juarez, Mexico (partially leased)

Golden Valley, MN

 

Brno, Czech Republic (leased)

 

Tijuana, Mexico (leased)

York, PA (leased)

 

Mosbach, Germany

 

Emmen, Netherlands

 

 

Neuss, Germany

 

Newhouse, Scotland

 

 

 

 

 

 

 

Performance Materials and Technologies

 

 

Mobile, AL

 

Shreveport, LA

 

Colonial Heights, VA

Des Plaines, IL

 

Frankford, PA

 

Hopewell, VA

Metropolis, IL

 

Pottsville, PA

 

Spokane, WA

Baton Rouge, LA

 

Orange, TX

 

Seelze, Germany

Geismar, LA

 

Chesterfield, VA

 

 

 

 

 

 

 

 

 

Transportation Systems

 

 

Shanghai, China

 

Atessa, Italy

 

Mexicali, Mexico (partially leased)

Glinde, Germany

 

Kodama, Japan

 

Bucharest, Romania

 

 

Ansan, Korea (leased)

 

Pune India

19



 

 

Item 3.

Legal Proceedings

          We are subject to a number of lawsuits, investigations and claims (some of which involve substantial amounts) arising out of the conduct of our business. See a discussion of environmental, asbestos and other litigation matters in Note 21 of Notes to Financial Statements.

Environmental Matters Involving Potential Monetary Sanctions in Excess of $100,000

          Although the outcome of the matter discussed below cannot be predicted with certainty, we do not believe that it will have a material adverse effect on our consolidated financial position, consolidated results of operations or operating cash flows.

          The United States Environmental Protection Agency and the United States Department of Justice are investigating whether the Company’s manufacturing facility in Hopewell, Virginia is in compliance with the requirements of the Clean Air Act and the facility’s air operating permit. Based on these investigations, the federal authorities have issued notices of violation with respect to the facility’s benzene waste operations, leak detection and repair program, emissions of nitrogen oxides and emissions of particulate matter. The Company has entered into negotiations with federal authorities to resolve the alleged violations.

20


Executive Officers of the Registrant

The executive officers of Honeywell, listed as follows, are elected annually by the Board of Directors. There are no family relationships among them.

 

 

 

Name, Age,
Date First Elected an
Executive Officer

 

Business Experience

David M. Cote, 59
2002(a)

 

Chairman of the Board and Chief Executive Officer since July 2002.

 

 

 

Alexandre Ismail, 46
2009

 

President and Chief Executive Officer Transportation Systems since April 2009. President Turbo Technologies from November 2008 to April 2009. President Global Passengers Vehicles from August 2006 to November 2008.

 

 

 

Roger Fradin, 58
2004

 

President and Chief Executive Officer Automation and Control Solutions since January 2004.

 

 

 

Timothy O. Mahoney, 55
2009

 

President and Chief Executive Officer Aerospace since September 2009. Vice President Aerospace Engineering and Technology and Chief Technology Officer from March 2007 to August 2009. President of Air Transport and Regional from July 2005 to March 2007.

 

 

 

Andreas C. Kramvis, 59
2008

 

President and Chief Executive Officer Performance Materials and Technologies since March 2008. President of Environmental and Combustion Controls from September 2002 to February 2008.

 

 

 

David J. Anderson, 62
2003

 

Senior Vice President and Chief Financial Officer since June 2003.

 

 

 

Krishna Mikkilineni, 52
2010

 

Senior Vice President Engineering and Operations since April 2010 and President Honeywell Technology Solutions since January 2009. Vice President Honeywell Technology Solutions from July 2002 to January 2009.

 

 

 

Katherine L. Adams, 47
2009

 

Senior Vice President and General Counsel since April 2009. Vice President and General Counsel from September 2008 to April 2009. Vice President and General Counsel for Performance Materials and Technologies from February 2005 to September 2008.

 

 

 

Mark R. James, 50
2007

 

Senior Vice President Human Resources and Communications since November 2007. Vice President of Human Resources and Communications for Aerospace from October 2004 to November 2007.


 

 

 

 

(a) Also a Director.

21


Part II.

 

 

Item 5.

    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

          Market and dividend information for Honeywell’s common stock is included in Note 26 of Notes to Financial Statements in “Item 8. Financial Statements and Supplementary Data.”

          The number of record holders of our common stock at December 31, 2011 was 58,965.

          Honeywell purchased 1,450,000 shares of its common stock, par value $1 per share, in the quarter ending December 31, 2011. Honeywell purchased a total of 20,250,000 shares of its common stock in 2011. Under the Company’s previously reported $3 billion share repurchase program, $1.9 billion remained available as of December 31, 2011 for additional share repurchases. Honeywell presently expects to repurchase outstanding shares from time to time during 2012 to offset the dilutive impact of employee stock based compensation plans, including future option exercises, restricted unit vesting and matching contributions under our savings plans. The amount and timing of future repurchases may vary depending on market conditions and the level of operating, financing and other investing activities.

          The following table summarizes Honeywell’s purchase of its common stock, par value $1 per share, for the three months ended December 31, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuer Purchases of Equity Securities

 

 

 

(a)

 

(b)

 

(c)

 

 

(d)

 

Period

 

Total
Number of
Shares
Purchased

 

Average
Price Paid
per Share

 

Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans
or Programs

 

Approximate Dollar
Value of Shares that
May Yet be Purchased
Under Plans or
Programs
(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

November 2011

 

 

1,250,000

 

 

$ 52.67

 

 

1,250,000

 

 

$ 1,925

 

December 2011

 

 

  200,000

 

 

$ 50.09

 

 

  200,000

 

 

$ 1,915

 

22


Performance Graph

         The following graph compares the five-year cumulative total return on our Common Stock to the total returns on the Standard & Poor’s 500 Stock Index and a composite of Standard & Poor’s Industrial Conglomerates and Aerospace and Defense indices, on a 60%/40% weighted basis, respectively (the “Composite Index”). The weighting of the components of the Composite Index are based on our segments’ relative contribution to total segment profit. The selection of the Industrial Conglomerates component of the Composite Index reflects the diverse and distinct range of non-aerospace businesses conducted by Honeywell. The annual changes for the five-year period shown in the graph are based on the assumption that $100 had been invested in Honeywell stock and each index on December 31, 2006 and that all dividends were reinvested.

(LINE GRAPH)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dec 2006

 

Dec 2007

 

Dec 2008

 

Dec 2009

 

Dec 2010

 

Dec 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Honeywell

 

100

 

 

138.64

 

 

75.77

 

 

93.82

 

 

130.89

 

 

137.22

 

 

S&P 500 Index®

 

100

 

 

105.49

 

 

66.46

 

 

84.05

 

 

96.71

 

 

98.76

 

 

Composite Index

 

100

 

 

110.34

 

 

60.12

 

 

69.70

 

 

81.74

 

 

83.81

 

 

23


HONEYWELL INTERNATIONAL INC.

The Consumer Products Group (CPG) automotive aftermarket business had historically been part of the Transportation Systems reportable segment. In accordance with generally accepted accounting principles, CPG is presented as discontinued operations in all periods presented. See Note 2 Acquisitions and Divestitures for further details. This selected financial data should be read in conjunction with Honeywell’s Consolidated Financial Statements and related Notes included elsewhere in this Annual Report as well as the section of this Annual Report titled Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

 

Item 6.

Selected Financial Data


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

 

 

 

 

 

 

2011

 

2010

 

2009

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in millions, except per share amounts)

 

Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

$

36,529

 

 

 

$

32,350

 

 

 

$

29,951

 

 

 

$

35,520

 

 

 

$

33,462

 

 

Amounts attributable to Honeywell:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations less net income attributable to the noncontrolling interest

 

 

 

1,858

 

 

 

 

1,944

 

 

 

 

1,492

 

 

 

 

789

 

 

 

 

2,535

 

 

Income from discontinued operations(1)

 

 

 

209

 

 

 

 

78

 

 

 

 

56

 

 

 

 

17

 

 

 

 

59

 

 

 

 

 

   

 

 

 

   

 

 

 

   

 

 

 

   

 

 

 

   

 

 

Net income attributable to Honeywell(2)

 

 

 

2,067

 

 

 

 

2,022

 

 

 

 

1,548

 

 

 

 

806

 

 

 

 

2,594

 

 

Earnings Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

 

2.38

 

 

 

 

2.51

 

 

 

 

1.99

 

 

 

 

1.07

 

 

 

 

3.31

 

 

Income from discontinued operations

 

 

 

0.27

 

 

 

 

0.10

 

 

 

 

0.07

 

 

 

 

0.02

 

 

 

 

0.08

 

 

 

 

 

   

 

 

 

   

 

 

 

   

 

 

 

   

 

 

 

   

 

 

Net income attributable to Honeywell

 

 

 

2.65

 

 

 

 

2.61

 

 

 

 

2.06

 

 

 

 

1.09

 

 

 

 

3.39

 

 

Assuming dilution:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

 

2.35

 

 

 

 

2.49

 

 

 

 

1.98

 

 

 

 

1.06

 

 

 

 

3.27

 

 

Income from discontinued operations

 

 

 

0.26

 

 

 

 

0.10

 

 

 

 

0.07

 

 

 

 

0.02

 

 

 

 

0.08

 

 

 

 

 

   

 

 

 

   

 

 

 

   

 

 

 

   

 

 

 

   

 

 

Net income attributable to Honeywell

 

 

 

2.61

 

 

 

 

2.59

 

 

 

 

2.05

 

 

 

 

1.08

 

 

 

 

3.35

 

 

Dividends per share

 

 

 

1.37

 

 

 

 

1.21

 

 

 

 

1.21

 

 

 

 

1.10

 

 

 

 

1.00

 

 

Financial Position at Year-End

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment—net

 

 

 

4,804

 

 

 

 

4,724

 

 

 

 

4,847

 

 

 

 

4,934

 

 

 

 

4,985

 

 

Total assets

 

 

 

39,808

 

 

 

 

37,834

 

 

 

 

35,993

 

 

 

 

35,570

 

 

 

 

33,805

 

 

Short-term debt

 

 

 

674

 

 

 

 

889

 

 

 

 

1,361

 

 

 

 

2,510

 

 

 

 

2,238

 

 

Long-term debt

 

 

 

6,881

 

 

 

 

5,755

 

 

 

 

6,246

 

 

 

 

5,865

 

 

 

 

5,419

 

 

Total debt

 

 

 

7,555

 

 

 

 

6,644

 

 

 

 

7,607

 

 

 

 

8,375

 

 

 

 

7,657

 

 

Shareowners’ equity

 

 

 

10,902

 

 

 

 

10,787

 

 

 

 

8,971

 

 

 

 

7,140

 

 

 

 

9,293

 

 


 

 

 

 

 

 

 

 

(1)

For the year ended December 31, 2011, Income from discontinued operations includes a $178 million, net of tax gain, resulting from the sale of the CPG business which funded a portion of the 2011 repositioning actions.

 

 

(2)

For the year ended December 31, 2008, Net income attributable to Honeywell includes a $417 million, net of tax gain, resulting from the sale of our Consumables Solutions business as well as a charge of $465 million for environmental liabilities deemed probable and reasonably estimable during 2008.

24



 

 

Item 7.

    Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Dollars in millions, except per share amounts)

          The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Honeywell International Inc. (“Honeywell”) for the three years ended December 31, 2011. All references to Notes related to Notes to the Financial Statements in “Item 8-Financial Statements and Supplementary Data”.

          The Consumer Products Group (CPG) automotive aftermarket business had historically been part of the Transportation Systems reportable segment. In accordance with generally accepted accounting principles, CPG results are excluded from continuing operations and are presented as discontinued operations in all periods presented. See Note 2 Acquisitions and Divestitures for further details.

CONSOLIDATED RESULTS OF OPERATIONS

          Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Net sales

 

 

$

36,529

 

 

 

$

32,350

 

 

 

$

29,951

 

 

% change compared with prior period

 

 

 

13

%

 

 

 

8

%

 

 

 

 

 

 

The change in net sales compared to the prior year period is attributable to the following:

 

 

 

 

 

 

 

 

 

 

2011
Versus
2010

 

2010
Versus
2009

 

 

 

 

 

 

 

Volume

 

6

%

 

5

%

 

Price

 

2

%

 

2

%

 

Acquisitions/Divestitures

 

3

%

 

1

%

 

Foreign Exchange

 

2

%

 

0

%

 

 

 

   

 

   

 

 

 

13

%

 

8

%

 

 

 

   

 

   

 

A discussion of net sales by segment can be found in the Review of Business Segments section of this MD&A.

         Cost of Products and Services Sold

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Cost of products and services sold

 

 

$

28,556

 

 

 

$

24,721

 

 

 

$

23,260

 

 

% change compared with prior period

 

 

 

16

%

 

 

 

6

%

 

 

 

 

 

 

 

Gross Margin percentage

 

 

 

21.8

%

 

 

 

23.6

%

 

 

 

22.3

%

 

          Cost of products and services sold increased by $3,835 million or 16 percent in 2011 compared with 2010 principally due to an estimated increase in direct material costs, labor costs and indirect costs of approximately $2 billion, $520 million, and $280 million, respectively, driven substantially by a 13 percent increase in sales as a result of the factors (excluding price) discussed above and in the Review of Business Segments section of this MD&A, an increase in pension and other postretirement expense of approximately $880 million (primarily driven by the increase in the pension mark-to-market adjustment allocated to cost of goods sold of $1.1 billion) and an increase in repositioning and other charges of approximately $90 million.

          Gross margin percentage decreased by 1.8 percentage points in 2011 compared with 2010 primarily due to higher pension and other postretirement expense (approximate 2.8 percentage point impact primarily driven by an unfavorable 3.3 percentage point impact resulting from the increase in the pension mark-to-market adjustment allocated to cost of goods sold) and repositioning and other charges (approximate 0.2 percentage point impact),

25


partially offset by higher sales volume driven by each of our business segments (approximate 1.2 percentage point impact).

          Cost of products and services sold increased by $1,461 million or 6 percent in 2010 compared with 2009, principally due to an estimated increase in direct material costs and indirect costs of approximately $1,250 million and $300 million, respectively, driven substantially by an 8 percent increase in sales as a result of the factors discussed above and in the Review of Business Segments section of this MD&A and approximately $130 million increase in repositioning and other charges (see Note 3 of Notes to Financial Statements), partially offset by a $300 million decrease in pension expense.

          Gross margin percentage increased by 1.3 percentage points in 2010 compared with 2009, primarily due to lower pension expense (approximate 1 percentage point impact) and higher sales volume driven by our Automation and Control Solutions segment, Performance Materials and Technologies segment and Transportation Systems segment (approximate 0.7 percentage point impact), partially offset by higher repositioning and other charges (approximate 0.5 percentage point impact).

          Selling, General and Administrative Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

 

$

5,399

 

 

 

$

4,618

 

 

 

$

4,323

 

 

 

Percent of sales

 

 

 

14.8

%

 

 

 

14.3

%

 

 

 

14.4

%

 

          Selling, general and administrative expenses (SG&A) increased as a percentage of sales by 0.5 percent in 2011 compared to 2010 driven by an estimated $430 million increase in labor costs resulting from acquisitions, investment for growth, and merit increases, an estimated increase of $240 million in pension and other postretirement expense (driven primarily by the allocated portion of the pension mark-to-market charge increase of approximately $270 million) and an estimated increase of $60 million in repositioning actions, partially offset by the impact of higher sales volume as a result of the factors discussed in the Review of Business Segments section of this MD&A.

          Selling, general and administrative expenses (SG&A) decreased as a percentage of sales by 0.1 percent in 2010 compared to 2009 driven by the impact of higher sales volume, discussed above, and lower pension expense, partially offset by an estimated $500 million increase in labor costs (reflecting the absence of prior period labor cost actions).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (Income) Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

Equity (income)/loss of affiliated companies

 

 

$

(51

)

 

 

$

(28

)

 

 

$

(26

)

 

Gain on sale of non-strategic businesses and assets

 

 

 

(61

)

 

 

 

 

 

 

 

(87

)

 

Interest income

 

 

 

(58

)

 

 

 

(39

)

 

 

 

(33

)

 

Foreign exchange

 

 

 

50

 

 

 

 

12

 

 

 

 

45

 

 

Other, net

 

 

 

36

 

 

 

 

(42

)

 

 

 

47

 

 

 

 

       

 

 

     

 

 

     

 

 

 

 

$

(84

)

 

 

$

(97

)

 

 

$

(54

)

 

 

 

       

 

 

     

 

       

 

          Other income decreased by $13 million in 2011 compared to 2010 due primarily to a $29 million loss resulting from early redemption of debt in the first quarter of 2011, included within “Other, net”, and the absence of a $62 million pre-tax gain related to the consolidation of a joint venture within our Performance Materials and Technologies segment in the third quarter of 2010, included within “Other, net”, (see Note 4 of Notes to Financial Statements for further details), partially offset by a $61 million increase in gain on sale of non-strategic businesses and assets due primarily to a $50 million pre-tax gain related to the divestiture of the automotive on-board sensors products business within our Automation and Control Solutions segment and the reduction of approximately $12 million of acquisition related costs compared to 2010 included within “Other, net”.

          Other income increased by $43 million in 2010 compared to 2009 primarily due to the consolidation of a joint venture resulting in a $62 million pre-tax gain within our Performance Materials and Technologies segment in the third quarter of 2010, included in “Other, net” (see Note 4 of Notes to Financial Statements for further details),

26


the absence of an other-than-temporary impairment charge of$62 million in the second quarter of 2009, included within “Other, net”, partially offset by the absence of a $50 million deconsolidation gain related to a subsidiary within our Automation and Control Solutions segment in 2009, included within “Gain on sale of non-strategic businesses and assets”, and $22 million of acquisition related costs in 2010, included within “Other, net”.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and Other Financial Charges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Interest and other financial charges

 

 

$

376

 

 

 

$

386

 

 

 

$

458

 

 

% change compared with prior period

 

 

 

(3

)%

 

 

 

(16

)%

 

 

 

 

 

 

 

          Interest and other financial charges decreased by 3% percent in 2011 compared with 2010 primarily due to lower borrowing costs, partially offset by higher debt balances.

          Interest and other financial charges decreased by 16% percent in 2010 compared with 2009 due to lower debt balances and lower borrowing costs.

         Tax Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Tax expense

 

 

$

417

 

 

 

$

765

 

 

 

$

436

 

 

Effective tax rate

 

 

 

18.3

%

 

 

 

28.1

%

 

 

 

22.2

%

 

          The effective tax rate decreased by 9.8 percentage points in 2011 compared with 2010 primarily due to a change in the mix of earnings between U.S. and foreign related to higher U.S. pension expense (primarily driven by an approixmate 7.6 percentage point impact which resulted from the increase in pension mark-to-market expense), an increased benefit from manufacturing incentives, an increased benefit from the favorable settlement of tax audits and an increased benefit from a lower foreign effective tax rate. The foreign effective tax rate was 21.1 percent, a decrease of approximately 4.9 percentage points which primarily consisted of (i) a 5.1 percent impact from decreased valuation allowances on net operating losses primarily due to an increase in German earnings available to be offset by net operating loss carry forwards, (ii) a 2.4 percent impact from tax benefits related to foreign exchange and investment losses, iii) a 1.2 percent impact from an increased benefit in tax credits and lower statutory tax rates, and (iv) a 4.1 percent impact related to an increase in tax reserves. The effective tax rate was lower than the U.S. statutory rate of 35 percent primarily due to earnings taxed at lower foreign rates.

          The effective tax rate increased by 5.9 percentage points in 2010 compared with 2009 primarily due to a change in the mix of earnings related to lower U.S. pension expense, the impact of an enacted change in the tax treatment of the Medicare Part D program, the absence of manufacturing incentives, a decreased impact from the settlement of audits and an increase in the foreign effective tax rate. The foreign effective tax rate increased by approximately 7 percentage points which primarily consisted of i) a 6 percentage point impact from the absence of tax benefits related to foreign exchange and investment losses and ii) a (0.1) percentage points impact from increased valuation allowances on net operating losses. The effective tax rate was lower than the U.S. statutory rate of 35 percent primarily due to earnings taxed at lower foreign rates.

          In 2012, the effective tax rate could change based upon the Company’s operating results, mix of earnings and the outcome of tax positions taken regarding previously filed tax returns currently under audit by various Federal, State and foreign tax authorities, several of which may be finalized in the foreseeable future. The Company believes that it has adequate reserves for these matters, the outcome of which could materially impact the results of operations and operating cash flows in the period they are resolved.

27



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Attributable to Honeywell

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

Amounts attributable to Honeywell

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1,858

 

 

$

1,944

 

 

$

1,492 

 

 

Income from discontinued operations

 

 

209

 

 

 

78

 

 

 

56 

 

 

 

 

     

 

     

 

     

 

Net income attributable to Honeywell

 

$

2,067

 

 

$

2,022

 

 

$

1,548 

 

 

 

 

     

 

     

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share of common stock – assuming dilution

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

2.35

 

 

$

2.49

 

 

$

1.98 

 

 

Income from discontinued operations

 

 

0.26

 

 

 

0.10

 

 

 

0.07 

 

 

 

 

     

 

     

 

     

 

Net income attributable to Honeywell

 

$

2.61

 

 

$

2.59

 

 

$

2.05 

 

 

 

 

     

 

     

 

     

 

          Earnings per share of common stock – assuming dilution increased by $0.02 per share in 2011 compared with 2010 primarily due to an increase in segment profit in each of our business segments, lower tax expense, the gain on disposal of discontinued operations, and lower other postretirement expense, partially offset by higher pension expense (primarily due to an increase in the pension mark-to-market adjustment) and higher repositioning and other charges.

          Earnings per share of common stock – assuming dilution increased by $0.54 per share in 2010 compared with 2009 primarily due to increased segment profit in our Automation and Control Solutions, Performance Materials and Technologies and Transportation Systems segments and lower pension expense, partially offset by higher tax expense and higher repositioning and other charges.

          For further discussion of segment results, see “Review of Business Segments”.

BUSINESS OVERVIEW

          This Business Overview provides a summary of Honeywell and its four reportable operating segments (Aerospace, Automation and Control Solutions, Performance Materials and Technologies and Transportation Systems), including their respective areas of focus for 2012 and the relevant economic and other factors impacting their results, and a discussion of each segment’s results for the three years ended December 31, 2011. Each of these segments is comprised of various product and service classes that serve multiple end markets. See Note 23 to the financial statements for further information on our reportable segments and our definition of segment profit.

Economic and Other Factors

          In addition to the factors listed below with respect to each of our operating segments, our consolidated operating results are principally driven by:

 

 

 

 

Impact of change in global economic growth rates (U.S., Europe and emerging regions) and industry conditions on demand in our key end markets;

 

 

 

 

Overall sales mix, in particular the mix of Aerospace original equipment and aftermarket sales and the mix of Automation and Control Solutions (ACS) products, distribution and services sales;

 

 

 

 

The extent to which cost savings from productivity actions are able to offset or exceed the impact of material and non-material inflation;

 

 

 

 

The impact of the pension discount rate and asset returns on pension expense, including mark-to-market adjustments, and funding requirements; and

 

 

 

 

The impact of fluctuations in foreign currency exchange rates (Euro and other global currencies), relative to the U.S. dollar.

 

 

 

Areas of Focus for 2012

 

 

 

 

The areas of focus for 2012, which are generally applicable to each of our operating segments, include:

 

 

 

 

Driving profitable growth and margin expansion by building innovative products that address customer needs;

28



 

 

 

 

Achieving sales growth, technological excellence and manufacturing capability and capacity through global expansion, especially focused on emerging regions in China, India, the Middle East and other high growth regions;

 

 

 

 

Proactively managing raw material costs through formula and long term supply agreements, price increases and hedging activities, where feasible;

 

 

 

 

Driving cash flow conversion through effective working capital management and capital investment in our businesses, thereby enhancing liquidity, repayment of debt, strategic acquisitions, and the ability to return value to shareholders;

 

 

 

 

Maintaining a flexible cost structure to ensure our ability to proactively respond to trends in short-cycle end markets such as the Transportation Systems Turbo business, ACS Energy, Safety & Security businesses, Aerospace commercial after-market and Performance Materials and Technologies Advanced Materials business;

 

 

 

 

Aligning and prioritizing investments in long-term growth considering short-term demand volatility;

 

 

 

 

Driving productivity savings through execution of repositioning actions;

 

 

 

 

Controlling discretionary spending levels with focus on non-customer related costs;

 

 

 

 

Utilizing our enablers Honeywell Operating System (HOS), Functional Transformation and Velocity Product Development (VPD) to drive margin expansion by standardizing the way we work, reducing cycle time, optimizing effectiveness of R&D, increasing quality and reducing the costs of product manufacturing, reducing costs and enhancing the quality of our administrative functions and improving business operations through investments in systems and process improvements;

 

 

 

 

Monitoring both suppliers and customers for signs of liquidity constraints, limiting exposure to any resulting inability to meet delivery commitments or pay amounts due, and identifying alternate sources of supply as necessary; and

 

 

 

 

Controlling Corporate costs, including costs incurred for asbestos and environmental matters, pension and other post-retirement expenses and tax expense.

29


Review of Business Segments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

2010

 

2009

 

 

   

 

 

 

 

Net Sales

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

6,494

 

 

$

5,868

 

 

$

5,930

 

Service

 

 

4,981

 

 

 

4,815

 

 

 

4,833

 

 

 

     

 

     

 

     

Total

 

 

11,475

 

 

 

10,683

 

 

 

10,763

 

Automation and Control Solutions

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

13,328

 

 

 

11,733

 

 

 

10,699

 

Service

 

 

2,207

 

 

 

2,016

 

 

 

1,912

 

 

 

     

 

     

 

     

Total

 

 

15,535

 

 

 

13,749

 

 

 

12,611

 

Performance Materials and Technologies

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

5,064

 

 

 

4,449

 

 

 

3,895

 

Service

 

 

595

 

 

 

277

 

 

 

249

 

 

 

     

 

     

 

     

Total

 

 

5,659

 

 

 

4,726

 

 

 

4,144

 

Transportation Systems

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

3,859

 

 

 

3,192

 

 

 

2,432

 

Service

 

 

 

 

 

 

 

 

 

 

 

     

 

     

 

     

Total

 

 

3,859

 

 

 

3,192

 

 

 

2,432

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

 

 

 

 

 

 

 

Service

 

 

1

 

 

 

 

 

 

1

 

 

 

     

 

     

 

     

Total

 

 

1

 

 

 

 

 

 

1

 

 

 

     

 

     

 

     

 

 

$

36,529

 

 

$

32,350

 

 

$

29,951

 

 

 

     

 

     

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Profit

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

2,023

 

 

$

1,835

 

 

$

1,893

 

Automation and Control Solutions

 

 

2,083

 

 

 

1,770

 

 

 

1,588

 

Performance Materials and Technologies

 

 

1,042

 

 

 

749

 

 

 

605

 

Transportation Systems

 

 

485

 

 

 

353

 

 

 

61

 

Corporate

 

 

(276

)

 

 

(222

)

 

 

(156

)

 

 

     

 

     

 

     

 

 

$

5,357

 

 

$

4,485

 

 

$

3,991

 

 

 

     

 

     

 

     

30


A reconciliation of segment profit to consolidated income from continuing operations before taxes are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

 

 

 

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Profit

 

$

5,357

 

 

$

4,485

 

 

$

3,991

 

Other income/ (expense)(1)

 

 

33

 

 

 

69

 

 

 

28

 

Interest and other financial charges

 

 

(376

)

 

 

(386

)

 

 

(458

)

Stock compensation expense(2)

 

 

(168

)

 

 

(163

)

 

 

(117

)

Pension expense-ongoing(2)

 

 

(105

)

 

 

(185

)

 

 

(287

)

Pension mark-to-market adjustment(2)

 

 

(1,802

)

 

 

(471

)

 

 

(741

)

Other postretirement income/(expense)(2)

 

 

86

 

 

 

(29

)

 

 

15

 

Repositioning and other charges (2)

 

 

(743

)

 

 

(598

)

 

 

(467

)

 

 

     

 

     

 

     

Income from continuing operations before taxes

 

$

2,282

 

 

$

2,722

 

 

$

1,964

 

 

 

     

 

     

 

     

 

 

 

(1)

Equity income/(loss) of affiliated companies is included in Segment Profit.

 

 

 

(2)

Amounts included in cost of products and services sold and selling, general and administrative expenses.

31



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

2010

 

2009

 

2011
Versus
2010

 

2010
Versus
2009

 

 

 

 

 

 

 

 

 

     

 

 

Aerospace Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Air transport and regional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Original equipment

 

$

1,439

 

 

$

1,362

 

 

$

1,396

 

 

6

%

 

(2

)%

 

Aftermarket

 

 

2,828

 

 

 

2,437

 

 

 

2,419

 

 

16

%

 

1

%

 

Business and general aviation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Original equipment

 

 

723

 

 

 

513

 

 

 

709

 

 

41

%

 

(28

)%

 

Aftermarket

 

 

1,207

 

 

 

976

 

 

 

902

 

 

24

%

 

8

%

 

Defense and Space Sales

 

 

5,278

 

 

 

5,395

 

 

 

5,337

 

 

(2

)%

 

1

%

 

 

 

     

 

     

 

     

 

 

 

 

 

 

 

Total Aerospace Sales

 

 

11,475

 

 

 

10,683

 

 

 

10,763

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Automation and Control Solutions Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Energy Safety & Security

 

 

7,977

 

 

 

6,789

 

 

 

5,932

 

 

17

%

 

14

%

 

Process Solutions

 

 

3,010

 

 

 

2,678

 

 

 

2,507

 

 

12

%

 

7

%

 

Building Solutions & Distribution

 

 

4,548

 

 

 

4,282

 

 

 

4,172

 

 

6

%

 

3

%

 

 

 

     

 

     

 

     

 

 

 

 

 

 

 

Total Automation and Control Solutions Sales

 

 

15,535

 

 

 

13,749

 

 

 

12,611

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Materials and Technologies Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

UOP

 

 

1,931

 

 

 

1,556

 

 

 

1,574

 

 

24

%

 

(1

)%

 

Advanced Materials

 

 

3,728

 

 

 

3,170

 

 

 

2,570

 

 

18

%

 

23

%

 

 

 

     

 

     

 

     

 

 

 

 

 

 

 

Total Performance Materials and Technologies Sales

 

 

5,659

 

 

 

4,726

 

 

 

4,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transportation Systems Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Turbo Technologies

 

 

3,859

 

 

 

3,192

 

 

 

2,432

 

 

21

%

 

31

%

 

 

 

     

 

     

 

     

 

 

 

 

 

 

 

Total Transportation Systems Sales

 

 

3,859

 

 

 

3,192

 

 

 

2,432

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

1

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

36,529

 

 

 

32,350

 

 

 

29,951

 

 

 

 

 

 

 

 

 

 

     

 

     

 

     

 

 

 

 

 

 

 

Aerospace

          Overview

          Aerospace is a leading global supplier of aircraft engines, avionics, and related products and services for aircraft manufacturers, airlines, aircraft operators, military services, and defense and space contractors. Our Aerospace products and services include auxiliary power units, propulsion engines, environmental control systems, electric power systems, engine controls, flight safety, communications, navigation, radar and surveillance systems, aircraft lighting, management and technical services, logistics services, advanced systems and instruments, aircraft wheels and brakes and repair and overhaul services. Aerospace sells its products to original equipment (OE) manufacturers in the air transport, regional, business and general aviation aircraft segments, and provides spare parts and repair and maintenance services for the aftermarket (principally to aircraft operators). The United States Government is a major customer for our defense and space products.

           Economic and Other Factors

          Aerospace operating results are principally driven by:

32



 

 

 

 

New aircraft production rates and delivery schedules set by commercial air transport, regional jet, business and general aviation OE manufacturers, as well as airline profitability, platform mix and retirement of aircraft from service;

 

 

 

 

Global demand for commercial air travel as reflected in global flying hours and utilization rates for corporate and general aviation aircraft, as well as the demand for spare parts and maintenance and repair services for aircraft currently in use;

 

 

 

 

Level and mix of U.S. Government appropriations for defense and space programs and military activity;

 

 

 

 

Changes in customer platform development schedules, requirements and demands for new technologies; and

 

 

 

 

Availability and price volatility of raw materials such as titanium and other metals.


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

2010

 

Change

 

2009

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

11,475

 

 

$

10,683

 

 

7

%

 

$

10,763

 

 

(1

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products and services sold

 

 

8,665

 

 

 

8,099

 

 

 

 

 

 

8,099

 

 

 

 

 

Selling, general and administrative expenses

 

 

591

 

 

 

553

 

 

 

 

 

 

570

 

 

 

 

 

Other

 

 

196

 

 

 

196

 

 

 

 

 

 

201

 

 

 

 

 

 

 

     

 

     

 

 

 

 

     

 

 

 

 

Segment profit

 

$

2,023

 

 

$

1,835

 

 

10

%

 

$

1,893

 

 

(3

)%

 

 

 

     

 

     

 

 

 

 

     

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011 vs. 2010

 

2010 vs. 2009

 

 

 

 

 

 

 

 

Factors Contributing to Year-Over-Year Change

 

 

Sales

 

Segment
Profit

 

Sales

 

Segment
Profit

 

 

 

 

 

 

 

 

 

 

 

Organic growth/ Operational segment profit

 

7

%

 

9

%

 

0

%

 

0

%

 

Acquisitions and divestitures, net

 

0

%

 

0

%

 

0

%

 

0

%

 

Other

 

0

%

 

1

%

 

(1

)%

 

(3

)%

 

 

 

   

 

   

 

   

 

   

 

Total % Change

 

7

%

 

10

%

 

(1

)%

 

(3

)%

 

 

 

   

 

   

 

   

 

   

 

          Aerospace sales by major customer end-markets were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% of Aerospace
Sales

 

% Change in
Sales

 

 

 

 

 

 

 

Customer End-Markets

 

2011

 

2010

 

2009

 

2011
Versus
2010

 

2010
Versus
2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Air transport and regional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Original equipment

 

13

%

 

13

%

 

13

%

 

6

%

 

(2

)%

 

Aftermarket

 

25

%

 

23

%

 

22

%

 

16

%

 

1

%

 

Business and general aviation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Original equipment

 

6

%

 

5

%

 

7

%

 

41

%

 

(27

)%

 

Aftermarket

 

11

%

 

9

%

 

8

%

 

24

%

 

8

%

 

Defense and Space

 

45

%

 

50

%

 

50

%

 

(2

)%

 

1

%

 

 

 

   

 

   

 

   

 

   

 

   

 

Total

 

100

%

 

100

%

 

100

%

 

7

%

 

(1

)%

 

 

 

   

 

   

 

   

 

   

 

   

 

           2011 compared with 2010

          Aerospace sales increased by 7 percent in 2011 compared with 2010 primarily due to an increase in organic growth of 7 percent primarily due to increased commercial sales volume.

33



 

 

 

 

Details regarding the changes in sales by customer end-markets are as follows:

 

 

 

 

Air transport and regional original equipment (OE) sales increased by 6 percent in 2011 primarily driven by higher sales to our OE customers, consistent with higher production rates, platform mix and a higher win rate on selectables (components selected by purchasers of new aircraft).

 

 

 

 

Air transport and regional aftermarket sales increased by 16 percent for 2011 primarily due to (i) increased maintenance activity and spare parts sales driven by an approximately 6 percent increase in global flying hours, (ii) increased sales of avionics upgrades, and (iii) changes in customer buying patterns relating to spare parts and maintenance activity.

 

 

 

 

Business and general aviation OE sales increased by 41 percent in 2011 due to a rebound from near trough levels in 2010 and strong demand in the business jet end market, favorable platform mix, growth from acquisitions and lower OEM Payments (as defined below) during 2011.

 

 

 

 

Business and general aviation aftermarket sales increased by 24 percent in 2011 primarily due to increased sales of spare parts and revenue associated with maintenance service agreements.

 

 

 

 

Defense and space sales decreased by 2 percent in 2011 primarily due to anticipated program ramp downs, partially offset by higher domestic and international aftermarket sales, increased unmanned aerial vehicle (UAV) shipments and the EMS acquisition (refer to Note 2).

          Aerospace segment profit increased by 10 percent in 2011 compared with 2010 primarily due to an increase in operational segment profit of 9 percent and an increase of 1 percent due to lower OEM Payments made during 2011. The increase in operational segment profit is comprised of the positive impact from higher commercial aftermarket demand, price and productivity, net of inflation, partially offset by research, development and engineering investments. Cost of goods sold totaled $8.7 billion in 2011, an increase of approximately $566 million from 2010 which is primarily a result of the factors discussed above.

          2010 compared with 2009

          Aerospace sales decreased by 1 percent in 2010 compared with 2009 primarily due to a 1 percent reduction of revenue related to amounts recognized for payments to business and general aviation original equipment manufacturers to partially offset their pre-production costs associated with new aircraft platforms (OEM Payments).

          Details regarding the decrease in sales by customer end-markets are as follows:

 

 

 

 

Air transport and regional original equipment (OE) sales decreased by 2 percent in 2010 primarily due to lower sales to our air transport OE customers.

 

 

 

 

Air transport and regional aftermarket sales increased by 1 percent in 2010 primarily due to increased sales of spare parts driven by the impact of increased flying hours of approximately 6 percent in 2010.

 

 

 

 

Business and general aviation OE sales decreased by 27 percent in 2010 due to decreases in new business jet deliveries reflecting rescheduling and cancellations of deliveries by OE customers in the first six months and the impact of the OEM Payments discussed above.

 

 

 

 

Business and general aviation aftermarket sales increased by 8 percent in 2010 primarily due to increased sales of spare parts due to higher engine utilization, partially offset by lower revenue associated with licensing and maintenance service agreements.

 

 

 

 

Defense and space sales increased by 1 percent in 2010 primarily due to higher sales of logistics services partially offset by program wind-downs and completions and lower sales related to commercial helicopters.

          Aerospace segment profit decreased by 3 percent in 2010 compared to 2009 primarily due to a negative 3 percent impact from the OEM payments, discussed above. Operational segment profit was flat in 2010 with the approximate positive 4 percent impact from price and productivity, net of inflation (including the absence of prior period labor cost actions offset by the benefits from prior repositioning actions) offset by an approximate negative 4 percent impact from lower sales volume. Cost of goods sold totaled $8.1 billion in 2010, unchanged from 2009.

34


           2012 Areas of Focus

          Aerospace’s primary areas of focus for 2012 include:

 

 

 

 

Driving customer satisfaction through operational excellence (product quality, cycle time reduction, and supplier management);

 

 

 

 

Aligning research and development and customer support costs with customer requirements and demand for new platforms;

 

 

 

 

Expanding sales and operations in international locations;

 

 

 

 

Global pursuit of new defense and space programs;

 

 

 

 

Focusing on cost structure initiatives to maintain profitability in face of potential defense and space budget reductions and program specific appropriations;

 

 

 

 

Continuing to design equipment that enhances the safety, performance and durability of aerospace and defense equipment, while reducing weight and operating costs; and

 

 

 

 

Continued deployment and optimization of our common enterprise resource planning (ERP) system.

Automation and Control Solutions (ACS)

           Overview

          ACS provides innovative products and solutions that make homes, buildings, industrial sites and infrastructure more efficient, safe and comfortable. Our ACS products and services include controls for heating, cooling, indoor air quality, ventilation, humidification, lighting and home automation; advanced software applications for home/building control and optimization; sensors, switches, control systems and instruments for measuring pressure, air flow, temperature and electrical current; security, fire and gas detection; personal protection equipment; access control; video surveillance; remote patient monitoring systems; products for automatic identification and data collection, installation, maintenance and upgrades of systems that keep buildings safe, comfortable and productive; and automation and control solutions for industrial plants, including advanced software and automation systems that integrate, control and monitor complex processes in many types of industrial settings as well as equipment that controls, measures and analyzes natural gas production and transportation.

          In 2011, we changed our presentation of ACS’s segment sales to better represent the key markets served (Energy, Safety & Security; Process Solutions; Building Solutions & Distribution). Prior period disclosure below has been conformed to this presentation format.

           Economic and Other Factors

          ACS’s operating results are principally driven by:

 

 

 

 

Global commercial construction (including retrofits and upgrades);

 

 

 

 

Demand for residential security and environmental control retrofits and upgrades;

 

 

 

 

Demand for energy efficient products and solutions;

 

 

 

 

Industrial production;

 

 

 

 

Government and public sector spending;

 

 

 

 

Economic conditions and growth rates in developed (U.S. and Europe) and emerging markets;

 

 

 

 

The strength of global capital and operating spending on process (including petrochemical and refining) and building automation;

 

 

 

 

Inventory levels in distribution channels; and

 

 

 

 

Changes to energy, fire, security, health care, safety and environmental concerns and regulations.

35



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Automation and Control Solutions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

2010

 

Change

 

2009

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

15,535

 

 

$

13,749

 

 

13

%

 

$

12,611

 

 

9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products and services sold

 

 

10,448

 

 

 

9,312

 

 

 

 

 

 

8,561

 

 

 

 

 

Selling, general and administrative expenses

 

 

2,819

 

 

 

2,480

 

 

 

 

 

 

2,256

 

 

 

 

 

Other

 

 

185

 

 

 

187

 

 

 

 

 

 

206

 

 

 

 

 

 

 

     

 

     

 

 

 

 

     

 

 

 

 

Segment profit

 

$

2,083

 

 

$

1,770

 

 

18

%

 

$

1,588

 

 

11

%

 

 

 

     

 

     

 

 

 

 

     

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011 vs. 2010

 

2010 vs. 2009

 

 

 

 

 

 

 

 

Factors Contributing to Year-Over-Year Change

 

Sales

 

Segment
Profit

 

Sales

 

Segment
Profit

 

 

 

 

 

 

 

 

 

 

 

Organic growth/ Operational segment profit

 

5

%

 

9

%

 

6

%

 

9

%

 

Foreign exchange

 

2

%

 

3

%

 

0

%

 

0

%

 

Acquisitions and divestitures, net

 

6

%

 

6

%

 

3

%

 

2

%

 

 

 

   

 

   

 

   

 

   

 

Total % Change

 

13

%

 

18

%

 

9

%

 

11

%

 

 

 

   

 

   

 

   

 

   

 

           2011 compared with 2010

          Automation and Control Solutions (“ACS”) sales increased by 13 percent in 2011 compared with 2010, primarily due to a 6 percent growth from acquisitions, net of divestitures, 5 percent increase in organic revenue driven by increased sales volume and higher prices and 2 percent favorable impact of foreign exchange through the first nine months partially offset by the negative impact of foreign exchange in the fourth quarter. We expect sales growth to continue to moderate in the first quarter of 2012 due to European economic conditions and the anticipated negative impact of foreign exchange.

 

 

 

 

Sales in our Energy, Safety & Security businesses increased by 17 percent (6 percent organically) in 2011 principally due to (i) the positive impact of acquisitions (most significantly Sperian and EMS), net of divestitures (ii) higher sales volume due to general industrial recovery and new product introductions and (iii) the favorable impact of foreign exchange.

 

 

 

 

Sales in our Process Solutions increased 12 percent (6 percent organically) in 2011 principally due to (i) increased volume reflecting conversion to sales from backlog (ii) the favorable impact of foreign exchange and (iii) the impact of acquisitions. Orders increased in 2011 compared to 2010 primarily driven by continued favorable macro trends in oil and gas infrastructure projects, growth in emerging regions and the positive impact of foreign exchange.

 

 

 

 

Sales in our Building Solutions & Distribution increased by 6 percent (4 percent organically) in 2011 driven principally due to (i) volume growth in our Building Solutions business reflecting conversion to sales from order backlog and increased sales volume in our Distribution business (ii) the favorable impact of foreign exchange and (iii) the impact of acquisitions, net of divestitures.

          ACS segment profit increased by 18 percent in 2011 compared with 2010 due to a 9 percent increase in operational segment profit, 6 percent increase from acquisitions, net of divestitures and 3 percent positive impact of foreign exchange. The increase in operational segment profit is comprised of an approximate 5 percent positive impact from price and productivity, net of inflation and investment for growth and a 4 percent positive impact from higher sales volumes. Cost of goods sold totaled $10.4 billion in 2011, an increase of approximately $1.1 billion which is primarily due to acquisitions, net of divestitures, higher sales volume, foreign exchange and inflation partially offset by positive impact from productivity.

           2010 compared with 2009

          ACS sales increased by 9 percent in 2010 compared with 2009, primarily due to a 6 percent increase in organic revenue driven by increased sales volume and 3 percent growth from acquisitions.

36



 

 

 

 

Sales in our Energy, Safety & Security businesses increased by 14 percent in 2010 primarily reflecting higher sales volumes in our businesses tied to industrial production (environmental and combustion controls, sensing and control, gas detection, personal protective equipment and scanning and mobility products), new product introductions and acquisitions, primarily Sperian.

 

 

 

 

Sales in Process Solutions increased 7 percent in 2010 primarily due to the positive impact of increased volume, acquisitions (primarily the RMG Group), higher prices and industrial field solutions driven by order growth and conversion to sales from order backlog.

 

 

 

 

Sales in Building Solutions & Distribution increased by 3 percent in 2010 driven primarily by energy efficiency projects and conversion to sales from order backlog.

          ACS segment profit increased by 11 percent in 2010 compared with 2009 due to a 9 percent increase in operational segment profit and 2 percent increase from acquisitions. The increase in operational segment profit is comprised of an approximate 18 percent positive impact from higher sales volume, partially offset by an approximate 9 percent negative impact from inflation, net of price and productivity (including the absence of prior period labor cost actions, partially offset by the benefits of prior repositioning). Cost of goods sold totaled $9.3 billion in 2010, an increase of approximately $750 million which is primarily as a result of the factors discussed above.

           2012 Areas of Focus

          ACS’s primary areas of focus for 2012 include:

 

 

 

 

Products and solutions for energy efficiency and asset management;

 

 

 

 

Extending technology leadership: lowest total installed cost and integrated product solutions;

 

 

 

 

Defending and extending our installed base through customer productivity and globalization;

 

 

 

 

Sustaining strong brand recognition through our brand and channel management;

 

 

 

 

Continued centralization and standardization of global software development capabilities;

 

 

 

 

Continuing to identify, execute and integrate acquisitions in or adjacent to the markets which we serve;

 

 

 

 

Continuing to establish and grow emerging markets presence and capability;

 

 

 

 

Continuing to invest in new product development and introductions;

 

 

 

 

Continued deployment and optimization of our common ERP system; and

 

 

 

 

Increased focus on commercial and R&D effectiveness.

Performance Materials and Technologies (PMT)

           Overview

          During the fourth quarter of 2011, the Specialty Materials segment was renamed to Performance Materials and Technologies (‘PMT’). PMT better reflects the businesses’ expanded set of technology and product offerings that reach far beyond the traditional scope associated with specialty materials.

          Performance Materials and Technologies develops and manufactures high-purity, high-quality and high-performance chemicals and materials for applications in the refining, petrochemical, automotive, healthcare, agricultural, packaging, refrigeration, appliance, housing, semiconductor, wax and adhesives segments. Performance Materials and Technologies also provides process technology, products and services for the petroleum refining, gas processing, petrochemical, renewable energy and other industries. Performance Materials and Technologies’ product portfolio includes fluorocarbons, hydrofluoroolefins, caprolactam, resins, ammonium sulfate for fertilizer, phenol, specialty films, waxes, additives, advanced fibers, customized research chemicals and intermediates, electronic materials and chemicals, catalysts, and adsorbents.

37



 

 

 

 

Economic and Other Factors

 

 

 

 

Performance Materials and Technologies operating results are principally driven by:

 

 

 

 

Level and timing of capital spending and capacity and utilization rates in refining and petrochemical end markets;

 

 

 

 

Pricing volatility and industry supply conditions for raw materials such as cumene, fluorspar, perchloroethylene, R240, natural gas, sulfur and ethylene;

 

 

 

 

Impact of environmental and energy efficiency regulations;

 

 

 

 

Extent of change in order rates from global semiconductor customers;

 

 

 

 

Global demand for non-ozone depleting Hydro fluorocarbons (HFCs);

 

 

 

 

Condition of the U.S. residential housing and non residential industries and automotive demand;

 

 

 

 

Global demand for caprolactam and ammonium sulfate; and

 

 

 

 

Demand for new products including renewable energy and biofuels.


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Materials and Technologies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

2010

 

Change

 

2009

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

5,659

 

$

4,726

 

20

%

 

$

4,144

 

14

%

 

 

Cost of products and services sold

 

 

4,151

 

 

3,554

 

 

 

 

 

3,127

 

 

 

 

Selling, general and administrative expenses

 

 

420

 

 

345

 

 

 

 

 

345

 

 

 

 

Other

 

 

46

 

 

78

 

 

 

 

 

67

 

 

 

 

 

 

   

 

   

 

 

 

 

   

 

 

 

 

Segment profit

 

$

1,042

 

$

749

 

39

%

 

$

605

 

24

%

 

 

 

   

 

   

 

 

 

 

   

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011 vs. 2010

 

2010 vs. 2009

 

 

 

 

 

 

 

 

Factors Contributing to Year-Over-Year Change

 

Sales

 

Segment
Profit

 

Sales

 

Segment
Profit

 

 

 

 

 

 

 

 

 

 

 

Organic growth/ Operational segment profit

 

 

 

16

%

 

 

 

38

%

 

 

 

14

%

 

 

 

25

%

 

Foreign exchange

 

 

 

1

%

 

 

 

1

%

 

 

 

0

%

 

 

 

(1

)%

 

Acquisitions and divestitures, net

 

 

 

3

%

 

 

 

0

%

 

 

 

0

%

 

 

 

0

%

 

 

 

 

     

 

 

     

 

 

     

 

 

     

 

Total % Change

 

 

 

20

%

 

 

 

39

%

 

 

 

14

%

 

 

 

24

%

 

 

 

 

     

 

 

     

 

 

     

 

 

     

 


 

 

 

 

 

2011 compared with 2010

 

 

                PMT sales increased by 20 percent in 2011 compared with 2010 due to a 16 percent increase in organic growth, 3 percent growth from acquisitions, and a 1 percent favorable impact of foreign exchange.

 

 

Advanced Materials sales increased by 18 percent (12 percent organically) in 2011 compared to 2010 primarily driven by (i) a 33 percent (18 percent organically) increase in Resins and Chemicals sales primarily due to higher prices driven by strong Asia demand, agricultural demand, formula pricing arrangements and increased sales resulting from the acquisition of a phenol plant, partially offset by decreased volumes primarily due to disruptions in phenol supply and weather related events, (ii) a 10 percent increase in our Fluorine Products business due to higher pricing reflecting robust global demand and tight industry supply conditions primarily in the first half of the year, which moderated in the second half of the year due to seasonally weaker demand and increased available capacity in the marketplace, (iii) a 12 percent increase in Specialty Products sales primarily due to higher sales volume in our armor, additives, and healthcare packaging products, and commercial excellence initiatives. We expect Advanced Materials sales growth to continue to moderate during the first half of 2012 due to slowing global demand and lower prices resulting from increased availability of refrigerants supply.

38



 

 

 

UOP sales increased by 24 percent in 2011 compared to 2010 primarily driven by increased service, and licensing revenues and higher unit sales of refining and specialty catalysts, primarily reflecting continued strength in the refining and petrochemical industries.

 

 

 

          PMT segment profit increased by 39 percent in 2011 compared with 2010 due to a 38 percent increase in operational segment profit and a 1 percent favorable impact of foreign exchange. The increase in operational segment profit is primarily due to the favorable price to raw materials spread in Resins and Chemicals and Fluorine Products and higher service, product and licensing revenues in UOP, partially offset by continued investment in growth and plant optimization initiatives. Cost of goods sold totaled $4.2 billion in 2011, an increase of approximately $597 million which is primarily due to volume, material inflation, the phenol plant acquisition and continued investment in growth initiatives.

 

 

2010 compared with 2009

 

 

 

PMT sales increased by 14 percent in 2010 compared with 2009 predominantly due to organic growth.

 

 

Advanced Materials sales increased by 23 percent in 2010 compared to 2009 primarily driven by (i) a 29 percent increase in Resins and Chemicals sales primarily due to higher prices driven by strong Asia demand, formula pricing arrangements and agricultural demand, (ii) a 21 percent increase in Specialty Products sales most significantly due to higher sales volume to our semiconductor, specialty additives, advanced fiber industrial applications and specialty chemicals customers, (iii) a 19 percent increase in our Fluorine Products business due to higher sales volume from increased demand for our refrigerants, insulating materials and industrial processing aids.

 

 

 

UOP sales decreased by 1 percent in 2010 compared to 2009 primarily driven by lower new unit catalyst sales and timing of projects activity in the refining and petrochemical industries, partially offset by increased gas processing equipment sales.

 

 

 

          PMT segment profit increased by 24 percent in 2010 compared with 2009 due to a 25 percent increase in operational segment profit. The increase in operational segment profit is primarily due to a 24 percent positive impact from higher sales volumes. The positive impact from price and productivity was offset by the negative impact from inflation (including the absence of prior period labor cost actions). Cost of goods sold totaled $3.6 billion in 2010, an increase of approximately $400 million which is primarily as a result of the factors discussed above.

 

 

 

 

2012 Areas of Focus

 

 

 

 

Performance Materials and Technologies primary areas of focus for 2012 include:

 

 

 

 

Continuing to develop new processes, products and technologies that address energy efficiency, the environment and security, as well as position the portfolio for higher value;

 

 

 

 

Commercializing new products and technologies in the petrochemical, gas processing and refining industries and renewable energy sector;

 

 

 

 

Investing to increase plant capacity and reliability and improving productivity and quality through operational excellence;

 

 

 

 

Driving sales and marketing excellence and expanding local presence in fast growing emerging markets; and

 

 

 

 

Managing exposure to raw material price and supply fluctuations through evaluation of alternative sources of supply and contractual arrangements.

39



 

 

 

Transportation Systems

 

 

 

 

Overview

 

 

 

          Transportation Systems provides automotive products that improve the performance and efficiency of cars, trucks, and other vehicles through state-of-the-art technologies, world class brands and global solutions to customers’ needs. Transportation Systems’ products include turbochargers and thermal systems; and friction materials (Bendix(R) and Jurid(R)) and brake hard parts. Transportation Systems sells its products to original equipment (“OE”) automotive and truck manufacturers (e.g., BMW, Caterpillar, Daimler, Renault, Ford, and Volkswagen), wholesalers and distributors and through the retail aftermarket.

 

 

 

 

Economic and Other Factors

 

 

 

 

Transportation Systems operating results are principally driven by:

 

 

 

 

Financial strength and stability of automotive OE manufacturers;

 

 

 

 

Global demand, particularly in Western Europe, for automobile and truck production;

 

 

 

 

Turbo penetration rates for new engine platforms;

 

 

 

 

Global consumer preferences, particularly in Western Europe, for boosted diesel passenger cars;

 

 

 

 

Degree of volatility in raw material prices, including nickel and steel;

 

 

 

 

New automobile production rates and the impact of inventory levels of automotive OE manufacturers on demand for our products;

 

 

 

 

Regulations mandating lower emissions and improved fuel economy;

 

 

 

 

Consumers’ ability to obtain financing for new vehicle purchases; and

 

 

 

 

Impact of factors such as consumer confidence on automotive aftermarket demand.


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transportation systems

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

2010

 

Change

 

2009

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

3,859  

 

$

3,192  

 

21

%

 

$

2,432  

 

31

%

 

 

Cost of products and services sold

 

 

3,174  

 

 

2,641  

 

 

 

 

 

2,190  

 

 

 

 

Selling, general and administrative expenses

 

 

161  

 

 

149  

 

 

 

 

 

141  

 

 

 

 

Other

 

 

39  

 

 

49  

 

 

 

 

 

40  

 

 

 

 

 

 

   

 

   

 

 

 

 

   

 

 

 

 

 

Segment profit

 

$

485  

 

$

353  

 

37

%

 

$

61  

 

479

%

 

 

 

   

 

   

 

 

 

 

   

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011 vs. 2010

 

2010 vs. 2009

 

 

 

 

 

 

 

Factors Contributing to Year-Over-Year Change

 

Sales

 

Segment
Profit

 

Sales

 

Segment
Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Organic growth/ Operational segment profit

 

16

%

 

32

%

 

33

%

 

490

%

 

Foreign exchange

 

5

%

 

5

%

 

(2

)%

 

(11

)%

 

 

 

   

 

   

 

   

 

   

 

Total % Change

 

21

%

 

37

%

 

31

%

 

479

%

 

 

 

   

 

   

 

   

 

   

 

          2011 compared with 2010

          Transportation Systems sales increased by 21 percent in 2011 compared with the 2010 primarily due to a 16 percent increase in organic revenue driven by increased sales volume and a favorable impact of foreign exchange of 5 percent.

40


          The sales increase in 2011 as compared with 2010 was primarily driven by (i) increased turbocharger sales to both light vehicle and commercial vehicle engine manufacturers primarily due to new platform launches and strong diesel penetration rates in Western Europe and (ii) the favorable impact of foreign exchange. We expect turbocharger year over year sales growth rate to moderate in the first quarter of 2012 primarily due to reduced European light vehicle production and the anticipated negative impact of foreign exchange.

          Transportation Systems segment profit increased by 37 percent in 2011 compared with 2010 due to a 32 percent increase in operational segment profit and a 5 percent favorable impact of foreign exchange. The increase in operational segment profit is comprised of an approximate 25 percent positive impact from productivity, net of inflation and price, and 7 percent positive impact from higher sales volumes. Cost of goods sold totaled $3.2 billion in 2011, an increase of $533 million which is primarily a result of higher sales volume, foreign exchange and inflation, partially offset by positive impact from productivity.

          2010 compared with 2009

          Transportation Systems sales increased by 31 percent in 2010 compared with the 2009, primarily due to a 33 percent increase in organic revenue driven by increased sales volume, partially offset by an unfavorable impact of foreign exchange of 2 percent.

          The sales increase in 2010 as compared with 2009 was primarily due to increased turbocharger sales to both light vehicle and commercial vehicle engine manufacturers partially offset by the negative impacts of foreign exchange.

          Transportation Systems segment profit increased by $292 million in 2010 compared with 2009 predominantly due to the positive impact from increased sales volume. Cost of goods sold totaled $2.6 billion in 2010, an increase of approximately $450 million which is also primarily a result of increased sales volume.

 

 

 

 

2012 Areas of Focus

 

 

 

Transportation Systems primary areas of focus in 2012 include:

 

 

 

Sustaining superior turbocharger technology through successful platform launches;

 

 

 

 

Maintaining the high quality of current products while executing new product introductions;

 

 

 

 

Increasing global penetration and share of diesel and gasoline turbocharger OEM demand;

 

 

 

 

Addressing capacity challenges and improving cost structure through increasing plant productivity and expansion of global manufacturing footprint;

 

 

 

 

Aligning cost structure with current economic outlook, and successful execution of repositioning actions; and

 

 

 

 

Aligning development efforts and costs with new turbo platform launch schedules.

Repositioning and Other Charges

          See Note 3 to the financial statements for a discussion of repositioning and other charges incurred in 2011, 2010, and 2009. Our repositioning actions are expected to generate incremental pretax savings of approximately $150 million in 2012 compared with 2011 principally from planned workforce reductions. Cash expenditures for severance and other exit costs necessary to execute our repositioning actions were $159, $147, and $193 million in 2011, 2010, and 2009, respectively. Such expenditures for severance and other exit costs have been funded principally through operating cash flows. Cash expenditures for severance and other costs necessary to execute the remaining actions are expected to be approximately $150 million in 2012 and will be funded through operating cash flows.

          The following tables provide details of the pretax impact of total net repositioning and other charges by segment.

41



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

 

 

 

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

Aerospace

 

 

 

 

 

 

 

 

 

Net repositioning charge

 

$

 

29

 

 

$

 

32

 

 

$

 

31

 

 

 

       

 

       

 

       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

 

 

 

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

Automation and Control Solutions

 

 

 

 

 

 

 

 

 

Net repositioning charge

 

$

 

191

 

 

$

 

79

 

 

$

 

70

 

 

 

       

 

       

 

       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

 

 

 

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

Performance Materials and Technologies

 

 

 

 

 

 

 

 

 

Net repositioning charge

 

$

 

41

 

 

$

 

18

 

 

$

 

9

 

 

 

       

 

       

 

       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

 

 

 

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

Transportation Systems

 

 

 

 

 

 

 

 

 

Net repositioning charge

 

$

 

82

 

 

$

 

20

 

 

$

 

50

 

Asbestos related litigation charges, net of insurance

 

 

 

146

 

 

 

 

158

 

 

 

 

112

 

 

 

       

 

       

 

       

 

 

 

$

 

228

 

 

$

 

178

 

 

$

 

162

 

 

 

       

 

       

 

       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

 

 

 

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

 

 

 

 

Net repositioning charge

 

$

 

11

 

 

$

 

 

 

$

 

 

Asbestos related litigation charges, net of insurance

 

 

 

3

 

 

 

 

17

 

 

 

 

43

 

Probable and reasonably estimable environmental liabilities

 

 

 

240

 

 

 

 

212

 

 

 

 

145

 

Other

 

 

 

 

 

 

 

62

 

 

 

 

7

 

 

 

       

 

       

 

       

 

 

 

$

 

254

 

 

$

 

291

 

 

$

 

195

 

 

 

       

 

       

 

       

LIQUIDITY AND CAPITAL RESOURCES

          The Company continues to manage its businesses to maximize operating cash flows as the primary source of liquidity. In addition to our available cash and operating cash flows, additional sources of liquidity include committed credit lines, short-term debt from the commercial paper market, long-term borrowings, and access to the public debt and equity markets, as well as the ability to sell trade accounts receivables. We continue to balance our cash and financing uses through investment in our existing core businesses, acquisition activity, share repurchases and dividends.

Cash Flow Summary

          Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows for the years ended 2011, 2010 and 2009, are summarized as follows:

42



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

Cash provided by (used for):

 

 

 

 

 

 

 

 

 

Operating activities

 

$

 

2,833

 

 

$

 

4,203

 

 

$

 

3,946

 

Investing activities

 

 

 

(611

)

 

 

 

(2,269

)

 

 

 

(1,133

)

Financing activities

 

 

 

(1,114

)

 

 

 

(2,047

)

 

 

 

(2,152

)

Effect of exchange rate changes on cash

 

 

 

(60

)

 

 

 

(38

)

 

 

 

75

 

 

 

       

 

       

 

       

 

Net increase/(decrease) in cash and cash equivalents

 

$

 

1,048

 

 

$

 

(151

)

 

$

 

736

 

 

 

       

 

       

 

       

          2011 compared with 2010

          Cash provided by operating activities decreased by $1,370 million during 2011 compared with 2010 primarily due to i) increased voluntary cash contributions of $1,050 million to our U.S. pension plans, ii) an unfavorable impact from decreased deferred taxes (excluding the impact of cash taxes) of approximately $710 million, and iii) higher cash tax payments of approximately $500 million, partially offset by an $863 million increase of net income before the non-cash pension mark-to-market adjustment.

          Cash used for investing activities decreased by $1,658 million during 2011 compared with 2010 primarily due to an increase in proceeds from sale of businesses of $1,149 million (most significantly the divestiture of the Consumer Products Group business and the automotive on-board sensor products business within our Automation and Control Solutions segment), a decrease in cash paid for acquisitions of $330 million, and a net $315 million decrease in investments of short-term marketable securities.

          Cash used for financing activities decreased by $933 million during 2011 compared to 2010 primarily due to an increase in the net proceeds from debt of $1,734 million and a decrease of $293 million in the payment of debt assumed with acquisitions, partially offset by an increase of $1,085 million of repurchases of common stock.

          2010 compared with 2009

          Cash provided by operating activities increased by $257 million during 2010 compared with 2009 primarily due to i) increased accrued expenses of $690 million (due to increased customer advances and incentive compensation accruals), ii) a $550 million impact from increased deferred taxes (excluding the impact of cash taxes), iii) increased net income of $474 million, iv) lower cash tax payments of approximately $300 million and v) a $219 million decrease in payments for repositioning and other charges, partially offset by a i) $1,059 unfavorable impact from working capital driven by higher receivables and increased purchases of raw materials and component inventory to support higher demand, partially offset by a corresponding increase to accounts payable, ii) increased pension and other postretirement payments of $598 million and iii) the absence of $155 million sale of long-term receivables in 2009.

          Cash used for investing activities increased by $1,136 million during 2010 compared with 2009 primarily due to an increase in cash paid for acquisitions of $835 million (most significantly Sperian Protection), and a net $341 million increase in investments in short-term marketable securities

          Cash used for financing activities decreased by $105 million during 2010 compared with 2009 primarily due to a decrease in the net repayment of debt (including commercial paper) of $287 million and an increase in the proceeds from the issuance of common stock, primarily related to stock option exercises of $158 million, partially offset by the repayment of $326 million of debt assumed in the acquisition of Sperian Protection.

Liquidity

          Each of our businesses is focused on implementing strategies to increase operating cash flows through revenue growth, margin expansion and improved working capital turnover. Considering the current economic environment in which each of the businesses operate and their business plans and strategies, including the focus on growth, cost reduction and productivity initiatives, the Company believes that cash balances and operating cash flows are the principal source of liquidity. In addition to the available cash and operating cash flows, additional sources of liquidity include committed credit lines, short term debt from the commercial paper markets, long-term borrowings, and access to the public debt and equity markets, as well as the ability to sell trade accounts receivables. At December 31, 2011, a substantial portion of the Company’s cash and cash equivalents were held by foreign subsidiaries. If the amounts held outside of the U.S. were to be repatriated, under current

43


law, they would be subject to U.S. federal income taxes, less applicable foreign tax credits. However, our intent is to permanently reinvest these funds outside of the U.S. It is not practicable to estimate the amount of tax that might be payable if some or all of such earnings were to be repatriated, and the amount of foreign tax credits that would be available to reduce or eliminate the resulting U.S. income tax liability.

          A source of liquidity is our ability to issue short-term debt in the commercial paper market. Commercial paper notes are sold at a discount and have a maturity of not more than 365 days from date of issuance. Borrowings under the commercial paper program are available for general corporate purposes as well as for financing potential acquisitions. There was $599 million of commercial paper outstanding at December 31, 2011.

          Our ability to access the commercial paper market, and the related cost of these borrowings, is affected by the strength of our credit rating and market conditions. Our credit ratings are periodically reviewed by the major independent debt-rating agencies. As of December 31, 2011, Standard and Poor’s (S&P), Fitch, and Moody’s have ratings on our long-term debt of A, A and A2 respectively, and short-term debt of A-1, F1 and P1 respectively. S&P, Fitch and Moody’s have Honeywell’s rating outlook as “stable”. To date, the company has not experienced any limitations in our ability to access these sources of liquidity.

          We also have a current shelf registration statement filed with the Securities and Exchange Commission under which we may issue additional debt securities, common stock and preferred stock that may be offered in one or more offerings on terms to be determined at the time of the offering. Net proceeds of any offering would be used for general corporate purposes, including repayment of existing indebtedness, capital expenditures and acquisitions.

          As a source of liquidity, we sell interests in designated pools of trade accounts receivables to third parties. As of December 31, 2011 and 2010, none of the receivables in the designated pools had been sold to third parties. When we sell receivables, they are over-collateralized and we retain a subordinated interest in the pool of receivables representing that over-collateralization as well as an undivided interest in the balance of the receivables pools. The terms of the trade accounts receivable program permit the repurchase of receivables from the third parties at our discretion, providing us with an additional source of revolving credit. As a result, program receivables remain on the Company’s balance sheet with a corresponding amount recorded as either Short-term borrowings or Long-term debt.

          In February 2011, the Company issued $800 million 4.25% Senior Notes due 2021 and $600 million 5.375% Senior Notes due 2041 (collectively, the “Notes”). The Notes are senior unsecured and unsubordinated obligations of Honeywell and rank equally with all of Honeywell’s existing and future senior unsecured debt and senior to all of Honeywell’s subordinated debt. The offering resulted in gross proceeds of $1,400 million, offset by $19 million in discount and closing costs related to the offering.

          In the first quarter of 2011, the Company repurchased the entire outstanding principal amount of its $400 million 5.625% Notes due 2012 via a cash tender offer and a subsequent optional redemption. The costs relating to the early redemption of the Notes, including the “make-whole premium”, was $29 million.

          In March 2011, the Company entered into a $2,800 million Five Year Credit Agreement (“Credit Agreement”) with a syndicate of banks. Commitments under the Credit Agreement can be increased pursuant to the terms of the Credit Agreement to an aggregate amount not to exceed $3,500 million. The Credit Agreement is maintained for general corporate purposes, including support for the issuance of commercial paper, and replaces the previous $2,800 million five year credit agreement dated May 14, 2007 (“Prior Agreement”). At December 31, 2011, there were no borrowings or letters of credit issued under the credit facility. The credit facility does not restrict Honeywell’s ability to pay dividends, nor does it contain financial covenants.

          In the fourth quarter of 2011, the Company repaid $500 million of its 6.125% notes at maturity. The repayment was funded with cash provided by operating activities.

          We monitor the third-party depository institutions that hold our cash and cash equivalents on a daily basis. Our emphasis is primarily on safety of principal and secondarily on maximizing yield on those funds. We diversify our cash and cash equivalents among counterparties to minimize exposure to any one of these entities.

          Global economic conditions or a tightening of credit markets could adversely affect our customers’ or suppliers’ ability to obtain financing, particularly in our long-cycle businesses and airline and automotive end markets. Customer or supplier bankruptcies, delays in their ability to obtain financing, or the unavailability of financing could adversely affect our cash flow or results of operations. To date we have not experienced material impacts from customer or supplier bankruptcy or liquidity issues. We continue to monitor and take measures to limit our exposure.

44


          In February 2011, the Board of Directors authorized the repurchase of up to a total of $3 billion of Honeywell common stock. During 2011, the Company repurchased $1,085 million of outstanding shares to offset the dilutive impact of employee stock based compensation plans, including future option exercises, restricted unit vesting and matching contributions under our savings plans (see Part II, Item 5 for share repurchases in the fourth quarter of 2011).

          In July 2011, the Company sold its Consumer Products Group business (CPG) to Rank Group Limited. The sale was completed for approximately $955 million in cash proceeds, resulting in a pre-tax gain of approximately $301 million and approximately $178 million net of tax. The gain was recorded in net income from discontinued operations after taxes in the Company’s Consolidated Statement of Operations for the year ended December 31, 2011. The net income attributable to the non-controlling interest for the discontinued operations is insignificant. The sale of CPG, which had been part of the Transportation Systems segment, is consistent with the Company’s strategic focus on its portfolio of differentiated global technologies. See Acquisitions and Divestitures in Note 2 to the financial statements for further discussion.

          In August 2011, the Company completed the acquisition of EMS, a leading provider of connectivity solutions for mobile networking, rugged mobile computers and satellite communications. The aggregate value, net of cash acquired, was approximately $513 million. See Acquisitions and Divestitures in Note 2 to the financial statements for further discussion.

          In December 2011, the Company acquired King’s Safetywear Limited (KSW), a leading international provider of branded safety footwear. The aggregate value, net of cash acquired, was approximately $331 million (including the assumption of debt of $33 million). See Acquisitions and Divestitures in Note 2 to the financial statements for further discussion.

          During 2011, the Company made voluntary cash contributions to its U.S. pension plans of $1,650 million to improve the funded status of our plans.

          In addition to our normal operating cash requirements, our principal future cash requirements will be to fund capital expenditures, debt repayments, dividends, employee benefit obligations, environmental remediation costs, asbestos claims, severance and exit costs related to repositioning actions, share repurchases and any strategic acquisitions.

          Specifically, we expect our primary cash requirements in 2012 to be as follows:

 

 

 

 

Capital expenditures—we expect to spend approximately $1.1 billion for capital expenditures in 2012 primarily for growth, production and capacity expansion, cost reduction, maintenance, and replacement.

 

 

 

 

Share repurchases— Under the Company’s previously reported $3 billion share repurchase program, $1.9 billion remained available as of December 31, 2011 for additional share repurchases. Honeywell presently expects to repurchase outstanding shares from time to time during 2012 to offset the dilutive impact of employee stock based compensation plans, including future option exercises, restricted unit vesting and matching contributions under our savings plans. The amount and timing of future repurchases may vary depending on market conditions and the level of operating, financing and other investing activities.

 

 

 

 

Dividends—we expect to pay approximately $1.2 billion in dividends on our common stock in 2012, reflecting the 12 percent increase in the dividend rate effective with the fourth quarter 2011 dividend.

 

 

 

 

Asbestos claims—we expect our cash spending for asbestos claims and our cash receipts for related insurance recoveries to be approximately $240 and $75 million, respectively, in 2012. See Asbestos Matters in Note 21 to the financial statements for further discussion of possible funding obligations in 2012 related to the Narco Trust.

 

 

 

 

Pension contributions—In 2012, we plan to make cash contributions of $800 million to $1 billion ($250 million was made in January 2012) to our plans to improve the funded status of the plans. These contributions principally consist of voluntary contributions to our U.S. plans. The timing and amount of contributions may be impacted by a number of factors, including the funded status of the plans.

 

 

 

 

Repositioning actions—we expect that cash spending for severance and other exit costs necessary to execute the previously announced repositioning actions will approximate $150 million in 2012.

45



 

 

 

 

Environmental remediation costs—we expect to spend approximately $300 million in 2012 for remedial response and voluntary clean-up costs. See Environmental Matters in Note 21 to the financial statements for additional information.

          We continuously assess the relative strength of each business in our portfolio as to strategic fit, market position, profit and cash flow contribution in order to upgrade our combined portfolio and identify business units that will most benefit from increased investment. We identify acquisition candidates that will further our strategic plan and strengthen our existing core businesses. We also identify businesses that do not fit into our long-term strategic plan based on their market position, relative profitability or growth potential. These businesses are considered for potential divestiture, restructuring or other repositioning actions subject to regulatory constraints. In 2011 we realized $1,156 million in cash proceeds from sales of non-strategic businesses.

          Based on past performance and current expectations, we believe that our operating cash flows will be sufficient to meet our future operating cash needs. Our available cash, committed credit lines, access to the public debt and equity markets as well as our ability to sell trade accounts receivables, provide additional sources of short-term and long-term liquidity to fund current operations, debt maturities, and future investment opportunities.

Contractual Obligations and Probable Liability Payments

          Following is a summary of our significant contractual obligations and probable liability payments at December 31, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments by Period

 

 

 

 

 

 

 

 

 

 

 

Total(6)

 

2012 

 

2013-
2014

 

2015-
2016

 

Thereafter

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, including capitalized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

leases(1)

 

$

 

6,896

 

 

$

 

15

 

 

$

 

1,241

 

 

$

 

456

 

 

$

 

5,184

 

Interest payments on long-term debt, including capitalized leases

 

 

 

2,836

 

 

 

 

258

 

 

 

 

420

 

 

 

 

357

 

 

 

 

1,801 

 

Minimum operating lease payments

 

 

 

1,213

 

 

 

 

311

 

 

 

 

432

 

 

 

 

227

 

 

 

 

243 

 

Purchase obligations(2)

 

 

 

1,566

 

 

 

 

1,086

 

 

 

 

294

 

 

 

 

122

 

 

 

 

64 

 

Estimated environmental liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

payments(3)

 

 

 

723

 

 

 

 

300

 

 

 

 

285

 

 

 

 

110

 

 

 

 

28 

 

Asbestos related liability payments(4)

 

 

 

1,736

 

 

 

 

237

 

 

 

 

805

 

 

 

 

460

 

 

 

 

234 

 

Asbestos insurance recoveries(5)

 

 

 

780

 

 

 

 

71

 

 

 

 

205

 

 

 

 

122

 

 

 

 

382 

 

 

 

       

 

       

 

       

 

       

 

       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

15,750

 

 

$

 

2,278

 

 

$

 

3,682

 

 

$

 

1,854

 

 

$

 

7,936 

 

 

 

       

 

       

 

       

 

       

 

       

 

 

(1)

Assumes all long-term debt is outstanding until scheduled maturity.

 

 

(2)

Purchase obligations are entered into with various vendors in the normal course of business and are consistent with our expected requirements.

 

 

(3)

The payment amounts in the table only reflect the environmental liabilities which are probable and reasonably estimable as of December 31, 2011. See Environmental Matters in Note 21 to the financial statements for additional information.

 

 

(4)

These amounts are estimates of asbestos related cash payments for NARCO and Bendix based on our asbestos related liabilities which are probable and reasonably estimable as of December 31, 2011. Except for amounts due upon the effective date of the NARCO Plan of Reorganization ($76 million), we have assumed funding for the NARCO Trust will occur in 2013 and beyond. Projecting the timing of NARCO payments is dependent on, among other things, the effective date of the Trust which could cause the timing of payments to be earlier or later than that projected. Projecting future events is subject to many uncertainties that could cause asbestos liabilities to be higher or lower than those projected and recorded. See Asbestos Matters in Note 21 to the financial statements for additional information.

 

 

(5)

These amounts represent our insurance recoveries that are deemed probable for asbestos related liabilities as of December 31, 2011. The timing of insurance recoveries are impacted by the terms of insurance settlement agreements, as well as the documentation, review and collection process required to collect on

46



 

 

 

insurance claims. Where probable insurance recoveries are not subject to definitive settlement agreements with specified payment dates, but instead are covered by insurance policies, we have assumed collection will occur beyond 2016. Projecting the timing of insurance recoveries is subject to many uncertainties that could cause the amounts collected to be higher or lower than those projected and recorded or could cause the timing of collections to be earlier or later than that projected. We reevaluate our projections concerning insurance recoveries in light of any changes or developments that would impact recoveries or the timing thereof. See Asbestos Matters in Note 21 to the financial statements for additional information.

 

 

(6)

The table excludes $815 million of uncertain tax positions. See Note 6 to the financial statements.

          The table also excludes our pension and other postretirement benefits (OPEB) obligations. In 2012, we plan to make cash contributions of $800 million to $1 billion ($250 million was made in January 2012) to our plans to improve the funded status of the plans. These contributions principally consist of voluntary contributions to our U.S. plans. The timing and amount of contributions may be impacted by a number of factors, including the funded status of the plans. Beyond 2012, the actual amounts required to be contributed are dependent upon, among other things, interest rates, underlying asset returns and the impact of legislative or regulatory actions related to pension funding obligations. Payments due under our OPEB plans are not required to be funded in advance, but are paid as medical costs are incurred by covered retiree populations, and are principally dependent upon the future cost of retiree medical benefits under our plans. We expect our OPEB payments to approximate $167 million in 2012 net of the benefit of approximately $13 million from the Medicare prescription subsidy. See Note 22 to the financial statements for further discussion of our pension and OPEB plans.

Off-Balance Sheet Arrangements

          Following is a summary of our off-balance sheet arrangements:

          Guarantees—We have issued or are a party to the following direct and indirect guarantees at December 31, 2011:

 

 

 

 

 

 

 

 

Maximum
Potential
Future
Payments

 

 

 

Operating lease residual values

 

$

 

43

 

Other third parties’ financing

 

 

 

5

 

Unconsolidated affiliates’ financing

 

 

 

12

 

Customer financing

 

 

 

13

 

 

 

       

 

 

 

 

 

 

 

 

$

 

73

 

 

 

       

          We do not expect that these guarantees will have a material adverse effect on our consolidated results of operations, financial position or liquidity.

          In connection with the disposition of certain businesses and facilities we have indemnified the purchasers for the expected cost of remediation of environmental contamination, if any, existing on the date of disposition. Such expected costs are accrued when environmental assessments are made or remedial efforts are probable and the costs can be reasonably estimated.

Environmental Matters

          We are subject to various federal, state, local and foreign government requirements relating to the protection of the environment. We believe that, as a general matter, our policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and personal injury and that our handling, manufacture, use and disposal of hazardous substances are in accordance with environmental and safety laws and regulations. However, mainly because of past operations and operations of predecessor companies, we, like other companies engaged in similar businesses, have incurred remedial response and voluntary cleanup costs for site contamination and are a party to lawsuits and claims associated with environmental and safety matters, including past production of products containing hazardous substances. Additional lawsuits, claims and costs involving environmental matters are likely to continue to arise in the future.

47


          With respect to environmental matters involving site contamination, we continually conduct studies, individually or jointly, with other potentially responsible parties, to determine the feasibility of various remedial techniques to address environmental matters. It is our policy (see Note 1 to the financial statements) to record appropriate liabilities for environmental matters when remedial efforts or damage claim payments are probable and the costs can be reasonably estimated. Such liabilities are based on our best estimate of the undiscounted future costs required to complete the remedial work. The recorded liabilities are adjusted periodically as remediation efforts progress or as additional technical or legal information becomes available. Given the uncertainties regarding the status of laws, regulations, enforcement policies, the impact of other potentially responsible parties, technology and information related to individual sites, we do not believe it is possible to develop an estimate of the range of reasonably possible environmental loss in excess of our recorded liabilities. We expect to fund expenditures for these matters from operating cash flow. The timing of cash expenditures depends on a number of factors, including the timing of litigation and settlements of remediation liability, personal injury and property damage claims, regulatory approval of cleanup projects, execution timeframe of projects, remedial techniques to be utilized and agreements with other parties.

          Remedial response and voluntary cleanup costs charged against pretax earnings were $240, $225 and $151 million in 2011, 2010 and 2009, respectively. At December 31, 2011 and 2010, the recorded liabilities for environmental matters was $723 and $753 million, respectively. In addition, in 2011 and 2010 we incurred operating costs for ongoing businesses of approximately $102 and $86 million, respectively, relating to compliance with environmental regulations.

          Remedial response and voluntary cleanup payments were $270, $266 and $318 million in 2011, 2010 and 2009, respectively, and are currently estimated to be approximately $300 million in 2012. We expect to fund such expenditures from operating cash flow.

          Although we do not currently possess sufficient information to reasonably estimate the amounts of liabilities to be recorded upon future completion of studies, litigation or settlements, and neither the timing nor the amount of the ultimate costs associated with environmental matters can be determined, they could be material to our consolidated results of operations or operating cash flows in the periods recognized or paid. However, considering our past experience and existing reserves, we do not expect that environmental matters will have a material adverse effect on our consolidated financial position.

          See Note 21 to the financial statements for a discussion of our commitments and contingencies, including those related to environmental matters and toxic tort litigation.

Financial Instruments

          As a result of our global operating and financing activities, we are exposed to market risks from changes in interest and foreign currency exchange rates and commodity prices, which may adversely affect our operating results and financial position. We minimize our risks from interest and foreign currency exchange rate and commodity price fluctuations through our normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. We do not use derivative financial instruments for trading or other speculative purposes and do not use leveraged derivative financial instruments. A summary of our accounting policies for derivative financial instruments is included in Note 1 to the financial statements. We also hold investments in marketable equity securities, which exposes us to market volatility, as discussed in Note 16 to the financial statements.

          We conduct our business on a multinational basis in a wide variety of foreign currencies. Our exposure to market risk from changes in foreign currency exchange rates arises from international financing activities between subsidiaries, foreign currency denominated monetary assets and liabilities and anticipated transactions arising from international trade. Our objective is to preserve the economic value of non-functional currency cash flows. We attempt to hedge transaction exposures with natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through foreign currency forward and option agreements with third parties. Our principal currency exposures relate to the U.S. dollar, Euro, British pound, Canadian dollar, Hong Kong dollar, Mexican peso, Swiss franc, Czech koruna, Chinese renminbi, Indian rupee, Singapore dollar, Swedish krona, Korean won and Thai baht.

          Our exposure to market risk from changes in interest rates relates primarily to our net debt and pension obligations. As described in Notes 14 and 16 to the financial statements, we issue both fixed and variable rate debt and use interest rate swaps to manage our exposure to interest rate movements and reduce overall borrowing costs.

48


          Financial instruments, including derivatives, expose us to counterparty credit risk for nonperformance and to market risk related to changes in interest or currency exchange rates. We manage our exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties, and procedures to monitor concentrations of credit risk. Our counterparties are substantial investment and commercial banks with significant experience using such derivative instruments. We monitor the impact of market risk on the fair value and expected future cash flows of our derivative and other financial instruments considering reasonably possible changes in interest and currency exchange rates and restrict the use of derivative financial instruments to hedging activities.

          The following table illustrates the potential change in fair value for interest rate sensitive instruments based on a hypothetical immediate one-percentage-point increase in interest rates across all maturities, the potential change in fair value for foreign exchange rate sensitive instruments based on a 10 percent weakening of the U.S. dollar versus local currency exchange rates across all maturities, and the potential change in fair value of contracts hedging commodity purchases based on a 20 percent decrease in the price of the underlying commodity across all maturities at December 31, 2011 and 2010.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Face or
Notional
Amount

 

Carrying
Value
(1)

 

Fair
Value
(1)

 

Estimated
Increase
(Decrease)
in Fair
Value

 

 

 

 

   

 

   

 

   

 

   

 

December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Sensitive Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt (including current maturities)

 

$

6,896

 

 

$

(6,896

)

 

$

(7,896

)

 

$

(578

)

 

Interest rate swap agreements

 

 

1,400

 

 

 

134

 

 

 

134

 

 

 

(74

)

 

Foreign Exchange Rate Sensitive Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts(2)

 

 

7,108

 

 

 

(26

)

 

 

(26

)

 

 

274 

 

 

Commodity Price Sensitive Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward commodity contracts(3)

 

 

59

 

 

 

(9

)

 

 

(9

)

 

 

(10

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Sensitive Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt (including current maturities)

 

$

6,278

 

 

$

(6,278

)

 

$

(6,835

)

 

$

(399

)

 

Interest rate swap agreements

 

 

600

 

 

 

22

 

 

 

22

 

 

 

(18

)

 

Foreign Exchange Rate Sensitive Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts(2)

 

 

5,733

 

 

 

2

 

 

 

2

 

 

 

102 

 

 

Commodity Price Sensitive Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward commodity contracts(3)

 

 

23

 

 

 

 

 

 

 

 

 

(4

)

 


 

 

(1)

Asset or (liability).

 

 

(2)

Changes in the fair value of foreign currency exchange contracts are offset by changes in the fair value o