| HONEYWELL INTERNATIONAL INC included in “Item 1A Risk Factors |
| ” Raw Materials The principal raw materials used in our operations are generally readily available |
| We experienced no significant or unusual problems in the purchase of key raw materials and commodities in 2005 |
| Except related to phenol, a raw material used in our Specialty Materials segment, we are not dependent on any one supplier for a material amount of our raw materials |
| We purchase phenol under a supply agreement with one supplier |
| We are highly dependent on our suppliers and subcontractors in order to meet commitments to our customers |
| In addition, many major components and product equipment items are procured or subcontracted on a sole-source basis with a number of domestic and foreign companies |
| We maintain a qualification and performance surveillance process to control risk associated with such reliance on third parties |
| While 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 |
| The costs of certain key raw materials, including natural gas and benzene, in our Specialty Materials &apos business were at historically high levels in 2005 and are expected to remain at those levels in 2006 |
| We will continue to attempt to offset raw material cost increases with formula price agreements and price increases where feasible |
| At present, we have no reason to believe a shortage of raw materials will cause any material adverse impact during 2006 |
| See “Item 1A Risk Factors” for further discussion |
| Patents, Trademarks, Licenses and Distribution Rights Our businesses 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 |
| 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 |
| We have registered trademarks for a number of our products, including such consumer brands as Honeywell, Prestone, FRAM, Autolite, Bendix, Jurid, Holts and Garrett |
| 8 _________________________________________________________________ Research and Development Our research activities are directed toward the discovery and development of new products and processes and the development of new uses for existing products |
| Research and development expense totaled dlra1cmam072, dlra917 and dlra751 million in 2005, 2004 and 2003, respectively |
| The increase in research and development expense in 2004 compared with 2003 resulted primarily from design and developments costs associated with new aircraft platforms in Aerospace and new product development costs in Automation and Control Solutions |
| Customer-sponsored (principally the US Government) research and development activities amounted to an additional dlra694, dlra593 and dlra608 million in 2005, 2004 and 2003, 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 or toxic 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 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 various hazardous waste sites, some of which are on the US Environmental Protection Agencyapstas 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 |
| Further information regarding environmental matters is included in “Item 7 |
| Managementapstas Discussion and Analysis of Financial Condition and Results of Operations,” in Note 21 of Notes to Financial Statements in “Item 8 |
| ” Employees We have approximately 116cmam000 employees at December 31, 2005, of which approximately 58cmam000 were located in the United States |
| Managementapstas Discussion and Analysis of Financial Condition and Results of Operations”, including under the headings “Economic and Other Factors”, “Areas of Focus” and “Review of Business Segments” |
| These sections and other parts of this report (including this Item 1A) contain 9 _________________________________________________________________ “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 managementapstas assumptions and assessments in light of past experience and trends, current 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 |
| 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 various risks and uncertainties, including, without limitation, those 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 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 costs |
| The operating results of our Aerospace segment, which generated 38 percent of our consolidated revenues in 2005, are directly tied to cyclical industry and economic conditions, including global demand for air travel as reflected in new aircraft production and/or the retirement of older aircraft, global flying hours, and business and general aviation aircraft utilization rates, as well as the level and mix of US Government appropriations for defense and space programs (as further discussed below) |
| The challenging operating environment faced by the commercial airline industry is expected to continue and may be influenced by a wide variety of factors, including aircraft fuel prices, labor issues, airline insolvencies, terrorism and safety concerns, and 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 34 percent of our consolidated revenues in 2005, are impacted by the level of global residential and commercial construction (including retrofits and upgrades), capital spending on building and process automation, industrial plant capacity utilization and expansion, and material price inflation |
| Specialty Materials &apos operating results are impacted by global gross domestic product and capacity utilization for chemical, industrial, refining and petrochemical plants |
| Transportation Systems &apos operating results are impacted by global production and demand for automobiles and trucks equipped with turbochargers, and consumer spending for automotive aftermarket and car care products |
| Because approximately 28 percent of our sales are in Europe, the relative strength of the European economy and exchange rate fluctuations impact our sales and margins |
| Raw material price fluctuations and the ability of key suppliers to meet quality and delivery requirements can increase the cost of our products and services and impact our ability to meet commitments to customers |
| The cost of raw materials is a key element in the cost of our products, particularly in our Specialty Materials (benzene and natural gas) and Transportation Systems (steel and other metals) segments |
| Our inability to offset material price inflation with pricing or productivity actions could adversely affect our results of operations |
| Our manufacturing operations are also highly dependent upon the delivery of 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 10 _________________________________________________________________ applicable laws and regulations |
| We also depend in limited instances on sole source suppliers |
| Our suppliers may fail to perform according to specifications as and when required and we may be unable to identify alternate suppliers or to mitigate the consequences of their non-performance |
| The supply chains for our businesses could also be disrupted by external events such as natural disasters, pandemic health issues, terrorist actions, labor disputes or governmental actions |
| 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 |
| 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 (iv) develop, manufacture and bring products to market quickly and cost-effectively |
| 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 or their obsolescence 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 US and foreign patents and patent applications, trademarks and copyrights |
| Our intellectual property rights may be challenged, invalidated or infringed 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-US 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 |
| An increasing percentage of our sales and operations is in non-US jurisdictions and is subject to the economic, political, regulatory and other risks of international operations |
| Our international operations, including US exports, comprise a growing proportion of our operating results and our strategy calls for increasing sales to and operations in overseas markets, including developing markets such as China, India and the Middle East |
| As this trend continues, our exposure to the risks attendant to international operations also increases |
| These risks include fluctuations in currency value, exchange control regulations, wage and price controls, employment regulations, foreign investment laws, import and trade restrictions (including embargoes), and government instability |
| 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 |
| We may be required to recognize impairment charges for our long-lived assets |
| At December 31, 2005, the net carrying value of long-lived assets (property, plant and equipment, goodwill and other intangible assets) totaled approximately dlra14dtta3 billion |
| In accordance with generally accepted accounting principles, we periodically assess our long-lived assets to determine if they are 11 _________________________________________________________________ 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 charges to goodwill and other asset impairments |
| Future impairment charges could significantly affect our results of operations in the periods recognized |
| Impairment charges would also reduce our consolidated net worth and our shareowners &apos equity and increase our debt-to-total-capitalization ratio, which could negatively impact our access to the public debt and equity markets |
| A change in the level of US Government defense and space funding or the mix of programs to which such funding is allocated could adversely impact sales of Aerospaceapstas defense and space-related product and services |
| Sales of our defense and space-related products and services are largely dependent upon government budgets, particularly the US defense budget |
| Sales as a prime contractor and subcontractor to the U S Department of Defense comprised approximately 28 and 11 percent of Aerospace and total sales, respectively, for the year ended December 31, 2005 |
| Although US defense spending increased in 2005 and is expected to increase again in 2006, we cannot predict the extent to which funding for individual programs will be included, increased or reduced as part of the 2007 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 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 US 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 US Government are subject to unusual risks, including dependence on Congressional appropriations and administrative allotment of funds, changes in governmental procurement legislations and regulations and other policies that reflect military and political developments, significant changes in contract scheduling, complexity of designs and the rapidity with which they become obsolete, necessity for constant design improvements, intense competition for US 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 |
| Changes are customary over the life of US Government contracts, particularly development contracts, and generally result in adjustments of contract prices |
| Our contracts with the US Government are subject to audits |
| Like many other government contractors, we have received audit reports that recommend downward price adjustments to certain contracts to comply with various government regulations |
| We have made adjustments and paid voluntary refunds in appropriate cases and may do so in the future |
| US Government contracts are subject to termination by the government, either for the convenience of the government or for our failure to perform under the applicable contract |
| In the case of a termination for convenience, we are typically entitled to reimbursement for our allowable costs incurred, plus termination costs and a reasonable profit |
| If a contract is terminated by the government for our failure to perform we could be liable for additional costs incurred by the government in acquiring undelivered goods or services from any other source and any other damages suffered by the government |
| We are also subject to government investigations of business practices and compliance with government procurement regulations |
| If Honeywell or one of its businesses were charged with wrongdoing as a result of any such investigation or other government investigations (including violations of certain environmental or export laws), it could be suspended from bidding on or receiving awards of new government contracts pending the completion of legal proceedings |
| The US 12 _________________________________________________________________ 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 |
| 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 and energy efficiency standards and regulations |
| Specialty Materials &apos results of operations can be affected by environmental (eg, government regulation of refrigerants), 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 |
| Completed acquisitions may not perform as anticipated or be integrated 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 failure to integrate acquired businesses into Honeywell on schedule and/or to achieve synergies within the plan and timeframe, and/or (iii) the inability to dispose of non-core assets and businesses on satisfactory terms and conditions and within the expected time frame |
| We cannot predict the outcome of litigation matters, government proceedings and other contingencies with certainty |
| 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, prior acquisitions and divestitures, employee benefits plans, and environmental, health and safety matters |
| Resolution of these matters can be prolonged and costly, and the ultimate results or judgments are uncertain |
| 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 be required to pay damage awards or settlements, or become subject to damage awards or 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 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 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 toxic 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 13 _________________________________________________________________ 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, 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 |