Edgar Filing: HONEYWELL INTERNATIONAL INC

Untitled Document

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

Form 10-K

S ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
OR
£ 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 incorporation or organization)		(I.R.S. Employer 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
9¹/₂% 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 S No £

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 £ No S

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 S No £

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 S No £

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. £

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 S Accelerated filer £ Non-accelerated filer £ Smaller reporting company £

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

The aggregate market value of the voting stock held by nonaffiliates of the Registrant was approximately $62.3 billion at June 30, 2013.

There were 784,131,620 shares of Common Stock outstanding at January 24, 2014.

Documents Incorporated by Reference

Part III: Proxy Statement for Annual Meeting of Shareowners to be held April 28, 2014.

TABLE OF CONTENTS


	Item		Page
Part I	1.	Business	1
	1A.	Risk Factors	14
	1B.	Unresolved Staff Comments	21
	2.	Properties	21
	3.	Legal Proceedings	22
	4.	Mine Safety Disclosures	23
	Executive Officers of the Registrant		23
Part II.	5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	24
	6.	Selected Financial Data	26
	7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
	7A.	Quantitative and Qualitative Disclosures About Market Risk	58
	8.	Financial Statements and Supplementary Data	59
	9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	122
	9A.	Controls and Procedures	122
	9B.	Other Information	123
Part III.	10.	Directors and Executive Officers of the Registrant	123
	11.	Executive Compensation	123
	12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	123
	13.	Certain Relationships and Related Transactions	126
	14.	Principal Accounting Fees and Services	126
Part IV.	15.	Exhibits and Financial Statement Schedules	126
Signatures			127

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 2014 Annual Meeting of Stockholders, which we expect to file with the SEC on or about March 13, 2014, 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, and Transportation Systems. Financial information related to our operating segments is included in Note 24 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.


Turbine propulsion engines

Major Products/Services	Major Customers/Uses	Key Competitors
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	Business, regional, and general aviation Commercial helicopters Military vehicles Military helicopters Military trainer	Rolls Royce/Allison Turbomeca United Technologies Williams


Turbine propulsion engines

Major Products/Services	Major Customers/Uses	Key Competitors
HTS900 turboshaft LT101 turboshaft TPE 331 turboprop AGT1500 turboshaft Repair, overhaul and spare parts


Auxiliary power units (APUs)

Major Products/Services	Major Customers/Uses	Key Competitors
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

Major Products/Services	Major Customers/Uses	Key Competitors
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 Liebherr Pacific Scientific TAT United Technologies


Electric power systems

Major Products/Services	Major Customers/Uses	Key Competitors
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 Safran United Technologies


Engine systems accessories

Major Products/Services	Major Customers/Uses	Key Competitors
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 Parker Hannifin United Technologies


Avionics, displays, flight guidance and flight management systems

Major Products/Services	Major Customers/Uses	Key Competitors
Flight data and cockpit voice recorders Integrated avionics systems	Commercial, business and general aviation aircraft Government aviation	BAE Boeing/Jeppesen Garmin


Avionics, displays, flight guidance and flight management systems

Major Products/Services	Major Customers/Uses	Key Competitors
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 Flight control and autopilot systems	Military aircraft	General Electric Kaiser L3 Lockheed Martin Lufthansa Technik Northrop Grumman Rockwell Collins Thales Trimble/Terra United Technologies Universal Avionics Universal Weather


Radios, radar, navigation communication, datalink safety systems

Major Products/Services	Major Customers/Uses	Key Competitors
Flight safety systems: Enhanced Ground Proximity Warning Systems (EGPWS) Traffic Alert and Collision Avoidance Systems (TCAS) Windshear detection systems Weather radar Communication, navigation and surveillance systems: Navigation and guidance systems Global positioning systems Satellite systems	Commercial, business and general aviation aircraft Government aviation Military aircraft	BAE Boeing/Jeppesen Garmin General Electric Kaiser L3 Lockheed Martin Northrop Grumman Rockwell Collins Thales Trimble/Terra United Technologies Universal Avionics Universal Weather


Aircraft lighting

Major Products/Services	Major Customers/Uses	Key Competitors
Interior and exterior aircraft lighting	Commercial, regional, business, helicopter and military aviation aircraft (operators, OEMs, parts distributors and MRO service providers)	Hella/United Technologies LSI Luminator Whelen


Inertial sensor

Major Products/Services	Major Customers/Uses	Key Competitors
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 and aircraft Commercial spacecraft and launch vehicles Transportation Powered, guided munitions Munitions Advanced drilling support	Astronautics Kearfott BAE GEC General Electric L3 KVH Northrop Grumman Rockwell United Technologies Thales Sagem


Control products

Major Products/Services	Major Customers/Uses	Key Competitors
Radar altimeters Pressure products Air data products Thermal switches Magnetic sensors	Military aircraft Powered, guided munitions, UAVs Commercial applications Commercial, regional, business aircraft	BAE Northrop Grumman Rockwell Collins Rosemount United Technologies


Space products and subsystems

Major Products/Services	Major Customers/Uses	Key Competitors
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 Ball Ithaco L3 Lockheed Martin Northrop Grumman Raytheon


Management and technical services

Major Products/Services	Major Customers/Uses	Key Competitors
Maintenance/operation and provision of space systems, services and facilities Systems engineering and integration Information technology services Logistics and sustainment	NASA DoD 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

Major Products/Services	Major Customers/Uses	Key Competitors
Wheels and brakes Wheel and brake repair and overhaul services	Commercial airline, regional, business and military aircraft USAF, DoD, DoE Boeing, Airbus, Lockheed Martin	Meggitt Messier-Bugatti United Technologies

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.


Environmental and combustion controls; sensing controls

Major Products/Services	Major Customers/Uses	Key Competitors
Heating, ventilating and air conditioning controls and components for homes and buildings	Original equipment manufacturers (OEMs) Distributors Contractors	Amphenol Bosch Cherry Danfoss


Environmental and combustion controls; sensing controls

Major Products/Services	Major Customers/Uses	Key Competitors
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	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	Eaton Emerson Endress & Hauser Freescale Semiconductor Holmes Invensys Johnson Controls Omron Schneider Siemens United Technologies Yamatake Measurement Specialties


Security and life safety products and services

Major Products/Services	Major Customers/Uses	Key Competitors
Security products and home control systems Fire products and systems Connected home solutions Access controls and closed circuit television Home health monitoring and nurse contractor, retail and utility call systems Gas and radiation detection products and systems Emergency lighting Distribution Personal protection equipment	OEMs Retailers Distributors Commercial customers and homeowners served by the distributor, wholesaler, channels Health care organizations Security monitoring service providers Industrial, fire service, utility distributors, data centers and telecommunication companies and U.S. Government	Alarm.com AT&T Axis Communications Bosch Comcast Draeger Hikvision Hubbell Inc Mine Safety Appliances Schneider Phillips Riken Keiki Siemens Tyco Tri Ed/Northern Video Distribution United Technologies 2Gig/Nortek 3M


Scanning and mobility

Major Products/Services	Major Customers/Uses	Key Competitors
Hand held and hands free image and laser based bar code scanners Scan engines Rugged mobile and wireless computers for use in hand held and vehicle mount applications Voice Solutions Industrial, desktop and mobile printers and printer media RFID tags, readers and hardware solutions After-market and mobility managed services	OEMs Retailers Distributors Governmental agencies Commercial customers served by the transportation and logistics, manufacturing, healthcare and retail, warehousing and ports industries	Bluebird Soft Code Corporation Datalogic Iridium Vars Lucas Motorola Solutions Skywave Tsi Voxware Zebra


Scanning and mobility

Major Products/Services	Major Customers/Uses	Key Competitors
Satellite tracking hardware, airtime services and applications	Security, logistics, maritime customers for: the tracking of vehicles, containers, ships, and personnel in remote environments
Search & Rescue ground stations system software	National organizations that monitor distress signals from aircraft, ships and individuals typically military branches and coast guards


Process automation products and solutions

Major Products/Services	Major Customers/Uses	Key Competitors
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-wovens and printing industries Mining and mineral industries	ABB AspenTech Emerson Invensys Siemens Yokogawa


Building solutions and services

Major Products/Services	Major Customers/Uses	Key Competitors
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 Invensys Johnson Controls Local contractors and utilities Safegate Schneider Siemens Trane Thorn United Technologies

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.


Resins & chemicals

Major Products/Services	Major Customers/Uses	Key Competitors
Nylon 6 polymer Caprolactam Ammonium sulfate Phenol Acetone Cyclohexanone MEKO	Nylon for carpet fibers, engineered resins and flexible packaging Fertilizer Resins - Phenolic, Epoxy, Polycarbonate Solvents Chemical intermediates Paints, Coatings, Laquers	BASF DSM INEOS Mitsui Polimeri Sinopec UBE Shell


Hydrofluoric acid (HF)

Major Products/Services	Major Customers/Uses	Key Competitors
Anhydrous and aqueous hydrofluoric acid	Fluorochemicals Metals processing Oil refining Chemical intermediates Semiconductors Photovoltaics	Mexichem Fluor Solvay


Fluorochemicals

Major Products/Services	Major Customers/Uses	Key Competitors
Refrigerants, aerosol and insulation foam blowing agents Solstice® refrigerants, blowing agents, aersols and solvents Oxyfume sterilant gases Enovate 3000 blowing agent for refrigeration insulation	Refrigeration Stationary air conditioning Automotive air conditioning Polyurethane foam Precision cleaning Optical Appliances Hospitals Medical equipment Manufacturers	Asahi Arkema Daikin Dupont Mexichem Fluor Sinochem Solvay 3M


Nuclear services

Major Products/Services	Major Customers/Uses	Key Competitors
UF6 conversion services	Nuclear fuel Electric utilities	Cameco Areva Rosatom


Research and fine chemicals

Major Products/Services	Major Customers/Uses	Key Competitors
Oxime-based fine chemicals Fluoroaromatics High-purity solvents	Agrichemicals Biotech	Avecia Degussa DSM E. Merck Lonza Thermo Fisher Scientific Sigma-Aldrich


Performance chemicals, Imaging chemicals, Chemical processing sealants

Major Products/Services	Major Customers/Uses	Key Competitors
HF derivatives Fluoroaromatics Catalysts	Diverse by product type	Atotech BASF DSM


Advanced fibers & composites

Major Products/Services	Major Customers/Uses	Key Competitors
High modulus polyethylene fiber and shield composites Aramid shield composites	Bullet resistant vests, helmets and other armor applications Cut-resistant gloves Rope & cordage	DuPont DSM Teijin


Healthcare and packaging

Major Products/Services	Major Customers/Uses	Key Competitors
Cast nylon film Bi-axially oriented nylon film Fluoropolymer film	Food and pharmaceutical packaging	American Biaxis CFP Daikin Kolon Unitika


Specialty additives

Major Products/Services	Major Customers/Uses	Key Competitors
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

Major Products/Services	Major Customers/Uses	Key Competitors
Ultra high-purity HF Inorganic acids Hi-purity solvents	Semiconductors Photovoltaics	BASF KMG


Semiconductor materials and services

Major Products/Services	Major Customers/Uses	Key Competitors
Interconnect-dielectrics Interconnect-metals Semiconductor packaging materials Advanced polymers Anti-reflective coatings Thermo-couples	Semiconductors Microelectronics Telecommunications	BASF Brewer Dow Nikko Praxair Shinko Tosoh


Catalysts, adsorbents and specialties

Major Products/Services	Major Customers/Uses	Key Competitors
Catalysts Molecular sieves Adsorbents Aluminas Customer catalyst manufacturing	Petroleum, refining, petrochemical industry, gas processing industry and home, automotive, steel and medical manufacturing industries	Axens Albemarle Chevron Exxon-MobilHaldor Topsoe Johnson Matthey Shell/Criterion Sinopec SK WR Grace


Process technology and equipment

Major Products/Services	Major Customers/Uses	Key Competitors
Technology licensing and engineering design of process units and systems Engineered products Proprietary equipment Training and development of technical personnel	Petroleum refining, petrochemical	Axens Chevron Lummus Global Chicago Bridge & Iron Exxon-Mobil Koch Glitsch Linde AG Natco Technip Sinopec Shell/SGS


Renewable fuels and chemicals

Major Products/Services	Major Customers/Uses	Key Competitors
Technology licensing of Process, catalysts, absorbents, Refining equipment and services for producing renewable-based fuels and chemicals	Military, refining, fuel oil, power production	Dynamotive Haldor Topsoe Kior Lurgi Neste Oy Syntroleum


Gas processing and hydrogen

Major Products/Services	Major Customers/Uses	Key Competitors
Design, engineer, manufacture and install natural gas processing hydrogen separation plants	Gas processing and hydrogen separation	Cameron General Electric Exterran Linde AG Lurgi Optimized Process Design Proquip PWA-Prosep

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.


Charge-air systems

Major Products/Services	Major Customers/Uses	Key Competitors
Turbochargers for gasoline, diesel, CNG, LPG	Passenger car, truck and off-highway OEMs Engine manufacturers Aftermarket distributors and dealers	Borg-Warner Cummins Holset IHI MHI Bosch Mahle Continental


Thermal systems

Major Products/Services	Major Customers/Uses	Key Competitors
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

Major Products/Services	Major Customers/Uses	Key Competitors
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	Akebono Continental Federal-Mogul ITT Corp JBI Nisshinbo TRW

Aerospace Sales

Our sales to aerospace customers were 31, 32, and 31 percent of our total sales in 2013, 2012 and 2011, respectively. Our sales to commercial aerospace original equipment manufacturers were 7, 7, and 6 percent of our total sales in 2013, 2012 and 2011, respectively. In addition, our sales to commercial aftermarket customers of aerospace products and services were 11, 12, and 11 percent of our total sales in 2013, 2012 and 2011. 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 $3,856, $4,109 and $4,276 million in 2013, 2012 and 2011, respectively, which included sales to the U.S. Department of Defense, as a prime contractor and subcontractor, of $3,066, $3,273 and $3,374 million in 2013, 2012 and 2011, respectively. U.S. defense spending decreased in 2013 compared to 2012. Due to anticipated lower U.S. Government spending levels mandated by the Budget Control Act (sequestration), we expect a slight decline in our defense and space revenue in 2014. We do not expect our overall operating results to be significantly affected by any proposed changes in 2014 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), increases in direct foreign defense and space market sales, 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

Our total backlog at December 31, 2013 and 2012 was $16,523 and $16,307 million, respectively. We anticipate that approximately $12,262 million of the 2013 backlog will be filled in 2014. 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 14, 14 and 12 percent of our total sales in 2013, 2012 and 2011, respectively. Foreign manufactured products and services, mainly in Europe and Asia, were 41, 41 and 43 percent of our total sales in 2013, 2012 and 2011, respectively.

Approximately 23 percent of total 2013 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 16 percent of total 2013 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 2013 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 57 percent of total 2013 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 30 percent of total 2013 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 23 percent of total 2013 Performance Materials and Technologies sales. The principal manufacturing facilities outside the U.S. are in Europe and Asia.

Approximately 4 percent of total 2013 sales of Transportation Systems products were exports of U.S. manufactured products. Foreign manufactured products accounted for 84 percent of total 2013 sales of Transportation Systems. The principal manufacturing facilities outside the U.S. are in Europe, with less significant operations in Asia.

Financial information including net sales and long-lived assets related to geographic areas is included in Note 25 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 2013. We are not dependent on any one supplier for a material 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, R240, natural gas, perchloroethylene, 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 continue to fluctuate. 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 2014. 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, Intermec, Jurid, Matrikon, Maxon, MK, North, Notifier, Novar, Oleflex, Parex, RAE Systems, RMG, Silent Knight, Solstice, 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 $1,804, $1,847 and $1,799 million in 2013, 2012 and 2011, respectively. The decrease in R&D expense of 2 percent in 2013 compared to 2012 was primarily due to lower pension (primarily due to the absence of U.S. pension mark-to-market adjustment in 2013) and other postretirement expenses, partially offset by the increased expenditures for new product development in our Automation and Control Solutions and Performance Materials Technologies segments. The increase in R&D expense of 3 percent in 2012 compared to 2011 was mainly due to increased expenditures on the development of new technologies to support existing and new aircraft platforms in our Aerospace segment and new product development in our Automation and Control Solutions and Performance Materials Technologies segments. R&D as a percentage of sales was 4.6, 4.9 and 4.9 percent in 2013, 2012 and 2011, respectively. Customer-sponsored (principally

the U.S. Government) R&D activities amounted to an additional $969, $835 and $867 million in 2013, 2012 and 2011, 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 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, to date 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 22 Commitments and Contingencies of Notes to Financial Statements in “Item 8. Financial Statements and Supplementary Data,” and in “Item 1A. Risk Factors.”

Employees

We have approximately 131,000 employees at December 31, 2013, of which approximately 51,000 were located in the United States.

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 2014. 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 markets 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 2013, 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. and foreign 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 42 percent of our consolidated revenues in 2013, 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 17 percent of our consolidated revenues in 2013, 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 10 percent of our consolidated revenues in 2013, 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.

The cost of raw materials is a key element in the cost of our products, particularly in our Performance Materials and Technologies (cumene, fluorspar, R240, natural gas, perchloroethylene, 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 could also arise from the failure of critical systems supplied by Honeywell to large industrial, refining and petrochemical customers.

Failure to increase productivity through sustainable operational improvements, as well as an inability to successfully execute repositioning projects, may reduce our profitability or adversely impact our businesses

Our profitability and margin growth are dependent upon our ability to drive sustainable improvements through the Honeywell Enablers. In addition, we seek productivity and cost savings benefits through repositioning actions and projects, such as consolidation of manufacturing facilities, transitions to cost- competitive regions and product line rationalizations. Risks associated with these actions include delays in execution of the planned initiatives, additional unexpected costs, adverse effects on employee morale and the failure to meet operational targets due to employee attrition. Many of the restructuring actions are complex and difficult to implement. Hence, we may not realize the full operational or financial benefits we expected, the recognition of these benefits may be delayed and these actions may potentially disrupt our operations. See Note 3 Repositioning and Other Charges of Notes to the Financial Statements in “Item 8. Financial Statements and Supplementary Data” for a summary of our repositioning actions.

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 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 and incidents can range from uncoordinated individual attempts to gain unauthorized access to information technology (IT) systems to sophisticated and targeted measures known as advanced persistent threats, directed at the Company and/or its third party service providers. While we have experienced, and expect to continue to experience, these types of threats and incidents, none of them to date have been material to the Company. Although 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 2013, 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 29 percent in Europe and approximately 13 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, acts of terrorism, 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.

With more than half of the Company’s sales generated internationally, global economic conditions can have a significant impact on our total sales. Uncertain global economic conditions arising from a tepid recovery in the Euro zone and varying rates of growth in emerging regions could reduce customer confidence that results 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) and increased risk regarding supplier performance. Volatility in exchange rates of emerging market currencies present uncertainties that complicate planning and could unexpectedly impact our profitability, presenting increased counterparty risk with respect to the financial institutions with whom we do business. 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.

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, 2013, the net carrying value of long-lived assets (property, plant and equipment, goodwill and other intangible assets) and available for sale securities totaled approximately $20.8 billion and $0.8 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 25 percent and 8 percent of Aerospace and total sales, respectively, for the year ended December 31, 2013. 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 2014 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 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, vendors, agents or business partners.

We cannot ensure that our extensive compliance controls, policies and procedures will, in all instances, protect us from reckless, unethical or criminal acts committed by our employees, vendors, 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, data privacy and rights of employees. 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, fuel economy and energy efficiency standards and regulations can impact the demand for turbochargers in our Transportation Systems segment. Honeywell sells products that address safety and environmental regulation and a substantial portion of our portfolio is dedicated to energy efficient products and services. 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, antitrust, 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 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 131,000 employees, including approximately 51,000 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. Our domestic and international tax liabilities are dependent, in part, upon the distribution of income among these different jurisdictions. In 2013, our tax expense represented 26.8 percent of our income before tax. Our tax expense includes estimates of tax reserves and reflects other estimates and assumptions, including assessments of future earnings of the Company which 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 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) Glendale, AZ (leased) Phoenix, AZ (partially leased) Tempe, AZ Tucson, AZ Torrance, CA Clearwater, FL	Olathe, KS Minneapolis, MN (partially leased) Plymouth, MN Rocky Mount, NC Albuquerque, NM (partially leased) Urbana, OH Greer, SC	Toronto, Canada Olomouc, Czech Republic (leased) Penang, Malaysia Chihuahua, Mexico Singapore Yeovil, UK (leased) South Bend, IN
	Automation and Control Solutions
San Diego, CA (leased) Northford, CT Freeport, IL St. Charles, IL (leased) Golden Valley, MN York, PA (leased) Murfreesboro, TN (leased)	Pleasant Prairie, WI (leased) Shenzhen, China (leased) Suzhou, China Tianjin, China (leased) Brno, Czech Republic (leased) Mosbach, Germany Neuss, Germany	Schonaich, Germany (leased) Pune, India (partially leased) Chihuahua, Mexico (partially leased) Juarez, Mexico (partially leased) Tijuana, Mexico (leased) Emmen, Netherlands Newhouse, Scotland
	Performance Materials and Technologies
Mobile, AL (partially leased) Des Plaines, IL Metropolis, IL Baton Rouge, LA Geismar, LA	Shreveport, LA Frankford, PA Pottsville, PA Orange, TX Chesterfield, VA	Colonial Heights, VA Hopewell, VA Spokane, WA (partially leased) Seelze, Germany Tulsa, OK Danville, IL
	Transportation Systems
Shanghai, China Glinde, Germany	Atessa, Italy Kodama, Japan Ansan, Korea (leased)	Mexicali, Mexico (partially leased) Bucharest, Romania Pune, India

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 22 Commitments and Contingencies of Notes to Financial Statements.

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

The U.S. Environmental Protection Agency (“EPA”) has alleged that PreCon, Inc., a Honeywell service provider, failed to comply with certain environmental regulations at a Virginia facility. EPA has initially calculated the relevant penalty at approximately $180,000, although negotiations are ongoing. Honeywell includes this allegation because of its contractual relationship with PreCon, Inc. The EPA has made no allegations against Honeywell.

Although the outcome of the matter discussed above 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.

Item 4. Mine Safety Disclosures

Not applicable.

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, 61 2002(a)		Chairman of the Board and Chief Executive Officer since July 2002.
Katherine L. Adams, 49 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.
David J. Anderson, 64 2003		Senior Vice President and Chief Financial Officer since June 2003.
Roger Fradin, 60 2004		President and Chief Executive Officer Automation and Control Solutions since January 2004.
Alexandre Ismail, 48 2009		President Energy, Safety and Security since May 2013. President and Chief Executive Officer Transportation Systems from April 2009 to May 2013. President Turbo Technologies from November 2008 to April 2009. President Global Passengers Vehicles from August 2006 to November 2008.
Mark R. James, 52 2007		Senior Vice President Human Resources, Procurement and Communications since November 2007.
Terrence S. Hahn, 47 2013		President and Chief Executive Officer Transportation Systems since May 2013. Vice President and General Manager of Fluorine Products from March 2007 to May 2013.
Andreas C. Kramvis, 61 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.
Timothy O. Mahoney, 57 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.
Krishna Mikkilineni, 54 2010		Senior Vice President Engineering, Operations and Information Technology since April 2013. Senior Vice President Engineering and Operations from April 2010 to April 2013 and President Honeywell Technology Solutions from January 2009 to April 2013. Vice President Honeywell Technology Solutions from July 2002 to January 2009

(a)

Also a Director.

Part II.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Honeywell’s common stock is listed on the New York Stock Exchange. Market and dividend information for Honeywell’s common stock is included in Note 27 Unaudited Quarterly Financial Information 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, 2013 was 55,537.

Honeywell purchased 3,500,000 shares of its common stock, par value $1 per share, in the quarter ending December 31, 2013. In December 2013, the Board of Directors authorized the repurchase of up to a total of $5 billion of Honeywell common stock, which replaced the previously approved share repurchase program. $5 billion remained available as of December 31, 2013 for additional share repurchases. Honeywell presently expects to repurchase outstanding shares from time to time 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, 2013:


Issuer Purchases of Equity Securities
Period	(a)		(b)			(c)		(d)
	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 2013		3,500,000		$	86.96		3,500,000		$	525
December 2013		—			—		—		$	5,000

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, 2008 and that all dividends were reinvested.

COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN

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,
	2013			2012			2011			2010			2009
	(Dollars in millions, except per share amounts)
Results of Operations
Net sales		$	39,055		$	37,665		$	36,529		$	32,350		$	29,951
Amounts attributable to Honeywell:
Income from continuing operations less net income attributable to the noncontrolling interest			3,924			2,926			1,858			1,944			1,492
Income from discontinued operations(1)			—			—			209			78			56

Net income attributable to Honeywell			3,924			2,926			2,067			2,022			1,548
Earnings Per Common Share
Basic:
Income from continuing operations			4.99			3.74			2.38			2.51			1.99
Income from discontinued operations			—			—			0.27			0.10			0.07

Net income attributable to Honeywell			4.99			3.74			2.65			2.61			2.06
Assuming dilution:
Income from continuing operations			4.92			3.69			2.35			2.49			1.98
Income from discontinued operations			—			—			0.26			0.10			0.07

Net income attributable to Honeywell			4.92			3.69			2.61			2.59			2.05
Dividends per share			1.68			1.53			1.37			1.21			1.21
Financial Position at Year-End
Property, plant and equipment—net			5,278			5,001			4,804			4,724			4,847
Total assets			45,435			41,853			39,808			37,834			35,993
Short-term debt			2,028			1,101			674			889			1,361
Long-term debt			6,801			6,395			6,881			5,755			6,246
Total debt			8,829			7,496			7,555			6,644			7,607
Redeemable noncontrolling interest			167			150			—			—			—
Shareowners’ equity			17,579			13,065			10,902			10,787			8,971

(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.

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. and its consolidated subsidiaries (“Honeywell” or the “Company”) for the three years ended December 31, 2013. 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.

EXECUTIVE SUMMARY

For Honeywell, 2013 marked another year of growth and enhanced profitability. Despite a modest 2.5 percent growth in World GDP and Industrial Production, Honeywell’s 2013 revenues were $39.1 billion representing a 4 percent improvement compared to 2012 revenues of $37.7 billion. Our segment profit improved by 8 percent, roughly two times revenue growth, evidencing the Company’s continued focus on operational excellence. We achieved strong segment profit expansion while reinvesting in our businesses through seed planting and continued focus on proactive repositioning. See Review of Business Segments section of this MD&A for a reconciliation of segment profit to consolidated income from continuing operations before taxes.

The Company’s operational excellence and ability to expand profit faster than sales growth is due in part to a consistent, methodical application of several key internal business processes which drive improvements in organizational efficiency and service quality, bringing world-class products and services to markets faster and more cost effectively for our customers. Honeywell refers to these processes as the Honeywell Enablers. In 2013, Honeywell continued to strengthen and expand the use of the Honeywell Enablers:

•

The Honeywell Operating System (“HOS”): HOS drives sustainable improvements in our manufacturing operations to generate exceptional performance in safety, quality, delivery, cost, and inventory management. Approximately 75 percent of our manufacturing cost base has achieved HOS certification.

•

Velocity Product Development (“VPD”): VPD is a process which brings together all of the functions necessary to successfully launch new products—R&D, manufacturing, marketing and sales—to increase the probability that in commercializing new technologies Honeywell delivers the right products at the right price.

•

Functional Transformation (“FT”): Functional Transformation is HOS for our administrative functions—Finance, Legal, HR, IT and Purchasing—standardizing the way we work, which improves service quality and reduces costs.

The Company continues to invest for future growth as measured by a number of important metrics:

•

R&D spending at 4.6 percent of revenues was targeted at such high growth areas as natural gas processing, low global warming refrigerants and blowing agents, and voice control and wireless control devices and technologies.

•

Capital expenditures grew 7 percent to $947 million principally related to the construction and expansion of Performance Materials and Technologies manufacturing facilities, as well as upgrades to our Aerospace facilities.

•

The Company recognized approximately $231 million of charges relating to restructuring actions to support sustainable productivity in years to come.

•

The Company completed $1,133 million (net of cash acquired) in acquisitions in 2013, including the acquisition of Intermec, Inc. (“Intermec”), a leading provider of mobile computing, radio frequency identification solutions (RFID) and bar code, label and receipt printers for use in warehousing, supply chain, field service and manufacturing environments and RAE Systems, Inc. (RAE), a global manufacturer of fixed and portable gas and radiation detection systems, and software.

•

The Company continued to monitor its portfolio of businesses and to divest those that do not fit within our long-term strategic plan. In January 2014, the Company entered into a definitive agreement to sell its Friction Materials business for approximately $155 million.

•

Expansion of Honeywell’s presence and sales in high growth regions and countries such as China, India, Eastern Europe, the Middle-East, and Latin America. Sales to customers outside the United States now account for approximately 55 percent of total revenues.

Operating cash flow grew by 23 percent in 2013 to $4,335 million. This operating cash flow performance enabled us to invest $947 million in capital expenditures, partially fund the acquisitions discussed above, make $156 million in non-U.S. pension contributions, provide a 10 percent increase in the Company’s cash dividend rate (vs. 2012) and repurchase 13.5 million shares of common stock.

CONSOLIDATED RESULTS OF OPERATIONS

Net Sales


	2013			2012			2011
Net sales		$	39,055		$	37,665		$	36,529
% change compared with prior period	4%			3%

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


	2013 Versus 2012			2012 Versus 2011
Volume		1	%		2	%
Price		1	%		1	%
Acquisitions/Divestitures		2	%		2	%
Foreign Exchange		—			(2	)%

		4	%		3	%

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


	2013				2012				2011
Cost of products and services sold		$	28,364			$	28,291			$	28,556
% change compared with prior period	—				(1)%
Gross Margin percentage			27.4	%			24.9	%			21.8	%

Cost of products and services sold increased by $73 million in 2013 compared with 2012 principally due to an estimated increase in direct material costs of approximately $585 million and indirect material costs of approximately $115 million (driven by higher sales volume and acquisitions) and increased repositioning and other charges of approximately $140 million partially offset by a decrease in pension expense of approximately $760 million, primarily driven by the $650 million decrease in the pension mark-to-market adjustment allocated to cost of products and services sold (approximately $30 million in 2013 versus approximately $680 million in 2012).

Gross margin percentage increased by 2.5 percentage points in 2013 compared with 2012 principally due to lower pension expense (approximately 2.0 percentage point impact primarily driven by the decrease in the pension mark-to-market adjustment allocated to cost of products and services

sold), higher segment gross margin in all of our business segments (approximately 0.5 percentage point impact collectively) and lower other postretirement expense (0.1 percentage point impact) partially offset by higher repositioning and other charges (approximately 0.4 percentage point impact)

Cost of products and services sold decreased by $265 million or 1 percent in 2012 compared with 2011, principally due to a decrease in pension expense of approximately $800 million (primarily driven by the decrease in the pension mark-to-market adjustment allocated to cost of products and services sold of $780 million) and a decrease in repositioning and other charges of approximately $220 million, partially offset by an estimated increase in direct material costs of approximately $620 million driven substantially by a 3 percent increase in sales as a result of the factors (excluding price) shown above and discussed in the Review of Business Segments section of this MD&A and an increase in other postretirement expense of approximately $135 million due to the absence of 2011 curtailment gains.

Gross margin percentage increased by 3.1 percentage points in 2012 compared with 2011 principally due to lower pension expense (approximately 2.2 percentage point impact primarily driven by the decrease in the pension mark-to-market adjustment allocated to cost of products and services sold), lower repositioning actions (approximately 0.6 percentage point impact) and higher segment gross margin in our Aerospace, Automation and Control Solutions and Performance Materials and Technologies segments (approximately 0.4 percentage point impact collectively), partially offset by higher other postretirement expense (approximately 0.4 percentage point impact).

Selling, General and Administrative Expenses


	2013			2012			2011
Selling, general and administrative expense		$	5,190		$	5,218		$	5,399
Percent of sales	13.3%			13.9%			14.8%

Selling, general and administrative expenses (SG&A) decreased as a percentage of sales by 0.6 percent in 2013 compared to 2012 primarily driven by (i) higher sales as a result of the factors discussed in the Review of Business Segments section of this MD&A, (ii) an estimated $270 million decrease in pension expense primarily driven by an approximately $250 million decrease in the pension mark-to-market charge allocated to SG&A (approximately $20 million in 2013 versus approximately $270 million in 2012) partially offset by an estimated $215 million increase in labor costs (primarily acquisitions, merit increases and investment for growth) and an $80 million increase in repositioning charges.

Selling, general and administrative expenses decreased as a percentage of sales by 0.9 percent in 2012 compared to 2011 driven by the impact of higher sales as a result of the factors discussed in the Review of Business Segments section of this MD&A, an estimated $110 million decrease in pension expense (driven by the decrease in the portion of the pension mark-to-market charge allocated to SG&A), $90 million decrease due to foreign exchange and $80 million decrease in repositioning actions, partially offset by the impact of an estimated $140 million increase in costs resulting from acquisitions, investment for growth and merit increases (net of other employee related costs).

Other (Income) Expense


	2013				2012				2011
Equity (income) loss of affiliated companies		$	(36	)		$	(45	)		$	(51	)
Gain on sale of available for sale investments			(195	)			—				—
Loss (gain) on sale of non-strategic businesses and assets			20				(5	)			(61	)
Interest income			(69	)			(58	)			(58	)
Foreign exchange			34				36				50
Other, net			8				2				36

		$	(238	)		$	(70	)		$	(84	)

Other income increased by $168 million in 2013 compared to 2012 primarily due to $195 million of realized gain related to the sale of marketable equity securities. These securities (B/E Aerospace common stock), designated as available for sale, were obtained in conjunction with the sale of the

Consumables Solutions business in July 2008. This gain was partially offset by an increase in loss on sale of non-strategic businesses and assets of $25 million, primarily due to a pre-tax loss of approximately $28 million related to the pending divestiture of the Friction Materials business within our Transportation Systems segment. See Note 2, Acquisitions and Divestitures for further details.

Other income decreased by $14 million in 2012 compared to 2011 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 in the first quarter of 2011, partially offset by a loss of $29 million resulting from early redemption of debt in 2011 included within “Other, net” and the reduction of approximately $6 million of acquisition related costs compared to 2011 included within “Other, net”.

Interest and Other Financial Charges


	2013			2012			2011
Interest and other financial charges		$	327		$	351		$	376
% change compared with prior period	(7)%			(7)%

Interest and other financial charges decreased by 7 percent in 2013 compared with 2012 primarily due to lower borrowing costs, partially offset by higher average debt balances.

Interest and other financial charges decreased by 7 percent in 2012 compared with 2011 primarily due to lower borrowing costs, partially offset by higher average debt balances.

Tax Expense


	2013				2012				2011
Tax expense		$	1,450			$	944			$	417
Effective tax rate			26.8	%			24.4	%			18.3	%

The effective tax rate increased by 2.4 percentage points in 2013 compared with 2012. The year over year increase in the effective tax rate was primarily attributable to lower mark-to-market pension expense in the U.S. Other factors causing an increase in the effective tax rate include higher tax expense related to an increase in tax reserves and higher state tax expense. These increases in the effective tax rate were partially offset by tax benefits from retroactive law changes in the U.S. The Company’s foreign effective tax rate for 2013 was 19.0 percent, an increase of approximately 2.0 percentage points compared to 2012. The year over year increase in the foreign effective tax rate was primarily attributable to higher expense related to retroactive tax law changes in Germany and additional reserves in various jurisdictions, coupled with higher earnings in higher tax rate jurisdictions. The effective tax rate was lower than the U.S. statutory rate of 35 percent primarily due to overall foreign earnings taxed at lower rates.

The effective tax rate increased by 6.1 percentage points in 2012 compared with 2011 primarily due to a change in the mix of earnings taxed at higher rates (primarily driven by an approximate 6.1 percentage point impact from the decrease in pension mark-to-market expense), a decreased benefit from valuation allowances, a decreased benefit from the settlement of tax audits and the absence of the U.S. R&D tax credit, partially offset by a decreased expense related to tax reserves. The foreign effective tax rate was 17.0 percent, a decrease of approximately 4.1 percentage points which primarily consisted of a 10.0 percent impact related to a decrease in tax reserves, partially offset by a 5.2 percent impact from increased valuation allowances on net operating losses primarily due to a decrease in Luxembourg and France earnings available to be offset by net operating loss carry forwards and a 1.4 percent impact from tax expense related to foreign exchange. The effective tax rate was lower than the U.S. statutory rate of 35 percent primarily due to overall foreign earnings taxed at lower rates.

The American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013. Some of these provisions provided retroactive changes to the 2012 tax year which were not taken into account in determining the Company’s effective tax rate for 2012. The impact of these retroactive changes was approximately $76 million of lower tax expense and was recorded in the first quarter of 2013.

Net Income Attributable to Honeywell


	2013			2012			2011
Amounts attributable to Honeywell
Income from continuing operations		$	3,924		$	2,926		$	1,858
Income from discontinued operations			—			—			209

Net income attributable to Honeywell		$	3,924		$	2,926		$	2,067

Earnings per share of common stock—assuming dilution
Income from continuing operations		$	4.92		$	3.69		$	2.35
Income from discontinued operations			—			—			0.26

Net income attributable to Honeywell		$	4.92		$	3.69		$	2.61

Earnings per share of common stock—assuming dilution increased by $1.23 per share in 2013 compared with 2012 primarily due to lower pension expense (mainly due to a decrease in the pension mark-to-market adjustment), increased segment profit in each of our business segments and higher other income as discussed above, partially offset by increased tax expense and higher repositioning and other charges.

Earnings per share of common stock—assuming dilution increased by $1.08 per share in 2012 compared with 2011 primarily due to lower pension expense (mainly due to a decrease in the pension mark-to-market adjustment), increased segment profit in our Aerospace, Automation and Control Solutions and Performance Materials and Technologies segments, lower repositioning and other charges, partially offset by increased tax expense, decreased income from discontinued operations and higher other postretirement expense.

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 2014 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, 2013. Each of these segments is comprised of various product and service classes that serve multiple end markets. See Note 24 Segment Financial Data of Notes 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 impacted by:

•

Change in global economic growth rates and industry conditions and 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 (in particular the Euro), relative to the U.S. dollar.

Areas of Focus for 2014

The 2014 areas of focus are supported by the enablers including the Honeywell Operating System, our Velocity Product Development process, and Functional Transformation. These areas of focus are generally applicable to each of our operating segments and include:

•

Driving profitable growth through R&D, technological excellence and optimized manufacturing capability to deliver innovative products that customers value;

•

Expanding margins by maintaining and improving the Company’s cost structure through manufacturing and administrative process improvements, repositioning, and other actions, which will drive productivity and enhance the flexibility of the business as it works to proactively respond to changes in end market demand;

•

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

•

Driving strong cash flow conversion through effective working capital management which will enable the Company to undertake strategic actions to benefit the business including capital expenditures, strategic acquisitions, and returning cash to shareholders;

•

Increasing our sales penetration and expanding our localized footprint in high growth regions, including China, India, Eastern Europe, the Middle East and Latin America;

•

Aligning and prioritizing investments for long-term growth, while considering short-term demand volatility;

•

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

Review of Business Segments


	2013				2012				2011
Net Sales
Aerospace
Product		$	7,043			$	6,999			$	6,494
Service			4,937				5,041				4,981

Total			11,980				12,040				11,475
Automation and Control Solutions
Product			14,193				13,610				13,328
Service			2,363				2,270				2,207

Total			16,556				15,880				15,535
Performance Materials and Technologies
Product			6,223				5,642				5,064
Service			541				542				595

Total			6,764				6,184				5,659
Transportation Systems
Product			3,755				3,561				3,859
Service			—				—				—

Total			3,755				3,561				3,859
Corporate
Product			—				—				—
Service			—				—				1

Total			—				—				1

		$	39,055			$	37,665			$	36,529

Segment Profit
Aerospace		$	2,372			$	2,279			$	2,023
Automation and Control Solutions			2,437				2,232				2,083
Performance Materials and Technologies			1,271				1,154				1,042
Transportation Systems			498				432				485
Corporate			(227	)			(218	)			(276	)

		$	6,351			$	5,879			$	5,357

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


	Years Ended December 31,
	2013				2012				2011
Segment Profit		$	6,351			$	5,879			$	5,357
Other income (expense)(1)			202				25				33
Interest and other financial charges			(327	)			(351	)			(376	)
Stock compensation expense(2)			(170	)			(170	)			(168	)
Pension ongoing income (expense)(2)			90				(36	)			(105	)
Pension mark-to-market expense(2)			(51	)			(957	)			(1,802	)
Other postretirement income (expense)(2)			(20	)			(72	)			86
Repositioning and other charges(2)			(663	)			(443	)			(743	)

Income from continuing operations before taxes		$	5,412			$	3,875			$	2,282


(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.


	2013			2012			2011			% Change
										2013 Versus 2012			2012 Versus 2011
Aerospace Sales
Commercial:
Original Equipment
Air transport and regional		$	1,716		$	1,601		$	1,439		7	%		11	%
Business and general aviation			935			967			723		(3	)%		34	%
Aftermarket
Air transport and regional			2,960			2,947			2,828		—			4	%
Business and general aviation			1,499			1,417			1,207		6	%		17	%
Defense and Space			4,870			5,108			5,278		(5	)%		(3	)%

Total Aerospace Sales			11,980			12,040			11,475
Automation and Control Solutions Sales
Energy Safety & Security			8,756			8,123			7,977		8	%		2	%
Process Solutions			3,091			3,093			3,010		—			3	%
Building Solutions & Distribution			4,709			4,664			4,548		1	%		3	%

Total Automation and Control Solutions Sales			16,556			15,880			15,535
Performance Materials and Technologies Sales
UOP			2,962			2,253			1,931		31	%		17	%
Advanced Materials			3,802			3,931			3,728		(3	)%		5	%

Total Performance Materials and Technologies Sales			6,764			6,184			5,659
Transportation Systems Sales
Turbo Technologies			3,755			3,561			3,859		5	%		(8	)%

Total Transportation Systems Sales			3,755			3,561			3,859
Corporate			—			—			1

Net Sales		$	39,055		$	37,665		$	36,529

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 impacted by:

•

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. and foreign government appropriations for defense and space programs and military activity;

•

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

•

Availability and price variability of raw materials such as nickel, titanium and other metals; and

•

International regulation affecting aircraft operating equipage.

Aerospace


	2013			2012			Change			2011			Change
Net sales		$	11,980		$	12,040		—			$	11,475		5	%
Cost of products and services sold			8,848			8,949						8,655
Selling, general and administrative expenses			547			606						589
Other			213			206						208

Segment profit		$	2,372		$	2,279		4	%		$	2,023		13	%


Factors Contributing to Year-Over-Year Change	2013 vs. 2012					2012 vs. 2011
	Sales		Segment Profit			Sales			Segment Profit
Organic growth/ Operational segment profit		—		4	%		3	%		8	%
Acquisitions and divestitures, net		—		—			1	%		1	%
Other		—		—			1	%		4	%

Total % Change		—		4	%		5	%		13	%

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


Customer End-Markets	% of Aerospace Sales									% Increase (Decrease) in Sales
Customer End-Markets	2013			2012			2011			2013 Versus 2012			2012 Versus 2011
Commercial original equipment
Air transport and regional		14	%		13	%		13	%		7	%		11	%
Business and general aviation		8	%		8	%		6	%		(3	)%		34	%

Commercial original equipment		22	%		21	%		19	%		3	%		19	%
Commercial aftermarket
Air transport and regional		25	%		25	%		25	%		—			4	%
Business and general aviation		12	%		12	%		11	%		6	%		17	%

Commercial aftermarket		37	%		37	%		36	%		2	%		8	%
Defense and Space		41	%		42	%		45	%		(5	)%		(3	)%

Total		100	%		100	%		100	%		—			5	%

2013 compared with 2012

Aerospace sales were flat in 2013 compared with 2012 primarily due to favorable pricing, increased volumes in our commercial original equipment (OE) business and increased licensing revenue (primarily due to a royalty gain in the fourth quarter), offset by decreased volumes in our defense and space and commercial aftermarket businesses and an increase in payments due to business and general aviation and air transport and regional OE manufacturers to partially offset their pre-production costs associated with new aircraft platforms (OEM Payments).

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

Commercial original equipment (OE) sales increased by 3 percent in 2013 compared to 2012.

•

Air transport and regional OE sales increased by 7 percent in 2013 driven by higher air transport volumes, consistent with the OE Manufacturers’ (OEM) higher production rates, partially offset by lower regional jet sales.

•

Business and general aviation OE sales decreased by 3 percent in 2013 driven by an increase in OEM Payments to business and general aviation customers, partially offset by strong demand in the business jet mid to large cabin segment.

Commercial aftermarket sales increased by 2 percent in 2013 compared to 2012.

•

Air transport and regional aftermarket sales were flat for 2013 primarily due to higher repair and overhaul activities related to utilization, offset by lower spares volumes.

•

Business and general aviation aftermarket sales increased by 6 percent in 2013 primarily due to higher sales for retrofit, modifications and upgrades, partially offset by fewer repair and overhaul activities.

Defense and space sales decreased by 5 percent in 2013 primarily due to U.S. government program ramp downs and lower defense budget, partially offset by a royalty gain in the fourth quarter.

Aerospace segment profit increased by 4 percent in 2013 compared with 2012 primarily due to an increase in operational segment profit driven by commercial sales growth, as discussed above, including favorable pricing and productivity, net of inflation, partially offset by lower defense and space sales, as discussed above. The segment margin impact from other factors was flat, which reflects the net effect of a royalty gain in the fourth quarter, offset by the unfavorable impact from an increase in OEM Payments. Cost of products and services sold totaled $8.8 billion in 2013, a decrease of approximately $101 million from 2012 which is primarily a result of the factors discussed above (excluding price).

2012 compared with 2011

Aerospace sales increased by 5 percent in 2012 compared with 2011 primarily due to an increase in organic growth of 3 percent primarily due to increased commercial sales volume, a 1 percent increase from acquisitions, net of divestitures, and a 1 percent increase in revenue related to an $88 million reduction in payments to business and general aviation OE manufacturers to partially offset their pre-production costs associated with new aircraft platforms (OEM Payments).

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

Commercial original equipment (OE) sales increased by 19 percent (12 percent organic) in 2012 compared to 2011.

•

Air transport and regional OE sales increased by 11 percent (11 percent organic) in 2012 primarily driven by higher sales to our OE customers, consistent with higher production rates, and a favorable platform mix.

•

Business and general aviation OE sales increased by 34 percent (15 percent organic) in 2012 driven by strong demand in the business jet end-market, favorable platform mix, growth from acquisitions and the favorable 12 percent impact of the OEM Payments discussed above.

Commercial aftermarket sales increased by 8 percent in 2012 compared to 2011.

•

Air transport and regional aftermarket sales increased by 4 percent for 2012 primarily due to increased sales of spare parts and higher maintenance activity driven by an approximate 2 percent increase in global flying hours in 2012, increased sales of avionics upgrades, and changes in customer buying patterns relating to maintenance activity in the first half of 2012.

•

Business and general aviation aftermarket sales increased by 17 percent in 2012 primarily due to increased sales of spare parts and revenue associated with maintenance service agreements and a higher penetration in retrofit, modifications, and upgrades.

Defense and space sales decreased by 3 percent (negative 4 percent organic) in 2012 primarily due to anticipated program ramp downs, partially offset by higher international aftermarket sales and growth from acquisitions, net of divestitures.

Aerospace segment profit increased by 13 percent in 2012 compared with 2011 primarily due to an increase in operational segment profit of 8 percent, a 4 percent favorable impact from lower OEM Payments, discussed above, and a 1 percent increase from acquisitions, net of divestitures. The increase in operational segment profit is due to the favorable impact from higher price and productivity, net of inflation, and commercial demand partially offset by increased research, development and engineering investments. Cost of products and services sold totaled $9.0 billion in 2012, an increase of approximately $324 million from 2011 which is primarily a result of the factors discussed above (excluding price).

2014 Areas of Focus

Aerospace’s primary areas of focus for 2014 include:

•

Global pursuit of new commercial, defense and space programs;

•

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 with high marketplace appeal;

•

Expanding sales and operations in international locations;

•

Focusing on cost structure initiatives to maintain profitability in face of economic uncertainty and 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 and displays for heating, cooling, indoor air quality, ventilation, humidification, combustion, 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 field instruments and 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.

Economic and Other Factors

ACS’s operating results are principally impacted by:

•

Economic conditions and growth rates in developed (North America, Europe and Australia) and high growth regions;

•

Industrial production and global commercial construction (including retrofits and upgrades);

•

Demand for residential security, environmental control retrofits and upgrades and energy efficient products and solutions;

•

Government and public sector spending;

•

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.

Automation and Control Solutions


	2013			2012			Change			2011			Change
Net sales		$	16,556		$	15,880		4	%		$	15,535		2	%
Cost of products and services sold			10,913			10,613						10,401
Selling, general and administrative expenses			2,898			2,743						2,773
Other			308			292						278

Segment profit		$	2,437		$	2,232		9	%		$	2,083		7	%


Factors Contributing to Year-Over-Year Change	2013 vs. 2012						2012 vs. 2011
Factors Contributing to Year-Over-Year Change	Sales			Segment Profit			Sales			Segment Profit
Organic growth/ Operational segment profit		2	%		8	%		3	%		8	%
Foreign exchange		0	%		0	%		(2	)%		(2	)%
Acquisitions and divestitures, net		2	%		1	%		1	%		1	%

Total % Change		4	%		9	%		2	%		7	%

2013 compared with 2012

Automation and Control Solutions (“ACS”) sales increased by 4 percent in 2013 compared with 2012, primarily due to organic sales growth and growth from acquisitions.

•

Sales in our Energy, Safety & Security businesses increased by 8 percent (3 percent organic) in 2013 principally due to (i) the positive impact of acquisitions, (ii) increases in sales volumes in our environmental and combustion control and security businesses driven by improved U.S. residential market conditions and new product introductions and (iii) higher sales volumes of our fire systems and sensors and safety products (in the second half), partially offset by decreases in sales volumes of our sensing and control products (in the first half of 2013) and scanning and mobility products primarily the result of continued softness in their U.S. end markets.

•

Sales in our Process Solutions business were flat (increased 1 percent organic) in 2013 principally due to decreased volume reflecting the completion of several large projects as expected offset by service and software solutions volume growth.

•

Sales in Building Solutions & Distribution increased by 1 percent in 2013 principally due to increased sales volumes in our Americas Distribution business due to improved U.S. residential market conditions partially offset by continued softness in the U.S. energy retrofit business.

ACS segment profit increased by 9 percent in 2013 compared with 2012 due to an 8 percent increase in operational segment profit and a 1 percent increase from acquisitions. The increase in operational segment profit is primarily the result of the positive impact from price and productivity, net of inflation, investment for growth and higher sales volumes as discussed above. Cost of products and services sold totaled $10.9 billion in 2013, an increase of $300 million which is primarily due to acquisitions, inflation and higher sales volume partially offset by the favorable impact of productivity and foreign exchange.

2012 compared with 2011

ACS sales increased by 2 percent in 2012 compared with 2011, primarily due to a 3 percent increase in organic revenue driven by increased sales volume and 1 percent growth from acquisitions, net of divestitures, partially offset by the unfavorable impact of foreign exchange.

•

Sales in our Energy, Safety & Security businesses increased by 2 percent (1 percent organic) in 2012 principally due to (i) the positive impact of acquisitions (most significantly EMS Technologies, Inc. and King’s Safetywear Limited), net of divestitures, (ii) higher sales volumes due to contract wins and new product introductions in the scanning and mobility business, (iii) higher sales volumes due to improved U.S. residential market conditions and new product introductions in the security business, partially offset by (i) the unfavorable impact of foreign exchange, (ii) lower sales volume in Europe and (iii) decreases in sales volumes of our personal protective equipment and sensing and control products primarily the result of softness in industrial end markets.

•

Sales in our Process Solutions business increased 3 percent (6 percent organic) in 2012 principally due to increased conversion to sales from backlog, partially offset by the unfavorable impact of foreign exchange. Project orders decreased in the second half of 2012 compared to the corresponding period in 2011 primarily driven by extension of project timing by customers and higher than typical project orders in the fourth quarter of 2011.

•

Sales in our Building Solutions & Distribution businesses increased by 3 percent (4 percent organic) in 2012 principally due to growth in our Building Solutions business reflecting conversion to sales from backlog and increased sales volume in our Americas Distribution business due to improved U.S. residential market conditions, partially offset by the unfavorable impact of foreign exchange and softness in the energy retrofit business. Project orders decreased in the fourth quarter of 2012 principally due to extension of project timing by customers and softness in the energy retrofit business.

ACS segment profit increased by 7 percent in 2012 compared with 2011 due to a 8 percent increase in operational segment profit and a 1 percent increase from acquisitions, net of divestitures partially offset by a 2 percent unfavorable impact of foreign exchange. The increase in operational segment profit is primarily the result of the positive impact from price and productivity, net of inflation. Cost of products and services sold totaled $10.6 billion in 2012, an increase of $212 million which is primarily due to higher sales, inflation and acquisitions, net of divestitures partially offset by the favorable impact of foreign exchange and productivity.

2014 Areas of Focus

ACS’s primary areas of focus for 2014 include:

•

Extending technology leadership through continued investment in new product development and introductions which deliver energy efficiency, lowest total installed cost and integrated solutions;

•

Defending and extending our installed base through customer productivity, globalization, channel optimization and service penetration;

•

Sustaining strong brand recognition through our brand and channel management;

•

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

•

Continuing to establish and grow presence and capability in high growth regions;

•

Continued deployment and optimization of our common ERP system;

•

Continued deployment and maturation of HOS; and

•

Continued proactive cost actions and successful execution of repositioning actions.

Performance Materials and Technologies (PMT)

Overview

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 includes UOP, which provides process technology, products, including catalysts and adsorbents, and services for the petroleum refining, gas processing, petrochemical, renewable energy and other industries. Performance Materials and Technologies also includes Advanced Materials, which provides products including fluorocarbons, hydrofluoroolefins, caprolactam, resins, ammonium sulfate fertilizer, phenol, specialty films, waxes, additives, advanced fibers, customized research chemicals and intermediates, electronic materials and chemicals, catalysts and adsorbents.

Economic and Other Factors

Performance Materials and Technologies operating results are principally impacted 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, R240, natural gas, perchloroethylene, sulfur and ethylene;

•

Impact of environmental and energy efficiency regulations;

•

Global supply conditions and demand for non-ozone depleting, low global warming refrigerants and blowing agents;

•

Global supply conditions and demand for caprolactam, nylon resin and ammonium sulfate;

•

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

•

Extent of change in order rates from global semiconductor customers; and

•

Demand for new products including renewable energy and biofuels, low global warming products for insulation and refrigeration, additives and enhanced nylon resin.

Performance Materials and Technologies


	2013			2012			Change			2011			Change
Net sales		$	6,764		$	6,184		9	%		$	5,659		9	%
Cost of products and services sold			4,933			4,525						4,144
Selling, general and administrative expenses			485			433						416
Other			75			72						57

Segment profit		$	1,271		$	1,154		10	%		$	1,042		11	%


Factors Contributing to Year-Over-Year Change	2013 vs. 2012						2012 vs. 2011
Factors Contributing to Year-Over-Year Change	Sales			Segment Profit			Sales			Segment Profit
Organic growth/ Operational segment profit		1	%		3	%		4	%		9	%
Foreign exchange		0	%		0	%		(1	)%		(1	)%
Acquisitions and divestitures, net		8	%		7	%		6	%		3	%

Total % Change		9	%		10	%		9	%		11	%

2013 compared with 2012

PMT sales increased by 9 percent in 2013 compared with 2012 due to 8 percent growth from acquisitions and 1 percent increase in organic sales.

•

UOP sales increased by 31 percent (9 percent organic) in 2013 compared to 2012 primarily driven by (i) the favorable impact of acquisitions, (ii) higher volume of petrochemical catalysts, (iii) increased revenue from gas processing and (iv) increased equipment revenue in the first half of 2013, partially offset by decreased service revenues related to scheduled project completions and lower licensing revenues.

•

Advanced Materials sales decreased by 3 percent in 2013 compared to 2012 primarily driven by (i) lower Flourine Products volume (due to the unfavorable impact of unseasonably cool weather on refrigerant volume and planned plant outages in the first half of 2013) and price, (ii) soft end market conditions in Electronic Materials and (iii) lower production volume in Resins and Chemicals.

PMT segment profit increased by 10 percent in 2013 compared with 2012 due to a 7 percent increase from acquisitions and 3 percent increase in operational segment profit. The increase in operational segment profit is primarily due to higher UOP sales volume and positive impact of price and productivity, net of inflation and investment for growth. Cost of products and services sold totaled $4.9 billion in 2013, an increase of $408 million which is primarily due to acquisitions, inflation and higher volume, partially offset by productivity.

The Company has completed upgrades to its Metropolis Works nuclear conversion facility, a Fluorine Products facility, as required by the U.S. Nuclear Regulatory Commission (NRC). Since the second quarter of 2012 production at the Metropolis facility had been suspended. Operations recommenced in July 2013 after final review and approval by the NRC.

2012 compared with 2011

PMT sales increased by 9 percent in 2012 compared with 2011 due to 6 percent growth from acquisitions and 4 percent increase in organic growth, partially offset by 1 percent unfavorable impact of foreign exchange.

•

UOP sales increased by 17 percent (12 percent organic) in 2012 compared to 2011 primarily driven by (i) increased equipment and licensing revenues and higher volume of petrochemical and refining catalysts in the first nine months, reflecting continued strength in the refining and petrochemical industries, and (ii) the favorable impact from acquisitions, partially offset by lower service revenue related to scheduled project completions.

•

Advanced Materials sales increased by 5 percent (flat organic) in 2012 compared to 2011 primarily driven by an increase in Resins and Chemicals sales, primarily due to the phenol plant acquisition; offset by lower sales in Fluorine Products primarily due to unfavorable pricing reflecting more challenging global end market conditions and the unfavorable impact of foreign exchange.

PMT segment profit increased by 11 percent in 2012 compared with 2011 due to a 9 percent increase in operational segment profit (net of a 10 percent decrease in the fourth quarter due to the factors described below) and a 3 percent increase from acquisitions partially offset by an unfavorable impact of 1 percent in foreign exchange. The increase in operational segment profit is primarily due to higher licensing, catalyst and equipment revenues in UOP and productivity (net of continued investment in growth initiatives) partially offset by unfavorable pricing in Fluorine Products and Resins and Chemicals reflecting more challenging global end market conditions. Cost of products and services sold totaled $4.5 billion in 2012, an increase of $381 million which is primarily due to acquisitions, higher volume and continued investment in growth initiatives partially offset by productivity and the favorable impact of foreign exchange.

2014 Areas of Focus

Performance Materials and Technologies primary areas of focus for 2014 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, fluorochemicals and renewable energy sector;

•

Investing to increase plant capacity and reliability to service backlog and improve productivity and quality through operational excellence;

•

Driving sales and marketing excellence and expanding local presence in high growth regions;

•

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

•

Secure long-term contracts for low-global warming products.

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 impacted by:

•

Financial strength and stability of automotive OE manufacturers;

•

Global demand 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


	2013			2012			Change			2011			Change
Net sales		$	3,755		$	3,561		5	%		$	3,859		(8	)%
Cost of products and services sold			3,041			2,914						3,159
Selling, general and administrative expenses			158			157						160
Other			58			58						55

Segment profit		$	498		$	432		15	%		$	485		(11	)%


Factors Contributing to Year-Over-Year Change	2013 vs. 2012						2012 vs. 2011
Factors Contributing to Year-Over-Year Change	Sales			Segment Profit			Sales			Segment Profit
Organic growth/ Operational segment profit		5	%		14	%		(3	)%		(4	)%
Foreign exchange		0	%		1	%		(5	)%		(7	)%

Total % Change		5	%		15	%		(8	)%		(11	)%

2013 compared with 2012

Transportation Systems sales increased by 5 percent in 2013 compared with 2012 primarily due to an increase in organic sales driven by continued strong growth from new platform launches and higher global turbo gas penetration.

Transportation Systems segment profit increased by 15 percent in 2013 compared with 2012 due to a 14 percent increase in operational segment profit and a 1 percent favorable impact from foreign exchange. The increase in operational segment profit is primarily due to increased productivity (most significantly the positive impacts from material productivity in Turbo Technologies and ongoing projects to drive operational improvement in the Friction Materials business), partially offset by unfavorable pricing. Cost of products and services sold totaled $3.0 billion in 2013, an increase of $127 million which is primarily a result of increased volume, partially offset by increased productivity.

In January 2014, the Company entered into a definitive agreement to sell its Friction Materials business unit to Federal Mogul Corporation for approximately $155 million. See Note 2 Acquisitions and Divestitures for further details.

2012 compared with 2011

Transportation Systems sales decreased by 8 percent in 2012 compared with the 2011 primarily due to an unfavorable impact from foreign exchange of 5 percent and a decrease in organic sales of 3 percent. Lower sales were primarily driven by decreased light vehicle production in Europe and lower aftermarket sales partially offset by new platform launches, including higher turbo gas penetration in North America.

Transportation Systems segment profit decreased by 11 percent in 2012 compared with 2011 due to a 7 percent unfavorable impact from foreign exchange and a 4 percent decrease in operational segment profit. The decrease in operational segment profit is primarily due to decreased volume and unfavorable pricing, substantially offset by productivity (net of the impact of ongoing projects to drive operational improvement in the Friction Materials business), net of inflation. Cost of products and services sold totaled $2.9 billion in 2012, a decrease of $235 million which is primarily a result of foreign exchange, decreased volume and increased productivity.

2014 Areas of Focus

Transportation Systems primary areas of focus in 2014 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;

•

Reducing manufacturing costs through increasing plant productivity and an improving 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 Repositioning and Other Charges of Notes to the Financial Statements for a discussion of repositioning and other charges incurred in 2013, 2012, and 2011. Our repositioning actions are expected to generate incremental pretax savings of approximately $150 million in 2014 compared with 2013 principally from planned workforce reductions. Cash expenditures for severance and other exit costs necessary to execute our repositioning actions were $160, $136, and $159 million in 2013, 2012, and 2011, respectively. Such expenditures for severance and other exit costs have been funded through operating cash flows. Cash expenditures for severance and other costs necessary to execute the remaining actions are expected to be approximately $175 million in 2014 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.


	Years Ended December 31,
	2013			2012				2011
Aerospace
Net repositioning charge		$	45		$	(5	)		$	29

Automation and Control Solutions
Net repositioning charge		$	90		$	18			$	191
Other			3			—				—

		$	93		$	18			$	191

Performance Materials and Technologies
Net repositioning charge		$	31		$	12			$	41

Transportation Systems
Net repositioning charge		$	26		$	28			$	82
Asbestos related litigation charges, net of insurance			164			169				146

		$	190		$	197			$	228

Corporate
Net repositioning charge		$	9		$	—			$	11
Asbestos related litigation charges, net of insurance			17			(13	)			3
Probable and reasonably estimable environmental liabilities			272			234				240
Other			6			—				—

		$	304		$	221			$	254

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 2013, 2012 and 2011, are summarized as follows:


	2013				2012				2011
Cash provided by (used for):
Operating activities		$	4,335			$	3,517			$	2,833
Investing activities			(1,959	)			(1,428	)			(611	)
Financing activities			(433	)			(1,206	)			(1,114	)
Effect of exchange rate changes on cash			(155	)			53				(60	)

Net increase in cash and cash equivalents		$	1,788			$	936			$	1,048

2013 compared with 2012

Cash provided by operating activities increased by $818 million during 2013 compared with 2012 primarily due to (i) reduced cash contributions to our pension plans of $883 million, (ii) a $447 million increase of net income before the non-cash pension mark-to-market adjustment, (iii) a $135 million favorable impact from working capital (driven by improved accounts payable performance and inventory, partially offset by higher receivables primarily due to sales growth and timing of sales), partially offset by higher cash tax payments of approximately $352 million and a $260 million increase in net payments for repositioning and other charges (most significantly the NARCO Trust establishment payments of $164 million).

Cash used for investing activities increased by $531 million during 2013 compared with 2012 primarily due to an increase in cash paid for acquisitions of $695 million (most significantly Intermec and RAE), partially offset by an increase of approximately $190 million in settlement receipts of foreign currency exchange contracts used as economic hedges on certain non-functional currency denominated monetary assets and liabilities.

Cash used for financing activities decreased by $773 million during 2013 compared to 2012 primarily due to an increase in the net proceeds from debt issuances of $1,462 million, partially offset by an increase in net repurchases of common stock of $651 million and an increase in cash dividends paid of $142 million.

2012 compared with 2011

Cash provided by operating activities increased by $684 million during 2012 compared with 2011 primarily due to reduced cash contributions to our pension plans of $706 million and a $342 million increase of net income before the non-cash pension mark-to-market adjustment, partially offset by higher cash tax payments of approximately $340 million.

Cash used for investing activities increased by $817 million during 2012 compared with 2011 primarily due to (i) a decrease in proceeds from sales of businesses of $1,135 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 in 2011), (ii) a net $117 million increase in investments (primarily short-term marketable securities), and (iii) an increase in expenditures for property, plant and equipment of $86 million, partially offset by a decrease in cash paid for acquisitions of $535 million.

Cash used for financing activities increased by $92 million during 2012 compared with 2011 primarily due to a decrease in the net proceeds from debt issuances of $825 million and an increase in dividends paid of $120 million, partially offset by a decrease of $806 million in net repurchases of common stock and a decrease of $33 million in the payment of debt assumed with acquisitions.

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, 2013, 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 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.

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, automotive and refining/petrochemical 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.

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 acquisitions. There was $1,299 million of commercial paper outstanding at December 31, 2013.

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, 2013, 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, 2013 and 2012, 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 Short-term borrowings.

In March 2013, the Company repaid $600 million of its 4.25 percent notes.

In November 2013, the Company issued $300 million 3.35 percent Senior Notes due 2023 and $700 million Floating Rate Senior Notes due 2015 (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 billion, offset by $7 million in discount and closing costs related to the offering.

On December 10, 2013, the Company entered into a $4 billion Amended and Restated 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 $4.5 billion. The Credit Agreement contains a $700 million sublimit for the issuance of letters of credit. The Credit Agreement is maintained for general corporate purposes and amends and restates the previous $3 billion five year credit agreement dated April 2, 2012 (“Prior Agreement”). There have been no borrowings under the Credit Agreement or the Prior Agreement.

During 2013, the Company repurchased $1,073 million of outstanding shares to offset the dilutive impact of employee stock based compensation plans, including 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 2013). In December 2013, the Board of Directors authorized the repurchase of up to a total of $5 billion of Honeywell common stock.

On June 3, 2013, the Company acquired RAE, a global manufacturer of fixed and portable gas and radiation detection systems, and software. The aggregate value, net of cash acquired, was $338 million. The acquisition was funded with available cash. See Acquisitions in Note 2 to the financial statements for further discussion.

On September 17, 2013, the Company acquired 100 percent of the issued and outstanding shares of Intermec, a leading provider of mobile computing, radio frequency identification solutions and bar code, label and receipt printers for use in warehousing, supply chain, field service and manufacturing environments. Intermec was a U.S. public company that operated globally and had reported 2012 revenues of $790 million. The aggregate value, net of cash acquired, was $607 million. The acquisition was funded with the issuance of commercial paper. See Acquisitions in Note 2 to the financial statements for further discussion.

In January 2014, the Company entered into a definitive agreement to sell its Friction Materials business to Federal Mogul Corporation for approximately $155 million. The transaction, subject to required regulatory approvals and applicable information and consultation requirements, is expected to close in the second half of 2014. See Divestitures in Note 2 to the financial statements for further discussion.

In 2013, we were not required to make contributions to our U.S. pension plans. During 2013, cash contributions of $156 million were made to our non-U.S. plans to satisfy regulatory funding standards.

The NARCO Plan of Reorganization went into effect on April 30, 2013. In 2013, the Company made NARCO Trust establishment payments of $164 million. See Asbestos Matters in Note 22 to the financial statements for further discussion of possible funding obligations in 2014 related to the NARCO Trust.

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

Specifically, we expect our primary cash requirements in 2014 to be as follows:

•

Capital expenditures—we expect to spend approximately $1.2 billion for capital expenditures in 2014 primarily for growth, production and capacity expansion, cost reduction, maintenance, and replacement.

•

Share repurchases—under the Company’s share repurchase program, $5 billion is available as of December 31, 2013 for additional share repurchases. Honeywell presently expects to repurchase outstanding shares from time to time 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 increased our dividend rate by 10 percent to $.45 per share of common stock effective with the fourth quarter 2013 dividend. The Company intends to continue to pay quarterly dividends in 2014.

•

Asbestos claims—we expect our cash spending for asbestos claims and our cash receipts for related insurance recoveries to be approximately $459 and $76 million, respectively, in 2014. See Asbestos Matters in Note 22 to the financial statements for further discussion of possible funding obligations in 2014 related to the NARCO Trust.

•

Pension contributions—in 2014, we are not required to make contributions to our U.S. pension plans. We plan to make contributions of cash and/or marketable securities of approximately $150 million ($117 million of marketable securities were contributed in January 2014) to our non-U.S. plans to satisfy regulatory funding standards. The timing and amount of contributions to both our U.S. and non-U.S. plans 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 repositioning actions will approximate $175 million in 2014.

•

Environmental remediation costs—we expect to spend approximately $300 million in 2014 for remedial response and voluntary clean-up costs. See Environmental Matters in Note 22 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 2013 and 2012, we realized $3 and $21 million, respectively, 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, 2013:


	Total(6)				Payments by Period												Thereafter
					2014				2015- 2016				2017- 2018
Long-term debt, including capitalized leases(1)		$	7,433			$	632			$	1,328			$	1,343			$	4,130
Interest payments on long-term debt, including capitalized leases			3,664				315				591				494				2,264
Minimum operating lease payments			1,244				313				440				227				264
Purchase obligations(2)			1,626				796				502				248				80
Estimated environmental liability payments(3)			643				304				230				80				29
Asbestos related liability payments(4)			1,611				461				630				401				119
Asbestos insurance recoveries(5)			(672	)			(77	)			(140	)			(148	)			(307	)

		$	15,549			$	2,744			$	3,581			$	2,645			$	6,579


(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, 2013. See Environmental Matters in Note 22 Commitments and Contingencies of Notes 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, 2013. We have accrued for the estimated value of future NARCO asbestos related claims expected to be asserted against the NARCO Trust through 2018. In light of the uncertainties inherent in making long-term projections and in connection with the initial operation of a 524(g) trust, as well as the stay of all NARCO asbestos claims from January 2002 until April 2013 when the NARCO Plan of Reorganization became fully effective, we do not believe that we have a reasonable basis for estimating NARCO asbestos claims beyond 2018. 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 22 Commitments and Contingencies of Notes 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, 2013. 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 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 2018. 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 22 Commitments and Contingencies of Notes to the Financial Statements for additional information.

(6)				The table excludes tax effects as well as $729 million of uncertain tax positions. See Note 6 Income Taxes of Notes to the Financial Statements for additional information.

The table also excludes our pension and other postretirement benefits (OPEB) obligations. In 2014, we are not required to make contributions to our U.S. pension plans, however, we plan to make contributions of cash and/or marketable securities of approximately $150 million ($117 million of marketable securities were contributed in January 2014) to our non-U.S. plans to satisfy regulatory funding standards. The timing and amount of contributions to both our U.S. and non-U.S. plans may be impacted by a number of factors, including the funded status of the plans. Beyond 2014, 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 $130 million in 2014 net of the benefit of approximately $11 million from the Medicare prescription subsidy. See Note 23 to the financial statements for further discussion of our pension and OPEB plans.

The noncontrolling interest shareholder of UOP Russell LLC (formerly Thomas Russell Co.), one of our subsidiaries, has put rights that may be exercised causing us to purchase their equity interests beginning January 1, 2016 through December 31, 2016. The same interest is subject to certain call rights by the Company. As the amount paid is based on operating income performance from 2013 to 2015, the actual settlement amount may be different and has therefore been excluded from this table.

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, 2013:


	Maximum Potential Future Payments
Operating lease residual values		$	40
Other third parties’ financing			5
Customer financing			4

		$	49

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.

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 $272, $234 and $240 million in 2013, 2012 and 2011, respectively. At December 31, 2013 and 2012, the recorded liabilities for environmental matters was $643 and $654 million, respectively. In addition, in 2013 and 2012 we incurred operating costs for ongoing businesses of approximately $88 and $84 million, respectively, relating to compliance with environmental regulations.

Remedial response and voluntary cleanup payments were $304, $320 and $270 million in 2013, 2012 and 2011, respectively, and are currently estimated to be approximately $300 million in 2014. 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 22 Commitments and Contingencies of Notes 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 Summary of Significant Accounting Policies of Notes to the Financial Statements. We also hold investments in marketable equity securities, which exposes us to market volatility, as discussed in Note 16 Financial Instruments and Fair Value Measures of Notes 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, Canadian Dollar, British Pound, Mexican Peso, Indian Rupee, Chinese Renminbi, Czech Koruna, Hong Kong Dollar, Korean Won, Singapore Dollar, Swiss Franc, United Arab Emirates Dirham, Swedish Krona, Thai Baht and Romanian Leu.

Our exposure to market risk from changes in interest rates relates primarily to our net debt and pension obligations. As described in Note 14 Long-term Debt and Credit Agreements and Note 16 Financial Instruments and Fair Value Measures of Notes 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.

Financial instruments, including derivatives, expose us to counterparty credit risk for nonperformance and to market risk related to changes in interest and foreign currency exchange rates and

commodity prices. 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, 2013 and 2012.


	Face or Notional Amount			Carrying Value(1)				Fair Value(1)				Estimated Increase (Decrease) in Fair Value(2)
December 31, 2013
Interest Rate Sensitive Instruments
Long-term debt (including current maturities)		$	7,433		$	(7,433	)		$	(8,066	)		$	(466	)
Interest rate swap agreements			1,700			55				55				(77	)
Foreign Exchange Rate Sensitive Instruments
Foreign currency exchange contracts(3)			7,298			(7	)			(7	)			296
Commodity Price Sensitive Instruments
Forward commodity contracts(4)			1			—				—				—
December 31, 2012
Interest Rate Sensitive Instruments
Long-term debt (including current maturities)		$	7,020		$	(7,020	)		$	(8,152	)		$	(555	)
Interest rate swap agreements			1,400			146				146				(67	)
Foreign Exchange Rate Sensitive Instruments
Foreign currency exchange contracts(3)			8,506			20				20				361
Commodity Price Sensitive Instruments
Forward commodity contracts(4)			17			—				—				(3	)


(1)				Asset or (liability).

(2)				A hypothetical immediate one percentage point decrease in interest rates across all maturities, a potential change in fair value of foreign exchange rate sensitive instruments based on a 10 percent strengthening of the U.S. dollar versus local currency exchange rates across all maturities, and a potential change in fair value of contracts hedging commodity purchases based on a 20 percent increase in the price of the underlying commodity across all maturities will result in a change in fair value equal to the inverse of the amount disclosed in the table.

(3)				Changes in the fair value of foreign currency exchange contracts are offset by changes in the fair value or cash flows of underlying hedged foreign currency transactions.

(4)				Changes in the fair value of forward commodity contracts are offset by changes in the cash flows of underlying hedged commodity transactions.

The above discussion of our procedures to monitor market risk and the estimated changes in fair value resulting from our sensitivity analyses are forward-looking statements of market risk assuming certain adverse market conditions occur. Actual results in the future may differ materially from these estimated results due to actual developments in the global financial markets. The methods used by us to assess and mitigate risk discussed above should not be considered projections of future events.

CRITICAL ACCOUNTING POLICIES

The preparation of our consolidated financial statements in accordance with generally accepted accounting principles is based on the selection and application of accounting policies that require us to make significant estimates and assumptions about the effects of matters that are inherently uncertain. We consider the accounting policies discussed below to be critical to the understanding of our financial statements. Actual results could differ from our estimates and assumptions, and any such differences could be material to our consolidated financial statements.

We have discussed the selection, application and disclosure of these critical accounting policies with the Audit Committee of our Board of Directors and our Independent Registered Public Accountants. New accounting standards effective in 2013 which had a material impact on our consolidated financial statements are described in the Recent Accounting Pronouncements section in Note 1 Summary of Significant Accounting Policies of Notes to the Financial Statements.

Contingent Liabilities—We are subject to a number of lawsuits, investigations and claims (some of which involve substantial dollar amounts) that arise out of the conduct of our global business operations or those of previously owned entities, including matters relating to commercial transactions, government contracts, product liability (including asbestos), prior acquisitions and divestitures, employee benefit plans, intellectual property, and environmental, health and safety matters. We recognize a liability for any contingency that is probable of occurrence and reasonably estimable. We continually assess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential amounts or ranges of probable losses, and recognize a liability, if any, for these contingencies based on a careful analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Such analysis includes making judgments concerning matters such as the costs associated with environmental matters, the outcome of negotiations, the number and cost of pending and future asbestos claims, and the impact of evidentiary requirements. Because most contingencies are resolved over long periods of time, liabilities may change in the future due to new developments (including new discovery of facts, changes in legislation and outcomes of similar cases through the judicial system), changes in assumptions or changes in our settlement strategy. For a discussion of our contingencies related to environmental, asbestos and other matters, including management’s judgment applied in the recognition and measurement of specific liabilities, see Notes 1 Summary of Significant Accounting Policies and 22 Commitments and Contingencies of Notes to the Financial Statements.

Asbestos Related Contingencies and Insurance Recoveries—We are a defendant in personal injury actions related to products containing asbestos (refractory and friction products). We recognize a liability for any asbestos related contingency that is probable of occurrence and reasonably estimable. Regarding North American Refractories Company (NARCO) asbestos related claims, we accrued for pending claims based on terms and conditions in agreements with NARCO, its former parent company, and certain asbestos claimants, and an estimate of the unsettled claims pending as of the time NARCO filed for bankruptcy protection. We also accrued for the estimated value of future NARCO asbestos related claims expected to be asserted against the NARCO Trust through 2018 as described in Note 22 Commitments and Contingencies of Notes to the Financial Statements. In light of the inherent uncertainties in making long term projections and in connection with the initial operation of a 524(g) trust, as well as the stay of all NARCO asbestos claims from January 2002 through the effective date of the NARCO Trust on April 30, 2013, we do not believe that we have a reasonable basis for estimating NARCO asbestos claims beyond 2018. Regarding Bendix asbestos related claims, we accrued for the estimated value of pending claims using average resolution values for the previous five years. We also accrued for the estimated value of future anticipated claims related to Bendix for the next five years based on historic claims filing experience and dismissal rates, disease classifications, and average resolution values in the tort system for the previous five years. In light of the uncertainties inherent in making long-term projections, as well as certain factors unique to friction product asbestos claims, we do not believe that we have a reasonable basis for estimating asbestos claims beyond the next five years. We will continue to update the resolution values used to estimate the cost of pending and future Bendix claims during the fourth quarter each year. For additional information see Note 22 Commitments and Contingencies of Notes to the Financial Statements. We continually assess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential ranges of

probable losses and recognize a liability, if any, for these contingencies based on an analysis of each individual issue with the assistance of outside legal counsel and, if applicable, other experts.

In connection with the recognition of liabilities for asbestos related matters, we record asbestos related insurance recoveries that are deemed probable. In assessing the probability of insurance recovery, we make judgments concerning insurance coverage that we believe are reasonable and consistent with our historical dealings and our knowledge of any pertinent solvency issues surrounding insurers. Our insurance is with both the domestic insurance market and the London excess market. While the substantial majority of our insurance carriers are solvent, some of our individual carriers are insolvent, which has been considered in our analysis of probable recoveries. Projecting future events is subject to various uncertainties that could cause the insurance recovery on asbestos related liabilities to be higher or lower than that projected and recorded. Given the inherent uncertainty in making future projections, we reevaluate our projections concerning our probable insurance recoveries in light of any changes to the projected liability, our recovery experience or other relevant factors that may impact future insurance recoveries. See Note 22 Commitments and Contingencies of Notes to the Financial Statements for a discussion of management’s judgments applied in the recognition and measurement of insurance recoveries for asbestos related liabilities.

Defined Benefit Pension Plans—We sponsor both funded and unfunded U.S. and non-U.S. defined benefit pension plans covering the majority of our employees and retirees.

We recognize net actuarial gains or losses in excess of 10 percent of the greater of the fair value of plan assets or the plans’ projected benefit obligation (the corridor) annually in the fourth quarter each year (MTM Adjustment) and, if applicable, in any quarter in which an interim remeasurement is triggered. Net actuarial gains and losses occur when the actual experience differs from any of the various assumptions used to value our pension plans or when assumptions change as they may each year. The primary factors contributing to actuarial gains and losses are changes in the discount rate used to value pension obligations as of the measurement date each year and the difference between expected and actual returns on plan assets. This accounting method results in the potential for volatile and difficult to forecast MTM Adjustments. MTM charges were $51, $957 and $1,802 million in 2013, 2012 and 2011, respectively. The remaining components of pension income/expense, primarily service and interest costs and assumed return on plan assets, are recorded on a quarterly basis (Pension ongoing (income) expense).

For financial reporting purposes, net periodic pension income/expense is calculated based upon a number of actuarial assumptions, including a discount rate for plan obligations and an expected long-term rate of return on plan assets. We determine the expected long-term rate of return on plan assets utilizing historical plan asset returns over varying long-term periods combined with our expectations on future market conditions and asset mix considerations (see Note 23 Pension and Other Postretirement Benefits of Notes to the Financial Statements for details on the actual various asset classes and targeted asset allocation percentages for our pension plans). The discount rate reflects the market rate on December 31 (measurement date) for high-quality fixed-income investments with maturities corresponding to our benefit obligations and is subject to change each year. Information on all our significant actuarial assumptions is included in Note 23 Pension and Other Postretirement Benefits of Notes to the Financial Statements.

The key assumptions used in developing our 2013, 2012 and 2011 net periodic pension expense for our U.S. plans included the following:


	2013			2012			2011
Discount rate		4.06	%		4.89	%		5.25	%
Assets:
Expected rate of return		7.75	%		8	%		8	%
Actual rate of return		23	%		13	%		—
Actual 10 year average annual compounded rate of return		8	%		8	%		6	%

The discount rate can be volatile from year to year as it is determined based upon prevailing interest rates as of the measurement date. We will use a 4.89 percent discount rate in 2014, reflecting the increase in the market interest rate environment since December 31, 2012. We plan to continue to

use an expected rate of return on plan assets of 7.75 percent for 2014 as this is a long-term rate based on historical plan asset returns over varying long term periods combined with our expectations on future market conditions and the asset mix of the plan’s investments.

In addition to the potential for MTM Adjustments, changes in our expected rate of return on plan assets and discount rate resulting from economic events also affects future pension ongoing (income) expense. The following table highlights the sensitivity of our U.S. pension obligations and ongoing (income) expense to changes in these assumptions, assuming all other assumptions remain constant. These estimates exclude any potential MTM Adjustment:


Change in Assumption	Impact on 2014 Pension Ongoing Expense	Impact on PBO
0.25 percentage point decrease in discount rate	Decrease $4 million	Increase $529 million
0.25 percentage point increase in discount rate	Increase $3 million	Decrease $512 million
0.25 percentage point decrease in expected rate of return on assets	Increase $40 million	—
0.25 percentage point increase in expected rate of return on assets	Decrease $40 million	—

Pension ongoing income for all of our pension plans is expected to be approximately $230 million in 2014 compared with pension ongoing income of $90 million in 2013. The increase in pension ongoing income in 2014 compared with 2013 results primarily from an increase in the plans’ assets at December 31, 2013 compared with December 31, 2012 mainly due to strong asset returns in 2013. Also, if required, an MTM Adjustment will be recorded in the fourth quarter of 2014 in accordance with our pension accounting method as previously described. It is difficult to reliably forecast or predict whether there will be a MTM Adjustment in 2014, and if one is required what the magnitude of such adjustment will be. MTM Adjustments are primarily driven by events and circumstances beyond the control of the Company such as changes in interest rates and the performance of the financial markets.

In 2013, 2012 and 2011, we were not required to make contributions to satisfy minimum statutory funding requirements in our U.S. pension plans and did not make a contribution to our U.S. plans during 2013. However, we made voluntary contributions of $792 and $1,650 million to our U.S. pension plans in 2012 and 2011, respectively, primarily to improve the funded status of our plans which had been adversely impacted by relatively low discount rates and asset losses in 2011 and 2008 resulting from the poor performance of the equity markets. In 2014, we are not required to make contributions to our U.S. pension plans. We plan to make contributions of cash and/or marketable securities of approximately $150 million ($117 million of marketable securities were contributed in January 2014) to our non-U.S. plans to satisfy regulatory funding standards. The timing and amount of contributions to both our U.S. and non- U.S. plans may be impacted by a number of factors, including the funded status of the plans.

Long-Lived Assets (including Tangible and Finite-Lived Intangible Assets)—To conduct our global business operations and execute our business strategy, we acquire tangible and intangible assets, including property, plant and equipment and finite-lived intangible assets. At December 31, 2013, the net carrying amount of these long-lived assets totaled approximately $7.1 billion. The determination of useful lives (for depreciation/amortization purposes) and whether or not these assets are impaired involves the use of accounting estimates and assumptions, changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions. We evaluate the recoverability of the carrying amount of our long-lived assets whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset group may not be fully recoverable. The principal factors in considering when to perform an impairment review are as follows:

•

Significant under-performance (i.e., declines in sales, earnings or cash flows) of a business or product line in relation to expectations;

•

Annual operating plans or five-year strategic plans that indicate an unfavorable trend in operating performance of a business or product line;

•

Significant negative industry or economic trends; or

•

Significant changes or planned changes in our use of the assets.

Once it is determined that an impairment review is necessary, recoverability of assets is measured by comparing the carrying amount of the asset grouping to the estimated future undiscounted cash flows. If the carrying amount exceeds the estimated future undiscounted cash flows, the asset grouping is considered to be impaired. The impairment is then measured as the difference between the carrying amount of the asset grouping and its fair value. We endeavor to utilize the best information available to measure fair value, which is usually either market prices (if available), level 1 or level 2 of the fair value hierarchy, or an estimate of the future discounted cash flow, level 3 of the fair value hierarchy. The key estimates in our discounted cash flow analysis include expected industry growth rates, our assumptions as to volume, selling prices and costs, and the discount rate selected. As described in more detail in Note 16 Financial Instruments and Fair Value Measures of Notes to the Financial Statements, we have recorded impairment charges related to long-lived assets of $72 million in 2013, principally related to property, plant and equipment and $22 million and 2012, principally related to property, plant and equipment and intangible assets.

Goodwill and Indefinite-Lived Intangible Assets Impairment Testing—Goodwill represents the excess of acquisition costs over the fair value of the net tangible assets and identifiable intangible assets acquired in a business combination. Indefinite-lived intangible assets primarily consist of trademarks acquired in business combinations. Goodwill and indefinite-lived assets are not amortized, but are subject to impairment testing. Our goodwill and indefinite-lived intangible asset balances of $13.0 billion and $725 million, respectively, as of December 31, 2013, are subject to impairment testing annually as of March 31, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. This testing compares carrying values to fair values and, when appropriate, the carrying value is reduced to fair value. In testing goodwill, the fair value of our reporting units is estimated utilizing a discounted cash flow approach utilizing cash flow forecasts in our five year strategic and annual operating plans adjusted for terminal value assumptions. This impairment test involves the use of accounting estimates and assumptions, changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions. To address this uncertainty we perform sensitivity analysis on key estimates and assumptions.

We completed our annual impairment test as of March 31, 2013 and determined that there was no impairment to our goodwill and indefinite-lived intangible assets as of that date. However, 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 have a negative effect on the fair values in the future.

Income Taxes—Deferred tax assets and liabilities are determined based on the difference between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Our provision for income taxes is based on domestic and international statutory income tax rates in the jurisdictions in which we operate. Significant judgment is required in determining income tax provisions as well as deferred tax asset and liability balances, including the estimation of valuation allowances and the evaluation of tax positions.

As of December 31, 2013, we recorded a net deferred tax asset of $1,004 million that is comprised of net deductible temporary differences, net operating loss carryforwards and tax credit carryforwards that are available to reduce taxable income in future periods. We maintain a valuation allowance of $614 million to offset a portion of this non-U.S. net deferred tax asset. The determination of the amount of valuation allowance to be provided on recorded deferred tax assets involves estimates regarding (1) the timing and amount of the reversal of taxable temporary differences, (2) expected future taxable income, and (3) the impact of tax planning strategies. A valuation allowance is established to offset any deferred tax assets if, based upon the available evidence it is more likely than not that some or all of the deferred tax asset will not be realized. In assessing the need for a valuation allowance, we consider all available positive and negative evidence, including past operating results, projections of future taxable income and the feasibility of ongoing tax planning strategies. The projections of future taxable income include a number of estimates and assumptions regarding our

volume, pricing and costs. Additionally, valuation allowances related to deferred tax assets can be impacted by changes to tax laws.

Our net deferred tax asset of $1,004 million consists of $19 million related to U.S. operations and $985 million related to non-U.S. operations. The U.S. net deferred tax asset of $19 million consists of federal and state tax credit and net operating loss carryforwards reduced by net taxable temporary differences. The non-U.S. net deferred tax asset of $985 million consists principally of net deductible temporary differences, net operating loss, capital loss and tax credit carryforwards, (mainly in Canada, France, Luxembourg, Netherlands and the United Kingdom). We maintain a valuation allowance of $614 million against a portion of the non-US net deferred tax assets. The valuation allowance maintained against these deferred tax assets reflects our historical experience and lower expectations of taxable income over the applicable carryforward periods. As more fully described in Note 6 to the financial statements, our valuation allowance increased by $16 million in 2013, increased by $7 million in 2012 and decreased by $45 million in 2011. In the event we determine that we will not be able to realize our net deferred tax assets in the future, we will reduce such amounts through a charge to income in the period such determination is made. Conversely, if we determine that we will be able to realize net deferred tax assets in excess of the carrying amounts, we will decrease the recorded valuation allowance through a credit to income in the period that such determination is made.

Significant judgment is required in determining income tax provisions and in evaluating tax positions. We establish additional reserves for income taxes when, despite the belief that tax positions are fully supportable, there remain certain positions that do not meet the minimum recognition threshold. The approach for evaluating certain and uncertain tax positions is defined by authoritative guidance which determines when a tax position is more likely than not to be sustained upon examination by the applicable taxing authority. In the normal course of business, the Company and its subsidiaries are examined by various federal, state and foreign tax authorities. We regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of our provision for income taxes. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to a change in estimate become known.

Sales Recognition on Long-Term Contracts—In 2013, we recognized approximately 16 percent of our total net sales using the percentage-of-completion method for long-term contracts in our Automation and Control Solutions, Aerospace and Performance Materials and Technologies segments. These long- term contracts are measured on the cost-to-cost basis for engineering-type contracts and the units-of-delivery basis for production-type contracts. Accounting for these contracts involves management judgment in estimating total contract revenue and cost. Contract revenues are largely determined by negotiated contract prices and quantities, modified by our assumptions regarding contract options, change orders, incentive and award provisions associated with technical performance and price adjustment clauses (such as inflation or index-based clauses). Contract costs are incurred over a period of time, which can be several years, and the estimation of these costs requires management judgment. Cost estimates are largely based on negotiated or estimated purchase contract terms, historical performance trends and other economic projections. Significant factors that influence these estimates include inflationary trends, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, asset utilization, and anticipated labor agreements. Revenue and cost estimates are regularly monitored and revised based on changes in circumstances. Anticipated losses on long-term contracts are recognized when such losses become evident. We maintain financial controls over the customer qualification, contract pricing and estimation processes to reduce the risk of contract losses.

OTHER MATTERS

Litigation

See Note 22 to the financial statements for a discussion of environmental, asbestos and other litigation matters.

Recent Accounting Pronouncements

See Note 1 to the financial statements for a discussion of recent accounting pronouncements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Information relating to market risk is included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Financial Instruments”.

ITEM 8. Financial Statements and Supplementary Data

HONEYWELL INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF OPERATIONS


	Years Ended December 31,
	2013				2012				2011
	(Dollars in millions, except per share amounts)
Product sales		$	31,214			$	29,812			$	28,745
Service sales			7,841				7,853				7,784

Net sales			39,055				37,665				36,529

Costs, expenses and other
Cost of products sold			23,317				22,929				23,220
Cost of services sold			5,047				5,362				5,336

			28,364				28,291				28,556
Selling, general and administrative expenses			5,190				5,218				5,399
Other (income) expense			(238	)			(70	)			(84	)
Interest and other financial charges			327				351				376

			33,643				33,790				34,247

Income from continuing operations before taxes			5,412				3,875				2,282
Tax expense			1,450				944				417

Income from continuing operations after taxes			3,962				2,931				1,865
Income from discontinued operations after taxes			—				—				209

Net income			3,962				2,931				2,074
Less: Net income attributable to the noncontrolling interest			38				5				7

Net income attributable to Honeywell		$	3,924			$	2,926			$	2,067

Amounts attributable to Honeywell:
Income from continuing operations less net income attributable to the noncontrolling interest			3,924				2,926				1,858
Income from discontinued operations			—				—				209

Net income attributable to Honeywell		$	3,924			$	2,926			$	2,067

Earnings per share of common stock—basic:
Income from continuing operations			4.99				3.74				2.38
Income from discontinued operations			—				—				0.27

Net income		$	4.99			$	3.74			$	2.65

Earnings per share of common stock—assuming dilution:
Income from continuing operations			4.92				3.69				2.35

Income from discontinued operations			—				—				0.26
Net income		$	4.92			$	3.69			$	2.61

Cash dividends per share of common stock		$	1.68			$	1.53			$	1.37

The Notes to Financial Statements are an integral part of this statement.

HONEYWELL INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME


	Years Ended December 31,
	2013				2012				2011
	(Dollars in millions)
Net income		$	3,962			$	2,931			$	2,074
Other comprehensive income (loss), net of tax
Foreign exchange translation adjustment			(52	)			282				(146	)
Actuarial gains (losses)			2,064				(839	)			(1,317	)
Prior service credit			99				9				10
Prior service cost (credit) recognized during year			5				6				(1	)
Actuarial losses recognized during year			61				649				1,171
Transition obligation recognized during year			2				2				2
Settlements and curtailments			(26	)			(2	)			(107	)
Foreign exchange translation and other			(2	)			(23	)			33

Pensions and other postretirement benefit adjustments			2,203				(198	)			(209	)
Unrealized gains (losses) for the period			140				(6	)			12
Less: reclassification adjustment for gains included in net income			127				—				—

Changes in fair value of available for sale investments			13				(6	)			12
Effective portion of cash flow hedges recognized in other comprehensive income			(30	)			14				(48	)
Less: reclassification adjustment for losses included in net income			(23	)			(13	)			(14	)

Changes in fair value of effective cash flow hedges			(7	)			27				(34	)
Other comprehensive income (loss), net of tax			2,157				105				(377	)
Comprehensive income			6,119				3,036				1,697
Less: Comprehensive income attributable to the noncontrolling interest			36				5				3

Comprehensive income attributable to Honeywell		$	6,083			$	3,031			$	1,694

The Notes to Financial Statements are an integral part of this statement.

HONEYWELL INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEET


	December 31,
	2013				2012
	(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents		$	6,422			$	4,634
Accounts, notes and other receivables			7,929				7,429
Inventories			4,293				4,235
Deferred income taxes			849				669
Investments and other current assets			1,671				631

Total current assets			21,164				17,598
Investments and long-term receivables			393				623
Property, plant and equipment—net			5,278				5,001
Goodwill			13,046				12,425
Other intangible assets—net			2,514				2,449
Insurance recoveries for asbestos related liabilities			595				663
Deferred income taxes			368				1,889
Other assets			2,077				1,205

Total assets		$	45,435			$	41,853

LIABILITIES
Current liabilities:
Accounts payable		$	5,174			$	4,736
Short-term borrowings			97				76
Commercial paper			1,299				400
Current maturities of long-term debt			632				625
Accrued liabilities			6,979				7,208

Total current liabilities			14,181				13,045
Long-term debt			6,801				6,395
Deferred income taxes			804				628
Postretirement benefit obligations other than pensions			1,019				1,365
Asbestos related liabilities			1,150				1,292
Other liabilities			3,734				5,913
Redeemable noncontrolling interest			167				150
SHAREOWNERS’ EQUITY
Capital—common stock issued			958				958
—additional paid-in capital			4,682				4,358
Common stock held in treasury, at cost			(9,374	)			(8,801	)
Accumulated other comprehensive income (loss)			818				(1,339	)
Retained earnings			20,383				17,799

Total Honeywell shareowners’ equity			17,467				12,975
Noncontrolling interest			112				90

Total shareowners’ equity			17,579				13,065

Total liabilities, redeemable noncontrolling interest and shareowners’ equity		$	45,435			$	41,853

The Notes to Financial Statements are an integral part of this statement.

HONEYWELL INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF CASH FLOWS


	Years Ended December 31,
	2013				2012				2011
	(Dollars in millions)
Cash flows from operating activities:
Net income		$	3,962			$	2,931			$	2,074
Less: Net income attributable to the noncontrolling interest			38				5				7

Net income attributable to Honeywell			3,924				2,926				2,067
Adjustments to reconcile net income attributable to Honeywell to net cash provided by operating activities:
Depreciation and amortization			989				926				957
Loss (Gain) on sale of non-strategic businesses and assets			20				(5	)			(362	)
Gain on sale of available for sale investments			(195	)			—				—
Repositioning and other charges			663				443				743
Net payments for repositioning and other charges			(763	)			(503	)			(468	)
Pension and other postretirement (income) expense			(19	)			1,065				1,823
Pension and other postretirement benefit payments			(298	)			(1,183	)			(1,883	)
Stock compensation expense			170				170				168
Deferred income taxes			262				84				(331	)
Excess tax benefits from share based payment arrangements			(132	)			(56	)			(42	)
Other			308				108				289
Changes in assets and liabilities, net of the effects of acquisitions and divestitures:
Accounts, notes and other receivables			(365	)			(119	)			(316	)
Inventories			41				25				(310	)
Other current assets			(421	)			(78	)			25
Accounts payable			352				(13	)			527
Accrued liabilities			(201	)			(273	)			(54	)

Net cash provided by operating activities			4,335				3,517				2,833

Cash flows from investing activities:
Expenditures for property, plant and equipment			(947	)			(884	)			(798	)
Proceeds from disposals of property, plant and equipment			15				5				6
Increase in investments			(1,220	)			(702	)			(380	)
Decrease in investments			1,122				559				354
Cash paid for acquisitions, net of cash acquired			(1,133	)			(438	)			(973	)
Proceeds from sales of businesses, net of fees paid			3				21				1,156
Other			201				11				24

Net cash used for investing activities			(1,959	)			(1,428	)			(611	)
Cash flows from financing activities:
Net increase (decrease) in commercial paper			899				(199	)			300
Net increase (decrease) in short-term borrowings			31				22				(2	)
Payment of debt assumed with acquisitions			—				—				(33	)
Proceeds from issuance of common stock			447				342				304
Proceeds from issuance of long-term debt			1,063				102				1,390
Payments of long-term debt			(607	)			(1	)			(939	)
Excess tax benefits from share based payment arrangements			132				56				42
Repurchases of common stock			(1,073	)			(317	)			(1,085	)
Cash dividends paid			(1,353	)			(1,211	)			(1,091	)
Other			28				—				—

Net cash used for financing activities			(433	)			(1,206	)			(1,114	)

Effect of foreign exchange rate changes on cash and cash equivalents			(155	)			53				(60	)

Net increase in cash and cash equivalents			1,788				936				1,048
Cash and cash equivalents at beginning of period			4,634				3,698				2,650

Cash and cash equivalents at end of period		$	6,422			$	4,634			$	3,698

The Notes to Financial Statements are an integral part of this statement.

HONEYWELL INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF SHAREOWNERS’ EQUITY


	Years Ended December 31,
	2013				2012				2011
	Shares		$		Shares		$		Shares		$

	(in millions)
Common stock, par value		957.6		958		957.6		958		957.6		958

Additional paid-in capital
Beginning balance				4,35