item 14 exhibits financial statement schedules reports form 8k a2 consolidated financial statement schedules two financial statement schedules applicable company omitted absence conditions required a3 exhibits see exhibit index form 10k annual report following exhibits listed exhibit index filed form 10k annual report exhibits identified exhibit index asterisk management contracts compensatory plans arrangements b reports form 8k reports form 8k filed three months ended december 31 1994 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report signed behalf undersigned thereunto duly authorized alliedsignal inc march 2 1995 g peter daloia g peter daloia vice president controller pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated individuals together perform functions principal financial officer march 2 1995 exhibit index exhibits identified asterisk management contracts compensatory plans arrangements statement differencesitem 14 exhibits financial statement schedules reports form 8k two financial statement schedules applicable company omitted absence conditions required a3 exhibits see exhibit index form 10k annual report following exhibits listed exhibit index filed form 10k annual report exhibits identified exhibit index asterisk management contracts compensatory plans arrangements b reports form 8k reports form 8k filed three months ended december 31 1995 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report signed behalf undersigned thereunto duly authorized alliedsignal inc february 27 1996 g peter daloia g peter daloia vice president controller pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated february 27 1996 statement differences registered trademark symbol shall expressed r trademark symbol shall expressed tm subscript numerics chemistry notation shall expressed baseline numerics eg sulfur hexafluoride would expressed sf6 exhibit index exhibits identified asterisk management contracts compensatory plans arrangementsitem 14 exhibits financial statement schedules reports form 8k a2 consolidated financial statement schedules two financial statement schedules applicable company omitted absence conditions required a3 exhibits see exhibit index form 10k annual report following exhibits listed exhibit index filed form 10k annual report exhibits identified exhibit index asterisk management contracts compensatory plans arrangements b reports form 8k three months ended december 31 1997 reports form 8k filed october 22 november 17 december 18 case reporting item 9 unregistered sales companys common stock reliance regulation act signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report signed behalf undersigned thereunto duly authorized alliedsignal inc february 26 1998 nancy garvey nancy garvey vice president controller pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated february 26 1998 exhibit index exhibits identified asterisk management contracts compensatory plans arrangements statement differences registered trademark symbol shall expressed asritem 14 exhibits financial statement schedules reports form 8k a2 consolidated financial statement schedules two financial statement schedules applicable company omitted absence conditions required a3 exhibits see exhibit index form 10k annual report following exhibits listed exhibit index filed form 10k annual report b reports form 8k three months ended december 31 1998 report form 8k filed october 21 1998 disclosing certain earnings data updated year 2000 information certain new credit facilities signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report signed behalf undersigned thereunto duly authorized alliedsignal inc march 4 1999 richard j diemer jr richard j diemer jr vice president controller pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated march 4 1999 exhibit index exhibits identified asterisk management contracts compensatory plans arrangements statement differences registered trademark symbol shall expressed ritem 14 exhibits financial statement schedules reports form 8k a2 consolidated financial statement schedules two financial statement schedules applicable us omitted absence conditions required a3 exhibits see exhibit index form 10k annual report following exhibits listed exhibit index filed form 10k annual report b reports form 8k three months ended december 31 1999 current reports form 8k filed december 3 announcing consummation merger alliedsignal inc honeywell inc december 17 reporting selected income statement segment financial data statement differences registered trademark symbol shall expressed asr signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report signed behalf undersigned thereunto duly authorized honeywell international inc february 22 2000 richard j diemer jr richard j diemer jr vice president controller pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated february 22 2000 exhibit index exhibits identified asterisk management contracts compensatory plans arrangementsitem 14 exhibits financial statement schedules reports form 8k a2 consolidated financial statement schedules two financial statement schedules applicable us omitted absence conditions required a3 exhibits see exhibit index form 10k annual report following exhibits listed exhibit index filed form 10k annual report b reports form 8k three months ended december 31 2000 current report form 8k filed october 25 reporting honeywell general electric company entered agreement plan merger signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report signed behalf undersigned thereunto duly authorized honeywell international inc march 30 2001 philip palazzari philip palazzari vice president controller pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated march 30 2001 exhibit index exhibits identified asterisk management contracts compensatory plans arrangements statement differences registered trademark symbol shall expressed r characters normally expressed subscript shall preceded uitem 14 controls procedures within 90 days prior filing report honeywell management including chief executive officer chief financial officer conducted evaluation effectiveness disclosure controls procedures pursuant exchange act rule 13a14 based upon evaluation chief executive officer chief financial officer concluded disclosure controls procedures effective alerting timely basis material information relating honeywell required included honeywells periodic filings exchange act significant changes internal controls factors could significantly affect internal controls including corrective actions regard significant deficiencies material weaknesses subsequent date chief executive officer chief financial officer completed evaluation item 15item 14 principal accountant fees services information relating fees paid services performed pricewaterhousecoopers llp 2003 2002 audit committees preapproval policies procedures respect nonaudit services contained proxy statement referred item 10 directors executive officers registrant information incorporated herein reference part iv item 15item 14 principal accounting fees services information relating fees paid services performed pricewaterhousecoopers llp 2004 2003 audit committees preapproval policies procedures respect nonaudit services contained proxy statement referred “item 10 directors executive officers registrant” information incorporated herein reference part iv item 15item 14 principal accounting fees services information relating fees paid services performed pricewaterhousecoopers llp 2005 2004 audit committees preapproval policies procedures respect nonaudit services contained proxy statement referred “item 10 directors executive officers registrant” information incorporated herein reference part iv item 15item 14 principal accounting fees services information relating fees paid services performed pricewaterhousecoopers llp 2006 2005 audit committees preapproval policies procedures respect nonaudit services contained proxy statement referred “item 10 directors executive officers registrant” information incorporated herein reference part iv item 15item 14 principal accounting fees services information relating fees paid services performed pricewaterhousecoopers llp 2007 2006 audit committee’s preapproval policies procedures respect non audit services contained proxy statement referred “item 10 directors executive officers registrant” information incorporated herein reference part iv item 15item 14 principal accounting fees services information relating fees paid services performed pricewaterhousecoopers llp 2008 2007 audit committee’s preapproval policies procedures respect nonaudit services contained proxy statement referred “item 10 directors executive officers registrant” information incorporated herein reference part iv item 15item 14 principal accounting fees services information relating fees paid services performed pricewaterhousecoopers llp 2009 2008 audit committee’s preapproval policies procedures respect nonaudit services contained proxy statement referred “item 10 directors executive officers registrant” information incorporated herein reference part iv item 15item 14 principal accounting fees services information relating fees paid services performed pricewaterhousecoopers llp 2010 2009 audit committee’s preapproval policies procedures respect nonaudit services contained proxy statement referred “item 10 directors executive officers registrant” information incorporated herein reference item 15item 14 principal accounting fees services information relating fees paid services performed pricewaterhousecoopers llp 2011 2010 audit committee’s preapproval policies procedures respect nonaudit services contained proxy statement referred “item 10 directors executive officers registrant” information incorporated herein reference item 15item 14 principal accounting fees services information relating fees paid services performed pricewaterhousecoopers llp 2013 2012 audit committee’s preapproval policies procedures respect nonaudit services contained proxy statement referred “item 10 directors executive officers registrant” information incorporated herein reference item 15item 14 principal accounting fees services information relating fees paid services performed deloitte touche llp audit committee’s preapproval policies procedures respect nonaudit services contained proxy statement referred item 10 directors executive officers registrant information incorporated herein reference part iv item 15item 14 principal accounting fees services information relating fees paid services performed deloitte touche llp audit committee’s preapproval policies procedures respect nonaudit services contained proxy statement referred item 10 directors executive officers registrant information incorporated herein reference part iv item 15item 14 principal accounting fees services information relating fees paid services performed deloitte touche llp audit committee’s preapproval policies procedures respect nonaudit services contained proxy statement referred item 10 directors executive officers registrant information incorporated herein reference part iv item 15item 14 principal accounting fees services information relating fees paid services performed deloitte touche llp audit committee’s preapproval policies procedures respect nonaudit services contained proxy statement referred item 10 directors executive officers registrant information incorporated herein reference part iv item 15item 14 principal accounting fees services information relating fees paid services performed pricewaterhousecoopers llp 2012 2011 audit committee’s preapproval policies procedures respect nonaudit services contained proxy statement referred “item 10 directors executive officers registrant” information incorporated herein reference item 15item 14 principal accounting fees services information relating fees paid services performed pricewaterhousecoopers llp 2014 2013 audit committee’s preapproval policies procedures respect nonaudit services contained proxy statement referred item 10 directors executive officers registrant information incorporated herein reference item 15item 14 exhibits financial statement schedules reports form 8k a2 consolidated financial statement schedules two financial statement schedules applicable company omitted absence conditions required a3 exhibits see exhibit index form 10k annual report following exhibits listed exhibit index filed form 10k annual report exhibits identified exhibit index asterisk management contracts compensatory plans arrangements b reports form 8k three months ended december 31 1996 reports form 8k filed november 26 december 16 case reporting item 9 unregistered sales companys common stock reliance regulation act signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report signed behalf undersigned thereunto duly authorized alliedsignal inc february 28 1997 nancy garvey nancy garvey vice president controller pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated name lawrence bossidy ivan g seidenberg chairman board chief executive director officer director hans w becherer andrew c sigler director ann fudge john r stafford director paul x kelley thomas p stafford director robert p luciano robert c winters director robert b palmer henry yang director russell e palmer director richard f wallman nancy garvey richard f wallman nancy garvey senior vice president vice president controller chief financial officer chief accounting officer richard f wallman richard f wallman attorneyinfact february 28 1997 exhibit index exhibits identified asterisk management contracts compensatory plans arrangements statement differences registered trademark symbol shall expressed ritem 14 exhibits financial statement schedules reports form 8k financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto a3 exhibits see exhibit index pages 70 72 form 10k annual report b reports form 8k three months ended december 31 2001 current reports form 8k filed october 10 reporting termination merger agreement general electric company october 25 reporting third quarter 2001 financial results signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report signed behalf undersigned thereunto duly authorized honeywell international inc march 19 2002 john j tus john j tus vice president controller pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated march 19 2002 exhibit index exhibits identified asterisk management contracts compensatory plans arrangements honeywell international inc schedule ii valuation qualifying accounts three years ended december 31 2001 millions 1 represents uncollectible accounts written less recoveries translation adjustments reserves acquired statement differences registered trademark symbol shall expressed r characters normally expressed subscript shall preceded uitem 14 principal accounting fees services information relating fees paid services performed deloitte touche llp 2015 pricewaterhousecoopers llp 2014 audit committee’s preapproval policies procedures respect nonaudit services contained proxy statement referred item 10 directors executive officers registrant information incorporated herein reference item 15 item 7 managements discussion analysis financial condition results operations managements discussion analysis pages 19 25 companys 1994 annual report shareowners incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations managements discussion analysis pages 19 25 companys 1995 annual report shareowners incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations managements discussion analysis pages 19 25 companys 1997 annual report shareowners incorporated herein reference report contains incorporates reference certain statements may deemed forwardlooking statements within meaning section 21e securities exchange act 1934 statements historical fact address activities events developments company management intends expects projects believes anticipates may occur future forwardlooking statements based upon certain assumptions assessments made management company light experience perception historical trends current conditions expected future developments factors believes appropriate forwardlooking statements included report also subject number material risks uncertainties including limited economic competitive governmental technological factors affecting companys operations markets products services prices forwardlooking statements guarantees future performance actual results developments business decisions may differ envisaged forwardlooking statements item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis pages 19 27 companys 1998 annual report shareowners incorporated herein reference report contains incorporates reference certain statements may deemed forwardlooking statements within meaning section 21e securities exchange act 1934 statements historical fact address activities events developments company management intends expects projects believes anticipates may occur future forwardlooking statements based upon certain assumptions assessments made management company light experience perception historical trends current conditions expected future developments factors believes appropriate forwardlooking statements included report also subject number material risks uncertainties including limited economic competitive governmental technological factors affecting companys operations markets products services prices forwardlooking statements guarantees future performance actual results developments business decisions may differ envisaged forwardlooking statements item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis pages 20 24 26 28 31 38 1999 annual report shareowners incorporated herein reference report contains incorporates reference certain statements may deemed forwardlooking statements within meaning section 21e securities exchange act 1934 statements historical fact address activities events developments management intends expects projects believes anticipates may occur future forwardlooking statements based upon certain assumptions assessments made management light experience perception historical trends current conditions expected future developments factors believe appropriate forwardlooking statements included report also subject number material risks uncertainties including limited economic competitive governmental technological factors affecting operations markets products services prices forwardlooking statements guarantees future performance actual results developments business decisions may differ envisaged forwardlooking statements item 7aitem 7 managements discussion analysis financial condition results operations results operations see item 8 financial statements supplementary data note 24 notes financial statements information reportable segments net sales 2000 25023 million increase 1288 million 5 percent compared 1999 net sales 1999 23735 million increase 180 million 1 percent compared 1998 increase sales 2000 1999 attributable following total segment profit 2000 3629 million increase 358 million 11 percent compared 1999 segment profit margin 2000 145 percent compared 138 percent 1999 increase segment profit 2000 led significant improvement aerospace solutions automation control segments lower corporate expenses increase partially offset lower segment profit performance materials power transportation products segments total segment profit 1999 3271 million increase 359 million 12 percent compared 1998 segment profit margin 1999 138 percent compared 124 percent 1998 increase segment profit 1999 led substantial improvement aerospace solutions segment power transportation products automation control segments also contributing solid gains lower corporate expenses also contributed increase partially offset substantial decrease segment profit performance materials segment postretirement benefit plans contributed cost reductions 282 61 million 2000 1999 respectively principally due workforce reductions funding status pension plans described item 8 financial statements supplementary data note 23 notes financial statements future effects operating results depend economic conditions investment performance discussion net sales segment profit reportable segment found review business segments section gain sale nonstrategic businesses 112 million 2000 represents pretax gain governmentmandated divestiture tcas product line honeywell inc former honeywell following merger alliedsignal inc honeywell inc december 1999 gain sale nonstrategic businesses 106 million 1999 represents pretax gain sale laminate systems business refer item 8 financial statements supplementary data note 6 notes financial statements information equity income loss affiliated companies loss 89 million 2000 compared income 76 million 1999 decrease 165 million equity income reflects current year includes charge 136 million costs associated closing affiliates chemical manufacturing operations equity investees customer claims prior year also included charge 40 million related writedown equity investment equity investees severance actions refer item 8 financial statements supplementary data note 5 notes financial statements discussion charges 2000 1999 excluding charges periods equity income loss affiliated companies income 47 million 2000 decrease 69 million compared 1999 decrease due mainly lower earnings uop process technology uop joint venture partially offset gain sale interest automotive aftermarket joint venture equity income loss affiliated companies income 76 million 1999 compared income 162 million 1998 decrease 86 million resulted charge 40 million relating writedown equity investment equity investees severance actions well lower earnings uop income expense 57 million income 2000 decreased 250 million compared 1999 decrease principally reflects 1999 net gain 268 million disposition investment amp incorporated amp common stock refer item 8 financial statements supplementary data note 7 notes financial statements information excluding net gain income expense 57 million income 2000 compared 39 million income 1999 increase income 18 million 2000 due principally lower minority interest expense increased benefits foreign exchange hedging income expense 307 million income 1999 increased 280 million compared 1998 increase principally reflects net gain 268 million disposition investment amp common stock interest financial charges 481 million 2000 increased 216 million 82 percent compared 1999 increase results higher average levels debt current year due principally pittway acquisition share repurchase program higher average interest rates impact tax interest expense interest financial charges 265 million 1999 decreased 10 million 4 percent compared 1998 decrease resulted lower interest rates tax interest expense somewhat offset effects higher average debt outstanding 1999 effective tax rate 308 315 313 percent 2000 1999 1998 respectively refer item 8 financial statements supplementary data note 9 notes financial statements information net income 2000 1659 million 205 per share 8 percent higher 1999 net income 1541 million 190 per share net income 2000 included gain disposition tcas product line former honeywell asset impairments repositioning environmental charges adjusted items net income 2000 634 million 078 per share higher reported net income 1999 included gains dispositions laminate systems business investment amp merger repositioning charges adjusted items net income 1999 624 million 078 per share higher reported net income 2000 increased 6 percent compared 1999 years adjusted items net income 1999 1541 million 190 per share 19 percent lower 1998 net income 1903 million 234 per share net income 1998 included repositioning charges litigation settlements tax settlement net income 1999 increased 14 percent compared 1998 years adjusted items review business segments aerospace solutions sales 2000 9988 million increase 80 million 1 percent compared 1999 higher sales aftermarket particularly repair overhaul military increased original equipment sales business regional general aviation customers partially offset lower original equipment sales air transport manufacturers decline engineering services revenues sales also decreased due effects governmentmandated divestitures connection merger alliedsignal former honeywell aerospace solutions sales 1999 9908 million basically flat compared 1998 sales avionics products higher due principally continued strong demand flight safety products sales aftermarket particularly repair overhaul military also higher acquisition 1998 controlling interest normalairgarrett ltd environmental controls joint venture also increased sales increase offset lower sales air transport military original equipment manufacturers effects divestitures restructuring government technical services contract aerospace solutions segment profit 2000 2195 million increase 277 million 14 percent compared 1999 due principally cost structure improvements primarily workforce benefit cost reductions mergerrelated savings increased sales highermargin aftermarket products services also contributed improvement segment profit aerospace solutions segment profit 1999 1918 million increase 331 million 21 percent compared 1998 due principally increased sales highermargin aftermarket avionics products cost structure improvements primarily workforce benefit cost reductions automation control sales 2000 7384 million increase 1269 million 21 percent compared 1999 sales home building control business substantially higher increased sales security products business due acquisition pittway partially offset lower sales solutions services business sales industrial control business declined moderately growth sensing control business offset lower sales industrial automation control business industrial automation control business continues adversely affected weakness hydrocarbon processing industry sales segment also adversely impacted foreign currency fluctuations due strong dollar automation control sales 1999 6115 million increase 158 million 3 percent compared 1998 sales increased home building control business driven growth control products building services security businesses acquisitions also contributed increase partially offset lower sales energy retrofit installed systems businesses sales industrial control business basically flat compared 1998 higher sales due acquisitions growth sensing control business offset effects continued weakness industrial automation control business automation control segment profit 2000 986 million increase 219 million 29 percent compared 1999 segment profit home building control industrial control businesses improved primarily result lower costs due workforce benefit cost reductions mergerrelated savings acquisition pittway portfolio changes also contributed improvement segment profit automation control segment profit 1999 767 million increase 62 million 9 percent compared 1998 segment profit home building control business increased significantly due improvement control products business contraction lowermargin energy retrofit installed systems businesses cost savings workforce reductions also contributed improvement increase offset somewhat lower segment profit industrial control business growth highermargin sensing control business cost structure improvements offset effects continued weakness certain key end markets industrial automation control business performance materials sales 2000 4055 million increase 48 million 1 percent compared 1999 higher sales advanced circuitry waferfabrication products electronic materials business largely offset effect divestitures principally laminate systems business performance materials sales 1999 4007 million decrease 162 million 4 percent compared 1998 due principally divestitures including environmental catalyst laminate systems phenol businesses lower sales carpet fibers business also contributed decrease partially offset higher sales specialty films engineering plastics waxes businesses increased sales acquisitions johnson matthey electronics pharmaceutical fine chemicals performance materials segment profit 2000 334 million decrease 105 million 24 percent compared 1999 decrease principally reflects higher raw material costs certain performance polymers chemicals businesses higher operating losses chip packaging pharmaceutical chemicals businesses decrease partially offset cost structure improvements price increases certain performance polymers chemicals businesses performance materials segment profit 1999 439 million decrease 195 million 31 percent compared 1998 decrease principally reflects effects pricing pressures performance polymers electronic materials businesses higher raw material costs certain performance polymers businesses impact 1998 divestitures also contributed decrease effect improved sales volume specialty films engineering plastics waxes businesses partial offset power transportation products sales 2000 3527 million decrease 54 million 2 percent compared 1999 due mainly lower sales commercial vehicle systems friction materials businesses sales commercial vehicles systems business negatively impacted decreased heavyduty truck builds sales friction materials business lower mainly due foreign currency fluctuations decrease partially offset higher sales turbocharging systems business continued strong worldwide demand offset adverse impact foreign currency fluctuations power transportation products sales 1999 3581 million increase 194 million 6 percent compared 1998 sales turbocharging systems business increased significantly due primarily continued strong sales europe reflecting turbodiesels increased penetration passenger car market sales commercial vehicle systems business also increased due principally increased north american truck builds sales consumer products group business also increased led higher sales prestoner products framr filters lower sales friction materials business due pricing pressures weakness european market foreign currency fluctuations partial offset power transportation products segment profit 2000 274 million decrease 48 million 15 percent compared 1999 decrease primarily reflects costs associated product recall lower sales commercial vehicle systems business costs related rampup turbogenerator product line costs associated supplier issue turbocharging systems business decrease partially offset effects cost structure improvements friction materials consumer products group businesses higher sales turbocharging systems business power transportation products segment profit 1999 322 million increase 88 million 38 percent compared 1998 increase reflects higher sales turbocharging systems commercial vehicle systems consumer products group businesses cost structure improvements businesses materials procurement savings workforce reductions also contributed increase financial condition liquidity capital resources total assets december 31 2000 25175 million increase 1648 million 7 percent december 31 1999 increase relates principally acquisition pittway total assets december 31 1999 23527 million increase 789 million 3 percent december 31 1998 cash provided operating activities 1989 million 2000 decreased 385 million compared 1999 due principally spending related merger repositioning actions decrease working capital higher noncash pension income decrease partially offset higher net income excluding onetime items previously described lower taxes paid sales businesses investments cash provided operating activities 2374 million 1999 increased 400 million compared 1998 due principally higher net income excluding onetime items previously described cash used investing activities 2714 million 2000 increased 2423 million compared 1999 acquisition pittway fact prior year included net proceeds disposition investment amp lower proceeds sales businesses principally responsible increase partially offset lower capital spending cash used investing activities 291 million 1999 decreased 1302 million compared 1998 decrease relates principally proceeds disposition investment amp increase proceeds sales businesses primarily laminate systems decrease partially offset higher spending acquisitions mainly johnson matthey electronics liquidation 1998 shortterm investments continuously assess relative strength business portfolio strategic fit market position profit contribution order upgrade combined portfolio identify operating units benefit increased investment identify acquisition candidates strategic plan strengthen existing core businesses also identify operating units fit longterm strategic plan based market position relative profitability growth potential operating units considered potential divestiture restructuring repositioning action subject regulatory constraints capital expenditures 853 986 1037 million 2000 1999 1998 respectively spending reportable segments corporate since 1998 shown item 8 financial statements supplementary data note 24 notes financial statements total capital expenditures 2001 currently projected approximately 1 billion expenditures expected financed principally internally generated funds primarily planned expansion cost reduction cash used financing activities 70 million 2000 decreased 1040 million compared 1999 led principally decrease stock repurchases higher net issuances debt 2000 repurchased 43 million shares common stock 166 million connection share repurchase program result pending merger general electric see item 8 financial statements supplementary data note 4 notes financial statements honeywell rescinded share repurchase program effective october 21 2000 total debt 5623 million december 31 2000 557 million 11 percent higher december 31 1999 due acquisition pittway cash used financing activities 1110 million 1999 increased 1002 million compared 1998 increase relates principally lower net issuances debt partially offset lower net stock repurchases total debt 5066 million yearend 1999 100 million 2 percent higher december 31 1998 maintain 2 billion bank revolving credit facility comprised 1 billion fiveyear credit agreement b 1 billion 364day credit agreement credit agreements established general corporate purposes including support issuance commercial paper 1192 2023 million commercial paper outstanding yearend 2000 1999 respectively see item 8 financial statements supplementary data note 16 notes financial statements details longterm debt discussion credit agreements believe available cash committed credit lines access public debt markets using debt securities commercial paper provide adequate shortterm longterm liquidity merger repositioning charges 2000 recognized charge 239 million related announced global workforce reductions reportable segments costs close chip package manufacturing plant related workforce reductions electronic materials business asset impairments principally associated completion previously announced plant shutdowns performance polymers chemicals business components charge included severance costs 151 million asset impairments 88 million workforce reductions consisted approximately 2800 manufacturing administrative positions expected substantially completed end second quarter 2001 asset impairments principally related manufacturing plant equipment held sale capable taken service actively marketed period impairment also 46 million accruals established 1999 principally severance returned income 2000 due higher expected voluntary employee attrition approximately 650 positions resulting reduced severance liabilities principally automation control aerospace solutions reportable segments also recognized charge 99 million equity income loss affiliated companies costs close affiliates chemical manufacturing operations components charge included severance costs 6 million asset impairments 53 million environmental exit costs period expenses 40 million 1999 upon completion merger alliedsignal former honeywell recognized charge 642 million cost actions designed improve combined competitiveness productivity future profitability mergerrelated actions included elimination redundant corporate offices functional administrative overhead elimination redundant excess facilities workforce combined aerospace businesses adoption six sigma productivity initiatives former honeywell businesses transition global shared services model components charge included severance costs 342 million asset impairments 108 million exit costs 57 million mergerrelated transaction period expenses 135 million planned global workforce reductions consisted approximately 6500 administrative manufacturing positions substantially complete asset impairments principally related elimination redundant excess corporate aerospace facilities equipment exit costs related lease terminations contract cancellation losses negotiated subject reasonable estimation yearend mergerrelated transaction period expenses consisted investment banking legal fees former honeywell deferred compensation vested upon change control direct mergerrelated expenses incurred period merger completed mergerrelated actions substantially complete 1999 also recognized pretax charge 321 million costs actions designed reposition principally alliedsignal businesses improved productivity future profitability repositioning actions included organizational realignment aerospace businesses strengthen market focus simplify business structure elimination unprofitable product line closing wax refinery carbon materials plant rationalization manufacturing capacity infrastructure performance polymers chemicals business reduction infrastructure turbocharging systems business elimination two manufacturing facilities electronic materials business plant closure outsourcing activity automotive consumer products group business related general workforce reductions alliedsignal businesses industrial control business components charge included severance costs 140 million asset impairments 149 million exit costs 32 million global workforce reductions consisted approximately 5100 manufacturing administrative sales positions substantially complete asset impairments principally related manufacturing plant equipment held sale capable taken service actively marketed period impairment exit costs principally consisted environmental exit costs associated chemical plant shutdowns repositioning actions excluding environmental remediation substantially complete merger repositioning actions committed 2000 1999 generated pretax savings 270 million 2000 principally planned workforce reductions facility consolidations expect actions generate pretax savings 600 million 2001 780 million 2002 cash expenditures severance exit costs future period expenses necessary execute actions exceed 500 million principally incurred 2000 expenditures funded operating cash flows proceeds government required divestitures resulting merger alliedsignal former honeywell sale merger related excess duplicate facilities equipment currently formulating detailed plan effect actions designed improve competitiveness productivity future profitability cost actions result charge earnings first quarter 2001 1998 recognized charge 54 million related productivity initiatives included workforce reductions 1200 employees facility consolidations principally home building control industrial control businesses actions completed december 31 1999 substantially reserve spending occurring 1999 environmental matters subject various federal state local government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage handling manufacture use disposal hazardous toxic substances accord environmental laws regulations however mainly past operations predecessor companies like companies engaged similar businesses party lawsuits claims incurred remedial response voluntary cleanup costs associated environmental matters additional lawsuits claims costs involving environmental matters likely continue arise future continually conduct studies individually owned sites jointly member industry groups nonowned sites determine feasibility various remedial techniques address environmental matters policy record appropriate liabilities matters environmental assessments made remedial efforts probable costs reasonably estimated timing accruals generally later completion feasibility studies remedial response voluntary cleanup expenditures 75 78 77 million 2000 1999 1998 respectively currently estimated approximately 69 million 2001 expect able fund expenditures operating cash flow timing expenditures depends number factors including regulatory approval cleanup projects remedial techniques utilized agreements parties 2000 charged 110 million pretax income remedial response voluntary cleanup costs december 31 2000 1999 recorded liability environmental matters 386 349 million respectively addition 2000 1999 incurred operating costs ongoing businesses approximately 80 89 million respectively relating compliance environmental regulations although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies settlements neither timing amount ultimate costs associated environmental matters determined may significant consolidated results operations expect environmental matters material adverse effect consolidated financial position see item 8 financial statements supplementary data note 22 notes financial statements discussion commitments contingencies including related environmental matters financial instruments result global operating financing activities exposed market risks changes interest foreign currency exchange rates may adversely affect operating results financial position minimize risks interest foreign currency exchange rate fluctuations normal operating financing activities deemed appropriate use derivative financial instruments use derivative financial instruments trading speculative purposes use leveraged derivative financial instruments summary accounting policies derivative financial instruments included item 8 financial statements supplementary data note 1 notes financial statements exposure market risk changes interest rates relates primarily debt obligations described item 8 financial statements supplementary data notes 16 18 notes financial statements issue fixed variable rate debt use interest rate swaps manage exposure interest rate movements reduce borrowing costs exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated receivables payables firm commitments arising international transactions attempt transaction exposures hedged internal natural offsets fullest extent possible opportunities exhausted foreign currency forward option agreements third parties also use derivative financial instruments hedge impact exchange rate movements translated us dollar value net income number foreign subsidiaries foreign currency forward option agreements used hedge net income markedtomarket gains losses recognized immediately income principal foreign currency exposures relate belgian franc french franc german mark collectively euro countries british pound canadian dollar us dollar december 31 2000 held written foreign currency forward option agreements maturing 2001 derivative financial instruments expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value cash flows derivative financial instruments considering reasonably possible changes interest currency exchange rates restrict use derivative financial instruments hedging activities following table illustrates potential change fair value interest rate sensitive instruments based hypothetical immediate onepercentagepoint increase interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 percent increase us dollar per local currency exchange rates across maturities december 31 2000 1999 1 asset liability 2 excludes capitalized leases 3 increases fair value foreign currency exchange contracts substantially offset changes fair value net underlying hedged foreign currency transactions discussion procedures monitor market risk estimated changes fair value resulting sensitivity analyses forwardlooking statements market risk assuming certain adverse market conditions occur actual results future may differ materially estimated results due actual developments global financial markets methods used us assess mitigate risk discussed considered projections future events matters litigation litton litigation march 13 1990 litton systems inc filed legal action former honeywell us district court central district california los angeles claims subsequently split two separate cases one alleges patent infringement federal law using ionbeam process coat mirrors incorporated former honeywells ring laser gyroscopes tortious interference state law interfering littons prospective advantage customers contractual relationships inventor company ojai research inc case alleges monopolization attempted monopolization federal antitrust laws former honeywell sale inertial reference systems containing ring laser gyroscopes commercial aircraft market former honeywell generally denied littons allegations cases patenttort case former honeywell also contested validity well infringement patent alleging among things patent obtained littons inequitable conduct united states patent trademark office 1993 1995 trials held case juries initially awarded litton significant monetary damages however verdicts set aside trial court judge ordered minimum new trials issue damages case following crossappeals parties various issues federal circuit us supreme court patenttort case remanded trial court legal perhaps factual review respect liability damages september 23 1999 trial court issued dispositive rulings case granting former honeywells motion judgment matter law summary judgment patent claims various grounds granting former honeywells motion judgment matter law state law claims grounds insufficient evidence denying littons motion partial summary judgment trial court entered final judgment honeywells favor january 31 2000 litton appealed judgment us court appeals federal circuit february 5 2001 three judge panel federal circuit court affirmed trial courts rulings granting former honeywells motion judgment matter law summary judgment patent claims agreeing former honeywell infringe state law claims panel vacated jurys verdict favor litton reversed trial courts grant judgment matter law former honeywell remanded case trial court proceedings state law resolve certain factual issues held submitted jury litton may seek review decision us supreme court retrial damages antitrust case commenced october 29 1998 december 9 1998 jury returned verdict honeywell actual damages amount 250 million following post trial motions september 24 1999 trial court issued rulings denying former honeywells motion judgment matter law motion new trial remittitur related litton systems inc granting former honeywells motion judgment matter law relates litton systems canada limited net effect rulings reduce existing judgment former honeywell 750 million 660 million plus attorney fees costs approximately 35 million believe factual legal basis magnitude jurys award believe overturned also believe strong arguments liability portion jury verdict first antitrust trial erroneous parties appealed judgment liability damages us court appeals ninth circuit execution trial courts judgment stayed pending resolution former honeywells postjudgment motions disposition appeals filed parties although possible time predict result appeals case potential remain adverse outcome could material financial position results operations result uncertainty regarding outcome matter provision made financial statements respect contingent liability detailed discussion litigation see item 8 financial statements supplementary data note 22 notes financial statements shareowner litigation honeywell seven officers named defendants several purported class action lawsuits filed united states district court district new jersey securities law complaints securities law complaints principally allege defendants violated federal securities laws purportedly making false misleading statements failing disclose material information concerning honeywells financial performance thereby allegedly causing value honeywells stock artificially inflated purported class period damages sought december 20 1999 june 19 2000 addition honeywell seven officers board directors named defendants purported shareowner derivative action filed november 27 2000 united states district court district new jersey derivative complaint derivative compliant alleges single claim breach fiduciary duty based nearly identical allegations set forth securities law complaints believe factual legal basis allegations securities law complaints derivative complaint although possible time predict result cases expect prevail however adverse outcome could material financial position results operations provision made financial statements respect contingent liability euro conversion january 1 1999 certain member countries european union established fixed conversion rates existing currencies european unions common currency euro transition period introduction euro january 1 1999 january 1 2002 identified ensuring euro conversion compliance issues addressed expect adverse consequences sales us government sales us government acting various departments agencies prime contractors amounted 2219 2383 2693 million 2000 1999 1998 respectively included sales department defense dod prime contractor subcontractor 1548 1415 1658 million 2000 1999 1998 respectively sales dod accounted 62 60 70 percent total sales 2000 1999 1998 respectively affected us government budget constraints defense space programs us defense spending increased slightly 2000 also expected increase slightly 2001 backlog total backlog yearend 2000 1999 8094 8736 million respectively anticipate approximately 5090 million 2000 backlog filled 2001 believe backlog necessarily reliable indicator future sales substantial portion orders constituting backlog may canceled customers option inflation highly competitive market conditions minimized inflations impact selling prices products cost purchased materials cost increases materials labor generally low productivity enhancement programs including six sigma initiatives largely offset impact new accounting pronouncement statement financial accounting standards 133 accounting derivative instruments hedging activities amended sfas 133 effective honeywell january 1 2001 sfas 133 requires derivatives recorded balance sheet assets liabilities measured fair value accounting gains losses resulting changes values derivatives depends use derivative whether qualifies hedge accounting estimate january 1 2001 effect consolidated financial statements adopting sfas 133 material item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis pages 26 39 2002 annual report shareowners incorporated herein reference item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis pages 27 44 2003 annual report shareowners incorporated herein reference item 7aitem 7 managements discussion analysis financial condition results operations business overview business overview provides summary honeywells four reportable operating segments aerospace automation control solutions specialty materials transportation systems including generate income relevant economic factors impacting results business challenges areas focus short longterm segments comprised various business units product classes serve multiple end markets see note 23 notes financial statements “item 8 financial statements supplementary data” information reportable segments definition segment profit aerospace leading global supplier aircraft engines avionics related products services commercial airlines business regional aircraft manned unmanned military aircraft spacecraft aerospace portfolio includes engines systems services auxiliary power units propulsion engines environmental control systems engine controls repair overhaul services hardware logistics electric power systems aerospace electronic systems flight safety communications navigation radar surveillance systems aircraft airport lighting management technical services advanced systems instruments aircraft landing systems aircraft wheels brakes aerospace sells products original equipment oe manufacturers commercial air transport business regional aircraft segments well spare parts aftermarket principally aircraft operators united states government also major customer defense space products economic factorsaerospaces operating results principally driven global demand air travel reflected new aircraft production well spare parts maintenance repair services aircraft currently use aircraft production commercial air transport oe manufacturers business regional jet deliveries well global flying hours airline profitability principal factors drive commercial aerospace operating results us government appropriations defense space programs military activity critical factors impacting defense space operating results business challengesareas focusaerospaces primary business challenges areas focus include • continuing grow sales profitability commercial aerospace aftermarket worldwide airline industry struggles regain maintain profitable operations • securing honeywell product content new aircraft platforms • making product development process faster less costly meet increasing customer requirements continuing reduce recurring manufacturing costs • continuing design equipment enhances safety performance durability aircraft reducing weight operating costs • utilizing systems engineering expertise continued growth network centric warfare initiatives us government automation control solutions acs provides innovative solutions make homes buildings industrial sites airport facilities efficient safe comfortable acs portfolio includes automation control products controls heating cooling indoor air quality ventilation humidification home automation advanced software applications homebuilding control optimization sensors switches control systems instruments measuring pressure air flow temperature electrical current security fire detection access control video surveillance remote patient monitoring systems building solutions installs maintains upgrades systems keep buildings safe comfortable productive process solutions provides full range automation control solutions industrial plants offering advanced software automation systems integrate control monitor complex processes many types industrial settings economic factorsacs operating results principally driven global residential nonresidential construction industrial production capital spending process building automation fire security concerns regulations business challengesareas focusacs primary business challenges areas focus include • extending technology leadership lowest total installed cost integrated solutions within security fire sensors product portfolios • defending extending installed base customer productivity globalization • sustaining strong brand recognition • continuing invest sales marketing resources new product development capabilities drive profitable growth • integrating novar plcs intelligent building systems division life safety building controls security related service businesses acquisition novar plc expected completed first quarter 2005 specialty materials specialty materials develops manufactures highpurity highquality highperformance chemicals materials applications automotive healthcare agricultural packaging fibers refrigeration semiconductor wax adhesives markets specialty materials product portfolio includes fluorocarbons specialty films advanced fibers customized research chemicals intermediates electronic materials chemicals specialty materials core growth businesses chemicals electronic materials performance products economic factorsspecialty materials operating results principally driven global gross domestic product plant capacity utilization costs raw materials including natural gas benzene expect raw material costs remain historically high levels 2005 continue attempt offset raw material cost increases price increases feasible business challengesareas focusspecialty materials primary business challenges areas focus include • sharpening focus core growth platforms drive improved profitability new product applications introductions • continuing restructure exit noncore commodity lines business minimal differentiating technology andor exposure raw material cost volatility • continuing improve manufacturing productivity transportation systems transportation systems provides automotive products improve performance efficiency appearance cars trucks vehicles stateoftheart technologies world class brands global solutions customers needs transportation systems portfolio includes honeywell turbo technologies garrett® turbochargers chargeair thermal systems consumer products group car care products including antifreeze prestone® filters fram® spark plugs autolite® cleaners waxes additives holts® friction materials friction materials related brake system components bendix® jurid® transportation systems sells products oe automotive truck manufacturers eg bmw caterpillar daimlerchrysler ford volkswagen wholesalers distributors retail aftermarket economic factorstransportation systems operating results principally driven worldwide automobile truck production global demand automobiles trucks equipped turbochargers enhance power increase engine efficiency lower emissions business challengesareas focustransportation systems primary business challenges areas focus include • sustaining superior turbocharger technology • increasing market penetration share diesel gasoline turbocharger oem demand • expanding strengthening established strong product brands consumer products group business • revitalizing friction materials business critical accounting policies preparation consolidated financial statements accordance generally accepted accounting principles based selection application accounting policies require us make significant estimates assumptions effects matters inherently uncertain consider accounting policies discussed critical understanding financial statements actual results could differ estimates assumptions differences could material consolidated financial statements discussed selection application disclosure critical accounting policies audit committee board directors independent registered public accountants new accounting standards effective 2004 material impact consolidated financial statements contingent liabilitieswe subject number lawsuits investigations claims involve substantial dollar amounts arise conduct global business operations previously owned entities contingencies relate product liabilities including asbestos commercial transactions government contracts environmental health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes contingencies well potential amounts ranges probable losses recognize liability contingencies based careful analysis matter assistance outside legal counsel applicable experts analysis includes making judgments concerning matters costs associated environmental matters outcome negotiations number cost pending future estimable asbestos claims impact evidentiary requirements contingencies resolved long periods time liabilities may change future due new developments changes settlement strategy discussion contingencies related shareowners litigation environmental asbestos matters including managements judgment applied recognition measurement specific liabilities see notes 1 21 notes financial statements “item 8 financial statements supplementary data” insurance asbestos related liabilitiesin connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical dealings insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs approximately 13 billion insurance coverage remaining specifically allocated north american refractories company narco related asbestos liabilities also 19 billion coverage remaining bendix related asbestos liabilities although gaps coverage due insurance company insolvencies comprehensive policy buyback settlement equitas certain uninsured periods resulting approximately 50 percent claims reimbursable insurance domestic insurance market london excess market substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries projecting future events subject various uncertainties could cause insurance recovery asbestos related liabilities higher lower projected recorded given inherent uncertainty making future projections reevaluate projections concerning probable insurance recoveries light changes projected liability recovery experience relevant factors may impact future insurance recoveries see note 21 notes financial statements “item 8 financial statements supplementary data” discussion managements judgments applied recognition measurement insurance recoveries asbestos related liabilities defined benefit pension planswe maintain defined benefit pension plans covering majority employees retirees financial reporting purposes net periodic pension expense income calculated based upon number actuarial assumptions including discount rate plan obligations expected rate return plan assets consider current market conditions including changes investment returns interest rates making assumptions determine expected longterm rate return plan assets utilizing historic plan asset returns varying longterm periods combined current market conditions broad asset mix considerations see note 22 notes financial statements “item 8 financial statements supplementary data” actual targeted asset allocation percentages pension plans expected rate return plan assets longterm assumption generally change annually discount rate reflects market rate highquality fixedincome investments annual measurement date december 31 subject change year expected rate return pension assets discount rate determined accordance consistent methodologies described note 22 notes financial statements “item 8 financial statements supplementary data” key assumptions used developing 2004 2003 2002 net periodic pension expense income us plans included following reduction discount rate 2004 2003 reflects lower market interest rate environment highquality fixed income debt instruments discount rate also volatile determined based upon prevailing rate measurement date due continuing declines interest rates use 5875 percent discount rate 2005 expected rate return plan assets reduced 10 9 percent 2003 reflect impact poor performance equity markets three year period ended december 31 2002 equity markets stabilized 2003 2004 plan continue use expected rate return 9 percent 2005 unrecognized net losses us pension plans 26 billion december 31 2004 32 billion december 31 2003 unrecognized losses mainly result actual plan asset returns expected rates return 2002 2001 2000 lower discount rates systematically recognized future net periodic pension expense accordance statement financial accounting standards 87 “employers accounting pensions” sfas 87 sfas 87 use marketrelated value plan assets reflecting changes fair value plan assets threeyear period unrecognized losses excess 10 percent greater marketrelated value plan assets plans projected benefit obligation recognized sixyear period net periodic pension expense us pension plans expected 320 million 2005 56 million decrease 2004 due principally decrease amortization unrecognized losses decline amortization unrecognized losses results principally actual plan asset returns higher expected rate return 2003 2004 made voluntary contributions 40 670 830 million us pension plans 2004 2003 2002 respectively 2003 2002 voluntary contributions made improve funded status plans impacted poor performance equity markets threeyear period ended december 31 2002 well declining interest rate environment future plan contributions dependent upon actual plan asset returns interest rates assuming actual plan returns consistent expected plan return 9 percent 2005 beyond interest rates remain constant would required make contributions us pension plans foreseeable future changes net periodic pension expense may occur future due changes expected rate return plan assets discount rate resulting economic events following table highlights sensitivity us pension obligations expense changes assumptions assuming assumptions remain constant sfas 87 requires recognition additional minimum pension liability fair value plan assets less accumulated benefit obligation end plan year 2004 recorded noncash adjustment equity accumulated nonowner changes 15 million 19 million pretax basis increased additional minimum pension liability 2003 recorded noncash adjustment equity accumulated nonowner changes 369 million 604 million pretax basis reduce additional minimum pension liability 304 million reinstate portion pension assets 300 million written result prior years minimum pension liability adjustment 2003 adjustment resulted increase pension assets 2003 due improvement equity markets contribution 670 million us plans 2002 due poor performance equity markets adversely affected pension assets decline discount rate recorded noncash adjustment equity accumulated nonowner changes 606 million 956 million pretax basis increased additional minimum pension liability equity market returns interest rates significantly impact funded status pension plans based future plan asset performance interest rates additional adjustments equity may required longlived assets including tangible definitelived intangible assetsto conduct global business operations execute business strategy acquire tangible intangible assets periodically evaluate recoverability carrying amount longlived assets including property plant equipment definitelived intangible assets whenever events changes circumstances indicate carrying amount longlived asset group may fully recoverable events changes circumstances include business plans forecasts economic competitive positions within industry well current operating performance anticipated future performance based business competitive position impairment assessed undiscounted expected future cash flows derived asset less carrying amount impairment losses measured amount carrying value longlived asset exceeds fair value recognized earnings continually apply best judgment applying impairment rules determine timing impairment test undiscounted cash flows used assess impairment fair value impaired longlived asset group dynamic economic environment businesses operate resulting assumptions used estimate future cash flows economic growth rates industry growth rates product life cycles selling price changes cost inflation significantly influence impact outcome impairment tests discussion result managements judgment applied recognition measurement impairment charges see repositioning charges section mda income taxesthe future tax benefit arising net deductible temporary differences tax carryforwards 17 18 billion december 31 2004 2003 respectively believe earnings periods temporary differences become deductible sufficient realize related future income tax benefits jurisdictions expiration date tax carryforwards projected operating results indicate realization likely valuation allowance provided assessing need valuation allowance consider available positive negative evidence including past operating results estimates future taxable income feasibility ongoing tax planning strategies significant management judgment required determining provision income taxes particular valuation allowance recorded deferred tax assets additionally valuation allowances related deferred tax assets impacted changes tax laws future taxable income levels event determine able realize deferred tax assets future reduce amounts charge income period determination made conversely determine able realize deferred tax assets excess carrying amounts decrease recorded valuation allowance credit income period determination made sales recognition longterm contractsin 2004 recognized approximately 8 percent total net sales using percentageofcompletion method longterm contracts automation control solutions aerospace reportable segments percentageofcompletion method requires us make judgments estimating contract revenues contract costs progress toward completion judgments form basis determinations regarding overall contract value contract profitability timing revenue recognition based measured progress toward contract completion revenue cost estimates monitored ongoing basis revised based changes circumstances anticipated losses longterm contracts recognized losses become evident maintain financial controls customer qualification contract pricing cost estimation processes reduce risk contract losses aerospace customer incentivesconsistent suppliers commercial aircraft manufacturers airlines provide sales incentives commercial aircraft manufacturers airlines connection selection aircraft wheel braking system hardware auxiliary power units installation commercial aircraft incentives consist free deeply discounted products product credits upfront cash payments cost incentives capitalized time deliver products customers case product credits time credit issued case upfront cash payments time payment made case free deeply discounted product cost manufacture less amount recovered airframe manufacturer airline capitalized product credits upfront cash payments capitalized exchanged value research design development qualification costs related products expensed incurred unless contractually guaranteed reimbursement cost sales incentives described capitalized selection aircraft wheel braking system hardware auxiliary power units installation commercial aircraft results creation future revenues cash flows aftermarket sales fulfill longterm product maintenance requirements mandated federal aviation administration faa similar international organizations useful life aircraft products certified selected aircraft recovery investment virtually guaranteed useful life aircraft likelihood displacement alternative supplier remote due contractual solesourcing high cost alternative suppliers aircraft operators product retrofits andor rigorous regulatory specifications qualification testing requirements amounts capitalized december 31 2004 2003 2002 776 719 662 million respectively amortized useful lives straightline basis 25 years representing estimated minimum service life aircraft useful life period virtually assured earn revenues aftermarket sales certified products necessary fulfill maintenance required faa similar international organizations classify amortization expense associated free discounted products cost goods sold amortization expense associated product credits upfront cash payments reduction sales regularly evaluate recoverablitity capitalized amounts whenever events changes circumstances indicate carrying amount incentives may fully recoverable impairment charges related capitalized incentives recognized 2004 2003 2002 additional information see note 13 notes financial statements “item 8 financial statements supplementary data” results operations net sales change net sales 2004 2003 attributable following discussion net sales reportable segment found review business segments section mda cost products services sold gross margin decreased 2004 15 percentage points compared 2003 decrease resulted primarily increase net repositioning charges 349 million higher pension postretirement benefits expense 249 million increase research development expense 166 million partially offset increase sales highermargin products services mainly aerospace reportable segment gross margin increased 2003 02 percentage points compared 2002 increase resulted primarily decrease net repositioning charges 289 million partially offset higher pension expense decrease sales highermargin products services mainly aerospace automation control solutions reportable segments selling general administrative expenses selling general administrative expenses increased 366 million 12 percent 2004 compared 2003 due increase general administrative expenses 155 million due part higher spending information technology systems increase selling expenses 136 million higher sales increase pension postretirement benefits expense 54 million selling general administrative expenses increased 193 million 7 percent 2003 compared 2002 due primarily increase general administrative expenses 120 million due part increase employee benefit expenses higher pension postretirement benefits expense 56 million pension expense increased 276 290 million 2004 2003 respectively mainly due following using expected longterm rate return 9 percent discount rate 5875 percent pension expense us plans expected 320 million 2005 decrease 56 million compared 2004 gain loss sale nonstrategic businesses gain sale nonstrategic businesses 255 million 2004 represents pretax gains sales security monitoring vcsel optical products businesses automation control solutions reportable segment 215 36 million respectively gain also includes adjustments 19 million related businesses sold prior periods pretax loss 15 million sale performance fibers business specialty materials reportable segment dispositions businesses materially impact net sales segment profit 2004 compared 2003 gain sale nonstrategic businesses 38 million 2003 represents net pretax gain dispositions certain specialty materials engineering plastics rudolstadt metglas aerospace honeywell aerospace defense services businesses dispositions businesses materially impact net sales segment profit 2003 compared 2002 asbestos related litigation charges net insurance 2004 recognized charges totaling 76 million primarily bendix related asbestos claims filed defense costs incurred 2004 net insurance recoveries charges include update expected resolution values pending bendix claims net additional 47 million narco insurance deemed probable recovery 2002 asbestos related litigation charges net insurance related costs associated asbestos claims related narco see asbestos matters note 21 notes financial statements “item 8 financial statements supplementary data” discussion business impairment charges business impairment charges 2004 relates principally writedown property plant equipment performance fibers business specialty materials reportable segment performance fibers business sold fourth quarter 2004 business impairment charges 2002 related writedown property plant equipment businesses specialty materials automation control solutions reportable segments friction materials business see repositioning charges section mda details equity income loss affiliated companies equity income increased 44 million 2004 compared 2003 due primarily improvement earnings uop process technology joint venture uop equity income decreased 4 million 2003 compared 2002 due charge 2 million 2003 related sale specialty materials equity investees investment also 2002 included income 15 million resulting exiting joint ventures aerospace transportation systems reportable segments partially offset charge 13 million severance actions uop income expense income increased 111 million 2004 compared 2003 due principally decrease foreign exchange losses 93 million current year due reduction foreign exchange exposures resulting losses 2003 due weak us dollar gain 27 million related settlement patent infringement lawsuit increase interest income 13 million higher cash balances partially offset inclusion gain 20 million prior year related settlement patent infringement lawsuit expense increased 23 million 2003 compared 2002 due principally increase 65 million foreign exchange losses resulting weakness us dollar mainly euro partially offset gain 20 million related settlement patent infringement lawsuit increase 19 million interest income higher cash balances interest financial charges interest financial charges decreased 1 percent 2004 compared 2003 due principally lower average shortterm debt outstanding current year interest financial charges decreased 3 percent 2003 compared 2002 due principally lower average interest rates tax expense benefit effective tax benefit rate 2004 2003 2002 different statutory rate 35 percent due part tax benefits export sales favorable tax audit settlements foreign tax planning strategies effective tax rate 2003 also includes tax benefits expected realized result redesignation friction materials business held sale held used resulting termination discussions federalmogul corp effective benefit rate 2002 included tax benefit resulting higher deductible tax basis book basis related sales advanced circuits pfc consumer products businesses impact tax benefits export sales us tax credits favorable audit settlements favorable impact effective benefit rate 2002 principally due relative amount benefits comparison amount pretax loss 2002 see note 7 notes financial statements “item 8 financial statements supplementary data” information taxes including detailed effective tax rate reconciliation american jobs creation act 2004 signed law october 2004 provides variety changes tax law including incentives repatriate undistributed earnings foreign subsidiaries phased elimination extraterritorial income exclusion domestic manufacturing benefit specifically act creates temporary incentive us corporations repatriate accumulated income earned outside us providing 85 percent dividends received deduction certain dividends controlled foreign corporations deduction subject number limitations currently uncertainty remains interpret numerous provisions act position determine whether extent might repatriate foreign earnings based analysis date however reasonably possible may repatriate amount approximately 26 billion estimate income tax effects repatriating 26 billion approximately 150 350 million honeywell provided us federal income foreign withholding taxes 39 billion undistributed earnings nonus operations december 31 2004 analysis act completed continue permanently reinvest earnings expect finalize assessment later 2005 extraterritorial income exclusion eti foreign sales phasedout two years beginning 2005 deduction income qualified domestic production activities phasedin 2005 2010 similar eti benefit domestic manufacturing benefit effect deferred tax assets liabilities existing enactment date rather impact deduction reported period deduction claimed federal income tax return currently assessing details act net effect phaseout eti phasein new deduction expect complete analysis later 2005 time possible determine impact legislation consolidated tax accruals effective tax rate net income loss decrease 005 per share 2004 compared 2003 relates primarily increased charges environmental matters primarily attributable denial appeal matter entitled interfaith community organization et al v honeywell international inc et al see note 21 notes financial statements “item 8 financial statements supplementary data” higher pension postretirement benefits expense partially offset increase segment profit across reportable segments increase 181 per share 2003 compared 2002 mainly relates decrease repositioning charges partially offset impact higher pension expense lower sales highermargin products services principally aerospace automation control solutions reportable segments review business segments reconciliation segment profit income loss taxes cumulative effect accounting change follows 1 amounts included cost products services sold selling general administrative expenses aerospace sales major customer endmarkets follows details changes sales 2004 2003 customer endmarkets follows • despite continuing financial problems experienced many commercial airlines air transport aftermarket sales improved substantially 2004 primarily related 10 percent increase global flying hours reintroduction aircraft service previously parked desert replenishment spare parts inventories airlines growth low cost carriers additionally global flying hours 2003 adversely impacted result sars epidemic sales also improved due increase upgrades retrofits avionics equipment ground proximity warning systems meet new regulatory standards air transport aftermarket sales adversely impacted 2003 decrease global flying hours 1 percent financial problems experienced many commercial airlines global flying hours sales decline trends began 2001 exacerbated abrupt downturn aviation industry following terrorists attacks september 11 2001 sars epidemic 2003 sales repair overhaul services started improve 2003 signaling increased maintenance outsourcing activity major airlines discretionary spending airlines purchases spare parts replacements upgrades continued weak • air transport original equipment oe sales increased 2004 primarily reflecting higher aircraft deliveries oe customers primarily airbus boeing aircraft orders commercial airlines began improve air transport oe sales decreased significantly 2003 reflecting dramatically lower deliveries oe customers due reduced aircraft orders commercial airlines • regional transport aftermarket sales increased 2004 due primarily increase fleet sizes routes regional carriers introduction primus epic integrated avionics system regional aftermarket sales decreased 2003 due mainly lower sales spare parts regional airline operators • business general aviation aftermarket sales higher 2004 improving economy drove increased utilization corporate aircraft also increase upgrade activity avionics equipment rvsm meet new regulatory standards business general aviation aftermarket sales also increased 2003 largely due higher repair overhaul activity fractional jet market • business general aviation oe sales improved 2004 due primarily deliveries primus epic integrated avionics system htf7000 engine business jet oe manufacturers business general aviation oe sales lower 2003 reflecting decline projected deliveries business jet airplanes due weakness demand fractional interests aircraft corporate profitability • defense space oe sales increased 2004 2003 due principally warrelated activities continued growth precision munitions increases restricted space programs • defense space aftermarket sales strong 2004 2003 driven warrelated activities resulting increases repairs platform upgrades modifications fixed rotary wing ground vehicles aerospace segment profit 2004 increased 21 percent compared 2003 due primarily increase sales higher margin commercial aftermarket products services volume growth increase partially offset higher development expense associated new programs increase spending information technology systems aerospace segment profit 2003 decreased 7 percent compared 2002 due mainly lower sales commercial original equipment highermargin commercial aftermarket spare parts trends may impact aerospace operating results 2005 include • global flying hours improved 10 percent 2004 expected increase 2005 5 6 percent • financial condition major commercial airlines continues concern due mainly high fuel costs intense fare competition • extent increased military activity offset lower oe sales due program completions reductions • magnitude expected increase aircraft orders deliveries air transport business general aviation segments automation control solutions automation control solutions sales 2004 increased 8 percent compared 2003 due higher volumes 5 percent favorable effect foreign exchange 4 percent partially offset impact lower prices 1 percent sales increased 9 percent automation control products businesses due principally strong sales fire solutions environmental controls sensor products favorable effects foreign exchange acquisitions sales process solutions business increased 8 percent due primarily favorable effect foreign exchange improvement industrial production capital spending sales building solutions business increased 5 percent due primarily favorable effect foreign exchange impact investments sales marketing initiatives partially offset divestiture security monitoring business automation control solutions sales 2003 increased 7 percent compared 2002 due favorable effects foreign exchange 5 percent acquisitions net disposition consumer products business 4 percent partially offset impact lower prices volumes 1 percent sales increased 11 percent automation control products businesses favorable effects foreign exchange acquisitions mainly invensys sensor systems invensys offset impact disposition consumer products business lower volumes sales process solutions business increased 4 percent due favorable effect foreign exchange partially offset lower unit volumes sales building solutions business increased 2 percent favorable effect foreign exchange offset lower volumes due continued softness nonresidential construction market automation control solutions segment profit 2004 increased 6 percent compared 2003 due favorable effect higher sales volumes partially offset increased investments sales marketing initiatives higher research development costs support new product introductions automation control solutions segment profit 2003 decreased 2 percent compared 2002 due mainly decline highermargin energyretrofit discretionary spot sales building solutions business increased research development expense investments sales marketing initiatives mainly automation control products building solutions businesses respectively segment profit also adversely impacted 2003 pricing pressures mainly automation control products process solutions businesses trends may impact automation control solutions operating results 2005 include • extent recovery nonresidential construction spending capital spending building process automation • consolidation fire security industry may result increased competition specialty materials specialty materials sales 2004 increased 10 percent compared 2003 due impact higher prices 6 percent mainly nylon system business higher volumes 5 percent favorable effect foreign exchange 1 percent partially offset prior year divestitures net acquisitions 2 percent sales chemicals business improved 19 percent driven principally continuing strong demand nonozone depleting hfc products refrigeration air conditioning applications well blowing agents insulation applications sales electronic materials business increased 13 percent driven improvement semiconductor industry sales performance products business also higher 13 percent due strong demand spectra fiber principally us military specialty materials sales 2003 decreased 1 percent compared 2002 due impact divestitures advanced circuits pfc engineering plastics businesses net acquisition basfs nylon fiber business 6 percent partially offset favorable effects foreign exchange 3 percent higher volumes 2 percent higher volumes principally driven strong demand spectra fiber us military increasing demand hfcs key component many nonozone depleting refrigerants foam blowing agents increased demand electronic materials semiconductor industry volumes adversely affected 2003 temporary plant shutdowns fluorocarbons nylon system businesses specialty materials segment profit 2004 increased 35 percent compared 2003 due principally higher sales volumes price increases partially offset higher raw material costs principally phenol resulting increases benzene prices mainly nylon system business additionally segment profit 2003 adversely impacted temporary plant shutdowns fluorocarbons nylon system businesses specialty materials segment profit 2003 increased 51 percent compared 2002 due mainly impact prior year writedown property plant equipment several businesses benefits cost actions including synergies nylon transaction divestitures nonstrategic businesses higher sales volumes increase partially offset higher raw material costs mainly natural gas phenol resulting increases benzene prices impact temporary plant shutdowns fluorocarbons nylon system businesses trends may impact specialty materials operating results 2005 include • continued excess global capacity production nylon system business perform accordance operating plan 2004 taken certain repositioning actions 2004 see repositioning section mda evaluating alternatives additionally continue evaluate strategic alternatives maximize value business • degree volatility significant raw material costs natural gas benzene • extent change order rates global semiconductor customers transportation systems transportation systems sales 2004 increased 18 percent compared 2003 due primarily favorable sales mix higher volumes 12 percent favorable effect foreign exchange 6 percent increase sales segment resulted principally 29 percent increase sales honeywell turbo technologies business due favorable sales mix volume growth driven increasing diesel penetration europe strength north american truck segment favorable effect foreign exchange sales consumer products group business increased 7 percent driven strong retail demand highend products recent introductions new autolite fram prestone products favorable effect foreign exchange higher prices offsetting incremental ethylene glycol raw material costs sales friction materials business increased 7 percent largely due favorable effect foreign exchange transportation systems sales 2003 increased 15 percent compared 2002 due mainly favorable effects foreign exchange 9 percent favorable sales mix volume growth 5 percent increase resulted mainly 27 percent increase sales honeywell turbo technologies business due favorable sales mix volume growth 15 percent worldwide demand turbochargers continued strong favorable effect foreign exchange 12 percent transportation systems segment profit 2004 increased 25 percent compared 2003 due primarily effect favorable sales mix volume growth honeywell turbo technologies business partially offset higher raw material costs mostly steel metals segments businesses ethylene glycol consumer products group business transportation systems segment profit 2003 increased 17 percent compared 2002 effect higher sales honeywell turbo technologies business partially offset higher new product development introduction facility relocations expenses lower aftermarket sales friction materials business trends may impact transportation systems operating results 2005 include • rate increase global diesel gasoline turbocharger oem demand arising continued penetration diesel passenger cars european market north america truck shipments • adoption regulations aimed reducing emissions • change consumer spending automotive aftermarket products repositioning charges summary repositioning charges follows following table summarizes pretax distribution total net repositioning charges income statement classification 2004 recognized repositioning charges totaling 116 million primarily severance costs related workforce reductions 2272 manufacturing administrative positions across reportable segments also 28 million previously established accruals primarily severance returned income 2004 due fewer employee separations originally planned associated certain prior repositioning actions resulting reduced severance liabilities principally automation control solutions reportable segment 2003 recognized repositioning charges totaling 82 million primarly severance costs related workforce reductions 1501 manufacturing administrative positions across reportable segments also 69 million previously established accruals primarily severance returned income 2003 due fewer employee separations originally planned associated certain prior repositioning actions resulting reduced severance liabilities automation control solutions aerospace specialty materials reportable segments 2002 recognized repositioning charges totaling 453 million workforce reductions across reportable segments uop process technology joint venture charge also related costs planned shutdown consolidation manufacturing plants specialty materials automation control solutions reportable segments severance costs related announced workforce reductions approximately 8100 manufacturing administrative positions asset impairments principally related manufacturing plant equipment held sale capable taken service actively marketed period impairment exit costs related principally incremental costs exit facilities including lease termination losses negotiated subject reasonable estimation related mainly closed facilities automation control solutions specialty materials reportable segments also 76 million previously established severance accruals returned income 2002 due fewer employee separations originally planned associated certain prior repositioning actions higher expected voluntary employee attrition resulting reduced severance liabilities aerospace automation control solutions specialty materials reportable segments 2004 repositioning actions expected generate incremental pretax savings approximately 75 million 2005 compared 2004 principally planned workforce reductions cash expenditures severance exit costs necessary execute repositioning actions 164 200 447 million 2004 2003 2002 respectively expenditures severance exit costs funded principally operating cash flows cash expenditures severance exit costs necessary execute remaining actions approximate 100 million 2005 funded principally operating cash flows 2004 recognized charge 565 million probable reasonably estimable legal environmental liabilities includes 536 million legacy environmental liabilities primarily related denial appeal matter entitled interfaith community organization et al v honeywell international inc et al estimated liabilities remediation environmental conditions around onondaga lake syracuse new york environmental matters discussed detail note 21 notes financial statements “item 8 financial statements supplementary data” recognized charge 29 million various legal settlements including property damage claims automation control solutions reportable segment recognized charge 76 million primarily bendix related asbestos claims defense costs incurred 2004 including update expected resolution values respect pending claims charge net probable bendix related insurance recoveries additional 47 million narco insurance deemed probable recovery see note 21 notes financial statements “item 8 financial statements supplementary data” discussion recognized impairment charge 42 million second quarter 2004 related principally writedown property plant equipment performance fibers business specialty materials reportable segment business sold december 2004 recognized charge 14 million writeoff receivables inventories assets also reversed reserve 10 million established prior year contract settlement 2003 recognized charge 261 million probable reasonably estimable legal environmental liabilities included 235 million environmental liabilities mainly related matter entitled interfaith community organization et al v honeywell international inc et al remediation environmental conditions around onondaga lake syracuse new york discussed note 21 notes financial statements “item 8 financial statements supplementary data” also recognized charge 4 million specialty materials reportable segment including loss sale investment owned equity investee 2002 recognized business impairment charges 877 million related businesses specialty materials automation control solutions reportable segments well friction materials business based current operating losses deteriorating economic conditions certain chemical telecommunications endmarkets performed impairment tests recognized impairment charges 785 million principally related writedown property plant equipment held used nylon system performance fibers metglas specialty materials businesses well automation control solutions communication business also recognized impairment charges 92 million related principally writedown property plant equipment friction materials business classified assets held disposal current assets december 31 2002 plan disposal friction materials adopted 2001 january 2003 entered letter intent sell business federalmogul corp assets reclassified held sale held used december 31 2003 following cessation negotiations sell friction materials business federalmogul corp time adjustment carrying value friction materials assets required based current reassessment fair value assets reassessment fair value property plant equipment performed using discounted estimated future cash flows business fair value approximated writtendown held sale value also less carrying amount property plant equipment prior classified held sale adjusted depreciation expense would otherwise recognized assets classified held used see note 21 notes financial statements “item 8 financial statements supplementary data” discussion recognized asbestos related litigation charges 1548 million principally related costs associated potential resolution asbestos claims narco see note 21 notes financial statements “item 8 financial statements supplementary data” discussion also recognized charges consisting customer claims settlements contract liabilities 152 million writeoffs receivables inventories assets 60 million charges related mainly advanced circuits business bankruptcy customer aerospace reportable segment customer claims aerospace automation control solutions reportable segments additionally recognized charges consisting probable reasonably estimable environmental liabilities 30 million writeoffs related temporary decline value certain equity investments 15 million following tables provide details pretax impact total net repositioning charges reportable segment aerospace automation control solutions specialty materials transportation systems corporate liquidity capital resources cash flow summary cash flows operating investing financing activities reflected consolidated statement cash flows summarized follows cash provided operating activities increased 54 million 2004 compared 2003 due primarily increased cash earnings decrease voluntary us pension contributions 630 million increase cash provided operating activities partially offset increase net asbestos related liability payments 558 million prior year included 472 million cash received equitas related comprehensive policy buyback settlement increase working capital receivables inventories accounts payable usage 268 million principally related higher sales weakening us dollar versus euro canadian dollar throughout 2004 cash provided operating activities decreased 181 million 2003 compared 2002 mainly due 540 million increase voluntary us pension contributions well increase working capital usage due primarily weakening us dollar versus euro canadian dollar throughout 2003 decrease partially offset reduced severance exit costs payments 247 million lower litigation payments 222 million well insurance receipts excess asbestos liability payments 107 million 2003 cash used investing activities decreased 96 million 2004 compared 2003 due primarily increase proceeds sales businesses 289 million largely dispositions security monitoring vcsel optical products businesses current year additionally proceeds maturity investment securities 80 million 2004 decrease cash used investing activities partially offset increase spending acquisitions 185 million due principally various acquisitions automation control solutions reportable segment investment 115 million auction rate securities cash used investing activities decreased 190 million 2003 compared 2002 due mainly reduced spending 321 million acquisitions principally reflecting acquisition invensys october 2002 decrease partially offset reduced proceeds sales investments 91 million related disposition cost investment automation control solutions reportable segment 2002 reduced proceeds sales businesses 46 million proceeds business sales 2003 resulted sale certain noncore specialty materials engineering plastics rudolstadt metglas aerospace honeywell aerospace defense services businesses cash used financing activities increased 328 million 2004 compared 2003 due primarily increase repurchases common stock 687 million connection stock repurchase program announced november 2003 partially offset reduction debt repayments net issuances 337 million 2004 total debt 5273 million december 31 2004 113 million 2 percent higher december 31 2003 principally reflecting higher commercial paper borrowings fund share repurchases 2004 cash used financing activities decreased 37 million 2003 compared 2002 mainly due lower net debt repayments 2003 partially offset cash used repurchase shares fourth quarter 2003 total debt 5160 million december 31 2003 71 million 1 percent higher december 31 2002 principally reflecting assumption 267 million debt associated purchase assets operating leases partially offset lower shortterm borrowings approximately 34 26 billion cash equivalents held nonus subsidiaries mainly local currencies principally euro canadian dollar australian dollar december 31 2004 2003 respectively 190 305 million increases cash equivalents 2004 2003 respectively due exchange rate changes principally resulted weakening us dollar mainly euro canadian dollar throughout 2004 2003 manage worldwide cash requirements considering available cash balances cost effective method access cash balances repatriation cash balances nonus subsidiaries us could us tax consequences see discussion american jobs creation act 2004 note 7 notes fo financial statements “item 8 financial statements supplementary data” however substantially cash balances held nonus subsidiaries available without legal restrictions fund business operations liquidity manage businesses maximize operating cash flows primary source liquidity operating cash flows 23 billion 2004 approximately 36 billion cash equivalents 48 billion working capital receivables inventories accounts payable businesses continues focus strategies improve working capital turnover 2005 increase operating cash flows considering current economic environment businesses operate business plans strategies including focus growth cost reduction productivity initiatives believe cash balances operating cash flows remain principal source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines access public debt equity markets using debt equity securities including commercial paper well ability sell trade accounts receivables source liquidity ability issue shortterm debt commercial paper market ability access commercial paper market related cost borrowings affected strength credit ratings 23 billion committed bank revolving credit facilities revolving credit facilities credit ratings periodically reviewed major independent debtrating agencies 2004 standard poors fitch rating services affirmed corporate ratings longterm debt respectively shortterm debt a1 respectively revised honeywells outlook “negative” “stable” moodys investors service affirmed corporate rating longterm shortterm debt a2 p1 respectively credit rating provided moodys investors service reflects “negative outlook” due principally cyclical market conditions commercial air transport industry potential exposure asbestos liabilities existence integration risk associated recently announced acquisition novar plc expected completed first quarter 2005 “negative outlook” impaired expect impair access commercial paper markets commercial paper notes sold discount maturity 270 days date issuance borrowings commercial paper program available general corporate purposes well financing potential acquisitions 220 million commercial paper outstanding december 31 2004 23 billion revolving credit facilities maintained group banks arranged citigroup global markets inc jp morgan securities inc comprises 1 billion fiveyear credit agreement b 13 billion fiveyear credit agreement credit agreements maintained general corporate purposes including support issuance commercial paper 1 billion fiveyear credit agreement put place october 22 2004 replacing 1 billion 364day credit agreement expiring november 24 2004 newly established fiveyear credit facility includes 200 million sublimit potential issuance letters credit 13 billion fiveyear credit agreement increased november 2003 addition 300 million sublimit potential issuance letters credit see note 15 notes financial statements “item 8 financial statements supplementary data” also shelf registration statement filed securities exchange commission allows us issue 3 billion debt securities common stock preferred stock may offered one offerings terms determined time offering net proceeds offering would used general corporate purposes including repayment existing indebtedness capital expenditures acquisitions also sell interests designated pools trade accounts receivables third parties sold receivables overcollateralized 120 million december 31 2004 retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools new receivables sold agreement previously sold receivables collected retained interests receivables reflected amounts expected collected us carrying value approximates fair value retained interests sold receivables 500 million december 31 2004 2003 addition normal operating cash requirements principal future cash requirements fund capital expenditures debt repayments employee benefit obligations environmental remediation costs asbestos claims severance exit costs related repositioning actions share repurchases strategic acquisitions total capital expenditures 2005 currently projected approximately 775 million expenditures primarily intended maintenance replacement production capacity expansion cost reduction growth 956 million longterm debt repayments scheduled 2005 assuming actual pension plan returns consistent expected rate return 9 percent 2005 beyond interest rates remain constant would required make contributions us pension plans foreseeable future due share repurchases made fourth quarter 2004 offset anticipated 2005 dilutive impact employee stockbased compensation plans anticipate need additional share repurchases 2005 program initiated fourth quarter 2003 total repurchases may vary depending market conditions level investing activities cash expenditures severance exit costs necessary execute remaining repositioning actions approximate 100 million 2005 expect cash expenditures asbestos claims 2005 approximately 744 million insurance recoveries approximately 150 million 2005 see asbestos matters note 21 notes financial statements “item 8 financial statements supplementary data” discussion discussed note 2 notes financial statements “item 8 financial statements supplementary data” expect complete acquisition novar plc first quarter 2005 expect fund acquisition existing cash resources continuously assess relative strength business portfolio strategic fit market position profit cash flow contribution order upgrade combined portfolio identify business units benefit increased investment identify acquisition candidates strategic plan strengthen existing core businesses also identify business units fit longterm strategic plan based market position relative profitability growth potential business units considered potential divestiture restructuring repositioning actions subject regulatory constraints 2004 realized 426 million cash proceeds sales nonstrategic businesses believe operating cash flows sufficient meet future cash needs available cash committed credit lines access public debt equity markets using debt equity securities including commercial paper well ability sell trade accounts receivables provide additional sources shortterm longterm liquidity fund current operations future investment opportunities based current financial position expected economic performance believe liquidity adversely impacted inability access sources financing contractual obligations probable liability payments following summary significant contractual obligations probable liability payments december 31 2004 1 assumes longterm debt outstanding scheduled maturity 2 purchase obligations entered various vendors normal course business consistent expected requirements 3 amounts estimates asbestos related cash payments narco bendix narco estimated payments based terms conditions including evidentiary requirements specified definitive agreements principle pursuant trust distribution procedures bendix payments based estimate pending claims projecting future events subject many uncertainties could cause asbestos liabilities higher lower projected recorded assurance narco bendix insurance recoveries timely narco plan reorganization proposed confirmed whether narco related asbestos claims beyond 2018 see asbestos matters note 21 notes financial statements “item 8 financial statements supplementary data” 4 amounts represent probable insurance recoveries 2018 see asbestos matters note 21 notes financial statements “item 8 financial statements supplementary data” table excludes pension postretirement benefits opeb obligations made voluntary contributions 40 670 830 million us pension plans 2004 2003 2002 respectively future plan contributions dependent upon actual plan asset returns interest rates assuming actual plan asset returns consistent expected plan return 9 percent 2005 beyond interest rates remain constant would required make contributions us pension plans foreseeable future payments due opeb plans required funded advance paid medical costs incurred covered retiree populations principally dependent upon future cost retiree medical benefits plans expect opeb payments approximate 208 million 2005 see note 22 notes financial statements “item 8 financial statements supplementary data” discussion pension opeb plans offbalance sheet arrangements following summary offbalance sheet arrangements guaranteeswe issued party following direct indirect guarantees december 31 2004 expect guarantees material adverse effect consolidated results operations financial position liquidity connection disposition certain businesses facilities indemnified purchasers expected cost remediation environmental contamination existing date disposition expected costs accrued environmental assessments made remedial efforts probable costs reasonably estimated retained interests factored pools trade accounts receivablesas source liquidity sell interests designated pools trade accounts receivables third parties sold receivables 500 million december 31 2004 overcollateralized retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools overcollateralization provides credit support purchasers receivable interest limiting losses event portion receivables sold becomes uncollectible december 31 2004 retained subordinated undivided interests risk 120 440 million respectively based underlying credit quality receivables placed designated pools receivables sold expect losses related retained interests risk material adverse effect consolidated results operations financial position liquidity environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous toxic substances accord environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing toxic substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually jointly responsible parties determine feasibility various remedial techniques address environmental matters policy see note 1 notes financial statements “item 8 financial statements supplementary data” record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonable possible environmental loss excess accrual expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects remedial techniques utilized agreements parties remedial response voluntary cleanup expenditures 248 77 81 million 2004 2003 2002 respectively currently estimated approximately 267 million 2005 expect fund expenditures operating cash flow remedial response voluntary cleanup costs charged pretax earnings 536 235 60 million 2004 2003 2002 respectively december 31 2004 2003 recorded liability environmental matters 895 593 million respectively addition 2004 2003 incurred operating costs ongoing businesses approximately 116 80 million respectively relating compliance environmental regulations although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position see note 3 notes financial statements “item 8 financial statements supplementary data” discussion legal environmental charges note 21 notes financial statements “item 8 financial statements supplementary data” discussion commitments contingencies including related environmental matters toxic tort litigation financial instruments result global operating financing activities exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position minimize risks interest foreign currency exchange rate commodity price fluctuations normal operating financing activities deemed appropriate use derivative financial instruments use derivative financial instruments trading speculative purposes use leveraged derivative financial instruments summary accounting policies derivative financial instruments included note 1 notes financial statements “item 8 financial statements supplementary data” conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities anticipated transactions arising international trade objective preserve economic value nonfunctional currency cash flows attempt transaction exposures hedged natural offsets fullest extent possible opportunities exhausted foreign currency forward option agreements third parties principal currency exposures relate euro canadian dollar british pound us dollar exposure market risk changes interest rates relates primarily debt obligations described notes 15 17 notes financial statements “item 8 financial statements supplementary data” issue fixed variable rate debt use interest rate swaps manage exposure interest rate movements reduce overall borrowing costs financial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value cash flows derivative financial instruments considering reasonably possible changes interest currency exchange rates restrict use derivative financial instruments hedging activities following table illustrates potential change fair value interest rate sensitive instruments based hypothetical immediate onepercentagepoint increase interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 percent weakening us dollar versus local currency exchange rates across maturities potential change fair value contracts hedging commodity purchases based 20 percent decrease price underlying commodity across maturities december 31 2004 2003 1 asset liability 2 changes fair value foreign currency exchange contracts offset changes fair value cash flows underlying hedged foreign currency transactions 3 changes fair value forward commodity contracts offset changes cash flows underlying hedged commodity transactions discussion procedures monitor market risk estimated changes fair value resulting sensitivity analyses forwardlooking statements market risk assuming certain adverse market conditions occur actual results future may differ materially estimated results due actual developments global financial markets methods used us assess mitigate risk discussed considered projections future events matters litigation see note 21 notes financial statements “item 8 financial statements supplementary data” discussion environmental asbestos litigation matters sales us government sales us government acting various departments agencies prime contractors amounted 3464 3111 2730 million 2004 2003 2002 respectively included sales department defense dod prime contractor subcontractor 2808 2564 2046 million 2004 2003 2002 respectively sales dod accounted 110 111 92 percent total sales 2004 2003 2002 respectively us defense spending increased 2004 also expected increase 2005 backlog total backlog yearend 2004 2003 8229 7191 million respectively anticipate approximately 6339 million 2004 backlog filled 2005 believe backlog necessarily reliable indicator future sales substantial portion orders constituting backlog may canceled customers option inflation highly competitive market conditions minimized inflations impact selling prices products costs purchased materials except costs certain raw materials specialty materials reportable segment see business overview section mda discussion cost increases materials labor generally low productivity enhancement programs including repositioning actions six sigma initiatives largely offset impact recent accounting pronouncements see note 1 notes financial statements “item 8 financial statements supplementary data” discussion recent accounting pronouncements item 7aitem 7 managements discussion analysis financial condition results operations business overview business overview provides summary honeywells four reportable operating segments aerospace automation control solutions specialty materials transportation systems including generate income relevant economic factors impacting results business challenges areas focus short longterm segments comprised various product service classes serve multiple end markets see note 23 notes financial statements “item 8 financial statements supplementary data” information reportable segments definition segment profit aerospace leading global supplier aircraft engines avionics related products services aircraft manufacturers airlines aircraft operators military services defense space contractors aerospace products services include auxiliary power units propulsion engines environmental control systems engine controls repair overhaul services flight safety communications navigation radar surveillance systems aircraft airport lighting management technical services advanced systems instruments aircraft wheels brakes aerospace sells products original equipment oe manufacturers commercial air transport business regional aircraft segments provides spare parts repair maintenance services aftermarket principally aircraft operators united states government also major customer defense space products economic factorsaerospaces operating results principally driven global demand air travel reflected new aircraft production well demand spare parts maintenance repair services aircraft currently use aircraft production commercial air transport oe manufacturers business regional jet deliveries well global flying hours airline profitability principal factors drive commercial aerospace operating results level mix us government appropriations defense space programs military activity critical factors impacting defense space operating results areas focusaerospaces primary areas focus include • continuing grow sales profitability commercial aerospace aftermarket worldwide airline industry struggles regain maintain profitable operations • securing honeywell product content new aircraft platforms • making product development process faster less costly meet increasing customer requirements continuing reduce manufacturing costs • continuing design equipment enhances safety performance durability aircraft reducing weight operating costs • reducing cost product manufacturing maintenance • improving business operations investments systems processes improvements automation control solutions acs provides innovative solutions make homes buildings industrial sites airport facilities efficient safe comfortable acs products services include controls heating cooling indoor air quality ventilation humidification home automation advanced software applications homebuilding control optimization sensors switches control systems instruments measuring pressure air flow temperature electrical current security fire gas detection access control video surveillance remote patient monitoring systems installation maintenance upgrades systems keep buildings safe comfortable productive automation control solutions industrial plants including advanced software automation systems integrate control monitor complex processes many types industrial settings economic factorsacs operating results principally driven global residential commercial construction including retrofits upgrades industrial production capital spending process building automation european economic conditions material price inflation fire security health care safety concerns regulations areas focusacs primary areas focus include • extending technology leadership lowest total installed cost integrated solutions within security fire sensors product portfolios • defending extending installed base customer productivity globalization • sustaining strong brand recognition • continuing invest sales marketing resources new product development capabilities drive profitable growth • continuing grow implementation disciplined acquisition rigorous integration processes • improving business operations investments systems processes improvements specialty materials specialty materials develops manufactures highpurity highquality highperformance chemicals materials applications automotive healthcare agricultural packaging fibers refrigeration semiconductor wax adhesives segments specialty materials also provides technology services petroleum refining petrochemical industries specialty materials product portfolio includes fluorocarbons specialty films advanced fibers customized research chemicals intermediates electronic materials chemicals catalysts adsorbents economic factorsspecialty materials operating results principally driven global gross domestic product level investment refining petrochemical capacity plant capacity utilization costs raw materials including benzene natural gas impact environmental safety energy efficiency regulations areas focusspecialty materials primary areas focus include • completing integration uop acquisition • achieving growth sales marketing excellence global expansion innovation including successful launch new products • continuing drive improvements manufacturing productivity • continuing offset raw material cost increases formula price agreements price increases feasible transportation systems transportation systems provides automotive products improve performance efficiency appearance cars trucks vehicles stateoftheart technologies world class brands global solutions customers needs transportation systems products include garrett® turbochargers chargeair thermal systems car care products including antifreeze prestone® filters fram® spark plugs autolite® cleaners waxes additives holts® brake hard parts friction materials bendix® jurid® transportation systems sells products oe automotive truck manufacturers eg bmw caterpillar daimlerchrysler ford volkswagen wholesalers distributors retail aftermarket economic factorstransportation systems operating results principally driven worldwide automobile truck production demand automotive aftermarket car care products global demand automobiles trucks equipped turbochargers areas focustransportation systems primary areas focus include • sustaining superior turbocharger technology • increasing global market penetration share diesel gasoline turbocharger oem demand • expanding strengthening established strong product brands consumer products group business including expansion new geographic demographic segments critical accounting policies preparation consolidated financial statements accordance generally accepted accounting principles based selection application accounting policies require us make significant estimates assumptions effects matters inherently uncertain consider accounting policies discussed critical understanding financial statements actual results could differ estimates assumptions differences could material consolidated financial statements discussed selection application disclosure critical accounting policies audit committee board directors independent registered public accountants new accounting standards effective 2005 material impact consolidated financial statements described recent accounting pronouncements section note 1 notes financial statements “item 8 financial statements supplementary data” contingent liabilitieswe subject number lawsuits investigations claims involve substantial dollar amounts arise conduct global business operations previously owned entities contingencies relate product liabilities including asbestos commercial transactions government contracts environmental health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes contingencies well potential amounts ranges probable losses recognize liability contingencies based careful analysis matter assistance outside legal counsel applicable experts analysis includes making judgments concerning matters costs associated environmental matters outcome negotiations number cost pending future estimable asbestos claims impact evidentiary requirements contingencies resolved long periods time liabilities may change future due new developments changes settlement strategy discussion contingencies related environmental asbestos matters including managements judgment applied recognition measurement specific liabilities see notes 1 21 notes financial statements “item 8 financial statements supplementary data” insurance asbestos related liabilitiesin connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical experience insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs consideration impacts settlements insurers approximately 12 billion insurance coverage remaining specifically allocated north american refractories company narco related asbestos liabilities also 19 billion coverage remaining bendix related asbestos liabilities although gaps coverage due insurance company insolvencies certain uninsured periods insurance settlements resulting approximately 50 percent claims cumulative historical basis reimbursable insurance domestic insurance market london excess market substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries projecting future events subject various uncertainties could cause insurance recovery asbestos related liabilities higher lower projected recorded given inherent uncertainty making future projections reevaluate projections concerning probable insurance recoveries light changes projected liability recovery experience relevant factors may impact future insurance recoveries see note 21 notes financial statements “item 8 financial statements supplementary data” discussion managements judgments applied recognition measurement insurance recoveries asbestos related liabilities defined benefit pension planswe maintain defined benefit pension plans covering majority employees retirees financial reporting purposes net periodic pension expense calculated based upon number actuarial assumptions including discount rate plan obligations expected rate return plan assets consider current market conditions including changes investment returns interest rates making assumptions determine expected longterm rate return plan assets utilizing historic plan asset returns varying longterm periods combined current market conditions broad asset mix considerations see note 22 notes financial statements “item 8 financial statements supplementary data” actual targeted asset allocation percentages pension plans expected rate return plan assets longterm assumption generally change annually discount rate reflects market rate annual measurement date december 31 highquality fixedincome investments maturities corresponding benefit obligations subject change year expected rate return pension assets discount rate determined accordance consistent methodologies information major actuarial assumption included note 22 notes financial statements “item 8 financial statements supplementary data” key assumptions used developing 2005 2004 2003 net periodic pension expense us plans included following reduction discount rate 2005 2004 reflects lower market interest rate environment highquality fixed income debt instruments discount rate also volatile determined based upon prevailing rate measurement date due continuing declines interest rates use 575 percent discount rate 2006 plan continue use expected rate return plan assets 9 percent 2006 unrecognized net losses us pension plans 26 billion december 31 2005 2004 decrease unrecognized net losses due loss amortization 2005 offset additional unrecognized net losses due lower discount rate adoption rp2000 mortality table december 31 2005 unrecognized net losses december 31 2005 principally result decline year since 2001 discount rate actual plan asset returns expected rates return 2000 2001 2002 2005 unrecognized net losses systematically recognized future net periodic pension expense accordance statement financial accounting standards 87 “employers accounting pensions” sfas 87 sfas 87 use marketrelated value plan assets reflecting changes fair value plan assets threeyear period unrecognized net losses excess 10 percent greater marketrelated value plan assets plans projected benefit obligation recognized sixyear period changes net periodic pension expense may occur future due changes expected rate return plan assets discount rate resulting economic events following table highlights sensitivity us pension obligations expense changes assumptions assuming assumptions remain constant net periodic pension expense pension plans expected approximately 320 million 2006 84 million decrease 2005 due principally decrease amortization unrecognized net losses decline amortization unrecognized net losses results principally actual plan asset returns higher expected rate return 2003 2004 2005 2004 2003 required make contribution satisfy minimum statutory funding requirements us pension plans made voluntary contributions 40 670 million us pension plans 2004 2003 respectively 2003 voluntary contribution made improve funded status plans impacted poor performance equity markets threeyear period ended december 31 2002 well declining interest rate environment future plan contributions dependent upon actual plan asset returns interest rates assuming actual plan returns consistent expected plan return 9 percent 2006 beyond interest rates remain constant would required make contributions us pension plans satisfy minimum statutory funding requirements foreseeable future however expect make voluntary contributions approximately 45 million cash 2006 certain us pension plans government contracting purposes also expect contribute approximately 150 million cash 2006 nonus defined benefit pension plans primarily related funding requirements recently acquired companies longlived assets including tangible definitelived intangible assetsto conduct global business operations execute business strategy acquire tangible intangible assets including property plant equipment definitelived intangible assets december 31 2005 net carrying amount longlived assets totaled 6527 million determination useful lives depreciationamortization purposes whether assets impaired involves use accounting estimates assumptions bear risk change could materially impact financial condition operating performance actual results differ estimates assumptions periodically evaluate recoverability carrying amount longlived assets whenever events changes circumstances indicate carrying amount longlived asset group may fully recoverable principal factors consider deciding perform impairment review follows • significant underperformance ie declines sales earnings cash flows business product line relation expectations • annual operating plans fiveyear strategic plans indicate unfavorable trend operating performance business product line • significant negative industry economic trends • significant changes planned changes use assets determined impairment review necessary recoverability assets measured comparing carrying amount asset grouping estimated future undiscounted cash flows carrying amount exceeds estimated future undiscounted cash flows asset grouping considered impaired impairment measured difference carrying amount asset grouping fair value use best information available determine fair value usually either market prices available estimate future discounted cash flow key estimates discounted cash flow analysis include expected industry growth rates assumptions volume selling prices costs discount rate selected described detail repositioning charges section mda recorded impairment charges related longlived assets 23 42 million 2005 2004 respectively principally related performance fibers research life sciences resins chemicals businesses specialty materials reportable segment businesses significantly underperforming industries negative economic trends subsequently businesses sold significantly restructured income taxesas december 31 2005 recognized net deferred tax asset 1706 million less valuation allowance 477 million net deferred tax assets primarily comprised net deductible temporary differences net operating loss carryforwards tax credit carryforwards available reduce taxable income future periods determination amount valuation allowance provided recorded deferred tax assets involves estimates regarding 1 timing amount reversal taxable temporary differences 2 future taxable income 3 impact tax planning strategies valuation allowance required likely portion deferred tax asset realized assessing need valuation allowance consider available positive negative evidence including past operating results projections future taxable income feasibility ongoing tax planning strategies projections future taxable income include number estimates assumptions regarding volume pricing costs additionally valuation allowances related deferred tax assets impacted changes tax laws net deferred tax asset 1706 million comprised 1102 million related us operations 604 million related nonus operations us net deferred tax asset 1102 million comprised net deductible temporary differences tax credit carryforwards state tax net operating losses believe likely realized generation future taxable income us tax planning strategies maintain valuation allowance 39 million asset related state tax net operating losses nonus net deferred tax asset 604 million comprised principally net operating capital loss carryforwards mainly germany france united kingdom maintain valuation allowance 438 million net asset reflecting historical experience lower expectations taxable income applicable carryforward periods fully described note 7 notes financial statements “item 8 financial statements supplementary data” valuation allowance increased 139 39 108 million 2005 2004 2003 respectively event determine able realize net deferred tax assets future reduce amounts charge income period determination made conversely determine able realize net deferred tax assets excess carrying amounts decrease recorded valuation allowance credit income credit goodwill period determination made valuation allowance recognized net deferred tax asset acquired entitys deductible temporary differences operating loss capital loss tax credit carryforwards acquisition date tax benefits items recognized acquisition date shall applied first reduce zero goodwill related acquisition second reduce zero noncurrent intangible assets related acquisition third reduce income tax expense sales recognition longterm contractsin 2005 recognized approximately 10 percent total net sales using percentageofcompletion method longterm contracts automation control solutions aerospace reportable segments longterm contracts measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts accounting contracts involves management judgment estimating total contract revenue cost contract revenues largely determined negotiated contract prices quantities modified assumptions regarding contract options change orders incentive award provisions associated technical performance price adjustment clauses inflation indexbased clauses contract costs incurred period time several years estimation costs requires management judgment cost estimates largely based negotiated estimated purchase contract terms historical performance trends economic projections significant factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements revenue cost estimates regularly monitored revised based changes circumstances anticipated losses longterm contracts recognized losses become evident maintain financial controls customer qualification contract pricing estimation processes reduce risk contract losses aerospace sales incentivesconsistent suppliers commercial aircraft manufacturers airlines provide sales incentives commercial aircraft manufacturers airlines connection selection aircraft wheel braking system hardware auxiliary power units installation commercial aircraft incentives consist free deeply discounted products product credits upfront cash payments cost incentives capitalized case auxiliary power units sole source supplier time deliver products customers case product credits time credit issued case upfront cash payments time payment made case free deeply discounted product cost manufacture less amount recovered airframe manufacturer airline capitalized product credits upfront cash payments capitalized exchanged value research design development qualification costs related products expensed incurred unless contractually guaranteed reimbursement cost sales incentives described capitalized selection aircraft wheel braking system hardware auxiliary power units installation commercial aircraft results creation future revenues cash flows aftermarket sales fulfill longterm product maintenance requirements mandated federal aviation administration faa similar international organizations useful life aircraft products certified selected aircraft recovery investment virtually guaranteed useful life aircraft likelihood displacement alternative supplier remote due contractual solesourcing high cost alternative suppliers aircraft operators product retrofits andor rigorous regulatory specifications qualification testing requirements amounts capitalized december 31 2005 2004 2003 803 776 719 million respectively amortized useful lives straightline basis 25 years representing estimated minimum service life aircraft useful life period virtually assured earn revenues aftermarket sales certified products necessary fulfill maintenance required faa similar international organizations classify amortization expense associated free discounted products cost goods sold amortization expense associated product credits upfront cash payments reduction sales regularly evaluate recoverability capitalized amounts whenever events changes circumstances indicate carrying amount incentives may fully recoverable impairment charges related capitalized incentives recognized 2005 2004 2003 additional information see notes 1 13 notes financial statements “item 8 financial statements supplementary data” results operations net sales change net sales 2005 2004 attributable following discussion net sales reportable segment found review business segments section managements discussion analysis financial condition results operations mda cost products services sold gross margin increased 2005 28 percentage points compared 2004 increase resulted increase 11 percentage points gross margin reportable segments see review business segments discussion segment results increase also resulted lower repositioning charges 12 percentage points lower pension postretirement benefits expense 05 percentage points gross margin decreased 2004 15 percentage points compared 2003 decrease resulted primarily increase repositioning charges 12 percentage points higher pension postretirement benefits expense 09 percentage points partially offset increase 06 percentage points gross margin reportable segments see review business segments discussion segment results selling general administrative expenses selling general administrative expenses percentage sales increased 04 percentage points 2005 compared 2004 due primarily impact acquisition novar higher spending information technology systems primarily erp system aerospace 03 percentage points higher repositioning charges 01 percentage points selling general administrative expenses percentage sales increased 02 percentage points 2004 compared 2003 due increases pension postretirement benefits expense net repositioning charges 02 01 percentage points respectively partially offset decrease 01 percentage points due primarily higher sales pension expense decreased 8 million 2005 compared 2004 due principally decrease amortization unrecognized net losses partially offset pension expense novar acquired 2005 pension expense increased 276 million 2004 compared 2003 due primarily increase amortization unrecognized net losses resulting mainly actual plan asset returns expected rate return period 2000 2002 decrease discount rate year since 2001 postretirement benefits expense decreased 59 million 2005 compared 2004 due primarily effect medicare prescription drug improvement modernization act 2003 see note 22 notes financial statements “item 8 financial statements supplementary data” discussion gain loss sale nonstrategic businesses gain sale nonstrategic businesses 36 million 2005 represents pretax gains totaling 66 million consisting postclosing adjustments 43 million related principally sales performance fibers security monitoring businesses prior year pretax gain 23 million related sale north american nylon carpet fiber business partially offset pretax loss 30 million related sale industrial wax business dispositions businesses materially impact net sales segment profit 2005 compared 2004 gain sale nonstrategic businesses 255 million 2004 represented pretax gains sales security monitoring vcsel optical products businesses 215 36 million respectively postclosing adjustments 19 million related businesses sold prior periods total pretax gain 270 million partially offset pretax loss 15 million sale performance fibers business dispositions businesses materially impact net sales segment profit 2004 compared 2003 asbestos related litigation charges net insurance see asbestos matters note 21 notes financial statements “item 8 financial statements supplementary data” discussion asbestos related litigation charges net insurance business impairment charges see note 3 notes financial statements “item 8 financial statements supplementary data” discussion business impairment charges equity income loss affiliated companies equity income increased 52 million 2005 compared 2004 due primarily higher earnings 36 million uop process technology joint venture uop due strength refining petrochemical industries gain 15 million sale equity investment effective november 30 2005 purchased remaining 50 percent interest uop consolidated results operations date equity income increased 44 million 2004 compared 2003 due primarily improvement earnings uop income expense income decreased 31 million 2005 compared 2004 prior year included gain 27 million related settlement patent infringement lawsuit current year included charge 10 million modification lease agreement related corporate headquarters facility income increased 111 million 2004 compared 2003 due principally decrease foreign exchange losses 93 million due reduction foreign exchange exposures resulting losses 2003 due weak us dollar gain 27 million related settlement patent infringement lawsuit increase interest income 13 million higher cash balances partially offset inclusion gain 20 million prior year related settlement patent infringement lawsuit interest financial charges interest financial charges increased 8 percent 2005 compared 2004 due principally higher average shortterm debt outstanding higher interest rates current year interest financial charges decreased 1 percent 2004 compared 2003 due principally lower average shortterm debt outstanding 2004 tax expense effective tax rate increased 81 percentage points 2005 compared 2004 due principally tax impact decision repatriate approximately 27 billion foreign earnings 22 billion receives benefit american jobs creation act 2004 excluding item impact gains losses sales nonstrategic businesses years effective tax rate increased 65 percentage points 2005 compared 2004 increase due principally higher effective tax benefit rate environmental litigation net repositioning charges prior year effective tax rate increased 58 percentage points 2004 compared 2003 principally due fact effective tax rate 2003 included tax benefits expected realized result redesignation friction materials business held sale held used resulting termination disposition discussions federalmogul corp excluding impact cash repatriation gains losses sales nonstrategic businesses tax benefits associated redesignation friction materials business environmental litigation net repositioning charges effective tax rate 2005 2004 2003 265 percent rate lower statutory rate years due part benefits export sales foreign taxes favorable audit settlements see note 7 notes financial statements “item 8 financial statements supplementary data” information taxes including detailed effective tax rate reconciliation income continuing operations increase 037 per share 2005 compared 2004 relates primarily increase segment profit reportable segments see review business segments discussion segment results decrease 007 per share 2004 compared 2003 relates primarily increased charges environmental matters primarily attributable denial appeal matter entitled interfaith community organization et al v honeywell international inc et al see note 21 notes financial statements “item 8 financial statements supplementary data” higher pension postretirement benefits expense partially offset increase segment profit income discontinued operations income discontinued operations 95 million 011 per share 2005 relates operating results indalex security printing businesses classified discontinued operations december 2005 security printing business sold mf worldwide corp february 2006 indalex business sold sun capital partners inc see note 2 notes financial statements “item 8 financial statements supplementary data discussion sales review business segments reconciliation segment profit income continuing operations taxes follows 1 amounts included cost products services sold selling general administrative expenses aerospace sales increased 8 11 percent 2005 2004 respectively due primarily higher volumes aerospace sales major customer endmarkets follows details changes sales 2005 2004 customer endmarkets follows • air transport aftermarket sales improved 2005 due primarily 7 percent increase global flying hours partially offset decrease level faamandated safety avionics equipment upgrades retrofits new faa regulatory standards effective 2005 resulted higher levels upgrades retrofits 2004 meet effective date air transport aftermarket sales improved substantially 2004 primarily related 10 percent increase global flying hours reintroduction aircraft service previously parked desert replenishment spare parts inventories airlines growth low cost carriers additionally global flying hours 2003 adversely impacted result sars epidemic sales also improved due increase faamandated safety avionics equipment upgrades retrofits meet new regulatory standards discussed previously • air transport original equipment oe sales increased 2005 2004 primarily reflecting higher aircraft production rates oe customers • regional transport aftermarket sales flat 2005 primarily due increase flying hours offset effects phaseout regional aircraft turboprop engines regional transport aftermarket sales increased 2004 due primarily increase fleet sizes routes regional carriers introduction primus epic integrated avionics system • business general aviation aftermarket sales higher 2005 2004 improving economy drove increased utilization corporate aircraft also increase upgrade activity avionics equipment rvsm 2004 meet new regulatory standards effective 2005 • business general aviation oe sales improved 2005 2004 due primarily deliveries primus epic integrated avionics system htf7000 engine support higher aircraft production rates business jet oe customers • defense space aftermarket sales flat 2005 principally due decline warrelated activities resulting lower replenishment demand us military defense space aftermarket sales increased 2004 driven warrelated activities resulting increases repairs platform upgrades modifications fixed rotary wing ground vehicles • defense space oe sales increased 2005 2004 due principally platform upgrades related warrelated activities growth precision munitions increases restricted space programs aerospace segment profit 2005 increased 15 percent compared 2004 due primarily volume growth effect productivity actions partially offset increase spending information technology systems aerospace segment profit 2004 increased 21 percent compared 2003 due primarily volume growth partially offset higher development expense associated new programs increase spending information technology systems trends may impact aerospace operating results 2006 include • global flying hours improved 7 percent 2005 expected increase 2006 5 6 percent • financial condition major commercial airlines continues concern due mainly high fuel costs intense fare competition • level mix us government appropriations defense space programs nature level warrelated activities • aircraft production rates delivery schedules air transport business general aviation endmarkets • impact global economic conditions utilization business jet general aviation aircraft automation control solutions automation control solutions sales 2005 increased 17 percent compared 2004 due acquisitions mainly novars ibs business net divestitures 13 percent higher volumes 4 percent favorable effect foreign exchange 1 percent partially offset impact lower prices 1 percent sales increased 26 percent products businesses driven primarily acquisition novars ibs business increase also due volume growth acquisitions security life safety businesses sales building solutions business increased 10 percent due primarily acquisition novars ibs business growth security energy retrofits partially offset divestiture security monitoring business prior year sales process solutions business increased 4 percent primarily due acquisition favorable effect foreign exchange automation control solutions sales 2004 increased 8 percent compared 2003 due higher volumes 5 percent favorable effect foreign exchange 4 percent partially offset impact lower prices 1 percent sales increased 9 percent products businesses due principally strong sales fire solutions environmental controls sensor products favorable effects foreign exchange acquisitions sales process solutions business increased 8 percent due primarily favorable effect foreign exchange improvement industrial production capital spending sales building solutions business increased 5 percent due primarily favorable effect foreign exchange impact investments sales marketing initiatives partially offset divestiture security monitoring business automation control solutions segment profit 2005 increased 19 percent compared 2004 favorable effects productivity actions acquisitions principally ibs higher sales volume due part new products offset unfavorable effects lower prices investments sales marketing initiatives automation control solutions segment profit 2004 increased 6 percent compared 2003 due favorable effect higher sales volumes partially offset increased investments sales marketing initiatives higher research development costs support new product introductions segment profit also adversely impacted 2003 pricing pressures across businesses trends may impact automation control solutions operating results 2006 include • level residential commercial construction including retrofits upgrades capital spending building process automation • level industrial plant capacity expansion specialty materials specialty materials sales decreased 8 percent 2005 compared 2004 due divestitures performance fibers industrial wax north american nylon carpet fiber businesses net acquisitions uop 12 percent lower volumes 3 percent partially offset impact higher prices 7 percent primarily resins chemicals previously nylon fluorocarbons previously chemicals businesses sales resins chemicals business increased 9 percent driven price increases sales fluorocarbons business improved 6 percent principally driven price increases demand nonozone depleting hfc products refrigeration air conditioning applications well blowing agents insulation applications sales performance products business decreased 4 percent primarily driven lower volumes specialty films business specialty materials sales 2004 increased 10 percent compared 2003 due impact higher prices 6 percent mainly resins chemicals business higher volumes 5 percent favorable effect foreign exchange 1 percent partially offset prior year divestitures net acquisitions 2 percent sales fluorocarbons business improved 19 percent driven principally continuing strong demand nonozone depleting hfc products refrigeration air conditioning applications well blowing agents insulation applications sales electronic materials business increased 13 percent driven improvement semiconductor industry sales performance products business also higher 13 percent due strong demand spectra fiber principally us military specialty materials segment profit 2005 increased 40 percent compared 2004 due principally price increases favorable effect productivity actions partially offset higher raw material costs lower sales volumes specialty materials segment profit 2004 increased 35 percent compared 2003 due principally higher sales volumes price increases partially offset higher raw material costs mainly resins chemicals business additionally segment profit 2003 adversely impacted temporary plant shutdowns fluorocarbons resins chemicals businesses trends may impact specialty materials operating results 2006 include • degree volatility significant raw material costs natural gas benzene • extent change order rates global semiconductor customers • worldwide demand nonozone depleting hfcs • refining petrochemical capacity utilization andor expansion transportation systems transportation systems sales 2005 increased 4 percent compared 2004 due primarily favorable sales mix 2 percent favorable effect foreign exchange 1 percent impact higher prices 1 percent principally ethylene glycol consumer products business sales turbo technologies business increased 5 percent due favorable sales mix favorable effect foreign exchange partially offset lower volumes europe favorable sales mix driven continued strength north american truck segment lower volumes europe principally resulted shift consumer demand among automotive platforms slightly lower light vehicle production partially offset slight increase diesel penetration sales consumer products group business increased 8 percent largely due higher prices primarily ethylene glycol sales friction materials business decreased 3 percent primarily due exit 2005 north american oe business transportation systems sales 2004 increased 18 percent compared 2003 due primarily favorable sales mix higher volumes 12 percent favorable effect foreign exchange 6 percent increase sales segment resulted principally 29 percent increase sales honeywell turbo technologies business due favorable sales mix volume growth driven increasing diesel penetration europe strength north american truck segment favorable effect foreign exchange sales consumer products group business increased 7 percent driven strong retail demand highend products recent introductions new autolite fram prestone products favorable effect foreign exchange higher prices offsetting incremental ethylene glycol raw material costs sales friction materials business increased 7 percent largely due favorable effect foreign exchange transportation systems segment profit 2005 decreased 3 percent compared 2004 due primarily impact higher raw material costs mainly steel metals segments businesses operating costs associated exit friction materials north american oe business partially offset effects higher prices productivity actions transportation systems segment profit 2004 increased 25 percent compared 2003 due primarily effect favorable sales mix volume growth honeywell turbo technologies business partially offset higher raw material costs mostly steel metals segments businesses trends may impact transportation systems operating results 2006 include • turbocharger demand diesel passenger cars european oem market • shift european consumer preferences diesel passenger cars lower displacement engines • demand north american truck production conjunction 2007 emissions change • change consumer spending automotive aftermarket car care products repositioning charges summary repositioning charges follows following table summarizes pretax distribution total net repositioning charges income statement classification 2005 recognized repositioning charges totaling 267 million primarily severance costs related workforce reductions 5269 manufacturing administrative positions across reportable segments including implementation new organizational structure aerospace reportable segment reorganized aerospace businesses better align customer segments implementation new aerospace organizational structure substantially completed third quarter 2005 also 25 million previously established accruals primarily severance corporate specialty materials automation control solutions reportable segments returned income 2005 reversal severance liabilities relates changes scope previously announced severance programs excise taxes relating executive severance amounts previously paid determined longer payable severance amounts previously paid outside service provider part outsourcing arrangement refunded honeywell 2004 recognized repositioning charges totaling 116 million primarily severance costs related workforce reductions 2272 manufacturing administrative positions across reportable segments also 28 million previously established accruals primarily severance returned income 2004 due fewer employee separations originally planned associated certain prior repositioning actions resulting reduced severance liabilities principally automation control solutions reportable segment 2003 recognized repositioning charges totaling 82 million primarily severance costs related workforce reductions 1501 manufacturing administrative positions across reportable segments also 69 million previously established accruals primarily severance returned income 2003 due fewer employee separations originally planned associated certain prior repositioning actions resulting reduced severance liabilities automation control solutions aerospace specialty materials reportable segments 2005 repositioning actions expected generate incremental pretax savings approximately 170 million 2006 compared 2005 principally planned workforce reductions cash expenditures severance exit costs necessary execute repositioning actions 171 164 200 million 2005 2004 2003 respectively expenditures severance exit costs funded principally operating cash flows cash expenditures severance exit costs necessary execute remaining actions approximate 125 million 2006 funded principally operating cash flows 2005 recognized charge 186 million environmental liabilities deemed probable reasonably estimable recognized asbestos related litigation charges net insurance 10 million discussed detail note 21 notes financial statements “item 8 financial statements supplementary data” recognized credit 67 million connection arbitration award overcharges supplier phenol specialty materials business june 2003 end 2004 arbitrator also awarded honeywell additional 31 million damages overcharges 2005 recognized overcharges years 2005 forward subject separate arbitration scheduled april 2006 existing arbitration awards 2003 2005 subject approval federal court recognized impairment charges 23 million related writedown property plant equipment held used research life sciences business writedown property plant equipment held sale resins chemicals business specialty materials reportable segment also recognized charges 18 million principally related modification lease agreement corporate headquarters facility 10 million various legal settlements 7 million 2004 recognized charge 536 million probable reasonably estimable environmental liabilities primarily related denial appeal matter entitled interfaith community organization et al v honeywell international inc et al estimated liabilities remediation environmental conditions around onondaga lake syracuse new york environmental matters discussed detail note 21 notes financial statements “item 8 financial statements supplementary data” recognized asbestos related litigation charges net insurance 76 million discussed detail note 21 notes financial statements “item 8 financial statements supplementary data” recognized impairment charge 42 million second quarter 2004 related principally writedown property plant equipment performance fibers business specialty materials reportable segment business sold december 2004 also recognized charges 33 million consisting 29 million various legal settlements including property damage claims automation control solutions reportable segment 14 million writeoff receivables inventories assets net reversal reserve 10 million established prior year contract settlement 2003 recognized charge 235 million probable reasonably estimable environmental liabilities mainly related matter entitled interfaith community organization et al v honeywell international inc et al remediation environmental conditions around onondaga lake syracuse new york discussed note 21 notes financial statements “item 8 financial statements supplementary data” also recognized charges 30 million consisting 26 million various legal settlements 4 million specialty materials reportable segment including loss sale investment owned equity investee following tables provide details pretax impact total net repositioning charges reportable segment aerospace automation control solutions specialty materials transportation systems corporate liquidity capital resources cash flow summary cash flows operating investing financing activities reflected consolidated statement cash flows summarized follows cash provided operating activities increased 189 million 2005 compared 2004 due primarily increased cash earnings improvements working capital receivables inventories accounts payable 270 million partially offset increase asbestos liability payments net insurance receipts 139 million cash provided operating activities increased 54 million 2004 compared 2003 due primarily increased cash earnings decrease voluntary us pension contributions 630 million increase cash provided operating activities partially offset increase asbestos liability payments net insurance receipts 558 million prior year included 472 million cash received connection settlement insurance carrier increase working capital usage 268 million principally related higher sales weakening us dollar versus euro canadian dollar throughout 2004 cash used investing activities increased 1426 million 2005 compared 2004 due primarily increase spending acquisitions 2295 million primarily novar uop zellweger partially offset increase proceeds sales businesses 571 million largely sale security printing business increase proceeds 320 million maturities investment securities cash used investing activities decreased 96 million 2004 compared 2003 due primarily increase proceeds sales businesses 289 million largely dispositions security monitoring vcsel optical products businesses 2004 additionally proceeds maturity investment securities 80 million 2004 decrease cash used investing activities partially offset increase spending acquisitions 185 million due principally various acquisitions automation control solutions reportable segment investment 115 million auction rate securities cash used financing activities increased 1493 million 2005 compared 2004 due primarily increase debt repayments 1120 million related increase scheduled maturities longterm debt 953 million repayment debt 702 million assumed novar acquisition partially offset increase shortterm commercial paper borrowings 535 million related principally uop acquisition share repurchases increase cash used financing activities also driven increase repurchases common stock 409 million higher dividend payments 57 million partially offset increased proceeds issuances common stock 93 million total debt 5106 million december 31 2005 167 million 3 percent lower december 31 2004 mainly due lower longterm debt due scheduled maturities 2005 partially offset higher shortterm borrowings mainly due acquisitions share repurchases cash used financing activities increased 328 million 2004 compared 2003 due primarily increase repurchases common stock 687 million connection stock repurchase program partially offset reduction debt repayments net issuances 337 million 2004 total debt 5273 million december 31 2004 113 million 2 percent higher december 31 2003 principally reflecting higher commercial paper borrowings fund share repurchases 2004 liquidity manage businesses maximize operating cash flows primary source liquidity operating cash flows 24 billion 2005 approximately 12 billion cash equivalents december 31 2005 36 billion december 31 2004 due primarily acquisitions share repurchases working capital receivables inventories accounts payable 55 billion december 31 2005 businesses focused implementing strategies improve working capital turnover 2006 increase operating cash flows considering current economic environment businesses operate business plans strategies including focus growth cost reduction productivity initiatives believe cash balances operating cash flows remain principal source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines access public debt equity markets well ability sell trade accounts receivables source liquidity ability issue shortterm debt commercial paper market commercial paper notes sold discount maturity 270 days date issuance borrowings commercial paper program available general corporate purposes well financing potential acquisitions 754 million commercial paper outstanding december 31 2005 ability access commercial paper market related cost borrowings affected strength credit ratings 25 billion committed bank revolving credit facilities revolving credit facilities credit ratings periodically reviewed major independent debtrating agencies 2004 standard poors fitchs rating services affirmed corporate ratings longterm debt respectively shortterm debt a1 respectively maintained honeywells ratings outlook “stable” 2005 moodys investors service affirmed corporate rating longterm shortterm debt a2 p1 respectively revised honeywells ratings outlook “stable” “negative” revolving credit facilities 23 billion maintained group banks arranged citigroup global markets inc jp morgan securities inc comprised 1 billion fiveyear credit agreement b 13 billion fiveyear credit agreement credit agreements maintained general corporate purposes including support issuance commercial paper 1 billion fiveyear credit agreement includes 200 million sublimit potential issuance letters credit 13 billion fiveyear credit agreement includes 300 million sublimit potential issuance letters credit new 364day 240 million canadian dollar facility 206 million us dollars established 2005 new facility arranged citibank na canadian branch general corporate purposes including support issuance commercial paper canada see note 15 notes financial statements “item 8 financial statements supplementary data” also shelf registration statement filed securities exchange commission allows us issue 3 billion debt securities common stock preferred stock may offered one offerings terms determined time offering net proceeds offering would used general corporate purposes including repayment existing indebtedness capital expenditures acquisitions also sell interests designated pools trade accounts receivables third parties sold receivables overcollateralized 178 million december 31 2005 retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools new receivables sold agreement previously sold receivables collected retained interests receivables reflected amounts expected collected us carrying value approximates fair value retained interests sold receivables 500 million december 31 2005 2004 addition normal operating cash requirements principal future cash requirements fund capital expenditures debt repayments dividends employee benefit obligations environmental remediation costs asbestos claims severance exit costs related repositioning actions share repurchases strategic acquisitions specifically expect primary cash requirements 2006 follows • capital expenditureswe expect spend approximately 800 million capital expenditures 2006 primarily growth replacement production capacity expansion cost reduction maintenance • debt repaymentsthere 995 million scheduled longterm debt maturities 2006 expect refinance substantially maturities debt capital markets 2006 • share repurchasesin november 2005 honeywells board directors authorized company repurchase 3 billion common stock intend repurchase outstanding shares time open market using cash generated operations • dividendswe expect pay approximately 750 million dividends common stock 2006 reflecting 10 percent increase dividend rate announced honeywells board directors december 2005 • asbestos claimswe expect cash spending asbestos claims cash receipts related insurance recoveries approximately 520 176 million respectively 2006 see asbestos matters note 21 notes financial statements “item 8 financial statements supplementary data” discussion • pension contributionsassuming actual pension plan returns consistent expected rate return 9 percent 2006 beyond interest rates remain constant would required make contributions us pension plans satisfy minimum statutory funding requirements foreseeable future however expect make voluntary contributions approximately 45 million us pension plans 2006 also expect make contributions nonus plans approximately 150 million 2006 see note 22 notes financial statements “item 8 financial statements supplementary data” discussion pension contributions • repositioning actionswe expect cash spending severance exit costs necessary execute remaining repositioning actions approximate 125 million 2006 • environmental remediation costswe expect spend approximately 250 million 2006 remedial response voluntary cleanup costs see environmental matters section mda discussion made allcash offer entire issued ordinary share capital first technology plc provider gas sensing detection products services headquartered uk aggregate value offer approximately 718 million fully diluted exercise outstanding options including assumption approximately 199 million outstanding debt expect complete transaction first half 2006 subject regulatory approval continuously assess relative strength business portfolio strategic fit market position profit cash flow contribution order upgrade combined portfolio identify business units benefit increased investment identify acquisition candidates strategic plan strengthen existing core businesses also identify businesses fit longterm strategic plan based market position relative profitability growth potential businesses considered potential divestiture restructuring repositioning actions subject regulatory constraints 2005 realized 997 million cash proceeds sales nonstrategic businesses based past performance current expectations believe operating cash flows sufficient meet future cash needs available cash committed credit lines access public debt equity markets well ability sell trade accounts receivables provide additional sources shortterm longterm liquidity fund current operations debt maturities future investment opportunities based current financial position expected economic performance believe liquidity adversely impacted inability access sources financing contractual obligations probable liability payments following summary significant contractual obligations probable liability payments december 31 2005 1 assumes longterm debt outstanding scheduled maturity 2 purchase obligations entered various vendors normal course business consistent expected requirements 3 amounts estimates asbestos related cash payments narco bendix narco estimated payments based terms conditions including evidentiary requirements specified definitive agreements principle pursuant trust distribution procedures bendix payments based estimate pending claims projecting future footnotes continued next page footnotes continued previous page events subject many uncertainties could cause asbestos liabilities higher lower projected recorded see asbestos matters note 21 notes financial statements “item 8 financial statements supplementary data” 4 amounts represent probable insurance recoveries 2018 see asbestos matters note 21 notes financial statements “item 8 financial statements supplementary data” table excludes pension postretirement benefits opeb obligations made voluntary contributions 40 670 million us pension plans 2004 2003 respectively future plan contributions dependent upon actual plan asset returns interest rates assuming actual plan asset returns consistent expected plan return 9 percent 2006 beyond interest rates remain constant would required make contributions us pension plans satisfy minimum statutory funding requirements foreseeable future expect make voluntary contributions approximately 45 million us plans 2006 expect make contributions nonus plans approximately 150 million 2006 payments due opeb plans required funded advance paid medical costs incurred covered retiree populations principally dependent upon future cost retiree medical benefits plans expect opeb payments approximate 186 million 2006 including benefit approximately 19 million medicare prescription subsidy see note 22 notes financial statements “item 8 financial statements supplementary data” discussion pension opeb plans offbalance sheet arrangements following summary offbalance sheet arrangements guaranteeswe issued party following direct indirect guarantees december 31 2005 expect guarantees material adverse effect consolidated results operations financial position liquidity connection disposition certain businesses facilities indemnified purchasers expected cost remediation environmental contamination existing date disposition expected costs accrued environmental assessments made remedial efforts probable costs reasonably estimated retained interests factored pools trade accounts receivablesas source liquidity sell interests designated pools trade accounts receivables third parties sold receivables 500 million december 31 2005 overcollateralized retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools overcollateralization provides credit support purchasers receivable interest limiting losses event portion receivables sold becomes uncollectible december 31 2005 retained subordinated undivided interests risk 178 573 million respectively based underlying credit quality receivables placed designated pools receivables sold expect losses related retained interests risk material adverse effect consolidated results operations financial position liquidity environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous toxic substances accord environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing toxic substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually jointly responsible parties determine feasibility various remedial techniques address environmental matters policy see note 1 notes financial statements “item 8 financial statements supplementary data” record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonable possible environmental loss excess accrual expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects remedial techniques utilized agreements parties remedial response voluntary cleanup payments 247 248 77 million 2005 2004 2003 respectively currently estimated approximately 250 million 2006 expect fund expenditures operating cash flow remedial response voluntary cleanup costs charged pretax earnings 186 536 235 million 2005 2004 2003 respectively december 31 2005 2004 recorded liability environmental matters 879 895 million respectively addition 2005 2004 incurred operating costs ongoing businesses approximately 87 75 million respectively relating compliance environmental regulations although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position see note 21 notes financial statements “item 8 financial statements supplementary data” discussion commitments contingencies including related environmental matters toxic tort litigation financial instruments result global operating financing activities exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position minimize risks interest foreign currency exchange rate commodity price fluctuations normal operating financing activities deemed appropriate use derivative financial instruments use derivative financial instruments trading speculative purposes use leveraged derivative financial instruments summary accounting policies derivative financial instruments included note 1 notes financial statements “item 8 financial statements supplementary data” conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities anticipated transactions arising international trade objective preserve economic value nonfunctional currency cash flows attempt transaction exposures hedged natural offsets fullest extent possible opportunities exhausted foreign currency forward option agreements third parties principal currency exposures relate euro canadian dollar british pound us dollar exposure market risk changes interest rates relates primarily debt obligations described notes 15 17 notes financial statements “item 8 financial statements supplementary data” issue fixed variable rate debt use interest rate swaps manage exposure interest rate movements reduce overall borrowing costs financial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value cash flows derivative financial instruments considering reasonably possible changes interest currency exchange rates restrict use derivative financial instruments hedging activities following table illustrates potential change fair value interest rate sensitive instruments based hypothetical immediate onepercentagepoint increase interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 percent weakening us dollar versus local currency exchange rates across maturities potential change fair value contracts hedging commodity purchases based 20 percent decrease price underlying commodity across maturities december 31 2005 2004 2 changes fair value foreign currency exchange contracts offset changes fair value cash flows underlying hedged foreign currency transactions 3 changes fair value forward commodity contracts offset changes cash flows underlying hedged commodity transactions discussion procedures monitor market risk estimated changes fair value resulting sensitivity analyses forwardlooking statements market risk assuming certain adverse market conditions occur actual results future may differ materially estimated results due actual developments global financial markets methods used us assess mitigate risk discussed considered projections future events matters litigation see note 21 notes financial statements “item 8 financial statements supplementary data” discussion environmental asbestos litigation matters sales us government sales us government acting various departments agencies prime contractors amounted 3719 3464 3111 million 2005 2004 2003 respectively included sales us department defense dod prime contractor subcontractor 2939 2808 2564 million 2005 2004 2003 respectively sales dod accounted 106 110 111 percent total sales 2005 2004 2003 respectively us defense spending increased 2005 also expected increase 2006 backlog total backlog december 31 2005 2004 9327 8229 million respectively anticipate approximately 7594 million 2005 backlog filled 2006 believe backlog necessarily reliable indicator future sales substantial portion orders constituting backlog may canceled customers option inflation highly competitive market conditions minimized inflations impact selling prices products costs purchased materials except costs certain raw materials specialty materials transportation systems reportable segments see review business segments section mda discussion cost increases materials labor generally low productivity enhancement programs including repositioning actions six sigma initiatives largely offset impact recent accounting pronouncements see note 1 notes financial statements “item 8 financial statements supplementary data” discussion recent accounting pronouncements item 7aitem 7 managements discussion analysis financial condition results operations following managements discussion analysis financial condition results operations “mda” intended help reader understand results operations financial condition honeywell international inc “honeywell” three years ended december 31 2006 references notes relate notes financial statements “item 8 financial statements supplementary data” consolidated results operations net sales change net sales 2006 2005 attributable following discussion net sales reportable segment found review business segments section mda cost products services sold gross margin increased 1 percentage point 2006 compared 2005 due primarily higher margins specialty materials segment following acquisition full ownership uop 13 percentage points lower pension postretirement benefits expense 05 percentage points partially offset higher repositioning costs 02 percentage points gross margin increased 33 percentage points 2005 compared 2004 primarily due increase 12 percentage points gross margin reportable segments lower repositioning charges 08 percentage points lower pension postretirement benefits expense 05 percentage points discussion segment results see “review business segments” selling general administrative expenses selling general administrative expenses percentage sales flat 2006 compared 2005 due primarily reduction expenses aerospace segment reflects benefit prior restructuring actions offsetting higher expenses automation control solutions acs specialty materials result acquisitions reduction repositioning pension costs 02 percentage points offset 02 percentage point increase expenses 77 million relating stockbased compensation expense following adoption fas 123r see note 20 stockbased compensation plans selling general administrative expenses percentage sales increased 04 percentage points 2005 compared 2004 due primarily impact acquisition novar higher spending information technology systems primarily erp system aerospace 03 percentage points higher repositioning charges 01 percentage points pension postretirement benefits pension expense decreased 23 percent 2006 compared 2005 due principally decrease amortization net losses principally us plans pension expense decreased 2 percent 2005 compared 2004 due principally decrease amortization net losses partially offset pension expense novar acquired 2005 postretirement benefits expense decreased 7 percent 2006 compared 2005 due primarily favorable demographic experience plan 27 percent 2005 compared 2004 due primarily effect implementing medicare prescription drug improvement modernization act 2003 see note 22 financial statements discussion incomeexpense income decreased 120 million 52 percent 2006 compared 2005 primarily due 121 million reduction equity income affiliated companies primarily related uop following acquisition full ownership uop november 2005 income decreased 198 million compared 2004 46 percent compared 2004 primarily result pretax gains sales security monitoring vcsel optical products businesses 215 36 million respectively recognition gain 27 million related favorable settlement patent infringement lawsuit interest financial charges interest financial charges increased 5 percent 2006 compared 2005 due higher debt balances higher borrowing costs increased 8 percent 2005 compared 2004 due higher average shortterm debt outstanding higher interest rates 2005 tax expense effective tax rate decreased 62 percentage points 2006 compared 2005 due principally absence 2005 onetime tax charge 155 million repatriation foreign earnings american jobs creation act 2004 offset part 64 million tax benefits associated 2005 sale industrial wax business higher tax basis book basis addition 2006 benefits recognized favorable resolution certain tax audits offset tax charge upfront licensing certain inprocess research development effective tax rate lower statutory rate 35 percent due part tax benefits derived export sales lower foreign taxes benefits tax planning strategies effective tax rate increased 87 percentage points 2005 compared 2004 due principally tax impact repatriation approximately 27 billion foreign earnings 22 billion subject significantly reduced tax american jobs creation act 2004 offset part higher effective tax benefit rate repositioning charges incurred 2004 see note 6 financial statements information taxes including detailed effective tax rate reconciliation 2007 effective tax rate could change based upon companys operating results outcome tax positions taken regarding previously filed tax returns currently audit various federal state foreign tax authorities several may finalized foreseeable future company believes adequate reserves matters outcome could materially impact results operations operating cash flows period resolved income continuing operations increase 067 earnings diluted per share continuing operations 2006 compared 2005 primarily relates increase segment profit aerospace automation control solutions income generated acquisition full ownership uop specialty materials reduced repositioning pension costs reduction number shares outstanding due previously announced stock repurchase program offset impact adopting fas 123r “sharebased payment” stockbased compensation expense 77 million 2006 addition 2005 onetime tax charge 155 million repatriation foreign earnings american jobs creation act 2004 decreased earnings per share 2005 increase 039 earnings diluted per share continuing operations 2005 compared 2004 relates primarily increase segment profit reportable segments discussion segment results see “review business segments” income discontinued operations income discontinued operations 5 million 001 earnings per share diluted 2006 relates operating results indalex business sold february 2006 sun capital partners inc income discontinued operations 95 million 011 earnings per share 2005 relates operating results indalex security printing businesses part novar acquisition subsequently divested december 2005 security printing business sold mf worldwide corp see note 2 financial statements discussion sales business overview business overview provides summary honeywells four reportable operating segments aerospace automation control solutions specialty materials transportation systems including generate income relevant economic factors impacting results discussion segments results three years ended december 31 2006 areas focus 2007 company operating segments comprised various product service classes serve multiple end markets see note 23 financial statements information reportable segments definition segment profit areas focus 2007 areas focus 2007 generally applicable operating segments include • driving profitable growth building innovative products address customer needs • achieving sales growth technological excellence manufacturing capability global expansion especially focused emerging regions china india middle east • continuing grow disciplined acquisition rigorous integration processes • proactively managing raw material cost increases formula price agreements price increases hedging activities feasible • driving free cash flow increased net income effective working capital management enabling continued investment businesses strategic acquisitions returning value shareholders share repurchases increased dividend payments • utilizing enablers honeywell operating system hos functional transformation velocity product development vpd™ standardize way work increase quality reduce costs product manufacturing reduce costs enhance quality administrative functions improve business operations investments systems process improvements • managing corporate costs including costs incurred asbestos environmental matters pension postretirement expenses tax expense review business segments reconciliation segment profit income continuing operations taxes follows 1 amounts included cost products services sold selling general administrative expenses aerospace overview aerospace leading global supplier aircraft engines avionics related products services aircraft manufacturers airlines aircraft operators military services defense space contractors aerospace products services include auxiliary power units propulsion engines environmental control systems engine controls flight safety communications navigation radar surveillance systems aircraft lighting management technical services advanced systems instruments aircraft wheels brakes repair overhaul services aerospace sells products original equipment oe manufacturers air transport regional business general aviation aircraft segments provides spare parts repair maintenance services aftermarket principally aircraft operators united states government also major customer defense space products economic factors aerospace operating results principally driven • global demand air travel reflected new aircraft production well demand spare parts maintenance repair services aircraft currently use • aircraft production commercial air transport regional jet business general aviation oe manufacturers well global flying hours airline profitability • level mix us government appropriations defense space programs military activity • pricing volatility pricing availability raw materials results operations aerospace sales increased 6 percent 8 percent 2006 2005 respectively due primarily strong growth new aircraft deliveries increased global flying hours aerospace sales major customer endmarkets follows details regarding net increase sales customer endmarkets 2006 2005 follows • air transport regional original equipment oe sales increased 14 percent 2006 9 percent 2005 primarily driven increased deliveries air transport customers primarily due higher aircraft production rates • air transport regional aftermarket sales increased 4 percent 2006 result increased sales spare parts maintenance activity relating 5 percent increase global flying hours offset anticipated decline sales upgrades retrofits avionics equipment meet certain mandated regulatory standards 2005 sales increased 3 percent due primarily 7 percent increase flying hours partially offset decrease level faamandated safety avionics equipment upgrades retrofits impact phaseout regional aircraft turboprop engines • business general aviation oe sales increased 16 percent 2006 42 percent 2005 due primarily continued demand business jet end market evidenced increase new business jet deliveries high demand fractional ownership market sales primarily relate sales primus epic integrated avionics systems tfe 731 htf 7000 engines generated sales commencing 2005 • business general aviation aftermarket sales increased 1 percent 2006 due increased sales spare parts increased maintenance activity resulting part higher engine utilization partially offset lower sales mandated upgrades retrofits avionics equipment required prior year meet certain mandated regulatory standards 2005 sales increased 10 percent due mandates result increased engine utilization corporate aircraft • defense space sales increased 3 percent 2006 primarily due higher sales surface systems sales spare parts helicopters offset lower volume space sales due delays project funding 2005 defense space sales increased 2 percent primarily driven platform upgrades warrelated activities growth precision munitions increased spending restricted space programs factors lower replenishment demand spare parts us military 2005 2006 aerospace segment profit increased 13 percent 2006 compared 2005 due primarily sales volume growth increased prices productivity savings including benefits prior restructuring actions partially offset inflation impact stronger oe sales typically lower margins aftermarket sales segment profit increased 18 percent 2005 compared 2004 due primarily volume growth effect productivity actions partially offset increase spending information technology systems 2007 areas focus aerospaces primary areas focus 2007 include • continuing grow sales profitability commercial aerospace aftermarket highly competitive cost focused airline industry • securing honeywell product content new aircraft platforms • continuing design equipment enhances safety performance durability aerospace defense equipment reducing weight operating costs • developing differentiated affordable products services defense space endmarket automation control solutions acs overview acs provides innovative solutions make homes buildings industrial sites airport facilities infrastructure efficient safe comfortable acs products services include controls heating cooling indoor air quality ventilation humidification home automation advanced software applications homebuilding control optimization sensors switches control systems instruments measuring pressure air flow temperature electrical current security fire gas detection access control video surveillance remote patient monitoring systems installation maintenance upgrades systems keep buildings safe comfortable productive automation control solutions industrial plants including advanced software automation systems integrate control monitor complex processes many types industrial settings economic factors acss operating results principally driven • growth global commercial construction including retrofits upgrades • demand residential retrofits upgrades • industrial production • us european economic conditions • strength capital spending process building automation • changes fire security health care safety concerns regulations results operations acs sales increased 17 percent 2006 compared 2005 due organic sales growth 10 percent 7 percent growth acquisitions net divestitures acs businesses contributed organic growth year 2005 sales increased 17 percent compared 2004 primarily due growth acquisitions 13 percent organic growth 4 percent organic sales growth acs products businesses increased 8 percent 2006 compared 2005 primarily due strong customer demand new products security life safety products increased sales customers emerging markets environmental combustion sensing control products 2005 organic sales products increased 5 percent compared 2004 primarily due strong sales fire solutions security products favorable effects foreign exchange organic sales acs solutions businesses increased 11 percent 2006 compared 2005 driven continued strong orders growth strong conversion sales order backlog increased sales emerging markets strong revenue energy projects 2005 organic sales growth solutions businesses 3 percent compared 2004 due primarily favorable foreign exchange increased capital spending sales acquisitions net divestitures increased 7 percent 2006 compared 2005 largely representing revenues acs products businesses relating novar primarily environmental combustion building controls life safety products first quarter 2006 zellweger gas detection first two quarters 2006 revenues gardiner groupe security distribution first technology gas detection acquisitions last three quarters 2006 2005 sales acquisitions net divestitures increased 13 percent compared 2004 due primarily acquisition novar partially offset loss sales due divestiture security monitoring business acs segment profit increased 15 percent 2006 compared 2005 due principally increased sales volume productivity savings including net integration savings acquisitions offset continued inflation segment profit also negatively impacted 2006 contract loss experienced building solutions project erp implementation costs acs segment profit 2005 increased 19 percent compared 2004 favorable effects productivity actions acquisitions novar higher sales volume offset unfavorable effects lower prices investments sales marketing initiatives 2007 areas focus acss primary areas focus 2007 include • extending technology leadership lowest total installed cost integrated product solutions • defending extending installed base customer productivity globalization • sustaining strong brand recognition brand channel management • centralization standardization global software development capabilities specialty materials overview specialty materials develops manufactures highpurity highquality highperformance chemicals materials applications automotive healthcare agricultural packaging carpet fibers refrigeration appliance housing semiconductor wax adhesives segments specialty materials also provides process technology products services petroleum refining petrochemical industries specialty materials product portfolio includes fluorocarbons caprolactam ammonium sulfate fertilizer specialty films advanced fibers customized research chemicals intermediates electronic materials chemicals catalysts adsorbents economic factors specialty materials operating results principally driven • degree volatility natural gas benzene key component phenol fluorspar prices • impact environmental energy efficiency regulations • extent change order rates global semiconductor customers • global demand nonozone depleting hydro fluorocarbons hfcs • extent slowdown us residential housing industry • level investment refining petrochemical capacity utilization andor expansion results operations specialty materials sales increased 43 percent 2006 compared 2005 due organic sales growth 7 percent 36 percent growth due uop acquisition net divestitures sales decreased 8 percent 2005 compared 2004 due loss sales divested businesses 16 percent offset organic growth 4 percent growth acquisitions uop 4 percent organic growth 7 percent 2006 primarily due higher volume prices organic sales fluorine products business increased 9 percent due continued strong demand nonozone depleting hfc products organic growth resins chemicals business 4 percent primarily due price increases recover increased raw material costs businesses experienced lower sales growth fourth quarter 2006 due slowdown us residential housing industry resins chemicals business also negatively impacted partial facility outage second half 2006 specialty products organic sales increased 10 percent due higher sales customers semiconductor industry increased sales specialty additives advanced fiber body armor 2005 organic sales increased 4 percent largely result higher prices 7 percent primarily resins chemicals fluorine businesses offsetting lower volumes specialty products businesses sales acquisitions net divestitures grew 36 percent 2006 compared 2005 due 44 percent growth sales uop consolidated specialty materials segment following acquisition remaining 50 percent interest uop november 2005 prior date uop results included income uop sales grown due continued strength petrochemical refining industries growth offset loss sales 8 percent principally divestiture industrial wax north american nylon fiber businesses specialty materials segment profit increased 121 percent 2006 compared 2005 due principally impact uop acquisition net divestitures increased organic growth productivity savings net lost margin partial facility outage price increases including benefits formula based pricing contracts offset impact continued inflation raw material costs specialty materials segment profit 2005 increased 40 percent compared 2004 due principally price increases favorable effect productivity actions partially offset higher raw material costs lower sales volumes 2007 areas focus specialty materials primary areas focus 2007 include • increasing resources market penetration asia • developing new products address energy efficiency global warming security regulations • increasing product differentiation order continue expand margins • continued contract wins petrochemical refining industries transportation systems overview transportation systems provides automotive products improve performance efficiency appearance cars trucks vehicles stateoftheart technologies world class brands global solutions customers needs transportation systems products include garrettr turbochargers chargeair thermal systems car care products including antifreeze prestoner filters framr spark plugs autoliter cleaners waxes additives holtsr brake hard parts friction materials bendixr juridr transportation systems sells products oe automotive truck manufacturers eg bmw caterpillar daimlerchrysler ford volkswagen wholesalers distributors retail aftermarket economic factors transportation systems operating results principally driven • global demand automobile truck production • diesel penetration rates new platforms • global consumer preferences diesel passenger cars • demand north american truck production conjunction new lower emission regulations • degree volatility raw material prices including nickel steel • changes consumer spending automotive aftermarket car care products results operations transportation systems sales increased 2 percent 2006 compared 2005 primarily due increased sales turbo technologies business offset lower sales consumer products group 2005 sales increased 4 percent compared 2004 due primarily favorable sales mix 2 percent favorable effect foreign exchange 1 percent impact higher prices 1 percent sales turbo technologies business 6 percent higher 2006 compared 2005 primarily due new product introductions europe asia slight increase diesel penetration europe relatively flat sales us sales 5 percent higher 2005 compared 2004 due higher volumes north american truck segment offset lower volumes europe due shift consumer demand among automotive platforms partially offset slight increase diesel penetration sales consumer products group business decreased 4 percent 2006 result reduced consumer spending north america automotive aftermarket products exit north america friction materials oe business sales increased 8 percent 2005 compared 2004 largely due higher prices offset impact exit late 2005 north american friction materials oe business transportation systems segment profit increased 3 percent 2006 compared 2005 due primarily increased turbo technologies volume productivity savings including benefits prior year restructuring actions offset higher material labor inflation increased warranty expense transportation systems segment profit 2005 decreased 3 percent compared 2004 due primarily impact higher raw material costs mainly steel nickel operating costs associated exit north american friction materials oe business late 2005 partially offset effects higher prices productivity actions 2007 areas focus transportation systems primary areas focus 2007 include • sustaining superior turbocharger technology • increasing global market penetration share diesel gasoline turbocharger oem demand • expanding strengthening established strong product brands consumer products group business including expansion new geographic demographic segments repositioning charges summary repositioning charges follows following table summarizes pretax distribution total net repositioning charges income statement classification following tables provide details pretax impact total net repositioning charges reportable segment 2006 recognized repositioning charges totaling 124 million primarily severance costs related workforce reductions 2253 manufacturing administrative positions across reportable segments also 22 million previously established accruals primarily severance aerospace transportation systems specialty materials reportable segments returned income 2006 due mainly changes scope previously announced severance programs due fewer employee separations originally planned associated prior aerospace severance actions 2005 recognized repositioning charges totaling 267 million primarily severance costs related workforce reductions 5269 maufacturing administrative positions across reportable segments including implementation new organizational structure aerospace reportable segment substantially implemented third quarter 2005 reorganized aerospace businesses better align customer segments also 25 million previously established accruals primarily severance corporate specialty materials automation control solutions reportable segments returned income 2005 reversal severance liabilities related changes scope previously announced severance programs excise taxes related executive severance amount previously paid determined longer payable severance amounts previously paid outside service provider part outsourcing arrangement refunded honeywell 2004 recognized repositioning charges totaling 116 million primarily severance costs related workforce reductions 2272 manufacturing administrative positions across reportable segments also 28 million previously established accruals primarily severance returned income 2004 due fewer employee separations originally planned associated certain prior repositioning actions resulting reduced severance liabilities principally automation control solutions reportable segment 2006 repositioning actions expected generate incremental pretax savings approximately 100 million 2007 compared 2006 principally planned workforce reductions cash expenditures severance exit costs necessary execute repositioning actions 142 171 164 million 2006 2005 2004 respectively expenditures severance exit costs funded principally operating cash flows cash expenditures severance exit costs necessary execute remaining actions approximate 125 million 2007 funded operating cash flows 2006 recognized charge 210 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 126 million discussed detail note 21 financial statements recognized charges 51 million related corporate segment primarily settlement property damage claim litigation matter brunswick ga entrance plea agreement related environmental matter baton rouge la facility see note 21 financial statements recognized impairment charges 12 million related writedown property plant equipment held sale specialty materials also recognized credit 18 million connection arbitration award overcharges supplier phenol specialty materials 2005 transactions 2005 recognized charge 186 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 10 million discussed detail note 21 financial statements recognized credit 67 million connection arbitration award overcharges supplier phenol specialty materials business june 2003 end 2004 recognized impairment charges 23 million related writedown property plant equipment held used specialty materials reportable segment also recognized charges 18 million principally related modification lease agreement corporate headquarters facility 10 million various legal settlements 7 million 2004 recognized charge 536 million probable reasonably estimable environmental liabilities primarily related estimated costs courtordered excavation transport offsite disposal approximately one million tons chromium residue present predecessor honeywell site located jersey city new jersey environmental conditions around onondaga lake syracuse new york environmental matters discussed detail note 21 financial statements recognized asbestos related litigation charges net insurance 76 million discussed note 21 recognized impairment charge 42 million second quarter 2004 related principally writedown property plant equipment performance fibers business specialty materials reportable segment business sold december 2004 also recognized charges 33 million consisting 29 million various legal settlements including property damage claims automation control solutions reportable segment 14 million writeoff receivables inventories assets net reversal reserve 10 million established prior year contract settlement liquidity capital resources company continues manage businesses maximize operating cash flows primary source liquidity supplement operating cash shortterm debt commercial paper market longterm borrowings continue balance cash financing uses investment existing core businesses acquisition activity share repurchases dividends cash flow summary cash flows operating investing financing activities reflected consolidated statement cash flows years ended december 31 2006 2005 2004 summarized follows cash provided operating activities increased 769 million 2006 compared 2005 primarily due increased earnings lower cash payments asbestos 331 million receipt 100 million sale insurance receivable increase customer advances deferred income net acquisitions 115 million 93 million receipt arbitration award relating raw material pricing specialty materials partially offset increased working capital usage accounts receivables net tax receivables inventory accounts payable 263 million including proceeds 58 million sale longterm receivable higher cash tax payments net tax receipts 236 million higher pension postretirement payments 154 million cash provided operating activities increased 189 million 2005 compared 2004 primarily due increased earnings working capital improvements net tax receivables 258 million offset higher cash payments asbestos 232 million higher cash tax payments net tax receipts 57 million cash used investing activities decreased 1396 million 2006 compared 2005 due primarily lower spending acquisitions partially offset lower proceeds 285 million maturities investment securities 2006 cash paid acquisitions net cash acquired 633 million primarily first technologies gardiner groupe compared 2679 million 2005 primarily acquisitions novar uop sale proceeds divestitures 665 million 2006 primarily due sale indalex february 425 million first technology safety analysis business ftsa 93 million may 2006 sale first technology automotive business december 2006 90 million cash used investing activities increased 1426 million 2005 compared 2004 due primarily acquisition novar uop cash used financing activities decreased 67 million 2006 compared 2005 primarily due 356 million reduction payment debt assumed acquisitions increase net proceeds debt 258 million increased proceeds issuance common stock primarily related stock option exercises 229 million offset increases repurchases common stock 763 million increased dividend payments cash used financing activities increased 1493 million 2005 compared 2004 primarily due payment debt assumed acquisition 702 million increased net repayments debt 418 million increase repurchases common stock 409 million liquidity businesses focused implementing strategies improve working capital turnover 2007 increase operating cash flows considering current economic environment businesses operate business plans strategies including focus growth cost reduction productivity initiatives believe cash balances operating cash flows remain principal source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines access public debt equity markets well ability sell trade accounts receivables source liquidity ability issue shortterm debt commercial paper market commercial paper notes sold discount maturity 270 days date issuance borrowings commercial paper program available general corporate purposes well financing potential acquisitions 669 million commercial paper outstanding december 31 2006 ability access commercial paper market related cost borrowings affected strength credit ratings 25 billion committed bank revolving credit facilities revolving credit facilities credit ratings periodically reviewed major independent debtrating agencies 2006 standard poors fitchs moodys rating services affirmed corporate ratings longterm debt a2 respectively shortterm debt a1 p1 respectively maintained honeywells ratings outlook “stable” april 27 2006 honeywell entered 23 billion fiveyear credit agreement “credit agreement” syndicate banks commitments credit agreement increased pursuant terms credit agreement aggregated amount exceed 3 billion credit facility contains 500 million sublimit issuance letters credit 23 billion credit agreement maintained general corporate purposes including support issuance commercial paper borrowings issued 145 million letters credit facility december 31 2006 credit agreement replaces previous 1 billion five year credit agreement dated october 22 2004 13 billion five year credit agreement dated november 26 2003 “prior agreements” credit agreement restrict honeywells ability pay dividends contain financial covenants september 2006 company renewed 364day canadian dollar cad credit facility 220 million cad facility established general corporate purposes including support issuance commercial paper canada borrowings outstanding credit facility december 31 2006 march 2006 company issued 300 million floating rate libor 6 bps senior notes due 2009 400 million 540 senior notes due 2016 550 million 570 senior notes due 2036 collectively “notes” notes senior unsecured unsubordinated obligations honeywell rank equally honeywells existing future senior unsecured debt senior honeywells subordinated debt offering resulted gross proceeds 1250 million offset 11 million discount closing costs relating offering proceeds notes used repay commercial paper debt first quarter 2006 company made cash tender offer repurchased 225 million 500 million 5125 notes due november 2006 costs relating early redemption notes immaterial fourth quarter 2006 company repaid 360 million euro 275 million 527 notes primarily issuance commercial paper also current shelf registration statement filed securities exchange commission allows us issue 3 billion debt securities common stock preferred stock may offered one offerings terms determined time offering net proceeds offering would used general corporate purposes including repayment existing indebtedness capital expenditures acquisitions also sell interests designated pools trade accounts receivables third parties sold receivables overcollateralized 171 million december 31 2006 retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools new receivables sold agreement previously sold receivables collected retained interests receivables reflected amounts expected collected us carrying value approximates fair value retained interests sold receivables 500 million december 31 2006 2005 addition normal operating cash requirements principal future cash requirements fund capital expenditures debt repayments dividends employee benefit obligations environmental remediation costs asbestos claims severance exit costs related repositioning actions share repurchases strategic acquisitions specifically expect primary cash requirements 2007 follows • capital expenditureswe expect spend approximately 800 million capital expenditures 2007 primarily growth replacement production capacity expansion cost reduction maintenance • debt repaymentsthere 423 million scheduled longterm debt maturities 2007 expect refinance substantially maturities debt capital markets 2007 • share repurchaseswe intend continue repurchase outstanding shares time open market using cash generated operations february 2007 board directors authorized repurchase shares 3 billion honeywell common stock honeywell intends repurchase outstanding shares time open market using cash flow generated operations amount timing repurchases may vary depending market conditions level investing activities • dividendswe expect pay approximately 800 million dividends common stock 2007 reflecting 10 percent increase dividend rate announced honeywells board directors december 2006 • asbestos claimswe expect cash spending asbestos claims cash receipts related insurance recoveries approximately 557 157 million respectively 2007 see asbestos matters note 21 financial statements discussion • pension contributionsassuming actual pension plan returns consistent expected rate return 9 percent 2007 beyond interest rates remain constant would required make contributions us pension plans satisfy minimum statutory funding requirements foreseeable future however expect make voluntary contributions approximately 52 million us pension plans 2007 government contracting purposes also expect make contributions nonus plans approximately 155 million 2007 see note 22 financial statements discussion pension contributions • repositioning actionswe expect cash spending severance exit costs necessary execute remaining repositioning actions approximate 125 million 2007 • environmental remediation costswe expect spend approximately 250 million 2007 remedial response voluntary cleanup costs see environmental matters note 21 financial statements additional information continuously assess relative strength business portfolio strategic fit market position profit cash flow contribution order upgrade combined portfolio identify business units benefit increased investment identify acquisition candidates strategic plan strengthen existing core businesses also identify businesses fit longterm strategic plan based market position relative profitability growth potential businesses considered potential divestiture restructuring repositioning actions subject regulatory constraints 2006 realized 665 million cash proceeds sales nonstrategic businesses based past performance current expectations believe operating cash flows sufficient meet future cash needs available cash committed credit lines access public debt equity markets well ability sell trade accounts receivables provide additional sources shortterm longterm liquidity fund current operations debt maturities future investment opportunities based current financial position expected economic performance believe liquidity adversely impacted inability access sources financing contractual obligations probable liability payments following summary significant contractual obligations probable liability payments december 31 2006 1 assumes longterm debt outstanding scheduled maturity 2 purchase obligations entered various vendors normal course business consistent expected requirements 3 amounts table reflect significant environmental liability payments 2011 see note 21 financial statements additional information 4 amounts estimates asbestos related cash payments narco bendix narco estimated payments based terms conditions including evidentiary requirements specified definitive agreements principle pursuant trust distribution procedures bendix payments based estimate pending future claims projecting future events subject many uncertainties could cause asbestos liabilities higher lower projected recorded see asbestos matters note 21 financial statements additional information 5 amounts represent probable insurance recoveries 2018 see asbestos matters note 21 financial statements table excludes pension postretirement benefits opeb obligations made voluntary contributions 68 40 million us pension plans 2006 2004 respectively future plan contributions dependent upon actual plan asset returns interest rates assuming actual plan asset returns consistent expected plan return 9 percent 2007 beyond interest rates remain constant would required make contributions us pension plans satisfy minimum statutory funding requirements foreseeable future expect make voluntary contributions approximately 52 million us plans 2007 government contracting purposes expect make contributions nonus plans approximately 155 million 2007 payments due opeb plans required funded advance paid medical costs incurred covered retiree populations principally dependent upon future cost retiree medical benefits plans expect opeb payments approximate 189 million 2007 net benefit approximately 22 million medicare prescription subsidy see note 22 financial statements discussion pension opeb plans offbalance sheet arrangements following summary offbalance sheet arrangements guaranteeswe issued party following direct indirect guarantees december 31 2006 expect guarantees material adverse effect consolidated results operations financial position liquidity connection disposition certain businesses facilities indemnified purchasers expected cost remediation environmental contamination existing date disposition expected costs accrued environmental assessments made remedial efforts probable costs reasonably estimated retained interests factored pools trade accounts receivablesas source liquidity sell interests designated pools trade accounts receivables third parties sold receivables 500 million december 31 2006 overcollateralized retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools overcollateralization provides credit support purchasers receivable interest limiting losses event portion receivables sold becomes uncollectible december 31 2006 retained subordinated undivided interests risk 171 579 million respectively based underlying credit quality receivables placed designated pools receivables sold expect losses related retained interests risk material adverse effect consolidated results operations financial position liquidity environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous toxic substances accord environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing toxic substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually jointly responsible parties determine feasibility various remedial techniques address environmental matters policy see note 1 notes financial statements “item 8 financial statements supplementary data” record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess accrual expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects execution timeframe projects remedial techniques utilized agreements parties remedial response voluntary cleanup payments 264 247 248 million 2006 2005 2004 respectively currently estimated approximately 250 million 2007 expect fund expenditures operating cash flow remedial response voluntary cleanup costs charged pretax earnings 210 186 536 million 2006 2005 2004 respectively december 31 2006 2005 recorded liability environmental matters 831 879 million respectively addition 2006 2005 incurred operating costs ongoing businesses approximately 101 87 million respectively relating compliance environmental regulations although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position see note 21 financial statements discussion commitments contingencies including related environmental matters toxic tort litigation financial instruments result global operating financing activities exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position minimize risks interest foreign currency exchange rate commodity price fluctuations normal operating financing activities deemed appropriate use derivative financial instruments use derivative financial instruments trading speculative purposes use leveraged derivative financial instruments summary accounting policies derivative financial instruments included note 1 financial statements conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities anticipated transactions arising international trade objective preserve economic value nonfunctional currency cash flows attempt transaction exposures hedged natural offsets fullest extent possible opportunities exhausted foreign currency forward option agreements third parties principal currency exposures relate us dollar euro british pound canadian dollar hong kong dollar chinese renminbi singapore dollar exposure market risk changes interest rates relates primarily debt pension obligations described notes 14 16 financial statements issue fixed variable rate debt use interest rate swaps manage exposure interest rate movements reduce overall borrowing costs financial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value expected future cash flows derivative financial instruments considering reasonably possible changes interest currency exchange rates restrict use derivative financial instruments hedging activities following table illustrates potential change fair value interest rate sensitive instruments based hypothetical immediate onepercentagepoint increase interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 percent weakening us dollar versus local currency exchange rates across maturities potential change fair value contracts hedging commodity purchases based 20 percent decrease price underlying commodity across maturities december 31 2006 2005 1 asset liability 2 changes fair value foreign currency exchange contracts offset changes fair value cash flows underlying hedged foreign currency transactions 3 changes fair value forward commodity contracts offset changes cash flows underlying hedged commodity transactions discussion procedures monitor market risk estimated changes fair value resulting sensitivity analyses forwardlooking statements market risk assuming certain adverse market conditions occur actual results future may differ materially estimated results due actual developments global financial markets methods used us assess mitigate risk discussed considered projections future events critical accounting policies preparation consolidated financial statements accordance generally accepted accounting principles based selection application accounting policies require us make significant estimates assumptions effects matters inherently uncertain consider accounting policies discussed critical understanding financial statements actual results could differ estimates assumptions differences could material consolidated financial statements discussed selection application disclosure critical accounting policies audit committee board directors independent registered public accountants new accounting standards effective 2006 material impact consolidated financial statements described recent accounting pronouncements section note 1 financial statements “item 8 financial statements supplementary data” contingent liabilitieswe subject number lawsuits investigations claims involve substantial dollar amounts arise conduct global business operations previously owned entities contingencies relate product liabilities including asbestos contractual matters environmental health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes contingencies well potential amounts ranges probable losses recognize liability contingencies based careful analysis matter assistance outside legal counsel applicable experts analysis includes making judgments concerning matters costs associated environmental matters outcome negotiations number cost pending future asbestos claims impact evidentiary requirements contingencies resolved long periods time liabilities may change future due new developments including new discovery fact changes legislation outcomes similar cases judicial system changes assumptions changes settlement strategy discussion contingencies related environmental asbestos matters including managements judgment applied recognition measurement specific liabilities see notes 1 21 financial statements asbestos related contingencies insurance recoverieswe defendant personal injury actions related asbestos containing products refractory products friction products recognize liability asbestos related contingency probable occurrence reasonably estimable regarding north american refractories company narco asbestos related claims accrue pending claims based terms conditions including evidentiary requirements definitive agreements principle current claimants also accrued probable value future narco asbestos related claims 2018 based disease criteria payment values contained narco trust described note 21 financial statements light inherent uncertainties making long term projections regarding claims filing rates disease manifestation believe reasonable basis estimating narco asbestos claims beyond 2018 statement financial accounting standards 5 “accounting contingencies” sfas 5 regarding bendix asbestos related claims accrue estimated value pending claims based expected claim resolution values dismissal rates fourth quarter 2006 company accrued liability estimated cost future anticipated claims related bendix 2011 based assessment additional claims may brought us anticipated resolution values tort system december 2006 also changed methodology valuing bendix pending future claims using average resolution values previous five years using average resolution values previous two years additional information relating bendix related claims see note 21 financial statements continually assess likelihood adverse judgments outcomes contingencies well potential ranges probable losses recognize liability contingencies based analysis individual issue assistance outside legal counsel applicable experts connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical experience insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs consideration impacts settlements insurers december 31 2006 recorded insurance receivables 955 million specifically allocated narco related asbestos liabilities also 19 billion coverage remaining bendix related asbestos liabilities although gaps coverage due insurance company insolvencies certain uninsured periods insurance settlements resulting approximately 50 percent claims cumulative historical basis reimbursable insurance domestic insurance market london excess market substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries projecting future events subject various uncertainties could cause insurance recovery asbestos related liabilities higher lower projected recorded given inherent uncertainty making future projections reevaluate projections concerning probable insurance recoveries light changes projected liability recovery experience relevant factors may impact future insurance recoveries see note 21 financial statements discussion managements judgments applied recognition measurement insurance recoveries asbestos related liabilities defined benefit pension planswe maintain defined benefit pension plans covering majority employees retirees financial reporting purposes net periodic pension expense calculated based upon number significant actuarial assumptions including discount rate plan obligations expected longterm rate return plan assets consider current market conditions including changes investment returns interest rates making assumptions determine expected longterm rate return plan assets utilizing historic expected plan asset returns varying longterm periods combined current market conditions broad asset mix considerations see note 22 financial statements actual targeted asset allocation percentages pension plans discount rate reflects market rate december 31 measurement date highquality fixedincome investments maturities corresponding benefit obligations subject change year information major actuarial assumption included note 22 financial statements key assumptions used developing 2006 2005 2004 net periodic pension expense us plans included following reduction discount rate 2006 2005 reflects lower market interest rate environment highquality fixed income debt instruments discount rate also volatile year determined based upon prevailing rate measurement date use 600 percent discount rate 2007 reflecting increase market interest rate environment plan continue use expected rate return plan assets 9 percent 2007 based principally historical experience actual plan returns net losses pension plans 24 billion december 31 2006 compared 34 billion december 31 2005 decrease 10 billion due primarily lower net losses us plans due higher discount rate december 31 2006 actual plan asset return 14 2006 us plans higher expected rate return 9 loss amortization 2006 net losses december 31 2006 principally result decline year discount rate period 2001 2005 actual plan asset returns expected rates return 2000 2001 2002 2005 net losses recognized december 31 2006 consolidated balance sheet component comprehensive income loss net tax accordance sfas 158 “employers accounting defined benefit pension postretirement plans sfas 158 discussed detail notes 1 22 financial statements future continue systematically recognize net losses net periodic pension expense accordance statement financial accounting standards 87 employers accounting pensions sfas 87 sfas 87 use marketrelated value plan assets reflecting changes fair value plan assets threeyear period net losses excess 10 percent greater marketrelated value plan assets plans projected benefit obligation recognized sixyear period changes net periodic pension expense may occur future due changes expected rate return plan assets discount rate resulting economic events following table highlights sensitivity us pension obligations expense changes assumptions assuming assumptions remain constant net periodic pension expense pension plans expected approximately 200 million 2007 113 million decrease 2006 due principally decrease amortization net losses decline amortization net losses results principally increase discount rate december 31 2006 actual plan asset returns higher expected rate return 2004 2006 2005 2004 required make contribution satisfy minimum statutory funding requirements us pension plans made voluntary contributions 68 40 million us pension plans 2006 2004 respectively mainly government contracting purposes future plan contributions dependent upon actual plan asset returns interest rates assuming actual plan returns consistent expected plan return 9 percent 2007 beyond interest rates remain constant would required make contributions us pension plans satisfy minimum statutory funding requirements foreseeable future however expect make voluntary contributions approximately 52 million cash 2007 certain us pension plans government contracting purposes also expect contribute approximately 155 million cash 2007 nonus defined benefit pension plans satisfy regulatory funding standards longlived assets including tangible definitelived intangible assetsto conduct global business operations execute business strategy acquire tangible intangible assets including property plant equipment definitelived intangible assets december 31 2006 net carrying amount longlived assets totaled 59 billion determination useful lives depreciationamortization purposes whether assets impaired involves use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions periodically evaluate recoverability carrying amount longlived assets whenever events changes circumstances indicate carrying amount longlived asset group may fully recoverable principal factors consider deciding perform impairment review follows • significant underperformance ie declines sales earnings cash flows business product line relation expectations • annual operating plans fiveyear strategic plans indicate unfavorable trend operating performance business product line • significant negative industry economic trends • significant changes planned changes use assets determined impairment review necessary recoverability assets measured comparing carrying amount asset grouping estimated future undiscounted cash flows carrying amount exceeds estimated future undiscounted cash flows asset grouping considered impaired impairment measured difference carrying amount asset grouping fair value use best information available determine fair value usually either market prices available estimate future discounted cash flow key estimates discounted cash flow analysis include expected industry growth rates assumptions volume selling prices costs discount rate selected described detail repositioning charges section mda recorded impairment charges related longlived assets 12 23 million 2006 2005 respectively principally related businesses specialty materials reportable segment businesses significantly underperforming industries negative economic trends subsequently businesses significantly restructured sold process sold goodwill impairment testinggoodwill represents excess acquisition costs fair value net tangible assets identifiable intangible assets acquired business combination goodwill amortized subject impairment testing goodwill balance 84 billion december 31 2006 subject impairment testing annually march 31 whenever events changes circumstances indicate carrying amount may fully recoverable using guidance criteria described statement financial accounting standards 142 sfas 142 “goodwill intangible assets” testing compares carrying values fair values appropriate carrying value reduced fair value fair value reporting units estimated utilizing discounted cash flow approach incorporating historic projected future operating performance impairment test involves use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions completed annual impairment test march 31 2006 determined impairment date income taxesdeferred tax assets liabilities determined based difference financial statements tax basis assets liabilities using enacted tax rates effect year differences expected reverse provision income taxes based domestic international statutory income tax rates tax planning opportunities jurisdictions operate significant judgment required determining income tax provisions well deferred tax asset liability balances including estimation valuation allowances evaluation tax positions december 31 2006 recognized net deferred tax asset 2414 million less valuation allowance 516 million net deferred tax assets primarily comprised net deductible temporary differences net operating loss carryforwards tax credit carryforwards available reduce taxable income future periods determination amount valuation allowance provided recorded deferred tax assets involves estimates regarding 1 timing amount reversal taxable temporary differences 2 expected future taxable income 3 impact tax planning strategies valuation allowance required likely portion deferred tax asset realized assessing need valuation allowance consider available positive negative evidence including past operating results projections future taxable income feasibility ongoing tax planning strategies projections future taxable income include number estimates assumptions regarding volume pricing costs additionally valuation allowances related deferred tax assets impacted changes tax laws net deferred tax asset 2414 million comprised 1624 million related us operations 790 million related nonus operations us net deferred tax asset 1624 million comprised net deductible temporary differences tax credit carryforwards state tax net operating losses believe likely realized generation future taxable income us tax planning strategies maintain valuation allowance 35 million asset related state tax net operating losses nonus net deferred tax asset 790 million comprised principally net operating capital loss carryforwards mainly germany france united kingdom maintain valuation allowance 481 million deferred tax assets reflecting historical experience lower expectations taxable income applicable carryforward periods fully described note 6 financial statements valuation allowance increased 39 139 39 million 2006 2005 2004 respectively event determine able realize net deferred tax assets future reduce amounts charge income period determination made conversely determine able realize net deferred tax assets excess carrying amounts decrease recorded valuation allowance credit income credit goodwill period determination made valuation allowance recognized net deferred tax asset acquired entitys deductible temporary differences operating loss capital loss tax credit carryforwards acquisition date tax benefits items recognized acquisition date shall applied first reduce zero goodwill related acquisition second reduce zero noncurrent intangible assets related acquisition third reduce income tax expense significant judgment required determining income tax provisions statement financial accounting standards 109 “accounting income taxes” sfas 109 evaluating tax positions establish additional provisions income taxes despite belief tax positions fully supportable remain certain positions likely challenged may sustained review tax authorities normal course business company subsidiaries examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes continually assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts give rise revision become known described detail recent accounting pronouncements section note 1 notes financial statements “item 8 financial statements supplementary data” fasb interpretation “fin” 48 “accounting uncertainty income taxesan interpretation fasb statement 109” effective beginning january 1 2007 fin 48 establishes single model address accounting uncertainty tax positions fin 48 clarifies accounting income taxes prescribing minimum recognition threshold tax position required meet recognized financial statements fin 48 also provides guidance derecognition measurement classification interest penalties accounting interim periods disclosure transition fin 48 effective fiscal years beginning december 15 2006 honeywell adopt fin 48 january 1 2007 required based current assessment subject changes may result additional technical guidance issued adoption fin 48 january 1 2007 expected reduce existing reserves uncertain tax positions approximately 130 million recorded cumulative effect adjustment equity largely relating state income tax matters sales recognition longterm contractsin 2006 recognized approximately 12 percent total net sales using percentageofcompletion method longterm contracts automation control solutions aerospace specialty materials reportable segments longterm contracts measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts accounting contracts involves management judgment estimating total contract revenue cost contract revenues largely determined negotiated contract prices quantities modified assumptions regarding contract options change orders incentive award provisions associated technical performance price adjustment clauses inflation indexbased clauses contract costs incurred period time several years estimation costs requires management judgment cost estimates largely based negotiated estimated purchase contract terms historical performance trends economic projections significant factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements revenue cost estimates regularly monitored revised based changes circumstances anticipated losses longterm contracts recognized losses become evident maintain financial controls customer qualification contract pricing estimation processes reduce risk contract losses matters litigation see note 21 financial statements discussion environmental asbestos litigation matters recent accounting pronouncements see note 1 financial statements discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations following management’s discussion analysis financial condition results operations “mda” intended help reader understand results operations financial condition honeywell international inc “honeywell” three years ended december 31 2007 references notes relate notes financial statements “item 8 financial statements supplementary data” consolidated results operations net sales change net sales 2007 2006 attributable following discussion net sales segment found review business segments section mda cost products services sold gross margin increased 08 percentage point 2007 compared 2006 primarily due higher margins specialty materials segment 10 percentage point mainly due continued growth uop ii higher margins aerospace segment 08 percentage point mainly resulting sales volume growth increased prices productivity savings iii lower pension post retirement benefits expense 03 percentage point partially offset lower margins transportation systems segment 10 percentage point primarily attributable lower consumer products group “cpg” sales volume operational planning production issues gross margin increased 1 percentage point 2006 compared 2005 due primarily higher margins specialty materials segment following acquisition full ownership uop 13 percentage points lower pension postretirement benefits expense 05 percentage point partially offset higher repositioning costs 02 percentage point discussion segment results see “review business segments” selling general administrative expenses selling general administrative expenses sga percentage sales decreased 02 percentage point 2007 compared 2006 sga percentage sales decreased segments primarily due benefits cost savings initiatives positive impact prior repositioning actions reduction 01 percentage point lower pension post retirement benefits expense offset higher repositioning costs sga percentage sales flat 2006 compared 2005 due primarily reduction expenses aerospace segment reflects benefit prior restructuring actions offsetting higher expenses automation control solutions acs specialty materials result acquisitions reduction repositioning pension costs 02 percentage point offset 02 percentage point increase expenses 77 million relating stockbased compensation expense following adoption fas 123r see note 20 financial statements incomeexpense income decreased 58 million 52 percent 2007 compared 2006 primarily result lower interest income due interest received favorable tax settlement 2006 higher foreign exchange losses due changes exchange rates income decreased 120 million 52 percent 2006 compared 2005 primarily due 121 million reduction equity income affiliated companies primarily related uop following acquisition full ownership uop november 2005 interest financial charges interest financial charges increased 22 percent 2007 compared 2006 5 percent 2006 compared 2005 due higher debt balances higher borrowing costs tax expense effective tax rate increased 07 percentage point 2007 compared 2006 due principally expiration tax benefit export sales partially offset decrease overall state foreign effective tax rate increase tax benefit domestic manufacturing deduction favorable resolution certain tax audits effective tax rate lower statutory rate 35 percent due part tax benefits derived lower foreign taxes benefits tax planning strategies effective tax rate decreased 62 percentage points 2006 compared 2005 due principally absence 2005 onetime tax charge 155 million repatriation foreign earnings american jobs creation act 2004 offset part 64 million tax benefits associated 2005 sale industrial wax business higher tax basis book basis addition 2006 benefits recognized favorable resolution certain tax audits offset tax charge upfront licensing certain inprocess research development effective tax rate lower statutory rate 35 percent due part tax benefits derived export sales lower foreign taxes benefits tax planning strategies see note 6 financial statements information taxes including detailed effective tax rate reconciliation 2008 effective tax rate could change based upon company’s operating results outcome tax positions taken regarding previously filed tax returns currently audit various federal state foreign tax authorities several may finalized foreseeable future company believes adequate reserves matters outcome could materially impact results operations operating cash flows period resolved income continuing operations increase 065 earnings diluted per share continuing operations 2007 compared 2006 primarily relates increase segment profit significantly aerospace automation control solutions reduction number shares outstanding due previously announced stock repurchase program lower pension post retirement expense partially offset increased repositioning costs increase 067 earnings diluted per share continuing operations 2006 compared 2005 primarily relates increase segment profit aerospace automation control solutions income generated acquisition full ownership uop specialty materials reduced repositioning pension costs reduction number shares outstanding due previously announced stock repurchase program offset impact adopting fas 123r “sharebased payment” stockbased compensation expense 77 million 2006 addition 2005 onetime tax charge 155 million repatriation foreign earnings american jobs creation act 2004 decreased earnings per share 2005 discussion segment results see “review business segments” income discontinued operations income discontinued operations 5 million 001 earnings per share diluted 2006 relates operating results indalex business sold february 2006 sun capital partners inc business overview business overview provides summary honeywell four reportable operating segments aerospace automation control solutions specialty materials transportation systems including respective areas focus 2008 relevant economic factors impacting results discussion segment’s results three years ended december 31 2007 segments comprised various product service classes serve multiple end markets see note 23 financial statements information reportable segments definition segment profit economic factors addition factors listed respect operating segments consolidated operating results principally driven • global economic growth rates us europe emerging regions • overall sales mix particular mix aerospace original equipment aftermarket sales mix automation control solutions products services sales • extent cost savings productivity actions able offset exceed impact material nonmaterial inflation • impact pension discount rate pension expense • impact changes foreign currency exchange rate particularly us dollareuro exchange rate areas focus 2008 areas focus 2008 generally applicable operating segments include • driving profitable growth building innovative products address customer needs • achieving sales growth technological excellence manufacturing capability global expansion especially focused emerging regions china india middle east • continuing grow disciplined acquisition rigorous integration processes • proactively managing raw material cost increases formula long term fixed price agreements price increases hedging activities feasible • driving free cash flow increased net income effective working capital management enabling continued investment businesses strategic acquisitions enabling us return value shareholders share repurchases increased dividend payments • utilizing enablers honeywell operating system hos functional transformation velocity product development vpdä standardize way work increase quality reduce costs product manufacturing reduce costs enhance quality administrative functions improve business operations investments systems process improvements • managing corporate costs including costs incurred asbestos environmental matters pension postretirement expenses tax expense • achieving productivity savings price increases offset inflation review business segments reconciliation segment profit income continuing operations taxes follows 1 amounts included cost products services sold selling general administrative expenses aerospace overview aerospace leading global supplier aircraft engines avionics related products services aircraft manufacturers airlines aircraft operators military services defense space contractors aerospace products services include auxiliary power units propulsion engines environmental control systems engine controls flight safety communications navigation radar surveillance systems aircraft lighting management technical services advanced systems instruments aircraft wheels brakes repair overhaul services aerospace sells products original equipment oe manufacturers air transport regional business general aviation aircraft segments provides spare parts repair maintenance services aftermarket principally aircraft operators united states government also major customer defense space products economic factors aerospace operating results principally driven • global demand air travel reflected new aircraft production well demand spare parts maintenance repair services aircraft currently use • aircraft production commercial air transport regional jet business general aviation oe manufacturers well global flying hours airline profitability • level mix us government appropriations defense space programs military activity • availability price volatility raw materials titanium metals results operations aerospace sales major customer endmarkets follows aerospace sales increased 10 percent 6 percent 2007 2006 respectively details regarding net increase sales customer endmarkets 2007 2006 follows aerospace segment profit increased 16 percent 2007 compared 2006 due primarily sales volume growth increased prices productivity partially offset inflation segment profit increased 13 percent 2006 compared 2005 due primarily sales volume growth increased prices productivity savings including benefits prior restructuring actions partially offset inflation impact stronger oe sales typically lower margins aftermarket sales 2008 areas focus aerospace’s primary areas focus 2008 include • continuing grow sales profitability commercial aerospace aftermarket highly competitive cost focused airline industry • securing honeywell product content new aircraft platforms • continuing design equipment enhances safety performance durability aerospace defense equipment reducing weight operating costs • developing differentiated affordable products services defense space endmarket • delivering worldclass customer service enhancing customer service experience automation control solutions acs overview acs provides innovative solutions make homes buildings industrial sites airport facilities infrastructure efficient safe comfortable acs products services include controls heating cooling indoor air quality ventilation humidification lighting home automation advanced software applications homebuilding control optimization sensors switches control systems instruments measuring pressure air flow temperature electrical current security fire gas detection access control video surveillance remote patient monitoring systems products automatic identification data collection installation maintenance upgrades systems keep buildings safe comfortable productive automation control solutions industrial plants including advanced software automation systems integrate control monitor complex processes many types industrial settings economic factors acs’s operating results principally driven • growth global commercial construction including retrofits upgrades • demand residential security environmental control retrofits upgrades • industrial production • us european economic conditions • economic growth rates emerging markets • strength capital spending process including petrochemical refining building automation • changes energy fire security health care safety environmental concerns regulations results operations acs sales increased 13 percent 2007 compared 2006 including 4 percent favorable impact foreign exchange net growth acquisitions divestitures 2 percent • sales products businesses grew 11 percent driven increased sales security products primarily due growth intrusion products european distribution sales emerging markets ii continued strong demand life safety products iii introduction new environmental combustion control products • sales solutions businesses increased 17 percent growth regions driven energy retrofit refining services projects global infrastructure expansion continued growth orders conversion sales order backlog well favorable impact foreign exchange acs sales increased 17 percent 2006 compared 2005 including 7 percent net impact acquisitions divestitures • sales grew 19 percent products businesses due 11 percent net impact acquisitions divestitures well strong customer demand new products security life safety products increased sales customers emerging markets environmental combustion sensing control products • sales solutions businesses increased 14 percent driven continued strong orders growth strong conversion sales order backlog increased sales emerging markets strong revenue energy projects 3 percent net impact acquisitions net divestitures • sales acquisitions net divestitures increased 7 percent 2006 compared 2005 largely representing revenues acs products businesses relating novar primarily environmental combustion building controls life safety products first quarter 2006 zellweger gas detection first two quarters 2006 revenues gardiner groupe security distribution first technology gas detection acquisitions last three quarters 2006 acs segment profit increased 15 percent 2007 compared 2006 principally due increased products solutions sales volume productivity savings partially offset inflation continue experience change mix resulting stronger sales growth solutions businesses historically lower margins products businesses acs segment profit increased 15 percent 2006 compared 2005 due principally increased sales volume productivity savings including net integration savings acquisitions offset continued inflation segment profit also negatively impacted 2006 contract loss experienced building solutions project erp implementation costs 2008 areas focus acs’s primary areas focus 2008 include • extending technology leadership lowest total installed cost integrated product solutions • defending extending installed base customer productivity globalization • sustaining strong brand recognition brand channel management • centralization standardization global software development capabilities • acquisition execution integration • continuing establish emerging markets presence capability specialty materials overview specialty materials develops manufactures highpurity highquality highperformance chemicals materials applications automotive healthcare agricultural packaging carpet fibers refrigeration appliance housing semiconductor wax adhesives segments specialty materials also provides process technology products services petroleum refining petrochemical industries specialty materials’ product portfolio includes fluorocarbons caprolactam ammonium sulfate fertilizer specialty films advanced fibers customized research chemicals intermediates electronic materials chemicals catalysts adsorbents economic factors specialty materials operating results principally driven • level investment refining petrochemical capacity utilization andor expansion • degree pricing volatility raw materials benzene key component phenol natural gas ethylene sulfur • impact environmental energy efficiency regulations • extent change order rates global semiconductor customers • global demand nonozone depleting hydro fluorocarbons hfc’s • condition us residential housing industry results operations specialty materials sales increased 5 percent 2007 compared 2006 driven 16 percent increase uop sales primarily result higher volume projects business principally due capacity expansion refining petrochemical industries ii 4 percent increase specialty products sales due large part increased sales electronic chemicals specialty additives higher sales customers health care industry partially offsetting increases 6 percent decrease fluorine products sales primarily due lower refrigerant pricing lower sales volume foam blowing agents used insulating material result continued weakness us housing market specialty materials sales increased 43 percent 2006 compared 2005 due organic sales growth 7 percent 36 percent growth due uop acquisition net divestitures organic growth 7 percent 2006 primarily due higher volume prices organic sales fluorine products business increased 9 percent due continued strong demand non ozone depleting hfc products organic growth resins chemicals business 4 percent primarily due price increases recover increased raw material costs businesses experienced lower sales growth fourth quarter 2006 due slowdown us residential housing industry resins chemicals business also negatively impacted partial facility outage second half 2006 specialty products organic sales increased 10 percent due higher sales customers semiconductor industry increased sales specialty additives advanced fiber body armor 2005 organic sales increased 4 percent largely result higher prices 7 percent primarily resins chemicals fluorine businesses offsetting lower volumes specialty products businesses sales acquisitions net divestitures grew 36 percent 2006 compared 2005 due 44 percent growth sales uop consolidated specialty materials segment following acquisition remaining 50 percent interest uop november 2005 prior date uop results included income uop sales grown due continued strength petrochemical refining industries growth offset loss sales 8 percent principally divestiture industrial wax north american nylon fiber businesses specialty materials segment profit increased 16 percent 2007 compared 2006 principally due increased uop specialty products sales partially offset decline fluorine products sales result factors discussed additionally effects increased pricing productivity offset raw material cost inflation specialty materials segment profit increased 121 percent 2006 compared 2005 due principally impact uop acquisition net divestitures increased organic growth productivity savings net lost margin partial facility outage price increases including benefits formula based pricing contracts offset impact continued inflation raw material costs 2008 areas focus specialty materials primary areas focus 2008 include • improving plant operational performance • increasing resources market penetration emerging regions • developing new products address energy efficiency renewable energy sources global warming security regulations • increasing product differentiation • continued contract wins development new process technologies products petrochemical refining industries • achieving productivity savings pricing actions offset inflation transportation systems overview transportation systems provides automotive products improve performance efficiency appearance cars trucks vehicles stateoftheart technologies world class brands global solutions customers’ needs transportation systems’ products include turbochargers chargeair thermal systems car care products including antifreeze prestoner filters framr spark plugs autoliter cleaners waxes additives holtsr brake hard parts friction materials bendixr juridr transportation systems sells products oe automotive truck manufacturers eg bmw caterpillar daimler renault ford volkswagen wholesalers distributors retail aftermarket economic factors transportation systems operating results principally driven • global demand automobile truck production • diesel penetration rates new engine platforms • global consumer preferences boosted diesel passenger cars • degree volatility raw material prices including nickel steel • changes consumer spending automotive aftermarket car care products • regulations mandating lower emissions improved fuel economy results operations transportation systems sales increased 9 percent 2007 compared 2006 primarily due 5 percent favorable impact foreign exchange increased turbo technologies sales volume • turbo technologies sales increased 12 percent primarily due favorable impact foreign exchange strong sales european light vehicle manufacturers resulting increased production diesel penetration rates well sales related launch new turbo platforms customers partially offset lower sales commercial vehicle engine manufacturers • consumer products group “cpg” sales increased 4 percent primarily due favorable impact foreign exchange higher prices primarily pass ethylene glycol cost increases higher pricing offset lower sales volume primarily due continued softness us automotive aftermarket transportation systems sales increased 2 percent 2006 compared 2005 primarily due increased turbo technologies sales offset lower cpg sales • turbo technologies sales increased 6 percent primarily due new product introductions europe asia slight increase diesel penetration europe relatively flat sales us • cpg sales decreased 4 percent result reduced consumer spending north america automotive aftermarket products exit north america friction materials oe business transportation system segment profit increased 2 percent 2007 compared 2006 primarily due increased productivity increased prices lower warranty expense partially offset impact inflation primarily relating nickel components investment product development support future turbo platforms costs associated cpg product introductions cpg operational planning production issues transportation systems segment profit increased 3 percent 2006 compared 2005 due primarily increased turbo technologies volume productivity savings including benefits prior year restructuring actions offset higher material labor inflation increased warranty expense 2008 areas focus transportation systems primary areas focus 2008 include • sustaining superior turbocharger technology successful platform launches • increasing global penetration share diesel gasoline turbocharger oem demand • global expansion extension established strong product brands cpg • addressing cpg operational planning production issues repositioning charges summary repositioning charges follows following table summarizes pretax distribution total net repositioning charges income statement classification following tables provide details pretax impact total net repositioning charges segment 2007 recognized repositioning charges totaling 209 million primarily severance costs related workforce reductions 3408 manufacturing administrative positions mainly automation control solutions aerospace segments also 18 million previously established accruals primarily severance transportation systems aerospace segments returned income 2007 due mainly changes scope previously announced severance programs due fewer employee separations originally planned associated prior severance programs 2006 recognized repositioning charges totaling 124 million primarily severance costs related workforce reductions 2253 manufacturing administrative positions across segments also 22 million previously established accruals primarily severance aerospace transportation systems specialty materials segments returned income 2006 due mainly changes scope previously announced severance programs due fewer employee separations originally planned associated prior aerospace severance actions 2005 recognized repositioning charges totaling 267 million primarily severance costs related workforce reductions 5269 maufacturing administrative positions across segments including implementation new organizational structure aerospace segment substantially implemented third quarter 2005 reorganized aerospace businesses better align customer segments also 25 million previously established accruals primarily severance corporate specialty materials automation control solutions segments returned income 2005 reversal severance liabilities related changes scope previously announced severance programs excise taxes related executive severance amount previously paid determined longer payable severance amounts previously paid outside service provider part outsourcing arrangement refunded honeywell repositioning actions expected generate incremental pretax savings approximately 100 million 2008 compared 2007 principally planned workforce reductions cash expenditures severance exit costs necessary execute repositioning actions 92 142 171 million 2007 2006 2005 respectively expenditures severance exit costs funded principally operating cash flows cash expenditures severance exit costs necessary execute remaining actions approximate 150 million 2008 funded operating cash flows 2007 recognized charge 225 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 100 million discussed note 21 financial statements recognized charges 18 million business sales tax related prior divestiture 8 million contemplated settlements certain legal matters 10 million also recognized impairment charges 9 million related writedown property plant equipment held sale specialty materials segment 2006 recognized charge 210 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 126 million discussed note 21 financial statements recognized charges 51 million related corporate segment primarily settlement property damage claim litigation matter brunswick ga entrance plea agreement related environmental matter baton rouge la facility recognized impairment charges 12 million related writedown property plant equipment held sale specialty materials segment also recognized credit 18 million connection arbitration award overcharges supplier phenol specialty materials business 2005 transactions 2005 recognized charge 186 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 10 million discussed note 21 financial statements recognized credit 67 million connection arbitration award overcharges supplier phenol specialty materials business june 2003 end 2004 recognized impairment charges 23 million related writedown property plant equipment held used specialty materials segment also recognized charges 18 million principally related modification lease agreement corporate headquarters facility 10 million various legal settlements 7 million liquidity capital resources company continues manage businesses maximize operating cash flows primary source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines shortterm debt commercial paper market longterm borrowings access public debt equity markets well ability sell trade accounts receivables continue balance cash financing uses investment existing core businesses acquisition activity share repurchases dividends cash flow summary cash flows operating investing financing activities reflected consolidated statement cash flows years ended december 31 2007 2006 2005 summarized follows cash provided operating activities increased 700 million 2007 compared 2006 primarily due increased earnings increase accrued liabilities 349 million primarily compensation benefits employee related accruals well customer advances deferred income 55 million decrease repositioning payments partially offset decreased deferred income tax expense 118 million increased working capital usage 68 million accounts receivables inventory accounts payable cash provided operating activities increased 769 million 2006 compared 2005 primarily due increased earnings lower cash payments asbestos 331 million receipt 100 million sale insurance receivable increase customer advances deferred income net acquisitions 115 million 93 million receipt arbitration award relating specialty materials partially offset increased working capital usage accounts receivables net tax receivables inventory accounts payable 263 million including proceeds 58 million sale longterm receivable higher cash tax payments net tax receipts 236 million higher pension postretirement payments 154 million cash used investing activities increased 1168 million 2007 compared 2006 due primarily higher spending acquisitions lower proceeds sales businesses 2007 cash paid acquisitions net cash acquired 1150 million primarily dimensions international enraf holding bv hand held products inc maxon corporation compared 633 million 2006 primarily acquisitions first technologies gardiner groupe sale proceeds divestitures 51 million 2007 compared 665 million 2006 primarily due sale indalex february 2006 425 million first technology safety analysis business ftsa 93 million may 2006 sale first technology automotive business december 2006 90 million cash used investing activities decreased 1396 million 2006 compared 2005 due primarily lower spending acquisitions partially offset lower proceeds 285 million maturities investment securities cash used financing activities decreased 1075 million 2007 compared 2006 primarily due 2620 million increase net proceeds debt including commercial paper short term borrowings 306 million reduction cash used payment debt assumed acquisitions increase proceeds issuance common stock primarily related stock option exercises 207 million partially offset increases repurchases common stock 2090 million cash used financing activities decreased 67 million 2006 compared 2005 primarily due reduction payment debt assumed acquisition 356 million increased net proceeds debt 258 million increased proceeds issuance common stock primarily related stock option exercises 229 million offset increase repurchases common stock 763 million increased dividend payments liquidity businesses focused implementing strategies improve working capital turnover 2008 increase operating cash flows considering current economic environment businesses operate business plans strategies including focus growth cost reduction productivity initiatives believe cash balances operating cash flows remain principal source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines short term debt commercial paper markets longterm borrowings access public debt equity markets well ability sell trade accounts receivables source liquidity ability issue shortterm debt commercial paper market commercial paper notes sold discount maturity 270 days date issuance borrowings commercial paper program available general corporate purposes well financing potential acquisitions 1756 million commercial paper outstanding december 31 2007 ability access commercial paper market related cost borrowings affected strength credit ratings 30 billion committed bank revolving credit facilities revolving credit facilities credit ratings periodically reviewed major independent debtrating agencies 2007 standard poor’s fitch’s moody’s rating services affirmed corporate ratings longterm debt a2 respectively shortterm debt a1 p1 respectively maintained honeywell’s ratings outlook “stable” march 2007 company issued 400 million 530 senior notes due 2017 600 million 570 senior notes due 2037 collectively “notes” notes senior unsecured unsubordinated obligations honeywell rank equally honeywell’s existing future senior unsecured debt senior honeywell’s subordinated debt offering resulted gross proceeds 1 billion offset 12 million discount issuance costs proceeds notes used repay commercial paper debt may 2007 honeywell entered 28 billion amended restated fiveyear credit agreement “credit agreement” syndicate banks commitments credit agreement increased pursuant terms credit agreement aggregated amount exceed 35 billion credit facility contains 700 million sublimit issuance letters credit agreement maintained general corporate purposes including support issuance commercial paper replaces previous 23 billion five year credit agreement dated april 27 2006 “prior agreement” december 31 2007 borrowings letters credit issued credit facility credit agreement restrict honeywell’s ability pay dividends contain financial covenants july 2007 company issued 500 million floating rate senior notes due 2009 400 million 5625 senior notes due 2012 collectively “senior notes” senior notes senior unsecured unsubordinated obligations honeywell rank equally honeywell’s existing future senior unsecured debt senior honeywell’s subordinated debt offering resulted gross proceeds 900 million offset 3 million discount issuance costs proceeds senior notes used repay commercial paper also current shelf registration statement filed securities exchange commission may issue additional debt securities common stock preferred stock may offered one offerings terms determined time offering net proceeds offering would used general corporate purposes including repayment existing indebtedness capital expenditures acquisitions also sell interests designated pools trade accounts receivables third parties sold receivables overcollateralized 101 million december 31 2007 retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools new receivables sold agreement previously sold receivables collected retained interests receivables reflected amounts expected collected us carrying value approximates fair value retained interests sold receivables 500 million december 31 2007 2006 addition normal operating cash requirements principal future cash requirements fund capital expenditures debt repayments dividends employee benefit obligations environmental remediation costs asbestos claims severance exit costs related repositioning actions share repurchases strategic acquisitions specifically expect primary cash requirements 2008 follows • capital expenditureswe expect spend approximately 900 million capital expenditures 2008 primarily growth replacement production capacity expansion cost reduction maintenance • debt repaymentsthere 418 million scheduled longterm debt maturities 2008 expect refinance substantially maturities debt capital markets 2008 • share repurchaseswe intend continue repurchase outstanding shares time open market principally using cash generated operations company’s previously announced 30 billion share repurchase program 27 billion remained available december 31 2007 additional share repurchases amount timing repurchases may vary depending market conditions level investing activities • dividendswe expect pay approximately 800 million dividends common stock 2008 reflecting 10 percent increase dividend rate announced honeywell’s board directors december 2007 • asbestos claimswe expect cash spending asbestos claims cash receipts related insurance recoveries approximately 244 44 million respectively 2008 see asbestos matters note 21 financial statements discussion • pension contributionsassuming actual pension plan returns consistent expected rate return 9 percent 2008 beyond interest rates remain constant would required make contributions us pension plans satisfy minimum statutory funding requirements foreseeable future however expect make voluntary contributions approximately 40 million us pension plans 2008 government contracting purposes also expect make contributions nonus plans approximately 125 million 2008 see note 22 financial statements discussion pension contributions • repositioning actionswe expect cash spending severance exit costs necessary execute remaining repositioning actions approximate 150 million 2008 • environmental remediation costswe expect spend approximately 300 million 2008 remedial response voluntary cleanup costs see environmental matters note 21 financial statements additional information continuously assess relative strength business portfolio strategic fit market position profit cash flow contribution order upgrade combined portfolio identify business units benefit increased investment identify acquisition candidates strategic plan strengthen existing core businesses also identify businesses fit longterm strategic plan based market position relative profitability growth potential businesses considered potential divestiture restructuring repositioning actions subject regulatory constraints 2007 realized 51 million cash proceeds sales nonstrategic businesses based past performance current expectations believe operating cash flows sufficient meet future cash needs available cash committed credit lines access public debt equity markets well ability sell trade accounts receivables provide additional sources shortterm longterm liquidity fund current operations debt maturities future investment opportunities based current financial position expected economic performance believe liquidity adversely impacted inability access sources financing contractual obligations probable liability payments following summary significant contractual obligations probable liability payments december 31 2007 1 assumes longterm debt outstanding scheduled maturity 2 purchase obligations entered various vendors normal course business consistent expected requirements 3 payment amounts table reflect environmental liabilities probable reasonably estimable december 31 2007 see environmental matters note 21 financial statements additional information 4 amounts estimates asbestos related cash payments narco bendix based asbestos related liabilities probable reasonably estimable december 31 2007 narco estimated payments based terms conditions including evidentiary requirements specified definitive agreements principle pursuant trust distribution procedures bendix payments based estimate pending future claims projecting future events subject many uncertainties could cause asbestos liabilities higher lower projected recorded see asbestos matters note 21 financial statements additional information 5 amounts represent probable insurance recoveries 2018 based insurance recoveries deemed probable asbestos related liabilities december 31 2007 see asbestos matters note 21 financial statements additional information table excludes 666 million uncertain tax positions see note 6 financial statements table also excludes pension postretirement benefits opeb obligations made voluntary contributions 42 68 million us pension plans 2007 2006 respectively future plan contributions dependent upon actual plan asset returns interest rates assuming actual plan asset returns consistent expected plan return 9 percent 2008 beyond interest rates remain constant would required make contributions us pension plans satisfy minimum statutory funding requirements foreseeable future expect make voluntary contributions approximately 40 million us plans 2008 government contracting purposes expect make contributions nonus plans approximately 125 million 2008 payments due opeb plans required funded advance paid medical costs incurred covered retiree populations principally dependent upon future cost retiree medical benefits plans expect opeb payments approximate 206 million 2008 net benefit approximately 15 million medicare prescription subsidy see note 22 financial statements discussion pension opeb plans offbalance sheet arrangements following summary offbalance sheet arrangements guaranteeswe issued party following direct indirect guarantees december 31 2007 expect guarantees material adverse effect consolidated results operations financial position liquidity connection disposition certain businesses facilities indemnified purchasers expected cost remediation environmental contamination existing date disposition expected costs accrued environmental assessments made remedial efforts probable costs reasonably estimated retained interests factored pools trade accounts receivablesas source liquidity sell interests designated pools trade accounts receivables third parties sold receivables 500 million december 31 2007 overcollateralized retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools overcollateralization provides credit support purchasers receivable interest limiting losses event portion receivables sold becomes uncollectible december 31 2007 retained subordinated undivided interests risk 101 721 million respectively based underlying credit quality receivables placed designated pools receivables sold expect losses related retained interests risk material adverse effect consolidated results operations financial position liquidity environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous toxic substances accordance environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing toxic substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually jointly potentially responsible parties determine feasibility various remedial techniques address environmental matters policy see note 1 financial statements record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects execution timeframe projects remedial techniques utilized agreements parties remedial response voluntary cleanup payments 267 264 247 million 2007 2006 2005 respectively currently estimated approximately 300 million 2008 expect fund expenditures operating cash flow remedial response voluntary cleanup costs charged pretax earnings 230 210 186 million 2007 2006 2005 respectively december 31 2007 2006 recorded liabilities environmental matters 799 831 million respectively addition 2007 2006 incurred operating costs ongoing businesses approximately 81 101 million respectively relating compliance environmental regulations although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position see note 21 financial statements discussion commitments contingencies including related environmental matters toxic tort litigation financial instruments result global operating financing activities exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position minimize risks interest foreign currency exchange rate commodity price fluctuations normal operating financing activities deemed appropriate use derivative financial instruments use derivative financial instruments trading speculative purposes use leveraged derivative financial instruments summary accounting policies derivative financial instruments included note 1 financial statements conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities anticipated transactions arising international trade objective preserve economic value nonfunctional currency cash flows attempt hedge transaction exposures natural offsets fullest extent possible opportunities exhausted foreign currency forward option agreements third parties principal currency exposures relate us dollar euro british pound canadian dollar hong kong dollar mexican peso swiss franc czech koruna chinese renminbi japanese yen exposure market risk changes interest rates relates primarily net debt pension obligations described notes 14 16 financial statements issue fixed variable rate debt use interest rate swaps manage exposure interest rate movements reduce overall borrowing costs financial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value expected future cash flows derivative financial instruments considering reasonably possible changes interest currency exchange rates restrict use derivative financial instruments hedging activities following table illustrates potential change fair value interest rate sensitive instruments based hypothetical immediate onepercentagepoint increase interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 percent weakening us dollar versus local currency exchange rates across maturities potential change fair value contracts hedging commodity purchases based 20 percent decrease price underlying commodity across maturities december 31 2007 2006 1 asset liability 2 changes fair value foreign currency exchange contracts offset changes fair value cash flows underlying hedged foreign currency transactions 3 changes fair value forward commodity contracts offset changes cash flows underlying hedged commodity transactions discussion procedures monitor market risk estimated changes fair value resulting sensitivity analyses forwardlooking statements market risk assuming certain adverse market conditions occur actual results future may differ materially estimated results due actual developments global financial markets methods used us assess mitigate risk discussed considered projections future events critical accounting policies preparation consolidated financial statements accordance generally accepted accounting principles based selection application accounting policies require us make significant estimates assumptions effects matters inherently uncertain consider accounting policies discussed critical understanding financial statements actual results could differ estimates assumptions differences could material consolidated financial statements discussed selection application disclosure critical accounting policies audit committee board directors independent registered public accountants new accounting standards effective 2007 material impact consolidated financial statements described recent accounting pronouncements section note 1 financial statements contingent liabilitieswe subject number lawsuits investigations claims involve substantial dollar amounts arise conduct global business operations previously owned entities contingencies primarily relate product liabilities including asbestos contractual matters environmental health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes contingencies well potential amounts ranges probable losses recognize liability contingencies based careful analysis matter assistance outside legal counsel applicable experts analysis includes making judgments concerning matters costs associated environmental matters outcome negotiations number cost pending future asbestos claims impact evidentiary requirements contingencies resolved long periods time liabilities may change future due new developments including new discovery fact changes legislation outcomes similar cases judicial system changes assumptions changes settlement strategy discussion contingencies related environmental asbestos matters including management’s judgment applied recognition measurement specific liabilities see notes 1 21 financial statements asbestos related contingencies insurance recoverieswe defendant personal injury actions related products containing asbestos refractory friction products recognize liability asbestos related contingency probable occurrence reasonably estimable regarding north american refractories company narco asbestos related claims accrue pending claims based terms conditions including evidentiary requirements definitive agreements principle current claimants also accrued probable value future narco asbestos related claims 2018 based disease criteria payment values contained narco trust described note 21 financial statements light inherent uncertainties making long term projections regarding claims filing rates disease manifestation believe reasonable basis estimating narco asbestos claims beyond 2018 statement financial accounting standards 5 “accounting contingencies” sfas 5 regarding bendix asbestos related claims accrue estimated value pending claims based expected claim resolution values historic dismissal rates since fourth quarter 2006 also accrue estimated cost future anticipated claims related bendix next five years based assessment additional claims may brought us anticipated resolution values tort system december 2006 also changed methodology valuing bendix pending future claims using average resolution values previous five years using average resolution values previous two years claims filing experience resolution data bendix related claims become reliable past several years accordingly fourth quarter 2007 updated methodology valuing bendix pending future claims using average resolution values past three years continue updated expected resolution values used estimate cost pending future bendix claims fourth quarter year additional information see note 21 financial statements continually assess likelihood adverse judgments outcomes contingencies well potential ranges probable losses recognize liability contingencies based analysis individual issue assistance outside legal counsel applicable experts connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical experience insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs consideration impacts settlements insurers december 31 2007 recorded insurance receivables 939 million specifically allocated narco related asbestos liabilities also 19 billion coverage remaining bendix related asbestos liabilities although gaps coverage due insurance company insolvencies certain uninsured periods insurance settlements resulting approximately 50 percent claims cumulative historical basis reimbursable insurance domestic insurance market london excess market substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries projecting future events subject various uncertainties could cause insurance recovery asbestos related liabilities higher lower projected recorded given inherent uncertainty making future projections reevaluate projections concerning probable insurance recoveries light changes projected liability recovery experience relevant factors may impact future insurance recoveries see note 21 financial statements discussion management’s judgments applied recognition measurement insurance recoveries asbestos related liabilities defined benefit pension planswe maintain defined benefit pension plans covering majority employees retirees financial reporting purposes net periodic pension expense calculated based upon number significant actuarial assumptions including discount rate plan obligations expected longterm rate return plan assets determine expected longterm rate return plan assets utilizing historic expected plan asset returns varying longterm periods combined current market conditions broad asset mix considerations see note 22 financial statements actual targeted asset allocation percentages pension plans discount rate reflects market rate december 31 measurement date highquality fixedincome investments maturities corresponding benefit obligations subject change year information major actuarial assumption included note 22 financial statements key assumptions used developing 2007 2006 2005 net periodic pension expense us plans included following discount rate volatile year determined based upon prevailing rate measurement date use 650 percent discount rate 2008 reflecting increase market interest rate environment plan continue use expected rate return plan assets 9 percent 2008 based principally historical experience actual plan returns net losses pension plans 17 billion december 31 2007 compared 24 billion december 31 2006 decrease 700 million due primarily lower net losses us plans due higher discount rate december 31 2007 loss amortization 2007 net losses december 31 2007 principally result decline year discount rate period 2002 2006 actual plan asset returns expected rates return 2000 2002 net losses recognized december 31 2006 consolidated balance sheet component comprehensive income loss net tax accordance sfas 158 “employers’ accounting defined benefit pension postretirement plans sfas 158 discussed detail notes 1 22 financial statements future continue systematically recognize net losses net periodic pension expense accordance statement financial accounting standards 87 “employers accounting pensions” sfas 87 sfas 87 use marketrelated value plan assets reflecting changes fair value plan assets threeyear period net losses excess 10 percent greater marketrelated value plan assets plans’ projected benefit obligation corridor recognized sixyear period changes net periodic pension expense may occur future due changes expected rate return plan assets discount rate resulting economic events following table highlights sensitivity us pension obligations expense changes assumptions assuming assumptions remain constant sensitivities regarding changes discount rate applicable unrecognized losses outside corridor subject amortization sixyear period december 31 2007 losses outside corridor subject amortization us plans future discount rate increase current rate 650 percent would significant change annual pension expense discount rate decrease 625 would sensitivities described table applicable net periodic pension expense pension plans expected approximately 30 million 2008 148 million decrease 2007 due principally decrease amortization net losses us plans decline amortization net losses results principally increase discount rate december 31 2007 actual plan asset returns higher expected rate return 2004 2006 2007 2006 2005 required make contribution satisfy minimum statutory funding requirements us pension plans made voluntary contributions 42 68 million us pension plans 2007 2006 respectively mainly government contracting purposes future plan contributions dependent upon actual plan asset returns interest rates assuming actual plan returns consistent expected plan return 9 percent 2008 beyond interest rates remain constant would required make contributions us pension plans satisfy minimum statutory funding requirements foreseeable future however expect make voluntary contributions approximately 40 million cash 2008 certain us pension plans government contracting purposes also expect contribute approximately 125 million cash 2008 nonus defined benefit pension plans satisfy regulatory funding standards longlived assets including tangible definitelived intangible assetsto conduct global business operations execute business strategy acquire tangible intangible assets including property plant equipment definitelived intangible assets december 31 2007 net carrying amount longlived assets totaled 64 billion determination useful lives depreciationamortization purposes whether assets impaired involves use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions periodically evaluate recoverability carrying amount longlived assets whenever events changes circumstances indicate carrying amount longlived asset group may fully recoverable principal factors consider deciding perform impairment review follows • significant underperformance ie declines sales earnings cash flows business product line relation expectations • annual operating plans fiveyear strategic plans indicate unfavorable trend operating performance business product line • significant negative industry economic trends • significant changes planned changes use assets determined impairment review necessary recoverability assets measured comparing carrying amount asset grouping estimated future undiscounted cash flows carrying amount exceeds estimated future undiscounted cash flows asset grouping considered impaired impairment measured difference carrying amount asset grouping fair value use best information available determine fair value usually either market prices available estimate future discounted cash flow key estimates discounted cash flow analysis include expected industry growth rates assumptions volume selling prices costs discount rate selected described detail repositioning charges section mda recorded impairment charges related longlived assets 9 12 million 2007 2006 respectively principally related businesses specialty materials segment businesses significantly underperforming industries negative economic trends subsequently businesses significantly restructured sold process sold goodwill impairment testinggoodwill represents excess acquisition costs fair value net tangible assets identifiable intangible assets acquired business combination goodwill amortized subject impairment testing goodwill balance 92 billion december 31 2007 subject impairment testing annually march 31 whenever events changes circumstances indicate carrying amount may fully recoverable using guidance criteria described statement financial accounting standards 142 sfas 142 “goodwill intangible assets” testing compares carrying values fair values appropriate carrying value reduced fair value fair value reporting units estimated utilizing discounted cash flow approach incorporating historic projected future operating performance impairment test involves use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions completed annual impairment test march 31 2007 determined impairment date income taxesdeferred tax assets liabilities determined based difference financial statements tax basis assets liabilities using enacted tax rates effect year differences expected reverse provision income taxes based domestic international statutory income tax rates tax planning opportunities jurisdictions operate significant judgment required determining income tax provisions well deferred tax asset liability balances including estimation valuation allowances evaluation tax positions december 31 2007 recognized net deferred tax asset 1611 million less valuation allowance 490 million net deferred tax assets primarily comprised net deductible temporary differences net operating loss carryforwards tax credit carryforwards available reduce taxable income future periods determination amount valuation allowance provided recorded deferred tax assets involves estimates regarding 1 timing amount reversal taxable temporary differences 2 expected future taxable income 3 impact tax planning strategies valuation allowance required likely portion deferred tax asset realized assessing need valuation allowance consider available positive negative evidence including past operating results projections future taxable income feasibility ongoing tax planning strategies projections future taxable income include number estimates assumptions regarding volume pricing costs additionally valuation allowances related deferred tax assets impacted changes tax laws net deferred tax asset 1611 million comprised 1095 million related us operations 516 million related nonus operations us net deferred tax asset 1095 million comprised net deductible temporary differences tax credit carryforwards state tax net operating losses believe likely realized generation future taxable income us tax planning strategies maintain valuation allowance 63 million asset related capital losses state tax net operating losses nonus net deferred tax asset 516 million comprised principally net operating capital loss carryforwards mainly germany france united kingdom maintain valuation allowance 427 million deferred tax assets reflecting historical experience lower expectations taxable income applicable carryforward periods fully described note 6 financial statements valuation allowance decreased 26 million 2007 increased 39 139 million 2006 2005 respectively event determine able realize net deferred tax assets future reduce amounts charge income period determination made conversely determine able realize net deferred tax assets excess carrying amounts decrease recorded valuation allowance credit income credit goodwill period determination made valuation allowance recognized net deferred tax asset acquired entity’s deductible temporary differences operating loss capital loss tax credit carryforwards acquisition date tax benefits items recognized acquisition date shall applied first reduce zero goodwill related acquisition second reduce zero noncurrent intangible assets related acquisition third reduce income tax expense significant judgment required determining income tax provisions statement financial accounting standards 109 “accounting income taxes” sfas 109 evaluating tax positions establish additional provisions income taxes despite belief tax positions fully supportable remain certain positions meet minimum probability threshold defined fasb interpretation “fin” 48 “accounting uncertainty income taxesan interpretation fasb statement 109” “fin 48” tax position likely sustained upon examination applicable taxing authority normal course business company subsidiaries examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes continually assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts give rise revision become known described detail recent accounting pronouncements section note 1 financial statements fin 48 effective beginning january 1 2007 fin 48 establishes single model address accounting uncertainty tax positions fin 48 clarifies accounting income taxes prescribing minimum recognition threshold tax position required meet recognized financial statements fin 48 also provides guidance derecognition measurement classification interest penalties accounting interim periods disclosure transition upon adoption january 1 2007 reduced existing reserves uncertain tax positions 33 million largely related reduction state income tax matters partially offset net increase federal international tax reserves reduction recorded cumulative effect adjustment shareholders’ equity additionally decreased deferred tax asset associated valuation allowance 44 million increased goodwill 1 million sales recognition longterm contractsin 2007 recognized approximately 13 percent total net sales using percentageofcompletion method longterm contracts automation control solutions aerospace specialty materials segments longterm contracts measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts accounting contracts involves management judgment estimating total contract revenue cost contract revenues largely determined negotiated contract prices quantities modified assumptions regarding contract options change orders incentive award provisions associated technical performance price adjustment clauses inflation indexbased clauses contract costs incurred period time several years estimation costs requires management judgment cost estimates largely based negotiated estimated purchase contract terms historical performance trends economic projections significant factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements revenue cost estimates regularly monitored revised based changes circumstances anticipated losses longterm contracts recognized losses become evident maintain financial controls customer qualification contract pricing estimation processes reduce risk contract losses matters litigation see note 21 financial statements discussion environmental asbestos litigation matters recent accounting pronouncements see note 1 financial statements discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations following management’s discussion analysis financial condition results operations “mda” intended help reader understand results operations financial condition honeywell international inc “honeywell” three years ended december 31 2008 references notes relate notes financial statements “item 8 financial statements supplementary data” consolidated results operations net sales change net sales 2008 2007 attributable following increase full year 2008 sales partially offset 6 percent decrease sales fourth quarter 2008 compared prior year period discussion net sales segment found review business segments section mda cost products services sold gross margin decreased 06 percentage point 2008 compared 2007 primarily due higher repositioning charges ii decreases 22 14 percent respectively transportation systems specialty materials segments primarily due lower sales volume partially offset lower pension post retirement benefits expense ii higher margins automation controls solutions segment 08 percentage point mainly resulting productivity savings iii higher margins aerospace segment 02 percentage point mainly resulting sales volume growth increased prices expect pension post retirement expense increase 2009 gross margin increased 08 percentage point 2007 compared 2006 primarily due higher margins specialty materials segment 10 percentage point mainly due continued growth uop ii higher margins aerospace segment 08 percentage point mainly resulting sales volume growth increased prices productivity savings iii lower pension post retirement benefits expense 03 percentage point partially offset lower margins transportation systems segment 10 percentage point primarily attributable lower consumer products group “cpg” sales volume operational planning production issues discussion segment results see “review business segments” selling general administrative expenses selling general administrative expenses sga percentage sales increased 06 percentage point 2008 compared 2007 increase primarily due higher sga automation control solutions segment mainly due acquisitions partially offset decreases sga specialty materials aerospace segments mainly due cost savings initiatives positive impact prior repositioning actions sga percentage sales decreased 02 percentage point 2007 compared 2006 sga percentage sales decreased segments primarily due benefits cost savings initiatives positive impact prior repositioning actions reduction 01 percentage point lower pension post retirement benefits expense offset higher repositioning costs incomeexpense income increased 675 million 2008 compared 2007 primarily due higher gain sale nonstrategic businesses assets representing sale consumables solutions business higher income equity method investments mainly specialty material segment income decreased 58 million 52 percent 2007 compared 2006 primarily result lower interest income due interest received favorable tax settlement 2006 higher foreign exchange losses due changes exchange rates interest financial charges interest financial charges flat 2008 compared 2007 due higher debt balances offset lower borrowing costs interest financial charges increased 22 percent 2007 compared 2006 due higher debt balances higher borrowing costs tax expense effective tax rate increased 01 percentage point 2008 compared 2007 due principally higher overall state effective tax rate decreased impact settlement audits partially offset decrease foreign effective tax rate effective tax rate lower us statutory rate 35 percent primarily due earnings taxed lower foreign tax rates effective tax rate increased 07 percentage point 2007 compared 2006 due principally expiration tax benefit export sales partially offset decrease overall state foreign effective tax rate increase tax benefit domestic manufacturing deduction favorable resolution certain tax audits effective tax rate lower statutory rate 35 percent due part tax benefits derived lower foreign taxes benefits tax planning strategies 2009 effective tax could change based upon company’s operating results outcome tax positions taken regarding previously filed tax returns currently audit various federal state foreign tax authorities several may utilized foreseeable future company believes adequate reserves matters outcome could materially impact results operations operating cash flows period resolved income continuing operations increase 060 earnings diluted per share continuing operations 2008 compared 2007 primarily relates gain sale consumables solutions business ii lower pension post retirement expense iii increase segment profit significantly automation control solutions aerospace partially offset decline transportation systems segment profit iv reduction number shares outstanding due share repurchases partially offset increased repositioning costs increase 065 earnings diluted per share continuing operations 2007 compared 2006 primarily relates increase segment profit significantly aerospace automation control solutions reduction number shares outstanding due share repurchases lower pension post retirement expense partially offset increased repositioning costs discussion segment results see “review business segments” income discontinued operations income discontinued operations 5 million 001 earnings per share diluted 2006 relates operating results indalex business sold february 2006 sun capital partners inc business overview business overview provides summary honeywell four reportable operating segments aerospace automation control solutions specialty materials transportation systems including respective areas focus 2009 relevant economic factors impacting results discussion segment’s results three years ended december 31 2008 segments comprised various product service classes serve multiple end markets see note 23 financial statements information reportable segments definition segment profit economic factors addition factors listed respect operating segments consolidated operating results principally driven • impact global economic growth rates us europe emerging regions industry conditions demand key end markets • overall sales mix particular mix aerospace original equipment aftermarket sales mix automation control solutions acs products services sales • extent cost savings productivity actions able offset exceed impact material nonmaterial inflation • impact pension discount rate pension expense pension asset returns funding requirements • impact changes foreign currency exchange rate particularly us dollareuro exchange rate areas focus 2009 areas focus 2009 generally applicable operating segments include • driving profitable growth building innovative products address customer needs • achieving sales growth technological excellence manufacturing capability global expansion especially focused emerging regions china india middle east • proactively managing raw material costs formula long term supply agreements price increases hedging activities feasible • driving cash flow conversion effective working capital management capital investment businesses thereby enabling liquidity repayment debt strategic acquisitions ability return value shareholders • actively monitoring trends shortcycle end markets transportations systems turbo business acs products businesses aerospace business general aviation aftermarket specialty materials resins chemicals continuing take proactive cost actions • align prioritize investments longterm growth vs shortterm demand volatility • driving productivity savings execution repositioning actions • actively reducing discretionary spending focus noncustomer related costs • proactively managing capacity utilization supply chain inventory demand achieving customer satisfaction • utilizing enablers honeywell operating system hos functional transformation velocity product development vpd standardize way work increase quality reduce costs product manufacturing reduce costs enhance quality administrative functions improve business operations investments systems process improvements • monitoring suppliers customers signs liquidity constraints limiting exposure resulting inability meet delivery commitments pay amounts due identifying alternate sources supply necessary • managing corporate costs including costs incurred asbestos environmental matters pension postretirement expenses tax expense review business segments reconciliation segment profit income continuing operations taxes follows aerospace overview aerospace leading global supplier aircraft engines avionics related products services aircraft manufacturers airlines aircraft operators military services defense space contractors aerospace products services include auxiliary power units propulsion engines environmental control systems engine controls flight safety communications navigation radar surveillance systems aircraft lighting management technical services advanced systems instruments aircraft wheels brakes repair overhaul services aerospace sells products original equipment oe manufacturers air transport regional business general aviation aircraft segments provides spare parts repair maintenance services aftermarket principally aircraft operators united states government also major customer defense space products economic factors aerospace operating results principally driven • new aircraft production rates delivery schedules set commercial air transport regional jet business general aviation oe manufacturers well airline profitability retirement aircraft service • global demand commercial air travel reflected global flying hours utilization rates corporate general aviation aircraft well demand spare parts maintenance repair services aircraft currently use • level mix us government appropriations defense space programs military activity • availability price volatility raw materials titanium metals results operations aerospace sales major customer endmarkets follows 2008 compared 2007 aerospace sales increased 3 percent 2008 details regarding net increase sales customer endmarkets follows • air transport regional original equipment oe sales decreased 6 percent 2008 decrease driven sale consumables solutions business partially offset increased deliveries air transport customers notwithstanding decrease total aircraft production rates major oem’s mainly due strike major oem settled fourth quarter expect sales oe customers decline first quarter 2009 due reduced delivery schedules light order deferrals cancellations platform mix • air transport regional aftermarket sales increased 4 percent 2008 primarily due increased volume price spare parts aftermarket growth driven flight hour growth consistent previously reported expectations growth rate global flying hours slowed 3 percent 2008 including 2 percent decline fourth quarter expected decline first quarter 2009 addition aftermarket customers may change buying patterns reduce inventory levels • business general aviation oe sales increased 5 percent 2008 due continued demand business jet end market evidenced increase new business jet deliveries expected decline first quarter 2009 improved pricing continued additions fractional ownership charter fleets expected decline first quarter 2009 2008 sales endmarket primarily consisted sales primus epic integrated avionics systems tfe 731 htf 7000 engines • business general aviation aftermarket sales increased 6 percent 2008 increase primarily due increased revenue maintenance service agreements higher sales spare parts expected decline first quarter 2009 consistent expected decrease business jet utilization • defense space sales increased 6 percent 2008 increase primarily due logistics services including positive impact acquisition dimensions international defense logistics business helicopter oe sales increase government funded engineering related orion cev program higher sales specialty foam insulation certain surface systems classified space programs aerospace segment profit increased 5 percent 2008 compared 2007 due primarily increased prices productivity sales volume growth increases partially offset inflation consumable solutions divestiture higher spending support new platform growth expect segment profit decline first quarter 2009 primarily due expected adverse sales impacts noted 2007 compared 2006 aerospace sales increased 10 percent 2007 details regarding net increase sales customer endmarkets follows • air transport regional original equipment oe sales increased 10 percent 2007 compared 2006 increase driven increased deliveries air transport customers primarily due higher aircraft production rates major oe manufacturers • air transport regional aftermarket sales increased 8 percent 2007 increase result increased sales volumes price spare parts maintenance activity relating approximately 6 percent increase global flying hours • business general aviation oe sales increased 16 percent 2007 increase due continued demand business jet end market evidenced increase new business jet deliveries well launch new aircraft platforms sales endmarket primarily consisted sales primus epic integrated avionics systems tfe 731 htf 7000 engines • business general aviation aftermarket sales increased 16 percent 2007 primarily due increased revenue maintenance service agreements higher sales spare parts • defense space sales increased 8 percent 2007 increase primarily due higher sales surface systems 2 percent positive impact acquisition dimensions international increase space sales including engineering activities relating orion cev program aerospace segment profit increased 16 percent 2007 compared 2006 due primarily sales volume growth increased prices productivity partially offset inflation 2009 areas focus aerospace’s primary areas focus 2009 include • focus cost structure initiatives maintain profitability face challenging conditions aerospace industry lower flight hours order deferrals cancellations • aligning inventory production research development customer demand production schedules • pursuit new defense space platforms growth opportunities • continuing design equipment enhances safety performance durability aerospace defense equipment reducing weight operating costs • delivering worldclass customer service achieving cycle lead time reduction improve responsiveness customer demand automation control solutions acs overview acs provides innovative solutions make homes buildings industrial sites infrastructure efficient safe comfortable acs products services include controls heating cooling indoor air quality ventilation humidification lighting home automation advanced software applications homebuilding control optimization sensors switches control systems instruments measuring pressure air flow temperature electrical current security fire gas detection personal protection equipment access control video surveillance remote patient monitoring systems products automatic identification data collection installation maintenance upgrades systems keep buildings safe comfortable productive automation control solutions industrial plants including advanced software automation systems integrate control monitor complex processes many types industrial settings economic factors acs’s operating results principally driven • growth global commercial construction including retrofits upgrades • demand residential security environmental control retrofits upgrades • demand energy efficient products solutions • industrial production • government public sector spending • us european economic conditions • economic growth rates developed us europe emerging markets • strength capital operating spending process including petrochemical refining building automation • changes energy fire security health care safety environmental concerns regulations results operations 2008 compared 2007 acs sales increased 12 percent 2008 compared 2007 including 10 percent net growth acquisitions divestitures although foreign exchange minimal impact full year sales 9 percent negative impact foreign exchange fourth quarter sales • sales products businesses grew 15 percent including positive impact acquisitions significantly norcross safety products metrologic instruments hand held products inc maxon corporation ii continued strong demand life safety products particularly fire systems sensors iii increased sales environmental combustion products driven new products demand energy efficient controls including growth across regions factors partially offset decreases sales volumes security reflecting us european residential construction softness sensing controls products notably automotive customers reflecting softness us europe • sales solutions businesses increased 8 percent primarily due volume growth driven continued orders growth strong conversion sales orders backlog ii positive impact acquisitions significantly enraf holding bv acs segment profit increased 15 percent 2008 compared 2007 principally due increased productivity savings acquisitions improved pricing partially offset inflation 2007 compared 2006 acs sales increased 13 percent 2007 compared 2006 including 4 percent favorable impact foreign exchange net growth acquisitions divestitures 2 percent • sales products businesses grew 11 percent driven increased sales security products primarily due growth intrusion products european distribution sales emerging markets ii continued strong demand life safety products iii introduction new environmental combustion control products • sales solutions businesses increased 17 percent growth regions driven energy retrofit refining services projects global infrastructure expansion continued growth orders conversion sales order backlog well favorable impact foreign exchange acs segment profit increased 15 percent 2007 compared 2006 principally due increased products solutions sales volume productivity savings partially offset inflation continue experience change mix resulting stronger sales growth solutions businesses historically lower margins products businesses 2009 areas focus acs’s primary areas focus 2009 include • extending technology leadership lowest total installed cost integrated product solutions • defending extending installed base customer productivity globalization • sustaining strong brand recognition brand channel management • centralization standardization global software development capabilities • continuing identify execute integrate acquisitions adjacent markets serve • continuing establish emerging markets presence capability • process solutions asset management energy efficiency • continuing invest new product development specialty materials overview specialty materials develops manufactures highpurity highquality highperformance chemicals materials applications refining petrochemical automotive healthcare agricultural packaging refrigeration appliance housing semiconductor wax adhesives segments specialty materials also provides process technology products services petroleum refining petrochemical industries specialty materials’ product portfolio includes fluorocarbons caprolactam ammonium sulfate fertilizer specialty films advanced fibers customized research chemicals intermediates electronic materials chemicals catalysts adsorbents economic factors specialty materials operating results principally driven • level capital spending capacity utilization rates refining petrochemical end markets • degree pricing volatility raw materials benzene key component phenol fluorspar natural gas ethylene sulfur • impact environmental energy efficiency regulations • extent change order rates global semiconductor customers • global demand nonozone depleting hydro fluorocarbons hfc’s • condition us residential housing industry • global demand commodities caprolactam ammonium sulfate results operations 2008 compared 2007 specialty materials sales increased 8 percent 2008 compared 2007 primarily driven increased pricing reflecting passthrough higher raw material costs pricing actions including benefits formula based pricing arrangements significantly resins chemicals fluorine products ii 8 percent increase uop sales result higher volume sales products projects businesses full year 2008 sales growth partially offset 12 percent sales decline revenue fourth quarter primarily resins chemicals business due sharp declines global demand commodities caprolactam ammonium sulfate specialty materials segment profit increased 10 percent 2008 compared 2007 increase due principally increased uop fluorine products resins chemicals sales result factors discussed higher income joint ventures partially offset impacts hurricanes gustav ike fourth quarter sales decline noted overall effects increased pricing reflecting passthrough higher raw material costs pricing actions including benefits formula based pricing arrangements productivity gains offset raw material significantly sulfur inflation 2009 expect continued declines global demand commodities caprolactam ammonium sulfate well demand semiconductor customers delays timing new unit deliveries uop products catalyst reloads 2007 compared 2006 specialty materials sales increased 5 percent 2007 compared 2006 driven 16 percent increase uop sales primarily result higher volume projects business principally due capacity expansion refining petrochemical industries ii 4 percent increase specialty products sales due large part increased sales electronic chemicals specialty additives higher sales customers health care industry partially offsetting increases 6 percent decrease fluorine products sales primarily due lower refrigerant pricing lower sales volume foam blowing agents used insulating material result continued weakness us housing market specialty materials segment profit increased 16 percent 2007 compared 2006 principally due increased uop specialty products sales partially offset decline fluorine products sales result factors discussed additionally effects increased pricing productivity offset raw material cost inflation 2009 areas focus specialty materials primary areas focus 2009 include transportation systems overview transportation systems provides automotive products improve performance efficiency appearance cars trucks vehicles stateoftheart technologies world class brands global solutions customers’ needs transportation systems’ products include turbochargers chargeair thermal systems car care products including antifreeze prestoner filters framr spark plugs autoliter cleaners waxes additives holtsr brake hard parts friction materials bendixr juridr transportation systems sells products original equipment “oe” automotive truck manufacturers eg bmw caterpillar daimler renault ford volkswagen wholesalers distributors retail aftermarket economic factors transportation systems operating results principally driven • financial strength stability automotive oe manufacturers • global demand automobile truck production • turbo penetration rates new engine platforms • global consumer preferences boosted diesel passenger cars • degree volatility raw material prices including nickel steel • automotive aftermarket trends consumer confidence miles driven consumer preference branded vs private label aftermarket car care products • regulations mandating lower emissions improved fuel economy • consumers’ ability obtain financing new vehicle purchases results operations 2008 compared 2007 transportation systems sales decreased 8 percent 2008 compared 2007 primarily due lower volumes significantly second half 2008 partially offset favorable impact foreign exchange • turbo technologies sales decreased 9 percent primarily due decreased volume broad decline vehicle production due challenging automotive industry conditions us europe accelerated second half 2008 impacting sales commercial light vehicle engine manufacturers partially offset favorable impact foreign exchange also continue see shift consumer preference towards lower displacement engines well delay new platform launches • consumer products group “cpg” sales decreased 10 percent primarily due lower sales automotive aftermarket products reflecting lower miles driven impact lower consumer confidence discretionary spending partially offset higher prices including pass ethylene glycol cost increases • friction materials sales essentially unchanged primarily due favorable impact foreign exchange increased pricing offset lower original equipment aftermarket product sales volume transportation systems segment profit decreased 30 percent 2008 compared 2007 primarily due volume declines discussed material nonmaterial cost inflation investments product development support future turbo platforms factors partially offset increased productivity favorable impact foreign exchange 2007 compared 2006 transportation systems sales increased 9 percent 2007 compared 2006 primarily due 5 percent favorable impact foreign exchange increased turbo technologies sales volume • turbo technologies sales increased 12 percent primarily due favorable impact foreign exchange strong sales european light vehicle manufacturers resulting increased production diesel penetration rates well sales related launch new turbo platforms customers partially offset lower sales commercial vehicle engine manufacturers • consumer products group “cpg” sales increased 4 percent primarily due favorable impact foreign exchange higher prices primarily pass ethylene glycol cost increases higher pricing offset lower sales volume primarily due continued softness us automotive aftermarket transportation system segment profit increased 2 percent 2007 compared 2006 primarily due increased productivity increased prices lower warranty expense partially offset impact inflation primarily relating nickel components investment product development support future turbo platforms costs associated cpg product introductions cpg operational planning production issues 2009 areas focus transportation systems primary areas focus 2009 include • sustaining superior turbocharger technology successful platform launches • maintaining high quality current products executing new product introductions • increasing global penetration share diesel gasoline turbocharger oem demand • increasing plant productivity address capacity challenges generated volatility product demand elevated oem inventory levels • align cost structure reflect current economic outlook successful execution repositioning actions • alignment development efforts costs new turbo platform launch schedules • global expansion extension established strong product brands cpg repositioning charges see note 3 financial statements discussion repositioning charges incurred 2008 2007 2006 2008 2007 repositioning actions expected generate incremental pretax savings approximately 180 million 2009 compared 2008 principally planned workforce reductions cash expenditures severance exit costs necessary execute repositioning actions 157 92 142 million 2008 2007 2006 respectively expenditures severance exit costs funded principally operating cash flows cash expenditures severance exit costs necessary execute remaining actions expected approximate 250 million 2009 funded operating cash flows following tables provide details pretax impact total net repositioning charges segment liquidity capital resources company continues manage businesses maximize operating cash flows primary source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines shortterm debt commercial paper market longterm borrowings access public debt equity markets well ability sell trade accounts receivables continue balance cash financing uses investment existing core businesses acquisition activity share repurchases dividends cash flow summary cash flows operating investing financing activities reflected consolidated statement cash flows years ended december 31 2008 2007 2006 summarized follows 2008 compared 2007 cash provided operating activities decreased 120 million 2008 compared 2007 primarily due decrease accrued liabilities 475 million decreased advances customers deferred income higher cash tax payments 336 million significantly due sale consumables solutions business partially offset increased earnings lower cash payments asbestos 121 million decrease working capital lower accounts receivable offset higher accounts payable cash used investing activities increased 241 million 2008 compared 2007 due primarily higher spending acquisitions partially offset higher proceeds sales businesses 2008 cash paid acquisitions net cash acquired 2181 million primarily safety products holding inc norcross metrologic instruments inc compared 1150 million 2007 primarily acquisitions dimensions international enraf holding bv hand held products inc maxon corporation cash proceeds divestitures 909 million 2008 compared 51 million 2007 primarily due sale consumables solutions cash used financing activities decreased 204 million 2008 compared 2007 primarily due 2527 million decrease repurchases common stock partially offset decreases net proceeds debt including commercial paper 1797 million decrease proceeds issuance common stock primarily related stock option exercises 457 million 2007 compared 2006 cash provided operating activities increased 700 million 2007 compared 2006 primarily due increased earnings increase accrued liabilities 349 million primarily compensation benefits employee related accruals well customer advances deferred income 55 million decrease repositioning payments partially offset decreased deferred income tax expense 118 million increased working capital usage 68 million accounts receivables inventory accounts payable cash used investing activities increased 1168 million 2007 compared 2006 due primarily higher spending acquisitions lower proceeds sales businesses 2007 cash paid acquisitions net cash acquired 1150 million primarily dimensions international enraf holding bv hand held products inc maxon corporation compared 633 million 2006 primarily acquisitions first technologies gardiner groupe sale proceeds divestitures 51 million 2007 compared 665 million 2006 primarily due sale indalex february 2006 425 million first technology safety analysis business ftsa 93 million may 2006 sale first technology automotive business december 2006 90 million cash used financing activities decreased 1075 million 2007 compared 2006 primarily due 2620 million increase net proceeds debt including commercial paper short term borrowings 306 million reduction cash used payment debt assumed acquisitions increase proceeds issuance common stock primarily related stock option exercises 207 million partially offset increases repurchases common stock 2090 million liquidity businesses focused implementing strategies improve working capital turnover 2009 increase operating cash flows considering current economic environment businesses operate business plans strategies including focus growth cost reduction productivity initiatives believe cash balances operating cash flows remain principal source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines short term debt commercial paper markets longterm borrowings access public debt equity markets well ability sell trade accounts receivables source liquidity ability issue shortterm debt commercial paper market commercial paper notes sold discount maturity 270 days date issuance borrowings commercial paper program available general corporate purposes well financing potential acquisitions 1431 million commercial paper outstanding december 31 2008 ability access commercial paper market related cost borrowings affected strength credit rating market conditions credit ratings periodically reviewed major independent debtrating agencies december 31 2008 standard poor’s fitch’s moody’s rating services ratings longterm debt a2 respectively shortterm debt a1 p1 respectively maintained honeywell’s ratings outlook “stable” 2009 support credit rating debt repayments date company experienced limitations ability access sources liquidity maintain 38 billion committed bank revolving credit facilities support commercial paper program 28 billion secured midmay 2012 may 2007 honeywell entered 28 billion amended restated fiveyear credit agreement “credit agreement” syndicate banks commitments credit agreement increased pursuant terms credit agreement aggregated amount exceed 35 billion credit facility contains 700 million sublimit issuance letters credit agreement maintained general corporate purposes including support issuance commercial paper replaces previous 23 billion five year credit agreement dated april 27 2006 “prior agreement” december 31 2008 borrowings letters credit issued credit facility credit agreement restrict honeywell’s ability pay dividends contain financial covenants february 2008 company issued 600 million 425 senior notes due 2013 900 million 530 senior notes due 2018 collectively “senior notes” senior notes senior unsecured unsubordinated obligations honeywell rank equally honeywell’s existing future senior unsecured debt senior honeywell’s subordinated debt offering resulted gross proceeds 15 billion offset 13 million discount issuance costs proceeds senior notes used repay outstanding commercial paper also current shelf registration statement filed securities exchange commission may issue additional debt securities common stock preferred stock may offered one offerings terms determined time offering net proceeds offering would used general corporate purposes including repayment existing indebtedness capital expenditures acquisitions also sell interests designated pools trade accounts receivables third parties sold receivables overcollateralized 93 million december 31 2008 retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools new receivables sold agreement previously sold receivables collected retained interests receivables reflected amounts expected collected us carrying value approximates fair value retained interests sold receivables 500 million december 31 2008 2007 monitor thirdparty depository institutions hold cash equivalents daily basis emphasis primarily safety principal secondarily maximizing yield funds diversify cash equivalents among counterparties minimize exposure one entities also monitoring ability customers obtain financing order mitigate adverse impact revenues primarily long cycle businesses addition normal operating cash requirements principal future cash requirements fund capital expenditures debt repayments dividends employee benefit obligations environmental remediation costs asbestos claims severance exit costs related repositioning actions share repurchases strategic acquisitions specifically expect primary cash requirements 2009 follows • capital expenditureswe expect spend approximately 800 million capital expenditures 2009 primarily cost reduction maintenance replacement growth production capacity expansion • debt repaymentsthere 1023 million scheduled longterm debt maturities 2009 expect refinance maturities debt capital markets 2009 reduce overall debt balances • share repurchasesunder company’s previously announced 30 billion share repurchase program 13 billion remained available december 31 2008 additional share repurchases amount timing repurchases may vary depending market conditions level operating investing activities • dividendswe expect pay approximately 900 million dividends common stock 2009 reflecting 10 percent increase 2009 dividend rate • asbestos claimswe expect cash spending asbestos claims cash receipts related insurance recoveries approximately 171 4 million respectively 2009 see asbestos matters note 21 financial statements discussion • pension contributionsin 2009 required make contributions us pension plans satisfy minimum statutory funding requirements however plan make voluntary contributions honeywell common stock us plan 2009 totaling approximately 800 million improve funded status plans also expect make cash contributions nonus plans approximately 140 million 2009 see note 22 financial statements discussion pension contributions • repositioning actionswe expect cash spending severance exit costs necessary execute previously announced repositioning actions approximate 250 million 2009 • environmental remediation costswe expect spend approximately 330 million 2009 remedial response voluntary cleanup costs see environmental matters note 21 financial statements additional information continuously assess relative strength business portfolio strategic fit market position profit cash flow contribution order upgrade combined portfolio identify business units benefit increased investment identify acquisition candidates strategic plan strengthen existing core businesses also identify businesses fit longterm strategic plan based market position relative profitability growth potential businesses considered potential divestiture restructuring repositioning actions subject regulatory constraints 2008 2007 realized 909 million 51 million respectively cash proceeds sales nonstrategic businesses july 2008 company completed sale consumables solutions business aerospace “be” 105 billion consisting approximately 901 million cash six million shares common stock discussed note 3 financial statements transaction resulted pre tax gain 623 million 417 million net tax proceeds along sources uses liquidity discussed utilized investment existing core businesses fund acquisition activity share repurchases dividends based past performance current expectations believe operating cash flows sufficient meet future cash needs available cash committed credit lines access public debt equity markets well ability sell trade accounts receivables provide additional sources shortterm longterm liquidity fund current operations debt maturities future investment opportunities based current financial position expected economic performance believe liquidity adversely impacted inability access sources financing contractual obligations probable liability payments following summary significant contractual obligations probable liability payments december 31 2008 1 assumes longterm debt outstanding scheduled maturity 2 purchase obligations entered various vendors normal course business consistent expected requirements 3 payment amounts table reflect environmental liabilities probable reasonably estimable december 31 2008 see environmental matters note 21 financial statements additional information 4 amounts estimates asbestos related cash payments narco bendix based asbestos related liabilities probable reasonably estimable december 31 2008 narco estimated payments based terms conditions including evidentiary requirements specified definitive agreements principle pursuant trust distribution procedures bendix payments based estimate pending future claims projecting future events subject many uncertainties could cause asbestos liabilities higher lower projected recorded see asbestos matters note 21 financial statements additional information 5 amounts represent probable insurance recoveries 2018 based insurance recoveries deemed probable asbestos related liabilities december 31 2008 see asbestos matters note 21 financial statements additional information 6 table excludes 671 million uncertain tax positions see note 6 financial statements table also excludes pension postretirement benefits opeb obligations made voluntary cash contributions 42 68 million us pension plans 2008 2007 2006 respectively december 2008 also made voluntary contribution 200 million honeywell common stock us plans improve funded status plans deteriorated 2008 due significant asset losses resulting poor performance equity markets 2009 plan make additional voluntary contributions honeywell common stock us plans totaling approximately 800 million improve funded status plans additional future plan contributions necessary satisfy minimum statutory funding requirements dependent upon actual plan asset returns interest rates assuming actual plan returns consistent expected plan return 9 percent 2009 interest rates remain constant additional changes us pension funding legislation expect would required make contributions us pension plans approximately 360 700 1000 800 million 2010 2011 2012 2013 respectively satisfy minimum statutory funding requirements may also make voluntary contributions us pension plans time also expect make cash contributions nonus plans approximately 140 million 2009 payments due opeb plans required funded advance paid medical costs incurred covered retiree populations principally dependent upon future cost retiree medical benefits plans expect opeb payments approximate 204 million 2009 net benefit approximately 15 million medicare prescription subsidy see note 22 financial statements discussion pension opeb plans offbalance sheet arrangements following summary offbalance sheet arrangements guaranteeswe issued party following direct indirect guarantees december 31 2008 expect guarantees material adverse effect consolidated results operations financial position liquidity connection disposition certain businesses facilities indemnified purchasers expected cost remediation environmental contamination existing date disposition expected costs accrued environmental assessments made remedial efforts probable costs reasonably estimated retained interests factored pools trade accounts receivablesas source liquidity sell interests designated pools trade accounts receivables third parties sold receivables 500 million december 31 2008 overcollateralized retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools overcollateralization provides credit support purchasers receivable interest limiting losses event portion receivables sold becomes uncollectible december 31 2008 retained subordinated undivided interests risk 93 480 million respectively based underlying credit quality receivables placed designated pools receivables sold expect losses related retained interests risk material adverse effect consolidated results operations financial position liquidity environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous substances accordance environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing hazardous substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually jointly potentially responsible parties determine feasibility various remedial techniques address environmental matters policy see note 1 financial statements record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects execution timeframe projects remedial techniques utilized agreements parties remedial response voluntary cleanup payments 320 267 264 million 2008 2007 2006 respectively currently estimated approximately 330 million 2009 expect fund expenditures operating cash flow remedial response voluntary cleanup costs charged pretax earnings 466 230 218 million 2008 2007 2006 respectively december 31 2008 2007 recorded liabilities environmental matters 946 799 million respectively addition 2008 2007 incurred operating costs ongoing businesses approximately 69 81 million respectively relating compliance environmental regulations although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position see note 21 financial statements discussion commitments contingencies including related environmental matters toxic tort litigation financial instruments result global operating financing activities exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position minimize risks interest foreign currency exchange rate commodity price fluctuations normal operating financing activities deemed appropriate use derivative financial instruments use derivative financial instruments trading speculative purposes use leveraged derivative financial instruments summary accounting policies derivative financial instruments included note 1 financial statements also hold investments marketable equity securities exposes us market volatility discussed note 16 financial statements conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities anticipated transactions arising international trade objective preserve economic value nonfunctional currency cash flows attempt hedge transaction exposures natural offsets fullest extent possible opportunities exhausted foreign currency forward option agreements third parties principal currency exposures relate us dollar euro british pound canadian dollar hong kong dollar mexican peso swiss franc czech koruna chinese renminbi indian rupee japanese yen exposure market risk changes interest rates relates primarily net debt pension obligations described notes 14 16 financial statements issue fixed variable rate debt use interest rate swaps manage exposure interest rate movements reduce overall borrowing costs financial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value expected future cash flows derivative financial instruments considering reasonably possible changes interest currency exchange rates restrict use derivative financial instruments hedging activities following table illustrates potential change fair value interest rate sensitive instruments based hypothetical immediate onepercentagepoint increase interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 percent weakening us dollar versus local currency exchange rates across maturities potential change fair value contracts hedging commodity purchases based 20 percent decrease price underlying commodity across maturities december 31 2008 2007 1 asset liability 2 changes fair value foreign currency exchange contracts offset changes fair value cash flows underlying hedged foreign currency transactions 3 changes fair value forward commodity contracts offset changes cash flows underlying hedged commodity transactions discussion procedures monitor market risk estimated changes fair value resulting sensitivity analyses forwardlooking statements market risk assuming certain adverse market conditions occur actual results future may differ materially estimated results due actual developments global financial markets methods used us assess mitigate risk discussed considered projections future events critical accounting policies preparation consolidated financial statements accordance generally accepted accounting principles based selection application accounting policies require us make significant estimates assumptions effects matters inherently uncertain consider accounting policies discussed critical understanding financial statements actual results could differ estimates assumptions differences could material consolidated financial statements discussed selection application disclosure critical accounting policies audit committee board directors independent registered public accountants new accounting standards effective 2008 material impact consolidated financial statements described recent accounting pronouncements section note 1 financial statements contingent liabilitieswe subject number lawsuits investigations claims involve substantial dollar amounts arise conduct global business operations previously owned entities contingencies primarily relate product liabilities including asbestos contractual matters environmental health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes contingencies well potential amounts ranges probable losses recognize liability contingencies based careful analysis matter assistance outside legal counsel applicable experts analysis includes making judgments concerning matters costs associated environmental matters outcome negotiations number cost pending future asbestos claims impact evidentiary requirements contingencies resolved long periods time liabilities may change future due new developments including new discovery fact changes legislation outcomes similar cases judicial system changes assumptions changes settlement strategy discussion contingencies related environmental asbestos matters including management’s judgment applied recognition measurement specific liabilities see notes 1 21 financial statements asbestos related contingencies insurance recoverieswe defendant personal injury actions related products containing asbestos refractory friction products recognize liability asbestos related contingency probable occurrence reasonably estimable regarding north american refractories company narco asbestos related claims accrue pending claims based terms conditions including evidentiary requirements definitive agreements principle current claimants also accrued probable value future narco asbestos related claims 2018 based disease criteria payment values contained narco trust described note 21 financial statements light inherent uncertainties making long term projections regarding claims filing rates disease manifestation believe reasonable basis estimating narco asbestos claims beyond 2018 statement financial accounting standards 5 “accounting contingencies” sfas 5 regarding bendix asbestos related claims accrue estimated value pending claims based expected claim resolution values historic dismissal rates also accrue estimated cost future anticipated claims related bendix next five years based assessment additional claims may brought us anticipated resolution values tort system value bendix pending future claims using average resolution values previous three years continue update expected resolution values used estimate cost pending future bendix claims fourth quarter year additional information see note 21 financial statements continually assess likelihood adverse judgments outcomes contingencies well potential ranges probable losses recognize liability contingencies based analysis individual issue assistance outside legal counsel applicable experts connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical experience insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs consideration impacts settlements insurers december 31 2008 recorded insurance receivables 877 million specifically allocated narco related asbestos liabilities also 19 billion coverage remaining bendix related asbestos liabilities although gaps coverage due insurance company insolvencies certain uninsured periods insurance settlements insurance domestic insurance market london excess market substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries projecting future events subject various uncertainties could cause insurance recovery asbestos related liabilities higher lower projected recorded given inherent uncertainty making future projections reevaluate projections concerning probable insurance recoveries light changes projected liability recovery experience relevant factors may impact future insurance recoveries see note 21 financial statements discussion management’s judgments applied recognition measurement insurance recoveries asbestos related liabilities defined benefit pension planswe maintain defined benefit pension plans covering majority employees retirees financial reporting purposes net periodic pension expense calculated based upon number actuarial assumptions including discount rate plan obligations expected longterm rate return plan assets determine expected longterm rate return plan assets utilizing historic expected plan asset returns varying longterm periods combined current market conditions broad asset mix considerations see note 22 financial statements actual targeted asset allocation percentages pension plans discount rate reflects market rate december 31 measurement date highquality fixedincome investments maturities corresponding benefit obligations subject change year information major actuarial assumption included note 22 financial statements key assumptions used developing 2008 2007 2006 net periodic pension expense us plans included following discount rate volatile year determined based upon prevailing interest rates measurement date use 695 percent discount rate 2009 reflecting increase market interest rate environment since december 31 2007 plan continue use expected rate return plan assets 9 percent 2009 based principally historical experience actual plan returns net losses pension plans 60 billion december 31 2008 compared 17 billion december 31 2007 increase 43 billion due primarily asset losses us plans 2008 due poor performance equity markets throughout 2008 net losses december 31 2008 principally result actual plan asset returns expected rates return 2008 decline year discount rate period 2002 2006 since adoption sfas 158 “employers’ accounting defined benefit pension postretirement plans sfas 158 december 31 2006 discussed detail notes 1 22 financial statements losses recognized component comprehensive income loss net tax future continue systematically recognize net losses net periodic pension expense accordance statement financial accounting standards 87 “employers accounting pensions” sfas 87 sfas 87 use marketrelated value plan assets reflecting changes fair value plan assets threeyear period net losses excess 10 percent greater marketrelated value plan assets plans’ projected benefit obligation corridor recognized sixyear period changes net periodic pension expense may occur future due changes expected rate return plan assets discount rate resulting economic events following table highlights sensitivity us pension obligations expense changes assumptions assuming assumptions remain constant net periodic pension expense pension plans expected approximately 170 million 2009 193 million increase 2008 due principally increase amortization net losses us plans increase amortization net losses results principally asset losses due poor performance equity markets throughout 2008 2007 2006 required make contributions satisfy minimum statutory funding requirements us pension plans however made voluntary cash contributions 42 68 million us pension plans 2008 2007 2006 respectively government contracting purposes december 2008 also made voluntary contribution 200 million honeywell common stock us plans improve funded status plans deteriorated 2008 due significant asset losses resulting poor performance equity markets 2009 plan make additional voluntary contributions honeywell common stock us plans totaling approximately 800 million improve funded status plans additional future plan contributions necessary satisfy minimum statutory funding requirements dependent upon actual plan asset returns interest rates assuming actual plan returns consistent expected plan return 9 percent 2009 interest rates remain constant additional changes us pension funding legislation expect would required make contributions us pension plans approximately 360 700 1000 800 million 2010 2011 2012 2013 respectively satisfy minimum statutory funding requirements also expect contribute approximately 140 million cash 2009 nonus defined benefit pension plans satisfy regulatory funding standards longlived assets including tangible definitelived intangible assetsto conduct global business operations execute business strategy acquire tangible intangible assets including property plant equipment definitelived intangible assets december 31 2008 net carrying amount longlived assets totaled 68 billion determination useful lives depreciationamortization purposes whether assets impaired involves use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions periodically evaluate recoverability carrying amount longlived assets whenever events changes circumstances indicate carrying amount longlived asset group may fully recoverable principal factors consider deciding perform impairment review follows • significant underperformance ie declines sales earnings cash flows business product line relation expectations • annual operating plans fiveyear strategic plans indicate unfavorable trend operating performance business product line • significant negative industry economic trends • significant changes planned changes use assets determined impairment review necessary recoverability assets measured comparing carrying amount asset grouping estimated future undiscounted cash flows carrying amount exceeds estimated future undiscounted cash flows asset grouping considered impaired impairment measured difference carrying amount asset grouping fair value use best information available determine fair value usually either market prices available estimate future discounted cash flow key estimates discounted cash flow analysis include expected industry growth rates assumptions volume selling prices costs discount rate selected described detail repositioning charges section mda recorded impairment charges related longlived assets 78 23 million 2008 2007 respectively principally related manufacturing plant equipment facilities scheduled close downsized certain administrative facilities information technology equipment corporate segment goodwill impairment testinggoodwill represents excess acquisition costs fair value net tangible assets identifiable intangible assets acquired business combination goodwill amortized subject impairment testing goodwill balance 102 billion december 31 2008 subject impairment testing annually march 31 whenever events changes circumstances indicate carrying amount may fully recoverable using guidance criteria described statement financial accounting standards 142 sfas 142 “goodwill intangible assets” testing compares carrying values fair values appropriate carrying value reduced fair value fair value reporting units estimated utilizing discounted cash flow approach incorporating historic projected future operating performance impairment test involves use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions completed annual impairment test march 31 2008 determined impairment date income taxesdeferred tax assets liabilities determined based difference financial statements tax basis assets liabilities using enacted tax rates effect year differences expected reverse provision income taxes based domestic international statutory income tax rates tax planning opportunities jurisdictions operate significant judgment required determining income tax provisions well deferred tax asset liability balances including estimation valuation allowances evaluation tax positions december 31 2008 recognized net deferred tax asset 2762 million less valuation allowance 445 million net deferred tax assets primarily comprised net deductible temporary differences net operating loss carryforwards tax credit carryforwards available reduce taxable income future periods determination amount valuation allowance provided recorded deferred tax assets involves estimates regarding 1 timing amount reversal taxable temporary differences 2 expected future taxable income 3 impact tax planning strategies valuation allowance required likely portion deferred tax asset realized assessing need valuation allowance consider available positive negative evidence including past operating results projections future taxable income feasibility ongoing tax planning strategies projections future taxable income include number estimates assumptions regarding volume pricing costs additionally valuation allowances related deferred tax assets impacted changes tax laws net deferred tax asset 2762 million comprised 2267 million related us operations 495 million related nonus operations us net deferred tax asset 2267 million comprised net deductible temporary differences tax credit carryforwards state tax net operating losses believe likely realized generation future taxable income us tax planning strategies maintain valuation allowance 6 million asset related state net operating losses nonus net deferred tax asset 495 million comprised principally net operating capital loss carryforwards mainly germany france united kingdom maintain valuation allowance 439 million deferred tax assets reflecting historical experience lower expectations taxable income applicable carryforward periods fully described note 6 financial statements valuation allowance decreased 45 million 26 million 2008 2007 respectively increased 39 2006 event determine able realize net deferred tax assets future reduce amounts charge income period determination made conversely determine able realize net deferred tax assets excess carrying amounts decrease recorded valuation allowance credit income period determination made significant judgment required determining income tax provisions statement financial accounting standards 109 “accounting income taxes” sfas 109 evaluating tax positions establish additional provisions income taxes despite belief tax positions fully supportable remain certain positions meet minimum probability threshold defined fasb interpretation “fin” 48 “accounting uncertainty income taxesan interpretation fasb statement 109” “fin 48” tax position likely sustained upon examination applicable taxing authority normal course business company subsidiaries examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes continually assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts give rise revision become known sales recognition longterm contractsin 2008 recognized approximately 13 percent total net sales using percentageofcompletion method longterm contracts automation control solutions aerospace specialty materials segments longterm contracts measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts accounting contracts involves management judgment estimating total contract revenue cost contract revenues largely determined negotiated contract prices quantities modified assumptions regarding contract options change orders incentive award provisions associated technical performance price adjustment clauses inflation indexbased clauses contract costs incurred period time several years estimation costs requires management judgment cost estimates largely based negotiated estimated purchase contract terms historical performance trends economic projections significant factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements revenue cost estimates regularly monitored revised based changes circumstances anticipated losses longterm contracts recognized losses become evident maintain financial controls customer qualification contract pricing estimation processes reduce risk contract losses matters litigation see note 21 financial statements discussion environmental asbestos litigation matters recent accounting pronouncements see note 1 financial statements discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations following management’s discussion analysis financial condition results operations “mda” intended help reader understand results operations financial condition honeywell international inc “honeywell” three years ended december 31 2009 references notes relate notes financial statements “item 8 financial statements supplementary data” consolidated results operations net sales change net sales 2009 2008 attributable following discussion net sales segment found review business segments section mda cost products services sold cost products services sold decreased 4809 million 17 percent 2009 compared 2008 decrease primarily due lower sales result factors discussed within review business segments section mda lower material costs reduced labor costs reflecting reduced census work scheduled reductions benefits prior repositioning actions lower incentive compensation positive impact indirect cost savings initiatives across business segments lower repositioning charges gross margin increased 16 percent 2009 compared 2008 primarily due increases 29 06 percent respectively specialty materials automation controls solutions segments result cost savings initiatives discussed lower repositioning charges partially offset lower margins transportation systems aerospace solutions segments 32 07 percent respectively due lower sales partially offset impact cost savings initiatives cost products services sold increased 1694 million 6 percent 2008 compared 2007 increase primarily due higher sales result factors discussed within review business segments section mda acquisitions higher repositioning charges partially offset lower pension post retirement benefits expense gross margin decreased 06 percentage point 2008 compared 2007 primarily due higher repositioning charges ii decreases 22 14 percent respectively transportation systems specialty materials segments primarily due lower sales volume partially offset lower pension post retirement benefits expense ii higher margins automation controls solutions segment 08 percentage point mainly resulting productivity savings iii higher margins aerospace segment 02 percentage point mainly resulting sales volume growth increased prices selling general administrative expenses selling general administrative expenses sga percentage sales increased 02 percentage point 2009 compared 2008 increase percentage sales driven lower sales volumes substantially offset positive impact indirect cost savings initiatives across business segments ii reduced labor costs reflecting reduced census work schedule reductions benefits prior repositioning actions lower incentive compensation iii lower repositioning charges resulting decreased sga expense 692 million sga percentage sales increased 06 percentage point 2008 compared 2007 increase primarily due higher sga automation control solutions segment mainly due acquisitions partially offset decreases sga specialty materials aerospace segments mainly due cost savings initiatives positive impact prior repositioning actions incomeexpense income decreased 693 million 2009 compared 2008 primarily due lower gain sale nonstrategic businesses assets due gain sale consumables solutions business 2008 partially offset gain related deconsolidation subsidiary within automation control solutions segment 2009 see note 4 financial statements ii lower interest income primarily due lower interest rates cash balances income increased 679 million 2008 compared 2007 primarily due higher gain sale nonstrategic businesses assets representing sale consumables solutions business higher income equity method investments mainly specialty material segment interest financial charges interest financial charges increased 1 percent 2009 compared 2008 due lower debt balances offset higher borrowing costs term debt interest financial charges flat 2008 compared 2007 due higher debt balances offset lower borrowing costs tax expense effective tax rate increased 01 percentage point 2009 compared 2008 due principally decreased impact settlement audits partially offset increased benefits us manufacturing incentives ii us tax credits iii employee stock ownership plan dividends effective tax rate lower us statutory rate 35 percent primarily due earnings taxed lower foreign rates effective tax rate increased 01 percentage point 2008 compared 2007 due principally higher overall state effective tax rate decreased impact settlement audits partially offset decrease foreign effective tax rate effective tax rate lower us statutory rate 35 percent primarily due earnings taxed lower foreign tax rates 2010 effective tax could change based upon company’s operating results outcome tax positions taken regarding previously filed tax returns currently audit various federal state foreign tax authorities several may finalized foreseeable future company believes adequate reserves matters outcome could materially impact results operations operating cash flows period resolved net income attributable honeywell decrease 091 earnings per share common stockassuming dilution 2009 compared 2008 primarily relates decrease segment profit business segments decreased income expense discussed increase number shares outstanding partially offset lower repositioning charges increase 060 earnings per share common stockassuming dilution 2008 compared 2007 primarily relates gain sale consumables solutions business ii lower pension post retirement expense iii increase segment profit significantly automation control solutions aerospace partially offset decline transportation systems segment profit iv reduction number shares outstanding due share repurchases partially offset increased repositioning costs discussion segment results see “review business segments” business overview business overview provides summary honeywell four reportable operating segments aerospace automation control solutions specialty materials transportation systems including respective areas focus 2010 relevant economic factors impacting results discussion segment’s results three years ended december 31 2009 segments comprised various product service classes serve multiple end markets see note 23 financial statements information reportable segments definition segment profit economic factors addition factors listed respect operating segments consolidated operating results principally driven • impact global economic growth rates us europe emerging regions industry conditions demand key end markets • overall sales mix particular mix aerospace original equipment aftermarket sales mix automation control solutions acs products services sales • extent cost savings productivity actions able offset exceed impact material nonmaterial inflation • impact pension discount rate pension expense pension asset returns funding requirements • impact changes foreign currency exchange rate particularly us dollareuro exchange rate areas focus 2010 areas focus 2010 generally applicable operating segments include • driving profitable growth building innovative products address customer needs • achieving sales growth technological excellence manufacturing capability global expansion especially focused emerging regions china india middle east • proactively managing raw material costs formula long term supply agreements price increases hedging activities feasible • driving cash flow conversion effective working capital management capital investment businesses thereby enabling liquidity repayment debt strategic acquisitions ability return value shareholders • actively monitoring trends shortcycle end markets transportations systems turbo business acs products businesses aerospace commercial aftermarket specialty materials resins chemicals continuing take proactive cost actions • aligning prioritizing investments longterm growth vs shortterm demand volatility • driving productivity savings execution repositioning actions • maintaining reduced discretionary spending levels focus noncustomer related costs • ensuring preparedness maximize performance response end customer inventory destocking andor improving end market conditions controlling costs proactively managing capacity utilization supply chain inventory demand • utilizing enablers honeywell operating system hos functional transformation velocity product development vpd standardize way work increase quality reduce costs product manufacturing reduce costs enhance quality administrative functions improve business operations investments systems process improvements • monitoring suppliers customers signs liquidity constraints limiting exposure resulting inability meet delivery commitments pay amounts due identifying alternate sources supply necessary • managing corporate costs including costs incurred asbestos environmental matters pension postretirement expenses tax expense review business segments reconciliation segment profit income continuing operations taxes follows aerospace overview aerospace leading global supplier aircraft engines avionics related products services aircraft manufacturers airlines aircraft operators military services defense space contractors aerospace products services include auxiliary power units propulsion engines environmental control systems engine controls flight safety communications navigation radar surveillance systems aircraft lighting management technical services advanced systems instruments aircraft wheels brakes repair overhaul services aerospace sells products original equipment oe manufacturers air transport regional business general aviation aircraft segments provides spare parts repair maintenance services aftermarket principally aircraft operators united states government also major customer defense space products economic factors aerospace operating results principally driven • new aircraft production rates delivery schedules set commercial air transport regional jet business general aviation oe manufacturers well airline profitability retirement aircraft service • global demand commercial air travel reflected global flying hours utilization rates corporate general aviation aircraft well demand spare parts maintenance repair services aircraft currently use • level mix us government appropriations defense space programs military activity • availability price volatility raw materials titanium metals results operations aerospace sales major customer endmarkets follows 2009 compared 2008 aerospace sales decreased 15 percent 2009 details regarding decrease sales customer endmarkets follows • air transport regional original equipment oe sales decreased 21 percent 2009 decrease driven lower sales oe customers consistent production rates platform mix impact divesting consumables solutions business partially offset 12 percent increase fourth quarter 2009 mainly due absence strike major oem fourth quarter 2008 • air transport regional aftermarket sales decreased 16 percent 2009 primarily due decreased sales spare parts lower maintenance activity driven impact higher parked aircraft part utilization customer inventory reduction initiatives decreased flying hours approximately 2 percent including 1 percent increase fourth quarter expect global flying hours increase slightly 2010 expect aftermarket sales remain soft first half 2010 due continuation inventory destocking rising number parked aircraft • business general aviation oe sales decreased 51 percent 2009 due decrease new business jet deliveries reflecting rescheduling cancellations deliveries oe customers • business general aviation aftermarket sales decreased 27 percent 2009 decrease primarily due decreased sales spare parts lower revenue associated maintenance service agreements consistent decrease business jet utilization started see increase business jet utilization rates fourth quarter 2009 expect stabilization levels • defense space sales essentially unchanged 2009 primarily due higher sales logistics services original equipment military platforms first nine months 2009 offset program completions delays defense space programs could impact timing sales end market course 2010 aerospace segment profit decreased 18 percent 2009 compared 2008 due primarily lower sales result factors discussed inflation partially offset volume related material cost reductions reduced labor costs reflecting reduced census work schedule reductions benefits prior repositioning actions lower incentive compensation positive impact cost savings initiatives increased prices 2008 compared 2007 aerospace sales increased 3 percent 2008 details regarding net increase sales customer endmarkets follows • air transport regional original equipment oe sales decreased 6 percent 2008 decrease driven sale consumables solutions business partially offset increased deliveries air transport customers notwithstanding decrease total aircraft production rates major oem’s mainly due strike major oem settled fourth quarter 2008 • air transport regional aftermarket sales increased 4 percent 2008 primarily due increased volume price spare parts aftermarket growth driven flight hour growth rate global flying hours slowed 3 percent 2008 including 2 percent decline fourth quarter • business general aviation oe sales increased 5 percent 2008 due continued demand business jet end market evidenced increase new business jet deliveries improved pricing continued additions fractional ownership charter fleets 2008 sales end market primarily consisted sales primus epic integrated avionics systems tfe 731 htf 7000 engines • business general aviation aftermarket sales increased 6 percent 2008 increase primarily due increased revenue maintenance service agreements higher sales spare parts • defense space sales increased 6 percent 2008 increase primarily due logistics services including positive impact acquisition dimensions international defense logistics business helicopter oe sales increase government funded engineering related orion cev program higher sales specialty foam insulation certain surface systems classified space programs aerospace segment profit increased 5 percent 2008 compared 2007 due primarily increased prices productivity sales volume growth increases partially offset inflation consumables solutions divestiture higher spending support new platform growth 2010 areas focus aerospace’s primary areas focus 2010 include • focus cost structure initiatives maintain profitability face challenging commercial aerospace conditions • aligning inventory production research development customer demand production schedules • expanding sales operations international locations • pursuit new defense space platforms • continuing design equipment enhances safety performance durability aerospace defense equipment reducing weight operating costs • delivering worldclass customer service achieving cycle lead time reduction improve responsiveness customer demand • continued deployment common enterprise resource planning erp system automation control solutions acs overview acs provides innovative products solutions make homes buildings industrial sites infrastructure efficient safe comfortable acs products services include controls heating cooling indoor air quality ventilation humidification lighting home automation advanced software applications homebuilding control optimization sensors switches control systems instruments measuring pressure air flow temperature electrical current security fire gas detection personal protection equipment access control video surveillance remote patient monitoring systems products automatic identification data collection installation maintenance upgrades systems keep buildings safe comfortable productive automation control solutions industrial plants including advanced software automation systems integrate control monitor complex processes many types industrial settings well equipment controls measures analyzes natural gas production transportation economic factors acs’s operating results principally driven • global commercial construction including retrofits upgrades • demand residential security environmental control retrofits upgrades • demand energy efficient products solutions • industrial production • government public sector spending • us european economic conditions • economic growth rates developed us europe emerging markets • strength capital operating spending process including petrochemical refining building automation • inventory levels distribution channels • changes energy fire security health care safety environmental concerns regulations results operations 2009 compared 2008 acs sales decreased 10 percent 2009 compared 2008 primarily due decreased sales volume reflecting slower global economic growth unfavorable impact foreign exchange 4 percent partially offset 3 percent growth acquisitions • sales products businesses decreased 11 percent including lower volumes sales businesses excluding impact acquisitions ii unfavorable impact foreign exchange softness residential industrial endmarkets partially offset positive impact acquisitions significantly norcross safety products • sales solutions businesses decreased 9 percent primarily due unfavorable impact foreign exchange volume decreases largely due softening demand result customer deferral capital operating expenditures orders decreased backlog increased 2009 decreased orders primarily due unfavorable impact foreign exchange softening demand noted order timing delays higher backlog primarily due longer duration projects impact factors partially offset positive impact acquisitions significantly rmg group acs segment profit decreased 2 percent 2009 compared 2008 principally due negative impact lower sales result factors discussed inflation partially offset lower material costs reduced labor costs reflecting reduced census work schedule reductions benefits prior repositioning actions lower incentive compensation positive impact indirect cost savings initiatives fourth quarter 2009 factors offset impact lower sales described resulting 5 percent increase segment profit 2008 compared 2007 acs sales increased 12 percent 2008 compared 2007 including 10 percent net growth acquisitions divestitures although foreign exchange minimal impact full year sales 9 percent negative impact foreign exchange fourth quarter sales • sales products businesses grew 15 percent including positive impact acquisitions significantly norcross safety products metrologic instruments hand held products inc maxon corporation ii continued strong demand life safety products particularly fire systems sensors iii increased sales environmental combustion products driven new products demand energy efficient controls including growth across regions factors partially offset decreases sales volumes security reflecting us european residential construction softness sensing controls products notably automotive customers reflecting softness us europe • sales solutions businesses increased 8 percent primarily due volume growth driven continued orders growth strong conversion sales orders backlog ii positive impact acquisitions significantly enraf holding bv acs segment profit increased 15 percent 2008 compared 2007 principally due increased productivity savings acquisitions improved pricing partially offset inflation 2010 areas focus acs’s primary areas focus 2010 include • products solutions energy efficiency asset management • extending technology leadership lowest total installed cost integrated product solutions • defending extending installed base customer productivity globalization • sustaining strong brand recognition brand channel management • centralization standardization global software development capabilities • continuing identify execute integrate acquisitions adjacent markets serve • continuing establish grow emerging markets presence capability • continuing invest new product development introductions • continued deployment common erp system specialty materials overview specialty materials develops manufactures highpurity highquality highperformance chemicals materials applications refining petrochemical automotive healthcare agricultural packaging refrigeration appliance housing semiconductor wax adhesives segments specialty materials also provides process technology products services petroleum refining gas processing technology petrochemical industries specialty materials’ product portfolio includes fluorocarbons caprolactam ammonium sulfate fertilizer specialty films advanced fibers customized research chemicals intermediates electronic materials chemicals catalysts adsorbents economic factors specialty materials operating results principally driven • level timing capital spending capacity utilization rates refining petrochemical end markets • degree pricing volatility raw materials benzene key component phenol fluorspar natural gas ethylene sulfur • impact environmental energy efficiency regulations • extent change order rates global semiconductor customers • global demand nonozone depleting hydro fluorocarbons hfc’s • condition us residential housing industry • global demand commodities caprolactam ammonium sulfate • increasing demand renewable energy biofuels results operations 2009 compared 2008 specialty materials sales decreased 21 percent 2009 compared 2008 primarily driven 32 percent decrease resins chemicals sales due substantial price declines arising pass lower raw materials costs partially offset increased volume notably fourth quarter ii 19 percent decrease uop sales due customer deferrals projects result reduced demand additional capacity refining petrochemical industries well lower catalyst sales iii 22 percent decrease specialty products sales significantly due continued demand softness across key customer endmarkets iv 11 percent decrease fluorine products sales due lower volume sales refrigerants insulating materials principally driven customer inventory reduction initiatives soft construction original equipment manufacturing end markets partially offset price increases specialty materials segment profit decreased 16 percent 2009 compared 2008 decrease principally due lower sales result factors discussed partially offset lower material costs reduced labor costs reflecting reduced census work schedule reductions lower incentive compensation positive impact indirect cost savings initiatives increased prices fourth quarter 2009 factors offset impact lower sales described resulting 56 percent increase segment profit 2008 compared 2007 specialty materials sales increased 8 percent 2008 compared 2007 primarily driven increased pricing reflecting passthrough higher raw material costs pricing actions including benefits formula based pricing arrangements significantly resins chemicals fluorine products ii 8 percent increase uop sales result higher volume sales products projects businesses full year 2008 sales growth partially offset 12 percent sales decline revenue fourth quarter primarily resins chemicals business due sharp declines global demand commodities caprolactam ammonium sulfate specialty materials segment profit increased 10 percent 2008 compared 2007 increase due principally increased uop fluorine products resins chemicals sales result factors discussed higher income joint ventures partially offset impacts hurricanes gustav ike fourth quarter sales decline noted overall effects increased pricing reflecting passthrough higher raw material costs pricing actions including benefits formula based pricing arrangements productivity gains offset raw material significantly sulfur inflation 2010 areas focus specialty materials primary areas focus 2010 include • continue develop new processes products technologies address energy efficiency renewable energy sources global warming security regulations position portfolio higher value • commercialize new products technologies petrochemical gas processing refining industries • drive sales marketing excellence expand local presence fast growing emerging markets • execution awarded government stimulus projects pursuit additional projects • manage exposure raw material commodity fluctuations • prioritize critical investment increase plant reliability attainment productivity quality operational excellence transportation systems overview transportation systems provides automotive products improve performance efficiency appearance cars trucks vehicles stateoftheart technologies world class brands global solutions customers’ needs transportation systems’ products include turbochargers chargeair thermal systems car care products including antifreeze prestoner filters framr spark plugs autoliter cleaners waxes additives holtsr brake hard parts friction materials bendixr juridr transportation systems sells products original equipment “oe” automotive truck manufacturers eg bmw caterpillar daimler renault ford volkswagen wholesalers distributors retail aftermarket economic factors transportation systems operating results principally driven • financial strength stability automotive oe manufacturers • global demand automobile truck production • turbo penetration rates new engine platforms • global consumer preferences boosted diesel passenger cars • degree volatility raw material prices including nickel steel • new automobile production rates impact customer inventory levels demand products • automotive aftermarket trends consumer confidence miles driven consumer preference branded vs private label aftermarket car care products • regulations mandating lower emissions improved fuel economy • consumers’ ability obtain financing new vehicle purchases results operations 2009 compared 2008 transportation systems sales decreased 27 percent 2009 compared 2008 primarily due lower volumes driven ongoing challenging global automotive industry conditions negative impact foreign exchange first nine months 2009 • turbo technologies sales decreased 34 percent primarily due lower sales volumes commercial light vehicle engine manufacturing customers negative impact foreign exchange diesel penetration rates western europe declined first nine months 2009 shift consumer preference towards lower displacement engines full year 2009 sales decline partially offset 22 percent sales increase fourth quarter primarily due positive impact foreign exchange higher sales volumes light vehicle engine manufacturing customers expect increased volumes continue benefit new platform launches scheduled 2010 • cpg sales decreased 8 percent primarily due lower prices primarily pass ethylene glycol cost decreases lower volumes negative impact foreign exchange • friction materials sales decreased 24 percent primarily due continued declines sales volumes unfavorable impact foreign exchange transportation systems segment profit decreased 62 percent 2009 compared 2008 due principally lower sales volume result factors discussed partially offset lower material costs reduced labor costs reflecting reduced census work schedule reductions benefits prior repositioning actions lower incentive compensation positive impact indirect cost savings initiatives fourth quarter 2009 factors increased turbo technologies volumes resulted 66 million increase transportation systems’ segment profit anticipate new platform launches translate increased segment profit 2010 2008 compared 2007 transportation systems sales decreased 8 percent 2008 compared 2007 primarily due lower volumes significantly second half 2008 partially offset favorable impact foreign exchange • turbo technologies sales decreased 9 percent primarily due decreased volume broad decline vehicle production due challenging automotive industry conditions us europe accelerated second half 2008 impacting sales commercial light vehicle engine manufacturers partially offset favorable impact foreign exchange • consumer products group “cpg” sales decreased 10 percent primarily due lower sales automotive aftermarket products reflecting lower miles driven impact lower consumer confidence discretionary spending partially offset higher prices including pass ethylene glycol cost increases • friction materials sales essentially unchanged primarily due favorable impact foreign exchange increased pricing offset lower original equipment aftermarket product sales volume transportation systems segment profit decreased 30 percent 2008 compared 2007 primarily due volume declines discussed material nonmaterial cost inflation investments product development support future turbo platforms factors partially offset increased productivity favorable impact foreign exchange 2010 areas focus transportation systems primary areas focus 2010 include • sustaining superior turbocharger technology successful platform launches • maintaining high quality current products executing new product introductions • increasing global penetration share diesel gasoline turbocharger oem demand • increasing plant productivity address capacity challenges generated volatility product demand oem inventory levels • aligning cost structure current economic outlook successful execution repositioning actions • aligning development efforts costs new turbo platform launch schedules • continuing global expansion extension established strong product brands cpg repositioning charges see note 3 financial statements discussion repositioning charges incurred 2009 2008 2007 repositioning actions expected generate incremental pretax savings approximately 300 million 2010 compared 2009 principally planned workforce reductions cash expenditures severance exit costs necessary execute repositioning actions 200 157 92 million 2009 2008 2007 respectively expenditures severance exit costs funded principally operating cash flows cash expenditures severance exit costs necessary execute remaining actions expected approximate 225 million 2010 funded operating cash flows following tables provide details pretax impact total net repositioning charges segment liquidity capital resources company continues manage businesses maximize operating cash flows primary source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines shortterm debt commercial paper market longterm borrowings access public debt equity markets well ability sell trade accounts receivables continue balance cash financing uses investment existing core businesses acquisition activity share repurchases dividends cash flow summary cash flows operating investing financing activities reflected consolidated statement cash flows years ended december 31 2009 2008 2007 summarized follows 2009 compared 2008 cash provided operating activities increased 155 million 2009 compared 2008 primarily due favorable impact working capital 577 million primarily due lower inventory lower cash taxes 449 million 155 million sale long term receivables partially offset decreased earnings receipts sale insurance receivables 82 million 2008 higher repositioning payments 43 million cash used investing activities decreased 890 million 2009 compared 2008 primarily due 1713 million decrease cash paid acquisitions significantly acquisition norcross metrolgic 2008 275 million decrease expenditures property plant equipment partially offset 908 million decrease proceeds sales businesses significantly divestiture consumables solutions 2008 cash used financing activities increased 782 million 2009 compared 2008 primarily due net repayment debt including commercial paper 2009 1272 million compared net proceeds including commercial paper 733 million 2008 partially offset decrease repurchases common stock 1459 million 2008 compared 2007 cash provided operating activities decreased 120 million 2008 compared 2007 primarily due decrease accrued liabilities 475 million decreased advances customers deferred income higher cash tax payments 336 million significantly due sale consumables solutions business partially offset increased earnings lower cash payments asbestos 121 million decrease working capital lower accounts receivable offset higher accounts payable cash used investing activities increased 241 million 2008 compared 2007 due primarily higher spending acquisitions partially offset higher proceeds sales businesses 2008 cash paid acquisitions net cash acquired 2181 million primarily safety products holding inc norcross metrologic instruments inc compared 1150 million 2007 primarily acquisitions dimensions international enraf holding bv hand held products inc maxon corporation cash proceeds divestitures 909 million 2008 compared 51 million 2007 primarily due sale consumables solutions cash used financing activities decreased 204 million 2008 compared 2007 primarily due 2527 million decrease repurchases common stock partially offset decreases net proceeds debt including commercial paper 1797 million decrease proceeds issuance common stock primarily related stock option exercises 457 million liquidity businesses focused implementing strategies improve working capital turnover 2010 increase operating cash flows considering current economic environment businesses operate business plans strategies including focus growth cost reduction productivity initiatives believe cash balances operating cash flows remain principal source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines short term debt commercial paper markets longterm borrowings access public debt equity markets well ability sell trade accounts receivables source liquidity ability issue shortterm debt commercial paper market commercial paper notes sold discount maturity 365 days date issuance borrowings commercial paper program available general corporate purposes well financing potential acquisitions 298 million commercial paper outstanding december 31 2009 ability access commercial paper market related cost borrowings affected strength credit rating market conditions credit ratings periodically reviewed major independent debtrating agencies december 31 2009 standard poor’s sp fitch moody’s ratings longterm debt a2 respectively shortterm debt a1 p1 respectively sp moody’s maintained honeywell’s ratings outlook “stable” fitch’s rating outlook “negative” 2010 support credit rating debt repayments date company experienced limitations ability access sources liquidity maintain 28 billion committed bank revolving credit facilities support commercial paper program secured midmay 2012 may 2007 honeywell entered 28 billion amended restated fiveyear credit agreement “credit agreement” syndicate banks commitments credit agreement increased pursuant terms credit agreement aggregated amount exceed 35 billion credit facility contains 700 million sublimit issuance letters credit agreement maintained general corporate purposes including support issuance commercial paper december 31 2009 borrowings letters credit issued credit facility credit agreement restrict honeywell’s ability pay dividends contain financial covenants february 2009 company issued 600 million 3875 senior notes due 2014 900 million 500 senior notes due 2019 collectively “2009 senior notes” 2009 senior notes senior unsecured unsubordinated obligations honeywell rank equally honeywell’s existing future senior unsecured debt senior honeywell’s subordinated debt offering resulted gross proceeds 15 billion offset 12 million discount issuance costs proceeds senior notes used repay outstanding commercial paper august 2009 company completed acquisition rmg group rmg regel messtechnik gmbh natural gas measuring control products services integrated solutions company integrated automation control solutions segment purchase price net cash acquired approximately 416 million funded using available cash also current shelf registration statement filed securities exchange commission may issue additional debt securities common stock preferred stock may offered one offerings terms determined time offering net proceeds offering would used general corporate purposes including repayment existing indebtedness capital expenditures acquisitions sell interests designated pools trade accounts receivables third parties april 2009 modified terms trade accounts receivable program permit repurchase receivables third parties discretion modification provides additional flexibility management receivable portfolio also requires receivables program remain company balance sheet result 500 million program receivables reflected accounts notes receivables corresponding amount recorded shortterm borrowings consolidated balance sheet shortterm borrowings repaid december 31 2009 monitor thirdparty depository institutions hold cash equivalents daily basis emphasis primarily safety principal secondarily maximizing yield funds diversify cash equivalents among counterparties minimize exposure one entities current global economic conditions current tightening credit could adversely affect customers’ suppliers’ ability obtain financing particularly longcycle businesses airline automotive end markets customer supplier bankruptcies delays ability obtain financing unavailability financing could adversely affect cash flow results operations date experienced material impacts customer supplier bankruptcy liquidity issues continue monitor take measures limit exposure addition normal operating cash requirements principal future cash requirements fund capital expenditures debt repayments dividends employee benefit obligations environmental remediation costs asbestos claims severance exit costs related repositioning actions share repurchases strategic acquisitions specifically expect primary cash requirements 2010 follows • capital expenditureswe expect spend approximately 700 million capital expenditures 2010 primarily cost reduction maintenance replacement growth production capacity expansion • debt repaymentsthere 1018 million scheduled longterm debt maturities 2010 expect refinance maturities 2010 utilizing shortterm debt reduce overall debt balances • share repurchasesunder company’s previously announced 30 billion share repurchase program 13 billion remained available december 31 2009 additional share repurchases amount timing repurchases may vary depending market conditions level operating investing activities anticipate share repurchases 2010 • dividendswe expect pay approximately 940 million dividends common stock 2010 reflecting 4 percent increase number shares outstanding • asbestos claimswe expect cash spending asbestos claims cash receipts related insurance recoveries approximately 654 62 million respectively 2010 see asbestos matters note 21 financial statements discussion • pension contributionsin 2010 required make contributions us pension plans satisfy minimum statutory funding requirements however presently anticipate making voluntary contributions approximately 400 million honeywell common stock us plan 2010 improve funded status plans also expect make contributions nonus plans approximately 150 million 2010 see note 22 financial statements discussion pension contributions • repositioning actionswe expect cash spending severance exit costs necessary execute previously announced repositioning actions approximate 225 million 2010 • environmental remediation costswe expect spend approximately 285 million 2010 remedial response voluntary cleanup costs see environmental matters note 21 financial statements additional information continuously assess relative strength business portfolio strategic fit market position profit cash flow contribution order upgrade combined portfolio identify business units benefit increased investment identify acquisition candidates strategic plan strengthen existing core businesses also identify businesses fit longterm strategic plan based market position relative profitability growth potential businesses considered potential divestiture restructuring repositioning actions subject regulatory constraints 2008 realized 909 million cash proceeds sales nonstrategic businesses july 2008 company completed sale consumables solutions business aerospace “be” 105 billion consisting approximately 901 million cash six million shares common stock discussed note 3 financial statements transaction resulted pre tax gain 623 million 417 million net tax proceeds along sources uses liquidity discussed utilized invest existing core businesses fund acquisition activity share repurchases dividends based past performance current expectations believe operating cash flows sufficient meet future cash needs available cash committed credit lines access public debt equity markets well ability sell trade accounts receivables provide additional sources shortterm longterm liquidity fund current operations debt maturities future investment opportunities based current financial position expected economic performance believe liquidity adversely impacted inability access sources financing contractual obligations probable liability payments following summary significant contractual obligations probable liability payments december 31 2009 1 assumes longterm debt outstanding scheduled maturity 2 purchase obligations entered various vendors normal course business consistent expected requirements 3 payment amounts table reflect environmental liabilities probable reasonably estimable december 31 2009 see environmental matters note 21 financial statements additional information 4 amounts estimates asbestos related cash payments narco bendix based asbestos related liabilities probable reasonably estimable december 31 2009 narco estimated payments based terms conditions including evidentiary requirements specified definitive agreements principle pursuant trust distribution procedures bendix payments based estimate pending future claims projecting future events subject many uncertainties could cause asbestos liabilities higher lower projected recorded see asbestos matters note 21 financial statements additional information 5 amounts represent probable insurance recoveries 2018 based insurance recoveries deemed probable asbestos related liabilities december 31 2009 see asbestos matters note 21 financial statements additional information 6 table excludes 720 million uncertain tax positions see note 6 financial statements table also excludes pension postretirement benefits opeb obligations 2010 plan make additional voluntary contributions honeywell common stock us plans improve funded status plans also expect make contributions nonus plans approximately 150 million 2010 beyond 2010 minimum statutory funding requirements us pension plans may become significant however actual amounts required contributed dependent upon among things interest rates underlying asset returns impact legislative regulatory actions related pension funding obligations payments due opeb plans required funded advance paid medical costs incurred covered retiree populations principally dependent upon future cost retiree medical benefits plans expect opeb payments approximate 200 million 2010 net benefit approximately 14 million medicare prescription subsidy see note 22 financial statements discussion pension opeb plans offbalance sheet arrangements following summary offbalance sheet arrangements guaranteeswe issued party following direct indirect guarantees december 31 2009 expect guarantees material adverse effect consolidated results operations financial position liquidity connection disposition certain businesses facilities indemnified purchasers expected cost remediation environmental contamination existing date disposition expected costs accrued environmental assessments made remedial efforts probable costs reasonably estimated retained interests factored pools trade accounts receivablesas source liquidity sell interests designated pools trade accounts receivables third parties sold receivables 500 million december 31 2008 overcollateralized retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools overcollateralization provides credit support purchasers receivable interest limiting losses event portion receivables sold becomes uncollectible april 2009 modified terms trade accounts receivable program permit repurchase receivables third parties discretion modification provides additional flexibility management receivable portfolio also requires receivables program remain company balance sheet result 500 million program receivables reflected accounts notes receivables corresponding amount recorded shortterm borrowings consolidated balance sheet shortterm borrowings repaid december 31 2009 environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous substances accordance environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing hazardous substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually jointly potentially responsible parties determine feasibility various remedial techniques address environmental matters policy see note 1 financial statements record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects execution timeframe projects remedial techniques utilized agreements parties remedial response voluntary cleanup payments 318 320 267 million 2009 2008 2007 respectively currently estimated approximately 285 million 2010 expect fund expenditures operating cash flow remedial response voluntary cleanup costs charged pretax earnings 151 466 230 million 2009 2008 2007 respectively december 31 2009 2008 recorded liabilities environmental matters 779 946 million respectively addition 2009 2008 incurred operating costs ongoing businesses approximately 73 69 million respectively relating compliance environmental regulations although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position see note 21 financial statements discussion commitments contingencies including related environmental matters toxic tort litigation financial instruments result global operating financing activities exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position minimize risks interest foreign currency exchange rate commodity price fluctuations normal operating financing activities deemed appropriate use derivative financial instruments use derivative financial instruments trading speculative purposes use leveraged derivative financial instruments summary accounting policies derivative financial instruments included note 1 financial statements also hold investments marketable equity securities exposes us market volatility discussed note 16 financial statements conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities anticipated transactions arising international trade objective preserve economic value nonfunctional currency cash flows attempt hedge transaction exposures natural offsets fullest extent possible opportunities exhausted foreign currency forward option agreements third parties principal currency exposures relate us dollar euro british pound canadian dollar hong kong dollar mexican peso swiss franc czech koruna chinese renminbi indian rupee singapore dollar exposure market risk changes interest rates relates primarily net debt pension obligations described notes 14 16 financial statements issue fixed variable rate debt use interest rate swaps manage exposure interest rate movements reduce overall borrowing costs financial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value expected future cash flows derivative financial instruments considering reasonably possible changes interest currency exchange rates restrict use derivative financial instruments hedging activities following table illustrates potential change fair value interest rate sensitive instruments based hypothetical immediate onepercentagepoint increase interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 percent weakening us dollar versus local currency exchange rates across maturities potential change fair value contracts hedging commodity purchases based 20 percent decrease price underlying commodity across maturities december 31 2009 2008 1 asset liability 2 changes fair value foreign currency exchange contracts offset changes fair value cash flows underlying hedged foreign currency transactions 3 changes fair value forward commodity contracts offset changes cash flows underlying hedged commodity transactions discussion procedures monitor market risk estimated changes fair value resulting sensitivity analyses forwardlooking statements market risk assuming certain adverse market conditions occur actual results future may differ materially estimated results due actual developments global financial markets methods used us assess mitigate risk discussed considered projections future events critical accounting policies preparation consolidated financial statements accordance generally accepted accounting principles based selection application accounting policies require us make significant estimates assumptions effects matters inherently uncertain consider accounting policies discussed critical understanding financial statements actual results could differ estimates assumptions differences could material consolidated financial statements discussed selection application disclosure critical accounting policies audit committee board directors independent registered public accountants new accounting standards effective 2009 material impact consolidated financial statements described recent accounting pronouncements section note 1 financial statements contingent liabilitieswe subject number lawsuits investigations claims involve substantial dollar amounts arise conduct global business operations previously owned entities contingencies primarily relate product liabilities including asbestos contractual matters environmental health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes contingencies well potential amounts ranges probable losses recognize liability contingencies based careful analysis matter assistance outside legal counsel applicable experts analysis includes making judgments concerning matters costs associated environmental matters outcome negotiations number cost pending future asbestos claims impact evidentiary requirements contingencies resolved long periods time liabilities may change future due new developments including new discovery facts changes legislation outcomes similar cases judicial system changes assumptions changes settlement strategy discussion contingencies related environmental asbestos matters including management’s judgment applied recognition measurement specific liabilities see notes 1 21 financial statements asbestos related contingencies insurance recoverieswe defendant personal injury actions related products containing asbestos refractory friction products recognize liability asbestos related contingency probable occurrence reasonably estimable regarding north american refractories company narco asbestos related claims accrue pending claims based terms conditions including evidentiary requirements definitive agreements principle current claimants also accrued probable value future narco asbestos related claims 2018 based disease criteria payment values contained narco trust described note 21 financial statements light inherent uncertainties making long term projections regarding claims filing rates disease manifestation believe reasonable basis estimating narco asbestos claims beyond 2018 regarding bendix asbestos related claims accrue estimated value pending claims based expected claim resolution values historic dismissal rates also accrue estimated cost future anticipated claims related bendix next five years based assessment additional claims may brought us anticipated resolution values tort system value bendix pending future claims using average resolution values previous four years continue update expected resolution values used estimate cost pending future bendix claims fourth quarter year additional information see note 21 financial statements continually assess likelihood adverse judgments outcomes contingencies well potential ranges probable losses recognize liability contingencies based analysis individual issue assistance outside legal counsel applicable experts connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical experience insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs consideration impacts settlements insurers december 31 2009 recorded insurance receivables 831 million specifically allocated narco related asbestos liabilities also 19 billion coverage remaining bendix related asbestos liabilities although gaps coverage due insurance company insolvencies certain uninsured periods insurance settlements insurance domestic insurance market london excess market substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries projecting future events subject various uncertainties could cause insurance recovery asbestos related liabilities higher lower projected recorded given inherent uncertainty making future projections reevaluate projections concerning probable insurance recoveries light changes projected liability recovery experience relevant factors may impact future insurance recoveries see note 21 financial statements discussion management’s judgments applied recognition measurement insurance recoveries asbestos related liabilities defined benefit pension planswe maintain defined benefit pension plans covering majority employees retirees financial reporting purposes net periodic pension expense calculated based upon number actuarial assumptions including discount rate plan obligations expected longterm rate return plan assets determine expected longterm rate return plan assets utilizing historic expected plan asset returns varying longterm periods combined current market conditions broad asset mix considerations see note 22 financial statements details actual various asset classes targeted asset allocation percentages pension plans discount rate reflects market rate december 31 measurement date highquality fixedincome investments maturities corresponding benefit obligations subject change year information major actuarial assumption included note 22 financial statements key assumptions used developing 2009 2008 2007 net periodic pension expense us plans included following discount rate volatile year determined based upon prevailing interest rates measurement date use 575 percent discount rate 2010 reflecting decrease market interest rate environment since december 31 2008 plan continue use expected rate return plan assets 9 percent 2010 longterm rate based historical plan asset returns varying longterm periods combined current market conditions broad asset mix considerations net losses pension plans 76 billion december 31 2009 compared 60 billion december 31 2008 increase 16 billion due primarily lower discount rates plans partially offset asset gains due performance equity markets 2009 net losses december 31 2009 principally result lower discount rates 2009 actual plan asset returns expected rates return 2008 discussed detail note 22 financial statements losses recognized component comprehensive income loss net tax future continue systematically recognize net losses net periodic pension expense use marketrelated value plan assets reflecting changes fair value plan assets threeyear period net losses excess 10 percent greater marketrelated value plan assets plans’ projected benefit obligation corridor recognized sixyear period changes net periodic pension expense may occur future due changes expected rate return plan assets discount rate resulting economic events following table highlights sensitivity us pension obligations expense changes assumptions assuming assumptions remain constant net periodic pension expense pension plans expected approximately 820 million 2010 712 million increase 2009 due principally increase amortization net losses us plans increase amortization net losses results principally asset losses due poor performance equity markets 2008 2009 2008 2007 required make contributions satisfy minimum statutory funding requirements us pension plans however made voluntary contributions 740 242 42 million us pension plans 2009 2008 2007 respectively primarily improve funded status plans deteriorated 2008 due significant asset losses resulting poor performance equity markets 2010 plan make additional voluntary contributions honeywell common stock us plans improve funded status plans beyond 2010 minimum statutory funding requirements us pension plans may become significant however actual amounts required contributed dependent upon among things interest rates underlying asset returns impact legislative regulatory changes related pension funding obligations also expect contribute approximately 150 nonus defined benefit pension plans 2010 satisfy regulatory funding standards longlived assets including tangible definitelived intangible assetsto conduct global business operations execute business strategy acquire tangible intangible assets including property plant equipment definitelived intangible assets december 31 2009 net carrying amount longlived assets totaled 66 billion determination useful lives depreciationamortization purposes whether assets impaired involves use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions periodically evaluate recoverability carrying amount longlived assets whenever events changes circumstances indicate carrying amount longlived asset group may fully recoverable principal factors consider deciding perform impairment review follows • significant underperformance ie declines sales earnings cash flows business product line relation expectations • annual operating plans fiveyear strategic plans indicate unfavorable trend operating performance business product line • significant negative industry economic trends • significant changes planned changes use assets determined impairment review necessary recoverability assets measured comparing carrying amount asset grouping estimated future undiscounted cash flows carrying amount exceeds estimated future undiscounted cash flows asset grouping considered impaired impairment measured difference carrying amount asset grouping fair value endeavor utilize best information available measure fair value usually either market prices available level 1 level 2 fair value hierarchy estimate future discounted cash flow level 3 fair value hierarchy key estimates discounted cash flow analysis include expected industry growth rates assumptions volume selling prices costs discount rate selected described detail note 16 financial statements recorded impairment charges related longlived assets 28 78 million 2009 2008 respectively principally related manufacturing plant equipment facilities scheduled close downsized goodwill impairment testinggoodwill represents excess acquisition costs fair value net tangible assets identifiable intangible assets acquired business combination goodwill amortized subject impairment testing goodwill balance 105 billion december 31 2009 subject impairment testing annually march 31 whenever events changes circumstances indicate carrying amount may fully recoverable testing compares carrying values fair values appropriate carrying value reduced fair value fair value reporting units estimated utilizing discounted cash flow approach utilizing cash flow forecasts five year strategic annual operating plans adjusted terminal value assumptions impairment test involves use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions address uncertainty perform sensitivity analysis key estimates assumptions completed annual impairment test march 31 2009 determined impairment date given significant changes business climate decline midrange forecasts certain reporting units retested goodwill impairment second half 2009 impairment indicated interim test however significant negative industry economic trends disruptions business unexpected significant changes planned changes use assets divestitures market capitalization declines may negative effect fair value reporting units income taxesdeferred tax assets liabilities determined based difference financial statements tax basis assets liabilities using enacted tax rates effect year differences expected reverse provision income taxes based domestic international statutory income tax rates jurisdictions operate significant judgment required determining income tax provisions well deferred tax asset liability balances including estimation valuation allowances evaluation tax positions december 31 2009 recognized net deferred tax asset 3028 million less valuation allowance 578 million net deferred tax assets primarily comprised net deductible temporary differences net operating loss carryforwards tax credit carryforwards available reduce taxable income future periods determination amount valuation allowance provided recorded deferred tax assets involves estimates regarding 1 timing amount reversal taxable temporary differences 2 expected future taxable income 3 impact tax planning strategies valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax asset realized assessing need valuation allowance consider available positive negative evidence including past operating results projections future taxable income feasibility ongoing tax planning strategies projections future taxable income include number estimates assumptions regarding volume pricing costs additionally valuation allowances related deferred tax assets impacted changes tax laws net deferred tax asset 3028 million comprised 2132 million related us operations 896 million related nonus operations us net deferred tax asset 2132 million comprised net deductible temporary differences tax credit carryforwards state tax net operating losses believe likely realized generation future taxable income us tax planning strategies maintain valuation allowance 8 million asset related state net operating losses nonus net deferred tax asset 896 million comprised principally net operating capital loss carryforwards mainly germany luxembourg netherlands united kingdom maintain valuation allowance 570 million deferred tax assets reflecting historical experience lower expectations taxable income applicable carryforward periods fully described note 6 financial statements valuation allowance increased 133 million 2009 decreased 45 million 26 million 2008 2007 respectively event determine able realize net deferred tax assets future reduce amounts charge income period determination made conversely determine able realize net deferred tax assets excess carrying amounts decrease recorded valuation allowance credit income period determination made significant judgment required determining income tax provisions evaluating tax positions establish additional provisions income taxes despite belief tax positions fully supportable remain certain positions meet minimum probability threshold defined authoritative guidance uncertainty income taxes tax position likely sustained upon examination applicable taxing authority normal course business company subsidiaries examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes continually assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts give rise revision become known sales recognition longterm contractsin 2009 recognized approximately 15 percent total net sales using percentageofcompletion method longterm contracts automation control solutions aerospace specialty materials segments longterm contracts measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts accounting contracts involves management judgment estimating total contract revenue cost contract revenues largely determined negotiated contract prices quantities modified assumptions regarding contract options change orders incentive award provisions associated technical performance price adjustment clauses inflation indexbased clauses contract costs incurred period time several years estimation costs requires management judgment cost estimates largely based negotiated estimated purchase contract terms historical performance trends economic projections significant factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements revenue cost estimates regularly monitored revised based changes circumstances anticipated losses longterm contracts recognized losses become evident maintain financial controls customer qualification contract pricing estimation processes reduce risk contract losses matters litigation see note 21 financial statements discussion environmental asbestos litigation matters recent accounting pronouncements see note 1 financial statements discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations dollars millions except per share amounts following management’s discussion analysis financial condition results operations “mda” intended help reader understand results operations financial condition honeywell international inc “honeywell” three years ended december 31 2010 references notes related notes financial statements “item 8 financial statements supplementary data” consolidated results operations change net sales compared prior year period attributable following discussion net sales segment found review business segments section mda cost products services sold increased 1507 million 6 percent 2010 compared 2009 principally due estimated increase direct material costs indirect costs approximately 1300 million 300 million respectively driven substantially 8 percent increase sales result factors discussed review business segments section mda 150 million increase repositioning charges see note 3 notes financial statements partially offset 300 million decrease pension expense gross margin percentage increased 12 percentage points 2010 compared 2009 primarily due lower pension expense approximate 1 percentage point impact higher sales volume driven automation control solutions segment specialty materials segment transportation systems segment approximate 07 percentage point impact partially offset higher repositioning charges approximate 04 percentage point impact cost products services sold decreased 7106 million 23 percent 2009 compared 2008 decrease primarily due lower pension expense lower sales result factors discussed within review business segments section mda lower material costs reduced labor costs reflecting reduced census work scheduled reductions benefits prior repositioning actions lower incentive compensation positive impact indirect cost savings initiatives across business segments lower repositioning charges gross margin percentage increased 74 percentage points 2009 compared 2008 primarily due lower pension expense increases 29 06 percent respectively specialty materials automation controls solutions segments result cost savings initiatives discussed lower repositioning charges partially offset lower margins transportation systems aerospace solutions segments 32 07 percent respectively due lower sales partially offset impact cost savings initiatives selling general administrative expenses sga decreased percentage sales 03 percent 2010 compared 2009 driven impact higher sales volume discussed lower pension expense partially offset estimated 500 million increase labor costs reflecting absence prior period labor cost actions sga percentage sales increased 04 percentage point 2009 compared 2008 increase percentage sales driven lower sales volumes substantially offset positive impact lower pension expense ii indirect cost savings initiatives across business segments iii reduced labor costs reflecting reduced census work schedule reductions benefits prior repositioning actions lower incentive compensation iv lower repositioning charges income increased 40 million 2010 compared 2009 due primarily 62 million pretax gain related consolidation joint venture within specialty materials segment third quarter 2010 see note 4 notes financial statements details ii absence otherthantemporary impairment charge 62 million second quarter 2009 partially offset absence 50 million deconsolidation gain related subsidiary within automation control solutions segment 2009 22 million acquisition related costs 2010 income decreased 693 million 2009 compared 2008 primarily due lower gain sale nonstrategic businesses assets due gain sale consumables solutions business 2008 partially offset gain related deconsolidation subsidiary within automation control solutions segment 2009 see note 4 financial statements ii lower interest income primarily due lower interest rates cash balances interest financial charges decreased 16 percent 2010 compared 2009 primarily due lower debt balances lower borrowing costs interest financial charges increased 1 percent 2009 compared 2008 due lower debt balances offset higher borrowing costs term debt effective tax rate increased 57 percentage points 2010 compared 2009 primarily due change mix earnings related lower us pension expense impact enacted change tax treatment medicare part program absence manufacturing incentives decreased impact settlement audits increase foreign effective tax rate foreign effective tax rate increased approximately 7 percentage points primarily consisted 6 percentage point impact absence tax benefits related foreign exchange investment losses ii 05 percentage points impact increased valuation allowances net operating loss effective tax rate lower us statutory rate 35 percent primarily due earnings taxed lower foreign rates effective tax rate increased 604 percentage points 2009 compared 2008 primarily due change mix earnings related lower us pension expense lesser extent decreased impact settlement audits effective tax rate lower us statutory rate 35 percent primarily due earnings taxed lower foreign rates 2011 effective tax rate could change based upon company’s operating results outcome tax positions taken regarding previously filed tax returns currently audit various federal state foreign tax authorities several may finalized foreseeable future company believes adequate reserves matters outcome could materially impact results operations operating cash flows period resolved earnings per share common stock assuming dilution increased 054 per share 2010 compared 2009 primarily due increased segment profit automation control solutions specialty materials transportation systems segments lower pension expense partially offset higher tax expense higher repositioning charges earnings per share common stock assuming dilution increased 097 per share 2009 compared 2008 primarily relates lower pension expense lower repositioning charges partially offset decrease segment profit business segments decreased income expense discussed increase number shares outstanding discussion segment results see “review business segments” business overview business overview provides summary honeywell four reportable operating segments aerospace automation control solutions specialty materials transportation systems including respective areas focus 2011 relevant economic factors impacting results discussion segment’s results three years ended december 31 2010 segments comprised various product service classes serve multiple end markets see note 23 financial statements information reportable segments definition segment profit economic factors addition factors listed respect operating segments consolidated operating results principally driven • impact global economic growth rates us europe emerging regions industry conditions demand key end markets • overall sales mix particular mix aerospace original equipment aftermarket sales mix automation control solutions acs products services sales • extent cost savings productivity actions able offset exceed impact material nonmaterial inflation • impact pension discount rate asset returns pension expense including marktomarket adjustments funding requirements • impact changes foreign currency exchange rate particularly us dollareuro exchange rate areas focus 2011 areas focus 2011 generally applicable operating segments include • driving profitable growth building innovative products address customer needs • achieving sales growth technological excellence manufacturing capability global expansion especially focused emerging regions china india middle east • proactively managing raw material costs formula long term supply agreements price increases hedging activities feasible • driving cash flow conversion effective working capital management capital investment businesses thereby enhancing liquidity repayment debt strategic acquisitions ability return value shareholders • actively monitoring trends shortcycle end markets transportation systems turbo business acs products businesses aerospace commercial aftermarket specialty materials advanced materials continuing take proactive cost actions • aligning prioritizing investments longterm growth considering shortterm demand volatility • driving productivity savings execution repositioning actions • controlling discretionary spending levels focus noncustomer related costs • ensuring preparedness maximize performance response improving end market conditions controlling costs proactively managing capacity utilization supply chain inventory demand • utilizing enablers honeywell operating system hos functional transformation velocity product development vpd standardize way work increase quality reduce costs product manufacturing reduce costs enhance quality administrative functions improve business operations investments systems process improvements • monitoring suppliers customers signs liquidity constraints limiting exposure resulting inability meet delivery commitments pay amounts due identifying alternate sources supply necessary • controlling corporate costs including costs incurred asbestos environmental matters pension postretirement expenses tax expense review business segments reconciliation segment profit consolidated income continuing operations taxes follows 1 equity incomeloss affiliated companies included segment profit 2 amounts included cost products services sold selling general administrative expenses 3 revised change method recognizing pension expense see note 1 notes financial statements discussion change impacts change years ended december 31 2009 2008 aerospace overview aerospace leading global supplier aircraft engines avionics related products services aircraft manufacturers airlines aircraft operators military services defense space contractors aerospace products services include auxiliary power units propulsion engines environmental control systems electric power systems engine controls flight safety communications navigation radar surveillance systems aircraft lighting management technical services logistics services advanced systems instruments aircraft wheels brakes repair overhaul services aerospace sells products original equipment oe manufacturers air transport regional business general aviation aircraft segments provides spare parts repair maintenance services aftermarket principally aircraft operators united states government also major customer defense space products economic factors aerospace operating results principally driven • new aircraft production rates delivery schedules set commercial air transport regional jet business general aviation oe manufacturers well airline profitability platform mix retirement aircraft service • global demand commercial air travel reflected global flying hours utilization rates corporate general aviation aircraft well demand spare parts maintenance repair services aircraft currently use • level mix us government appropriations defense space programs military activity • availability price volatility raw materials titanium metals aerospace sales major customer endmarkets follows 2010 compared 2009 aerospace sales decreased 1 percent 2010 compared 2009 primarily due 1 percent reduction revenue related amounts recognized payments business general aviation original equipment manufacturers oem payments partially offset preproduction costs associated new aircraft platforms details regarding changes sales customer endmarkets follows • air transport regional original equipment oe sales decreased 2 percent 2010 primarily due lower sales air transport oe customers • air transport regional aftermarket sales increased 1 percent 2010 primarily due increased sales spare parts driven impact increased flying hours approximately 6 percent 2010 • business general aviation oe sales decreased 27 percent 2010 due decreases new business jet deliveries reflecting rescheduling cancellations deliveries oe customers first six months impact oem payments discussed • business general aviation aftermarket sales increased 8 percent 2010 primarily due increased sales spare parts due higher engine utilization partially offset lower revenue associated licensing maintenance service agreements • defense space sales increased 1 percent 2010 primarily due higher sales logistics services partially offset program winddowns completions lower sales related commercial helicopters changes defense space budgets program delays anticipated impact amount timing sales endmarket 2011 aerospace segment profit decreased 3 percent 2010 compared 2009 primarily due negative 3 percent impact oem payments discussed operational segment profit flat 2010 approximate positive 4 percent impact price productivity net inflation including absence prior period labor cost actions offset benefits prior repositioning actions offset approximate negative 4 percent impact lower sales volume cost goods sold totaled 81 billion 2010 unchanged 2009 compared 2008 aerospace sales decreased 15 percent 2009 details regarding decrease sales customer endmarkets follows • air transport regional original equipment oe sales decreased 21 percent 2009 decrease driven lower sales oe customers consistent production rates platform mix impact divesting consumables solutions business partially offset 12 percent increase fourth quarter 2009 mainly due absence strike major oem fourth quarter 2008 • air transport regional aftermarket sales decreased 16 percent 2009 primarily due decreased sales spare parts lower maintenance activity driven impact higher parked aircraft part utilization customer inventory reductions initiatives decreased flying hours approximately 2 percent including 1 percent increase fourth quarter • business general aviation oe sales decreased 51 percent 2009 due decreases new business jet deliveries reflecting rescheduling cancellations deliveries oe customers • business general aviation aftermarket sales decreased 27 percent 2009 decrease primarily due decreased sales spare parts lower revenue associated maintenance service agreements consistent decrease business jet utilization started see increase business jet utilization rates fourth quarter 2009 • defense space sales essentially unchanged 2009 primarily due higher sales logistics services original equipment military platforms first nine months 2009 offset program completions aerospace segment profit decreased 18 percent 2009 compared 2008 due primarily lower sales result factors discussed inflation partially offset volume related material cost reductions reduced labor costs reflecting reduced census work schedule reductions benefits prior repositioning actions lower incentive compensation positive impact cost savings initiatives increased prices 2011 areas focus aerospace’s primary areas focus 2011 include • aligning inventory production research development improving customer demand production schedules • expanding sales operations international locations • global pursuit new defense space programs • focus cost structure initiatives maintain profitability face evolving defense space budgets program specific appropriations • continuing design equipment enhances safety performance durability aerospace defense equipment reducing weight operating costs • delivering worldclass customer service achieving cycle lead time reduction improve responsiveness customer demand • continued deployment common enterprise resource planning erp system automation control solutions acs overview acs provides innovative products solutions make homes buildings industrial sites infrastructure efficient safe comfortable acs products services include controls heating cooling indoor air quality ventilation humidification lighting home automation advanced software applications homebuilding control optimization sensors switches control systems instruments measuring pressure air flow temperature electrical current security fire gas detection personal protection equipment access control video surveillance remote patient monitoring systems products automatic identification data collection installation maintenance upgrades systems keep buildings safe comfortable productive automation control solutions industrial plants including advanced software automation systems integrate control monitor complex processes many types industrial settings well equipment controls measures analyzes natural gas production transportation economic factors acs’s operating results principally driven • global commercial construction including retrofits upgrades • demand residential security environmental control retrofits upgrades • demand energy efficient products solutions • industrial production • government public sector spending • economic conditions growth rates developed us europe emerging markets • strength global capital operating spending process including petrochemical refining building automation • inventory levels distribution channels • changes energy fire security health care safety environmental concerns regulations automation control solutions 2010 compared 2009 automation control solutions “acs” sales increased 9 percent 2010 compared 2009 primarily due 6 percent increase organic revenue driven increased sales volume 3 percent growth acquisitions • sales products businesses increased 11 percent 2010 primarily reflecting higher sales volumes businesses tied industrial production environmental combustion controls sensing control gas detection personal protective equipment scanning mobility products new product introductions acquisitions primarily sperian • sales solutions businesses increased 6 percent 2010 primarily due positive impact increased volume acquisitions net divestitures primarily rmg group net divestitures higher prices growth energy efficiency projects industrial field solutions driven orders growth conversion sales order backlog orders backlog increased 2010 compared 2009 primarily driven energy efficiency projects refining natural gas infrastructure projects growth emerging regions acs segment profit increased 11 percent 2010 compared 2009 due 9 percent increase operational segment profit 2 percent increase acquisitions increase operational segment profit comprised approximate 18 percent positive impact higher sales volume partially offset approximate 9 percent negative impact inflation net price productivity including absence prior period labor cost actions partially offset benefits prior repositioning cost goods sold totaled 93 billion 2010 increase approximately 750 million primarily result factors discussed 2009 compared 2008 acs sales decreased 10 percent 2009 compared 2008 primarily due decreased sales volume reflecting slower global economic growth unfavorable impact foreign exchange 4 percent partially offset 3 percent growth acquisitions • sales products businesses decreased 11 percent including lower volumes sales businesses excluding impact acquisitions ii unfavorable impact foreign exchange softness residential industrial endmarkets partially offset positive impact acquisitions significantly norcross safety products • sales solutions businesses decreased 9 percent primarily due unfavorable impact foreign exchange volume decreases largely due softening demand result customer deferral capital operating expenditures orders decreased backlog increased 2009 decreased orders primarily due unfavorable impact foreign exchange softening demand noted order timing delays higher backlog primarily due longer duration projects impact factors partially offset positive impact acquisitions significantly rmg group acs segment profit decreased 2 percent 2009 compared 2008 principally due negative impact lower sales result factors discussed inflation partially offset lower material costs reduced labor costs reflecting reduced census work schedule reductions benefits prior repositioning actions lower incentive compensation positive impact indirect cost savings initiatives fourth quarter 2009 factors offset impact lower sales described resulting 5 percent increase segment profit areas focus acs’s primary areas focus 2011 include • products solutions energy efficiency asset management • extending technology leadership lowest total installed cost integrated product solutions • defending extending installed base customer productivity globalization • sustaining strong brand recognition brand channel management • continued centralization standardization global software development capabilities • continuing identify execute integrate acquisitions adjacent markets serve • continuing establish grow emerging markets presence capability • continuing invest new product development introductions • continued deployment common erp system specialty materials overview specialty materials develops manufactures highpurity highquality highperformance chemicals materials applications refining petrochemical automotive healthcare agricultural packaging refrigeration appliance housing semiconductor wax adhesives segments specialty materials also provides process technology products services petroleum refining gas processing petrochemical renewable energy industries specialty materials’ product portfolio includes fluorocarbons hydrofluoroolefins caprolactam resins ammonium sulfate fertilizer specialty films waxes additives advanced fibers customized research chemicals intermediates electronic materials chemicals catalysts adsorbents economic factors specialty materials operating results principally driven • level timing capital spending capacity utilization rates refining petrochemical end markets • degree pricing volatility raw materials benzene key component phenol fluorspar natural gas ethylene sulfur • impact environmental energy efficiency regulations • extent change order rates global semiconductor customers • global demand nonozone depleting hydro fluorocarbons hfc’s • condition us residential housing non residential industries automotive demand • global demand commodities caprolactam ammonium sulfate • increasing demand renewable energy biofuels specialty materials 2010 compared 2009 specialty materials sales increased 14 percent 2010 compared 2009 predominantly due organic growth • advanced materials sales increased 23 percent 2010 compared 2009 primarily driven 29 percent increase resins chemicals sales primarily due higher prices driven strong asia demand formula pricing arrangements agricultural demand ii 21 percent increase specialty products sales significantly due higher sales volume semiconductor specialty additives advanced fiber industrial applications specialty chemicals customers iii 19 percent increase fluorine products business due higher sales volume increased demand refrigerants insulating materials industrial processing aids • uop sales decreased 1 percent 2010 compared 2009 primarily driven lower new unit catalyst sales timing projects activity refining petrochemical industries partially offset increased gas processing equipment sales specialty materials segment profit increased 24 percent 2010 compared 2009 due 25 percent increase operational segment profit increase operational segment profit primarily due 24 percent positive impact higher sales volumes positive impact price productivity offset negative impact inflation including absence prior period labor cost actions cost goods sold totaled 36 billion 2010 increase approximately 400 million primarily result factors discussed 2009 compared 2008 specialty materials sales decreased 21 percent 2009 compared 2008 primarily driven 32 percent decrease resins chemicals sales due substantial price declines arising pass lower raw materials costs partially offset increased volume notably fourth quarter ii 19 percent decrease uop sales due customer deferrals projects result reduced demand additional capacity refining petrochemical industries well lower catalyst sales iii 22 percent decrease specialty products sales significantly due continued demand softness across key customer endmarkets iv 11 percent decrease fluorine products sales due lower volume sales refrigerants insulating materials principally driven customer inventory reduction initiatives soft construction original equipment manufacturing end markets partially offset price increases specialty materials segment profit decreased 16 percent 2009 compared 2008 decrease principally due lower sales result factors discussed partially offset lower material costs reduced labor costs reflecting reduced census work schedule reductions lower incentive compensation positive impact indirect cost savings initiatives increased prices fourth quarter 2009 factors offset impact lower sales described resulting 56 percent increase segment profit areas focus specialty materials primary areas focus 2011 include • continuing develop new processes products technologies address energy efficiency environment security well position portfolio higher value • commercializing new products technologies petrochemical gas processing refining industries renewable energy sector • driving sales marketing excellence expand local presence fast growing emerging markets • execution awarded government projects • managing exposure raw material commodity fluctuations • investing increase plant reliability operational effectiveness productivity quality operational excellence transportation systems overview transportation systems provides automotive products improve performance efficiency appearance cars trucks vehicles stateoftheart technologies world class brands global solutions customers’ needs transportation systems’ products include turbochargers chargeair thermal systems car care products including antifreeze prestoner filters framr spark plugs autoliter cleaners waxes additives holtsr brake hard parts friction materials bendixr juridr transportation systems sells products original equipment “oe” automotive truck manufacturers eg bmw caterpillar daimler renault ford volkswagen wholesalers distributors retail aftermarket economic factors transportation systems operating results principally driven • financial strength stability automotive oe manufacturers • global demand automobile truck production • turbo penetration rates new engine platforms • global consumer preferences boosted diesel passenger cars • degree volatility raw material prices including nickel steel • new automobile production rates impact customer inventory levels demand products • regulations mandating lower emissions improved fuel economy • consumers’ ability obtain financing new vehicle purchases • automotive aftermarket trends consumer confidence miles driven consumer preference branded vs private label aftermarket car care products transportation system 2010 compared 2009 transportation systems sales increased 24 percent 2010 compared 2009 primarily due 25 percent increase organic revenue driven increased sales volume partially offset unfavorable impact foreign exchange 1 percent • turbo technologies sales increased 31 percent primarily due increased turbocharger sales light vehicle commercial vehicle engine manufacturers partially offset negative impacts foreign exchange expect increased volume continue 2011 benefit new platform launches continued strong diesel penetration rates western europe • consumer products group “cpg” sales increased 7 percent primarily due higher prices primarily pass ethylene glycol cost increases higher volume antifreeze products fourth quarter transportation systems segment profit increased 317 million 2010 compared 2009 predominantly due positive impact increased sales volume cost goods sold totaled 34 billion 2010 increase approximately 500 million also primarily result increased sales volume 2009 compared 2008 transportation systems sales decreased 27 percent 2009 compared 2008 primarily due lower volumes driven ongoing challenging global automotive industry conditions negative impact foreign exchange first nine months 2009 • turbo technologies sales including friction materials decreased 32 percent primarily due lower sales volumes commercial light vehicle engine manufacturing customers negative impact foreign exchange diesel penetration rates western europe declined first nine months 2009 shift consumer preference towards lower displacement engines full year 2009 sales decline partially offset 19 percent sales increase fourth quarter primarily due positive impact foreign exchange higher sales volumes light vehicle engine manufacturing customers • cpg sales decreased 8 percent primarily due lower prices primarily pass ethylene glycol cost decreases lower volumes negative impact foreign exchange transportation systems segment profit decreased 250 million 2009 compared 2008 due principally lower sales volume result factors discussed partially offset lower material costs reduced labor costs reflecting reduced census work schedule reductions benefits prior repositioning actions lower incentive compensation positive impact indirect cost savings initiatives fourth quarter 2009 factors increased turbo technologies volumes resulted 66 million increase transportation systems’ segment profit areas focus transportation systems primary areas focus 2011 include • sustaining superior turbocharger technology successful platform launches • maintaining high quality current products executing new product introductions • increasing global penetration share diesel gasoline turbocharger oem demand • increasing plant productivity address capacity challenges generated volatility product demand oem inventory levels • aligning cost structure current economic outlook successful execution repositioning actions • aligning development efforts costs new turbo platform launch schedules repositioning charges see note 3 financial statements discussion repositioning charges incurred 2010 2009 2008 repositioning actions expected generate incremental pretax savings approximately 200 million 2011 compared 2010 principally planned workforce reductions cash expenditures severance exit costs necessary execute repositioning actions 151 200 157 million 2010 2009 2008 respectively expenditures severance exit costs funded principally operating cash flows cash expenditures severance costs necessary execute remaining actions approximate total 150 million 2011 funded operating cash flows following tables provide details pretax impact total net repositioning charges segment liquidity capital resources company continues manage businesses maximize operating cash flows primary source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines shortterm debt commercial paper market longterm borrowings access public debt equity markets well ability sell trade accounts receivables continue balance cash financing uses investment existing core businesses acquisition activity share repurchases dividends cash flow summary cash flows operating investing financing activities reflected consolidated statement cash flows years ended 2010 2009 2008 summarized follows compared 2009 cash provided operating activities increased 257 million 2010 compared 2009 primarily due increased accrued expenses 690 million due increased customer advances incentive compensation accruals ii 550 million impact increased deferred taxes excluding impact cash taxes iii increased net income 474 million iv lower cash tax payments approximately 300 million v 219 million decrease payments repositioning charges partially offset 1059 unfavorable impact working capital driven higher receivables increased purchases raw materials component inventory support higher demand partially offset corresponding increase accounts payable ii increased pension postretirement payments 598 million iii absence 155 million sale longterm receivables 2009 cash used investing activities increased 1136 million 2010 compared 2009 primarily due increase cash paid acquisitions 835 million significantly sperian protection discussed net 341 million increase investments shortterm marketable securities cash used financing activities decreased 105 million 2010 compared 2009 primarily due decrease net repayment debt including commercial paper 287 million increase proceeds issuance common stock primarily related stock option exercises 158 million partially offset repayment 326 million debt assumed acquisition sperian protection see compared 2008 cash provided operating activities increased 155 million 2009 compared 2008 primarily due favorable impact working capital 577 million primarily due decrease inventory 479 million driven reduced purchases raw material component inventory lower production finished goods line decreased sales volumes inventory reduction initiatives across segments ii lower cash tax payments 449 million iii 155 million sale long term receivables iv increased net income 742 million v 718 million impact increased deferred income taxes excluding impact cash tax payments noted partially offset decreased pension expense 2312 million ii receipts sale insurance receivables 82 million 2008 iii 56 million decreased impact current assets significantly lower receipts insurance receivables iv higher repositioning payments 43 million cash used investing activities decreased 890 million 2009 compared 2008 primarily due 1713 million decrease cash paid acquisitions significantly acquisition norcross metrolgic 2008 275 million decrease expenditures property plant equipment partially offset 908 million decrease proceeds sales businesses significantly divestiture consumables solutions 2008 cash used financing activities increased 782 million 2009 compared 2008 primarily due net repayment debt including commercial paper 2009 1272 million compared net proceeds including commercial paper 733 million 2008 partially offset decrease repurchases common stock 1459 million liquidity businesses focused implementing strategies improve working capital turnover 2011 increase operating cash flows considering current economic environment businesses operate business plans strategies including focus growth cost reduction productivity initiatives believe cash balances operating cash flows remain principal source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines short term debt commercial paper markets longterm borrowings access public debt equity markets well ability sell trade accounts receivables source liquidity ability issue shortterm debt commercial paper market commercial paper notes sold discount maturity 365 days date issuance borrowings commercial paper program available general corporate purposes well financing potential acquisitions 299 million commercial paper outstanding december 31 2010 ability access commercial paper market related cost borrowings affected strength credit rating market conditions credit ratings periodically reviewed major independent debtrating agencies december 31 2010 standard poor’s sp fitch moody’s ratings longterm debt a2 respectively shortterm debt a1 p1 respectively sp fitch moody’s honeywell’s rating outlook “stable” date company experienced limitations ability access sources liquidity maintain 28 billion committed bank revolving credit facility general corporate purposes including support issuance commercial paper expires midmay 2012 december 31 2010 borrowings letters credit issued credit facility credit facility restrict honeywell’s ability pay dividends contain financial covenants expect refinance credit facility 2011 first quarter 2010 company repaid 1000 million 750 notes repayment funded cash provided operating activities october 2010 completed acquisition issued outstanding shares sperian protection sperian french company operates globally personal protection equipment design manufacturing industry aggregate value net cash acquired approximately 1475 million including assumption approximately 326 million outstanding debt also current shelf registration statement filed securities exchange commission may issue additional debt securities common stock preferred stock may offered one offerings terms determined time offering net proceeds offering would used general corporate purposes including repayment existing indebtedness capital expenditures acquisitions source liquidity sell interests designated pools trade accounts receivables third parties december 31 2010 2009 none receivables designated pools sold third parties sell receivables overcollateralized retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools terms trade accounts receivable program permit repurchase receivables third parties discretion providing us additional source revolving credit result program receivables remain company’s balance sheet corresponding amount recorded either shortterm borrowings longterm debt monitor thirdparty depository institutions hold cash equivalents daily basis emphasis primarily safety principal secondarily maximizing yield funds diversify cash equivalents among counterparties minimize exposure one entities global economic conditions tightening credit markets could adversely affect customers’ suppliers’ ability obtain financing particularly longcycle businesses airline automotive end markets customer supplier bankruptcies delays ability obtain financing unavailability financing could adversely affect cash flow results operations date experienced material impacts customer supplier bankruptcy liquidity issues continue monitor take measures limit exposure addition normal operating cash requirements principal future cash requirements fund capital expenditures debt repayments dividends employee benefit obligations environmental remediation costs asbestos claims severance exit costs related repositioning actions share repurchases strategic acquisitions specifically expect primary cash requirements 2011 follows • capital expenditureswe expect spend approximately 800 million capital expenditures 2011 primarily cost reduction maintenance replacement growth production capacity expansion • debt repaymentsthere 523 million scheduled longterm debt maturities 2011 • share repurchasesthe board directors authorized repurchase total 3 billion honeywell common stock amount includes 13 billion remained available company’s previously reported share repurchase program honeywell presently expects repurchase outstanding shares time 2011 offset dilutive impact employee stock based compensation plans including future option exercises restricted unit vesting matching contributions savings plans amount timing future repurchases may vary depending market conditions level operating financing investing activities • dividendswe expect pay approximately 1050 million dividends common stock 2011 reflecting 1 percent increase number shares outstanding 10 percent increase 2011 dividend rate • asbestos claimswe expect cash spending asbestos claims cash receipts related insurance recoveries approximately 162 50 million respectively 2011 see asbestos matters note 21 financial statements discussion • pension contributionsin 2011 required make contributions us pension plans satisfy minimum statutory funding requirements however january 2011 made voluntary cash contribution 1 billion us plans improve funded status plans 2010 made voluntary contributions 600 million cash 400 million honeywell common stock us pension plans well 242 million marketable securities nonus pension plans improve funded status plans see note 22 financial statements discussion pension contributions addition company evaluating additional voluntary contributions 2011 currently expects contribute portion proceeds sale consumer products group business discussed us pension plans timing amount contributions may impacted number factors including rate return plan assets discount rates • repositioning actionswe expect cash spending severance exit costs necessary execute previously announced repositioning actions approximate 150 million 2011 • environmental remediation costswe expect spend approximately 325 million 2011 remedial response voluntary cleanup costs see environmental matters note 21 financial statements additional information continuously assess relative strength business portfolio strategic fit market position profit cash flow contribution order upgrade combined portfolio identify business units benefit increased investment identify acquisition candidates strategic plan strengthen existing core businesses also identify businesses fit longterm strategic plan based market position relative profitability growth potential businesses considered potential divestiture restructuring repositioning actions subject regulatory constraints 2008 realized 909 million cash proceeds sales nonstrategic businesses january 2011 company entered definitive agreement sell consumer products group business cpg rank group limited approximately 950 million sale subject customary closing conditions including receipt regulatory approvals expected close third quarter 2011 currently estimate transaction result pretax gain approximately 350 million approximately 200 million net tax sale cpg within transportation systems segment consistent company’s strategic focus portfolio differentiated global technologies july 2008 company completed sale consumables solutions business aerospace “be” 105 billion consisting approximately 901 million cash six million shares common stock discussed note 3 financial statements transaction resulted pretax gain 623 million 417 million net tax proceeds along sources uses liquidity discussed utilized invest existing core businesses fund acquisition activity share repurchases dividends based past performance current expectations believe operating cash flows sufficient meet future operating cash needs available cash committed credit lines access public debt equity markets well ability sell trade accounts receivables provide additional sources shortterm longterm liquidity fund current operations debt maturities future investment opportunities based current financial position expected economic performance contractual obligations probable liability payments following summary significant contractual obligations probable liability payments december 31 2010 1 assumes longterm debt outstanding scheduled maturity 2 purchase obligations entered various vendors normal course business consistent expected requirements 3 payment amounts table reflect environmental liabilities probable reasonably estimable december 31 2010 see environmental matters note 21 financial statements additional information 4 amounts estimates asbestos related cash payments narco bendix based asbestos related liabilities probable reasonably estimable december 31 2010 narco estimated payments based terms conditions including evidentiary requirements specified definitive agreements principle pursuant trust distribution procedures projecting timing narco payments dependent among things effective date trust could cause timing payments earlier later projected bendix payments based estimate pending future claims projecting future events subject many uncertainties could cause asbestos liabilities higher lower projected recorded see asbestos matters note 21 financial statements additional information 5 amounts represent insurance recoveries deemed probable asbestos related liabilities december 31 2010 timing insurance recoveries impacted terms insurance settlement agreements well documentation review collection process required collect insurance claims probable insurance recoveries subject definitive settlement agreements specified payment dates instead covered insurance policies assumed collection occur beyond 2015 projecting timing insurance recoveries subject many uncertainties could cause amounts collected higher lower projected recorded could cause timing collections earlier later projected reevaluate projections concerning insurance recoveries light changes developments would impact recoveries timing thereof see asbestos matters note 21 financial statements additional information 6 table excludes 757 million uncertain tax positions see note 6 financial statements table also excludes pension postretirement benefits opeb obligations january 2011 made voluntary cash contribution 1 billion us plans improve funded status plans addition company evaluating additional voluntary contributions 2011 also expect make contributions nonus plans approximately 55 million 2011 beyond 2011 actual amounts required contributed dependent upon among things interest rates underlying asset returns impact legislative regulatory actions related pension funding obligations payments due opeb plans required funded advance paid medical costs incurred covered retiree populations principally dependent upon future cost retiree medical benefits plans expect opeb payments approximate 188 million 2011 net benefit approximately 13 million medicare prescription subsidy see note 22 financial statements discussion pension opeb plans offbalance sheet arrangements following summary offbalance sheet arrangements guaranteeswe issued party following direct indirect guarantees december 31 2010 expect guarantees material adverse effect consolidated results operations financial position liquidity connection disposition certain businesses facilities indemnified purchasers expected cost remediation environmental contamination existing date disposition expected costs accrued environmental assessments made remedial efforts probable costs reasonably estimated environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous substances accordance environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing hazardous substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually jointly potentially responsible parties determine feasibility various remedial techniques address environmental matters policy see note 1 financial statements record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects execution timeframe projects remedial techniques utilized agreements parties remedial response voluntary cleanup payments 266 318 320 million 2010 2009 2008 respectively currently estimated approximately 325 million 2011 expect fund expenditures operating cash flow remedial response voluntary cleanup costs charged pretax earnings 225 151 466 million 2010 2009 2008 respectively december 31 2010 2009 recorded liabilities environmental matters 753 779 million respectively addition 2010 2009 incurred operating costs ongoing businesses approximately 86 73 million respectively relating compliance environmental regulations although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position see note 21 financial statements discussion commitments contingencies including related environmental matters toxic tort litigation financial instruments result global operating financing activities exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position minimize risks interest foreign currency exchange rate commodity price fluctuations normal operating financing activities deemed appropriate use derivative financial instruments use derivative financial instruments trading speculative purposes use leveraged derivative financial instruments summary accounting policies derivative financial instruments included note 1 financial statements also hold investments marketable equity securities exposes us market volatility discussed note 16 financial statements conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities anticipated transactions arising international trade objective preserve economic value nonfunctional currency cash flows attempt hedge transaction exposures natural offsets fullest extent possible opportunities exhausted foreign currency forward option agreements third parties principal currency exposures relate us dollar euro british pound canadian dollar hong kong dollar mexican peso swiss franc czech koruna chinese renminbi indian rupee singapore dollar swedish krona exposure market risk changes interest rates relates primarily net debt pension obligations described notes 14 16 financial statements issue fixed variable rate debt use interest rate swaps manage exposure interest rate movements reduce overall borrowing costs financial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value expected future cash flows derivative financial instruments considering reasonably possible changes interest currency exchange rates restrict use derivative financial instruments hedging activities following table illustrates potential change fair value interest rate sensitive instruments based hypothetical immediate onepercentagepoint increase interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 percent weakening us dollar versus local currency exchange rates across maturities potential change fair value contracts hedging commodity purchases based 20 percent decrease price underlying commodity across maturities december 31 2010 2009 1 asset liability 2 changes fair value foreign currency exchange contracts offset changes fair value cash flows underlying hedged foreign currency transactions 3 changes fair value forward commodity contracts offset changes cash flows underlying hedged commodity transactions discussion procedures monitor market risk estimated changes fair value resulting sensitivity analyses forwardlooking statements market risk assuming certain adverse market conditions occur actual results future may differ materially estimated results due actual developments global financial markets methods used us assess mitigate risk discussed considered projections future events critical accounting policies preparation consolidated financial statements accordance generally accepted accounting principles based selection application accounting policies require us make significant estimates assumptions effects matters inherently uncertain consider accounting policies discussed critical understanding financial statements actual results could differ estimates assumptions differences could material consolidated financial statements discussed selection application disclosure critical accounting policies audit committee board directors independent registered public accountants new accounting standards effective 2010 material impact consolidated financial statements described recent accounting pronouncements section note 1 financial statements contingent liabilitieswe subject number lawsuits investigations claims involve substantial dollar amounts arise conduct global business operations previously owned entities including matters relating commercial transactions government contracts product liability including asbestos prior acquisitions divestitures employee benefit plans intellectual property environmental health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes contingencies well potential amounts ranges probable losses recognize liability contingencies based careful analysis matter assistance outside legal counsel applicable experts analysis includes making judgments concerning matters costs associated environmental matters outcome negotiations number cost pending future asbestos claims impact evidentiary requirements contingencies resolved long periods time liabilities may change future due new developments including new discovery facts changes legislation outcomes similar cases judicial system changes assumptions changes settlement strategy discussion contingencies related environmental asbestos matters including management’s judgment applied recognition measurement specific liabilities see notes 1 21 financial statements asbestos related contingencies insurance recoverieswe defendant personal injury actions related products containing asbestos refractory friction products recognize liability asbestos related contingency probable occurrence reasonably estimable regarding north american refractories company narco asbestos related claims accrued pending claims based terms conditions including evidentiary requirements definitive agreements principle current claimants also accrued probable value future narco asbestos related claims 2018 based disease criteria payment values contained narco trust described note 21 financial statements light inherent uncertainties making long term projections regarding claims filing rates disease manifestation believe reasonable basis estimating narco asbestos claims beyond 2018 regarding bendix asbestos related claims accrued estimated value pending claims based expected claim resolution values historic dismissal rates also accrued estimated cost future anticipated claims related bendix next five years based assessment additional claims may brought us anticipated resolution values tort system value bendix pending future claims using average resolution values previous five years continue update expected resolution values used estimate cost pending future bendix claims fourth quarter year additional information see note 21 financial statements continually assess likelihood adverse judgments outcomes contingencies well potential ranges probable losses recognize liability contingencies based analysis individual issue assistance outside legal counsel applicable experts connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical experience insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs consideration impacts settlements insurers december 31 2010 recorded insurance receivables 718 million specifically allocated narco related asbestos liabilities also 19 billion coverage remaining bendix related asbestos liabilities although gaps coverage due insurance company insolvencies certain uninsured periods insurance settlements insurance domestic insurance market london excess market substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries projecting future events subject various uncertainties could cause insurance recovery asbestos related liabilities higher lower projected recorded given inherent uncertainty making future projections reevaluate projections concerning probable insurance recoveries light changes projected liability recovery experience relevant factors may impact future insurance recoveries see note 21 financial statements discussion management’s judgments applied recognition measurement insurance recoveries asbestos related liabilities defined benefit pension plans sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees 2010 elected change method recognizing pension expense previously us defined benefit pension plans used marketrelated value plan assets reflecting changes fair value plan assets threeyear period net actuarial gains losses excess 10 percent greater marketrelated value plan assets plans’ projected benefit obligation corridor recognized sixyear period new accounting method adopted 2010 recognize changes fair value plan assets net actuarial gains losses excess corridor annually fourth quarter year mtm adjustment new accounting method results faster recognition net actuarial gains losses previous amortization method net actuarial gains losses occur actual experience differs various assumptions used value pension plans assumptions change may year primary factors contributing actuarial gains losses changes discount rate used value pension obligations measurement date year differences expected actual returns plan assets accounting method also results potential volatile difficult forecast mtm adjustments mtm adjustments 471 741 3290 million 2010 2009 2008 respectively remaining components pension expense primarily service interest costs assumed return plan assets recorded quarterly basis ongoing pension expense see note 1 financial statements details change impact retrospective application new policy financial reporting purposes net periodic pension expense calculated based upon number actuarial assumptions including discount rate plan obligations expected longterm rate return plan assets determine expected longterm rate return plan assets utilizing historic expected plan asset returns varying longterm periods combined current market conditions broad asset mix considerations see note 22 financial statements details actual various asset classes targeted asset allocation percentages pension plans discount rate reflects market rate december 31 measurement date highquality fixedincome investments maturities corresponding benefit obligations subject change year information major actuarial assumptions included note 22 financial statements key assumptions used developing 2010 2009 2008 net periodic pension expense us plans included following discount rate volatile year determined based upon prevailing interest rates measurement date use 525 percent discount rate 2011 reflecting decrease market interest rate environment since december 31 2009 use expected rate return plan assets 8 percent 2011 9 percent 2010 due lower future expected market returns addition potential mtm adjustments changes expected rate return plan assets discount rate resulting economic events also affects future ongoing pension expense following table highlights sensitivity us pension obligations ongoing expense changes assumptions assuming assumptions remain constant estimates exclude potential mtm adjustment ongoing pension expense pension plans expected approximately 110 million 2011 decrease 79 million 2010 due primarily voluntary contribution 1 billion cash us pension plans january 2011 strong 2010 asset returns also required mtm adjustment recorded fourth quarter 2011 accordance new pension accounting method previously described difficult reliably forecast predict whether mtm adjustment 2011 one required magnitude adjustment mtm adjustments primarily driven events circumstances beyond control company changes interest rates performance financial markets 2010 2009 2008 required make contributions satisfy minimum statutory funding requirements us pension plans however made voluntary contributions 1000 740 242 million us pension plans 2010 2009 2008 respectively primarily improve funded status plans deteriorated 2008 due significant asset losses resulting poor performance equity markets 2011 still required make contributions us pension plans satisfy minimum statutory funding requirements however january 2011 made voluntary cash contribution 1 billion us plans improve funded status plans addition company evaluating additional voluntary contributions 2011 timing amount contributions may impacted number factors including rate return plan assets discount rate also expect contribute approximately 55 million nonus defined benefit pension plans 2011 satisfy regulatory funding standards longlived assets including tangible definitelived intangible assetsto conduct global business operations execute business strategy acquire tangible intangible assets including property plant equipment definitelived intangible assets december 31 2010 net carrying amount longlived assets totaled 70 billion determination useful lives depreciationamortization purposes whether assets impaired involves use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions periodically evaluate recoverability carrying amount longlived assets whenever events changes circumstances indicate carrying amount longlived asset group may fully recoverable principal factors consider deciding perform impairment review follows • significant underperformance ie declines sales earnings cash flows business product line relation expectations • annual operating plans fiveyear strategic plans indicate unfavorable trend operating performance business product line • significant negative industry economic trends • significant changes planned changes use assets determined impairment review necessary recoverability assets measured comparing carrying amount asset grouping estimated future undiscounted cash flows carrying amount exceeds estimated future undiscounted cash flows asset grouping considered impaired impairment measured difference carrying amount asset grouping fair value endeavor utilize best information available measure fair value usually either market prices available level 1 level 2 fair value hierarchy estimate future discounted cash flow level 3 fair value hierarchy key estimates discounted cash flow analysis include expected industry growth rates assumptions volume selling prices costs discount rate selected described detail note 16 financial statements recorded impairment charges related longlived assets 30 28 million 2010 2009 respectively principally related manufacturing plant equipment facilities scheduled close downsized goodwill impairment testinggoodwill represents excess acquisition costs fair value net tangible assets identifiable intangible assets acquired business combination goodwill amortized subject impairment testing goodwill balance 116 billion december 31 2010 subject impairment testing annually march 31 whenever events changes circumstances indicate carrying amount may fully recoverable testing compares carrying values fair values appropriate carrying value reduced fair value fair value reporting units estimated utilizing discounted cash flow approach utilizing cash flow forecasts five year strategic annual operating plans adjusted terminal value assumptions impairment test involves use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions address uncertainty perform sensitivity analysis key estimates assumptions completed annual impairment test march 31 2010 determined impairment date however significant negative industry economic trends disruptions business unexpected significant changes planned changes use assets divestitures market capitalization declines may negative effect fair value reporting units income taxesdeferred tax assets liabilities determined based difference financial statements tax basis assets liabilities using enacted tax rates effect year differences expected reverse provision income taxes based domestic international statutory income tax rates jurisdictions operate significant judgment required determining income tax provisions well deferred tax asset liability balances including estimation valuation allowances evaluation tax positions december 31 2010 recognized net deferred tax asset 2015 million less valuation allowance 636 million net deferred tax assets primarily comprised net deductible temporary differences net operating loss carryforwards tax credit carryforwards available reduce taxable income future periods determination amount valuation allowance provided recorded deferred tax assets involves estimates regarding 1 timing amount reversal taxable temporary differences 2 expected future taxable income 3 impact tax planning strategies valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax asset realized assessing need valuation allowance consider available positive negative evidence including past operating results projections future taxable income feasibility ongoing tax planning strategies projections future taxable income include number estimates assumptions regarding volume pricing costs additionally valuation allowances related deferred tax assets impacted changes tax laws net deferred tax asset 2015 million consists 1254 million related us operations 761 million related nonus operations us net deferred tax asset 1254 million consists net deductible temporary differences tax credit carryforwards federal state tax net operating losses believe likely realized generation future taxable income us tax planning strategies maintain valuation allowance 3 million asset related state net operating losses nonus net deferred tax asset 761 million consists principally net operating capital loss carryforwards mainly united kingdom netherlands luxembourg germany maintain valuation allowance 634 million deferred tax assets reflecting historical experience lower expectations taxable income applicable carryforward periods fully described note 6 financial statements valuation allowance increased 58 million 2010 increased 133 million decreased 45 million 2009 2008 respectively event determine able realize net deferred tax assets future reduce amounts charge income period determination made conversely determine able realize net deferred tax assets excess carrying amounts decrease recorded valuation allowance credit income period determination made significant judgment required determining income tax provisions evaluating tax positions establish additional provisions income taxes despite belief tax positions fully supportable remain certain positions meet minimum probability threshold defined authoritative guidance uncertainty income taxes tax position likely sustained upon examination applicable taxing authority normal course business company subsidiaries examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes continually assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts give rise revision become known sales recognition longterm contractsin 2010 recognized approximately 14 percent total net sales using percentageofcompletion method longterm contracts automation control solutions aerospace specialty materials segments longterm contracts measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts accounting contracts involves management judgment estimating total contract revenue cost contract revenues largely determined negotiated contract prices quantities modified assumptions regarding contract options change orders incentive award provisions associated technical performance price adjustment clauses inflation indexbased clauses contract costs incurred period time several years estimation costs requires management judgment cost estimates largely based negotiated estimated purchase contract terms historical performance trends economic projections significant factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements revenue cost estimates regularly monitored revised based changes circumstances anticipated losses longterm contracts recognized losses become evident maintain financial controls customer qualification contract pricing estimation processes reduce risk contract losses matters litigation see note 21 financial statements discussion environmental asbestos litigation matters recent accounting pronouncements see note 1 financial statements discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations dollars millions except per share amounts following management’s discussion analysis financial condition results operations “mda” intended help reader understand results operations financial condition honeywell international inc “honeywell” three years ended december 31 2011 references notes related notes financial statements “item 8 financial statements supplementary data” consumer products group cpg automotive aftermarket business historically part transportation systems reportable segment accordance generally accepted accounting principles cpg results excluded continuing operations presented discontinued operations periods presented see note 2 acquisitions divestitures details consolidated results operations net sales change net sales compared prior year period attributable following discussion net sales segment found review business segments section mda cost products services sold cost products services sold increased 3835 million 16 percent 2011 compared 2010 principally due estimated increase direct material costs labor costs indirect costs approximately 2 billion 520 million 280 million respectively driven substantially 13 percent increase sales result factors excluding price discussed review business segments section mda increase pension postretirement expense approximately 880 million primarily driven increase pension marktomarket adjustment allocated cost goods sold 11 billion increase repositioning charges approximately 90 million gross margin percentage decreased 18 percentage points 2011 compared 2010 primarily due higher pension postretirement expense approximate 28 percentage point impact primarily driven unfavorable 33 percentage point impact resulting increase pension marktomarket adjustment allocated cost goods sold repositioning charges approximate 02 percentage point impact partially offset higher sales volume driven business segments approximate 12 percentage point impact cost products services sold increased 1461 million 6 percent 2010 compared 2009 principally due estimated increase direct material costs indirect costs approximately 1250 million 300 million respectively driven substantially 8 percent increase sales result factors discussed review business segments section mda approximately 130 million increase repositioning charges see note 3 notes financial statements partially offset 300 million decrease pension expense gross margin percentage increased 13 percentage points 2010 compared 2009 primarily due lower pension expense approximate 1 percentage point impact higher sales volume driven automation control solutions segment performance materials technologies segment transportation systems segment approximate 07 percentage point impact partially offset higher repositioning charges approximate 05 percentage point impact selling general administrative expenses selling general administrative expenses sga increased percentage sales 05 percent 2011 compared 2010 driven estimated 430 million increase labor costs resulting acquisitions investment growth merit increases estimated increase 240 million pension postretirement expense driven primarily allocated portion pension marktomarket charge increase approximately 270 million estimated increase 60 million repositioning actions partially offset impact higher sales volume result factors discussed review business segments section mda selling general administrative expenses sga decreased percentage sales 01 percent 2010 compared 2009 driven impact higher sales volume discussed lower pension expense partially offset estimated 500 million increase labor costs reflecting absence prior period labor cost actions income decreased 13 million 2011 compared 2010 due primarily 29 million loss resulting early redemption debt first quarter 2011 included within “other net” absence 62 million pretax gain related consolidation joint venture within performance materials technologies segment third quarter 2010 included within “other net” see note 4 notes financial statements details partially offset 61 million increase gain sale nonstrategic businesses assets due primarily 50 million pretax gain related divestiture automotive onboard sensors products business within automation control solutions segment reduction approximately 12 million acquisition related costs compared 2010 included within “other net” income increased 43 million 2010 compared 2009 primarily due consolidation joint venture resulting 62 million pretax gain within performance materials technologies segment third quarter 2010 included “other net” see note 4 notes financial statements details absence otherthantemporary impairment charge of62 million second quarter 2009 included within “other net” partially offset absence 50 million deconsolidation gain related subsidiary within automation control solutions segment 2009 included within “gain sale nonstrategic businesses assets” 22 million acquisition related costs 2010 included within “other net” interest financial charges decreased 3 percent 2011 compared 2010 primarily due lower borrowing costs partially offset higher debt balances interest financial charges decreased 16 percent 2010 compared 2009 due lower debt balances lower borrowing costs tax expense effective tax rate decreased 98 percentage points 2011 compared 2010 primarily due change mix earnings us foreign related higher us pension expense primarily driven approixmate 76 percentage point impact resulted increase pension marktomarket expense increased benefit manufacturing incentives increased benefit favorable settlement tax audits increased benefit lower foreign effective tax rate foreign effective tax rate 211 percent decrease approximately 49 percentage points primarily consisted 51 percent impact decreased valuation allowances net operating losses primarily due increase german earnings available offset net operating loss carry forwards ii 24 percent impact tax benefits related foreign exchange investment losses iii 12 percent impact increased benefit tax credits lower statutory tax rates iv 41 percent impact related increase tax reserves effective tax rate lower us statutory rate 35 percent primarily due earnings taxed lower foreign rates effective tax rate increased 59 percentage points 2010 compared 2009 primarily due change mix earnings related lower us pension expense impact enacted change tax treatment medicare part program absence manufacturing incentives decreased impact settlement audits increase foreign effective tax rate foreign effective tax rate increased approximately 7 percentage points primarily consisted 6 percentage point impact absence tax benefits related foreign exchange investment losses ii 01 percentage points impact increased valuation allowances net operating losses effective tax rate lower us statutory rate 35 percent primarily due earnings taxed lower foreign rates 2012 effective tax rate could change based upon company’s operating results mix earnings outcome tax positions taken regarding previously filed tax returns currently audit various federal state foreign tax authorities several may finalized foreseeable future company believes adequate reserves matters outcome could materially impact results operations operating cash flows period resolved earnings per share common stock assuming dilution increased 002 per share 2011 compared 2010 primarily due increase segment profit business segments lower tax expense gain disposal discontinued operations lower postretirement expense partially offset higher pension expense primarily due increase pension marktomarket adjustment higher repositioning charges earnings per share common stock assuming dilution increased 054 per share 2010 compared 2009 primarily due increased segment profit automation control solutions performance materials technologies transportation systems segments lower pension expense partially offset higher tax expense higher repositioning charges discussion segment results see “review business segments” business overview business overview provides summary honeywell four reportable operating segments aerospace automation control solutions performance materials technologies transportation systems including respective areas focus 2012 relevant economic factors impacting results discussion segment’s results three years ended december 31 2011 segments comprised various product service classes serve multiple end markets see note 23 financial statements information reportable segments definition segment profit economic factors addition factors listed respect operating segments consolidated operating results principally driven • impact change global economic growth rates us europe emerging regions industry conditions demand key end markets • overall sales mix particular mix aerospace original equipment aftermarket sales mix automation control solutions acs products distribution services sales • extent cost savings productivity actions able offset exceed impact material nonmaterial inflation • impact pension discount rate asset returns pension expense including marktomarket adjustments funding requirements • impact fluctuations foreign currency exchange rates euro global currencies relative us dollar areas focus 2012 areas focus 2012 generally applicable operating segments include • driving profitable growth margin expansion building innovative products address customer needs • achieving sales growth technological excellence manufacturing capability capacity global expansion especially focused emerging regions china india middle east high growth regions • proactively managing raw material costs formula long term supply agreements price increases hedging activities feasible • driving cash flow conversion effective working capital management capital investment businesses thereby enhancing liquidity repayment debt strategic acquisitions ability return value shareholders • maintaining flexible cost structure ensure ability proactively respond trends shortcycle end markets transportation systems turbo business acs energy safety security businesses aerospace commercial aftermarket performance materials technologies advanced materials business • aligning prioritizing investments longterm growth considering shortterm demand volatility • driving productivity savings execution repositioning actions • controlling discretionary spending levels focus noncustomer related costs • utilizing enablers honeywell operating system hos functional transformation velocity product development vpd drive margin expansion standardizing way work reducing cycle time optimizing effectiveness rd increasing quality reducing costs product manufacturing reducing costs enhancing quality administrative functions improving business operations investments systems process improvements • monitoring suppliers customers signs liquidity constraints limiting exposure resulting inability meet delivery commitments pay amounts due identifying alternate sources supply necessary • controlling corporate costs including costs incurred asbestos environmental matters pension postretirement expenses tax expense review business segments reconciliation segment profit consolidated income continuing operations taxes follows 1 equity incomeloss affiliated companies included segment profit 2 amounts included cost products services sold selling general administrative expenses aerospace overview aerospace leading global supplier aircraft engines avionics related products services aircraft manufacturers airlines aircraft operators military services defense space contractors aerospace products services include auxiliary power units propulsion engines environmental control systems electric power systems engine controls flight safety communications navigation radar surveillance systems aircraft lighting management technical services logistics services advanced systems instruments aircraft wheels brakes repair overhaul services aerospace sells products original equipment oe manufacturers air transport regional business general aviation aircraft segments provides spare parts repair maintenance services aftermarket principally aircraft operators united states government major customer defense space products economic factors aerospace operating results principally driven • new aircraft production rates delivery schedules set commercial air transport regional jet business general aviation oe manufacturers well airline profitability platform mix retirement aircraft service • global demand commercial air travel reflected global flying hours utilization rates corporate general aviation aircraft well demand spare parts maintenance repair services aircraft currently use • level mix us government appropriations defense space programs military activity • changes customer platform development schedules requirements demands new technologies • availability price volatility raw materials titanium metals aerospace sales major customer endmarkets follows 2011 compared 2010 aerospace sales increased 7 percent 2011 compared 2010 primarily due increase organic growth 7 percent primarily due increased commercial sales volume details regarding changes sales customer endmarkets follows • air transport regional original equipment oe sales increased 6 percent 2011 primarily driven higher sales oe customers consistent higher production rates platform mix higher win rate selectables components selected purchasers new aircraft • air transport regional aftermarket sales increased 16 percent 2011 primarily due increased maintenance activity spare parts sales driven approximately 6 percent increase global flying hours ii increased sales avionics upgrades iii changes customer buying patterns relating spare parts maintenance activity • business general aviation oe sales increased 41 percent 2011 due rebound near trough levels 2010 strong demand business jet end market favorable platform mix growth acquisitions lower oem payments defined 2011 • business general aviation aftermarket sales increased 24 percent 2011 primarily due increased sales spare parts revenue associated maintenance service agreements • defense space sales decreased 2 percent 2011 primarily due anticipated program ramp downs partially offset higher domestic international aftermarket sales increased unmanned aerial vehicle uav shipments ems acquisition refer note 2 aerospace segment profit increased 10 percent 2011 compared 2010 primarily due increase operational segment profit 9 percent increase 1 percent due lower oem payments made 2011 increase operational segment profit comprised positive impact higher commercial aftermarket demand price productivity net inflation partially offset research development engineering investments cost goods sold totaled 87 billion 2011 increase approximately 566 million 2010 primarily result factors discussed compared 2009 aerospace sales decreased 1 percent 2010 compared 2009 primarily due 1 percent reduction revenue related amounts recognized payments business general aviation original equipment manufacturers partially offset preproduction costs associated new aircraft platforms oem payments details regarding decrease sales customer endmarkets follows • air transport regional original equipment oe sales decreased 2 percent 2010 primarily due lower sales air transport oe customers • air transport regional aftermarket sales increased 1 percent 2010 primarily due increased sales spare parts driven impact increased flying hours approximately 6 percent 2010 • business general aviation oe sales decreased 27 percent 2010 due decreases new business jet deliveries reflecting rescheduling cancellations deliveries oe customers first six months impact oem payments discussed • business general aviation aftermarket sales increased 8 percent 2010 primarily due increased sales spare parts due higher engine utilization partially offset lower revenue associated licensing maintenance service agreements • defense space sales increased 1 percent 2010 primarily due higher sales logistics services partially offset program winddowns completions lower sales related commercial helicopters aerospace segment profit decreased 3 percent 2010 compared 2009 primarily due negative 3 percent impact oem payments discussed operational segment profit flat 2010 approximate positive 4 percent impact price productivity net inflation including absence prior period labor cost actions offset benefits prior repositioning actions offset approximate negative 4 percent impact lower sales volume cost goods sold totaled 81 billion 2010 unchanged 2009 2012 areas focus aerospace’s primary areas focus 2012 include • driving customer satisfaction operational excellence product quality cycle time reduction supplier management • aligning research development customer support costs customer requirements demand new platforms • expanding sales operations international locations • global pursuit new defense space programs • focusing cost structure initiatives maintain profitability face potential defense space budget reductions program specific appropriations • continuing design equipment enhances safety performance durability aerospace defense equipment reducing weight operating costs • continued deployment optimization common enterprise resource planning erp system automation control solutions acs overview acs provides innovative products solutions make homes buildings industrial sites infrastructure efficient safe comfortable acs products services include controls heating cooling indoor air quality ventilation humidification lighting home automation advanced software applications homebuilding control optimization sensors switches control systems instruments measuring pressure air flow temperature electrical current security fire gas detection personal protection equipment access control video surveillance remote patient monitoring systems products automatic identification data collection installation maintenance upgrades systems keep buildings safe comfortable productive automation control solutions industrial plants including advanced software automation systems integrate control monitor complex processes many types industrial settings well equipment controls measures analyzes natural gas production transportation 2011 changed presentation acs’s segment sales better represent key markets served energy safety security process solutions building solutions distribution prior period disclosure conformed presentation format economic factors acs’s operating results principally driven • global commercial construction including retrofits upgrades • demand residential security environmental control retrofits upgrades • demand energy efficient products solutions • industrial production • government public sector spending • economic conditions growth rates developed us europe emerging markets • strength global capital operating spending process including petrochemical refining building automation • inventory levels distribution channels • changes energy fire security health care safety environmental concerns regulations 2011 compared 2010 automation control solutions “acs” sales increased 13 percent 2011 compared 2010 primarily due 6 percent growth acquisitions net divestitures 5 percent increase organic revenue driven increased sales volume higher prices 2 percent favorable impact foreign exchange first nine months partially offset negative impact foreign exchange fourth quarter expect sales growth continue moderate first quarter 2012 due european economic conditions anticipated negative impact foreign exchange • sales energy safety security businesses increased 17 percent 6 percent organically 2011 principally due positive impact acquisitions significantly sperian ems net divestitures ii higher sales volume due general industrial recovery new product introductions iii favorable impact foreign exchange • sales process solutions increased 12 percent 6 percent organically 2011 principally due increased volume reflecting conversion sales backlog ii favorable impact foreign exchange iii impact acquisitions orders increased 2011 compared 2010 primarily driven continued favorable macro trends oil gas infrastructure projects growth emerging regions positive impact foreign exchange • sales building solutions distribution increased 6 percent 4 percent organically 2011 driven principally due volume growth building solutions business reflecting conversion sales order backlog increased sales volume distribution business ii favorable impact foreign exchange iii impact acquisitions net divestitures acs segment profit increased 18 percent 2011 compared 2010 due 9 percent increase operational segment profit 6 percent increase acquisitions net divestitures 3 percent positive impact foreign exchange increase operational segment profit comprised approximate 5 percent positive impact price productivity net inflation investment growth 4 percent positive impact higher sales volumes cost goods sold totaled 104 billion 2011 increase approximately 11 billion primarily due acquisitions net divestitures higher sales volume foreign exchange inflation partially offset positive impact productivity 2010 compared 2009 acs sales increased 9 percent 2010 compared 2009 primarily due 6 percent increase organic revenue driven increased sales volume 3 percent growth acquisitions • sales energy safety security businesses increased 14 percent 2010 primarily reflecting higher sales volumes businesses tied industrial production environmental combustion controls sensing control gas detection personal protective equipment scanning mobility products new product introductions acquisitions primarily sperian • sales process solutions increased 7 percent 2010 primarily due positive impact increased volume acquisitions primarily rmg group higher prices industrial field solutions driven order growth conversion sales order backlog • sales building solutions distribution increased 3 percent 2010 driven primarily energy efficiency projects conversion sales order backlog acs segment profit increased 11 percent 2010 compared 2009 due 9 percent increase operational segment profit 2 percent increase acquisitions increase operational segment profit comprised approximate 18 percent positive impact higher sales volume partially offset approximate 9 percent negative impact inflation net price productivity including absence prior period labor cost actions partially offset benefits prior repositioning cost goods sold totaled 93 billion 2010 increase approximately 750 million primarily result factors discussed 2012 areas focus acs’s primary areas focus 2012 include • products solutions energy efficiency asset management • extending technology leadership lowest total installed cost integrated product solutions • defending extending installed base customer productivity globalization • sustaining strong brand recognition brand channel management • continued centralization standardization global software development capabilities • continuing identify execute integrate acquisitions adjacent markets serve • continuing establish grow emerging markets presence capability • continuing invest new product development introductions • continued deployment optimization common erp system • increased focus commercial rd effectiveness performance materials technologies pmt overview fourth quarter 2011 specialty materials segment renamed performance materials technologies ‘pmt’ pmt better reflects businesses’ expanded set technology product offerings reach far beyond traditional scope associated specialty materials performance materials technologies develops manufactures highpurity highquality highperformance chemicals materials applications refining petrochemical automotive healthcare agricultural packaging refrigeration appliance housing semiconductor wax adhesives segments performance materials technologies also provides process technology products services petroleum refining gas processing petrochemical renewable energy industries performance materials technologies’ product portfolio includes fluorocarbons hydrofluoroolefins caprolactam resins ammonium sulfate fertilizer phenol specialty films waxes additives advanced fibers customized research chemicals intermediates electronic materials chemicals catalysts adsorbents economic factors performance materials technologies operating results principally driven • level timing capital spending capacity utilization rates refining petrochemical end markets • pricing volatility industry supply conditions raw materials cumene fluorspar perchloroethylene r240 natural gas sulfur ethylene • impact environmental energy efficiency regulations • extent change order rates global semiconductor customers • global demand nonozone depleting hydro fluorocarbons hfcs • condition us residential housing non residential industries automotive demand • global demand caprolactam ammonium sulfate • demand new products including renewable energy biofuels compared 2010 pmt sales increased 20 percent 2011 compared 2010 due 16 percent increase organic growth 3 percent growth acquisitions 1 percent favorable impact foreign exchange • advanced materials sales increased 18 percent 12 percent organically 2011 compared 2010 primarily driven 33 percent 18 percent organically increase resins chemicals sales primarily due higher prices driven strong asia demand agricultural demand formula pricing arrangements increased sales resulting acquisition phenol plant partially offset decreased volumes primarily due disruptions phenol supply weather related events ii 10 percent increase fluorine products business due higher pricing reflecting robust global demand tight industry supply conditions primarily first half year moderated second half year due seasonally weaker demand increased available capacity marketplace iii 12 percent increase specialty products sales primarily due higher sales volume armor additives healthcare packaging products commercial excellence initiatives expect advanced materials sales growth continue moderate first half 2012 due slowing global demand lower prices resulting increased availability refrigerants supply • uop sales increased 24 percent 2011 compared 2010 primarily driven increased service licensing revenues higher unit sales refining specialty catalysts primarily reflecting continued strength refining petrochemical industries pmt segment profit increased 39 percent 2011 compared 2010 due 38 percent increase operational segment profit 1 percent favorable impact foreign exchange increase operational segment profit primarily due favorable price raw materials spread resins chemicals fluorine products higher service product licensing revenues uop partially offset continued investment growth plant optimization initiatives cost goods sold totaled 42 billion 2011 increase approximately 597 million primarily due volume material inflation phenol plant acquisition continued investment growth initiatives compared 2009 pmt sales increased 14 percent 2010 compared 2009 predominantly due organic growth • advanced materials sales increased 23 percent 2010 compared 2009 primarily driven 29 percent increase resins chemicals sales primarily due higher prices driven strong asia demand formula pricing arrangements agricultural demand ii 21 percent increase specialty products sales significantly due higher sales volume semiconductor specialty additives advanced fiber industrial applications specialty chemicals customers iii 19 percent increase fluorine products business due higher sales volume increased demand refrigerants insulating materials industrial processing aids • uop sales decreased 1 percent 2010 compared 2009 primarily driven lower new unit catalyst sales timing projects activity refining petrochemical industries partially offset increased gas processing equipment sales pmt segment profit increased 24 percent 2010 compared 2009 due 25 percent increase operational segment profit increase operational segment profit primarily due 24 percent positive impact higher sales volumes positive impact price productivity offset negative impact inflation including absence prior period labor cost actions cost goods sold totaled 36 billion 2010 increase approximately 400 million primarily result factors discussed areas focus performance materials technologies primary areas focus 2012 include • continuing develop new processes products technologies address energy efficiency environment security well position portfolio higher value • commercializing new products technologies petrochemical gas processing refining industries renewable energy sector • investing increase plant capacity reliability improving productivity quality operational excellence • driving sales marketing excellence expanding local presence fast growing emerging markets • managing exposure raw material price supply fluctuations evaluation alternative sources supply contractual arrangements transportation systems overview transportation systems provides automotive products improve performance efficiency cars trucks vehicles stateoftheart technologies world class brands global solutions customers’ needs transportation systems’ products include turbochargers thermal systems friction materials bendixr juridr brake hard parts transportation systems sells products original equipment “oe” automotive truck manufacturers eg bmw caterpillar daimler renault ford volkswagen wholesalers distributors retail aftermarket economic factors transportation systems operating results principally driven • financial strength stability automotive oe manufacturers • global demand particularly western europe automobile truck production • turbo penetration rates new engine platforms • global consumer preferences particularly western europe boosted diesel passenger cars • degree volatility raw material prices including nickel steel • new automobile production rates impact inventory levels automotive oe manufacturers demand products • regulations mandating lower emissions improved fuel economy • consumers’ ability obtain financing new vehicle purchases • impact factors consumer confidence automotive aftermarket demand compared 2010 transportation systems sales increased 21 percent 2011 compared 2010 primarily due 16 percent increase organic revenue driven increased sales volume favorable impact foreign exchange 5 percent sales increase 2011 compared 2010 primarily driven increased turbocharger sales light vehicle commercial vehicle engine manufacturers primarily due new platform launches strong diesel penetration rates western europe ii favorable impact foreign exchange expect turbocharger year sales growth rate moderate first quarter 2012 primarily due reduced european light vehicle production anticipated negative impact foreign exchange transportation systems segment profit increased 37 percent 2011 compared 2010 due 32 percent increase operational segment profit 5 percent favorable impact foreign exchange increase operational segment profit comprised approximate 25 percent positive impact productivity net inflation price 7 percent positive impact higher sales volumes cost goods sold totaled 32 billion 2011 increase 533 million primarily result higher sales volume foreign exchange inflation partially offset positive impact productivity 2010 compared 2009 transportation systems sales increased 31 percent 2010 compared 2009 primarily due 33 percent increase organic revenue driven increased sales volume partially offset unfavorable impact foreign exchange 2 percent sales increase 2010 compared 2009 primarily due increased turbocharger sales light vehicle commercial vehicle engine manufacturers partially offset negative impacts foreign exchange transportation systems segment profit increased 292 million 2010 compared 2009 predominantly due positive impact increased sales volume cost goods sold totaled 26 billion 2010 increase approximately 450 million also primarily result increased sales volume areas focus transportation systems primary areas focus 2012 include • sustaining superior turbocharger technology successful platform launches • maintaining high quality current products executing new product introductions • increasing global penetration share diesel gasoline turbocharger oem demand • addressing capacity challenges improving cost structure increasing plant productivity expansion global manufacturing footprint • aligning cost structure current economic outlook successful execution repositioning actions • aligning development efforts costs new turbo platform launch schedules repositioning charges see note 3 financial statements discussion repositioning charges incurred 2011 2010 2009 repositioning actions expected generate incremental pretax savings approximately 150 million 2012 compared 2011 principally planned workforce reductions cash expenditures severance exit costs necessary execute repositioning actions 159 147 193 million 2011 2010 2009 respectively expenditures severance exit costs funded principally operating cash flows cash expenditures severance costs necessary execute remaining actions expected approximately 150 million 2012 funded operating cash flows following tables provide details pretax impact total net repositioning charges segment liquidity capital resources company continues manage businesses maximize operating cash flows primary source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines shortterm debt commercial paper market longterm borrowings access public debt equity markets well ability sell trade accounts receivables continue balance cash financing uses investment existing core businesses acquisition activity share repurchases dividends cash flow summary cash flows operating investing financing activities reflected consolidated statement cash flows years ended 2011 2010 2009 summarized follows compared 2010 cash provided operating activities decreased 1370 million 2011 compared 2010 primarily due increased voluntary cash contributions 1050 million us pension plans ii unfavorable impact decreased deferred taxes excluding impact cash taxes approximately 710 million iii higher cash tax payments approximately 500 million partially offset 863 million increase net income noncash pension marktomarket adjustment cash used investing activities decreased 1658 million 2011 compared 2010 primarily due increase proceeds sale businesses 1149 million significantly divestiture consumer products group business automotive onboard sensor products business within automation control solutions segment decrease cash paid acquisitions 330 million net 315 million decrease investments shortterm marketable securities cash used financing activities decreased 933 million 2011 compared 2010 primarily due increase net proceeds debt 1734 million decrease 293 million payment debt assumed acquisitions partially offset increase 1085 million repurchases common stock compared 2009 cash provided operating activities increased 257 million 2010 compared 2009 primarily due increased accrued expenses 690 million due increased customer advances incentive compensation accruals ii 550 million impact increased deferred taxes excluding impact cash taxes iii increased net income 474 million iv lower cash tax payments approximately 300 million v 219 million decrease payments repositioning charges partially offset 1059 unfavorable impact working capital driven higher receivables increased purchases raw materials component inventory support higher demand partially offset corresponding increase accounts payable ii increased pension postretirement payments 598 million iii absence 155 million sale longterm receivables 2009 cash used investing activities increased 1136 million 2010 compared 2009 primarily due increase cash paid acquisitions 835 million significantly sperian protection net 341 million increase investments shortterm marketable securities cash used financing activities decreased 105 million 2010 compared 2009 primarily due decrease net repayment debt including commercial paper 287 million increase proceeds issuance common stock primarily related stock option exercises 158 million partially offset repayment 326 million debt assumed acquisition sperian protection liquidity businesses focused implementing strategies increase operating cash flows revenue growth margin expansion improved working capital turnover considering current economic environment businesses operate business plans strategies including focus growth cost reduction productivity initiatives company believes cash balances operating cash flows principal source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines short term debt commercial paper markets longterm borrowings access public debt equity markets well ability sell trade accounts receivables december 31 2011 substantial portion company’s cash equivalents held foreign subsidiaries amounts held outside us repatriated current law would subject us federal income taxes less applicable foreign tax credits however intent permanently reinvest funds outside us practicable estimate amount tax might payable earnings repatriated amount foreign tax credits would available reduce eliminate resulting us income tax liability source liquidity ability issue shortterm debt commercial paper market commercial paper notes sold discount maturity 365 days date issuance borrowings commercial paper program available general corporate purposes well financing potential acquisitions 599 million commercial paper outstanding december 31 2011 ability access commercial paper market related cost borrowings affected strength credit rating market conditions credit ratings periodically reviewed major independent debtrating agencies december 31 2011 standard poor’s sp fitch moody’s ratings longterm debt a2 respectively shortterm debt a1 p1 respectively sp fitch moody’s honeywell’s rating outlook “stable” date company experienced limitations ability access sources liquidity also current shelf registration statement filed securities exchange commission may issue additional debt securities common stock preferred stock may offered one offerings terms determined time offering net proceeds offering would used general corporate purposes including repayment existing indebtedness capital expenditures acquisitions source liquidity sell interests designated pools trade accounts receivables third parties december 31 2011 2010 none receivables designated pools sold third parties sell receivables overcollateralized retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools terms trade accounts receivable program permit repurchase receivables third parties discretion providing us additional source revolving credit result program receivables remain company’s balance sheet corresponding amount recorded either shortterm borrowings longterm debt february 2011 company issued 800 million 425 senior notes due 2021 600 million 5375 senior notes due 2041 collectively “notes” notes senior unsecured unsubordinated obligations honeywell rank equally honeywell’s existing future senior unsecured debt senior honeywell’s subordinated debt offering resulted gross proceeds 1400 million offset 19 million discount closing costs related offering first quarter 2011 company repurchased entire outstanding principal amount 400 million 5625 notes due 2012 via cash tender offer subsequent optional redemption costs relating early redemption notes including “makewhole premium” 29 million march 2011 company entered 2800 million five year credit agreement “credit agreement” syndicate banks commitments credit agreement increased pursuant terms credit agreement aggregate amount exceed 3500 million credit agreement maintained general corporate purposes including support issuance commercial paper replaces previous 2800 million five year credit agreement dated may 14 2007 “prior agreement” december 31 2011 borrowings letters credit issued credit facility credit facility restrict honeywell’s ability pay dividends contain financial covenants fourth quarter 2011 company repaid 500 million 6125 notes maturity repayment funded cash provided operating activities monitor thirdparty depository institutions hold cash equivalents daily basis emphasis primarily safety principal secondarily maximizing yield funds diversify cash equivalents among counterparties minimize exposure one entities global economic conditions tightening credit markets could adversely affect customers’ suppliers’ ability obtain financing particularly longcycle businesses airline automotive end markets customer supplier bankruptcies delays ability obtain financing unavailability financing could adversely affect cash flow results operations date experienced material impacts customer supplier bankruptcy liquidity issues continue monitor take measures limit exposure february 2011 board directors authorized repurchase total 3 billion honeywell common stock 2011 company repurchased 1085 million outstanding shares offset dilutive impact employee stock based compensation plans including future option exercises restricted unit vesting matching contributions savings plans see part ii item 5 share repurchases fourth quarter 2011 july 2011 company sold consumer products group business cpg rank group limited sale completed approximately 955 million cash proceeds resulting pretax gain approximately 301 million approximately 178 million net tax gain recorded net income discontinued operations taxes company’s consolidated statement operations year ended december 31 2011 net income attributable noncontrolling interest discontinued operations insignificant sale cpg part transportation systems segment consistent company’s strategic focus portfolio differentiated global technologies see acquisitions divestitures note 2 financial statements discussion august 2011 company completed acquisition ems leading provider connectivity solutions mobile networking rugged mobile computers satellite communications aggregate value net cash acquired approximately 513 million see acquisitions divestitures note 2 financial statements discussion december 2011 company acquired king’s safetywear limited ksw leading international provider branded safety footwear aggregate value net cash acquired approximately 331 million including assumption debt 33 million see acquisitions divestitures note 2 financial statements discussion 2011 company made voluntary cash contributions us pension plans 1650 million improve funded status plans addition normal operating cash requirements principal future cash requirements fund capital expenditures debt repayments dividends employee benefit obligations environmental remediation costs asbestos claims severance exit costs related repositioning actions share repurchases strategic acquisitions specifically expect primary cash requirements 2012 follows • capital expenditureswe expect spend approximately 11 billion capital expenditures 2012 primarily growth production capacity expansion cost reduction maintenance replacement • share repurchases company’s previously reported 3 billion share repurchase program 19 billion remained available december 31 2011 additional share repurchases honeywell presently expects repurchase outstanding shares time 2012 offset dilutive impact employee stock based compensation plans including future option exercises restricted unit vesting matching contributions savings plans amount timing future repurchases may vary depending market conditions level operating financing investing activities • dividendswe expect pay approximately 12 billion dividends common stock 2012 reflecting 12 percent increase dividend rate effective fourth quarter 2011 dividend • asbestos claimswe expect cash spending asbestos claims cash receipts related insurance recoveries approximately 240 75 million respectively 2012 see asbestos matters note 21 financial statements discussion possible funding obligations 2012 related narco trust • pension contributionsin 2012 plan make cash contributions 800 million 1 billion 250 million made january 2012 plans improve funded status plans contributions principally consist voluntary contributions us plans timing amount contributions may impacted number factors including funded status plans • repositioning actionswe expect cash spending severance exit costs necessary execute previously announced repositioning actions approximate 150 million 2012 • environmental remediation costswe expect spend approximately 300 million 2012 remedial response voluntary cleanup costs see environmental matters note 21 financial statements additional information continuously assess relative strength business portfolio strategic fit market position profit cash flow contribution order upgrade combined portfolio identify business units benefit increased investment identify acquisition candidates strategic plan strengthen existing core businesses also identify businesses fit longterm strategic plan based market position relative profitability growth potential businesses considered potential divestiture restructuring repositioning actions subject regulatory constraints 2011 realized 1156 million cash proceeds sales nonstrategic businesses based past performance current expectations believe operating cash flows sufficient meet future operating cash needs available cash committed credit lines access public debt equity markets well ability sell trade accounts receivables provide additional sources shortterm longterm liquidity fund current operations debt maturities future investment opportunities contractual obligations probable liability payments following summary significant contractual obligations probable liability payments december 31 2011 1 assumes longterm debt outstanding scheduled maturity 2 purchase obligations entered various vendors normal course business consistent expected requirements 3 payment amounts table reflect environmental liabilities probable reasonably estimable december 31 2011 see environmental matters note 21 financial statements additional information 4 amounts estimates asbestos related cash payments narco bendix based asbestos related liabilities probable reasonably estimable december 31 2011 except amounts due upon effective date narco plan reorganization 76 million assumed funding narco trust occur 2013 beyond projecting timing narco payments dependent among things effective date trust could cause timing payments earlier later projected projecting future events subject many uncertainties could cause asbestos liabilities higher lower projected recorded see asbestos matters note 21 financial statements additional information 5 amounts represent insurance recoveries deemed probable asbestos related liabilities december 31 2011 timing insurance recoveries impacted terms insurance settlement agreements well documentation review collection process required collect insurance claims probable insurance recoveries subject definitive settlement agreements specified payment dates instead covered insurance policies assumed collection occur beyond 2016 projecting timing insurance recoveries subject many uncertainties could cause amounts collected higher lower projected recorded could cause timing collections earlier later projected reevaluate projections concerning insurance recoveries light changes developments would impact recoveries timing thereof see asbestos matters note 21 financial statements additional information 6 table excludes 815 million uncertain tax positions see note 6 financial statements table also excludes pension postretirement benefits opeb obligations 2012 plan make cash contributions 800 million 1 billion 250 million made january 2012 plans improve funded status plans contributions principally consist voluntary contributions us plans timing amount contributions may impacted number factors including funded status plans beyond 2012 actual amounts required contributed dependent upon among things interest rates underlying asset returns impact legislative regulatory actions related pension funding obligations payments due opeb plans required funded advance paid medical costs incurred covered retiree populations principally dependent upon future cost retiree medical benefits plans expect opeb payments approximate 167 million 2012 net benefit approximately 13 million medicare prescription subsidy see note 22 financial statements discussion pension opeb plans offbalance sheet arrangements following summary offbalance sheet arrangements guaranteeswe issued party following direct indirect guarantees december 31 2011 expect guarantees material adverse effect consolidated results operations financial position liquidity connection disposition certain businesses facilities indemnified purchasers expected cost remediation environmental contamination existing date disposition expected costs accrued environmental assessments made remedial efforts probable costs reasonably estimated environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous substances accordance environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing hazardous substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually jointly potentially responsible parties determine feasibility various remedial techniques address environmental matters policy see note 1 financial statements record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects execution timeframe projects remedial techniques utilized agreements parties remedial response voluntary cleanup costs charged pretax earnings 240 225 151 million 2011 2010 2009 respectively december 31 2011 2010 recorded liabilities environmental matters 723 753 million respectively addition 2011 2010 incurred operating costs ongoing businesses approximately 102 86 million respectively relating compliance environmental regulations remedial response voluntary cleanup payments 270 266 318 million 2011 2010 2009 respectively currently estimated approximately 300 million 2012 expect fund expenditures operating cash flow although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position see note 21 financial statements discussion commitments contingencies including related environmental matters toxic tort litigation financial instruments result global operating financing activities exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position minimize risks interest foreign currency exchange rate commodity price fluctuations normal operating financing activities deemed appropriate use derivative financial instruments use derivative financial instruments trading speculative purposes use leveraged derivative financial instruments summary accounting policies derivative financial instruments included note 1 financial statements also hold investments marketable equity securities exposes us market volatility discussed note 16 financial statements conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities anticipated transactions arising international trade objective preserve economic value nonfunctional currency cash flows attempt hedge transaction exposures natural offsets fullest extent possible opportunities exhausted foreign currency forward option agreements third parties principal currency exposures relate us dollar euro british pound canadian dollar hong kong dollar mexican peso swiss franc czech koruna chinese renminbi indian rupee singapore dollar swedish krona korean thai baht exposure market risk changes interest rates relates primarily net debt pension obligations described notes 14 16 financial statements issue fixed variable rate debt use interest rate swaps manage exposure interest rate movements reduce overall borrowing costs financial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value expected future cash flows derivative financial instruments considering reasonably possible changes interest currency exchange rates restrict use derivative financial instruments hedging activities following table illustrates potential change fair value interest rate sensitive instruments based hypothetical immediate onepercentagepoint increase interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 percent weakening us dollar versus local currency exchange rates across maturities potential change fair value contracts hedging commodity purchases based 20 percent decrease price underlying commodity across maturities december 31 2011 2010 1 asset liability 2 changes fair value foreign currency exchange contracts offset changes fair value cash flows underlying hedged foreign currency transactions 3 changes fair value forward commodity contracts offset changes cash flows underlying hedged commodity transactions discussion procedures monitor market risk estimated changes fair value resulting sensitivity analyses forwardlooking statements market risk assuming certain adverse market conditions occur actual results future may differ materially estimated results due actual developments global financial markets methods used us assess mitigate risk discussed considered projections future events critical accounting policies preparation consolidated financial statements accordance generally accepted accounting principles based selection application accounting policies require us make significant estimates assumptions effects matters inherently uncertain consider accounting policies discussed critical understanding financial statements actual results could differ estimates assumptions differences could material consolidated financial statements discussed selection application disclosure critical accounting policies audit committee board directors independent registered public accountants new accounting standards effective 2011 material impact consolidated financial statements described recent accounting pronouncements section note 1 financial statements contingent liabilitieswe subject number lawsuits investigations claims involve substantial dollar amounts arise conduct global business operations previously owned entities including matters relating commercial transactions government contracts product liability including asbestos prior acquisitions divestitures employee benefit plans intellectual property environmental health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes contingencies well potential amounts ranges probable losses recognize liability contingencies based careful analysis matter assistance outside legal counsel applicable experts analysis includes making judgments concerning matters costs associated environmental matters outcome negotiations number cost pending future asbestos claims impact evidentiary requirements contingencies resolved long periods time liabilities may change future due new developments including new discovery facts changes legislation outcomes similar cases judicial system changes assumptions changes settlement strategy discussion contingencies related environmental asbestos matters including management’s judgment applied recognition measurement specific liabilities see notes 1 21 financial statements asbestos related contingencies insurance recoverieswe defendant personal injury actions related products containing asbestos refractory friction products recognize liability asbestos related contingency probable occurrence reasonably estimable regarding north american refractories company narco asbestos related claims accrued pending claims based terms conditions agreements narco former parent company certain asbestos claimants estimate unsettled claims pending time narco filed bankruptcy protection also accrued estimated value future narco asbestos related claims expected asserted narco trust 2018 described note 21 financial statements light inherent uncertainties making long term projections connection initial operation 524g trust well stay narco asbestos claims since january 2002 believe reasonable basis estimating narco asbestos claims beyond 2018 regarding bendix asbestos related claims accrued estimated value pending claims using average resolution values previous five years also accrued estimated value future anticipated claims related bendix next five years based historic claims filing experience dismissal rates disease classifications average resolution values tort system previous five years light uncertainties inherent making longterm projections well certain factors unique friction product asbestos claims believe reasonable basis estimating asbestos claims beyond next five years continue update resolution values used estimate cost pending future bendix claims fourth quarter year additional information see note 21 financial statements continually assess likelihood adverse judgments outcomes contingencies well potential ranges probable losses recognize liability contingencies based analysis individual issue assistance outside legal counsel applicable experts connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical experience insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs consideration impacts settlements insurers insurance domestic insurance market london excess market substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries projecting future events subject various uncertainties could cause insurance recovery asbestos related liabilities higher lower projected recorded given inherent uncertainty making future projections reevaluate projections concerning probable insurance recoveries light changes projected liability recovery experience relevant factors may impact future insurance recoveries see note 21 financial statements discussion management’s judgments applied recognition measurement insurance recoveries asbestos related liabilities defined benefit pension plans sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees recognize changes fair value plan assets net actuarial gains losses excess 10 percent greater marketrelated value plan assets plans’ projected benefit obligation corridor annually fourth quarter year mtm adjustment net actuarial gains losses occur actual experience differs various assumptions used value pension plans assumptions change may year primary factors contributing actuarial gains losses changes discount rate used value pension obligations measurement date year differences expected actual returns plan assets accounting method also results potential volatile difficult forecast mtm adjustments mtm adjustments 1802 471 741 million 2011 2010 2009 respectively remaining components pension expense primarily service interest costs assumed return plan assets recorded quarterly basis ongoing pension expense financial reporting purposes net periodic pension expense calculated based upon number actuarial assumptions including discount rate plan obligations expected longterm rate return plan assets determine expected longterm rate return plan assets utilizing historical plan asset returns varying longterm periods combined expectations future market conditions asset mix considerations see note 22 financial statements details actual various asset classes targeted asset allocation percentages pension plans discount rate reflects market rate december 31 measurement date highquality fixedincome investments maturities corresponding benefit obligations subject change year information major actuarial assumptions included note 22 financial statements key assumptions used developing 2011 2010 2009 net periodic pension expense us plans included following discount rate volatile year determined based upon prevailing interest rates measurement date use 489 percent discount rate 2012 reflecting decrease market interest rate environment since december 31 2010 plan continue use expected rate return plan assets 8 percent 2012 longterm rate based historical plan asset returns varying longterm periods combined expectations future market conditions asset mix plan’s investments addition potential mtm adjustments changes expected rate return plan assets discount rate resulting economic events also affects future ongoing pension expense following table highlights sensitivity us pension obligations ongoing expense changes assumptions assuming assumptions remain constant estimates exclude potential mtm adjustment ongoing pension expense pension plans expected approximately 60 million 2012 decrease 45 million 2011 due primarily impact planned cash contributions 2012 also required mtm adjustment recorded fourth quarter 2012 accordance pension accounting method previously described difficult reliably forecast predict whether mtm adjustment 2012 one required magnitude adjustment mtm adjustments primarily driven events circumstances beyond control company changes interest rates performance financial markets 2011 2010 2009 required make contributions satisfy minimum statutory funding requirements us pension plans however made voluntary contributions 1650 1000 740 million us pension plans 2011 2010 2009 respectively primarily improve funded status plans adversely impacted relatively low discount rates asset losses 2011 2008 resulting poor performance equity markets 2012 plan make cash contributions 800 million 1 billion 250 million made january 2012 plans improve funded status plans contributions principally consist voluntary contributions us plans timing amount contributions may impacted number factors including funded status plans longlived assets including tangible definitelived intangible assetsto conduct global business operations execute business strategy acquire tangible intangible assets including property plant equipment definitelived intangible assets december 31 2011 net carrying amount longlived assets totaled approximately 65 billion determination useful lives depreciationamortization purposes whether assets impaired involves use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions periodically evaluate recoverability carrying amount longlived assets whenever events changes circumstances indicate carrying amount longlived asset group may fully recoverable principal factors consider deciding perform impairment review follows • significant underperformance ie declines sales earnings cash flows business product line relation expectations • annual operating plans fiveyear strategic plans indicate unfavorable trend operating performance business product line • significant negative industry economic trends • significant changes planned changes use assets determined impairment review necessary recoverability assets measured comparing carrying amount asset grouping estimated future undiscounted cash flows carrying amount exceeds estimated future undiscounted cash flows asset grouping considered impaired impairment measured difference carrying amount asset grouping fair value endeavor utilize best information available measure fair value usually either market prices available level 1 level 2 fair value hierarchy estimate future discounted cash flow level 3 fair value hierarchy key estimates discounted cash flow analysis include expected industry growth rates assumptions volume selling prices costs discount rate selected described detail note 16 financial statements recorded impairment charges related longlived assets 127 million 30 million 2011 2010 respectively principally related manufacturing plant equipment facilities scheduled close downsized goodwill impairment testinggoodwill represents excess acquisition costs fair value net tangible assets identifiable intangible assets acquired business combination goodwill amortized subject impairment testing goodwill balance 119 billion december 31 2011 subject impairment testing annually march 31 whenever events changes circumstances indicate carrying amount may fully recoverable testing compares carrying values fair values appropriate carrying value reduced fair value fair value reporting units estimated utilizing discounted cash flow approach utilizing cash flow forecasts five year strategic annual operating plans adjusted terminal value assumptions impairment test involves use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions address uncertainty perform sensitivity analysis key estimates assumptions completed annual impairment test march 31 2011 determined impairment date however significant negative industry economic trends disruptions business unexpected significant changes planned changes use assets divestitures market capitalization declines may negative effect fair value reporting units income taxesdeferred tax assets liabilities determined based difference financial statements tax basis assets liabilities using enacted tax rates effect year differences expected reverse provision income taxes based domestic international statutory income tax rates jurisdictions operate significant judgment required determining income tax provisions well deferred tax asset liability balances including estimation valuation allowances evaluation tax positions december 31 2011 recognized net deferred tax asset 2421 million less valuation allowance 591 million net deferred tax assets primarily comprised net deductible temporary differences net operating loss carryforwards tax credit carryforwards available reduce taxable income future periods determination amount valuation allowance provided recorded deferred tax assets involves estimates regarding 1 timing amount reversal taxable temporary differences 2 expected future taxable income 3 impact tax planning strategies valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax asset realized assessing need valuation allowance consider available positive negative evidence including past operating results projections future taxable income feasibility ongoing tax planning strategies projections future taxable income include number estimates assumptions regarding volume pricing costs additionally valuation allowances related deferred tax assets impacted changes tax laws net deferred tax asset 2421 million consists 1516 million related us operations 905 million related nonus operations us net deferred tax asset 1516 million consists net deductible temporary differences tax credit carryforwards federal state tax net operating losses believe likely realized generation future taxable income us tax planning strategies maintain valuation allowance 5 million asset related state net operating losses nonus net deferred tax asset 905 million consists principally net operating capital loss carryforwards mainly france netherlands luxembourg germany maintain valuation allowance 588 million deferred tax assets reflecting historical experience lower expectations taxable income applicable carryforward periods fully described note 6 financial statements valuation allowance decreased 45 million 2011 increased 58 million 133 million 2010 2009 respectively event determine able realize net deferred tax assets future reduce amounts charge income period determination made conversely determine able realize net deferred tax assets excess carrying amounts decrease recorded valuation allowance credit income period determination made significant judgment required determining income tax provisions evaluating tax positions establish additional reserves income taxes despite belief tax positions fully supportable remain certain positions meet minimum recognition threshold approach evaluating certain uncertain tax positions defined authoritative guidance determines tax position likely sustained upon examination applicable taxing authority normal course business company subsidiaries examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes continually assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts give rise revision become known sales recognition longterm contractsin 2011 recognized approximately 16 percent total net sales using percentageofcompletion method longterm contracts automation control solutions aerospace performance materials technologies segments longterm contracts measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts accounting contracts involves management judgment estimating total contract revenue cost contract revenues largely determined negotiated contract prices quantities modified assumptions regarding contract options change orders incentive award provisions associated technical performance price adjustment clauses inflation indexbased clauses contract costs incurred period time several years estimation costs requires management judgment cost estimates largely based negotiated estimated purchase contract terms historical performance trends economic projections significant factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements revenue cost estimates regularly monitored revised based changes circumstances anticipated losses longterm contracts recognized losses become evident maintain financial controls customer qualification contract pricing estimation processes reduce risk contract losses matters litigation see note 21 financial statements discussion environmental asbestos litigation matters recent accounting pronouncements see note 1 financial statements discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations dollars millions except per share amounts following management’s discussion analysis financial condition results operations “mda” intended help reader understand results operations financial condition honeywell international inc consolidated subsidiaries “honeywell” “company” three years ended december 31 2013 references notes related notes financial statements “item 8 financial statements supplementary data” consumer products group cpg automotive aftermarket business historically part transportation systems reportable segment accordance generally accepted accounting principles cpg results excluded continuing operations presented discontinued operations periods presented see note 2 acquisitions divestitures details executive summary honeywell 2013 marked another year growth enhanced profitability despite modest 25 percent growth world gdp industrial production honeywell’s 2013 revenues 391 billion representing 4 percent improvement compared 2012 revenues 377 billion segment profit improved 8 percent roughly two times revenue growth evidencing company’s continued focus operational excellence achieved strong segment profit expansion reinvesting businesses seed planting continued focus proactive repositioning see review business segments section mda reconciliation segment profit consolidated income continuing operations taxes company’s operational excellence ability expand profit faster sales growth due part consistent methodical application several key internal business processes drive improvements organizational efficiency service quality bringing worldclass products services markets faster cost effectively customers honeywell refers processes honeywell enablers 2013 honeywell continued strengthen expand use honeywell enablers • honeywell operating system “hos” hos drives sustainable improvements manufacturing operations generate exceptional performance safety quality delivery cost inventory management approximately 75 percent manufacturing cost base achieved hos certification • velocity product development “vpd” vpd process brings together functions necessary successfully launch new productsrd manufacturing marketing salesto increase probability commercializing new technologies honeywell delivers right products right price • functional transformation “ft” functional transformation hos administrative functionsfinance legal hr purchasingstandardizing way work improves service quality reduces costs company continues invest future growth measured number important metrics • rd spending 46 percent revenues targeted high growth areas natural gas processing low global warming refrigerants blowing agents voice control wireless control devices technologies • capital expenditures grew 7 percent 947 million principally related construction expansion performance materials technologies manufacturing facilities well upgrades aerospace facilities • company recognized approximately 231 million charges relating restructuring actions support sustainable productivity years come • company completed 1133 million net cash acquired acquisitions 2013 including acquisition intermec inc “intermec” leading provider mobile computing radio frequency identification solutions rfid bar code label receipt printers use warehousing supply chain field service manufacturing environments rae systems inc rae global manufacturer fixed portable gas radiation detection systems software • company continued monitor portfolio businesses divest fit within longterm strategic plan january 2014 company entered definitive agreement sell friction materials business approximately 155 million • expansion honeywell’s presence sales high growth regions countries china india eastern europe middleeast latin america sales customers outside united states account approximately 55 percent total revenues operating cash flow grew 23 percent 2013 4335 million operating cash flow performance enabled us invest 947 million capital expenditures partially fund acquisitions discussed make 156 million nonus pension contributions provide 10 percent increase company’s cash dividend rate vs 2012 repurchase 135 million shares common stock consolidated results operations net sales change net sales compared prior year period attributable following discussion net sales segment found review business segments section mda cost products services sold cost products services sold increased 73 million 2013 compared 2012 principally due estimated increase direct material costs approximately 585 million indirect material costs approximately 115 million driven higher sales volume acquisitions increased repositioning charges approximately 140 million partially offset decrease pension expense approximately 760 million primarily driven 650 million decrease pension marktomarket adjustment allocated cost products services sold approximately 30 million 2013 versus approximately 680 million 2012 gross margin percentage increased 25 percentage points 2013 compared 2012 principally due lower pension expense approximately 20 percentage point impact primarily driven decrease pension marktomarket adjustment allocated cost products services sold higher segment gross margin business segments approximately 05 percentage point impact collectively lower postretirement expense 01 percentage point impact partially offset higher repositioning charges approximately 04 percentage point impact cost products services sold decreased 265 million 1 percent 2012 compared 2011 principally due decrease pension expense approximately 800 million primarily driven decrease pension marktomarket adjustment allocated cost products services sold 780 million decrease repositioning charges approximately 220 million partially offset estimated increase direct material costs approximately 620 million driven substantially 3 percent increase sales result factors excluding price shown discussed review business segments section mda increase postretirement expense approximately 135 million due absence 2011 curtailment gains gross margin percentage increased 31 percentage points 2012 compared 2011 principally due lower pension expense approximately 22 percentage point impact primarily driven decrease pension marktomarket adjustment allocated cost products services sold lower repositioning actions approximately 06 percentage point impact higher segment gross margin aerospace automation control solutions performance materials technologies segments approximately 04 percentage point impact collectively partially offset higher postretirement expense approximately 04 percentage point impact selling general administrative expenses selling general administrative expenses sga decreased percentage sales 06 percent 2013 compared 2012 primarily driven higher sales result factors discussed review business segments section mda ii estimated 270 million decrease pension expense primarily driven approximately 250 million decrease pension marktomarket charge allocated sga approximately 20 million 2013 versus approximately 270 million 2012 partially offset estimated 215 million increase labor costs primarily acquisitions merit increases investment growth 80 million increase repositioning charges selling general administrative expenses decreased percentage sales 09 percent 2012 compared 2011 driven impact higher sales result factors discussed review business segments section mda estimated 110 million decrease pension expense driven decrease portion pension marktomarket charge allocated sga 90 million decrease due foreign exchange 80 million decrease repositioning actions partially offset impact estimated 140 million increase costs resulting acquisitions investment growth merit increases net employee related costs income expense income increased 168 million 2013 compared 2012 primarily due 195 million realized gain related sale marketable equity securities aerospace common stock designated available sale obtained conjunction sale consumables solutions business july 2008 gain partially offset increase loss sale nonstrategic businesses assets 25 million primarily due pretax loss approximately 28 million related pending divestiture friction materials business within transportation systems segment see note 2 acquisitions divestitures details income decreased 14 million 2012 compared 2011 due primarily 50 million pretax gain related divestiture automotive onboard sensors products business within automation control solutions segment first quarter 2011 partially offset loss 29 million resulting early redemption debt 2011 included within “other net” reduction approximately 6 million acquisition related costs compared 2011 included within “other net” interest financial charges interest financial charges decreased 7 percent 2013 compared 2012 primarily due lower borrowing costs partially offset higher average debt balances interest financial charges decreased 7 percent 2012 compared 2011 primarily due lower borrowing costs partially offset higher average debt balances tax expense effective tax rate increased 24 percentage points 2013 compared 2012 year increase effective tax rate primarily attributable lower marktomarket pension expense us factors causing increase effective tax rate include higher tax expense related increase tax reserves higher state tax expense increases effective tax rate partially offset tax benefits retroactive law changes us company’s foreign effective tax rate 2013 190 percent increase approximately 20 percentage points compared 2012 year increase foreign effective tax rate primarily attributable higher expense related retroactive tax law changes germany additional reserves various jurisdictions coupled higher earnings higher tax rate jurisdictions effective tax rate lower us statutory rate 35 percent primarily due overall foreign earnings taxed lower rates effective tax rate increased 61 percentage points 2012 compared 2011 primarily due change mix earnings taxed higher rates primarily driven approximate 61 percentage point impact decrease pension marktomarket expense decreased benefit valuation allowances decreased benefit settlement tax audits absence us rd tax credit partially offset decreased expense related tax reserves foreign effective tax rate 170 percent decrease approximately 41 percentage points primarily consisted 100 percent impact related decrease tax reserves partially offset 52 percent impact increased valuation allowances net operating losses primarily due decrease luxembourg france earnings available offset net operating loss carry forwards 14 percent impact tax expense related foreign exchange effective tax rate lower us statutory rate 35 percent primarily due overall foreign earnings taxed lower rates american taxpayer relief act 2012 signed law january 2 2013 provisions provided retroactive changes 2012 tax year taken account determining company’s effective tax rate 2012 impact retroactive changes approximately 76 million lower tax expense recorded first quarter 2013 net income attributable honeywell earnings per share common stockassuming dilution increased 123 per share 2013 compared 2012 primarily due lower pension expense mainly due decrease pension marktomarket adjustment increased segment profit business segments higher income discussed partially offset increased tax expense higher repositioning charges earnings per share common stockassuming dilution increased 108 per share 2012 compared 2011 primarily due lower pension expense mainly due decrease pension marktomarket adjustment increased segment profit aerospace automation control solutions performance materials technologies segments lower repositioning charges partially offset increased tax expense decreased income discontinued operations higher postretirement expense discussion segment results see “review business segments” business overview business overview provides summary honeywell four reportable operating segments aerospace automation control solutions performance materials technologies transportation systems including respective areas focus 2014 relevant economic factors impacting results discussion segment’s results three years ended december 31 2013 segments comprised various product service classes serve multiple end markets see note 24 segment financial data notes financial statements information reportable segments definition segment profit economic factors addition factors listed respect operating segments consolidated operating results principally impacted • change global economic growth rates industry conditions demand key end markets • overall sales mix particular mix aerospace original equipment aftermarket sales mix automation control solutions acs products distribution services sales • extent cost savings productivity actions able offset exceed impact material nonmaterial inflation • impact pension discount rate asset returns pension expense including marktomarket adjustments funding requirements • impact fluctuations foreign currency exchange rates particular euro relative us dollar areas focus 2014 areas focus supported enablers including honeywell operating system velocity product development process functional transformation areas focus generally applicable operating segments include • driving profitable growth rd technological excellence optimized manufacturing capability deliver innovative products customers value • expanding margins maintaining improving company’s cost structure manufacturing administrative process improvements repositioning actions drive productivity enhance flexibility business works proactively respond changes end market demand • proactively managing raw material costs formula longterm supply agreements hedging activities feasible prudent • driving strong cash flow conversion effective working capital management enable company undertake strategic actions benefit business including capital expenditures strategic acquisitions returning cash shareholders • increasing sales penetration expanding localized footprint high growth regions including china india eastern europe middle east latin america • aligning prioritizing investments longterm growth considering shortterm demand volatility • monitoring suppliers customers signs liquidity constraints limiting exposure resulting inability meet delivery commitments pay amounts due identifying alternate sources supply necessary • controlling corporate nonoperating costs including costs incurred asbestos environmental matters pension postretirement expenses tax expense review business segments reconciliation segment profit consolidated income continuing operations taxes follows 1 equity income loss affiliated companies included segment profit 2 amounts included cost products services sold selling general administrative expenses aerospace overview aerospace leading global supplier aircraft engines avionics related products services aircraft manufacturers airlines aircraft operators military services defense space contractors aerospace products services include auxiliary power units propulsion engines environmental control systems electric power systems engine controls flight safety communications navigation radar surveillance systems aircraft lighting management technical services logistics services advanced systems instruments aircraft wheels brakes repair overhaul services aerospace sells products original equipment oe manufacturers air transport regional business general aviation aircraft segments provides spare parts repair maintenance services aftermarket principally aircraft operators united states government major customer defense space products economic factors aerospace operating results principally impacted • new aircraft production rates delivery schedules set commercial air transport regional jet business general aviation oe manufacturers well airline profitability platform mix retirement aircraft service • global demand commercial air travel reflected global flying hours utilization rates corporate general aviation aircraft well demand spare parts maintenance repair services aircraft currently use • level mix us foreign government appropriations defense space programs military activity • changes customer platform development schedules requirements demands new technologies • availability price variability raw materials nickel titanium metals • international regulation affecting aircraft operating equipage aerospace sales major customer endmarkets follows 2013 compared 2012 aerospace sales flat 2013 compared 2012 primarily due favorable pricing increased volumes commercial original equipment oe business increased licensing revenue primarily due royalty gain fourth quarter offset decreased volumes defense space commercial aftermarket businesses increase payments due business general aviation air transport regional oe manufacturers partially offset preproduction costs associated new aircraft platforms oem payments details regarding changes sales customer endmarkets follows commercial original equipment oe sales increased 3 percent 2013 compared 2012 • air transport regional oe sales increased 7 percent 2013 driven higher air transport volumes consistent oe manufacturers’ oem higher production rates partially offset lower regional jet sales • business general aviation oe sales decreased 3 percent 2013 driven increase oem payments business general aviation customers partially offset strong demand business jet mid large cabin segment commercial aftermarket sales increased 2 percent 2013 compared 2012 • air transport regional aftermarket sales flat 2013 primarily due higher repair overhaul activities related utilization offset lower spares volumes • business general aviation aftermarket sales increased 6 percent 2013 primarily due higher sales retrofit modifications upgrades partially offset fewer repair overhaul activities defense space sales decreased 5 percent 2013 primarily due us government program ramp downs lower defense budget partially offset royalty gain fourth quarter aerospace segment profit increased 4 percent 2013 compared 2012 primarily due increase operational segment profit driven commercial sales growth discussed including favorable pricing productivity net inflation partially offset lower defense space sales discussed segment margin impact factors flat reflects net effect royalty gain fourth quarter offset unfavorable impact increase oem payments cost products services sold totaled 88 billion 2013 decrease approximately 101 million 2012 primarily result factors discussed excluding price 2012 compared 2011 aerospace sales increased 5 percent 2012 compared 2011 primarily due increase organic growth 3 percent primarily due increased commercial sales volume 1 percent increase acquisitions net divestitures 1 percent increase revenue related 88 million reduction payments business general aviation oe manufacturers partially offset preproduction costs associated new aircraft platforms oem payments details regarding changes sales customer endmarkets follows commercial original equipment oe sales increased 19 percent 12 percent organic 2012 compared 2011 • air transport regional oe sales increased 11 percent 11 percent organic 2012 primarily driven higher sales oe customers consistent higher production rates favorable platform mix • business general aviation oe sales increased 34 percent 15 percent organic 2012 driven strong demand business jet endmarket favorable platform mix growth acquisitions favorable 12 percent impact oem payments discussed commercial aftermarket sales increased 8 percent 2012 compared 2011 • air transport regional aftermarket sales increased 4 percent 2012 primarily due increased sales spare parts higher maintenance activity driven approximate 2 percent increase global flying hours 2012 increased sales avionics upgrades changes customer buying patterns relating maintenance activity first half 2012 • business general aviation aftermarket sales increased 17 percent 2012 primarily due increased sales spare parts revenue associated maintenance service agreements higher penetration retrofit modifications upgrades defense space sales decreased 3 percent negative 4 percent organic 2012 primarily due anticipated program ramp downs partially offset higher international aftermarket sales growth acquisitions net divestitures aerospace segment profit increased 13 percent 2012 compared 2011 primarily due increase operational segment profit 8 percent 4 percent favorable impact lower oem payments discussed 1 percent increase acquisitions net divestitures increase operational segment profit due favorable impact higher price productivity net inflation commercial demand partially offset increased research development engineering investments cost products services sold totaled 90 billion 2012 increase approximately 324 million 2011 primarily result factors discussed excluding price 2014 areas focus aerospace’s primary areas focus 2014 include • global pursuit new commercial defense space programs • driving customer satisfaction operational excellence product quality cycle time reduction supplier management • aligning research development customer support costs customer requirements demand new platforms high marketplace appeal • expanding sales operations international locations • focusing cost structure initiatives maintain profitability face economic uncertainty potential defense space budget reductions program specific appropriations • continuing design equipment enhances safety performance durability aerospace defense equipment reducing weight operating costs • continued deployment optimization common enterprise resource planning erp system automation control solutions acs overview acs provides innovative products solutions make homes buildings industrial sites infrastructure efficient safe comfortable acs products services include controls displays heating cooling indoor air quality ventilation humidification combustion lighting home automation advanced software applications homebuilding control optimization sensors switches control systems instruments measuring pressure air flow temperature electrical current security fire gas detection personal protection equipment access control video surveillance remote patient monitoring systems products automatic identification data collection installation maintenance upgrades systems keep buildings safe comfortable productive automation control solutions industrial plants including field instruments advanced software automation systems integrate control monitor complex processes many types industrial settings well equipment controls measures analyzes natural gas production transportation economic factors acs’s operating results principally impacted • economic conditions growth rates developed north america europe australia high growth regions • industrial production global commercial construction including retrofits upgrades • demand residential security environmental control retrofits upgrades energy efficient products solutions • government public sector spending • strength global capital operating spending process including petrochemical refining building automation • inventory levels distribution channels • changes energy fire security health care safety environmental concerns regulations automation control solutions 2013 compared 2012 automation control solutions “acs” sales increased 4 percent 2013 compared 2012 primarily due organic sales growth acquisitions • sales energy safety security businesses increased 8 percent 3 percent organic 2013 principally due positive impact acquisitions ii increases sales volumes environmental combustion control security businesses driven improved us residential market conditions new product introductions iii higher sales volumes fire systems sensors safety products second half partially offset decreases sales volumes sensing control products first half 2013 scanning mobility products primarily result continued softness us end markets • sales process solutions business flat increased 1 percent organic 2013 principally due decreased volume reflecting completion several large projects expected offset service software solutions volume growth • sales building solutions distribution increased 1 percent 2013 principally due increased sales volumes americas distribution business due improved us residential market conditions partially offset continued softness us energy retrofit business acs segment profit increased 9 percent 2013 compared 2012 due 8 percent increase operational segment profit 1 percent increase acquisitions increase operational segment profit primarily result positive impact price productivity net inflation investment growth higher sales volumes discussed cost products services sold totaled 109 billion 2013 increase 300 million primarily due acquisitions inflation higher sales volume partially offset favorable impact productivity foreign exchange 2012 compared 2011 acs sales increased 2 percent 2012 compared 2011 primarily due 3 percent increase organic revenue driven increased sales volume 1 percent growth acquisitions net divestitures partially offset unfavorable impact foreign exchange • sales energy safety security businesses increased 2 percent 1 percent organic 2012 principally due positive impact acquisitions significantly ems technologies inc king’s safetywear limited net divestitures ii higher sales volumes due contract wins new product introductions scanning mobility business iii higher sales volumes due improved us residential market conditions new product introductions security business partially offset unfavorable impact foreign exchange ii lower sales volume europe iii decreases sales volumes personal protective equipment sensing control products primarily result softness industrial end markets • sales process solutions business increased 3 percent 6 percent organic 2012 principally due increased conversion sales backlog partially offset unfavorable impact foreign exchange project orders decreased second half 2012 compared corresponding period 2011 primarily driven extension project timing customers higher typical project orders fourth quarter 2011 • sales building solutions distribution businesses increased 3 percent 4 percent organic 2012 principally due growth building solutions business reflecting conversion sales backlog increased sales volume americas distribution business due improved us residential market conditions partially offset unfavorable impact foreign exchange softness energy retrofit business project orders decreased fourth quarter 2012 principally due extension project timing customers softness energy retrofit business acs segment profit increased 7 percent 2012 compared 2011 due 8 percent increase operational segment profit 1 percent increase acquisitions net divestitures partially offset 2 percent unfavorable impact foreign exchange increase operational segment profit primarily result positive impact price productivity net inflation cost products services sold totaled 106 billion 2012 increase 212 million primarily due higher sales inflation acquisitions net divestitures partially offset favorable impact foreign exchange productivity 2014 areas focus acs’s primary areas focus 2014 include • extending technology leadership continued investment new product development introductions deliver energy efficiency lowest total installed cost integrated solutions • defending extending installed base customer productivity globalization channel optimization service penetration • sustaining strong brand recognition brand channel management • continuing identify execute integrate acquisitions adjacent markets serve • continuing establish grow presence capability high growth regions • continued deployment optimization common erp system • continued deployment maturation hos • continued proactive cost actions successful execution repositioning actions performance materials technologies pmt overview performance materials technologies develops manufactures highpurity highquality highperformance chemicals materials applications refining petrochemical automotive healthcare agricultural packaging refrigeration appliance housing semiconductor wax adhesives segments performance materials technologies includes uop provides process technology products including catalysts adsorbents services petroleum refining gas processing petrochemical renewable energy industries performance materials technologies also includes advanced materials provides products including fluorocarbons hydrofluoroolefins caprolactam resins ammonium sulfate fertilizer phenol specialty films waxes additives advanced fibers customized research chemicals intermediates electronic materials chemicals catalysts adsorbents economic factors performance materials technologies operating results principally impacted • level timing capital spending capacity utilization rates refining petrochemical end markets • pricing volatility industry supply conditions raw materials cumene fluorspar r240 natural gas perchloroethylene sulfur ethylene • impact environmental energy efficiency regulations • global supply conditions demand nonozone depleting low global warming refrigerants blowing agents • global supply conditions demand caprolactam nylon resin ammonium sulfate • condition us residential housing nonresidential industries automotive demand • extent change order rates global semiconductor customers • demand new products including renewable energy biofuels low global warming products insulation refrigeration additives enhanced nylon resin performance materials technologies 2013 compared 2012 pmt sales increased 9 percent 2013 compared 2012 due 8 percent growth acquisitions 1 percent increase organic sales • uop sales increased 31 percent 9 percent organic 2013 compared 2012 primarily driven favorable impact acquisitions ii higher volume petrochemical catalysts iii increased revenue gas processing iv increased equipment revenue first half 2013 partially offset decreased service revenues related scheduled project completions lower licensing revenues • advanced materials sales decreased 3 percent 2013 compared 2012 primarily driven lower flourine products volume due unfavorable impact unseasonably cool weather refrigerant volume planned plant outages first half 2013 price ii soft end market conditions electronic materials iii lower production volume resins chemicals pmt segment profit increased 10 percent 2013 compared 2012 due 7 percent increase acquisitions 3 percent increase operational segment profit increase operational segment profit primarily due higher uop sales volume positive impact price productivity net inflation investment growth cost products services sold totaled 49 billion 2013 increase 408 million primarily due acquisitions inflation higher volume partially offset productivity company completed upgrades metropolis works nuclear conversion facility fluorine products facility required us nuclear regulatory commission nrc since second quarter 2012 production metropolis facility suspended operations recommenced july 2013 final review approval nrc 2012 compared 2011 pmt sales increased 9 percent 2012 compared 2011 due 6 percent growth acquisitions 4 percent increase organic growth partially offset 1 percent unfavorable impact foreign exchange • uop sales increased 17 percent 12 percent organic 2012 compared 2011 primarily driven increased equipment licensing revenues higher volume petrochemical refining catalysts first nine months reflecting continued strength refining petrochemical industries ii favorable impact acquisitions partially offset lower service revenue related scheduled project completions • advanced materials sales increased 5 percent flat organic 2012 compared 2011 primarily driven increase resins chemicals sales primarily due phenol plant acquisition offset lower sales fluorine products primarily due unfavorable pricing reflecting challenging global end market conditions unfavorable impact foreign exchange pmt segment profit increased 11 percent 2012 compared 2011 due 9 percent increase operational segment profit net 10 percent decrease fourth quarter due factors described 3 percent increase acquisitions partially offset unfavorable impact 1 percent foreign exchange increase operational segment profit primarily due higher licensing catalyst equipment revenues uop productivity net continued investment growth initiatives partially offset unfavorable pricing fluorine products resins chemicals reflecting challenging global end market conditions cost products services sold totaled 45 billion 2012 increase 381 million primarily due acquisitions higher volume continued investment growth initiatives partially offset productivity favorable impact foreign exchange 2014 areas focus performance materials technologies primary areas focus 2014 include • continuing develop new processes products technologies address energy efficiency environment security well position portfolio higher value • commercializing new products technologies petrochemical gas processing refining industries fluorochemicals renewable energy sector • investing increase plant capacity reliability service backlog improve productivity quality operational excellence • driving sales marketing excellence expanding local presence high growth regions • managing exposure raw material price supply fluctuations evaluation alternative sources supply contractual arrangements • secure longterm contracts lowglobal warming products transportation systems overview transportation systems provides automotive products improve performance efficiency cars trucks vehicles stateoftheart technologies world class brands global solutions customers’ needs transportation systems’ products include turbochargers thermal systems friction materials bendixr juridr brake hard parts transportation systems sells products original equipment “oe” automotive truck manufacturers eg bmw caterpillar daimler renault ford volkswagen wholesalers distributors retail aftermarket economic factors transportation systems operating results principally impacted • financial strength stability automotive oe manufacturers • global demand automobile truck production • turbo penetration rates new engine platforms • global consumer preferences particularly western europe boosted diesel passenger cars • degree volatility raw material prices including nickel steel • new automobile production rates impact inventory levels automotive oe manufacturers demand products • regulations mandating lower emissions improved fuel economy • consumers’ ability obtain financing new vehicle purchases • impact factors consumer confidence automotive aftermarket demand transportation systems 2013 compared 2012 transportation systems sales increased 5 percent 2013 compared 2012 primarily due increase organic sales driven continued strong growth new platform launches higher global turbo gas penetration transportation systems segment profit increased 15 percent 2013 compared 2012 due 14 percent increase operational segment profit 1 percent favorable impact foreign exchange increase operational segment profit primarily due increased productivity significantly positive impacts material productivity turbo technologies ongoing projects drive operational improvement friction materials business partially offset unfavorable pricing cost products services sold totaled 30 billion 2013 increase 127 million primarily result increased volume partially offset increased productivity january 2014 company entered definitive agreement sell friction materials business unit federal mogul corporation approximately 155 million see note 2 acquisitions divestitures details 2012 compared 2011 transportation systems sales decreased 8 percent 2012 compared 2011 primarily due unfavorable impact foreign exchange 5 percent decrease organic sales 3 percent lower sales primarily driven decreased light vehicle production europe lower aftermarket sales partially offset new platform launches including higher turbo gas penetration north america transportation systems segment profit decreased 11 percent 2012 compared 2011 due 7 percent unfavorable impact foreign exchange 4 percent decrease operational segment profit decrease operational segment profit primarily due decreased volume unfavorable pricing substantially offset productivity net impact ongoing projects drive operational improvement friction materials business net inflation cost products services sold totaled 29 billion 2012 decrease 235 million primarily result foreign exchange decreased volume increased productivity 2014 areas focus transportation systems primary areas focus 2014 include • sustaining superior turbocharger technology successful platform launches • maintaining high quality current products executing new product introductions • increasing global penetration share diesel gasoline turbocharger oem demand • reducing manufacturing costs increasing plant productivity improving global manufacturing footprint • aligning cost structure current economic outlook successful execution repositioning actions • aligning development efforts costs new turbo platform launch schedules repositioning charges see note 3 repositioning charges notes financial statements discussion repositioning charges incurred 2013 2012 2011 repositioning actions expected generate incremental pretax savings approximately 150 million 2014 compared 2013 principally planned workforce reductions cash expenditures severance exit costs necessary execute repositioning actions 160 136 159 million 2013 2012 2011 respectively expenditures severance exit costs funded operating cash flows cash expenditures severance costs necessary execute remaining actions expected approximately 175 million 2014 funded operating cash flows following tables provide details pretax impact total net repositioning charges segment liquidity capital resources company continues manage businesses maximize operating cash flows primary source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines shortterm debt commercial paper market longterm borrowings access public debt equity markets well ability sell trade accounts receivables continue balance cash financing uses investment existing core businesses acquisition activity share repurchases dividends cash flow summary cash flows operating investing financing activities reflected consolidated statement cash flows years ended 2013 2012 2011 summarized follows 2013 compared 2012 cash provided operating activities increased 818 million 2013 compared 2012 primarily due reduced cash contributions pension plans 883 million ii 447 million increase net income noncash pension marktomarket adjustment iii 135 million favorable impact working capital driven improved accounts payable performance inventory partially offset higher receivables primarily due sales growth timing sales partially offset higher cash tax payments approximately 352 million 260 million increase net payments repositioning charges significantly narco trust establishment payments 164 million cash used investing activities increased 531 million 2013 compared 2012 primarily due increase cash paid acquisitions 695 million significantly intermec rae partially offset increase approximately 190 million settlement receipts foreign currency exchange contracts used economic hedges certain nonfunctional currency denominated monetary assets liabilities cash used financing activities decreased 773 million 2013 compared 2012 primarily due increase net proceeds debt issuances 1462 million partially offset increase net repurchases common stock 651 million increase cash dividends paid 142 million 2012 compared 2011 cash provided operating activities increased 684 million 2012 compared 2011 primarily due reduced cash contributions pension plans 706 million 342 million increase net income noncash pension marktomarket adjustment partially offset higher cash tax payments approximately 340 million cash used investing activities increased 817 million 2012 compared 2011 primarily due decrease proceeds sales businesses 1135 million significantly divestiture consumer products group business automotive onboard sensor products business within automation control solutions segment 2011 ii net 117 million increase investments primarily shortterm marketable securities iii increase expenditures property plant equipment 86 million partially offset decrease cash paid acquisitions 535 million cash used financing activities increased 92 million 2012 compared 2011 primarily due decrease net proceeds debt issuances 825 million increase dividends paid 120 million partially offset decrease 806 million net repurchases common stock decrease 33 million payment debt assumed acquisitions liquidity businesses focused implementing strategies increase operating cash flows revenue growth margin expansion improved working capital turnover considering current economic environment businesses operate business plans strategies including focus growth cost reduction productivity initiatives company believes cash balances operating cash flows principal source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines shortterm debt commercial paper markets longterm borrowings access public debt equity markets well ability sell trade accounts receivables december 31 2013 substantial portion company’s cash equivalents held foreign subsidiaries amounts held outside us repatriated current law would subject us federal income taxes less applicable foreign tax credits however intent permanently reinvest funds outside us practicable estimate amount tax might payable earnings repatriated amount foreign tax credits would available reduce eliminate resulting us income tax liability monitor thirdparty depository institutions hold cash equivalents daily basis emphasis primarily safety principal secondarily maximizing yield funds diversify cash equivalents among counterparties minimize exposure one entities global economic conditions tightening credit markets could adversely affect customers’ suppliers’ ability obtain financing particularly longcycle businesses airline automotive refiningpetrochemical end markets customer supplier bankruptcies delays ability obtain financing unavailability financing could adversely affect cash flow results operations date experienced material impacts customer supplier bankruptcy liquidity issues continue monitor take measures limit exposure source liquidity ability issue shortterm debt commercial paper market commercial paper notes sold discount maturity 365 days date issuance borrowings commercial paper program available general corporate purposes well financing acquisitions 1299 million commercial paper outstanding december 31 2013 ability access commercial paper market related cost borrowings affected strength credit rating market conditions credit ratings periodically reviewed major independent debtrating agencies december 31 2013 standard poor’s sp fitch moody’s ratings longterm debt a2 respectively shortterm debt a1 p1 respectively sp fitch moody’s honeywell’s rating outlook “stable” date company experienced limitations ability access sources liquidity also current shelf registration statement filed securities exchange commission may issue additional debt securities common stock preferred stock may offered one offerings terms determined time offering net proceeds offering would used general corporate purposes including repayment existing indebtedness capital expenditures acquisitions source liquidity sell interests designated pools trade accounts receivables third parties december 31 2013 2012 none receivables designated pools sold third parties sell receivables overcollateralized retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools terms trade accounts receivable program permit repurchase receivables third parties discretion providing us additional source revolving credit result program receivables remain company’s balance sheet corresponding amount recorded shortterm borrowings march 2013 company repaid 600 million 425 percent notes november 2013 company issued 300 million 335 percent senior notes due 2023 700 million floating rate senior notes due 2015 collectively “notes” notes senior unsecured unsubordinated obligations honeywell rank equally honeywell’s existing future senior unsecured debt senior honeywell’s subordinated debt offering resulted gross proceeds 1 billion offset 7 million discount closing costs related offering december 10 2013 company entered 4 billion amended restated five year credit agreement “credit agreement” syndicate banks commitments credit agreement increased pursuant terms credit agreement aggregate amount exceed 45 billion credit agreement contains 700 million sublimit issuance letters credit agreement maintained general corporate purposes amends restates previous 3 billion five year credit agreement dated april 2 2012 “prior agreement” borrowings credit agreement prior agreement 2013 company repurchased 1073 million outstanding shares offset dilutive impact employee stock based compensation plans including option exercises restricted unit vesting matching contributions savings plans see part ii item 5 share repurchases fourth quarter 2013 december 2013 board directors authorized repurchase total 5 billion honeywell common stock june 3 2013 company acquired rae global manufacturer fixed portable gas radiation detection systems software aggregate value net cash acquired 338 million acquisition funded available cash see acquisitions note 2 financial statements discussion september 17 2013 company acquired 100 percent issued outstanding shares intermec leading provider mobile computing radio frequency identification solutions bar code label receipt printers use warehousing supply chain field service manufacturing environments intermec us public company operated globally reported 2012 revenues 790 million aggregate value net cash acquired 607 million acquisition funded issuance commercial paper see acquisitions note 2 financial statements discussion january 2014 company entered definitive agreement sell friction materials business federal mogul corporation approximately 155 million transaction subject required regulatory approvals applicable information consultation requirements expected close second half 2014 see divestitures note 2 financial statements discussion 2013 required make contributions us pension plans 2013 cash contributions 156 million made nonus plans satisfy regulatory funding standards narco plan reorganization went effect april 30 2013 company made narco trust establishment payments 164 million see asbestos matters note 22 financial statements discussion possible funding obligations 2014 related narco trust addition normal operating cash requirements principal future cash requirements fund capital expenditures dividends strategic acquisitions share repurchases employee benefit obligations environmental remediation costs asbestos claims severance exit costs related repositioning actions debt repayments specifically expect primary cash requirements 2014 follows • capital expenditureswe expect spend approximately 12 billion capital expenditures 2014 primarily growth production capacity expansion cost reduction maintenance replacement • share repurchasesunder company’s share repurchase program 5 billion available december 31 2013 additional share repurchases honeywell presently expects repurchase outstanding shares time offset dilutive impact employee stockbased compensation plans including future option exercises restricted unit vesting matching contributions savings plans amount timing future repurchases may vary depending market conditions level operating financing investing activities • dividendswe increased dividend rate 10 percent 45 per share common stock effective fourth quarter 2013 dividend company intends continue pay quarterly dividends 2014 • asbestos claimswe expect cash spending asbestos claims cash receipts related insurance recoveries approximately 459 76 million respectively 2014 see asbestos matters note 22 financial statements discussion possible funding obligations 2014 related narco trust • pension contributionsin 2014 required make contributions us pension plans plan make contributions cash andor marketable securities approximately 150 million 117 million marketable securities contributed january 2014 nonus plans satisfy regulatory funding standards timing amount contributions us nonus plans may impacted number factors including funded status plans • repositioning actionswe expect cash spending severance exit costs necessary execute repositioning actions approximate 175 million 2014 • environmental remediation costswe expect spend approximately 300 million 2014 remedial response voluntary cleanup costs see environmental matters note 22 financial statements additional information continuously assess relative strength business portfolio strategic fit market position profit cash flow contribution order upgrade combined portfolio identify business units benefit increased investment identify acquisition candidates strategic plan strengthen existing core businesses also identify businesses fit longterm strategic plan based market position relative profitability growth potential businesses considered potential divestiture restructuring repositioning actions subject regulatory constraints 2013 2012 realized 3 21 million respectively cash proceeds sales nonstrategic businesses based past performance current expectations believe operating cash flows sufficient meet future operating cash needs available cash committed credit lines access public debt equity markets well ability sell trade accounts receivables provide additional sources shortterm longterm liquidity fund current operations debt maturities future investment opportunities contractual obligations probable liability payments following summary significant contractual obligations probable liability payments december 31 2013 1 assumes longterm debt outstanding scheduled maturity 2 purchase obligations entered various vendors normal course business consistent expected requirements 3 payment amounts table reflect environmental liabilities probable reasonably estimable december 31 2013 see environmental matters note 22 commitments contingencies notes financial statements additional information 4 amounts estimates asbestos related cash payments narco bendix based asbestos related liabilities probable reasonably estimable december 31 2013 accrued estimated value future narco asbestos related claims expected asserted narco trust 2018 light uncertainties inherent making longterm projections connection initial operation 524g trust well stay narco asbestos claims january 2002 april 2013 narco plan reorganization became fully effective believe reasonable basis estimating narco asbestos claims beyond 2018 projecting future events subject many uncertainties could cause asbestos liabilities higher lower projected recorded see asbestos matters note 22 commitments contingencies notes financial statements additional information 5 amounts represent insurance recoveries deemed probable asbestos related liabilities december 31 2013 timing insurance recoveries impacted terms insurance settlement agreements well documentation review collection process required collect insurance claims probable insurance recoveries subject definitive settlement agreements specified payment dates instead covered insurance policies assumed collection occur beyond 2018 projecting timing insurance recoveries subject many uncertainties could cause amounts collected higher lower projected recorded could cause timing collections earlier later projected reevaluate projections concerning insurance recoveries light changes developments would impact recoveries timing thereof see asbestos matters note 22 commitments contingencies notes financial statements additional information 6 table excludes tax effects well 729 million uncertain tax positions see note 6 income taxes notes financial statements additional information table also excludes pension postretirement benefits opeb obligations 2014 required make contributions us pension plans however plan make contributions cash andor marketable securities approximately 150 million 117 million marketable securities contributed january 2014 nonus plans satisfy regulatory funding standards timing amount contributions us nonus plans may impacted number factors including funded status plans beyond 2014 actual amounts required contributed dependent upon among things interest rates underlying asset returns impact legislative regulatory actions related pension funding obligations payments due opeb plans required funded advance paid medical costs incurred covered retiree populations principally dependent upon future cost retiree medical benefits plans expect opeb payments approximate 130 million 2014 net benefit approximately 11 million medicare prescription subsidy see note 23 financial statements discussion pension opeb plans noncontrolling interest shareholder uop russell llc formerly thomas russell co one subsidiaries put rights may exercised causing us purchase equity interests beginning january 1 2016 december 31 2016 interest subject certain call rights company amount paid based operating income performance 2013 2015 actual settlement amount may different therefore excluded table offbalance sheet arrangements following summary offbalance sheet arrangements guaranteeswe issued party following direct indirect guarantees december 31 2013 expect guarantees material adverse effect consolidated results operations financial position liquidity connection disposition certain businesses facilities indemnified purchasers expected cost remediation environmental contamination existing date disposition expected costs accrued environmental assessments made remedial efforts probable costs reasonably estimated environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous substances accordance environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing hazardous substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually jointly potentially responsible parties determine feasibility various remedial techniques address environmental matters policy see note 1 financial statements record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects execution timeframe projects remedial techniques utilized agreements parties remedial response voluntary cleanup costs charged pretax earnings 272 234 240 million 2013 2012 2011 respectively december 31 2013 2012 recorded liabilities environmental matters 643 654 million respectively addition 2013 2012 incurred operating costs ongoing businesses approximately 88 84 million respectively relating compliance environmental regulations remedial response voluntary cleanup payments 304 320 270 million 2013 2012 2011 respectively currently estimated approximately 300 million 2014 expect fund expenditures operating cash flow although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position see note 22 commitments contingencies notes financial statements discussion commitments contingencies including related environmental matters toxic tort litigation financial instruments result global operating financing activities exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position minimize risks interest foreign currency exchange rate commodity price fluctuations normal operating financing activities deemed appropriate use derivative financial instruments use derivative financial instruments trading speculative purposes use leveraged derivative financial instruments summary accounting policies derivative financial instruments included note 1 summary significant accounting policies notes financial statements also hold investments marketable equity securities exposes us market volatility discussed note 16 financial instruments fair value measures notes financial statements conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities anticipated transactions arising international trade objective preserve economic value nonfunctional currency cash flows attempt hedge transaction exposures natural offsets fullest extent possible opportunities exhausted foreign currency forward option agreements third parties principal currency exposures relate us dollar euro canadian dollar british pound mexican peso indian rupee chinese renminbi czech koruna hong kong dollar korean singapore dollar swiss franc united arab emirates dirham swedish krona thai baht romanian leu exposure market risk changes interest rates relates primarily net debt pension obligations described note 14 longterm debt credit agreements note 16 financial instruments fair value measures notes financial statements issue fixed variable rate debt use interest rate swaps manage exposure interest rate movements reduce overall borrowing costs financial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest foreign currency exchange rates commodity prices manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value expected future cash flows derivative financial instruments considering reasonably possible changes interest currency exchange rates restrict use derivative financial instruments hedging activities following table illustrates potential change fair value interest rate sensitive instruments based hypothetical immediate onepercentagepoint increase interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 percent weakening us dollar versus local currency exchange rates across maturities potential change fair value contracts hedging commodity purchases based 20 percent decrease price underlying commodity across maturities december 31 2013 2012 1 asset liability 2 hypothetical immediate one percentage point decrease interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 percent strengthening us dollar versus local currency exchange rates across maturities potential change fair value contracts hedging commodity purchases based 20 percent increase price underlying commodity across maturities result change fair value equal inverse amount disclosed table 3 changes fair value foreign currency exchange contracts offset changes fair value cash flows underlying hedged foreign currency transactions 4 changes fair value forward commodity contracts offset changes cash flows underlying hedged commodity transactions discussion procedures monitor market risk estimated changes fair value resulting sensitivity analyses forwardlooking statements market risk assuming certain adverse market conditions occur actual results future may differ materially estimated results due actual developments global financial markets methods used us assess mitigate risk discussed considered projections future events critical accounting policies preparation consolidated financial statements accordance generally accepted accounting principles based selection application accounting policies require us make significant estimates assumptions effects matters inherently uncertain consider accounting policies discussed critical understanding financial statements actual results could differ estimates assumptions differences could material consolidated financial statements discussed selection application disclosure critical accounting policies audit committee board directors independent registered public accountants new accounting standards effective 2013 material impact consolidated financial statements described recent accounting pronouncements section note 1 summary significant accounting policies notes financial statements contingent liabilitieswe subject number lawsuits investigations claims involve substantial dollar amounts arise conduct global business operations previously owned entities including matters relating commercial transactions government contracts product liability including asbestos prior acquisitions divestitures employee benefit plans intellectual property environmental health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes contingencies well potential amounts ranges probable losses recognize liability contingencies based careful analysis matter assistance outside legal counsel applicable experts analysis includes making judgments concerning matters costs associated environmental matters outcome negotiations number cost pending future asbestos claims impact evidentiary requirements contingencies resolved long periods time liabilities may change future due new developments including new discovery facts changes legislation outcomes similar cases judicial system changes assumptions changes settlement strategy discussion contingencies related environmental asbestos matters including management’s judgment applied recognition measurement specific liabilities see notes 1 summary significant accounting policies 22 commitments contingencies notes financial statements asbestos related contingencies insurance recoverieswe defendant personal injury actions related products containing asbestos refractory friction products recognize liability asbestos related contingency probable occurrence reasonably estimable regarding north american refractories company narco asbestos related claims accrued pending claims based terms conditions agreements narco former parent company certain asbestos claimants estimate unsettled claims pending time narco filed bankruptcy protection also accrued estimated value future narco asbestos related claims expected asserted narco trust 2018 described note 22 commitments contingencies notes financial statements light inherent uncertainties making long term projections connection initial operation 524g trust well stay narco asbestos claims january 2002 effective date narco trust april 30 2013 believe reasonable basis estimating narco asbestos claims beyond 2018 regarding bendix asbestos related claims accrued estimated value pending claims using average resolution values previous five years also accrued estimated value future anticipated claims related bendix next five years based historic claims filing experience dismissal rates disease classifications average resolution values tort system previous five years light uncertainties inherent making longterm projections well certain factors unique friction product asbestos claims believe reasonable basis estimating asbestos claims beyond next five years continue update resolution values used estimate cost pending future bendix claims fourth quarter year additional information see note 22 commitments contingencies notes financial statements continually assess likelihood adverse judgments outcomes contingencies well potential ranges probable losses recognize liability contingencies based analysis individual issue assistance outside legal counsel applicable experts connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical dealings knowledge pertinent solvency issues surrounding insurers insurance domestic insurance market london excess market substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries projecting future events subject various uncertainties could cause insurance recovery asbestos related liabilities higher lower projected recorded given inherent uncertainty making future projections reevaluate projections concerning probable insurance recoveries light changes projected liability recovery experience relevant factors may impact future insurance recoveries see note 22 commitments contingencies notes financial statements discussion management’s judgments applied recognition measurement insurance recoveries asbestos related liabilities defined benefit pension planswe sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees recognize net actuarial gains losses excess 10 percent greater fair value plan assets plans’ projected benefit obligation corridor annually fourth quarter year mtm adjustment applicable quarter interim remeasurement triggered net actuarial gains losses occur actual experience differs various assumptions used value pension plans assumptions change may year primary factors contributing actuarial gains losses changes discount rate used value pension obligations measurement date year difference expected actual returns plan assets accounting method results potential volatile difficult forecast mtm adjustments mtm charges 51 957 1802 million 2013 2012 2011 respectively remaining components pension incomeexpense primarily service interest costs assumed return plan assets recorded quarterly basis pension ongoing income expense financial reporting purposes net periodic pension incomeexpense calculated based upon number actuarial assumptions including discount rate plan obligations expected longterm rate return plan assets determine expected longterm rate return plan assets utilizing historical plan asset returns varying longterm periods combined expectations future market conditions asset mix considerations see note 23 pension postretirement benefits notes financial statements details actual various asset classes targeted asset allocation percentages pension plans discount rate reflects market rate december 31 measurement date highquality fixedincome investments maturities corresponding benefit obligations subject change year information significant actuarial assumptions included note 23 pension postretirement benefits notes financial statements key assumptions used developing 2013 2012 2011 net periodic pension expense us plans included following discount rate volatile year determined based upon prevailing interest rates measurement date use 489 percent discount rate 2014 reflecting increase market interest rate environment since december 31 2012 plan continue use expected rate return plan assets 775 percent 2014 longterm rate based historical plan asset returns varying long term periods combined expectations future market conditions asset mix plan’s investments addition potential mtm adjustments changes expected rate return plan assets discount rate resulting economic events also affects future pension ongoing income expense following table highlights sensitivity us pension obligations ongoing income expense changes assumptions assuming assumptions remain constant estimates exclude potential mtm adjustment pension ongoing income pension plans expected approximately 230 million 2014 compared pension ongoing income 90 million 2013 increase pension ongoing income 2014 compared 2013 results primarily increase plans’ assets december 31 2013 compared december 31 2012 mainly due strong asset returns 2013 also required mtm adjustment recorded fourth quarter 2014 accordance pension accounting method previously described difficult reliably forecast predict whether mtm adjustment 2014 one required magnitude adjustment mtm adjustments primarily driven events circumstances beyond control company changes interest rates performance financial markets 2013 2012 2011 required make contributions satisfy minimum statutory funding requirements us pension plans make contribution us plans 2013 however made voluntary contributions 792 1650 million us pension plans 2012 2011 respectively primarily improve funded status plans adversely impacted relatively low discount rates asset losses 2011 2008 resulting poor performance equity markets 2014 required make contributions us pension plans plan make contributions cash andor marketable securities approximately 150 million 117 million marketable securities contributed january 2014 nonus plans satisfy regulatory funding standards timing amount contributions us non us plans may impacted number factors including funded status plans longlived assets including tangible finitelived intangible assetsto conduct global business operations execute business strategy acquire tangible intangible assets including property plant equipment finitelived intangible assets december 31 2013 net carrying amount longlived assets totaled approximately 71 billion determination useful lives depreciationamortization purposes whether assets impaired involves use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions evaluate recoverability carrying amount longlived assets whenever events changes circumstances indicate carrying amount longlived asset group may fully recoverable principal factors considering perform impairment review follows • significant underperformance ie declines sales earnings cash flows business product line relation expectations • annual operating plans fiveyear strategic plans indicate unfavorable trend operating performance business product line • significant negative industry economic trends • significant changes planned changes use assets determined impairment review necessary recoverability assets measured comparing carrying amount asset grouping estimated future undiscounted cash flows carrying amount exceeds estimated future undiscounted cash flows asset grouping considered impaired impairment measured difference carrying amount asset grouping fair value endeavor utilize best information available measure fair value usually either market prices available level 1 level 2 fair value hierarchy estimate future discounted cash flow level 3 fair value hierarchy key estimates discounted cash flow analysis include expected industry growth rates assumptions volume selling prices costs discount rate selected described detail note 16 financial instruments fair value measures notes financial statements recorded impairment charges related longlived assets 72 million 2013 principally related property plant equipment 22 million 2012 principally related property plant equipment intangible assets goodwill indefinitelived intangible assets impairment testinggoodwill represents excess acquisition costs fair value net tangible assets identifiable intangible assets acquired business combination indefinitelived intangible assets primarily consist trademarks acquired business combinations goodwill indefinitelived assets amortized subject impairment testing goodwill indefinitelived intangible asset balances 130 billion 725 million respectively december 31 2013 subject impairment testing annually march 31 whenever events changes circumstances indicate carrying amount may fully recoverable testing compares carrying values fair values appropriate carrying value reduced fair value testing goodwill fair value reporting units estimated utilizing discounted cash flow approach utilizing cash flow forecasts five year strategic annual operating plans adjusted terminal value assumptions impairment test involves use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions address uncertainty perform sensitivity analysis key estimates assumptions completed annual impairment test march 31 2013 determined impairment goodwill indefinitelived intangible assets date however significant negative industry economic trends disruptions business unexpected significant changes planned changes use assets divestitures market capitalization declines may negative effect fair values future income taxesdeferred tax assets liabilities determined based difference financial statements tax basis assets liabilities using enacted tax rates effect year differences expected reverse provision income taxes based domestic international statutory income tax rates jurisdictions operate significant judgment required determining income tax provisions well deferred tax asset liability balances including estimation valuation allowances evaluation tax positions december 31 2013 recorded net deferred tax asset 1004 million comprised net deductible temporary differences net operating loss carryforwards tax credit carryforwards available reduce taxable income future periods maintain valuation allowance 614 million offset portion nonus net deferred tax asset determination amount valuation allowance provided recorded deferred tax assets involves estimates regarding 1 timing amount reversal taxable temporary differences 2 expected future taxable income 3 impact tax planning strategies valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax asset realized assessing need valuation allowance consider available positive negative evidence including past operating results projections future taxable income feasibility ongoing tax planning strategies projections future taxable income include number estimates assumptions regarding volume pricing costs additionally valuation allowances related deferred tax assets impacted changes tax laws net deferred tax asset 1004 million consists 19 million related us operations 985 million related nonus operations us net deferred tax asset 19 million consists federal state tax credit net operating loss carryforwards reduced net taxable temporary differences nonus net deferred tax asset 985 million consists principally net deductible temporary differences net operating loss capital loss tax credit carryforwards mainly canada france luxembourg netherlands united kingdom maintain valuation allowance 614 million portion nonus net deferred tax assets valuation allowance maintained deferred tax assets reflects historical experience lower expectations taxable income applicable carryforward periods fully described note 6 financial statements valuation allowance increased 16 million 2013 increased 7 million 2012 decreased 45 million 2011 event determine able realize net deferred tax assets future reduce amounts charge income period determination made conversely determine able realize net deferred tax assets excess carrying amounts decrease recorded valuation allowance credit income period determination made significant judgment required determining income tax provisions evaluating tax positions establish additional reserves income taxes despite belief tax positions fully supportable remain certain positions meet minimum recognition threshold approach evaluating certain uncertain tax positions defined authoritative guidance determines tax position likely sustained upon examination applicable taxing authority normal course business company subsidiaries examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes continually assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts give rise change estimate become known sales recognition longterm contractsin 2013 recognized approximately 16 percent total net sales using percentageofcompletion method longterm contracts automation control solutions aerospace performance materials technologies segments long term contracts measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts accounting contracts involves management judgment estimating total contract revenue cost contract revenues largely determined negotiated contract prices quantities modified assumptions regarding contract options change orders incentive award provisions associated technical performance price adjustment clauses inflation indexbased clauses contract costs incurred period time several years estimation costs requires management judgment cost estimates largely based negotiated estimated purchase contract terms historical performance trends economic projections significant factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements revenue cost estimates regularly monitored revised based changes circumstances anticipated losses longterm contracts recognized losses become evident maintain financial controls customer qualification contract pricing estimation processes reduce risk contract losses matters litigation see note 22 financial statements discussion environmental asbestos litigation matters recent accounting pronouncements see note 1 financial statements discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations dollars millions except per share amounts following management’s discussion analysis financial condition results operations intended help reader understand results operations financial condition honeywell international inc consolidated subsidiaries honeywell company three years ended december 31 2016 references notes relate notes financial statements item 8 financial statements supplementary data july 2016 company announced realignment business units comprising automation control solutions reporting segment forming two new reportable operating segments home building technologies safety productivity solutions home building technologies includes environmental energy solutions security fire building solutions distribution additionally industrial combustionthermal business previously part environmental energy solutions automation control solutions became part performance materials technologies safety productivity solutions includes sensing productivity solutions industrial safety well intelligrated business realigned segment reporting structure company four reportable operating segments aerospace home building technologies performance materials technologies safety productivity solutions company reported financial performance based realignment periods presented realignments impact company’s historical consolidated financial position results operations cash flows prior period amounts reclassified conform current period segment presentation september 16 2016 company completed sale aerospace government services business honeywell technology solutions inc assets liabilities associated honeywell technology solutions inc removed company’s consolidated balance sheet effective date sale results operations honeywell technology solutions included consolidated statement operations effective date sale october 1 2016 company completed taxfree spinoff resins chemicals business part performance materials technologies standalone publiclytraded company named advansix honeywell shareowners assets liabilities associated advansix removed company’s consolidated balance sheet effective date spinoff results operations advansix included consolidated statement operations effective date spinoff executive summary 2016 honeywell successfully navigated challenging macroeconomic environment grew net sales 2 39302 million grew earnings per share common stock assuming dilution 3 620 grew net income attributable honeywell 1 4809 million executed cost reduction activities accelerated capital deployment strategy improved growth portfolio acquisitions divestitures including divestiture honeywell technology solutions inc taxfree spinoff advansix also announced realignment business units comprising automation control solutions segment two new reportable operating segments previously mentioned company also announced leadership succession plan chief executive officer successfully executed leadership transitions three four reportable operating segments continued balanced longterm focus enhancing shareowner value without sacrificing growth investment including maintaining rd spending 5 sales new product introductions aligned global macroeconomic trends energy safety security productivity global urbanization 300 million new repositioning investments improve operations increased investment high growth regions also continued enhance software capabilities creation software center united states staff 730 fulltime product software engineers addition 11000 software engineers already part honeywell 2016 deployed capital 75 billion including following ·mergers acquisitionswe deployed 25 billion 2016 acquiring businesses integrated four operating segments acquisitions share software technology focus increase existing deep alignment enduring macro trends energy efficiency clean energy generation safety security productivity global urbanization ·dividendafter 15 dividend rate increase 2015 increased annual dividend rate 12 2016 seek continue grow dividend faster earnings marking 12th dividend increase past 11 years ·share repurchaseswe continue opportunistically repurchase shares goal generally keeping share count flat seeking offset dilutive impact employee stock based compensation savings plans 2016 repurchased 193 million shares 21 billion ·capital investment facilitieswe invested 1 billion capital expenditures focused high return investments expansion facilities manufacture solstice® low globalwarming potential refrigerant products building new production facilities make uop catalyst absorbent products honeywell also completed refinancing longterm debt issuance €4000 million senior notes february additional 4500 million senior notes october proceeds offerings senior notes used repurchase 2200 million senior notes outstanding well repay outstanding commercial paper expect refinancing activities reduce ongoing annual interest expense consolidated results operations net sales change net sales attributable following discussion net sales segment found review business segments section mda foreign currency translation impact 2016 compared 2015 principally driven weakening british pound chinese renminbi canadian dollar partially offset strengthening japanese yen us dollar foreign currency translation impact 2015 compared 2014 principally driven weakening euro canadian dollar us dollar cost products services sold cost products services sold increased 2016 compared 2015 principally due increased direct material costs approximately 380 million driven primarily acquisitions net divestitures partially offset favorable impact productivity net inflation foreign currency translation higher depreciation amortization attributable acquisitions approximately 135 million increased pension marktomarket expense allocated cost products services sold 70 million partially offset higher pension postretirement benefits income allocated cost products services sold 200 million gross margin percentage increased 2016 compared 2015 principally due higher gross margin performance materials technologies approximately 06 percentage point impact higher pension postretirement benefits income allocated cost products services sold approximately 05 percentage point impact partially offset lower gross margin aerospace home building solutions safety productivity solutions approximately 07 percentage point impact collectively increased pension marktomarket expense allocated cost products services sold approximately 02 percentage point impact cost products services sold decreased 2015 compared 2014 principally due decrease direct indirect material costs approximately 1460 million driven primarily favorable impact foreign currency translation productivity lower raw materials passthrough pricing absence friction materials business partially offset higher sales volume decrease labor costs approximately 450 million higher pension income allocated cost products services sold approximately 230 million gross margin percentage increased 2015 compared 2014 principally due higher gross margin business segments approximately 20 percentage point impact collectively increased pension income allocated cost products services sold approximately 05 percentage point impact selling general administrative expenses selling general administrative expenses sga increased 2016 compared 2015 primarily due increased labor costs driven primarily acquisitions net divestitures investment growth merit increases increased pension marktomarket expense allocated sga higher repositioning charges partially offset favorable impact foreign currency translation increased pension income allocated sga decreased 2015 compared 2014 primarily driven favorable impact foreign currency translation increased pension income allocated sga decreased indirect costs benefits repositioning partially offset increased labor costs primarily merit increases investment growth tax expense discussion changes effective tax rate see note 5 income taxes notes financial statements effective tax rates 2016 2015 2014 lower us statutory rate 35 primarily due lower tax rates nonus earnings vast majority intend permanently reinvest outside united states company currently expects effective tax rate 2017 approximately 25 effective tax rate vary quarter due unusual infrequently occurring items resolution income tax audits changes tax laws items pension marktomarket adjustments tax impact employee sharebased payments net income attributable honeywell earnings per share common stock assuming dilution increased 2016 compared 2015 primarily driven increased pension postretirement income higher segment profit home building technologies performance materials technologies gain related honeywell technology solutions inc divestiture decrease weighted average shares outstanding tax benefit adoption fasb’s accounting standard related employee sharebased payment accounting partially offset lower segment profit aerospace safety productivity solutions increased pension marktomarket expense higher repositioning charges earnings per share common stock assuming dilution increased 2015 compared 2014 primarily driven increased segment profit business segments lower pension postretirement expense partially offset increased tax expense lower income principally due absence realized gain related prior year sale marketable equity securities business overview consolidated results principally impacted · change global economic growth rates industry conditions demand key end markets · ability recently acquired businesses integrate continue operate grow accordance assumptions utilized determining acquisition purchase price · impact fluctuations foreign currency exchange rates particular euro relative us dollar · extent cost savings productivity actions able offset exceed impact material nonmaterial inflation · impact pension discount rate asset returns pension expense including marktomarket adjustments funding requirements 2017 areas focus generally applicable operating segments include · ensuring successful completion leadership transition includes chief executive officer leaders three operating segments continuing execute realignment home building technologies safety productivity solutions operating segments · driving profitable organic growth rd technological excellence deliver innovative products customers value expansion localization footprint high growth regions · executing strategy become softwareindustrial company us means products services facilitate connected plane home building factory · executing disciplined rigorous integration processes deliver growth previously announced acquisitions · expanding margins maintaining improving company’s cost structure manufacturing administrative process improvements repositioning productivity actions · controlling corporate nonoperating costs including costs incurred asbestos environmental matters pension postretirement income tax expense · increasing availability capital strong cash flow conversion effective working capital management proactively managing debt levels enable company smartly deploy capital strategic acquisitions dividends share repurchases capital expenditures review business segments aerospace 2016 compared 2015 aerospace sales decreased primarily due higher incentives original equipment manufacturers oem incentives decrease organic sales volumes honeywell technology solutions inc divestiture partially offset growth acquisitions · commercial original equipment sales decreased 13 decreased 12 organic primarily due higher oem incentives decreased demand business general aviation original equipment manufacturers oems partially offset higher shipments air transport oems consistent broader aerospace industry trends expect continuation lower business general aviation oem sales volumes · commercial aftermarket sales increased 3 increased 3 organic primarily driven higher repair overhaul activities increased spares shipments · defense space sales decreased 7 decreased 6 organic primarily due declines us space international defense programs lower us government services revenue largely attributable impact divestitures decreased demand commercial helicopter oems partially offset sales acquisitions · transportation systems sales increased 3 increased 4 organic primarily driven new platform launches higher global turbo gas penetration aerospace segment profit decreased primarily due 6 decrease operational segment profit 1 unfavorable impact foreign currency translation decrease operational segment profit primarily due product mix higher oem incentives lower sales volumes partially offset productivity price net inflation cost products services sold decreased primarily driven productivity net inflation lower sales volumes partially offset acquisitions net divestitures 2015 compared 2014 aerospace sales decreased primarily due unfavorable impact foreign currency translation friction materials divestiture partially offset increase organic sales discussed decrease oem incentives predominantly air transport regional aviation oems · commercial original equipment sales increased 11 increased 5 organic primarily driven decrease oem incentives higher business general aviation engine shipments · commercial aftermarket sales increased 2 increased 2 organic primarily driven higher repair overhaul activities partially offset lower retrofits modifications upgrades business general aviation customers · defense space sales decreased 1 flat organic primarily due lower us government revenue partially offset growth international programs · transportation systems sales decreased 19 increased 3 organic primarily due unfavorable impact foreign currency translation friction materials divestiture partially offset continued growth new platform launches higher global turbo gas penetration aerospace segment profit increased primarily due 8 increase operational segment profit 6 favorable impact acquisitions divestitures predominantly absence higher prior year oem incentives discussed partially offset 4 unfavorable impact foreign currency translation increase operational segment profit primarily driven productivity net inflation favorable pricing partially offset continued investments growth cost products services sold decreased primarily due favorable impact foreign currency translation friction materials divestiture productivity net inflation partially offset continued investments growth home building technologies 2016 compared 2015 home building technologies sales increased primarily due growth acquisitions organic sales growth partially offset unfavorable impact foreign currency translation ·sales home building products increased 27 increased 2 organic principally driven acquisitions organic sales growth primarily attributable new product introductions environmental energy solutions business volume growth security fire business ·sales home building distribution increased 5 increased 7 organic principally due organic sales growth partially offset unfavorable impact foreign currency translation organic sales growth primarily driven volume distribution building solutions energy businesses home building technologies segment profit increased due increase operational segment profit acquisitions partially offset unfavorable impact foreign currency translation increase operational segment profit primarily driven productivity net inflation price cost products services increased due acquisitions inflation partially offset favorable impact foreign currency translation 2015 compared home building technologies sales decreased primarily due unfavorable impact foreign currency translation partially offset organic sales growth ·sales home building products decreased 3 increased 3 organic principally due unfavorable impact foreign currency translation partially offset volume growth security fire business ·sales home building distribution decreased 4 increased 3 organic principally due unfavorable impact foreign currency translation organic sales growth primarily due increased sales volume distribution partially offset softness project installation us energy retrofit businesses home building technologies segment profit increased primarily due positive impact price productivity net inflation partially offset continued investment growth higher sales volumes unfavorable impact foreign currency translation cost products services sold decreased primarily due favorable impact foreign currency translation productivity partially offset higher organic sales volume performance materials technologies 2016 compared 2015 performance materials technologies sales decreased due decrease organic sales volumes unfavorable impact foreign currency translation partially offset growth acquisitions net divestitures ·uop sales decreased 17 decreased 16 organic driven primarily lower gas processing revenues due significant slowdown customer projects decreased catalyst volumes first nine months partially offset increased catalyst licensing equipment sales fourth quarter ·process solutions sales increased 16 increased 4 organic driven primarily increased volumes driven elster acquisition higher revenues projects partially offset lower field products sales ·advanced materials sales decreased 5 increased 3 organic driven primarily impact october 1 2016 spinoff advansix lower market pricing well lower raw material passthrough pricing advansix first nine months partially offset increased volumes fluorine specialty products performance materials technologies segment profit increased due acquisitions net divestitures increase operational segment profit partially offset unfavorable impact foreign currency translation increase operational segment profit primarily due productivity net inflation partially offset lower organic sales volumes continued investments growth cost products services sold decreased primarily due lower organic sales volumes favorable foreign currency translation productivity net inflation partially offset acquisitions net divestitures 2015 compared performance materials technologies sales decreased due decrease organic sales volumes unfavorable impact foreign currency translation ·uop sales decreased 7 decreased 6 organic driven primarily lower gas processing revenues due significant slowdown customer projects decreased equipment engineering licensing revenues partially offset increased catalyst revenues ·process solutions sales decreased 12 decreased 3 organic driven primarily unfavorable impact foreign currency translation lower volumes primarily due weakness projects field products ·advanced materials sales decreased 10 decreased 7 organic primarily driven lower raw material passthrough pricing unplanned plant outages resins chemicals partially offset increased volumes fluorine products performance materials technologies segment profit increased due increase operational segment profit partially offset unfavorable impact foreign currency translation increase operational segment profit primarily due price productivity net inflation partially offset lower organic sales volumes continued investments growth cost products services sold decreased primarily due favorable impacts inflation foreign currency translation lower organic sales volumes productivity partially offset continued investments growth safety productivity solutions 2016 compared 2015 safety productivity solutions sales decreased primarily due decreased sales volumes unfavorable impact foreign currency translation partially offset growth acquisitions ·sales safety decreased 3 decreased 2 organic due decreased sales volume industrial safety business lower distribution retail business unfavorable impact foreign currency translation ·sales productivity solutions decreased 1 decreased 11 organic principally due declines productivity products business partially offset growth acquisitions safety productivity solutions segment profit decreased due decrease operational segment profit unfavorable impact foreign currency translation partially offset growth acquisitions decrease operational segment profit due decreased sales volumes partially offset price productivity net inflation growth acquisitions cost products services decreased primarily due productivity net inflation decreased sales volumes favorable impact foreign currency translation partially offset growth acquisitions 2015 compared safety productivity solutions sales decreased primarily due unfavorable impact foreign currency translation partially offset acquisitions organic sales growth ·sales safety decreased 9 decreased 3 organic principally due decreased sales volumes industrial safety unfavorable impact foreign currency translation partially offset increased sales volume retail business ·sales productivity solutions increased 7 increased 8 organic principally due acquisitions increased sales volumes productivity products business partially offset unfavorable impact foreign currency translation safety productivity solutions segment profit increased due increase operational segment profit acquisitions partially offset unfavorable impact foreign currency translation increase operational segment profit due positive impact price productivity net inflation higher sales volumes partially offset continued investment growth cost products services sold decreased primarily due favorable impact foreign currency translation partially offset acquisitions higher sales volumes repositioning charges see note 3 repositioning charges notes financial statements discussion repositioning actions related charges incurred 2016 2015 2014 repositioning actions expected generate incremental pretax savings 200 million 300 million 2017 compared 2016 principally planned workforce reductions cash spending related repositioning actions 228 million 118 million 161 million 2016 2015 2014 funded operating cash flows 2017 expect cash spending repositioning actions approximately 225 million funded operating cash flows liquidity capital resources company continues manage businesses maximize operating cash flows primary source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines shortterm debt commercial paper market longterm borrowings access public debt equity markets continue balance cash financing uses investment existing core businesses acquisition activity share repurchases dividends cash flow summary cash flows operating investing financing activities reflected consolidated statement cash flows summarized follows 2016 compared 2015 cash provided operating activities decreased 21 million primarily due 958 million unfavorable impact working capital partially offset 395 million improvement customer advances deferred income ii 171 million increase net income noncash pension marktomarket adjustment iii absence 151 million oem incentive payments iv lower cash tax payments 50 million cash used investing activities decreased 3172 million primarily due decrease cash paid acquisitions 2655 million significantly elster 2015 ii increase proceeds sales businesses 295 million significantly honeywell technology solutions inc iii 384 million favorable change settlements foreign currency exchange contracts used economic hedges certain nonfunctional currency denominated monetary assets liabilities decreases partially offset net 146 million increase investments primarily shortterm marketable securities cash provided financing activities increased 309 million primarily due increase net proceeds debt issuances 497 million partially offset increase cash dividends paid 189 million including amounts paid former uop russell llc noncontrolling shareholder 2015 compared 2014 cash provided operating activities increased 439 million primarily due 489 million favorable impact working capital 382 million increase net income noncash pension marktomarket adjustment partially offset 175 million decrease customer advances deferred income ii 151 million oem incentives iii increased cash tax payments 50 million cash used investing activities increased 4638 million primarily due increase cash paid acquisitions 5224 million significantly elster decrease proceeds 159 million primarily friction materials divestiture partially offset net 659 million decrease investments primarily shortterm marketable securities cash provided financing activities increased 2365 million primarily due increase net proceeds debt issuances 3648 million partially offset increase net repurchases common stock 1039 million increase cash dividends paid 216 million liquidity businesses focused implementing strategies increase operating cash flows revenue growth margin expansion improved working capital turnover considering current economic environment businesses operate business plans strategies including focus growth cost reduction productivity initiatives believe cash balances operating cash flow continue principal source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines shortterm debt commercial paper markets longterm borrowings access public debt equity markets december 31 2016 substantial portion company’s cash equivalents held foreign subsidiaries amounts held outside us repatriated current law would subject us federal income taxes less applicable foreign tax credits however intent permanently reinvest vast majority funds outside us practicable estimate amount tax might payable earnings repatriated amount foreign tax credits would available reduce eliminate resulting us income tax liability monitor thirdparty depository institutions hold cash equivalents daily basis emphasis primarily safety principal secondarily maximizing yield funds diversify cash equivalents among counterparties minimize exposure one entities source liquidity ability issue shortterm debt commercial paper market commercial paper notes sold discount maturity 365 days date issuance borrowings commercial paper program available general corporate purposes well financing acquisitions weighted average interest rate shortterm borrowings commercial paper outstanding december 31 2016 013 december 31 2015 026 ability access commercial paper market related cost borrowings affected strength credit rating market conditions credit ratings periodically reviewed major independent debtrating agencies december 31 2016 standard poor’s sp fitch moody’s ratings longterm debt a2 shortterm debt a1 p1 sp fitch moody’s honeywell’s rating outlook “stable” date company experienced limitations ability access sources liquidity also current shelf registration statement filed securities exchange commission may issue additional debt securities common stock preferred stock may offered one offerings terms determined time offering net proceeds offering would used general corporate purposes including repayment existing indebtedness share repurchases capital expenditures acquisitions see note 2 acquisitions divestitures note 12 longterm debt credit agreements notes financial statements additional discussion items impacting liquidity 2016 company repurchased 2079 million outstanding shares offset dilutive impact employee stock based compensation plans including option exercises restricted unit vesting matching contributions savings plans april 2016 board directors authorized repurchase total 5 billion honeywell common stock 41 billion remained available december 31 2016 additional share repurchases honeywell presently expects repurchase outstanding shares time generally offset dilutive impact employee stock based compensation plans including option exercises restricted unit vesting matching contributions savings plans addition normal operating cash requirements principal future cash requirements fund capital expenditures dividends strategic acquisitions share repurchases employee benefit obligations environmental remediation costs asbestos claims severance exit costs related repositioning actions debt repayments specifically expect primary cash requirements 2017 follows §capital expenditureswe expect spend approximately 11 billion capital expenditures 2017 primarily growth production capacity expansion cost reduction maintenance replacement §share repurchases company’s share repurchase program 41 billion available december 31 2016 additional share repurchases honeywell presently expects repurchase outstanding shares time generally offset dilutive impact employee stockbased compensation plans including option exercises restricted unit vesting matching contributions savings plans amount timing future repurchases may vary depending market conditions level operating financing investing activities §dividendswe increased quarterly dividend rate 12 6650 per share common stock effective fourth quarter 2016 dividend company intends continue pay quarterly dividends 2017 §asbestos claimswe expect cash spending asbestos claims cash receipts related insurance recoveries approximately 546 million 23 million 2017 §pension contributionsin 2017 required make contributions us pension plans plan make contributions cash andor marketable securities approximately 130 million 89 million marketable securities contributed january 2017 nonus plans satisfy regulatory funding standards timing amount contributions us nonus plans may impacted number factors including funded status plans §repositioning actionswe expect cash spending severance exit costs necessary execute repositioning actions approximate 225 million 2017 §environmental remediation costswe expect spend approximately 250 million 2017 remedial response voluntary cleanup costs continuously assess relative strength business portfolio strategic fit market position profit cash flow contribution order upgrade combined portfolio identify business units benefit increased investment identify acquisition candidates strategic plan strengthen existing core businesses also identify businesses fit longterm strategic plan based market position relative profitability growth potential businesses considered potential divestiture restructuring repositioning actions subject regulatory constraints 2016 2015 realized 565 million 1 million cash proceeds sales spinoff nonstrategic businesses based past performance current expectations believe operating cash flows sufficient meet future operating cash needs available cash committed credit lines access public debt equity markets provide additional sources shortterm longterm liquidity fund current operations debt maturities future investment opportunities contractual obligations probable liability payments following summary significant contractual obligations probable liability payments december 31 2016 1assumes longterm debt outstanding scheduled maturity 2purchase obligations entered various vendors normal course business consistent expected requirements 3the payment amounts table reflect environmental liabilities probable reasonably estimable december 31 2016 4these amounts estimates asbestos related cash payments narco bendix based asbestos related liabilities probable reasonably estimable december 31 2016 see asbestos matters note 19 commitments contingencies notes financial statements additional information 5these amounts represent insurance recoveries deemed probable asbestos related liabilities december 31 2016 see asbestos matters note 19 commitments contingencies notes financial statements additional information 6the table excludes tax liability payments including unrecognized tax benefits see note 5 income taxes notes financial statements additional information environmental matters accruals environmental matters deemed probable reasonably estimable 195 million 194 million 268 million 2016 2015 2014 addition 2016 2015 incurred operating costs ongoing businesses approximately 83 million 90 million relating compliance environmental regulations spending related known environmental matters 228 million 273 million 321 million 2016 2015 2014 estimated approximately 250 million 2017 expect fund expenditures environmental matters operating cash flow timing cash expenditures depends several factors including timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects execution timeframe projects remedial techniques utilized agreement parties see note 19 commitments contingencies notes financial statements discussion environmental matters financial instruments following table illustrates potential change fair value interest rate sensitive instruments based hypothetical immediate one percentage point increase interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 weakening us dollar versus local currency exchange rates across maturities december 31 2016 2015 1asset liability 2a hypothetical immediate one percentage point decrease interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 strengthening us dollar versus local currency exchange rates across maturities result change fair value equal inverse amount disclosed table 3changes fair value foreign currency exchange contracts offset changes fair value cash flows underlying hedged foreign currency transactions see note 14 financial instruments fair value measures notes financial statements discussion agreements critical accounting policies preparation consolidated financial statements accordance generally accepted accounting principles based selection application accounting policies require us make significant estimates assumptions effects matters inherently uncertain consider accounting policies discussed critical understanding financial statements actual results could differ estimates assumptions differences could material consolidated financial statements contingent liabilitieswe subject number lawsuits investigations claims involve substantial dollar amounts arise conduct global business operations previously owned entities including matters relating commercial transactions government contracts product liability including asbestos prior acquisitions divestitures employee benefit plans intellectual property legal environmental health safety matters continually assess likelihood adverse judgments outcomes contingencies well potential amounts ranges probable losses recognize liability contingencies based careful analysis matter assistance outside legal counsel applicable experts analysis includes making judgments concerning matters costs associated environmental matters outcome negotiations number cost pending future asbestos claims impact evidentiary requirements contingencies resolved long periods time liabilities may change future due new developments including new discovery facts changes legislation outcomes similar cases judicial system changes assumptions changes settlement strategy see note 19 commitments contingencies notes financial statements discussion management’s judgment applied recognition measurement environmental asbestos liabilities represent significant contingencies asbestos related contingencies insurance recoverieshoneywell’s involvement asbestos related personal injury actions relates two predecessor companies regarding north american refractories company narco asbestos related claims accrued pending claims based terms conditions agreements narco former parent company certain asbestos claimants estimate unsettled claims pending time narco filed bankruptcy protection also accrued estimated value future narco asbestos related claims expected asserted narco trust estimate future narco claims based commonly accepted methodology used numerous bankruptcy courts addressing 524g trusts also reflects disputes concerning implementation trust distribution procedures narco trust lack sufficient trust claims processing experience well stay narco asbestos claims remained place throughout narco’s chapter 11 case critical assumptions underlying commonly accepted methodology include claims filing rates disease criteria payment values contained trust distribution procedures estimated approval rates claims submitted narco trust epidemiological studies estimating disease instances estimated value future narco claims originally established time narco chapter 11 filing reflecting claims expected asserted narco fifteen year period projection resulted range estimated liability 743 million 961 million believe amount within range better estimate amount accordingly recorded minimum amount range regarding bendix asbestos related claims accrued estimated value pending claims using average resolution values previous five years also accrued estimated value future anticipated claims related bendix next five years based historic claims filing experience dismissal rates disease classifications average resolution values tort system previous five years light uncertainties inherent making longterm projections well certain factors unique friction product asbestos claims believe reasonable basis estimating asbestos claims beyond next five years connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical dealings knowledge pertinent solvency issues surrounding insurers substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries projecting future events subject various uncertainties could cause insurance recovery asbestos related liabilities higher lower projected recorded given inherent uncertainty making future projections reevaluate projections concerning probable insurance recoveries light changes projected liability recovery experience relevant factors may impact future insurance recoveries see note 19 commitments contingencies notes financial statements discussion management’s judgments applied recognition measurement asbestosrelated liabilities related insurance recoveries defined benefit pension planswe sponsor funded unfunded us nonus defined benefit pension plans financial reporting purposes net periodic pension income expense calculated annually based upon number actuarial assumptions including discount rate plan obligations expected longterm rate return plan assets changes discount rate expected longterm rate return plan assets could materially affect annual pension income expense amount annual pension income expense comprised potential marktomarket adjustment mtm adjustment service interest cost assumed return plan assets prior service amortization pension ongoing income expense key assumptions used developing 2016 2015 2014 net periodic pension income expense us plans included following 1 na 2015 2014 discount rate methodology changed fourth quarter 2015 see note 20 pension postretirement benefits notes financial statements mtm adjustment represents recognition net actuarial gains losses excess corridor net actuarial gains losses occur actual experience differs various assumptions used value pension plans assumptions change primary factors contributing actuarial gains losses changes discount rate used value pension obligations measurement date year difference expected actual returns plan assets marktomarket accounting method results potential volatile difficult forecast mtm adjustments mtm charges 273 million 67 million 249 million 2016 2015 2014 determine expected longterm rate return plan assets utilizing historical plan asset returns varying longterm periods combined expectations future market conditions asset mix considerations see note 20 pension postretirement benefits notes financial statements details actual various asset classes targeted asset allocation percentages pension plans plan continue use expected rate return plan assets 775 2017 longterm rate based historical plan asset returns varying long term periods combined expectations future market conditions asset mix plan’s investments discount rate reflects market rate december 31 measurement date highquality fixedincome investments maturities corresponding benefit obligations subject change year discount rate volatile year determined based upon prevailing interest rates measurement date used 420 discount rate determine benefit obligations december 31 2016 reflecting decrease market interest rate environment since prior yearend addition potential mtm adjustments changes expected rate return plan assets discount rate resulting economic events also affects future pension ongoing income expense following table highlights sensitivity us pension obligations ongoing income expense changes assumptions assuming assumptions remain constant estimates exclude potential mtm adjustment pension ongoing income pension plans expected approximately 715 million 2017 compared pension ongoing income 601 million 2016 expected increase primarily due higher asset returns 2016 lower interest costs due decline discount rates mainly us uk plans also required mtm adjustment recorded fourth quarter 2017 accordance pension accounting method previously described difficult reliably forecast predict whether mtm adjustment 2017 one required magnitude adjustment mtm adjustments primarily driven events circumstances beyond control company changes interest rates performance financial markets longlived assets including tangible finitelived intangible assetsthe determination useful lives depreciationamortization purposes whether tangible intangible assets impaired involves use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions evaluate recoverability carrying amount longlived assets whenever events changes circumstances indicate carrying amount longlived asset group may fully recoverable principal factors considering perform impairment review follows • significant underperformance ie declines sales earnings cash flows business product line relation expectations • annual operating plans fiveyear strategic plans indicate unfavorable trend operating performance business product line • significant negative industry economic trends • significant changes planned changes use assets determined impairment review necessary recoverability assets measured comparing carrying amount asset grouping estimated future undiscounted cash flows carrying amount exceeds estimated future undiscounted cash flows asset grouping considered impaired impairment measured difference carrying amount asset grouping fair value endeavor utilize best information available measure fair value usually either market prices available level 1 level 2 fair value hierarchy estimate future discounted cash flow level 3 fair value hierarchy key estimates discounted cash flow analysis include assumptions expected industry growth rates sales volume selling prices costs discount rate selected estimates subject changes economic environment including market interest rates expected volatility management believes estimates future cash flows fair values reasonable however changes estimates due variance assumptions could materially affect valuations goodwill indefinitelived intangible assets impairment testing goodwill intangible assets deemed indefinite lives amortized subject annual frequent necessary impairment testing goodwill indefinitelived intangible assets fair value estimated utilizing discounted cash flow approach utilizing cash flow forecasts five year strategic annual operating plans adjusted terminal value assumptions impairment tests involve use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions address uncertainty perform sensitivity analysis key estimates assumptions income taxeson recurring basis assess need valuation allowance deferred tax assets considering available positive negative evidence past operating results projections future taxable income enacted tax law changes feasibility impact tax planning initiatives projections future taxable income include number estimates assumptions regarding volume pricing costs well timing amount reversals taxable temporary differences sales recognition longterm contractsin 2016 recognized approximately 13 total net sales using percentageofcompletion method longterm contracts longterm contracts measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts accounting contracts involves management judgment estimating total contract revenue cost contract revenues largely determined negotiated contract prices quantities modified assumptions regarding contract options change orders incentive award provisions associated technical performance price adjustment clauses inflation indexbased clauses contract costs incurred period time several years estimation costs requires management judgment cost estimates largely based negotiated estimated purchase contract terms historical performance trends economic projections significant factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements revenue cost estimates regularly monitored revised based changes circumstances anticipated losses longterm contracts recognized losses become evident maintain financial controls customer qualification contract pricing estimation processes reduce risk contract losses matters litigation see note 19 commitments contingencies notes financial statements discussion environmental asbestos litigation matters recent accounting pronouncements see note 1 summary significant accounting policies notes financial statements discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations dollars millions except per share amounts following management’s discussion analysis financial condition results operations intended help reader understand results operations financial condition honeywell international inc consolidated subsidiaries “honeywell” “the company” three years ended december 31 2017 references notes relate notes consolidated financial statements item 8 financial statements supplementary data october 2017 company announced results comprehensive portfolio review included announcement intent spinoff homes global distribution business well transportation systems business two standalone publicly traded companies effective october 2017 realigned smart energy business previously part home building technologies segment process solutions business within performance materials technologies segment effective july 2016 company realigned business units comprising automation control solutions segment forming two new segments home building technologies safety productivity solutions realignments impact company’s historical consolidated financial position results operations cash flows prior period amounts reclassified conform current period segment presentation october 1 2016 company completed taxfree spinoff resins chemicals business part performance materials technologies standalone publiclytraded company named advansix inc “advansix” honeywell shareowners assets liabilities associated advansix removed company’s consolidated balance sheet effective date spinoff results operations advansix included consolidated statement operations effective date spinoff september 16 2016 company completed sale aerospace government services business honeywell technology solutions inc “htsi” “government services business” assets liabilities associated htsi removed company’s consolidated balance sheet effective date sale results operations htsi included consolidated statement operations effective date sale executive summary 2017 honeywell continued successfully deliver financial commitments still creating longterm value shareowners grew net sales 3 40534 million grew income taxes 7 6902 million improvement year income taxes attributable organic sales growth well operational improvements increased operating margins believe ability consistently grow earnings derives consistent rigorous deployment honeywell operating system well long history identifying investing productivity initiatives made concerted efforts revitalize commercial excellence processes velocity product development “vpd” enables higher organic revenue better margins careful allow attainment shortterm financial results imperil creation longterm sustainable shareowner value hence part announcement october 2017 results portfolio review affirmed commitment strategy investments intended enable us become one world’s leading software industrial companies refocused strategy investments intended take better advantage core technological software strengths high growth businesses participate six attractive industrial end markets end markets characterized favorable global megatrends including energy efficiency infrastructure investment urbanization safety 2017 deployed capital 6 billion including following • share repurchaseswe continue repurchase shares goal keeping share count flat offsetting dilutive impact employee stock based compensation savings plans additionally seek reduce share count via share repurchases attractive opportunities arise 2017 repurchased 205 million shares 29 billion • dividendin 2017 paid cash dividends 21 billion increased annual dividend rate 12 seek continue grow dividend faster earnings since 2010 increased dividend rate 10 eight times • capital investment facilitieswe invested 1 billion capital expenditures focused high return projects consolidated results operations net sales change net sales attributable following discussion net sales segment found review business segments section mda foreign currency translation impact 2017 compared 2016 flat strengthening euro offset weakening british pound us dollar foreign currency translation impact 2016 compared 2015 principally driven weakening british pound chinese renminbi canadian dollar partially offset strengthening japanese yen us dollar cost products services sold cost products services sold increased 2017 compared 2016 principally due increased direct material costs approximately 290 million driven higher sales volume acquisitions partially offset divestitures productivity net inflation higher repositioning charges approximately 260 million higher depreciation amortization approximately 90 million partially offset higher pension postretirement benefits income lower pension marktomarket expense allocated cost products services sold approximately 110 million decreased indirect material costs approximately 70 million gross margin percentage increased 2017 compared 2016 principally due higher gross margin aerospace performance materials technologies approximately 17 percentage point impact collectively higher pension postretirement benefits income lower pension market expense allocated cost products services sold approximately 03 percentage point impact partially offset higher repositioning charges approximately 06 percentage point impact lower gross margin home building solutions safety productivity solutions approximately 03 percentage point impact collectively cost products services sold increased 2016 compared 2015 principally due increased direct material costs approximately 380 million driven primarily acquisitions net divestitures partially offset favorable impact productivity net inflation foreign currency translation higher depreciation amortization attributable acquisitions approximately 135 million increased pension marktomarket expense allocated cost products services sold 70 million partially offset higher pension postretirement benefits income allocated cost products services sold 200 million gross margin percentage increased 2016 compared 2015 principally due higher gross margin performance materials technologies approximately 02 percentage point impact higher pension postretirement benefits income allocated cost products services sold approximately 05 percentage point impact partially offset lower gross margin aerospace home building technologies safety productivity solutions approximately 03 percentage point impact collectively increased pension marktomarket expense allocated cost products services sold approximately 02 percentage point impact selling general administrative expenses selling general administrative expenses sga increased 2017 compared 2016 primarily due increased labor costs driven primarily acquisitions net divestitures investment growth merit increases higher repositioning charges partially offset decreased pension marktomarket expense allocated sga increased 2016 compared 2015 primarily due increased labor costs driven primarily acquisitions net divestitures investment growth merit increases increased pension marktomarket expense allocated sga higher repositioning charges partially offset favorable impact foreign currency translation increased pension income allocated sga tax expense december 22 2017 us enacted tax cuts jobs act “tax act” instituted fundamental changes us tax system tax act includes changes taxation foreign earnings implementing dividend exemption system expansion current antideferral rules minimum tax lowtaxed foreign earnings new measures deter base erosion tax act also permanently reduces corporate tax rate 35 21 imposes onetime mandatory transition tax historical earnings foreign affiliates implements territorial style tax system impacts changes reflected 2017 tax expense resulted provisional charge approximately 38 billion subject adjustment given provisional nature charge resulted effective tax rate higher statutory rate 2017 effective tax rates 2016 2015 lower us statutory rate 35 primarily due lower tax rates nonus earnings company currently expects effective tax rate 2018 range 220 230 effective tax rate may vary quarter due unusual infrequently occurring items resolution income tax audits changes tax laws tax impact employee sharebased payments taxes incurred connection territorial style tax system items pension marktomarket adjustments discussion changes effective tax rate see note 5 income taxes notes consolidated financial statements net income attributable honeywell earnings per share common stockassuming dilution decreased 2017 compared 2016 primarily driven additional income tax expense tax act higher repositioning charges partially offset higher segment profit across segments lower pension marktomarket expense increased pension postretirement income earnings per share common stockassuming dilution increased 2016 compared 2015 primarily driven increased pension postretirement income higher segment profit home building technologies performance materials technologies gain related honeywell technology solutions inc divestiture decrease weighted average shares outstanding tax benefit adoption financial accounting standards board’s fasb accounting standard related employee sharebased payment accounting partially offset lower segment profit aerospace safety productivity solutions increased pension marktomarket expense higher repositioning charges business overview consolidated results principally impacted • changes global economic growth rates industry conditions demand key end markets • impact fluctuations foreign currency exchange rates particular euro relative us dollar • extent cost savings productivity actions able offset exceed impact material nonmaterial inflation • impact pension discount rate asset returns pension expense including marktomarket adjustments funding requirements • impact tax act 2018 areas focus applicable segments include • driving profitable organic growth rd technological excellence deliver innovative products customers value expansion localization footprint high growth regions • executing strategy become softwareindustrial company us means products services facilitate connected plane home building factory • expanding margins maintaining improving company’s cost structure manufacturing administrative process improvements repositioning productivity actions • executing disciplined rigorous integration processes deliver growth acquisitions • ensuring successful completion proposed spinoffs homes global distribution business well transportation systems business two standalone publicly traded companies • controlling corporate costs including costs incurred asbestos environmental matters pension postretirement benefits • increasing availability capital strong cash flow conversion effective working capital management proactively managing debt levels enable company smartly deploy capital strategic acquisitions dividends share repurchases capital expenditures • aligning operating structure benefit territorial tax system implemented tax act review business segments aerospace 2017 compared 2016 aerospace sales flat due organic sales growth offset government services business divestiture • commercial original equipment sales decreased 2 decreased 2 organic primarily due lower shipments business jet oems partially offset lower air transport regional oem incentives • commercial aftermarket sales increased 6 increased 6 organic primarily driven higher repair overhaul activities increased spares shipments • defense space sales decreased 7 increased 1 organic primarily due government services business divestiture lower space sales partially offset growth us defense • transportation systems sales increased 3 increased 2 organic primarily driven higher commercial vehicle volumes gas turbo penetration favorable impact foreign currency translation partially offset lower diesel turbo volumes aerospace segment profit increased due increase operational segment profit partially offset government services business divestiture increase operational segment profit driven primarily productivity net inflation including restructuring benefits lower oem incentives higher organic sales volume partially offset government services business divestiture cost products services sold decreased primarily driven government services business divestiture productivity net inflation partially offset higher organic sales volume 2016 compared 2015 aerospace sales decreased primarily due higher oem incentives decrease organic sales volumes government services business divestiture partially offset growth acquisitions • commercial original equipment sales decreased 13 decreased 12 organic primarily due higher oem incentives decreased demand business general aviation original equipment manufacturers partially offset higher shipments air transport oems • commercial aftermarket sales increased 3 increased 3 organic primarily driven higher repair overhaul activities increased spares shipments • defense space sales decreased 7 decreased 6 organic primarily due declines us space international defense programs lower us government services revenue largely attributable impact divestitures decreased demand commercial helicopter oems partially offset sales acquisitions • transportation systems sales increased 3 increased 4 organic primarily driven new platform launches higher global turbo gas penetration aerospace segment profit decreased primarily due 6 decrease operational segment profit 1 unfavorable impact foreign currency translation decrease operational segment profit primarily due product mix higher oem incentives lower sales volumes partially offset productivity price net inflation cost products services sold decreased primarily driven productivity net inflation lower sales volumes partially offset acquisitions net divestitures home building technologies 2017 compared 2016 home building technologies sales increased primarily due increase organic sales pricing acquisitions • sales home building products increased 3 increased 2 organic due increase organic sales growth acquisitions organic sales growth primarily attributable sales volume environmental energy solutions security fire businesses • sales home building distribution increased 3 increased 3 organic due organic sales growth global distribution business building solutions home building technologies segment profit increased due increase operational segment profit favorable impact foreign currency translation increase operational segment profit primarily driven productivity net inflation pricing partially offset unfavorable product mix cost products services increased due higher organic sales acquisitions 2016 compared 2015 home building technologies sales increased primarily due growth organic sales growth acquisitions partially offset unfavorable impact foreign currency translation • sales home building products increased 5 increased 2 organic principally driven organic sales growth acquisitions organic sales growth primarily attributable new product introductions environmental energy solutions business volume growth security fire business • sales home building distribution increased 5 increased 7 organic principally due organic sales growth partially offset unfavorable impact foreign currency translation organic sales growth primarily driven volume global distribution business building solutions home building technologies segment profit increased primarily due increase operational segment profit acquisition partially offset unfavorable impact foreign currency translation increase operational segment profit primarily driven productivity net inflation pricing cost products services increased due growth organic sales acquisitions partially offset favorable impact foreign currency translation productivity net inflation performance materials technologies 2017 compared 2016 performance materials technologies sales decreased primarily due divestitures partially offset organic sales growth • uop sales increased 12 increased 12 organic driven primarily higher gas processing project revenues increased catalyst volumes increased equipment sales increased engineering revenues partially offset decreased licensing revenues • process solutions sales increased 3 increased 3 organic driven primarily higher revenue smart energy services thermal solutions software partially offset lower field products sales • advanced materials sales decreased 16 increased 11 organic driven primarily spinoff former resins chemicals business partially offset increased volumes fluorine products performance materials technologies segment profit increased primarily due increase operational segment profit partially offset divestitures increase operational segment profit primarily due productivity net inflation higher organic sales volume pricing partially offset unfavorable product mix continued investments growth cost products services sold decreased primarily due divestitures productivity net inflation partially offset higher organic sales volumes 2016 compared 2015 performance materials technologies sales increased due growth acquisitions net divestitures partially offset decrease organic sales volumes unfavorable impact foreign currency translation • uop sales decreased 17 decreased 16 organic driven primarily lower gas processing revenues due significant slowdown customer projects decreased catalyst volumes first nine months partially offset increased catalyst licensing equipment sales fourth quarter • process solutions sales increased 49 increased 4 organic driven primarily increased volumes driven acquisitions net divestitures higher revenues projects partially offset lower field products sales • advanced materials sales decreased 5 increased 3 organic driven primarily impact october 1 2016 spinoff former resins chemicals business lower market pricing well lower raw material passthrough pricing former resins chemicals business first nine months partially offset increased volumes fluorine specialty products performance materials technologies segment profit increased due acquisitions net divestitures increase operational segment profit partially offset unfavorable impact foreign currency translation increase operational segment profit primarily due productivity net inflation partially offset lower organic sales volumes continued investments growth cost products services sold increased primarily due acquisitions net divestitures partially offset lower organic sales volumes favorable foreign currency translation productivity net inflation safety productivity solutions 2017 compared 2016 safety productivity solutions sales increased primarily due acquisitions organic sales volume • sales safety increased 5 increased 4 organic due increased sales volume industrial safety business higher distribution retail business favorable impact foreign currency translation • sales productivity solutions increased 36 increased 6 organic principally due growth acquisitions intelligrated acquired august 2016 safety productivity solutions segment profit increased due increase operational segment profit acquisitions increase operational segment profit driven higher productivity net inflation sales volume cost products services increased primarily due acquisitions higher sales volume offset productivity net inflation 2016 compared 2015 safety productivity solutions sales decreased primarily due decreased sales volumes unfavorable impact foreign currency translation partially offset growth acquisitions • sales safety decreased 3 decreased 2 organic due decreased sales volume industrial safety business lower distribution retail business unfavorable impact foreign currency translation • sales productivity solutions decreased 1 decreased 11 organic principally due declines productivity products business partially offset growth acquisitions safety productivity solutions segment profit decreased due decrease operational segment profit unfavorable impact foreign currency translation partially offset growth acquisitions decrease operational segment profit due decreased sales volumes partially offset price productivity net inflation growth acquisitions cost products services decreased primarily due productivity net inflation decreased sales volumes favorable impact foreign currency translation partially offset growth acquisitions repositioning charges see note 3 repositioning charges notes consolidated financial statements discussion repositioning actions related charges incurred 2017 2016 2015 repositioning actions expected generate incremental pretax savings 300 million 2018 compared 2017 principally planned workforce reductions cash spending related repositioning actions 177 million 228 million 118 million 2017 2016 2015 funded operating cash flows 2018 expect cash spending repositioning actions approximately 250 million funded operating cash flows liquidity capital resources company continues manage businesses maximize operating cash flows primary source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines shortterm debt commercial paper market longterm borrowings access public debt equity markets ability access nonus cash result tax act continue balance cash financing uses investment existing core businesses acquisition activity share repurchases dividends cash flow summary cash flows operating investing financing activities reflected consolidated statement cash flows summarized follows 2017 compared 2016 cash provided operating activities increased 468 million primarily due 504 million increase segment profit 294 million favorable impact working capital favorable accounts payable partially offset inventory accounts receivable partially offset higher cash tax payments 609 million cash used investing activities increased 232 million primarily due net 2056 million increase investments primarily shortterm marketable securities ii increase 500 million settlement payments foreign currency exchange contracts used economic hedges certain nonfunctional currency denominated monetary assets liabilities iii decrease proceeds sales businesses 296 million significantly honeywell technology solutions inc 2016 partially offset decrease cash paid acquisitions 2491 million significantly intelligrated 2016 cash used financing activities increased 3862 million primarily due decrease net proceeds debt issuances 2827 million increase net repurchases common stock 699 million increase cash dividends paid 204 million 2016 compared 2015 cash provided operating activities decreased 21 million primarily due 725 million unfavorable impact working capital offset 395 million improvement customer advances deferred income ii 171 million increase net income noncash pension marktomarket adjustment iii absence 151 million oem incentive payments iv lower cash tax payments 50 million cash used investing activities decreased 3172 million primarily due decrease cash paid acquisitions 2655 million significantly elster 2015 ii increase proceeds sales businesses 295 million significantly honeywell technology solutions inc iii 384 million favorable change settlements foreign currency exchange contracts used economic hedges certain nonfunctional currency denominated monetary assets liabilities decreases partially offset net 146 million increase investments primarily shortterm marketable securities cash provided financing activities increased 309 million primarily due increase net proceeds debt issuances 497 million partially offset increase cash dividends paid 189 million including amounts paid former uop russell llc noncontrolling shareholder liquidity businesses focused implementing strategies increase operating cash flows revenue growth margin expansion improved working capital turnover considering current economic environment businesses operate business plans strategies including focus growth cost reduction productivity initiatives believe cash balances operating cash flow continue principal source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines shortterm debt commercial paper markets longterm borrowings access public debt equity markets monitor thirdparty depository institutions hold cash equivalents daily basis emphasis primarily safety principal secondarily maximizing yield funds diversify cash equivalents among counterparties minimize exposure one entities source liquidity ability issue shortterm debt commercial paper market commercial paper notes sold discount maturity 365 days date issuance borrowings commercial paper program available general corporate purposes well financing acquisitions weighted average interest rate shortterm borrowings commercial paper outstanding december 31 2017 017 december 31 2016 013 ability access commercial paper market related cost borrowings affected strength credit rating market conditions credit ratings periodically reviewed major independent debtrating agencies december 31 2017 standard poor’s sp fitch moody’s ratings longterm debt a2 shortterm debt a1 p1 sp fitch moody’s honeywell’s rating outlook “stable” date company experienced limitations ability access sources liquidity also current shelf registration statement filed securities exchange commission may issue additional debt securities common stock preferred stock may offered one offerings terms determined time offering net proceeds offering would used general corporate purposes including repayment existing indebtedness share repurchases capital expenditures acquisitions see note 2 acquisitions divestitures note 12 longterm debt credit agreements notes consolidated financial statements additional discussion items impacting liquidity 2017 company repurchased 2889 million outstanding shares offset dilutive impact employee stock based compensation plans including option exercises restricted unit vesting matching contributions savings plans additionally sought reduce share count via share repurchases attractive opportunities arose december 2017 board directors authorized repurchase total 8 billion honeywell common stock 77 billion remained available december 31 2017 additional share repurchases authorization included amounts remaining replaced previously approved share repurchase program honeywell presently expects repurchase outstanding shares time generally offset dilutive impact employee stock based compensation plans including option exercises restricted unit vesting matching contributions savings plans continue seek reduce share count via share repurchases attractive opportunities arise december 31 2017 substantial portion company’s cash equivalents held foreign subsidiaries result tax act company longer intends permanently reinvest historical foreign earnings plans repatriate least 7 billion earnings us next two years addition normal operating cash requirements principal future cash requirements fund capital expenditures dividends strategic acquisitions share repurchases employee benefit obligations environmental remediation costs asbestos claims severance exit costs related repositioning actions debt repayments specifically expect primary cash requirements 2018 follows • capital expenditureswe expect spend approximately 900 million capital expenditures 2018 primarily growth production capacity expansion cost reduction maintenance replacement • share repurchasesunder company’s share repurchase program 77 billion available december 31 2017 additional share repurchases honeywell presently expects repurchase outstanding shares time offset dilutive impact employee stockbased compensation plans including option exercises restricted unit vesting matching contributions savings plans additionally seek reduce share count via share repurchases attractive opportunities arise amount timing future repurchases may vary depending market conditions level operating financing investing activities • dividendswe increased quarterly dividend rate 12 745 per share common stock effective fourth quarter 2017 dividend company intends continue pay quarterly dividends 2018 • asbestos claimswe expect cash spending asbestos claims cash receipts related insurance recoveries approximately 350 million 24 million 2018 • pension contributionsin 2018 required make contributions us pension plans plan make contributions cash andor marketable securities approximately 140 million 99 million marketable securities contributed january 2018 nonus plans satisfy regulatory funding standards timing amount contributions us nonus plans may impacted number factors including funded status plans • repositioning actionswe expect cash spending severance exit costs necessary execute repositioning actions approximately 250 million 2018 • environmental remediation costswe expect spend approximately 225 million 2018 remedial response voluntary cleanup costs • spinoff separation costswe expect incur significant cash expenditures associated announced spinoff transactions including third party professional services tax costs amounts still determined continuously assess relative strength business portfolio strategic fit market position profit cash flow contribution order upgrade combined portfolio identify business units benefit increased investment identify acquisition candidates strategic plan strengthen existing core businesses also identify businesses fit longterm strategic plan based market position relative profitability growth potential businesses considered potential divestiture restructuring repositioning actions subject regulatory constraints 2016 realized 565 million cash proceeds sales spinoff nonstrategic businesses based past performance current expectations believe operating cash flows sufficient meet future operating cash needs available cash committed credit lines access public debt equity markets provide additional sources shortterm longterm liquidity fund current operations debt maturities future investment opportunities contractual obligations probable liability payments following summary significant contractual obligations probable liability payments december 31 2017 1 assumes longterm debt outstanding scheduled maturity 2 purchase obligations entered various vendors normal course business consistent expected requirements 3 payment amounts table reflect environmental liabilities probable reasonably estimable december 31 2017 4 amounts estimates asbestos related cash payments narco bendix based asbestos related liabilities probable reasonably estimable december 31 2017 see asbestos matters note 19 commitments contingencies notes consolidated financial statements additional information 5 amounts represent insurance recoveries deemed probable asbestos related liabilities december 31 2017 see asbestos matters note 19 commitments contingencies notes consolidated financial statements additional information 6 table excludes tax liability payments including unrecognized tax benefits see note 5 income taxes notes consolidated financial statements additional information environmental matters accruals environmental matters deemed probable reasonably estimable 287 million 195 million 194 million 2017 2016 2015 addition 2017 2016 incurred operating costs ongoing businesses approximately 82 million 83 million relating compliance environmental regulations spending related known environmental matters 212 million 228 million 273 million 2017 2016 2015 estimated approximately 225 million 2018 expect fund expenditures environmental matters operating cash flow timing cash expenditures depends several factors including timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects execution timeframe projects remedial techniques utilized agreement parties see note 19 commitments contingencies notes consolidated financial statements discussion environmental matters financial instruments following table illustrates potential change fair value interest rate sensitive instruments based hypothetical immediate one percentage point increase interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 weakening us dollar versus local currency exchange rates across maturities december 31 2017 2016 1 asset liability 2 hypothetical immediate one percentage point decrease interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 strengthening us dollar versus local currency exchange rates across maturities result change fair value equal inverse amount disclosed table 3 changes fair value foreign currency exchange contracts offset changes fair value cash flows net investments underlying hedged foreign currency transactions foreign operations see note 14 financial instruments fair value measures notes consolidated financial statements discussion agreements critical accounting policies preparation consolidated financial statements accordance generally accepted accounting principles based selection application accounting policies require us make significant estimates assumptions effects matters inherently uncertain consider accounting policies discussed critical understanding financial statements actual results could differ estimates assumptions differences could material consolidated financial statements contingent liabilitieswe subject number lawsuits investigations claims involve substantial dollar amounts arise conduct global business operations previously owned entities including matters relating commercial transactions government contracts product liability including asbestos prior acquisitions divestitures employee benefit plans intellectual property legal environmental health safety matters continually assess likelihood adverse judgments outcomes contingencies well potential amounts ranges probable losses recognize liability contingencies based thorough analysis matter assistance outside legal counsel applicable experts analysis includes making judgments concerning matters costs associated environmental matters outcome negotiations number cost pending future asbestos claims impact evidentiary requirements contingencies resolved long periods time liabilities may change future due new developments including new discovery facts changes legislation outcomes similar cases judicial system changes assumptions changes settlement strategy see note 19 commitments contingencies notes consolidated financial statements discussion management’s judgment applied recognition measurement environmental asbestos liabilities represent significant contingencies asbestos related contingencies insurance recoverieshoneywell’s involvement asbestos related personal injury actions relates two predecessor companies regarding north american refractories company “narco” asbestos related claims accrued pending claims based terms conditions agreements narco former parent company certain asbestos claimants estimate unsettled claims pending time narco filed bankruptcy protection also accrued estimated value future narco asbestos related claims expected asserted narco trust estimate future narco claims prepared 2002 year narco filed bankruptcy protection using narco tort system litigation experience based commonly accepted methodology used numerous bankruptcy courts addressing 524g trusts accordingly estimated value future narco asbestos claims prepared data claims filings payment rates narco trust distribution procedures also prepared stay narco asbestos claims effect remained effect narco emerged bankruptcy protection critical assumptions underlying commonly accepted methodology included claims filing rates disease criteria payment values contained trust distribution procedures estimated approval rates claims submitted narco trust epidemiological studies estimating disease instances estimated value future narco liability reflects claims expected asserted narco fifteen year period projection resulted range estimated liability 743 million 961 million believe amount within range better estimate amount accordingly recorded minimum amount range given trust’s lack sufficient claims processing experience since narco emerged bankruptcy protection yet possible reliably estimate future claim costs based actual trust experience regarding bendix friction materials “bendix” asbestos related claims accrued estimated value pending claims using average resolution values previous five years also accrued estimated value future anticipated claims related bendix next five years based historic claims filing experience dismissal rates disease classifications average resolution values tort system previous five years light uncertainties inherent making longterm projections well certain factors unique friction product asbestos claims believe reasonable basis estimating asbestos claims beyond next five years connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical dealings knowledge pertinent solvency issues surrounding insurers substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries projecting future events subject various uncertainties could cause insurance recovery asbestos related liabilities higher lower projected recorded given inherent uncertainty making future projections reevaluate projections concerning probable insurance recoveries light changes projected liability recovery experience relevant factors may impact future insurance recoveries see note 19 commitments contingencies notes consolidated financial statements discussion management’s judgments applied recognition measurement asbestosrelated liabilities related insurance recoveries defined benefit pension planswe sponsor funded unfunded us nonus defined benefit pension plans financial reporting purposes net periodic pension income expense calculated annually based upon number actuarial assumptions including discount rate plan obligations expected longterm rate return plan assets changes discount rate expected longterm rate return plan assets could materially affect annual pension income expense amount annual pension income expense comprised service interest cost assumed return plan assets prior service amortization pension ongoing income expense potential marktomarket adjustment mtm adjustment key assumptions used developing 2017 2016 2015 net periodic pension income expense us plans included following mtm adjustment represents recognition net actuarial gains losses excess 10 greater fair value plan assets plans’ projected benefit obligation corridor net actuarial gains losses occur actual experience differs various assumptions used value pension plans assumptions change primary factors contributing actuarial gains losses changes discount rate used value pension obligations measurement date year difference expected actual returns plan assets marktomarket accounting method results potential volatile difficult forecast mtm adjustments mtm charges 87 million 273 million 67 million 2017 2016 2015 determine expected longterm rate return plan assets utilizing historical plan asset returns varying longterm periods combined expectations future market conditions asset mix considerations see note 20 pension postretirement benefits notes consolidated financial statements details actual various asset classes targeted asset allocation percentages pension plans plan continue use expected rate return plan assets 775 2018 longterm rate based historical plan asset returns varying long term periods combined expectations future market conditions asset mix plan’s investments discount rate reflects market rate december 31 measurement date highquality fixedincome investments maturities corresponding benefit obligations subject change year discount rate volatile year determined based upon prevailing interest rates measurement date used 368 discount rate determine benefit obligations december 31 2017 reflecting decrease market interest rate environment since prior yearend addition potential mtm adjustments changes expected rate return plan assets discount rate resulting economic events also affects future pension ongoing income expense following table highlights sensitivity us pension obligations ongoing income expense changes assumptions assuming assumptions remain constant estimates exclude potential mtm adjustment pension ongoing income pension plans expected approximately 984 million 2018 compared pension ongoing income 713 million 2017 expected increase primarily due higher asset returns 2017 us uk plans also required mtm adjustment recorded fourth quarter 2018 accordance pension accounting method previously described difficult reliably forecast predict whether mtm adjustment 2018 one required magnitude adjustment mtm adjustments primarily driven events circumstances beyond control company changes interest rates performance financial markets longlived assets including tangible finitelived intangible assetsthe determination useful lives depreciationamortization purposes whether tangible intangible assets impaired involves use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions evaluate recoverability carrying amount longlived assets whenever events changes circumstances indicate carrying amount longlived asset group may fully recoverable principal factors considering perform impairment review follows • significant underperformance ie declines sales earnings cash flows business product line relation expectations • annual operating plans fiveyear strategic plans indicate unfavorable trend operating performance business product line • significant negative industry economic trends • significant changes planned changes use assets determined impairment review necessary recoverability assets measured comparing carrying amount asset grouping estimated future undiscounted cash flows carrying amount exceeds estimated future undiscounted cash flows asset grouping considered impaired impairment measured difference carrying amount asset grouping fair value endeavor utilize best information available measure fair value usually either market prices available level 1 level 2 fair value hierarchy estimate future discounted cash flow level 3 fair value hierarchy key estimates discounted cash flow analysis include assumptions expected industry business growth rates sales volume selling prices costs cash flows discount rate selected estimates subject changes economic environment including market interest rates expected volatility management believes estimates future cash flows fair values reasonable however changes estimates due variance assumptions could materially affect valuations goodwill indefinitelived intangible assets impairment testinggoodwill intangible assets deemed indefinite lives amortized subject annual frequent necessary impairment testing goodwill indefinitelived intangible assets fair value estimated utilizing discounted cash flow approach utilizing cash flow forecasts five year strategic annual operating plans adjusted terminal value assumptions impairment tests involve use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions address uncertainty perform sensitivity analysis key estimates assumptions income taxeson recurring basis assess need valuation allowance deferred tax assets considering available positive negative evidence past operating results projections future taxable income enacted tax law changes feasibility impact tax planning initiatives projections future taxable income include number estimates assumptions regarding volume pricing costs well timing amount reversals taxable temporary differences sales recognition longterm contractsin 2017 recognized approximately 16 total net sales using percentageofcompletion method longterm contracts longterm contracts measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts accounting contracts involves management judgment estimating total contract revenue cost contract revenues largely determined negotiated contract prices quantities modified assumptions regarding contract options change orders incentive award provisions associated technical performance price adjustment clauses inflation indexbased clauses contract costs incurred period time several years estimation costs requires management judgment cost estimates largely based negotiated estimated purchase contract terms historical performance trends economic projections significant factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements revenue cost estimates regularly monitored revised based changes circumstances anticipated losses longterm contracts recognized losses become evident maintain financial controls customer qualification contract pricing estimation processes reduce risk contract losses matters litigation see note 19 commitments contingencies notes consolidated financial statements discussion environmental asbestos litigation matters recent accounting pronouncements see note 1 summary significant accounting policies notes consolidated financial statements discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations dollars millions except per share amounts following management’s discussion analysis financial condition results operations intended help reader understand results operations financial condition honeywell international inc consolidated subsidiaries “honeywell” “the company” three years ended december 31 2018 references notes relate notes consolidated financial statements item 8 financial statements supplementary data october 29 2018 company completed taxfree spinoff honeywell shareowners homes global distribution business part home building technologies renamed honeywell building technologies following spinoff standalone publiclytraded company resideo technologies inc “resideo” assets liabilities associated resideo removed company’s consolidated balance sheet effective date spinoff results operations resideo included consolidated statement operations effective date spinoff october 1 2018 company completed taxfree spinoff honeywell shareowners transportation systems business part aerospace standalone publiclytraded company garrett motion inc “garrett” assets liabilities associated garrett removed company’s consolidated balance sheet effective date spinoff results operations garrett included consolidated statement operations effective date spinoff october 1 2016 company completed taxfree spinoff honeywell shareowners resins chemicals business part performance materials technologies standalone publiclytraded company named advansix inc “advansix” assets liabilities associated advansix removed company’s consolidated balance sheet effective date spinoff results operations advansix included consolidated statement operations effective date spinoff september 16 2016 company completed sale aerospace government services business honeywell technology solutions inc “htsi” “government services business” assets liabilities associated htsi removed company’s consolidated balance sheet effective date sale results operations htsi included consolidated statement operations effective date sale executive summary 2018 honeywell continued deliver financial commitments create longterm shareowner value grew net sales 3 41802 million grew income taxes 8 7487 million improvement year income taxes attributable sales growth well operational improvements increased operating margins believe ability consistently grow earnings derives consistent rigorous deployment honeywell operating system well long history identifying investing productivity initiatives continued focus commercial excellence processes velocity product development “vpd” drive higher sales better margins careful allow attainment shortterm financial results imperil creation longterm sustainable shareowner value hence part announcement october 2017 results portfolio review affirmed commitment strategy investments intended enable us become one world’s leading software industrial companies refocused strategy investments intended take better advantage core technological software strengths high growth businesses participate six attractive industrial end markets end markets characterized favorable global megatrends including energy efficiency infrastructure investment urbanization safety 2018 deployed capital 76 billion including following • capital investmentwe invested 08 billion capital expenditures focused high return projects • dividendsin 2018 paid cash dividends 23 billion increased annual dividend rate 10 seek continue grow dividend line earnings dividend increase september 2018 marked ninth consecutive doubledigit increase since 2010 • share repurchaseswe continue repurchase shares goal keeping share count flat offsetting dilutive impact employee stock based compensation savings plans additionally seek reduce share count via share repurchases attractive opportunities arise 2018 repurchased 265 million shares 40 billion • mergers acquisitionswe deployed approximately 05 billion 2018 acquisitions consolidated results operations net sales change net sales attributable following discussion net sales segment found review business segments section management’s discussion analysis foreign currency translation impact 2018 compared 2017 principally driven strengthening average year euro us dollar foreign currency translation impact 2017 compared 2016 flat strengthening euro offset weakening british pound us dollar cost products services sold cost products services sold increased 2018 compared 2017 principally due increased direct material costs approximately 790 million driven higher sales volume inflation partially offset divestitures productivity higher repositioning charges approximately 70 million gross margin percentage decreased 2018 compared 2017 principally due higher repositioning charges approximately 02 percentage point impact partially offset higher gross margin segments approximately 01 percentage point impact collectively cost products services sold increased 2017 compared 2016 principally due increased direct material costs approximately 290 million driven higher sales volume acquisitions partially offset divestitures productivity net inflation higher repositioning charges approximately 220 million higher depreciation amortization approximately 90 million partially offset decreased indirect material costs approximately 70 million lower labor costs approximately 60 million gross margin percentage increased 2017 compared 2016 principally due higher gross margin aerospace performance materials technologies approximately 17 percentage point impact collectively partially offset higher repositioning charges approximately 05 percentage point impact lower gross margin home building solutions safety productivity solutions approximately 03 percentage point impact collectively selling general administrative expenses selling general administrative expenses decreased 2018 compared 2017 primarily due productivity divestiture impacts partially offset labor inflation higher repositioning charges selling general administrative expenses increased 2017 compared 2016 primarily due increased labor costs driven primarily acquisitions net divestitures investment growth merit increases higher repositioning charges income expense income expense increased 2018 compared 2017 primarily due increase pension ongoing incomenonservice favorable impacts foreign currency increase interest income partially offset separation costs associated spinoffs homes global distribution business transportation systems business income expense increased 2017 compared 2016 primarily due increase pension ongoing incomenonservice tax expense effective tax rate 2018 lower us federal statutory rate 21 primarily attributable internal restructuring initiatives resulted reduction accrued withholding taxes approximately 11 billion related unremitted foreign earnings addition recorded tax benefit approximately 440 million reduction 2017 provisional estimate impacts commonly referred us tax cuts jobs act “us tax reform” partially offset 411 million tax costs associated internal restructuring homes global distribution business transportation systems business advance spinoffs effective tax rate 2017 higher us federal statutory rate 35 primarily estimated impacts us tax reform approximately 38 billion partially offset lower tax rates nonus earnings effective tax rate 2016 lower us federal statutory rate 35 primarily lower tax rates nonus earnings discussion changes effective tax rate see note 5 income taxes notes consolidated financial statements net income attributable honeywell earnings per share common stockassuming dilution increased 2018 compared 2017 primarily driven lower income tax expenses due reduction accrued withholding taxes higher comparative income taxes 2017 us tax reform higher segment profit increased pension postretirement income lower share count partially offset separation costs higher repositioning charges earnings per share common stockassuming dilution decreased 2017 compared 2016 primarily driven additional income tax expense us tax reform higher repositioning charges partially offset higher segment profit across segments lower pension marktomarket expense increased pension postretirement income business overview consolidated results principally impacted • changes global economic growth rates industry conditions demand key end markets • impact fluctuations foreign currency exchange rates particular euro relative us dollar • extent cost savings productivity actions able offset exceed impact material nonmaterial inflation • spinoffs homes global distribution business transportation systems business two standalone publiclytraded companies associated separation costs • impact pension discount rate asset returns pension expense including marktomarket adjustments funding requirements • impact us tax reform 2019 areas focus applicable segments include • driving profitable growth research development technological excellence deliver innovative products customers value expansion localization footprint high growth regions • executing strategy become softwareindustrial company us means products services facilitate connected plane building factory • expanding margins optimizing company’s cost structure manufacturing administrative process improvements repositioning productivity actions • executing disciplined rigorous integration processes deliver growth acquisitions • controlling corporate costs including costs incurred asbestos environmental matters pension postretirement benefits • increasing availability capital strong cash flow conversion effective working capital management proactively managing debt levels enable company smartly deploy capital strategic acquisitions dividends share repurchases capital expenditures review business segments aerospace 2018 compared 2017 aerospace sales increased due organic sales growth due volume price favorable impact foreign currency translation impact adoption new revenue recognition accounting standard included within acquisitions divestitures net table offset spinoff transportation systems business october 1 2018 • commercial original equipment sales increased 14 increased 11 organic primarily due increased demand business aviation air transport regional original equipment manufacturers oem lower oem incentives impact classification nonrecurring engineering development funding resulting adoption new revenue recognition accounting standard • commercial aftermarket sales increased 5 increased 5 organic primarily due growth business aviation air transport regional • defense space sales increased 15 increased 15 organic primarily driven growth us international defense • transportation systems sales decreased 17 driven divestiture impacts following october 1 2018 spinoff ninemonth period prior spinoff sales increased 7 organic driven higher volumes light vehicle gas turbos commercial vehicles aerospace segment profit increased due increase operational segment profit favorable impact foreign currency translation impact service programs adoption new revenue recognition accounting standard partially offset transportation systems divestiture increase operational segment profit driven primarily higher organic sales volume price productivity net inflation lower oem incentives partially offset spinoff transportation systems business cost products services sold increased primarily due higher organic sales volume impact foreign currency translation inflation partially offset transportation systems divestiture 2017 compared 2016 aerospace sales flat due organic sales growth offset government services business divestiture • commercial original equipment sales decreased 2 decreased 2 organic primarily due lower shipments business jet oems partially offset lower air transport regional oem incentives • commercial aftermarket sales increased 6 increased 6 organic primarily driven higher repair overhaul activities increased spares shipments • defense space sales decreased 7 increased 1 organic primarily due government services business divestiture lower space sales partially offset growth us defense • transportation systems sales increased 3 increased 2 organic primarily driven higher commercial vehicle volumes gas turbo penetration favorable impact foreign currency translation partially offset lower diesel turbo volumes aerospace segment profit increased due increase operational segment profit partially offset government services business divestiture increase operational segment profit driven primarily productivity net inflation including restructuring benefits lower oem incentives higher organic sales volume partially offset government services business divestiture cost products services sold decreased primarily driven government services business divestiture productivity net inflation partially offset higher organic sales volume honeywell building technologies 2018 compared 2017 honeywell building technologies sales decreased primarily due homes divestiture partially offset increase organic growth due volume price favorable impact foreign currency translation • sales homes decreased 12 driven divestiture impacts following october 29 2018 spinoff period prior spinoff sales increased 6 organic driven products distribution adi businesses • sales buildings increased 1 flat organic due organic growth building solutions favorable impact foreign currency translation offset lower sales building management systems building products honeywell building technologies segment profit decreased due homes divestiture partially offset increase operational segment profit favorable impact foreign currency translation increase operational segment profit primarily driven price productivity partially offset inflation higher sales lower margin products cost products services decreased due homes divestiture partially offset higher organic sales 2017 compared 2016 honeywell building technologies sales increased primarily due increase organic sales price acquisitions • sales homes increased 2 increased 2 organic due increase organic sales growth distribution partially offset lower sales volume products • sales buildings increased 4 increased 3 organic due organic sales growth building products building management systems building solutions acquisitions honeywell building technologies segment profit increased due increase operational segment profit favorable impact foreign currency translation increase operational segment profit primarily driven productivity net inflation price partially offset higher sales lower margin products cost products services increased due higher organic sales acquisitions performance materials technologies 2018 compared 2017 performance materials technologies sales increased primarily due organic growth mainly due price favorable impact foreign currency translation • uop sales increased 3 increased 3 organic driven primarily increases engineering revenues increased catalyst volumes partially offset lower gas processing equipment revenues • process solutions sales increased 4 increased 3 organic driven primarily increases maintenance migration services increased revenues projects higher field products sales • advanced materials sales increased 2 flat organic driven primarily increased volumes fluorine products partially offset lower specialty products sales performance materials technologies segment profit increased primarily due increase operational segment profit favorable impact foreign currency translation increase operational segment profit primarily due productivity price partially offset inflation higher sales lower margin products continued investments growth cost products services sold increased primarily due inflation higher sales lower margin products foreign currency translation partially offset productivity 2017 compared 2016 performance materials technologies sales decreased primarily due divestitures partially offset organic growth • uop sales increased 12 increased 12 organic driven primarily higher gas processing project revenues increased catalyst volumes increased equipment sales increased engineering revenues partially offset decreased licensing revenues • process solutions sales increased 3 increased 3 organic driven primarily higher revenue smart energy services thermal solutions software partially offset lower field products sales • advanced materials sales decreased 16 increased 11 organic driven primarily spinoff former resins chemicals business partially offset increased volumes fluorine products performance materials technologies segment profit increased primarily due increase operational segment profit partially offset divestitures increase operational segment profit primarily due productivity net inflation higher organic sales volume pricing partially offset unfavorable product mix continued investments growth cost products services sold decreased primarily due divestitures productivity net inflation partially offset higher organic sales volumes safety productivity solutions 2018 compared 2017 safety productivity solutions sales increased primarily due organic sales growth mainly due sales volume modest impact due price • sales safety increased 5 increased 4 organic due increased sales volume industrial safety retail • sales productivity solutions increased 17 increased 16 organic primarily due increased sales volume intelligrated sensing iot productivity products safety productivity solutions segment profit increased primarily due increase operational segment profit increase operational segment profit driven higher sales volume price cost products services increased primarily due higher organic sales 2017 compared 2016 safety productivity solutions sales increased primarily due acquisitions organic sales volume • sales safety increased 5 increased 4 organic due increased sales volume industrial safety business higher distribution retail business favorable impact foreign currency translation • sales productivity solutions increased 36 increased 6 organic principally due growth acquisitions intelligrated acquired august 2016 safety productivity solutions segment profit increased due increase operational segment profit acquisitions increase operational segment profit driven higher productivity net inflation sales volume cost products services increased primarily due acquisitions higher sales volume offset productivity net inflation repositioning charges see note 3 repositioning charges notes consolidated financial statements discussion repositioning actions related charges incurred 2018 2017 2016 cash spending related repositioning actions 285 million 177 million 228 million 2018 2017 2016 funded operating cash flows 2019 expect cash spending repositioning actions approximately 300 million funded operating cash flows liquidity capital resources company continues manage businesses maximize operating cash flows primary source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines shortterm debt commercial paper market longterm borrowings access public debt equity markets ability access nonus cash result us tax reform continue balance cash financing uses investment existing core businesses acquisition activity share repurchases dividends cash flow summary cash flows operating investing financing activities reflected consolidated statement cash flows summarized follows 2018 compared 2017 cash provided operating activities increased 468 million primarily due 239 million increase customer advances deferred income lower cash tax payments 185 million cash provided investing activities increased 4601 million primarily due net 4302 million decrease investments primarily shortterm marketable securities 620 million favorable change settlements foreign currency exchange contracts used economic hedges certain nonfunctional currency denominated monetary assets liabilities partially offset increase cash paid acquisitions 453 million cash used financing activities increased 1516 million primarily due increase net debt payments 2622 million increase net repurchases common stock 1364 million increase cash dividends paid 153 million partially offset net spin separation funding 2622 million net spinoff cash 2017 compared 2016 cash provided operating activities increased 468 million primarily due 504 million increase segment profit 294 million favorable impact working capital favorable accounts payable partially offset inventory accounts receivable partially offset higher cash tax payments 609 million cash used investing activities increased 232 million primarily due net 2056 million increase investments primarily shortterm marketable securities ii increase 500 million settlement payments foreign currency exchange contracts used economic hedges certain nonfunctional currency denominated monetary assets liabilities iii decrease proceeds sales businesses 296 million significantly honeywell technology solutions inc 2016 partially offset decrease cash paid acquisitions 2491 million significantly intelligrated 2016 cash provided financing activities increased 3862 million primarily due decrease net proceeds debt issuances 2827 million increase net repurchases common stock 699 million increase cash dividends paid 204 million liquidity businesses focused implementing strategies increase operating cash flows revenue growth margin expansion improved working capital turnover considering current economic environment businesses operate business plans strategies including focus growth cost reduction productivity initiatives believe cash balances operating cash flow continue principal source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines shortterm debt commercial paper markets longterm borrowings access public debt equity markets date company experienced limitations ability access sources liquidity monitor thirdparty depository institutions hold cash equivalents daily basis emphasis primarily safety principal secondarily maximizing yield funds diversify cash equivalents among counterparties minimize exposure one entities source liquidity ability issue shortterm debt commercial paper market commercial paper notes sold discount premium maturity 365 days date issuance borrowings commercial paper program available general corporate purposes well financing acquisitions weighted average interest rate shortterm borrowings commercial paper outstanding december 31 2018 031 december 31 2017 017 ability access commercial paper market related cost borrowings affected strength credit rating market conditions credit ratings periodically reviewed major independent debtrating agencies december 31 2018 standard poor’s sp fitch moody’s ratings longterm debt a2 shortterm debt a1 p1 sp fitch moody’s honeywell’s rating outlook “stable” also current shelf registration statement filed securities exchange commission may issue additional debt securities common stock preferred stock may offered one offerings terms determined time offering net proceeds offering would used general corporate purposes including repayment existing indebtedness share repurchases capital expenditures acquisitions see note 2 acquisitions divestitures note 13 longterm debt credit agreements notes consolidated financial statements additional discussion items impacting liquidity 2018 company repurchased 4000 million outstanding shares offset dilutive impact employee stock based compensation plans including option exercises restricted unit vesting matching contributions savings plans reduce share count attractive opportunities arise december 2017 board directors authorized repurchase total 8 billion honeywell common stock 37 billion remained available december 31 2018 additional share repurchases authorization included amounts remaining replaced previously approved share repurchase program honeywell presently expects repurchase outstanding shares time offset dilutive impact employee stock based compensation plans including option exercises restricted unit vesting matching contributions savings plans continue seek reduce share count via share repurchases attractive opportunities arise addition normal operating cash requirements principal future cash requirements fund capital expenditures share repurchases dividends strategic acquisitions debt repayments specifically expect primary cash requirements 2019 follows • capital expenditureswe expect spend approximately 800 million capital expenditures 2019 primarily growth production capacity expansion cost reduction maintenance replacement • share repurchasesunder company’s share repurchase program 37 billion available december 31 2018 additional share repurchases honeywell presently expects repurchase outstanding shares time offset dilutive impact employee stockbased compensation plans including option exercises restricted unit vesting matching contributions savings plans additionally seek reduce share count via share repurchases attractive opportunities arise amount timing future repurchases may vary depending market conditions level operating financing investing activities • dividendswe increased quarterly dividend rate 10 082 per share common stock effective fourth quarter 2018 dividend company intends continue pay quarterly dividends 2019 continuously assess relative strength business portfolio strategic fit market position profit cash flow contribution order upgrade combined portfolio identify business units benefit increased investment identify acquisition candidates strategic plan strengthen existing core businesses also identify businesses fit longterm strategic plan based market position relative profitability growth potential businesses considered potential divestiture restructuring repositioning actions subject regulatory constraints 2018 realized 2622 million net cash proceeds spinoff nonstrategic businesses based past performance current expectations believe operating cash flows sufficient meet future operating cash needs available cash committed credit lines access public debt equity markets provide additional sources shortterm longterm liquidity fund current operations debt maturities future investment opportunities contractual obligations probable liability payments following summary significant contractual obligations probable liability payments december 31 2018 1 assumes longterm debt outstanding scheduled maturity 2 purchase obligations entered various vendors normal course business consistent expected requirements 3 payment amounts table reflect environmental liabilities probable reasonably estimable december 31 2018 4 amounts estimates asbestos related cash payments narco bendix based asbestos related liabilities probable reasonably estimable december 31 2018 see asbestos matters note 20 commitments contingencies notes consolidated financial statements additional information 5 amounts represent insurance recoveries deemed probable asbestos related liabilities december 31 2018 see asbestos matters note 20 commitments contingencies notes consolidated financial statements additional information 6 table excludes tax liability payments including unrecognized tax benefits see note 5 income taxes notes consolidated financial statements additional information 7 table excludes expected proceeds indemnification reimbursement agreements entered garrett resideo see note 20 commitments contingencies notes consolidated financial statements additional information environmental matters accruals environmental matters deemed probable reasonably estimable 395 million 287 million 195 million 2018 2017 2016 addition 2018 2017 2016 incurred operating costs ongoing businesses approximately 95 million 82 million 83 million relating compliance environmental regulations spending related known environmental matters 218 million 212 million 228 million 2018 2017 2016 estimated approximately 175 million 2019 expect fund expenditures environmental matters operating cash flow timing cash expenditures depends several factors including timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects execution timeframe projects remedial techniques utilized agreement parties reimbursements resideo spending environmental matters certain sites defined indemnification reimbursement agreement 25 million 2018 expected 140 million 2019 reimbursements offset operating cash outflows incurred company see note 20 commitments contingencies notes consolidated financial statements discussion environmental matters indemnification reimbursement agreement entered resideo financial instruments following table illustrates potential change fair value interest rate sensitive instruments based hypothetical immediate one percentage point increase interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 weakening us dollar versus local currency exchange rates across maturities december 31 2018 2017 1 asset liability 2 hypothetical immediate one percentage point decrease interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 strengthening us dollar versus local currency exchange rates across maturities result change fair value approximately equal inverse amount disclosed table 3 changes fair value foreign currency exchange contracts offset changes fair value cash flows net investments underlying hedged foreign currency transactions foreign operations see note 15 financial instruments fair value measures notes consolidated financial statements discussion agreements critical accounting policies preparation consolidated financial statements accordance generally accepted accounting principles based selection application accounting policies require us make significant estimates assumptions effects matters inherently uncertain consider accounting policies discussed critical understanding financial statements actual results could differ estimates assumptions differences could material consolidated financial statements contingent liabilitieswe subject number lawsuits investigations claims involve substantial dollar amounts arise conduct global business operations previously owned entities including matters relating commercial transactions government contracts product liability including asbestos prior acquisitions divestitures employee benefit plans intellectual property legal environmental health safety matters continually assess likelihood adverse judgments outcomes contingencies well potential amounts ranges probable losses recognize liability contingencies based thorough analysis matter assistance outside legal counsel applicable experts analysis includes making judgments concerning matters costs associated environmental matters outcome negotiations number cost pending future asbestos claims impact evidentiary requirements contingencies resolved long periods time liabilities may change future due new developments including new discovery facts changes legislation outcomes similar cases judicial system changes assumptions changes settlement strategy see note 20 commitments contingencies notes consolidated financial statements discussion management’s judgment applied recognition measurement environmental asbestos liabilities represent significant contingencies asbestos related liabilities insurance recoveries indemnification receivableshoneywell’s involvement asbestos related personal injury actions relates two predecessor companies regarding north american refractories company “narco” asbestos related claims accrued pending claims based terms conditions agreements narco former parent company certain asbestos claimants estimate unsettled claims pending time narco filed bankruptcy protection also accrued estimated value future narco asbestos related claims expected asserted narco trust estimate future narco claims prepared 2002 year narco filed bankruptcy protection using narco tort system litigation experience based commonly accepted methodology used numerous bankruptcy courts addressing 524g trusts accordingly estimated value future narco asbestos claims prepared data claims filings payment rates narco trust distribution procedures prepared stay narco asbestos claims effect remained effect narco emerged bankruptcy protection critical assumptions underlying commonly accepted methodology included claims filing rates disease criteria payment values contained trust distribution procedures estimated approval rates claims submitted narco trust epidemiological studies estimating disease instances estimate resulted range estimated liability 743 million 961 million believe amount within range better estimate amount accordingly recorded minimum amount range given trust’s lack sufficiently reliable claims data since narco emerged bankruptcy protection yet possible update estimated future claim costs based actual narco trust experience regarding bendix friction materials “bendix” asbestos related claims accrued estimated value pending claims using average resolution values previous five years also accrued estimated value future claims related bendix full term epidemiological projections 2059 based historic anticipated claims filing experience dismissal rates disease classifications average resolution values tort system previous five years connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical dealings knowledge pertinent solvency issues surrounding insurers substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries projecting future events subject various uncertainties could cause insurance recovery asbestos related liabilities higher lower projected recorded given inherent uncertainty making future projections reevaluate projections concerning probable insurance recoveries considering changes projected liability recovery experience relevant factors may impact future insurance recoveries additionally conjunction garrett spinoff company entered indemnification reimbursement agreement garrett subsidiary pursuant garrett’s subsidiary obligation make cash payments honeywell reimbursement asbestos liabilities accordingly company recorded indemnification receivable monitor recoverability receivable subject terms applicable credit agreements garrett general ability pay see note 20 commitments contingencies notes consolidated financial statements discussion management’s judgments applied recognition measurement asbestosrelated liabilities related insurance recoveries additional details regarding indemnification reimbursement agreement defined benefit pension planswe sponsor funded unfunded us nonus defined benefit pension plans financial reporting purposes net periodic pension income expense calculated annually based upon number actuarial assumptions including discount rate plan obligations expected longterm rate return plan assets changes discount rate expected longterm rate return plan assets could materially affect annual pension income expense amount annual pension income expense comprised service interest cost assumed return plan assets prior service amortization pension ongoing income expense potential marktomarket adjustment mtm adjustment key assumptions used developing 2018 2017 2016 net periodic pension income expense us plans included following mtm adjustment represents recognition net actuarial gains losses excess 10 greater fair value plan assets plans’ projected benefit obligation corridor net actuarial gains losses occur actual experience differs various assumptions used value pension plans assumptions change primary factors contributing actuarial gains losses changes discount rate used value pension obligations measurement date year difference expected actual returns plan assets marktomarket accounting method results potential volatile difficult forecast mtm adjustments mtm charges 37 million 87 million 273 million 2018 2017 2016 determine expected longterm rate return plan assets utilizing historical plan asset returns varying longterm periods combined expectations future market conditions asset mix considerations see note 21 pension postretirement benefits notes consolidated financial statements details actual various asset classes targeted asset allocation percentages pension plans plan use expected rate return plan assets 675 2019 775 2018 reflecting rebalancing assets fixed income 2018 discount rate reflects market rate december 31 measurement date highquality fixedincome investments maturities corresponding benefit obligations subject change year discount rate volatile year determined based upon prevailing interest rates measurement date used 435 discount rate determine benefit obligations december 31 2018 reflecting increase market interest rate environment since prior yearend addition potential mtm adjustments changes expected rate return plan assets discount rate resulting economic events also affects future pension ongoing income expense following table highlights sensitivity us pension obligations ongoing income expense changes assumptions assuming assumptions remain constant estimates exclude potential mtm adjustment pension ongoing income worldwide pension plans expected approximately 590 million 2019 compared pension ongoing income 992 million 2018 expected decrease pension income primarily due lower actual asset returns 2018 lower expected return asset assumption 2019 us uk plans also required mtm adjustment recorded fourth quarter 2019 accordance pension accounting method previously described difficult reliably forecast predict whether mtm adjustment 2019 one required magnitude adjustment mtm adjustments primarily driven events circumstances beyond control company changes interest rates performance financial markets longlived assets including tangible finitelived intangible assetsthe determination useful lives depreciationamortization purposes whether tangible intangible assets impaired involves use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions evaluate recoverability carrying amount longlived assets whenever events changes circumstances indicate carrying amount longlived asset group may fully recoverable principal factors considering perform impairment review follows • significant underperformance ie declines sales earnings cash flows business product line relation expectations • annual operating plans strategic plan outlook indicate unfavorable trend operating performance business product line • significant negative industry economic trends • significant changes planned changes use assets determined impairment review necessary recoverability assets measured comparing carrying amount asset grouping estimated future undiscounted cash flows carrying amount exceeds estimated future undiscounted cash flows asset grouping considered impaired impairment measured difference carrying amount asset grouping fair value endeavor utilize best information available measure fair value usually either market prices available level 1 level 2 fair value hierarchy estimate future discounted cash flow level 3 fair value hierarchy key estimates discounted cash flow analysis include assumptions expected industry business growth rates sales volume selling prices costs cash flows discount rate selected estimates subject changes economic environment including market interest rates expected volatility management believes estimates future cash flows fair values reasonable however changes estimates due variance assumptions could materially affect valuations goodwill indefinitelived intangible assets impairment testinggoodwill intangible assets deemed indefinite lives amortized subject annual frequent necessary impairment testing goodwill indefinitelived intangible assets fair value estimated utilizing discounted cash flow approach utilizing cash flow forecasts five year strategic annual operating plans adjusted terminal value assumptions impairment tests involve use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions address uncertainty perform sensitivity analysis key estimates assumptions income taxeson recurring basis assess need valuation allowance deferred tax assets considering available positive negative evidence past operating results projections future taxable income enacted tax law changes feasibility impact tax planning initiatives projections future taxable income include number estimates assumptions regarding volume pricing costs well timing amount reversals taxable temporary differences discussion additional income tax policies provision items recorded regards us tax reform see note 1 summary significant accounting policies note 5 income taxes notes consolidated financial statements sales recognition longterm contractswe recognize sales longterm contracts performance obligations satisfied time using either input output method recognize revenue time perform contracts based continuous transfer control customer control transferring time revenue recognized based extent progress towards completion performance obligation generally use costtocost input method progress contracts best depicts transfer control customer occurs incur costs costtocost method extent progress towards completion measured based proportion costs incurred date total estimated costs completion performance obligation due nature work required performed many performance obligations estimation total revenue cost completion requires judgment contract revenues largely determined negotiated contract prices quantities modified assumptions regarding contract options change orders incentive award provisions associated technical performance price adjustment clauses inflation indexbased clauses cost estimates largely based negotiated estimated purchase contract terms historical performance trends economic projections significant factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements revenue cost estimates regularly monitored revised based changes circumstances impacts changes estimates net sales cost sales recognized cumulative catchup basis recognizes current period cumulative effect changes current prior periods based performance obligation’s percentage completion anticipated losses longterm contracts recognized losses become evident maintain financial controls customer qualification contract pricing estimation processes reduce risk contract losses matters litigation see note 20 commitments contingencies notes consolidated financial statements discussion environmental asbestos litigation matters recent accounting pronouncements see note 1 summary significant accounting policies notes consolidated financial statements discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations dollars millions except per share amounts following management’s discussion analysis financial condition results operations intended help reader understand results operations financial condition honeywell international inc consolidated subsidiaries “honeywell” “the company” three years ended december 31 2019 references notes relate notes consolidated financial statements item 8 financial statements supplementary data october 1 2018 completed taxfree spinoff honeywell shareowners transportation systems business previously part aerospace standalone publiclytraded company garrett motion inc “garrett” october 29 2018 completed taxfree spinoff honeywell shareowners homes global distribution business previously part home building technologies renamed honeywell building technologies following spinoff standalone publiclytraded company resideo technologies inc “resideo” removed assets liabilities associated garrett resideo consolidated balance sheet effective dates respective spinoffs included results operations garrett resideo consolidated statement operations effective dates respective spinoffs total sales total cost products services sold attributable spinoffs impacting segment profit 66 billion 48 billion year ended december 31 2018 detailed discussion prior year 2018 2017 yearoveryear changes included herein found managements discussion analysis section 2018 annual report form 10k filed february 8 2019 executive summary 2019 continued deliver financial commitments create longterm shareowner value income taxes grew 1 76 billion despite spinoffs improvement year income taxes attributable sales growth well operational improvements increased operating margins believe ability drive continuous earnings growth long history results consistently identifying investing productivity initiatives continue focus commercial excellence improvements manufacturing operational processes including integrated supply chain honeywell digital transformations drive higher sales better margins careful allow attainment shortterm financial results imperil creation longterm sustainable shareowner value committed strategy become one world’s leading software industrial companies technology investments allow us introduce new technology solutions high growth businesses broadbased attractive industrial end markets end markets characterized favorable global megatrends including energy efficiency infrastructure investment urbanization safety 2019 deployed capital 78 billion including capital expenditures dividends share repurchases mergers acquisitions venture investments business objectives businesses focused following objectives • driving profitable growth delivering innovative products research development technological excellence continued enhancement footprint high growth regions • continuing execute strategy become premier softwareindustrial including ongoing expansion honeywell forge connected solutions aircraft buildings cybersecurity plants workers driving recurring revenue model across company • expanding margins optimizing company’s cost structure supply chain honeywell digital transformation initiatives commercial excellence repositioning manufacturing operational process improvements • executing disciplined rigorous integration processes deliver growth acquisitions • controlling corporate costs including costs incurred asbestos environmental matters pension postretirement benefits • increasing availability capital strong cash flow generation conversion effective working capital management proactively managing debt enable company smartly deploy capital strategic acquisitions dividends share repurchases capital expenditures consolidated results operations net sales net sales decreased 2019 compared 2018 due spinoffs 2018 results included 6550 million sales related transportation systems homes global distribution businesses absent impact spinoffs 2018 sales grew 4 35252 2018 36709 2019 change net sales attributable following discussion net sales segment found review business segments section management’s discussion analysis unfavorable impact foreign currency translation 2019 compared 2018 principally driven strengthening us dollar currencies majority international markets primarily euro british pound chinese renminbi cost products services sold cost products services sold decreased 2019 compared 2018 due lower direct indirect material costs approximately 3920 million lower labor costs approximately 160 million driven spinoffs transportation systems homes global distribution businesses lower repositioning charges approximately 530 million largely due lower asbestos environmental related charges net reimbursements absent impact items 2018 cost products services sold increased approximately 3 gross margin percentage increased 2019 compared 2018 primarily due higher gross margin segments approximately 14 percentage points higher aerospace honeywell building technologies performance materials technologies gross margins including favorable impact following spinoffs partially offset lower safety productivity solutions gross margin additionally gross margin percentage increased due lower costs within cost products services sold repositioning charges approximately 15 percentage point impact pension service costs approximately 02 percentage point impact selling general administrative expenses selling general administrative expenses decreased 2019 compared 2018 primarily due impact spinoffs addition selling general administrative expenses decreased due productivity favorable impact foreign currency translation partially offset labor inflation income expense income expense decreased 2019 compared 2018 primarily due lower pension nonservice income partially offset lower separation costs tax expense effective tax rate 2019 lower us federal statutory rate 21 primarily resulting impacts revised guidance related us tax reform internal restructuring initiatives resulted 281 million reduction accrued withholding taxes related unremitted foreign earnings effective tax rate 2018 lower us federal statutory rate 21 primarily attributable internal restructuring initiatives resulted reduction accrued withholding taxes approximately 11 billion related unremitted foreign earnings addition recorded tax benefit approximately 440 million reduction 2017 provisional estimate impacts commonly referred us tax cuts jobs act “us tax reform” partially offset 411 million tax costs associated internal restructuring homes global distribution business transportation systems business advance spinoffs discussion changes effective tax rate see note 5 income taxes notes consolidated financial statements net income attributable honeywell earnings per share common stockassuming dilution decreased 2019 compared 2018 primarily driven absence profit attributable spinoffs higher income tax expense attributable lower income tax benefit related us tax reform internal restructuring initiatives compared prior year partially offset increased operational segment profit lower repositioning charges review business segments globally manage business operations four segments aerospace honeywell building technologies performance materials technologies safety productivity solutions aerospace 2019 compared 2018 aerospace sales decreased due impact spinoff transportation systems business 2018 results included 2622 million sales related spinoff absent impact spinoff 2018 sales grew approximately 9 12871 million 14054 million due growth organic sales • commercial aviation original equipment sales increased 6 increased 6 organic primarily due increased demand business aviation original equipment manufacturers oem • commercial aviation aftermarket sales increased 7 increased 7 organic primarily due growth air transport regional business aviation • defense space sales increased 14 increased 14 organic primarily driven growth us international defense aerospace segment profit increased primarily due organic sales volume price productivity net inflation partially offset divestiture impacts following spinoff transportation systems business cost products services sold decreased primarily due spinoff transportation systems business productivity net inflation partially offset higher sales volume honeywell building technologies 2019 compared 2018 honeywell building technologies sales decreased due impact spinoff homes global distribution business 2018 results included 3928 million sales related spinoff absent impact spinoff 2018 sales grew approximately 6 5370 million 5717 million • sales building technologies increased 6 increased 5 organic due organic growth products building solutions partially offset unfavorable impact foreign currency translation honeywell building technologies segment profit decreased primarily due divestiture impacts following spinoff homes global distribution business offset increase organic sales volumes price partially offset inflation cost products services sold decreased due spinoff partially offset higher sales volumes performance materials technologies 2019 compared 2018 performance materials technologies sales increased primarily due organic growth mainly due volumes partially offset unfavorable impact foreign currency translation • uop sales increased 2 increased 3 organic driven primarily increases catalyst sales project volumes licensing partially offset lower gas processing volumes unfavorable impact foreign currency translation • process solutions sales increased 3 increased 6 organic driven primarily increases maintenance migration services project volumes field products software sales partially offset unfavorable impact foreign currency translation • advanced materials sales decreased 2 flat organic driven primarily unfavorable impact foreign currency translation decreased volumes specialty products partially offset growth fluorine products sales performance materials technologies segment profit increased primarily due productivity net inflation price partially offset higher sales lower margin products impact foreign currency translation cost products services sold increased primarily due higher sales volumes partially offset impact foreign currency translation productivity net inflation safety productivity solutions 2019 compared 2018 safety productivity solutions sales decreased primarily due lower organic sales unfavorable impact foreign currency translation partially offset acquisitions • sales safety decreased 3 decreased 1 organic primarily due unfavorable impact foreign currency translation lower organic sales industrial safety • sales productivity solutions decreased 4 decreased 6 organic primarily due lower organic sales productivity products unfavorable impact foreign currency translation partially offset acquisitions safety productivity solutions segment profit decreased result lower sales volumes productivity products higher sales lower margin products impact foreign currency translation partially offset higher productivity net inflation favorable pricing acquisitions cost products services sold decreased primarily due higher productivity net inflation impact foreign currency translation partially offset acquisitions repositioning charges see note 3 repositioning charges notes consolidated financial statements discussion repositioning actions related charges incurred 2019 2018 2017 cash spending related repositioning actions 249 million 285 million 177 million 2019 2018 2017 funded operating cash flows 2020 expect cash spending repositioning actions approximately 300 million funded operating cash flows liquidity capital resources continue manage businesses maximize operating cash flows primary source liquidity addition available cash operating cash flows maintain additional sources liquidity including committed credit lines shortterm debt commercial paper market longterm borrowings access public debt equity markets ability access nonus cash result us tax reform use cash generated operations invest existing core businesses acquisitions share repurchases dividends cash flow summary cash flows operating investing financing activities reflected consolidated statement cash flows summarized follows 2019 compared 2018 cash provided operating activities increased 463 million primarily due 276 million decrease net payments repositioning charges largely due asbestos environmental related reimbursement receipts 35 million favorable impact working capital favorable inventory accounts receivable partially offset accounts payable cash used investing activities increased 1560 million primarily due net 1762 million increase investments primarily shortterm marketable securities cash used financing activities increased 1568 million primarily due prior year prespin separation funding 2622 million net spinoff cash increase cash dividends paid 170 million increase net repurchases common stock 169 million partially offset decrease net debt payments 1330 million liquidity businesses focused increasing operating cash flows revenue growth margin expansion improved working capital turnover believe cash balances operating cash flow continue principal source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines shortterm debt commercial paper markets longterm borrowings access public debt equity markets date company experienced limitations ability access sources liquidity monitor thirdparty depository institutions hold cash equivalents daily basis emphasis primarily safety principal secondarily maximizing yield funds diversify cash equivalents among counterparties minimize exposure one entities source liquidity ability access commercial paper market commercial paper notes sold discount premium maturity 365 days date issuance borrowings commercial paper program available general corporate purposes well financing acquisitions weighted average interest rate shortterm borrowings commercial paper outstanding december 31 2019 037 december 31 2018 031 ability access commercial paper market related cost borrowings affected strength credit rating market conditions credit ratings periodically reviewed major independent debtrating agencies december 31 2019 standard poor’s sp fitch moody’s ratings longterm debt a2 shortterm debt a1 p1 sp fitch moody’s honeywell’s rating outlook “stable” also current shelf registration statement filed securities exchange commission may issue additional debt securities common stock preferred stock may offered one offerings terms determined time offering net proceeds offering would used general corporate purposes including repayment existing indebtedness share repurchases capital expenditures acquisitions see note 2 acquisitions divestitures note 13 longterm debt credit agreements notes consolidated financial statements additional discussion items impacting liquidity 2019 repurchased 4400 million outstanding shares offset dilutive impact employee stock based compensation plans including option exercises restricted unit vesting matching contributions savings plans reduce share count attractive opportunities arise april 29 2019 board directors authorized repurchase total 100 billion honeywell common stock 70 billion remained available december 31 2019 additional share repurchases authorization included amounts remaining replaced previously approved share repurchase program expect repurchase outstanding shares time offset dilutive impact employee stock based compensation plans including option exercises restricted unit vesting matching contributions savings plans continue seek reduce share count via share repurchases attractive opportunities arise addition normal operating cash requirements principal future cash requirements fund capital expenditures share repurchases dividends strategic acquisitions debt repayments specifically expect primary cash requirements 2020 follows • capital expenditureswe expect spend approximately 900 million capital expenditures 2020 primarily growth production capacity expansion cost reduction maintenance replacement • share repurchasesunder share repurchase program 70 billion available december 31 2019 additional share repurchases expect repurchase outstanding shares time offset dilutive impact employee stockbased compensation plans including option exercises restricted unit vesting matching contributions savings plans additionally seek reduce share count via share repurchases attractive opportunities arise amount timing future repurchases may vary depending market conditions level operating financing investing activities • dividendswe increased quarterly dividend rate 10 090 per share common stock effective fourth quarter 2019 dividend intend continue pay quarterly dividends 2020 continuously assess relative strength business portfolio strategic fit market position profit cash flow contribution order identify target investment acquisition opportunities order upgrade combined portfolio identify acquisition candidates strategic plan strengthen existing core businesses also identify businesses fit longterm strategic plan based market position relative profitability growth potential businesses considered potential divestiture restructuring repositioning actions subject regulatory constraints based past performance current expectations believe operating cash flows sufficient meet future operating cash needs available cash committed credit lines access public debt equity markets provide additional sources shortterm longterm liquidity fund current operations debt maturities future investment opportunities contractual obligations following summary significant contractual obligations probable liability payments december 31 2019 1 assumes longterm debt outstanding scheduled maturity 2 purchase obligations entered various vendors normal course business consistent expected requirements 3 payment amounts table reflect environmental liabilities probable reasonably estimable december 31 2019 4 amounts estimates asbestos related cash payments narco bendix based asbestos related liabilities probable reasonably estimable december 31 2019 see asbestos matters note 20 commitments contingencies notes consolidated financial statements additional information 5 amounts represent insurance recoveries deemed probable asbestos related liabilities december 31 2019 see asbestos matters note 20 commitments contingencies notes consolidated financial statements additional information 6 table excludes tax liability payments including unrecognized tax benefits see note 5 income taxes notes consolidated financial statements additional information 7 table excludes expected proceeds indemnification reimbursement agreements entered garrett resideo see note 20 commitments contingencies notes consolidated financial statements additional information asbestos matters payments net insurance recoveries related known asbestos matters 163 million 216 million 239 million 2019 2018 2017 estimated approximately 320 million 2020 expect pay asbestos matters operating cash flows timing payments depends several factors including timing litigation settlements liability claims reimbursements garrett payments related asbestos matters defined indemnification reimbursement agreement 152 million 2019 expected approximately 115 million 2020 received approximately 36 million january 2020 see note 20 commitments contingencies notes consolidated financial statements discussion asbestos matters indemnification reimbursement agreement entered garrett environmental matters accruals environmental matters deemed probable reasonably estimable 213 million 395 million 287 million 2019 2018 2017 addition 2019 2018 2017 incurred operating costs ongoing businesses approximately 99 million 95 million 82 million relating compliance environmental regulations payments related known environmental matters 256 million 218 million 212 million 2019 2018 2017 estimated approximately 220 million 2020 expect pay environmental matters operating cash flows timing payments depends several factors including timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects execution timeframe projects remedial techniques utilized agreement parties reimbursements resideo payments related environmental matters certain sites defined indemnification reimbursement agreement 140 million 2019 expected 140 million 2020 received approximately 35 million january 2020 see note 20 commitments contingencies notes consolidated financial statements discussion environmental matters indemnification reimbursement agreement entered resideo financial instruments following table illustrates potential change fair value interest rate sensitive instruments based hypothetical immediate one percentage point increase interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 weakening us dollar versus local currency exchange rates across maturities december 31 2019 2018 1 asset liability 2 hypothetical immediate one percentage point decrease interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 strengthening us dollar versus local currency exchange rates across maturities result change fair value approximately equal inverse amount disclosed table 3 changes fair value foreign currency exchange contracts offset changes fair value cash flows net investments underlying hedged foreign currency transactions foreign operations see note 15 financial instruments fair value measures notes consolidated financial statements discussion agreements critical accounting estimates preparation consolidated financial statements accordance generally accepted accounting principles based selection application accounting policies require us make significant estimates assumptions effects matters inherently uncertain many estimates assumptions involved application accounting principles material impact reported financial condition operating performance comparability reported information different reporting periods critical accounting estimates assumptions nature estimates assumptions material due levels subjectivity judgment necessary account highly uncertain matters susceptibility matters change impact estimates assumptions financial condition operating performance material consider estimates assumptions discussed critical understanding financial statements actual results could differ estimates assumptions differences could material consolidated financial statements contingent liabilitieswe subject number lawsuits investigations claims involve substantial dollar amounts arise conduct global business operations previously owned entities including matters relating commercial transactions government contracts product liability including asbestos prior acquisitions divestitures employee benefit plans intellectual property legal environmental health safety matters continually assess likelihood adverse judgments outcomes contingencies well potential amounts ranges probable losses recognize liability contingencies based thorough analysis matter assistance outside legal counsel applicable experts analysis includes making judgments concerning matters costs associated environmental matters outcome negotiations number cost pending future asbestos claims impact evidentiary requirements contingencies resolved long periods time liabilities may change future due new developments including new discovery facts changes legislation outcomes similar cases judicial system changes assumptions changes settlement strategy see note 20 commitments contingencies notes consolidated financial statements discussion management’s judgment applied recognition measurement environmental asbestos liabilities represent significant contingencies asbestos related liabilities insurance recoveriesin connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical dealings knowledge pertinent solvency issues surrounding insurers substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries projecting future events subject various uncertainties could cause insurance recovery asbestos related liabilities higher lower projected recorded given inherent uncertainty making future projections reevaluate projections concerning probable insurance recoveries considering changes projected liability recovery experience relevant factors may impact future insurance recoveries involvement asbestos related personal injury actions relates two predecessor companies regarding north american refractories company “narco” asbestos related claims accrue pending claims based terms conditions agreements narco former parent company certain asbestos claimants estimate unsettled claims pending time narco filed bankruptcy protection also accrue estimated value future narco asbestos related claims expected asserted narco trust estimate future narco claims prepared 2002 year narco filed bankruptcy protection using narco tort system litigation experience based commonly accepted methodology used numerous bankruptcy courts addressing 524g trusts accordingly estimated value future narco asbestos claims prepared data claims filings payment rates narco trust distribution procedures prepared stay narco asbestos claims effect remained effect narco emerged bankruptcy protection critical assumptions underlying commonly accepted methodology included claims filing rates disease criteria payment values contained trust distribution procedures estimated approval rates claims submitted narco trust epidemiological studies estimating disease instances estimate resulted range estimated liability 743 million 961 million believe amount within range better estimate amount accordingly recorded minimum amount range given trust’s lack sufficiently reliable claims data since narco emerged bankruptcy protection yet possible update estimated future claim costs based actual narco trust experience sufficiently reliable claims data exists update estimate narco trust liability possible material change may need recognized regarding bendix friction materials “bendix” asbestos related claims accrued estimated value pending claims using average resolution values previous five years also accrued estimated value future claims related bendix full term epidemiological projections 2059 based historic anticipated claims filing experience dismissal rates disease classifications average resolution values tort system previous five years see note 20 commitments contingencies notes consolidated financial statements discussion management’s judgments applied recognition measurement asbestosrelated liabilities related insurance recoveries reimbursement receivablesin conjunction garrett resideo spinoffs company entered reimbursement agreements honeywell receives cash payments reimbursement primarily asbestos related liability payments related bendix business us garrett net spending environmental matters certain sites defined agreement resideo accordingly company recorded receivable based estimates underlying reimbursable honeywell spend monitor recoverability receivable subject terms applicable credit agreements general ability pay see note 20 commitments contingencies notes consolidated financial statements discussion recognition measurement reimbursement receivables defined benefit pension planswe sponsor funded unfunded us nonus defined benefit pension plans financial reporting purposes net periodic pension income expense calculated annually based upon number actuarial assumptions including discount rate plan obligations expected longterm rate return plan assets changes discount rate expected longterm rate return plan assets could materially affect annual pension income expense amount annual pension income expense comprised service interest cost assumed return plan assets prior service amortization pension ongoing income expense potential marktomarket adjustment mtm adjustment key assumptions used developing 2019 2018 2017 net periodic pension income expense us plans included following mtm adjustment represents recognition net actuarial gains losses excess 10 greater fair value plan assets plans’ projected benefit obligation corridor net actuarial gains losses occur actual experience differs various assumptions used value pension plans assumptions change primary factors contributing actuarial gains losses changes discount rate used value pension obligations measurement date year difference expected actual returns plan assets marktomarket accounting method results potential volatile difficult forecast mtm adjustments mtm charges 123 million 37 million 87 million 2019 2018 2017 determine expected longterm rate return plan assets utilizing historical plan asset returns varying longterm periods combined expectations future market conditions asset mix considerations see note 21 pension postretirement benefits notes consolidated financial statements details actual various asset classes targeted asset allocation percentages pension plans plan use expected rate return plan assets 615 2020 675 2019 reflecting decline interest rates additional rebalancing assets fixed income discount rate reflects market rate december 31 measurement date highquality fixedincome investments maturities corresponding benefit obligations subject change year discount rate volatile year determined based upon prevailing interest rates measurement date used 322 discount rate determine benefit obligations december 31 2019 reflecting decrease market interest rate environment since prior yearend addition potential mtm adjustments changes expected rate return plan assets discount rate resulting economic events also affects future pension ongoing income expense following table highlights sensitivity us pension obligations ongoing income expense changes assumptions assuming assumptions remain constant estimates exclude potential mtm adjustment pension ongoing income worldwide pension plans expected approximately 786 million 2020 compared pension ongoing income 592 million 2019 expected increase pension income primarily due lower interest cost decrease discount rates us uk plans higher expected return plan assets lower rate return higher asset base also required mtm adjustment recorded fourth quarter 2020 accordance pension accounting method previously described difficult reliably forecast predict whether mtm adjustment 2020 one required magnitude adjustment mtm adjustments primarily driven events circumstances beyond control company changes interest rates performance financial markets finitelived intangible assetsthe determination useful lives depreciationamortization purposes whether intangible assets impaired involves use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions evaluate recoverability carrying amount finitelived intangible assets whenever events changes circumstances indicate carrying amount finitelived intangible asset group may fully recoverable principal factors considering perform impairment review follows • significant underperformance ie declines sales earnings cash flows business product line relation expectations • annual operating plans strategic plan outlook indicate unfavorable trend operating performance business product line • significant negative industry economic trends • significant changes planned changes use assets determined impairment review necessary recoverability assets measured comparing carrying amount asset grouping estimated future undiscounted cash flows carrying amount exceeds estimated future undiscounted cash flows asset grouping considered impaired impairment measured difference carrying amount asset grouping fair value endeavor utilize best information available measure fair value usually either market prices available level 1 level 2 fair value hierarchy estimate future discounted cash flow level 3 fair value hierarchy key estimates discounted cash flow analysis include assumptions expected industry business growth rates sales volume selling prices costs cash flows discount rate selected estimates subject changes economic environment including market interest rates expected volatility management believes estimates future cash flows fair values reasonable however changes estimates due variance assumptions could materially affect valuations goodwill indefinitelived intangible assets impairment testinggoodwill intangible assets deemed indefinite lives amortized subject annual frequent necessary impairment testing goodwill indefinitelived intangible assets fair value estimated utilizing discounted cash flow approach utilizing cash flow forecasts including strategic annual operating plans adjusted terminal value assumptions impairment tests involve use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions address uncertainty perform sensitivity analysis key estimates assumptions income taxeson recurring basis assess need valuation allowance deferred tax assets considering available positive negative evidence past operating results projections future taxable income enacted tax law changes feasibility impact tax planning initiatives projections future taxable income include number estimates assumptions regarding volume pricing costs well timing amount reversals taxable temporary differences recognize tax benefits uncertain tax positions likely tax position sustained examination taxing authorities including resolution related appeals litigation assess income tax positions based upon evaluation facts circumstances information available reporting date tax benefits recognized financial statements positions measured based largest benefit greater 50 likelihood realized upon ultimate settlement taxing authority full knowledge relevant information income tax positions likely tax benefit sustained tax benefit recognized financial statements discussion additional income tax policies see note 1 summary significant accounting policies note 5 income taxes notes consolidated financial statements sales recognition longterm contractswe recognize sales longterm contracts performance obligations satisfied time using either input output method recognize revenue time perform contracts based continuous transfer control customer control transferring time revenue recognized based extent progress towards completion performance obligation generally use costtocost input method progress contracts best depicts transfer control customer occurs incur costs costtocost method extent progress towards completion measured based proportion costs incurred date total estimated costs completion performance obligation due nature work required performed many performance obligations estimation total revenue cost completion requires judgment contract revenues largely determined negotiated contract prices quantities modified assumptions regarding contract options change orders incentive award provisions associated technical performance price adjustment clauses inflation indexbased clauses cost estimates largely based negotiated estimated purchase contract terms historical performance trends economic projections significant factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements revenue cost estimates regularly monitored revised based changes circumstances impacts changes estimates net sales cost sales recognized cumulative catchup basis recognizes current period cumulative effect changes current prior periods based performance obligation’s percentage completion anticipated losses longterm contracts recognized losses become evident maintain financial controls customer qualification contract pricing estimation processes reduce risk contract losses matters litigation see note 20 commitments contingencies notes consolidated financial statements discussion environmental asbestos litigation matters recent accounting pronouncements see note 1 summary significant accounting policies notes consolidated financial statements discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations dollars millions except per share amounts following management’s discussion analysis financial condition results operations “mda” intended help reader understand results operations financial condition honeywell international inc consolidated subsidiaries “honeywell” “company” three years ended december 31 2012 references notes related notes financial statements “item 8 financial statements supplementary data” consumer products group cpg automotive aftermarket business historically part transportation systems reportable segment accordance generally accepted accounting principles cpg results excluded continuing operations presented discontinued operations periods presented see note 2 acquisitions divestitures details executive summary honeywell 2012 marked another year strong growth despite challenging political macroeconomic environment company continued manage uncertainty associated slower expected economic growth united states recession european union political unrest middle east slowing growth china emerging economies despite modest 26 percent growth world gdp industrial production honeywell’s 2012 revenues 377 billion representing 3 percent improvement compared 2011 revenues 365 billion honeywell’s 2012 revenue growth achieved despite significant foreign exchange weakness euro nonus dollar currencies negative 2 percent impact 2012 revenues segment profit improved 10 percent excess three times revenue growth evidencing company’s continued focus operational excellence see review business segments section mda reconciliation segment profit consolidated income continuing operations taxes company’s operational excellence ability expand profit faster sales growth due part consistent methodical application several key internal business processes drive efficiency service quality bringing worldclass products services markets faster cost effectively customers honeywell refers processes honeywell enablers 2012 honeywell continued strengthen expand use honeywell enablers • honeywell operating system “hos” hos drives sustainable improvements manufacturing operations generate exceptional performance safety quality delivery cost inventory management approximately 70 percent manufacturing cost base achieved hos certification • velocity product development “vpd” vpd process brings together functions necessary successfully launch new productsrd manufacturing marketing salesto increase probability commercializing new technologies honeywell delivers right products right price • functional transformation “ft” functional transformation hos administrative functionsfinance legal hr purchasingstandardizing way work improves service quality reduces costs • organizational efficiency “oef” oef simplest form cost labor improvements oef represent success honeywell’s initiatives increase labor cost efficiency employee productivity company continues invest future growth measured number important metrics • rd spending 49 percent revenues targeted high growth areas natural gas processing low global warming refrigerants blowing agents wireless control devices technologies • capital expenditures grew 11 percent 884 million including construction expansion technology centers india saudi arabia • company recognized approximately 119 million restructuring actions support sustainable productivity years come • company completed 438 million net cash acquired acquisitions 2012 including acquisition 70 percent ownership interest thomas russell llc “thomas russell co” leader technology equipment natural gas processing treating primarily serving us market • expansion honeywell’s presence sales high growth regions countries china india eastern europe middleeast latin america sales customers outside united states account approximately 55 percent total revenues operating cash flow grew 24 percent 2012 3517 million operating cash flow performance enabled us invest 884 million capital expenditures fund acquisitions discussed make 1039 million pension contributions provide 11 percent increase dividends paid vs 2011 repurchase 5 million shares common stock consolidated results operations net sales change net sales compared prior year period attributable following discussion net sales segment found review business segments section mda cost products services sold cost products services sold decreased 265 million 1 percent 2012 compared 2011 principally due decrease pension expense approximately 800 million primarily driven decrease pension marktomarket adjustment allocated cost products services sold 780 million decrease repositioning charges approximately 220 million partially offset estimated increase direct material costs approximately 620 million driven substantially 3 percent increase sales result factors excluding price shown discussed review business segments section mda increase postretirement expense approximately 135 million due absence 2011 curtailment gains gross margin percentage increased 31 percentage points 2012 compared 2011 principally due lower pension expense approximately 22 percentage point impact primarily driven decrease pension marktomarket adjustment allocated cost products services sold lower repositioning actions approximately 06 percentage point impact higher segment gross margin aerospace automation control solutions performance materials technologies segments approximately 04 percentage point impact collectively partially offset higher postretirement expense approximately 04 percentage point impact cost products services sold increased 3835 million 16 percent 2011 compared 2010 principally due estimated increase direct material costs labor costs indirect costs approximately 2 billion 520 million 280 million respectively driven substantially 13 percent increase sales result factors excluding price shown discussed review business segments section mda increase pension postretirement expense approximately 880 million primarily driven increase pension marktomarket adjustment allocated cost products services sold 11 billion increase repositioning charges approximately 90 million gross margin percentage decreased 18 percentage points 2011 compared 2010 primarily due higher pension postretirement expense approximate 28 percentage point impact primarily driven unfavorable 33 percentage point impact resulting increase pension marktomarket adjustment allocated cost products services sold repositioning charges approximate 02 percentage point impact partially offset higher sales volume driven business segments approximate 12 percentage point impact selling general administrative expenses selling general administrative expenses sga decreased percentage sales 09 percent 2012 compared 2011 driven impact higher sales result factors discussed review business segments section mda estimated 110 million decrease pension expense driven decrease portion pension marktomarket charge allocated sga 90 million decrease due foreign exchange 80 million decrease repositioning actions partially offset impact estimated 140 million increase costs resulting acquisitions investment growth merit increases net employee related costs selling general administrative expenses increased percentage sales 05 percent 2011 compared 2010 driven estimated 430 million increase labor costs resulting acquisitions investment growth merit increases estimated increase 240 million pension postretirement expense driven primarily allocated portion pension marktomarket charge increase approximately 270 million estimated increase 60 million repositioning actions partially offset impact higher sales volume result factors discussed review business segments section mda income expense income decreased 14 million 2012 compared 2011 due primarily 50 million pretax gain related divestiture automotive onboard sensors products business within automation control solutions segment first quarter 2011 partially offset loss 29 million resulting early redemption debt 2011 included within “other net” reduction approximately 6 million acquisition related costs compared 2011 included within “other net” income decreased 13 million 2011 compared 2010 due primarily 29 million loss resulting early redemption debt first quarter 2011 included within “other net” absence 62 million pretax gain related consolidation joint venture within performance materials technologies segment third quarter 2010 included within “other net” see note 4 notes financial statements details partially offset 61 million increase gain sale nonstrategic businesses assets due primarily 50 million pretax gain related divestiture automotive onboard sensors products business within automation control solutions segment reduction approximately 12 million acquisition related costs compared 2010 included within “other net” interest financial charges interest financial charges decreased 7 percent 2012 compared 2011 primarily due lower borrowing costs partially offset higher average debt balances interest financial charges decreased 3 percent 2011 compared 2010 primarily due lower borrowing costs partially offset higher debt balances tax expense effective tax rate increased 61 percentage points 2012 compared 2011 primarily due change mix earnings taxed higher rates primarily driven approximate 61 percentage point impact decrease pension marktomarket expense decreased benefit valuation allowances decreased benefit settlement tax audits absence us rd tax credit partially offset decreased expense related tax reserves foreign effective tax rate 170 percent decrease approximately 41 percentage points primarily consisted 100 percent impact related decrease tax reserves partially offset 52 percent impact increased valuation allowances net operating losses primarily due decrease luxembourg france earnings available offset net operating loss carry forwards 14 percent impact tax expense related foreign exchange effective tax rate lower us statutory rate 35 percent primarily due earnings taxed lower foreign rates effective tax rate decreased 98 percentage points 2011 compared 2010 primarily due change mix earnings us foreign sources related higher us pension expense primarily driven approximate 76 percentage point impact resulted increase pension marktomarket expense increased benefit manufacturing incentives increased benefit favorable settlement tax audits increased benefit lower foreign effective tax rate foreign effective tax rate 211 percent decrease approximately 49 percentage points primarily consisted 51 percent impact decreased valuation allowances net operating losses primarily due increase german earnings available offset net operating loss carry forwards ii 24 percent impact tax benefits related foreign exchange investment losses iii 12 percent impact increased benefit tax credits lower statutory tax rates iv 41 percent impact related increase tax reserves effective tax rate lower us statutory rate 35 percent primarily due earnings taxed lower foreign rates american taxpayer relief act 2012 signed law january 2 2013 provisions provide retroactive changes 2012 tax year taken account determining company’s effective tax rate 2012 impact retroactive changes recorded first quarter 2013 however 2013 effective tax rate could also change based upon company’s operating results mix earnings outcome tax positions taken regarding previously filed tax returns currently audit various federal state foreign tax authorities several may finalized foreseeable future company believes adequate reserves matters however ultimate outcome matters may differ could materially impact results operations operating cash flows period resolved net income attributable honeywell earnings per share common stockassuming dilution increased 108 per share 2012 compared 2011 primarily due lower pension expense mainly due decrease pension marktomarket adjustment increased segment profit aerospace automation control solutions performance materials technologies segments lower repositioning charges partially offset increased tax expense decreased income discontinued operations higher postretirement expense earnings per share common stockassuming dilution increased 002 per share 2011 compared 2010 primarily due increase segment profit business segments lower tax expense gain disposal discontinued operations lower postretirement expense partially offset higher pension expense primarily due increase pension marktomarket adjustment higher repositioning charges discussion segment results see “review business segments” business overview business overview provides summary honeywell four reportable operating segments aerospace automation control solutions performance materials technologies transportation systems including respective areas focus 2013 relevant economic factors impacting results discussion segment’s results three years ended december 31 2012 segments comprised various product service classes serve multiple end markets see note 24 segment financial data notes financial statements information reportable segments definition segment profit economic factors addition factors listed respect operating segments consolidated operating results principally impacted • change global economic growth rates industry conditions demand key end markets • overall sales mix particular mix aerospace original equipment aftermarket sales mix automation control solutions acs products distribution services sales • extent cost savings productivity actions able offset exceed impact material nonmaterial inflation • impact pension discount rate asset returns pension expense including marktomarket adjustments funding requirements • impact fluctuations foreign currency exchange rates particular euro relative us dollar areas focus 2013 areas focus supported enablers including honeywell operating system velocity product development process functional transformation organizational efficiency areas focus generally applicable operating segments include • driving profitable growth rd technological excellence optimized manufacturing capability deliver innovative products customers value • expanding margins maintaining improving company’s cost structure manufacturing administrative process improvements restructuring actions drive productivity enhance flexibility business works proactively respond changes end market demand • proactively managing raw material costs formula longterm supply agreements hedging activities feasible prudent • driving strong cash flow conversion effective working capital management enable company undertake strategic actions benefit business including capital expenditures strategic acquisitions returning cash shareholders • increasing sales penetration expanding localized footprint high growth regions including china india eastern europe middle east latin america • aligning prioritizing investments longterm growth considering shortterm demand volatility • monitoring suppliers customers signs liquidity constraints limiting exposure resulting inability meet delivery commitments pay amounts due identifying alternate sources supply necessary • controlling corporate nonoperating costs including costs incurred asbestos environmental matters pension postretirement expenses tax expense review business segments reconciliation segment profit consolidated income continuing operations taxes follows 1 equity incomeloss affiliated companies included segment profit 2 amounts included cost products services sold selling general administrative expenses aerospace overview aerospace leading global supplier aircraft engines avionics related products services aircraft manufacturers airlines aircraft operators military services defense space contractors aerospace products services include auxiliary power units propulsion engines environmental control systems electric power systems engine controls flight safety communications navigation radar surveillance systems aircraft lighting management technical services logistics services advanced systems instruments aircraft wheels brakes repair overhaul services aerospace sells products original equipment oe manufacturers air transport regional business general aviation aircraft segments provides spare parts repair maintenance services aftermarket principally aircraft operators united states government major customer defense space products economic factors aerospace operating results principally impacted • new aircraft production rates delivery schedules set commercial air transport regional jet business general aviation oe manufacturers well airline profitability platform mix retirement aircraft service • global demand commercial air travel reflected global flying hours utilization rates corporate general aviation aircraft well demand spare parts maintenance repair services aircraft currently use • level mix us foreign government appropriations defense space programs military activity • changes customer platform development schedules requirements demands new technologies • availability price variability raw materials nickel titanium metals aerospace sales major customer endmarkets follows 2012 compared 2011 aerospace sales increased 5 percent 2012 compared 2011 primarily due increase organic growth 3 percent primarily due increased commercial sales volume 1 percent increase acquisitions net divestitures 1 percent increase revenue related 88 million reduction payments business general aviation oe manufacturers partially offset preproduction costs associated new aircraft platforms oem payments details regarding changes sales customer endmarkets follows commercial original equipment oe sales increased 19 percent 12 percent organic 2012 compared 2011 • air transport regional oe sales increased 11 percent 11 percent organic 2012 primarily driven higher sales oe customers consistent higher production rates favorable platform mix • business general aviation oe sales increased 34 percent 15 percent organic 2012 driven strong demand business jet endmarket favorable platform mix growth acquisitions favorable 12 percent impact oem payments discussed commercial aftermarket sales increased 8 percent 2012 compared 2011 • air transport regional aftermarket sales increased 4 percent 2012 primarily due increased sales spare parts higher maintenance activity driven approximate 2 percent increase global flying hours 2012 increased sales avionics upgrades changes customer buying patterns relating maintenance activity first half 2012 • business general aviation aftermarket sales increased 17 percent 2012 primarily due increased sales spare parts revenue associated maintenance service agreements higher penetration retrofit modifications upgrades defense space sales decreased 3 percent negative 4 percent organic 2012 primarily due anticipated program ramp downs partially offset higher international aftermarket sales growth acquisitions net divestitures aerospace segment profit increased 13 percent 2012 compared 2011 primarily due increase operational segment profit 8 percent 4 percent favorable impact lower oem payments discussed 1 percent increase acquisitions net divestitures increase operational segment profit due favorable impact higher price productivity net inflation commercial demand partially offset increased research development engineering investments cost products services sold totaled 90 billion 2012 increase approximately 324 million 2011 primarily result factors discussed excluding price 2011 compared 2010 aerospace sales increased 7 percent 2011 compared 2010 primarily due increase organic growth 7 percent primarily due increased commercial sales volume details regarding increase sales customer endmarkets follows commercial oe sales increased 15 percent 11 percent organic 2011 compared 2010 • air transport regional oe sales increased 6 percent 2011 primarily driven higher sales oe customers consistent higher production rates platform mix higher win rate selectables components selected purchasers new aircraft • business general aviation oe sales increased 41 percent 24 percent organic 2011 due rebound near trough levels 2010 strong demand business jet end market favorable platform mix growth acquisitions lower oem payments 2011 commercial aftermarket sales increased 18 percent 2011 compared 2010 • air transport regional aftermarket sales increased 16 percent 2011 primarily due increased maintenance activity spare parts sales driven approximately 6 percent increase global flying hours ii increased sales avionics upgrades iii changes customer buying patterns relating spare parts maintenance activity • business general aviation aftermarket sales increased 24 percent 2011 primarily due increased sales spare parts revenue associated maintenance service agreements defense space sales decreased 2 percent negative 3 percent organic 2011 primarily due anticipated program ramp downs partially offset higher domestic international aftermarket sales increased unmanned aerial vehicle uav shipments ems acquisition refer note 2 aerospace segment profit increased 10 percent 2011 compared 2010 primarily due increase operational segment profit 9 percent increase 1 percent due lower oem payments made 2011 increase operational segment profit comprised positive impact higher commercial aftermarket demand price productivity net inflation partially offset research development engineering investments cost products services sold totaled 87 billion 2011 increase approximately 566 million 2010 primarily result factors discussed excluding price 2013 areas focus aerospace’s primary areas focus 2013 include • global pursuit new commercial defense space programs • driving customer satisfaction operational excellence product quality cycle time reduction supplier management • aligning research development customer support costs customer requirements demand new platforms • expanding sales operations international locations • focusing cost structure initiatives maintain profitability face economic uncertainty potential defense space budget reductions program specific appropriations • continuing design equipment enhances safety performance durability aerospace defense equipment reducing weight operating costs • continued deployment optimization common enterprise resource planning erp system automation control solutions acs overview acs provides innovative products solutions make homes buildings industrial sites infrastructure efficient safe comfortable acs products services include controls displays heating cooling indoor air quality ventilation humidification combustion lighting home automation advanced software applications homebuilding control optimization sensors switches control systems instruments measuring pressure air flow temperature electrical current security fire gas detection personal protection equipment access control video surveillance remote patient monitoring systems products automatic identification data collection installation maintenance upgrades systems keep buildings safe comfortable productive automation control solutions industrial plants including field instruments advanced software automation systems integrate control monitor complex processes many types industrial settings well equipment controls measures analyzes natural gas production transportation economic factors acs’s operating results principally impacted • economic conditions growth rates developed north america europe australia high growth regions • industrial production global commercial construction including retrofits upgrades • demand residential security environmental control retrofits upgrades energy efficient products solutions • government public sector spending • strength global capital operating spending process including petrochemical refining building automation • inventory levels distribution channels • changes energy fire security health care safety environmental concerns regulations automation control solutions 2012 compared 2011 automation control solutions “acs” sales increased 2 percent 2012 compared 2011 primarily due 3 percent increase organic revenue driven increased sales volume 1 percent growth acquisitions net divestitures partially offset unfavorable impact foreign exchange • sales energy safety security businesses increased 2 percent 1 percent organic 2012 principally due positive impact acquisitions significantly ems technologies inc king’s safetywear limited net divestitures ii higher sales volumes due contract wins new product introductions scanning mobility business iii higher sales volumes due improved us residential market conditions new product introductions security business partially offset unfavorable impact foreign exchange ii lower sales volume europe iii decreases sales volumes personal protective equipment sensing control products primarily result softness industrial end markets • sales process solutions business increased 3 percent 6 percent organic 2012 principally due increased conversion sales backlog partially offset unfavorable impact foreign exchange project orders decreased second half 2012 compared corresponding period 2011 primarily driven extension project timing customers higher typical project orders fourth quarter 2011 expect lead moderate growth rates 2013 • sales building solutions distribution businesses increased 3 percent 4 percent organic 2012 principally due growth building solutions business reflecting conversion sales backlog increased sales volume americas distribution business due improved us residential market conditions partially offset unfavorable impact foreign exchange softness energy retrofit business project orders decreased fourth quarter 2012 principally due extension project timing customers softness energy retrofit business acs segment profit increased 7 percent 2012 compared 2011 due 8 percent increase operational segment profit 1 percent increase acquisitions net divestitures partially offset 2 percent unfavorable impact foreign exchange increase operational segment profit primarily result positive impact price productivity net inflation cost products services sold totaled 107 billion 2012 increase 243 million primarily due higher sales inflation acquisitions net divestitures partially offset favorable impact foreign exchange productivity 2011 compared 2010 acs sales increased 13 percent 2011 compared 2010 primarily due 6 percent growth acquisitions net divestitures 5 percent increase organic revenue driven increased sales volume higher prices 2 percent favorable impact foreign exchange first nine months partially offset negative impact foreign exchange fourth quarter • sales energy safety security businesses increased 17 percent 6 percent organically 2011 principally due positive impact acquisitions significantly sperian ems net divestitures ii higher sales volume due general industrial recovery new product introductions iii favorable impact foreign exchange • sales process solutions increased 12 percent 6 percent organically 2011 principally due increased volume reflecting conversion sales backlog ii favorable impact foreign exchange iii impact acquisitions orders increased 2011 compared 2010 primarily driven continued favorable macro trends oil gas infrastructure projects growth emerging regions positive impact foreign exchange • sales building solutions distribution increased 6 percent 4 percent organically 2011 driven principally due volume growth building solutions business reflecting conversion sales order backlog increased sales volume distribution business ii favorable impact foreign exchange iii impact acquisitions net divestitures acs segment profit increased 18 percent 2011 compared 2010 due 9 percent increase operational segment profit 6 percent increase acquisitions net divestitures 3 percent positive impact foreign exchange increase operational segment profit comprised approximate 5 percent positive impact price productivity net inflation investment growth 4 percent positive impact higher sales volumes cost products services sold totaled 104 billion 2011 increase approximately 11 billion primarily due acquisitions net divestitures higher sales volume foreign exchange inflation partially offset positive impact productivity 2013 areas focus acs’s primary areas focus 2013 include • extending technology leadership continued investment new product development introductions deliver energy efficiency lowest total installed cost integrated solutions • defending extending installed base customer productivity globalization • sustaining strong brand recognition brand channel management • continuing identify execute integrate acquisitions adjacent markets serve • continuing establish grow presence capability high growth regions • continued deployment optimization common erp system • continued proactive cost actions successful execution repositioning actions performance materials technologies pmt overview performance materials technologies develops manufactures highpurity highquality highperformance chemicals materials applications refining petrochemical automotive healthcare agricultural packaging refrigeration appliance housing semiconductor wax adhesives segments performance materials technologies also provides process technology products including catalysts adsorbents services petroleum refining gas processing petrochemical renewable energy industries performance materials technologies’ product portfolio includes fluorocarbons hydrofluoroolefins caprolactam resins ammonium sulfate fertilizer phenol specialty films waxes additives advanced fibers customized research chemicals intermediates electronic materials chemicals catalysts adsorbents economic factors performance materials technologies operating results principally impacted • level timing capital spending capacity utilization rates refining petrochemical end markets • pricing volatility industry supply conditions raw materials cumene fluorspar perchloroethylene r240 natural gas sulfur ethylene • impact environmental energy efficiency regulations • global supply conditions demand nonozone depleting low global warming refrigerants blowing agents • global supply conditions demand caprolactam nylon resin ammonium sulfate • condition us residential housing nonresidential industries automotive demand • extent change order rates global semiconductor customers • demand new products including renewable energy biofuels low global warming products insulation refrigeration additives enhanced nylon resin performance materials technologies 2012 compared 2011 pmt sales increased 9 percent 2012 compared 2011 due 6 percent growth acquisitions 4 percent increase organic growth partially offset 1 percent unfavorable impact foreign exchange • uop sales increased 17 percent 12 percent organic 2012 compared 2011 primarily driven increased equipment licensing revenues higher volume petrochemical refining catalysts first nine months reflecting continued strength refining petrochemical industries ii favorable impact acquisitions partially offset lower service revenue related scheduled project completions • advanced materials sales increased 5 percent flat organic 2012 compared 2011 primarily driven increase resins chemicals sales primarily due phenol plant acquisition offset lower sales fluorine products primarily due unfavorable pricing reflecting challenging global end market conditions unfavorable impact foreign exchange expect challenging global end market conditions continue first quarter 2013 pmt segment profit increased 11 percent 2012 compared 2011 due 9 percent increase operational segment profit net 10 percent decrease fourth quarter due factors described 3 percent increase acquisitions partially offset unfavorable impact 1 percent foreign exchange increase operational segment profit primarily due higher licensing catalyst equipment revenues uop productivity net continued investment growth initiatives partially offset unfavorable pricing fluorine products resins chemicals reflecting challenging global end market conditions cost products services sold totaled 45 billion 2012 increase 392 million primarily due acquisitions higher volume continued investment growth initiatives partially offset productivity favorable impact foreign exchange july 2012 company announced evaluating series upgrades metropolis works nuclear conversion facility fluorine products facility following us nuclear regulatory commission nrc inspection focused preparedness extreme natural disasters strong earthquakes tornados nrc inspection part comprehensive assessment us nuclearrelated facilities following fukushima japan earthquake 2011 production metropolis facility suspended following nrc inspection resume certain seismicrelated upgrades implemented company reviewed nrc scope upgrades defined confirmatory order issued nrc honeywell october 16 2012 company believes completion upgrades facility could completed third quarter 2013 continued suspension operations cost plant upgrades expected material negative impact performance materials technologies’ 2013 results operations 2011 compared 2010 pmt sales increased 20 percent 2011 compared 2010 due 16 percent increase organic growth 3 percent growth acquisitions 1 percent favorable impact foreign exchange • uop sales increased 24 percent 2011 compared 2010 primarily driven increased service licensing revenues higher unit sales refining specialty catalysts primarily reflecting continued strength refining petrochemical industries • advanced materials sales increased 18 percent 12 percent organically 2011 compared 2010 primarily driven 33 percent 18 percent organically increase resins chemicals sales primarily due higher prices driven strong asia demand agricultural demand formula pricing arrangements increased sales resulting acquisition phenol plant partially offset decreased volumes primarily due disruptions phenol supply weather related events ii 10 percent increase fluorine products business due higher pricing reflecting robust global demand tight industry supply conditions primarily first half year moderated second half year due seasonally weaker demand increased available capacity marketplace iii 12 percent increase specialty products sales primarily due higher sales volume armor additives healthcare packaging products commercial excellence initiatives expect advanced materials sales growth continue moderate first half 2012 due slowing global demand lower prices resulting increased availability refrigerants supply pmt segment profit increased 39 percent 2011 compared 2010 due 38 percent increase operational segment profit 1 percent favorable impact foreign exchange increase operational segment profit primarily due favorable price raw materials spread resins chemicals fluorine products higher service product licensing revenues uop partially offset continued investment growth plant optimization initiatives cost products services sold totaled 42 billion 2011 increase approximately 597 million primarily due volume material inflation phenol plant acquisition continued investment growth initiatives 2013 areas focus performance materials technologies primary areas focus 2013 include • continuing develop new processes products technologies address energy efficiency environment security well position portfolio higher value • commercializing new products technologies petrochemical gas processing refining industries renewable energy sector • investing increase plant capacity reliability service backlog improve productivity quality operational excellence • driving sales marketing excellence expanding local presence high growth regions • managing exposure raw material price supply fluctuations evaluation alternative sources supply contractual arrangements • managing successful integration acquisitions related gas processing hydrogen business unit including capacity geographic expansion address rapidly growing commercial opportunities existing backlog transportation systems overview transportation systems provides automotive products improve performance efficiency cars trucks vehicles stateoftheart technologies world class brands global solutions customers’ needs transportation systems’ products include turbochargers thermal systems friction materials bendixr juridr brake hard parts transportation systems sells products original equipment “oe” automotive truck manufacturers eg bmw caterpillar daimler renault ford volkswagen wholesalers distributors retail aftermarket economic factors transportation systems operating results principally impacted • financial strength stability automotive oe manufacturers • global demand particularly western europe automobile truck production • turbo penetration rates new engine platforms • global consumer preferences particularly western europe boosted diesel passenger cars • degree volatility raw material prices including nickel steel • new automobile production rates impact inventory levels automotive oe manufacturers demand products • regulations mandating lower emissions improved fuel economy • consumers’ ability obtain financing new vehicle purchases • impact factors consumer confidence automotive aftermarket demand transportation systems 2012 compared 2011 transportation systems sales decreased 8 percent 2012 compared 2011 primarily due unfavorable impact foreign exchange 5 percent decrease organic sales 3 percent lower sales primarily driven decreased light vehicle production europe lower aftermarket sales partially offset new platform launches including higher turbo gas penetration north america transportation systems segment profit decreased 11 percent 2012 compared 2011 due 7 percent unfavorable impact foreign exchange 4 percent decrease operational segment profit decrease operational segment profit primarily due decreased volume unfavorable pricing substantially offset productivity net impact ongoing projects drive operational improvement friction materials business net inflation cost products services sold totaled 29 billion 2012 decrease 235 million primarily result foreign exchange decreased volume increased productivity 2011 compared 2010 transportation systems sales increased 21 percent 2011 compared 2010 primarily due 16 percent increase organic revenue driven increased sales volume favorable impact foreign exchange 5 percent sales increase 2011 compared 2010 primarily driven increased turbocharger sales light vehicle commercial vehicle engine manufacturers primarily due new platform launches strong diesel penetration rates western europe ii favorable impact foreign exchange transportation systems segment profit increased 37 percent 2011 compared 2010 due 32 percent increase operational segment profit 5 percent favorable impact foreign exchange increase operational segment profit comprised approximate 25 percent positive impact productivity net inflation price 7 percent positive impact higher sales volumes cost products services sold totaled 32 billion 2011 increase 533 million primarily result higher sales volume foreign exchange inflation partially offset positive impact productivity 2013 areas focus transportation systems primary areas focus 2013 include • sustaining superior turbocharger technology successful platform launches • maintaining high quality current products executing new product introductions • increasing global penetration share diesel gasoline turbocharger oem demand • reducing manufacturing costs increasing plant productivity improving global manufacturing footprint • aligning cost structure current economic outlook successful execution repositioning actions • aligning development efforts costs new turbo platform launch schedules repositioning charges see note 3 repositioning charges notes financial statements discussion repositioning charges incurred 2012 2011 2010 repositioning actions expected generate incremental pretax savings approximately 150 million 2013 compared 2012 principally planned workforce reductions cash expenditures severance exit costs necessary execute repositioning actions 136 159 147 million 2012 2011 2010 respectively expenditures severance exit costs funded principally operating cash flows cash expenditures severance costs necessary execute remaining actions expected approximately 175 million 2013 funded operating cash flows following tables provide details pretax impact total net repositioning charges segment liquidity capital resources company continues manage businesses maximize operating cash flows primary source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines shortterm debt commercial paper market longterm borrowings access public debt equity markets well ability sell trade accounts receivables continue balance cash financing uses investment existing core businesses acquisition activity share repurchases dividends cash flow summary cash flows operating investing financing activities reflected consolidated statement cash flows years ended 2012 2011 2010 summarized follows 2012 compared 2011 cash provided operating activities increased 684 million 2012 compared 2011 primarily due reduced cash contributions pension plans 706 million 344 million increase net income noncash pension marktomarket adjustment partially offset higher cash tax payments approximately 340 million cash used investing activities increased 817 million 2012 compared 2011 primarily due decrease proceeds sales businesses 1135 million significantly divestiture consumer products group business automotive onboard sensor products business within automation control solutions segment 2011 ii net 117 million increase investments primarily shortterm marketable securities iii increase expenditures property plant equipment 86 million partially offset decrease cash paid acquisitions 535 million cash used financing activities increased 92 million 2012 compared 2011 primarily due decrease net proceeds debt issuances 825 million increase dividends paid 120 million partially offset decrease 806 million net repurchases common stock decrease 33 million payment debt assumed acquisitions 2011 compared 2010 cash provided operating activities decreased 1370 million 2011 compared 2010 primarily due increased voluntary cash contributions 1050 million us pension plans ii unfavorable impact decreased deferred taxes excluding impact cash taxes approximately 710 million iii higher cash tax payments approximately 500 million partially offset 863 million increase net income noncash pension marktomarket adjustment cash used investing activities decreased 1658 million 2011 compared 2010 primarily due increase proceeds sale businesses 1149 million significantly divestiture consumer products group business automotive onboard sensor products business within automation control solutions segment decrease cash paid acquisitions 330 million net 315 million decrease investments shortterm marketable securities cash used financing activities decreased 933 million 2011 compared 2010 primarily due increase net proceeds debt 1734 million decrease 293 million payment debt assumed acquisitions partially offset increase 1085 million repurchases common stock liquidity businesses focused implementing strategies increase operating cash flows revenue growth margin expansion improved working capital turnover considering current economic environment businesses operate business plans strategies including focus growth cost reduction productivity initiatives company believes cash balances operating cash flows principal source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines short term debt commercial paper markets longterm borrowings access public debt equity markets well ability sell trade accounts receivables december 31 2012 substantial portion company’s cash equivalents held foreign subsidiaries amounts held outside us repatriated current law would subject us federal income taxes less applicable foreign tax credits however intent permanently reinvest funds outside us practicable estimate amount tax might payable earnings repatriated amount foreign tax credits would available reduce eliminate resulting us income tax liability source liquidity ability issue shortterm debt commercial paper market commercial paper notes sold discount maturity 365 days date issuance borrowings commercial paper program available general corporate purposes well financing potential acquisitions 400 million commercial paper outstanding december 31 2012 ability access commercial paper market related cost borrowings affected strength credit rating market conditions credit ratings periodically reviewed major independent debtrating agencies december 31 2012 standard poor’s sp fitch moody’s ratings longterm debt a2 respectively shortterm debt a1 p1 respectively sp fitch moody’s honeywell’s rating outlook “stable” date company experienced limitations ability access sources liquidity also current shelf registration statement filed securities exchange commission may issue additional debt securities common stock preferred stock may offered one offerings terms determined time offering net proceeds offering would used general corporate purposes including repayment existing indebtedness capital expenditures acquisitions source liquidity sell interests designated pools trade accounts receivables third parties december 31 2012 2011 none receivables designated pools sold third parties sell receivables overcollateralized retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools terms trade accounts receivable program permit repurchase receivables third parties discretion providing us additional source revolving credit result program receivables remain company’s balance sheet corresponding amount recorded shortterm borrowings april 2 2012 company entered 3000 million amended restated five year credit agreement “credit agreement” syndicate banks commitments credit agreement increased pursuant terms credit agreement aggregate amount exceed 3500 million credit agreement contains 700 million sublimit issuance letters credit agreement maintained general corporate purposes amends restates previous 2800 million five year credit agreement dated march 31 2011 “prior agreement” borrowings credit agreement prior agreement monitor thirdparty depository institutions hold cash equivalents daily basis emphasis primarily safety principal secondarily maximizing yield funds diversify cash equivalents among counterparties minimize exposure one entities global economic conditions tightening credit markets could adversely affect customers’ suppliers’ ability obtain financing particularly longcycle businesses airline automotive refiningpetrochemical end markets customer supplier bankruptcies delays ability obtain financing unavailability financing could adversely affect cash flow results operations date experienced material impacts customer supplier bankruptcy liquidity issues continue monitor take measures limit exposure february 2011 board directors authorized repurchase total 3 billion honeywell common stock 2012 company repurchased 317 million outstanding shares offset dilutive impact employee stock based compensation plans including future option exercises restricted unit vesting matching contributions savings plans see part ii item 5 share repurchases fourth quarter 2012 october 22 2012 company acquired 70 percent controlling interest thomas russell co privatelyheld leading provider technology equipment natural gas processing treating approximately 525 million 368 million net cash thomas russell co’s results operations consolidated performance materials technologies segment noncontrolling interest portion reflected net income attributable noncontrolling interest consolidated statement operations calendar year 2016 honeywell right acquire noncontrolling shareholder right sell honeywell remaining 30 percent interest price based multiple thomas russell co’s average annual operating income 2013 2015 subject predetermined cap floor additionally honeywell right acquire remaining 30 percent interest fixed price equivalent cap time december 31 2015 see note 21 redeemable noncontrolling interest december 2012 company entered definitive agreement acquire intermec inc intermec leading provider mobile computing radio frequency identification solutions rfid bar code label receipt printers use warehousing supply chain field service manufacturing environments 10 per share cash aggregate purchase price approximately 600 million net cash acquired intermec us public company operates globally reported 2011 revenues approximately 850 million transaction expected close end second quarter 2013 pending intermec shareholder approval following customary regulatory reviews acquisition expected funded available cash issuance commercial paper intermec integrated automation control solutions segment 2012 company made cash contributions 1039 million principally improve funded status pension plans addition normal operating cash requirements principal future cash requirements fund capital expenditures dividends strategic acquisitions share repurchases employee benefit obligations environmental remediation costs asbestos claims severance exit costs related repositioning actions debt repayments specifically expect primary cash requirements 2013 follows • capital expenditureswe expect spend approximately 12 billion capital expenditures 2013 primarily growth production capacity expansion cost reduction maintenance replacement • share repurchasesunder company’s previously reported 3 billion share repurchase program 16 billion remained available december 31 2012 additional share repurchases honeywell presently expects repurchase outstanding shares time 2013 offset dilutive impact employee stock based compensation plans including future option exercises restricted unit vesting matching contributions savings plans amount timing future repurchases may vary depending market conditions level operating financing investing activities • dividendswe expect pay approximately 13 billion dividends common stock 2013 reflecting 10 percent increase dividend rate effective fourth quarter 2012 dividend • asbestos claimswe expect cash spending asbestos claims cash receipts related insurance recoveries approximately 480 44 million respectively 2013 believe possible effective date narco plan reorganization occur 2013 included estimated funding narco trust 2013 see asbestos matters note 22 financial statements discussion possible funding obligations 2013 related narco trust • pension contributionsin 2013 required make contributions us pension plans plan make cash contributions approximately 150 million 113 million made january 2013 nonus plans satisfy regulatory funding standards timing amount contributions us nonus plans may impacted number factors including funded status plans • repositioning actionswe expect cash spending severance exit costs necessary execute previously announced repositioning actions approximate 175 million 2013 • environmental remediation costswe expect spend approximately 300 million 2013 remedial response voluntary cleanup costs see environmental matters note 22 financial statements additional information continuously assess relative strength business portfolio strategic fit market position profit cash flow contribution order upgrade combined portfolio identify business units benefit increased investment identify acquisition candidates strategic plan strengthen existing core businesses also identify businesses fit longterm strategic plan based market position relative profitability growth potential businesses considered potential divestiture restructuring repositioning actions subject regulatory constraints 2012 2011 realized 21 1156 million respectively cash proceeds sales nonstrategic businesses based past performance current expectations believe operating cash flows sufficient meet future operating cash needs available cash committed credit lines access public debt equity markets well ability sell trade accounts receivables provide additional sources shortterm longterm liquidity fund current operations debt maturities future investment opportunities contractual obligations probable liability payments following summary significant contractual obligations probable liability payments december 31 2012 1 assumes longterm debt outstanding scheduled maturity 2 purchase obligations entered various vendors normal course business consistent expected requirements 3 payment amounts table reflect environmental liabilities probable reasonably estimable december 31 2012 see environmental matters note 22 commitments contingencies notes financial statements additional information 4 amounts estimates asbestos related cash payments narco bendix based asbestos related liabilities probable reasonably estimable december 31 2012 believe possible effective date narco plan reorganization occur 2013 included estimated funding narco trust starting 2013 accrued estimated value future narco asbestos related claims expected asserted narco trust 2018 light uncertainties inherent making longterm projections connection initial operation 524g trust well stay narco asbestos claims since january 2002 believe reasonable basis estimating narco asbestos claims beyond 2018 projecting timing narco payments dependent among things effective date trust could cause timing payments earlier later projected projecting future events subject many uncertainties could cause asbestos liabilities higher lower projected recorded see asbestos matters note 22 commitments contingencies notes financial statements additional information 5 amounts represent insurance recoveries deemed probable asbestos related liabilities december 31 2012 timing insurance recoveries impacted terms insurance settlement agreements well documentation review collection process required collect insurance claims probable insurance recoveries subject definitive settlement agreements specified payment dates instead covered insurance policies assumed collection occur beyond 2017 projecting timing insurance recoveries subject many uncertainties could cause amounts collected higher lower projected recorded could cause timing collections earlier later projected reevaluate projections concerning insurance recoveries light changes developments would impact recoveries timing thereof see asbestos matters note 22 commitments contingencies notes financial statements additional information 6 table excludes tax effects well 722 million uncertain tax positions see note 6 income taxes notes financial statements additional information table also excludes pension postretirement benefits opeb obligations 2013 required make contributions us pension plans however plan make cash contributions approximately 150 million 113 million made january 2013 nonus plans satisfy regulatory funding standards timing amount contributions may impacted number factors including funded status plans beyond 2013 actual amounts required contributed dependent upon among things interest rates underlying asset returns impact legislative regulatory actions related pension funding obligations payments due opeb plans required funded advance paid medical costs incurred covered retiree populations principally dependent upon future cost retiree medical benefits plans expect opeb payments approximate 149 million 2013 net benefit approximately 11 million medicare prescription subsidy see note 23 financial statements discussion pension opeb plans noncontrolling interest shareholder thomas russell co one subsidiaries put rights may exercised causing us purchase equity interests beginning january 1 2016 december 31 2016 interest subject certain call rights company amount paid based operating income performance 2013 2015 actual settlement amount may different therefore excluded table offbalance sheet arrangements following summary offbalance sheet arrangements guaranteeswe issued party following direct indirect guarantees december 31 2012 expect guarantees material adverse effect consolidated results operations financial position liquidity connection disposition certain businesses facilities indemnified purchasers expected cost remediation environmental contamination existing date disposition expected costs accrued environmental assessments made remedial efforts probable costs reasonably estimated environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous substances accordance environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing hazardous substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually jointly potentially responsible parties determine feasibility various remedial techniques address environmental matters policy see note 1 financial statements record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects execution timeframe projects remedial techniques utilized agreements parties remedial response voluntary cleanup costs charged pretax earnings 234 240 225 million 2012 2011 2010 respectively december 31 2012 2011 recorded liabilities environmental matters 654 723 million respectively addition 2012 2011 incurred operating costs ongoing businesses approximately 84 102 million respectively relating compliance environmental regulations remedial response voluntary cleanup payments 320 270 266 million 2012 2011 2010 respectively currently estimated approximately 300 million 2013 expect fund expenditures operating cash flow although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position see note 22 commitments contingencies notes financial statements discussion commitments contingencies including related environmental matters toxic tort litigation financial instruments result global operating financing activities exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position minimize risks interest foreign currency exchange rate commodity price fluctuations normal operating financing activities deemed appropriate use derivative financial instruments use derivative financial instruments trading speculative purposes use leveraged derivative financial instruments summary accounting policies derivative financial instruments included note 1 summary significant accounting policies notes financial statements also hold investments marketable equity securities exposes us market volatility discussed note 16 financial instruments fair value measures notes financial statements conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities anticipated transactions arising international trade objective preserve economic value nonfunctional currency cash flows attempt hedge transaction exposures natural offsets fullest extent possible opportunities exhausted foreign currency forward option agreements third parties principal currency exposures relate us dollar euro british pound canadian dollar chinese renminbi mexican peso indian rupee korean czech koruna hong kong dollar singapore dollar romanian leu swiss franc swedish krona thai baht exposure market risk changes interest rates relates primarily net debt pension obligations described note 14 longterm debt credit agreements note 16 financial instruments fair value measures notes financial statements issue fixed variable rate debt use interest rate swaps manage exposure interest rate movements reduce overall borrowing costs financial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest foreign currency exchange rates commodity prices manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value expected future cash flows derivative financial instruments considering reasonably possible changes interest currency exchange rates restrict use derivative financial instruments hedging activities following table illustrates potential change fair value interest rate sensitive instruments based hypothetical immediate onepercentagepoint increase interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 percent weakening us dollar versus local currency exchange rates across maturities potential change fair value contracts hedging commodity purchases based 20 percent decrease price underlying commodity across maturities december 31 2012 2011 1 asset liability 2 changes fair value foreign currency exchange contracts offset changes fair value cash flows underlying hedged foreign currency transactions 3 changes fair value forward commodity contracts offset changes cash flows underlying hedged commodity transactions discussion procedures monitor market risk estimated changes fair value resulting sensitivity analyses forwardlooking statements market risk assuming certain adverse market conditions occur actual results future may differ materially estimated results due actual developments global financial markets methods used us assess mitigate risk discussed considered projections future events critical accounting policies preparation consolidated financial statements accordance generally accepted accounting principles based selection application accounting policies require us make significant estimates assumptions effects matters inherently uncertain consider accounting policies discussed critical understanding financial statements actual results could differ estimates assumptions differences could material consolidated financial statements discussed selection application disclosure critical accounting policies audit committee board directors independent registered public accountants new accounting standards effective 2012 material impact consolidated financial statements described recent accounting pronouncements section note 1 summary significant accounting policies notes financial statements contingent liabilitieswe subject number lawsuits investigations claims involve substantial dollar amounts arise conduct global business operations previously owned entities including matters relating commercial transactions government contracts product liability including asbestos prior acquisitions divestitures employee benefit plans intellectual property environmental health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes contingencies well potential amounts ranges probable losses recognize liability contingencies based careful analysis matter assistance outside legal counsel applicable experts analysis includes making judgments concerning matters costs associated environmental matters outcome negotiations number cost pending future asbestos claims impact evidentiary requirements contingencies resolved long periods time liabilities may change future due new developments including new discovery facts changes legislation outcomes similar cases judicial system changes assumptions changes settlement strategy discussion contingencies related environmental asbestos matters including management’s judgment applied recognition measurement specific liabilities see notes 1 summary significant accounting policies 22 commitments contingencies notes financial statements asbestos related contingencies insurance recoverieswe defendant personal injury actions related products containing asbestos refractory friction products recognize liability asbestos related contingency probable occurrence reasonably estimable regarding north american refractories company narco asbestos related claims accrued pending claims based terms conditions agreements narco former parent company certain asbestos claimants estimate unsettled claims pending time narco filed bankruptcy protection also accrued estimated value future narco asbestos related claims expected asserted narco trust 2018 described note 22 commitments contingencies notes financial statements light inherent uncertainties making long term projections connection initial operation 524g trust well stay narco asbestos claims since january 2002 believe reasonable basis estimating narco asbestos claims beyond 2018 regarding bendix asbestos related claims accrued estimated value pending claims using average resolution values previous five years also accrued estimated value future anticipated claims related bendix next five years based historic claims filing experience dismissal rates disease classifications average resolution values tort system previous five years light uncertainties inherent making longterm projections well certain factors unique friction product asbestos claims believe reasonable basis estimating asbestos claims beyond next five years continue update resolution values used estimate cost pending future bendix claims fourth quarter year additional information see note 22 commitments contingencies notes financial statements continually assess likelihood adverse judgments outcomes contingencies well potential ranges probable losses recognize liability contingencies based analysis individual issue assistance outside legal counsel applicable experts connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical experience insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs consideration impacts settlements insurers insurance domestic insurance market london excess market substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries projecting future events subject various uncertainties could cause insurance recovery asbestos related liabilities higher lower projected recorded given inherent uncertainty making future projections reevaluate projections concerning probable insurance recoveries light changes projected liability recovery experience relevant factors may impact future insurance recoveries see note 22 commitments contingencies notes financial statements discussion management’s judgments applied recognition measurement insurance recoveries asbestos related liabilities defined benefit pension planswe sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees recognize net actuarial gains losses excess 10 percent greater marketrelated value plan assets plans’ projected benefit obligation corridor annually fourth quarter year mtm adjustment applicable quarter interim remeasurement triggered net actuarial gains losses occur actual experience differs various assumptions used value pension plans assumptions change may year primary factors contributing actuarial gains losses changes discount rate used value pension obligations measurement date year differences expected actual returns plan assets accounting method also results potential volatile difficult forecast mtm adjustments mtm charges 957 1802 471 million 2012 2011 2010 respectively remaining components pension incomeexpense primarily service interest costs assumed return plan assets recorded quarterly basis pension ongoing incomeexpense financial reporting purposes net periodic pension incomeexpense calculated based upon number actuarial assumptions including discount rate plan obligations expected longterm rate return plan assets determine expected longterm rate return plan assets utilizing historical plan asset returns varying longterm periods combined expectations future market conditions asset mix considerations see note 23 pension postretirement benefits notes financial statements details actual various asset classes targeted asset allocation percentages pension plans discount rate reflects market rate december 31 measurement date highquality fixedincome investments maturities corresponding benefit obligations subject change year information major actuarial assumptions included note 23 pension postretirement benefits notes financial statements key assumptions used developing 2012 2011 2010 net periodic pension expense us plans included following discount rate volatile year determined based upon prevailing interest rates measurement date use 406 percent discount rate 2013 reflecting decrease market interest rate environment since december 31 2011 use expected rate return plan assets 775 percent 2013 8 percent 2012 due lower future expected market returns addition potential mtm adjustments changes expected rate return plan assets discount rate resulting economic events also affects future pension ongoing expense following table highlights sensitivity us pension obligations ongoing expense changes assumptions assuming assumptions remain constant estimates exclude potential mtm adjustment pension ongoing income pension plans expected range 50 75 million 2013 compared ongoing pension expense 36 million 2012 increase pension ongoing income 2013 compared 2012 results primarily increase plans’ assets december 31 2012 compared december 31 2011 due contributions strong asset returns 2012 also required mtm adjustment recorded fourth quarter 2013 accordance pension accounting method previously described difficult reliably forecast predict whether mtm adjustment 2013 one required magnitude adjustment mtm adjustments primarily driven events circumstances beyond control company changes interest rates performance financial markets 2012 2011 2010 required make contributions satisfy minimum statutory funding requirements us pension plans however made voluntary contributions 792 1650 1000 million us pension plans 2012 2011 2010 respectively primarily improve funded status plans adversely impacted relatively low discount rates asset losses 2011 2008 resulting poor performance equity markets 2013 required make contributions us pension plans however plan make cash contributions approximately 150 million 113 million made january 2013 nonus plans satisfy regulatory funding standards timing amount contributions us nonus plans may impacted number factors including funded status plans longlived assets including tangible definitelived intangible assetsto conduct global business operations execute business strategy acquire tangible intangible assets including property plant equipment definitelived intangible assets december 31 2012 net carrying amount longlived assets totaled approximately 67 billion determination useful lives depreciationamortization purposes whether assets impaired involves use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions periodically evaluate recoverability carrying amount longlived assets whenever events changes circumstances indicate carrying amount longlived asset group may fully recoverable principal factors consider deciding perform impairment review follows • significant underperformance ie declines sales earnings cash flows business product line relation expectations • annual operating plans fiveyear strategic plans indicate unfavorable trend operating performance business product line • significant negative industry economic trends • significant changes planned changes use assets determined impairment review necessary recoverability assets measured comparing carrying amount asset grouping estimated future undiscounted cash flows carrying amount exceeds estimated future undiscounted cash flows asset grouping considered impaired impairment measured difference carrying amount asset grouping fair value endeavor utilize best information available measure fair value usually either market prices available level 1 level 2 fair value hierarchy estimate future discounted cash flow level 3 fair value hierarchy key estimates discounted cash flow analysis include expected industry growth rates assumptions volume selling prices costs discount rate selected described detail note 16 financial statements recorded impairment charges related longlived assets 22 million 127 million 2012 2011 respectively principally related manufacturing plant equipment facilities scheduled close downsized goodwill indefinitelived intangible assets impairment testinggoodwill represents excess acquisition costs fair value net tangible assets identifiable intangible assets acquired business combination indefinitelived intangible assets primarily consist trademarks acquired business combinations goodwill indefinitelived assets amortized subject impairment testing goodwill indefinitelived intangible asset balances 124 billion 725 million respectively december 31 2012 subject impairment testing annually march 31 whenever events changes circumstances indicate carrying amount may fully recoverable testing compares carrying values fair values appropriate carrying value reduced fair value testing goodwill fair value reporting units estimated utilizing discounted cash flow approach utilizing cash flow forecasts five year strategic annual operating plans adjusted terminal value assumptions impairment test involves use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions address uncertainty perform sensitivity analysis key estimates assumptions completed annual impairment test march 31 2012 determined impairment goodwill indefinitelived intangible assets date however significant negative industry economic trends disruptions business unexpected significant changes planned changes use assets divestitures market capitalization declines may negative effect fair values income taxesdeferred tax assets liabilities determined based difference financial statements tax basis assets liabilities using enacted tax rates effect year differences expected reverse provision income taxes based domestic international statutory income tax rates jurisdictions operate significant judgment required determining income tax provisions well deferred tax asset liability balances including estimation valuation allowances evaluation tax positions december 31 2012 recorded net deferred tax asset 2473 million less valuation allowance 598 million net deferred tax assets primarily comprised net deductible temporary differences net operating loss carryforwards tax credit carryforwards available reduce taxable income future periods determination amount valuation allowance provided recorded deferred tax assets involves estimates regarding 1 timing amount reversal taxable temporary differences 2 expected future taxable income 3 impact tax planning strategies valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax asset realized assessing need valuation allowance consider available positive negative evidence including past operating results projections future taxable income feasibility ongoing tax planning strategies projections future taxable income include number estimates assumptions regarding volume pricing costs additionally valuation allowances related deferred tax assets impacted changes tax laws net deferred tax asset 2473 million consists 1422 million related us operations 1051 million related nonus operations us net deferred tax asset 1422 million consists net deductible temporary differences tax credit carryforwards state tax net operating losses believe likely realized generation future taxable income us tax planning strategies nonus net deferred tax asset 1051 million consists principally net operating loss capital loss tax credit carryforwards mainly canada france germany luxembourg netherlands united kingdom maintain valuation allowance 598 million deferred tax assets reflecting historical experience lower expectations taxable income applicable carryforward periods fully described note 6 financial statements valuation allowance increased 7 million 2012 decreased 45 million 2011 increased 58 million 2010 respectively event determine able realize net deferred tax assets future reduce amounts charge income period determination made conversely determine able realize net deferred tax assets excess carrying amounts decrease recorded valuation allowance credit income period determination made significant judgment required determining income tax provisions evaluating tax positions establish additional reserves income taxes despite belief tax positions fully supportable remain certain positions meet minimum recognition threshold approach evaluating certain uncertain tax positions defined authoritative guidance determines tax position likely sustained upon examination applicable taxing authority normal course business company subsidiaries examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes continually assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts give rise revision become known sales recognition longterm contractsin 2012 recognized approximately 16 percent total net sales using percentageofcompletion method longterm contracts automation control solutions aerospace performance materials technologies segments long term contracts measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts accounting contracts involves management judgment estimating total contract revenue cost contract revenues largely determined negotiated contract prices quantities modified assumptions regarding contract options change orders incentive award provisions associated technical performance price adjustment clauses inflation indexbased clauses contract costs incurred period time several years estimation costs requires management judgment cost estimates largely based negotiated estimated purchase contract terms historical performance trends economic projections significant factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements revenue cost estimates regularly monitored revised based changes circumstances anticipated losses longterm contracts recognized losses become evident maintain financial controls customer qualification contract pricing estimation processes reduce risk contract losses matters litigation see note 22 financial statements discussion environmental asbestos litigation matters recent accounting pronouncements see note 1 financial statements discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations dollars millions except per share amounts following management’s discussion analysis financial condition results operations mda intended help reader understand results operations financial condition honeywell international inc consolidated subsidiaries honeywell company three years ended december 31 2014 references notes relate notes financial statements item 8 financial statements supplementary data april 2014 company announced realignment honeywell process solutions business automation control solutions acs performance materials technologies pmt company reported financial performance based inclusion honeywell process solutions performance materials technologies periods presented july 2014 following closing sale friction materials business company announced realignment transportation systems business segment aerospace business segment realigned segment reporting structure company three business segments aerospace automation control solutions performance materials technologies company reported financial performance based inclusion transportation systems aerospace periods presented realignments impact company’s historical consolidated financial position results operations cash flows prior period amounts reclassified conform current period presentation executive summary honeywell 2014 represented year strong performance despite continued slow growth global environment honeywell’s 2014 revenues 403 billion representing 3 improvement compared 2013 revenues 391 billion segment profit improved 5 one onehalf times revenue growth evidencing company’s continued focus operational excellence achieved strong segment profit expansion reinvesting businesses seed planting continued focus effective repositioning company’s operational excellence ability expand profit faster sales growth due part consistent methodical application several key internal business processes honeywell enablers drive improvements organizational efficiency service quality bringing worldclass products services markets faster cost effectively customers continued execute key strategies growth including penetration high growth regions investments high return capital expenditures new products technologies maintaining cost disciplines leveraging honeywell enablers company continues invest future growth measured number important metrics • rd spending 47 revenues targeted high growth areas natural gas processing low global warming refrigerants blowing agents avionics equipment technology connected voice wireless control devices technologies software mobile app development data science deliver value • capital expenditures 1094 million addition 947 million 2013 principally related construction expansion aerospace pmt manufacturing facilities well continued investment acs facilities • company recognized 184 million charges relating repositioning actions support sustainable productivity years come • company continued monitor portfolio businesses ensure fit longterm strategic plan 2014 company sold friction materials business approximately 155 million addition company signed definitive agreement acquire datamaxo’neil consolidated results operations net sales change net sales attributable following discussion net sales segment found review business segments section mda cost products services sold cost products services sold increased 2014 compared 2013 principally due increase direct material labor costs approximately 645 million driven higher sales volume acquisitions net divestitures increase pension postretirement benefit expense approximately 35 million partially offset decrease repositioning charges approximately 40 million gross margin percentage increased 2014 compared 2013 principally due higher gross margin business segments approximately 07 percentage point impact collectively lower repositioning charges approximately 01 percentage point impact partially offset higher pension postretirement benefit expense approximately 01 percentage point impact cost products services sold increased 2013 compared 2012 principally due increase direct material costs approximately 585 million indirect material costs approximately 115 million driven higher sales volume acquisitions increased repositioning charges approximately 140 million partially offset decrease pension expense approximately 760 million primarily driven 650 million decrease pension marktomarket adjustment allocated cost products services sold approximately 30 million 2013 versus approximately 680 million 2012 gross margin percentage increased 2013 compared 2012 principally due lower pension expense approximately 20 percentage point impact primarily driven decrease pension marktomarket adjustment allocated cost products services sold higher segment gross margin business segments approximately 05 percentage point impact collectively lower postretirement expense 01 percentage point impact partially offset higher repositioning charges approximately 04 percentage point impact selling general administrative expenses selling general administrative expenses sga increased 2014 compared 2013 percentage sales primarily driven estimated 435 million increase labor costs primarily acquisitions incentive compensation merit increases investment growth estimated 30 million increase pension postretirement benefit expense partially offset 25 million decrease repositioning charges selling general administrative expenses decreased 2013 compared 2012 percentage sales primarily driven higher sales result factors discussed review business segments section mda ii estimated 270 million decrease pension expense primarily driven approximately 250 million decrease pension marktomarket charge allocated sga approximately 20 million 2013 versus approximately 270 million 2012 partially offset estimated 215 million increase labor costs primarily acquisitions merit increases investment growth 80 million increase repositioning charges tax expense discussion income taxes effective income tax rate see note 5 income taxes notes financial statements effective income tax rates 2014 2013 2012 reflect pension marktomarket adjustments tax benefits associated lower tax rates nonus earnings vast majority intend permanently reinvest outside united states net income attributable honeywell earnings per share common stockassuming dilution increased 2014 compared 2013 primarily due increased segment profit business segments lower repositioning charges partially offset higher pension postretirement expense increased tax expense earnings per share common stockassuming dilution increased 2013 compared 2012 primarily due lower pension expense increased segment profit business segments higher income partially offset increased tax expense higher repositioning charges business overview consolidated operating results principally impacted • change global economic growth rates industry conditions demand key end markets • overall sales mix particular mix aerospace original equipment aftermarket sales mix acs products distribution services sales • impact fluctuations foreign currency exchange rates particular euro relative us dollar • extent cost savings productivity actions able offset exceed impact material nonmaterial inflation • impact pension discount rate asset returns pension expense including marktomarket adjustments funding requirements 2015 areas focus supported honeywell enablers including honeywell operating system hos gold velocity product development functional transformation honeywell user experience areas focus generally applicable operating segments include • driving profitable growth rd technological excellence optimized manufacturing capability deliver innovative products customers value • expanding margins maintaining improving company’s cost structure manufacturing administrative process improvements repositioning actions drive productivity enhance flexibility business works proactively respond changes end market demand • proactively managing raw material costs formula longterm supply agreements hedging activities feasible prudent • driving strong cash flow conversion effective working capital management enable company undertake strategic actions benefit business including capital expenditures strategic acquisitions returning cash shareholders • driving organic growth expansion localized footprint high growth regions including china india eastern europe middle east latin america • driving inorganic growth identification appropriate acquisition targets deployment disciplined rigorous integration processes • aligning prioritizing capital expenditures longterm growth considering shortterm demand volatility • monitoring suppliers customers signs liquidity constraints limiting exposure resulting inability meet delivery commitments pay amounts due identifying alternate sources supply necessary • controlling corporate nonoperating costs including costs incurred asbestos environmental matters pension postretirement expenses tax expense review business segments aerospace 2014 compared 2013 aerospace sales decreased primarily due friction materials divestiture increase incentive payments due air transport regional business general aviation original equipment oe manufacturers oem incentive payments partially offset increase organic sales discussed • commercial original equipment sales decreased 2 increased 3 organic primarily due increase oem incentive payments air transport regional oe manufacturers partially offset higher air transport volumes consistent oe manufacturers’ higher production rates business general aviation engine shipments • commercial aftermarket sales increased 3 driven primarily higher sales spare parts air transport regional customers partially offset decline retrofits modifications upgrades lower repair overhaul activities business general aviation customers • defense space sales decreased 2 primarily due lower us government services revenue absence prior year royalty gain partially offset growth international programs • transportation systems sales decreased 3 increased 5 organic primarily due friction materials divestiture partially offset continued growth new platform launches higher global turbo gas penetration increased commercial vehicle demand europe aerospace segment profit increased 2 due 8 increase operational segment profit partially offset 6 unfavorable impact acquisitions divestitures predominantly higher oem incentive payments absence prior year royalty gain discussed increase operational segment profit driven primarily favorable price productivity net inflation cost products services sold totaled 117 billion 2014 decrease 190 million primarily due factors discussed excluding price 2013 compared 2012 aerospace sales increased primarily due favorable pricing increased volumes commercial original equipment business increased licensing revenue primarily due royalty gain fourth quarter offset decreased volumes defense space commercial aftermarket businesses increase incentive payments due business general aviation air transport regional oe manufacturers partially offset preproduction costs associated new aircraft platforms • commercial original equipment sales increased 3 driven primarily higher air transport volumes consistent oe manufacturers’ higher production rates strong demand business jet mid large cabin segment partially offset increase oem incentive payments business general aviation customers • commercial aftermarket sales increased 2 driven primarily higher retrofits modifications upgrades activities higher repair overhaul activities air transport regional customers partially offset fewer repair overhaul activities business general aviation customers • defense space sales decreased 5 primarily due us government program ramp downs lower defense budget partially offset royalty gain fourth quarter • transportation systems sales increased 5 primarily due increase organic sales driven continued strong growth new platform launches higher global turbo gas penetration aerospace segment profit increased 6 primarily due increase operational segment profit driven commercial sales growth discussed including favorable pricing productivity net inflation partially offset lower defense space sales discussed cost products services sold totaled 119 billion 2013 increase approximately 26 million primarily due factors discussed excluding price automation control solutions 2014 compared 2013 acs sales increased 8 2014 compared 2013 primarily due growth acquisitions net divestitures organic sales growth partially offset unfavorable impact foreign exchange • sales energy safety security businesses increased 11 4 organic 2014 principally due acquisitions net divestitures ii higher global sales volumes environmental combustion controls business driven strong us residential market conditions new product introductions iii increases sales volumes fire industrial safety businesses driven organic growth regions iv increases sales volumes scanning mobility business second half 2014 • sales building solutions distribution increased 1 2 organic 2014 principally due increased sales volumes americas distribution business partially offset softness us energy retrofit business building solutions backlog increased 2014 acs segment profit increased 11 2014 compared 2013 due 9 increase operational segment profit 3 increase acquisitions net divestitures partially offset unfavorable impact foreign exchange increase operational segment profit primarily result higher sales volumes discussed positive impact price productivity net inflation partially offset continued investment growth cost products services sold totaled 94 billion 2014 increase 575 million primarily due higher sales volume acquisitions net divestitures inflation partially offset productivity favorable impact foreign exchange 2013 compared 2012 acs sales increased 5 2013 compared 2012 primarily due 3 increase organic revenue driven increased sales volume 2 growth acquisitions net divestitures • sales energy safety security businesses increased 8 3 organic 2013 principally due positive impact acquisitions ii increases sales volumes environmental combustion control security businesses driven improved us residential market conditions new product introductions iii higher sales volumes fire systems sensors safety products second half partially offset decreases sales volumes sensing control products first half 2013 scanning mobility products primarily result continued softness us end markets • sales building solutions distribution businesses increased 1 2013 principally due increased sales volumes americas distribution business due improved us residential market conditions partially offset continued softness us energy retrofit business acs segment profit increased 8 2013 compared 2012 due 7 increase operational segment profit 1 increase acquisitions increase operational segment profit primarily result positive impact price productivity net inflation investment growth higher sales volumes discussed cost products services sold totaled 89 billion 2013 increase 361 million primarily due higher sales volume acquisitions inflation partially offset favorable impact productivity foreign exchange performance materials technologies 2014 compared 2013 pmt sales increased 4 due 5 increase organic sales partially offset unfavorable impact foreign exchange • uop sales increased 8 driven primarily higher catalyst gas processing volumes partially offset lower equipment service revenues first nine months catalyst sales decreased fourth quarter due timing shipments well stronger volume growth fourth quarter 2013 compared 2014 partially offset increased licensing revenues • sales process solutions business increased 1 4 organic driven primarily volume growth advanced solutions software services field products partially offset unfavorable foreign exchange predominately fourth quarter project service orders backlog increased 2014 • advanced materials sales increased 3 primarily driven increased volume fluorine products resins chemicals partially offset unfavorable pricing significantly fluorine products resins chemicals anticipate unfavorable pricing continue 2015 primarily resins chemicals sales fluctuate market price certain raw materials correlated price oil pmt segment profit increased 5 due 6 increase operational segment profit partially offset unfavorable impact foreign exchange increase operational segment profit primarily due higher sales volumes discussed productivity net inflation partially offset unfavorable advanced materials pricing continued investment growth unfavorable foreign exchange cost products services sold totaled 72 billion 2014 increase 247 million primarily due higher volume continued investment growth partially offset productivity net inflation favorable impact foreign exchange 2013 compared 2012 pmt sales increased 6 due 5 growth acquisitions 1 increase organic growth • uop sales increased 31 9 organic primarily driven favorable impact acquisitions ii higher volume petrochemical catalysts iii increased revenue gas processing iv increased equipment revenue first half 2013 partially offset decreased service revenues related scheduled project completions lower licensing revenues • sales process solutions business flat increased 1 organic principally due decreased volume reflecting completion several large projects expected offset service software solutions volume growth • advanced materials sales decreased 3 primarily driven lower flourine products volume due unfavorable impact unseasonably cool weather refrigerant volume planned plant outages first half 2013 price ii soft end market conditions electronic materials iii lower production volume resins chemicals pmt segment profit increased 11 due 6 increase operational segment profit 5 increase acquisitions increase operational segment profit primarily due higher uop sales volume positive impact productivity net inflation investment growth cost products services sold totaled 69 billion 2013 increase 347 million primarily due acquisitions inflation partially offset productivity repositioning charges see note 3 repositioning charges notes financial statements discussion repositioning actions related charges incurred 2014 2013 2012 repositioning actions expected generate incremental pretax savings 100 million 125 million 2015 compared 2014 principally planned workforce reductions cash spending related repositioning actions 161 million 160 million 136 million 2014 2013 2012 respectively funded operating cash flows 2015 expect cash spending repositioning actions approximately 150 million funded operating cash flows liquidity capital resources company continues manage businesses maximize operating cash flows primary source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines shortterm debt commercial paper market longterm borrowings access public debt equity markets continue balance cash financing uses investment existing core businesses acquisition activity share repurchases dividends cash flow summary cash flows operating investing financing activities reflected consolidated statement cash flows summarized follows 2014 compared 2013 cash provided operating activities increased 689 million primarily due 508 million increase net income noncash pension marktomarket adjustment ii reduced net payments repositioning charges 233 million primarily due collection 130 million asbestos receivable due one insurance carriers lower asbestos related payments 98 million iii reduced cash contributions pension postretirement plans 131 million iv lower cash tax payments approximately 129 million partially offset 93 million unfavorable impact working capital primarily driven higher inventory support sales growth cash used investing activities decreased 83 million primarily due decrease cash paid acquisitions 1129 million significantly intermec rae systems inc 2013 increase proceeds sales businesses 157 million significantly friction materials partially offset net 688 million increase investments primarily shortterm marketable securities ii increase approximately 371 million settlement payments foreign currency exchange contracts used economic hedges certain nonfunctional currency denominated monetary assets liabilities iii 147 million increase expenditures property plant equipment cash used financing activities increased 1839 million primarily due decrease net proceeds debt issuances 1589 million increase cash dividends paid 157 million lower net proceeds issuance common stock 33 million 2013 compared 2012 cash provided operating activities increased 818 million primarily due reduced cash contributions pension plans 883 million ii 447 million increase net income noncash pension marktomarket adjustment iii 135 million favorable impact working capital driven improved accounts payable performance inventory partially offset higher receivables primarily due sales growth timing sales partially offset higher cash tax payments approximately 352 million 260 million increase net payments repositioning charges significantly narco trust establishment payments 164 million cash used investing activities increased 531 million primarily due increase cash paid acquisitions 695 million significantly intermec rae systems inc partially offset increase approximately 190 million settlement receipts foreign currency exchange contracts used economic hedges certain nonfunctional currency denominated monetary assets liabilities cash used financing activities decreased 773 million primarily due increase net proceeds debt issuances 1462 million partially offset increase net repurchases common stock 651 million increase cash dividends paid 142 million liquidity businesses focused implementing strategies increase operating cash flows revenue growth margin expansion improved working capital turnover considering current economic environment businesses operate business plans strategies including focus growth cost reduction productivity initiatives believe cash balances operating cash flow continue principal source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines shortterm debt commercial paper markets longterm borrowings access public debt equity markets december 31 2014 substantial portion company’s cash equivalents held foreign subsidiaries amounts held outside us repatriated current law would subject us federal income taxes less applicable foreign tax credits however intent permanently reinvest vast majority funds outside us practicable estimate amount tax might payable earnings repatriated amount foreign tax credits would available reduce eliminate resulting us income tax liability monitor thirdparty depository institutions hold cash equivalents daily basis emphasis primarily safety principal secondarily maximizing yield funds diversify cash equivalents among counterparties minimize exposure one entities source liquidity ability issue shortterm debt commercial paper market commercial paper notes sold discount maturity 365 days date issuance borrowings commercial paper program available general corporate purposes well financing acquisitions weighted average interest rate shortterm borrowings commercial paper outstanding december 31 2014 2013 060 079 respectively ability access commercial paper market related cost borrowings affected strength credit rating market conditions credit ratings periodically reviewed major independent debtrating agencies december 31 2014 standard poor’s sp fitch moody’s ratings longterm debt a2 respectively shortterm debt a1 p1 respectively sp fitch moody’s honeywell’s rating outlook “stable” date company experienced limitations ability access sources liquidity also current shelf registration statement filed securities exchange commission may issue additional debt securities common stock preferred stock may offered one offerings terms determined time offering net proceeds offering would used general corporate purposes including repayment existing indebtedness capital expenditures acquisitions december 10 2013 company entered 4 billion amended restated five year credit agreement “credit agreement” syndicate banks commitments credit agreement increased pursuant terms credit agreement aggregate amount exceed 45 billion credit agreement maintained general corporate purposes borrowings credit agreement 2014 company repurchased 924 million outstanding shares offset dilutive impact employee stock based compensation plans including option exercises restricted unit vesting matching contributions savings plans december 2013 board directors authorized repurchase total 5 billion honeywell common stock 41 billion remained available december 31 2014 additional share repurchases addition normal operating cash requirements principal future cash requirements fund capital expenditures dividends strategic acquisitions share repurchases employee benefit obligations environmental remediation costs asbestos claims severance exit costs related repositioning actions debt repayments specifically expect primary cash requirements 2015 follows • capital expenditureswe expect spend approximately 13 billion capital expenditures 2015 primarily growth production capacity expansion cost reduction maintenance replacement • share repurchasesunder company’s share repurchase program 41 billion available december 31 2014 additional share repurchases honeywell presently expects repurchase outstanding shares time offset dilutive impact employee stockbased compensation plans including option exercises restricted unit vesting matching contributions savings plans amount timing future repurchases may vary depending market conditions level operating financing investing activities • dividendswe increased dividend rate 15 5175 per share common stock effective fourth quarter 2014 dividend company intends continue pay quarterly dividends 2015 • asbestos claimswe expect cash spending asbestos claims cash receipts related insurance recoveries approximately 350 million 30 million respectively 2015 • pension contributionsin 2015 required make contributions us pension plans plan make contributions cash andor marketable securities approximately 140 million 109 million marketable securities contributed january 2015 nonus plans satisfy regulatory funding standards timing amount contributions us nonus plans may impacted number factors including funded status plans • repositioning actionswe expect cash spending severance exit costs necessary execute repositioning actions approximate 150 million 2015 • environmental remediation costswe expect spend approximately 275 million 2015 remedial response voluntary cleanup costs continuously assess relative strength business portfolio strategic fit market position profit cash flow contribution order upgrade combined portfolio identify business units benefit increased investment identify acquisition candidates strategic plan strengthen existing core businesses also identify businesses fit longterm strategic plan based market position relative profitability growth potential businesses considered potential divestiture restructuring repositioning actions subject regulatory constraints 2014 2013 realized 160 million 3 million respectively cash proceeds sales nonstrategic businesses based past performance current expectations believe operating cash flows sufficient meet future operating cash needs available cash committed credit lines access public debt equity markets provide additional sources shortterm longterm liquidity fund current operations debt maturities future investment opportunities contractual obligations probable liability payments following summary significant contractual obligations probable liability payments december 31 2014 1 assumes longterm debt outstanding scheduled maturity 2 purchase obligations entered various vendors normal course business consistent expected requirements 3 payment amounts table reflect environmental liabilities probable reasonably estimable december 31 2014 4 amounts estimates asbestos related cash payments narco bendix based asbestos related liabilities probable reasonably estimable december 31 2014 see asbestos matters note 19 commitments contingencies notes financial statements additional information 5 amounts represent insurance recoveries deemed probable asbestos related liabilities december 31 2014 see asbestos matters note 19 commitments contingencies notes financial statements additional information 6 table excludes tax effects well 659 million uncertain tax positions see note 5 income taxes notes financial statements additional information environmental matters accruals environmental matters deemed probable reasonably estimable 268 million 272 million 234 million 2014 2013 2012 respectively addition 2014 2013 incurred operating costs ongoing businesses approximately 88 million relating compliance environmental regulations spending related known environmental matters 321 million 304 million 320 million 2014 2013 2012 respectively estimated approximately 275 million 2015 expect fund expenditures environmental matters operating cash flow timing cash expenditures depends numbers factors including timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects execution timeframe projects remedial techniques utilized agreement parties see note 19 commitments contingencies notes financial statements discussion environmental matters financial instruments following table illustrates potential change fair value interest rate sensitive instruments based hypothetical immediate one percentage point increase interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 weakening us dollar versus local currency exchange rates across maturities december 31 2014 2013 1 asset liability 2 hypothetical immediate one percentage point decrease interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 strengthening us dollar versus local currency exchange rates across maturities result change fair value equal inverse amount disclosed table 3 changes fair value foreign currency exchange contracts offset changes fair value cash flows underlying hedged foreign currency transactions see note 14 financial instruments fair value measures notes financial statements discussion critical accounting policies preparation consolidated financial statements accordance generally accepted accounting principles based selection application accounting policies require us make significant estimates assumptions effects matters inherently uncertain consider accounting policies discussed critical understanding financial statements actual results could differ estimates assumptions differences could material consolidated financial statements contingent liabilitieswe subject number lawsuits investigations claims involve substantial dollar amounts arise conduct global business operations previously owned entities including matters relating commercial transactions government contracts product liability including asbestos prior acquisitions divestitures employee benefit plans intellectual property environmental health safety matters continually assess likelihood adverse judgments outcomes contingencies well potential amounts ranges probable losses recognize liability contingencies based careful analysis matter assistance outside legal counsel applicable experts analysis includes making judgments concerning matters costs associated environmental matters outcome negotiations number cost pending future asbestos claims impact evidentiary requirements contingencies resolved long periods time liabilities may change future due new developments including new discovery facts changes legislation outcomes similar cases judicial system changes assumptions changes settlement strategy see note 19 commitments contingencies notes financial statements discussion management’s judgment applied recognition measurement environmental asbestos liabilities represent significant contingencies asbestos related contingencies insurance recoverieshoneywell’s involvement asbestos related personal injury actions relates two predecessor companies regarding north american refractories company narco asbestos related claims accrued pending claims based terms conditions agreements narco former parent company certain asbestos claimants estimate unsettled claims pending time narco filed bankruptcy protection also accrued estimated value future narco asbestos related claims expected asserted narco trust 2018 light inherent uncertainties making long term projections connection initial operation 524g trust well stay narco asbestos claims january 2002 effective date narco trust april 30 2013 believe reasonable basis estimating narco asbestos claims beyond 2018 regarding bendix asbestos related claims accrued estimated value pending claims using average resolution values previous five years also accrued estimated value future anticipated claims related bendix next five years based historic claims filing experience dismissal rates disease classifications average resolution values tort system previous five years light uncertainties inherent making longterm projections well certain factors unique friction product asbestos claims believe reasonable basis estimating asbestos claims beyond next five years connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical dealings knowledge pertinent solvency issues surrounding insurers substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries projecting future events subject various uncertainties could cause insurance recovery asbestos related liabilities higher lower projected recorded given inherent uncertainty making future projections reevaluate projections concerning probable insurance recoveries light changes projected liability recovery experience relevant factors may impact future insurance recoveries see note 19 commitments contingencies notes financial statements discussion management’s judgments applied recognition measurement asbestosrelated liabilities related insurance recoveries defined benefit pension planswe sponsor funded unfunded us nonus defined benefit pension plans financial reporting purposes net periodic pension income expense calculated annually based upon number actuarial assumptions including discount rate plan obligations expected longterm rate return plan assets changes discount rate expected longterm rate return plan assets could materially affect annual pension income expense amount annual pension income expense comprised potential marktomarket adjustment mtm adjustment service interest cost assumed return plan assets prior service amortization pension ongoing income expense key assumptions used developing 2014 2013 2012 net periodic pension income expense us plans included following mtm adjustment represents recognition net actuarial gains losses excess corridor net actuarial gains losses occur actual experience differs various assumptions used value pension plans assumptions change primary factors contributing actuarial gains losses changes discount rate used value pension obligations measurement date year difference expected actual returns plan assets marktomarket accounting method results potential volatile difficult forecast mtm adjustments mtm charges 249 million 51 million 957 million 2014 2013 2012 respectively determine expected longterm rate return plan assets utilizing historical plan asset returns varying longterm periods combined expectations future market conditions asset mix considerations see note 20 pension postretirement benefits notes financial statements details actual various asset classes targeted asset allocation percentages pension plans plan continue use expected rate return plan assets 775 2015 longterm rate based historical plan asset returns varying long term periods combined expectations future market conditions asset mix plan’s investments discount rate reflects market rate december 31 measurement date highquality fixedincome investments maturities corresponding benefit obligations subject change year discount rate volatile year determined based upon prevailing interest rates measurement date use 408 discount rate 2015 reflecting significant decline market interest rate environment since prior yearend addition potential mtm adjustments changes expected rate return plan assets discount rate resulting economic events also affects future pension ongoing income expense following table highlights sensitivity us pension obligations ongoing income expense changes assumptions assuming assumptions remain constant estimates exclude potential mtm adjustment pension ongoing income pension plans expected approximately 385 million 2015 compared pension ongoing income 254 million 2014 increase pension ongoing income 2015 compared 2014 results primarily lower interest cost due decline discount rates december 31 2014 compared december 31 2013 increase plans’ assets december 31 2014 compared december 31 2013 mainly due strong asset returns 2014 also required mtm adjustment recorded fourth quarter 2015 accordance pension accounting method previously described difficult reliably forecast predict whether mtm adjustment 2015 one required magnitude adjustment mtm adjustments primarily driven events circumstances beyond control company changes interest rates performance financial markets longlived assets including tangible finitelived intangible assetsthe determination useful lives depreciationamortization purposes whether tangible intangible assets impaired involves use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions evaluate recoverability carrying amount longlived assets whenever events changes circumstances indicate carrying amount longlived asset group may fully recoverable principal factors considering perform impairment review follows • significant underperformance ie declines sales earnings cash flows business product line relation expectations • annual operating plans fiveyear strategic plans indicate unfavorable trend operating performance business product line • significant negative industry economic trends • significant changes planned changes use assets determined impairment review necessary recoverability assets measured comparing carrying amount asset grouping estimated future undiscounted cash flows carrying amount exceeds estimated future undiscounted cash flows asset grouping considered impaired impairment measured difference carrying amount asset grouping fair value endeavor utilize best information available measure fair value usually either market prices available level 1 level 2 fair value hierarchy estimate future discounted cash flow level 3 fair value hierarchy key estimates discounted cash flow analysis include expected industry growth rates assumptions volume selling prices costs discount rate selected goodwill indefinitelived intangible assets impairment testingin testing goodwill indefinitelived intangible assets fair value estimated utilizing discounted cash flow approach utilizing cash flow forecasts five year strategic annual operating plans adjusted terminal value assumptions impairment tests involve use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions address uncertainty perform sensitivity analysis key estimates assumptions income taxeson recurring basis assess need valuation allowance deferred tax assets considering available positive negative evidence past operating results projections future taxable income enacted tax law changes feasibility impact tax planning initiatives projections future taxable income include number estimates assumptions regarding volume pricing costs well timing amount reversals taxable temporary differences sales recognition longterm contractsin 2014 recognized approximately 15 total net sales using percentageofcompletion method longterm contracts aerospace acs pmt segments longterm contracts measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts accounting contracts involves management judgment estimating total contract revenue cost contract revenues largely determined negotiated contract prices quantities modified assumptions regarding contract options change orders incentive award provisions associated technical performance price adjustment clauses inflation indexbased clauses contract costs incurred period time several years estimation costs requires management judgment cost estimates largely based negotiated estimated purchase contract terms historical performance trends economic projections significant factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements revenue cost estimates regularly monitored revised based changes circumstances anticipated losses longterm contracts recognized losses become evident maintain financial controls customer qualification contract pricing estimation processes reduce risk contract losses matters litigation see note 19 commitments contingencies notes financial statements discussion environmental asbestos litigation matters recent accounting pronouncements see note 1 summary significant accounting policies notes financial statements discussion recent accounting pronouncements item 7aitem 7 managements discussion analysis financial condition results operations managements discussion analysis pages 19 25 companys 1996 annual report shareowners incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations results operations net sales 2001 23652 million decrease 1371 million 5 percent compared 2000 net sales 2000 25023 million increase 1288 million 5 percent compared 1999 change net sales 2001 2000 attributable following cost goods sold 20429 19090 18495 million 2001 2000 1999 respectively included merger repositioning charges 2438 830 947 million 2001 2000 1999 respectively see item 8 financial statements supplementary data note 5 notes financial statements discussion merger repositioning charges excluding charges cost goods sold 17991 18260 17548 million 2001 2000 1999 respectively excluding merger repositioning charges cost goods sold percent sales 761 730 739 percent 2001 2000 1999 respectively increase cost goods sold percent sales 2001 compared 2000 principally reflected significantly lower sales specialty materials segment lower sales highermargin aftermarket products services aerospace segment increase partially offset lower costs due headcount reductions decrease cost goods sold percent sales 2000 compared 1999 related principally lower costs due headcount reductions increased sales highermargin aftermarket products services aerospace segment partially offset higher raw materials costs primarily specialty materials segment selling general administrative expenses 3064 3134 3216 million 2001 2000 1999 respectively selling general administrative expenses included merger repositioning charges 151 300 million 2001 1999 respectively see item 8 financial statements supplementary data note 5 notes financial statements discussion merger repositioning charges excluding charges selling general administrative expenses 2913 3134 2916 million 2001 2000 1999 respectively excluding merger repositioning charges selling general administrative expenses percent sales 123 125 123 percent 2001 2000 1999 respectively decrease selling general administrative expenses percent sales 2001 compared 2000 principally reflected impact headcount reductions decline discretionary spending professional services travel overtime increase selling general administrative expenses percent sales 2000 compared 1999 principally reflected acquisition pittway higher level selling general administrative expenses percent sales retirement benefit pension post retirement plans contributed cost reductions 165 282 61 million 2001 2000 1999 respectively principally due funding status pension plans described item 8 financial statements supplementary data note 23 notes financial statements workforce reductions future effects operating results principally depend pension plan investment performance economic conditions gain sale nonstrategic businesses 112 million 2000 represented pretax gain governmentmandated divestiture tcas product line honeywell inc former honeywell connection merger alliedsignal inc former honeywell december 1999 gain sale nonstrategic businesses 106 million 1999 represented pretax gain sale laminate systems business see item 8 financial statements supplementary data note 6 notes financial statements information equity income loss affiliated companies loss 193 89 million 2001 2000 respectively income 76 million 1999 equity income loss affiliated companies included repositioning charges 200 136 40 million 2001 2000 1999 respectively see item 8 financial statements supplementary data note 5 notes financial statements discussion repositioning charges excluding charges equity income loss affiliated companies income 7 47 116 million 2001 2000 1999 respectively decrease 40 million equity income 2001 compared 2000 due mainly gain sale interest automotive aftermarket joint venture 2000 decrease 69 million equity income 2000 compared 1999 due mainly lower earnings uop process technology uop joint venture partially offset gain sale interest automotive aftermarket joint venture income expense 17 million income 2001 decreased 40 million compared 2000 current year included net provision 5 million consisting 6 million charge related redemption 200 million 5 34 dealer remarketable securities 1 million credit recognized upon adoption statement financial accounting standards 133 accounting derivative instruments hedging activities amended excluding net provision income expense 22 million income 2001 decrease 35 million compared 2000 due decrease benefits foreign exchange hedging lower interest income partially offset lower minority interests expense income expense 57 million income 2000 decreased 250 million compared 1999 decrease principally reflected 1999 net gain 268 million disposition investment amp common stock excluding net gain income expense 57 million income 2000 compared 39 million income 1999 increase income 18 million 2000 due principally lower minority interests expense increase benefits foreign exchange hedging interest financial charges 405 million 2001 decreased 76 million 16 percent compared 2000 due lower average debt outstanding lower average interest rates 2001 interest financial charges 481 million 2000 increased 216 million 82 percent compared 1999 increase resulted higher average debt outstanding 2000 due principally acquisition pittway share repurchase program higher average interest rates impact tax interest expense effective tax benefit rate 766 308 315 percent 2001 2000 1999 respectively excluding impact merger repositioning charges gains sales nonstrategic businesses investment amp effective tax rate 295 315 percent 2001 2000 1999 respectively decrease effective tax rate 2000 compared 1999 related principally tax synergies europe associated merger alliedsignal inc former honeywell see item 8 financial statements supplementary data note 9 notes financial statements information net loss 99 million 012 per share 2001 compared net income 1659 million 205 per share 2000 adjusted repositioning charges net income 2001 1771 million 217 per share higher reported adjusted repositioning charges gain disposition tcas product line former honeywell net income 2000 634 million 078 per share higher reported net income 2001 decreased 27 percent compared 2000 years adjusted exclude impact repositioning charges gain disposition tcas product line former honeywell net income 1659 million 205 per share 2000 compared net income 1541 million 190 per share 1999 adjusted gains dispositions laminate systems business investment amp merger repositioning charges net income 1999 624 million 078 per share higher reported net income 2000 increased 6 percent compared 1999 years adjusted merger repositioning charges gains dispositions tcas product line former honeywell laminate systems business investment amp review business segments reconciliation segment profit consolidated income loss taxes follows see item 8 financial statements supplementary data note 24 notes financial statements information reportable segments aerospace sales 2001 9653 million decrease 335 million 3 percent compared 2000 decrease principally reflected lower sales commercial air transport aftermarket original equipment customers impact prior year divestitures sales original equipment business general aviation customers also lower decrease partially offset higher aftermarket sales business general aviation customers sales military also moderately higher lower commercial sales resulted abrupt downturn aviation industry following terrorist attacks september 11 2001 already weak economy dramatic downturn commercial air transport industry continue negatively impact operating results aerospace segment 2002 response accelerated costreduction actions mitigate impact downturn aerospace sales 2000 9988 million increase 80 million 1 percent compared 1999 higher sales aftermarket particularly repair overhaul military increased original equipment sales business general aviation customers partially offset lower sales commercial air transport original equipment customers decline engineering services revenues sales also decreased due effects governmentmandated divestitures connection merger alliedsignal former honeywell aerospace segment profit 2001 1741 million decrease 454 million 21 percent compared 2000 decrease related principally lower sales highermargin aftermarket products higher retirement benefit costs engineering development costs related new products impact prior year divestitures decrease partially offset impact cost reduction actions primarily workforce reductions aerospace segment profit 2000 2195 million increase 277 million 14 percent compared 1999 due principally coststructure improvements primarily workforce retirement benefit cost reductions mergerrelated savings increased sales highermargin aftermarket products services also contributed improvement segment profit automation control solutions sales 2001 7185 million decrease 199 million 3 percent compared 2000 excluding impact foreign exchange acquisitions divestitures sales decreased approximately 2 percent decrease resulted primarily lower sales control products business primarily due weakness key endmarkets service business also lower sales due primarily weakness security monitoring business decrease partially offset higher sales industry solutions business sales also higher security fire solutions business due principally acquisition pittway prior year automation control solutions sales 2000 7384 million increase 1269 million 21 percent compared 1999 due principally higher sales security fire solutions business due acquisition pittway february 2000 sales control products business also increased increase partially offset lower sales service industry solutions businesses industry solutions business adversely affected weakness hydrocarbon processing industry sales segment also adversely impacted foreign currency fluctuations due strong dollar automation control solutions segment profit 2001 819 million decrease 167 million 17 percent compared 2000 decrease resulted principally lower sales control products service businesses higher raw material costs pricing pressures across segment higher retirement benefit costs impact prior year divestitures decrease partially offset impact costreduction actions primarily workforce reductions automation control solutions segment profit 2000 986 million increase 219 million 29 percent compared 1999 segment profit improved primarily result lower costs due workforce benefit cost reductions mergerrelated savings acquisition pittway portfolio changes also contributed improvement segment profit specialty materials sales 2001 3313 million decrease 742 million 18 percent compared 2000 excluding effect divestitures sales decreased 13 percent decrease driven substantial decline sales electronic materials business due weakness electronics telecommunications markets sales also lower nylon system performance fibers businesses due weakness carpet automotive endmarkets specialty materials sales 2000 4055 million increase 48 million 1 percent compared 1999 higher sales advanced circuitry waferfabrication products largely offset impact divestitures principally laminate systems business specialty materials segment profit 2001 52 million decrease 282 million 84 percent compared 2000 decrease resulted primarily lower volumes price declines principally electronic materials nylon system performance fibers businesses higher energy raw material costs principally nylon system performance fibers businesses impact prior year divestitures also contributed decrease segment profit end 2001 began experience lower energy raw materials costs businesses decrease segment profit partially offset impact costreduction actions principally plant shutdowns workforce reductions specialty materials segment profit 2000 334 million decrease 105 million 24 percent compared 1999 decrease principally reflected higher energy raw material costs primarily nylon system performance fibers businesses higher operating losses chip packaging pharmaceutical chemicals businesses decrease partially offset coststructure improvements price increases certain specialty materials businesses transportation power systems sales 2001 3457 million decrease 70 million 2 percent compared 2000 excluding effects foreign exchange acquisitions divestitures sales flat sales significantly higher garrett engine boosting systems business due continued strong demand turbochargers european dieselpowered passenger car market increase offset lower sales bendix commercial vehicle systems business due decreased heavyduty truck builds north america lower sales friction materials consumer products group businesses due weakness automotive endmarkets transportation power systems sales 2000 3527 million decrease 54 million 2 percent compared 1999 due mainly lower sales bendix commercial vehicle systems friction materials businesses sales bendix commercial vehicles systems business negatively impacted decreased heavyduty truck builds sales friction materials business lower mainly due foreign currency fluctuations decrease partially offset higher sales garrett engine boosting systems business continued strong worldwide demand turbochargers offset adverse impact foreign currency fluctuations transportation power systems segment profit 2001 289 million increase 15 million 5 percent compared 2000 due higher sales garrett engine boosting systems business impact repositioning actions across businesses shutdown turbogenerator product line 2001 fact prior year included costs associated product recall bendix commercial vehicle systems business also contributed improvement segment profit 2001 increase partially offset impact lower sales bendix commercial vehicle systems consumer products group friction materials businesses transportation power systems segment profit 2000 274 million decrease 48 million 15 percent compared 1999 decrease primarily reflected costs associated product recall lower sales bendix commercial vehicle systems business costs related rampup turbogenerator product line costs associated supplier issue garrett engine boosting systems business decrease partially offset effects coststructure improvements friction materials consumer products group businesses higher sales garrett engine boosting systems business financial condition liquidity capital resources manage businesses maximize operating cash flows principal source liquidity continuously assess relative strength business portfolio strategic fit market position profit cash flow contribution order upgrade combined portfolio identify business units benefit increased investment identify acquisition candidates strategic plan strengthen existing core businesses also identify business units fit longterm strategic plan based market position relative profitability growth potential business units considered potential divestiture restructuring repositioning actions subject regulatory constraints considering current economic environment businesses operate business plans strategies including focus cost reduction productivity initiatives believe operating cash flows remain principal source liquidity available cash committed credit lines access public debt markets using debt securities commercial paper well ability sell trade accounts receivables provide additional sources shortterm longterm liquidity fund current operations future investment opportunities based current financial position expected economic performance believe liquidity adversely impacted inability access sources financing total assets december 31 2001 24226 million decrease 949 million 4 percent december 31 2000 inventories accounts receivable lower compared prior yearend driven improvement working capital performance decrease total assets also resulted asset writedowns included repositioning charges discussed detail item 8 financial statements supplementary data note 5 notes financial statements total assets december 31 2000 25175 million increase 1648 million 7 percent december 31 1999 increase related principally acquisition pittway february 2000 cash provided operating activities 1996 million 2001 increased 7 million compared 2000 increase driven improvement working capital performance offset lower net income excluding noncash repositioning charges gains sales nonstrategic businesses years cash provided operating activities 1989 million 2000 decreased 385 million compared 1999 due principally spending related merger repositioning actions deterioration working capital performance higher pension income decrease partially offset lower taxes paid sales businesses investments higher net income excluding noncash merger repositioning charges gains sales nonstrategic businesses investment amp years cash used investing activities 906 million 2001 decreased 1808 million compared 2000 due principally acquisition pittway 2000 decrease partially offset lower proceeds sales businesses property plant equipment slight increase capital spending cash used investing activities 2714 million 2000 increased 2423 million compared 1999 acquisition pittway fact prior year included net proceeds disposition investment amp lower proceeds sales businesses principally responsible increase partially offset lower capital spending 2000 capital expenditures 876 853 986 million 2001 2000 1999 respectively spending reportable segments corporate since 1999 shown item 8 financial statements supplementary data note 24 notes financial statements total capital expenditures 2002 currently projected approximately 735 million expected decrease capital spending 2002 principally reflects intention limit capital spending nonstrategic businesses expenditures expected financed principally cash provided operating activities primarily intended expansion cost reduction cash used financing activities 893 million 2001 increased 823 million compared 2000 increase resulted principally reduced longterm borrowings current year 2001 issued 500 million 5 18 notes due 2006 500 million 6 18 notes due 2011 247 million 525 notes due 2006 2000 issued 1 billion 750 notes due 2010 750 million 6875 notes due 2005 total debt 5270 million december 31 2001 353 million 6 percent lower december 31 2000 decrease resulted lower levels commercial paper outstanding current yearend increase cash used financing activities also resulted lower proceeds issuances common stock partially offset lower repurchases common stock cash used financing activities 70 million 2000 decreased 1040 million compared 1999 led principally decrease stock repurchases higher net issuances debt 2000 repurchased 43 million shares common stock 166 million connection share repurchase program rescinded effective october 21 2000 total debt 5623 million december 31 2000 557 million 11 percent higher december 31 1999 due acquisition pittway maintain 2 billion bank revolving credit facility comprised 1 billion fiveyear credit agreement b 1 billion 364day credit agreement credit agreements established general corporate purposes including support issuance commercial paper 3 1192 million commercial paper outstanding yearend 2001 2000 respectively see item 8 financial statements supplementary data note 16 notes financial statements details longterm debt discussion credit agreements following summaries contractual obligations commercial commitments december 31 2001 entered agreements lease land equipment buildings principally operating leases initial terms 25 years contain renewal options subject customary conditions time terms leases may option purchase leased assets amounts approximate fair value elect purchase assets end lease guaranteed residual values underlying assets principally aircraft equipment buildings land also issued party various direct indirect guarantees debt unconsolidated affiliates third parties minimum operating lease payments residual value guarantees maximum amount unconsolidated affiliates third party guarantees reflected table expect commercial commitments material adverse effect consolidated results operations financial position liquidity merger repositioning charges 2001 recognized repositioning charge 1016 million cost actions designed reduce cost structure improve future profitability actions consisted announced global workforce reductions approximately 20000 manufacturing administrative positions across reportable segments approximately 15000 positions eliminated december 31 2001 actions expected completed september 30 2002 repositioning charge also included asset impairments exit costs related plant closures rationalization manufacturing capacity infrastructure principally specialty materials engines systems services transportation power systems businesses including shutdown turbogenerator product line components charge included severance costs 727 million asset impairments 194 million exit costs 95 million consisting contract cancellations penalties including lease terminations negotiated subject reasonable estimation also 119 million previously established accruals mainly severance returned income 2001 due principally higher expected voluntary employee attrition resulting reduced severance liabilities principally aerospace automation control solutions reportable segments 2000 recognized repositioning charge 239 million related announced global workforce reductions across reportable segments costs close chip package manufacturing plant related workforce reductions asset impairments principally associated completion previously announced plant shutdowns specialty materials reportable segment components repositioning charge included severance costs 151 million asset impairments 88 million announced workforce reductions consisted approximately 2800 manufacturing administrative positions complete asset impairments principally related manufacturing plant equipment held sale capable taken service actively marketed period impairment also 46 million previously established accruals principally severance returned income 2000 due higher expected voluntary employee attrition resulting reduced severance liabilities principally automation control solutions aerospace reportable segments also recognized repositioning charge 99 million equity income loss affiliated companies costs close affiliates chemical manufacturing operations components repositioning charge included severance costs 6 million asset impairments 53 million environmental exit costs period expenses 40 million 1999 upon completion merger alliedsignal former honeywell recognized repositioning charge 642 million cost actions designed improve combined competitiveness productivity future profitability mergerrelated actions included elimination redundant corporate offices functional administrative overhead elimination redundant excess facilities workforce combined aerospace businesses adoption six sigma productivity initiatives former honeywell businesses transition global shared services model components repositioning charge included severance costs 342 million asset impairments 108 million exit costs 57 million mergerrelated transaction period expenses 135 million global workforce reductions consisted approximately 6500 administrative manufacturing positions complete asset impairments principally related elimination redundant excess corporate aerospace facilities equipment exit costs related lease terminations contract cancellation losses negotiated subject reasonable estimation yearend mergerrelated transaction period expenses consisted investment banking legal fees former honeywell deferred compensation vested upon change control direct mergerrelated expenses incurred period merger completed mergerrelated actions complete 1999 also recognized repositioning charge 321 million cost actions designed reposition principally alliedsignal businesses improved productivity future profitability actions included organizational realignment aerospace businesses strengthen market focus simplify business structure elimination unprofitable product line closing wax refinery carbon materials plant rationalization manufacturing capacity infrastructure specialty materials reportable segment reduction infrastructure garrett engine boosting systems business elimination two manufacturing facilities electronic materials business plant closure outsourcing activity automotive consumer products group business related general workforce reductions alliedsignal businesses automation control solutions reportable segment components repositioning charge included severance costs 140 million asset impairments 149 million exit costs 32 million global workforce reductions consisted approximately 5100 manufacturing administrative sales positions complete asset impairments principally related manufacturing plant equipment held sale capable taken service actively marketed period impairment exit costs principally consisted environmental exit costs associated chemical plant shutdowns repositioning actions excluding environmental remediation complete repositioning actions expected generate incremental pretax savings approximately 760 million 2002 compared 2001 principally planned workforce reductions facility consolidations cash expenditures severance exit costs necessary execute actions 422 344 million 2001 2000 respectively expenditures severance exit costs funded operating cash flows proceeds sales nonstrategic businesses government required divestitures resulting merger alliedsignal former honeywell sale mergerrelated excess duplicate facilities equipment cash expenditures severance exit costs necessary execute remaining 2001 actions approximate 500 million 2002 funded principally operating cash flows 2001 recognized charges consisting settlement litton systems inc litigation 440 million see item 8 financial statements supplementary data note 22 notes financial statements discussion probable reasonably estimable legal environmental claims 408 million see item 8 financial statements supplementary data note 22 notes financial statements discussion customer claims settlements contract liabilities 310 million writeoffs principally related asset impairments including receivables inventories 335 million 2001 adopted plan dispose friction materials business held discussions potential acquiror business friction materials business designated held disposal recognized impairment charge 145 million related writedown property plant equipment goodwill identifiable intangible assets fair value less costs sell recognized charges 112 million related temporary decline value equity investment equity investees loss contract 100 million charge writeoff investments including inventory related regional jet engine contract cancellation also recognized 42 million transaction expenses related proposed merger ge redeemed 200 million 5 34 dealer remarketable securities due 2011 resulting loss 6 million 2000 identified certain business units manufacturing facilities noncore business strategy result assessment implemented cost reduction initiatives conducted discussions potential acquirors businesses assets part process evaluated businesses assets possible impairment result analysis recognized impairment charges 2000 245 165 million principally related writedown property plant equipment goodwill identifiable intangible assets friction materials business chemical manufacturing facility respectively recognized charges consisting probable reasonably estimable environmental liabilities 87 million contract claims mergerrelated period expenses contingencies writeoffs tangible assets removed service including inventory totaling 140 million addition recognized charge 37 million costs principally related equity investees customer claims 1999 recognized charges consisting losses aerospace engine maintenance contracts contract cancellation penalty totaling 45 million customer employee claims 69 million contract settlements contingent liabilities 18 million writeoffs principally related tangible intangible assets removed service including inventory 152 million also recognized 36 million charge resulting temporary decline value equity investment due significant deterioration market conditions 4 million charge related equity investees severance action involving approximately 220 employees following table summarizes pretax impact total merger repositioning charges reportable business segment environmental matters subject various federal state local government requirements relating protection employee health safety environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury employees customers handling manufacture use disposal hazardous toxic substances accord environmental laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental matters including past production products containing toxic substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually owned sites jointly member industry groups nonowned sites determine feasibility various remedial techniques address environmental matters respect environmental matters involving production products containing toxic substances believe costs defending resolving matters largely covered insurance subject deductibles exclusions retentions policy limits policy see item 8 financial statements supplementary data note 1 notes financial statements record appropriate liabilities environmental matters environmental assessments made remedial efforts damage claim payments probable costs reasonably estimated respect site contamination timing accruals generally later completion feasibility studies expect able fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing litigation settlements personal injury property damage claims insurance recoveries regulatory approval cleanup projects remedial techniques utilized agreements parties remedial response voluntary cleanup expenditures 82 75 78 million 2001 2000 1999 respectively currently estimated approximately 77 million 2002 expect able fund expenditures operating cash flow remedial response voluntary cleanup costs charged pretax earnings 152 110 23 million 2001 2000 1999 respectively december 31 2001 2000 recorded liability environmental matters 456 386 million respectively addition 2001 2000 incurred operating costs ongoing businesses approximately 75 80 million respectively relating compliance environmental regulations although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined could material consolidated results operations however considering past experience insurance coverage reserves expect environmental matters material adverse effect consolidated financial position see item 8 financial statements supplementary data note 5 notes financial statements discussion legal environmental charges note 22 notes financial statements discussion commitments contingencies including related environmental matters toxic tort litigation financial instruments result global operating financing activities exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position minimize risks interest foreign currency exchange rate commodity price fluctuations normal operating financing activities deemed appropriate use derivative financial instruments use derivative financial instruments trading speculative purposes use leveraged derivative financial instruments summary accounting policies derivative financial instruments included item 8 financial statements supplementary data note 1 notes financial statements conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities anticipated transactions arising international trade objective preserve economic value cash flows nonfunctional currencies attempt transaction exposures hedged natural offsets fullest extent possible opportunities exhausted foreign currency forward option agreements third parties principal currency exposures relate euro countries british pound canadian dollar us dollar exposure market risk changes interest rates relates primarily debt obligations described item 8 financial statements supplementary data notes 16 18 notes financial statements issue fixed variable rate debt use interest rate swaps manage exposure interest rate movements reduce overall borrowing costs financial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value cash flows derivative financial instruments considering reasonably possible changes interest currency exchange rates restrict use derivative financial instruments hedging activities following table illustrates potential change fair value interest rate sensitive instruments based hypothetical immediate onepercentagepoint increase interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 percent increase us dollar per local currency exchange rates across maturities potential change fair value contracts hedging commodity purchases based 20 percent decrease price underlying commodity across maturities december 31 2001 2000 1 asset liability 2 excludes capitalized leases 3 changes fair value foreign currency exchange contracts offset changes fair value cash flows underlying hedged foreign currency transactions 4 changes fair value forward commodity contracts offset changes cash flows underlying hedged commodity transactions discussion procedures monitor market risk estimated changes fair value resulting sensitivity analyses forwardlooking statements market risk assuming certain adverse market conditions occur actual results future may differ materially estimated results due actual developments global financial markets methods used us assess mitigate risk discussed considered projections future events matters litigation see item 8 financial statements supplementary data note 22 notes financial statements discussion litigation matters critical accounting policies preparation consolidated financial statements conformity generally accepted accounting principles requires management make complex subjective judgments selection application accounting policies item 8 financial statements supplementary data note 1 notes financial statements contains detailed summary significant accounting policies believe number accounting policies critical understanding financial position results operations following summary accounting policies believe critical accounting policies judgments uncertainties affecting application policies likelihood materially different amounts would reported different conditions using different assumptions sales recognition product service sales recognized agreement sale exists product delivery occurred services rendered pricing fixed determinable collection reasonably assured sales longterm contracts aerospace automation control solutions segments recorded percentageofcompletion method measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts provisions anticipated losses longterm contracts recorded full losses become evident apply judgment ensure criteria recognizing sales consistently applied achieved recognized sales transactions upon recognizing longterm contract sales judgment must applied ensure anticipated losses properly recognized period become evident longterm contract loss experience dependent upon economic health customers principally aerospace automation control segments well ability estimate contract cost inputs perform according contract terms conditions believe relevant conditions assumptions considered recognizing sales contract losses accounting contingent liabilities subject number lawsuits investigations claims involve substantial dollar amounts arise conduct global business operations contingencies relate commercial transactions government contracts product liabilities environmental health safety matters enumerated item 8 financial statements supplementary data notes 1 22 notes financial statements recognize liability contingency probable occurrence reasonably estimable based judgment although impossible predict outcome lawsuit investigation claim item 8 financial statements supplementary data note 22 notes financial statements provides summary material contingencies currently pending us expectations related financial outcome contingency longlived assets including tangible intangible assets goodwill conduct global business operations execute strategy acquire tangible intangible assets periodically evaluate recoverability carrying amount longlived assets including property plant equipment goodwill intangible assets whenever events changes circumstances indicate carrying amount asset may fully recoverable impairment assessed undiscounted expected future cash flows derived asset less carrying amount impairment losses measured amount carrying value asset exceeds fair value recognized operating earnings continually apply best judgment applying impairment rules determine timing impairment test undiscounted cash flows used assess impairments fair value impaired asset dynamic economic environment businesses operate resulting assumptions used estimate future cash flows impact outcome impairment tests pension postretirement benefits maintain pension plans covering majority employees retirees postretirement benefit plans retirees include health care benefits life insurance coverage see item 8 financial statements supplementary data note 23 notes financial statements additional details financial reporting purposes net periodic pension postretirement benefit costs income calculated based upon number actuarial assumptions including discount rate plan obligations assumed rate return pension plan assets assumed annual rate compensation increase plan employees annual rate increase per capita costs covered postretirement healthcare benefits assumptions based upon judgment considering known trends uncertainties actual asset returns pension plans significantly assumed rate return would result lower net periodic pension income higher expense future years actual annual rates increase per capita costs covered postretirement healthcare benefits assumed rates increase would result higher net periodic postretirement benefit costs future years euro conversion january 1 1999 certain member countries european union established fixed conversion rates existing currencies european unions common currency euro transition period introduction euro january 1 1999 january 1 2002 ensuring euro conversion compliance issues addressed expect adverse consequences sales us government sales us government acting various departments agencies prime contractors amounted 2491 2219 2383 million 2001 2000 1999 respectively included sales department defense dod prime contractor subcontractor 1631 1548 1415 million 2001 2000 1999 respectively sales dod accounted 69 62 60 percent total sales 2001 2000 1999 respectively affected us government budget constraints defense space programs us defense spending increased 2001 also expected increase 2002 backlog total backlog yearend 2001 2000 7178 8094 million respectively anticipate approximately 5375 million 2001 backlog filled 2002 believe backlog necessarily reliable indicator future sales substantial portion orders constituting backlog may canceled customers option inflation highly competitive market conditions minimized inflations impact selling prices products costs purchased materials cost increases materials labor generally low productivity enhancement programs including six sigma initiatives largely offset impact recent accounting pronouncements see item 8 financial statements supplementary data note 1 notes financial statements discussion recent accounting pronouncements item 7aitem 7 management’s discussion analysis financial condition results operations dollars millions except per share amounts following management’s discussion analysis financial condition results operations mda intended help reader understand results operations financial condition honeywell international inc consolidated subsidiaries honeywell company three years ended december 31 2015 references notes relate notes financial statements item 8 financial statements supplementary data executive summary 2015 honeywell successfully navigated challenging macroeconomic climate combining strategic growth diverse portfolio wellknown cost discipline marked acceleration capital deployment strategy earnings per share common stockassuming dilution grew 13 604 per share 2015 net income attributable honeywell grew 12 4768 million balanced longterm focus enhancing shareowner value resulted segment margin expansion 220 basis points versus 2014 without sacrificing seed planting intended ensure future growth including maintaining rd spending 5 sales new product introductions aligned global macroeconomic trends energy safety security productivity 216 million repositioning investments improve operations increased investment high growth regions honeywell operating system hos gold honeywell user experience hue initiatives intensified throughout company driving productivity sustainable improvements factories footprints supply chain 2015 deployed capital 10 billion including following • mergers acquisitionswe deployed 5 billion 2015 acquiring businesses integrated three operating segments acquisitions share technology focus increase existing deep alignment enduring macro trends energy efficiency clean energy generation safety security urbanization customer productivity • dividendafter 15 dividend rate increase 2014 increased annual dividend rate 15 2015 seek grow dividend faster earnings • share repurchaseswe continue opportunistically repurchase shares goal generally keeping share count flat seeking offset dilutive impact employee stock based compensation plans 2015 repurchased 188 million shares 19 billion • capital investment facilitieswe invested 1 billion high return capital expenditures focused revenue growth projects solstice low globalwarming potential refrigerant products automotive industry catalyst products uop consolidated results operations net sales change net sales attributable following discussion net sales segment found review business segments section mda foreign currency translation impact principally driven weakening euro canadian dollar us dollar cost products services sold cost products services sold decreased 2015 compared 2014 principally due decrease direct indirect material costs approximately 1460 million driven primarily favorable impact foreign currency translation productivity lower raw materials passthrough pricing absence friction materials business partially offset higher sales volume decrease labor costs approximately 450 million higher pension income approximately 230 million gross margin percentage increased 2015 compared 2014 principally due higher gross margin business segments approximately 20 percentage point impact collectively increased pension income allocated cost products services sold approximately 05 percentage point impact cost products services sold increased 2014 compared 2013 principally due increase direct material labor costs approximately 645 million driven higher sales volume acquisitions net divestitures increase pension postretirement benefit expense approximately 35 million partially offset decrease repositioning charges approximately 40 million gross margin percentage increased 2014 compared 2013 principally due higher gross margin business segments approximately 07 percentage point impact collectively lower repositioning charges approximately 01 percentage point impact partially offset higher pension postretirement benefit expense approximately 01 percentage point impact selling general administrative expenses selling general administrative expenses sga decreased 2015 compared 2014 primarily driven favorable impact foreign currency translation increased pension income decreased indirect costs benefits repositioning partially offset increased labor costs primarily merit increases investment growth sga increased 2014 compared 2013 primarily driven increase labor costs primarily acquisitions incentive compensation merit increases investment growth increase pension postretirement benefit expense partially offset decrease repositioning charges tax expense discussion changes effective tax rate see note 5 income taxes notes financial statements effective tax rates 2015 2014 2013 lower us statutory rate 35 primarily due lower tax rates nonus earnings vast majority intend permanently reinvest outside united states company currently expects effective tax rate 2016 approximately 265 effective tax rate vary quarter due unusual infrequently occurring items resolution income tax audits changes tax laws items pension marktomarket adjustments net income attributable honeywell earnings per share common stockassuming dilution increased 2015 compared 2014 primarily driven increased segment profit business segments lower pension postretirement expense partially offset increased tax expense lower income principally due absence realized gain related prior year sale marketable equity securities earnings per share common stockassuming dilution increased 2014 compared 2013 primarily due increased segment profit business segments lower repositioning charges partially offset higher pension postretirement expense increased tax expense business overview consolidated results principally impacted • change global economic growth rates industry conditions demand key end markets • overall sales mix particular mix aerospace original equipment aftermarket sales mix acs products distribution services sales • impact fluctuations foreign currency exchange rates particular euro relative us dollar • extent cost savings productivity actions able offset exceed impact material nonmaterial inflation • impact pension discount rate asset returns pension expense including marktomarket adjustments funding requirements 2016 areas focus supported honeywell enablers including hos gold generally applicable operating segments include • driving profitable growth rd technological excellence optimized manufacturing capability deliver innovative products customers value • expanding margins maintaining improving company’s cost structure manufacturing administrative process improvements repositioning actions drive productivity enhance flexibility business works proactively respond changes end market demand • driving strong cash flow conversion effective working capital management enable company deploy capital strategic acquisitions capital expenditures returning cash shareholders • driving organic growth expansion localized footprint high growth regions including china india eastern europe middle east latin america • executing disciplined rigorous integration processes deliver inorganic growth previously announced acquisitions also identifying appropriate acquisitions deploy capital effectively • aligning prioritizing capital expenditures longterm growth considering shortterm demand volatility • actively monitoring trends oil gas industry end markets principally demand midstream downstream customers products services provided process solutions uop • monitoring suppliers customers signs liquidity constraints limiting exposure resultjing inability meet delivery commitments pay amounts due identifying alternate sources supply necessary • proactively managing raw material costs formula longterm supply agreements hedging activities feasible prudent • controlling corporate nonoperating costs including costs incurred asbestos environmental matters pension postretirement expenses tax expense review business segments aerospace 2015 compared 2014 aerospace sales decreased primarily due unfavorable impact foreign currency translation friction materials divestiture partially offset increase organic sales discussed decrease incentives predominantly air transport regional aviation original equipment manufacturers oem incentives • commercial original equipment sales increased 11 increased 5 organic primarily driven decrease oem incentives higher business general aviation engine shipments • commercial aftermarket sales increased 2 increased 2 organic primarily driven higher repair overhaul activities partially offset lower retrofits modifications upgrades business general aviation customers • defense space sales decreased 1 flat organic primarily due lower us government revenue partially offset growth international programs • transportation systems sales decreased 19 increased 3 organic primarily due unfavorable impact foreign currency translation friction materials divestiture partially offset continued growth new platform launches higher global turbo gas penetration aerospace segment profit increased primarily due 8 increase operational segment profit 6 favorable impact acquisitions divestitures predominantly absence higher prior year oem incentives discussed partially offset 4 unfavorable impact foreign currency translation increase operational segment profit primarily driven productivity net inflation favorable pricing partially offset continued investments growth cost products services sold decreased primarily due favorable impact foreign currency translation friction materials divestiture productivity net inflation partially offset continued investments growth 2014 compared 2013 aerospace sales decreased primarily due friction materials divestiture increase oem incentives partially offset increase organic sales discussed • commercial original equipment sales decreased 2 increased 3 organic primarily due increase oem incentives air transport regional original equipment manufacturers oems partially offset higher air transport volumes consistent oems’ higher production rates business general aviation engine shipments • commercial aftermarket sales increased 3 driven primarily higher sales spare parts air transport regional customers partially offset decline retrofits modifications upgrades lower repair overhaul activities business general aviation customers • defense space sales decreased 2 primarily due lower us government services revenue absence prior year royalty gain partially offset growth international programs • transportation systems sales decreased 3 increased 5 organic primarily due friction materials divestiture partially offset continued growth new platform launches higher global turbo gas penetration increased commercial vehicle demand europe aerospace segment profit increased primarily due 8 increase operational segment profit partially offset 6 unfavorable impact acquisitions divestitures predominantly higher oem incentives absence prior year royalty gain discussed increase operational segment profit driven primarily favorable price productivity net inflation cost products services sold decreased primarily due factors discussed excluding price automation control solutions 2015 compared 2014 acs sales decreased primarily due unfavorable impact foreign currency translation partially offset organic sales growth acquisitions net divestitures • sales energy safety security decreased 2 increased 2 organic principally due unfavorable impact foreign currency translation partially offset organic sales growth acquisitions net divestitures organic sales growth primarily due increased sales volumes significantly security fire across regions well sensing productivity solutions • sales building solutions distribution decreased 4 increased 2 organic principally due unfavorable impact foreign currency translation organic sales growth primarily due increased sales volume americas distribution partially offset softness project installation us energy retrofit businesses expected continue acs segment profit increased due increase operational segment profit acquisitions net divestitures partially offset unfavorable impact foreign currency translation increase operational segment profit primarily due positive impact price productivity net inflation higher organic sales volumes partially offset continued investments growth cost products services decreased primarily due favorable impact foreign currency translation productivity partially offset higher organic sales volume inflation 2014 compared 2013 acs sales increased primarily due growth acquisitions net divestitures organic sales growth partially offset unfavorable impact foreign currency translation • sales energy safety security increased 11 4 organic principally due acquisitions net divestitures ii higher global sales volumes environmental energy solutions business driven strong us residential market conditions new product introductions iii increases sales volumes security fire industrial safety businesses driven organic growth regions iv increases sales volumes sensing productivity solutions business second half 2014 • sales building solutions distribution increased 1 2 organic principally due increased sales volumes americas distribution business partially offset softness us energy retrofit business building solutions backlog increased 2014 acs segment profit increased due increase operational segment profit acquisitions net divestitures partially offset unfavorable impact foreign currency translation increase operational segment profit primarily result higher sales volumes discussed positive impact price productivity net inflation partially offset continued investment growth cost products services sold increased primarily due higher sales volume acquisitions net divestitures inflation partially offset productivity favorable impact foreign currency translation performance materials technologies 2015 compared 2014 performance materials technologies pmt sales decreased due decrease organic sales volumes unfavorable impact foreign currency translation • uop sales decreased 7 decreased 6 organic driven primarily lower gas processing revenues due significant slowdown customer projects expected continue decreased equipment engineering licensing revenues partially offset increased catalyst revenues • process solutions sales decreased 12 decreased 3 organic driven primarily unfavorable impact foreign currency translation lower volumes primarily due weakness projects field products expected moderate 2016 • advanced materials sales decreased 10 decreased 7 organic primarily driven lower raw material passthrough pricing unplanned plant outages resins chemicals partially offset increased volumes fluorine products anticipate volatility raw materials passthrough pricing continue 2016 primarily resins chemicals sales fluctuate market price certain raw materials correlated price oil pmt segment profit increased due increase operational segment profit partially offset unfavorable impact foreign currency translation increase operational segment profit primarily due price productivity net inflation partially offset lower organic sales volumes continued investments growth cost products services sold decreased primarily due favorable impacts inflation foreign currency translation lower organic sales volumes productivity partially offset continued investments growth 2014 compared 2013 pmt sales increased due increase organic sales partially offset unfavorable impact foreign currency translation • uop sales increased 8 driven primarily higher catalyst gas processing volumes partially offset lower equipment service revenues first nine months catalyst sales decreased fourth quarter due timing shipments well stronger volume growth fourth quarter 2013 compared 2014 partially offset increased licensing revenues • sales process solutions business increased 1 4 organic driven primarily volume growth advanced solutions software services field products partially offset unfavorable foreign currency translation predominately fourth quarter project service orders backlog increased 2014 • advanced materials sales increased 3 primarily driven increased volume fluorine products resins chemicals partially offset unfavorable pricing significantly fluorine products lower raw materials passthrough pricing resins chemicals anticipate lower raw materials passthrough pricing continue 2015 primarily resins chemicals sales fluctuate market price certain raw materials correlated price oil pmt segment profit increased due increase operational segment profit partially offset unfavorable impact foreign currency translation increase operational segment profit primarily due higher sales volumes discussed productivity net inflation partially offset unfavorable advanced materials pricing continued investment growth unfavorable foreign currency translation cost products services sold increased primarily due higher volume continued investment growth partially offset productivity net inflation favorable impact foreign currency translation repositioning charges see note 3 repositioning charges notes financial statements discussion repositioning actions related charges incurred 2015 2014 2013 repositioning actions expected generate incremental pretax savings 175 million 200 million 2016 compared 2015 principally planned workforce reductions cash spending related repositioning actions 118 million 161 million 160 million 2015 2014 2013 funded operating cash flows 2016 expect cash spending repositioning actions approximately 175 million funded operating cash flows liquidity capital resources company continues manage businesses maximize operating cash flows primary source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines shortterm debt commercial paper market longterm borrowings access public debt equity markets continue balance cash financing uses investment existing core businesses acquisition activity share repurchases dividends cash flow summary cash flows operating investing financing activities reflected consolidated statement cash flows summarized follows 2015 compared 2014 cash provided operating activities increased 430 million primarily due 489 million favorable impact working capital 382 million increase net income noncash pension marktomarket adjustment partially offset 175 million decrease customer advances deferred income ii 151 million oem incentives iii increased cash tax payments 50 million cash used investing activities increased 4638 million primarily due increase cash paid acquisitions 5224 million significantly elster division melrose industries plc elster decrease proceeds 159 million primarily friction materials divestiture partially offset net 659 million decrease investments primarily shortterm marketable securities cash provided financing activities increased 2374 million primarily due increase net proceeds debt issuances 3648 million partially offset increase net repurchases common stock 1039 million increase cash dividends paid 216 million 2014 compared 2013 cash provided operating activities increased 689 million primarily due 508 million increase net income noncash pension marktomarket adjustment ii reduced net payments repositioning charges 233 million primarily due collection 130 million asbestos receivable due one insurance carriers lower asbestos related payments 98 million iii reduced cash contributions pension postretirement plans 131 million iv lower cash tax payments approximately 129 million partially offset 93 million unfavorable impact working capital primarily driven higher inventory support sales growth cash used investing activities decreased 83 million primarily due decrease cash paid acquisitions 1129 million significantly intermec rae systems inc 2013 increase proceeds sales businesses 157 million significantly friction materials partially offset net 688 million increase investments primarily shortterm marketable securities ii increase approximately 371 million settlement payments foreign currency exchange contracts used economic hedges certain nonfunctional currency denominated monetary assets liabilities iii 147 million increase expenditures property plant equipment cash used financing activities increased 1839 million primarily due decrease net proceeds debt issuances 1589 million increase cash dividends paid 157 million lower net proceeds issuance common stock 33 million liquidity businesses focused implementing strategies increase operating cash flows revenue growth margin expansion improved working capital turnover considering current economic environment businesses operate business plans strategies including focus growth cost reduction productivity initiatives believe cash balances operating cash flow continue principal source liquidity addition available cash operating cash flows additional sources liquidity include committed credit lines shortterm debt commercial paper markets longterm borrowings access public debt equity markets december 31 2015 substantial portion company’s cash equivalents held foreign subsidiaries amounts held outside us repatriated current law would subject us federal income taxes less applicable foreign tax credits however intent permanently reinvest vast majority funds outside us practicable estimate amount tax might payable earnings repatriated amount foreign tax credits would available reduce eliminate resulting us income tax liability monitor thirdparty depository institutions hold cash equivalents daily basis emphasis primarily safety principal secondarily maximizing yield funds diversify cash equivalents among counterparties minimize exposure one entities source liquidity ability issue shortterm debt commercial paper market commercial paper notes sold discount maturity 365 days date issuance borrowings commercial paper program available general corporate purposes well financing acquisitions weighted average interest rate shortterm borrowings commercial paper outstanding december 31 2015 2014 026 060 ability access commercial paper market related cost borrowings affected strength credit rating market conditions credit ratings periodically reviewed major independent debtrating agencies december 31 2015 standard poor’s sp fitch moody’s ratings longterm debt a2 shortterm debt a1 p1 sp fitch moody’s honeywell’s rating outlook “stable” date company experienced limitations ability access sources liquidity also current shelf registration statement filed securities exchange commission may issue additional debt securities common stock preferred stock may offered one offerings terms determined time offering net proceeds offering would used general corporate purposes including repayment existing indebtedness share repurchases capital expenditures acquisitions 2015 company entered credit agreements syndicate banks see note 12 longterm debt credit agreements notes financial statements discussion credit agreements 2015 company repurchased 1884 million outstanding shares offset dilutive impact employee stock based compensation plans including option exercises restricted unit vesting matching contributions savings plans december 2013 board directors authorized repurchase total 5 billion honeywell common stock 22 billion remained available december 31 2015 additional share repurchases honeywell presently expects repurchase outstanding shares time offset dilutive impact employee stock based compensation plans including future option exercises restricted unit vesting matching contributions savings plans addition normal operating cash requirements principal future cash requirements fund capital expenditures dividends strategic acquisitions share repurchases employee benefit obligations environmental remediation costs asbestos claims severance exit costs related repositioning actions debt repayments specifically expect primary cash requirements 2016 follows • capital expenditureswe expect spend approximately 11 billion capital expenditures 2016 primarily growth production capacity expansion cost reduction maintenance replacement • share repurchasesunder company’s share repurchase program 22 billion available december 31 2015 additional share repurchases honeywell presently expects repurchase outstanding shares time generally offset dilutive impact employee stockbased compensation plans including option exercises restricted unit vesting matching contributions savings plans amount timing future repurchases may vary depending market conditions level operating financing investing activities • dividendswe increased dividend rate 15 5950 per share common stock effective fourth quarter 2015 dividend company intends continue pay quarterly dividends 2016 • asbestos claimswe expect cash spending asbestos claims cash receipts related insurance recoveries approximately 295 million 25 million 2016 • pension contributionsin 2016 required make contributions us pension plans plan make contributions cash andor marketable securities approximately 160 million 106 million marketable securities contributed january 2016 nonus plans satisfy regulatory funding standards timing amount contributions us nonus plans may impacted number factors including funded status plans • repositioning actionswe expect cash spending severance exit costs necessary execute repositioning actions approximate 175 million 2016 • environmental remediation costswe expect spend approximately 250 million 2016 remedial response voluntary cleanup costs • acquisitionswe acquired remaining 30 percent noncontrolling interest uop russell llc approximately 240 million january 2016 addition february 2016 acquired com dev international aggregate purchase price approximately 330 million entered definitive agreement acquire xtralis international holdings limited aggregate purchase price approximately 480 million continuously assess relative strength business portfolio strategic fit market position profit cash flow contribution order upgrade combined portfolio identify business units benefit increased investment identify acquisition candidates strategic plan strengthen existing core businesses also identify businesses fit longterm strategic plan based market position relative profitability growth potential businesses considered potential divestiture restructuring repositioning actions subject regulatory constraints 2015 2014 realized 1 million 160 million cash proceeds sales nonstrategic businesses based past performance current expectations believe operating cash flows sufficient meet future operating cash needs available cash committed credit lines access public debt equity markets provide additional sources shortterm longterm liquidity fund current operations debt maturities future investment opportunities contractual obligations probable liability payments following summary significant contractual obligations probable liability payments december 31 2015 1 assumes longterm debt outstanding scheduled maturity 2 purchase obligations entered various vendors normal course business consistent expected requirements 3 payment amounts table reflect environmental liabilities probable reasonably estimable december 31 2015 4 amounts estimates asbestos related cash payments narco bendix based asbestos related liabilities probable reasonably estimable december 31 2015 see asbestos matters note 19 commitments contingencies notes financial statements additional information 5 amounts represent insurance recoveries deemed probable asbestos related liabilities december 31 2015 see asbestos matters note 19 commitments contingencies notes financial statements additional information 6 table excludes tax liability payments including unrecognized tax benefits see note 5 income taxes notes financial statements additional information environmental matters accruals environmental matters deemed probable reasonably estimable 194 million 268 million 272 million 2015 2014 2013 addition 2015 2014 incurred operating costs ongoing businesses approximately 90 million 88 million relating compliance environmental regulations spending related known environmental matters 273 million 321 million 304 million 2015 2014 2013 estimated approximately 250 million 2016 expect fund expenditures environmental matters operating cash flow timing cash expenditures depends numbers factors including timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects execution timeframe projects remedial techniques utilized agreement parties see note 19 commitments contingencies notes financial statements discussion environmental matters financial instruments following table illustrates potential change fair value interest rate sensitive instruments based hypothetical immediate one percentage point increase interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 weakening us dollar versus local currency exchange rates across maturities december 31 2015 2014 1 asset liability 2 hypothetical immediate one percentage point decrease interest rates across maturities potential change fair value foreign exchange rate sensitive instruments based 10 strengthening us dollar versus local currency exchange rates across maturities result change fair value equal inverse amount disclosed table 3 changes fair value foreign currency exchange contracts offset changes fair value cash flows underlying hedged foreign currency transactions see note 14 financial instruments fair value measures notes financial statements discussion agreements critical accounting policies preparation consolidated financial statements accordance generally accepted accounting principles based selection application accounting policies require us make significant estimates assumptions effects matters inherently uncertain consider accounting policies discussed critical understanding financial statements actual results could differ estimates assumptions differences could material consolidated financial statements contingent liabilitieswe subject number lawsuits investigations claims involve substantial dollar amounts arise conduct global business operations previously owned entities including matters relating commercial transactions government contracts product liability including asbestos prior acquisitions divestitures employee benefit plans intellectual property environmental health safety matters continually assess likelihood adverse judgments outcomes contingencies well potential amounts ranges probable losses recognize liability contingencies based careful analysis matter assistance outside legal counsel applicable experts analysis includes making judgments concerning matters costs associated environmental matters outcome negotiations number cost pending future asbestos claims impact evidentiary requirements contingencies resolved long periods time liabilities may change future due new developments including new discovery facts changes legislation outcomes similar cases judicial system changes assumptions changes settlement strategy see note 19 commitments contingencies notes financial statements discussion management’s judgment applied recognition measurement environmental asbestos liabilities represent significant contingencies asbestos related contingencies insurance recoverieshoneywell’s involvement asbestos related personal injury actions relates two predecessor companies regarding north american refractories company narco asbestos related claims accrued pending claims based terms conditions agreements narco former parent company certain asbestos claimants estimate unsettled claims pending time narco filed bankruptcy protection also accrued estimated value future narco asbestos related claims expected asserted narco trust 2018 light inherent uncertainties making long term projections connection initial operation 524g trust well stay narco asbestos claims january 2002 effective date narco trust april 30 2013 believe reasonable basis estimating narco asbestos claims beyond 2018 regarding bendix asbestos related claims accrued estimated value pending claims using average resolution values previous five years also accrued estimated value future anticipated claims related bendix next five years based historic claims filing experience dismissal rates disease classifications average resolution values tort system previous five years light uncertainties inherent making longterm projections well certain factors unique friction product asbestos claims believe reasonable basis estimating asbestos claims beyond next five years connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical dealings knowledge pertinent solvency issues surrounding insurers substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries projecting future events subject various uncertainties could cause insurance recovery asbestos related liabilities higher lower projected recorded given inherent uncertainty making future projections reevaluate projections concerning probable insurance recoveries light changes projected liability recovery experience relevant factors may impact future insurance recoveries see note 19 commitments contingencies notes financial statements discussion management’s judgments applied recognition measurement asbestosrelated liabilities related insurance recoveries defined benefit pension planswe sponsor funded unfunded us nonus defined benefit pension plans financial reporting purposes net periodic pension income expense calculated annually based upon number actuarial assumptions including discount rate plan obligations expected longterm rate return plan assets changes discount rate expected longterm rate return plan assets could materially affect annual pension income expense amount annual pension income expense comprised potential marktomarket adjustment mtm adjustment service interest cost assumed return plan assets prior service amortization pension ongoing income expense key assumptions used developing 2015 2014 2013 net periodic pension income expense us plans included following mtm adjustment represents recognition net actuarial gains losses excess corridor net actuarial gains losses occur actual experience differs various assumptions used value pension plans assumptions change primary factors contributing actuarial gains losses changes discount rate used value pension obligations measurement date year difference expected actual returns plan assets marktomarket accounting method results potential volatile difficult forecast mtm adjustments mtm charges 67 million 249 million 51 million 2015 2014 2013 determine expected longterm rate return plan assets utilizing historical plan asset returns varying longterm periods combined expectations future market conditions asset mix considerations see note 20 pension postretirement benefits notes financial statements details actual various asset classes targeted asset allocation percentages pension plans plan continue use expected rate return plan assets 775 2016 longterm rate based historical plan asset returns varying long term periods combined expectations future market conditions asset mix plan’s investments discount rate reflects market rate december 31 measurement date highquality fixedincome investments maturities corresponding benefit obligations subject change year discount rate volatile year determined based upon prevailing interest rates measurement date use 446 discount rate december 31 2015 reflecting increase market interest rate environment since prior yearend addition potential mtm adjustments changes expected rate return plan assets discount rate resulting economic events also affects future pension ongoing income expense following table highlights sensitivity us pension obligations ongoing income expense changes assumptions assuming assumptions remain constant estimates exclude potential mtm adjustment pension ongoing income pension plans expected approximately 580 million 2016 compared pension ongoing income 430 million 2015 expected increase primarily due lower service interest costs resulting mainly change discount rate methodology described note 20 pension postretirement benefits notes financial statements plan amendment fourth quarter 2015 freeze final average compensation us pension plans december 31 2015 partially offset impact lower asset returns 2015 also required mtm adjustment recorded fourth quarter 2016 accordance pension accounting method previously described difficult reliably forecast predict whether mtm adjustment 2016 one required magnitude adjustment mtm adjustments primarily driven events circumstances beyond control company changes interest rates performance financial markets longlived assets including tangible finitelived intangible assetsthe determination useful lives depreciationamortization purposes whether tangible intangible assets impaired involves use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions evaluate recoverability carrying amount longlived assets whenever events changes circumstances indicate carrying amount longlived asset group may fully recoverable principal factors considering perform impairment review follows • significant underperformance ie declines sales earnings cash flows business product line relation expectations • annual operating plans fiveyear strategic plans indicate unfavorable trend operating performance business product line • significant negative industry economic trends • significant changes planned changes use assets determined impairment review necessary recoverability assets measured comparing carrying amount asset grouping estimated future undiscounted cash flows carrying amount exceeds estimated future undiscounted cash flows asset grouping considered impaired impairment measured difference carrying amount asset grouping fair value endeavor utilize best information available measure fair value usually either market prices available level 1 level 2 fair value hierarchy estimate future discounted cash flow level 3 fair value hierarchy key estimates discounted cash flow analysis include expected industry growth rates assumptions volume selling prices costs discount rate selected goodwill indefinitelived intangible assets impairment testingin testing goodwill indefinitelived intangible assets fair value estimated utilizing discounted cash flow approach utilizing cash flow forecasts five year strategic annual operating plans adjusted terminal value assumptions impairment tests involve use accounting estimates assumptions changes could materially impact financial condition operating performance actual results differ estimates assumptions address uncertainty perform sensitivity analysis key estimates assumptions income taxeson recurring basis assess need valuation allowance deferred tax assets considering available positive negative evidence past operating results projections future taxable income enacted tax law changes feasibility impact tax planning initiatives projections future taxable income include number estimates assumptions regarding volume pricing costs well timing amount reversals taxable temporary differences sales recognition longterm contractsin 2015 recognized approximately 14 total net sales using percentageofcompletion method longterm contracts longterm contracts measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts accounting contracts involves management judgment estimating total contract revenue cost contract revenues largely determined negotiated contract prices quantities modified assumptions regarding contract options change orders incentive award provisions associated technical performance price adjustment clauses inflation indexbased clauses contract costs incurred period time several years estimation costs requires management judgment cost estimates largely based negotiated estimated purchase contract terms historical performance trends economic projections significant factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements revenue cost estimates regularly monitored revised based changes circumstances anticipated losses longterm contracts recognized losses become evident maintain financial controls customer qualification contract pricing estimation processes reduce risk contract losses matters litigation see note 19 commitments contingencies notes financial statements discussion environmental asbestos litigation matters recent accounting pronouncements see note 1 summary significant accounting policies notes financial statements discussion recent accounting pronouncements item 7a nannanitem 7a quantitative qualitative disclosure market risk company exposed market risk changes interest rates foreign currency exchange rates may adversely affect results operations financial condition company seeks minimize risks interest rates foreign currency exchange rate fluctuations regular operating financing activities deemed appropriate use derivative financial instruments company use financial instruments trading speculative purposes party leveraged financial instruments discussion companys accounting policies financial instruments included note 1 summary significant accounting policies notes financial statements page 29 companys 1997 annual report shareowners information incorporated herein reference additional disclosure relating financial instruments included note 17 financial instruments notes financial statements pages 34 35 companys 1997 annual report shareowners information incorporated herein reference company uses foreign currency forward option contracts hedge exposure adverse changes foreign currency exchange rates companys principal currency exposures relate french franc german deutsche mark british pound us dollar companys exposure changes foreign currency exchange rates arises intercompany loans utilized finance foreign subsidiaries receivables payables firm commitments arising international transactions company attempts transaction exposures hedged internal natural offsets fullest extent possible opportunities exhausted derivative financial instruments third parties using forward option agreements company also uses derivative financial instruments hedge companys exposure changes foreign currency exchange rates translated us dollar value net income number foreign subsidiaries forward option agreements used hedge net income marked market recognized immediately income company utilizes fixedrate variablerate debt described note 15 longterm debt credit agreement notes financial statements page 33 companys 1997 annual report shareowners information incorporated herein reference company uses interest rate swaps manage companys exposure interest rate movements reduce borrowing costs company also maintains debt investments classified availableforsale carried quoted market value shortterm investments result excess cash hand company manages market risk restricting use derivative financial instruments hedging activities limiting potential interest currency rate exposures amounts material companys consolidated results operations cash flows company also procedures monitor impact market risk fair value longterm debt shortterm debt investments financial instruments considering reasonably possible changes interest currency rates procedures include use sensitivity analysis estimate impact interest rate currency rate changes future cash flows fair values following table illustrates potential change fair value interest rate sensitive instruments based hypothetical immediate 1 point increase interest rates across maturities potential change fair value foreign exchange sensitive instruments based 10 increase us dollar per local currency exchange rates across maturities december 31 1997 dollars millions 1 asset liability 2 excludes capitalized leases 3 increases decreases fair value foreign currency forward agreements completely offset changes fair value net underlying foreign currency transaction exposures discussion companys procedures monitor market risk estimated changes fair value resulting companys sensitivity analyses forwardlooking statements market risk assuming certain adverse market conditions occur actual results future may differ materially estimated results due actual developments global financial markets analysis methods used company assess mitigate risk discussed considered projections future events losses item 8item 7a quantitative qualitative disclosure market risk information relating market risk included caption financial instruments managements discussion analysis pages 22 23 companys 1998 annual report shareowners information incorporated herein reference item 8item 7a quantitative qualitative disclosure market risk information relating market risk included caption financial instruments managements discussion analysis pages 35 36 1999 annual report shareowners information incorporated herein reference item 8item 7a quantitative qualitative disclosure market risk information relating market risk included item 7 managements discussion analysis financial condition results operations caption financial instruments item 8item 7a quantitative qualitative disclosures market risk information relating market risk included caption financial instruments managements discussion analysis pages 36 37 2002 annual report shareowners information incorporated herein reference item 8item 7a quantitative qualitative disclosures market risk information relating market risk included caption financial instruments managements discussion analysis pages 43 44 2003 annual report shareowners information incorporated herein reference item 8item 7a quantitative qualitative disclosures market risk information relating market risk included “item 7 managements discussion analysis financial condition results operations” caption “financial instruments” item 8item 7a quantitative qualitative disclosures market risk information relating market risk included “item 7 managements discussion analysis financial condition results operations” caption “financial instruments” item 8item 7a quantitative qualitative disclosures market risk information relating market risk included “item 7 managements discussion analysis financial condition results operations” caption “financial instruments” item 8item 7a quantitative qualitative disclosures market risk information relating market risk included item 7 management discussion analysis financial condition results operations caption “financial instruments” item 8item 7a quantitative qualitative disclosures market risk information relating market risk included item 7 management discussion analysis financial condition results operations caption “financial instruments” item 8item 7a quantitative qualitative disclosures market risk information relating market risk included item 7 management discussion analysis financial condition results operations caption “financial instruments” item 8item 7a quantitative qualitative disclosures market risk information relating market risk included item 7 management discussion analysis financial condition results operations caption “financial instruments” item 8item 7a quantitative qualitative disclosures market risk information relating market risk included item 7 management discussion analysis financial condition results operations caption “financial instruments” item 8item 7a quantitative qualitative disclosures market risk information relating market risk included item 7 management’s discussion analysis financial condition results operations caption “financial instruments” item 8item 7a quantitative qualitative disclosures market risks information relating market risks included item 7 management’s discussion analysis financial condition results operations caption “financial instruments” item 8item 7a quantitative qualitative disclosures market risks information relating market risks included item 7 management’s discussion analysis financial condition results operations caption “financial instruments” item 8item 7a quantitative qualitative disclosures market risks information relating market risks included item 7 management’s discussion analysis financial condition results operations caption “financial instruments” item 8item 7a quantitative qualitative disclosures market risks information relating market risks included item 7 management’s discussion analysis financial condition results operations caption “financial instruments” item 8item 7a quantitative qualitative disclosures market risk information relating market risk included item 7 management’s discussion analysis financial condition results operations caption “financial instruments” item 8item 7a quantitative qualitative disclosures market risk information relating market risk included item 7 management’s discussion analysis financial condition results operations caption “financial instruments” item 8nanitem 7a quantitative qualitative disclosures market risk information relating market risk included item 7 managements discussion analysis financial condition results operations caption financial instruments item 8item 7a quantitative qualitative disclosures market risks information relating market risks included item 7 management’s discussion analysis financial condition results operations caption “financial instruments” item 8 item 8 financial statements supplementary data companys consolidated financial statements together report thereon price waterhouse llp dated february 1 1995 appearing pages 26 38 companys 1994 annual report shareowners incorporated herein reference exception aforementioned information incorporated reference items 1 3 5 6 7 1994 annual report shareowners deemed filed part form 10k annual report item 9item 8 financial statements supplementary data companys consolidated financial statements together report thereon price waterhouse llp dated february 1 1996 appearing pages 26 38 companys 1995 annual report shareowners incorporated herein reference exception aforementioned information incorporated reference items 1 3 5 6 7 1995 annual report shareowners deemed filed part form 10k annual report item 9item 8 financial statements supplementary data companys consolidated financial statements together report thereon price waterhouse llp dated january 28 1998 appearing pages 26 40 companys 1997 annual report shareowners incorporated herein reference exception aforementioned information incorporated reference items 1 3 5 6 7 7a 1997 annual report shareowners deemed filed part form 10k annual report item 9item 8 financial statements supplementary data companys consolidated financial statements together report thereon pricewaterhousecoopers llp dated february 1 1999 appearing pages 27 42 companys 1998 annual report shareowners incorporated herein reference exception aforementioned information incorporated reference items 1 3 5 6 7 7a 1998 annual report shareowners deemed filed part form 10k annual report item 9item 8 financial statements supplementary data consolidated financial statements together report thereon pricewaterhousecoopers llp dated january 27 except note 25 february 4 2000 appearing pages 39 61 1999 annual report shareowners incorporated herein reference pricewaterhousecoopers llp audit financial statements honeywell inc whollyowned subsidiary statements reflect total assets 71704 million december 31 1998 total sales 84267 80275 million two years period ended december 31 1998 financial statements audited deloitte touche llp whose audit opinion statements follows independent auditors report shareowners honeywell inc audited statement financial position honeywell inc subsidiaries december 31 1998 related statements income shareowners equity cash flows two years period ended december 31 1998 separately included herein financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements present fairly material respects financial position honeywell inc subsidiaries december 31 1998 results operations cash flows two years period ended december 31 1998 conformity generally accepted accounting principles deloitte touche llp deloitte touche llp minneapolis minnesota february 10 1999 exception aforementioned information incorporated reference items 1 3 5 6 7 7a 1999 annual report shareowners deemed filed part form 10k annual report information provided pursuant item supersedes modifies financial information pro forma financial information included current reports form 8k filed january 21 february 14 2000 item 9item 8 financial statements supplementary data honeywell international inc consolidated statement income notes financial statements integral part statement honeywell international inc consolidated balance sheet notes financial statements integral part statement honeywell international inc consolidated statement cash flows notes financial statements integral part statement honeywell international inc consolidated statement shareowners equity notes financial statements integral part statement honeywell international inc notes financial statements dollars millions except per share amounts note 1 summary significant accounting policies honeywell international inc diversified technology manufacturing company serving customers worldwide aerospace products services control technologies buildings homes industry automotive products power generation systems specialty chemicals fibers plastics electronic advanced materials described note 2 honeywell international inc formed upon merger alliedsignal inc honeywell inc following description significant accounting policies honeywell international inc principles consolidation consolidated financial statements include accounts honeywell international inc subsidiaries controlling interest maintained intercompany transactions balances eliminated consolidation inventories valued lower cost market using firstin firstout average cost method lastin firstout lifo method certain qualifying domestic inventories investments affiliates significant influence controlling interest accounted using equity method accounting investments carried market value readily determinable cost property plant equipment property plant equipment recorded cost less accumulated depreciation financial reporting straightline method depreciation used estimated useful lives 10 40 years buildings improvements 3 15 years machinery equipment goodwill intangible assets goodwill represents excess acquisition costs fair value net assets businesses acquired amortized straightline basis appropriate periods 40 years goodwill net 5600 4282 million december 31 2000 1999 respectively accumulated amortization 974 804 million december 31 2000 1999 respectively intangible assets includes patents trademarks customer lists items amortized straightline basis appropriate periods 24 years intangible assets net 298 378 million december 31 2000 1999 respectively accumulated amortization 437 398 million december 31 2000 1999 respectively longlived assets periodically evaluate recoverability carrying amount longlived assets including property plant equipment goodwill intangible assets whenever events changes circumstances indicate carrying amount asset may fully recoverable impairment assessed undiscounted expected future cash flows derived asset less carrying amount impairment losses measured amount carrying value asset exceeds fair value recognized operating results also continually evaluate estimated useful lives longlived assets periodically revise estimates based current events sales recognition product service sales recognized agreement sale exists product delivery occurred services rendered pricing fixed determinable collection reasonably assured sales longterm contracts aerospace solutions automation control segments recorded percentageofcompletion method measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts provisions anticipated losses longterm contracts recorded full losses become evident environmental expenditures environmental expenditures relate current operations expensed capitalized appropriate expenditures relate existing condition caused past operations provide future benefits expensed incurred liabilities recorded environmental assessments made remedial efforts probable costs honeywell international inc notes financial statements continued dollars millions except per share amounts reasonably estimated timing accruals generally later completion feasibility studies foreign currency translation assets liabilities subsidiaries operating outside united states functional currency us dollars translated us dollars using yearend exchange rates sales costs expenses translated average exchange rates effective year foreign currency translation gains losses included component accumulated nonowner changes shareowners equity subsidiaries operating highly inflationary environments inventories property plant equipment including related expenses remeasured exchange rate effect date assets acquired monetary assets liabilities remeasured yearend exchange rates remeasurement adjustments operations included net income financial instruments interest rate swap foreign currency forward option agreements accounted hedge related asset liability firm commitment anticipated transaction designated effective hedge items agreements qualifying hedge accounting accounted follows changes amount received paid interest rate swap agreements recognized interest financial charges gains losses foreign currency exchange contracts used hedge assets liabilities net income recognized income expense gains losses foreign currency exchange contracts hedge net investments foreign subsidiaries recognized cumulative foreign exchange translation adjustment gains losses foreign currency exchange contracts used hedge firm foreign currency commitments purchased foreign currency options used hedge anticipated foreign currency transactions recognized measurement hedged transaction occurs changes fair value agreements qualifying hedge accounting recognized income expense gains losses terminated interest rate swap agreements amortized shorter remaining term agreement hedged liability carrying value agreement reported accounts notes receivable current assets accounts payable accrued liabilities appropriate income taxes deferred tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established deferred tax asset realization likely research development research development costs companysponsored research development projects expensed incurred costs classified part cost goods sold 818 909 876 million 2000 1999 1998 respectively earnings per share basic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding dilutive potential common shares outstanding earnings per share data report reflect earnings per share assuming dilution unless otherwise indicated cash equivalents cash equivalents includes cash hand deposit highly liquid temporary cash investments original maturity three months less use estimates preparation consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions honeywell international inc notes financial statements continued dollars millions except per share amounts affect reported amounts financial statements related disclosures accompanying notes actual results could differ estimates new accounting pronouncement statement financial accounting standards 133 accounting derivative instruments hedging activities amended sfas 133 effective honeywell january 1 2001 sfas 133 requires derivatives recorded balance sheet assets liabilities measured fair value accounting gains losses resulting changes values derivatives depends use derivative whether qualifies hedge accounting estimate january 1 2001 effect consolidated financial statements adopting sfas 133 material note 2 alliedsignal honeywell merger december 1 1999 alliedsignal inc alliedsignal honeywell inc former honeywell completed merger agreement plan merger agreement dated june 4 1999 merger agreement whollyowned subsidiary alliedsignal merged former honeywell result merger former honeywell become whollyowned subsidiary alliedsignal effective time merger alliedsignal renamed honeywell international inc honeywell former honeywell shareowners received 1875 shares honeywell common stock share former honeywell common stock cash paid lieu fractional shares result former honeywell shareowners received approximately 241 million shares honeywell common stock valued approximately 15 billion merger date addition outstanding former honeywell employee stock options converted exchange factor options purchase approximately 10 million shares honeywell common stock merger qualified taxfree reorganization accounted poolingofinterests accounting method accordingly honeywells consolidated financial statements restated periods prior merger include results operations financial position cash flows former honeywell though always part honeywell material transactions alliedsignal former honeywell prior merger material adjustments conform accounting policies combining companies net sales net income previously reported separate companies combined amounts presented accompanying consolidated statement income follows described note 5 fees expenses related merger costs integrate combined companies expensed fourth quarter 1999 honeywell international inc notes financial statements continued dollars millions except per share amounts note 3 acquisitions addition poolingofinterests transaction discussed note 2 acquired businesses aggregate cost 2646 1314 1191 million 2000 1999 1998 respectively following table presents information significant acquisitions 1 pittway corporation designs manufactures distributes security fire systems homes buildings 2 johnson matthey electronics supplies wafer fabrication materials interconnect products electronics telecommunications industries 3 tristar aerospace co distributes fasteners fastening systems related hardware provides customized inventory management services original equipment manufacturers aircraft components commercial airlines aircraft maintenance repair overhaul facilities 4 banner aerospace distributes faacertified aircraft hardware principally commercial air transport general aviation markets 5 pharmaceutical fine chemicals manufactures distributes active intermediate pharmaceutical chemicals acquisitions accounted purchase method accounting accordingly assets liabilities acquired businesses recorded estimated fair values dates acquisition excess purchase price estimated fair values net assets acquired 1678 678 883 million 2000 1999 1998 respectively recorded goodwill amortized estimated useful lives connection acquisitions amounts recorded transaction costs integrating acquired businesses honeywell material results operations acquired businesses included consolidated results honeywell respective acquisition dates pro forma results 2000 1999 1998 assuming acquisitions made beginning year would materially different reported results note 4 honeywellgeneral electric merger october 22 2000 honeywell general electric company ge entered agreement plan merger agreement providing business combination honeywell ge merger effective whollyowned subsidiary ge merged honeywell become whollyowned subsidiary ge issued outstanding share common stock honeywell converted right receive 1055 shares common stock ge fractional shares paid cash merger approved honeywell shareowners january 10 2001 subject certain remaining conditions include review approval transaction various governmental authorities ge honeywell working regulatory agencies complete required reviews obtain required approvals transaction close early possible 2001 merger agreement provides payment 135 billion termination fee honeywell certain circumstances connection execution merger agreement honeywell ge entered stock option agreement honeywell international inc notes financial statements continued dollars millions except per share amounts pursuant honeywell granted ge option purchase 199 percent honeywells outstanding shares common stock option exercisable circumstances honeywell required pay ge 135 billion termination fee note 5 merger repositioning charges 2000 recognized charge 239 million related announced global workforce reductions reportable segments costs close chip package manufacturing plant related workforce reductions electronic materials business asset impairments principally associated completion previously announced plant shutdowns performance polymers chemicals business components charge included severance costs 151 million asset impairments 88 million workforce reductions consisted approximately 2800 manufacturing administrative positions expected substantially completed end second quarter 2001 asset impairments principally related manufacturing plant equipment held sale capable taken service actively marketed period impairment also 46 million accruals established 1999 principally severance returned income 2000 due higher expected voluntary employee attrition approximately 650 positions resulting reduced severance liabilities principally automation control aerospace solutions reportable segments also recognized charge 99 million equity income loss affiliated companies costs close affiliates chemical manufacturing operations components charge included severance costs 6 million asset impairments 53 million environmental exit costs period expenses 40 million 1999 upon completion merger alliedsignal former honeywell recognized charge 642 million cost actions designed improve combined competitiveness productivity future profitability mergerrelated actions included elimination redundant corporate offices functional administrative overhead elimination redundant excess facilities workforce combined aerospace businesses adoption six sigma productivity initiatives former honeywell businesses transition global shared services model components charge included severance costs 342 million asset impairments 108 million exit costs 57 million mergerrelated transaction period expenses 135 million planned global workforce reductions consisted approximately 6500 administrative manufacturing positions substantially complete asset impairments principally related elimination redundant excess corporate aerospace facilities equipment exit costs related lease terminations contract cancellation losses negotiated subject reasonable estimation yearend mergerrelated transaction period expenses consisted investment banking legal fees former honeywell deferred compensation vested upon change control direct mergerrelated expenses incurred period merger completed mergerrelated actions substantially complete 1999 also recognized charge 321 million cost actions designed reposition principally alliedsignal businesses improved productivity future profitability repositioning actions included organizational realignment aerospace businesses strengthen market focus simplify business structure elimination unprofitable product line closing wax refinery carbon materials plant rationalization manufacturing capacity infrastructure performance polymers chemicals business reduction infrastructure turbocharging systems business elimination two manufacturing facilities electronic materials business plant closure outsourcing activity automotive consumer products group business related general workforce reductions alliedsignal businesses industrial control business components charge included severance costs 140 million asset impairments 149 million exit costs 32 million global workforce reductions consisted approximately 5100 manufacturing administrative sales positions substantially complete asset impairments principally related manufacturing plant honeywell international inc notes financial statements continued dollars millions except per share amounts equipment held sale capable taken service actively marketed period impairment exit costs principally consisted environmental exit costs associated chemical plant shutdowns repositioning actions excluding environmental remediation substantially complete following table summarizes status total merger repositioning costs 2000 identified certain business units manufacturing facilities noncore business strategy result assessment implemented cost reduction initiatives conducted discussions potential acquirers businesses assets part process evaluated businesses assets possible impairment result analysis recognized impairment charges 245 165 million principally related writedown property plant equipment goodwill identifiable intangible assets friction materials business chemical manufacturing facility respectively recognized charges consisting probable reasonably estimable environmental liabilities 87 million contract claims merger related period expenses contingencies writeoffs tangible assets removed service including inventory totaling 140 million addition recognized charge 37 million equity income loss affiliated companies costs principally related equity investees customer claims 1999 recognized charges consisting losses aerospace engine maintenance contracts contract cancellation penalty totaling 45 million customer employee claims 69 million contract settlements contingent liabilities 18 million writeoffs principally related tangible intangible assets removed service including inventory 152 million also recognized 36 million charge resulting temporary decline value equity investment due significant deterioration market conditions 4 million charge related equity investees severance action involving approximately 220 employees investees severance action completed december 31 1999 1998 recognized charge 54 million related productivity initiatives included workforce reductions facility consolidations principally home building control industrial control businesses components charge included severance costs 46 million exit costs 8 million global workforce reductions included approximately 1200 sales marketing manufacturing administrative positions exit costs consisted lease termination penalties consolidate field office locations period costs incurred rationalize product lines actions completed december 31 1999 substantially reserve spending occurring 1999 honeywell international inc notes financial statements continued dollars millions except per share amounts following table summarizes pretax impact total merger repositioning charges reportable business segment following table summarizes pretax distribution total merger repositioning charges income statement classification note 6 gain sale nonstrategic businesses 2000 result government mandate connection merger alliedsignal former honeywell sold tcas product line former honeywell received approximately 215 million cash resulting pretax gain 112 million tcas product line annual sales approximately 100 million 1999 sold laminate systems business approximately 425 million cash resulting pretax gain 106 million laminate systems business annual sales 400 million note 7 income expense april 1999 reached agreement tyco international ltd tyco amp incorporated amp settling amps claim gain would realize disposition investment amp common stock made payment amp 50 million parties released claims relating amp subsequently converted investment amp common stock tyco common stock sold tyco common stock net cash proceeds 12 billion resulting pretax gain 268 million net settlement payment honeywell international inc notes financial statements continued dollars millions except per share amounts note 8 interest financial charges cash payments interest years 2000 1999 1998 573 328 426 million respectively weighted average interest rate shortterm borrowings commercial paper outstanding december 31 2000 1999 660 597 percent respectively note 9 taxes income taxes income taxes income honeywell international inc notes financial statements continued dollars millions except per share amounts deferred income taxes deferred tax assets liabilities amount federal tax net operating loss carryforwards available december 31 2000 111 million majority loss carryforwards generated certain subsidiaries prior acquisition 1997 expiration dates year 2011 use preacquisition operating losses subject limitations imposed internal revenue code anticipate limitations affect utilization carryforwards prior expiration also foreign net operating losses 595 million available reduce future income tax payments several countries subject varying expiration rules honeywell international inc notes financial statements continued dollars millions except per share amounts deferred income taxes provided approximately 21 billion undistributed earnings foreign affiliated companies considered permanently reinvested practicable estimate amount tax might payable eventual remittance earnings cash payments income taxes years 2000 1999 1998 442 625 729 million respectively note 10 earnings per share following table sets forth computations basic diluted earnings per share diluted earnings per share calculation excludes effect stock options exercise prices exceed average market price common shares period 2000 1999 1998 number stock options included computations 14563673 868631 3688074 respectively stock options outstanding end respective years note 11 accounts notes receivable unbilled receivables related longterm contracts 423 359 million december 31 2000 1999 respectively generally billable collectible within one year party agreements sell undivided interests designated pools trade accounts receivable december 31 2000 1999 trade accounts receivable honeywell international inc notes financial statements continued dollars millions except per share amounts consolidated balance sheet reduced approximately 500 million reflecting sales act agent purchasers collection administration receivables note 12 inventories valued lifo amounted 167 million december 31 2000 1999 lifo inventories valued current costs carrying values would approximately 129 109 million higher december 31 2000 1999 respectively inventories related longterm contracts net progress payments customer advances 220 271 million december 31 2000 1999 respectively note 13 investments longterm receivables note 14 property plant equipment note 15 accrued liabilities honeywell international inc notes financial statements continued dollars millions except per share amounts note 16 longterm debt credit agreements schedule principal payments longterm debt follows maintain 2 billion bank revolving credit facilities group banks comprised 1 billion fiveyear credit agreement b 1 billion 364day credit agreement credit agreements maintained general corporate purposes including support issuance commercial paper balance outstanding either agreement december 31 2000 neither credit agreements restrict ability pay dividends neither contain financial covenants failure comply customary conditions occurrence customary events default contained credit agreements would prevent borrowings would generally require repayment outstanding borrowings credit agreements events default include nonpayment credit agreement debt interest thereon b noncompliance terms credit agreement covenants c crossdefault debt certain circumstances bankruptcy e defaults upon obligations employee retirement income security act additionally banks right terminate commitment lend credit agreements person group acquires beneficial ownership 30 percent voting stock 12month period individuals directors honeywell beginning period cease constitute majority board directors board honeywell international inc notes financial statements continued dollars millions except per share amounts loans fiveyear credit agreement required repaid later december 2 2004 agreed pay facility fee 0065 percent per annum aggregate commitment fiveyear credit agreement subject increase decrease event changes longterm debt ratings interest borrowings fiveyear credit agreement would determined option auction bidding procedure b highest floating base rate agent bank 05 percent average cd rate 05 percent federal funds rate c average eurocurrency rate three reference banks plus 0135 percent applicable margin applicable margin eurocurrency rate fiveyear credit agreement subject increase decrease longterm debt ratings change commitments 364day credit agreement terminate november 29 2001 annually prior agreements anniversary date may request termination date 364day credit agreement extended 364 days agreed pay facility fee 0055 percent per annum aggregate commitment 364day credit agreement interest borrowings 364day credit agreement would determined option auction bidding procedure b highest floating base rate agent bank 05 percent average cd rate 05 percent federal funds rate c average eurocurrency rate three reference banks plus 0145 percent applicable margin note 17 lease commitments future minimum lease payments operating leases initial remaining noncancellable lease terms excess one year follows rent expense 306 291 262 million 2000 1999 1998 respectively note 18 financial instruments result global operating financing activities exposed market risks changes interest foreign currency exchange rates may adversely affect operating results financial position minimize risks interest foreign currency exchange rate fluctuations normal operating financing activities deemed appropriate use derivative financial instruments use derivative financial instruments trading speculative purposes use leveraged derivative financial instruments interest rate swap agreements used manage interest rate risk adjusting ratio fixed floating interest rates payable outstanding debt december 31 2000 1999 interest rate swap agreements effectively changed 1600 850 million respectively fixed rate debt average rate 71 66 percent respectively libor commercial paper based floating rate debt interest rate swaps december 31 1999 effectively changed 250 million libor commercial paper based floating rate swaps debt fixed rate swaps debt average fixed rate 63 percent interest rate swaps mature year 2007 honeywell international inc notes financial statements continued dollars millions except per share amounts exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated receivables payables firm commitments arising international transactions attempt transaction exposure hedged internal natural offsets fullest extent possible opportunities exhausted foreign currency forward option agreements third parties also use derivative financial instruments hedge impact exchange rate movements translated us dollar value net income number foreign subsidiaries foreign currency forward option agreements used hedge net income markedtomarket gains losses recognized immediately income principal foreign currency exposures relate belgian franc french franc german mark collectively euro countries british pound canadian dollar us dollar december 31 2000 held written foreign currency forward option agreements maturing 2001 derivative financial instruments expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value cash flows derivative financial instruments considering reasonably possible changes interest currency exchange rates restrict use derivative financial instruments hedging activities values outstanding derivative financial instruments december 31 2000 1999 follows 1 fair value financial instruments based quoted market prices valuation techniques appropriate financial instruments carried consolidated balance sheet amounts approximate fair values certain debt instruments carrying value longterm debt related current maturities excluding capitalized leases 30 36 million december 31 2000 1999 respectively 4291 2705 million fair values 4517 2702 million december 31 2000 1999 respectively fair values estimated based quoted market price issues traded based current rates offered us debt remaining maturity characteristics note 19 capital stock authorized issue 2000000000 shares common stock par value one dollar common shareowners entitled receive dividends may declared board entitled one vote per share entitled event liquidation share ratably assets honeywell available distribution common shareowners common shareowners preemptive conversion rights shares common stock issued honeywell international inc notes financial statements continued dollars millions except per share amounts outstanding held treasury liable calls assessments restrictions us relative dividends repurchase redemption common stock july 21 2000 board authorized share repurchase program purchase 40 million shares common stock open market privately negotiated transactions depending market conditions factors 2000 repurchased 43 million shares common stock 166 million connection share repurchase program result pending merger general electric company see note 4 honeywell rescinded share repurchase program effective october 21 2000 authorized issue 40000000 shares preferred stock without par value determine number shares series rights preferences limitations series december 31 2000 preferred stock outstanding note 20 nonowner changes shareowners equity total nonowner changes shareowners equity included consolidated statement shareowners equity components accumulated nonowner changes follows honeywell international inc notes financial statements continued dollars millions except per share amounts components accumulated nonowner changes follows note 21 stockbased compensation plans stock plans available grant incentive stock options nonqualified stock options stock appreciation rights officers employees fixed stock options exercise price term conditions applicable option granted stock plans generally determined management development compensation committee board options granted price equal stocks fair market value date grant options generally become exercisable threeyear period expire ten years following table summarizes information stock option activity three years ended december 31 2000 following table summarizes information stock options outstanding december 31 2000 1 average remaining contractual life years honeywell international inc notes financial statements continued dollars millions except per share amounts 30927704 33530799 options exercisable weighted average exercise prices 2721 2038 december 31 1999 1998 respectively 3627101 shares available future grants terms stock option plans december 31 2000 statement financial accounting standards 123 accounting stockbased compensation sfas 123 requires cost stockbased compensation measured using fair value based method permitted sfas 123 elected continue account stockbased compensation using intrinsic value based method accounting principles board opinion 25 accounting stock issued employees accordingly compensation cost recognized fixed stock option plans following table sets forth pro forma information including related assumptions compensation cost determined consistent requirements sfas 123 1 estimated date grant using blackscholes optionpricing model restricted stock units restricted stock unit rsu awards entitle holder receive one share common stock unit units vest rsus issued certain key employees compensation incentives tied directly achievement certain performance objectives rsus issued 1374640 1175127 942143 2000 1999 1998 respectively 2449749 2657561 3117736 rsus outstanding weighted average grant date fair value per share 4733 3781 2884 december 31 2000 1999 1998 respectively nonemployee directors plan also stock plan nonemployee directors plan restricted shares options granted new director receives onetime grant 3000 shares common stock subject certain restrictions addition director granted option purchase 2000 shares common stock year date annual meeting shareowners set aside 450000 shares issuance directors plan options generally become exercisable threeyear period expire ten years employee stock match plans sponsor employee savings plans match form common stock certain eligible us employee savings plan contributions shares issued stock match plans 39 26 34 million 2000 1999 1998 respectively cost 161 142 139 million respectively note 22 commitments contingencies litton litigation march 13 1990 litton systems inc litton filed legal action former honeywell us district court central district california los angeles trial court claims subsequently split two separate cases one alleges patent infringement honeywell international inc notes financial statements continued dollars millions except per share amounts federal law using ionbeam process coat mirrors incorporated former honeywells ring laser gyroscopes tortious interference state law interfering littons prospective advantage customers contractual relationships inventor company ojai research inc case alleges monopolization attempted monopolization federal antitrust laws former honeywell sale inertial reference systems containing ring laser gyroscopes commercial aircraft market former honeywell generally denied littons allegations cases patenttort case former honeywell also contested validity well infringement patent alleging among things patent obtained littons inequitable conduct united states patent trademark office patenttort case us district court judge mariana pfaelzer presided threemonth patent infringement tortious interference trial 1993 august 31 1993 jury returned verdict favor litton awarding damages former honeywell amount 12 billion three claims former honeywell filed posttrial motions contesting verdict damage award january 9 1995 trial court set aside ruling among things litton patent invalid due obviousness unenforceable littons inequitable conduct patent trademark office case infringed former honeywells current process ruled littons state tort claims supported sufficient evidence trial court also held rulings concerning liability vacated reversed appeal former honeywell least granted new trial issue damages jurys award inconsistent clear weight evidence based upon speculative damage study trial courts rulings appealed us court appeals federal circuit july 3 1996 two one split decision three judge panel court reversed trial courts rulings patent invalidity unenforceability noninfringement also found former honeywell violated california law intentionally interfering littons consultant contracts customer prospects however panel upheld two trial court rulings favorable former honeywell namely former honeywell entitled new trial damages claims also grant intervening patent rights defined quantified trial court unsuccessfully requesting rehearing panels decision full federal circuit appellate court former honeywell filed petition us supreme court november 26 1996 seeking review panels decision interim litton filed motion briefs trial court seeking injunctive relief former honeywells commercial ring laser gyroscope sales former honeywell certain aircraft manufacturers filed briefs made oral arguments opposing injunction trial court denied littons motion public interest grounds december 23 1996 scheduled patenttort damages retrial may 6 1997 march 17 1997 us supreme court granted former honeywells petition review vacated july 3 1996 federal circuit panel decision case remanded federal circuit panel reconsideration light recent decision us supreme court warnerjenkinson vs hilton davis case refined law concerning patent infringement doctrine equivalents march 21 1997 litton filed notice appeal federal circuit trial courts december 23 1996 decision deny injunctive relief federal circuit stayed briefing consideration matter time completed reconsideration liability issues ordered us supreme court liability issues argued three judge federal circuit panel september 30 1997 april 7 1998 panel issued decision affirming trial courts ruling former honeywells hollow cathode rf ionbeam processes literally infringe asserted claims littons 849 reissue patent littons patent ii vacating trial courts ruling former honeywells rf ionbeam process infringe asserted claims littons patent doctrine equivalents also honeywell international inc notes financial statements continued dollars millions except per share amounts vacating jurys verdict issue remanding issue trial court proceedings accordance warnerjenkinson decision iii vacating jurys verdict former honeywells hollow cathode process infringes asserted claims littons patent doctrine equivalents remanding issue trial court proceedings iv reversing trial courts ruling respect torts intentional interference contractual relations intentional interference prospective economic advantage also vacating jurys verdict issue remanding issue trial court proceedings accordance california state law v affirming trial courts grant new trial former honeywell damages claims necessary vi affirming trial courts order granting intervening rights former honeywell patent claim vii reversing trial courts ruling asserted claims littons patent invalid due obviousness reinstating jurys verdict issue viii reversing trial courts determination litton obtained littons patent inequitable conduct littons request rehearing panels decision full federal circuit court denied appeal denial injunction dismissed case remanded trial court legal perhaps factual review parties filed motions trial court dispose remanded issues matters law argued trial court july 26 1999 september 23 1999 trial court issued dispositive rulings case granting former honeywells motion judgment matter law summary judgment patent claims various grounds granting former honeywells motion judgment matter law state law claims grounds insufficient evidence denying littons motion partial summary judgment trial court entered final judgment honeywells favor january 31 2000 litton appealed judgment us court appeals federal circuit february 5 2001 three judge panel federal circuit court affirmed trial courts rulings granting former honeywells motion judgment matter law summary judgment patent claims agreeing former honeywell infringe state law claims panel vacated jurys verdict favor litton reversed trial courts grant judgment matter law former honeywell remanded case trial court proceedings state law resolve certain factual issues held submitted jury litton may attempt seek review decision us supreme court preparing patenttort damages retrial scheduled may 1997 litton submitted revised damage study trial court seeking damages high 19 billion expect litton files appeal us supreme court ultimately succeed expect absence patent infringement litton able prove tortious conduct former honeywell state law interfered littons contracts business prospects believe reasonably possible damages ultimately awarded litton although possible time predict whether litton seek review us supreme court whether appeal would succeed potential remain adverse outcome could material financial position results operations believe however potential award damages adverse judgment infringement interference based upon reasonable royalty reflecting value ionbeam coating process award would material financial position results operations result uncertainty regarding outcome matter provision made financial statements respect contingent liability honeywell international inc notes financial statements continued dollars millions except per share amounts antitrust case preparations conduct trial antitrust case generally followed completion comparable proceedings patenttort case antitrust trial begin november 20 1995 judge pfaelzer also presided trial held different jury close evidence jury deliberations began trial court dismissed failure proof littons contentions former honeywell illegally monopolized attempted monopolize engaging belowcost predatory pricing ii tying bundling product offerings packaged pricing iii misrepresenting products disparaging litton products iv acquiring sperry avionics business 1986 february 2 1996 case submitted jury remaining allegations former honeywell illegally monopolized attempted monopolize entering certain longterm exclusive dealing penalty arrangements aircraft manufacturers airlines exclude litton commercial aircraft market ii failing provide litton access proprietary software used cockpits certain business jets february 29 1996 jury returned 234 million single damages verdict former honeywell illegal monopolization verdict would automatically trebled march 1 1996 jury indicated unable reach verdict damages attempt monopolize claim mistrial declared claim former honeywell subsequently filed motion judgment matter law motion new trial contending among things jurys partial verdict overturned former honeywell prejudiced trial litton failed prove essential elements liability submit competent evidence support speculative allornothing 2985 million damage claim litton filed motions entry judgment injunctive relief july 24 1996 trial court denied former honeywells alternative motions judgment matter law complete new trial concluded littons damage study seriously flawed granted former honeywell retrial damages court also denied littons two motions time judge pfaelzer expected conduct retrial antitrust damages sometime following retrial patenttort damages however us supreme court remanded patenttort case federal circuit march 1997 litton moved trial court expeditiously schedule antitrust damages retrial september 1997 trial court rejected motion indicating wished know outcome current patenttort appeal scheduling retrials type following april 7 1998 federal circuit panel decision patenttort case litton petitioned trial court schedule retrial antitrust damages trial court tentatively scheduled trial commence fourth quarter 1998 reopened limited discovery pretrial preparations litton filed another antitrust damage claim nearly 300 million damages retrial began october 29 1998 judge pfaelzer new jury december 9 1998 jury returned verdicts former honeywell totaling 250 million 220 million favor litton 30 million favor sister corporation litton systems canada limited january 27 1999 court vacated prior mistrial ruling respect attempt monopolize claim entered treble damages judgment total amount 750 million actual attempted monopolization former honeywell filed appropriate postjudgment motions trial court litton filed motions seeking add substantial attorneys fees costs judgment hearing postjudgment motions held trial court may 20 1999 september 24 1999 trial court issued rulings denying former honeywells motion judgment matter law motion new trial remittitur related litton systems inc honeywell international inc notes financial statements continued dollars millions except per share amounts granting former honeywells motion judgment matter law relates litton systems canada limited net effect rulings reduce existing judgment former honeywell 750 million 660 million plus attorney fees costs approximately 35 million parties appealed judgment liability damages us court appeals ninth circuit execution trial courts judgment stayed pending resolution former honeywells postjudgment motions disposition appeals filed parties expect obtain substantial relief current adverse judgment antitrust case appeal ninth circuit based upon sound substantive procedural legal grounds believe factual legal basis magnitude jurys award damages retrial case first trial jurys award overturned also believe serious questions concerning identity nature business arrangements conduct found first antitrust jury 1996 anticompetitive damaging litton verdict liability overturned matter law although possible time predict result appeals potential remains adverse outcome could material financial position results operations result uncertainty regarding outcome matter provision made financial statements respect contingent liability also believe would inappropriate litton obtain recovery damages eg losses suffered due former honeywells sales ring laser gyroscopebased inertial systems oems airline customers multiple legal theories claims cases eventually duplicative recovery would eliminated antitrust patenttort cases shareowner litigation honeywell seven officers named defendants several purported class action lawsuits filed united states district court district new jersey securities law complaints securities law complaints principally allege defendants violated federal securities laws purportedly making false misleading statements failing disclose material information concerning honeywells financial performance thereby allegedly causing value honeywells stock artifically inflated purported class period damages sought december 20 1999 june 19 2000 addition honeywell seven officers board named defendants purported shareowner derivative action filed november 27 2000 united states district court district new jersey derivative complaint derivative complaint alleges single claim breach fiduciary duty based nearly identical allegations set forth securities law complaints believe factual legal basis allegations securities law complaints derivative complaint although possible time predict result cases expect prevail however adverse outcome could material financial position results operations provision made financial statements respect contingent liability environmental matters accordance accounting policy see note 1 liabilities recorded environmental matters generally later completion feasibility studies although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies may significant consolidated results operations expect material adverse effect consolidated financial position liabilities environmental costs recorded accrued liabilities december 31 2000 171 215 million respectively december 31 1999 104 245 million respectively matters subject number lawsuits investigations claims involve substantial amounts arising conduct business respect matters including relating commercial transactions government contracts product honeywell international inc notes financial statements continued dollars millions except per share amounts liability nonenvironmental health safety matters ultimate results lawsuits investigations claims cannot determined expect matters material adverse effect consolidated results operations financial position issued party various direct indirect guarantees bank letters credit customer guarantees expect guarantees material adverse effect consolidated results operations financial position note 23 pension postretirement benefits maintain pension plans covering majority employees retirees postretirement benefit plans retirees include health care benefits life insurance coverage pension benefits substantially us employees provided noncontributory defined benefit pension plans employees foreign countries us citizens covered various retirement benefit arrangements considered defined benefit pension plans accounting purposes retiree medical plans cover us canadian employees retire pension eligibility hospital professional medical services us retiree medical plans require deductibles copayments virtually integrated medicare retiree contributions generally required based coverage type plan medicare eligibility retiree medical life insurance plans funded claims expenses paid general assets net periodic pension postretirement benefit costs income include following components honeywell international inc notes financial statements continued dollars millions except per share amounts following table summarizes balance sheet impact including benefit obligations assets funded status actuarial assumptions associated significant pension postretirement benefit plans projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 350 310 44 million respectively december 31 2000 608 534 210 million respectively december 31 1999 measurement purposes assumed annual healthcare cost trend rate 6 percent 2001 beyond assumed healthcare cost trend rates significant effect amounts reported retiree healthcare plan onepercentagepoint change assumed health care cost trend rates would following effects honeywell international inc notes financial statements continued dollars millions except per share amounts note 24 segment financial data statement financial accounting standards 131 disclosures segments enterprise related information sfas 131 establishes standards reporting information operating segments following information provided accordance requirements sfas 131 consistent business results reported internally management globally manage business operations strategic business units sbus offering products services aerospace automation control chemicals automotive industries based similar economic operational characteristics sbus aggregated following four reportable segments aerospace solutions includes engines systems auxiliary power units propulsion engines environmental control systems engine controls power generation systems aerospace electronic systems flight safety communications navigation radar surveillance systems aircraft airfield lighting advanced systems instruments aerospace services repair overhaul services hardware logistics management technical services aircraft landing systems aircraft wheels brakes automation control includes home building control controls heating ventilating humidification airconditioning equipment energyefficient lighting controls home consumer products security fire alarm systems home automation systems building management systems services industrial control systems automation control process operations solidstate sensors position pressure air flow temperature current precision electromechanical switches control products advanced visionbased sensors fiberoptic components performance materials includes performance polymers chemicals fibers plastic resins specialty films intermediate chemicals fluorinebased products pharmaceutical agricultural chemicals specialty waxes adhesives sealants process technology electronic materials wafer fabrication materials services advanced circuits amorphous metals power transportation products includes transportation power systems turbochargers chargeair coolers portable power systems air brake antilock braking systems consumer products group car care products including antifreeze filters spark plugs cleaners waxes additives friction materials friction material related brake system components accounting policies segments described note 1 evaluate segment performance based segment profit excludes general corporate unallocated expenses gains sales nonstrategic businesses equity income expense interest financial charges merger repositioning charges disaggregate assets products services basis internal management reporting therefore information presented intersegment sales approximate market significant reportable segment data follows honeywell international inc notes financial statements continued dollars millions except per share amounts reconciliation segment profit consolidated income taxes income follows 1 represents gain disposition investment amp common stock 1999 litigation settlements 1998 honeywell international inc notes financial statements continued dollars millions except per share amounts note 25 geographic areas financial data 1 sales geographic areas approximate market significant net sales classified according country origin included united states net sales export sales 3194 3715 3824 million 2000 1999 1998 respectively sales materially dependent single customer small group customers 2 longlived assets comprised property plant equipment goodwill intangible assets note 26 unaudited quarterly financial information 1 includes 96 million aftertax 59 million 008 per share repositioning charges see note 5 notes financial statements information 2 includes aftertax gain 71 million 009 per share sale tcas product line former honeywell see note 6 notes financial statements information 3 gross profit includes 116 million charge repositioning charges gross profit include equity charge 99 million closing affiliates operations total charge 215 million aftertax 133 million 016 per share see note 5 notes financial statements information 4 includes impairment charge 245 million aftertax 198 million 025 per share related longlived assets friction materials business see note 5 notes financial statements information 5 gross profit includes 373 million charge asset impairment environmental charges gross profit include equity charge 37 million related equity investees customer claims total charge 410 million aftertax 315 million 039 per share see note 5 notes financial statements information footnotes continued next page honeywell international inc notes financial statements continued dollars millions except per share amounts footnotes continued previous page 6 gross profit includes 222 million charge repositioning charges gross profit include equity charge 36 million related writedown equity investment total charge 258 million aftertax 156 million 019 per share see note 5 notes financial statements information 7 includes aftertax gain 161 million 020 per share disposition investment amp common stock see note 7 notes financial statements information 8 gross profit includes 103 million charge repositioning charges gross profit include equity charge 4 million related equity investees severance actions total charge 107 million aftertax 65 million 008 per share see note 5 notes financial statements information 9 includes aftertax gain 59 million 007 per share sale laminate systems business see note 6 notes financial statements information 10 includes 622 million aftertax 395 million 049 per share repositioning charges see note 5 notes financial statements information 11 includes 300 million aftertax 228 million 028 per share repositioning charges see note 5 notes financial statements information 12 represents historical dividends alliedsignal december 1 1999 honeywell subsequent date 13 represents historical market price alliedsignal december 1 1999 honeywell subsequent date composite tapestock primarily traded new york stock exchange report independent accountants board directors shareowners honeywell international inc opinion based audits report auditors consolidated financial statements listed index appearing item 14a1 page 63 present fairly material respects financial position honeywell international inc subsidiaries december 31 2000 1999 results operations cash flows three years period ended december 31 2000 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits audit financial statements honeywell inc whollyowned subsidiary statements reflect total sales 84267 million year ended december 31 1998 statements audited auditors whose report thereon furnished us opinion expressed herein insofar related amounts included honeywell inc based solely report auditors conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits report auditors provide reasonable basis opinion pricewaterhousecoopers llp pricewaterhousecoopers llp florham park new jersey february 9 2001 independent auditors report shareowners honeywell inc audited statements financial position honeywell inc subsidiaries december 31 1998 related statements income shareowners equity cash flows year ended separately included herein financial statements responsibility companys management responsibility express opinion financial statements based audit conducted audit accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion financial statements present fairly material respects financial position honeywell inc subsidiaries december 31 1998 results operations cash flows year ended conformity accounting principles generally accepted united states america deloitte touche llp minneapolis minnesota february 10 1999 item 9item 8 financial statements supplementary data consolidated financial statements together report thereon pricewaterhousecoopers llp dated february 6 2003 appearing pages 40 66 2002 annual report shareowners incorporated herein reference exception aforementioned information incorporated reference items 1 5 6 7 7a 2002 annual report shareowners deemed filed part form 10k annual report item 9item 8 financial statements supplementary data consolidated financial statements together report thereon pricewaterhousecoopers llp dated february 5 2004 appearing pages 45 76 2003 annual report shareowners incorporated herein reference exception aforementioned information incorporated reference items 1 3 5 6 7 7a 2003 annual report shareowners deemed filed part annual report form 10k item 9item 8 financial statements supplementary data honeywell international inc consolidated statement operations notes financial statements integral part statement honeywell international inc consolidated balance sheet notes financial statements integral part statement honeywell international inc consolidated statement cash flows notes financial statements integral part statement honeywell international inc consolidated statement shareowners equity notes financial statements integral part statement honeywell international inc notes financial statements dollars millions except per share amounts note 1summary significant accounting policies honeywell international inc diversified technology manufacturing company serving customers worldwide aerospace products services control sensing security technologies buildings homes industry turbochargers automotive products specialty chemicals fibers electronic advanced materials following description significant accounting policies honeywell international inc principles consolidationthe consolidated financial statements include accounts honeywell international inc subsidiaries entities controlling interest maintained consolidation policy requires consolidation entities controlling financial interest obtained well consolidation variable interest entities designated primary beneficiary accordance financial accounting standards board fasb interpretation 46 “consolidation variable interest entities” fin 46 amended see recent accounting pronouncements note discussion fin 46 intercompany transactions balances eliminated consolidation cash equivalentscash cash equivalents include cash hand deposit highly liquid temporary cash investments original maturity three months less inventoriesinventories valued lower cost market using firstin firstout average cost method lastin firstout lifo method certain qualifying domestic inventories investmentsinvestments affiliates significant influence controlling interest accounted using equity method accounting investments carried market value readily determinable cost equity investments periodically reviewed determine declines fair value cost basis otherthantemporary significant sustained decreases quoted market prices series historic projected operating losses investees considered review decline fair value determined otherthantemporary impairment loss recorded investment written new carrying value property plant equipmentproperty plant equipment recorded cost less accumulated depreciation financial reporting straightline method depreciation used estimated useful lives 10 40 years buildings improvements 3 15 years machinery equipment goodwill indefinitelived intangible assetsgoodwill represents excess acquisition costs fair value net assets businesses acquired statement financial accounting standards 142 “goodwill intangible assets” sfas 142 requires goodwill certain intangible assets indefinite lives longer amortized income instead periodically tested impairment intangible assets determined definite lives continue amortized useful lives adopted sfas 142 reassessed useful lives residual values acquired intangible assets make necessary amortization period adjustments based assessment amount related trademark automotive consumer products business determined indefinitelived intangible asset expected generate cash flows indefinitely adjustments made amortization period residual values intangible assets also completed goodwill impairment testing three months ended march 31 2002 determined impairment january 1 2002 initial impairment assessment updated march 31 2004 impairment determined impairment tests reporting units performed annually march 31 events changes circumstances occur see note 13 additional details intangible assets determinable livesother intangible assets determinable lives consist aerospace customer incentives patents trademarks intangibles amortized weighted average service periods 25 19 15 years respectively honeywell international inc notes financial statementscontinued dollars millions except per share amounts longlived assetswe periodically evaluate recoverability carrying amount longlived assets including property plant equipment intangible assets determinable lives whenever events changes circumstances indicate carrying amount asset may fully recoverable evaluate events changes circumstances based number factors including operating results business plans forecasts general industry trends economic projections anticipated cash flows impairment assessed undiscounted expected future cash flows derived asset less carrying amount impairment losses measured amount carrying value asset exceeds fair value recognized earnings also continually evaluate estimated useful lives longlived assets periodically revise estimates based current events sales recognitionproduct service sales recognized persuasive evidence arrangement exists product delivery occurred services rendered pricing fixed determinable collection reasonably assured service sales principally representing repair maintenance engineering activities aerospace automation control solutions reportable segments recognized contractual period services rendered sales longterm contracts aerospace automation control solutions reportable segments recorded percentageofcompletion method measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts provisions anticipated losses longterm contracts recorded full losses become evident revenues contracts multiple element arrangements recognized element earned based relative fair value element delivered elements value customers standalone basis amounts allocated element based objectively determined fair value sales price product service sold separately competitor prices similar products services aerospace customer incentiveswe provide sales incentives commercial aircraft manufacturers airlines connection selection aircraft wheel braking system hardware auxiliary power units installation commercial aircraft incentives consist free deeply discounted products product credits upfront cash payments cost incentives capitalized time deliver products customers case product credits time credit issued case upfront cash payments time payment made case free deeply discounted product cost manufacture less amount recovered airframe manufacturer airline capitalized product credits upfront cash payments capitalized exchanged value research design development qualification costs related products expensed incurred unless contractually guaranteed reimbursement cost sales incentives described capitalized selection aircraft wheel braking system hardware auxiliary power units installation commercial aircraft results creation future revenues cash flows aftermarket sales fulfill longterm product maintenance requirements mandated federal aviation administration faa similar international organizations useful life aircraft products certified selected aircraft recovery investment virtually guaranteed useful life aircraft likelihood displacement alternative supplier remote due contractual solesourcing high cost alternative suppliers aircraft operators product retrofits andor rigorous regulatory specifications qualification testing requirements amortize cost capitalized sales incentives useful lives straightline basis 25 years representing estimated minimum service life aircraft useful life period virtually assured earn revenues aftermarket sales certified products necessary fulfill maintenance required faa similar international organizations classify amortization expense associated free discounted products cost goods sold amortization expense associated product credits upfront cash payments honeywell international inc notes financial statementscontinued dollars millions except per share amounts reduction sales regularly evaluate recoverability capitalized amounts whenever events changes circumstances indicate carrying amount incentives may fully recoverable impairment charges related capitalized incentives recognized 2004 2003 2002 see note 13 additional details environmental expendituresenvironmental expenditures relate current operations expensed capitalized appropriate expenditures relate existing condition caused past operations provide future benefits expensed incurred liabilities recorded environmental remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess accruals undiscounted liabilities environmental costs recorded accrued liabilities december 31 2004 267 628 million respectively december 31 2003 90 503 million respectively asbestos related contingencies insurance recoverieshoneywell defendant personal injury actions related asbestos containing products refractory products friction products recognize liability asbestos related contingency probable occurrence reasonably estimable regarding north american refractories company narco asbestos related claims accrue pending claims based terms conditions including evidentiary requirements definitive agreements principle current claimants also accrued probable value future asbestos related claims 2018 based disease criteria payment values contained narco trust described note 21 light inherent uncertainties making long term projections regarding claims filing rates disease manifestation believe reasonable basis estimating asbestos claims beyond 2018 statement financial accounting standards 5 “accounting contingencies” sfas 5 regarding bendix asbestos related claims accrue estimated value pending claims based expected claim resolution values dismissal rates accrued future bendix asbestos related claims cannot reasonably predict many additional claims may brought us allegations claims probable outcomes resulting settlement values tort system continually assess likelihood adverse judgments outcomes contingencies well potential ranges probable losses recognize liability contingencies based careful analysis individual issue assistance outside legal counsel applicable experts connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical dealings insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs research developmentresearch development costs companysponsored research development projects expensed incurred costs principally included cost products sold 917 751 757 million 2004 2003 2002 respectively stockbased compensation planswe account fixed stock option plans accounting principles board opinion 25 “accounting stock issued employees” apb 25 apb 25 compensation cost recognized fixed stock option plans options granted plans exercise price equal market value honeywell international inc notes financial statementscontinued dollars millions except per share amounts underlying stock grant date statement financial accounting standards 123 “accounting stockbased compensation” sfas 123 amended allows require companies record compensation cost fixed stock option plans using fair value based method permitted sfas 123 elected continue account compensation cost fixed stock option plans using intrinsic value based method apb 25 see recent accounting pronouncements section note discussion recently issued rules regarding accounting sharebased payments following table sets forth pro forma information compensation cost determined consistent requirements sfas 123 following table sets forth fair value per share information including related assumptions used determine compensation cost consistent requirements sfas 123 1 estimated date grant using blackscholes optionpricing model foreign currency translationassets liabilities subsidiaries operating outside united states functional currency us dollars translated us dollars using yearend exchange rates sales costs expenses translated average exchange rates effective year foreign currency translation gains losses included component accumulated nonowner changes subsidiaries operating highly inflationary environments inventories property plant equipment including related expenses remeasured exchange rate effect date assets acquired monetary assets liabilities remeasured yearend exchange rates remeasurement adjustments subsidiaries included earnings derivative financial instrumentsderivative financial instruments accounted statement financial accounting standards 133 “accounting derivative instruments hedging activities” amended sfas 133 sfas 133 derivatives recorded balance sheet assets liabilities measured fair value derivatives designated hedges fair value assets liabilities changes fair values derivatives honeywell international inc notes financial statementscontinued dollars millions except per share amounts hedged items recorded current earnings derivatives designated cash flow hedges effective portion changes fair value derivatives recorded accumulated nonowner changes subsequently recognized earnings hedged items impact earnings changes fair value derivatives designated hedges ineffective portion cash flow hedges recorded current earnings transfers financial instrumentssales transfers securitization financial instruments accounted statement financial accounting standards 140 “accounting transfers servicing financial assets extinguishments liabilities” sell interests designated pools trade accounts receivables third parties receivables removed consolidated balance sheet time sold value assigned subordinated interests undivided interests retained trade receivables sold based relative fair values interests retained sold carrying value retained interests approximates fair value due shortterm nature collection period receivables income taxesdeferred tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax assets realized earnings per sharebasic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding dilutive potential common shares outstanding use estimatesthe preparation consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts financial statements related disclosures accompanying notes actual results could differ estimates assumptions periodically reviewed effects revisions reflected consolidated financial statements period determined necessary reclassificationscertain prior year amounts reclassified conform current year presentation recent accounting pronouncementsin december 2004 fasb issued statement financial accounting standards 123 revised “sharebased payment revised 2004” sfas 123r requiring compensation cost relating sharebased payment transactions recognized financial statements cost measured based fair value equity liability instruments issued sfas 123r effective first interim annual reporting period beginning june 15 2005 currently expect adoption sfas 123r reduce 2005 diluted earnings per share 004 005 november 2004 fasb issued statement financial accounting standards 151 “inventory costs amendment arb 43 chapter 4” sfas 151 amends accounting research bulletin arb 43 chapter 4 clarify abnormal amounts idle facility expense freight handling costs wasted materials spoilage recognized currentperiod charges addition sfas 151 requires allocation fixed production overhead inventory based normal capacity production facilities sfas 151 effective inventory costs incurred fiscal years beginning june 15 2005 currently assessing impact sfas 151 consolidated financial statements may 2004 fasb issued fasb staff position 1062 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003” fsp 1062 provides guidance accounting effects medicare honeywell international inc notes financial statementscontinued dollars millions except per share amounts prescription drug improvement modernization act 2003 act employers sponsor postretirement health care plans provide prescription drug coverage least actuarially equivalent offered medicare part determined enactment act material impact accumulated postretirement benefit obligation therefore “significant event” defined fsp 1062 postretirement health care plans accordingly permitted adopted fsp 1062 december 31 2004 adoption material effect consolidated financial statements december 2003 fasb issued statement financial accounting standards 132 revised 2003 “employers disclosures pensions postretirement benefits amendment fasb statements 87 88 106” sfas 132revised 2003 revises employers disclosures pension plans postretirement benefit plans provisions statement effective year ended december 31 2004 see note 22 information january 2003 fasb issued fin 46 provides guidance consolidation variable interest entities december 2003 fasb deferred effective date fin 46 certain variable interest entities ie nonspecial purpose entities first quarter 2004 full adoption provisions fin 46 material effect consolidated financial statements november 2002 fasb issued fasb interpretation 45 “guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others” fin 45 requires us recognize liability fair value obligation assumed issuing guarantee fin 45 effective guarantees issued modified january 1 2003 adoption fin 45 material effect consolidated financial statements see note 21 information november 2002 emerging issues task force eitf reached consensus eitf issue 0021 “accounting revenue arrangements multiple deliverables” eitf issue 0021 provides guidance separate elements arrangement may involve delivery performance multiple products services rights use assets separate units accounting guidance consensus effective revenue arrangements entered fiscal periods beginning june 15 2003 adopted eitf issue 0021 prospectively quarter beginning july 1 2003 adoption eitf issue 0021 material effect consolidated financial statements june 2002 fasb issued statement financial accounting standards 146 “accounting costs associated exit disposal activities” sfas 146 provisions effective exit disposal activities initiated us december 31 2002 sfas 146 provides guidance recognition measurement liabilities associated exit disposal activities requires liabilities recognized incurred adoption provisions sfas 146 impacted measurement timing costs associated exit disposal activities initiated december 31 2002 june 2001 fasb issued statement financial accounting standards 143 “accounting asset retirement obligations” sfas 143 requires recognition fair value obligations associated retirement tangible longlived assets legal obligation incur costs upon initial recognition liability cost capitalized part related longlived asset depreciated corresponding assets useful life sfas 143 primarily impacts accounting costs associated future retirement nuclear fuel conversion facilities specialty materials reportable segment upon adoption january 1 2003 recorded increase property plant equipment net 16 million recognized asset retirement obligation 47 million resulted recognition noncash charge 31 million 20 million aftertax 002 per share reported cumulative effect accounting honeywell international inc notes financial statementscontinued dollars millions except per share amounts change accounting change material impact results operations 2004 2003 pro forma effects 2002 assuming adoption sfas 143 january 1 2002 material net income per share amounts note 2acquisitions acquired businesses aggregate cost 396 199 520 million 2004 2003 2002 respectively acquisitions accounted purchase method accounting accordingly assets liabilities acquired businesses recorded estimated fair values dates acquisition significant acquisitions made years discussed may 2003 honeywell sold engineering plastics business basf exchange basfs nylon fiber business 90 million cash basfs nylon fiber business became part specialty materials nylon business since cash consideration received basf excess 25 percent fair value exchange transaction viewed “monetary” accordance issue 8a eitf 012 “interpretations apb opinion 29” accordingly pretax gain sale engineering plastics business 38 million based fair value consideration received basf less sum net book value engineering plastics business related transaction costs recorded assets liabilities acquired basf business fair market value based valuation performed independent appraisal firm acquistion date corresponded value agreed upon asset purchase agreement transaction specialty materials engineering plastics business basfs nylon fiber business annual sales approximately 400 million october 2002 acquired invensys sensor systems iss approximately 416 million cash 115 million allocated tangible net assets 206 million allocated goodwill 95 million allocated intangible assets determinable lives iss global supplier sensors controls used medical office automation aerospace hvac automotive offroad vehicle consumer appliance industries iss part automation control products business automation control solutions reportable segment iss sales approximately 253 million 2002 connection acquisitions 2004 2003 2002 amounts recorded transaction costs integrating acquired businesses honeywell material results operations acquired businesses included consolidated results honeywell respective acquisition dates pro forma results 2004 2003 2002 assuming acquisitions made beginning year would materially different reported results december 13 2004 announced reached agreement board directors novar plc novar terms recommended offers entire issued ordinary preference share capital novar aggregate value offers 24 billion fully diluted exercise outstanding options including assumption approximately 580 million outstanding debt net cash novar board unanimously recommended offers expect complete transaction first quarter 2005 fund acquisition existing cash resources novar uk listed holding company operates globally electrical electronic control products aluminum extrusion security printing businesses reported 2003 revenues 27 billion intend hold aluminum extrusion security printing businesses longterm expect pursue strategic alternatives units soon practical honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 3repositioning charges summary repositioning charges follows following table summarizes pretax distribution total net repositioning charges income statement classification following table summarizes pretax impact total net repositioning charges reportable segment 2004 recognized repositioning charges totaling 116 million primarily severance costs related workforce reductions 2272 manufacturing administrative positions across reportable segments also 28 million previously established accruals primarily severance returned income 2004 due fewer employee separations originally planned associated certain prior repositioning actions resulting reduced severance liabilities principally automation control solutions reportable segment honeywell international inc notes financial statementscontinued dollars millions except per share amounts 2003 recognized repositioning charges totaling 82 million primarily severance costs related workforce reductions 1501 manufacturing administrative positions across reportable segments also 69 million previously established accruals primarily severance returned income 2003 due fewer employee separations originally planned associated certain prior repositioning actions resulting reduced severance liabilities automation control solutions aerospace specialty materials reportable segments 2002 recognized repositioning charges totaling 453 million workforce reductions across reportable segments uop process technology joint venture charge also related costs planned shutdown consolidation manufacturing plants specialty materials automation control solutions reportable segments severance costs related workforce reductions approximately 8100 manufacturing administrative positions asset impairments principally related manufacturing plant equipment held sale capable taken service actively marketed period impairment exit costs related principally incremental costs exit facilities including lease termination losses negotiated subject reasonable estimation related mainly closed facilities automation control solutions specialty materials reportable segments also 76 million previously established severance accruals returned income 2002 due fewer employee separations originally planned associated certain prior repositioning actions higher expected voluntary employee attrition resulting reduced severance liabilities aerospace automation control solutions specialty materials reportable segments following table summarizes status total repositioning costs 2004 recognized charge 565 million probable reasonably estimable legal environmental liabilities includes 536 million legacy environmental liabilities primarily related denial appeal matter entitled interfaith community organization et al v honeywell international inc et al estimated liabilities remediation environmental conditions around onondaga lake syracuse new york environmental matters discussed detail note 21 recognized charge 29 million various legal settlements including property damage claims automation control solutions reportable segment recognized charge 76 million primarily bendix related asbestos claims defense costs incurred 2004 including update expected resolution values respect pending claims charge net probable bendix related insurance recoveries additional 47 million narco insurance deemed probable recovery see note 21 discussion recognized impairment charge 42 million second quarter 2004 related principally honeywell international inc notes financial statementscontinued dollars millions except per share amounts writedown property plant equipment performance fibers business specialty materials reportable segment business sold december 2004 recognized charge 14 million writeoff receivables inventories assets also reversed reserve 10 million established prior year contract settlement 2003 recognized charge 261 million probable reasonably estimable legal environmental liabilities included 235 million environmental liabilities mainly related matter entitled interfaith community organization et al v honeywell international inc et al remediation environmental conditions around onondaga lake syracuse new york discussed note 21 also recognized charge 4 million specialty materials reportable segment including loss sale investment owned equity investee 2002 recognized business impairment charges 877 million related businesses specialty materials automation control solutions reportable segments well friction materials business based current operating losses deteriorating economic conditions certain chemical telecommunications end markets performed impairment tests recognized impairment charges 785 million principally related writedown property plant equipment held used nylon system performance fibers metglas specialty materials businesses well automation control solutions communication business also recognized impairment charges 92 million related principally writedown property plant equipment friction materials business classified assets held disposal current assets december 31 2002 plan disposal friction materials adopted 2001 january 2003 entered letter intent sell business federalmogul corp assets reclassified held sale held used december 31 2003 following cessation negotiations sell friction materials business federalmogul corp time adjustment carrying value friction materials assets required based current reassessment fair value assets reassessment fair value property plant equipment performed using discounted estimated future cash flows business fair value approximated writtendown held sale value also less carrying amount property plant equipment prior classified held sale adjusted depreciation expense would otherwise recognized assets classified held used see note 21 recognized asbestos related litigation charges 1548 million principally related costs associated potential resolution asbestos claims narco see note 21 also recognized charges consisting customer claims settlements contract liabilities 152 million writeoffs receivables inventories assets 60 million charges related mainly advanced circuits business bankruptcy customer aerospace reportable segment customer claims aerospace automation control solutions reportable segments additionally recognized charges consisting probable reasonably estimable environmental liabilities 30 million writeoffs related temporary decline value certain equity investments 15 million honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 4gain loss sale nonstrategic businesses following summary nonstrategic businesses sold 2004 realized proceeds 426 million cash sale businesses sales businesses materially impact net sales segment profit 2004 compared 2003 realized proceeds 137 million cash sales businesses sales businesses materially impact net sales segment profit 2003 compared 2002 aftertax loss sale specialty materials businesses resulted mainly tax benefits associated prior capital losses 2002 realized proceeds approximately 435 million cash investment securities sales businesses advanced circuits pfc businesses higher deductible tax basis book basis resulted aftertax gain sales businesses reduced net sales increased segment profit 2002 compared 2001 approximately 500 31 million respectively honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 5other income expense note 6interest financial charges weighted average interest rate shortterm borrowings commercial paper outstanding december 31 2004 2003 281 681 percent respectively note 7income taxes income loss taxes cumulative effect accounting change tax expense benefit honeywell international inc notes financial statementscontinued dollars millions except per share amounts 1 net changes valuation allowance honeywell international inc notes financial statementscontinued dollars millions except per share amounts deferred tax assets liabilities amount federal tax net operating losses available carryforward december 31 2004 213 million including 79 million charitable contributions deductions converted federal net operating losses internal revenue code also included 86 million loss carryforwards generated certain subsidiaries prior acquisition expiration dates 2022 use preacquisition operating losses subject limitations imposed internal revenue code anticipate limitations affect utilization carryforwards prior expiration various subsidiaries state tax net operating loss carryforwards 35 billion december 31 2004 varying expiration dates 2024 also foreign net operating losses 19 billion available reduce future income tax payments several countries subject varying expiration rules us tax credit carryforwards 170 million december 31 2004 including carryforwards 90 million various expiration dates 2024 tax credits 80 million subject expiration addition 270 million foreign tax credits available carryback carryforward december 31 2004 varying expiration dates 2014 valuation allowance increased 39 108 80 million 2004 2003 2002 respectively increase 2004 primarily due increase state tax net operating loss carryforwards net federal impact foreign net operating capital losses expected realized 40 27 million respectively offset decrease 30 million foreign tax credits believe utilized due extension foreign tax credit carryforward period five 10 years american jobs creation act 2004 increase 2003 primarily due increase foreign net operating losses expected utilized increase 2002 primarily due foreign tax credits expected realized state tax net operating loss carryforwards net federal impact believe expire unutilized american jobs creation act 2004 signed law october 2004 provides variety changes tax law including incentives repatriate undistributed earnings foreign subsidiaries phased elimination extraterritorial income exclusion domestic manufacturing benefit specifically act creates temporary incentive us corporations repatriate accumulated honeywell international inc notes financial statementscontinued dollars millions except per share amounts income earned outside us providing 85 percent dividends received deduction certain dividends controlled foreign corporations deduction subject number limitations currently uncertainty remains interpret numerous provisions act position determine whether extent might repatriate foreign earnings based analysis date however reasonably possible may repatriate amount approximately 26 billion estimate income tax effects repatriating 26 billion approximately 150 350 million honeywell provided us federal income foreign withholding taxes 39 billion undistributed earnings nonus operations december 31 2004 analysis act completed continue permanently reinvest earnings expect finalize assessment later 2005 extraterritorial income exclusion eti foreign sales phasedout two years beginning 2005 deduction income qualified domestic production activities phasedin 2005 2010 similar eti benefit domestic manufacturing benefit effect deferred tax assets liabilities existing enactment date rather impact deduction reported period deduction claimed federal income tax return currently assessing details act net effect phaseout eti phasein new deduction expect complete analysis later 2005 time possible determine impact legislation consolidated tax accruals effective tax rate note 8earnings loss per share following table sets forth computations basic diluted earnings loss per share 2004 2003 diluted earnings per share calculation excludes effect stock options exercise prices exceed average market price common shares period 2004 2003 number stock options included computation 41656606 41908964 respectively stock options outstanding end respective years result net loss 2002 2527229 dilutive securities issuable connection stock plans excluded diluted loss per share calculation effect would reduce loss per share honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 9accounts notes receivables sell interests designated pools trade accounts receivables third parties sold receivables overcollateralized 120 million december 31 2004 retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools new receivables sold agreement previously sold receivables collected losses recognized interest receivables sold retained interests receivables shown amounts expected collected us carrying value approximates fair value retained interests compensated services collection administration receivables losses sales receivables 9 7 10 million 2004 2003 2002 respectively credit losses incurred years note 10inventories inventories valued lifo amounted 108 144 million december 31 2004 2003 respectively lifo inventories valued current costs carrying values would approximately 130 126 million higher december 31 2004 2003 respectively note 11investments longterm receivables honeywell international inc notes financial statementscontinued dollars millions except per share amounts marketable equity securities classified availableforsale december 31 2004 2003 note 12property plant equipment depreciation expense 572 595 671 million 2004 2003 2002 respectively note 13goodwill intangiblesnet change carrying amount goodwill years ended december 31 2004 2003 reportable segment follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts intangible assets comprised intangible assets amortization expense 78 66 59 million 2004 2003 2002 respectively estimated intangible assets amortization expense five succeeding years approximates 75 million note 14accrued liabilities honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 15longterm debt credit agreements schedule principal payments longterm debt follows maintain 23 billion bank revolving credit facilities group banks arranged citigroup global markets inc jp morgan securities inc comprises 13 billion fiveyear credit agreement 300 million letter credit sublimit b 1 billion fiveyear credit agreement 200 million letter credit sublimit credit agreements maintained general corporate purposes including support issuance commercial paper borrowings outstanding either agreement december 31 2004 issued 115 million letters credit 13 billion fiveyear credit agreement december 31 2004 neither credit agreements restricts ability pay dividends neither contains financial covenants failure comply customary conditions occurrence customary events default contained credit agreements would prevent borrowings would generally require repayment outstanding borrowings credit agreements events default include nonpayment credit agreement debt interest fees b noncompliance terms credit agreement covenants c crossdefault debt certain circumstances honeywell international inc notes financial statementscontinued dollars millions except per share amounts bankruptcy e defaults upon obligations employee retirement income security act additionally banks right terminate commitment lend additional funds issue additional letters credit agreements person group acquires beneficial ownership 30 percent voting stock 12month period individuals directors honeywell beginning period cease constitute majority board directors board loans 13 billion fiveyear credit agreement required repaid later november 26 2008 loans 1 billion fiveyear credit agreement required repaid later october 22 2009 agreed pay facility fee 008 percent per annum aggregate commitment fiveyear credit agreements interest borrowings fiveyear credit agreements would determined honeywells option auction bidding procedure b highest floating base rate publicly announced citibank na 05 percent average cd rate 05 percent federal funds rate c eurocurrency rate plus 022 percent applicable margin facility fee applicable margin eurocurrency rate fiveyear credit agreements letter credit issuance fee fiveyear credit agreements subject change based upon grid determined longterm debt ratings neither credit agreement subject termination based upon decrease debt ratings material adverse change note 16lease commitments future minimum lease payments operating leases initial remaining noncancellable lease terms excess one year follows entered agreements lease land equipment buildings principally operating leases initial terms 25 years contain renewal options subject customary conditions time terms leases may option purchase leased assets amounts approximate fair value expect commitments lease agreements material adverse effect consolidated results operations financial position liquidity rent expense 321 314 274 million 2004 2003 2002 respectively note 17financial instruments result global operating financing activities exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position minimize risks interest foreign currency exchange rate commodity price fluctuations normal operating financing activities deemed appropriate use derivative financial instruments honeywell international inc notes financial statementscontinued dollars millions except per share amounts credit market riskfinancial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties derivative transactions substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value cash flows derivative financial instruments considering reasonably possible changes interest currency exchange rates restrict use derivative financial instruments hedging activities use derivative financial instruments trading speculative purposes use leveraged derivative financial instruments continually monitor creditworthiness customers grant credit terms normal course business concentrations credit risk associated trade accounts notes receivable considered minimal due diverse customer base significant portion customers commercial air transport industry aircraft manufacturers airlines accounting approximately 13 percent consolidated sales 2004 terms conditions credit sales designed mitigate eliminate concentrations credit risk single customer sales materially dependent single customer small group customers foreign currency risk managementwe conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities anticipated transactions arising international trade objective preserve economic value nonfunctional currency denominated cash flows attempt transaction exposures hedged natural offsets fullest extent possible opportunities exhausted foreign currency forward option agreements third parties principal currency exposures relate euro british pound canadian dollar us dollar hedge monetary assets liabilities denominated nonfunctional currencies prior conversion us dollars assets liabilities remeasured spot exchange rates effect balance sheet date effects changes spot rates recognized earnings included income expense hedge exposure changes foreign exchange rates principally forward contracts forward contracts markedtomarket resulting gains losses similarly recognized earnings offsetting gains losses nonfunctional currency denominated monetary assets liabilities hedged partially hedge forecasted 2005 sales purchases denominated nonfunctional currencies currency forward contracts functional currency strengthens nonfunctional currencies decline value forecasted nonfunctional currency cash inflows sales outflows purchases partially offset recognition gains sales losses purchases respectively value forward contracts designated hedges conversely functional currency weakens nonfunctional currencies increase value forecasted nonfunctional currency cash inflows sales outflows purchases partially offset recognition losses sales gains purchases respectively value forward contracts designated hedges market value gains losses contracts recognized earnings hedged transaction recognized open forward contracts mature december 31 2005 december 31 2004 2003 contracts notional amounts 790 641 million respectively exchange foreign currencies principally euro countries great britain commodity price risk managementour exposure market risk commodity prices arises changes cost production mitigate exposure commodity price risk honeywell international inc notes financial statementscontinued dollars millions except per share amounts use longterm firmprice contracts suppliers forward commodity purchase agreements third parties hedging anticipated purchases several commodities principally natural gas forward commodity purchase agreements markedtomarket resulting gains losses recognized earnings hedged transaction recognized interest rate risk managementwe use combination financial instruments including mediumterm shortterm financing variablerate commercial paper interest rate swaps manage interest rate mix total debt portfolio related overall cost borrowing december 31 2004 2003 interest rate swap agreements designated fair value hedges effectively changed 1218 1189 million respectively fixed rate debt average rate 642 645 percent respectively libor based floating rate debt interest rate swaps mature 2007 fair value financial instrumentsthe carrying value cash equivalents trade accounts notes receivables payables commercial paper shortterm borrowings contained consolidated balance sheet approximates fair value summarized carrying values fair values financial instruments december 31 2004 2003 fair values based quoted market prices issues traded current rates offered us debt remaining maturity characteristics valuation techniques appropriate note 18capital stock authorized issue 2000000000 shares common stock par value one dollar common shareowners entitled receive dividends may declared board entitled one vote per share entitled event liquidation share ratably assets honeywell available distribution common shareowners common shareowners preemptive conversion rights shares common stock issued outstanding held treasury liable calls assessments restrictions us relative dividends repurchase redemption common stock november 2003 honeywell announced intention repurchase sufficient outstanding shares common stock offset dilutive impact employee stock based compensation plans including future option exercises restricted unit vesting matching contributions savings plans estimate issuance approximately 10 million shares annually plans 2004 repurchased 201 million shares 699 million included shares repurchased response market conditions fourth quarter offset anticipated 2005 dilutive impact employee stock based compensation plans honeywell international inc notes financial statementscontinued dollars millions except per share amounts authorized issue 40000000 shares preferred stock without par value determine number shares series rights preferences limitations series december 31 2004 preferred stock outstanding note 19other nonowner changes shareowners equity total nonowner changes shareowners equity included consolidated statement shareowners equity changes accumulated nonowner changes follows components accumulated nonowner changes follows note 20stockbased compensation plans stock plans available grant incentive stock options nonqualified stock options stock appreciation rights officers employees fixed stock optionsthe exercise price term conditions applicable option granted stock plans generally determined management development compensation committee board options granted price equal stocks fair market value date grant options generally become exercisable threeyear period expire ten years honeywell international inc notes financial statementscontinued dollars millions except per share amounts following table summarizes information stock option activity three years ended december 31 2004 following table summarizes information stock options outstanding exercisable december 31 2004 1 average remaining contractual life years 40547240 38179208 options exercisable weighted average exercise prices 4114 3958 december 31 2003 2002 respectively 20173109 shares available future grants terms stock option plans december 31 2004 restricted stock unitsrestricted stock unit rsu awards entitle holder receive one share common stock unit units vest rsus issued certain key employees compensation incentives tied directly achievement certain performance objectives rsus issued 980706 1578000 1777700 2004 2003 2002 respectively compensation expense related rsus 24 27 36 million 2004 2003 2002 respectively 3691556 3103513 2342960 rsus outstanding weighted average grant date fair value per share 3118 3010 3712 december 31 2004 2003 2002 respectively nonemployee directors planwe also stock plan nonemployee directors plan restricted shares options granted new director receives onetime grant 3000 shares common stock subject specific restrictions directors plan also provides annual grant director options purchase 5000 shares common stock fair market value date grant set aside 450000 honeywell international inc notes financial statementscontinued dollars millions except per share amounts shares issuance directors plan options generally become exercisable threeyear period expire ten years note 21commitments contingencies shareowner litigationhoneywell three former officers defendants class action lawsuit filed united states district court district new jersey plaintiffs alleged among things defendants violated federal securities laws purportedly making false misleading statements failing disclose material information concerning honeywells financial performance thereby allegedly causing value honeywells stock artificially inflated court certified class consisting purchasers honeywell stock december 20 1999 june 19 2000 june 4 2004 honeywell lead plaintiffs agreed settlement matter required payment class 100 million honeywells contribution settlement 15 million amount previously fully reserved honeywells insurance carriers paid remainder settlement approved court august 16 2004 small number class members including florida state board administration fsba opted settlement fsba claims settled 125 million honeywell believes optout claims including fsba fully insured erisa class action lawsuithoneywell several current former officers directors defendants purported class action lawsuit filed united states district court district new jersey complaint principally alleges defendants breached fiduciary duties participants honeywell savings ownership plan “savings plan” purportedly making false misleading statements failing disclose material information concerning honeywells financial performance failing diversify savings plans assets monitor prudence honeywell stock savings plan investment september 2004 honeywell reached agreement principle settle matter 14 million plus agreement permit savings plan participants greater diversification rights settlement paid full honeywells insurers settlement require court approval expected 2005 environmental matterswe subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous toxic substances accord environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing toxic substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually jointly responsible parties determine feasibility various remedial techniques address environmental matters policy record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess accruals expect fund expenditures matters operating cash flow timing honeywell international inc notes financial statementscontinued dollars millions except per share amounts cash expenditures depends number factors including timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects remedial techniques utilized agreements parties although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position matter entitled interfaith community organization et al v honeywell international inc et al united states district court district new jersey held may 2003 predecessor honeywell site located jersey city new jersey constituted imminent substantial endangerment ordered honeywell conduct excavation transport offsite disposal approximately one million tons chromium residue present site honeywell appealed courts decision third circuit court appeals court disclosed prior sec filings believed district courtordered remedy would remanded reversed replaced accordingly provisions previously made financial statements remedial costs site assume excavation offsite removal chromium february 18 2005 appeals court denied honeywells appeal light appeals court decision recorded pretax charge 278 million fourth quarter 2004 reflects incremental cost implementing courtordered remedy implementation excavation offsite removal remedy expected take place fiveyear period cost implementation expected incurred evenly period expect implementation remedy material adverse effect future consolidated results operations operating cash flows financial position accordance 1992 consent decree state new york honeywell studying environmental conditions around onondaga lake syracuse new york purpose study identify evaluate propose remedial measures taken remedy historic industrial contamination lake predecessor company honeywell operated chemical plant alleged contributed mercury contaminants lake november 2004 new york state department environmental conservation dec issued proposed plan remediation industrial contamination lake public comment period march 1 2005 proposed plan subject review us environmental protection agency dec currently expected issue record decision first half 2005 proposed plan calls combined dredgingcapping remedy generally line approach recommended feasibility study submitted honeywell may 2004 may 2004 feasibility study although proposed plan calls additional remediation certain parts lake would require extensive dredging alternatives described may 2004 feasibility study decs aggregate cost estimate based high end range potential costs major elements proposed plan includes contingency actual cost proposed plan depend upon among things resolution certain technical issues design phase remediation expected occur sometime 2007 beyond based currently available information analysis performed engineering consultants estimated cost implementing remedy set forth proposed plan consistent amounts previously provided financial statements estimating process considered range possible outcomes amounts recorded reflect best estimate time believe matter material adverse impact consolidated financial position honeywell international inc notes financial statementscontinued dollars millions except per share amounts given scope complexity project possible actual costs could exceed estimated costs amount could material adverse impact consolidated results operations operating cash flows periods recognized paid time however cannot identify legal regulatory technical reason conclude specific alternative outcome probable outcome made provisions financial statements asbestos matterslike many industrial companies honeywell defendant personal injury actions related asbestos mine produce asbestos make sell insulation products construction materials identified primary cause asbestos related disease vast majority claimants products containing asbestos previously manufactured honeywell previously owned subsidiaries fall two general categories refractory products friction products refractory productshoneywell owned north american refractories company narco 1979 1986 narco produced refractory products high temperature bricks cement sold largely steel industry east midwest less 2 percent narcos products contained asbestos sold narco business 1986 agreed indemnify narco respect personal injury claims products discontinued prior sale defined sale agreement narco retained liability claims narco resolved approximately 176000 claims january 4 2002 date narco filed reorganization chapter 11 us bankruptcy code average cost per claim two thousand two hundred dollars claims 43 percent dismissed ground insufficient evidence narco responsible claimants asbestos exposure date narcos bankruptcy filing approximately 116000 remaining claims pending narco including approximately 7 percent honeywell also named defendant since 1983 honeywell insurers contributed defense settlement costs associated narco claims result narco bankruptcy filing claims pending narco automatically stayed pending reorganization narco claims pending honeywell necessarily impact liabilities narco insurance policies held honeywell essential successful narco reorganization honeywell offered commit value policies reorganization bankruptcy court temporarily enjoined claims honeywell current future related narco except one claim material stay lifted august 2003 although stay remained effect continuously since january 4 2002 assurance stay remain effect connection narcos bankruptcy filing paid narcos parent company 40 million agreed provide narco 20 million financing also agreed pay 20 million narcos parent company upon filing plan reorganization narco acceptable honeywell pay narcos parent company 40 million forgive outstanding narco indebtedness upon confirmation consummation plan result negotiations counsel representing narco related asbestos claimants regarding settlement pending potential narco related asbestos claims honeywell reached definitive agreements approximately 260000 claimants represents excess 90 percent anticipated current claimants expected file claim part narco reorganization process also discussions narco committee asbestos creditors courtappointed legal representative future asbestos claimants trust distribution procedures narco believe part narco plan reorganization trust established pursuant trust distribution procedures benefit asbestos claimants current future trust put place approved court fair equitable honeywell well narco entitled permanent channeling injunction barring honeywell international inc notes financial statementscontinued dollars millions except per share amounts present future individual actions state federal courts requiring asbestos related claims based exposure narco products made federallysupervised trust narco deferred filing plan reorganization pending resolution bankruptcy proceedings related one sister companies expect narco plan reorganization narco trust approved court 2005 part ongoing settlement negotiations honeywell reached agreement principle representative future narco claimants cap annual contributions trust respect future claims level would material impact honeywells operating cash flows given substantial progress negotiations honeywell narco related asbestos claimants honeywell committee asbestos creditors fourth quarter 2002 honeywell developed estimated liability settlement pending future asbestos claims recorded charge 14 billion narco related asbestos litigation charges net insurance recoveries charge consisted estimated liability settle current asbestos related claims estimated liability related future asbestos related claims 2018 obligations narcos parent net insurance recoveries 18 billion estimated liability current claims based terms conditions including evidentiary requirements definitive agreements excess 90 percent current claimants substantially settlement payments respect current claims expected made end 2007 liability future claims estimates probable value future asbestos related bodily injury claims asserted narco 2018 obligations narcos parent discussed estimate based upon disease criteria payment values contained narco trust distribution procedures negotiated narco committee asbestos creditors narco future claimants representative light uncertainties inherent making longterm projections believe reasonable basis estimating asbestos claims beyond 2018 statement financial accounting standards 5 honeywell retained expert services hamilton rabinovitz alschuler inc hra project probable number value including trust claim handling costs asbestos related future liabilities based upon historical experience similar trusts methodology used estimate liability future claims commonly accepted numerous courts methodology utilized expert routinely retained asbestos claimants committee asbestos related bankruptcies valuation methodology includes analysis population likely exposed asbestos containing products epidemiological studies estimate number people likely develop asbestos related diseases narco claims filing history pending inventory narco asbestos related claims payment rates expected established narco trust honeywell approximately 13 billion insurance limits remaining reimburses portions costs incurred settle narco related claims court judgments well defense costs coverage provided large number insurance policies written dozens insurance companies domestic insurance market london excess market december 31 2004 significant portion coverage insurance companies agreements pay full policy limits based corresponding honeywell claims costs includes agreements substantial majority londonbased insurance companies entered primarily first quarter 2004 conduct analyses determine amount insurance estimate probable recover relation payment current projected future claims substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries second quarter 2004 based ongoing evaluation ability enforce rights various insurance policies concluded additional probable insurance recoveries 47 million net solvency reserves reflected insurance receivables made judgments honeywell international inc notes financial statementscontinued dollars millions except per share amounts concerning insurance coverage believe reasonable consistent historical dealings insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs projecting future events subject many uncertainties could cause narco related asbestos liabilities higher lower projected recorded assurance plan reorganization proposed confirmed insurance recoveries timely whether narco related asbestos claims beyond 2018 given inherent uncertainty predicting future events review estimates periodically update based experience relevant factors similarly reevaluate projections concerning probable insurance recoveries light changes projected liability developments may impact insurance recoveries friction productshoneywells bendix friction materials bendix business manufactured automotive brake pads contained chrysotile asbestos encapsulated form group existing potential claimants consisting largely individuals allege performed brake replacements 1981 december 31 2004 resolved approximately 71000 bendix related asbestos claims including trials covering 120 plaintiffs resulted 115 favorable verdicts trials covering five individuals resulted adverse verdicts however two verdicts reversed appeal remaining three claims settled second quarter 2002 honeywell outofpocket costs bendix related asbestos claims since insurance deductible satisfied many years ago beginning claim payments made third quarter 2002 honeywell began advancing indemnity defense claim costs indemnity defense costs approximately 165 112 70 million 2004 2003 2002 respectively 2004 2003 honeywell collected approximately 8 90 million respectively insurance reimbursements settlements bendix related asbestos claims see discussion insurance coverage following tables present information regarding bendix related asbestos claims activity past two years approximately 30 percent approximately 76000 pending claims december 31 2004 inactive deferred similar dockets established jurisdictions claimants allege minimal impairment approximately 76000 pending claims also include claims filed jurisdictions texas virginia mississippi allow consolidated filings honeywell international inc notes financial statementscontinued dollars millions except per share amounts jurisdictions plaintiffs permitted file complaints predetermined master list defendants regardless whether claims individual defendant many plaintiffs may actually claims honeywell based state rules prior experience jurisdictions anticipate many claims ultimately dismissed 2003 honeywell served numerous complaints filed mississippi advance january 1 2003 effective date tort reform state also 2003 honeywell experienced increase nonmalignancy filings believe response possibility federal legislation based prior experience anticipate many claims placed deferred inactive similar dockets dismissed honeywell experienced average resolution values excluding legal costs follows possible predict whether resolution values bendix related asbestos claims increase decrease stabilize future accrued estimated cost pending bendix related asbestos claims estimate based number pending claims december 31 2004 disease classifications expected settlement values historic dismissal rates honeywell retained expert services hra see discussion hra refractory products assist developing estimated expected settlement values historic dismissal rates cannot reasonably estimate losses could arise future bendix related asbestos claims cannot predict many additional claims may brought us allegations claims probable outcomes resulting settlement values tort system honeywell presently approximately 19 billion insurance coverage remaining respect pending bendix related asbestos claims well claims may filed us future coverage provided large number insurance policies written dozens insurance companies domestic insurance market london excess market although honeywell approximately 19 billion insurance gaps coverage due insurance company insolvencies comprehensive policy buyback settlement equitas 2003 certain uninsured periods analyzed amount insurance estimate probable recover relation payment asbestos related claims determined approximately 50 percent expenditures claims recoverable insurance substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries made judgments concerning insurance coverage believe reasonable consistent historical dealings insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs based analysis december 31 2004 amounts receivable insurers approximately 340 million representing probable reimbursements associated liability pending claims well amounts due us previously settled paid claims related estimated liabilities pending claims fourth quarter 2002 recorded charge 167 million consisted 127 million accrual bendix related asbestos liabilities settled contemplated sale bendix federalmogul net insurance recoveries 40 million accrual costs expected required order complete transaction completion costs 2003 paid 112 million settle bendix related asbestos claims charged accrual deal negotiations ended 40 million accrual expected completion costs reversed honeywell international inc notes financial statementscontinued dollars millions except per share amounts additional asbestos accrual recorded reflect current estimate asbestos exposure net expected insurance coverage honeywell believes sufficient insurance coverage reserves cover pending bendix related asbestos claims although impossible predict outcome pending claims reasonably estimate losses could arise future bendix related asbestos claims believe claims would material adverse effect consolidated financial position light insurance coverage prior experience resolving claims rate types claims filed average indemnity cost claims period time claim settlements paid collectively “variable claims factors” substantially change honeywell would expect future bendix related asbestos claims material adverse effect results operations operating cash flows fiscal year assurances given however variable claims factors substantially change narco bendix asbestos related balances included following balance sheet accounts 2004 paid 518 million indemnity defense costs related narco bendix claims additionally recognized charges totaling 76 million primarily bendix related asbestos claims filed defense costs incurred 2004 net probable insurance recoveries charges include update expected resolution values pending bendix claims net additional 47 million narco insurance deemed probable recovery monitoring proposals federal asbestos legislation pending united states congress due uncertainty surrounding proposed legislation possible point time determine impact legislation would narco bankruptcy strategy asbestos liabilities related insurance recoveries warranties guaranteeswe issued party following direct indirect guarantees december 31 2004 expect guarantees material adverse effect consolidated results operations financial position liquidity connection disposition certain businesses facilities indemnified purchasers expected cost remediation environmental contamination existing honeywell international inc notes financial statementscontinued dollars millions except per share amounts date disposition expected costs accrued environmental assessments made remedial efforts probable costs reasonably estimated normal course business issue product warranties product performance guarantees accrue estimated cost product warranties performance guarantees based contract terms historical experience time sale adjustments initial obligations warranties guarantees made changes obligations become reasonably estimable following table summarizes information concerning recorded obligations product warranties product performance guarantees product warranties product performance guarantees included following balance sheet accounts matterswe subject number lawsuits investigations disputes involve substantial amounts claimed arising conduct business including matters relating commercial transactions government contracts product liability prior acquisitions divestitures health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes matters well potential ranges probable losses based careful analysis matter assistance outside legal counsel applicable experts given uncertainty inherent litigation believe possible develop estimates range reasonably possible loss excess current accruals matters considering past experience existing accruals expect outcome matters either individually aggregate material adverse effect consolidated financial position contingencies resolved long periods time potential liabilities subject change due new developments changes settlement strategy impact evidentiary requirements could cause us pay damage awards settlements become subject equitable remedies could material adverse effect results operations operating cash flows periods recognized paid note 22pension postretirement benefits sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees pension benefits substantially us employees provided noncontributory qualified nonqualified defined benefit pension plans us defined benefit pension plans comprise 86 percent projected benefit obligation nonus employees us citizens covered various retirement benefit arrangements considered defined benefit pension plans accounting purposes nonus defined benefit pension plans comprise 14 percent projected benefit obligation honeywell international inc notes financial statementscontinued dollars millions except per share amounts also sponsor postretirement benefit plans provide health care benefits life insurance coverage eligible retirees retiree medical plans mainly cover us employees retire pension eligibility hospital professional medical services nonunion hourly salaried employees joining honeywell january 1 2000 eligible participate retiree medical life insurance plans us retiree medical plans require deductibles copayments virtually integrated medicare retiree contributions generally required based coverage type plan medicare eligibility honeywell limited subsidy retiree medical plans fixeddollar amount substantially future retirees almost half current retirees cap retiree medical benefits plans limits exposure impact future health care cost increases retiree medical life insurance plans funded claims expenses paid general assets honeywell international inc notes financial statementscontinued dollars millions except per share amounts following tables summarize balance sheet impact including benefit obligations assets funded status associated significant pension postretirement benefit plans december 31 2004 2003 use december 31 measurement date majority pension postretirement benefit plans honeywell international inc notes financial statementscontinued dollars millions except per share amounts accumulated benefit obligation defined benefit pension plans 12996 12391 million december 31 2004 2003 respectively net periodic pension postretirement benefit costs income significant plans include following components honeywell international inc notes financial statementscontinued dollars millions except per share amounts major actuarial assumptions used determining benefit obligations net periodic benefit cost income us benefit plans presented following table nonus benefit plans one material assumptions reflect economic assumptions applicable country considered available yields highquality fixedincome investments maturities corresponding expected payment dates benefit obligations determine discount rates measurement date pension benefits pension plans accumulated benefit obligations exceeding fair value plan assets follows statement financial accounting standards 87 “employers accounting pensions” sfas 87 requires recognition additional minimum pension liability fair value plan assets less accumulated benefit obligation end plan year 2004 recorded noncash adjustment equity accumulated nonowner changes 15 million 19 million pretax basis increased additional minimum pension liability 2003 recorded noncash adjustment equity accumulated nonowner changes 369 million 604 million pretax basis reduce additional minimum pension liability 304 million reinstate portion pension assets 300 million written prior years minimum pension liability adjustment 2003 adjustment resulted increase pension assets 2003 due improvement equity markets contribution 670 million us plans 2002 due poor performance equity markets adversely affected pension assets decline discount rate recorded noncash adjustment equity accumulated nonowner changes 606 million 956 million pretax basis increased additional minimum pension liability sfas 87 us pension plans use marketrelated value plan assets reflecting changes fair value plan assets threeyear period unrecognized honeywell international inc notes financial statementscontinued dollars millions except per share amounts losses excess 10 percent greater marketrelated value plan assets plans projected benefit obligation recognized sixyear period us pension plans assets 115 109 billion nonus pension plans assets 16 14 billion december 31 2004 2003 respectively asset allocation target allocation pension plans assets follows equity securities include honeywell common stock 214 544 million december 31 2004 2003 respectively independent fiduciary holds makes investment decisions respect honeywell common stock asset investment strategy focuses maintaining diversified portfolio using various asset classes order achieve longterm investment objectives risk adjusted basis actual invested positions various securities change time based short longerterm investment opportunities achieve objectives us investment policy requires us master retirement trust invested follows less 30 percent invested fixed income securities b 10 percent highyield securities c 10 percent private real estate investments 6 percent investment alternatives involving limited partnerships various types stated limit investments publicallyheld us international equity securities nonus investment policies different country longterm investment objectives remain expected rate return plan assets 9 percent longterm rate based historic plan asset returns varying longterm periods combined current market conditions broad asset mix considerations expected rate return longterm assumption generally change annually general funding policy qualified pension plans contribute amounts least sufficient satisfy regulatory funding standards 2004 2003 2002 made voluntary contributions 40 670 830 million respectively us defined benefit pension plans improve funded status plans contributions 2002 included 700 million honeywell common stock assuming actual plan asset returns consistent expected rate 9 percent 2005 beyond interest rates remain constant would required make contributions us pension plans foreseeable future expect contribute approximately 28 million cash nonus defined benefit pension plans 2005 contributions reflect benefits paid directly company assets honeywell international inc notes financial statementscontinued dollars millions except per share amounts benefit payments including amounts paid company assets reflecting expected future service appropriate expected paid follows postretirement benefits assumed health care cost trend rate significant effect amounts reported onepercentagepoint change assumed health care cost trend rate would following effects benefit payments including amounts paid company assets reflecting expected future service appropriate expected paid follows employee savings planswe sponsor employee savings plans match form common stock certain eligible us employee savings plan contributions shares issued stock match plans 43 65 56 million cost 151 173 million 2004 2003 2002 respectively note 23segment financial data globally manage business operations strategic business units sbus serving customers worldwide aerospace products services control sensing security technologies buildings homes industry automotive products chemicals segment information consistent management reviews businesses makes investing resource allocation decisions assesses operating performance based similar economic operational characteristics sbus aggregated managed four reportable segments follows • aerospace includes engines systems services auxiliary power units propulsion engines environmental control systems engine controls repair overhaul services hardware honeywell international inc notes financial statementscontinued dollars millions except per share amounts logistics electric power systems aerospace electronic systems flight safety communications navigation radar surveillance systems aircraft airport lighting management technical services advanced systems instruments aircraft landing systems aircraft wheels brakes • automation control solutions includes automation control products controls heating cooling indoor air quality ventilation humidification home automation advanced software applications homebuilding control optimization sensors switches control systems instruments measuring pressure air flow temperature electrical current security fire detection access control video surveillance remote patient monitoring systems building solutions installs maintains upgrades systems keep buildings safe comfortable productive process solutions provides full range automation control solutions industrial plants offering advanced software automation systems integrate control monitor complex processes many types industrial settings • specialty materials includes fluorocarbons specialty films advanced fibers customized research chemicals intermediates electronic materials chemicals • transportation systems includes honeywell turbo technologies turbochargers chargeair thermal systems consumer products group car care products including antifreeze filters spark plugs cleaners waxes additives friction materials friction materials related brake system components accounting policies segments described note 1 honeywells senior management evaluates segment performance based segment profit segment profit business unit income loss taxes excluding general corporate unallocated expenses gains losses sales nonstrategic businesses equity income loss income expense interest financial charges pension postretirement benefits expense income repositioning charges accounting changes 2003 honeywell changed definition segment profit exclude pension postretirement benefits expense income pension postretirement benefits expense income significantly impacted external factors investment returns interest rates actuarial assumptions honeywell consider indicative underlying business segment operating performance control business unit management periods presented annual report restated reflect change intersegment sales approximate market significant reportable segment data follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts honeywell international inc notes financial statementscontinued dollars millions except per share amounts reconciliation segment profit consolidated income loss taxes cumulative effect accounting change follows 1 amounts included cost products services sold selling general administrative expenses note 24geographic areasfinancial data note 25supplemental cash flow information honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 26unaudited quarterly financial information footnotes continued next page honeywell international inc notes financial statementscontinued dollars millions except per share amounts footnotes continued previous page 11 includes 34 million provision environmental net repositioning charges total aftertax charge 21 million 003 per share total pretax charge included gross profit 29 million 12 includes aftertax gain 9 million 001 per share sale engineering plastics business 13 includes aftertax gain 15 million 002 per share related settlement patent infringement lawsuit 14 includes 30 million provision environmental net repositioning charges total aftertax charge 1 million effect earnings per share total pretax charge included gross profit 26 million 15 includes aftertax loss 3 million effect earnings per share sale several nonstrategic businesses 16 includes 214 million provision environmental net repositioning charges total aftertax charge 19 million 002 per share total pretax charge included gross profit 217 million 17 includes aftertax loss 2 million effect earnings per share adjustments related businesses sold prior periods 18 composite tapestock primarily traded new york stock exchange report independent registered public accounting firm board directors shareowners honeywell international inc completed integrated audit honeywell international incs 2004 consolidated financial statements internal control financial reporting december 31 2004 audits 2003 2002 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements financial statement schedule opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position honeywell international inc subsidiaries december 31 2004 2003 results operations cash flows three years period ended december 31 2004 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 1 consolidated financial statements january 1 2003 company adopted provisions statement financial accounting standards 143 “accounting asset retirement obligations” internal control financial reporting also opinion managements assessment included managements report internal control financial reporting appearing item 9a company maintained effective internal control financial reporting december 31 2004 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting december 31 2004 based criteria established internal controlintegrated framework issued coso companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions managements assessment effectiveness companys internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating managements assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp florham park new jersey february 25 2005 item 9item 8 financial statements supplementary data honeywell international inc consolidated statement operations notes financial statements integral part statement honeywell international inc consolidated balance sheet notes financial statements integral part statement honeywell international inc consolidated statement cash flows notes financial statements integral part statement honeywell international inc consolidated statement shareowners equity notes financial statements integral part statement honeywell international inc notes financial statements dollars millions except per share amounts note 1summary significant accounting policies honeywell international inc diversified technology manufacturing company serving customers worldwide aerospace products services control sensing security technologies buildings homes industry turbochargers automotive products specialty chemicals electronic advanced materials process technology refining petrochemicals following description significant accounting policies honeywell international inc principles consolidationthe consolidated financial statements include accounts honeywell international inc subsidiaries entities controlling interest maintained consolidation policy requires consolidation entities controlling financial interest obtained well consolidation variable interest entities bear majority risk entities potential losses stand gain majority entities expected returns intercompany transactions balances eliminated consolidation cash equivalentscash cash equivalents include cash hand deposit highly liquid temporary cash investments original maturity three months less inventoriesinventories valued lower cost market using firstin firstout average cost method lastin firstout lifo method certain qualifying domestic inventories investmentsinvestments affiliates significant influence controlling interest accounted using equity method accounting investments carried market value readily determinable cost equity investments periodically reviewed determine declines fair value cost basis otherthantemporary significant sustained decreases quoted market prices series historic projected operating losses investees considered review decline fair value determined otherthantemporary impairment loss recorded investment written new carrying value property plant equipmentproperty plant equipment recorded cost less accumulated depreciation financial reporting straightline method depreciation used estimated useful lives 10 40 years buildings improvements 3 15 years machinery equipment goodwill indefinitelived intangible assetsgoodwill represents excess acquisition costs fair value net assets businesses acquired goodwill certain intangible assets deemed indefinite lives amortized intangible assets determined definite lives amortized useful lives goodwill indefinite lived intangible assets subject impairment testing annually march 31 whenever events changes circumstances indicate carrying amount may fully recoverable using guidance criteria described statement financial accounting standards 142 “goodwill intangible assets” testing compares carrying values fair values appropriate carrying value assets reduced fair value completed annual goodwill impairment test march 31 2005 determined impairment date see note 13 additional details intangible assets determinable livesother intangible assets determinable lives consist aerospace sales incentives patents trademarks intangibles amortized weighted average service periods 25 19 15 years respectively longlived assetswe periodically evaluate recoverability carrying amount longlived assets including property plant equipment intangible assets determinable lives whenever events changes circumstances indicate carrying amount asset may fully recoverable evaluate events changes circumstances based number factors including operating results business plans forecasts general industry trends economic projections anticipated cash flows impairment assessed undiscounted expected future cash flows derived asset less carrying amount impairment losses measured amount carrying value asset exceeds fair value honeywell international inc notes financial statementscontinued dollars millions except per share amounts recognized earnings also continually evaluate estimated useful lives longlived assets periodically revise estimates based current events sales recognitionproduct service sales recognized persuasive evidence arrangement exists product delivery occurred services rendered pricing fixed determinable collection reasonably assured service sales principally representing repair maintenance engineering activities aerospace automation control solutions reportable segments recognized contractual period services rendered sales longterm contracts aerospace automation control solutions reportable segments recorded percentageofcompletion method measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts provisions anticipated losses longterm contracts recorded full losses become evident revenues contracts multiple element arrangements recognized element earned based relative fair value element delivered elements value customers standalone basis amounts allocated element based objectively determined fair value sales price product service sold separately competitor prices similar products services aerospace sales incentiveswe provide sales incentives commercial aircraft manufacturers airlines connection selection aircraft wheel braking system hardware auxiliary power units installation commercial aircraft incentives consist free deeply discounted products product credits upfront cash payments cost incentives capitalized case auxiliary power units sole source supplier time deliver products customers case product credits time credit issued case upfront cash payments time payment made case free deeply discounted product cost manufacture less amount recovered airframe manufacturer airline capitalized product credits upfront cash payments capitalized exchanged value research design development qualification costs related products expensed incurred unless contractually guaranteed reimbursement cost sales incentives described capitalized selection aircraft wheel braking system hardware auxiliary power units installation commercial aircraft results creation future revenues cash flows aftermarket sales fulfill longterm product maintenance requirements mandated federal aviation administration faa similar international organizations useful life aircraft products certified selected aircraft recovery investment virtually guaranteed useful life aircraft likelihood displacement alternative supplier remote due contractual solesourcing high cost alternative suppliers aircraft operators product retrofits andor rigorous regulatory specifications qualification testing requirements amortize cost capitalized sales incentives useful lives straightline basis 25 years representing estimated minimum service life aircraft useful life period virtually assured earn revenues aftermarket sales certified products necessary fulfill maintenance required faa similar international organizations classify amortization expense associated free discounted products cost goods sold amortization expense associated product credits upfront cash payments reduction sales regularly evaluate recoverability capitalized amounts whenever events changes circumstances indicate carrying amount incentives may fully recoverable impairment charges related capitalized incentives recognized 2005 2004 2003 february 17 2006 honeywell announced intention change method accounting sales incentives first quarter 2006 recognize cost incentives provided consider existing policy acceptable believe new policy preferable honeywell international inc notes financial statementscontinued dollars millions except per share amounts improve decisionmaking controls sales incentives result change honeywell apply new accounting policy retrospectively companys previously issued financial statements applicable historical periods adopted first quarter 2006 new accounting policy reduce previously reported net income 2005 2004 2003 approximately 20 35 million respectively 002 per share 2005 004 per share 2004 004 per share 2003 additionally application new accounting policy would reduced shareowners equity beginning 2003 approximately 400 million impact previously reported cash flows see note 13 additional details environmental expendituresenvironmental expenditures relate current operations expensed capitalized appropriate expenditures relate existing condition caused past operations provide future benefits expensed incurred liabilities recorded environmental remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess accruals asbestos related contingencies insurance recoverieshoneywell defendant personal injury actions related asbestos containing products refractory products friction products recognize liability asbestos related contingency probable occurrence reasonably estimable regarding north american refractories company narco asbestos related claims accrue pending claims based terms conditions including evidentiary requirements definitive agreements principle current claimants also accrued probable value future asbestos related claims 2018 based disease criteria payment values contained narco trust described note 21 light inherent uncertainties making long term projections regarding claims filing rates disease manifestation believe reasonable basis estimating narco asbestos claims beyond 2018 statement financial accounting standards 5 “accounting contingencies” sfas 5 regarding bendix asbestos related claims accrue estimated value pending claims based expected claim resolution values dismissal rates accrued future bendix asbestos related claims cannot reasonably predict many additional claims may brought us allegations claims probable outcomes resulting settlement values tort system continually assess likelihood adverse judgments outcomes contingencies well potential ranges probable losses recognize liability contingencies based analysis individual issue assistance outside legal counsel applicable experts connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical dealings insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs research developmentresearch development costs companysponsored research development projects expensed incurred costs principally included cost products sold 1072 917 751 million 2005 2004 2003 respectively stockbased compensation planswe account fixed stock option plans accounting principles board opinion 25 “accounting stock issued employees” apb 25 apb 25 compensation cost recognized fixed stock option plans honeywell international inc notes financial statementscontinued dollars millions except per share amounts options granted plans exercise price equal market value underlying stock grant date statement financial accounting standards 123 “accounting stockbased compensation” sfas 123 amended allows require companies record compensation cost fixed stock option plans using fair value based method permitted sfas 123 elected continue account compensation cost fixed stock option plans using intrinsic value based method apb 25 see recent accounting pronouncements section note discussion recently issued rules regarding accounting sharebased payments following table sets forth pro forma information compensation cost determined consistent requirements sfas 123 following table sets forth fair value per share information including related assumptions used determine compensation cost consistent requirements sfas 123 1 estimated date grant using blackscholes optionpricing model foreign currency translationassets liabilities subsidiaries operating outside united states functional currency us dollars translated us dollars using yearend exchange rates sales costs expenses translated average exchange rates effective year foreign currency translation gains losses included component accumulated nonowner changes shareowners equity subsidiaries operating highly inflationary environments inventories property plant equipment including related expenses remeasured exchange rate effect date assets acquired monetary assets liabilities remeasured yearend exchange rates remeasurement adjustments subsidiaries included earnings derivative financial instrumentsas result global operating financing activities exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position minimize risks interest foreign currency exchange rate commodity price fluctuations honeywell international inc notes financial statementscontinued dollars millions except per share amounts normal operating financing activities deemed appropriate use derivative financial instruments derivative financial instruments used manage risk used trading speculative purposes use leveraged derivative financial instruments derivative financial instruments used hedging purposes must designated effective hedge identified risk exposure inception contract accordingly changes fair value derivative contract must highly correlated changes fair value underlying hedged item inception hedge life hedge contract derivatives recorded balance sheet assets liabilities measured fair value derivatives designated hedges fair value assets liabilities changes fair values derivatives hedged items recorded current earnings derivatives designated cash flow hedges effective portion changes fair value derivatives recorded accumulated nonowner changes shareowners equity subsequently recognized earnings hedged items impact earnings changes fair value derivatives designated hedges ineffective portion cash flow hedges recorded current earnings transfers financial instrumentssales transfers securitization financial instruments accounted statement financial accounting standards 140 “accounting transfers servicing financial assets extinguishments liabilities” sell interests designated pools trade accounts receivables third parties receivables removed consolidated balance sheet time sold value assigned subordinated interests undivided interests retained trade receivables sold based relative fair values interests retained sold carrying value retained interests approximates fair value due shortterm nature collection period receivables income taxesdeferred tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax assets realized earnings per sharebasic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding dilutive potential common shares outstanding use estimatesthe preparation consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts financial statements related disclosures accompanying notes actual results could differ estimates assumptions periodically reviewed effects revisions reflected consolidated financial statements period determined necessary reclassificationscertain prior year amounts reclassified conform current year presentation recent accounting pronouncementsin march 2005 financial accounting standards board fasb issued fasb interpretation 47 “accounting conditional asset retirement obligations interpretation fasb statement 143” fin 47 provides clarification respect timing liability recognition legal obligations associated retirement tangible longlived assets timing andor method settlement obligation conditional future event may within control entity fin 47 also clarifies required recognize liability obligation incurred liabilitys fair value reasonably estimated fin 47 primarily impacts accounting costs associated future honeywell international inc notes financial statementscontinued dollars millions except per share amounts retirement facilities automation control solutions specialty materials reportable segments upon adoption december 31 2005 recorded increase property plant equipment net 14 million recognized asset retirement obligation 46 million resulted recognition noncash charge 32 million 21 million tax 003 per share reported cumulative effect accounting change december 2004 fasb issued statement financial accounting standards 123 revised 2004 “sharebased payment” sfas 123r requiring compensation cost relating sharebased payment transactions recognized financial statements cost measured based fair value equity liability instruments issued sfas 123r effective fiscal years begin june 15 2005 adopt sfas 123r effective january 1 2006 currently expect use modified prospective method adoption therefore restate priorperiod results modified prospective method awards granted modified settled date adoption measured accounted accordance sfas 123r unvested equityclassified awards granted prior effective date sfas 123r continue accounted accordance sfas 123 except amounts must recognized financial statements currently estimate adoption sfas 123r reduce 2006 diluted earnings per share 008 010 future compensation cost impacted various factors including number awards granted related fair value date grant november 2004 fasb issued statement financial accounting standards 151 “inventory costs amendment arb 43 chapter 4” sfas 151 clarifies abnormal amounts idle facility expense freight handling costs wasted materials spoilage recognized currentperiod charges addition sfas 151 requires allocation fixed production overhead inventory based normal capacity production facilities sfas 151 effective inventory costs incurred fiscal years beginning june 15 2005 expect adoption sfas 151 material effect consolidated financial statements statement financial accounting standards 143 “accounting asset retirement obligations” sfas 143 requires recognition fair value obligations associated retirement tangible longlived assets legal obligation incur costs upon initial recognition liability cost capitalized part related longlived asset depreciated corresponding assets useful life sfas 143 primarily impacted accounting costs associated future retirement nuclear fuel conversion facilities specialty materials reportable segment upon adoption january 1 2003 recorded increase property plant equipment net 16 million recognized asset retirement obligation 47 million resulted recognition noncash charge 31 million 20 million aftertax 002 per share reported cumulative effect accounting change accounting change material impact results operations 2005 2004 2003 note 2acquisitions acquired businesses aggregate cost 3500 396 199 million 2005 2004 2003 respectively acquisitions accounted purchase method accounting accordingly assets liabilities acquired businesses recorded estimated fair values dates acquisition significant acquisitions made years discussed march 31 2005 honeywell declared offers entire issued ordinary preference share capital novar plc novar wholly unconditional assumed control novar date aggregate value offers approximately 24 billion fully diluted exercise honeywell international inc notes financial statementscontinued dollars millions except per share amounts outstanding options including assumption approximately 569 million outstanding debt net cash payment novars share capital repayment substantially novars existing debt occurred second quarter 2005 funded existing cash resources novar consolidated revenues approximately 27 billion 2004 operated globally three different businesses intelligent building systems ibs global business supplying electrical electronic control products services building operators contractors developers integration ibs business automation control solutions segment enhanced offerings security fire building controls products services particularly united kingdom germany supporting global growth businesses indalex aluminum solutions indalex leading manufacturer aluminum extrusions comprehensive network plants across north america security printing services security printing engaged printing checks financial instruments business forms providing checkrelated services financial institutions credit unions customers members throughout united states december 2005 completed sale security printing business mf worldwide corp 800 million cash resulting decrease 225 million value goodwill attributable novar acquisition february 2006 completed sale indalex affiliate private investment firm sun capital partners inc approximately 425 million cash indalex business classified held sale december 31 2005 consolidated balance sheet indalex security printing businesses presented discontinued operations statement operations periods presented purchase price novar net cash acquired approximately 17 billion following table summarizes estimated fair values assets liabilities acquired including reclassification fair values assets liabilities indalex security printing businesses held sale 13 billion goodwill resulting acquisition arises primarily avoidance time costs would required associated risks would encountered develop business comparable novars ibs business expected cost synergies honeywell international inc notes financial statementscontinued dollars millions except per share amounts realized consolidation acquired business automation control solutions segment cost synergies expected realized principally areas selling general administrative expenses material sourcing manufacturing allocated 261 million intangible assets contractual customer relationships existing technology trademarks based valuation studies performed third party valuation consultants intangible assets amortized estimated useful lives range 5 15 years using straightline accelerated amortization methods addition accrued liabilities include approximately 76 million repositioning costs related integration novar operations repositioning costs relate principally severance costs workforce reductions primarily ibs business former novar corporate office workforce reductions expected completed june 30 2006 since acquisition date made adjustments original fair value assets liabilities acquired resulting principally refinements analyses receivables inventories property plant equipment pension liabilities deferred taxes including valuation studies performed third party valuation consultants adjustments considered material december 31 2005 allocation purchase price assets acquired liabilities assumed complete following table presents balance sheet information indalex business acquired part novar transaction described classified held sale december 31 2005 consolidated balance sheet net sales pretax income discontinued operations 2005 1209 149 million respectively effective november 30 2005 acquired 50 percent interest uop llc uop formerly indirectly owned union carbide corporation wholly owned subsidiary dow chemical company giving honeywell full ownership entity aggregate cost remaining 50 percent interest uop approximately 800 million including assumption outstanding debt net cash acquired estimated fair value assets liabilities acquired resulted increase goodwill 353 million uop net sales approximately 12 billion 2004 supplier licensor process technology catalysts process plants consulting services petroleum refining petrochemical gas processing industries included specialty materials reportable segment may 2003 honeywell sold engineering plastics business basf exchange basfs nylon fiber business 90 million cash basfs nylon fiber business became part specialty materials nylon business since cash consideration received basf excess 25 percent fair value exchange transaction viewed “monetary” accordance honeywell international inc notes financial statementscontinued dollars millions except per share amounts issue 8a eitf 012 “interpretations apb opinion 29” accordingly pretax gain sale engineering plastics business 38 million based fair value consideration received basf less sum net book value engineering plastics business related transaction costs recorded assets liabilities acquired basf business fair market value based valuation performed third party valuation consultant acquistion date corresponded value agreed upon asset purchase agreement transaction specialty materials engineering plastics business basfs nylon fiber business annual sales approximately 400 million connection acquisitions 2005 2004 2003 except novar acquisition described amounts recorded transaction costs integrating acquired businesses honeywell material results operations acquired businesses included consolidated results honeywell respective acquisition dates pro forma results 2005 2004 2003 assuming acquisitions made beginning year would materially different reported results note 3repositioning charges summary repositioning charges follows following table summarizes pretax distribution total net repositioning charges income statement classification honeywell international inc notes financial statementscontinued dollars millions except per share amounts following table summarizes pretax impact total net repositioning charges reportable segment 2005 recognized repositioning charges totaling 267 million primarily severance costs related workforce reductions 5269 maufacturing administrative positions across reportable segments including implementation new organizational structure aerospace reportable segment reorganized aerospace businesses better align customer segments implementation new aerospace organizational structure substantially completed third quarter 2005 also 25 million previously established accruals primarily severance corporate specialty materials automation control solutions reportable segments returned income 2005 reversal severance liabilities relates changes scope previously announced severance programs excise taxes relating executive severance amount previously paid determined longer payable severance amounts previously paid outside service provider part outsourcing arrangement refunded honeywell 2004 recognized repositioning charges totaling 116 million primarily severance costs related workforce reductions 2272 manufacturing administrative positions across reportable segments also 28 million previously established accruals primarily severance returned income 2004 due fewer employee separations originally planned associated certain prior repositioning actions resulting reduced severance liabilities principally automation control solutions reportable segment 2003 recognized repositioning charges totaling 82 million primarily severance costs related workforce reductions 1501 manufacturing administrative positions across reportable segments also 69 million previously established accruals primarily severance returned income 2003 due fewer employee separations originally planned associated certain prior repositioning actions resulting reduced severance liabilities automation control solutions aerospace specialty materials reportable segments honeywell international inc notes financial statementscontinued dollars millions except per share amounts following table summarizes status total repositioning costs 2005 recognized charge 186 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 10 million discussed detail note 21 recognized credit 67 million connection arbitration award overcharges supplier phenol specialty materials business june 2003 end 2004 arbitrator also awarded honeywell additional 31 million damages overcharges 2005 recognized overcharges years 2005 forward subject separate arbitration scheduled april 2006 existing arbitration awards 2003 2005 subject approval federal court recognized impairment charges 23 million related writedown property plant equipment held used research life sciences business writedown property plant equipment held sale resins chemicals business specialty materials reportable segment also recognized charges 18 million principally related modification lease agreement corporate headquarters facility 10 million various legal settlements 7 million 2004 recognized charge 536 million probable reasonably estimable environmental liabilities primarily related denial appeal matter entitled interfaith community organization et al v honeywell international inc et al estimated liabilities remediation environmental conditions around onondaga lake syracuse new york environmental matters discussed detail note 21 recognized asbestos related litigation charges net insurance 76 million discussed detail note 21 recognized impairment charge 42 million second quarter 2004 related principally writedown property plant equipment performance fibers business specialty materials reportable segment business sold december 2004 also recognized charges 33 million consisting 29 million various legal settlements including property damage claims automation control solutions reportable segment 14 million writeoff receivables inventories assets net reversal reserve 10 million established prior year contract settlement 2003 recognized charge 235 million probable reasonably estimable environmental liabilities mainly related matter entitled interfaith community organization et al v honeywell international inc et al remediation environmental conditions around onondaga lake syracuse new york discussed note 21 also recognized charges 30 million consisting 26 million various legal settlements 4 million honeywell international inc notes financial statementscontinued dollars millions except per share amounts specialty materials reportable segment including loss sale investment owned equity investee note 4gain loss sale nonstrategic businesses following summary nonstrategic businesses sold 2005 realized proceeds 197 million cash sales businesses sales businesses materially impact net sales segment profit 2005 compared 2004 aftertax gain sale industrial wax business due higher tax basis business book basis 2004 realized proceeds 426 million cash sales businesses sales businesses materially impact net sales segment profit 2004 compared 2003 realized proceeds 137 million cash sales businesses sales businesses materially impact net sales segment profit 2003 compared 2002 aftertax loss sale specialty materials businesses resulted mainly tax benefits associated prior capital losses 1 consists post closing adjustments related businesses sold prior years honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 5other income expense note 6interest financial charges weighted average interest rate shortterm borrowings commercial paper outstanding december 31 2005 2004 448 281 percent respectively note 7income taxes income continuing operations taxes tax expense honeywell international inc notes financial statementscontinued dollars millions except per share amounts 1 net changes valuation allowance honeywell international inc notes financial statementscontinued dollars millions except per share amounts deferred tax assets liabilities amount federal tax net operating losses available carryforward december 31 2005 22 million generated certain subsidiaries prior acquisition expiration dates 2022 use preacquisition operating losses subject limitations imposed internal revenue code anticipate limitations affect utilization carryforwards prior expiration 2005 reported net capital loss 251 million sale industrial wax business loss carried back 2004 sufficient capital gains absorb loss various subsidiaries state tax net operating loss carryforwards 29 billion december 31 2005 varying expiration dates 2024 also foreign net operating capital losses 23 billion available reduce future income tax payments several countries subject varying expiration rules also included 698 million loss carryforwards generated certain subsidiaries prior acquisition varying expiration dates us tax credit carryforwards 81 million december 31 2005 including carryforwards 78 million various expiration dates 2025 tax credits 3 million subject expiration addition 327 million foreign tax credits available carryback carryforward december 31 2005 varying expiration dates 2015 valuation allowance increased 139 39 108 million 2005 2004 2003 respectively increase 2005 primarily due increase foreign net operating capital losses net deferred tax assets attributable acquired businesses expected realized offset decrease state tax net operating loss carryforwards net federal impact disallowance foreign net operating losses valuation allowance previously provided 222 46 39 million respectively portion valuation allowance charged goodwill 219 million therefore future realization tax benefits credited first reduce zero goodwill related acquisition second reduce zero non current intangible assets related acquisition third reduce income tax expense increase 2004 primarily due increase state tax net operating loss carryforwards net federal impact foreign net operating capital losses expected realized 40 honeywell international inc notes financial statementscontinued dollars millions except per share amounts 27 million respectively offset decrease 30 million foreign tax credits believe utilized due extension foreign tax credit carryforward period five 10 years american jobs creation act 2004 act increase 2003 primarily due increase foreign net operating losses expected utilized act signed law october 2004 provides variety changes tax law including incentives repatriate undistributed earnings foreign subsidiaries phased elimination extraterritorial income exclusion domestic manufacturing benefit specifically act creates temporary incentive us corporations repatriate accumulated income earned outside us providing 85 percent dividends received deduction certain dividends controlled foreign corporations may 2005 us treasury issued guidance clarifying certain provisions act accordingly second quarter 2005 able finalize assessment act impact honeywell repatriated approximately 27 billion foreign earnings remainder 2005 22 billion receives benefit act income tax provision 155 million december 31 2005 honeywell provided us federal income foreign withholding taxes 21 billion undistributed earnings nonus operations earnings currently intended reinvested indefinitely practicable estimate amount tax might payable earnings remitted foreign tax credits would available reduce eliminate resulting us income tax liability extraterritorial income exclusion foreign sales phasedout two years beginning 2005 deduction income qualified domestic production activities phasedin 2005 2010 expect legislation material effect consolidated tax accruals effective tax rate note 8earnings loss per share following table sets forth computations basic diluted earnings loss per share honeywell international inc notes financial statementscontinued dollars millions except per share amounts 2005 2004 2003 diluted earnings per share calculation excludes effect stock options exercise prices exceed average market price common shares period 2005 2004 2003 number stock options included computation 17793385 41656606 41908964 respectively stock options outstanding end respective years note 9accounts notes receivables sell interests designated pools trade accounts receivables third parties sold receivables overcollateralized 178 million december 31 2005 retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools new receivables sold agreement previously sold receivables collected losses recognized interest receivables sold retained interests receivables shown amounts expected collected us carrying value approximates fair value retained interests compensated services collection administration receivables losses sales receivables 18 9 7 million 2005 2004 2003 respectively credit losses incurred years note 10inventories inventories valued lifo amounted 258 108 million december 31 2005 2004 respectively lifo inventories valued current costs carrying values would approximately 145 130 million higher december 31 2005 2004 respectively honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 11investments longterm receivables note 12property plant equipment depreciation expense 578 572 595 million 2005 2004 2003 respectively note 13goodwill intangiblesnet change carrying amount goodwill years ended december 31 2005 2004 reportable segment follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts intangible assets comprised aerospace sales incentives capitalized 71 93 95 million 2005 2004 2003 respectively aerospace sales incentives amortized income 44 36 38 million 2005 2004 2003 respectively sales incentives related certain auxiliary power units sole supplier 13 9 13 million 2005 2004 2003 respectively expensed incurred intangible assets amortization expense 119 78 66 million 2005 2004 2003 respectively estimated intangible assets amortization expense five succeeding years approximates 140 million note 14accrued liabilities honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 15longterm debt credit agreements schedule principal payments longterm debt follows maintain 23 billion bank revolving credit facilities group banks arranged citigroup global markets inc jp morgan securities inc comprised 13 billion fiveyear credit agreement 300 million letter credit sublimit b 1 billion fiveyear credit agreement 200 million letter credit sublimit credit agreements maintained general corporate purposes including support issuance commercial paper borrowings outstanding either agreement december 31 2005 issued 175 million letters credit 13 billion fiveyear credit agreement december 31 2005 neither credit agreements restricts ability pay dividends neither contains financial covenants failure comply customary conditions occurrence customary events default contained credit agreements would prevent borrowings would generally require repayment outstanding borrowings credit agreements events default include nonpayment credit agreement debt interest fees b noncompliance terms credit agreement covenants c crossdefault debt certain circumstances bankruptcy e defaults upon obligations employee retirement income security act honeywell international inc notes financial statementscontinued dollars millions except per share amounts additionally banks right terminate commitment lend additional funds issue additional letters credit agreements person group acquires beneficial ownership 30 percent voting stock 12month period individuals directors honeywell beginning period cease constitute majority board directors board loans 13 billion fiveyear credit agreement required repaid later november 26 2008 loans 1 billion fiveyear credit agreement required repaid later october 22 2009 agreed pay facility fee 008 percent per annum aggregate commitment fiveyear credit agreements interest borrowings fiveyear credit agreements would determined honeywells option auction bidding procedure b highest floating base rate publicly announced citibank na 05 percent average cd rate 05 percent federal funds rate c eurocurrency rate plus 022 percent applicable margin facility fee applicable margin eurocurrency rate fiveyear credit agreements letter credit issuance fee fiveyear credit agreements subject change based upon grid determined longterm debt ratings neither credit agreement subject termination based upon decrease debt ratings material adverse change new 364day 240 million canadian dollar credit facility established september 9 2005 arranged citibank na canadian branch facility established general corporate purposes including support issuance commercial paper canada borrowings outstanding credit facility december 31 2005 agreed pay facility fee 006 percent per annum commitment amount interest borrowings facility would determined honeywells option highest floating base rate publicly announced citibank na 05 percent average cd rate 05 percent federal funds rate b highest canadian dollar prime rate publicly announced citibank na 05 percent canadian dollar bankers acceptance c eurocurrency rate bankers acceptance plus 024 percent applicable margin note 16lease commitments future minimum lease payments operating leases initial remaining noncancellable lease terms excess one year follows entered agreements lease land equipment buildings principally operating leases initial terms 25 years contain renewal options subject customary conditions time terms leases may option purchase leased assets amounts approximate fair value expect commitments lease agreements material adverse effect consolidated results operations financial position liquidity honeywell international inc notes financial statementscontinued dollars millions except per share amounts rent expense 326 321 314 million 2005 2004 2003 respectively note 17financial instruments credit market riskfinancial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties derivative transactions substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value cash flows derivative financial instruments considering reasonably possible changes interest currency exchange rates restrict use derivative financial instruments hedging activities continually monitor creditworthiness customers grant credit terms normal course business concentrations credit risk associated trade accounts notes receivable considered minimal due diverse customer base significant portion customers commercial air transport industry aircraft manufacturers airlines accounting approximately 13 percent consolidated sales 2005 terms conditions credit sales designed mitigate eliminate concentrations credit risk single customer sales materially dependent single customer small group customers foreign currency risk managementwe conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities anticipated transactions arising international trade objective preserve economic value nonfunctional currency denominated cash flows attempt transaction exposures hedged natural offsets fullest extent possible opportunities exhausted foreign currency forward option agreements third parties principal currency exposures relate euro british pound canadian dollar us dollar hedge monetary assets liabilities denominated nonfunctional currencies prior conversion us dollars assets liabilities remeasured spot exchange rates effect balance sheet date effects changes spot rates recognized earnings included income expense hedge exposure changes foreign exchange rates principally forward contracts forward contracts markedtomarket resulting gains losses similarly recognized earnings offsetting gains losses nonfunctional currency denominated monetary assets liabilities hedged partially hedge forecasted 2006 sales purchases denominated nonfunctional currencies currency forward contracts functional currency strengthens nonfunctional currencies decline value forecasted nonfunctional currency cash inflows sales outflows purchases partially offset recognition gains sales losses purchases respectively value forward contracts designated hedges conversely functional currency weakens nonfunctional currencies increase value forecasted nonfunctional currency cash inflows sales outflows purchases partially offset recognition losses sales gains purchases respectively value forward contracts designated hedges market value gains losses contracts recognized earnings hedged transaction recognized open forward contracts mature december 31 2006 december 31 2005 2004 contracts notional amounts 1998 790 million respectively exchange foreign currencies principally euro countries great britain honeywell international inc notes financial statementscontinued dollars millions except per share amounts commodity price risk managementour exposure market risk commodity prices result changes cost production mitigate exposure commodity price risk use longterm firmprice contracts suppliers forward commodity purchase agreements third parties hedging anticipated purchases several commodities principally natural gas forward commodity purchase agreements markedtomarket resulting gains losses recognized earnings hedged transaction recognized interest rate risk managementwe use combination financial instruments including mediumterm shortterm financing variablerate commercial paper interest rate swaps manage interest rate mix total debt portfolio related overall cost borrowing december 31 2005 2004 interest rate swap agreements designated fair value hedges effectively changed 681 1218 million respectively fixed rate debt average rate 615 642 percent respectively libor based floating rate debt interest rate swaps mature 2007 fair value financial instrumentsthe carrying value cash equivalents trade accounts notes receivables payables commercial paper shortterm borrowings contained consolidated balance sheet approximates fair value summarized carrying values fair values financial instruments december 31 2005 2004 fair values based quoted market prices issues traded current rates offered us debt remaining maturity characteristics valuation techniques appropriate note 18capital stock authorized issue 2000000000 shares common stock par value one dollar common shareowners entitled receive dividends may declared board entitled one vote per share entitled event liquidation share ratably assets honeywell available distribution common shareowners common shareowners preemptive conversion rights shares common stock issued outstanding held treasury liable calls assessments restrictions us relative dividends repurchase redemption common stock november 2005 honeywells board authorized company repurchase 3 billion common stock december 31 2005 approximately 26 billion additional shares may yet purchased program amount timing repurchases may vary depending market conditions level investing activities honeywell international inc notes financial statementscontinued dollars millions except per share amounts authorized issue 40000000 shares preferred stock without par value determine number shares series rights preferences limitations series december 31 2005 preferred stock outstanding note 19other nonowner changes shareowners equity total nonowner changes shareowners equity included consolidated statement shareowners equity changes accumulated nonowner changes follows components accumulated nonowner changes follows note 20stockbased compensation plans stock plans available grant incentive stock options nonqualified stock options stock appreciation rights officers employees fixed stock optionsthe exercise price term conditions applicable option granted stock plans generally determined management development compensation committee board options granted price equal stocks fair market value date grant options generally become exercisable threeyear period expire ten years honeywell international inc notes financial statementscontinued dollars millions except per share amounts following table summarizes information stock option activity three years ended december 31 2005 following table summarizes information stock options outstanding exercisable december 31 2005 1 average remaining contractual life years 43343099 40547240 options exercisable weighted average exercise prices 4036 4114 december 31 2004 2003 respectively 13454032 shares available future grants terms stock option plans december 31 2005 restricted stock unitsrestricted stock unit rsu awards entitle holder receive one share common stock unit units vest rsus issued certain key employees compensation incentives tied directly achievement certain performance objectives 1230884 980706 1578000 rsus issued 2005 2004 2003 respectively compensation expense related rsus 24 27 million 2005 2004 2003 respectively 3965531 3691556 3103513 rsus outstanding weighted average grant date fair value per share 3297 3118 3010 december 31 2005 2004 2003 respectively nonemployee directors planwe also stock plan nonemployee directors plan restricted shares options granted new director receives onetime grant 3000 shares common stock subject specific restrictions directors plan also provides annual grant director options purchase 5000 shares common stock fair market value date grant options generally become exercisable threeyear period expire ten years honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 21commitments contingencies environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous toxic substances accord environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing toxic substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually jointly potentially responsible parties determine feasibility various remedial techniques address environmental matters policy record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess accruals expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects remedial techniques utilized agreements parties following table summarizes information concerning recorded undiscounted liabilities environmental costs 1 2005 45 million principally relates reclassification carrying value land property plant equipment corresponding increase environmental liabilities environmental liabilities included following balance sheet accounts honeywell international inc notes financial statementscontinued dollars millions except per share amounts although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position jersey city njin february 2005 third circuit court appeals upheld decision united states district court district new jersey “district court” matter entitled interfaith community organization ico et al v honeywell international inc et al predecessor honeywell site located jersey city new jersey constituted imminent substantial endangerment ordered honeywell conduct excavation transport offsite disposal approximately one million tons chromium residue present site well remediation siteimpacted ground water river sediments district court dismissed without prejudice honeywells motion relief matter seeking approval alternative remedy honeywell would excavate approximately half chromium residue present site encase remaining material multimedia containment system provisions made financial statements estimated cost implementation excavation offsite removal remedy expected incurred evenly fiveyear period starting april 2006 expect implementation remedy material adverse effect future consolidated results operations operating cash flows financial position developing proposed plan remediation ground water river sediments submission later year cannot reasonably estimate costs remediation planned finalized numerous third parties could responsible yet undetermined portion ultimate costs remediating river sediment site issue ico matter one twentyone sites located jersey city new jersey subject administrative consent order aco entered new jersey department environmental protection njdep 1993 remedial investigations activities consistent aco underway sites “honeywell aco sites” may 3 2005 njdep filed lawsuit new jersey superior court honeywell two companies seeking declaratory injunctive relief unspecified damages reimbursement unspecified total costs relating sites new jersey allegedly contaminated chrome ore processing residue claims honeywell relate activities predecessor company ceased new jersey manufacturing operations mid1950s complaint entirely clear appears approximately 100 sites issue including 17 honeywell aco sites approximately 32 sites two companies agreed remediate separate administrative consent orders well approximately 53 sites identified complaint “publicly funded sites” none three companies signed administrative consent order addition claims specific company njdep claims three companies collectively liable chrome sites based “market share” theory addition njdep seeking treble damages costs incurred incur publicly funded sites honeywell previously denied responsibility publicly funded sites honeywell believes connection either sites covered companies administrative consent orders publicly funded sites therefore responsibility sites honeywell aco sites conducting remedial investigations activities consistent aco thus believe lawsuit significantly change obligations respect honeywell aco sites lawsuits also filed honeywell district court resource conservation recovery act rcra two new jersey municipal utilities seeking honeywell international inc notes financial statementscontinued dollars millions except per share amounts cleanup chromium residue two honeywell aco sites citizens group honeywell thirteen defendants respect contamination dozen honeywell aco sites reasons stated believe lawsuits significantly change obligations respect honeywell aco sites although possible time predict outcome matters discussed believe allegations without merit intend vigorously defend lawsuits expect matters material adverse effect consolidated financial position expect prevail adverse litigation outcome could material adverse impact consolidated results operations operating cash flows periods recognized paid onondaga lake syracuse nya predecessor company honeywell operated chemical plant alleged contributed mercury contaminants lake july 2005 new york state department environmental conservation dec issued record decision respect remediation industrial contamination lake record decision calls combined dredgingcapping remedy generally line approach recommended feasibility study submitted honeywell may 2004 based currently available information analysis performed engineering consultants accrued estimated cost implementing remedy set forth record decision estimating process considered range possible outcomes amounts recorded reflect best estimate time believe matter material adverse impact consolidated financial position given scope complexity project possible actual costs could exceed estimated costs amount could material adverse impact consolidated results operations operating cash flows periods recognized paid time however cannot identify legal regulatory technical reason conclude specific alternative outcome probable outcome made provisions financial statements decs aggregate cost estimate higher amount reserved based high end range potential costs major elements record decision includes contingency actual cost record decision depend upon among things resolution certain technical issues design phase remediation asbestos matters like many industrial companies honeywell defendant personal injury actions related asbestos mine produce asbestos make sell insulation products construction materials identified primary cause asbestos related disease vast majority claimants products containing asbestos previously manufactured honeywell previously owned subsidiaries primarily fall two general categories refractory products friction products refractory productshoneywell owned north american refractories company narco 1979 1986 narco produced refractory products high temperature bricks cement sold largely steel industry east midwest less 2 percent narcos products contained asbestos sold narco business 1986 agreed indemnify narco respect personal injury claims products discontinued prior sale defined sale agreement narco retained liability claims january 4 2002 narco filed reorganization chapter 11 us bankruptcy code result narco bankruptcy filing claims pending narco automatically stayed pending reorganization narco addition bankruptcy court enjoined honeywell international inc notes financial statementscontinued dollars millions except per share amounts filing prosecution narcorelated asbestos claims honeywell although stay remained effect continuously since january 4 2002 assurance stay remain effect connection narcos bankruptcy filing paid narcos parent company 40 million agreed provide narco 20 million financing also agreed pay 20 million narcos parent company upon filing plan reorganization narco acceptable honeywell amount paid december 2005 following filing narcos third amended plan reorganization pay narcos parent company 40 million forgive outstanding narco indebtedness upon confirmation consummation respectively plan believe part narco plan reorganization trust established benefit asbestos claimants current future pursuant trust distribution procedures negotiated narco committee asbestos creditors courtappointed legal representative future asbestos claimants trust put place approved court fair equitable honeywell well narco entitled permanent channeling injunction barring present future individual actions state federal courts requiring asbestos related claims based exposure narco products made federallysupervised trust honeywell reached agreement representative future narco claimants asbestos claimants committee cap annual contributions trust respect future claims level would material impact honeywells operating cash flows court approved narcos disclosure statement third amended plan reorganization late january 2006 narco process distributing disclosure statement creditors voting close march 31 2006 court scheduled narcos confirmation hearing begin june 2006 although expect narco plan reorganization narco trust ultimately approved court assurances given courts ruling time frame resolving appeals ruling consolidated financial statements reflect estimated liability settlement pending future narcorelated asbestos claims 18 24 billion december 31 2005 2004 respectively estimated liability current claims based terms conditions including evidentiary requirements definitive agreements approximately 260000 current claimants substantially settlement payments respect current claims expected made end 2007 approximately 90 million payments due pursuant settlements due upon establishment narco trust estimated liability future claims represents estimated value future asbestos related bodily injury claims expected asserted narco 2018 aforementioned obligations narcos parent estimate based upon disease criteria payment values contained narco trust distribution procedures negotiated narco asbestos claimants committee narco future claimants representative light uncertainties inherent making longterm projections believe reasonable basis estimating asbestos claims beyond 2018 statement financial accounting standards 5 honeywell retained expert services hamilton rabinovitz alschuler inc hra project probable number value including trust claim handling costs asbestos related future liabilities based upon historical experience similar trusts methodology used estimate liability future claims commonly accepted numerous courts methodology utilized expert routinely retained asbestos claimants committee asbestos related bankruptcies valuation methodology includes analysis population likely exposed asbestos containing products epidemiological studies estimate number people likely develop asbestos related diseases narco claims filing history pending honeywell international inc notes financial statementscontinued dollars millions except per share amounts inventory narco asbestos related claims payment rates expected established narco trust december 31 2005 2004 consolidated financial statements reflect insurance receivable corresponding liability settlement pending future narcorelated asbestos claims 11 12 billion respectively coverage reimburses honeywell portions costs incurred settle narco related claims court judgments well defense costs provided large number insurance policies written dozens insurance companies domestic insurance market london excess market december 31 2005 significant portion coverage insurance companies agreements pay full policy limits based corresponding honeywell claims costs conduct analyses determine amount insurance estimate probable recover relation payment current estimated future claims substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries made judgments concerning insurance coverage believe reasonable consistent historical dealings insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs projecting future events subject many uncertainties could cause narco related asbestos liabilities higher lower projected recorded assurance plan reorganization confirmed insurance recoveries timely whether narco related asbestos claims beyond 2018 given inherent uncertainty predicting future events review estimates periodically update based experience relevant factors similarly reevaluate projections concerning probable insurance recoveries light changes projected liability developments may impact insurance recoveries friction productshoneywells bendix friction materials bendix business manufactured automotive brake pads contained chrysotile asbestos encapsulated form group existing potential claimants consisting largely individuals allege performed brake replacements 1981 december 31 2005 resolved approximately 78000 bendix related asbestos claims including trials covering 122 plaintiffs resulted 116 favorable verdicts trials covering six individuals resulted adverse verdicts however two verdicts reversed appeal third shortly appealed remaining three claims settled following tables present information regarding bendix related asbestos claims activity approximately 30 percent approximately 77000 pending claims december 31 2005 inactive deferred similar dockets established jurisdictions claimants allege honeywell international inc notes financial statementscontinued dollars millions except per share amounts minimal impairment approximately 77000 pending claims also include claims filed jurisdictions texas virginia mississippi historically allowed consolidated filings jurisdictions plaintiffs permitted file complaints predetermined master list defendants regardless whether claims individual defendant many plaintiffs may actually claims honeywell based state rules prior experience jurisdictions anticipate many claims ultimately dismissed honeywell experienced average resolution values per claim excluding legal costs follows possible predict whether resolution values bendix related asbestos claims increase decrease stabilize future accrued estimated cost pending bendix related asbestos claims estimate based number pending claims december 31 2005 disease classifications expected settlement values historic dismissal rates honeywell retained expert services hra see discussion hra refractory products assist developing estimated expected settlement values historic dismissal rates hra updates expected settlement values pending claims second quarter year cannot reasonably estimate losses could arise future bendix related asbestos claims cannot predict many additional claims may brought us allegations claims probable outcomes resulting settlement values tort system honeywell currently approximately 19 billion insurance coverage remaining respect pending potential future bendix related asbestos claims 377 336 million reflected receivables consolidated balance sheet december 31 2005 2004 respectively coverage provided large number insurance policies written dozens insurance companies domestic insurance market london excess market insurance receivables recorded financial statements simultaneous recording liability estimated value underlying asbestos claims amount insurance receivable recorded based ongoing analysis insurance estimate probable recovery determination based analysis underlying insurance policies historical experience insurers ongoing review solvency insurers interpretation judicial determinations relevant insurance programs consideration impacts settlements reached insurers insurance receivables also recorded structured insurance settlements provide future fixed payment streams contingent upon future claims events amounts recorded net present value fixed payment stream cumulative historical basis honeywell recorded insurance receivables equal approximately 50 percent value underlying asbestos claims recorded however gaps coverage due insurance company insolvencies certain uninsured periods insurance settlements rate expected decline future bendix related asbestos liabilities may recorded future recoverability rates may also impacted numerous factors future insurance settlements insolvencies judicial determinations relevant coverage program difficult predict assuming continued defense indemnity spending current levels estimate cumulative recoverability rate could decline next five years approximately 40 percent honeywell believes sufficient insurance coverage reserves cover pending bendix related asbestos claims although impossible predict outcome pending claims honeywell international inc notes financial statementscontinued dollars millions except per share amounts reasonably estimate losses could arise future bendix related asbestos claims believe claims would material adverse effect consolidated financial position light insurance coverage prior experience resolving claims rate types claims filed average indemnity cost claims period time claim settlements paid collectively “variable claims factors” substantially change honeywell would expect future bendix related asbestos claims material adverse effect results operations operating cash flows fiscal year assurances given however variable claims factors change refractory friction productsthe following tables summarize information concerning narco bendix asbestos related balances asbestos related liabilities 1 2005 consists charge 52 million reflect settlement certain current asbestos claims year credit 73 million related reestimation asbestos reserves connection additional settlement 2 2003 relates accrual asbestos liabilities recognized upon termination transaction sell friction materials business insurance recoveries asbestos related liabilities 1 2005 consists gains insurance settlements 172 million principally related structured insurance settlement carrier converted policy future fixed noncontingent payment stream charges 131 million writeoffs certain amounts due insurance carriers footnotes continued next page honeywell international inc notes financial statementscontinued dollars millions except per share amounts footnotes continued previous page 2 2004 47 million related additional probable insurance recoveries identified second quarter 2004 based ongoing evaluation enforceability rights various insurance policies 2003 155 million related additional probable insurance recoveries recognized connection accrual asbestos liabilities recorded upon termination transaction sell friction materials business narco bendix asbestos related balances included following balance sheet accounts monitoring proposals federal asbestos legislation pending united states congress due uncertainty whether proposed legislation adopted terms adopted legislation possible point time determine impact legislation would asbestos liabilities related insurance recoveries matters breed technologies inc v alliedsignalthe plaintiff alleges fraud connection alliedsignals predecessor company october 1997 sale safety restraints business breed seeks compensatory damages 375 million punitive damages trial commenced january 2006 florida state court believe plaintiffs claims without merit expect prevail matter accordingly believe liability probable occurrence reasonably estimable recorded provision matter financial statements given uncertainty inherent litigation possible estimate range possible loss might result adverse resolution matter allen et al v honeywell retirement earnings planthis represents purported class action lawsuit plaintiffs seek unspecified damages relating allegations among things honeywell impermissibly reduced pension benefits employees garrett corporation predecessor entity plan amended 1983 failed calculate certain benefits accordance terms plan third quarter 2005 us district court district arizona ruled favor plaintiffs claims favor honeywell virtually claims strongly disagree intend appeal courts adverse ruling class yet certified court matter light merits arguments appeal substantial affirmative defenses yet considered court continue expect prevail matter accordingly believe liability probable occurrence reasonably estimable recorded provision matter financial statements given uncertainty inherent litigation possible estimate range possible loss might result adverse resolution matter although expect prevail breed allen matters discussed adverse outcome either matter could material adverse effect results operations operating honeywell international inc notes financial statementscontinued dollars millions except per share amounts cash flows periods recognized paid believe adverse outcome either matter would material adverse effect consolidated financial position subject number lawsuits investigations disputes involve substantial amounts claimed arising conduct business including matters relating commercial transactions government contracts product liability prior acquisitions divestitures employee benefit plans health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes matters well potential ranges probable losses based careful analysis matter assistance outside legal counsel applicable experts given uncertainty inherent litigation believe possible develop estimates range reasonably possible loss excess current accruals matters considering past experience existing accruals expect outcome matters either individually aggregate material adverse effect consolidated financial position contingencies resolved long periods time potential liabilities subject change due new developments changes settlement strategy impact evidentiary requirements could cause us pay damage awards settlements become subject equitable remedies could material adverse effect results operations operating cash flows periods recognized paid warranties guaranteeswe issued party following direct indirect guarantees december 31 2005 expect guarantees material adverse effect consolidated results operations financial position liquidity connection disposition certain businesses facilities indemnified purchasers expected cost remediation environmental contamination existing date disposition expected costs accrued environmental assessments made remedial efforts probable costs reasonably estimated normal course business issue product warranties product performance guarantees accrue estimated cost product warranties performance guarantees based contract terms historical experience time sale adjustments initial obligations warranties guarantees made changes obligations become reasonably estimable following table summarizes information concerning recorded obligations product warranties product performance guarantees honeywell international inc notes financial statementscontinued dollars millions except per share amounts product warranties product performance guarantees included following balance sheet accounts note 22pension postretirement benefits sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees pension benefits substantially us employees provided noncontributory qualified nonqualified defined benefit pension plans us defined benefit pension plans comprise 79 percent projected benefit obligation nonus employees us citizens covered various retirement benefit arrangements considered defined benefit pension plans accounting purposes nonus defined benefit pension plans comprise 21 percent projected benefit obligation also sponsor postretirement benefit plans provide health care benefits life insurance coverage eligible retirees retiree medical plans mainly cover us employees retire pension eligibility hospital professional medical services nonunion hourly salaried employees joining honeywell january 1 2000 eligible participate retiree medical life insurance plans us retiree medical plans require deductibles copayments virtually integrated medicare retiree contributions generally required based coverage type plan medicare eligibility honeywell limited subsidy retiree medical plans fixeddollar amount substantially future retirees almost half current retirees cap retiree medical benefits plans limits exposure impact future health care cost increases retiree medical life insurance plans funded claims expenses paid operating cash flow honeywell international inc notes financial statementscontinued dollars millions except per share amounts following tables summarize balance sheet impact including benefit obligations assets funded status associated significant pension postretirement benefit plans december 31 2005 2004 use december 31 measurement date majority pension postretirement benefit plans honeywell international inc notes financial statementscontinued dollars millions except per share amounts accumulated benefit obligation defined benefit pension plans 15420 12996 million december 31 2005 2004 respectively net periodic pension postretirement benefit costs significant plans include following components honeywell international inc notes financial statementscontinued dollars millions except per share amounts major actuarial assumptions used determining benefit obligations net periodic benefit cost us benefit plans presented following table nonus benefit plans one material assumptions reflect economic assumptions applicable country select discount rate retirement benefit plans use modeling process involves matching expected cash outflows benefit plans yield curve constructed portfolio double rated fixedincome debt instruments use average yield hypothetical portfolio discount rate benchmark discount rate used determine postretirement benefit obligation lower due shorter expected duration postretirement plan obligations compared pension plan obligations expected rate return plan assets 9 percent longterm rate based historic plan asset returns varying longterm periods combined current market conditions broad asset mix considerations expected rate return longterm assumption generally change annually us pension plans use marketrelated value plan assets reflecting changes fair value plan assets threeyear period us benefit plans unrecognized losses excess 10 percent greater marketrelated value plan assets plans projected benefit obligation recognized sixyear period mortality assumptions us benefit plans updated december 31 2005 using rp2000 mortality table participants pension benefits pension plans accumulated benefit obligations exceeding fair value plan assets follows statement financial accounting standards 87 “employers accounting pensions” sfas 87 requires recognition additional minimum pension liability fair value plan assets honeywell international inc notes financial statementscontinued dollars millions except per share amounts less accumulated benefit obligation end plan year 2005 recorded noncash adjustment equity accumulated nonowner changes 16 million 26 million pretax basis increased minimum pension liability 2004 recorded noncash adjustment equity accumulated nonowner changes 15 million 19 million pretax basis increased additional minimum pension liability 2003 recorded noncash adjustment equity accumulated nonowner changes 369 million 604 million pretax basis reduce additional minimum pension liability 304 million reinstate portion pension assets 300 million written prior years minimum pension liability adjustment 2003 adjustment resulted increase pension assets 2003 due improvement equity markets contribution 670 million us plans us pension plans assets 120 115 billion nonus pension plans assets 26 16 billion december 31 2005 2004 respectively asset allocation target allocation pension plans assets follows equity securities include honeywell common stock 2 214 million december 31 2005 2004 respectively independent fiduciary holds makes investment decisions respect honeywell common stock asset investment strategy focuses maintaining diversified portfolio using various asset classes order achieve longterm investment objectives risk adjusted basis actual invested positions various securities change time based short longerterm investment opportunities achieve objectives us investment policy requires us master retirement trust invested follows less 30 percent invested fixed income securities b 10 percent highyield securities c 10 percent private real estate investments 6 percent investment alternatives involving limited partnerships various types stated limit investments publicallyheld us international equity securities nonus investment policies different country longterm investment objectives remain general funding policy qualified pension plans contribute amounts least sufficient satisfy regulatory funding standards 2004 2003 made voluntary contributions 40 670 million respectively us defined benefit pension plans improve funded status plans assuming actual plan asset returns consistent expected rate 9 percent 2006 beyond interest rates remain constant would required make contributions us pension plans foreseeable future expect make voluntary contributions approximately 45 million cash 2006 certain us plans government contracting purposes also expect contribute approximately 150 million cash 2006 nonus defined benefit pension plans primarily related funding requirements recently acquired companies contributions reflect benefits paid directly company assets honeywell international inc notes financial statementscontinued dollars millions except per share amounts benefit payments including amounts paid company assets reflecting expected future service appropriate expected paid follows postretirement benefits effective december 31 2004 adopted fasb staff position 1062 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003” fsp 1062 fsp 1062 provides guidance accounting effects medicare prescription drug improvement modernization act 2003 act employers sponsor postretirement health care plans provide prescription drug coverage least actuarially equivalent offered medicare part enactment act material impact accumulated postretirement benefit obligation december 31 2004 impact act reduced postretirement benefits expense approximately 45 million 2005 decrease postretirement benefits expense resulted lower amortization actuarial losses approximately 33 million due effect actuarial gain experienced impact act lower interest cost approximately 12 million assumed health care cost trend rate significant effect amounts reported onepercentagepoint change assumed health care cost trend rate would following effects benefit payments reflecting expected future service appropriate expected paid follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts employee savings planswe sponsor employee savings plans match form common stock savings plan contributions certain eligible us employees shares issued stock match plans 41 43 65 million cost 153 151 173 million 2005 2004 2003 respectively note 23segment financial data globally manage business operations four reportable segments serving customers worldwide aerospace products services control sensing security technologies buildings homes industry automotive products chemicals segment information consistent management reviews businesses makes investing resource allocation decisions assesses operating performance four reportable segments follows • aerospace organized customer endmarket air transport regional business general aviation defense space provides products services include auxiliary power units propulsion engines environmental control systems engine controls repair overhaul services hardware logistics electric power systems flight safety communications navigation radar surveillance systems aircraft airport lighting management technical services advanced systems instruments aircraft wheels brakes • automation control solutions includes products controls heating cooling indoor air quality ventilation humidification home automation advanced software applications homebuilding control optimization sensors switches control systems instruments measuring pressure air flow temperature electrical current security fire gas detection access control video surveillance remote patient monitoring systems building solutions installs maintains upgrades systems keep buildings safe comfortable productive process solutions provides full range automation control solutions industrial plants offering advanced software automation systems integrate control monitor complex processes many types industrial settings • specialty materials includes fluorocarbons specialty films advanced fibers customized research chemicals intermediates electronic materials chemicals catalysts adsorbents • transportation systems includes honeywell turbo technologies turbochargers chargeair thermal systems consumer products group car care products including antifreeze filters spark plugs cleaners waxes additives brake hard parts friction materials accounting policies segments described note 1 honeywells senior management evaluates segment performance based segment profit segment profit business unit income loss taxes excluding general corporate unallocated expenses gains losses sales nonstrategic businesses equity income loss income expense interest financial charges pension postretirement benefits expense repositioning charges accounting changes 2003 honeywell changed definition segment profit exclude pension postretirement benefits expense pension postretirement benefits expense significantly impacted external factors investment returns interest rates actuarial assumptions honeywell consider indicative underlying business segment operating performance control business unit management intersegment sales approximate market significant reportable segment data follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts honeywell international inc notes financial statementscontinued dollars millions except per share amounts reconciliation segment profit consolidated income continuing operations taxes follows 1 amounts included cost products services sold selling general administrative expenses note 24geographic areasfinancial data note 25supplemental cash flow information honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 26unaudited quarterly financial information 1 includes 99 million provision environmental litigation net repositioning charges total aftertax charge 70 million 008 per share total pretax charge included gross profit 68 million 2 includes aftertax gain 5 million 001 per share postclosing adjustment related sale security monitoring business sold prior year 3 includes 123 million provision environmental litigation net repositioning charges total aftertax charge 96 million 011 per share total pretax charge included gross profit 117 million 4 includes aftertax gain 39 million 005 per share sale industrial wax business postclosing adjustment sale performance fibers business sold prior year also includes tax provision 155 million 018 per share repatriation foreign earnings 5 includes 110 million provision environmental litigation net repositioning charges total aftertax charge 76 million 009 per share total pretax charge included gross profit 24 million 6 includes aftertax gain 13 million 002 per share postclosing adjustments related businesses sold prior year footnotes continued next page honeywell international inc notes financial statementscontinued dollars millions except per share amounts footnotes continued previous page 7 includes 65 million provision environmental litigation net repositioning charges credits total aftertax charge 54 million 006 per share total pretax charge included gross profit 115 million 8 includes aftertax gain 3 million effect earnings per share related sale nylon carpet fiber business postclosing adjustments related businesses sold prior periods 9 includes 56 million provision environmental litigation net repositioning charges total aftertax charge 35 million 004 per share total pretax charge included gross profit 41 million 10 includes aftertax gain 14 million 002 per share sale vcsel optical products business 11 includes 242 million provision environmental litigation business impairment net repositioning charges total aftertax charge 158 million 018 per share total pretax charge included gross profit 183 million 12 includes aftertax gain 130 million 015 per share sale security monitoring business 13 includes 101 million provision environmental litigation net repositioning charges total aftertax charge 56 million 006 per share total pretax charge included gross profit 76 million 14 includes aftertax gain 3 million effect earnings per share postclosing adjustments related businesses sold prior periods 15 includes aftertax gain 17 million 002 per share related settlement patent infringement lawsuit 16 includes 376 million provision environmental litigation business impairment net repositioning charges total aftertax charge 227 million 026 per share total pretax charge included gross profit 321 million 17 includes aftertax loss 3 million effect earnings per share sale performance fibers business postclosing adjustments related businesses sold prior periods 18 composite tapestock primarily traded new york stock exchange report independent registered public accounting firm board directors shareowners honeywell international inc completed integrated audits honeywell international incs 2005 2004 consolidated financial statements internal control financial reporting december 31 2005 audit 2003 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements financial statement schedule opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position honeywell international inc subsidiaries december 31 2005 2004 results operations cash flows three years period ended december 31 2005 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 1 consolidated financial statements company adopted provisions financial accounting standards board interpretation 47 “accounting conditional asset retirement obligations interpretation fasb statement 143” year ended december 31 2005 fasb statement 143 “accounting asset retirement obligations” year ended december 31 2003 internal control financial reporting also opinion managements assessment included managements report internal control financial reporting appearing item 9a company maintained effective internal control financial reporting december 31 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting december 31 2005 based criteria established internal controlintegrated framework issued coso companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions managements assessment effectiveness companys internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating managements assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp florham park new jersey march 1 2006 item 9item 8 financial statements supplementary data honeywell international inc consolidated statement operations notes financial statements integral part statement honeywell international inc consolidated balance sheet notes financial statements integral part statement honeywell international inc consolidated statement cash flows notes financial statements integral part statement honeywell international inc consolidated statement shareowners equity notes financial statements integral part statement honeywell international inc notes financial statements dollars millions except per share amounts note 1summary significant accounting policies accounting principlesthe financial statements accompanying notes prepared accordance accounting principles generally accepted united states america following description significant accounting policies honeywell international inc principles consolidationthe consolidated financial statements include accounts honeywell international inc subsidiaries entities controlling interest maintained consolidation policy requires consolidation entities controlling financial interest obtained well consolidation variable interest entities bear majority risk entities potential losses stand gain majority entities expected returns intercompany transactions balances eliminated consolidation cash equivalentscash cash equivalents include cash hand deposit highly liquid temporary cash investments original maturity three months less inventoriesinventories valued lower cost market using firstin firstout average cost method lastin firstout lifo method certain qualifying domestic inventories investmentsinvestments affiliates significant influence controlling interest accounted using equity method accounting investments carried market value readily determinable cost equity investments periodically reviewed determine declines fair value cost basis otherthantemporary significant sustained decreases quoted market prices series historic projected operating losses investees strong indicators otherthantemporary declines decline fair value determined otherthantemporary impairment loss recorded investment written new carrying value property plant equipmentproperty plant equipment recorded cost less accumulated depreciation financial reporting straightline method depreciation used estimated useful lives 10 50 years buildings improvements 2 15 years machinery equipment statement financial accounting standards 143 “accounting asset retirement obligations” sfas 143 fasb interpretation 47 “fin 47” require recognition fair value obligations associated retirement tangible longlived assets legal obligation incur costs upon adoption fin 47 december 31 2005 recorded increase 14 million property plant equipment recognized asset retirement obligation liability 46 million resulted recognition noncash charge 32 million 21 million tax reported cumulative effect accounting change upon initial recognition liability cost capitalized part related longlived asset depreciated corresponding assets useful life see note 17 additional details goodwill indefinitelived intangible assetsgoodwill represents excess acquisition costs fair value tangible net assets identifiable intangible assets businesses acquired goodwill certain intangible assets deemed indefinite lives amortized intangible assets determined definite lives amortized useful lives goodwill indefinite lived intangible assets subject impairment testing annually march 31 whenever events changes circumstances indicate carrying amount may fully recoverable using guidance criteria described statement financial accounting standards 142 “goodwill intangible assets” testing compares carrying values fair values appropriate carrying value assets reduced fair value completed annual goodwill impairment test march 31 2006 determined impairment date see note 12 additional details goodwill balances intangible assets determinable livesother intangible assets determinable lives consist customer lists technology patents trademarks intangibles amortized estimated useful lives ranging 2 24 years honeywell international inc notes financial statementscontinued dollars millions except per share amounts longlived assetswe periodically evaluate recoverability carrying amount longlived assets including property plant equipment intangible assets determinable lives whenever events changes circumstances indicate carrying amount asset may fully recoverable evaluate events changes circumstances based number factors including operating results business plans forecasts general industry trends economic projections anticipated cash flows impairment assessed undiscounted expected future cash flows derived asset less carrying amount impairment losses measured amount carrying value asset exceeds fair value recognized earnings also continually evaluate estimated useful lives longlived assets periodically revise estimates based current events sales recognitionproduct service sales recognized persuasive evidence arrangement exists product delivery occurred services rendered pricing fixed determinable collection reasonably assured service sales principally representing repair maintenance engineering activities aerospace automation control solutions reportable segments recognized contractual period services rendered sales longterm contracts aerospace automation control solutions specialty materials reportable segments recorded percentageofcompletion method measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts provisions anticipated losses longterm contracts recorded full losses become evident revenues contracts multiple element arrangements recognized element earned based relative fair value element provided delivered elements value customers standalone basis amounts allocated element based objectively determined fair value sales price product service sold separately competitor prices similar products services environmental expendituresenvironmental expenditures relate current operations expensed capitalized appropriate expenditures relate existing condition caused past operations provide future benefits expensed incurred liabilities recorded environmental remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess accruals asbestos related contingencies insurance recoverieshoneywell defendant personal injury actions related asbestos containing products refractory products friction products recognize liability asbestos related contingency probable occurrence reasonably estimable regarding north american refractories company narco asbestos related claims accrue pending claims based terms conditions including evidentiary requirements definitive agreements principle current claimants also accrued probable value future narco asbestos related claims 2018 based disease criteria payment values contained narco trust described note 21 light inherent uncertainties making long term projections regarding claims filing rates disease manifestation believe reasonable basis estimating narco asbestos claims beyond 2018 statement financial accounting standards 5 “accounting contingencies” sfas 5 regarding bendix asbestos related claims accrue estimated value pending claims based expected claim resolution values dismissal rates fourth honeywell international inc notes financial statementscontinued dollars millions except per share amounts quarter 2006 company accrued liability estimated cost future anticipated claims related bendix 2011 based assessment additional claims may brought us anticipated resolution values tort system december 2006 also changed methodology valuing bendix pending future claims using average resolution values previous five years using average resolution values previous two years additional information see note 21 continually assess likelihood adverse judgments outcomes contingencies well potential ranges probable losses recognize liability contingencies based analysis individual issue assistance outside legal counsel applicable experts connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical experience insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs consideration impacts settlements insurers aerospace sales incentivesthe company provides sales incentives commercial aircraft manufacturers airlines connection selection aircraft wheel braking system hardware auxiliary power units installation commercial aircraft incentives principally consist free deeply discounted products also include credits future purchases product upfront cash payments costs expensed provided aircraft manufacturers incentives recorded products delivered airlines incentives recorded associated aircraft delivered aircraft manufacturer airline research developmentresearch development costs companysponsored research development projects expensed incurred costs principally included cost products sold 1411 1072 917 million 2006 2005 2004 respectively stockbased compensation planseffective january 1 2006 adopted sfas 123 revised 2004 “sharebased payment” sfas 123r requiring compensation cost relating sharebased payment awards made employees directors recognized financial statements principal awards issued stockbased compensation plans described note 20 “stockbased compensation plans” include nonqualified stock options restricted stock units rsus cost awards measured grant date based calculated fair value award value portion award ultimately expected vest recognized expense requisite service periods generally vesting period equity award consolidated statement operations prior january 1 2006 accounted sharebased compensation cost using intrinsic value method accordance accounting principles board 25 “accounting stock issued employees” apb 25 related interpretations also followed disclosure requirements sfas 123 “accounting stockbased compensation” amended sfas 148 “accounting stockbased compensationtransition disclosure” apb 25 compensation cost recognized consolidated statement operations stock option awards compensation cost rsus recognized consolidated statement operations included selling general administrative expenses affected adoption fas 123r adopted sfas 123r using modified prospective method accordingly consolidated statement operations prior years restated reflect fair value method recognizing compensation cost relating stock options sharebased compensation cost relating stock options recognized 2006 based value portion award ultimately expected vest sfas 123r requires forfeitures estimated time grant honeywell international inc notes financial statementscontinued dollars millions except per share amounts order estimate portion award ultimately vest estimate based historical rates forfeiture pro forma information required sfas 123 years prior 2006 accounted forfeitures occurred compensation cost related stock options recognized operating results included selling general administrative expenses sfas 123r 2006 77 million pretax basis associated future income tax benefit recognized 28 million compensation cost related stock options recognized consolidated statement operations 2006 includes 1 compensation cost stock option awards granted prior yet vested december 31 2005 based grantdate fair value estimated accordance pro forma provisions sfas 123 2 compensation cost stock option awards granted subsequent december 31 2005 based grantdate fair value estimated accordance provisions sfas 123r following table illustrates effect net income earnings per share applied fair value recognition provisions sfas 123 years prior adoption fas 123r following table sets forth fair value per share information including related assumptions used determine compensation cost consistent requirements sfas 123 1 estimated date grant using blackscholes optionpricing model foreign currency translationassets liabilities subsidiaries operating outside united states functional currency us dollars translated us dollars using yearend exchange rates sales costs expenses translated average exchange rates effect year foreign currency translation gains losses included component accumulated nonowner changes shareowners equity subsidiaries operating highly inflationary environments inventories property plant equipment including related expenses remeasured exchange rate effect date assets acquired monetary honeywell international inc notes financial statementscontinued dollars millions except per share amounts assets liabilities remeasured yearend exchange rates remeasurement adjustments subsidiaries included earnings derivative financial instrumentsas result global operating financing activities exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position minimize risks interest foreign currency exchange rate commodity price fluctuations normal operating financing activities deemed appropriate use derivative financial instruments derivative financial instruments used manage risk used trading speculative purposes use leveraged derivative financial instruments derivative financial instruments used hedging purposes must designated effective hedge identified risk exposure inception contract accordingly changes fair value derivative contract must highly correlated changes fair value underlying hedged item inception hedge life hedge contract derivatives recorded balance sheet assets liabilities measured fair value derivatives designated hedges fair value assets liabilities changes fair values derivatives hedged items recorded current earnings derivatives designated cash flow hedges effective portion changes fair value derivatives recorded accumulated comprehensive income loss subsequently recognized earnings hedged items impact earnings transfers financial instrumentssales transfers securitization financial instruments accounted statement financial accounting standards 140 “accounting transfers servicing financial assets extinguishments liabilities” sell interests designated pools trade accounts receivables third parties receivables removed consolidated balance sheet time sold value assigned subordinated interests undivided interests retained trade receivables sold based relative fair values interests retained sold carrying value retained interests approximates fair value due shortterm nature collection period receivables income taxesdeferred tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax assets realized determination amount valuation allowance provided recorded deferred tax assets involves estimates regarding 1 timing amount reversal taxable temporary differences 2 expected future taxable income 3 impact tax planning strategies assessing need valuation allowance consider available positive negative evidence including past operating results projections future taxable income feasibility ongoing tax planning strategies projections future taxable income include number estimates assumptions regarding volume pricing costs additionally valuation allowances related deferred tax assets impacted changes tax laws significant judgment required determining income tax provisions statement financial accounting standards 109 “accounting income taxes” sfas 109 evaluating tax positions establish additional provisions income taxes despite belief tax positions fully supportable remain certain positions likely challenged may sustained review tax authorities normal course business company subsidiaries examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes continually assess likelihood honeywell international inc notes financial statementscontinued dollars millions except per share amounts amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts give rise revision become known earnings per sharebasic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding dilutive potential common shares outstanding use estimatesthe preparation consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts financial statements related disclosures accompanying notes actual results could differ estimates assumptions periodically reviewed effects revisions reflected consolidated financial statements period determined necessary reclassificationscertain prior year amounts reclassified conform current year presentation recent accounting pronouncementsin june 2006 fasb issued fasb interpretation “fin” 48 “accounting uncertainty income taxesan interpretation fasb statement 109” fin 48 establishes single model address accounting uncertainty tax positions fin 48 clarifies accounting income taxes prescribing minimum recognition threshold tax position required meet recognized financial statements fin 48 also provides guidance derecognition measurement classification interest penalties accounting interim periods disclosure transition fin 48 effective fiscal years beginning december 15 2006 honeywell adopt fin 48 january 1 2007 required based current assessment subject changes may result additional technical guidance issued adoption fin 48 expected reduce existing reserves uncertain tax positions approximately 130 million recorded cumulative effect adjustment equity largely relating state income tax matters september 2006 fasb issued sfas 157 “fair value measurements” sfas 157 sfas 157 establishes common definition fair value applied us gaap requiring use fair value establishes framework measuring fair value expands disclosure fair value measurements sfas 157 effective fiscal years beginning november 15 2007 company currently assessing impact sfas 157 consolidated financial position results operations september 2006 fasb issued sfas 158 “employers accounting defined benefit pension postretirement plans” sfas 158 sfas 158 requires employers recognize prospective basis funded status defined benefit pension postretirement benefit plans consolidated balance sheet recognize component comprehensive income loss net tax gains losses prior service costs credits arise period recognized components net periodic benefit cost adopted sfas 158 december 31 2006 see note 22pensions postretirement benefits additional disclosures required sfas 158 effects adoption february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities sfas 159 sfas 159 permits entities choose measure many financial assets financial liabilities fair value unrealized gains losses items fair value option elected reported earnings sfas 159 effective fiscal years beginning november 15 2007 company currently assessing impact sfas 159 consolidated financial position results operations september 2006 fasb issued fasb staff position “fsp” aug air1 “accounting planned major maintenance activities” fsp aug air1 fsp aug air1 amends guidance honeywell international inc notes financial statementscontinued dollars millions except per share amounts accounting planned major maintenance activities specifically precludes use previously acceptable “accrue advance” method fsp aug air1 effective fiscal years beginning december 15 2006 implementation standard material impact consolidated financial position results operations september 2006 sec staff issued staff accounting bulletin “sab” 108 “considering effects prior year misstatements quantifying misstatements current year financial statements” sab 108 sab 108 requires public companies utilize “dualapproach” assessing quantitative effects financial misstatements dual approach includes income statement focused assessment balance sheet focused assessment guidance sab 108 must applied annual financial statements fiscal years ending november 15 2006 adoption sab 108 material effect consolidated financial position results operations note 2acquisitions divestitures acquired businesses aggregate cost 979 3500 396 million 2006 2005 2004 respectively acquisitions accounted purchase method accounting accordingly assets liabilities acquired businesses recorded estimated fair values dates acquisition significant acquisitions made years discussed may 2006 company purchased gardiner groupe privately held company purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values lives acquisition date company assigned 47 million identifiable intangible assets predominantly customer relationships trademarks intangible assets amortized estimated lives range 3 15 years using straightline accelerated amortization periods excess purchase price estimated fair values net assets acquired approximating 129 million recorded goodwill nondeductible tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2006 included automation control solutions segment material consolidated financial statements march 2006 company purchased first technology plc uk publicly listed company aggregate value purchase price 723 million including assumption approximately 217 million outstanding debt 23 million transaction costs purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 155 million identifiable intangible assets predominantly customer relationships existing technology trademarks intangible assets amortized estimated lives range 3 15 years using straightline accelerated amortization periods excess purchase price estimated fair values net assets acquired approximating 439 million recorded goodwill nondeductible tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2006 included automation control solutions segment material consolidated financial statements year company completed sales first technology safety analysis business 93 million first technology automotive 90 million accounted part purchase price allocation honeywell international inc notes financial statementscontinued dollars millions except per share amounts november 2005 company acquired remaining 50 percent uop llc giving honeywell full ownership entity aggregate value purchase price approximately 825 million including assumption approximately 115 million outstanding debt purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 339 million identifiable intangible assets predominantly existing technology amortized 15 years straightline basis trade names amortized excess purchase price estimated fair values net assets acquired approximating 336 million recorded goodwill nondeductible tax purposes following acquisition accounted purchase method results operations included specialty materials segment prior date uop results 50 percent share company owned included equity income affiliated companies march 31 2005 company purchased 100 issued ordinary preference share capital novar plc novar 17 billion net cash acquired represented 24 billion consideration outstanding shares outstanding options exercised net assumption debt 07 billion transaction costs related acquisition 49 million december 2005 completed sale security printing business mf worldwide corp 800 million cash february 2006 completed sale indalex affiliate private investment firm sun capital partners inc approximately 425 million cash indalex business classified held sale december 31 2005 consolidated balance sheet indalex security printing businesses presented discontinued operations statement operations periods presented goodwill approximately 13 billion recognized allocated 261 million intangible assets contractual customer relationships existing technology trademarks intangible assets amortized estimated useful lives range 5 15 years using straightline accelerated amortization methods addition accrued liabilities included 76 million restructuring costs related integration novar operations december 31 2006 purchase accounting first technology gardiner groupe still subject final adjustment primarily amounts related businesses sold preacquisition contingencies connection acquisitions 2006 2005 2004 except first technology novar acquisitions described amounts recorded transaction costs integrating acquired businesses honeywell material results operations acquired businesses included consolidated results honeywell respective acquisition dates pro forma results 2006 2005 2004 assuming acquisitions made beginning year would materially different consolidated reported results honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 3repositioning charges summary repositioning charges follows following table summarizes pretax distribution total net repositioning charges income statement classification following table summarizes pretax impact total net repositioning charges reportable segment 2006 recognized repositioning charges totaling 124 million primarily severance costs related workforce reductions 2253 manufacturing administrative positions across reportable segments also 22 million previously established accruals primarily severance aerospace transportation systems specialty materials reportable segments returned income 2006 due mainly changes scope previously announced severance programs due fewer employee separations originally planned associated prior aerospace severance programs 2005 recognized repositioning charges totaling 267 million primarily severance costs related workforce reductions 5269 manufacturing administrative positions across reportable segments including implementation new organizational structure aerospace reportable segment substantially implemented third quarter 2005 reorganized aerospace businesses better align customer segments also 25 million previously established accruals primarily severance corporate specialty materials automation control solutions reportable segments returned income 2005 reversal severance liabilities related changes scope previously announced severance programs excise taxes honeywell international inc notes financial statementscontinued dollars millions except per share amounts related executive severance amount previously paid determined longer payable severance amounts previously paid outside service provider part outsourcing arrangement refunded honeywell 2004 recognized repositioning charges totaling 116 million primarily severance costs related workforce reductions 2272 manufacturing administrative positions across reportable segments also 28 million previously established accruals primarily severance returned income 2004 due fewer employee separations originally planned associated certain prior repositioning actions resulting reduced severance liabilities principally automation control solutions reportable segment following table summarizes status total repositioning reserves 2006 recognized charge 210 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 126 million discussed note 21 recognized charges 51 million related corporate segment primarily settlement property damage claim litigation matter brunswick ga entrance plea agreement related environmental matter baton rouge la facility see note 21 discussion matters recognized impairment charges 12 million related writedown property plant equipment held sale specialty materials reportable segment also recognized credit 18 million connection arbitration award overcharges supplier phenol specialty materials business 2005 transactions 2005 recognized charge 186 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 10 million discussed note 21 recognized credit 67 million connection arbitration award overcharges supplier phenol specialty materials business june 2003 end 2004 recognized impairment charges 23 million related writedown property plant equipment held used specialty materials reportable segment also recognized charges 18 million principally related modification lease agreement corporate headquarters facility 10 million various legal settlements 7 million 2004 recognized charge 536 million probable reasonably estimable environmental liabilities primarily related estimated costs courtordered excavation transport offsite disposal approximately one million tons chromium residue present predecessor honeywell site located jersey city new jersey environmental conditions around onondaga lake syracuse new york environmental matters discussed honeywell international inc notes financial statementscontinued dollars millions except per share amounts detail note 21 recognized asbestos related litigation charges net insurance 76 million discussed note 21 recognized impairment charge 42 million second quarter 2004 related principally writedown property plant equipment performance fibers business specialty materials reportable segment business sold december 2004 also recognized charges 33 million consisting 29 million various legal settlements including property damage claims automation control solutions reportable segment 14 million writeoff receivables inventories assets net reversal reserve 10 million established prior year contract settlement note 4other incomeexpense note 5interest financial charges weighted average interest rate shortterm borrowings commercial paper outstanding december 31 2006 2005 567 percent 448 percent respectively note 6income taxes income continuing operations taxes honeywell international inc notes financial statementscontinued dollars millions except per share amounts tax expense 1 net changes valuation allowance honeywell international inc notes financial statementscontinued dollars millions except per share amounts deferred tax assets liabilities deferred income taxes represent future tax effects transactions reported different periods tax financial reporting purposes tax effects temporary differences tax carryforwards give rise future income tax benefits payables follows companys effective tax rate decreased 62 percentage points 2006 compared 2005 due principally absence 2005 onetime tax charge 155 million repatriation foreign earnings american jobs creation act 2004 “act” offset part 64 million tax benefits associated 2005 sale industrial wax business higher tax basis book basis addition 2006 benefits recognized favorable resolution certain tax audits offset tax charge upfront licensing certain inprocess research development amount us federal tax net operating losses available carryforward december 31 2006 35 million generated certain subsidiaries prior acquisition expiration dates 2024 use preacquisition operating losses subject limitations imposed internal revenue code anticipate limitations affect utilization carryforwards prior expiration various subsidiaries state tax net operating loss carryforwards 32 billion december 31 2006 varying expiration dates 2025 also foreign net operating capital losses 24 billion available reduce future income tax payments several countries subject varying expiration rules included losses 32 million loss carryforwards related businesses purchased honeywell 2006 us tax credit carryforwards 94 million december 31 2006 including carryforwards 41 million various expiration dates 2026 tax credits 53 million subject expiration addition 221 million foreign tax credits available carryback carryforward us federal tax return december 31 2006 varying expiration dates 2015 valuation allowance deferred tax assets increased 39 139 39 million 2006 2005 2004 respectively 2006 increase valuation allowance primarily due increase foreign net operating losses attributable acquired businesses expected realized partial valuation allowance deferred tax asset established connection adoption sfas 158 partially offset decrease state tax net operating loss carryforwards net federal impact 2005 increase valuation allowance primarily due increase foreign net operating capital losses net deferred tax assets attributable honeywell international inc notes financial statementscontinued dollars millions except per share amounts acquired businesses expected realized partially offset decrease state tax net operating loss carryforwards net federal impact disallowance foreign net operating losses valuation allowance previously provided 2004 increase valuation allowance primarily due increase state tax net operating loss carryforwards net federal impact foreign net operating capital losses expected realized partially offset decrease foreign tax credits believe utilized due extension foreign tax credit carryforward period five 10 years act federal income taxes provided undistributed earnings majority international subsidiaries intention reinvest earnings respective businesses december 31 2006 honeywell provided us federal income foreign withholding taxes approximately 29 billion earnings nonus operations practicable estimate amount tax might payable earnings remitted foreign tax credits would available reduce eliminate resulting us income tax liability 2005 company effected actions taken relating certain provisions act signed law october 2004 provides variety changes tax law including incentives repatriate undistributed earnings foreign subsidiaries phased elimination extraterritorial income exclusion domestic manufacturing benefit specifically act created temporary incentive us corporations repatriate accumulated income earned outside us providing 85 percent dividends received deduction certain dividends controlled foreign corporations 2005 repatriated approximately 27 billion foreign earnings 22 billion received benefit act income tax provision 155 million additional amounts repatriated act 2006 note 7earnings loss per share following table sets forth computations basic diluted earnings loss per share honeywell international inc notes financial statementscontinued dollars millions except per share amounts 2006 2005 2004 diluted earnings per share calculation excludes effect stock options exercise prices exceed average market price common shares period 2006 2005 2004 number stock options included computation 22749056 17793385 41656606 respectively stock options outstanding end respective years note 8accounts notes receivables trade accounts receivable includes 808 565 million unbilled balances longterm contracts december 31 2006 2005 respectively amounts billed accordance terms customer contracts relate sell interests designated pools trade accounts receivables third parties sold receivables overcollateralized 171 million december 31 2006 retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools new receivables sold agreement previously sold receivables collected losses recognized interest receivables sold retained interests receivables shown amounts expected collected us carrying value approximates fair value retained interests compensated services collection administration receivables losses sales receivables 27 18 9 million 2006 2005 2004 respectively credit losses incurred years note 9inventories honeywell international inc notes financial statementscontinued dollars millions except per share amounts inventories valued lifo amounted 205 258 million december 31 2006 2005 respectively lifo inventories valued current costs carrying values would approximately 170 145 million higher december 31 2006 2005 respectively note 10investments longterm receivables longterm trade receivables includes 68 137 million unbilled balances longterm contracts december 31 2006 2005 respectively amounts billed accordance terms customer contracts relate note 11property plant equipment depreciation expense 650 578 572 million 2006 2005 2004 respectively note 12goodwill intangiblesnet change carrying amount goodwill years ended december 31 2006 2005 reportable segment follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts intangible assets comprised intangible assets amortization expense 144 75 42 million 2006 2005 2004 respectively estimated intangible assets amortization expense next five years approximates 150 million 2007 140 million 2008 140 million 2009 130 million 2010 120 million 2011 note 13accrued liabilities honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 14longterm debt credit agreements schedule principal payments longterm debt follows maintain 23 billion five year revolving credit facility group banks arranged citigroup global markets inc jpmorgan securities inc credit facility contains 500 million sublimit issuance letters credit 23 billion credit facility maintained general corporate purposes including support issuance commercial paper borrowings outstanding credit facility december 31 2006 issued 145 million letters credit facility december 31 2006 credit agreement restrict ability pay dividends contains financial covenants failure comply customary conditions occurrence customary events default contained credit agreement would prevent borrowings would generally honeywell international inc notes financial statementscontinued dollars millions except per share amounts require repayment outstanding borrowings credit agreement events default include nonpayment credit agreement debt interest fees b noncompliance terms credit agreement covenants c crossdefault debt certain circumstances bankruptcy e defaults upon obligations employee retirement income security act additionally banks right terminate commitment lend additional funds issue letters credit agreement person group acquires beneficial ownership 30 percent voting stock 12month period individuals directors honeywell beginning period cease constitute majority board directors board loans 23 billion credit facility required repaid later april 27 2011 agreed pay facility fee 006 percent per annum aggregate commitment interest borrowings 23 billion credit facility would determined honeywells option auction bidding procedure b highest floating base rate publicly announced citibank na 05 percent average cd rate 05 percent federal funds rate c eurocurrency rate plus 014 percent applicable margin facility fee applicable margin eurocurrency rate letter credit issuance fee subject change based upon grid determined long term debt ratings credit agreement subject termination based upon decrease debt ratings material adverse change 364day canadian dollar credit facility arranged citibank na canadian branch renewed september 8 2006 220 million canadian dollars facility established general corporate purposes including support issuance commercial paper canada borrowings outstanding credit facility december 31 2006 agreed pay facility fee 006 percent per annum commitment amount interest borrowings facility would determined honeywells option highest floating base rate publicly announced citibank na 05 percent average cd rate 05 percent federal funds rate b highest canadian dollar prime rate publicly announced citibank na 05 percent canadian dollar bankers acceptance c eurocurrency rate bankers acceptance plus 024 percent applicable margin march 2006 company issued 300 million floating rate libor 6 bps senior notes due 2009 400 million 540 senior notes due 2016 550 million 570 senior notes due 2036 collectively “notes” notes senior unsecured unsubordinated obligations honeywell rank equally honeywells existing future senior unsecured debt senior honeywells subordinated debt offering resulted gross proceeds 1250 million offset 11 million discount closing costs relating offering first quarter 2006 company made cash tender offer repurchased 225 million 500 million 5125 notes due november 2006 costs relating early redemption notes immaterial honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 15lease commitments future minimum lease payments operating leases initial remaining noncancellable lease terms excess one year follows entered agreements lease land equipment buildings principally operating leases initial terms 25 years contain renewal options subject customary conditions time terms leases may option purchase leased assets amounts approximate fair value expect commitments lease agreements material adverse effect consolidated results operations financial position liquidity rent expense 341 326 321 million 2006 2005 2004 respectively note 16financial instruments credit market riskfinancial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties derivative transactions substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value cash flows derivative financial instruments considering reasonably possible changes interest currency exchange rates restrict use derivative financial instruments hedging activities continually monitor creditworthiness customers grant credit terms normal course business concentrations credit risk associated trade accounts notes receivable considered minimal due diverse customer base significant portion customers commercial air transport industry aircraft manufacturers airlines accounting approximately 21 percent consolidated sales 2006 terms conditions credit sales designed mitigate eliminate concentrations credit risk single customer sales materially dependent single customer small group customers foreign currency risk managementwe conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities anticipated transactions arising international trade objective preserve economic value nonfunctional currency denominated cash flows attempt transaction exposures hedged natural offsets fullest extent possible opportunities exhausted foreign currency forward option agreements third parties principal currency exposures relate us dollar euro honeywell international inc notes financial statementscontinued dollars millions except per share amounts british pound canadian dollar hong kong dollar chinese renminbi singapore dollar hedge monetary assets liabilities denominated nonfunctional currencies prior conversion us dollars assets liabilities remeasured spot exchange rates effect balance sheet date effects changes spot rates recognized earnings included otherincome expense hedge exposure changes foreign exchange rates principally forward contracts forward contracts markedtomarket resulting gains losses similarly recognized earnings offsetting gains losses nonfunctional currency denominated monetary assets liabilities hedged partially hedge forecasted 2007 sales purchases denominated nonfunctional currencies currency forward contracts functional currency strengthens nonfunctional currencies decline value forecasted nonfunctional currency cash inflows sales outflows purchases partially offset recognition gains sales losses purchases respectively value forward contracts designated hedges conversely functional currency weakens nonfunctional currencies increase value forecasted nonfunctional currency cash inflows sales outflows purchases partially offset recognition losses sales gains purchases respectively value forward contracts designated hedges market value gains losses contracts recognized earnings hedged transaction recognized open forward contracts mature december 31 2007 december 31 2006 2005 contracts notional amounts 2572 1998 million respectively exchange foreign currencies principally euro countries great britain commodity price risk managementour exposure market risk commodity prices result changes cost production primarily mitigate exposure commodity price risk use longterm fixedprice contracts suppliers formula price agreements suppliers customers also enter forward commodity purchase agreements third parties designated hedges anticipated purchases several commodities forward commodity purchase agreements markedtomarket resulting gains losses recognized earnings hedged transaction recognized interest rate risk managementwe use combination financial instruments including longterm mediumterm shortterm financing variablerate commercial paper interest rate swaps manage interest rate mix total debt portfolio related overall cost borrowing december 31 2006 2005 interest rate swap agreements designated fair value hedges effectively changed 700 681 million respectively fixed rate debt average rate 638 615 percent respectively libor based floating rate debt interest rate swaps mature 2028 fair value financial instrumentsthe carrying value cash equivalents trade accounts notes receivables payables commercial paper shortterm borrowings contained consolidated balance sheet approximates fair value summarized carrying values fair values financial instruments december 31 2006 2005 fair values based quoted market prices issues traded current rates offered us debt remaining maturity characteristics valuation techniques appropriate honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 17other liabilities consist following 1 asset retirement obligations primarily relate costs associated future retirement nuclear fuel conversion facilities specialty materials reportable segment future retirement facilities automation control solutions reportable segment reconciliation liability asset retirement obligations year ended december 31 2006 follows note 18capital stock authorized issue 2000000000 shares common stock par value one dollar common shareowners entitled receive dividends may declared board entitled one vote per share entitled event liquidation share ratably assets honeywell available distribution common shareowners common shareowners preemptive conversion rights shares common stock issued outstanding held treasury liable calls assessments restrictions us relative dividends repurchase redemption common stock honeywell international inc notes financial statementscontinued dollars millions except per share amounts november 2005 honeywells board authorized company repurchase 3 billion common stock december 31 2006 709 million additional shares may yet purchased program amount timing repurchases may vary depending market conditions level investing activities authorized issue 40000000 shares preferred stock without par value determine number shares series rights preferences limitations series december 31 2006 preferred stock outstanding note 19accumulated comprehensive income loss total accumulated comprehensive income loss included consolidated statement shareowners equity changes accumulated comprehensive income loss follows components accumulated comprehensive income loss follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 20stockbased compensation plans stockbased compensation plans available grant nonqualified stock options incentive stock options stock appreciation rights restricted units restricted stock key employees 2006 stock incentive plan honeywell international inc affiliates plan approved shareowners annual meeting shareowners became effective april 24 2006 maximum 43 million shares common stock may awarded expect common stock awarded annual basis 10 15 percent total common stock outstanding following approval plan april 24 2006 grant new awards previously existing stockbased compensation plans additionally 2006 stock plan nonemployee directors honeywell international inc directors plan approved shareowners annual meeting shareowners became effective april 24 2006 500000 shares honeywell common stock may awarded directors plan replaces 1994 stock plan nonemployee directors honeywell international inc stock optionsthe exercise price term conditions applicable option granted stock plans generally determined management development compensation committee board exercise price stock options set grant date may less fair market value per share stock date fair value recognized expense employees requisite service period generally vesting period award options generally vested threeyear period expire ten years starting 2007 option grants vesting period extended four years fair value option award estimated date grant using blackscholes optionpricing model expected volatility based implied volatilities traded options honeywell stock used monte carlo simulation model derive expected term model uses historical data estimate option exercise activity postvest termination behavior expected term represents estimate time options expected remain outstanding riskfree rate periods within contractual life option based us treasury yield curve effect time grant fair value stock option grant made 2006 estimated grantdate using blackscholes model using following weightedaverage assumptions consistent requirements sfas 123r honeywell international inc notes financial statementscontinued dollars millions except per share amounts following table summarizes information stock option activity three years ended december 31 2006 1 expected vest options result applying prevesting forfeiture rate assumption total outstanding options following table summarizes information stock options outstanding exercisable december 31 2006 1 average remaining contractual life years 42416585 43343099 options exercisable weighted average exercise prices 4001 4036 december 31 2005 2004 respectively 43341460 shares available future grants terms stock option plans december 31 2006 weighted average fair value options granted 2006 944 total intrinsic value options amount stock price exceeded exercise price options date exercise exercised 2006 92 million 2006 amount cash received exercise stock options 385 million associated tax benefit realized 34 million consistent requirements sfas 123r classified 31 million benefit financing cash inflow consolidated statement cash flows balance classified cash operations december 31 2006 90 million total unrecognized compensation cost related nonvested stock option awards expected recognized weightedaverage period 159 years total fair value options vested 2006 70 million honeywell international inc notes financial statementscontinued dollars millions except per share amounts restricted stock unitsrestricted stock unit rsu awards entitle holder receive one share common stock unit units vest rsus issued certain key employees fair market value date grant compensation rsus typically become fully vested periods ranging three seven years payable honeywell common stock upon vesting following table summarizes information rsu activity three years ended december 31 2006 december 31 2006 approximately 113 million total unrecognized compensation cost related nonvested rsus granted stock plans expected recognized weightedaverage period 236 years compensation expense related rsus 29 24 million 2006 2005 2004 respectively december 31 2006 company reclassified 112 million obligations equity restricted deferred stock awards settled equity nonemployee directors planunder directors plan new director receives onetime grant 3000 shares common stock subject specific restrictions directors plan also provides annual grant director options purchase 5000 shares common stock fair market value date grant options generally become exercisable threeyear period expire ten years starting 2007 option grants vesting period extended four years note 21commitments contingencies environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous toxic substances accordance environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination honeywell international inc notes financial statementscontinued dollars millions except per share amounts party lawsuits claims associated environmental safety matters including past production products containing toxic substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually jointly potentially responsible parties determine feasibility various remedial techniques address environmental matters policy record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess accruals expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing remedial investigations feasibility studies timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects remedial techniques utilized agreements parties following table summarizes information concerning recorded liabilities environmental costs 1 2005 45 million principally relates reclassification carrying value land property plant equipment corresponding increase environmental liabilities environmental liabilities included following balance sheet accounts although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position honeywell international inc notes financial statementscontinued dollars millions except per share amounts new jersey chrome sitesprovisions made financial statements estimated costs courtordered excavation transport offsite disposal approximately one million tons chromium residue present predecessor honeywell site located jersey city new jersey expected incurred evenly fiveyear period started april 2006 expect implementation remedy material adverse effect future consolidated results operations operating cash flows financial position provision also made financial statements estimated costs implementing groundwater sediment remedial plans proposed site presently review court litigation concerning site pending ultimate cost remediating river sediments may reduced numerous third parties could responsible yet undetermined portion costs abovereferenced site significant twentyone sites located hudson county new jersey subject administrative consent order aco entered new jersey department environmental protection njdep 1993 remedial investigations activities consistent aco conducted underway sites “honeywell aco sites” recorded reserves honeywell aco sites appropriate accounting policy described may 3 2005 njdep filed lawsuit new jersey superior court honeywell two companies seeking declaratory injunctive relief unspecified damages reimbursement unspecified total costs relating sites new jersey allegedly contaminated chrome ore processing residue claims honeywell relate activities predecessor company ceased new jersey manufacturing operations mid1950s complaint entirely clear appears approximately 100 sites issue including 17 honeywell aco sites two companies agreed remediate separate administrative consent orders well approximately 53 sites identified complaint “publicly funded sites” none three companies signed administrative consent order addition claims specific company njdep claims three companies collectively liable chrome sites based “market share” theory addition njdep seeking treble damages costs incurred incur publicly funded sites honeywell believes connection sites covered companies administrative consent orders therefore responsibility sites honeywell aco sites conducting remedial investigations activities consistent aco thus believe lawsuit significantly change obligations respect honeywell aco sites lawsuits also filed honeywell district court resource conservation recovery act rcra two new jersey municipal utilities seeking cleanup chromium residue two honeywell aco sites citizens group honeywell thirteen defendants respect contamination dozen honeywell aco sites discovery underway cases reasons stated believe lawsuits significantly change obligations respect honeywell aco sites although possible time predict outcome litigation administrative proceedings discussed believe allegations without merit intend vigorously defend lawsuits expect matters material adverse effect consolidated financial position expect prevail adverse litigation outcome could material adverse impact consolidated results operations operating cash flows periods recognized paid onondaga lake syracuse nya predecessor company honeywell operated chemical plant alleged contributed mercury contaminants lake july 2005 new york state department environmental conservation dec issued record honeywell international inc notes financial statementscontinued dollars millions except per share amounts decision respect remediation industrial contamination lake october 2006 honeywell entered consent decree state new york implement remedy set forth record decision january 2007 consent decree approved united states district court northern district new york record decision calls combined dredgingcapping remedy generally line approach recommended feasibility study submitted honeywell may 2004 based currently available information analysis performed engineering consultants accrued estimated cost implementing remedy set forth record decision estimating process considered range possible outcomes amounts recorded reflect best estimate time given scope complexity project possible actual costs could exceed estimated costs amount could material adverse impact consolidated results operations operating cash flows periods recognized paid time however cannot identify legal regulatory technical reason conclude specific alternative outcome probable outcome made provisions financial statements decs aggregate cost estimate higher amount reserved based high end range potential costs major elements record decision includes contingency actual cost record decision depend upon among things resolution certain technical issues design phase remediation believe matter material adverse impact consolidated financial position december 2006 united states fish wildlife service published notice intent pursue natural resource damages related site possible predict outcome timing assessments typically lengthy processes lasting several years amounts responsibility damages dundalk marine terminal baltimorechrome residue legacy chrome plant operations baltimore deposited fill dundalk marine terminal “dmt” owned operated maryland port administration “mpa” honeywell mpa sharing costs investigate mitigate related environmental issues entered cost sharing agreement honeywell bear 77 percent share costs developing implementing permanent remedies dmt facility investigative phase began april 2006 expected take approximately 18 36 months appropriate remedies identified chosen negotiated consent decree mpa maryland department environment “mde” respect investigation remediation dmt facility consent decree filed maryland state court baltimore county maryland build baltimore community group together local church two individuals intervened challenging consent decree believe matter material adverse impact consolidated financial position operating cash flows given scope complexity project possible cost remediation determinable could material adverse impact results operations periods recognized asbestos matters like many industrial companies honeywell defendant personal injury actions related asbestos mine produce asbestos make sell insulation products construction materials identified primary cause asbestos related disease vast majority claimants products containing asbestos previously manufactured honeywell previously owned subsidiaries primarily fall two general categories refractory products friction products refractory productshoneywell owned north american refractories company narco 1979 1986 narco produced refractory products high temperature bricks cement honeywell international inc notes financial statementscontinued dollars millions except per share amounts sold largely steel industry east midwest less 2 percent narcos products contained asbestos sold narco business 1986 agreed indemnify narco respect personal injury claims products discontinued prior sale defined sale agreement narco retained liability claims january 4 2002 narco filed reorganization chapter 11 us bankruptcy code result narco bankruptcy filing claims pending narco automatically stayed pending reorganization narco addition bankruptcy court enjoined filing prosecution narcorelated asbestos claims honeywell although stay remained effect continuously since january 4 2002 assurance stay remain effect connection narcos bankruptcy filing paid narcos parent company 40 million agreed provide narco 20 million financing also agreed pay 20 million narcos parent company upon filing plan reorganization narco acceptable honeywell amount paid december 2005 following filing narcos third amended plan reorganization pay narcos parent company 40 million forgive outstanding narco indebtedness honeywell upon effective date plan reorganization believe part narco plan reorganization trust established benefit asbestos claimants current future pursuant trust distribution procedures negotiated narco asbestos claimants committee courtappointed legal representative future asbestos claimants trust put place approved court fair equitable honeywell well narco entitled permanent channeling injunction barring present future individual actions state federal courts requiring asbestos related claims based exposure narco products made federallysupervised trust honeywell reached agreement representative future narco claimants asbestos claimants committee cap annual contributions trust respect future claims level would material impact honeywells operating cash flows vast majority asbestos claimants voted favor narcos third amended plan reorganization narco plan court conducted evidentiary hearing confirmation issues june 5 6 2006 objections narco plan either resolved dismissed bankruptcy court courts confirmation order narco plan may delayed however due additional evidentiary requirements relating confirmation plan reorganization one narcos affiliates although expect narco plan narco trust ultimately approved court assurances given courts ruling time frame resolving appeals ruling consolidated financial statements reflect estimated liability settlement pending future narcorelated asbestos claims december 31 2006 2005 13 18 billion respectively estimated liability pending claims based terms conditions including evidentiary requirements definitive agreements approximately 260000 current claimants estimate unsettled claims pending time narco filed bankruptcy protection substantially settlement payments respect current claims expected completed end 2007 approximately 90 million payments due pursuant settlements due upon establishment narco trust estimated liability future claims represents estimated value future asbestos related bodily injury claims expected asserted narco 2018 aforementioned obligations narcos parent light uncertainties inherent making longterm projections believe reasonable basis estimating asbestos claims beyond 2018 honeywell international inc notes financial statementscontinued dollars millions except per share amounts sfas 5 “accounting contingencies” estimate based upon disease criteria payment values contained narco trust distribution procedures negotiated narco asbestos claimants committee narco future claimants representative honeywell projected probable number value including trust claim handling costs asbestos related future liabilities based upon historical experience similar trusts methodology used estimate liability future claims commonly accepted numerous courts methodology utilized expert routinely retained asbestos claimants committee asbestos related bankruptcies valuation methodology includes analysis population likely exposed asbestos containing products epidemiological studies estimate number people likely develop asbestos related diseases narco claims filing history pending inventory narco asbestos related claims payment rates expected established narco trust december 2006 result significantly varying experiences asbestos claims filing rates tort system certain operating asbestos trusts changing claims experience forums result clearly defined proof requirements possible enactment state medical criteria bills updated range estimated liability future narcorelated claims update resulted range estimated liability future claims 743 961 million believe amount within range better estimate amount accordingly recorded minimum amount range resulted reduction 207 million estimated liability future narcorelated asbestos claims december 31 2006 2005 consolidated financial statements reflect insurance receivable corresponding liability settlement pending future narcorelated asbestos claims 955 million 11 billion respectively coverage reimburses honeywell portions costs incurred settle narco related claims court judgments well defense costs provided large number insurance policies written dozens insurance companies domestic insurance market london excess market december 31 2006 significant portion coverage insurance companies agreements pay full policy limits based corresponding honeywell claims costs conduct analyses determine amount insurance estimate probable recovery relation payment current estimated future claims substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries made judgments concerning insurance coverage believe reasonable consistent historical dealings insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs second quarter 2006 travelers casualty insurance company “travelers” filed lawsuit honeywell insurance carriers supreme court new york county new york disputing obligations narcorelated asbestos claims high excess insurance coverage issued travelers insurance carriers approximately 370 million coverage policies included narcorelated insurance receivable december 31 2006 honeywell believes entitled coverage issue filed counterclaims superior court new jersey seeking among things declaratory relief respect coverage although honeywell expects prevail matter adverse outcome could material impact results operations period recognized would material consolidated financial position operating cash flows projecting future events subject many uncertainties could cause narco related asbestos liabilities assets higher lower projected recorded assurance plan reorganization confirmed insurance recoveries timely whether narco related asbestos claims beyond 2018 given inherent uncertainty predicting future events review estimates periodically update based honeywell international inc notes financial statementscontinued dollars millions except per share amounts experience relevant factors similarly reevaluate projections concerning probable insurance recoveries light changes projected liability developments may impact insurance recoveries friction productshoneywells bendix friction materials bendix business manufactured automotive brake pads contained chrysotile asbestos encapsulated form group existing potential claimants consisting largely individuals allegedly performed brake replacements 1981 december 31 2006 resolved approximately 105000 bendix related asbestos claims including trials covering 124 plaintiffs resulted 116 favorable verdicts trials covering eight individuals resulted adverse verdicts however two verdicts reversed appeal three shortly appeal remaining three claims settled following tables present information regarding bendix related asbestos claims activity approximately 45 percent approximately 57000 pending claims december 31 2006 inactive deferred similar dockets established jurisdictions claimants allege minimal impairment approximately 57000 pending claims also include claims filed jurisdictions texas virginia mississippi historically allowed consolidated filings jurisdictions plaintiffs permitted file complaints predetermined master list defendants regardless whether claims individual defendant many plaintiffs may actually claims honeywell based state rules prior experience jurisdictions anticipate many claims ultimately dismissed 2006 approximately 16000 cases dismissed 85 percent dismissals occurred mississippi result judicial rulings relating nonresident filings venue anticipate additional dismissals jurisdiction honeywell experienced average resolution values per claim excluding legal costs follows possible predict whether resolution values bendix related asbestos claims increase decrease stabilize future honeywell international inc notes financial statementscontinued dollars millions except per share amounts consolidated financial statements reflect estimated liability resolution pending future bendix related abestos claims december 31 2006 528 million prior december 2006 accrued estimated cost pending bendix related abestos claims could reasonably estimate losses could arise future bendix related abestos claims due steady threeyear decline rate bendix related asbestos claims filed reduced volatility rates believe possible determine reasonable estimate costs incurred claims filed next five years accordingly fourth quarter 2006 recorded reserve 335 million estimated cost future bendix related asbestos claims based number pending claims december 31 2006 disease classifications expected resolution values historic dismissal rates prior december 2006 historically valued bendix claims average resolution value previous five years december 2006 based bendix related experience last five years believe average prior two years accurate indicator future resolution values accordingly applied twoyear resolution value calculating reserves pending future bendix related asbestos claims change resulted reduction 118 million reserve pending bendix claims fourth quarter 2006 update expected resolution values used estimate cost pending future bendix claims fourth quarter year estimated liability future claims represents estimated value future asbestos related bodily injury claims expected asserted bendix 2011 light uncertainties inherent making longterm projections well certain factors unique friction product asbestos claims believe reasonable basis estimating asbestos claims beyond 2011 sfas 5 “accounting contingencies” estimate based upon bendix historical experience tort system two years ended december 31 2006 respect claims filing resolution methodology used estimate liability future claims commonly accepted numerous courts substantially similar used estimate future narco related asbestos claims liability exception valuation methodology bendix includes payment rates based bendix resolution history rather expected trust payment rates honeywell currently approximately 19 billion insurance coverage remaining respect pending potential future bendix related asbestos claims 302 377 million reflected receivables consolidated balance sheet december 31 2006 2005 respectively coverage provided large number insurance policies written dozens insurance companies domestic insurance market london excess market insurance receivables recorded financial statements simultaneous recording liability estimated value underlying asbestos claims amount insurance receivable recorded based ongoing analysis insurance estimate probable recovery determination based analysis underlying insurance policies historical experience insurers ongoing review solvency insurers interpretation judicial determinations relevant insurance programs consideration impacts settlements reached issuers insurance receivables also recorded structured insurance settlements provide future fixed payment streams contingent upon future claims events amounts recorded net present value fixed payment stream cumulative historical basis honeywell recorded insurance receivables equal approximately 50 percent value underlying asbestos claims recorded however gaps coverage due insurance company insolvencies certain uninsured periods insurance settlements rate expected decline future bendix related asbestos liabilities may recorded future recoverability rates may also impacted numerous factors future insurance settlements insolvencies judicial determinations relevant coverage program difficult predict assuming continued defense indemnity spending current honeywell international inc notes financial statementscontinued dollars millions except per share amounts levels estimate cumulative recoverability rate could decline next five years approximately 40 percent honeywell believes sufficient insurance coverage reserves cover pending bendix related asbestos claims bendix related asbestos claims estimated filed within next five years although impossible predict outcome either pending future bendix related asbestos claims believe claims would material adverse effect consolidated financial position light insurance coverage prior experience resolving claims rate types claims filed average resolution value claims period time claim settlements paid collectively “variable claims factors” substantially change honeywell would expect future bendix related asbestos claims material adverse effect results operations operating cash flows fiscal year assurances given however variable claims factors change refractory friction productsthe following tables summarize information concerning narco bendix asbestos related balances asbestos related liabilities honeywell international inc notes financial statementscontinued dollars millions except per share amounts insurance recoveries asbestos related liabilities 1 2006 34 million reflects gains settlements two bendix insurance carriers 41 million represents writedown narco insurance receivable reflect reduction estimated cost future claims 2005 consists gains insurance settlements 172 million principally related structured insurance settlement carrier converted policy future fixed noncontingent payment stream charges 131 million writeoffs certain amounts due insurance carriers 2 2004 47 million related additional probable insurance recoveries identified second quarter 2004 based ongoing evaluation enforceability rights various insurance policies narco bendix asbestos related balances included following balance sheet accounts matters baton rouge laas previously reported three incidents occurred 2003 honeywells baton rouge louisiana chemical plant including release chlorine release antimony pentachloride resulted employee fatality employee exposure hydrofluoric acid united states environmental protection agency united states department justice conducted investigations incidents including federal grand jury convened investigate employee fatality result investigation signed plea agreement us attorney honeywell plead guilty misdemeanor charge pay 12 million combined restitution fines plea agreement filed plea sentence still subject court acceptance expect receive honeywell served several civil lawsuits regarding incidents believe adequate insurance coverage extent liability also engaged discussions louisiana department honeywell international inc notes financial statementscontinued dollars millions except per share amounts environmental quality ladeq resolve alleged civil environmental violations baton rouge geismar louisiana facilities part overlap subject federal investigation brunswick gahoneywell reached settlements glynn county georgia group private individuals owned properties near allied chemical predecessor company chloralkali plant brunswick georgia various related cases plaintiffs alleged mercury pcb discharges plant devalued property caused loss use enjoyment property seeking compensatory injunctive punitive damages settlement glynn county 25 million amount paid settlement private property owners also 25 million money placed plaintiffs attorney trust account pending confirmation none private landowners opted settlement allocation proceeds among parties special master appointed court honeywell private landowners ask court confirm settlement final hearing set april 6 2007 allen et al v honeywell retirement earnings planthis represents class action lawsuit plaintiffs seek unspecified damages relating allegations among things honeywell impermissibly reduced pension benefits employees garrett corporation predecessor entity plan amended 1983 failed calculate certain benefits accordance terms plan third quarter 2005 us district court district arizona ruled favor plaintiffs claims favor honeywell virtually claims strongly disagree intend appeal courts adverse ruling class certified court september 2006 light merits arguments appeal substantial affirmative defenses yet considered court continue expect prevail matter accordingly believe liability probable occurrence reasonably estimable recorded provision matter financial statements given uncertainty inherent litigation wide range potential remedies possible estimate range possible loss might result adverse resolution matter although expect prevail matter adverse outcome could material adverse effect results operations operating cash flows periods recognized paid believe adverse outcome matter would material adverse effect consolidated financial position subject number lawsuits investigations disputes involve substantial amounts claimed arising conduct business including matters relating commercial transactions government contracts product liability prior acquisitions divestitures employee benefit plans health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes matters well potential ranges probable losses taking consideration insurance recoveries based careful analysis matter assistance outside legal counsel applicable experts given uncertainty inherent litigation believe possible develop estimates range reasonably possible loss excess current accruals matters considering past experience existing accruals expect outcome matters either individually aggregate material adverse effect consolidated financial position contingencies resolved long periods time potential liabilities subject change due new developments changes settlement strategy impact evidentiary requirements could cause us pay damage awards settlements become subject equitable remedies could material adverse effect results operations operating cash flows periods recognized paid honeywell international inc notes financial statementscontinued dollars millions except per share amounts warranties guaranteeswe issued party following direct indirect guarantees december 31 2006 expect guarantees material adverse effect consolidated results operations financial position liquidity connection disposition certain businesses facilities indemnified purchasers expected cost remediation environmental contamination existing date disposition expected costs accrued environmental assessments made remedial efforts probable costs reasonably estimated normal course business issue product warranties product performance guarantees accrue estimated cost product warranties performance guarantees based contract terms historical experience time sale adjustments initial obligations warranties guarantees made changes obligations become reasonably estimable following table summarizes information concerning recorded obligations product warranties product performance guarantees product warranties product performance guarantees included following balance sheet accounts note 22pension postretirement benefits sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees pension benefits substantially us employees provided noncontributory qualified nonqualified defined benefit pension plans us defined benefit pension plans comprise 74 percent projected benefit obligation nonus employees us citizens covered various retirement benefit arrangements considered defined benefit pension plans accounting purposes nonus defined benefit pension plans comprise 26 percent projected benefit obligation honeywell international inc notes financial statementscontinued dollars millions except per share amounts also sponsor postretirement benefit plans provide health care benefits life insurance coverage eligible retirees retiree medical plans mainly cover us employees retire pension eligibility hospital professional medical services nonunion hourly salaried employees joining honeywell january 1 2000 eligible participate retiree medical life insurance plans us retiree medical plans require deductibles copayments virtually integrated medicare retiree contributions generally required based coverage type plan medicare eligibility honeywell limited subsidy retiree medical plans fixeddollar amount substantially future retirees almost half current retirees cap retiree medical benefits plans limits exposure impact future health care cost increases retiree medical life insurance plans funded claims expenses paid operating cash flow discussed note 1summary significant accounting policies adopted sfas 158 december 31 2006 sfas 158 requires recognize prospective basis funded status defined benefit pension postretirement benefit plans consolidated balance sheet recognize component accumulated comprehensive income loss net tax gains losses prior service costs credits arise period recognized components net periodic benefit cost additional minimum pension liabilities related intangible assets also derecognized upon adoption new standard adjustment sfas 158 affected consolidated balance sheet follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts following tables summarize balance sheet impact including benefit obligations assets funded status associated significant pension postretirement benefit plans december 31 2006 2005 honeywell international inc notes financial statementscontinued dollars millions except per share amounts accumulated benefit obligation defined benefit pension plans 162 154 billion december 31 2006 2005 respectively net periodic pension postretirement benefit costs significant plans include following components estimated net loss prior service cost pension benefits amortized accumulated comprehensive income loss net periodic benefit cost next fiscal year expected 193 27 million respectively estimated net loss prior service credit postretirement benefits amortized accumulated comprehensive income loss net periodic benefit cost next fiscal year expected 45 40 million respectively major actuarial assumptions used determining benefit obligations net periodic benefit cost us benefit plans presented following table nonus benefit plans one individually material assumptions reflect economic assumptions applicable country honeywell international inc notes financial statementscontinued dollars millions except per share amounts select discount rate retirement benefit plans use modeling process involves matching expected cash outflows benefit plans yield curve constructed portfolio double rated fixedincome debt instruments use average yield hypothetical portfolio discount rate benchmark discount rate used determine postretirement benefit obligation lower due shorter expected duration postretirement plan obligations compared pension plan obligations expected rate return plan assets 9 percent longterm rate based historic plan asset returns varying longterm periods combined current market conditions broad asset mix considerations expected rate return longterm assumption generally change annually us pension plans use marketrelated value plan assets reflecting changes fair value plan assets threeyear period us benefit plans actuarial losses excess 10 percent greater marketrelated value plan assets plans projected benefit obligation amortized sixyear period mortality assumptions us benefit plans updated december 31 2005 using rp2000 mortality table participants pension benefits pension plans accumulated benefit obligations exceeding fair value plan assets follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts us pension plans assets 128 120 billion nonus pension plans assets 38 26 billion december 31 2006 2005 respectively asset allocation target allocation pension plans assets follows asset investment strategy focuses maintaining diversified portfolio using various asset classes order achieve longterm investment objectives risk adjusted basis actual invested positions various securities change time based short longerterm investment opportunities achieve objectives us investment policy requires us master retirement trust invested follows less 25 percent invested fixed income securities b 10 percent highyield securities c 10 percent private real estate investments 6 percent investment alternatives involving limited partnerships various types stated limit investments publicallyheld us international equity securities nonus investment policies different country longterm investment objectives remain general funding policy qualified pension plans contribute amounts least sufficient satisfy regulatory funding standards 2006 2004 made voluntary contributions 68 40 million respectively us defined benefit pension plans primarily government contracting purposes assuming actual plan asset returns consistent expected rate 9 percent 2007 beyond interest rates remain constant would required make contributions us pension plans foreseeable future expect make voluntary contributions approximately 52 million cash 2007 certain us plans government contracting purposes also expect contribute approximately 155 million cash 2007 nonus defined benefit pension plans satisfy regulatory funding standards contributions reflect benefits paid directly company assets benefit payments including amounts paid company assets reflecting expected future service appropriate expected paid follows postretirement benefits effective december 31 2004 adopted fasb staff position 1062 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003” fsp 1062 fsp 1062 provides guidance accounting effects honeywell international inc notes financial statementscontinued dollars millions except per share amounts medicare prescription drug improvement modernization act 2003 act employers sponsor postretirement health care plans provide prescription drug coverage least actuarially equivalent offered medicare part impact act reduced postretirement benefits expense approximately 37 45 million 2006 2005 respectively assumed health care cost trend rate significant effect amounts reported onepercentagepoint change assumed health care cost trend rate would following effects benefit payments reflecting expected future service appropriate expected paid follows employee savings planswe sponsor employee savings plans match form common stock savings plan contributions certain eligible us employees shares issued stock match plans 45 41 43 million cost 179 153 151 million 2006 2005 2004 respectively honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 23segment financial data globally manage business operations four reportable segments serving customers worldwide aerospace products services control sensing security technologies buildings homes industry automotive products chemicals segment information consistent management reviews businesses makes investing resource allocation decisions assesses operating performance four reportable segments follows • aerospace organized customer endmarket air transport regional business general aviation defense space provides products services include auxiliary power units propulsion engines environmental control systems engine controls repair overhaul services hardware logistics electric power systems flight safety communications navigation radar surveillance systems aircraft lighting management technical services advanced systems instruments aircraft wheels brakes • automation control solutions includes products controls heating cooling indoor air quality ventilation humidification home automation advanced software applications homebuilding control optimization sensors switches control systems instruments measuring pressure air flow temperature electrical current security fire gas detection access control video surveillance remote patient monitoring systems building solutions installs maintains upgrades systems keep buildings safe comfortable productive process solutions provides full range automation control solutions industrial plants offering advanced software automation systems integrate control monitor complex processes many types industrial settings • specialty materials includes fluorocarbons specialty films advanced fibers customized research chemicals intermediates electronic materials chemicals catalysts adsorbents • transportation systems includes honeywell turbo technologies turbochargers chargeair thermal systems consumer products group car care products including antifreeze filters spark plugs cleaners waxes additives brake hard parts friction materials accounting policies segments described note 1 honeywells senior management evaluates segment performance based segment profit segment profit business unit income loss taxes excluding general corporate unallocated expenses income expense interest financial charges pension postretirement benefits expense stock option expense repositioning charges accounting changes intersegment sales approximate market prices significant reportable segment data follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts honeywell international inc notes financial statementscontinued dollars millions except per share amounts reconciliation segment profit consolidated income continuing operations taxes follows 1 amounts included cost products services sold selling general administrative expenses note 24geographic areasfinancial data note 25supplemental cash flow information honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 26unaudited quarterly financial information report independent registered public accounting firm board directors shareowners honeywell international inc completed integrated audits honeywell international incs consolidated financial statements internal control financial reporting december 31 2006 accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements financial statement schedule opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position honeywell international inc subsidiaries december 31 2006 2005 results operations cash flows three years period ended december 31 2006 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 1 consolidated financial statements company changed manner accounts stockbased compensation defined benefit pension postretirement plans 2006 manner accounts conditional asset retirement obligations 2005 internal control financial reporting also opinion managements assessment included managements report internal control financial reporting appearing item 9a company maintained effective internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued coso companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions managements assessment effectiveness companys internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating managements assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp florham park new jersey february 15 2007 item 9item 8 financial statements supplementary data honeywell international inc consolidated statement operations notes financial statements integral part statement honeywell international inc consolidated balance sheet notes financial statements integral part statement honeywell international inc consolidated statement cash flows notes financial statements integral part statement honeywell international inc consolidated statement shareowners’ equity notes financial statements integral part statement honeywell international inc notes financial statements dollars millions except per share amounts note 1summary significant accounting policies accounting principlesthe financial statements accompanying notes prepared accordance accounting principles generally accepted united states america following description significant accounting policies honeywell international inc principles consolidationthe consolidated financial statements include accounts honeywell international inc subsidiaries entities controlling interest maintained consolidation policy requires consolidation entities controlling financial interest obtained well consolidation variable interest entities bear majority risk entities’ potential losses stand gain majority entities’ expected returns intercompany transactions balances eliminated consolidation cash equivalentscash cash equivalents include cash hand deposit highly liquid temporary cash investments original maturity three months less inventoriesinventories valued lower cost market using firstin firstout average cost method lastin firstout lifo method certain qualifying domestic inventories investmentsinvestments affiliates significant influence controlling interest accounted using equity method accounting investments carried market value readily determinable cost equity investments periodically reviewed determine declines fair value cost basis otherthantemporary significant sustained decreases quoted market prices series historic projected operating losses investees strong indicators otherthantemporary declines decline fair value determined otherthantemporary impairment loss recorded investment written new carrying value property plant equipmentproperty plant equipment recorded cost including asset retirement obligations less accumulated depreciation financial reporting straightline method depreciation used estimated useful lives 10 50 years buildings improvements 2 15 years machinery equipment statement financial accounting standards 143 “accounting asset retirement obligations” sfas 143 fasb interpretation 47 “fin 47” require recognition fair value obligations associated retirement tangible longlived assets legal obligation incur costs upon adoption fin 47 december 31 2005 recorded increase 14 million property plant equipment recognized asset retirement obligation liability 46 million resulted recognition noncash charge 32 million 21 million tax reported cumulative effect accounting change upon initial recognition liability cost capitalized part related longlived asset depreciated corresponding asset’s useful life see note 11 note 17 additional details goodwill indefinitelived intangible assetsgoodwill represents excess acquisition costs fair value tangible net assets identifiable intangible assets businesses acquired goodwill certain intangible assets deemed indefinite lives amortized intangible assets determined definite lives amortized useful lives goodwill indefinite lived intangible assets subject impairment testing annually march 31 whenever events changes circumstances indicate carrying amount may fully recoverable using guidance criteria described statement financial accounting standards 142 “goodwill intangible assets” testing compares carrying values fair values appropriate carrying value assets reduced fair value completed annual goodwill impairment test march 31 2007 determined impairment date see note 12 additional details goodwill balances honeywell international inc notes financial statementscontinued dollars millions except per share amounts intangible assets determinable livesother intangible assets determinable lives consist customer lists technology patents trademarks intangibles amortized estimated useful lives ranging 2 24 years longlived assetswe periodically evaluate recoverability carrying amount longlived assets including property plant equipment intangible assets determinable lives whenever events changes circumstances indicate carrying amount asset may fully recoverable evaluate events changes circumstances based number factors including operating results business plans forecasts general industry trends economic projections anticipated cash flows impairment assessed undiscounted expected future cash flows derived asset less carrying amount impairment losses measured amount carrying value asset exceeds fair value recognized earnings also continually evaluate estimated useful lives longlived assets periodically revise estimates based current events sales recognitionproduct service sales recognized persuasive evidence arrangement exists product delivery occurred services rendered pricing fixed determinable collection reasonably assured service sales principally representing repair maintenance engineering activities aerospace automation control solutions segments recognized contractual period services rendered sales longterm contracts aerospace automation control solutions segments recorded percentageofcompletion method measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts provisions anticipated losses long term contracts recorded full losses become evident revenues contracts multiple element arrangements recognized element earned based relative fair value element provided delivered elements value customers standalone basis amounts allocated element based objectively determined fair value sales price product service sold separately competitor prices similar products services environmental expendituresenvironmental expenditures relate current operations expensed capitalized appropriate expenditures relate existing condition caused past operations provide future benefits expensed incurred liabilities recorded environmental remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical regulatory legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities asbestos related contingencies insurance recoverieshoneywell defendant personal injury actions related products containing asbestos refractory friction products recognize liability asbestos related contingency probable occurrence reasonably estimable regarding north american refractories company narco asbestos related claims accrue pending claims based terms conditions including evidentiary requirements definitive agreements principle current claimants also accrued probable value future narco asbestos related claims 2018 based disease criteria payment values contained narco trust described note 21 light inherent uncertainties making long term projections regarding claims filing rates disease manifestation believe reasonable basis estimating narco asbestos claims beyond 2018 statement financial accounting standards 5 “accounting contingencies” sfas honeywell international inc notes financial statementscontinued dollars millions except per share amounts 5 regarding bendix asbestos related claims accrue estimated value pending claims based expected claim resolution values historic dismissal rates since fourth quarter 2006 also accrue estimated cost future anticipated claims related bendix next five years based assessment additional claims may brought us anticipated resolution values tort system december 2006 also changed methodology valuing bendix pending future claims using average resolution values previous five years using average resolution values previous two years claims filing experience resolution data bendix related claims become reliable past several years accordingly fourth quarter 2007 updated methodology valuing bendix pending future claims using average resolution values past three years continue update expected resolution values used estimate cost pending future bendix claims fourth quarter year additional information see note 21 continually assess likelihood adverse judgments outcomes contingencies well potential ranges probable losses recognize liability contingencies based analysis individual issue assistance outside legal counsel applicable experts connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical experience insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs consideration impacts settlements insurers aerospace sales incentiveswe provide sales incentives commercial aircraft manufacturers airlines connection selection aircraft equipment predominately wheel braking system hardware auxiliary power units installation commercial aircraft incentives principally consist free deeply discounted products also include credits future purchases product upfront cash payments costs expensed provided aircraft manufacturers incentives recorded products delivered airlines incentives recorded associated aircraft delivered aircraft manufacturer airline research developmentresearch development costs companysponsored research development projects expensed incurred costs principally included cost products sold 1459 1411 1072 million 2007 2006 2005 respectively stockbased compensation planseffective january 1 2006 adopted sfas 123 revised 2004 “sharebased payment” sfas 123r requiring compensation cost relating sharebased payment awards made employees directors recognized financial statements principal awards issued stockbased compensation plans described note 20 include nonqualified stock options restricted stock units rsus cost awards measured grant date based fair value award value portion award ultimately expected vest recognized expense requisite service periods generally vesting period equity award consolidated statement operations prior january 1 2006 accounted sharebased compensation cost using intrinsic value method accordance accounting principles board 25 “accounting stock issued employees” apb 25 related interpretations also followed disclosure requirements sfas 123 “accounting stockbased compensation” amended sfas 148 “accounting stockbased compensationtransition disclosure” apb 25 compensation cost recognized consolidated statement operations stock option awards compensation cost rsus recognized consolidated statement operations honeywell international inc notes financial statementscontinued dollars millions except per share amounts included selling general administrative expenses affected adoption fas 123r adopted sfas 123r using modified prospective method accordingly 2005 consolidated statement operations restated reflect fair value method recognizing compensation cost relating stock options sharebased compensation cost relating stock options recognized 2007 2006 based value portion award ultimately expected vest sfas 123r requires forfeitures estimated time grant order estimate portion award ultimately vest estimate based historical rates forfeiture pro forma information required sfas 123 2005 accounted forfeitures occurred pension postretirement benefitswe sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees also sponsor postretirement benefit plans provide health care benefits life insurance coverage eligible retirees us defined benefit pension plans use marketrelated value plan assets reflecting changes fair value plan assets threeyear period net actuarial gains losses excess 10 percent greater marketrelated value plan assets plans’ projected benefit obligation corridor recognized six year period adopted sfas 158 “employers’ accounting defined benefit pension postretirement plans” sfas 158 december 31 2006 see note 22 additional disclosures foreign currency translationassets liabilities subsidiaries operating outside united states functional currency us dollars translated us dollars using yearend exchange rates sales costs expenses translated average exchange rates effect year foreign currency translation gains losses included component accumulated comprehensive income loss subsidiaries operating highly inflationary environments inventories property plant equipment including related expenses remeasured exchange rate effect date assets acquired monetary assets liabilities remeasured yearend exchange rates remeasurement adjustments subsidiaries included earnings derivative financial instrumentsas result global operating financing activities exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position minimize risks interest foreign currency exchange rate commodity price fluctuations normal operating financing activities deemed appropriate use derivative financial instruments derivative financial instruments used manage risk used trading speculative purposes use leveraged derivative financial instruments derivative financial instruments used hedging purposes must designated effective hedge identified risk exposure inception contract accordingly changes fair value derivative contract must highly correlated changes fair value underlying hedged item inception hedge life hedge contract derivatives recorded balance sheet assets liabilities measured fair value derivatives designated hedges fair value assets liabilities changes fair values derivatives hedged items recorded current earnings derivatives designated cash flow hedges effective portion changes fair value derivatives recorded accumulated comprehensive income loss subsequently recognized earnings hedged items impact earnings cash flows derivative financial instruments classified consistent underlying hedged item transfers financial instrumentssales transfers securitization financial instruments accounted statement financial accounting standards 140 “accounting transfers servicing financial assets extinguishments liabilities” sell interests honeywell international inc notes financial statementscontinued dollars millions except per share amounts designated pools trade accounts receivables third parties receivables removed consolidated balance sheet time sold value assigned subordinated interests undivided interests retained trade receivables sold based relative fair values interests retained sold carrying value retained interests approximates fair value due shortterm nature collection period receivables income taxesdeferred tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax assets realized determination amount valuation allowance provided recorded deferred tax assets involves estimates regarding 1 timing amount reversal taxable temporary differences 2 expected future taxable income 3 impact tax planning strategies assessing need valuation allowance consider available positive negative evidence including past operating results projections future taxable income feasibility ongoing tax planning strategies projections future taxable income include number estimates assumptions regarding volume pricing costs additionally valuation allowances related deferred tax assets impacted changes tax laws significant judgment required determining income tax provisions statement financial accounting standards 109 “accounting income taxes” sfas 109 evaluating tax positions establish additional provisions income taxes despite belief tax positions fully supportable remain certain positions meet minimum probability threshold defined fasb interpretation “fin” 48 “accounting uncertainty income taxes” fin 48 tax position likely sustained upon examination applicable taxing authority normal course business company subsidiaries examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes continually assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts give rise revision become known earnings per sharebasic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding dilutive potential common shares outstanding use estimatesthe preparation consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts financial statements related disclosures accompanying notes actual results could differ estimates assumptions periodically reviewed effects revisions reflected consolidated financial statements period determined necessary reclassificationscertain prior year amounts reclassified conform current year presentation recent accounting pronouncementsin june 2006 financial accounting standards board “fasb” issued fin 48 establishes single model address accounting uncertain tax positions fin 48 clarifies accounting income taxes prescribing minimum recognition threshold tax position required meet recognized financial statements fin 48 also provides guidance derecognition measurement classification interest penalties accounting interim periods disclosure transition upon adoption january 1 2007 reduced existing reserves uncertain tax positions 33 million largely related reduction state income tax matters partially offset net increase federal international tax reserves honeywell international inc notes financial statementscontinued dollars millions except per share amounts reduction recorded cumulative effect adjustment shareowners’ equity additionally decreased deferred tax asset associated valuation allowance 44 million increased goodwill 1 million see note 6 additional fin 48 information disclosure may 2007 fasb issued fasb staff position “fsp” fin 481 “definition settlement fasb interpretation 48” fsp fin 481 fsp fin 481 provides guidance determine whether tax position effectively settled purpose recognizing previously unrecognized tax benefits fsp fin 481 effective retroactively january 1 2007 implementation standard material impact consolidated financial position results operations september 2006 fasb issued fsp aug air1 “accounting planned major maintenance activities” fsp aug air1 fsp aug air1 amends guidance accounting planned major maintenance activities specifically precludes use previously acceptable “accrue advance” method fsp aug air1 effective fiscal years beginning december 15 2006 implementation standard material impact consolidated financial position results operations september 2006 fasb issued statement financial accounting standard “sfas” 157 “fair value measurements” sfas 157 sfas 157 establishes common definition fair value applied us gaap requiring use fair value establishes framework measuring fair value expands disclosure fair value measurements sfas 157 effective fiscal years beginning november 15 2007 february 2008 fasb issued fsp 1572 “partial deferral effective date statement 157” fsp 1572 fsp 1572 delays effective date sfas 157 nonfinancial assets nonfinancial liabilities except recognized disclosed fair value financial statements recurring basis least annually fiscal years beginning november 15 2008 company currently assessing impact sfas 157 nonfinancial assets nonfinancial liabilities consolidated financial position results operations implementation standard financial assets financial liabilities material impact consolidated financial position results operations february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities” sfas 159 sfas 159 permits entities choose measure many financial assets financial liabilities fair value unrealized gains losses items fair value option elected reported earnings sfas 159 effective fiscal years beginning november 15 2007 implementation standard material impact consolidated financial position results operations march 2007 fasb ratified emerging issues task force “eitf” issue 0610 “accounting collateral assignment splitdollar life insurance agreements” eitf 0610 eitf 0610 provides guidance determining liability postretirement benefit obligations well recognition measurement associated asset basis terms collateral assignment agreement eitf 0610 effective fiscal years beginning december 15 2007 implementation standard material impact consolidated financial position results operations june 2007 fasb ratified eitf 0611 “accounting income tax benefits dividends sharebased payment awards” eitf 0611 eitf 0611 provides tax benefits associated dividends sharebased payment awards recorded component additional paidin capital eitf 0611 effective prospective basis fiscal years beginning december 15 2007 implementation standard material impact consolidated financial position results operations december 2007 fasb issued sfas 141revised 2007 “business combinations” sfas 141r sfas 141r provides revised guidance acquirers recognize honeywell international inc notes financial statementscontinued dollars millions except per share amounts measure consideration transferred identifiable assets acquired liabilities assumed noncontrolling interests goodwill acquired business combination sfas 141r also expands required disclosures surrounding nature financial effects business combinations sfas 141r effective prospective basis fiscal years beginning december 15 2008 company currently assessing impact sfas 141r consolidated financial position results operations december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statements” sfas 160 sfas 160 establishes requirements ownership interests subsidiaries held parties company sometimes called “minority interests” clearly identified presented disclosed consolidated statement financial position within equity separate parent’s equity changes parent’s ownership interests required accounted consistently equity transactions noncontrolling equity investments deconsolidated subsidiaries must measured initially fair value sfas 160 effective prospective basis fiscal years beginning december 15 2008 however presentation disclosure requirements must retrospectively applied comparative financial statements company currently assessing impact sfas 160 consolidated financial position results operations note 2acquisitions divestitures acquired businesses aggregate cost 1190 979 3500 million 2007 2006 2005 respectively acquisitions accounted purchase method accounting accordingly assets liabilities acquired businesses recorded estimated fair values dates acquisition significant acquisitions made years discussed july 2007 company completed acquisition dimensions international defense logistics business purchase price approximately 230 million purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 21 million identifiable intangible assets predominantly contractual relationships intangible assets amortized estimated life 5 years using straightline accelerated amortization methods excess purchase price estimated fair values net assets acquired approximating 180 million recorded goodwill nondeductible tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2007 included aerospace segment material consolidated financial statements july 2007 company completed acquisition enraf holding bv provider comprehensive solutions control management transportation storage blending operations oil gas industry purchase price approximately 264 million including assumption approximately 40 million debt purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 90 million identifiable intangible assets predominantly customer relationships existing technology trademarks intangible assets amortized estimated life 815 years using straightline accelerated amortization methods excess purchase price estimated fair values net assets acquired approximating 167 million recorded goodwill deducted 15 year period tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2007 included honeywell international inc notes financial statementscontinued dollars millions except per share amounts automation control solutions segment material consolidated financial statements december 2007 company specifically automation control solutions segment completed acquisition maxon corporation leading industrial combustion business purchase price approximately 185 million purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 88 million identifiable intangible assets predominantly customer relationships trademarks intangible assets amortized estimated lives range 610 years using straight line accelerated amortization methods excess purchase price estimated fair values net assets acquired approximating 92 million recorded goodwill nondeductible tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2007 material consolidated financial statements december 2007 company specifically automation control solutions segment completed acquisition hand held products inc privately held automatic identification data collection company purchase price approximately 390 million purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 114 million identifiable intangible assets predominantly customer relationships existing technology intangible assets amortized estimated lives range 6 10 years using straightline accelerated amortization methods excess purchase price estimated fair values net assets acquired approximating 259 million recorded goodwill nondeductible tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2007 material consolidated financial statements may 2006 company purchased gardiner groupe privately held company purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values lives acquisition date company assigned 47 million identifiable intangible assets predominantly customer relationships trademarks intangible assets amortized estimated lives range 3 15 years using straightline accelerated amortization methods excess purchase price estimated fair values net assets acquired approximating 130 million recorded goodwill nondeductible tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2006 included automation control solutions segment material consolidated financial statements march 2006 company purchased first technology plc uk publicly listed company aggregate value purchase price 723 million including assumption approximately 217 million outstanding debt 23 million transaction costs purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 155 million identifiable intangible assets predominantly customer relationships existing technology trademarks intangible assets amortized estimated lives range 2 15 years using straightline accelerated amortization methods excess purchase price estimated fair values net assets acquired approximating 432 million honeywell international inc notes financial statementscontinued dollars millions except per share amounts recorded goodwill nondeductible tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2006 included automation control solutions segment material consolidated financial statements year company completed sales first technology safety analysis business 93 million first technology automotive 90 million accounted part purchase price allocation november 2005 company acquired remaining 50 percent uop llc giving honeywell full ownership entity aggregate value purchase price approximately 825 million including assumption approximately 115 million outstanding debt purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 339 million identifiable intangible assets predominantly existing technology amortized 15 years straightline basis trade names amortized excess purchase price estimated fair values net assets acquired approximating 336 million recorded goodwill nondeductible tax purposes following acquisition accounted purchase method results operations included specialty materials segment prior date uop results 50 percent share company owned included equity income affiliated companies march 31 2005 company purchased 100 issued ordinary preference share capital novar plc novar 17 billion net cash acquired represented 24 billion consideration outstanding shares outstanding options exercised net assumption debt 07 billion transaction costs related acquisition 49 million december 2005 completed sale security printing business mf worldwide corp 800 million cash february 2006 completed sale indalex affiliate private investment firm sun capital partners inc approximately 425 million cash indalex business classified held sale december 31 2005 consolidated balance sheet indalex security printing businesses presented discontinued operations statement operations periods prior sale goodwill approximately 13 billion recognized allocated 261 million intangible assets contractual customer relationships existing technology trademarks intangible assets amortized estimated useful lives range 5 15 years using straightline accelerated amortization methods addition accrued liabilities included 76 million restructuring costs related integration novar operations december 31 2007 purchase accounting dimensions international enraf holding bv hand held products inc maxon corporation still subject final adjustment primarily useful lives amounts allocated intangible assets goodwill certain preacquisition contingencies settlement post closing purchase price adjustments connection acquisitions 2007 2006 2005 amounts recorded transaction costs integrating acquired businesses honeywell material pro forma results 2007 2006 2005 assuming acquisitions made beginning year would materially different consolidated reported results honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 3repositioning charges summary repositioning charges follows following table summarizes pretax distribution total net repositioning charges income statement classification following table summarizes pretax impact total net repositioning charges segment 2007 recognized repositioning charges totaling 209 million primarily severance costs related workforce reductions 3408 manufacturing administrative positions mainly automation control solutions aerospace segments also 18 million previously established accruals primarily severance transportation systems aerospace segments returned income 2007 due mainly changes scope previously announced severance programs due fewer employee separations originally planned associated prior severance programs 2006 recognized repositioning charges totaling 124 million primarily severance costs related workforce reductions 2253 manufacturing administrative positions across segments also 22 million previously established accruals primarily severance aerospace transportation systems specialty materials segments returned income 2006 due mainly changes scope previously announced severance programs due honeywell international inc notes financial statementscontinued dollars millions except per share amounts fewer employee separations originally planned associated prior aerospace severance programs 2005 recognized repositioning charges totaling 267 million primarily severance costs related workforce reductions 5269 manufacturing administrative positions across segments including implementation new organizational structure aerospace segment substantially implemented third quarter 2005 reorganized aerospace businesses better align customer segments also 25 million previously established accruals primarily severance corporate specialty materials automation control solutions segments returned income 2005 reversal severance liabilities related changes scope previously announced severance programs excise taxes related executive severance amount previously paid determined longer payable severance amounts previously paid outside service provider part outsourcing arrangement refunded honeywell following table summarizes status total repositioning reserves 2007 recognized charge 225 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 100 million discussed note 21 recognized charges 18 million business sales tax related prior divestiture 8 million contemplated settlements certain legal matters 10 million also recognized impairment charges 9 million related writedown property plant equipment held sale specialty materials segment 2006 recognized charge 210 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 126 million discussed note 21 recognized charges 51 million related corporate segment primarily settlement property damage claim litigation matter brunswick ga entrance plea agreement related environmental matter baton rouge la facility recognized impairment charges 12 million related write property plant equipment held sale specialty materials segment also recognized credit 18 million connection arbitration award overcharges supplier phenol specialty materials business 2005 transactions 2005 recognized charge 186 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 10 million discussed note 21 recognized credit 67 million honeywell international inc notes financial statementscontinued dollars millions except per share amounts connection arbitration award overcharges supplier phenol specialty materials business june 2003 end 2004 recognized impairment charges 23 million related writedown property plant equipment held used specialty materials segment also recognized charges 18 million principally related modification lease agreement corporate headquarters facility 10 million various legal settlements 7 million note 4other incomeexpense note 5interest financial charges weighted average interest rate shortterm borrowings commercial paper outstanding december 31 2007 2006 465 percent 567 percent respectively note 6income taxes income continuing operations taxes honeywell international inc notes financial statementscontinued dollars millions except per share amounts tax expense company’s effective tax rate increased 07 percentage point 2007 compared 2006 due principally expiration tax benefit export sales partially offset decrease overall state foreign effective tax rate increase tax benefit domestic manufacturing deduction favorable resolution certain tax audits honeywell international inc notes financial statementscontinued dollars millions except per share amounts deferred tax assets liabilities deferred income taxes represent future tax effects transactions reported different periods tax financial reporting purposes tax effects temporary differences tax carryforwards give rise future income tax benefits payables follows 32 million us federal tax net operating losses available carryforward december 31 2007 generated certain subsidiaries prior acquisition expiration dates 2024 use preacquisition operating losses subject limitations imposed internal revenue code anticipate limitations affect utilization carryforwards prior expiration various subsidiaries state tax net operating loss carryforwards 33 billion december 31 2007 varying expiration dates 2026 us federal capital losses available carryforward 112 million expire 2011 state capital losses available carryforward 286 million varying expiration dates anticipate using capital losses expiration also foreign net operating capital losses 26 billion available reduce future income tax payments several countries subject varying expiration rules state tax credit carryforwards 42 million december 31 2007 including carryforwards 29 million various expiration dates 2027 tax credits 13 million subject expiration addition 5 million foreign tax credits available carryback carryforward us federal tax return december 31 2007 varying expiration dates 2013 valuation allowance deferred tax assets decreased 26 million 2007 increased 39 139 million 2006 2005 respectively 2007 decrease valuation allowance primarily due decrease valuation allowances related state foreign net operating losses partially offset valuation allowance us capital losses 2006 increase valuation allowance primarily due increase foreign net operating losses attributable acquired businesses expected realized partial valuation allowance deferred tax asset established connection adoption sfas 158 partially offset decrease state tax net operating loss carryforwards net federal impact federal income taxes provided undistributed earnings majority international subsidiaries intention reinvest earnings respective businesses december 31 2007 honeywell provided us federal income foreign withholding taxes approximately 41 billion earnings nonus operations practicable estimate amount tax might payable earnings remitted foreign tax credits would available reduce eliminate resulting us income tax liability honeywell international inc notes financial statementscontinued dollars millions except per share amounts january 1 2007 adopted provisions fin 48 described note 1 date 744 million unrecognized tax benefits recognized approximately 575 million would recorded component income tax expense year ended december 31 2007 company decreased unrecognized tax benefits 78 million due tax benefit favorable resolution tax audits partially offset foreign currency translation additional reserves various international us tax audit matters net decrease recorded benefit income tax expense december 31 2007 666 million unrecognized tax benefits recognized approximately 547 million would recorded component income tax expense following table summarizes activity related unrecognized tax benefits many cases uncertain tax positions related tax years remain subject examination relevant tax authorities following table summarizes open tax years major jurisdiction december 31 2007 1 includes federal well state provincial similar local jurisdictions applicable based outcome examinations result expiration statute limitations specific jurisdictions reasonably possible related unrecognized tax benefits tax positions taken regarding previously filed tax returns materially change recorded liabilities uncertain tax positions financial statements addition outcome examinations may impact valuation certain deferred tax assets net operating losses future periods based number tax years currently audit relevant us federal state foreign tax authorities company anticipates several audits may finalized foreseeable future however based status examinations protocol finalizing audits relevant tax authorities could include formal legal proceedings time possible estimate impact amount changes previously recorded uncertain tax positions honeywell international inc notes financial statementscontinued dollars millions except per share amounts unrecognized tax benefits listed examinations progress 502 million 373 million january 1 2007 december 31 2007 respectively decrease primarily due settlement tax examinations year estimated interest penalties related underpayment income taxes classified component tax expense consolidated statement operations totaled 20 million twelve months ended december 31 2007 accrued interest penalties 98 million 118 million january 1 2007 december 31 2007 respectively note 7earnings loss per share following table sets forth computations basic diluted earnings loss per share 2007 2006 2005 diluted earnings per share calculation excludes effect stock options’ exercise prices exceed average market price common shares period 2007 2006 2005 number stock options included computation 8599620 22749056 17793385 respectively stock options outstanding end respective years note 8accounts notes receivables honeywell international inc notes financial statementscontinued dollars millions except per share amounts trade accounts receivable includes 946 808 million unbilled balances longterm contracts december 31 2007 2006 respectively amounts billed accordance terms customer contracts relate sell interests designated pools trade accounts receivables third parties sold receivables overcollateralized 101 million december 31 2007 retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools new receivables sold agreement previously sold receivables collected losses recognized interest receivables sold retained interests receivables shown amounts expected collected us carrying value approximates fair value retained interests compensated services collection administration receivables losses sales receivables 29 27 18 million 2007 2006 2005 respectively credit losses incurred years note 9inventories inventories valued lifo amounted 247 205 million december 31 2007 2006 respectively lifo inventories valued current costs carrying values would approximately 199 170 million higher december 31 2007 2006 respectively note 10investments longterm receivables longterm trade receivables includes 63 68 million unbilled balances longterm contracts december 31 2007 2006 respectively amounts billed accordance terms customer contracts relate honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 11property plant equipment depreciation expense 675 650 578 million 2007 2006 2005 respectively note 12goodwill intangiblesnet change carrying amount goodwill years ended december 31 2007 2006 segment follows intangible assets comprised honeywell international inc notes financial statementscontinued dollars millions except per share amounts intangible assets amortization expense 162 144 75 million 2007 2006 2005 respectively estimated intangible assets amortization expense next five years approximates 190 million 2008 190 million 2009 180 million 2010 160 million 2011 140 million 2012 note 13accrued liabilities honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 14longterm debt credit agreements schedule principal payments longterm debt follows maintain 28 billion five year revolving credit facility group banks arranged citigroup global markets inc jpmorgan securities inc credit facility contains 700 million sublimit issuance letters credit 28 billion credit facility maintained general corporate purposes including support issuance commercial paper borrowings outstanding letters credit issued credit facility december 31 2007 credit agreement restrict ability pay dividends contains financial covenants failure comply customary conditions occurrence customary events default contained credit agreement would prevent borrowings would generally require repayment outstanding borrowings credit agreement events honeywell international inc notes financial statementscontinued dollars millions except per share amounts default include nonpayment credit agreement debt interest fees b noncompliance terms credit agreement covenants c crossdefault debt certain circumstances bankruptcy e defaults upon obligations employee retirement income security act additionally banks right terminate commitment lend additional funds issue letters credit agreement person group acquires beneficial ownership 30 percent voting stock 12month period individuals directors honeywell beginning period cease constitute majority board directors board loans 28 billion credit facility required repaid later may 14 2012 agreed pay facility fee 005 percent per annum aggregate commitment interest borrowings 28 billion credit facility would determined honeywell’s option auction bidding procedure b highest floating base rate publicly announced citibank na 05 percent average cd rate 05 percent federal funds rate c eurocurrency rate plus 015 percent applicable margin facility fee applicable margin eurocurrency rate letter credit issuance fee subject change based upon grid determined long term debt ratings credit agreement subject termination based upon decrease debt ratings material adverse change march 2007 company issued 400 million 530 senior notes due 2017 600 million 570 senior notes due 2037 collectively “notes” notes senior unsecured unsubordinated obligations honeywell rank equally honeywell’s existing future senior unsecured debt senior honeywell’s subordinated debt offering resulted gross proceeds 1 billion offset 12 million discount issuance costs july 2007 company issued 500 million floating rate senior notes due 2009 400 million 5625 senior notes due 2012 collectively “senior notes” senior notes senior unsecured unsubordinated obligations honeywell rank equally honeywell’s existing future senior unsecured debt senior honeywell’s subordinated debt offering resulted gross proceeds 900 million offset 3 million discount issuance costs first quarter 2007 company repaid 350 million 70 notes primarily issuance notes proceeds senior notes used repay commercial paper note 15lease commitments future minimum lease payments operating leases initial remaining noncancellable lease terms excess one year follows entered agreements lease land equipment buildings principally operating leases initial terms 25 years contain renewal options subject customary conditions time terms leases may option honeywell international inc notes financial statementscontinued dollars millions except per share amounts purchase leased assets amounts approximate fair value expect commitments lease agreements material adverse effect consolidated results operations financial position liquidity rent expense 365 341 326 million 2007 2006 2005 respectively note 16financial instruments credit market riskfinancial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties derivative transactions substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value cash flows derivative financial instruments considering reasonably possible changes interest currency exchange rates restrict use derivative financial instruments hedging activities continually monitor creditworthiness customers grant credit terms normal course business concentrations credit risk associated trade accounts notes receivable considered minimal due diverse customer base significant portion customers commercial air transport industry aircraft manufacturers airlines accounting approximately 21 percent consolidated sales 2007 terms conditions credit sales designed mitigate eliminate concentrations credit risk single customer sales materially dependent single customer small group customers foreign currency risk managementwe conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities anticipated transactions arising international trade objective preserve economic value nonfunctional currency denominated cash flows attempt hedge transaction exposures natural offsets fullest extent possible opportunities exhausted foreign currency forward option agreements third parties principal currency exposures relate us dollar euro british pound canadian dollar hong kong dollar mexican peso swiss franc czech koruna chinese renminbi japanese yen hedge monetary assets liabilities denominated nonfunctional currencies prior conversion us dollars assets liabilities remeasured spot exchange rates effect balance sheet date effects changes spot rates recognized earnings included otherincome expense hedge exposure changes foreign exchange rates principally forward contracts forward contracts markedtomarket resulting gains losses similarly recognized earnings offsetting gains losses nonfunctional currency denominated monetary assets liabilities hedged partially hedge forecasted 2008 sales purchases denominated nonfunctional currencies currency forward contracts functional currency strengthens nonfunctional currencies decline value forecasted nonfunctional currency cash inflows sales outflows purchases partially offset recognition gains sales losses purchases respectively value forward contracts designated hedges conversely functional currency weakens nonfunctional currencies increase value forecasted nonfunctional currency cash inflows sales outflows purchases partially offset recognition losses sales gains purchases respectively value forward contracts honeywell international inc notes financial statementscontinued dollars millions except per share amounts designated hedges market value gains losses contracts recognized earnings hedged transaction recognized open forward contracts mature december 31 2008 december 31 2007 2006 contracts notional amounts 3295 2572 million respectively exchange foreign currencies principally us dollar euro british pound canadian dollar hong kong dollar mexican peso swiss franc czech koruna chinese renminbi japanese yen commodity price risk managementour exposure market risk commodity prices result changes cost production primarily mitigate exposure commodity price risk use longterm fixedprice contracts suppliers formula price agreements suppliers customers also enter forward commodity purchase agreements third parties designated hedges anticipated purchases several commodities forward commodity purchase agreements markedtomarket resulting gains losses recognized earnings hedged transaction recognized interest rate risk managementwe use combination financial instruments including longterm mediumterm shortterm financing variablerate commercial paper interest rate swaps manage interest rate mix total debt portfolio related overall cost borrowing december 31 2007 2006 interest rate swap agreements designated fair value hedges effectively changed 300 700 million respectively fixed rate debt average rate 601 638 percent respectively libor based floating rate debt interest rate swaps mature 2037 fair value financial instrumentsthe carrying value cash equivalents trade accounts notes receivables payables commercial paper shortterm borrowings contained consolidated balance sheet approximates fair value summarized carrying values fair values financial instruments december 31 2007 2006 fair values based quoted market prices issues traded current rates offered us debt remaining maturity characteristics valuation techniques appropriate honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 17other liabilities consist following 1 asset retirement obligations primarily relate costs associated future retirement nuclear fuel conversion facilities specialty materials segment future retirement facilities automation control solutions segment reconciliation liability asset retirement obligations year ended december 31 2007 follows note 18capital stock authorized issue 2000000000 shares common stock par value one dollar common shareowners entitled receive dividends may declared board entitled one vote per share entitled event liquidation share ratably assets honeywell available distribution common shareowners common shareowners preemptive conversion rights shares common stock issued outstanding held treasury liable calls assessments restrictions us relative dividends repurchase redemption common stock company’s previously reported 30 billion share repurchase program 27 billion remained available december 31 2007 additional share repurchases amount timing repurchases may vary depending market conditions level investing activities authorized issue 40000000 shares preferred stock without par value determine number shares series rights preferences limitations series december 31 2007 preferred stock outstanding honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 19accumulated comprehensive income loss total accumulated comprehensive income loss included consolidated statement shareowners’ equity changes accumulated comprehensive income loss follows components accumulated comprehensive income loss follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 20stockbased compensation plans stockbased compensation plans available grant nonqualified stock options incentive stock options stock appreciation rights restricted units restricted stock key employees 2006 stock incentive plan honeywell international inc affiliates plan approved shareowners annual meeting shareowners became effective april 24 2006 maximum 43 million shares honeywell common stock may awarded expect common stock awarded annual basis 10 15 percent total common stock outstanding following approval plan april 24 2006 grant new awards previously existing stockbased compensation plans additionally 2006 stock plan nonemployee directors honeywell international inc directors plan approved shareowners annual meeting shareowners became effective april 24 2006 500000 shares honeywell common stock may awarded directors plan replaced 1994 stock plan nonemployee directors honeywell international inc stock optionsthe exercise price term conditions applicable option granted stock plans generally determined management development compensation committee board exercise price stock options set grant date may less fair market value per share stock date fair value recognized expense employee’s requisite service period generally vesting period award options generally vested threeyear period expire ten years starting 2007 option grants vesting period extended four years fair value option award estimated date grant using blackscholes optionpricing model expected volatility based implied volatilities traded options honeywell common stock used monte carlo simulation model derive expected term model uses historical data estimate option exercise activity postvest termination behavior expected term represents estimate time options expected remain outstanding riskfree rate periods within contractual life option based us treasury yield curve effect time grant compensation cost pretax basis related stock options recognized operating results included selling general administrative expenses sfas 123r 2007 2006 65 77 million respectively associated future income tax benefit recognized 2007 2006 25 28 million respectively compensation cost related stock options recognized consolidated statement operations 2007 2006 includes 1 compensation cost stock option awards granted prior yet vested december 31 2005 based grantdate fair value estimated accordance pro forma provisions sfas 123 2 compensation cost stock option awards granted subsequent december 31 2005 based grantdate fair value estimated accordance provisions sfas 123r honeywell international inc notes financial statementscontinued dollars millions except per share amounts following table illustrates effect net income earnings per share applied fair value recognition provisions sfas 123 2005 year prior adoption fas 123r following table sets forth fair value per share information including related weightedaverage assumptions used determine compensation cost consistent requirements sfas 123r 2007 2006 sfas 123 2005 honeywell international inc notes financial statementscontinued dollars millions except per share amounts following table summarizes information stock option activity three years ended december 31 2007 1 expected vest options result applying prevesting forfeiture rate assumption total outstanding options following table summarizes information stock options outstanding exercisable december 31 2007 37902956 42416585 options exercisable weighted average exercise prices 4016 4001 december 31 2006 2005 respectively 38279009 shares available future grants terms stock option plans december 31 2007 total intrinsic value options amount stock price exceeded exercise price options date exercise exercised 2007 2006 281 92 million respectively 2007 2006 amount cash received exercise stock options 592 385 million respectively associated tax benefit realized 101 31 million respectively consistent requirements sfas 123r 2007 2006 classified 86 31 million respectively benefit financing cash inflow consolidated statement cash flows balance classified cash operations december 31 2007 73 million total unrecognized compensation cost related nonvested stock option awards expected recognized weightedaverage period 218 years total fair value options vested 2007 2006 83 70 million respectively honeywell international inc notes financial statementscontinued dollars millions except per share amounts restricted stock unitsrestricted stock unit rsu awards entitle holder receive one share common stock unit units vest rsu’s issued certain key employees fair market value date grant compensation rsus typically become fully vested periods ranging three seven years payable honeywell common stock upon vesting following table summarizes information rsu activity three years ended december 31 2007 december 31 2007 approximately 153 million total unrecognized compensation cost related nonvested rsus granted stock plans expected recognized weightedaverage period 206 years compensation expense related rsus 47 29 24 million 2007 2006 2005 respectively nonemployee directors’ planunder directors’ plan new director receives onetime grant 3000 shares common stock subject specific restrictions directors’ plan also provides annual grant director options purchase 5000 shares common stock fair market value date grant options generally become exercisable threeyear period expire ten years starting 2007 option grants vesting period extended four years note 21commitments contingencies environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous toxic substances accordance environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing toxic substances additional lawsuits claims costs involving environmental matters likely continue arise future honeywell international inc notes financial statementscontinued dollars millions except per share amounts respect environmental matters involving site contamination continually conduct studies individually jointly potentially responsible parties determine feasibility various remedial techniques address environmental matters policy record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical regulatory legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing remedial investigations feasibility studies timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects remedial techniques utilized agreements parties following table summarizes information concerning recorded liabilities environmental costs 1 2005 45 million principally relates reclassification carrying value land property plant equipment corresponding increase environmental liabilities environmental liabilities included following balance sheet accounts although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position new jersey chrome sitesprovisions made financial statements estimated costs courtordered excavation transport offsite disposal approximately one million tons chromium residue present predecessor honeywell site located jersey city new jersey known study area 7 “sa 7” expenditures expected continue incurred evenly fiveyear period started april 2006 expect implementation remedy material adverse effect future consolidated results honeywell international inc notes financial statementscontinued dollars millions except per share amounts operations operating cash flows financial position provision also made financial statements estimated costs implementing related groundwater remedial plans approved court well sediment remedial plans presently review court litigation concerning site pending ultimate cost remediating river sediments may reduced numerous third parties could responsible yet undetermined portion costs abovereferenced site significant twentyone sites located hudson county new jersey subject administrative consent order aco entered new jersey department environmental protection njdep 1993 remedial investigations activities consistent aco conducted underway sites “honeywell aco sites” recorded reserves honeywell aco sites appropriate accounting policy described may 3 2005 njdep filed lawsuit new jersey superior court honeywell two companies seeking declaratory injunctive relief unspecified damages reimbursement unspecified total costs relating sites new jersey allegedly contaminated chrome ore processing residue claims honeywell relate activities predecessor company ceased new jersey manufacturing operations mid1950’s complaint entirely clear appears approximately 100 sites issue including 17 honeywell aco sites two companies agreed remediate separate administrative consent orders well approximately 53 sites identified complaint “publicly funded sites” none three companies signed administrative consent order addition claims specific company njdep claims three companies collectively liable chrome sites based “market share” theory addition njdep seeking treble damages costs incurred incur publicly funded sites honeywell believes connection sites covered companies’ administrative consent orders therefore responsibility sites honeywell aco sites conducting remedial investigations activities consistent aco thus believe lawsuit significantly change obligations respect honeywell aco sites lawsuits also filed honeywell district court resource conservation recovery act rcra jersey city two municipal utilities seeking cleanup chromium residue two honeywell aco sites january 2008 honeywell jersey city agreed settle claims settlement become effective upon receipt njdep approval remedial action workplan sites classification jersey city related sites area need redevelopment approval related redevelopment plan agreement court approval settlement remedial actions contemplated settlement consistent recorded reserves rcra litigation also filed honeywell citizens’ group thirteen defendants respect contamination dozen honeywell aco sites reasons stated believe lawsuit significantly change obligations respect honeywell aco sites although possible time predict ultimate outcome resolution litigation administrative proceedings discussed expect matters material adverse effect consolidated financial position expect prevail settle claims adverse litigation outcome could material adverse impact consolidated results operations operating cash flows periods recognized paid dundalk marine terminal baltimorechrome residue legacy chrome plant operations baltimore deposited fill dundalk marine terminal “dmt” owned operated maryland port administration “mpa” honeywell mpa sharing costs honeywell international inc notes financial statementscontinued dollars millions except per share amounts investigate mitigate related environmental issues entered cost sharing agreement honeywell bear 77 percent share costs developing implementing permanent remedies dmt facility investigative phase began april 2006 expected take approximately 18 36 months appropriate remedies identified chosen negotiated consent decree mpa maryland department environment “mde” respect investigation remediation dmt facility consent decree challenged federal court build baltimore community group together local church two individuals collectively “build” october 2007 court dismissed build’s state law claims prejudice dismissed build’s rcra claims regarding neighborhoods near dmt facility without prejudice build since sent notice letters indicating intend file latter claims continue oppose court expected schedule hearing second quarter 2008 company’s motion dismiss build’s remaining claims grounds mde diligently prosecuting investigation remediation dmt believe matter material adverse impact consolidated financial position operating cash flows given scope complexity project possible cost remediation determinable could material adverse impact results operations periods recognized onondaga lake syracuse nya predecessor company honeywell operated chemical plant alleged contributed mercury contaminants lake july 2005 new york state department environmental conservation dec issued record decision respect remediation industrial contamination lake october 2006 honeywell entered consent decree state new york implement remedy set forth record decision january 2007 consent decree approved united states district court northern district new york record decision calls combined dredgingcapping remedy generally line approach recommended feasibility study submitted honeywell may 2004 based currently available information analysis performed engineering consultants accrued estimated cost implementing remedy set forth record decision estimating process considered range possible outcomes amounts recorded reflect best estimate time given scope complexity project possible actual costs could exceed estimated costs amount could material adverse impact consolidated results operations operating cash flows periods recognized paid time however cannot identify legal regulatory technical reason conclude specific alternative outcome probable outcome made provisions financial statements dec’s aggregate cost estimate higher amount reserved based high end range potential costs major elements record decision includes contingency actual cost record decision depend upon among things resolution certain technical issues design phase remediation believe matter material adverse impact consolidated financial position december 2006 united states fish wildlife service published notice intent pursue natural resource damages related site possible predict outcome timing assessments typically lengthy processes lasting several years amounts responsibility damages asbestos matters like many industrial companies honeywell defendant personal injury actions related asbestos mine produce asbestos make sell insulation products construction materials identified primary cause asbestos related disease vast majority claimants products containing asbestos previously manufactured honeywell international inc notes financial statementscontinued dollars millions except per share amounts previously owned subsidiaries primarily fall two general categories refractory products friction products refractory productshoneywell owned north american refractories company narco 1979 1986 narco produced refractory products high temperature bricks cement sold largely steel industry east midwest less 2 percent narco’s products contained asbestos sold narco business 1986 agreed indemnify narco respect personal injury claims products discontinued prior sale defined sale agreement narco retained liability claims january 4 2002 narco filed reorganization chapter 11 us bankruptcy code result narco bankruptcy filing claims pending narco automatically stayed pending reorganization narco addition bankruptcy court enjoined filing prosecution narcorelated asbestos claims honeywell stay remained effect continuously since january 4 2002 connection narco’s bankruptcy filing paid narco’s parent company 40 million agreed provide narco 20 million financing also agreed pay 20 million narco’s parent company upon filing plan reorganization narco acceptable honeywell amount paid december 2005 following filing narco’s third amended plan reorganization pay narco’s parent company 40 million forgive outstanding narco indebtedness honeywell upon effective date plan reorganization believe part narco plan reorganization trust established benefit asbestos claimants current future pursuant trust distribution procedures negotiated narco asbestos claimants committee courtappointed legal representative future asbestos claimants trust put place approved court fair equitable honeywell well narco entitled permanent channeling injunction barring present future individual actions state federal courts requiring asbestos related claims based exposure narco products made federallysupervised trust honeywell reached agreement representative future narco claimants asbestos claimants committee cap annual contributions trust respect future claims level would material impact honeywell’s operating cash flows november 2007 bankruptcy court entered amended order confirming narco plan without modification approving 524g trust channeling injunction favor narco honeywell december 2007 certain insurers filed appeal bankruptcy court’s amended confirmation order appeal pending united states district court western district pennsylvania assurances given time frame outcome appeal expect stay enjoining litigation narco honeywell remain effect pendency proceedings consolidated financial statements reflect estimated liability settlement pending future narcorelated asbestos claims december 31 2007 2006 11 13 billion respectively estimated liability pending claims based terms conditions including evidentiary requirements definitive agreements approximately 260000 current claimants estimate unsettled claims pending time narco filed bankruptcy protection substantially settlement payments respect current claims made december 31 2007 approximately 95 million payments due pursuant settlements due upon establishment narco trust estimated liability future claims represents estimated value future asbestos related bodily injury claims expected asserted narco 2018 aforementioned obligations narco’s parent light uncertainties inherent making longterm projections honeywell international inc notes financial statementscontinued dollars millions except per share amounts believe reasonable basis estimating asbestos claims beyond 2018 sfas 5 “accounting contingencies” estimate based upon disease criteria payment values contained narco trust distribution procedures negotiated narco asbestos claimants committee narco future claimants’ representative honeywell projected probable number value including trust claim handling costs asbestos related future liabilities based upon experience asbestos claims filing rates tort system certain operating asbestos trusts claims experience forums valuation methodology also includes analysis population likely exposed asbestos containing products epidemiological studies estimate number people likely develop asbestos related diseases narco claims filing history pending inventory narco asbestos related claims payment rates expected established narco trust methodology used estimate liability future claims commonly accepted numerous courts methodology utilized expert routinely retained asbestos claimants committee asbestos related bankruptcies december 2006 result significantly varying experiences asbestos claims filing rates tort system result clearly defined proof requirements certain operating asbestos trusts updated range estimated liability future narcorelated claims update resulted range estimated liability future claims 743 961 million believe amount within range better estimate amount accordingly december 2006 recorded minimum amount range resulted reduction 207 million estimated liability future narcorelated asbestos claims new data developments 2007 would warrant change estimated liability future narcorelated asbestos claims december 31 2007 2006 consolidated financial statements reflect insurance receivable corresponding liability settlement pending future narcorelated asbestos claims 939 955 million respectively coverage reimburses honeywell portions costs incurred settle narco related claims court judgments well defense costs provided large number insurance policies written dozens insurance companies domestic insurance market london excess market december 31 2007 significant portion coverage insurance companies agreements pay full policy limits based corresponding honeywell claims costs conduct analyses determine amount insurance estimate probable recovery relation payment current estimated future claims substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries made judgments concerning insurance coverage believe reasonable consistent historical dealings insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs second quarter 2006 travelers casualty insurance company “travelers” filed lawsuit honeywell insurance carriers supreme court new york county new york disputing obligations narcorelated asbestos claims high excess insurance coverage issued travelers insurance carriers approximately 340 million coverage policies included narcorelated insurance receivable december 31 2007 honeywell believes entitled coverage issue filed counterclaims superior court new jersey seeking among things declaratory relief respect coverage third quarter 2007 honeywell prevailed new york action critical choice law issue concerning appropriate method allocating narcorelated asbestos liabilities triggered policies court’s ruling subject appeal honeywell expects prevail matter adverse outcome could material impact results operations period recognized would material consolidated financial position operating cash flows honeywell international inc notes financial statementscontinued dollars millions except per share amounts projecting future events subject many uncertainties could cause narco related asbestos liabilities assets higher lower projected recorded assurance plan reorganization become final insurance recoveries timely whether narco related asbestos claims beyond 2018 given inherent uncertainty predicting future events review estimates periodically update based experience relevant factors similarly reevaluate projections concerning probable insurance recoveries light changes projected liability developments may impact insurance recoveries friction productshoneywell’s bendix friction materials bendix business manufactured automotive brake parts contained chrysotile asbestos encapsulated form group existing potential claimants consisting largely individuals allege exposure asbestos brakes either performing vicinity individuals performed brake replacements 1981 december 31 2007 resolved approximately 113000 bendix related asbestos claims trials covering 126 plaintiffs resulted 125 favorable verdicts one mistrial trials covering ten individuals resulted adverse verdicts however two verdicts reversed appeal five shortly appeal remaining three claims settled following tables present information regarding bendix related asbestos claims activity approximately 45 percent approximately 52000 pending claims december 31 2007 inactive deferred similar dockets established jurisdictions claimants allege minimal impairment approximately 52000 pending claims also include claims filed jurisdictions texas virginia mississippi historically allowed consolidated filings jurisdictions plaintiffs permitted file complaints predetermined master list defendants regardless whether claims individual defendant many plaintiffs may actually intend assert claims honeywell based state rules prior experience jurisdictions anticipate many claims ultimately dismissed 2006 approximately 16000 cases dismissed 85 percent dismissals occurred mississippi result judicial rulings relating nonresident filings venue continue experience dismissals jurisdiction honeywell experienced average resolution values per claim excluding legal costs follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts possible predict whether resolution values bendix related asbestos claims increase decrease stabilize future consolidated financial statements reflect estimated liability resolution pending future bendix related asbestos claims 517 528 million december 31 2007 2006 respectively prior december 2006 accrued estimated cost pending bendix related asbestos claims could reasonably estimate losses could arise future bendix related asbestos claims due steady threeyear decline rate bendix related asbestos claims filed reduced volatility rates felt possible determine reasonable estimate costs would incurred claims filed next five years accordingly fourth quarter 2006 recorded reserve 335 million estimated cost future bendix related asbestos claims based historic claims filing experience disease classifications expected resolution values historic dismissal rates december 2007 updated analysis estimated cost future bendix related asbestos claims resulted reduction reserve 327 million december 31 2007 december 2006 also changed methodology valuing bendix pending future claims using average resolution values previous five years using average resolution values previous two years resulted reduction 118 million reserve pending bendix claims fourth quarter 2006 claims filing experience resolution data bendix related claims become reliable past several years accordingly fourth quarter 2007 updated methodology valuing bendix pending future claims using average resolution values past three years data resulted 10 million reduction reserve pending bendix claims continue update expected resolution values used estimate cost pending future bendix claims fourth quarter year estimated liability future claims represents estimated value future asbestos related bodily injury claims expected asserted bendix next five years light uncertainties inherent making longterm projections well certain factors unique friction product asbestos claims believe reasonable basis estimating asbestos claims beyond next five years sfas 5 “accounting contingencies” estimate based upon bendix historical experience tort system three years ended december 31 2007 respect claims filing resolution values methodology used estimate liability future claims commonly accepted numerous courts similar used estimate future narco related asbestos claims liability honeywell currently approximately 19 billion insurance coverage remaining respect pending potential future bendix related asbestos claims 197 302 million reflected receivables consolidated balance sheet december 31 2007 2006 respectively coverage provided large number insurance policies written dozens insurance companies domestic insurance market london excess market insurance receivables recorded financial statements simultaneous recording liability estimated value underlying asbestos claims amount insurance receivable recorded based ongoing analysis insurance estimate probable recovery determination based analysis underlying insurance policies historical experience insurers ongoing review solvency insurers interpretation judicial determinations relevant insurance programs consideration impacts settlements reached insurers insurance receivables also recorded structured insurance settlements provide future fixed payment streams contingent upon future claims events amounts recorded net present value fixed payment stream cumulative historical basis honeywell recorded insurance receivables equal approximately 50 percent value underlying asbestos claims recorded however honeywell international inc notes financial statementscontinued dollars millions except per share amounts gaps coverage due insurance company insolvencies certain uninsured periods insurance settlements rate expected decline future bendix related asbestos liabilities may recorded future recoverability rates may also impacted numerous factors future insurance settlements insolvencies judicial determinations relevant coverage program difficult predict assuming continued defense indemnity spending current levels estimate cumulative recoverability rate could decline next five years approximately 40 percent honeywell believes sufficient insurance coverage reserves cover pending bendix related asbestos claims bendix related asbestos claims estimated filed within next five years although impossible predict outcome either pending future bendix related asbestos claims believe claims would material adverse effect consolidated financial position light insurance coverage prior experience resolving claims rate types claims filed average resolution value claims period time claim settlements paid collectively “variable claims factors” substantially change honeywell would expect future bendix related asbestos claims material adverse effect results operations operating cash flows fiscal year assurances given however variable claims factors change refractory friction productsthe following tables summarize information concerning narco bendix asbestos related balances asbestos related liabilities honeywell international inc notes financial statementscontinued dollars millions except per share amounts insurance recoveries asbestos related liabilities 1 2006 34 million reflects gains settlements two bendix insurance carriers 41 million represents writedown narco insurance receivable reflect reduction estimated cost future claims 2005 consists gains insurance settlements 172 million principally related structured insurance settlement carrier converted policy future fixed noncontingent payment stream charges 131 million writeoffs certain amounts due insurance carriers narco bendix asbestos related balances included following balance sheet accounts matters allen et al v honeywell retirement earnings planduring third quarter 2007 agreed settlement principle plaintiffs class action lawsuit relating allegations among things honeywell impermissibly reduced pension benefits certain employees former garrett corporation predecessor entity merger plan amended 1983 failed calculate certain benefits accordance terms plan terms settlement 18 21 claims alleged plaintiffs would dismissed prejudice exchange approximately 35 million maximum aggregate liability remaining three claims would capped 500 million third quarter 2007 recorded 35 million settlement part pension expense see note 22 amounts payable including settlement amount paid company’s pension plan definitive settlement agreement received final approval us district court district arizona february 2008 continue expect prevail remaining claims light applicable law substantial affirmative defenses yet considered court accordingly believe liability probable occurrence reasonably estimable respect claims honeywell international inc notes financial statementscontinued dollars millions except per share amounts recorded provision remaining claims financial statements although expect prevail three remaining claims adverse ruling one claims could material adverse effect results operations periods recognized believe adverse outcome matter would material adverse effect consolidated operating cash flows consolidated financial position subject number lawsuits investigations disputes involve substantial amounts claimed arising conduct business including matters relating commercial transactions government contracts product liability prior acquisitions divestitures employee benefit plans intellectual property health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes matters well potential ranges probable losses taking consideration insurance recoveries based careful analysis matter assistance outside legal counsel applicable experts given uncertainty inherent litigation believe possible develop estimates range reasonably possible loss excess current accruals matters considering past experience existing accruals expect outcome matters either individually aggregate material adverse effect consolidated financial position contingencies resolved long periods time potential liabilities subject change due new developments changes settlement strategy impact evidentiary requirements could cause us pay damage awards settlements become subject equitable remedies could material adverse effect results operations operating cash flows periods recognized paid warranties guaranteeswe issued party following direct indirect guarantees december 31 2007 expect guarantees material adverse effect consolidated results operations financial position liquidity connection disposition certain businesses facilities indemnified purchasers expected cost remediation environmental contamination existing date disposition expected costs accrued environmental assessments made remedial efforts probable costs reasonably estimated normal course business issue product warranties product performance guarantees accrue estimated cost product warranties performance guarantees based contract terms historical experience time sale adjustments initial obligations warranties guarantees made changes obligations become reasonably estimable following table summarizes information concerning recorded obligations product warranties product performance guarantees honeywell international inc notes financial statementscontinued dollars millions except per share amounts product warranties product performance guarantees included following balance sheet accounts note 22pension postretirement benefits sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees pension benefits substantially us employees provided noncontributory qualified nonqualified defined benefit pension plans us defined benefit pension plans comprise 73 percent projected benefit obligation nonus employees us citizens covered various retirement benefit arrangements considered defined benefit pension plans accounting purposes nonus defined benefit pension plans comprise 27 percent projected benefit obligation also sponsor postretirement benefit plans provide health care benefits life insurance coverage eligible retirees retiree medical plans mainly cover us employees retire pension eligibility hospital professional medical services nonunion hourly salaried employees joining honeywell january 1 2000 eligible participate retiree medical life insurance plans us retiree medical plans require deductibles copayments virtually integrated medicare retiree contributions generally required based coverage type plan medicare eligibility honeywell limited subsidy retiree medical plans fixeddollar amount substantially future retirees almost half current retirees cap retiree medical benefits plans limits exposure impact future health care cost increases retiree medical life insurance plans funded claims expenses paid operating cash flow discussed note 1 adopted sfas 158 december 31 2006 sfas 158 requires recognize prospective basis funded status defined benefit pension postretirement benefit plans consolidated balance sheet recognize component accumulated comprehensive income loss net tax gains losses prior service costs credits arise period recognized components net periodic benefit cost additional minimum pension liabilities related intangible assets also derecognized upon adoption new standard adjustment sfas 158 affected 2006 consolidated balance sheet follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts honeywell international inc notes financial statementscontinued dollars millions except per share amounts following tables summarize balance sheet impact including benefit obligations assets funded status associated significant pension postretirement benefit plans december 31 2007 2006 honeywell international inc notes financial statementscontinued dollars millions except per share amounts recognized accumulated comprehensive income loss december 31 2007 2006 follows accumulated benefit obligation defined benefit pension plans 160 162 billion december 31 2007 2006 respectively components net periodic benefit cost amounts recognized comprehensive income loss significant plans include following components estimated net loss prior service cost pension benefits amortized accumulated comprehensive income loss net periodic benefit cost 2008 expected 48 28 million respectively estimated net loss prior service credit postretirement benefits amortized accumulated comprehensive income loss net periodic benefit cost 2008 expected 35 40 million respectively honeywell international inc notes financial statementscontinued dollars millions except per share amounts major actuarial assumptions used determining benefit obligations net periodic benefit cost us benefit plans presented following table nonus benefit plans one individually material assumptions reflect economic assumptions applicable country select discount rate retirement benefit plans use modeling process involves matching expected cash outflows benefit plans yield curve constructed portfolio double rated fixedincome debt instruments use average yield hypothetical portfolio discount rate benchmark discount rate used determine postretirement benefit obligation lower due shorter expected duration postretirement plan obligations compared pension plan obligations expected rate return plan assets 9 percent longterm rate based historic plan asset returns varying longterm periods combined current market conditions broad asset mix considerations expected rate return longterm assumption generally change annually mortality assumptions us benefit plans updated december 31 2005 using rp2000 mortality table participants pension benefits included aggregate data tables amounts applicable pension plans accumulated benefit obligations exceeding fair value plan assets well plans projected benefit obligations exceeding fair value plan assets amounts related plans follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts us pension plans assets 130 128 billion nonus pension plans assets 42 38 billion december 31 2007 2006 respectively asset allocation target allocation pension plans assets follows asset investment strategy focuses maintaining diversified portfolio using various asset classes order achieve longterm investment objectives risk adjusted basis actual invested positions various securities change time based short longerterm investment opportunities achieve objectives us investment policy requires us master retirement trust invested follows less 5 percent invested fixed income securities b 10 percent private real estate investments c 18 percent investment alternatives involving limited partnerships various types stated limit investments publiclyheld us international equity securities nonus investment policies different country longterm investment objectives remain general funding policy qualified pension plans contribute amounts least sufficient satisfy regulatory funding standards 2007 2006 made voluntary contributions 42 68 million respectively us defined benefit pension plans primarily government contracting purposes assuming actual plan asset returns consistent expected rate 9 percent 2008 beyond interest rates remain constant would required make contributions us pension plans foreseeable future expect make voluntary contributions approximately 40 million cash 2008 certain us plans government contracting purposes also expect contribute approximately 125 million cash 2008 nonus defined benefit pension plans satisfy regulatory funding standards contributions reflect benefits paid directly company assets benefit payments including amounts paid company assets reflecting expected future service appropriate expected paid follows postretirement benefits fasb staff position 1062 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003” fsp 1062 provides guidance accounting effects medicare prescription drug improvement modernization act 2003 act employers sponsor postretirement health care plans provide prescription drug coverage least actuarially equivalent offered medicare part impact honeywell international inc notes financial statementscontinued dollars millions except per share amounts act reduced postretirement benefits expense approximately 25 37 45 million 2007 2006 2005 respectively assumed health care cost trend rate significant effect amounts reported onepercentagepoint change assumed health care cost trend rate would following effects benefit payments reflecting expected future service appropriate expected paid follows employee savings plans sponsor employee savings plans match form common stock savings plan contributions certain eligible us employees shares issued stock match plans 37 45 41 million cost 199 179 153 million 2007 2006 2005 respectively honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 23segment financial data globally manage business operations four reportable operating segments serving customers worldwide aerospace products services control sensing security technologies buildings homes industry automotive products chemicals segment information consistent management reviews businesses makes investing resource allocation decisions assesses operating performance four reportable segments follows • aerospace organized customer endmarket air transport regional business general aviation defense space provides products services include auxiliary power units propulsion engines environmental control systems engine controls repair overhaul services hardware logistics electric power systems flight safety communications navigation radar surveillance systems aircraft lighting management technical services advanced systems instruments aircraft wheels brakes • automation control solutions includes products controls heating cooling indoor air quality ventilation humidification home automation advanced software applications home building control optimization sensors switches control systems instruments measuring pressure air flow temperature electrical current security fire gas detection access control video surveillance remote patient monitoring systems building solutions installs maintains upgrades systems keep buildings safe comfortable productive process solutions provides full range automation control solutions industrial plants offering advanced software automation systems integrate control monitor complex processes many types industrial settings • specialty materials includes fluorocarbons specialty films advanced fibers customized research chemicals intermediates electronic materials chemicals catalysts adsorbents • transportation systems includes honeywell turbo technologies turbochargers chargeair thermal systems consumer products group car care products including antifreeze filters spark plugs cleaners waxes additives brake hard parts friction materials accounting policies segments described note 1 honeywell’s senior management evaluates segment performance based segment profit segment profit business unit income loss taxes excluding general corporate unallocated expenses income expense interest financial charges pension postretirement benefits expense stock option expense repositioning charges accounting changes intersegment sales approximate market prices significant reportable segment data follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts honeywell international inc notes financial statementscontinued dollars millions except per share amounts reconciliation segment profit consolidated income continuing operations taxes follows 1 amounts included cost products services sold selling general administrative expenses note 24geographic areasfinancial data note 25supplemental cash flow information honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 26unaudited quarterly financial information report independent registered public accounting firm board directors shareowners honeywell international inc opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position honeywell international inc subsidiaries december 31 2007 2006 results operations cash flows three years period ended december 31 2007 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 1 consolidated financial statements company changed manner accounts income tax uncertainties 2007 manner accounts stock based compensation defined benefit pension postretirement plans 2006 manner accounts conditional asset retirement obligations 2005 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp florham park new jersey february 14 2008 item 9item 8 financial statements supplementary data honeywell international inc consolidated statement operations notes financial statements integral part statement honeywell international inc consolidated balance sheet notes financial statements integral part statement honeywell international inc consolidated statement cash flows notes financial statements integral part statement honeywell international inc consolidated statement shareowners’ equity notes financial statements integral part statement honeywell international inc notes financial statements dollars millions except per share amounts note 1summary significant accounting policies accounting principlesthe financial statements accompanying notes prepared accordance accounting principles generally accepted united states america following description significant accounting policies honeywell international inc principles consolidationthe consolidated financial statements include accounts honeywell international inc subsidiaries entities controlling interest maintained consolidation policy requires consolidation entities controlling financial interest obtained well consolidation variable interest entities bear majority risk entities’ potential losses stand gain majority entities’ expected returns intercompany transactions balances eliminated consolidation cash equivalentscash cash equivalents include cash hand deposit highly liquid temporary cash investments original maturity three months less inventoriesinventories valued lower cost market using firstin firstout average cost method lastin firstout lifo method certain qualifying domestic inventories investmentsinvestments affiliates significant influence controlling interest accounted using equity method accounting investments carried market value readily determinable cost equity investments periodically reviewed determine declines fair value cost basis otherthantemporary significant sustained decreases quoted market prices series historic projected operating losses investees strong indicators otherthantemporary declines decline fair value determined thantemporary impairment loss recorded investment written new carrying value property plant equipmentproperty plant equipment recorded cost including asset retirement obligations less accumulated depreciation financial reporting straightline method depreciation used estimated useful lives 10 50 years buildings improvements 2 16 years machinery equipment statement financial accounting standards 143 “accounting asset retirement obligations” sfas 143 fasb interpretation 47 “fin 47” require recognition fair value obligations associated retirement tangible longlived assets legal obligation incur costs upon initial recognition liability cost capitalized part related longlived asset depreciated corresponding asset’s useful life see note 11 note 17 additional details goodwill indefinitelived intangible assetsgoodwill represents excess acquisition costs fair value tangible net assets identifiable intangible assets businesses acquired goodwill certain intangible assets deemed indefinite lives amortized intangible assets determined definite lives amortized useful lives goodwill indefinite lived intangible assets subject impairment testing annually march 31 whenever events changes circumstances indicate carrying amount may fully recoverable using guidance criteria described statement financial accounting standards 142 “goodwill intangible assets” testing compares carrying values fair values appropriate carrying value assets reduced fair value completed annual goodwill impairment test march 31 2008 determined impairment date see note 12 additional details goodwill balances intangible assets determinable livesother intangible assets determinable lives consist customer lists technology patents trademarks intangibles amortized estimated useful lives ranging 2 24 years longlived assetswe periodically evaluate recoverability carrying amount longlived assets including property plant equipment intangible assets determinable lives whenever events changes circumstances indicate carrying amount asset may honeywell international inc notes financial statementscontinued dollars millions except per share amounts fully recoverable evaluate events changes circumstances based number factors including operating results business plans forecasts general industry trends economic projections anticipated cash flows impairment assessed undiscounted expected future cash flows derived asset less carrying amount impairment losses measured amount carrying value asset exceeds fair value recognized earnings also continually evaluate estimated useful lives longlived assets periodically revise estimates based current events sales recognitionproduct service sales recognized persuasive evidence arrangement exists product delivery occurred services rendered pricing fixed determinable collection reasonably assured service sales principally representing repair maintenance engineering activities aerospace automation control solutions segments recognized contractual period services rendered sales longterm contracts aerospace automation control solutions segments recorded percentageofcompletion method measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts provisions anticipated losses longterm contracts recorded full losses become evident revenues contracts multiple element arrangements recognized element earned based relative fair value element provided delivered elements value customers standalone basis amounts allocated element based objectively determined fair value sales price product service sold separately competitor prices similar products services allowance doubtful accountswe maintain allowances doubtful accounts estimated losses result customer’s inability make required payments estimate anticipated losses doubtful accounts based days past due measured contractual due date historical collection history incorporate changes economic conditions may reflected historical trends example customers bankruptcy liquidation reorganization receivables writtenoff allowance doubtful accounts determined uncollectible determination includes analysis consideration particular conditions account including time intervals since last collection success outside collection agencies activity solvency customer bankruptcy proceedings environmental expendituresenvironmental expenditures relate current operations expensed capitalized appropriate expenditures relate existing condition caused past operations provide future benefits expensed incurred liabilities recorded environmental remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical regulatory legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities asbestos related contingencies insurance recoverieshoneywell defendant personal injury actions related products containing asbestos refractory friction products recognize liability asbestos related contingency probable occurrence reasonably estimable regarding north american refractories company narco asbestos related claims accrue pending claims based terms conditions including evidentiary requirements definitive agreements principle current claimants also accrue probable value future narco asbestos related claims 2018 based disease criteria payment values contained narco trust described note 21 light inherent honeywell international inc notes financial statementscontinued dollars millions except per share amounts uncertainties making long term projections regarding claims filing rates disease manifestation believe reasonable basis estimating narco asbestos claims beyond 2018 statement financial accounting standards 5 “accounting contingencies” sfas 5 regarding bendix asbestos related claims accrue estimated value pending claims based expected claim resolution values historic dismissal rates also accrue estimated cost future anticipated claims related bendix next five years based assessment additional claims may brought us anticipated resolution values tort system value bendix pending future claims using average resolution values previous three years continue update expected resolution values used estimate cost pending future bendix claims fourth quarter year additional information see note 21 continually assess likelihood adverse judgments outcomes contingencies well potential ranges probable losses recognize liability contingencies based analysis individual issue assistance outside legal counsel applicable experts connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical experience insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs consideration impacts settlements insurers aerospace sales incentiveswe provide sales incentives commercial aircraft manufacturers airlines connection selection aircraft equipment predominately wheel braking system hardware auxiliary power units installation commercial aircraft incentives principally consist free deeply discounted products also include credits future purchases product upfront cash payments costs recognized period incurred cost products sold reduction sales appropriate aircraft manufacturers incentives recorded products delivered airlines incentives recorded associated aircraft delivered aircraft manufacturer airline research developmentresearch development costs companysponsored research development projects expensed incurred costs principally included cost products sold 1543 1459 1411 million 2008 2007 2006 respectively stockbased compensation plansthe principal awards issued stockbased compensation plans described note 20 include nonqualified stock options restricted stock units rsus cost awards measured grant date based fair value award value portion award ultimately expected vest recognized expense requisite service periods generally vesting period equity award included selling general administrative expense consolidated statement operations sfas 123 revised 2004 “sharebased payment” sfas 123r requires forfeitures estimated time grant order estimate portion award ultimately vest estimate based historical rates forfeiture pension postretirement benefitswe sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees also sponsor postretirement benefit plans provide health care benefits life insurance coverage eligible retirees us defined benefit pension plans use marketrelated value plan assets reflecting changes fair value plan assets threeyear period net actuarial gains losses excess 10 percent greater marketrelated value plan assets plans’ projected benefit obligation corridor recognized sixyear period adopted honeywell international inc notes financial statementscontinued dollars millions except per share amounts sfas 158 “employers’ accounting defined benefit pension postretirement plans” sfas 158 december 31 2006 see note 22 additional disclosures foreign currency translationassets liabilities subsidiaries operating outside united states functional currency us dollars translated us dollars using yearend exchange rates sales costs expenses translated average exchange rates effect year foreign currency translation gains losses included component accumulated comprehensive income loss subsidiaries operating highly inflationary environments inventories property plant equipment including related expenses remeasured exchange rate effect date assets acquired monetary assets liabilities remeasured yearend exchange rates remeasurement adjustments subsidiaries included earnings derivative financial instrumentsas result global operating financing activities exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position minimize risks interest foreign currency exchange rate commodity price fluctuations normal operating financing activities deemed appropriate use derivative financial instruments derivative financial instruments used manage risk used trading speculative purposes use leveraged derivative financial instruments derivative financial instruments used hedging purposes must designated effective hedge identified risk exposure inception contract accordingly changes fair value derivative contract must highly correlated changes fair value underlying hedged item inception hedge life hedge contract derivatives recorded balance sheet assets liabilities measured fair value derivatives designated hedges fair value assets liabilities changes fair values derivatives hedged items recorded current earnings derivatives designated cash flow hedges effective portion changes fair value derivatives recorded accumulated comprehensive income loss subsequently recognized earnings hedged items impact earnings cash flows derivative financial instruments classified consistent underlying hedged item transfers financial instrumentssales transfers securitization financial instruments accounted statement financial accounting standards 140 “accounting transfers servicing financial assets extinguishments liabilities” sell interests designated pools trade accounts receivables third parties receivables removed consolidated balance sheet time sold value assigned subordinated interests undivided interests retained trade receivables sold based relative fair values interests retained sold carrying value retained interests approximates fair value due shortterm nature collection period receivables income taxesdeferred tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax assets realized determination amount valuation allowance provided recorded deferred tax assets involves estimates regarding 1 timing amount reversal taxable temporary differences 2 expected future taxable income 3 impact tax planning strategies assessing need valuation allowance consider available positive negative evidence including past operating results projections future taxable income feasibility ongoing tax planning strategies projections future taxable income include number estimates honeywell international inc notes financial statementscontinued dollars millions except per share amounts assumptions regarding volume pricing costs additionally valuation allowances related deferred tax assets impacted changes tax laws significant judgment required determining income tax provisions statement financial accounting standards 109 “accounting income taxes” sfas 109 evaluating tax positions establish additional provisions income taxes despite belief tax positions fully supportable remain certain positions meet minimum probability threshold defined fasb interpretation “fin” 48 “accounting uncertainty income taxes” fin 48 tax position likely sustained upon examination applicable taxing authority normal course business company subsidiaries examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes continually assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts give rise revision become known june 2006 financial accounting standards board “fasb” issued fin 48 establishes single model address accounting uncertain tax positions fin 48 clarifies accounting income taxes prescribing minimum recognition threshold tax position required meet recognized financial statements fin 48 also provides guidance derecognition measurement classification interest penalties accounting interim periods disclosure transition upon adoption january 1 2007 reduced existing reserves uncertain tax positions 33 million largely related reduction state income tax matters partially offset net increase federal international tax reserves earnings per sharebasic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding dilutive potential common shares outstanding use estimatesthe preparation consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts financial statements related disclosures accompanying notes actual results could differ estimates assumptions periodically reviewed effects revisions reflected consolidated financial statements period determined necessary reclassificationscertain prior year amounts reclassified conform current year presentation recent accounting pronouncementsin september 2006 fasb issued statement financial accounting standard “sfas” 157 “fair value measurements” sfas 157 sfas 157 establishes common definition fair value applied us gaap requiring use fair value establishes framework measuring fair value expands disclosure fair value measurements sfas 157 effective fiscal years beginning november 15 2007 issued february 2008 fsp 1571 “application fasb statement 157 fasb statement 13 accounting pronouncements address fair value measurements purposes lease classification measurement statement 13” removed leasing transactions accounted statement 13 related guidance scope sfas 157 fsp 1572 “partial deferral effective date statement 157” fsp 1572 deferred effective date sfas 157 nonfinancial assets nonfinancial liabilities fiscal years beginning november 15 2008 october 2008 fasb issued fsp 1573 “determining fair value financial asset market active” fsp 1573 fsp 1573 clarified application sfas 157 inactive market demonstrated fair value financial asset determined market honeywell international inc notes financial statementscontinued dollars millions except per share amounts financial asset inactive fsp 1573 effective upon issuance including prior periods financial statements issued implementation sfas 157 financial assets financial liabilities effective january 1 2008 material impact consolidated financial position results operations implementation sfas 157 nonfinancial assets nonfinancial liabilities effective january 1 2009 material impact consolidated financial position results operations sfas 157 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date exit price sfas 157 classifies inputs used measure fair value following hierarchy level 1 unadjusted quoted prices active markets identical assets liabilities level 2 unadjusted quoted prices active markets similar assets liabilities unadjusted quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability level 3 unobservable inputs asset liability company utilizes best available information measuring fair value financial assets liabilities classified entirety based lowest level input significant fair value measurement company determined financial assets liabilities level 2 fair value hierarchy following table sets forth company’s financial assets liabilities accounted fair value recurring basis december 31 2008 result global operating financing activities company exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position deemed appropriate minimize risks interest foreign currency exchange rate commodity price fluctuations use derivative financial instruments derivative financial instruments used manage risk used trading speculative purposes use leveraged derivative financial instruments forward foreign currency exchange contracts forward commodity purchase agreements valued using broker quotations market transactions either listed overthe counter markets derivative instruments classified within level 2 company also holds investments marketable equity securities designated available sale valued using market transactions overthecounter markets investments classified within level 2 february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities” sfas 159 sfas 159 permits entities choose measure many financial assets financial liabilities fair value unrealized gains losses items honeywell international inc notes financial statementscontinued dollars millions except per share amounts fair value option elected reported earnings sfas 159 effective fiscal years beginning november 15 2007 implementation standard material impact consolidated financial position results operations march 2007 fasb ratified emerging issues task force “eitf” issue 0610 “accounting collateral assignment splitdollar life insurance agreements” eitf 0610 eitf 0610 provides guidance determining liability postretirement benefit obligations well recognition measurement associated asset basis terms collateral assignment agreement eitf 0610 effective fiscal years beginning december 15 2007 implementation standard material impact consolidated financial position results operations june 2007 fasb ratified eitf 0611 “accounting income tax benefits dividends sharebased payment awards” eitf 0611 eitf 0611 provides tax benefits associated dividends sharebased payment awards recorded component additional paidin capital eitf 0611 effective prospective basis fiscal years beginning december 15 2007 implementation standard material impact consolidated financial position results operations december 2007 fasb issued sfas 141 revised 2007 “business combinations” sfas 141r sfas 141r provides revised guidance acquirers recognize measure consideration transferred identifiable assets acquired liabilities assumed contingencies noncontrolling interests goodwill acquired business combination sfas 141r also expands required disclosures surrounding nature financial effects business combinations sfas 141r effective prospective basis fiscal years beginning december 15 2008 upon adoption standard material impact consolidated financial position results operations however company enters business combinations adoption sfas 141r transaction may significantly impact company’s consolidated financial position results operations compared company’s recent acquisitions accounted existing gaap requirements due changes described december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statements” sfas 160 sfas 160 establishes requirements ownership interests subsidiaries held parties company sometimes called “minority interests” clearly identified presented disclosed consolidated statement financial position within equity separate parent’s equity changes parent’s ownership interests required accounted consistently equity transactions noncontrolling equity investments unconsolidated subsidiaries must measured initially fair value sfas 160 effective prospective basis fiscal years beginning december 15 2008 however presentation disclosure requirements must retrospectively applied comparative financial statements implementation standard material impact consolidated financial position results operations december 2007 fasb issued sfas 133 accounting derivative instruments hedging activities sfas 133 implementation issue e23 “hedginggeneral issues involving application shortcut method paragraph 68” issue e23 issue e23 amends sfas 133 explicitly permit use shortcut method hedging relationships interest rate swaps nonzero fair value inception hedging relationship provided certain conditions met issue e23 effective hedging relationships designated january 1 2008 implementation guidance material impact consolidated financial position results operations march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activitiesan amendment fasb statement 133” sfas 161 sfas 161 expands quarterly disclosure requirements sfas 133 entity’s derivative instruments honeywell international inc notes financial statementscontinued dollars millions except per share amounts hedging activities sfas 161 effective fiscal years beginning november 15 2008 implementation standard material impact consolidated financial position results operations april 2008 fasb issued fsp 1423 “determination useful life intangible assets” fsp 1423 fsp 1423 amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset sfas 142 “goodwill intangible assets” fsp 1423 effective fiscal years beginning december 15 2008 implementation standard material impact consolidated financial position results operations may 2008 fasb issued sfas 162 “the hierarchy generally accepted accounting principles” sfas 162 sfas 162 identifies sources accounting principles framework selecting principles used preparation financial statements sfas 162 effective 60 days following sec’s approval public company accounting oversight board amendments au section 411 “the meaning present fairly conformity generally accepted accounting principles” implementation standard material impact consolidated financial position results operations june 2008 fasb issued fsp eitf 0361 “determining whether instruments granted sharebased payment transactions participating securities” fsp eitf 0361 fsp eitf 0361 clarified outstanding unvested sharebased payment awards contain rights nonforfeitable dividends participate undistributed earnings common shareholders awards nature considered participating securities twoclass method computing basic diluted earnings per share must applied fsp eitf 0361 effective fiscal years beginning december 15 2008 implementation standard material impact consolidated financial position results operations june 2008 fasb ratified eitf issue 075 “determining whether instrument embedded feature indexed entity’s stock” eitf 075 eitf 075 provides entity use two step approach evaluate whether equitylinked financial instrument embedded feature indexed stock including evaluating instrument’s contingent exercise settlement provisions also clarifies impact foreign currency denominated strike prices marketbased employee stock option valuation instruments evaluation eitf 075 effective fiscal years beginning december 15 2008 implementation standard material impact consolidated financial position results operations june 2008 fasb ratified eitf issue 083 “accounting lessees maintenance deposits lease arrangements” eitf 083 eitf 083 provides guidance accounting nonrefundable maintenance deposits also provides revenue recognition accounting guidance lessor eitf 083 effective fiscal years beginning december 15 2008 implementation standard material impact consolidated financial position results operations september 2008 fasb issued fsp 1331 fin 454 “disclosures credit derivatives certain guarantees amendment fasb statement 133 fasb interpretation 45 clarification effective date fasb statement 161” fsp 1331 fin 454 fsp 1331 fin 454 amends enhances disclosure requirements sellers credit derivatives financial guarantees also clarifies disclosure requirements sfas 161 effective quarterly periods beginning november 15 2008 fiscal years include periods fsp 1331 fin 454 effective reporting periods annual interim ending november 15 2008 implementation standard material impact consolidated financial position results operations honeywell international inc notes financial statementscontinued dollars millions except per share amounts september 2008 fasb ratified eitf issue 085 “issuer’s accounting liabilities measured fair value thirdparty credit enhancement” eitf 085 eitf 085 provides guidance measuring liabilities issued attached thirdparty credit enhancement guarantee clarifies issuer liability thirdparty credit enhancement guarantee include effect credit enhancement fair value measurement liability eitf 085 effective first reporting period beginning december 15 2008 implementation standard material impact consolidated financial position results operations november 2008 fasb ratified eitf issue 086 “equity method investment accounting considerations” eitf 086 eitf 086 addresses number matters associated impact sfas 141r sfas 160 accounting equity method investments including initial recognition measurement subsequent measurement issues eitf 086 effective prospective basis fiscal years beginning december 15 2008 interim periods within fiscal years implementation standard material impact consolidated financial position results operations november 2008 fasb ratified eitf issue 0807 “accounting defensive intangible assets” eitf 087 eitf 087 provides guidance accounting defensive intangible assets subsequent acquisition accordance sfas 141r sfas 157 including estimated useful life assigned assets eitf 087 effective intangible assets acquired beginning first annual reporting period beginning december 15 2008 company currently assessing impact eitf 087 consolidated financial position results operations november 2008 fasb ratified eitf issue 0808 “accounting instrument embedded feature settlement amount based stock entity’s consolidated subsidiary” eitf 088 eitf 088 clarifies whether financial instrument payoff counterparty based whole part stock entity’s consolidated subsidiary indexed reporting entity’s stock eitf 088 effective fiscal years beginning december 15 2008 interim periods within fiscal years implementation standard material impact consolidated financial position results operations december 2008 fasb issued fsp fas 1404 fin 46r8 “disclosures public entities enterprises transfers financial assets interests variable interest entities” fsp 1404 46r8 fsp 1404 46r8 requires additional disclosures transfers financial assets involvement variable interest entities fsp 1404 46r8 effective first reporting period annual interim ending december 15 2008 implementation standard material impact consolidated financial position results operations december 2008 fasb issued fsp 132r1 “employers’ disclosures postretirement benefit plan assets” fsp 132r1 fsp 132r1 provides guidance employer’s disclosures plan assets defined benefit pension postretirement plan fsp 132r1 effective fiscal years ending december 15 2009 implementation standard material impact consolidated financial position results operations january 2009 fasb issued fsp eitf 99201 “amendments impairment guidance eitf issue 9920” fsp 99201 fsp 99201 amends impairment guidance eitf issue 9920 “recognition interest income impairment purchased beneficial interests beneficial interests continue held transferor securitized financial assets” achieve consistent determination whether otherthantemporary impairment occurred fsp 99201 effective prospective basis interim annual reporting periods ending december 15 2008 implementation standard material impact consolidated financial position results operations honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 2acquisitions divestitures acquired businesses aggregate cost 2181 1190 979 million 2008 2007 2006 respectively acquisitions accounted purchase method accounting accordingly assets liabilities acquired businesses recorded estimated fair values dates acquisition significant acquisitions made years discussed may 2008 company completed acquisition safety products holding inc subsidiary norcross safety products llc norcross leading manufacturer personal protective equipment purchase price net cash acquired approximately 12 billion allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date following table summarizes estimated fair values assets liabilities acquired acquisition date company assigned 708 million intangible assets predominantly customer relationships trade names technology intangibles assets amortized estimated lives using straight line accelerated amortization methods value assigned trade names approximately 264 million classified indefinite lived intangible excess purchase price estimated fair values net assets acquired approximately 598 million recorded goodwill nondeductible tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2008 included automation control solutions segment material consolidated financial statements july 2008 company completed sale consumables solutions business aerospace 105 billion consisting approximately 901 million cash six million shares common stock connection completion sale company entered among things exclusive supply license agreements stockholder agreement extent company’s cash flows associated supply license agreements consumables solutions business classified discontinued operations provisions license supply agreements determined atmarket allocated portion proceeds agreements pretax gain 623 million classified incomeexpense statement operations gain sale approximately 417 million net tax sale consumables solutions business within aerospace segment consistent company’s strategic focus core product areas utilizing advanced technologies honeywell international inc notes financial statementscontinued dollars millions except per share amounts july 2008 company completed acquisition metrologic instruments inc metrologic leading manufacturer data capture collection hardware software purchase price approximately 715 million net cash acquired purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 248 million identifiable intangible assets predominantly customer relationships technology trademarks intangible assets amortized estimated lives range 115 years using straight line accelerated amortization methods excess purchase price estimated fair values net assets acquired approximately 440 million recorded goodwill nondeductible tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2008 included automation control solutions segment material consolidated financial statements december 2007 company specifically automation control solutions segment completed acquisition maxon corporation leading industrial combustion business purchase price approximately 185 million purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 70 million identifiable intangible assets predominantly customer relationships trademarks intangible assets amortized estimated lives range 720 years using straight line accelerated amortization methods value assigned trade marks approximately 10 million classified indefinite lived intangible excess purchase price estimated fair values net assets acquired approximating 114 million recorded goodwill nondeductible tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2007 material consolidated financial statements december 2007 company specifically automation control solutions segment completed acquisition hand held products inc privately held automatic identification data collection company purchase price approximately 390 million purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 101 million identifiable intangible assets predominantly customer relationships existing technology intangible assets amortized estimated lives range 1 15 years using straightline accelerated amortization methods excess purchase price estimated fair values net assets acquired approximating 257 million recorded goodwill non deductible tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2007 material consolidated financial statements july 2007 company completed acquisition dimensions international defense logistics business purchase price approximately 233 million purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 21 million identifiable intangible assets predominantly contractual relationships intangible assets amortized estimated life 5 years using straightline accelerated amortization methods excess purchase price estimated fair values net assets acquired approximating 183 million recorded goodwill deducted 15 year period tax purposes acquisition accounted purchase method accordingly results honeywell international inc notes financial statementscontinued dollars millions except per share amounts operations included consolidated financial statements date acquisition results acquisition date december 31 2007 included aerospace segment material consolidated financial statements july 2007 company completed acquisition enraf holding bv provider comprehensive solutions control management transportation storage blending operations oil gas industry purchase price approximately 264 million including assumption approximately 40 million debt purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 90 million identifiable intangible assets predominantly customer relationships existing technology trademarks remaining intangible assets amortized estimated life 815 years using straightline accelerated amortization methods value assigned trademarks approximately 27 million classified indefinite lived intangible excess purchase price estimated fair values net assets acquired approximating 167 million recorded goodwill nondeductible tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2007 included automation control solutions segment material consolidated financial statements may 2006 company purchased gardiner groupe privately held company purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values lives acquisition date company assigned 47 million identifiable intangible assets predominantly customer relationships trademarks intangible assets amortized estimated lives range 3 15 years using straightline accelerated amortization methods excess purchase price estimated fair values net assets acquired approximating 130 million recorded goodwill nondeductible tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2006 included automation control solutions segment material consolidated financial statements march 2006 company purchased first technology plc uk publicly listed company aggregate value purchase price 723 million including assumption approximately 217 million outstanding debt 23 million transaction costs purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 155 million identifiable intangible assets predominantly customer relationships existing technology trademarks intangible assets amortized estimated lives range 2 15 years using straightline accelerated amortization methods excess purchase price estimated fair values net assets acquired approximating 432 million recorded goodwill nondeductible tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2006 included automation control solutions segment material consolidated financial statements year company completed sales first technology safety analysis business 93 million first technology automotive 90 million accounted part purchase price allocation honeywell international inc notes financial statementscontinued dollars millions except per share amounts december 31 2008 purchase accounting norcross metrologic still subject final adjustment primarily useful lives amounts allocated intangible assets goodwill certain preacquisition contingencies settlement post closing purchase price adjustments connection acquisitions 2008 2007 2006 amounts recorded transaction costs integrating acquired businesses honeywell material pro forma results 2008 2007 2006 assuming acquisitions made beginning year would materially different consolidated reported results note 3repositioning charges summary repositioning charges follows following table summarizes pretax distribution total net repositioning charges income statement classification following table summarizes pretax impact total net repositioning charges segment honeywell international inc notes financial statementscontinued dollars millions except per share amounts 2008 recognized repositioning charges totaling 444 million including severance costs 333 million related workforce reductions 7480 manufacturing administrative positions across segments workforce reductions primarily relate planned downsizing shutdown certain manufacturing facilities aerospace automation control solutions transportation systems segments rationalization nonmanufacturing infrastructure outsourcing noncore components managing capacity utilization address product demand volatility functional transformation initiative repositioning charge also included asset impairments 78 million principally related manufacturing plant equipment facilities scheduled close downsized certain administrative facilities information technology equipment corporate segment also 20 million previously established accruals primarily severance automation control solutions segment returned income 2008 due mainly fewer employee separations originally planned associated prior severance programs 2007 recognized repositioning charges totaling 209 million primarily severance costs related workforce reductions 3408 manufacturing administrative positions mainly automation control solutions aerospace segments also 18 million previously established accruals primarily severance transportation systems aerospace segments returned income 2007 due mainly changes scope previously announced severance programs due fewer employee separations originally planned associated prior severance programs 2006 recognized repositioning charges totaling 124 million primarily severance costs related workforce reductions 2253 manufacturing administrative positions across segments also 22 million previously established accruals primarily severance aerospace transportation systems specialty materials segments returned income 2006 due mainly changes scope previously announced severance programs due fewer employee separations originally planned associated prior aerospace severance programs following table summarizes status total repositioning reserves 2008 certain repositioning projects aerospace automation control solutions transportation systems segments included exit disposal activities costs related recognized future periods actual liability incurred nature exit disposal costs principally includes product recertification requalification employee training travel following table summarizes segment expected incurred remaining exit disposal honeywell international inc notes financial statementscontinued dollars millions except per share amounts costs related 2008 repositioning actions able recognize time actions initiated 2008 recognized charge 465 million environmental liabilities deemed probable reasonably estimable year 309 million recognized third quarter included • 100 million related resolution technical design issues regarding remediation plan onondaga lake “lake” previously reported ultimate cost remediation lake depended upon resolution issues • 90 million estimated cost proposed remedial actions taken sites located syracuse new york accordance remediation plans submitted state environmental regulators • 38 million primarily related changes cost estimates due among things increases cost steel waste transportation disposal costs settlement costs relating remediation new jersey chrome sites known study areas 5 6 7 also recognized asbestos related litigation charges net insurance 125 million discussed note 21 2007 recognized charge 225 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 100 million discussed note 21 recognized charges 18 million business sales tax related prior divestiture 8 million contemplated settlements certain legal matters 10 million also recognized impairment charges 9 million related writedown property plant equipment held sale specialty materials segment 2006 recognized charge 210 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 126 million discussed note 21 recognized charges 51 million related corporate segment primarily settlement property damage claim litigation matter brunswick ga entrance plea agreement related environmental matter baton rouge la facility recognized impairment charges 12 million related writedown property plant equipment held sale specialty materials segment also recognized credit 18 million connection arbitration award overcharges supplier phenol specialty materials business 2005 transactions note 4other incomeexpense honeywell international inc notes financial statementscontinued dollars millions except per share amounts gain sale nonstrategic businesses assets 2008 includes 623 million pretax gain related sale consumables solutions business see note 2 details note 5interest financial charges weighted average interest rate shortterm borrowings commercial paper outstanding december 31 2008 2007 163 percent 465 percent respectively note 6income taxes income continuing operations taxes tax expense honeywell international inc notes financial statementscontinued dollars millions except per share amounts effective tax rate increased 01 percentage point 2008 compared 2007 due principally higher overall state effective tax rate decreased impact settlement audits partially offset decrease foreign effective tax rate deferred tax assets liabilities deferred income taxes represent future tax effects transactions reported different periods tax financial reporting purposes tax effects temporary differences tax carryforwards give rise future income tax benefits payables follows 102 million us federal tax net operating losses available carryforward december 31 2008 generated certain subsidiaries prior acquisition expiration dates 2024 use preacquisition operating losses subject limitations imposed internal revenue code anticipate limitations affect utilization carryforwards prior expiration various subsidiaries state tax net operating loss carryforwards 27 billion december 31 2008 varying expiration dates 2025 also foreign net operating capital losses 25 billion available reduce future income tax payments several countries subject varying expiration rules honeywell international inc notes financial statementscontinued dollars millions except per share amounts state tax credit carryforwards 57 million december 31 2008 including carryforwards 31 million various expiration dates 2023 tax credits 26 million subject expiration addition 5 million foreign tax credits available carryback carryforward us federal tax return december 31 2008 various expiration dates 2013 valuation allowance deferred tax assets decreased 45 million 26 million 2008 2007 respectively increased 39 2006 2008 decrease valuation allowance primarily due decrease valuation allowance related federal state capital loss carryforwards partially offset increased foreign net operating losses 2007 decrease valuation allowance primarily due decrease valuation allowances related state foreign net operating losses partially offset valuation allowance us capital losses federal income taxes provided undistributed earnings majority international subsidiaries intention reinvest earnings respective businesses december 31 2008 honeywell provided us federal income foreign withholding taxes approximately 47 billion earnings nonus operations practicable estimate amount tax might payable earnings remitted foreign tax credits would available reduce eliminate resulting us income tax liability 671 million 666 million unrecognized tax benefits december 31 2008 2007 respectively recognized 671 million would recorded component income tax expense december 31 2008 year ended december 31 2008 company increased unrecognized tax benefits 5 million due additional reserves various international us tax audit matters partially offset change foreign currency translation expiration various statute limitations settlement audits following table summarizes activity related unrecognized tax benefits honeywell international inc notes financial statementscontinued dollars millions except per share amounts many cases uncertain tax positions related tax years remain subject examination relevant tax authorities following table summarizes open tax years major jurisdiction december 31 2008 1 includes federal well state provincial similar local jurisdictions applicable based outcome examinations result expiration statute limitations specific jurisdictions reasonably possible related unrecognized tax benefits tax positions taken regarding previously filed tax returns materially change recorded liabilities uncertain tax positions financial statements addition outcome examinations may impact valuation certain deferred tax assets net operating losses future periods based number tax years currently audit relevant us federal state foreign tax authorities company anticipates several audits may finalized foreseeable future however based status examinations protocol finalizing audits relevant tax authorities could include formal legal proceedings time possible estimate impact amount changes previously recorded uncertain tax positions unrecognized tax benefits listed examinations progress 249 million 199 million december 31 2008 2007 respectively increase primarily due reserves examinations initiated 2008 increases prior reserves based facts circumstances reporting date partially offset settlement tax examinations expiration various statute limitations year estimated interest penalties related underpayment income taxes classified component tax expense consolidated statement operations totaled 19 million 20 million years ended december 31 2008 2007 respectively accrued interest penalties 137 million 118 million december 31 2008 december 31 2007 respectively honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 7earnings loss per share following table sets forth computations basic diluted earnings loss per share 2008 2007 2006 diluted earnings per share calculation excludes effect stock options’ exercise prices exceed average market price common shares period 2008 2007 2006 number stock options included computation 17825720 8599620 22749056 respectively stock options outstanding end respective years note 8accounts notes receivables trade accounts receivable includes 1195 1084 million unbilled balances longterm contracts december 31 2008 2007 respectively amounts billed accordance terms customer contracts relate sell interests designated pools trade accounts receivables third parties sold receivables overcollateralized 93 million december 31 2008 retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools overcollateralization provides credit support purchasers receivable interest limiting losses event portion receivables becomes uncollectable new receivables sold agreement previously sold receivables collected losses recognized interest receivables sold retained interests receivables shown amounts expected collected us carrying value approximates fair value retained interests compensated services collection administration receivables honeywell international inc notes financial statementscontinued dollars millions except per share amounts losses sales receivables 18 29 27 million 2008 2007 2006 respectively credit losses incurred years note 9inventories inventories valued lifo amounted 269 247 million december 31 2008 2007 respectively lifo inventories valued current costs carrying values would approximately 160 199 million higher december 31 2008 2007 respectively note 10investments longterm receivables longterm trade receivables includes 36 63 million unbilled balances longterm contracts december 31 2008 2007 respectively amounts billed accordance terms customer contracts relate note 11property plant equipment honeywell international inc notes financial statementscontinued dollars millions except per share amounts depreciation expense 702 675 650 million 2008 2007 2006 respectively note 12goodwill intangiblesnet change carrying amount goodwill years ended december 31 2008 2007 segment follows intangible assets comprised intangible assets amortization expense 201 162 144 million 2008 2007 2006 respectively estimated intangible assets amortization expense next five years approximates 254 million 2009 243 million 2010 226 million 2011 210 million 2012 181 million 2013 honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 13accrued liabilities honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 14longterm debt credit agreements schedule principal payments longterm debt follows maintain 38 billion committed bank revolving credit facilities including 28 billion five year revolving credit facility group banks arranged citigroup global markets inc jpmorgan securities inc place midmay 2012 credit facility contains 700 million sub limit issuance letters credit 28 billion credit facility maintained general corporate purposes including support issuance commercial paper borrowings outstanding letters credit issued credit facility december 31 2008 credit agreement restrict ability pay dividends contains financial covenants failure comply customary conditions occurrence customary events honeywell international inc notes financial statementscontinued dollars millions except per share amounts default contained credit agreement would prevent borrowings would generally require repayment outstanding borrowings credit agreement events default include nonpayment credit agreement debt interest fees b noncompliance terms credit agreement covenants c crossdefault debt certain circumstances bankruptcy e defaults upon obligations employee retirement income security act additionally banks right terminate commitment lend additional funds issue letters credit agreement person group acquires beneficial ownership 30 percent voting stock 12month period individuals directors honeywell beginning period cease constitute majority board directors board loans 28 billion credit facility required repaid later may 14 2012 agreed pay facility fee 005 percent per annum aggregate commitment interest borrowings 28 billion credit facility would determined honeywell’s option auction bidding procedure b highest floating base rate publicly announced citibank na 05 percent average cd rate 05 percent federal funds rate c eurocurrency rate plus 015 percent applicable margin facility fee applicable margin eurocurrency rate letter credit issuance fee subject change based upon grid determined long term debt ratings credit agreement subject termination based upon decrease debt ratings material adverse change february 2008 company issued 600 million 425 senior notes due 2013 900 million 530 senior notes due 2018 collectively “senior notes” senior notes senior unsecured unsubordinated obligations honeywell rank equally honeywell’s existing future senior unsecured debt senior honeywell’s subordinated debt offering resulted gross proceeds 15 billion offset 13 million discount issuance costs first quarter 2008 company repaid 200 million 62 notes primarily issuance commercial paper second quarter 2008 company repaid 200 million 712 notes primarily issuance commercial paper note 15lease commitments future minimum lease payments operating leases initial remaining noncancellable lease terms excess one year follows entered agreements lease land equipment buildings principally operating leases initial terms 25 years contain renewal options subject customary conditions time terms leases may option purchase leased assets amounts approximate fair value expect commitments lease agreements material adverse effect consolidated results operations financial position liquidity honeywell international inc notes financial statementscontinued dollars millions except per share amounts rent expense 383 365 341 million 2008 2007 2006 respectively note 16financial instruments credit market riskfinancial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates commodity prices manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties derivative transactions substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value cash flows derivative financial instruments considering reasonably possible changes interest currency exchange rates restrict use derivative financial instruments hedging activities continually monitor creditworthiness customers grant credit terms normal course business concentrations credit risk associated trade accounts notes receivable considered minimal due diverse customer base significant portion customers commercial air transport industry aircraft manufacturers airlines accounting approximately 20 percent consolidated sales 2008 terms conditions credit sales designed mitigate eliminate concentrations credit risk single customer sales materially dependent single customer small group customers foreign currency risk managementwe conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities anticipated transactions arising international trade objective preserve economic value nonfunctional currency denominated cash flows attempt hedge transaction exposures natural offsets fullest extent possible opportunities exhausted foreign currency forward option agreements third parties principal currency exposures relate us dollar euro british pound canadian dollar hong kong dollar mexican peso swiss franc czech koruna chinese renminbi indian rupee japanese yen hedge monetary assets liabilities denominated nonfunctional currencies prior conversion us dollars assets liabilities remeasured spot exchange rates effect balance sheet date effects changes spot rates recognized earnings included otherincome expense hedge exposure changes foreign exchange rates principally forward contracts forward contracts markedtomarket resulting gains losses similarly recognized earnings offsetting gains losses nonfunctional currency denominated monetary assets liabilities hedged partially hedge forecasted 2009 sales purchases denominated nonfunctional currencies currency forward contracts functional currency strengthens nonfunctional currencies decline value forecasted nonfunctional currency cash inflows sales outflows purchases partially offset recognition gains sales losses purchases respectively value forward contracts designated hedges conversely functional currency weakens nonfunctional currencies increase value forecasted nonfunctional currency cash inflows sales outflows purchases partially offset recognition losses sales gains purchases respectively value forward contracts designated hedges market value gains losses contracts recognized earnings hedged transaction recognized open forward contracts mature december 31 2009 december 31 2008 2007 contracts notional amounts 3030 3295 million respectively exchange foreign currencies principally us dollar euro british pound honeywell international inc notes financial statementscontinued dollars millions except per share amounts canadian dollar hong kong dollar mexican peso swiss franc czech koruna chinese renminbi indian rupee japanese yen commodity price risk managementour exposure market risk commodity prices result changes cost production primarily mitigate exposure commodity price risk use longterm fixedprice contracts suppliers formula price agreements suppliers customers also enter forward commodity purchase agreements third parties designated hedges anticipated purchases several commodities forward commodity purchase agreements markedtomarket resulting gains losses recognized earnings hedged transaction recognized interest rate risk managementwe use combination financial instruments including longterm mediumterm shortterm financing variablerate commercial paper interest rate swaps manage interest rate mix total debt portfolio related overall cost borrowing december 31 2008 interest rate swap agreements december 31 2007 interest rate swap agreements designated fair value hedges effectively changed 300 million fixed rate debt average rate 601 percent libor based floating rate debt fair value financial instrumentsthe carrying value cash equivalents trade accounts notes receivables payables commercial paper shortterm borrowings contained consolidated balance sheet approximates fair value company holds investments marketable equity securities designated cost method investments available sale securities appropriate investments susceptible market volatility result unrealized loss positions december 31 2008 company evaluated nearterm prospects investees relation severity duration impairments despite unrealized loss position certain investments approximately 100 million company concluded december 31 2008 investments temporarily impaired given short duration unrealized loss position stable liquidity positions financial condition investees company’s intent ability hold investments reasonable period time sufficient forecasted recovery fair value summarized carrying values fair values financial instruments december 31 2008 2007 fair values based quoted market prices issues traded current rates offered us debt remaining maturity characteristics valuation techniques appropriate honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 17other liabilities consist following 1 asset retirement obligations primarily relate costs associated future retirement nuclear fuel conversion facilities specialty materials segment future retirement facilities automation control solutions segment reconciliation liability asset retirement obligations year ended december 31 2008 follows note 18capital stock authorized issue 2000000000 shares common stock par value one dollar common shareowners entitled receive dividends may declared board entitled one vote per share entitled event liquidation share ratably assets honeywell available distribution common shareowners common shareowners preemptive conversion rights shares common stock issued outstanding held treasury liable calls assessments restrictions us relative dividends repurchase redemption common stock company’s previously reported 30 billion share repurchase program 13 billion remained available december 31 2008 additional share repurchases amount timing repurchases may vary depending market conditions level operating investing activities authorized issue 40000000 shares preferred stock without par value determine number shares series rights preferences limitations series december 31 2008 preferred stock outstanding honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 19accumulated comprehensive income loss total accumulated comprehensive income loss included consolidated statement shareowners’ equity changes accumulated comprehensive income loss follows components accumulated comprehensive income loss follows note 20stockbased compensation plans stockbased compensation plans available grant nonqualified stock options incentive stock options stock appreciation rights restricted units restricted stock key employees 2006 stock incentive plan honeywell international inc affiliates plan maximum 43 million shares honeywell common stock may awarded expect common stock awarded annual basis 10 15 percent total common stock outstanding additionally 2006 stock plan nonemployee directors honeywell international inc directors plan 500000 shares honeywell common stock may awarded stock optionsthe exercise price term conditions applicable option granted stock plans generally determined management development compensation committee board exercise price stock options set grant date may less fair market value per share stock date fair value recognized honeywell international inc notes financial statementscontinued dollars millions except per share amounts expense employee’s requisite service period generally vesting period award options generally vest fouryear period expire ten years fair value option award estimated date grant using blackscholes optionpricing model expected volatility based implied volatilities traded options honeywell common stock used monte carlo simulation model derive expected term model uses historical data estimate option exercise activity postvest termination behavior expected term represents estimate time options expected remain outstanding riskfree rate periods within contractual life option based us treasury yield curve effect time grant compensation cost pretax basis related stock options recognized operating results included selling general administrative expenses sfas 123r 2008 2007 2006 51 65 77 million respectively associated future income tax benefit recognized 2008 2007 2006 19 25 28 million respectively compensation cost related stock options recognized consolidated statement operations 2008 2007 2006 includes 1 compensation cost stock option awards granted prior yet vested december 31 2005 based grantdate fair value estimated accordance pro forma provisions sfas 123 2 compensation cost stock option awards granted subsequent december 31 2005 based grantdate fair value estimated accordance provisions sfas 123r following table sets forth fair value per share information including related weightedaverage assumptions used determine compensation cost consistent requirements sfas 123r honeywell international inc notes financial statementscontinued dollars millions except per share amounts following table summarizes information stock option activity three years ended december 31 2008 1 expected vest options result applying prevesting forfeiture rate assumption total outstanding options following table summarizes information stock options outstanding exercisable december 31 2008 28624279 37902956 options exercisable weighted average exercise prices 4114 4016 december 31 2007 2006 respectively 33712148 shares available future grants terms stock option plans december 31 2008 total intrinsic value options amount stock price exceeded exercise price options date exercise exercised 2008 2007 2006 76 281 92 million respectively 2008 2007 2006 amount cash received exercise stock options 134 592 385 million respectively associated tax benefit realized 28 101 31 million respectively consistent requirements sfas 123r 2008 2007 2006 classified 21 86 31 million respectively benefit financing cash inflow consolidated statement cash flows balance classified cash operations december 31 2008 77 million total unrecognized compensation cost related nonvested stock option awards expected recognized weightedaverage period 266 years total fair value options vested 2008 2007 2006 63 83 70 million respectively honeywell international inc notes financial statementscontinued dollars millions except per share amounts restricted stock unitsrestricted stock unit rsu awards entitle holder receive one share common stock unit units vest rsu’s issued certain key employees fair market value date grant compensation rsus typically become fully vested periods ranging three seven years payable honeywell common stock upon vesting following table summarizes information rsu activity three years ended december 31 2008 december 31 2008 approximately 179 million total unrecognized compensation cost related nonvested rsus granted stock plans expected recognized weightedaverage period 20 years compensation expense related rsus 77 47 29 million 2008 2007 2006 respectively nonemployee directors’ planunder directors’ plan new director receives onetime grant 3000 restricted stock units vest fifth anniversary continuous board service directors’ plan also provides annual grant director options purchase 5000 shares common stock fair market value date grant options generally become exercisable fouryear period expire ten years note 21commitments contingencies environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous substances accordance environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing hazardous substances additional lawsuits claims costs involving environmental matters likely continue arise future honeywell international inc notes financial statementscontinued dollars millions except per share amounts respect environmental matters involving site contamination continually conduct studies individually jointly potentially responsible parties determine feasibility various remedial techniques policy record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical regulatory legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing remedial investigations feasibility studies timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects remedial techniques utilized agreements parties following table summarizes information concerning recorded liabilities environmental costs see note 3 repositioning charges detail regarding accruals environmental matters 2008 environmental liabilities included following balance sheet accounts although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position new jersey chrome sitesprovisions made financial statements estimated costs courtordered excavation transport offsite disposal approximately one million tons chromium residue present predecessor honeywell site located jersey city new jersey known study area 7 expenditures expected continue incurred evenly remedy’s expected completion date 2010 expect implementation remedy material adverse effect future consolidated results operations operating cash flows financial position provision also made financial statements estimated costs implementing related groundwater remedial plans approved honeywell international inc notes financial statementscontinued dollars millions except per share amounts court well sediment remedial plans also approved court presently review us environmental protection agency abovereferenced site significant twentyone sites located hudson county new jersey subject administrative consent order aco entered new jersey department environmental protection njdep 1993 “honeywell aco sites” remedial investigations activities consistent aco also conducted underway honeywell aco sites recorded reserves honeywell aco sites appropriate accounting policy described may 3 2005 njdep filed lawsuit new jersey superior court honeywell two companies seeking declaratory injunctive relief unspecified damages reimbursement unspecified total costs relating sites new jersey allegedly contaminated chrome ore processing residue claims honeywell relate activities predecessor company ceased new jersey manufacturing operations mid1950’s honeywell two companies agreed settle litigation njdep subject court approval settlement honeywell would pay 5 million njdep’s past costs well accept sole responsibility remediate 24 53 “publicly funded sites” ie sites none three companies previously accepted responsibility honeywell would also bear 50 costs another 10 publicly funded sites recorded reserves publicly funded sites appropriate accounting policy described lawsuits previously filed federal court honeywell landowners jersey city two municipal utility authorities separately citizens group seeking cleanup chromium residue several honeywell aco sites federal resource conservation recovery act rcra honeywell jersey city municipal utility authorities citizens group agreed settle claims relating group properties known study area 6 north settlement approved court sites related sites classified jersey city area need redevelopment jersey city approved redevelopment plan agreement regarding sites part settlement honeywell also agreed release claims may jersey city municipal utility authorities contamination river sediments remediation chrome residue publicly funded sites sewer lines honeywell plaintiffs reached settlement one group properties known study area 6 south settlement approved court remedial actions regarding settlements discussed consistent recorded reserves settlement negotiations ongoing remaining sites portions known study area 5 litigation dundalk marine terminal baltimorechrome residue legacy chrome plant operations baltimore deposited fill dundalk marine terminal “dmt” owned operated maryland port administration “mpa” honeywell mpa sharing costs investigate mitigate related environmental issues entered cost sharing agreement honeywell bear 77 percent share costs developing implementing permanent remedies dmt facility investigative phase ongoing appropriate remedies identified chosen negotiated consent decree mpa maryland department environment “mde” respect investigation remediation dmt facility consent decree challenged federal court build baltimore community group together local church two individuals collectively “build” october 2007 court dismissed prejudice build’s state law claims dismissed without prejudice build’s rcra claims regarding neighborhoods near dmt facility august 2008 court held hearing company’s motion dismiss build’s remaining claims grounds mde diligently prosecuting investigation remediation dmt awaiting court’s decision believe matter material adverse impact honeywell international inc notes financial statementscontinued dollars millions except per share amounts consolidated financial position operating cash flows given scope complexity project possible cost remediation determinable could material adverse impact results operations periods recognized onondaga lake syracuse nya predecessor company honeywell operated chemical plant alleged contributed mercury contaminants lake july 2005 new york state department environmental conservation dec issued record decision rod respect remediation industrial contamination lake january 2007 consent decree approved united states district court northern district new york implementation combined dredgingcapping remedy set forth rod accrued estimated cost implementing remedy set forth rod based current available information analysis performed engineering consultants december 2006 united states fish wildlife service published notice intent pursue natural resource damages related site possible predict outcome timing assessments typically lengthy processes lasting several years amounts responsibility damages honeywell also conducting remedial investigations activities sites syracuse new york recorded reserves investigations activities appropriate accounting policy described asbestos matters like many industrial companies honeywell defendant personal injury actions related asbestos mine produce asbestos make sell insulation products construction materials identified primary cause asbestos related disease vast majority claimants products containing asbestos previously manufactured honeywell previously owned subsidiaries primarily fall two general categories refractory products friction products refractory productshoneywell owned north american refractories company narco 1979 1986 narco produced refractory products high temperature bricks cement sold largely steel industry east midwest less 2 percent narco’s products contained asbestos sold narco business 1986 agreed indemnify narco respect personal injury claims products discontinued prior sale defined sale agreement narco retained liability claims january 4 2002 narco filed reorganization chapter 11 us bankruptcy code result narco bankruptcy filing claims pending narco automatically stayed pending reorganization narco addition bankruptcy court enjoined filing prosecution narcorelated asbestos claims honeywell stay remained effect continuously since january 4 2002 connection narco’s bankruptcy filing paid narco’s parent company 40 million agreed provide narco 20 million financing also agreed pay 20 million narco’s parent company upon filing plan reorganization narco acceptable honeywell amount paid december 2005 following filing narco’s third amended plan reorganization pay narco’s parent company 40 million forgive outstanding narco indebtedness honeywell upon effective date plan reorganization believe part narco plan reorganization trust established benefit asbestos claimants current future pursuant trust distribution procedures negotiated narco asbestos claimants committee courtappointed legal representative future asbestos claimants trust put place approved court honeywell international inc notes financial statementscontinued dollars millions except per share amounts fair equitable honeywell well narco entitled permanent channeling injunction barring present future individual actions state federal courts requiring asbestos related claims based exposure narco products made federallysupervised trust honeywell reached agreement representative future narco claimants asbestos claimants committee cap annual contributions trust respect future claims level would material impact honeywell’s operating cash flows november 2007 bankruptcy court entered amended order confirming narco plan without modification approving 524g trust channeling injunction favor narco honeywell december 2007 certain insurers filed appeal bankruptcy court order united states district court western district pennsylvania district court affirmed bankruptcy court order july 2008 august 2008 insurers filed notice appeal third circuit court appeals assurances given time frame outcome appeal expect stay enjoining litigation narco honeywell remain effect pendency proceedings consolidated financial statements reflect estimated liability settlement pending future narcorelated asbestos claims december 31 2008 2007 11 billion estimated liability pending claims based terms conditions including evidentiary requirements definitive agreements approximately 260000 current claimants estimate unsettled claims pending time narco filed bankruptcy protection substantially settlement payments respect current claims made approximately 100 million payments due pursuant settlements due upon establishment narco trust estimated liability future claims represents estimated value future asbestos related bodily injury claims expected asserted narco 2018 aforementioned obligations narco’s parent light uncertainties inherent making longterm projections believe reasonable basis estimating asbestos claims beyond 2018 sfas 5 “accounting contingencies” estimate based upon disease criteria payment values contained narco trust distribution procedures negotiated narco asbestos claimants committee narco future claimants’ representative honeywell projected probable number value including trust claim handling costs asbestos related future liabilities based upon experience asbestos claims filing rates tort system certain operating asbestos trusts claims experience forums valuation methodology also includes analysis population likely exposed asbestos containing products epidemiological studies estimate number people likely develop asbestos related diseases narco claims filing history pending inventory narco asbestos related claims payment rates expected established narco trust methodology used estimate liability future claims commonly accepted numerous courts resulted range estimated liability future claims 743 961 million believe amount within range better estimate amount accordingly december 2006 recorded minimum amount range resulted reduction 207 million estimated liability future narcorelated asbestos claims new data developments 2008 2007 would warrant change estimated liability future narcorelated asbestos claims december 31 2008 2007 consolidated financial statements reflect insurance receivable corresponding liability settlement pending future narcorelated asbestos claims 877 939 million respectively coverage reimburses honeywell portions costs incurred settle narco related claims court judgments well defense costs provided large number insurance policies written dozens insurance companies domestic insurance market london excess market december 31 2008 significant honeywell international inc notes financial statementscontinued dollars millions except per share amounts portion coverage insurance companies agreements pay full policy limits based corresponding honeywell claims costs conduct analyses determine amount insurance estimate probable recovery relation payment current estimated future claims substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries made judgments concerning insurance coverage believe reasonable consistent historical dealings insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs second quarter 2006 travelers casualty insurance company “travelers” filed lawsuit honeywell insurance carriers supreme court new york county new york disputing obligations narcorelated asbestos claims high excess insurance coverage issued travelers insurance carriers approximately 340 million coverage policies included narcorelated insurance receivable december 31 2008 honeywell believes entitled coverage issue filed counterclaims superior court new jersey seeking among things declaratory relief respect coverage third quarter 2007 honeywell prevailed new york action critical choice law issue concerning appropriate method allocating narcorelated asbestos liabilities triggered policies court’s ruling subject appeal honeywell expects prevail matter based upon understanding relevant facts applicable law ii terms insurance policies issue iii experience matters nature iv advice counsel thus believe amount due travelers insurance carriers 340 million december 31 2008 probable recovery honeywell expects prevail matter adverse outcome could material impact results operations period recognized would material consolidated financial position operating cash flows projecting future events subject many uncertainties could cause narco related asbestos liabilities assets higher lower projected recorded assurance plan reorganization become final insurance recoveries timely whether narco related asbestos claims beyond 2018 given inherent uncertainty predicting future events review estimates periodically update based experience relevant factors similarly reevaluate projections concerning probable insurance recoveries light changes projected liability developments may impact insurance recoveries friction productshoneywell’s bendix friction materials bendix business manufactured automotive brake parts contained chrysotile asbestos encapsulated form existing potential claimants consist largely individuals allege exposure asbestos brakes either performing vicinity individuals performed brake replacements 1981 december 31 2008 resolved approximately 117000 bendix related asbestos claims 127 trials resulting favorable verdicts 12 trials resulting adverse verdicts two adverse verdicts reversed appeal three claims settled remaining appealed following tables present information regarding bendix related asbestos claims activity honeywell international inc notes financial statementscontinued dollars millions except per share amounts approximately 45 percent approximately 52000 pending claims december 31 2008 inactive deferred similar dockets established jurisdictions claimants allege minimal impairment approximately 52000 pending claims also include claims filed jurisdictions texas virginia mississippi historically allowed consolidated filings jurisdictions plaintiffs permitted file complaints predetermined master list defendants regardless whether claims individual defendant many plaintiffs may actually intend assert claims honeywell based state rules prior experience jurisdictions anticipate many claims ultimately dismissed honeywell experienced average resolution values per claim excluding legal costs follows possible predict whether resolution values bendix related asbestos claims increase decrease stabilize future consolidated financial statements reflect estimated liability resolution pending future bendix related asbestos claims 578 517 million december 31 2008 2007 respectively prior december 2006 accrued estimated cost pending bendix related asbestos claims could reasonably estimate losses could arise future bendix related asbestos claims december 2006 due steady threeyear decline rate bendix related asbestos claims filed reduced volatility rates felt possible determine reasonable estimate costs would incurred claims filed next five years accordingly recorded reserve 335 million estimated cost future bendix related asbestos claims based historic claims filing experience disease classifications expected resolution values historic dismissal rates fourth quarter year update analysis estimated cost future bendix related asbestos claims updates resulted reduction reserve 327 million december 31 2007 increase reserve 370 million december 31 2008 december 2006 also changed methodology valuing bendix pending future claims using average resolution values previous five years using average resolution values previous two years resulted reduction 118 million reserve pending bendix claims fourth quarter 2006 claims filing experience resolution data bendix related claims become reliable past several years accordingly fourth quarter 2007 updated methodology valuing bendix pending future claims using average resolution values past three years data resulted 10 million reduction reserve pending bendix claims fourth quarter 2008 updated resolution values used estimate cost pending future bendix claims resulting 5 million increase reserve pending bendix claims continue update expected resolution values used estimate cost pending future bendix claims fourth quarter year estimated liability future claims represents estimated value future asbestos related bodily injury claims expected asserted bendix next five years light uncertainties inherent making longterm projections well certain factors unique friction honeywell international inc notes financial statementscontinued dollars millions except per share amounts product asbestos claims believe reasonable basis estimating asbestos claims beyond next five years sfas 5 “accounting contingencies” estimate based upon bendix historical experience tort system three years ended december 31 2008 respect claims filing resolution values methodology used estimate liability future claims commonly accepted numerous courts similar used estimate future narco related asbestos claims liability honeywell currently approximately 19 billion insurance coverage remaining respect pending potential future bendix related asbestos claims 156 197 million reflected receivables consolidated balance sheet december 31 2008 2007 respectively coverage provided large number insurance policies written dozens insurance companies domestic insurance market london excess market insurance receivables recorded financial statements simultaneous recording liability estimated value underlying asbestos claims amount insurance receivable recorded based ongoing analysis insurance estimate probable recovery determination based analysis underlying insurance policies historical experience insurers ongoing review solvency insurers interpretation judicial determinations relevant insurance programs consideration impacts settlements reached insurers insurance receivables also recorded structured insurance settlements provide future fixed payment streams contingent upon future claims events amounts recorded net present value fixed payment stream cumulative historical basis honeywell recorded insurance receivables equal approximately 50 percent value underlying asbestos claims recorded however gaps coverage due insurance company insolvencies certain uninsured periods insurance settlements rate expected decline future bendix related asbestos liabilities may recorded future recoverability rates may also impacted numerous factors future insurance settlements insolvencies judicial determinations relevant coverage program difficult predict assuming continued defense indemnity spending current levels estimate cumulative recoverability rate could decline next five years approximately 40 percent honeywell believes sufficient insurance coverage reserves cover pending bendix related asbestos claims bendix related asbestos claims estimated filed within next five years although impossible predict outcome either pending future bendix related asbestos claims believe claims would material adverse effect consolidated financial position light insurance coverage prior experience resolving claims rate types claims filed average resolution value claims period time claim settlements paid collectively “variable claims factors” substantially change honeywell would expect future bendix related asbestos claims material adverse effect results operations operating cash flows fiscal year assurances given however variable claims factors change honeywell international inc notes financial statementscontinued dollars millions except per share amounts refractory friction productsthe following tables summarize information concerning narco bendix asbestos related balances asbestos related liabilities insurance recoveries asbestos related liabilities honeywell international inc notes financial statementscontinued dollars millions except per share amounts narco bendix asbestos related balances included following balance sheet accounts matters subject number lawsuits investigations disputes involve substantial amounts claimed arising conduct business including matters relating commercial transactions government contracts product liability prior acquisitions divestitures employee benefit plans intellectual property health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes matters well potential ranges possible losses taking consideration insurance recoveries based careful analysis matter assistance outside legal counsel applicable experts included matters following allen et al v honeywell retirement earnings planpursuant settlement approved us district court district arizona february 2008 18 21 claims alleged plaintiffs class action lawsuit dismissed prejudice exchange approximately 35 million maximum aggregate liability remaining three claims alleging honeywell impermissibly reduced pension benefits certain employees predecessor entity plan amended 1983 failed calculate benefits accordance terms plan capped 500 million amounts payable including settlement amount paid company’s pension plan continue expect prevail remaining claims light applicable law substantial affirmative defenses yet considered court accordingly believe liability probable occurrence reasonably estimable respect claims recorded provision remaining claims financial statements quick lubeon march 31 2008 se quick lube filter distributor filed suit us district court district connecticut alleging twelve filter manufacturers including honeywell engaged conspiracy fix prices rig bids allocate us customers aftermarket automotive filters suit purported class action behalf direct purchasers filters defendants parallel purported class actions including behalf indirect purchasers filters filed plaintiffs variety jurisdictions united states canada us cases consolidated single multidistrict litigation northern district illinois intend vigorously defend claims raised actions antitrust division department justice doj also investigating allegations raised suits fully cooperating doj investigation gyrosin march 2008 us department state advised honeywell reviewing honeywell’s compliance applicable us export controls connection company’s export gg1320 gyros related inertial navigation systems state commerce department honeywell international inc notes financial statementscontinued dollars millions except per share amounts licenses december 2008 us department state notified honeywell completed review matter without imposition fines penalties given uncertainty inherent litigation investigations including specific matters referenced believe possible develop estimates reasonably possible loss excess current accruals matters considering past experience existing accruals expect outcome matters either individually aggregate material adverse effect consolidated financial position contingencies resolved long periods time potential liabilities subject change due new developments changes settlement strategy impact evidentiary requirements could cause us pay damage awards settlements become subject equitable remedies could material adverse effect results operations operating cash flows periods recognized paid warranties guaranteeswe issued party following direct indirect guarantees december 31 2008 expect guarantees material adverse effect consolidated results operations financial position liquidity connection disposition certain businesses facilities indemnified purchasers expected cost remediation environmental contamination existing date disposition expected costs accrued environmental assessments made remedial efforts probable costs reasonably estimated normal course business issue product warranties product performance guarantees accrue estimated cost product warranties performance guarantees based contract terms historical experience time sale adjustments initial obligations warranties guarantees made changes obligations become reasonably estimable following table summarizes information concerning recorded obligations product warranties product performance guarantees product warranties product performance guarantees included following balance sheet accounts honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 22pension postretirement benefits sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees pension benefits substantially us employees provided noncontributory qualified nonqualified defined benefit pension plans us defined benefit pension plans comprise 78 percent projected benefit obligation nonus employees us citizens covered various retirement benefit arrangements considered defined benefit pension plans accounting purposes nonus defined benefit pension plans comprise 22 percent projected benefit obligation also sponsor postretirement benefit plans provide health care benefits life insurance coverage eligible retirees retiree medical plans mainly cover us employees retire pension eligibility hospital professional medical services nonunion hourly salaried employees joining honeywell january 1 2000 eligible participate retiree medical life insurance plans us retiree medical plans require deductibles copayments virtually integrated medicare retiree contributions generally required based coverage type plan medicare eligibility honeywell limited subsidy retiree medical plans fixeddollar amount substantially future retirees almost half current retirees cap retiree medical benefits plans limits exposure impact future health care cost increases retiree medical life insurance plans funded claims expenses paid operating cash flow discussed note 1 adopted sfas 158 december 31 2006 sfas 158 requires recognize prospective basis funded status defined benefit pension postretirement benefit plans consolidated balance sheet recognize component accumulated comprehensive income loss net tax gains losses prior service costs credits arise period recognized components net periodic benefit cost additional minimum pension liabilities related intangible assets also derecognized upon adoption new standard honeywell international inc notes financial statementscontinued dollars millions except per share amounts following tables summarize balance sheet impact including benefit obligations assets funded status associated significant pension postretirement benefit plans december 31 2008 2007 honeywell international inc notes financial statementscontinued dollars millions except per share amounts recognized accumulated comprehensive income loss associated significant pension postretirement benefit plans december 31 2008 2007 follows accumulated benefit obligation defined benefit pension plans 143 160 billion december 31 2008 2007 respectively components net periodic benefit cost amounts recognized comprehensive income loss significant plans include following components honeywell international inc notes financial statementscontinued dollars millions except per share amounts estimated net loss prior service cost pension benefits amortized accumulated comprehensive income loss net periodic benefit cost 2009 expected 145 29 million respectively estimated net loss prior service credit postretirement benefits amortized accumulated comprehensive income loss net periodic benefit cost 2009 expected 11 46 million respectively major actuarial assumptions used determining benefit obligations net periodic benefit cost us benefit plans presented following table nonus benefit plans one individually material assumptions reflect economic assumptions applicable country select discount rate retirement benefit plans use modeling process involves matching expected cash outflows benefit plans yield curve constructed portfolio double rated fixedincome debt instruments use average yield hypothetical portfolio discount rate benchmark discount rate used determine postretirement benefit obligation lower principally due shorter expected duration postretirement plan obligations compared pension plan obligations expected rate return plan assets 9 percent longterm rate based historic plan asset returns varying longterm periods combined current market conditions broad asset mix considerations expected rate return longterm assumption generally change annually pension benefits included aggregate data tables amounts applicable pension plans accumulated benefit obligations exceeding fair value plan assets amounts related plans follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts us pension plans assets 87 130 billion nonus pension plans assets 28 42 billion december 31 2008 2007 respectively asset allocation target allocation pension plans assets follows asset investment strategy focuses maintaining diversified portfolio using various asset classes order achieve longterm investment objectives risk adjusted basis actual invested positions various securities change time based short longerterm investment opportunities achieve objectives us investment policy requires us master retirement trust invested follows less 5 percent invested fixed income securities b 10 percent private real estate investments c 18 percent investment alternatives involving limited partnerships various types stated limit investments publiclyheld us international equity securities nonus investment policies different country longterm investment objectives remain general funding policy qualified pension plans contribute amounts least sufficient satisfy regulatory funding standards 2008 2007 2006 made voluntary cash contributions 42 68 million respectively us defined benefit pension plans primarily government contracting purposes december 2008 also made voluntary contribution 200 million honeywell common stock us plans improve funded status plans december 31 2008 2007 fair value pension plans assets invested honeywell common stock 204 14 million respectively 2009 plan make additional voluntary contributions honeywell common stock us plans totaling approximately 800 million improve funded status plans 2009 also expect contribute approximately 140 million cash nonus defined benefit pension plans satisfy regulatory funding standards contributions reflect benefits paid directly company assets benefit payments including amounts paid company assets reflecting expected future service appropriate expected paid follows postretirement benefits fasb staff position 1062 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003” fsp 1062 provides guidance accounting effects medicare prescription drug improvement modernization act 2003 act employers sponsor postretirement health care plans provide prescription honeywell international inc notes financial statementscontinued dollars millions except per share amounts drug coverage least actuarially equivalent offered medicare part impact act reduced postretirement benefits expense approximately 21 25 37 million 2008 2007 2006 respectively assumed health care cost trend rate significant effect amounts reported onepercentagepoint change assumed health care cost trend rate would following effects benefit payments reflecting expected future service appropriate expected paid follows employee savings plans sponsor employee savings plans match form common stock savings plan contributions certain eligible employees shares issued stock match plans 49 37 45 million cost 220 199 179 million 2008 2007 2006 respectively honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 23segment financial data globally manage business operations four reportable operating segments serving customers worldwide aerospace products services control sensing security technologies buildings homes industry automotive products chemicals segment information consistent management reviews businesses makes investing resource allocation decisions assesses operating performance four reportable segments follows • aerospace organized customer endmarket air transport regional business general aviation defense space provides products services include auxiliary power units propulsion engines environmental control systems engine controls repair overhaul services hardware logistics electric power systems flight safety communications navigation radar surveillance systems aircraft lighting management technical services advanced systems instruments aircraft wheels brakes • automation control solutions includes products controls heating cooling indoor air quality ventilation humidification home automation advanced software applications homebuilding control optimization sensors switches control systems instruments measuring pressure air flow temperature electrical current security fire gas detection personal protection equipment access control video surveillance remote patient monitoring systems building solutions installs maintains upgrades systems keep buildings safe comfortable productive process solutions provides full range automation control solutions industrial plants offering advanced software automation systems integrate control monitor complex processes many types industrial settings • specialty materials includes fluorocarbons specialty films advanced fibers customized research chemicals intermediates electronic materials chemicals catalysts adsorbents • transportation systems includes honeywell turbo technologies turbochargers chargeair thermal systems consumer products group car care products including antifreeze filters spark plugs cleaners waxes additives friction materials brake hard parts friction materials accounting policies segments described note 1 honeywell’s senior management evaluates segment performance based segment profit segment profit measured business unit income loss taxes excluding general corporate unallocated expense income expense interest financial charges pension postretirement benefits expense stock compensation expense repositioning charges accounting changes beginning january 1 2008 consistent changes made measure segment performance utilized senior management segment profit adjusted exclude expense associated restricted stock units “rsu” include equity incomeloss affiliated companies stock compensation expense including rsu expense totaled 112 106 million years ended december 31 2007 2006 respectively equity incomeloss affiliated companies included income expense totaled 10 million 13 million years ended december 31 2007 2006 respectively changes applied prospective basis beginning january 1 2008 material following reportable segment data honeywell international inc notes financial statementscontinued dollars millions except per share amounts honeywell international inc notes financial statementscontinued dollars millions except per share amounts reconciliation segment profit consolidated income continuing operations taxes follows note 24geographic areasfinancial data honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 25supplemental cash flow information note 26unaudited quarterly financial information report independent registered public accounting firm board directors hareowners honeywell international inc opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position honeywell international inc subsidiaries december 31 2008 2007 results operations cash flows three years period ended december 31 2008 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 1 consolidated financial statements company changed manner accounts income tax uncertainties 2007 manner accounts defined benefit pension postretirement plans 2006 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp florham park new jersey february 12 2009 item 9item 8 financial statements supplementary data honeywell international inc consolidated statement operations notes financial statements integral part statement honeywell international inc consolidated balance sheet notes financial statements integral part statement honeywell international inc consolidated statement cash flows notes financial statements integral part statement honeywell international inc consolidated statement shareowners’ equity notes financial statements integral part statement honeywell international inc notes financial statements dollars millions except per share amounts note 1summary significant accounting policies accounting principlesthe financial statements accompanying notes prepared accordance accounting principles generally accepted united states america following description significant accounting policies honeywell international inc principles consolidationthe consolidated financial statements include accounts honeywell international inc subsidiaries entities controlling interest maintained consolidation policy requires consolidation entities controlling financial interest obtained well consolidation variable interest entities bear majority risk entities’ potential losses stand gain majority entities’ expected returns intercompany transactions balances eliminated consolidation cash equivalentscash cash equivalents include cash hand deposit highly liquid temporary cash investments original maturity three months less inventoriesinventories valued lower cost market using firstin firstout average cost method lastin firstout lifo method certain qualifying domestic inventories investmentsinvestments affiliates significant influence controlling interest accounted using equity method accounting investments carried market value readily determinable cost equity investments periodically reviewed determine declines fair value cost basis otherthantemporary significant sustained decreases quoted market prices series historic projected operating losses investees strong indicators otherthantemporary declines decline fair value determined thantemporary impairment loss recorded investment written new carrying value property plant equipmentproperty plant equipment recorded cost including asset retirement obligations less accumulated depreciation financial reporting straightline method depreciation used estimated useful lives 10 50 years buildings improvements 2 16 years machinery equipment recognition fair value obligations associated retirement tangible longlived assets required legal obligation incur costs upon initial recognition liability cost capitalized part related longlived asset depreciated corresponding asset’s useful life see note 11 note 17 additional details goodwill indefinitelived intangible assetsgoodwill represents excess acquisition costs fair value tangible net assets identifiable intangible assets businesses acquired goodwill certain intangible assets deemed indefinite lives amortized intangible assets determined definite lives amortized useful lives goodwill indefinite lived intangible assets subject impairment testing annually march 31 whenever events changes circumstances indicate carrying amount may fully recoverable testing compares carrying values fair values appropriate carrying value assets reduced fair value completed annual goodwill impairment test march 31 2009 determined impairment date see note 12 additional details goodwill balances intangible assets determinable livesother intangible assets determinable lives consist customer lists technology patents trademarks intangibles amortized estimated useful lives ranging 2 24 years longlived assetswe periodically evaluate recoverability carrying amount longlived assets including property plant equipment intangible assets determinable lives whenever events changes circumstances indicate carrying amount asset may fully recoverable evaluate events changes circumstances based number factors including operating results business plans forecasts general industry trends economic honeywell international inc notes financial statementscontinued dollars millions except per share amounts projections anticipated cash flows impairment assessed undiscounted expected future cash flows derived asset less carrying amount impairment losses measured amount carrying value asset exceeds fair value recognized earnings also continually evaluate estimated useful lives longlived assets periodically revise estimates based current events sales recognitionproduct service sales recognized persuasive evidence arrangement exists product delivery occurred services rendered pricing fixed determinable collection reasonably assured service sales principally representing repair maintenance engineering activities aerospace automation control solutions segments recognized contractual period services rendered sales longterm contracts aerospace automation control solutions segments recorded percentageofcompletion method measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts provisions anticipated losses longterm contracts recorded full losses become evident revenues contracts multiple element arrangements recognized element earned based relative fair value element provided delivered elements value customers standalone basis amounts allocated element based objectively determined fair value sales price product service sold separately competitor prices similar products services allowance doubtful accountswe maintain allowances doubtful accounts estimated losses result customer’s inability make required payments estimate anticipated losses doubtful accounts based days past due measured contractual due date historical collection history incorporate changes economic conditions may reflected historical trends example customers bankruptcy liquidation reorganization receivables writtenoff allowance doubtful accounts determined uncollectible determination includes analysis consideration particular conditions account including time intervals since last collection success outside collection agencies activity solvency customer bankruptcy proceedings environmental expendituresenvironmental expenditures relate current operations expensed capitalized appropriate expenditures relate existing condition caused past operations provide future benefits expensed incurred liabilities recorded environmental remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical regulatory legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities asbestos related contingencies insurance recoverieshoneywell defendant personal injury actions related products containing asbestos refractory friction products recognize liability asbestos related contingency probable occurrence reasonably estimable regarding north american refractories company narco asbestos related claims accrue pending claims based terms conditions including evidentiary requirements definitive agreements principle current claimants also accrue probable value future narco asbestos related claims 2018 based disease criteria payment values contained narco trust described note 21 light inherent uncertainties making long term projections regarding claims filing rates disease manifestation believe reasonable basis estimating narco asbestos claims beyond honeywell international inc notes financial statementscontinued dollars millions except per share amounts 2018 regarding bendix asbestos related claims accrue estimated value pending claims based expected claim resolution values historic dismissal rates also accrue estimated cost future anticipated claims related bendix next five years based assessment additional claims may brought us anticipated resolution values tort system value bendix pending future claims using average resolution values previous four years continue update expected resolution values used estimate cost pending future bendix claims fourth quarter year additional information see note 21 continually assess likelihood adverse judgments outcomes contingencies well potential ranges probable losses recognize liability contingencies based analysis individual issue assistance outside legal counsel applicable experts connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical experience insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs consideration impacts settlements insurers aerospace sales incentiveswe provide sales incentives commercial aircraft manufacturers airlines connection selection aircraft equipment predominately wheel braking system hardware auxiliary power units installation commercial aircraft incentives principally consist free deeply discounted products also include credits future purchases product upfront cash payments costs recognized period incurred cost products sold reduction sales appropriate aircraft manufacturers incentives recorded products delivered airlines incentives recorded associated aircraft delivered aircraft manufacturer airline research developmentresearch development costs companysponsored research development projects expensed incurred costs principally included cost products sold 1330 1543 1459 million 2009 2008 2007 respectively stockbased compensation plansthe principal awards issued stockbased compensation plans described note 20 include nonqualified stock options restricted stock units rsus cost awards measured grant date based fair value award value portion award ultimately expected vest recognized expense requisite service periods generally vesting period equity award included selling general administrative expense consolidated statement operations forfeitures required estimated time grant order estimate portion award ultimately vest estimate based historical rates forfeiture pension postretirement benefitswe sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees also sponsor postretirement benefit plans provide health care benefits life insurance coverage eligible retirees us defined benefit pension plans use marketrelated value plan assets reflecting changes fair value plan assets threeyear period net actuarial gains losses excess 10 percent greater marketrelated value plan assets plans’ projected benefit obligation corridor recognized sixyear period foreign currency translationassets liabilities subsidiaries operating outside united states functional currency us dollars translated us dollars using yearend exchange rates sales costs expenses translated average exchange rates effect year foreign currency translation gains losses included component accumulated comprehensive income loss subsidiaries operating highly inflationary honeywell international inc notes financial statementscontinued dollars millions except per share amounts environments inventories property plant equipment including related expenses remeasured exchange rate effect date assets acquired monetary assets liabilities remeasured yearend exchange rates remeasurement adjustments subsidiaries included earnings derivative financial instrumentsas result global operating financing activities exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position minimize risks interest foreign currency exchange rate commodity price fluctuations normal operating financing activities deemed appropriate use derivative financial instruments derivative financial instruments used manage risk used trading speculative purposes use leveraged derivative financial instruments derivative financial instruments used hedging purposes must designated effective hedge identified risk exposure inception contract accordingly changes fair value derivative contract must highly correlated changes fair value underlying hedged item inception hedge life hedge contract derivatives recorded balance sheet assets liabilities measured fair value derivatives designated hedges fair value assets liabilities changes fair values derivatives hedged items recorded current earnings derivatives designated cash flow hedges effective portion changes fair value derivatives recorded accumulated comprehensive income loss subsequently recognized earnings hedged items impact earnings cash flows derivative financial instruments classified consistent underlying hedged item transfers financial instrumentssales transfers securitization financial instruments accounted authoritative guidance transfers servicing financial assets extinguishments liabilities sell interests designated pools trade accounts receivables third parties receivables removed consolidated balance sheet time sold value assigned subordinated interests undivided interests retained trade receivables sold based relative fair values interests retained sold carrying value retained interests approximates fair value due shortterm nature collection period receivables income taxesdeferred tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax assets realized determination amount valuation allowance provided recorded deferred tax assets involves estimates regarding 1 timing amount reversal taxable temporary differences 2 expected future taxable income 3 impact tax planning strategies assessing need valuation allowance consider available positive negative evidence including past operating results projections future taxable income feasibility ongoing tax planning strategies projections future taxable income include number estimates assumptions regarding volume pricing costs additionally valuation allowances related deferred tax assets impacted changes tax laws significant judgment required determining income tax provisions evaluating tax positions establish additional provisions income taxes despite belief tax positions fully supportable remain certain positions meet minimum probability threshold defined authoritative guidance uncertainty income taxes tax position likely sustained upon examination applicable taxing authority normal course business company subsidiaries examined various honeywell international inc notes financial statementscontinued dollars millions except per share amounts federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes continually assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts give rise revision become known june 2006 financial accounting standards board fasb issued guidance accounting uncertainty income taxes establishes single model address accounting uncertain tax positions guidance clarifies accounting income taxes prescribing minimum recognition threshold tax position required meet recognized financial statements guidance also provides guidance derecognition measurement classification interest penalties accounting interim periods disclosure transition upon adoption january 1 2007 reduced existing reserves uncertain tax positions 33 million largely related reduction state income tax matters partially offset net increase federal international tax reserves earnings per sharebasic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding dilutive potential common shares outstanding use estimatesthe preparation consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts financial statements related disclosures accompanying notes actual results could differ estimates assumptions periodically reviewed effects revisions reflected consolidated financial statements period determined necessary reclassificationscertain prior year amounts reclassified conform current year presentation recent accounting pronouncementsin september 2006 financial accounting standards board fasb issued new accounting guidance fair value measurements guidance establishes common definition fair value applied us gaap requiring use fair value establishes framework measuring fair value expands disclosure fair value measurements effective financial assets financial liabilities fiscal years beginning november 15 2007 issued february 2008 fasb staff position removed leasing transactions scope new fair value guidance also february 2008 fasb issued authoritative guidance deferring effective date fair value guidance nonfinancial assets nonfinancial liabilities fiscal years beginning november 15 2008 september 2009 fasb issued additional guidance measuring fair value liabilities effective first reporting period including interim periods beginning issuance implementation material impact consolidated financial position results operations implementation fair value guidance nonfinancial assets nonfinancial liabilities effective january 1 2009 material impact consolidated financial position results operations see note 16 additional fair value information disclosure financial nonfinancial assets liabilities december 2007 fasb issued new guidance business combinations new standard provides revised guidance acquirors recognize measure consideration transferred identifiable assets acquired liabilities assumed noncontrolling interests goodwill acquired business combination new standard also expands required disclosures surrounding nature financial effects business combinations standard effective prospective basis fiscal years beginning december 15 2008 upon adoption standard material honeywell international inc notes financial statementscontinued dollars millions except per share amounts impact consolidated financial position results operations however company enters business combinations adoption new guidance business combinations transaction may significantly impact company’s consolidated financial position results operations compared company’s recent acquisitions accounted prior gaap requirements due changes described april 2009 fasb issued staff position amending clarifying new business combination standard address application issues associated initial recognition measurement subsequent measurement accounting disclosure assets liabilities arising contingencies business combination staff position effective assets liabilities arising contingencies business combinations acquisition date beginning first annual reporting period beginning december 15 2008 implementation standard material impact consolidated financial position results operations december 2007 fasb issued new guidance noncontrolling interests establishes requirements ownership interests subsidiaries held parties company sometimes called “minority interests” clearly identified presented disclosed consolidated statement financial position within equity separate parent’s equity changes parent’s ownership interests required accounted consistently equity transactions noncontrolling equity investments unconsolidated subsidiaries must measured initially fair value new guidance effective prospective basis fiscal years beginning december 15 2008 however presentation disclosure requirements must retrospectively applied comparative financial statements upon adoption new guidance noncontrolling interest company reclassified 82 million 71 million noncontrolling interest liabilities noncontrolling interest separate component shareholders equity consolidated balance sheet december 31 2008 2007 respectively 20 million 16 million noncontrolling interest expense net income attributable noncontrolling interest statement operations years ended december 31 2008 2007 respectively see statement shareholders’ equity additional disclosures regarding noncontrolling interest components comprehensive income implementation standard material impact consolidated financial position results operations november 2008 fasb ratified issue providing guidance accounting defensive intangible assets subsequent acquisition accordance new business combination fair value standards including estimated useful life assigned assets new guidance effective intangible assets acquired beginning first annual reporting period beginning december 15 2008 implementation standard material impact consolidated financial position results operations april 2009 fasb issued staff position changes method determining whether otherthantemporary impairment exists debt securities amount impairment recorded earnings guidance effective interim annual periods ending june 15 2009 implementation standard material impact consolidated financial position results operations may 2009 fasb issued new guidance subsequent events standard provides guidance management’s assessment subsequent events incorporates guidance accounting literature standard effective prospectively interim annual periods ending june 15 2009 implementation standard material impact consolidated financial position results operations company evaluated subsequent events february 12 2010 date issuance consolidated financial statements june 2009 fasb issued amendment accounting disclosure requirements transfers financial assets guidance requires additional disclosures transfers financial honeywell international inc notes financial statementscontinued dollars millions except per share amounts assets changes requirements derecognizing financial assets guidance effective fiscal years beginning november 15 2009 implementation standard material impact consolidated financial position results operations june 2009 fasb issued amendment accounting disclosure requirements consolidation variable interest entities guidance affects overall consolidation analysis requires enhanced disclosures involvement variable interest entities guidance effective fiscal years beginning november 15 2009 implementation standard material impact consolidated financial position results operations october 2009 fasb issued amendments accounting disclosure revenue recognition amendments effective fiscal years beginning june 15 2010 early adoption permitted modify criteria recognizing revenue multiple element arrangements scope constitutes nonsoftware deliverable company elected early adopt guidance prospective basis applicable transactions originating materially modified january 1 2010 implementation amended accounting guidance expected material impact consolidated financial position results operations note 2acquisitions divestitures acquired businesses aggregate cost 468 2181 1190 million 2009 2008 2007 respectively acquisitions acquired businesses recorded estimated fair values dates acquisition significant acquisitions made years discussed august 2009 company completed acquisition rmg group rmg regel messtechnik gmbh natural gas measuring control products services integrated solutions company purchase price approximately 416 million net cash acquired purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 174 million identifiable intangible assets predominantly customer relationships existing technology trademarks intangible assets amortized estimated lives using straightline accelerated amortization methods excess purchase price estimated fair values net assets acquired approximating 225 million recorded goodwill non deductible tax purposes acquisition accounted acquisition method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2009 included automation control solutions segment material consolidated financial statements december 31 2009 purchase accounting rmg group still subject adjustment primarily useful lives intangible assets amounts allocated intangible assets goodwill certain pre acquisition contingencies may 2008 company completed acquisition safety products holding inc subsidiary norcross safety products llc norcross leading manufacturer personal protective equipment purchase price net cash acquired approximately 12 billion allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date honeywell international inc notes financial statementscontinued dollars millions except per share amounts following table summarizes estimated fair values assets liabilities acquired acquisition date company assigned 702 million intangible assets predominantly customer relationships trade names technology intangibles assets amortized estimated lives using straight line accelerated amortization methods value assigned trade names approximately 257 million classified indefinite lived intangible excess purchase price estimated fair values net assets acquired approximately 604 million recorded goodwill nondeductible tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2008 included automation control solutions segment material consolidated financial statements july 2008 company completed sale consumables solutions business aerospace 105 billion consisting approximately 901 million cash six million shares common stock connection completion sale company entered among things exclusive supply license agreements stockholder agreement extent company’s cash flows associated supply license agreements consumables solutions business classified discontinued operations provisions license supply agreements determined atmarket allocated portion proceeds agreements pretax gain 623 million classified incomeexpense statement operations gain sale approximately 417 million net tax sale consumables solutions business within aerospace segment consistent company’s strategic focus core product areas utilizing advanced technologies july 2008 company completed acquisition metrologic instruments inc metrologic leading manufacturer data capture collection hardware software purchase price approximately 715 million net cash acquired purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 248 million identifiable intangible assets predominantly customer relationships technology trademarks intangible assets amortized estimated lives range 115 years using straight line accelerated amortization methods excess purchase price estimated fair values net assets acquired approximately 440 million recorded goodwill nondeductible tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date honeywell international inc notes financial statementscontinued dollars millions except per share amounts acquisition results acquisition date december 31 2008 included automation control solutions segment material consolidated financial statements december 2007 company specifically automation control solutions segment completed acquisition maxon corporation leading industrial combustion business purchase price approximately 185 million purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 70 million identifiable intangible assets predominantly customer relationships trademarks intangible assets amortized estimated lives range 720 years using straight line accelerated amortization methods value assigned trade marks approximately 10 million classified indefinite lived intangible excess purchase price estimated fair values net assets acquired approximating 114 million recorded goodwill nondeductible tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2007 material consolidated financial statements december 2007 company specifically automation control solutions segment completed acquisition hand held products inc privately held automatic identification data collection company purchase price approximately 390 million purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 101 million identifiable intangible assets predominantly customer relationships existing technology intangible assets amortized estimated lives range 1 15 years using straightline accelerated amortization methods excess purchase price estimated fair values net assets acquired approximating 257 million recorded goodwill non deductible tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2007 material consolidated financial statements july 2007 company completed acquisition dimensions international defense logistics business purchase price approximately 233 million purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 21 million identifiable intangible assets predominantly contractual relationships intangible assets amortized estimated life 5 years using straightline accelerated amortization methods excess purchase price estimated fair values net assets acquired approximating 183 million recorded goodwill deducted 15 year period tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2007 included aerospace segment material consolidated financial statements july 2007 company completed acquisition enraf holding bv provider comprehensive solutions control management transportation storage blending operations oil gas industry purchase price approximately 264 million including assumption approximately 40 million debt purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 90 million identifiable intangible assets predominantly customer relationships existing technology trademarks honeywell international inc notes financial statementscontinued dollars millions except per share amounts remaining intangible assets amortized estimated life 815 years using straightline accelerated amortization methods value assigned trademarks approximately 27 million classified indefinite lived intangible excess purchase price estimated fair values net assets acquired approximating 167 million recorded goodwill nondeductible tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2007 included automation control solutions segment material consolidated financial statements connection acquisitions 2009 2008 2007 amounts recorded transaction costs integrating acquired businesses honeywell material pro forma results 2009 2008 2007 assuming acquisitions made beginning year would materially different consolidated reported results note 3repositioning charges summary repositioning charges follows following table summarizes pretax distribution total net repositioning charges income statement classification following table summarizes pretax impact total net repositioning charges segment honeywell international inc notes financial statementscontinued dollars millions except per share amounts 2009 recognized repositioning charges totaling 224 million primarily severance costs related workforce reductions 4423 manufacturing administrative positions mainly automation control solutions transportation systems aerospace segments workforce reductions primarily related adverse market conditions experienced many businesses cost savings actions taken connection ongoing functional transformation initiative planned downsizing shutdown certain manufacturing facilities organizational realignments portions aerospace transportation systems segments also 53 million previously established accruals primarily severance automation control solutions aerospace transportation systems segments returned income 2009 due fewer employee separations originally planned associated prior severance programs changes scope previously announced repositioning actions 2008 recognized repositioning charges totaling 444 million including severance costs 333 million related workforce reductions 7480 manufacturing administrative positions across segments workforce reductions primarily relate planned downsizing shutdown certain manufacturing facilities aerospace automation control solutions transportation systems segments rationalization nonmanufacturing infrastructure outsourcing noncore components managing capacity utilization address product demand volatility functional transformation initiative repositioning charge also included asset impairments 78 million principally related manufacturing plant equipment facilities scheduled close downsized certain administrative facilities information technology equipment corporate segment also 20 million previously established accruals primarily severance automation control solutions segment returned income 2008 due mainly fewer employee separations originally planned associated prior severance programs 2007 recognized repositioning charges totaling 209 million primarily severance costs related workforce reductions 3408 manufacturing administrative positions mainly automation control solutions aerospace segments also 18 million previously established accruals primarily severance transportation systems aerospace segments returned income 2007 due mainly changes scope previously announced severance programs due fewer employee separations originally planned associated prior severance programs following table summarizes status total repositioning reserves 1 relates businesses divested 2009 included gain sale nonstrategic businesses assets see note 4 income expense honeywell international inc notes financial statementscontinued dollars millions except per share amounts certain repositioning projects aerospace automation control solutions transportation systems segments included exit disposal activities costs related recognized future periods actual liability incurred nature exit disposal costs principally includes product recertification requalification employee training travel following table summarizes segment expected incurred remaining exit disposal costs related 2008 repositioning actions able recognize time actions initiated exit disposal costs related 2009 repositioning actions able recognize time actions initiated significant 2009 recognized charge 145 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 155 million environmental asbestos matters discussed detail note 21 2008 recognized charge 465 million environmental liabilities deemed probable reasonably estimable year 309 million recognized third quarter included • 100 million related resolution technical design issues regarding remediation plan onondaga lake “lake” previously reported ultimate cost remediation lake depended upon resolution issues • 90 million estimated cost proposed remedial actions taken sites located syracuse new york accordance remediation plans submitted state environmental regulators • 38 million primarily related changes cost estimates due among things increases cost steel waste transportation disposal costs settlement costs relating remediation new jersey chrome sites known study areas 5 6 7 also recognized asbestos related litigation charges net insurance 125 million 2007 recognized charge 225 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 100 million recognized charges 18 million business sales tax related prior divestiture 8 million contemplated settlements certain legal matters 10 million also recognized impairment charges 9 million related writedown property plant equipment held sale specialty materials segment honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 4other incomeexpense gain sale nonstrategic businesses assets 2009 includes 50 million pretax gain 42 million net tax related deconsolidation subsidiary within automation control solutions segment subsidiary achieved contractual milestones december 31 2009 result longer primary beneficiary resulting deconsolidation continue hold noncontrolling interest recorded estimated fair value 67 million upon deconsolidation fair value estimated using combination market income approaches utilizing observable market data comparable businesses discounted cash flow modeling noncontrolling interest classified within investments longterm receivables balance sheet accounted equity method prospective basis net 2009 includes otherthantemporary impairment charge 62 million recognized second quarter 2009 see note 16 financial instruments fair value measures details gain sale nonstrategic businesses assets 2008 includes 623 million pretax gain related sale consumables solutions business see note 2 details note 5interest financial charges weighted average interest rate shortterm borrowings commercial paper outstanding december 31 2009 2008 147 percent 163 percent respectively note 6income taxes income continuing operations taxes honeywell international inc notes financial statementscontinued dollars millions except per share amounts tax expense effective tax rate increased 01 percentage point 2009 compared 2008 due principally decreased impact settlement audits partially offset increased benefits us manufacturing incentives ii us tax credits iii employee stock ownership plan esop dividends deferred tax assets liabilities deferred income taxes represent future tax effects transactions reported different periods tax financial reporting purposes tax effects temporary differences tax carryforwards give rise future income tax benefits payables follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts 1 million us federal tax net operating losses available carryforward december 31 2009 generated certain subsidiaries prior acquisition expiration dates 2024 use preacquisition operating losses subject limitations imposed internal revenue code anticipate limitations affect utilization carryforwards prior expiration company state tax net operating loss carryforwards 28 billion december 31 2009 varying expiration dates 2024 also foreign net operating capital losses 28 billion available reduce future income tax payments several countries subject varying expiration rules state tax credit carryforwards 58 million december 31 2009 including carryforwards 32 million various expiration dates 2024 tax credits 26 million subject expiration valuation allowance deferred tax assets increased 133 million 2009 decreased 45 million 26 million 2008 2007 respectively 2009 increase valuation allowance primarily due increased foreign net operating losses related germany luxembourg netherlands 2008 decrease valuation allowance primarily due decrease valuation allowance related federal state capital loss carryforwards partially offset increased foreign net operating losses 2007 decrease valuation allowance primarily due decrease valuation allowances related state foreign net operating losses partially offset valuation allowance us capital losses federal income taxes provided undistributed earnings majority international subsidiaries intention reinvest earnings respective subsidiaries december 31 2009 honeywell provided us federal income foreign withholding taxes approximately 51 billion earnings nonus operations practicable estimate amount tax might payable earnings repatriated foreign tax credits would available reduce eliminate resulting us income tax liability 720 million 671 million 666 million unrecognized tax benefits december 31 2009 2008 2007 respectively recognized 720 million would recorded component income tax expense december 31 2009 years ended december 31 2009 2008 company increased unrecognized tax benefits 49 million 5 million respectively due additional reserves various international us tax audit matters partially offset adjustments related ongoing assessments likelihood amount potential outcomes current future examinations expiration various statute limitations settlements tax authorities following table summarizes activity related unrecognized tax benefits honeywell international inc notes financial statementscontinued dollars millions except per share amounts many cases uncertain tax positions related tax years remain subject examination relevant tax authorities following table summarizes open tax years major jurisdiction december 31 2009 1 includes federal well state provincial similar local jurisdictions applicable based outcome examinations result expiration statute limitations specific jurisdictions reasonably possible related unrecognized tax benefits tax positions taken regarding previously filed tax returns materially change recorded liabilities uncertain tax positions financial statements addition outcome examinations may impact valuation certain deferred tax assets net operating losses future periods based number tax years currently audit relevant us federal state foreign tax authorities company anticipates several audits may finalized foreseeable future however based status examinations protocol finalizing audits relevant taxing authorities possibility company might challenge certain audit findings could include formal legal proceedings time possible estimate impact amount changes previously recorded uncertain tax positions unrecognized tax benefits listed examinations progress 261 million 249 million 199 million december 31 2009 2008 2007 respectively increases primarily due increase tax examinations fewer settlements year estimated interest penalties related underpayment income taxes classified component tax expense consolidated statement operations totaled 13 million 19 million 20 million years ended december 31 2009 2008 2007 respectively accrued interest penalties 150 million 137 million 118 million december 31 2009 2008 2007 respectively honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 7earnings loss per share following table sets forth computations basic diluted earnings loss per share diluted earnings per share calculation excludes effect stock options’ exercise prices exceed average market price common shares period 2009 2008 2007 number stock options included computation 33962053 17825720 8599620 respectively stock options outstanding end respective years note 8accounts notes receivables trade accounts receivable includes 1167 1195 million unbilled balances longterm contracts december 31 2009 2008 respectively amounts billed accordance terms customer contracts relate sell interests designated pools trade accounts receivables third parties sold receivables 500 million december 31 2008 overcollateralized retained subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools overcollateralization provides credit support purchasers receivable interest limiting losses event portion receivables sold becomes uncollectible april 2009 modified terms trade accounts receivable program permit repurchase receivables third parties discretion modification provides additional flexibility management receivable portfolio also requires receivables program remain company balance sheet result 500 million program receivables reflected accounts notes receivables corresponding amount recorded shortterm borrowings consolidated balance sheet shortterm borrowings repaid december 31 2009 modification also results honeywell international inc notes financial statementscontinued dollars millions except per share amounts program costs recognized interest financial charges consolidated statement operations prospective basis note 9inventories inventories valued lifo amounted 211 269 million december 31 2009 2008 respectively lifo inventories valued current costs carrying values would approximately 161 160 million higher december 31 2009 2008 respectively year ended december 31 2009 quantity inventory valued using lastin firstout lifo method specialty materials segment declined reduction resulted liquidation lifo inventory quantities carried lower costs prevailing prior years compared cost 2009 purchases effect decreased cost products sold 12 million year ended december 31 2009 note 10investments longterm receivables longterm trade receivables includes 27 36 million unbilled balances longterm contracts december 31 2009 2008 respectively amounts billed accordance terms customer contracts relate note 11property plant equipment honeywell international inc notes financial statementscontinued dollars millions except per share amounts depreciation expense 707 702 675 million 2009 2008 2007 respectively note 12goodwill intangiblesnet change carrying amount goodwill years ended december 31 2009 2008 segment follows intangible assets comprised intangible assets amortization expense 250 201 162 million 2009 2008 2007 respectively estimated intangible assets amortization expense next five years approximates 245 million 2010 227 million 2011 215 million 2012 192 million 2013 173 million 2014 honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 13accrued liabilities note 14longterm debt credit agreements honeywell international inc notes financial statementscontinued dollars millions except per share amounts schedule principal payments longterm debt follows maintain 28 billion five year committed revolving credit facility group banks arranged citigroup global markets inc jpmorgan securities inc place midmay 2012 credit facility contains 700 million sublimit issuance letters credit 28 billion credit facility maintained general corporate purposes including support issuance commercial paper borrowings outstanding letters credit issued credit facility december 31 2009 credit agreement restrict ability pay dividends contains financial covenants failure comply customary conditions occurrence customary events default contained credit agreement would prevent borrowings would generally require repayment outstanding borrowings credit agreement events default include nonpayment credit agreement debt interest fees b noncompliance terms credit agreement covenants c crossdefault debt certain circumstances bankruptcy e defaults upon obligations employee retirement income security act additionally banks right terminate commitment lend additional funds issue letters credit agreement person group acquires beneficial ownership 30 percent voting stock 12month period individuals directors honeywell beginning period cease constitute majority board directors board loans credit facility required repaid later may 14 2012 agreed pay facility fee 005 percent per annum aggregate commitment interest borrowings credit facility would determined honeywell’s option auction bidding procedure b highest floating base rate publicly announced citibank na 05 percent average cd rate 05 percent federal funds rate c eurocurrency rate plus 015 percent applicable margin facility fee applicable margin eurocurrency rate letter credit issuance fee subject change based upon grid determined long term debt ratings credit agreement subject termination based upon decrease debt ratings material adverse change february 2009 company issued 600 million 3875 senior notes due 2014 900 million 500 senior notes due 2019 collectively “2009 senior notes” 2009 senior notes senior unsecured unsubordinated obligations honeywell rank equally honeywell’s existing future senior unsecured debt senior honeywell’s subordinated debt offering resulted gross proceeds 15 billion offset 12 million discount issuance costs honeywell international inc notes financial statementscontinued dollars millions except per share amounts first quarter 2009 company repaid 493 million floating rate notes third quarter 2009 company repaid 500 million floating rate notes 100 million zero coupon bonds money multiplier notes note 15lease commitments future minimum lease payments operating leases initial remaining noncancellable lease terms excess one year follows entered agreements lease land equipment buildings principally operating leases initial terms 25 years contain renewal options subject customary conditions time terms leases may option purchase leased assets amounts approximate fair value expect commitments lease agreements material adverse effect consolidated results operations financial position liquidity rent expense 371 383 365 million 2009 2008 2007 respectively note 16financial instruments fair value measures credit market riskfinancial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates commodity prices manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties derivative transactions substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value cash flows derivative financial instruments considering reasonably possible changes interest rates currency exchange rates commodity prices restrict use derivative financial instruments hedging activities continually monitor creditworthiness customers grant credit terms normal course business terms conditions credit sales designed mitigate eliminate concentrations credit risk single customer sales materially dependent single customer small group customers foreign currency risk managementwe conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities transactions arising international trade objective preserve economic value nonfunctional currency denominated cash flows attempt hedge transaction exposures natural offsets fullest extent possible opportunities exhausted foreign currency exchange forward option contracts third parties honeywell international inc notes financial statementscontinued dollars millions except per share amounts hedge monetary assets liabilities denominated nonfunctional currencies prior conversion us dollars assets liabilities remeasured spot exchange rates effect balance sheet date effects changes spot rates recognized earnings included income expense partially hedge forecasted sales purchases predominantly occur next twelve months denominated nonfunctional currencies currency forward contracts changes forecasted nonfunctional currency cash flows due movements exchange rates substantially offset changes fair value currency forward contracts designated hedges market value gains losses contracts recognized earnings hedged transaction recognized open foreign currency exchange forward contracts mature predominantly next twelve months december 31 2009 2008 contracts notional amounts 2959 3030 million respectively exchange foreign currencies principally us dollar euro british pound canadian dollar hong kong dollar mexican peso swiss franc czech koruna chinese renminbi indian rupee singapore dollar commodity price risk managementour exposure market risk commodity prices result changes cost production primarily mitigate exposure commodity price risk use longterm fixedprice contracts suppliers formula price agreements suppliers customers also enter forward commodity contracts third parties designated hedges anticipated purchases several commodities forward commodity contracts markedtomarket resulting gains losses recognized earnings hedged transaction recognized december 31 2009 2008 contracts notional amounts 52 8 million respectively related forward commodity agreements principally base metals natural gas interest rate risk managementwe use combination financial instruments including longterm mediumterm shortterm financing variablerate commercial paper interest rate swaps manage interest rate mix total debt portfolio related overall cost borrowing december 31 2009 interest rate swap agreements designated fair value hedges effectively changed 600 million fixed rate debt rate 3875 percent libor based floating debt interest rate swaps mature 2014 december 31 2008 interest rate swap agreements fair value financial instrumentthe fasb’s accounting guidance defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date exit price fasb’s guidance classifies inputs used measure fair value following hierarchy level 1 unadjusted quoted prices active markets identical assets liabilities level 2 unadjusted quoted prices active markets similar assets liabilities unadjusted quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability level 3 unobservable inputs asset liability company endeavors utilize best available information measuring fair value financial nonfinancial assets liabilities classified entirety based lowest level input significant fair value measurement company determined financial assets honeywell international inc notes financial statementscontinued dollars millions except per share amounts liabilities level 2 fair value hierarchy following table sets forth company’s financial assets liabilities accounted fair value recurring basis december 31 2009 2008 foreign currency exchange contracts interest rate swap agreements forward commodity contracts valued using broker quotations market transactions either listed overthecounter markets derivative instruments classified within level 2 company also holds investments marketable equity securities designated available sale valued using market transactions overthecounter markets investments classified within level 2 carrying value cash equivalents trade accounts notes receivables payables commercial paper shortterm borrowings contained consolidated balance sheet approximates fair value following table sets forth company’s financial assets liabilities carried fair value december 31 2009 company assets net book value 72 million specifically property plant equipment intangible assets accounted fair value nonrecurring basis assets tested impairment based fair value assets company recognized losses 28 million 2009 company determined fair value measurements nonfinancial assets level 3 fair value hierarchy company holds investments marketable equity securities designated available sale securities company considers duration unrealized loss position stability liquidity positions financial conditions investees company’s intent ability hold investments reasonable period time sufficient forecasted recovery fair value determining temporary impairments result otherthantemporary decline fair value investments company recognized impairment charge 62 million second quarter 2009 included income expense honeywell international inc notes financial statementscontinued dollars millions except per share amounts derivatives utilized risk management purposes detailed included consolidated balance sheet impacted statement operations follows fair value asset derivatives consist following fair value liability derivatives consist following gains losses recognized oci consist following gains losses reclassified aoci income effective portions consist following ineffective portions commodity derivative instruments designated cash flow hedge relationships less 1 million 2009 located cost products sold foreign currency exchange contracts cash flow hedge relationships qualify critical matched terms hedge relationships result ineffectiveness interest rate swap agreements designated hedge relationships gains losses derivative recognized interest financial charges offsetting gains losses underlying debt hedged losses interest rate swap agreements recognized earnings 2 million 2009 losses fully offset gains underlying debt hedged also economically hedge exposure changes foreign exchange rates principally forward contracts markedtomarket resulting gains losses similarly recognized earnings offsetting gains losses nonfunctional currency denominated monetary assets liabilities hedged year ended december 31 2009 recognized 85 million expense income expense honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 17other liabilities consist following 1 asset retirement obligations primarily relate costs associated future retirement nuclear fuel conversion facilities specialty materials segment future retirement facilities automation control solutions segment reconciliation liability asset retirement obligations year ended december 31 2009 follows note 18capital stock authorized issue 2000000000 shares common stock par value one dollar common shareowners entitled receive dividends may declared board entitled one vote per share entitled event liquidation share ratably assets honeywell available distribution common shareowners common shareowners preemptive conversion rights shares common stock issued outstanding held treasury liable calls assessments restrictions us relative dividends repurchase redemption common stock company’s previously reported 30 billion share repurchase program 13 billion remained available december 31 2009 additional share repurchases amount timing repurchases may vary depending market conditions level operating investing activities authorized issue 40000000 shares preferred stock without par value determine number shares series rights preferences limitations series december 31 2009 preferred stock outstanding honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 19accumulated comprehensive income loss total accumulated comprehensive income loss included consolidated statement shareowners’ equity comprehensive income loss attributable noncontrolling interest consisted predominantly net income changes accumulated comprehensive income loss follows components accumulated comprehensive income loss note 20stockbased compensation plans stockbased compensation plans available grant nonqualified stock options incentive stock options stock appreciation rights restricted units restricted stock key employees 2006 stock incentive plan honeywell international inc affiliates plan maximum 43 million shares honeywell common stock may awarded additionally 2006 stock plan nonemployee directors honeywell international inc directors plan 500000 shares honeywell common stock may awarded stock optionsthe exercise price term conditions applicable option granted stock plans generally determined management development compensation committee board exercise price stock options set grant date may less fair market value per share stock date fair value recognized expense employee’s requisite service period generally vesting period award options generally vest fouryear period expire ten years honeywell international inc notes financial statementscontinued dollars millions except per share amounts fair value option award estimated date grant using blackscholes optionpricing model expected volatility based implied volatilities traded options honeywell common stock used monte carlo simulation model derive expected term model uses historical data estimate option exercise activity postvest termination behavior expected term represents estimate time options expected remain outstanding riskfree rate periods within contractual life option based us treasury yield curve effect time grant compensation cost pretax basis related stock options recognized operating results included selling general administrative expenses 2009 2008 2007 39 51 65 million respectively associated future income tax benefit recognized 2009 2008 2007 13 19 25 million respectively following table sets forth fair value per share information including related weightedaverage assumptions used determine compensation cost following table summarizes information stock option activity three years ended december 31 2009 1 expected vest options result applying prevesting forfeiture rate assumption total outstanding options honeywell international inc notes financial statementscontinued dollars millions except per share amounts following table summarizes information stock options outstanding exercisable december 31 2009 30314667 28624279 options exercisable weighted average exercise prices 4140 4114 december 31 2008 2007 respectively 30000541 shares available future grants terms stock option plans december 31 2009 total intrinsic value options amount stock price exceeded exercise price options date exercise exercised 2009 2008 2007 4 76 281 million respectively 2009 2008 2007 amount cash received exercise stock options 20 134 592 million respectively associated tax benefit realized 1 28 101 million respectively 2009 2008 2007 classified 1 21 86 million respectively benefit financing cash inflow consolidated statement cash flows balance classified cash operations december 31 2009 82 million total unrecognized compensation cost related nonvested stock option awards expected recognized weightedaverage period 249 years total fair value options vested 2009 2008 2007 51 63 83 million respectively honeywell international inc notes financial statementscontinued dollars millions except per share amounts restricted stock unitsrestricted stock unit rsu awards entitle holder receive one share common stock unit units vest rsus issued certain key employees fair market value date grant compensation rsus typically become fully vested periods ranging three seven years payable honeywell common stock upon vesting following table summarizes information rsu activity three years ended december 31 2009 december 31 2009 approximately 167 million total unrecognized compensation cost related nonvested rsus granted stock plans expected recognized weightedaverage period 18 years compensation expense related rsus 79 77 47 million 2009 2008 2007 respectively nonemployee directors’ planunder directors’ plan new director receives onetime grant 3000 restricted stock units vest fifth anniversary continuous board service directors’ plan also provides annual grant director options purchase 5000 shares common stock fair market value date grant options generally become exercisable fouryear period expire ten years note 21commitments contingencies environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous substances accordance environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing hazardous substances additional lawsuits claims costs involving environmental matters likely continue arise future honeywell international inc notes financial statementscontinued dollars millions except per share amounts respect environmental matters involving site contamination continually conduct studies individually jointly potentially responsible parties determine feasibility various remedial techniques policy record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical regulatory legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing remedial investigations feasibility studies timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects remedial techniques utilized agreements parties following table summarizes information concerning recorded liabilities environmental costs see note 3 repositioning charges detail regarding accruals environmental matters 2009 environmental liabilities included following balance sheet accounts although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position new jersey chrome sitesthe excavation offsite disposal approximately one million tons chromium residue present predecessor honeywell site located jersey city new jersey known study area 7 completed january 2010 also received approval united states district court district new jersey implementation related groundwater sediment remedial actions seeking appropriate permits state federal agencies provisions made financial statements estimated cost remedies honeywell international inc notes financial statementscontinued dollars millions except per share amounts abovereferenced site significant twentyone sites located hudson county new jersey subject administrative consent order aco entered new jersey department environmental protection njdep 1993 “honeywell aco sites” remedial investigations activities consistent aco also conducted underway honeywell aco sites recorded reserves honeywell aco sites appropriate accounting policy described may 3 2005 njdep filed lawsuit new jersey superior court honeywell two companies seeking declaratory injunctive relief unspecified damages reimbursement unspecified total costs relating sites new jersey allegedly contaminated chrome ore processing residue claims honeywell relate activities predecessor company ceased new jersey manufacturing operations mid1950’s honeywell two companies agreed settle litigation njdep subject court approval settlement honeywell would pay 5 million njdep’s past costs well accept sole responsibility remediate 24 53 “publicly funded sites” ie sites none three companies previously accepted responsibility honeywell would also bear 50 costs another 10 publicly funded sites recorded reserves publicly funded sites appropriate accounting policy described entered courtapproved settlements litigation filed federal court honeywell landowners seeking cleanup chrome residue groups properties known study areas 5 6 south 6 north honeywell aco sites required remedial actions consistent recorded reserves dundalk marine terminal baltimorechrome residue legacy chrome plant operations baltimore deposited fill dundalk marine terminal “dmt” owned operated maryland port administration “mpa” honeywell mpa sharing costs investigate mitigate related environmental issues entered cost sharing agreement honeywell bear 77 percent costs developing implementing permanent remedies dmt facility investigative phase ongoing appropriate remedies identified chosen negotiated consent decree mpa maryland department environment “mde” respect investigation remediation dmt facility consent decree challenged federal court build baltimore community group together local church two individuals collectively “build” october 2007 court dismissed prejudice build’s state law claims dismissed without prejudice build’s rcra claims regarding neighborhoods near dmt facility august 2008 court held hearing company’s motion dismiss build’s remaining claims grounds mde diligently prosecuting investigation remediation dmt awaiting court’s decision believe matter material adverse impact consolidated financial position operating cash flows given scope complexity project possible cost remediation determinable could material adverse impact results operations periods recognized onondaga lake syracuse nywe implementing combined dredgingcapping remedy onondaga lake pursuant consent decree approved united states district court northern district new york january 2007 accrued estimated cost remediating onondaga lake based currently available information analysis performed engineering consultants honeywell also conducting remedial investigations activities sites syracuse recorded reserves investigations activities appropriate accounting policy described honeywell entered cooperative agreement potential natural resource trustees assess alleged natural resource damages relating site possible predict outcome duration assessment amounts responsibility damages honeywell international inc notes financial statementscontinued dollars millions except per share amounts asbestos matters like many industrial companies honeywell defendant personal injury actions related asbestos mine produce asbestos make sell insulation products construction materials identified primary cause asbestos related disease vast majority claimants products containing asbestos previously manufactured honeywell previously owned subsidiaries primarily fall two general categories refractory products friction products refractory productshoneywell owned north american refractories company narco 1979 1986 narco produced refractory products high temperature bricks cement sold largely steel industry east midwest less 2 percent narco’s products contained asbestos sold narco business 1986 agreed indemnify narco respect personal injury claims products discontinued prior sale defined sale agreement narco retained liability claims january 4 2002 narco filed reorganization chapter 11 us bankruptcy code result narco bankruptcy filing claims pending narco automatically stayed pending reorganization narco addition bankruptcy court enjoined filing prosecution narcorelated asbestos claims honeywell stay remained effect continuously since january 4 2002 connection narco’s bankruptcy filing paid narco’s parent company 40 million agreed provide narco 20 million financing also agreed pay 20 million narco’s parent company upon filing plan reorganization narco acceptable honeywell amount paid december 2005 following filing narco’s third amended plan reorganization pay narco’s parent company 40 million forgive outstanding narco indebtedness honeywell upon effective date plan reorganization believe part narco plan reorganization trust established benefit asbestos claimants current future pursuant trust distribution procedures negotiated narco asbestos claimants committee courtappointed legal representative future asbestos claimants trust put place approved court fair equitable honeywell well narco entitled permanent channeling injunction barring present future individual actions state federal courts requiring asbestos related claims based exposure narco products made federallysupervised trust honeywell reached agreement representative future narco claimants asbestos claimants committee cap annual contributions trust respect future claims level would material impact honeywell’s operating cash flows november 2007 bankruptcy court entered amended order confirming narco plan without modification approving 524g trust channeling injunction favor narco honeywell december 2007 certain insurers filed appeal bankruptcy court order united states district court western district pennsylvania district court affirmed bankruptcy court order july 2008 august 2008 insurers filed notice appeal third circuit court appeals appeal fully briefed oral argument took place may 21 2009 matter submitted decision expect stay enjoining litigation narco honeywell remain effect pendency proceedings consolidated financial statements reflect estimated liability settlement pending future narcorelated asbestos claims december 31 2009 2008 11 billion estimated liability pending claims based terms conditions including evidentiary requirements definitive agreements approximately 260000 current claimants estimate honeywell international inc notes financial statementscontinued dollars millions except per share amounts unsettled claims pending time narco filed bankruptcy protection substantially settlement payments respect current claims made approximately 100 million payments due pursuant settlements due upon establishment narco trust estimated liability future claims represents estimated value future asbestos related bodily injury claims expected asserted narco 2018 aforementioned obligations narco’s parent light uncertainties inherent making longterm projections believe reasonable basis estimating asbestos claims beyond 2018 estimate based upon disease criteria payment values contained narco trust distribution procedures negotiated narco asbestos claimants committee narco future claimants’ representative honeywell projected probable number value including trust claim handling costs asbestos related future liabilities based upon experience asbestos claims filing rates tort system certain operating asbestos trusts claims experience forums valuation methodology also includes analysis population likely exposed asbestos containing products epidemiological studies estimate number people likely develop asbestos related diseases narco claims filing history pending inventory narco asbestos related claims payment rates expected established narco trust methodology used estimate liability future claims commonly accepted numerous courts resulted range estimated liability future claims 743 961 million believe amount within range better estimate amount accordingly recorded minimum amount range december 31 2009 2008 consolidated financial statements reflect insurance receivable corresponding liability settlement pending future narcorelated asbestos claims 831 877 million respectively coverage reimburses honeywell portions costs incurred settle narco related claims court judgments well defense costs provided large number insurance policies written dozens insurance companies domestic insurance market london excess market december 31 2009 significant portion coverage insurance companies agreements pay full policy limits based corresponding honeywell claims costs conduct analyses determine amount insurance estimate probable recovery relation payment current estimated future claims substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries made judgments concerning insurance coverage believe reasonable consistent historical dealings insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs second quarter 2006 travelers casualty insurance company “travelers” filed lawsuit honeywell insurance carriers supreme court new york county new york disputing obligations narcorelated asbestos claims high excess insurance coverage issued travelers insurance carriers approximately 300 million coverage policies included narcorelated insurance receivable december 31 2009 honeywell believes entitled coverage issue expects prevail matter third quarter 2007 honeywell prevailed critical choice law issue concerning appropriate method allocating narcorelated asbestos liabilities triggered policies plaintiffs appealed trial court’s ruling upheld intermediate appellate court second quarter 2009 plaintiffs’ appeal new york appellate division highest court new york denied october 2009 related new jersey action brought honeywell dismissed coverage claims plaintiffs preserved new york action based upon understanding relevant facts applicable law ii terms insurance policies issue iii experience matters nature iv advice counsel believe amount due travelers insurance carriers probable recovery honeywell expects prevail matter adverse outcome could material impact results operations honeywell international inc notes financial statementscontinued dollars millions except per share amounts period recognized would material consolidated financial position operating cash flows projecting future events subject many uncertainties could cause narco related asbestos liabilities assets higher lower projected recorded assurance plan reorganization become final insurance recoveries timely whether narco related asbestos claims beyond 2018 given inherent uncertainty predicting future events review estimates periodically update based experience relevant factors similarly reevaluate projections concerning probable insurance recoveries light changes projected liability developments may impact insurance recoveries friction productshoneywell’s bendix friction materials bendix business manufactured automotive brake parts contained chrysotile asbestos encapsulated form existing potential claimants consist largely individuals allege exposure asbestos brakes either performing vicinity individuals performed brake replacements 1981 december 31 2009 resolved approximately 152000 bendix related asbestos claims 129 trials resulting favorable verdicts 17 trials resulting adverse verdicts four adverse verdicts reversed appeal five verdicts vacated posttrial motions three claims settled remaining five appealed claims portfolio reduced 2009 due settlements dismissals elimination significantly aged ie pending six years inactive including claims required medical exposure showings made duplicate claims following tables present information regarding bendix related asbestos claims activity honeywell experienced average resolution values per claim excluding legal costs follows possible predict whether resolution values bendix related asbestos claims increase decrease stabilize future consolidated financial statements reflect estimated liability resolution pending future bendix related asbestos claims 566 578 million december 31 2009 2008 respectively liability estimated cost future bendix related asbestos claims based historic claims filing experience disease classifications expected resolution values historic dismissal rates fourth quarter year update analysis estimated cost honeywell international inc notes financial statementscontinued dollars millions except per share amounts future bendix related asbestos claims valued bendix pending future claims using average resolution values previous four years extended three years changes tort system began 2006 refocused asbestos litigation mesothelioma cases making four year period 2006 2009 representative forecasting purposes continue update expected resolution values used estimate cost pending future bendix claims fourth quarter year estimated liability future claims represents estimated value future asbestos related bodily injury claims expected asserted bendix next five years light uncertainties inherent making longterm projections well certain factors unique friction product asbestos claims believe reasonable basis estimating asbestos claims beyond next five years estimate based upon bendix historical experience tort system four years ended december 31 2009 respect claims filing resolution values methodology used estimate liability future claims commonly accepted numerous courts similar used estimate future narco related asbestos claims liability honeywell currently approximately 19 billion insurance coverage remaining respect pending potential future bendix related asbestos claims 172 156 million reflected receivables consolidated balance sheet december 31 2009 2008 respectively coverage provided large number insurance policies written dozens insurance companies domestic insurance market london excess market insurance receivables recorded financial statements simultaneous recording liability estimated value underlying asbestos claims amount insurance receivable recorded based ongoing analysis insurance estimate probable recovery determination based analysis underlying insurance policies historical experience insurers ongoing review solvency insurers interpretation judicial determinations relevant insurance programs consideration impacts settlements reached insurers insurance receivables also recorded structured insurance settlements provide future fixed payment streams contingent upon future claims events amounts recorded net present value fixed payment stream cumulative historical basis honeywell recorded insurance receivables equal approximately 45 percent value underlying asbestos claims recorded however gaps coverage due insurance company insolvencies certain uninsured periods insurance settlements rate expected decline future bendix related asbestos liabilities may recorded future recoverability rates may also impacted numerous factors future insurance settlements insolvencies judicial determinations relevant coverage program difficult predict assuming continued defense indemnity spending current levels estimate cumulative recoverability rate could decline next five years approximately 35 percent honeywell believes sufficient insurance coverage reserves cover pending bendix related asbestos claims bendix related asbestos claims estimated filed within next five years although impossible predict outcome either pending future bendix related asbestos claims believe claims would material adverse effect consolidated financial position light insurance coverage prior experience resolving claims rate types claims filed average resolution value claims period time claim settlements paid collectively “variable claims factors” substantially change honeywell would expect future bendix related asbestos claims material adverse effect results operations operating cash flows fiscal year assurances given however variable claims factors change honeywell international inc notes financial statementscontinued dollars millions except per share amounts refractory friction productsthe following tables summarize information concerning narco bendix asbestos related balances asbestos related liabilities insurance recoveries asbestos related liabilities honeywell international inc notes financial statementscontinued dollars millions except per share amounts narco bendix asbestos related balances included following balance sheet accounts matters subject number lawsuits investigations disputes involve substantial amounts claimed arising conduct business including matters relating commercial transactions government contracts product liability prior acquisitions divestitures employee benefit plans intellectual property health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes matters well potential ranges possible losses taking consideration insurance recoveries based careful analysis matter assistance outside legal counsel applicable experts included matters following allen et al v honeywell retirement earnings planpursuant settlement approved us district court district arizona february 2008 18 21 claims alleged plaintiffs class action lawsuit dismissed prejudice exchange approximately 35 million maximum aggregate liability remaining three claims alleging honeywell impermissibly reduced pension benefits certain employees predecessor entity plan amended 1983 failed calculate benefits accordance terms plan capped 500 million amounts payable including settlement amount paid company’s pension plan october 2009 court granted summary judgment favor honeywell retirement earnings plan respect claim regarding calculation benefits continue expect prevail remaining claims light applicable law substantial affirmative defenses yet considered fully court accordingly believe liability probable occurrence reasonably estimable respect claims recorded provision remaining claims financial statements quick lubeon march 31 2008 se quick lube filter distributor filed suit us district court district connecticut alleging twelve filter manufacturers including honeywell engaged conspiracy fix prices rig bids allocate us customers aftermarket automotive filters suit purported class action behalf direct purchasers filters defendants parallel purported class actions including behalf indirect purchasers filters filed plaintiffs variety jurisdictions united states canada us cases consolidated single multidistrict litigation northern district illinois intend vigorously defend claims raised actions antitrust division department justice notified honeywell january 21 2010 officially closed investigation possible collusion replacement auto filters industry given uncertainty inherent litigation investigations including specific matters referenced believe possible develop estimates reasonably possible loss excess current accruals matters considering past experience existing accruals honeywell international inc notes financial statementscontinued dollars millions except per share amounts expect outcome matters either individually aggregate material adverse effect consolidated financial position contingencies resolved long periods time potential liabilities subject change due new developments changes settlement strategy impact evidentiary requirements could cause us pay damage awards settlements become subject equitable remedies could material adverse effect results operations operating cash flows periods recognized paid warranties guaranteeswe issued party following direct indirect guarantees december 31 2009 expect guarantees material adverse effect consolidated results operations financial position liquidity connection disposition certain businesses facilities indemnified purchasers expected cost remediation environmental contamination existing date disposition expected costs accrued environmental assessments made remedial efforts probable costs reasonably estimated normal course business issue product warranties product performance guarantees accrue estimated cost product warranties performance guarantees based contract terms historical experience time sale adjustments initial obligations warranties guarantees made changes obligations become reasonably estimable following table summarizes information concerning recorded obligations product warranties product performance guarantees product warranties product performance guarantees included following balance sheet accounts note 22pension postretirement benefits sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees pension benefits substantially us employees honeywell international inc notes financial statementscontinued dollars millions except per share amounts provided noncontributory qualified nonqualified defined benefit pension plans us defined benefit pension plans comprise 76 percent projected benefit obligation nonus employees us citizens covered various retirement benefit arrangements considered defined benefit pension plans accounting purposes nonus defined benefit pension plans comprise 24 percent projected benefit obligation also sponsor postretirement benefit plans provide health care benefits life insurance coverage eligible retirees retiree medical plans mainly cover us employees retire pension eligibility hospital professional medical services nonunion hourly salaried employees joining honeywell january 1 2000 eligible participate retiree medical life insurance plans us retiree medical plans require deductibles copayments virtually integrated medicare retiree contributions generally required based coverage type plan medicare eligibility honeywell limited subsidy retiree medical plans fixeddollar amount future retirees half current retirees cap retiree medical benefits plans limits exposure impact future health care cost increases retiree medical life insurance plans funded claims expenses paid operating cash flow may 1 2009 honeywell amended us retiree medical plan eliminating subsidy nonunion employees retire september 1 2009 employees already retired september 1 2009 affected change plan amendment reduced accumulated postretirement benefit obligation 180 million representing elimination benefits attributable years service already rendered active nonunion employees eligible retire eligible nonunion employees assumed retire prior september 1 2009 reduction accumulated postretirement benefit obligation recognized part net periodic postretirement benefit cost average future service period full eligibility remaining active union employees still eligible retiree medical subsidy plan amendment also resulted curtailment gain 98 million second quarter 2009 included part net periodic postretirement benefit cost curtailment gain represents recognition previously unrecognized prior service credits attributable future years service employee group future accrual benefits eliminated honeywell international inc notes financial statementscontinued dollars millions except per share amounts following tables summarize balance sheet impact including benefit obligations assets funded status associated significant pension postretirement benefit plans december 31 2009 2008 honeywell international inc notes financial statementscontinued dollars millions except per share amounts recognized accumulated comprehensive income loss associated significant pension postretirement benefit plans december 31 2009 2008 follows components net periodic benefit cost amounts recognized comprehensive income loss significant plans include following components estimated net loss prior service cost pension benefits amortized accumulated comprehensive income loss net periodic benefit cost 2010 expected 706 20 million respectively estimated net loss prior service credit postretirement benefits amortized accumulated comprehensive income loss net periodic benefit cost 2010 expected 21 41 million respectively honeywell international inc notes financial statementscontinued dollars millions except per share amounts major actuarial assumptions used determining benefit obligations net periodic benefit cost us benefit plans presented following table nonus benefit plans none individually material assumptions reflect economic assumptions applicable country select discount rate retirement benefit plans use modeling process involves matching expected cash outflows benefit plans yield curve constructed portfolio double rated fixedincome debt instruments use average yield hypothetical portfolio discount rate benchmark discount rate used determine postretirement benefit obligation lower principally due shorter expected duration postretirement plan obligations compared pension plan obligations expected rate return plan assets 9 percent longterm rate based historic plan asset returns varying longterm periods combined current market conditions broad asset mix considerations expected rate return longterm assumption generally change annually pension benefits included aggregate data tables amounts applicable pension plans accumulated benefit obligations exceeding fair value plan assets amounts related plans follows accumulated benefit obligation defined benefit pension plans 168 143 billion december 31 2009 2008 respectively asset investment strategy focuses maintaining diversified portfolio using various asset classes order achieve longterm investment objectives risk adjusted basis actual invested positions various securities change time based short longerterm investment opportunities achieve objectives established longterm target allocations follows 6070 percent equity securities 1020 percent fixed income securities cash 515 percent real estate investments 1020 percent types investments equity securities include publiclytraded stock companies located inside outside united states fixed income securities include corporate bonds companies diversified industries mortgagebacked securities us treasuries real estate investments include direct investments commercial properties honeywell international inc notes financial statementscontinued dollars millions except per share amounts investments real estate funds types investments include investments private equity hedge funds follow several different strategies nonus investment policies different country longterm investment objectives remain us pension plans assets 103 87 billion nonus pension plans assets 35 28 billion december 31 2009 2008 respectively fair values pension plans assets december 31 2009 asset category follows following table summarizes changes fair value level 3 assets year ended december 31 2009 general funding policy qualified pension plans contribute amounts least sufficient satisfy regulatory funding standards 2009 2008 2007 made voluntary contributions 740 242 42 million respectively us defined benefit pension plans primarily improve funded status plans december 31 2009 2008 fair value pension plans assets invested honeywell common stock 11 billion 204 million respectively 2010 plan make additional voluntary contributions honeywell common stock us plans improve funded status plans 2010 also expect contribute approximately 150 million nonus defined benefit pension plans satisfy regulatory funding standards fund benefits paid directly company assets benefit payments including amounts paid company assets reflecting expected future service appropriate expected paid follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts postretirement benefits medicare prescription drug improvement modernization act 2003 act provides subsidies employers sponsor postretirement health care plans provide prescription drug coverage least actuarially equivalent offered medicare part impact act reduced postretirement benefits expense approximately 11 21 25 million 2009 2008 2007 respectively assumed health care cost trend rate significant effect amounts reported onepercentagepoint change assumed health care cost trend rate would following effects benefit payments reflecting expected future service appropriate expected paid follows employee savings plans sponsor employee savings plans match form common stock savings plan contributions certain eligible employees shares issued stock match plans 48 49 37 million cost 158 220 199 million 2009 2008 2007 respectively honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 23segment financial data globally manage business operations four reportable operating segments serving customers worldwide aerospace products services control sensing security technologies buildings homes industry automotive products chemicals segment information consistent management reviews businesses makes investing resource allocation decisions assesses operating performance four reportable segments follows • aerospace organized customer endmarket air transport regional business general aviation defense space provides products services include auxiliary power units propulsion engines environmental control systems engine controls repair overhaul services hardware logistics electric power systems flight safety communications navigation radar surveillance systems aircraft lighting management technical services advanced systems instruments aircraft wheels brakes • automation control solutions includes products controls heating cooling indoor air quality ventilation humidification home automation advanced software applications homebuilding control optimization sensors switches control systems instruments measuring pressure air flow temperature electrical current security fire gas detection personal protection equipment access control video surveillance remote patient monitoring systems building solutions installs maintains upgrades systems keep buildings safe comfortable productive process solutions provides full range automation control solutions industrial plants offering advanced software automation systems integrate control monitor complex processes many types industrial settings • specialty materials includes fluorocarbons specialty films advanced fibers customized research chemicals intermediates electronic materials chemicals catalysts adsorbents • transportation systems includes honeywell turbo technologies turbochargers chargeair thermal systems consumer products group car care products including antifreeze filters spark plugs cleaners waxes additives friction materials brake hard parts friction materials accounting policies segments described note 1 honeywell’s senior management evaluates segment performance based segment profit segment profit measured business unit income loss taxes excluding general corporate unallocated expense income expense interest financial charges pension postretirement benefits expense stock compensation expense repositioning charges accounting changes beginning january 1 2008 consistent changes made measure segment performance utilized senior management segment profit adjusted exclude expense associated restricted stock units “rsu” include equity incomeloss affiliated companies stock compensation expense including rsu expense totaled 112 million year ended december 31 2007 equity incomeloss affiliated companies included income expense totaled 10 million year ended december 31 2007 changes applied prospective basis beginning january 1 2008 material following reportable segment data honeywell international inc notes financial statementscontinued dollars millions except per share amounts honeywell international inc notes financial statementscontinued dollars millions except per share amounts reconciliation segment profit consolidated income continuing operations taxes follows note 24geographic areasfinancial data honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 25supplemental cash flow information note 26unaudited quarterly financial information report independent registered public accounting firm board directors shareowners honeywell international inc opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position honeywell international inc subsidiaries december 31 2009 2008 results operations cash flows three years period ended december 31 2009 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 1 accompanying consolidated financial statements 2009 company retrospectively applied accounting noncontrolling interests 2007 changed manner accounts income tax uncertainties company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp florham park new jersey february 11 2010 item 9item 8 financial statements supplementary data honeywell international inc consolidated statement operations notes financial statements integral part statement honeywell international inc consolidated balance sheet notes financial statements integral part statement honeywell international inc consolidated statement cash flows notes financial statements integral part statement honeywell international inc consolidated statement shareowners equity notes financial statements integral part statement honeywell international inc notes financial statements dollars millions except per share amounts note 1summary significant accounting policies accounting principlesthe financial statements accompanying notes prepared accordance accounting principles generally accepted united states america following description significant accounting policies honeywell international inc principles consolidationthe consolidated financial statements include accounts honeywell international inc subsidiaries entities controlling interest maintained consolidation policy requires equity investments exercise significant influence control investee primary beneficiary investee’s activities accounted using equity method investments able exercise significant influence investee readily determinable fair values accounted cost method intercompany transactions balances eliminated consolidation cash equivalentscash cash equivalents include cash hand deposit highly liquid temporary cash investments original maturity three months less inventoriesinventories valued lower cost market using firstin firstout average cost method lastin firstout lifo method certain qualifying domestic inventories investmentsinvestments affiliates significant influence controlling interest accounted using equity method accounting investments carried market value readily determinable cost equity investments periodically reviewed determine declines fair value cost basis otherthantemporary significant sustained decreases quoted market prices series historic projected operating losses investees strong indicators otherthantemporary declines decline fair value determined otherthantemporary impairment loss recorded investment written new carrying value property plant equipmentproperty plant equipment recorded cost including asset retirement obligations less accumulated depreciation financial reporting straightline method depreciation used estimated useful lives 10 50 years buildings improvements 2 16 years machinery equipment recognition fair value obligations associated retirement tangible longlived assets required legal obligation incur costs upon initial recognition liability cost capitalized part related longlived asset depreciated corresponding asset’s useful life see note 11 note 17 additional details goodwill indefinitelived intangible assetsgoodwill represents excess acquisition costs fair value tangible net assets identifiable intangible assets businesses acquired goodwill certain intangible assets deemed indefinite lives amortized intangible assets determined definite lives amortized useful lives goodwill indefinite lived intangible assets subject impairment testing annually march 31 whenever events changes circumstances indicate carrying amount may fully recoverable testing compares carrying values fair values appropriate carrying value assets reduced fair value completed annual goodwill impairment test march 31 2010 determined impairment date see note 12 additional details goodwill balances intangible assets determinable livesother intangible assets determinable lives consist customer lists technology patents trademarks intangibles amortized estimated useful lives ranging 2 24 years longlived assetswe periodically evaluate recoverability carrying amount longlived assets including property plant equipment intangible assets determinable lives whenever events changes circumstances indicate carrying amount asset may fully recoverable evaluate events changes circumstances based number factors including operating results business plans forecasts general industry trends economic projections anticipated cash flows impairment assessed undiscounted expected future cash flows derived asset less carrying amount impairment losses measured amount carrying value asset exceeds fair value recognized earnings also continually evaluate estimated useful lives longlived assets periodically revise estimates based current events sales recognitionproduct service sales recognized persuasive evidence arrangement exists product delivery occurred services rendered pricing fixed determinable collection reasonably assured service sales principally representing repair maintenance engineering activities aerospace automation control solutions segments recognized honeywell international inc notes financial statementscontinued dollars millions except per share amounts contractual period services rendered sales longterm contracts aerospace automation control solutions segments recorded percentageofcompletion method measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts provisions anticipated losses longterm contracts recorded full losses become evident revenues contracts multiple element arrangements recognized element earned based relative fair value element provided delivered elements value customers standalone basis amounts allocated element based objectively determined fair value sales price product service sold separately competitor prices similar products services allowance doubtful accountswe maintain allowances doubtful accounts estimated losses result customer’s inability make required payments estimate anticipated losses doubtful accounts based days past due measured contractual due date historical collection history incorporate changes economic conditions may reflected historical trends example customers bankruptcy liquidation reorganization receivables writtenoff allowance doubtful accounts determined uncollectible determination includes analysis consideration particular conditions account including time intervals since last collection success outside collection agencies activity solvency customer bankruptcy proceedings environmental expendituresenvironmental expenditures relate current operations expensed capitalized appropriate expenditures relate existing condition caused past operations provide future benefits expensed incurred liabilities recorded environmental remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical regulatory legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities asbestos related contingencies insurance recoverieshoneywell defendant personal injury actions related products containing asbestos refractory friction products recognize liability asbestos related contingency probable occurrence reasonably estimable regarding north american refractories company narco asbestos related claims accrue pending claims based terms conditions including evidentiary requirements definitive agreements principle current claimants also accrue probable value future narco asbestos related claims 2018 based disease criteria payment values contained narco trust described note 21 light inherent uncertainties making long term projections regarding claims filing rates disease manifestation believe reasonable basis estimating narco asbestos claims beyond 2018 regarding bendix asbestos related claims accrue estimated value pending claims based expected claim resolution values historic dismissal rates also accrue estimated cost future anticipated claims related bendix next five years based assessment additional claims may brought us anticipated resolution values tort system value bendix pending future claims using average resolution values previous five years continue update expected resolution values used estimate cost pending future bendix claims fourth quarter year additional information see note 21 continually assess likelihood adverse judgments outcomes contingencies well potential ranges probable losses recognize liability contingencies based analysis individual issue assistance outside legal counsel applicable experts connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical experience insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs consideration impacts settlements insurers aerospace sales incentiveswe provide sales incentives commercial aircraft manufacturers airlines connection selection aircraft equipment predominately wheel braking system hardware auxiliary power units installation commercial aircraft incentives principally consist free deeply discounted products also include credits future purchases product upfront cash payments costs recognized period incurred cost products sold reduction sales honeywell international inc notes financial statementscontinued dollars millions except per share amounts appropriate aircraft manufacturers incentives recorded products delivered airlines incentives recorded associated aircraft delivered aircraft manufacturer airline research developmentresearch development costs companysponsored research development projects expensed incurred costs principally included cost products sold 1466 1330 1543 million 2010 2009 2008 respectively stockbased compensation plansthe principal awards issued stockbased compensation plans described note 20 include nonqualified stock options restricted stock units rsus cost awards measured grant date based fair value award value portion award ultimately expected vest recognized expense requisite service periods generally vesting period equity award included selling general administrative expense consolidated statement operations forfeitures required estimated time grant order estimate portion award ultimately vest estimate based historical rates forfeiture pension postretirement benefits sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees also sponsor postretirement benefit plans provide health care benefits life insurance coverage eligible retirees 2010 elected change method recognizing pension expense previously us defined benefit pension plans used marketrelated value plan assets reflecting changes fair value plan assets threeyear period net actuarial gains losses excess 10 percent greater marketrelated value plan assets plans’ projected benefit obligation corridor recognized sixyear period new accounting method recognize changes fair value plan assets net actuarial gains losses excess corridor annually fourth quarter year mtm adjustment remaining components pension expense primarily service interest costs assumed return plan assets recorded quarterly basis ongoing pension expense historical policy recognizing pension expense considered acceptable believe new policy preferable eliminates delay recognition actuarial gains losses outside corridor change reported retrospective application new policy periods presented impacts adjustments made financial statements summarized consolidated statement operations honeywell international inc notes financial statementscontinued dollars millions except per share amounts consolidated balance sheet consolidated statement cash flows honeywell international inc notes financial statementscontinued dollars millions except per share amounts consolidated statement shareowners equity foreign currency translationassets liabilities subsidiaries operating outside united states functional currency us dollars translated us dollars using yearend exchange rates sales costs expenses translated average exchange rates effect year foreign currency translation gains losses included component accumulated comprehensive income loss subsidiaries operating highly inflationary environments inventories property plant equipment including related expenses remeasured exchange rate effect date assets acquired monetary assets liabilities remeasured yearend exchange rates remeasurement adjustments subsidiaries included earnings derivative financial instrumentsas result global operating financing activities exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position minimize risks interest foreign currency exchange rate commodity price fluctuations normal operating financing activities deemed appropriate use derivative financial instruments derivative financial instruments used manage risk used trading speculative purposes use leveraged derivative financial instruments derivative financial instruments used hedging purposes must designated effective hedge identified risk exposure inception contract honeywell international inc notes financial statementscontinued dollars millions except per share amounts accordingly changes fair value derivative contract must highly correlated changes fair value underlying hedged item inception hedge life hedge contract derivatives recorded balance sheet assets liabilities measured fair value derivatives designated hedges fair value assets liabilities changes fair values derivatives hedged items recorded current earnings derivatives designated cash flow hedges effective portion changes fair value derivatives recorded accumulated comprehensive income loss subsequently recognized earnings hedged items impact earnings cash flows derivative financial instruments classified consistent underlying hedged item transfers financial instruments sales transfers securitization financial instruments accounted authoritative guidance transfers servicing financial assets extinguishments liabilities sell interests designated pools trade accounts receivables third parties terms trade accounts receivable program permit repurchase receivables third parties discretion result program receivables accounted sale remain consolidated balance sheet corresponding amount recorded either shortterm borrowings longterm debt times also transfer trade receivables qualify sale thus removed consolidated balance sheet time sold value assigned subordinated interests undivided interests retained receivables sold based relative fair values interests retained sold carrying value retained interests approximates fair value due shortterm nature collection period receivables income taxesdeferred tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax assets realized determination amount valuation allowance provided recorded deferred tax assets involves estimates regarding 1 timing amount reversal taxable temporary differences 2 expected future taxable income 3 impact tax planning strategies assessing need valuation allowance consider available positive negative evidence including past operating results projections future taxable income feasibility ongoing tax planning strategies projections future taxable income include number estimates assumptions regarding volume pricing costs additionally valuation allowances related deferred tax assets impacted changes tax laws significant judgment required determining income tax provisions evaluating tax positions establish additional provisions income taxes despite belief tax positions fully supportable remain certain positions meet minimum probability threshold defined authoritative guidance uncertainty income taxes tax position likely sustained upon examination applicable taxing authority normal course business tax filings company subsidiaries examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes continually assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts give rise revision become known earnings per sharebasic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding dilutive potential common shares outstanding use estimatesthe preparation consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts financial statements related disclosures accompanying notes actual results could differ estimates assumptions periodically reviewed effects revisions reflected consolidated financial statements period determined necessary reclassificationscertain prior year amounts reclassified conform current year presentation honeywell international inc notes financial statementscontinued dollars millions except per share amounts recent accounting pronouncementschanges accounting principles generally accepted united states america us gaap established financial accounting standards board fasb form accounting standards updates asu’s fasb’s accounting standards codification company considers applicability impact asu’s asu’s listed assessed determined either applicable expected minimal impact consolidated financial position results operations june 2009 fasb issued amendment accounting disclosure requirements transfers financial assets guidance requires additional disclosures transfers financial assets changes requirements derecognizing financial assets guidance effective fiscal years beginning november 15 2009 implementation standard material impact consolidated financial position results operations june 2009 fasb issued amendment accounting disclosure requirements consolidation variable interest entities guidance affects overall consolidation analysis requires enhanced disclosures involvement variable interest entities guidance effective fiscal years beginning november 15 2009 implementation standard material impact consolidated financial position results operations october 2009 fasb issued amendments accounting disclosure revenue recognition amendments effective fiscal years beginning june 15 2010 early adoption permitted modify criteria recognizing revenue multiple element arrangements scope constitutes nonsoftware deliverable company elected early adopt guidance prospective basis applicable transactions originating materially modified january 1 2010 implementation amended accounting guidance material impact consolidated financial position results operations period adoption impacts future periods vary based upon nature volume new materially modified transactions expected significant impact sales note 2acquisitions divestitures acquired businesses aggregate cost 1303 468 2181 million 2010 2009 2008 respectively acquisitions acquired businesses recorded estimated fair values dates acquisition significant acquisitions made years discussed october 2010 completed acquisition issued outstanding shares sperian protection sperian french company operates globally personal protection equipment design manufacturing industry sperian reported 2009 revenues approximately 900 million aggregate value net cash acquired approximately 1475 million including assumption approximately 326 million outstanding debt allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date following table summarizes estimated fair values assets liabilities acquired acquisition date honeywell international inc notes financial statementscontinued dollars millions except per share amounts assigned 619 million intangible assets predominantly customer relationships trade names technology intangible assets amortized estimated lives range 3 20 years using straight line accelerated amortization methods included amount value approximately 203 million assigned trade names intangibles determined indefinite lives excess purchase price estimated fair values net assets acquired approximately 898 million recorded goodwill arises primarily avoidance time costs would required associated risks would encountered develop business product offering customer base comparable sperian expected cost synergies realized consolidation acquired business automations controls solutions segment cost synergies expected realized principally areas selling general administrative expenses material sourcing manufacturing goodwill nondeductible tax purposes results acquisition date december 31 2010 included automation control solutions segment material consolidated financial statements december 31 2010 purchase accounting sperian subject final adjustment primarily useful lives intangible assets amounts allocated intangible assets goodwill certain preacquisition contingencies settlement postclosing purchase price adjustments august 2009 company completed acquisition rmg group rmg regel messtechnik gmbh natural gas measuring control products services integrated solutions company purchase price approximately 416 million net cash acquired purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 174 million identifiable intangible assets predominantly customer relationships existing technology trademarks intangible assets amortized estimated lives range 1 15 years using straightline accelerated amortization methods excess purchase price estimated fair values net assets acquired approximating 225 million recorded goodwill nondeductible tax purposes acquisition accounted acquisition method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2009 included automation control solutions segment material consolidated financial statements may 2008 company completed acquisition safety products holding inc subsidiary norcross safety products llc norcross leading manufacturer personal protective equipment purchase price net cash acquired approximately 1221 million allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date following table summarizes estimated fair values assets liabilities acquired acquisition date honeywell international inc notes financial statementscontinued dollars millions except per share amounts company assigned 702 million intangible assets predominantly customer relationships trade names technology intangible assets amortized estimated lives range 1 20 years using straight line accelerated amortization methods value assigned trade names approximately 257 million classified indefinite lived intangible excess purchase price estimated fair values net assets acquired approximately 604 million recorded goodwill nondeductible tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2008 included automation control solutions segment material consolidated financial statements july 2008 company completed sale consumables solutions business aerospace 1050 million consisting approximately 901 million cash six million shares common stock connection completion sale company entered among things exclusive supply license agreements stockholder agreement extent company’s cash flows associated supply license agreements consumables solutions business classified discontinued operations provisions license supply agreements determined atmarket allocated portion proceeds agreements pretax gain 623 million classified incomeexpense statement operations gain sale approximately 417 million net tax sale consumables solutions business within aerospace segment consistent company’s strategic focus core product areas utilizing advanced technologies july 2008 company completed acquisition metrologic instruments inc metrologic leading manufacturer data capture collection hardware software purchase price approximately 715 million net cash acquired purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 248 million identifiable intangible assets predominantly customer relationships technology trademarks intangible assets amortized estimated lives range 115 years using straight line accelerated amortization methods excess purchase price estimated fair values net assets acquired approximately 440 million recorded goodwill nondeductible tax purposes acquisition accounted purchase method accordingly results operations included consolidated financial statements date acquisition results acquisition date december 31 2008 included automation control solutions segment material consolidated financial statements january 2011 company entered definitive agreement sell consumer products group business cpg rank group limited approximately 950 million sale subject customary closing conditions including receipt regulatory approvals expected close third quarter 2011 currently estimate transaction result pretax gain approximately 350 million approximately 200 million net tax sale cpg within transportation systems segment consistent company’s strategic focus portfolio differentiated global technologies connection acquisitions 2010 2009 2008 amounts recorded transaction costs integrating acquired businesses honeywell material honeywell international inc notes financial statementscontinued dollars millions except per share amounts pro forma results 2010 2009 2008 assuming acquisitions made beginning year would materially different consolidated reported results note 3repositioning charges summary repositioning charges follows following table summarizes pretax distribution total net repositioning charges income statement classification following table summarizes pretax impact total net repositioning charges segment 2010 recognized repositioning charges totaling 181 million including severance costs 145 million related workforce reductions 2807 manufacturing administrative positions primarily automation control solutions aerospace transportation systems segments workforce reductions primarily related planned shutdown certain manufacturing facilities automation control solutions transportation systems segments cost savings actions taken connection ongoing functional transformation productivity initiatives factory transitions aerospace automation control solutions specialty materials segments costeffective locations achieving acquisitionrelated synergies automation control solutions segment exit andor rationalization certain product lines specialty materials segment repositioning charge also included asset impairments 22 million principally related manufacturing plant equipment associated exit andor rationalization certain product lines facilities scheduled close also 30 million previously established accruals primarily severance automation control solutions transportation systems aerospace segments returned income 2010 due fewer employee separations originally planned associated prior severance programs honeywell international inc notes financial statementscontinued dollars millions except per share amounts 2009 recognized repositioning charges totaling 224 million primarily severance costs related workforce reductions 4423 manufacturing administrative positions mainly automation control solutions transportation systems aerospace segments workforce reductions primarily related adverse market conditions experienced many businesses cost savings actions taken connection ongoing functional transformation initiative planned downsizing shutdown certain manufacturing facilities organizational realignments portions aerospace transportation systems segments also 53 million previously established accruals primarily severance automation control solutions aerospace transportation systems segments returned income 2009 due fewer employee separations originally planned associated prior severance programs changes scope previously announced repositioning actions 2008 recognized repositioning charges totaling 444 million including severance costs 333 million related workforce reductions 7480 manufacturing administrative positions across segments workforce reductions primarily relate planned downsizing shutdown certain manufacturing facilities aerospace automation control solutions transportation systems segments rationalization nonmanufacturing infrastructure outsourcing noncore components managing capacity utilization address product demand volatility functional transformation initiative repositioning charge also included asset impairments 78 million principally related manufacturing plant equipment facilities scheduled close downsized certain administrative facilities information technology equipment corporate segment also 20 million previously established accruals primarily severance automation control solutions segment returned income 2008 due mainly fewer employee separations originally planned associated prior severance programs following table summarizes status total repositioning reserves 1 relates businesses divested 2009 included gain sale nonstrategic businesses assets see note 4 income expense certain repositioning projects aerospace automation control solutions transportation systems segments included exit disposal activities costs related recognized future periods actual liability incurred nature exit disposal costs principally includes product recertification requalification employee training travel following tables summarize segment expected incurred remaining exit disposal costs related 2010 2008 repositioning actions able recognize time actions initiated exit disposal costs related repositioning actions 2009 able recognize time actions initiated significant honeywell international inc notes financial statementscontinued dollars millions except per share amounts 2010 recognized charge 212 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 175 million environmental asbestos matters discussed detail note 21 also recognized charges 62 million connection evaluation potential resolution certain legal matters 2009 recognized charge 145 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 155 million 2008 recognized charge 465 million environmental liabilities deemed probable reasonably estimable year 309 million recognized third quarter included • 100 million related resolution technical design issues regarding remediation plan onondaga lake “lake” previously reported ultimate cost remediation lake depended upon resolution issues • 90 million estimated cost proposed remedial actions taken sites located syracuse new york accordance remediation plans submitted state environmental regulators • 38 million primarily related changes cost estimates due among things increases cost steel waste transportation disposal costs settlement costs relating remediation new jersey chrome sites known study areas 5 6 7 also recognized asbestos related litigation charges net insurance 125 million honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 4other income expense net 2010 includes 62 million pretax gain 39 million net tax related consolidation joint venture within specialty materials segment company obtained control ability direct activities significant joint venture’s economic performance third quarter resulting consolidation accordingly recognized assets liabilities fair value ii included results operations consolidated financial statements date consolidation iii recognized noted gain representing difference carrying amount fair value previously held equity method investment company assigned 24 million intangibles predominantly joint venture’s customer contracts intangible assets amortized estimated lives using straight line method excess book value estimated fair values net assets consolidated approximating 132 million recorded goodwill nondeductible tax purposes results consolidation date december 31 2010 included specialty materials segment material consolidated financial statements gain sale nonstrategic businesses assets 2009 includes 50 million pretax gain 42 million net tax related deconsolidation subsidiary within automation control solutions segment subsidiary achieved contractual milestones december 31 2009 result longer primary beneficiary resulting deconsolidation continue hold noncontrolling interest recorded estimated fair value 67 million upon deconsolidation fair value estimated using combination market income approaches utilizing observable market data comparable businesses discounted cash flow modeling noncontrolling interest classified within investments longterm receivables balance sheet accounted equity method prospective basis net 2009 includes thantemporary impairment charge 62 million see note 16 financial instruments fair value measures details gain sale nonstrategic businesses assets 2008 includes 623 million pretax gain related sale consumables solutions business see note 2 details note5interest financial charges weighted average interest rate shortterm borrowings commercial paper outstanding december 31 2010 2009 164 percent 147 percent respectively honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 6income taxes income continuing operations taxes tax expense benefit honeywell international inc notes financial statementscontinued dollars millions except per share amounts effective tax rate increased 57 percentage points 2010 compared 2009 primarily due change mix earnings related lower us pension expense impact enacted change tax treatment medicare part program absence manufacturing incentives decreased impact settlement audits increase foreign effective tax rate foreign effective tax rate increased approximately 7 percentage points primarily consisted 6 percentage point impact absence tax benefits related foreign exchange investment losses ii 05 percentage point impact increased valuation allowances net operating losses effective tax rate increased 604 percentage points 2009 compared 2008 primarily due decrease mix earnings related lower us pension expense lesser extent decreased impact settlement audits deferred tax assets liabilities deferred income taxes represent future tax effects transactions reported different periods tax financial reporting purposes tax effects temporary differences tax carryforwards give rise future income tax benefits payables follows 35 million us federal tax net operating losses available carryforward december 31 2010 generated certain subsidiaries prior acquisition expiration dates 2029 use preacquisition operating losses subject limitations imposed internal revenue code anticipate limitations affect utilization carryforwards prior expiration company state tax net operating loss carryforwards 32 billion december 31 2010 varying expiration dates 2030 also foreign net operating capital losses 28 billion available reduce future income tax payments several countries subject varying expiration rules us federal tax credit carryforwards 311 million december 31 2010 including foreign tax credits research general business credits various expiration dates 2030 also state tax credit carryforwards 64 million december 31 2010 including carryforwards 37 million various expiration dates 2025 tax credits 27 million subject expiration valuation allowance deferred tax assets increased 58 million 133 million 2010 2009 respectively decreased 45 million 2008 2010 increase valuation allowance primarily due increased foreign net operating losses related france luxembourg netherlands offset reversal valuation allowance related germany 2010 increase valuations allowance also includes adjustments related purchase accounting various acquisitions 2009 increase valuation allowance primarily due increased foreign net operating losses related germany luxembourg netherlands 2008 decrease valuation allowance primarily due decrease valuation allowance related federal state capital loss carryforwards partially offset increased foreign net operating losses honeywell international inc notes financial statementscontinued dollars millions except per share amounts federal income taxes provided undistributed earnings majority international subsidiaries intention reinvest earnings respective subsidiaries december 31 2010 honeywell provided us federal income foreign withholding taxes approximately 60 billion earnings nonus operations practicable estimate amount tax might payable earnings repatriated foreign tax credits would available reduce eliminate resulting us income tax liability 757 million 720 million 671 million unrecognized tax benefits december 31 2010 2009 2008 respectively recognized 757 million would recorded component income tax expense december 31 2010 years ended december 31 2010 2009 company increased unrecognized tax benefits 37 million 49 million respectively due additional reserves various international us tax audit matters partially offset adjustments related ongoing assessments likelihood amount potential outcomes current future examinations expiration various statute limitations settlements tax authorities following table summarizes activity related unrecognized tax benefits many cases uncertain tax positions related tax years remain subject examination relevant tax authorities following table summarizes open tax years major jurisdiction december 31 2010 based outcome examinations result expiration statute limitations specific jurisdictions reasonably possible related unrecognized tax benefits tax positions taken regarding previously filed tax returns materially change recorded liabilities uncertain tax positions financial statements addition outcome examinations may impact valuation certain deferred tax assets net operating losses future periods based number tax years currently audit relevant us federal state foreign tax authorities company anticipates several audits may finalized foreseeable future however based status examinations protocol finalizing audits relevant taxing authorities possibility company might challenge certain audit findings could include formal legal proceedings time honeywell international inc notes financial statementscontinued dollars millions except per share amounts possible estimate impact amount changes previously recorded uncertain tax positions unrecognized tax benefits examinations progress 274 million 261 million 249 million december 31 2010 2009 2008 respectively increases primarily due increase tax examinations fewer settlements year estimated interest penalties related underpayment income taxes classified component tax expense consolidated statement operations totaled 33 million 13 million 19 million years ended december 31 2010 2009 2008 respectively accrued interest penalties 183 million 150 million 137 million december 31 2010 2009 2008 respectively note 7earnings per share details earnings per share calculations years ended december 31 2010 2009 follows diluted earnings per share calculations exclude effect stock options’ assumed proceeds exceed average market price common shares period 2010 2009 2008 weighted number stock options excluded computations 148 340 178 respectively stock options outstanding end respective periods note 8accounts notes receivables trade receivables includes 1307 1167 million unbilled balances longterm contracts december 31 2010 december 31 2009 respectively amounts billed accordance terms customer contracts relate honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 9inventories inventories valued lifo amounted 248 211 million december 31 2010 2009 respectively lifo inventories valued current costs carrying values would approximately 154 161 million higher december 31 2010 2009 respectively year ended december 31 2009 quantity inventory valued using lastin firstout lifo method specialty materials segment declined reduction resulted liquidation lifo inventory quantities carried lower costs prevailing prior years compared cost 2009 purchases effect decreased cost products sold 12 million year ended december 31 2009 note 10investments longterm receivables longterm trade receivables include 19 27 million unbilled balances longterm contracts december 31 2010 2009 respectively amounts billed accordance terms customer contracts relate following table summarizes long term trade financing receivables segment including current portions allowances credit losses allowance credit losses detailed longterm trade financing receivables totaled 7 million 7 million december 31 2010 2009 respectively receivables evaluated impairment individual basis including consideration credit quality detailed financing receivables predominately commercial governmental counterparties investment grade credit quality honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 11property plant equipment depreciation expense 724 707 702 million 2010 2009 2008 respectively note 12goodwill intangible assets net change carrying amount goodwill years ended december 31 2010 2009 segment follows intangible assets amortization expense 263 250 201 million 2010 2009 2008 respectively estimated intangible asset amortization expense next five years approximates 259 million 2011 253 million 2012 228 million 2013 196 million 2014 161 2015 honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 13accrued liabilities note 14longterm debt credit agreements schedule principal payments long term debt follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts maintain 2800 million five year committed revolving credit facility group banks arranged citigroup global markets inc jpmorgan securities inc place may 14 2012 credit facility contains 700 million sublimit issuance letters credit facility maintained general corporate purposes including support issuance commercial paper borrowings outstanding letters credit issued credit facility december 31 2010 credit agreement restrict ability pay dividends contains financial covenants failure comply customary conditions occurrence customary events default contained credit agreement would prevent borrowings would generally require repayment outstanding borrowings credit agreement events default include nonpayment credit agreement debt interest fees b noncompliance terms credit agreement covenants c crossdefault debt certain circumstances bankruptcy e defaults upon obligations employee retirement income security act additionally banks right terminate commitment lend additional funds issue letters credit agreement person group acquires beneficial ownership 30 percent voting stock 12month period individuals directors honeywell beginning period cease constitute majority board directors loans credit facility required repaid later may 14 2012 agreed pay facility fee 005 percent per annum aggregate commitment interest borrowings credit facility would determined honeywell’s option auction bidding procedure b highest floating base rate publicly announced citibank na 05 percent average cd rate 05 percent federal funds rate c eurocurrency rate plus 015 percent applicable margin facility fee applicable margin eurocurrency rate letter credit issuance fee subject change based upon grid determined long term debt ratings credit agreement subject termination based upon decrease debt ratings material adverse change february 2009 company issued 600 million 3875 senior notes due 2014 900 million 500 senior notes due 2019 collectively “2009 senior notes” 2009 senior notes senior unsecured unsubordinated obligations honeywell rank equally honeywell’s existing future senior unsecured debt senior honeywell’s subordinated debt offering resulted gross proceeds 1500 million offset 12 million discount issuance costs first quarter 2009 company repaid 493 million floating rate notes third quarter 2009 company repaid 500 million floating rate notes 100 million zero coupon bonds money multiplier notes first quarter 2010 company repaid 1000 million 750 notes repayment funded cash provided operating activities source liquidity sell interests designated pools trade accounts receivables third parties december 31 2010 december 31 2009 none receivables designated pools sold third parties sell receivables overcollateralized retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools terms trade accounts receivable program permit repurchase receivables third parties discretion providing us additional source revolving credit result program receivables remain company’s balance sheet corresponding amount recorded either shortterm borrowings longterm debt note 15lease commitments future minimum lease payments operating leases initial remaining noncancellable lease terms excess one year follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts entered agreements lease land equipment buildings principally operating leases initial terms 25 years contain renewal options subject customary conditions time terms leases may option purchase leased assets amounts approximate fair value expect commitments lease agreements material adverse effect consolidated results operations financial position liquidity rent expense 373 371 383 million 2010 2009 2008 respectively note 16financial instruments fair value measures credit market riskfinancial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates commodity prices manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties derivative transactions substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value cash flows derivative financial instruments considering reasonably possible changes interest rates currency exchange rates commodity prices restrict use derivative financial instruments hedging activities continually monitor creditworthiness customers grant credit terms normal course business terms conditions credit sales designed mitigate eliminate concentrations credit risk single customer sales materially dependent single customer small group customers foreign currency risk managementwe conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities transactions arising international trade objective preserve economic value nonfunctional currency denominated cash flows attempt hedge transaction exposures natural offsets fullest extent possible opportunities exhausted foreign currency exchange forward option contracts third parties hedge monetary assets liabilities denominated nonfunctional currencies prior conversion us dollars assets liabilities remeasured spot exchange rates effect balance sheet date effects changes spot rates recognized earnings included income expense partially hedge forecasted sales purchases predominantly occur next twelve months denominated nonfunctional currencies currency forward contracts changes forecasted nonfunctional currency cash flows due movements exchange rates substantially offset changes fair value currency forward contracts designated hedges market value gains losses contracts recognized earnings hedged transaction recognized open foreign currency exchange forward contracts mature predominantly next twelve months december 31 2010 2009 contracts notional amounts 5733 million 2959 million respectively exchange foreign currencies principally us dollar euro british pound canadian dollar hong kong dollar mexican peso swiss franc czech koruna chinese renminbi indian rupee singapore dollar swedish krona commodity price risk managementour exposure market risk commodity prices result changes cost production primarily mitigate exposure commodity price risk use longterm fixedprice contracts suppliers formula price agreements suppliers customers honeywell international inc notes financial statementscontinued dollars millions except per share amounts also enter forward commodity contracts third parties designated hedges anticipated purchases several commodities forward commodity contracts markedtomarket resulting gains losses recognized earnings hedged transaction recognized december 31 2010 2009 contracts notional amounts 23 million 52 million respectively related forward commodity agreements principally base metals natural gas interest rate risk management use combination financial instruments including longterm mediumterm shortterm financing variablerate commercial paper interest rate swaps manage interest rate mix total debt portfolio related overall cost borrowing december 31 2010 2009 interest rate swap agreements designated fair value hedges effectively changed 600 million fixed rate debt rate 3875 percent libor based floating debt interest rate swaps mature 2014 fair value financial instruments fasb’s accounting guidance defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date exit price fasb’s guidance classifies inputs used measure fair value following hierarchy level 1 unadjusted quoted prices active markets identical assets liabilities level 2 unadjusted quoted prices active markets similar assets liabilities unadjusted quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability level 3 unobservable inputs asset liability company endeavors utilize best available information measuring fair value financial nonfinancial assets liabilities classified entirety based lowest level input significant fair value measurement company determined available sale investments level 1 remaining financial assets liabilities level 2 fair value hierarchy following table sets forth company’s financial assets liabilities accounted fair value recurring basis december 31 2010 2009 foreign currency exchange contracts interest rate swap agreements forward commodity contracts valued using broker quotations market transactions either listed overthecounter markets derivative instruments classified within level 2 company also holds investments marketable equity securities commercial paper certificates deposits time deposits designated available sale valued using market transactions overthecounter markets investments classified within level 2 honeywell international inc notes financial statementscontinued dollars millions except per share amounts carrying value cash equivalents trade accounts notes receivables payables commercial paper shortterm borrowings contained consolidated balance sheet approximates fair value following table sets forth company’s financial assets liabilities carried fair value years ended december 31 2010 2009 company assets net book value 32 million 72 million respectively specifically property plant equipment software intangible assets accounted fair value nonrecurring basis assets tested impairment based fair value assets company recognized losses 30 million 28 million respectively years ended december 31 2010 2009 primarily connection repositioning actions see note 3 repositioning charges company determined fair value measurements nonfinancial assets level 3 fair value hierarchy company holds investments marketable equity securities designated available sale securities due otherthantemporary decline fair value investments company recognized impairment charge 62 million second quarter 2009 included income expense derivatives utilized risk management purposes detailed included consolidated balance sheet impacted statement operations follows fair value derivatives classified assets consist following honeywell international inc notes financial statementscontinued dollars millions except per share amounts gains losses recognized oci effective portions consist following gains losses reclassified aoci income consist following ineffective portions foreign currency exchange contracts commodity derivative instruments designated cash flow hedge relationships insignificant years ended december 31 2010 2009 located cost products sold interest rate swap agreements designated hedge relationships gains losses derivative recognized interest financial charges offsetting gains losses underlying debt hedged gains losses interest rate swap agreements recognized earnings 24 2 million years ended december 31 2010 2009 respectively also economically hedge exposure changes foreign exchange rates principally forward contracts markedtomarket resulting gains losses recognized earnings offsetting gains losses nonfunctional currency denominated monetary assets liabilities hedged recognized 18 million 85 million expense income expense years ended december 31 2010 2009 respectively honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 17other liabilities 1 asset retirement obligations primarily relate costs associated future retirement nuclear fuel conversion facilities specialty materials segment future retirement facilities automation control solutions segment reconciliation liability asset retirement obligations year ended december 31 2010 follows note 18capital stock authorized issue 2000000000 shares common stock par value 1 common shareowners entitled receive dividends may declared board entitled one vote per share entitled event liquidation share ratably assets honeywell available distribution common shareowners common shareowners preemptive conversion rights shares common stock issued outstanding held treasury liable calls assessments restrictions us relative dividends repurchase redemption common stock board directors authorized repurchase total 30 billion honeywell common stock amount includes 13 billion remained available company’s previously reported share repurchase program authorized issue 40000000 shares preferred stock without par value determine number shares series rights preferences limitations series december 31 2010 preferred stock outstanding note 19accumulated comprehensive income loss total accumulated comprehensive income loss included consolidated statement shareowners’ equity comprehensive income loss attributable noncontrolling interest consisted predominantly net income changes accumulated comprehensive income loss follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts components accumulated comprehensive income loss note 20stockbased compensation plans stockbased compensation plans available grant nonqualified stock options incentive stock options stock appreciation rights restricted units restricted stock key employees 2006 stock incentive plan honeywell international inc affiliates plan maximum 43 million shares honeywell common stock may awarded additionally 2006 stock plan nonemployee directors honeywell international inc directors plan 500000 shares honeywell common stock may awarded stock optionsthe exercise price term conditions applicable option granted stock plans generally determined management development compensation committee board exercise price stock options set grant date may less fair market value per share stock date fair value recognized expense employee’s requisite service period generally vesting period award options generally vest fouryear period expire ten years fair value option award estimated date grant using blackscholes optionpricing model expected volatility based implied volatilities traded options honeywell common stock used monte carlo simulation model derive expected term model uses historical data estimate option exercise activity postvest termination behavior expected term represents estimate time options expected remain outstanding riskfree rate periods within contractual life option based us treasury yield curve effect time grant compensation cost pretax basis related stock options recognized operating results included selling general administrative expenses 2010 2009 2008 55 39 51 million respectively associated future income tax benefit recognized 2010 2009 2008 16 13 19 million respectively honeywell international inc notes financial statementscontinued dollars millions except per share amounts following table sets forth fair value per share information including related weightedaverage assumptions used determine compensation cost following table summarizes information stock option activity three years ended december 31 2010 1 represents sum vested options 247 million expected vest options 131 million expected vest options derived applying prevesting forfeiture rate assumption total outstanding unvested options 161 million following table summarizes information stock options outstanding exercisable december 31 2010 honeywell international inc notes financial statementscontinued dollars millions except per share amounts 27427023 30314667 options exercisable weighted average exercise prices 3885 4140 december 31 2009 2008 respectively 21512252 shares available future grants terms stock option plans december 31 2010 total intrinsic value options amount stock price exceeded exercise price options date exercise exercised 2010 2009 2008 54 4 76 million respectively 2010 2009 2008 amount cash received exercise stock options 181 20 134 million respectively associated tax benefit realized 18 1 28 million respectively 2010 2009 2008 classified 13 1 21 million respectively benefit financing cash inflow consolidated statement cash flows balance classified cash operations december 31 2010 94 million total unrecognized compensation cost related nonvested stock option awards expected recognized weightedaverage period 243 years total fair value options vested 2010 2009 2008 41 51 63 million respectively restricted stock unitsrestricted stock unit rsu awards entitle holder receive one share common stock unit units vest rsus issued certain key employees fair market value date grant compensation rsus typically become fully vested periods ranging three seven years payable honeywell common stock upon vesting following table summarizes information rsu activity three years ended december 31 2010 honeywell international inc notes financial statementscontinued dollars millions except per share amounts december 31 2010 approximately 202 million total unrecognized compensation cost related nonvested rsus granted stock plans expected recognized weightedaverage period 18 years compensation expense related rsus 109 79 77 million 2010 2009 2008 respectively nonemployee directors’ planunder directors’ plan new director receives onetime grant 3000 restricted stock units vest fifth anniversary continuous board service directors’ plan also provides annual grant director options purchase 5000 shares common stock fair market value date grant options generally become exercisable fouryear period expire ten years note 21commitments contingencies environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous substances accordance environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing hazardous substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually jointly potentially responsible parties determine feasibility various remedial techniques policy record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical regulatory legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing remedial investigations feasibility studies timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects remedial techniques utilized agreements parties following table summarizes information concerning recorded liabilities environmental costs honeywell international inc notes financial statementscontinued dollars millions except per share amounts environmental liabilities included following balance sheet accounts although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position new jersey chrome sitesthe excavation offsite disposal approximately one million tons chromium residue present predecessor honeywell site located jersey city new jersey known study area 7 completed january 2010 also received approval united states district court district new jersey implementation related groundwater sediment remedial actions seeking appropriate permits state federal agencies provisions made financial statements estimated cost remedies abovereferenced site significant 21 sites located hudson county new jersey subject administrative consent order aco entered new jersey department environmental protection njdep 1993 “honeywell aco sites” remedial investigations activities consistent aco also conducted underway honeywell aco sites recorded reserves honeywell aco sites appropriate accounting policy described may 3 2005 njdep filed lawsuit new jersey superior court honeywell two companies seeking declaratory injunctive relief unspecified damages reimbursement unspecified total costs relating sites new jersey allegedly contaminated chrome ore processing residue claims honeywell relate activities predecessor company ceased new jersey manufacturing operations mid1950’s honeywell two companies agreed settle litigation njdep subject court approval settlement honeywell would pay 5 million njdep’s past costs well accept sole responsibility remediate 24 53 “publicly funded sites” ie sites none three companies previously accepted responsibility honeywell would also bear 50 costs another 10 publicly funded sites recorded reserves publicly funded sites appropriate accounting policy described entered courtapproved settlements litigation filed federal court honeywell landowners seeking cleanup chrome residue groups properties known study areas 5 6 south 6 north honeywell aco sites required remedial actions consistent recorded reserves dundalk marine terminal baltimore mdchrome residue legacy chrome plant operations baltimore deposited fill dundalk marine terminal “dmt” owned operated maryland port administration “mpa” honeywell mpa sharing costs investigate mitigate related environmental issues entered cost sharing agreement honeywell bear 77 percent costs developing implementing permanent remedies dmt facility january 2011 mpa honeywell submitted maryland department environment “mde” corrective measures alternatives analysis “cmaa” certain potential remedies dmt assist mde selection final remedy provision made financial statements cmaa consistent accounting policy described negotiated consent decree mpa mde respect investigation remediation dmt facility consent decree challenged federal court build baltimore community group together local church two individuals collectively “build” october 2007 court dismissed prejudice build’s state law claims dismissed without prejudice build’s rcra claims regarding neighborhoods near dmt facility august 2008 court held hearing company’s motion dismiss build’s remaining claims grounds mde diligently prosecuting investigation remediation dmt awaiting court’s decision believe honeywell international inc notes financial statementscontinued dollars millions except per share amounts matter material adverse impact consolidated financial position operating cash flows given scope complexity project possible cost remediation determinable could material adverse impact results operations periods recognized onondaga lake syracuse nywe implementing combined dredgingcapping remedy onondaga lake pursuant consent decree approved united states district court northern district new york january 2007 accrued estimated cost remediating onondaga lake based currently available information analysis performed engineering consultants honeywell also conducting remedial investigations activities sites syracuse recorded reserves investigations activities appropriate accounting policy described honeywell entered cooperative agreement potential natural resource trustees assess alleged natural resource damages relating site possible predict outcome duration assessment amounts responsibility damages asbestos matters like many industrial companies honeywell defendant personal injury actions related asbestos mine produce asbestos make sell insulation products construction materials identified primary cause asbestos related disease vast majority claimants products containing asbestos previously manufactured honeywell previously owned subsidiaries primarily fall two general categories refractory products friction products refractory productshoneywell owned north american refractories company narco 1979 1986 narco produced refractory products high temperature bricks cement sold largely steel industry east midwest less 2 percent narco’s products contained asbestos sold narco business 1986 agreed indemnify narco respect personal injury claims products discontinued prior sale defined sale agreement narco retained liability claims january 4 2002 narco filed reorganization chapter 11 us bankruptcy code result narco bankruptcy filing claims pending narco automatically stayed pending reorganization narco addition bankruptcy court enjoined filing prosecution narcorelated asbestos claims honeywell stay remained effect continuously since january 4 2002 connection narco’s bankruptcy filing paid narco’s parent company 40 million agreed provide narco 20 million financing also agreed pay 20 million narco’s parent company upon filing plan reorganization narco acceptable honeywell amount paid december 2005 following filing narco’s third amended plan reorganization pay narco’s parent company 40 million forgive outstanding narco indebtedness honeywell upon effective date plan reorganization believe part narco plan reorganization trust established benefit asbestos claimants current future pursuant trust distribution procedures negotiated narco asbestos claimants committee courtappointed legal representative future asbestos claimants trust put place approved court fair equitable honeywell well narco entitled permanent channeling injunction barring present future individual actions state federal courts requiring asbestos related claims based exposure narco products made federallysupervised trust honeywell reached agreement representative future narco claimants asbestos claimants committee cap annual contributions trust respect future claims level would material impact honeywell’s operating cash flows november 2007 bankruptcy court entered amended order confirming narco plan without modification approving 524g trust channeling injunction favor narco honeywell december 2007 certain insurers filed appeal bankruptcy court order united states district court western district pennsylvania district court affirmed bankruptcy court order july 2008 august 2008 insurers filed notice appeal third circuit court appeals appeal fully briefed oral argument took place may 21 2009 matter submitted decision connection settlement insurance coverage litigation matter insurer appellants withdrew appeal regarding narco plan august 3 2010 third circuit court appeals entered order formally dismissing narco appeal narco plan reorganization cannot become effective however resolution appeal chapter 11 proceedings narco affiliates third circuit reheard appeal en banc october 13 2010 possible predict court rule appeal expect stay honeywell international inc notes financial statementscontinued dollars millions except per share amounts enjoining litigation narco honeywell remain effect effective date narco plan reorganization consolidated financial statements reflect estimated liability settlement pending future narcorelated asbestos claims 1125 million 1128 million december 31 2010 december 31 2009 respectively estimated liability pending claims based terms conditions including evidentiary requirements definitive agreements approximately 260000 current claimants estimate unsettled claims pending time narco filed bankruptcy protection substantially settlement payments respect current claims made approximately 100 million payments due pursuant settlements due upon establishment narco trust estimated liability future claims represents estimated value future asbestos related bodily injury claims expected asserted narco 2018 aforementioned obligations narco’s parent light uncertainties inherent making longterm projections believe reasonable basis estimating asbestos claims beyond 2018 estimate based upon disease criteria payment values contained narco trust distribution procedures negotiated narco asbestos claimants committee narco future claimants’ representative honeywell projected probable number value including trust claim handling costs asbestos related future liabilities based upon experience asbestos claims filing rates tort system certain operating asbestos trusts claims experience forums valuation methodology also includes analysis population likely exposed asbestos containing products epidemiological studies estimate number people likely develop asbestos related diseases narco claims filing history pending inventory narco asbestos related claims payment rates expected established narco trust methodology used estimate liability future claims commonly accepted numerous courts resulted range estimated liability future claims 743 961 million believe amount within range better estimate amount accordingly recorded minimum amount range december 31 2010 december 31 2009 consolidated financial statements reflect insurance receivable corresponding liability settlement pending future narcorelated asbestos claims 718 831 million respectively coverage reimburses honeywell portions costs incurred settle narco related claims court judgments well defense costs provided large number insurance policies written dozens insurance companies domestic insurance market london excess market december 31 2010 significant portion coverage insurance companies agreements pay full policy limits based corresponding honeywell claims costs conduct analyses determine amount insurance estimate probable recovery relation payment current estimated future claims substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries made judgments concerning insurance coverage believe reasonable consistent historical dealings insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs second quarter 2006 travelers casualty insurance company “travelers” filed lawsuit honeywell insurance carriers supreme court new york county new york disputing obligations narcorelated asbestos claims high excess insurance coverage issued travelers insurance carriers july 2010 company entered settlement agreement resolving asbestos coverage issues certain plaintiffs approximately 180 million unsettled coverage policies included narcorelated insurance receivable december 31 2010 honeywell believes entitled coverage issue expects prevail matter third quarter 2007 honeywell prevailed critical choice law issue concerning appropriate method allocating narcorelated asbestos liabilities triggered policies plaintiffs appealed trial court’s ruling upheld intermediate appellate court second quarter 2009 plaintiffs’ appeal new york court appeals highest court new york denied october 2009 related new jersey action brought honeywell dismissed coverage claims plaintiffs preserved new york action based upon understanding relevant facts applicable law ii terms insurance policies issue iii experience matters nature iv advice counsel believe amount due travelers insurance carriers probable recovery honeywell expects prevail matter adverse outcome could material impact results operations period recognized would material consolidated financial position operating cash flows projecting future events subject many uncertainties could cause narco related asbestos liabilities assets higher lower projected recorded assurance plan reorganization become final insurance recoveries timely whether narco honeywell international inc notes financial statementscontinued dollars millions except per share amounts related asbestos claims beyond 2018 given inherent uncertainty predicting future events review estimates periodically update based experience relevant factors similarly reevaluate projections concerning probable insurance recoveries light changes projected liability developments may impact insurance recoveries friction productshoneywell’s bendix friction materials bendix business manufactured automotive brake parts contained chrysotile asbestos encapsulated form existing potential claimants consist largely individuals allege exposure asbestos brakes either performing vicinity individuals performed brake replacements 1981 december 31 2010 resolved approximately 155000 bendix related asbestos claims 131 trials resulting favorable verdicts 18 trials resulting adverse verdicts four adverse verdicts reversed appeal five verdicts vacated posttrial motions three claims settled remaining appealed claims portfolio reduced 2009 due settlements dismissals elimination significantly aged ie pending six years inactive including claims required medical exposure showings made duplicate claims following tables present information regarding bendix related asbestos claims activity number claims filed 2010 includes approximately 1541 nonmalignant claims accrued liability approximately 575 thousand aggregate majority previously dismissed mississippi refiled arkansas b number claims resolved 2010 includes approximately 1300 claims previously classified inactive 95 nonmalignant accrued liability approximately 20 million activated current period honeywell experienced average resolution values per claim excluding legal costs follows possible predict whether resolution values bendix related asbestos claims increase decrease stabilize future consolidated financial statements reflect estimated liability resolution pending future honeywell international inc notes financial statementscontinued dollars millions except per share amounts bendix related asbestos claims 594 566 million december 31 2010 december 31 2009 respectively liability estimated cost future bendix related asbestos claims based historic claims filing experience disease classifications expected resolution values historic dismissal rates fourth quarter year update analysis estimated cost future bendix related asbestos claims valued bendix pending future claims using average resolution values previous five years changes tort system began 2006 refocused asbestos litigation mesothelioma cases making five year period 2006 2010 representative forecasting purposes continue update expected resolution values used estimate cost pending future bendix claims fourth quarter year estimated liability future claims represents estimated value future asbestos related bodily injury claims expected asserted bendix next five years light uncertainties inherent making longterm projections well certain factors unique friction product asbestos claims believe reasonable basis estimating asbestos claims beyond next five years estimate based upon bendix historical experience tort system five years ended december 31 2010 respect claims filing resolution values methodology used estimate liability future claims commonly accepted numerous courts similar used estimate future narco related asbestos claims liability honeywell currently approximately 1900 million insurance coverage remaining respect pending potential future bendix related asbestos claims 157 172 million reflected receivables consolidated balance sheet december 31 2010 december 31 2009 respectively coverage provided large number insurance policies written dozens insurance companies domestic insurance market london excess market insurance receivables recorded financial statements simultaneous recording liability estimated value underlying asbestos claims amount insurance receivable recorded based ongoing analysis insurance estimate probable recovery determination based analysis underlying insurance policies historical experience insurers ongoing review solvency insurers interpretation judicial determinations relevant insurance programs consideration impacts settlements reached insurers insurance receivables also recorded structured insurance settlements provide future fixed payment streams contingent upon future claims events amounts recorded net present value fixed payment stream cumulative historical basis honeywell recorded insurance receivables equal approximately 41 percent value underlying asbestos claims recorded however gaps coverage due insurance company insolvencies certain uninsured periods insurance settlements rate expected decline future bendix related asbestos liabilities may recorded future recoverability rates may also impacted numerous factors future insurance settlements insolvencies judicial determinations relevant coverage program difficult predict assuming continued defense indemnity spending current levels estimate cumulative recoverability rate could decline next five years approximately 35 percent honeywell believes sufficient insurance coverage reserves cover pending bendix related asbestos claims bendix related asbestos claims estimated filed within next five years although impossible predict outcome either pending future bendix related asbestos claims believe claims would material adverse effect consolidated financial position light insurance coverage prior experience resolving claims rate types claims filed average resolution value claims period time claim settlements paid collectively “variable claims factors” substantially change honeywell would expect future bendix related asbestos claims material adverse effect results operations operating cash flows fiscal year assurances given however variable claims factors change refractory friction products following tables summarize information concerning narco bendix asbestos related balances honeywell international inc notes financial statementscontinued dollars millions except per share amounts asbestos related liabilities insurance recoveries asbestos related liabilities narco bendix asbestos related balances included following balance sheet accounts change accrued liabilities asbestos related liabilities december 31 2010 december 31 2009 driven primarily best estimate timing expected payments related effective date narco trust honeywell international inc notes financial statementscontinued dollars millions except per share amounts matters subject number lawsuits investigations disputes involve substantial amounts claimed arising conduct business including matters relating commercial transactions government contracts product liability prior acquisitions divestitures employee benefit plans intellectual property environmental health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes matters well potential ranges possible losses taking consideration insurance recoveries based careful analysis matter assistance outside legal counsel applicable experts included matters following allen et al v honeywell retirement earnings planpursuant settlement approved us district court district arizona february 2008 18 21 claims alleged plaintiffs class action lawsuit dismissed prejudice exchange approximately 35 million maximum aggregate liability remaining three claims alleging honeywell impermissibly reduced pension benefits certain employees predecessor entity plan amended 1983 failed calculate benefits accordance terms plan capped 500 million amounts payable including settlement amount paid company’s pension plan october 2009 court granted summary judgment favor honeywell retirement earnings plan respect claim regarding calculation benefits continue expect prevail remaining claims light applicable law substantial affirmative defenses yet considered fully court accordingly believe liability probable occurrence reasonably estimable respect claims recorded provision remaining claims financial statements quick lubeon march 31 2008 se quick lube filter distributor filed suit us district court district connecticut alleging twelve filter manufacturers including honeywell engaged conspiracy fix prices rig bids allocate us customers aftermarket automotive filters suit purported class action behalf direct purchasers filters defendants parallel purported class actions including behalf indirect purchasers filters filed plaintiffs variety jurisdictions united states canada us cases consolidated single multidistrict litigation northern district illinois intend vigorously defend claims raised actions antitrust division department justice notified honeywell january 21 2010 officially closed investigation possible collusion replacement auto filters industry borgwarner v honeywellin patent infringement suit district court western district north carolina plaintiff borgwarner claiming honeywell’s manufacture sale cast titanium compressor wheels turbochargers infringes three borgwarner patents seeking damages approximately 120 million plaintiff asserts trebled willful infringement process claimed borgwarner’s patents already described detail printed publications offered sale borgwarner’s alleged invention violation statutory requirements patentability honeywell asked court enter summary judgment invalidity borgwarner’s patents court declined enter summary judgment september 2010 finding question decided jury trial scheduled may 2011 honeywell continue vigorous defense claim expects prevail trial event company found liable believe evidence supports damages magnitude claimed finding willfulness honeywell also asked united states patent trademark office reexamine three borgwarner’s patents light prior art publications patent office ultimately invalidates borgwarner patents issue prior final adjudication patent infringement litigation plaintiff would entitled recover damages given uncertainty inherent litigation investigations including specific matters referenced believe possible develop estimates reasonably possible loss excess current accruals matters considering past experience existing accruals expect outcome matters either individually aggregate material adverse effect consolidated financial position contingencies resolved long periods time potential liabilities subject change due new developments changes settlement strategy impact evidentiary requirements could cause us pay damage awards settlements become subject equitable remedies could material adverse effect results operations operating cash flows periods recognized paid warranties guaranteeswe issued party following direct indirect guarantees december 31 2010 honeywell international inc notes financial statementscontinued dollars millions except per share amounts expect guarantees material adverse effect consolidated results operations financial position liquidity connection disposition certain businesses facilities indemnified purchasers expected cost remediation environmental contamination existing date disposition expected costs accrued environmental assessments made remedial efforts probable costs reasonably estimated normal course business issue product warranties product performance guarantees accrue estimated cost product warranties performance guarantees based contract terms historical experience time sale adjustments initial obligations warranties guarantees made changes obligations become reasonably estimable following table summarizes information concerning recorded obligations product warranties product performance guarantees product warranties product performance guarantees included following balance sheet accounts honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 22 pension postretirement benefits sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees pension benefits substantially us employees provided noncontributory qualified nonqualified defined benefit pension plans us defined benefit pension plans comprise 77 percent projected benefit obligation nonus employees us citizens covered various retirement benefit arrangements considered defined benefit pension plans accounting purposes nonus defined benefit pension plans comprise 23 percent projected benefit obligation also sponsor postretirement benefit plans provide health care benefits life insurance coverage eligible retirees retiree medical plans mainly cover us employees retire pension eligibility hospital professional medical services nonunion hourly salaried employees joining honeywell january 1 2000 eligible participate retiree medical life insurance plans us retiree medical plans require deductibles copayments virtually integrated medicare retiree contributions generally required based coverage type plan medicare eligibility honeywell limited subsidy retiree medical plans fixeddollar amount future retirees half current retirees cap retiree medical benefits plans limits exposure impact future health care cost increases retiree medical life insurance plans funded claims expenses paid operating cash flow third quarter 2010 honeywell amended us retiree medical plan longer offer certain postage65 retirees honeywell group coverage facilitate purchase individual plan medicare marketplace plan amendment reduced accumulated postretirement benefit obligation 137 million recognized part net periodic postretirement benefit cost average future service period full eligibility remaining active union employees still eligible retiree medical subsidy february 1 2010 connection new collective bargaining agreement reached one union groups honeywell amended us retiree medical plan eliminating subsidy union employees retire february 1 2013 plan amendment reduced accumulated postretirement benefit obligation 39 million recognized part net periodic postretirement benefit cost average future service period full eligibility remaining active union employees still eligible retiree medical subsidy plan amendment also resulted curtailment gain 37 million year ended december 31 2010 included part net periodic postretirement benefit cost curtailment gain represents recognition previously unrecognized prior service credits attributable future years service union group future accrual benefits eliminated may 2009 honeywell amended us retiree medical plan eliminating subsidy active nonunion employees retire september 1 2009 employees already retired september 1 2009 affected change plan amendment reduced accumulated postretirement benefit obligation 180 million representing elimination benefits attributable years service already rendered active nonunion employees eligible retire eligible nonunion employees assumed retire prior september 1 2009 reduction accumulated postretirement benefit obligation recognized part net periodic postretirement benefit cost average future service period full eligibility remaining active union employees still eligible retiree medical subsidy plan amendment also resulted curtailment gain 98 million second quarter 2009 included part net periodic postretirement benefit cost curtailment gain represented recognition previously unrecognized prior service credits attributable future years service employee group future accrual benefits eliminated honeywell international inc notes financial statementscontinued dollars millions except per share amounts following tables summarize balance sheet impact including benefit obligations assets funded status associated significant pension postretirement benefit plans december 31 2010 2009 honeywell international inc notes financial statementscontinued dollars millions except per share amounts recognized accumulated comprehensive income loss associated significant pension postretirement benefit plans december 31 2010 2009 follows components net periodic benefit cost amounts recognized comprehensive income loss significant plans years ended december 31 2010 2009 2008 include following components honeywell international inc notes financial statementscontinued dollars millions except per share amounts estimated prior service cost pension benefits amortized accumulated comprehensive income loss net periodic benefit cost 2011 expected 33 million 2 million us nonus benefit plans respectively honeywell international inc notes financial statementscontinued dollars millions except per share amounts estimated net loss prior service credit postretirement benefits amortized accumulated comprehensive income loss net periodic benefit cost 2011 expected 44 51 million respectively major actuarial assumptions used determining benefit obligations net periodic benefit cost benefit plans presented following table honeywell international inc notes financial statementscontinued dollars millions except per share amounts discount rate us pension postretirement benefits plans reflects current rate associated liabilities could settled measurement date december 31 determine discount rates us pension postretirement benefit plans use modeling process involves matching expected cash outflows benefit plans yield curve constructed portfolio double rated fixedincome debt instruments use average yield hypothetical portfolio discount rate benchmark discount rate used determine postretirement benefit obligation lower principally due shorter expected duration postretirement plan obligations compared pension plan obligations expected rate return us plan assets longterm rate based historic plan asset returns varying longterm periods combined current market conditions broad asset mix considerations use expected rate return us plan assets 8 2011 9 2010 due lower future expected market returns review expected rate return annual basis revise appropriate nonus benefit plans none individually material assumptions reflect economic assumptions applicable country pension benefits included aggregate data tables amounts applicable pension plans accumulated benefit obligations exceeding fair value plan assets amounts related plans follows accumulated benefit obligation us defined benefit pension plans 143 128 billion nonus defined benefit plans 41 40 billion december 31 2010 2009 respectively asset investment strategy us pension plans focuses maintaining diversified portfolio using various asset classes order achieve longterm investment objectives risk adjusted basis actual invested positions various securities change time based short longerterm investment opportunities achieve objectives established longterm target allocations follows 6070 percent equity securities 1020 percent fixed income securities cash 515 percent real estate investments 1020 percent types investments equity securities include publiclytraded stock companies located inside outside united states fixed income securities include corporate bonds companies diversified industries mortgagebacked securities us treasuries real estate investments include direct investments commercial properties investments real estate funds types investments include investments private equity hedge funds follow several different strategies review assets regular basis ensure within targeted asset allocation ranges necessary asset balances adjusted back within target allocations nonus pension assets typically managed decentralized fiduciary committees honeywell corporate investments group providing standard funding investment guidance local regulations local funding rules local financial tax considerations part funding investment allocation process country nonus investment policies different country longterm investment objectives generally us pension assets honeywell international inc notes financial statementscontinued dollars millions except per share amounts fair values us nonus pension plans assets december 31 2010 2009 asset category follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts following tables summarize changes fair value level 3 assets years ended december 31 2010 2009 honeywell international inc notes financial statementscontinued dollars millions except per share amounts us pension assets december 31 2010 2009 include 834 481 million respectively notional derivative exposure primarily related outstanding equity futures contracts company enters futures contracts gain exposure certain markets common stocks preferred stocks real estate investment trusts shortterm investments valued closing price reported active market individual securities traded corporate bonds mortgages assetbacked securities government securities valued either using pricing models bids provided brokers dealers quoted prices securities similar characteristics discounted cash flows include adjustments certain risks may observable credit liquidity risks certain securities held commingled funds valued using net asset values provided administrators funds investments private equity debt hedge funds direct private investments valued estimated fair value based quarterly financial information received investment advisor andor general partner investments real estate valued based annual independent appraised values honeywell international inc notes financial statementscontinued dollars millions except per share amounts general funding policy qualified pension plans contribute amounts least sufficient satisfy regulatory funding standards 2010 2009 2008 required make contributions us pension plans however made voluntary contributions 1000 740 242 million respectively primarily improve funded status plans 2011 still required make contributions us pension plans however january 2011 made voluntary cash contribution 1 billion improve funded status plans 2010 contributed marketable securities valued 242 million one nonus plans 2011 also expect contribute approximately 55 million nonus defined benefit pension plans satisfy regulatory funding standards fund benefits paid directly company assets benefit payments including amounts paid company assets reflecting expected future service appropriate expected paid follows postretirement benefits medicare prescription drug improvement modernization act 2003 act provides subsidies employers sponsor postretirement health care plans provide prescription drug coverage least actuarially equivalent offered medicare part march 2010 enactment patient protection affordable care act including modifications made health care education reconciliation act 2010 resulted onetime noncash charge 13 million related income taxes first quarter 2010 charge results change tax treatment medicare part program impact act reduced postretirement benefits expense approximately 11 21 million 2009 2008 respectively impact act postretirement benefits expense insignificant 2010 assumed health care cost trend rate significant effect amounts reported onepercentagepoint change assumed health care cost trend rate would following effects benefit payments reflecting expected future service appropriate expected paid follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts employee savings plans sponsor employee savings plans match form common stock savings plan contributions certain eligible employees shares issued stock match plans 24 48 49 million cost 105 158 220 million 2010 2009 2008 respectively note 23 segment financial data globally manage business operations four reportable operating segments serving customers worldwide aerospace products services control sensing security technologies buildings homes industry automotive products chemicals segment information consistent management reviews businesses makes investing resource allocation decisions assesses operating performance four reportable segments follows • aerospace organized customer endmarket air transport regional business general aviation defense space provides products services include auxiliary power units propulsion engines environmental control systems electric power systems engine controls repair overhaul services flight safety communications navigation radar surveillance systems aircraft lighting management technical services logistic services advanced systems instruments aircraft wheels brakes • automation control solutions includes products controls heating cooling indoor air quality ventilation humidification lighting home automation advanced software applications homebuilding control optimization sensors switches control systems instruments measuring pressure air flow temperature electrical current security fire gas detection personal protection equipment access control video surveillance remote patient monitoring systems automatic identification data collection building solutions installs maintains upgrades systems keep buildings safe comfortable productive process solutions provides full range automation control solutions industrial plants offering advanced software automation systems integrate control monitor complex processes many types industrial settings well equipment controls measures analyzes natural gas production transportation • specialty materials includes fluorocarbons hydrofluoroolefins caprolactam resins ammonium sulfate fertilizer specialty films waxes additives advanced fibers customized research chemicals intermediates electronic materials chemicals catalysts adsorbents • transportation systems includes honeywell turbo technologies turbochargers chargeair thermal systems brake hard parts friction materials consumer products group car care products including antifreeze filters spark plugs cleaners waxes additives accounting policies segments described note 1 honeywell’s senior management evaluates segment performance based segment profit segment profit measured business unit income loss taxes excluding general corporate unallocated expense income expense interest financial charges pension postretirement benefits expense stock compensation expense repositioning charges accounting changes honeywell international inc notes financial statementscontinued dollars millions except per share amounts honeywell international inc notes financial statementscontinued dollars millions except per share amounts reconciliation segment profit consolidated income continuing operations taxes follows 1 equity incomeloss affiliated companies included segment profit 2 amounts included cost products services sold selling general administrative expenses 3 revised change method recognizing pension expense see note 1 notes financial statements discussion change impacts change years ended december 31 2009 2008 note 24 geographic areas financial data honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 25 supplemental cash flow information honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 26 unaudited quarterly financial information 1 revised change method recognizing pension expense see note 1 notes financial statements discussion change impacts change year ended december 31 2009 2 quarter ended march 31 2010 retrospective change recognizing pension expense increased gross profit 124 million net income attributable honeywell 103 million earnings per share basic 013 earnings per share assuming dilution 013 3 quarter ended june 30 2010 retrospective change recognizing pension expense increased gross profit 120 million net income attributable honeywell 98 million earnings per share basic 013 earnings per share assuming dilution 013 4 quarter ended september 30 2010 retrospective change recognizing pension expense increased gross profit 121 million net income attributable honeywell 99 million earnings per share basic 013 earnings per share assuming dilution 013 5 quarter ended december 31 2010 includes 471 pension expense result marktomarket adjustments see note notes financial statements discussion accounting policy 6 quarter ended march 31 2009 retrospective change recognizing pension expense reduced gross profit 42 million net income attributable honeywell 22 million earnings per share basic 003 earnings per share assuming dilution 003 7 quarter ended june 30 2009 retrospective change recognizing pension expense reduced gross profit 42 million net income attributable honeywell 19 million earnings per share basic 003 earnings per share assuming dilution 003 8 quarter ended september 30 2009 retrospective change recognizing pension expense reduced gross profit 42 million net income attributable honeywell 16 million earnings per share basic 002 earnings per share assuming dilution 002 9 quarter ended december 31 2009 retrospective change recognizing pension expense reduced gross profit 701 million net income attributable honeywell 548 million earnings per share basic 072 earnings per share assuming dilution 071 quarter ended december 31 2009 includes 741 pension expense result marktomarket adjustments see note notes financial statements discussion accounting policy report independent registered public accounting firm report independent registered public accounting firm board directors shareholders honeywell international inc opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position honeywell international inc subsidiaries december 31 2010 2009 results operations cash flows three years period ended december 31 2010 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 1 consolidated financial statements 2010 company changed method accounting defined benefit pension costs periods retroactively restated accounting change company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp florham park new jersey february 11 2011 item 9item 8 financial statements supplementary data honeywell international inc consolidated statement operations notes financial statements integral part statement honeywell international inc consolidated balance sheet notes financial statements integral part statement honeywell international inc consolidated statement cash flows notes financial statements integral part statement honeywell international inc consolidated statement shareowners’ equity notes financial statements integral part statement note 1 summary significant accounting policies accounting principlesthe financial statements accompanying notes prepared accordance accounting principles generally accepted united states america following description honeywell’s significant accounting policies principles consolidationthe consolidated financial statements include accounts honeywell international inc subsidiaries entities controlling interest maintained consolidation policy requires equity investments exercise significant influence control investee primary beneficiary investee’s activities accounted using equity method investments able exercise significant influence investee readily determinable fair values accounted cost method intercompany transactions balances eliminated consolidation consumer products group cpg automotive aftermarket business historically part transportation systems reportable segment accordance generally accepted accounting principles cpg presented discontinued operations periods presented see note 2 acquisitions divestitures details cash equivalentscash cash equivalents include cash hand deposit highly liquid temporary cash investments original maturity three months less inventoriesinventories valued lower cost market using firstin firstout average cost method lastin firstout lifo method certain qualifying domestic inventories investmentsinvestments affiliates significant influence controlling interest accounted using equity method accounting investments carried market value readily determinable cost equity investments periodically reviewed determine declines fair value cost basis otherthantemporary significant sustained decreases quoted market prices series historic projected operating losses investees strong indicators otherthantemporary declines decline fair value determined otherthantemporary impairment loss recorded investment written new carrying value property plant equipmentproperty plant equipment recorded cost including asset retirement obligations less accumulated depreciation financial reporting straightline method depreciation used estimated useful lives 10 50 years buildings improvements 2 16 years machinery equipment recognition fair value obligations associated retirement tangible longlived assets required legal obligation incur costs upon initial recognition liability cost capitalized part related longlived asset depreciated corresponding asset’s useful life see note 11 note 17 additional details goodwill indefinitelived intangible assetsgoodwill represents excess acquisition costs fair value tangible net assets identifiable intangible assets businesses acquired goodwill certain intangible assets deemed indefinite lives amortized intangible assets determined definite lives amortized useful lives goodwill indefinite lived intangible assets subject impairment testing annually march 31 whenever events changes circumstances indicate carrying amount may fully recoverable testing compares carrying values fair values appropriate carrying value assets reduced fair value completed annual goodwill impairment test march 31 2011 determined impairment date see note 12 additional details goodwill balances intangible assets determinable livesother intangible assets determinable lives consist customer lists technology patents trademarks intangibles amortized estimated useful lives ranging 2 24 years longlived assetswe periodically evaluate recoverability carrying amount longlived assets including property plant equipment intangible assets determinable lives whenever events changes circumstances indicate carrying amount asset may fully recoverable evaluate events changes circumstances based number factors including operating results business plans forecasts general industry trends economic projections anticipated cash flows impairment assessed undiscounted expected future cash flows derived asset less carrying amount impairment losses measured amount carrying value asset exceeds fair value recognized earnings also continually evaluate estimated useful lives longlived assets periodically revise estimates based current events sales recognitionproduct service sales recognized persuasive evidence arrangement exists product delivery occurred services rendered pricing fixed determinable collection reasonably assured service sales principally representing repair maintenance engineering activities aerospace automation control solutions segments recognized contractual period services rendered sales longterm contracts aerospace automation control solutions segments recorded percentageofcompletion method measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts provisions anticipated losses longterm contracts recorded full losses become evident revenues contracts multiple element arrangements recognized element earned based relative fair value element provided delivered elements value customers standalone basis amounts allocated element based objectively determined fair value sales price product service sold separately competitor prices similar products services allowance doubtful accountswe maintain allowances doubtful accounts estimated losses result customer’s inability make required payments estimate anticipated losses doubtful accounts based days past due measured contractual due date historical collection history incorporate changes economic conditions may reflected historical trends example customers bankruptcy liquidation reorganization receivables writtenoff allowance doubtful accounts determined uncollectible determination includes analysis consideration particular conditions account including time intervals since last collection success outside collection agencies activity solvency customer bankruptcy proceedings environmental expendituresenvironmental expenditures relate current operations expensed capitalized appropriate expenditures relate existing condition caused past operations provide future benefits expensed incurred liabilities recorded environmental remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical regulatory legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities asbestos related contingencies insurance recoverieshoneywell defendant personal injury actions related products containing asbestos refractory friction products recognize liability asbestos related contingency probable occurrence reasonably estimable regarding north american refractories company narco asbestos related claims accrued pending claims based terms conditions agreements narco former parent company certain asbestos claimants estimate unsettled claims pending time narco filed bankruptcy protection also accrued estimated value future narco asbestos related claims expected asserted narco trust 2018 described note 21 light inherent uncertainties making long term projections connection initial operation 524g trust well stay narco asbestos claims since january 2002 believe reasonable basis estimating narco asbestos claims beyond 2018 regarding bendix asbestos related claims accrued estimated value pending claims using average resolution values previous five years also accrued estimated value future anticipated claims related bendix next five years based historic claims filing experience dismissal rates disease classifications average resolution values tort system previous five years light uncertainties inherent making longterm projections well certain factors unique friction product asbestos claims believe reasonable basis estimating asbestos claims beyond next five years continue update resolution values used estimate cost pending future bendix claims fourth quarter year additional information see note 21 continually assess likelihood adverse judgments outcomes contingencies well potential ranges probable losses recognize liability contingencies based analysis individual issue assistance outside legal counsel applicable experts connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical experience insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs consideration impacts settlements insurers aerospace sales incentiveswe provide sales incentives commercial aircraft manufacturers airlines connection selection aircraft equipment predominately wheel braking system hardware auxiliary power units installation commercial aircraft incentives principally consist free deeply discounted products also include credits future purchases product upfront cash payments costs recognized period incurred cost products sold reduction sales appropriate aircraft manufacturers incentives recorded products delivered airlines incentives recorded associated aircraft delivered aircraft manufacturer airline research developmentresearch development costs companysponsored research development projects expensed incurred costs principally included cost products sold 1799 1450 1321 million 2011 2010 2009 respectively stockbased compensation plansthe principal awards issued stockbased compensation plans described note 20 include nonqualified stock options restricted stock units rsus cost awards measured grant date based fair value award value portion award ultimately expected vest recognized expense requisite service periods generally vesting period equity award included selling general administrative expense consolidated statement operations forfeitures required estimated time grant order estimate portion award ultimately vest estimate based historical rates forfeiture pension benefitswe sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees recognize changes fair value plan assets net actuarial gains losses excess 10 percent greater marketrelated value plan assets plans’ projected benefit obligation corridor annually fourth quarter year mtm adjustment remaining components pension expense primarily service interest costs assumed return plan assets recorded quarterly basis ongoing pension expense foreign currency translationassets liabilities subsidiaries operating outside united states functional currency us dollars translated us dollars using yearend exchange rates sales costs expenses translated average exchange rates effect year foreign currency translation gains losses included component accumulated comprehensive income loss subsidiaries operating highly inflationary environments inventories property plant equipment including related expenses remeasured exchange rate effect date assets acquired monetary assets liabilities remeasured yearend exchange rates remeasurement adjustments subsidiaries included earnings derivative financial instrumentsas result global operating financing activities exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position minimize risks interest foreign currency exchange rate commodity price fluctuations normal operating financing activities deemed appropriate use derivative financial instruments derivative financial instruments used manage risk used trading speculative purposes use leveraged derivative financial instruments derivative financial instruments used hedging purposes must designated effective hedge identified risk exposure inception contract accordingly changes fair value derivative contract must highly correlated changes fair value underlying hedged item inception hedge life hedge contract derivatives recorded balance sheet assets liabilities measured fair value derivatives designated hedges fair value assets liabilities changes fair values derivatives hedged items recorded current earnings derivatives designated cash flow hedges effective portion changes fair value derivatives recorded accumulated comprehensive income loss subsequently recognized earnings hedged items impact earnings cash flows derivative financial instruments classified consistent underlying hedged item transfers financial instrumentssales transfers securitization financial instruments accounted authoritative guidance transfers servicing financial assets extinguishments liabilities sell interests designated pools trade accounts receivables third parties terms trade accounts receivable program permit repurchase receivables third parties discretion result program receivables accounted sale remain consolidated balance sheet corresponding amount recorded either shortterm borrowings longterm debt times also transfer trade receivables qualify sale thus removed consolidated balance sheet time sold value assigned subordinated interests undivided interests retained receivables sold based relative fair values interests retained sold carrying value retained interests approximates fair value due shortterm nature collection period receivables income taxesdeferred tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax assets realized determination amount valuation allowance provided recorded deferred tax assets involves estimates regarding 1 timing amount reversal taxable temporary differences 2 expected future taxable income 3 impact tax planning strategies assessing need valuation allowance consider available positive negative evidence including past operating results projections future taxable income feasibility ongoing tax planning strategies projections future taxable income include number estimates assumptions regarding volume pricing costs additionally valuation allowances related deferred tax assets impacted changes tax laws significant judgment required determining income tax provisions evaluating tax positions establish additional reserves income taxes despite belief tax positions fully supportable remain certain positions meet minimum recognition threshold approach evaluating certain uncertain tax positions defined authoritative guidance determines tax position likely sustained upon examination applicable taxing authority normal course business tax filings company subsidiaries examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes continually assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts give rise revision become known earnings per sharebasic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding dilutive potential common shares outstanding use estimatesthe preparation consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts financial statements related disclosures accompanying notes actual results could differ estimates assumptions periodically reviewed effects revisions reflected consolidated financial statements period determined necessary reclassificationscertain prior year amounts reclassified conform current year presentation recent accounting pronouncementschanges accounting principles generally accepted united states america us gaap established financial accounting standards board fasb form accounting standards updates asu’s fasb’s accounting standards codification company considers applicability impact asu’s asu’s listed assessed determined either applicable expected minimal impact consolidated financial position results operations may 2011 fasb issued amendments disclosure requirements common fair value measurement amendments effective interim annual periods beginning december 15 2011 early adoption prohibited result common definition fair value common requirements measurement disclosure requirements us gaap ifrs consequently amendments change fair value measurement principles disclosure requirements implementation amended accounting guidance expected material impact consolidated financial position results operations june 2011 fasb issued amendments disclosure requirements presentation comprehensive income guidance effective retrospectively interim annual periods beginning december 15 2011 early adoption permitted requires presentation total comprehensive income components net income components comprehensive income either single continuous statement comprehensive income two separate consecutive statements december 2011 fasb issued amendment defer presentation face financial statements effects reclassifications accumulated comprehensive income components net income comprehensive income annual interim financial statements implementation two aforementioned amendments expected material impact consolidated financial position results operations september 2011 fasb issued amendments goodwill impairment guidance provides option companies use qualitative approach test goodwill impairment certain conditions met amendments effective annual interim goodwill impairment tests performed fiscal years beginning december 15 2011 early adoption permitted implementation amended accounting guidance expected material impact consolidated financial position results operations note 2 acquisitions divestitures acquisitions acquired businesses aggregate cost 973 1303 468 million 2011 2010 2009 respectively acquisitions acquired businesses recorded estimated fair values dates acquisition significant acquisitions made years discussed december 2011 company acquired king’s safetywear limited ksw leading international provider branded safety footwear aggregate value net cash acquired approximately 331 million including assumption debt 33 million allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date preliminary basis company assigned approximately 178 million identifiable intangible assets predominantly trademarks technology customer relationships definite lived intangible assets amortized estimated lives using straightline accelerated amortization methods value assigned trademarks approximately 91 million classified indefinite lived intangibles excess purchase price estimated fair values net assets acquired approximately 163 million recorded goodwill arises primarily avoidance time costs would required associated risks would encountered enhance product offerings key target markets serve entry new profitable segments expected cost synergies realized consolidation acquired business automation control solutions segment cost synergies expected realized principally areas selling general administrative expenses material sourcing manufacturing goodwill nondeductible tax purposes results acquisition date december 31 2011 included automation control solutions segment material consolidated financial statements december 31 2011 purchase accounting ksw subject final adjustment primarily valuation inventory property plant equipment useful lives intangible assets amounts allocated intangible assets goodwill tax balances certain preacquisition contingencies august 2011 company acquired 100 percent issued outstanding shares ems technologies inc ems leading provider connectivity solutions mobile networking rugged mobile computers satellite communications ems reported 2010 revenues approximately 355 million aggregate value net cash acquired approximately 513 million allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date preliminary basis company assigned approximately 119 million identifiable intangible assets approximately 89 million approximately 30 million recorded within aerospace automation control segments respectively intangible assets predominantly customer relationships existing technology trademarks intangible assets amortized estimated lives using straightline accelerated amortization methods excess purchase price estimated fair values net assets acquired approximating 326 million recorded goodwill arises primarily avoidance time costs would required associated risks would encountered enhance product offerings key target markets serve entry new profitable segments expected cost synergies realized consolidation acquired business aerospace automation control solutions segments cost synergies expected realized principally areas selling general administrative expenses material sourcing manufacturing goodwill nondeductible tax purposes results acquisition date december 31 2011 included aerospace automation control solutions segments material consolidated financial statements december 31 2011 purchase accounting ems subject final adjustment primarily valuation inventory property plant equipment useful lives intangible assets amounts allocated intangible assets goodwill certain preacquisition contingencies october 2010 completed acquisition issued outstanding shares sperian protection sperian french company operates globally personal protection equipment design manufacturing industry sperian reported 2009 revenues approximately 900 million aggregate value net cash acquired approximately 1475 million including assumption approximately 326 million outstanding debt allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date following amounts represent final determination fair value identifiable assets acquired liabilities assumed assigned 539 million intangible assets predominantly customer relationships trade names technology intangible assets amortized estimated lives range 3 20 years using straight line accelerated amortization methods included amount value approximately 246 million assigned trade names intangibles determined indefinite lives excess purchase price estimated fair values net assets acquired approximately 930 million recorded goodwill arises primarily avoidance time costs would required associated risks would encountered develop business product offering customer base comparable sperian expected cost synergies realized consolidation acquired business automations controls solutions segment cost synergies expected realized principally areas selling general administrative expenses material sourcing manufacturing goodwill nondeductible tax purposes results acquisition date december 31 2010 included automation control solutions segment material consolidated financial statements august 2009 company completed acquisition rmg group rmg regel messtechnik gmbh natural gas measuring control products services integrated solutions company purchase price approximately 416 million net cash acquired purchase price acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned 174 million identifiable intangible assets predominantly customer relationships existing technology trademarks intangible assets amortized estimated lives range 1 15 years using straightline accelerated amortization methods excess purchase price estimated fair values net assets acquired approximating 225 million recorded goodwill nondeductible tax purposes results acquisition date december 31 2009 included automation control solutions segment material consolidated financial statements connection acquisitions 2011 2010 2009 amounts recorded transaction costs integrating acquired businesses honeywell material pro forma results 2011 2010 2009 assuming acquisitions made beginning comparable prior year would materially different consolidated reported results divestituresin july 2011 company sold consumer products group business cpg rank group limited sale completed approximately 955 million cash proceeds resulting pretax gain approximately 301 million approximately 178 million net tax gain recorded net income discontinued operations taxes company’s consolidated statement operations year ended december 31 2011 net income attributable noncontrolling interest discontinued operations insignificant sale cpg part transportation systems segment consistent company’s strategic focus portfolio differentiated global technologies key components income discontinued operations related cpg follows components assets liabilities classified discontinued operations included current assets current liabilities related cpg business consisted following note 3 repositioning charges summary repositioning charges follows following table summarizes pretax distribution total net repositioning charges income statement classification following table summarizes pretax impact total net repositioning charges segment 2011 recognized repositioning charges totaling 380 million including severance costs 246 million related workforce reductions 3188 manufacturing administrative positions across segments workforce reductions primarily related planned shutdown manufacturing facility transportation systems segment cost savings actions taken connection ongoing functional transformation productivity initiatives factory transitions connection acquisitionrelated synergies automation control solutions aerospace segments exit andor rationalization certain product lines markets performance materials technologies automation control solutions segments consolidation repair facilities aerospace segment factory consolidations andor rationalizations organizational realignments businesses automation control solutions segment repositioning charges included asset impairments 86 million principally related writeoff certain intangible assets automation control solutions segment due change branding strategy manufacturing plant equipment associated planned shutdown manufacturing facility exit product line factory transition discussed repositioning charges also included exit costs 48 million principally costs terminate contracts related exit market product line factory transition discussed exit costs also included closure obligations associated planned shutdown manufacturing facility exit product line also discussed also 26 million previously established accruals primarily severance aerospace automation control solutions segments returned income 2011 due principally fewer employee separations originally planned associated prior severance programs 2010 recognized repositioning charges totaling 179 million including severance costs 144 million related workforce reductions 2781 manufacturing administrative positions primarily automation control solutions aerospace transportation systems segments workforce reductions primarily related planned shutdown certain manufacturing facilities automation control solutions transportation systems segments cost savings actions taken connection ongoing functional transformation productivity initiatives factory transitions aerospace automation control solutions performance materials technologies segments costeffective locations achieving acquisitionrelated synergies automation control solutions segment exit andor rationalization certain product lines performance materials technologies segment repositioning charge also included asset impairments 21 million principally related manufacturing plant equipment associated exit andor rationalization certain product lines facilities scheduled close also 30 million previously established accruals primarily severance automation control solutions transportation systems aerospace segments returned income 2010 due fewer employee separations originally planned associated prior severance programs 2009 recognized repositioning charges totaling 213 million primarily severance costs related workforce reductions 4145 manufacturing administrative positions mainly automation control solutions transportation systems aerospace segments workforce reductions primarily related adverse market conditions experienced many businesses cost savings actions taken connection ongoing functional transformation initiative planned downsizing shutdown certain manufacturing facilities organizational realignments portions aerospace transportation systems segments also 53 million previously established accruals primarily severance automation control solutions aerospace transportation systems segments returned income 2009 due fewer employee separations originally planned associated prior severance programs changes scope previously announced repositioning actions following table summarizes status total repositioning reserves 1 relates businesses divested 2009 included gain sale nonstrategic businesses assets see note 4 income expense certain repositioning projects aerospace automation control solutions transportation systems segments included exit disposal activities costs related recognized future periods actual liability incurred nature exit disposal costs includes asset setup moving product recertification requalification employee retention training travel following tables summarize segment expected incurred remaining exit disposal costs related 2011 2010 repositioning actions able recognize time actions initiated 2011 recognized charge 240 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 149 million environmental asbestos matters discussed detail note 21 commitments contingencies 2010 recognized charge 212 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 175 million also recognized charges 62 million connection evaluation potential resolution certain legal matters 2009 recognized charge 145 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 155 million note 4 income expense gain sale nonstrategic businesses assets 2011 includes 50 million pretax gain 31 million net tax related divestiture automotive onboard sensor products business within automation control solutions segment net 2011 includes loss 29 million resulting early redemption debt first quarter 2011 see note 14 longterm debt credit agreements details net 2010 includes 62 million pretax gain 39 million net tax related consolidation joint venture within performance materials technologies segment company obtained control ability direct activities significant joint venture’s economic performance third quarter resulting consolidation accordingly recognized assets liabilities fair value ii included results operations consolidated financial statements date consolidation iii recognized noted gain representing difference carrying amount fair value previously held equity method investment company assigned 24 million intangibles predominantly joint venture’s customer contracts intangible assets amortized estimated lives using straight line method excess book value estimated fair values net assets consolidated approximating 132 million recorded goodwill nondeductible tax purposes results consolidation date december 31 2010 included performance materials technologies segment material consolidated financial statements gain sale nonstrategic businesses assets 2009 includes 50 million pretax gain 42 million net tax related deconsolidation subsidiary within automation control solutions segment subsidiary achieved contractual milestones december 31 2009 result longer primary beneficiary resulting deconsolidation continue hold noncontrolling interest recorded estimated fair value 67 million upon deconsolidation fair value estimated using combination market income approaches utilizing observable market data comparable businesses discounted cash flow modeling noncontrolling interest classified within investments longterm receivables balance sheet accounted equity method prospective basis net 2009 includes thantemporary impairment charge 62 million see note 16 financial instruments fair value measures details note 5 interest financial charges weighted average interest rate shortterm borrowings commercial paper outstanding december 31 2011 2010 084 percent 164 percent respectively note 6 income taxes income continuing operations taxes 1 net changes valuation allowance tax reserves effective tax rate decreased 98 percentage points 2011 compared 2010 primarily due change mix earnings related higher us pension expense primarily driven approximate 76 percentage point impact resulted increase pension marktomarket expense increased benefit manufacturing incentives increased benefit favorable settlement tax audits increased benefit lower foreign effective tax rate foreign effective tax rate 211 percent decrease approximately 49 percentage points primarily consisted 51 percent impact decreased valuation allowances net operating losses primarily due increase german earnings available offset net operating loss carry forwards ii 24 percent impact tax benefits related foreign exchange investment losses iii 12 percent impact increased benefit tax credits lower statutory tax rates iv 41 percent impact related increase tax reserves effective tax rate lower us statutory rate 35 percent primarily due earnings taxed lower foreign rates effective tax rate increased 59 percentage points 2010 compared 2009 primarily due change mix earnings related lower us pension expense impact enacted change tax treatment medicare part program absence manufacturing incentives decreased impact settlement audits increase foreign effective tax rate foreign effective tax rate increased approximately 7 percentage points primarily consisted 6 percentage point impact absence tax benefits related foreign exchange investment losses ii 01 percentage point impact increased valuation allowances net operating losses deferred tax assets liabilities deferred income taxes represent future tax effects transactions reported different periods tax financial reporting purposes tax effects temporary differences tax carryforwards give rise future income tax benefits payables follows 3 million us federal tax net operating losses available carryforward december 31 2011 expiration dates 2029 company state tax net operating loss carryforwards 35 billion december 31 2011 varying expiration dates 2032 also foreign net operating capital losses 27 billion available reduce future income tax payments several countries subject varying expiration rules us federal tax credit carryforwards 35 million december 31 2011 including alternative minimum tax credits subject expiration also state tax credit carryforwards 61 million december 31 2011 including carryforwards 38 million various expiration dates 2026 tax credits 23 million subject expiration valuation allowance deferred tax assets decreased 45 million 2011 increased 58 million 133 million 2010 2009 respectively 2011 decrease valuation allowance primarily due decreased foreign net operating losses related netherlands germany partially offset increase valuation allowance france luxembourg canada 2010 increase valuation allowance primarily due increased foreign net operating losses related france luxembourg netherlands offset reversal valuation allowance related germany 2010 increase valuation allowance also includes adjustments related purchase accounting various acquisitions 2009 increase valuation allowance primarily due increased foreign net operating losses related germany luxembourg netherlands federal income taxes provided undistributed earnings majority international subsidiaries intention reinvest earnings respective subsidiaries december 31 2011 honeywell provided us federal income foreign withholding taxes approximately 81 billion earnings nonus operations practicable estimate amount tax might payable earnings repatriated amount foreign tax credits would available reduce eliminate resulting us income tax liability 815 million 757 million 720 million unrecognized tax benefits december 31 2011 2010 2009 respectively recognized 815 million would recorded component income tax expense december 31 2011 years ended december 31 2011 2010 company increased unrecognized tax benefits 58 million 37 million respectively due additional reserves various international us tax audit matters partially offset adjustments related ongoing assessments likelihood amount potential outcomes current future examinations expiration various statute limitations settlements tax authorities following table summarizes activity related unrecognized tax benefits generally uncertain tax positions related tax years remain subject examination relevant tax authorities following table summarizes open tax years major jurisdiction december 31 2011 1 includes federal well state provincial similar local jurisdictions applicable based outcome examinations result expiration statute limitations specific jurisdictions reasonably possible related unrecognized tax benefits tax positions taken regarding previously filed tax returns materially change recorded liabilities uncertain tax positions financial statements addition outcome examinations may impact valuation certain deferred tax assets net operating losses future periods based number tax years currently audit relevant us federal state foreign tax authorities company anticipates several audits may finalized foreseeable future however based status examinations protocol finalizing audits relevant taxing authorities possibility company might challenge certain audit findings could include formal legal proceedings time possible estimate impact amount changes previously recorded uncertain tax positions unrecognized tax benefits examinations progress 482 million 274 million 261 million december 31 2011 2010 2009 respectively increases primarily due increase tax examinations estimated interest penalties related underpayment income taxes classified component tax expense consolidated statement operations totaled 63 million 33 million 13 million years ended december 31 2011 2010 2009 respectively accrued interest penalties 247 million 183 million 150 million december 31 2011 2010 2009 respectively note 7 earnings per share details earnings per share calculations years ended december 31 2011 2010 2009 follows diluted earnings per share calculations exclude effect stock options’ assumed proceeds exceed average market price common shares period 2011 2010 2009 weighted number stock options excluded computations 95 148 340 million respectively stock options outstanding end respective periods note 8 accounts notes receivables trade receivables includes 1404 1307 million unbilled balances longterm contracts december 31 2011 december 31 2010 respectively amounts billed accordance terms customer contracts relate note 9 inventories valued lifo amounted 302 198 million december 31 2011 2010 respectively lifo inventories valued current costs carrying values would approximately 169 154 million higher december 31 2011 2010 respectively note 10 investments longterm receivables longterm trade receivables include 29 19 million unbilled balances longterm contracts december 31 2011 2010 respectively amounts billed accordance terms customer contracts relate following table summarizes long term trade financing receivables segment including current portions allowances credit losses allowance credit losses detailed longterm trade financing receivables totaled 5 million 7 million december 31 2011 2010 respectively receivables evaluated impairment individual basis including consideration credit quality detailed financing receivables predominately commercial governmental counterparties investment grade credit quality note 11 property plant equipment depreciation expense 699 707 686 million 2011 2010 2009 respectively note 12 goodwill intangible assets net change carrying amount goodwill years ended december 31 2011 2010 segment follows intangible assets amortization expense 249 263 250 million 2011 2010 2009 respectively estimated intangible asset amortization expense next five years approximates 250 million 2012 226 million 2013 200 million 2014 166 million 2015 141 2016 note 13 accrued liabilities note 14 long term debt credit agreements schedule principal payments long term debt follows february 2011 company issued 800 million 425 percent senior notes due 2021 600 million 5375 percent senior notes due 2041 collectively “notes” notes senior unsecured unsubordinated obligations honeywell rank equally honeywell’s existing future senior unsecured debt senior honeywell’s subordinated debt offering resulted gross proceeds 1400 million offset 19 million discount closing costs related offering first quarter 2011 company repurchased entire outstanding principal amount 400 million 5625 percent notes due 2012 via cash tender offer subsequent optional redemption cost relating early redemption notes including “makewhole premium” 29 million march 2011 company entered 2800 million five year credit agreement “credit agreement” syndicate banks commitments credit agreement increased pursuant terms credit agreement aggregate amount exceed 3500 million credit agreement contains 700 million sublimit issuance letters credit agreement maintained general corporate purposes including support issuance commercial paper replaces previous 2800 million five year credit agreement dated may 14 2007 “prior agreement” borrowings credit agreement prior agreement credit agreement restrict ability pay dividends contains financial covenants failure comply customary conditions occurrence customary events default contained credit agreement would prevent borrowings would generally require repayment outstanding borrowings credit agreement events default include nonpayment credit agreement debt interest fees b noncompliance terms credit agreement covenants c crossdefault debt certain circumstances bankruptcy e defaults upon obligations employee retirement income security act additionally banks right terminate commitment lend additional funds issue letters credit agreement person group acquires beneficial ownership 30 percent voting stock 12month period individuals directors honeywell beginning period cease constitute majority board directors loans credit agreement required repaid later march 31 2016 agreed pay facility fee 0125 percent per annum aggregate commitment interest borrowings credit agreement would determined honeywell’s option competitive bidding procedure b highest floating base rate publicly announced citibank na 05 percent federal funds rate libor plus 1 percent c eurocurrency rate plus honeywell’s credit default swap spread subject floor cap applicable margin facility fee applicable margin eurocurrency rate letter credit issuance fee subject change based upon grid determined long term debt ratings credit agreement subject termination based upon decrease debt ratings material adverse change fourth quarter 2011 company repaid 500 million 6125 notes repayment funded cash provided operating activities first quarter 2010 company repaid 1000 million 750 notes repayment funded cash provided operating activities source liquidity sell interests designated pools trade accounts receivables third parties december 31 2011 december 31 2010 none receivables designated pools sold third parties sell receivables overcollateralized retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools terms trade accounts receivable program permit repurchase receivables third parties discretion providing us additional source revolving credit result program receivables remain company’s balance sheet corresponding amount recorded either shortterm borrowings longterm debt note 15 lease commitments future minimum lease payments operating leases initial remaining noncancellable lease terms excess one year follows entered agreements lease land equipment buildings principally operating leases initial terms 25 years contain renewal options subject customary conditions time terms leases may option purchase leased assets amounts approximate fair value expect commitments lease agreements material adverse effect consolidated results operations financial position liquidity rent expense 386 369 366 million 2011 2010 2009 respectively note 16 financial instruments fair value measures credit market riskfinancial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates commodity prices manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties derivative transactions substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value cash flows derivative financial instruments considering reasonably possible changes interest rates currency exchange rates commodity prices restrict use derivative financial instruments hedging activities continually monitor creditworthiness customers grant credit terms normal course business terms conditions credit sales designed mitigate eliminate concentrations credit risk single customer sales materially dependent single customer small group customers foreign currency risk managementwe conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities transactions arising international trade objective preserve economic value nonfunctional currency denominated cash flows attempt hedge transaction exposures natural offsets fullest extent possible opportunities exhausted foreign currency exchange forward option contracts third parties hedge monetary assets liabilities denominated nonfunctional currencies prior conversion us dollars assets liabilities remeasured spot exchange rates effect balance sheet date effects changes spot rates recognized earnings included income expense partially hedge forecasted sales purchases predominantly occur next twelve months denominated nonfunctional currencies currency forward contracts changes forecasted nonfunctional currency cash flows due movements exchange rates substantially offset changes fair value currency forward contracts designated hedges market value gains losses contracts recognized earnings hedged transaction recognized open foreign currency exchange forward contracts mature predominantly next twelve months december 31 2011 2010 contracts notional amounts 7108 million 5733 million respectively exchange foreign currencies principally us dollar euro british pound canadian dollar hong kong dollar mexican peso swiss franc czech koruna chinese renminbi indian rupee singapore dollar swedish krona korean thai baht commodity price risk managementour exposure market risk commodity prices result changes cost production primarily mitigate exposure commodity price risk use longterm fixedprice contracts suppliers formula price agreements suppliers customers also enter forward commodity contracts third parties designated hedges anticipated purchases several commodities forward commodity contracts markedtomarket resulting gains losses recognized earnings hedged transaction recognized december 31 2011 2010 contracts notional amounts 59 million 23 million respectively related forward commodity agreements principally base metals natural gas interest rate risk management use combination financial instruments including longterm mediumterm shortterm financing variablerate commercial paper interest rate swaps manage interest rate mix total debt portfolio related overall cost borrowing december 31 2011 2010 interest rate swap agreements designated fair value hedges effectively changed 1400 600 million respectively fixed rate debt rate 409 388 percent respectively libor based floating rate debt interest rate swaps mature 2021 fair value financial instruments fasb’s accounting guidance defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date exit price fasb’s guidance classifies inputs used measure fair value following hierarchy level 1 unadjusted quoted prices active markets identical assets liabilities level 2 unadjusted quoted prices active markets similar assets liabilities unadjusted quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability level 3 unobservable inputs asset liability company endeavors utilize best available information measuring fair value financial nonfinancial assets liabilities classified entirety based lowest level input significant fair value measurement company determined available sale investments marketable equity securities level 1 remaining financial assets liabilities level 2 fair value hierarchy following table sets forth company’s financial assets liabilities accounted fair value recurring basis december 31 2011 2010 foreign currency exchange contracts interest rate swap agreements forward commodity contracts valued using broker quotations market transactions either listed overthecounter markets derivative instruments classified within level 2 company also holds investments commercial paper certificates deposits time deposits designated available sale valued using market transactions overthecounter markets investments classified within level 2 carrying value cash equivalents trade accounts notes receivables payables commercial paper shortterm borrowings contained consolidated balance sheet approximates fair value following table sets forth company’s financial assets liabilities carried fair value years ended december 31 2011 2010 company assets net book value 262 million 32 million respectively specifically property plant equipment software intangible assets accounted fair value nonrecurring basis assets tested impairment based fair value assets company recognized losses 127 million 30 million respectively years ended december 31 2011 2010 primarily connection repositioning actions see note 3 repositioning charges company determined fair value measurements nonfinancial assets level 3 fair value hierarchy company holds investments marketable equity securities designated available sale securities due otherthantemporary decline fair value investments company recognized impairment charge 62 million second quarter 2009 included income expense derivatives utilized risk management purposes detailed included consolidated balance sheet impacted statement operations follows fair value derivatives classified assets consist following ineffective portions commodity derivative instruments designated cash flow hedge relationships insignificant years ended december 31 2011 2010 located cost products sold interest rate swap agreements designated hedge relationships gains losses derivative recognized interest financial charges offsetting gains losses underlying debt hedged gains losses interest rate swap agreements recognized earnings 112 24 million years ended december 31 2011 2010 respectively gains fully offset losses underlying debt hedged also economically hedge exposure changes foreign exchange rates principally forward contracts markedtomarket resulting gains losses recognized earnings offsetting gains losses nonfunctional currency denominated monetary assets liabilities hedged recognized 30 million income 18 million expense income expense years ended december 31 2011 2010 respectively note 17 liabilities reconciliation liability asset retirement obligations year ended december 31 2011 follows note 18 capital stock authorized issue 2000000000 shares common stock par value 1 common shareowners entitled receive dividends may declared board entitled one vote per share entitled event liquidation share ratably assets honeywell available distribution common shareowners common shareowners preemptive conversion rights shares common stock issued outstanding held treasury liable calls assessments restrictions us relative dividends repurchase redemption common stock board directors authorized repurchase total 30 billion honeywell common stock amount includes 19 billion remained available company’s previously reported share repurchase program purchased total approximately 203 million shares common stock 2011 1085 million authorized issue 40000000 shares preferred stock without par value determine number shares series rights preferences limitations series december 31 2011 preferred stock outstanding note 19 accumulated comprehensive income loss total accumulated comprehensive income loss included consolidated statement shareowners’ equity comprehensive income loss attributable noncontrolling interest consisted predominantly net income changes accumulated comprehensive income loss follows 1 includes reclassification adjustment losses included net income note 20 stockbased compensation plans stockbased compensation plans available grant nonqualified stock options incentive stock options stock appreciation rights restricted units restricted stock key employees 2011 stock incentive plan honeywell international inc affiliates plan approved shareowners annual meeting shareowners effective april 26 2011 following approval plan april 26 2011 grant new awards key employees previously existing stockbased compensation plans 39582132 shares available future grants terms plan december 31 2011 additionally 2006 stock plan nonemployee directors honeywell international inc directors plan 229000 shares honeywell common stock available future grant december 31 2011 stock optionsthe exercise price term conditions applicable option granted stock plans generally determined management development compensation committee board exercise price stock options set grant date may less fair market value per share stock date fair value recognized expense employee’s requisite service period generally vesting period award options generally vest fouryear period expire ten years fair value option award estimated date grant using blackscholes optionpricing model expected volatility based implied volatilities traded options honeywell common stock used monte carlo simulation model derive expected term model uses historical data estimate option exercise activity postvest termination behavior expected term represents estimate time options expected remain outstanding riskfree rate periods within contractual life option based us treasury yield curve effect time grant compensation cost pretax basis related stock options recognized operating results included selling general administrative expenses 2011 2010 2009 59 55 39 million respectively associated future income tax benefit recognized 2011 2010 2009 19 16 13 million respectively following table sets forth fair value per share information including related weightedaverage assumptions used determine compensation cost 1 estimated date grant using blackscholes optionpricing model following table summarizes information stock option activity three years ended december 31 2011 1 represents sum vested options 217 million expected vest options 141 million expected vest options derived applying prevesting forfeiture rate assumption total outstanding unvested options 172 million following table summarizes information stock options outstanding exercisable december 31 2011 1 average remaining contractual life years 24722493 27427023 options exercisable weighted average exercise prices 3943 3885 december 31 2010 2009 respectively total intrinsic value options amount stock price exceeded exercise price options date exercise exercised 2011 2010 2009 164 54 4 million respectively 2011 2010 2009 amount cash received exercise stock options 290 181 20 million respectively associated tax benefit realized 54 18 1 million respectively 2011 2010 2009 classified 42 13 1 million respectively benefit financing cash inflow consolidated statement cash flows balance classified cash operations december 31 2011 119 million total unrecognized compensation cost related nonvested stock option awards expected recognized weightedaverage period 252 years total fair value options vested 2011 2010 2009 52 41 51 million respectively restricted stock unitsrestricted stock unit rsu awards entitle holder receive one share common stock unit units vest rsus issued certain key employees fair market value date grant compensation rsus typically become fully vested periods ranging three seven years payable honeywell common stock upon vesting following table summarizes information rsu activity three years ended december 31 2011 december 31 2011 approximately 179 million total unrecognized compensation cost related nonvested rsus granted stock plans expected recognized weightedaverage period 18 years compensation expense related rsus 109 79 million 2011 2010 2009 respectively nonemployee directors’ planunder directors’ plan new nonemployee director receives onetime grant 3000 restricted stock units vest fifth anniversary continuous board service 2011 nonemployee director received annual grant purchase 5000 shares common stock fair market value date grant 2012 annual equity grant change fixed number shares target value 75000 consist 50 percent options 50 percent rsus options become exercisable fouryear period expire ten years rsus generally vest third anniversary date grant note 21 commitments contingencies environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous substances accordance environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing hazardous substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually jointly potentially responsible parties determine feasibility various remedial techniques policy record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical regulatory legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing remedial investigations feasibility studies timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects remedial techniques utilized agreements parties following table summarizes information concerning recorded liabilities environmental costs environmental liabilities included following balance sheet accounts although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position new jersey chrome sitesthe excavation offsite disposal approximately one million tons chromium residue present predecessor honeywell site located jersey city new jersey known study area 7 completed january 2010 also implementing related groundwater remedial actions seeking appropriate permits state federal agencies related river sediment work approved federal court provisions made financial statements estimated cost remedies abovereferenced site significant 21 sites located hudson county new jersey subject administrative consent order aco entered new jersey department environmental protection njdep 1993 “honeywell aco sites” remedial investigations activities consistent aco applicable settlement orders conducted underway honeywell aco sites addition settlement order entered new jersey state superior court third quarter 2011 resolving litigation brought njdep honeywell two companies regarding investigation remediation remaining sites area allegedly chromium contamination known publicly funded sites settlement honeywell accepted responsibility remediate 24 53 publicly funded sites also bear 50 percent costs another 10 publicly funded sites honeywell developing schedule investigation remediation publicly funded sites recorded reserves honeywell aco sites applicable publicly funded sites appropriate accounting policy described dundalk marine terminal baltimore mdchrome residue legacy chrome plant operations baltimore deposited fill dundalk marine terminal “dmt” owned operated maryland port administration “mpa” honeywell mpa sharing costs investigate mitigate related environmental issues entered cost sharing agreement honeywell bear 77 percent costs developing implementing permanent remedies dmt facility january 2011 mpa honeywell submitted maryland department environment “mde” corrective measures alternatives analysis “cmaa” certain potential remedies dmt assist mde selection final remedy yet occurred provision made financial statements cmaa consistent accounting policy described negotiated consent decree mpa mde respect investigation remediation dmt facility consent decree challenged federal court build baltimore community group together local church two individuals collectively “build” october 2007 court dismissed prejudice build’s state law claims dismissed without prejudice build’s rcra claims regarding neighborhoods near dmt facility august 2008 court held hearing company’s motion dismiss build’s remaining claims grounds mde diligently prosecuting investigation remediation dmt awaiting court’s decision believe matter material adverse impact consolidated financial position operating cash flows given scope complexity project possible cost remediation determinable could material adverse impact results operations periods recognized onondaga lake syracuse nywe implementing combined dredgingcapping remedy onondaga lake pursuant consent decree approved united states district court northern district new york january 2007 accrued estimated cost remediating onondaga lake based currently available information analysis performed engineering consultants honeywell also conducting remedial investigations activities sites syracuse recorded reserves investigations activities appropriate accounting policy described honeywell entered cooperative agreement potential natural resource trustees assess alleged natural resource damages relating site possible predict outcome duration assessment amounts responsibility damages asbestos matters like many industrial companies honeywell defendant personal injury actions related asbestos mine produce asbestos make sell insulation products construction materials identified primary cause asbestos related disease vast majority claimants honeywell’s predecessors owned north american refractories company narco 1979 1986 narco produced refractory products bricks cement used high temperature applications sold narco business 1986 agreed indemnify narco respect personal injury claims products discontinued prior sale defined sale agreement narco retained liability claims narco andor honeywell defendants asbestos personal injury cases asserting claims based upon alleged exposure narco asbestoscontaining products claimants consist largely individuals allege exposure narco asbestoscontaining refractory products occupational setting claims filing subsequent claims stayed continuously since january 4 2002 date narco sought bankruptcy protection see discussion honeywell’s bendix friction materials bendix business manufactured automotive brake parts contained chrysotile asbestos encapsulated form claimants consist largely individuals allege exposure asbestos brakes either performing vicinity individuals performed brake replacements following tables summarize information concerning narco bendix asbestos related balances narco bendix asbestos related balances included following balance sheet accounts narco products january 4 2002 narco filed petition reorganization chapter 11 us bankruptcy code connection filing narco’s petition 2002 bankruptcy court issued injunction staying prosecution narcorelated asbestos claims company stay continuously remained place november 2007 us bankruptcy court western district pennsylvania confirmed narco’s third amended plan reorganization narco plan reorganization challenges narco plan reorganization fully resolved third quarter 2010 narco plan reorganization cannot become effective however unrelated issues pertaining certain narco affiliates pending bankruptcy court resolved possible predict timing outcome bankruptcy court proceedings affiliates’ case whether discussions parties resolve matter expect stay enjoining litigation narco honeywell remain effect effective date narco plan reorganization connection narco’s bankruptcy filing agreed certain obligations triggered upon effective date narco plan reorganization honeywell provide narco 20 million financing simultaneously forgive indebtedness also pay 40 million narco’s former parent company 16 million certain asbestos claimants whose claims resolved pendency narco bankruptcy proceedings amounts classified accrued liabilities consolidated balance sheet december 31 2011 narco plan reorganization becomes effective connection implementation federally authorized 524g trust “narco trust” established evaluation resolution existing future narco asbestos claims narco trust established honeywell narco entitled permanent channeling injunction barring present future individual actions state federal courts requiring asbestos related claims based exposure narco products made trust narco trust review submitted claims determine award amounts accordance established trust distribution procedures approved bankruptcy court set forth criteria claimants must meet qualify compensation including among things exposure medical criteria determine award amount narco trust established operational honeywell obligated fund narco asbestos claims submitted trust qualify payment trust distribution procedures subject annual caps 150 million year provided however first 100 million claims processed narco trust “initial claims amount” count first year annual cap unused portion initial claims amount roll subsequent years fully utilized narco trust established operational honeywell also responsible following funding obligations subject annual cap described previously approved payments due claimants pursuant settlement agreements reached pendency narco bankruptcy proceedings provide portion settlements paid narco trust amounts estimated 130 million expected paid first year trust operations b payments due claimants pursuant settlement agreements reached pendency narco bankruptcy proceedings provide right submit claims narco trust subject qualification terms settlement agreements trust distribution procedures criteria amounts estimated 150 million expected paid first two years trust operations consolidated financial statements reflect estimated liability amounts discussed unsettled claims pending time narco filed bankruptcy protection estimated value future narco asbestos claims expected asserted narco trust 2018 light uncertainties inherent making longterm projections connection initial operation 524g trust well stay narco asbestos claims since january 2002 believe reasonable basis estimating narco asbestos claims beyond 2018 absence actual trust experience base estimate honeywell projected probable value including trust claim handling costs asbestos related future liabilities based company specific general asbestos claims filing rates expected rates disease anticipated claim values specifically valuation methodology included analysis population likely exposed asbestos containing products epidemiological studies estimate number people likely develop asbestos related diseases narco asbestos claims filing history general asbestos claims filing rates tort system certain operating asbestos trusts claims experience forums pending inventory narco asbestos claims disease criteria payment values contained trust distribution procedures estimated approval rate claims submitted narco trust methodology used estimate liability future claims commonly accepted numerous bankruptcy courts addressing 524g trusts resulted range estimated liability future claims 743 961 million believe amount within range better estimate amount accordingly recorded minimum amount range insurance receivable corresponding liability settlement pending future narco asbestos claims reflects coverage reimburses honeywell portions costs incurred settle narco related claims court judgments well defense costs provided large number insurance policies written dozens insurance companies domestic insurance market london excess market december 31 2011 significant portion coverage insurance companies agreements pay full policy limits conduct analyses determine amount insurance estimate probable recovery relation payment current estimated future claims substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries made judgments concerning insurance coverage believe reasonable consistent historical dealings insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs 2006 travelers casualty insurance company “travelers” filed declaratory judgment action supreme court new york county new york honeywell insurance carriers provide coverage narco asbestos claims seeking declaration regarding coverage obligations narco asbestos claims high excess insurance coverage issued travelers insurance carriers insurance carriers asserted cross claims honeywell seeking declarations regarding coverage obligations narco asbestos claims high excess insurance coverage issued since company entered settlement agreements resolving narcorelated asbestos coverage issues certain insurance carriers including travelers approximately 57 million remaining unsettled coverage included narcorelated insurance receivable december 31 2011 honeywell believes entitled coverage issue expects prevail matter 2007 honeywell prevailed critical choice law issue concerning appropriate method allocating narcorelated asbestos liabilities triggered policies plaintiffs appealed trial court’s ruling upheld intermediate appellate court 2009 plaintiffs’ appeal new york court appeals highest court new york denied october 2009 related new jersey action brought honeywell dismissed coverage claims plaintiffs preserved new york action based upon understanding relevant facts applicable law ii terms insurance policies issue iii experience matters nature iv advice counsel believe amount due remaining insurance carriers probable recovery honeywell expects prevail matter adverse outcome could material impact results operations period recognized would material consolidated financial position operating cash flows projecting future events subject many uncertainties could cause narco related asbestos liabilities assets higher lower projected recorded assurance plan reorganization become final insurance recoveries timely whether narco related asbestos claims beyond 2018 given inherent uncertainty predicting future events review estimates periodically update based experience relevant factors similarly reevaluate projections concerning probable insurance recoveries light changes projected liability developments may impact insurance recoveries friction productsthe following tables present information regarding bendix related asbestos claims activity number claims filed 2010 includes approximately 1541 nonmalignant claims accrued liability approximately 575 thousand aggregate majority previously dismissed mississippi refiled arkansas b number claims resolved 2011 includes approximately 351 claims previously classified inactive 82 nonmalignant accrued liability approximately 17 million activated 2011 number claims resolved 2010 includes approximately 1300 claims previously classified inactive 95 nonmalignant accrued liability approximately 20 million activated 2010 honeywell experienced average resolution values per claim excluding legal costs follows possible predict whether resolution values bendix related asbestos claims increase decrease stabilize future consolidated financial statements reflect estimated liability resolution pending claims actually filed financial statement date future bendix related asbestos claims valued bendix pending future claims using average resolution values previous five years update resolution values used estimate cost bendix pending future claims fourth quarter year liability future claims represents estimated value future asbestos related bodily injury claims expected asserted bendix next five years estimated cost future bendix related asbestos claims based historic claims filing experience dismissal rates disease classifications resolution values tort system previous five years light uncertainties inherent making longterm projections well certain factors unique friction product asbestos claims believe reasonable basis estimating asbestos claims beyond next five years methodology used estimate liability future claims similar used estimate future narco related asbestos claims liability insurance receivable corresponding liability settlement pending future bendix asbestos claims reflects coverage provided large number insurance policies written dozens insurance companies domestic insurance market london excess market based ongoing analysis probable insurance recovery insurance receivables recorded financial statements simultaneous recording estimated liability underlying asbestos claims determination based analysis underlying insurance policies historical experience insurers ongoing review solvency insurers interpretation judicial determinations relevant insurance programs consideration impacts settlements reached insurers insurance receivables also recorded structured insurance settlements provide future fixed payment streams contingent upon future claims events amounts recorded net present value fixed payment stream cumulative historical basis honeywell recorded insurance receivables equal approximately 40 percent value underlying asbestos claims recorded however gaps coverage due insurance company insolvencies certain uninsured periods insurance settlements rate expected decline future bendix related asbestos liabilities may recorded future recoverability rates may also impacted numerous factors future insurance settlements insolvencies judicial determinations relevant coverage program difficult predict assuming continued defense indemnity spending current levels estimate cumulative recoverability rate could decline next five years approximately 33 percent honeywell believes sufficient insurance coverage reserves cover pending bendix related asbestos claims bendix related asbestos claims estimated filed within next five years although impossible predict outcome either pending future bendix related asbestos claims believe claims would material adverse effect consolidated financial position light insurance coverage prior experience resolving claims rate types claims filed average resolution value claims period time claim settlements paid collectively “variable claims factors” substantially change honeywell would expect future bendix related asbestos claims material adverse effect results operations operating cash flows fiscal year assurances given however variable claims factors change matters subject number lawsuits investigations disputes involve substantial amounts claimed arising conduct business including matters relating commercial transactions government contracts product liability prior acquisitions divestitures employee benefit plans intellectual property environmental health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes matters well potential ranges possible losses taking consideration insurance recoveries based careful analysis matter assistance outside legal counsel applicable experts included matters following allen et al v honeywell retirement earnings planpursuant settlement approved us district court district arizona february 2008 18 21 claims alleged plaintiffs class action lawsuit dismissed prejudice exchange approximately 35 million paid company’s pension plan maximum aggregate liability remaining three claims alleging honeywell impermissibly reduced pension benefits certain employees predecessor entity plan amended 1983 failed calculate benefits accordance terms plan capped 500 million october 2009 court granted summary judgment favor honeywell retirement earnings plan respect claim regarding calculation benefits may 2011 parties engaged mediation reached agreement principle settle three remaining claims 238 million also paid company’s pension plan settlement documents submitted court classwide approval preliminary settlement order approved court fairness hearing settlement scheduled april 2012 upon court approval settlement claims matter fully resolved quick lubeon march 31 2008 se quick lube filter distributor filed suit us district court district connecticut alleging twelve filter manufacturers including honeywell engaged conspiracy fix prices rig bids allocate us customers aftermarket automotive filters suit purported class action behalf direct purchasers filters defendants parallel purported class actions including behalf indirect purchasers filters filed plaintiffs variety jurisdictions united states canada us cases consolidated single multidistrict litigation northern district illinois june 2011 plaintiff’s principal witness pled guilty felony count made false statements federal investigators february 2012 honeywell reached agreement principle resolve multidistrict litigation class action plaintiffs subject finalization agreement approval court previously reported antitrust division department justice notified honeywell january 2010 officially closed investigation possible collusion replacement auto filters industry honeywell v united auto workers “uaw” et alin july 2011 honeywell filed action federal court district new jersey uaw former employees retired series master collective bargaining agreements “mcbas” honeywell uaw company seeking declaratory judgment certain express limitations obligation contribute toward healthcare coverage retirees “caps” set forth mcbas may implemented effective january 1 2012 september 2011 uaw certain retiree defendants filed motion dismiss new jersey action filed suit eastern district michigan alleging mcbas provide caps company’s liability healthcare coverage uaw retiree plaintiffs subsequently filed motion class certification motion partial summary judgment michigan action seeking ruling retirees retired prior initial inclusion caps 2003 mcba covered caps matter law december 2011 new jersey action dismissed jurisdictional grounds honeywell filed motion expedited review new jersey court’s dismissal united states court appeals third circuit parties awaiting court’s instructions respect michigan action proceed honeywell confident caps upheld liability healthcare coverage premiums respect putative class limited negotiated expressly set forth applicable mcbas event adverse ruling however honeywell’s postretirement benefits pre2003 retirees would increase approximately 150 million reflecting estimated value caps given uncertainty inherent litigation investigations including specific matters referenced believe possible develop estimates reasonably possible loss excess current accruals matters considering past experience existing accruals expect outcome matters either individually aggregate material adverse effect consolidated financial position contingencies resolved long periods time potential liabilities subject change due new developments changes settlement strategy impact evidentiary requirements could cause us pay damage awards settlements become subject equitable remedies could material adverse effect results operations operating cash flows periods recognized paid warranties guaranteeswe issued party following direct indirect guarantees december 31 2011 expect guarantees material adverse effect consolidated results operations financial position liquidity connection disposition certain businesses facilities indemnified purchasers expected cost remediation environmental contamination existing date disposition expected costs accrued environmental assessments made remedial efforts probable costs reasonably estimated normal course business issue product warranties product performance guarantees accrue estimated cost product warranties performance guarantees based contract terms historical experience time sale adjustments initial obligations warranties guarantees made changes obligations become reasonably estimable following table summarizes information concerning recorded obligations product warranties product performance guarantees product warranties product performance guarantees included following balance sheet accounts note 22 pension postretirement benefits sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees pension benefits substantially us employees provided noncontributory qualified nonqualified defined benefit pension plans us defined benefit pension plans comprise 77 percent projected benefit obligation nonus employees us citizens covered various retirement benefit arrangements considered defined benefit pension plans accounting purposes nonus defined benefit pension plans comprise 23 percent projected benefit obligation also sponsor postretirement benefit plans provide health care benefits life insurance coverage eligible retirees retiree medical plans mainly cover us employees retire pension eligibility hospital professional medical services us retiree medical plans require deductibles copayments virtually integrated medicare retiree contributions generally required based coverage type plan medicare eligibility nonunion hourly salaried employees joining honeywell january 1 2000 eligible participate retiree medical life insurance plans approximately 5 percent honeywell’s us employees eligible retiree medical subsidy company subsidy limited fixeddollar amount addition half current retirees either company subsidy fixed dollar subsidy amount significantly limits exposure impact future health care cost increases retiree medical life insurance plans funded claims expenses paid operating cash flow 2011 connection new collective bargaining agreements reached several union groups honeywell amended us retiree medical plans eliminating subsidy union employees resulting curtailment gains totaling 167 million curtailment gains represent recognition net periodic postretirement benefit cost prior service credits attributable future years service union groups future accrual benefits eliminated 2010 honeywell amended us retiree medical plan longer offer certain postage65 retirees honeywell group coverage facilitate purchase individual plan medicare marketplace plan amendment reduced accumulated postretirement benefit obligation 137 million recognized part net periodic postretirement benefit cost average future service period full eligibility remaining active union employees still eligible retiree medical subsidy also 2010 connection new collective bargaining agreement reached one union groups honeywell amended us retiree medical plan eliminating subsidy union employees retire february 1 2013 plan amendment reduced accumulated postretirement benefit obligation 39 million recognized part net periodic postretirement benefit cost average future service period full eligibility remaining active union employees still eligible retiree medical subsidy plan amendment also resulted curtailment gain 37 million 2010 represented recognition net periodic postretirement benefit cost prior service credits attributable future years service union group future accrual benefits eliminated 2009 honeywell amended us retiree medical plan eliminating subsidy active nonunion employees retire september 1 2009 employees already retired september 1 2009 affected change plan amendment reduced accumulated postretirement benefit obligation 180 million representing elimination benefits attributable years service already rendered active nonunion employees eligible retire eligible nonunion employees assumed retire prior september 1 2009 reduction accumulated postretirement benefit obligation recognized part net periodic postretirement benefit cost average future service period full eligibility remaining active union employees still eligible retiree medical subsidy plan amendment also resulted curtailment gain 98 million 2009 represented recognition net periodic post retirement benefit cost prior service credits attributable future years service employee group future accrual benefits eliminated following tables summarize balance sheet impact including benefit obligations assets funded status associated significant pension postretirement benefit plans december 31 2011 2010 1 included assets consolidated balance sheet 2 included liabilities noncurrent consolidated balance sheet 1 excludes nonus plans 50 46 million 2011 2010 respectively amounts recognized accumulated comprehensive income loss associated significant pension postretirement benefit plans december 31 2011 2010 follows components net periodic benefit cost amounts recognized comprehensive income loss significant plans years ended december 31 2011 2010 2009 include following components estimated prior service cost pension benefits amortized accumulated comprehensive income loss net periodic benefit cost 2012 expected 28 million 2 million us nonus benefit plans respectively estimated net loss prior service credit postretirement benefits amortized accumulated comprehensive income loss net periodic benefit cost 2012 expected 40 15 million respectively major actuarial assumptions used determining benefit obligations net periodic benefit cost significant benefit plans presented following table discount rate us pension postretirement benefits plans reflects current rate associated liabilities could settled measurement date december 31 determine discount rates us pension postretirement benefit plans use modeling process involves matching expected cash outflows benefit plans yield curve constructed portfolio high quality fixedincome debt instruments use average yield hypothetical portfolio discount rate benchmark discount rate used determine postretirement benefit obligation lower principally due shorter expected duration postretirement plan obligations compared pension plan obligations expected rate return us plan assets 8 percent longterm rate based historical plan asset returns varying longterm periods combined expectations future market conditions asset mix plan’s investments review expected rate return annual basis revise appropriate nonus benefit plans none individually material assumptions reflect economic assumptions applicable country pension benefits included aggregate data tables amounts applicable pension plans accumulated benefit obligations exceeding fair value plan assets amounts related plans follows accumulated benefit obligation us defined benefit pension plans 148 143 billion nonus defined benefit plans 44 41 billion december 31 2011 2010 respectively asset investment strategy us pension plans focuses maintaining diversified portfolio using various asset classes order achieve longterm investment objectives risk adjusted basis actual invested positions various securities change time based short longerterm investment opportunities achieve objectives established longterm target allocations follows 6070 percent equity securities 1020 percent fixed income securities cash 515 percent real estate investments 1020 percent types investments equity securities include publiclytraded stock companies located inside outside united states fixed income securities include corporate bonds companies diversified industries mortgagebacked securities us treasuries real estate investments include direct investments commercial properties investments real estate funds types investments include investments private equity hedge funds follow several different strategies review assets regular basis ensure within targeted asset allocation ranges necessary asset balances adjusted back within target allocations nonus pension assets typically managed decentralized fiduciary committees honeywell corporate investments group providing standard funding investment guidance local regulations local funding rules local financial tax considerations part funding investment allocation process country nonus investment policies different country longterm investment objectives generally us pension assets fair values us nonus pension plans assets december 31 2011 2010 asset category follows following tables summarize changes fair value level 3 assets years ended december 31 2011 2010 us pension assets december 31 2011 2010 include 976 834 million respectively notional derivative exposure primarily related outstanding equity futures contracts company enters futures contracts gain exposure certain markets common stocks preferred stocks real estate investment trusts shortterm investments valued closing price reported active market individual securities traded corporate bonds mortgages assetbacked securities government securities valued either using pricing models bids provided brokers dealers quoted prices securities similar characteristics discounted cash flows include adjustments certain risks may observable credit liquidity risks certain securities held commingled funds valued using net asset values provided administrators funds investments private equity debt real estate hedge funds direct private investments valued estimated fair value based quarterly financial information received investment advisor andor general partner investments real estate properties valued quarterly basis using income approach valuation estimates periodically supplemented third party appraisals general funding policy qualified pension plans contribute amounts least sufficient satisfy regulatory funding standards 2011 2010 2009 required make contributions us pension plans however made voluntary contributions 1650 1000 740 million respectively primarily improve funded status plans contributions reflect benefits paid directly company assets 2012 expect make cash contributions 800 million 1 billion 250 million made january 2012 global defined benefit pension plans principally improve funded status plans also satisfy regulatory funding standards nonus plans benefit payments including amounts paid company assets reflecting expected future service appropriate expected paid follows postretirement benefits medicare prescription drug improvement modernization act 2003 act provides subsidies employers sponsor postretirement health care plans provide prescription drug coverage least actuarially equivalent offered medicare part march 2010 enactment patient protection affordable care act including modifications made health care education reconciliation act 2010 resulted onetime noncash charge 13 million related income taxes first quarter 2010 charge results change tax treatment medicare part program assumed health care cost trend rate significant effect amounts reported onepercentagepoint change assumed health care cost trend rate would following effects benefit payments reflecting expected future service appropriate expected paid follows employee savings plans sponsor employee savings plans match form common stock savings plan contributions certain eligible employees shares issued stock match plans 26 24 48 million cost 138 105 158 million 2011 2010 2009 respectively note 23 segment financial data globally manage business operations four reportable operating segments serving customers worldwide aerospace products services control sensing security technologies buildings homes industry automotive products chemicals segment information consistent management reviews businesses makes investing resource allocation decisions assesses operating performance four reportable segments follows • aerospace includes air transport regional business general aviation defense space provides products services include auxiliary power units propulsion engines environmental control systems electric power systems engine controls repair overhaul services flight safety communications navigation radar surveillance systems aircraft lighting management technical services logistic services advanced systems instruments aircraft wheels brakes • automation control solutions includes energy safety security controls heating cooling indoor air quality ventilation humidification lighting home automation advanced software applications homebuilding control optimization sensors switches control systems instruments measuring pressure air flow temperature electrical current security fire gas detection personal protection equipment access control video surveillance equipment remote patient monitoring systems automatic identification data collection process solutions provides full range automation control solutions industrial plants offering advanced software automation systems integrate control monitor complex processes many types industrial settings well equipment controls measures analyzes natural gas production transportation building solutions distribution installs distributes maintains upgrades systems keep buildings safe comfortable productive • performance materials technologies includes advanced materials fluorocarbons hydrofluoroolefins caprolactam resins ammonium sulfate fertilizer specialty films waxes additives advanced fibers customized research chemicals intermediates electronic materials chemicals uop catalysts adsorbents • transportation systems includes turbochargers thermal systems brake hard parts friction materials accounting policies segments described note 1 honeywell’s senior management evaluates segment performance based segment profit segment profit measured business unit income loss taxes excluding general corporate unallocated expense income expense interest financial charges pension postretirement benefits expense stock compensation expense repositioning charges accounting changes reconciliation segment profit consolidated income continuing operations taxes follows 1 equity incomeloss affiliated companies included segment profit 2 amounts included cost products services sold selling general administrative expenses note 24 geographic areas financial data 1 sales geographic areas approximate market significant net sales classified according country origin included united states net sales export sales 4549 3629 3548 million 2011 2010 2009 respectively 2 longlived assets comprised property plant equipment goodwill intangible assets note 25 supplemental cash flow information note 26 unaudited quarterly financial information 1 year ended december 31 2011 income discontinued operations includes 178 million net tax gain resulting sale cpg business funded portion 2011 repositioning actions report independent registered public accounting firm board directors shareholders honeywell international inc opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position honeywell international inc subsidiaries december 31 2011 2010 results operations cash flows three years period ended december 31 2011 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2011 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting item 9a responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp florham park new jersey february 17 2012 item 9item 8 financial statements supplementary data honeywell international inc consolidated statement operations notes financial statements integral part statement honeywell international inc consolidated statement comprehensive income notes financial statements integral part statement honeywell international inc consolidated balance sheet notes financial statements integral part statement honeywell international inc consolidated statement cash flows notes financial statements integral part statement honeywell international inc consolidated statement shareowners’ equity notes financial statements integral part statement honeywell international inc notes financial statements dollars millions except per share amounts note 1 summary significant accounting policies accounting principlesthe financial statements accompanying notes prepared accordance accounting principles generally accepted united states america following description honeywell’s significant accounting policies principles consolidationthe consolidated financial statements include accounts honeywell international inc subsidiaries entities controlling interest maintained consolidation policy requires equity investments exercise significant influence control investee primary beneficiary investee’s activities accounted using equity method investments able exercise significant influence investee readily determinable fair values accounted cost method intercompany transactions balances eliminated consolidation consumer products group cpg automotive aftermarket business historically part transportation systems reportable segment accordance generally accepted accounting principles cpg presented discontinued operations periods presented see note 2 acquisitions divestitures details noncontrolling interest included within equity section consolidated balance sheet redeemable noncontrolling interest considered temporary equity therefore reported outside permanent equity consolidated balance sheet greater initial carrying amount adjusted noncontrolling interest’s share net income loss redemption value present net income attributable honeywell noncontrolling interest consolidated statement operations furthermore disclose comprehensive income attributable honeywell noncontrolling interest consolidated statement comprehensive income cash equivalentscash cash equivalents include cash hand deposit highly liquid temporary cash investments original maturity three months less inventoriesinventories valued lower cost market using firstin firstout average cost method lastin firstout lifo method certain qualifying domestic inventories investmentsinvestments affiliates significant influence controlling interest accounted using equity method accounting investments carried market value readily determinable cost equity investments periodically reviewed determine declines fair value cost basis otherthantemporary significant sustained decreases quoted market prices series historic projected operating losses investees strong indicators otherthantemporary declines decline fair value determined thantemporary impairment loss recorded investment written new carrying value property plant equipmentproperty plant equipment recorded cost including asset retirement obligations less accumulated depreciation financial reporting straightline method depreciation used estimated useful lives 10 50 years buildings improvements 2 16 years machinery equipment recognition fair value obligations associated retirement tangible longlived assets required legal obligation incur costs upon initial recognition liability cost capitalized part related longlived asset depreciated corresponding asset’s useful life see note 11 property plant equipmentnet note 17 liabilities additional details goodwill indefinitelived intangible assetsgoodwill represents excess acquisition costs fair value tangible net assets identifiable intangible assets businesses acquired goodwill certain intangible assets deemed indefinite lives amortized intangible assets determined finite lives amortized useful lives goodwill indefinitelived intangible assets subject impairment testing annually march honeywell international inc notes financial statementscontinued dollars millions except per share amounts 31 whenever events changes circumstances indicate carrying amount may fully recoverable testing compares carrying values fair values appropriate carrying value assets reduced fair value completed annual goodwill impairment test march 31 2013 determined impairment date see note 12 additional details goodwill balances intangible assets determinable livesother intangible assets determinable lives consist customer lists technology patents trademarks intangibles amortized estimated useful lives ranging 2 24 years longlived assetswe evaluate recoverability carrying amount longlived assets including property plant equipment intangible assets determinable lives whenever events changes circumstances indicate carrying amount asset may fully recoverable evaluate events changes circumstances based number factors including operating results business plans forecasts general industry trends economic projections anticipated cash flows impairment assessed undiscounted expected future cash flows derived asset less carrying amount impairment losses measured amount carrying value asset exceeds fair value recognized earnings also evaluate estimated useful lives longlived assets circumstances warrant revise estimates based current events sales recognitionproduct service sales recognized persuasive evidence arrangement exists product delivery occurred services rendered pricing fixed determinable collection reasonably assured service sales principally representing repair maintenance engineering activities aerospace automation control solutions segments recognized contractual period services rendered sales longterm contracts aerospace automation control solutions performance materials technologies segments recorded percentageofcompletion method measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts provisions anticipated losses longterm contracts recorded full losses become evident revenues contracts multiple element arrangements recognized element earned based relative fair value element provided delivered elements value customers standalone basis amounts allocated element based objectively determined fair value sales price product service sold separately competitor prices similar products services allowance doubtful accountswe maintain allowances doubtful accounts estimated losses result customer’s inability make required payments estimate anticipated losses doubtful accounts based days past due measured contractual due date historical collection history incorporate changes economic conditions may reflected historical trends example customers bankruptcy liquidation reorganization receivables writtenoff allowance doubtful accounts determined uncollectible determination includes analysis consideration particular conditions account including time intervals since last collection success outside collection agencies activity solvency customer bankruptcy proceedings environmental expendituresenvironmental expenditures relate current operations expensed capitalized appropriate expenditures relate existing condition caused past operations provide future benefits expensed incurred liabilities recorded environmental remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical regulatory legal information becomes available given uncertainties regarding status laws regulations enforcement policies honeywell international inc notes financial statementscontinued dollars millions except per share amounts impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental losses excess recorded liabilities asbestos related contingencies insurance recoverieshoneywell defendant personal injury actions related products containing asbestos refractory friction products recognize liability asbestos related contingency probable occurrence reasonably estimable regarding north american refractories company narco asbestos related claims accrued pending claims based terms conditions agreements narco former parent company certain asbestos claimants estimate unsettled claims pending time narco filed bankruptcy protection also accrued estimated value future narco asbestos related claims expected asserted narco trust 2018 described note 22 commitments contingencies light inherent uncertainties making long term projections connection initial operation 524g trust well stay narco asbestos claims january 2002 effective date narco trust april 30 2013 believe reasonable basis estimating narco asbestos claims beyond 2018 regarding bendix asbestos related claims accrued estimated value pending claims using average resolution values previous five years also accrued estimated value future anticipated claims related bendix next five years based historic claims filing experience dismissal rates disease classifications average resolution values tort system previous five years light uncertainties inherent making longterm projections well certain factors unique friction product asbestos claims believe reasonable basis estimating asbestos claims beyond next five years continue update resolution values used estimate cost pending future bendix claims fourth quarter year additional information see note 22 continually assess likelihood adverse judgments outcomes contingencies well potential ranges probable losses recognize liability contingencies based analysis individual issue assistance outside legal counsel applicable experts connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical dealings knowledge pertinent solvency issues surrounding insurers aerospace sales incentiveswe provide sales incentives commercial aircraft manufacturers airlines connection selection aircraft equipment predominately wheel braking system hardware avionics auxiliary power units installation commercial aircraft incentives consist free deeply discounted products credits future purchases product upfront cash payments costs recognized period incurred cost products sold reduction sales appropriate generally aircraft manufacturers incentives recorded products delivered airlines incentives recorded associated aircraft delivered aircraft manufacturer airline research developmentresearch development costs companysponsored research development projects expensed incurred costs principally included cost products sold 1804 1847 1799 million 2013 2012 2011 respectively stockbased compensation plansthe principal awards issued stockbased compensation plans described note 20 stockbased compensation plans include nonqualified stock options restricted stock units rsus cost awards measured grant date based fair value award value portion award ultimately expected vest recognized expense requisite service periods generally honeywell international inc notes financial statementscontinued dollars millions except per share amounts vesting period equity award included selling general administrative expense consolidated statement operations forfeitures estimated time grant recognize expense awards expected vest based historical forfeiture rates pension benefitswe sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees recognize net actuarial gains losses excess 10 percent greater fair value plan assets plans’ projected benefit obligation corridor annually fourth quarter year mtm adjustment applicable quarter interim remeasurement triggered remaining components pension expense primarily service interest costs assumed return plan assets recorded quarterly basis pension ongoing income expense foreign currency translationassets liabilities subsidiaries operating outside united states functional currency us dollars translated us dollars using yearend exchange rates sales costs expenses translated average exchange rates effect year foreign currency translation gains losses included component accumulated comprehensive income loss subsidiaries operating highly inflationary environments inventories property plant equipment including related expenses remeasured exchange rate effect date assets acquired monetary assets liabilities remeasured yearend exchange rates remeasurement adjustments subsidiaries included earnings derivative financial instrumentsas result global operating financing activities exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position minimize risks interest foreign currency exchange rate commodity price fluctuations normal operating financing activities deemed appropriate use derivative financial instruments derivative financial instruments used manage risk used trading speculative purposes use leveraged derivative financial instruments derivative financial instruments qualify hedge accounting must designated effective hedge identified risk exposure inception contract accordingly changes fair value derivative contract must highly correlated changes fair value underlying hedged item inception hedge life hedge contract derivatives recorded balance sheet assets liabilities measured fair value derivatives designated hedges fair value assets liabilities changes fair values derivatives hedged items recorded current earnings derivatives designated cash flow hedges effective portion changes fair value derivatives recorded accumulated comprehensive income loss subsequently recognized earnings hedged items impact earnings cash flows derivative financial instruments classified consistent underlying hedged item transfers financial instrumentssales transfers securitization financial instruments accounted authoritative guidance transfers servicing financial assets extinguishments liabilities sell interests designated pools trade accounts receivables third parties terms trade accounts receivable program permit repurchase receivables third parties discretion result program receivables accounted sale remain consolidated balance sheet corresponding amount recorded shortterm borrowings times also transfer trade receivables qualify sale thus removed consolidated balance sheet time sold value assigned subordinated interests undivided interests retained receivables sold based relative fair honeywell international inc notes financial statementscontinued dollars millions except per share amounts values interests retained sold carrying value retained interests approximates fair value due shortterm nature collection period receivables income taxesdeferred tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred tax asset based upon available evidence likely deferred tax assets realized determination amount valuation allowance provided recorded deferred tax assets involves estimates regarding 1 timing amount reversal taxable temporary differences 2 expected future taxable income 3 impact tax planning strategies valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax asset realized assessing need valuation allowance consider available positive negative evidence including past operating results projections future taxable income feasibility ongoing tax planning strategies projections future taxable income include number estimates assumptions regarding volume pricing costs additionally valuation allowances related deferred tax assets impacted changes tax laws significant judgment required determining income tax provisions evaluating tax positions establish additional reserves income taxes despite belief tax positions fully supportable remain certain positions meet minimum recognition threshold approach evaluating certain uncertain tax positions defined authoritative guidance determines tax position likely sustained upon examination applicable taxing authority normal course business company subsidiaries examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes continually assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts give rise change estimate become known earnings per sharebasic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding dilutive potential common shares outstanding use estimatesthe preparation consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts financial statements related disclosures accompanying notes actual results could differ estimates assumptions periodically reviewed effects revisions reflected consolidated financial statements period determined necessary reclassificationscertain prior year amounts reclassified conform current year presentation recent accounting pronouncementschanges accounting principles generally accepted united states america us gaap established financial accounting standards board fasb form accounting standards updates asu’s fasb’s accounting standards codification company considers applicability impact asu’s asu’s listed assessed determined either applicable expected minimal impact consolidated financial position results operations honeywell international inc notes financial statementscontinued dollars millions except per share amounts may 2011 fasb issued amendments clarify application existing fair value measurements expand existing disclosure requirements amendments effective interim annual periods beginning december 15 2011 early adoption prohibited resulted common definition fair value common requirements measurement disclosure requirements us gaap international financial reporting standards implementation amended accounting guidance material impact consolidated financial position results operations june 2011 fasb issued amendments disclosure requirements presentation comprehensive income guidance effective retrospectively interim annual periods beginning december 15 2011 early adoption permitted required presentation total comprehensive income components net income components comprehensive income either single continuous statement comprehensive income two separate consecutive statements december 2011 fasb issued amendment defer presentation face financial statements effects reclassifications accumulated comprehensive income components net income comprehensive income annual interim financial statements implementation amended accounting guidance material impact consolidated financial position results operations february 2013 fasb issued amendments disclosure requirements presentation comprehensive income standard required presentation either single note parenthetically face financial statements effect significant amounts reclassified component accumulated comprehensive income based source income statement line items affected reclassification component required reclassified net income entirety cross reference related footnote additional information would required amendments effective prospectively reporting periods beginning december 15 2012 early adoption permitted since amendments accounting guidance impacted presentation disclosure requirements adoption material impact consolidated financial position results operations september 2011 fasb issued amendments goodwill impairment guidance provided option companies use qualitative approach test goodwill impairment certain conditions met amendments effective annual interim goodwill impairment tests performed fiscal years beginning december 15 2011 early adoption permitted implementation amended accounting guidance material impact consolidated financial position results operations july 2012 fasb issued amendments indefinitelived intangible asset impairment guidance provided option companies use qualitative approach test indefinitelived intangible assets impairment certain conditions met amendments effective annual interim indefinitelived intangible asset impairment tests performed fiscal years beginning september 15 2012 implementation amended accounting guidance material impact consolidated financial position results operations february 2013 fasb issued amendments guidance obligations resulting joint several liability arrangements amended guidance requires entity measure obligations resulting joint several liability arrangements sum 1 amount obligation within scope guidance fixed reporting date amount reporting entity agreed pay basis arrangement among coobligors 2 additional amount reporting entity expects pay behalf coobligors guidance also requires entity disclose nature amount obligation well information obligations amendments applied retrospectively prior periods presented obligations within scope guidance exist beginning entity’s fiscal year adoption amendments effective fiscal years interim periods within years beginning honeywell international inc notes financial statementscontinued dollars millions except per share amounts december 15 2013 early adoption permitted implementation amended accounting guidance expected material impact consolidated financial position results operations march 2013 fasb issued amendments address accounting cumulative translation adjustment parent either sells part investment foreign entity longer holds controlling financial interest subsidiary group assets nonprofit activity business within foreign entity amendments effective prospectively fiscal years interim reporting periods within years beginning december 15 2013 early adoption permitted initial adoption impact consolidated financial position results operations july 2013 fasb issued amendments allow federal funds effective swap rate overnight index swap rate ois rate us designated benchmark interest rate hedge accounting purposes derivatives hedging guidance amendments also allowed use different benchmark rates similar hedges amendments effective prospectively qualifying new redesignated hedging relationships entered july 17 2013 initial adoption impact consolidated financial position results operation july 2013 fasb issued amendments guidance financial statement presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists amendments require entities present unrecognized tax benefit netted certain deferred tax assets specific requirements met however amendments affect gross versus net presentation impact calculation unrecognized tax benefit amendments effective fiscal years interim periods within years beginning december 15 2013 early adoption permitted implementation amended accounting guidance expected material impact consolidated financial position note 2 acquisitions divestitures acquisitionswe acquired businesses aggregate cost net cash acquired 1133 million 438 million 973 million 2013 2012 2011 respectively acquisitions acquired businesses recorded estimated fair values dates acquisition significant acquisitions made years discussed september 17 2013 company acquired 100 percent issued outstanding shares intermec leading provider mobile computing rfid bar code label receipt printers use warehousing supply chain field service manufacturing environments intermec us public company operated globally reported 2012 revenues 790 million aggregate value net cash acquired 607 million allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date preliminary basis company assigned 257 million identifiable intangible assets predominantly customer relationships existing technology trademarks intangible assets amortized estimated lives range 4 15 years using straightline accelerated amortization methods excess purchase price estimated fair values net assets acquired approximating 349 million recorded goodwill arises primarily avoidance time costs would required associated risks would encountered enhance product offerings key target markets enter new profitable segments expected cost synergies realized consolidation acquired business within automation control solutions segment goodwill nondeductible tax purposes honeywell international inc notes financial statementscontinued dollars millions except per share amounts june 3 2013 company acquired rae global manufacturer fixed portable gas radiation detection systems software aggregate value net cash acquired 338 million allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date preliminary basis company assigned approximately 102 million identifiable intangible assets predominantly customer relationships existing technology trademarks intangible assets amortized estimated lives range 3 15 years using straightline accelerated amortization methods excess purchase price estimated fair values net assets acquired approximating 264 million recorded goodwill arises primarily avoidance time costs would required associated risks would encountered enhance product offerings key target markets enter new profitable segments expected cost synergies realized consolidation acquired business within automation control solutions segment goodwill nondeductible tax purposes results intermec rae acquisition dates december 31 2013 included automation control solutions segment results material consolidated financial statements december 31 2013 purchase accounting intermec rae subject final adjustment primarily amounts allocated intangible assets goodwill useful lives intangible assets certain preacquisition contingencies valuation inventory property plant equipment october 22 2012 company acquired 70 percent controlling interest thomas russell co privatelyheld leading provider technology equipment natural gas processing treating approximately 525 million 368 million net cash acquired thomas russell co’s results operations consolidated performance materials technologies segment noncontrolling interest portion reflected net income attributable noncontrolling interest consolidated statement operations calendar year 2016 honeywell right acquire noncontrolling shareholder right sell honeywell remaining 30 percent interest price based multiple thomas russell co’s average annual operating income 2013 2015 subject predetermined cap floor additionally honeywell right acquire remaining 30 percent interest fixed price equivalent cap time december 31 2015 see note 21 redeemable noncontrolling interest aggregate value thomas russell co allocated tangible identifiable intangible assets acquired liabilities assumed based consolidated estimated fair values acquisition date company assigned approximately 205 million identifiable intangible assets intangible assets predominantly backlog technology trademarks intangible assets amortized estimated lives range 3 10 years using straightline accelerated amortization methods excess purchase price estimated fair values net assets acquired approximating 453 million recorded goodwill arises primarily avoidance time costs would required associated risks would encountered enhance product offerings key target markets serve entry new profitable businesses within performance materials technologies segment interest acquired goodwill deductible tax purposes honeywell international inc notes financial statementscontinued dollars millions except per share amounts following amounts represent final determination fair value identifiable assets acquired liabilities assumed results acquisition date december 31 2012 included performance materials technologies segment material consolidated financial statements december 2011 company acquired king’s safetywear limited ksw leading international provider branded safety footwear aggregate value net cash acquired approximately 331 million including assumption debt 33 million allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned approximately 167 million identifiable intangible assets predominantly trademarks technology customer relationships definite lived intangible assets amortized estimated lives using straightline accelerated amortization methods value assigned trademarks approximately 84 million classified indefinite lived intangibles excess purchase price estimated fair values net assets acquired approximately 157 million recorded goodwill arises primarily avoidance time costs would required associated risks would encountered enhance product offerings key target markets serve entry new profitable segments expected cost synergies realized consolidation acquired business automation control solutions segment cost synergies expected realized principally areas selling general administrative expenses material sourcing manufacturing goodwill nondeductible tax purposes results acquisition date december 31 2011 included automation control solutions segment material consolidated financial statements august 2011 company acquired 100 percent issued outstanding shares ems technologies inc ems leading provider connectivity solutions mobile networking rugged mobile computers satellite communications ems reported 2010 revenues approximately 355 million aggregate value net cash acquired approximately 513 million allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned approximately 119 million identifiable intangible assets approximately 89 million approximately 30 million recorded within aerospace automation control segments respectively intangible assets predominantly customer relationships existing technology trademarks intangible assets amortized estimated lives using straightline accelerated amortization methods excess purchase price estimated fair values net assets acquired approximating 314 million recorded goodwill arises primarily avoidance time costs would required associated risks would encountered enhance product offerings key target markets serve entry new profitable segments expected cost synergies realized consolidation acquired business honeywell international inc notes financial statementscontinued dollars millions except per share amounts aerospace automation control solutions segments cost synergies expected realized principally areas selling general administrative expenses material sourcing manufacturing goodwill nondeductible tax purposes results acquisition date december 31 2011 included aerospace automation control solutions segments material consolidated financial statements connection acquisitions 2013 2012 2011 amounts recorded transaction costs integrating acquired businesses honeywell material proforma results 2013 2012 2011 assuming acquisitions made beginning comparable prior year would materially different consolidated reported results divestituresin january 2014 company entered definitive agreement sell friction materials business federal mogul corporation approximately 155 million transaction subject required regulatory approvals applicable information consultation requirements expected close second half 2014 company recognized pretax aftertax loss approximately 28 million fourth quarter 2013 sale friction materials part transportation systems segment consistent company’s strategic focus portfolio differentiated global technologies july 2011 company sold consumer products group business cpg rank group limited sale completed approximately 955 million cash proceeds resulting pretax gain approximately 301 million approximately 178 million net tax gain recorded net income discontinued operations taxes company’s consolidated statement operations year ended december 31 2011 net income attributable noncontrolling interest discontinued operations insignificant sale cpg part transportation systems segment consistent company’s strategic focus portfolio differentiated global technologies key components income discontinued operations related cpg follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 3 repositioning charges summary repositioning charges follows following table summarizes pretax distribution total net repositioning charges income statement classification following table summarizes pretax impact total net repositioning charges segment 2013 recognized repositioning charges totaling 231 million including severance costs 186 million related workforce reductions 3081 manufacturing administrative positions across segments workforce reductions primarily related cost savings actions taken connection productivity ongoing functional transformation initiatives achieving acquisitionrelated synergies automation control solutions segment outsourcing noncore components aerospace transportation systems segments shutdown manufacturing facility performance materials technologies segment factory transitions automation control solutions segment costeffective locations repositioning charges include asset impairments 23 million primarily related manufacturing plant equipment associated shutdown manufacturing facility performance materials technologies segment repositioning charges also includes exit costs 22 million primarily related closure obligations associated shutdown manufacturing facilities costs early termination lease contracts also 30 million previously established accruals primarily severance automation control solutions performance materials technologies segments returned income 2013 due changes scope previously announced honeywell international inc notes financial statementscontinued dollars millions except per share amounts repositioning actions lower expected costs completing exit product line fewer employee severance actions caused higher attrition originally planned associated prior severance programs 2012 recognized repositioning charges totaling 119 million including severance costs 91 million related workforce reductions 2204 manufacturing administrative positions across segments workforce reductions primarily related planned shutdown manufacturing facility transportation systems segment exit product line performance materials technologies segment cost savings actions taken connection productivity ongoing functional transformation initiatives repositioning charge also included asset impairments 12 million principally related manufacturing plant equipment associated exit product line performance materials technologies segment repositioning charge also included exit costs 16 million principally related closure obligations associated planned shutdown manufacturing facility transportation systems segment exit product line performance materials technologies segment also 66 million previously established accruals primarily severance automation control solutions aerospace performance materials technologies segments returned income 2012 due primarily fewer employee severance actions caused higher attrition originally planned associated prior severance programs changes scope previously announced repositioning actions 2011 recognized repositioning charges totaling 380 million including severance costs 246 million related workforce reductions 3188 manufacturing administrative positions across segments workforce reductions primarily related planned shutdown manufacturing facility transportation systems segment cost savings actions taken connection productivity ongoing functional transformation initiatives factory transitions connection acquisitionrelated synergies automation control solutions aerospace segments exit andor rationalization certain product lines markets performance materials technologies automation control solutions segments consolidation repair facilities aerospace segment factory consolidations andor rationalizations organizational realignments businesses automation control solutions segment repositioning charges included asset impairments 86 million principally related writeoff certain intangible assets automation control solutions segment due change branding strategy manufacturing plant equipment associated planned shutdown manufacturing facility exit product line factory transition discussed repositioning charges also included exit costs 48 million principally costs terminate contracts related exit market product line factory transition discussed exit costs also included closure obligations associated planned shutdown manufacturing facility exit product line also discussed also 26 million previously established accruals primarily severance aerospace automation control solutions segments returned income 2011 due principally fewer employee separations originally planned associated prior severance programs honeywell international inc notes financial statementscontinued dollars millions except per share amounts following table summarizes status total repositioning reserves certain repositioning projects aerospace automation control solutions transportation systems segments included exit disposal activities costs related recognized future periods actual liability incurred nature exit disposal costs includes asset setup moving product recertification requalification employee retention training travel following table summarizes segment expected incurred remaining exit disposal costs related 2011 repositioning actions able recognize time actions initiated exit disposal costs related repositioning actions 2013 2012 able recognize time actions initiated significant 2013 2012 2011 recognized charges 272 234 240 million respectively environmental liabilities deemed probable reasonably estimable year 2013 included charge 58 million fourth quarter related onondaga lake syracuse new york mainly reflecting updated estimates completion dredging capping components approved lake remedy 2013 2012 2011 recognized asbestos related litigation charges net insurance 181 156 149 million respectively environmental asbestos matters honeywell international inc notes financial statementscontinued dollars millions except per share amounts discussed detail note 22 commitments contingencies notes financial statements 2013 also recognized charges 9 million related resolution legal matters note 4 income expense gain sale available sale investments 2013 due 195 million realized gain related sale marketable equity securities aerospace common stock designated available sale obtained conjunction sale consumables solutions business july 2008 see note 16 financial instruments fair value measures details loss sale nonstrategic business assets 2013 includes pretax loss approximately 28 million related pending divestiture friction materials business within transportation systems segment see note 2 acquisitions divestitures details gain sale nonstrategic businesses assets 2011 includes 50 million pretax gain 31 million net tax related divestiture automotive onboard sensor products business within automation control solutions segment net 2011 includes loss 29 million resulting early redemption debt first quarter 2011 see note 14 longterm debt credit agreements details note 5 interest financial charges weighted average interest rate shortterm borrowings commercial paper outstanding december 31 2013 2012 079 percent 143 percent respectively note 6 income taxes income continuing operations taxes honeywell international inc notes financial statementscontinued dollars millions except per share amounts tax expense benefit effective tax rate increased 24 percentage points 2013 compared 2012 year increase primarily attributable lower marktomarket pension expense us factors causing increase effective tax rate include higher tax expense related increase tax reserves higher state tax expense increases effective tax rate partially offset tax benefits retroactive law changes us company’s foreign effective tax rate 2013 190 percent increase approximately 20 percentage points compared 2012 year increase foreign effective tax rate primarily attributable higher expense related retroactive tax law changes germany additional reserves various jurisdictions coupled higher earnings higher tax rate jurisdictions effective tax rate lower us statutory rate 35 percent primarily due overall foreign earnings taxed lower rates honeywell international inc notes financial statementscontinued dollars millions except per share amounts effective tax rate increased 61 percentage points 2012 compared 2011 primarily due change mix earnings taxed higher rates primarily driven approximate 61 percentage point impact decrease pension marktomarket expense decreased benefit valuation allowances decreased benefit settlement tax audits absence us rd tax credit partially offset decreased expense related tax reserves foreign effective tax rate 170 percent decrease approximately 41 percentage points primarily consisted 100 percent impact related decrease tax reserves partially offset 52 percent impact increased valuation allowances net operating losses primarily due decrease luxembourg french earnings available offset net operating loss carry forwards 14 percent impact tax expense related foreign exchange effective tax rate lower us statutory rate 35 percent primarily due overall foreign earnings taxed lower rates deferred tax assets liabilities deferred income taxes represent future tax effects transactions reported different periods tax financial reporting purposes tax effects temporary differences tax carryforwards give rise future income tax benefits payables follows net deferred tax assets included components current noncurrent deferred income taxes accrued liabilities within consolidated balance sheet approximately 45 million us federal tax net operating losses available carryforward december 31 2013 various expiration dates though 2032 carryforwards generated subsidiaries prior acquisition use preacquisition net operating loss carryforwards subject limitations imposed section 382 internal revenue code anticipate limitations affect utilization carryforwards prior expiration company state tax net operating loss carryforwards 27 billion december 31 2013 various expiration dates 2034 also foreign net operating capital losses 30 billion available reduce future income tax payments several countries subject varying expiration rules honeywell international inc notes financial statementscontinued dollars millions except per share amounts approximately 62 million us federal tax credits available carryforward december 31 2013 various expiration dates 2032 carryforwards generated subsidiaries prior acquisition use preacquisition tax credit carryforwards subject limitations imposed section 382 internal revenue code anticipate limitations affect utilization carryforwards prior expiration also state tax credit carryforwards 46 million december 31 2013 including carryforwards 40 million various expiration dates 2028 tax credits 6 million subject expiration approximately 173 million tax credits available carryforward foreign jurisdictions primarily canada december 31 2013 various expiration dates 2032 valuation allowance deferred tax assets increased 16 million 2013 increased 7 million decreased 45 million 2012 2011 respectively 2013 increase valuation allowance primarily due decreased earnings france luxembourg partially offset decrease valuation allowance germany united kingdom 2012 increase valuation allowance primarily due decreased earnings france luxembourg partially offset decrease valuation allowance related purchase accounting various acquisitions audit resolutions various countries 2011 decrease valuation allowance primarily due decreased foreign net operating losses related netherlands germany partially offset increase valuation allowance france luxembourg canada federal income taxes provided undistributed earnings majority international subsidiaries intention reinvest earnings respective subsidiaries december 31 2013 honeywell provided us federal income foreign withholding taxes approximately 135 billion earnings nonus operations practicable estimate amount tax might payable earnings repatriated amount foreign tax credits would available reduce eliminate resulting us income tax liability 729 million 722 million 815 million unrecognized tax benefits december 31 2013 2012 2011 respectively recognized 729 million would recorded component income tax expense december 31 2013 year ended december 31 2013 company increased unrecognized tax benefits 7 million due adjustments related ongoing assessment likelihood amount potential outcomes current future examinations partially offset expiration various statute limitations resolutions audits tax authorities year ended december 31 2012 company decreased unrecognized tax benefits 93 million due expiration various statute limitations resolutions audits tax authorities partially offset adjustments related ongoing assessment likelihood amount potential outcomes current future examinations following table summarizes activity related unrecognized tax benefits honeywell international inc notes financial statementscontinued dollars millions except per share amounts generally uncertain tax positions related tax years remain subject examination relevant tax authorities following table summarizes open tax years major jurisdiction december 31 2013 1 includes federal well state provincial similar local jurisdictions applicable based outcome examinations result expiration statute limitations specific jurisdictions reasonably possible certain unrecognized tax benefits tax positions taken previously filed tax returns materially change recorded liabilities uncertain tax positions financial statements addition outcome examinations may impact valuation certain deferred tax assets net operating losses future periods based number tax years currently audit relevant us federal state foreign tax authorities company anticipates several audits may finalized foreseeable future however based status examinations protocol finalizing audits relevant taxing authorities possibility company might challenge certain audit findings could include formal legal proceedings time possible estimate impact changes previously recorded uncertain tax positions unrecognized tax benefits examinations progress 431 million 443 million 482 million december 31 2013 2012 2011 respectively decrease 2012 2013 primarily due expiration various statute limitations resolutions audits tax authorities decrease 2011 2012 primarily due expiration various statute limitations resolutions audits tax authorities estimated interest penalties related underpayment income taxes classified component tax expense consolidated statement operations totaled 17 million 37 million 63 million years ended december 31 2013 2012 2011 respectively accrued interest penalties 301 million 284 million 247 million december 31 2013 2012 2011 respectively honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 7 earnings per share details earnings per share calculations years ended december 31 2013 2012 2011 follows diluted earnings per share calculations exclude effect stock options’ assumed proceeds exceed average market price common shares period 2013 2012 2011 weighted number stock options excluded computations 22 million 125 million 95 million respectively stock options outstanding end respective periods note 8 accounts notes receivables honeywell international inc notes financial statementscontinued dollars millions except per share amounts trade receivables includes 1609 1495 million unbilled balances longterm contracts december 31 2013 december 31 2012 respectively amounts billed accordance terms customer contracts relate note 9 inventories valued lifo amounted 405 325 million december 31 2013 2012 respectively lifo inventories valued current costs carrying values would approximately 166 197 million higher december 31 2013 2012 respectively note 10 investments longterm receivables decline investments balance december 31 2013 compared december 31 2012 primarily due reclassification available sale securities aerospace common stock investments current assets consolidated balance sheet longterm trade receivables include 26 million 31 million unbilled balances longterm contracts december 31 2013 2012 respectively amounts billed accordance terms customer contracts relate following table summarizes long term trade financing receivables segment including current portions receivables related allowances credit losses allowance credit losses detailed longterm trade financing receivables totaled 5 million 4 million december 31 2013 2012 respectively receivables evaluated recoverability individual basis including consideration credit quality detailed financing receivables predominately commercial governmental counterparties investment grade credit quality honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 11 property plant equipmentnet depreciation expense 670 660 699 million 2013 2012 2011 respectively note 12 goodwill intangible assetsnet change carrying amount goodwill years ended december 31 2013 2012 segment follows completed annual impairment testing goodwill indefinitelived intangibles march 31 2013 determined impairment date matters arisen subsequent date resulted change assessment intangible assets amortization expense 319 million 266 million 249 million 2013 2012 2011 respectively estimated intangible asset amortization expense next five years approximates 261 million 2014 217 million 2015 193 million 2016 183 million 2017 168 million 2018 honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 13 accrued liabilities honeywell international inc notes financial statements dollars millions except per share amounts note 14 longterm debt credit agreements schedule principal payments longterm debt follows march 2013 company repaid 600 million 425 percent notes november 2013 company issued 300 million 335 percent senior notes due 2023 700 million floating rate senior notes due 2015 collectively “notes” notes senior unsecured unsubordinated obligations honeywell rank equally honeywell’s existing future senior unsecured debt senior honeywell’s subordinated debt offering resulted gross proceeds 1 billion offset 7 million discount closing costs related offering december 10 2013 company entered 4 billion amended restated five year credit agreement “credit agreement” syndicate banks commitments credit agreement increased pursuant terms credit agreement aggregate amount exceed 45 billion credit agreement contains 700 million sublimit issuance honeywell international inc notes financial statementscontinued dollars millions except per share amounts letters credit agreement maintained general corporate purposes amends restates previous 3 billion five year credit agreement dated april 2 2012 “prior agreement” borrowings credit agreement prior agreement credit agreement restrict ability pay dividends contains financial covenants failure comply customary conditions occurrence customary events default contained credit agreement would prevent borrowings would generally require repayment outstanding borrowings credit agreement events default include nonpayment credit agreement debt interest fees b noncompliance terms credit agreement covenants c crossdefault debt certain circumstances bankruptcy insolvency e defaults upon obligations employee retirement income security act additionally banks right terminate commitment lend additional funds issue letters credit agreement person group acquires beneficial ownership 30 percent voting stock 12month period individuals directors honeywell beginning period cease constitute majority board directors credit agreement substantially material terms conditions prior agreement improvement pricing extension maturity loans credit agreement required repaid later december 10 2018 unless date extended pursuant terms credit agreement revolving credit borrowings credit agreement would bear interest honeywell’s option 1 rate equal highest floating base rate publicly announced citibank na b 05 percent federal funds rate c libor plus 100 percent plus 2 margin based honeywell’s credit default swap midrate spread subject floor cap set forth credit agreement “applicable margin” minus 100 percent provided margin shall less zero b rate equal libor plus applicable margin c competitive bidding procedure agreed pay commitment fee aggregate unused commitment credit agreement subject change based upon grid determined long term debt ratings credit agreement subject termination based upon decrease debt ratings material adverse change defined credit agreement source liquidity sell interests designated pools trade accounts receivables third parties december 31 2013 december 31 2012 none receivables designated pools sold third parties sell receivables overcollateralized retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools terms trade accounts receivable program permit repurchase receivables third parties discretion providing us additional source revolving credit result program receivables remain company’s balance sheet corresponding amount recorded shortterm borrowings honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 15 lease commitments future minimum lease payments operating leases initial remaining noncancellable lease terms excess one year follows entered agreements lease land equipment buildings principally operating leases initial terms 25 years contain renewal options subject customary conditions time terms leases may option purchase leased assets amounts approximate fair value expect commitments lease agreements material adverse effect consolidated results operations financial position liquidity rent expense 404 390 386 million 2013 2012 2011 respectively note 16 financial instruments fair value measures credit market riskfinancial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates commodity prices manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties derivative transactions substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value cash flows derivative financial instruments considering reasonably possible changes interest rates currency exchange rates commodity prices restrict use derivative financial instruments hedging activities continually monitor creditworthiness customers grant credit terms normal course business terms conditions credit sales designed mitigate eliminate concentrations credit risk single customer sales materially dependent single customer small group customers foreign currency risk managementwe conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities transactions arising international trade objective preserve economic value nonfunctional currency denominated cash flows attempt hedge transaction exposures natural offsets fullest extent possible opportunities exhausted foreign currency exchange forward option contracts third parties hedge monetary assets liabilities denominated nonfunctional currencies prior conversion us dollars assets liabilities remeasured spot exchange rates effect balance sheet date effects changes spot rates recognized earnings included income expense partially hedge forecasted sales purchases predominantly occur next twelve months denominated nonfunctional currencies honeywell international inc notes financial statementscontinued dollars millions except per share amounts currency forward contracts changes forecasted nonfunctional currency cash flows due movements exchange rates substantially offset changes fair value currency forward contracts designated hedges market value gains losses contracts recognized earnings hedged transaction recognized open foreign currency exchange forward contracts mature predominantly next twelve months december 31 2013 2012 contracts notional amounts 7298 million 8506 million respectively exchange foreign currencies principally us dollar euro canadian dollar british pound mexican peso indian rupee chinese renminbi czech koruna hong kong dollar korean singapore dollar swiss franc united arab emirates dirham swedish krona thai baht romanian leu commodity price risk managementour exposure market risk commodity prices result changes cost production primarily mitigate exposure commodity price risk use longterm fixedprice contracts suppliers formula price agreements suppliers customers also enter forward commodity contracts third parties designated hedges anticipated purchases several commodities forward commodity contracts markedtomarket resulting gains losses recognized earnings hedged transaction recognized december 31 2013 2012 contracts notional amounts 1 million 17 million respectively related forward commodity agreements principally base metals natural gas interest rate risk managementwe use combination financial instruments including longterm mediumterm shortterm financing variablerate commercial paper interest rate swaps manage interest rate mix total debt portfolio related overall cost borrowing december 31 2013 2012 interest rate swap agreements designated fair value hedges effectively changed 1700 million 1400 million respectively fixed rate debt rates 396 409 respectively libor based floating rate debt interest rate swaps mature various dates 2023 fair value financial instrumentsthe fasb’s accounting guidance defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date exit price fasb’s guidance classifies inputs used measure fair value following hierarchy level 1 unadjusted quoted prices active markets identical assets liabilities level 2 unadjusted quoted prices active markets similar assets liabilities unadjusted quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability level 3 unobservable inputs asset liability company endeavors utilize best available information measuring fair value financial nonfinancial assets liabilities classified entirety based lowest level input significant fair value measurement following table sets forth company’s financial assets liabilities accounted fair value recurring basis december 31 2013 2012 honeywell international inc notes financial statementscontinued dollars millions except per share amounts foreign currency exchange contracts interest rate swap agreements forward commodity contracts valued using broker quotations market transactions either listed overthecounter markets derivative instruments classified within level 2 company holds investments marketable equity securities designated available sale valued using quoted market prices investments classified within level 1 company also holds investments commercial paper certificates deposits time deposits designated available sale valued using market transactions overthecounter markets investments classified within level 2 carrying value cash equivalents trade accounts notes receivables payables commercial paper shortterm borrowings contained consolidated balance sheet approximates fair value following table sets forth company’s financial assets liabilities carried fair value company determined fair value long term receivables discounting based upon terms receivable counterparty details including credit quality fair value receivables considered level 2 company determined fair value longterm debt related current maturities utilizing transactions listed markets identical similar liabilities fair value longterm debt related current maturities considered level 2 well december 31 2013 company nonfinancial assets principally property plant equipment net book value 244 million accounted fair value nonrecurring basis assets tested impairment based fair value assets company recognized losses 72 million year ended december 31 2013 primarily connection repositioning actions see note 3 repositioning charges pending divestiture friction materials business within transportation systems segment december 31 2012 company nonfinancial assets principally property plant equipment intangible assets net book value 22 million accounted fair value nonrecurring basis assets tested impairment based fair value assets company recognized losses 22 million year ended december 31 2012 primarily connection repositioning actions see note 3 repositioning charges company determined fair value measurements nonfinancial assets level 3 fair value hierarchy company utilizes market income cost approaches combination honeywell international inc notes financial statementscontinued dollars millions except per share amounts valuation techniques nonrecurring level 3 fair value measures inputs measures include observable market data obtained independent sources broker quotes recent market transactions similar assets company’s policy maximize use observable inputs measurement fair value nonrecurring level 3 measurements extent observable inputs available company utilizes unobservable inputs based upon assumptions market participants would use valuing asset examples utilized unobservable inputs future cash flows long term growth rates applicable discount rates enter transactions subject arrangements designed provide netting offsetting obligations event insolvency default counterparty however elected offset multiple contracts single counterparty therefore fair value derivative instruments loss position offset fair value derivative instruments gain position derivatives utilized risk management purposes detailed included consolidated balance sheet impacted statement operations follows fair value derivatives classified assets consist following fair value derivatives classified liabilities consist following gains losses recognized comprehensive income effective portions consist following gains losses reclassified aoci income consist following honeywell international inc notes financial statementscontinued dollars millions except per share amounts ineffective portions commodity derivative instruments designated cash flow hedge relationships insignificant years ended december 31 2013 2012 classified within cost products sold foreign currency exchange contracts cash flow hedge relationships qualify critical matched terms hedge relationships result ineffectiveness interest rate swap agreements designated hedge relationships gains losses derivative recognized interest financial charges offsetting gains losses underlying debt hedged losses interest rate swap agreements recognized earnings 91 million year ended december 31 2013 gains interest rate swap agreements recognized earnings 12 million year ended 2012 gains losses fully offset losses gains underlying debt hedged also economically hedge exposure changes foreign exchange rates principally forward contracts markedtomarket resulting gains losses recognized earnings offsetting gains losses nonfunctional currency denominated monetary assets liabilities hedged recognized 162 million 20 million income expense years ended december 31 2013 2012 respectively see note 4 income expense details net impact economic foreign currency hedges note 17 liabilities 1 asset retirement obligations primarily relate costs associated future retirement nuclear fuel conversion facilities performance materials technologies segment future retirement facilities automation control solutions segment reconciliation liability asset retirement obligations year ended december 31 2013 follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 18 capital stock authorized issue 2000000000 shares common stock par value 1 common shareowners entitled receive dividends may declared board entitled one vote per share entitled event liquidation share ratably assets honeywell available distribution common shareowners common shareowners preemptive conversion rights shares common stock issued outstanding held treasury liable calls assessments restrictions us relative dividends repurchase redemption common stock december 2013 board directors authorized repurchase total 5 billion honeywell common stock 5 billion remained available december 31 2013 additional share repurchases purchased total approximately 135 million 5 million shares common stock 2013 2012 1073 317 million respectively authorized issue 40000000 shares preferred stock without par value determine number shares series rights preferences limitations series december 31 2013 preferred stock outstanding note 19 accumulated comprehensive income loss total accumulated comprehensive income loss included consolidated statement shareowners’ equity comprehensive income loss attributable noncontrolling interest consisted predominantly net income changes accumulated comprehensive income loss follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts components accumulated comprehensive income loss changes accumulated comprehensive income component reclassifications accumulated comprehensive income honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 20 stockbased compensation plans stockbased compensation plans available grant nonqualified stock options incentive stock options stock appreciation rights restricted units restricted stock key employees terms 2011 stock incentive plan honeywell international inc affiliates plan 25913501 shares honeywell common stock available future grants december 31 2013 additionally 2006 stock plan nonemployee directors honeywell international inc directors plan 145367 shares honeywell common stock available future grant december 31 2013 stock optionsthe exercise price term conditions applicable option granted stock plans generally determined management development compensation committee board exercise price stock options set grant date may less fair market value per share stock date fair value recognized expense employee’s requisite service period generally vesting period award options generally vest fouryear period expire ten years fair value option award estimated date grant using blackscholes optionpricing model expected volatility based implied volatilities traded options common stock historical volatility common stock used monte carlo simulation model derive expected term model uses historical data estimate option exercise activity postvest termination behavior expected term represents estimate time options expected remain outstanding riskfree rate periods within contractual life option based us treasury yield curve effect time grant compensation cost pretax basis related stock options recognized operating results included selling general administrative expenses 2013 2012 2011 70 65 59 million respectively associated future income tax benefit recognized 2013 2012 2011 24 23 19 million respectively following table sets forth fair value per share information including related weightedaverage assumptions used determine compensation cost honeywell international inc notes financial statementscontinued dollars millions except per share amounts following table summarizes information stock option activity three years ended december 31 2013 1 represents sum vested options 156 million expected vest options 126 million expected vest options derived applying prevesting forfeiture rate assumption total outstanding unvested options 151 million following table summarizes information stock options outstanding exercisable december 31 2013 19468017 21672281 options exercisable weighted average exercise prices 4364 4071 december 31 2012 2011 respectively total intrinsic value options amount stock price exceeded exercise price options date exercise exercised 2013 2012 2011 367 202 164 million respectively 2013 2012 2011 amount cash received exercise stock options 432 305 290 million respectively associated tax benefit realized 129 74 54 million respectively 2013 2012 2011 classified 99 56 42 million respectively benefit financing cash inflow consolidated statement cash flows balance classified cash operations honeywell international inc notes financial statementscontinued dollars millions except per share amounts december 31 2013 120 million total unrecognized compensation cost related nonvested stock option awards expected recognized weightedaverage period 228 years total fair value options vested 2013 2012 2011 67 63 52 million respectively restricted stock unitsrestricted stock unit rsu awards entitle holder receive one share common stock unit units vest rsus issued certain key employees fair market value date grant compensation rsus typically become fully vested periods ranging three seven years payable honeywell common stock upon vesting following table summarizes information rsu activity three years ended december 31 2013 december 31 2013 approximately 191 million total unrecognized compensation cost related nonvested rsus granted stock plans expected recognized weightedaverage period 342 years compensation expense related rsus 100 105 109 million 2013 2012 2011 respectively associated future income tax benefit recognized 2013 2012 2011 35 37 36 million respectively nonemployee directors’ planunder directors’ plan new nonemployee director receives onetime grant 3000 restricted stock units vest fifth anniversary continuous board service 2011 nonemployee director received annual grant purchase 5000 shares common stock fair market value date grant 2012 annual equity grant changed fixed number shares target value 75000 consists 50 percent options 50 percent rsus options become exercisable fouryear period expire ten years rsus generally vest third anniversary date grant note 21 redeemable noncontrolling interest discussed note 2 acquisitions divestitures october 22 2012 company acquired 70 percent controlling interest thomas russell co calendar year 2016 honeywell right acquire noncontrolling shareholder right sell honeywell remaining 30 percent interest price based multiple thomas russell co’s average annual operating income 2013 2015 subject predetermined cap floor additionally honeywell international inc notes financial statementscontinued dollars millions except per share amounts right acquire remaining 30 percent interest fixed price equivalent cap time december 31 2015 noncontrolling interests redemption features arrangement described solely within company’s control considered redeemable noncontrolling interests redeemable noncontrolling interest considered temporary equity therefore reported outside permanent equity company’s consolidated balance sheet greater initial carrying amount adjusted noncontrolling interest’s share net income loss redemption value company accretes changes redemption value period date acquisition date redemption feature becomes puttable company reflect redemption value adjustments earnings per share calculation redemption value excess fair value noncontrolling interest december 31 2012 redemption value redeemable noncontrolling interest approximated carrying value rollforward redeemable noncontrolling interest december 31 2012 december 31 2013 follows note 22 commitments contingencies environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous substances accordance environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing hazardous substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually jointly potentially responsible parties determine feasibility various remedial techniques policy record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical regulatory legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing remedial investigations feasibility studies timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects remedial techniques utilized agreements parties honeywell international inc notes financial statementscontinued dollars millions except per share amounts following table summarizes information concerning recorded liabilities environmental costs environmental liabilities included following balance sheet accounts although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position new jersey chrome sitesthe excavation offsite disposal approximately one million tons chromium residue present predecessor honeywell site located jersey city new jersey known study area 7 completed january 2010 also implementing related groundwater remedial actions conducting related river sediment work addition remedial investigations related activities underway sites hudson county new jersey allegedly chromium contamination honeywell accepted responsibility whole part provisions made financial statements estimated cost investigations implementation remedies consistent accounting policy described believe matters material adverse impact consolidated results operations financial position operating cash flows onondaga lake syracuse nywe implementing combined dredgingcapping remedy onondaga lake pursuant consent decree approved united states district court northern district new york january 2007 accrued estimated cost remediating onondaga lake based currently available information analysis performed engineering consultants honeywell also conducting remedial investigations activities sites syracuse recorded reserves investigations activities appropriate consistent accounting policy described honeywell entered cooperative agreement potential natural resource trustees assess alleged natural resource damages relating site possible predict outcome duration assessment amounts responsibility damages honeywell international inc notes financial statementscontinued dollars millions except per share amounts asbestos matters like many industrial companies honeywell defendant personal injury actions related asbestos mine produce asbestos make sell insulation products construction materials identified primary cause asbestos related disease vast majority claimants honeywell’s predecessors owned north american refractories company narco 1979 1986 narco produced refractory products bricks cement used high temperature applications sold narco business 1986 agreed indemnify narco respect personal injury claims products discontinued prior sale defined sale agreement narco retained liability claims narco andor honeywell defendants asbestos personal injury cases asserting claims based upon alleged exposure narco asbestoscontaining products claimants consist largely individuals allege exposure narco asbestoscontaining refractory products occupational setting claims filing subsequent claims stayed continuously since january 4 2002 date narco sought bankruptcy protection see discussion honeywell’s bendix friction materials bendix business manufactured automotive brake parts contained chrysotile asbestos encapsulated form claimants consist largely individuals allege exposure asbestos brakes either performing vicinity individuals performed brake replacements following tables summarize information concerning narco bendix asbestos related balances asbestos related liabilities honeywell international inc notes financial statementscontinued dollars millions except per share amounts insurance recoveries asbestos related liabilities narco bendix asbestos related balances included following balance sheet accounts narco productson january 4 2002 narco filed petition reorganization chapter 11 us bankruptcy code connection filing narco’s petition 2002 us bankruptcy court western district pennsylvania “the bankruptcy court” issued injunction staying prosecution narcorelated asbestos claims company stayed place throughout narco’s chapter 11 case november 2007 bankruptcy court confirmed narco’s third amended plan reorganization narco plan reorganization became fully effective april 30 2013 connection implementation narco plan reorganization federally authorized 524g trust “narco trust” established evaluation resolution existing future narco asbestos claims honeywell narco protected permanent channeling injunction barring present future individual actions state federal courts requiring asbestos related claims based exposure narco products made narco trust narco trust review submitted claims determine award amounts accordance established trust distribution procedures approved bankruptcy court set forth criteria claimants must meet qualify compensation including among things exposure medical criteria determine award amount addition honeywell continue provide input detailed controls design narco trust ongoing audit rights review monitor claims processor’s adherence established requirements trust distribution procedures means detecting deterring irregularities claims connection narco’s bankruptcy filing honeywell agreed certain obligations triggered upon effective date narco plan reorganization agreed second quarter 2013 provided narco 17 million financing simultaneously forgave indebtedness also paid 40 million narco’s former parent company 16 million certain honeywell international inc notes financial statementscontinued dollars millions except per share amounts asbestos claimants whose claims fully resolved pendency narco bankruptcy proceedings honeywell obligated fund narco asbestos claims submitted trust qualify payment trust distribution procedures subject annual caps 140 million years 2014 2018 145 million year thereafter provided however first 100 million claims processed narco trust “initial claims amount” count first year annual cap unused portion initial claims amount roll subsequent years fully utilized honeywell also responsible following funding obligations subject annual cap described previously approved payments due claimants pursuant settlement agreements reached pendency narco bankruptcy proceedings provide portion settlements paid narco trust amounts estimated 130 million expected paid first year trust operations 91 million paid 2013 b payments due claimants pursuant settlement agreements reached pendency narco bankruptcy proceedings provide right submit claims narco trust subject qualification terms settlement agreements trust distribution procedures criteria amounts estimated 150 million expected paid first two years trust operations consolidated financial statements reflect estimated liability amounts discussed unsettled claims pending time narco filed bankruptcy protection estimated value future narco asbestos claims expected asserted narco trust 2018 light uncertainties inherent making longterm projections connection initial operation 524g trust well stay narco asbestos claims remained place throughout narco’s chapter 11 case believe reasonable basis estimating narco asbestos claims beyond 2018 absence actual trust experience base estimate honeywell projected probable value including trust claim handling costs asbestos related future liabilities based company specific general asbestos claims filing rates expected rates disease anticipated claim values specifically valuation methodology included analysis population likely exposed asbestos containing products epidemiological studies estimating number people likely develop asbestos related diseases narco asbestos claims filing history general asbestos claims filing rates tort system certain operating asbestos trusts claims experience forums pending inventory narco asbestos claims disease criteria payment values contained trust distribution procedures estimated approval rate claims submitted narco trust methodology used estimate liability future claims commonly accepted numerous bankruptcy courts addressing 524g trusts resulted range estimated liability 743 961 million believe amount within range better estimate amount accordingly recorded minimum amount range insurance receivable corresponding estimated liability pending future narco asbestos claims reflects coverage reimburses honeywell portions narcorelated indemnity defense costs provided large number insurance policies written dozens insurance companies domestic insurance market london excess market conduct analyses determine amount insurance estimate probable recovery relation payment current estimated future claims substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries made judgments concerning insurance coverage believe reasonable consistent historical dealings knowledge pertinent solvency issues surrounding insurers honeywell international inc notes financial statementscontinued dollars millions except per share amounts projecting future events subject many uncertainties could cause narcorelated asbestos liabilities assets higher lower projected recorded assurance insurance recoveries timely whether narcorelated asbestos claims beyond 2018 given inherent uncertainty predicting future events review estimates periodically update based experience relevant factors similarly reevaluate projections concerning probable insurance recoveries light changes projected liability developments may impact insurance recoveries friction productsthe following tables present information regarding bendix related asbestos claims activity honeywell experienced average resolution values per claim excluding legal costs follows possible predict whether resolution values bendixrelated asbestos claims increase decrease stabilize future consolidated financial statements reflect estimated liability resolution pending claims actually filed financial statement date future bendixrelated asbestos claims valued bendix pending future claims using average resolution values previous five years update resolution values used estimate cost bendix pending future claims fourth quarter year liability future claims represents estimated value future asbestos related bodily injury claims expected asserted bendix next five years estimated cost future bendixrelated asbestos claims based historic claims filing experience dismissal rates disease classifications resolution values tort system previous five years light uncertainties inherent making longterm projections well certain factors unique friction product asbestos claims believe reasonable basis estimating asbestos claims beyond next five years methodology used estimate liability future claims similar used estimate future narcorelated asbestos claims liability honeywell international inc notes financial statementscontinued dollars millions except per share amounts insurance receivable corresponding liability settlement pending future bendix asbestos claims reflects coverage provided large number insurance policies written dozens insurance companies domestic insurance market london excess market based ongoing analysis probable insurance recovery insurance receivables recorded financial statements simultaneous recording estimated liability underlying asbestos claims determination based analysis underlying insurance policies historical experience insurers ongoing review solvency insurers judicial determinations relevant insurance programs consideration impacts settlements reached insurers cumulative historical basis honeywell recorded insurance receivables equal approximately 36 percent value underlying asbestos claims recorded however gaps coverage due insurance company insolvencies certain uninsured periods insurance settlements rate expected decline future bendixrelated asbestos liabilities may recorded future recoverability rates may also impacted numerous factors future insurance settlements insolvencies judicial determinations relevant coverage program difficult predict assuming continued defense indemnity spending current levels estimate cumulative recoverability rate could decline next five years approximately 30 percent honeywell believes sufficient insurance coverage reserves cover pending bendixrelated asbestos claims bendixrelated asbestos claims estimated filed within next five years although impossible predict outcome either pending future bendixrelated asbestos claims believe claims would material adverse effect consolidated financial position light insurance coverage prior experience resolving claims rate types claims filed average resolution value claims period time claim settlements paid collectively “variable claims factors” substantially change honeywell would expect future bendixrelated asbestos claims material adverse effect results operations operating cash flows fiscal year assurances given however variable claims factors change matters subject number lawsuits investigations disputes involve substantial amounts claimed arising conduct business including matters relating commercial transactions government contracts product liability prior acquisitions divestitures employee benefit plans intellectual property environmental health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes matters well potential ranges possible losses taking consideration insurance recoveries based careful analysis matter assistance outside legal counsel applicable experts included matters following honeywell v united auto workers “uaw” et alin july 2011 honeywell filed action federal court district new jersey uaw former employees retired series master collective bargaining agreements “mcbas” honeywell uaw company seeking declaratory judgment certain express limitations obligation contribute toward healthcare coverage retirees “caps” set forth mcbas may implemented effective january 1 2012 september 2011 uaw certain retiree defendants filed motion dismiss new jersey action filed suit eastern district michigan alleging mcbas provide caps company’s liability healthcare coverage uaw retiree plaintiffs subsequently filed motion class certification motion partial summary judgment michigan action seeking ruling retirees retired honeywell international inc notes financial statementscontinued dollars millions except per share amounts prior initial inclusion caps 2003 mcba covered caps matter law december 2011 new jersey action dismissed forum grounds honeywell appealed new jersey court’s dismissal united states court appeals third circuit third circuit denied appeal honeywell answered uaw’s complaint michigan asserted counterclaims fraudulent inducement negligent misrepresentation breach implied warranty parties stipulated certification class potentially affected retirees surviving spouses eligible dependents uaw filed motion dismiss counterclaims court dismissed honeywell’s fraudulent inducement negligent misrepresentation claims let stand claim breach implied warranty honeywell confident caps upheld liability healthcare coverage premiums respect putative class limited negotiated expressly set forth applicable mcbas event adverse ruling however honeywell’s postretirement benefits pre2003 retirees would increase approximately 180 million reflecting estimated value caps joint strike fighter investigationin 2013 company received subpoenas department justice requesting information relating primarily parts manufactured united kingdom china used fighter jet company cooperating fully investigation believe honeywell complied relevant us laws regulations regarding manufacture sensors possible predict outcome investigation action may result given uncertainty inherent litigation investigations including specific matters referenced believe possible develop estimates reasonably possible loss excess current accruals matters specifically set forth considering past experience existing accruals expect outcome matters either individually aggregate material adverse effect consolidated financial position contingencies resolved long periods time potential liabilities subject change due new developments changes settlement strategy impact evidentiary requirements could cause us pay damage awards settlements become subject equitable remedies could material adverse effect results operations operating cash flows periods recognized paid warranties guaranteeswe issued party following direct indirect guarantees december 31 2013 expect guarantees material adverse effect consolidated results operations financial position liquidity connection disposition certain businesses facilities indemnified purchasers expected cost remediation environmental contamination existing date disposition expected costs accrued environmental assessments made remedial efforts probable costs reasonably estimated normal course business issue product warranties product performance guarantees accrue estimated cost product warranties performance guarantees based contract terms historical experience time sale adjustments initial obligations warranties guarantees made changes obligations become reasonably estimable honeywell international inc notes financial statementscontinued dollars millions except per share amounts following table summarizes information concerning recorded obligations product warranties product performance guarantees product warranties product performance guarantees included following balance sheet accounts honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 23 pension postretirement benefits sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees pension benefits substantially us employees provided noncontributory qualified nonqualified defined benefit pension plans us defined benefit pension plans comprise 75 percent projected benefit obligation nonunion hourly salaried employees joining honeywell first time december 31 2012 eligible participate honeywell’s us defined benefit pension plans nonus employees us citizens covered various retirement benefit arrangements considered defined benefit pension plans accounting purposes nonus defined benefit pension plans comprise 25 percent projected benefit obligation also sponsor postretirement benefit plans provide health care benefits life insurance coverage eligible retirees retiree medical plans mainly cover us employees retire pension eligibility prescription drug hospital professional medical services us retiree medical plans require deductibles copayments virtually integrated medicare retiree contributions generally required based coverage type plan medicare eligibility nonunion hourly salaried employees joining honeywell january 1 2000 eligible participate retiree medical life insurance plans less 5 percent honeywell’s us employees eligible retiree medical subsidy company subsidy limited fixeddollar amount addition seventyfive percent honeywell’s current retirees either company subsidy fixeddollar subsidy amount significantly limits exposure impact future health care cost increases retiree medical life insurance plans funded claims expenses paid operating cash flow 2013 honeywell amended us retiree medical plans longer offer certain retirees company group coverage plan amendment reduced accumulated postretirement benefit obligation 166 million recognized part net periodic postretirement benefit cost expected future lifetime remaining participants plans also 2013 connection new collective bargaining agreement reached union group honeywell amended plans eliminating company subsidy union employees plan amendment resulted curtailment gain 42 million included part net periodic postretirement benefit cost curtailment gain represents recognition net periodic postretirement benefit cost prior service credits attributable future years service union group future accrual benefits eliminated 2011 connection new collective bargaining agreements reached several union groups honeywell amended us retiree medical plans eliminating subsidy union employees resulted curtailment gains totaling 167 million curtailment gains represented recognition net periodic postretirement benefit cost prior service credits attributable future years service union groups future accrual benefits eliminated following tables summarize balance sheet impact including benefit obligations assets funded status associated significant pension postretirement benefit plans december 31 2013 2012 honeywell international inc notes financial statementscontinued dollars millions except per share amounts 1 included assets consolidated balance sheet 2 included liabilities noncurrent consolidated balance sheet honeywell international inc notes financial statementscontinued dollars millions except per share amounts recognized accumulated comprehensive income loss associated significant pension postretirement benefit plans december 31 2013 2012 follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts components net periodic benefit cost amounts recognized comprehensive income loss significant plans years ended december 31 2013 2012 2011 include following components estimated prior service cost credit pension benefits amortized accumulated comprehensive income loss net periodic benefit cost 2014 expected 23 million 2 million us nonus benefit plans respectively honeywell international inc notes financial statementscontinued dollars millions except per share amounts estimated net loss prior service credit postretirement benefits amortized accumulated comprehensive income loss net periodic benefit cost 2014 expected 24 20 million respectively major actuarial assumptions used determining benefit obligations net periodic benefit cost significant benefit plans presented following table discount rate us pension postretirement benefits plans reflects current rate associated liabilities could settled measurement date december 31 determine discount rates us pension postretirement benefit plans use modeling process involves matching expected cash outflows benefit plans yield curve constructed portfolio high quality fixedincome debt instruments use average yield hypothetical portfolio discount rate benchmark discount rate used determine postretirement benefit obligation lower principally due shorter expected duration postretirement plan obligations compared pension plan obligations expected rate return us plan assets 775 percent longterm rate based historical plan asset returns varying longterm periods combined current market conditions honeywell international inc notes financial statementscontinued dollars millions except per share amounts broad asset mix considerations review expected rate return annual basis revise appropriate nonus benefit plans none individually material assumptions reflect economic assumptions applicable country pension benefits included aggregate data tables amounts applicable pension plans accumulated benefit obligations exceeding fair value plan assets amounts related plans follows accumulated benefit obligation us defined benefit pension plans 157 163 billion nonus defined benefit plans 53 50 billion december 31 2013 2012 respectively asset investment strategy us pension plans focuses maintaining diversified portfolio using various asset classes order achieve longterm investment objectives risk adjusted basis actual invested positions various securities change time based short longer term investment opportunities achieve objectives established longterm target allocations follows 6070 percent equity securities 1020 percent fixed income securities cash 515 percent real estate investments 1020 percent types investments equity securities include publiclytraded stock companies located inside outside united states fixed income securities include corporate bonds companies diversified industries mortgagebacked securities us treasuries real estate investments include direct investments commercial properties investments real estate funds types investments include investments private equity hedge funds follow several different strategies review assets regular basis ensure within targeted asset allocation ranges necessary asset balances adjusted back within target allocations nonus pension assets typically managed decentralized fiduciary committees honeywell corporate investments group providing standard funding investment guidance local regulations local funding rules local financial tax considerations part funding investment allocation process country nonus investment policies different country longterm investment objectives generally us pension assets honeywell international inc notes financial statementscontinued dollars millions except per share amounts fair values us nonus pension plans assets december 31 2013 2012 asset category follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts honeywell international inc notes financial statementscontinued dollars millions except per share amounts following tables summarize changes fair value level 3 assets years ended december 31 2013 2012 company enters futures contracts gain exposure certain markets sufficient cash equivalents held pension plans cover notional value futures contracts december 31 2013 2012 us plans contracts notional amounts 1938 1241 million respectively december 31 2013 2012 nonus plans contracts notional amounts 61 55 million respectively us nonus pension plans notional derivative exposure primarily related outstanding equity futures contracts common stocks preferred stocks real estate investment trusts shortterm investments valued closing price reported active market individual securities traded corporate bonds mortgages assetbacked securities government securities valued either using pricing models bids provided brokers dealers quoted prices securities similar characteristics discounted cash flows include adjustments certain risks may observable credit liquidity risks certain securities held commingled funds valued using net asset values provided administrators funds investments private honeywell international inc notes financial statementscontinued dollars millions except per share amounts equity debt real estate hedge funds direct private investments valued estimated fair value based quarterly financial information received investment advisor andor general partner investments real estate properties valued quarterly basis using income approach valuation estimates periodically supplemented third party appraisals general funding policy qualified pension plans contribute amounts least sufficient satisfy regulatory funding standards 2013 2012 2011 required make contributions us pension plans contribution made us plans 2013 however 2012 2011 made voluntary contributions 792 1650 million respectively us plans primarily improve funded status contributions reflect benefits paid directly company assets 2013 cash contributions 156 million made nonus plans satisfy regularly funding requirements 2014 expect make contributions cash andor marketable securities approximately 150 million 117 million marketable securities contributed january 2014 nonus defined benefit pension plans satisfy regulatory funding standards required make contributions us defined benefit pension plans 2014 benefit payments including amounts paid company assets reflecting expected future service appropriate expected paid follows postretirement benefits assumed health care cost trend rate significant effect amounts reported onepercentagepoint change assumed health care cost trend rate would following effects benefit payments reflecting expected future service appropriate expected paid follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts employee savings plans sponsor employee savings plans match form common stock savings plan contributions certain eligible employees shares issued stock match plans 20 24 26 million cost 159 144 138 million 2013 2012 2011 respectively note 24 segment financial data globally manage business operations four reportable operating segments serving customers worldwide aerospace products services control sensing security technologies buildings homes industry automotive products chemicals segment information consistent management reviews businesses makes investing resource allocation decisions assesses operating performance four reportable segments follows • aerospace includes air transport regional business general aviation defense space provides products services include auxiliary power units propulsion engines environmental control systems electric power systems engine controls repair overhaul services flight safety communications navigation radar surveillance systems aircraft lighting management technical services logistic services advanced systems instruments aircraft wheels brakes • automation control solutions includes energy safety security controls heating cooling indoor air quality ventilation humidification lighting home automation advanced software applications homebuilding control optimization sensors switches control systems instruments measuring pressure air flow temperature electrical current security fire gas detection monitoring radiation detection personal protection equipment access control video surveillance equipment remote patient monitoring systems automatic identification data collection voice solutions process solutions provides full range automation control solutions industrial plants offering advanced software automation systems integrate control monitor complex processes many types industrial settings well equipment controls measures analyzes natural gas production transportation building solutions distribution installs distributes maintains upgrades systems keep buildings safe comfortable productive • performance materials technologies includes advanced materials fluorocarbons hydrofluoroolefins caprolactam resins ammonium sulfate fertilizer specialty films waxes additives advanced fibers customized research chemicals intermediates electronic materials chemicals uop process technology products including catalysts absorbents services petroleum refining gas processing petrochemical renewable energy industries • transportation systems includes turbochargers thermal systems brake hard parts friction materials accounting policies segments described note 1 honeywell’s senior management evaluates segment performance based segment profit segment profit measured business unit income loss taxes excluding general corporate unallocated expense income expense interest financial charges pension postretirement benefits expense stock compensation expense repositioning charges accounting changes honeywell international inc notes financial statementscontinued dollars millions except per share amounts honeywell international inc notes financial statementscontinued dollars millions except per share amounts reconciliation segment profit consolidated income continuing operations taxes follows 1 equity income loss affiliated companies included segment profit 2 amounts included cost products services sold selling general administrative expenses note 25 geographic areasfinancial data honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 26 supplemental cash flow information note 27 unaudited quarterly financial information report independent registered public accounting firm board directors shareholders honeywell international inc opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position honeywell international inc subsidiaries december 31 2013 2012 results operations cash flows three years period ended december 31 2013 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2013 based criteria established internal control integrated framework 1992 issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting item 9a responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp florham park new jersey february 14 2014 item 9item 8 financial statements supplementary data honeywell international inc consolidated statement operations notes financial statements integral part statement honeywell international inc consolidated statement comprehensive income notes financial statements integral part statement honeywell international inc consolidated balance sheet notes financial statements integral part statement honeywell international inc consolidated statement cash flows notes financial statements integral part statement honeywell international inc consolidated statement shareowners’ equity notes financial statements integral part statement honeywell international inc notes financial statements dollars millions except per share amounts note 1 summary significant accounting policies accounting principlesthe financial statements accompanying notes prepared accordance accounting principles generally accepted united states america following description honeywell’s significant accounting policies principles consolidationthe consolidated financial statements include accounts honeywell international inc subsidiaries entities controlling interest maintained consolidation policy requires equity investments exercise significant influence control investee primary beneficiary investee’s activities accounted using equity method investments able exercise significant influence investee readily determinable fair values accounted cost method intercompany transactions balances eliminated consolidation redeemable noncontrolling interest considered temporary equity therefore reported outside permanent equity consolidated balance sheet greater initial carrying amount adjusted noncontrolling interest’s share net income loss redemption value property plant equipmentproperty plant equipment recorded cost including asset retirement obligations less accumulated depreciation financial reporting straightline method depreciation used estimated useful lives 10 50 years buildings improvements 2 16 years machinery equipment recognition fair value obligations associated retirement tangible longlived assets required legal obligation incur costs upon initial recognition liability cost capitalized part related longlived asset depreciated corresponding asset’s useful life goodwill indefinitelived intangible assetsgoodwill indefinitelived intangible assets subject impairment testing annually march 31 whenever events changes circumstances indicate carrying amount may fully recoverable testing compares carrying values fair values appropriate carrying value assets reduced fair value completed annual goodwill impairment test march 31 2016 determined impairment date intangible assets determinable livesother intangible assets determinable lives consist customer lists technology patents trademarks intangibles amortized estimated useful lives ranging 2 24 years sales recognitionproduct service sales recognized persuasive evidence arrangement exists product delivery occurred services rendered pricing fixed determinable collection reasonably assured service sales principally representing repair maintenance engineering activities recognized contractual period services rendered sales longterm contracts recorded percentageofcompletion method measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts provisions anticipated losses longterm contracts recorded full losses become evident revenues contracts multiple element arrangements recognized element earned based relative fair value element provided delivered elements value customers standalone basis amounts allocated element based objectively determined fair value sales price product service sold separately competitor prices similar products services environmentalwe accrue costs related environmental matters probable incurred liability related contaminated site amount reasonably estimated additional information see note 19 commitments contingencies asbestos related contingencies insurance recoverieswe recognize liability asbestos related contingency probable occurrence reasonably estimable connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable additional information see note 19 commitments contingencies aerospace sales incentiveswe provide sales incentives commercial aircraft manufacturers airlines connection selection aircraft equipment predominately wheel braking system hardware avionics auxiliary power units installation commercial aircraft incentives consist honeywell international inc notes financial statements continued dollars millions except per share amounts free deeply discounted products credits future purchases product upfront cash payments costs recognized period incurred cost products sold reduction sales appropriate research developmentresearch development costs companysponsored research development projects expensed incurred costs principally included cost products sold 2143 million 1856 million 1892 million 2016 2015 2014 stockbased compensation plansthe principal awards issued stockbased compensation plans described note 18 stockbased compensation plans nonqualified stock options restricted stock units cost awards measured grant date based fair value award value portion award ultimately expected vest recognized expense requisite service periods generally vesting period equity award included selling general administrative expenses forfeitures estimated time grant recognize expense awards expected vest based historical forfeiture rates pension benefitswe recognize net actuarial gains losses excess 10 greater fair value plan assets plans’ projected benefit obligation corridor annually fourth quarter year mtm adjustment applicable quarter interim remeasurement triggered remaining components pension income expense primarily service interest costs assumed return plan assets recognized quarterly basis pension ongoing income expense foreign currency translation assets liabilities subsidiaries operating outside united states functional currency us dollars translated us dollars using yearend exchange rates sales costs expenses translated average exchange rates effect year foreign currency translation gains losses included component accumulated comprehensive income loss subsidiaries operating highly inflationary environments inventories property plant equipment including related expenses remeasured exchange rate effect date assets acquired monetary assets liabilities remeasured yearend exchange rates remeasurement adjustments subsidiaries included earnings derivative financial instruments minimize risks interest foreign currency exchange rate fluctuations normal operating financing activities deemed appropriate use derivative financial instruments derivative financial instruments used manage risk used trading speculative purposes use leveraged derivative financial instruments derivative financial instruments qualify hedge accounting must designated effective hedge identified risk exposure inception contract accordingly changes fair value derivative contract must highly correlated changes fair value underlying hedged item inception hedge life hedge contract derivatives recorded balance sheet assets liabilities measured fair value derivatives designated hedges fair value assets liabilities changes fair values derivatives hedged items recorded current earnings derivatives designated cash flow hedges effective portion changes fair value derivatives recorded accumulated comprehensive income loss subsequently recognized earnings hedged items impact earnings cash flows derivative financial instruments classified consistent underlying hedged item income taxes significant judgment required evaluating tax positions establish additional reserves income taxes despite belief tax positions fully supportable remain certain positions meet minimum recognition threshold approach evaluating certain uncertain tax positions defined authoritative guidance determines tax position likely sustained upon examination applicable taxing authority normal course business company subsidiaries examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes continually assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts give rise change estimate become known honeywell international inc notes financial statements continued dollars millions except per share amounts cash equivalents cash equivalents include cash hand highly liquid investments original maturity three months less earnings per sharebasic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding dilutive potential common shares outstanding reclassificationscertain prior year amounts reclassified conform current year presentation recent accounting pronouncementswe consider applicability impact accounting standards updates asus listed assessed determined either applicable expected minimal impact consolidated results operations financial position cash flows consolidated financial statements may 2014 fasb issued guidance revenue contracts customers supersede current revenue recognition guidance including industryspecific guidance underlying principle entity recognize revenue depict transfer goods services customers amount entity expects entitled exchange goods services guidance provides fivestep analysis transactions determine revenue recognized major provisions include capitalization certain contract costs consideration time value money transaction price allowing estimates variable consideration recognized contingencies resolved certain circumstances guidance also requires enhanced disclosures regarding nature amount timing uncertainty revenue cash flows arising entity’s contracts customers effective date deferred one year interim annual periods beginning december 15 2017 early adoption permitted original effective date interim annual periods beginning december 15 2016 guidance permits use either retrospective cumulative effect transition method yet selected transition method still finalizing analysis quantify adoption impact provisions new standard currently expect material impact consolidated financial position results operations based evaluation current contracts revenue streams recorded consistently current new standard fasb issued may issue future interpretive guidance may cause evaluation change believe following appropriate timeline allow proper recognition presentation disclosure upon adoption effective beginning fiscal year 2018 february 2016 fasb issued guidance accounting leases requires lessees recognize leases balance sheets rights obligations created leases guidance requires enhanced disclosures regarding amount timing uncertainty cash flows arising leases effective interim annual periods beginning december 15 2018 early adoption permitted guidance requires use modified retrospective approach currently evaluating impact guidance consolidated financial position results operations related notes financial statements march 2016 fasb issued amended guidance related employee sharebased payment accounting guidance requires income tax effect awards recognized income statement previously presented component total shareowners’ equity prospective basis guidance also requires presentation excess tax benefits operating activity statement cash flows rather financing activity elected early adopt standard quarter ended september 30 2016 requires adoption effective beginning fiscal year adoption resulted diluted earnings per share benefit 014 recognition excess tax benefits reduction provision income taxes 127 million year ended december 31 2016 refer note 24 unaudited quarterly financial information earnings per share first second quarters 2016 recast reflect impact adoption cash paid company directly withholding shares taxwithholding purposes classified financing activity retrospective basis honeywell international inc notes financial statements continued dollars millions except per share amounts guidance allows accounting policy election estimate number awards expected vest account forfeitures occur elected maintain current forfeitures policy continue include estimate forfeitures recognizing stock compensation expense classification excess tax benefits consolidated statement cash flows presented prospective basis january 1 2016 august 2016 fasb issued new guidance intended reduce diversity practice certain cash receipts payments classified statement cash flows including debt prepayment extinguishment costs settlement contingent liabilities arising business combination proceeds insurance settlements distributions certain equity method investees guidance effective interim annual periods beginning december 15 2017 early adoption permitted guidance requires application retrospective basis company currently evaluating impact guidance october 2016 fasb issued accounting standard update requires entity recognize income tax consequences intraentity transfer asset inventory transfer occurs current gaap recognition income tax consequences asset transfers inventory could recognized asset sold third party guidance intended reduce diversity practice related tax consequences certain types intraentity asset transfers particularly involving intellectual property guidance effective interim annual periods beginning december 15 2017 early adoption permitted guidance requires application modified retrospective basis currently evaluating impact accounting standard update consolidated financial statements note 2 acquisitions divestitures 2016 2015 acquired businesses aggregate cost net cash debt assumed 2538 million 5244 million august 2016 company acquired intelligrated leading provider supply chain warehouse automation technologies aggregate value net cash acquired 1488 million intelligrated part safety productivity solutions preliminary determination assets liabilities acquired intelligrated included consolidated balance sheet december 31 2016 including 1129 million allocated goodwill nondeductible tax purposes april 2016 company completed acquisition xtralis international holdings limited xtralis leading global provider aspiration smoke detection perimeter security technologies aggregate cost net cash acquired debt assumed 515 million xtralis part home building technologies february 2016 company acquired 100 percent issued outstanding shares com dev international com dev leading satellite space components provider aggregate value net cash acquired debt assumed 347 million com dev part aerospace reported 2015 fiscal year revenues 159 million january 2016 company acquired remaining 30 percent noncontrolling interest uop russell llc develops technology manufactures modular equipment process natural gas 240 million uop russell llc part performance materials technologies december 2015 company completed acquisition elster division melrose industries plc elster aggregate value net cash acquired 4899 million elster 2015 revenues 1670 million integrated home building technologies performance materials technologies following table summarizes final fair value acquired elster assets liabilities honeywell international inc notes financial statements continued dollars millions except per share amounts elster identifiable intangible assets primarily include customer relationships trade names technology amortized estimated lives ranging 1 20 years using straight line accelerated amortization methods goodwill nondeductible tax purposes december 31 2016 purchase accounting intelligrated xtralis com dev subject final adjustment primarily valuation amounts allocated intangible assets goodwill determination useful lives definitelived intangible assets tax balances preacquisition contingencies goodwill arising acquisitions nondeductible tax purposes results operations date acquisition december 31 2016 included consolidated statement operations october 1 2016 company completed taxfree spinoff resins chemicals business part performance materials technologies standalone publiclytraded company named advansix inc advansix honeywell shareowners assets liabilities associated advansix removed company’s consolidated balance sheet results operations advansix included consolidated statement operations effective date spinoff honeywell shareowners record close business september 16 2016 received one share advansix common stock every 25 shares honeywell common stock immediately prior effective date spinoff advansix incurred debt make cash distribution 269 million company time advansix also incurred 38 million borrowings order fund post spinoff working capital company entered certain agreements advansix effect legal structural separation including transition services agreement advansix provide certain administrative services limited time september 16 2016 company completed sale honeywell technology solutions inc sale price 300 million company recognized pretax gain 176 million recorded income expense honeywell technology solutions inc business part aerospace honeywell international inc notes financial statements continued dollars millions except per share amounts note 3 repositioning charges summary repositioning charges follows following table summarizes pretax distribution total net repositioning charges income statement classification following table summarizes pretax impact total net repositioning charges segment 2016 recognized repositioning charges totaling 369 million including severance costs 283 million related workforce reductions 6585 manufacturing administrative positions across segments workforce reductions primarily related cost savings actions taken connection productivity ongoing functional transformation initiatives separation former automation control solutions reporting segment two new reporting segments factory transitions reportable operating segments costeffective locations achieving acquisitionrelated synergies repositioning charge included asset impairments 43 million principally related writeoff certain intangible assets connection sale performance materials technologies business repositioning charge included exit costs 43 million principally expenses related spinoff advansix business closure obligations associated factory transitions also 109 million previously established accruals primarily severance returned income result higher attrition anticipated prior severance programs resulting lower required severance payments lower expected severance costs certain repositioning actions changes scope previously announced repositioning actions honeywell international inc notes financial statements continued dollars millions except per share amounts 2015 recognized repositioning charges totaling 216 million including severance costs 197 million related workforce reductions 6405 manufacturing administrative positions across segments workforce reductions primarily related cost savings actions taken connection productivity ongoing functional transformation initiatives also 53 million previously established accruals primarily severance returned income due principally higher attrition anticipated prior severance programs resulting lower required severance payments changes scope previously announced repositioning actions 2014 recognized repositioning charges totaling 184 million including severance costs 156 million related workforce reductions 2975 manufacturing administrative positions across segments workforce reductions primarily related cost savings actions taken connection productivity ongoing functional transformation initiatives factory transitions home building technologies safety productivity solutions aerospace costeffective locations site consolidations organizational realignments businesses home building technologies safety productivity solutions performance materials technologies also 38 million previously established accruals primarily severance returned income due principally change scope previously announced repositioning action higher attrition anticipated prior severance programs resulting lower required severance payments following table summarizes status total repositioning reserves certain repositioning projects reportable operating segments 2016 2015 2014 included exit disposal activities costs related recognized future periods actual liability incurred exit disposal costs significant honeywell international inc notes financial statements continued dollars millions except per share amounts note 4 income expense refer note 2 acquisitions divestitures note 12 longterm debt credit agreements details transactions recognized 2016 within income expense note 5 income taxes income continuing operations taxes tax expense benefit honeywell international inc notes financial statements continued dollars millions except per share amounts 1net changes valuation allowance effective tax rate decreased 16 percentage points 2016 compared 2015 decrease primarily attributable excess tax benefits employee sharebased payments arising adoption fasb’s amended guidance related employee sharebased payment accounting partially offset increased tax reserves various jurisdictions lower tax benefits manufacturing incentives company’s nonus effective tax rate 167 decrease approximately 28 percentage points compared 2015 yearoveryear decrease nonus effective tax rate primarily driven higher earnings lower tax rate jurisdictions decrease tax impact restructuring divestitures effective tax rate lower us federal statutory rate 35 primarily due overall nonus earnings taxed lower rates effective tax rate increased 08 percentage points 2015 compared 2014 increase primarily attributable decreased tax benefits resolution tax audits partially offset increased tax benefits manufacturing incentives impact income jurisdictions lower tax rates fewer reserves company’s nonus effective tax rate 2015 195 decrease approximately 18 percentage points compared 2014 yearoveryear decrease nonus effective tax rate primarily attributable higher earnings lower tax rate jurisdictions coupled lower expense related reserves various jurisdictions partially offset increase tax impact restructuring dispositions effective tax rate lower us federal statutory rate 35 primarily due overall nonus earnings taxed lower rates deferred tax assets liabilities tax effects temporary differences tax carryforwards give rise future income tax benefits payables follows honeywell international inc notes financial statements continued dollars millions except per share amounts change deferred tax balance primarily attributable deferred tax liabilities transferred connection advansix spinoff gross deferred tax assets include 1034 million related nonus operations comprised principally net operating losses capital loss tax credit carryforwards mainly canada france germany luxembourg united kingdom deductible temporary differences maintain valuation allowance 619 million portion nonus gross deferred tax assets change valuation allowance resulted increase 69 million increase 114 million decrease 10 million income tax expense 2016 2015 2014 event determine able realize net deferred tax assets future reduce amounts increase income tax expense period determination made conversely determine able realize net deferred tax assets excess carrying amounts decrease recorded valuation allowance reduction income tax expense period determination made december 31 2016 net operating loss capital loss tax credit carryforwards follows many jurisdictions impose limitations timing utilization net operating loss tax credit carryforwards instances whereby expected permanent limitation utilization net operating loss tax credit carryforward deferred tax asset amount carryforward reduced us federal income taxes provided undistributed earnings vast majority international subsidiaries intention reinvest earnings respective subsidiaries honeywell international inc notes financial statements continued dollars millions except per share amounts december 31 2016 honeywell provided us federal income nonus withholding taxes approximately 183 billion earnings nonus operations practicable estimate amount tax might payable earnings repatriated amount foreign tax credits would available reduce eliminate resulting us income tax liability december 31 2016 2015 2014 877 million 765 million 659 million unrecognized tax benefits recognized would recorded component income tax expense following table summarizes tax years remain subject examination major tax jurisdictions december 31 2016 1 includes provincial similar local jurisdictions applicable based outcome examinations result expiration statute limitations specific jurisdictions reasonably possible certain unrecognized tax benefits tax positions taken previously filed tax returns materially change recorded liabilities financial statements addition outcome examinations may impact valuation certain deferred tax assets net operating losses future periods unrecognized tax benefits examinations progress 398 million 349 million 403 million december 31 2016 2015 2014 estimated interest penalties related underpayment income taxes classified component tax expense consolidated statement operations totaled 18 million 11 million 24 million years ended december 31 2016 2015 2014 accrued interest penalties 395 million 336 million 325 million december 31 2016 2015 2014 honeywell international inc notes financial statements continued dollars millions except per share amounts note 6 earnings per share details earnings per share calculations years ended december 31 2016 2015 2014 follows diluted earnings per share calculations exclude effect stock options’ assumed proceeds exceed average market price common shares period 2016 2015 2014 weighted number stock options excluded computations 75 million 71 million 47 million stock options outstanding end respective periods note 7 accounts notes receivables trade receivables includes 1626 million 1590 million unbilled balances longterm contracts december 31 2016 december 31 2015 amounts billed accordance terms customer contracts relate honeywell international inc notes financial statements continued dollars millions except per share amounts note 8 inventories valued lifo amounted 296 million 399 million december 31 2016 2015 lifo inventories valued current costs carrying values would approximately 65 million 116 million higher december 31 2016 2015 note 9 property plant equipment net depreciation expense 726 million 672 million 667 million 2016 2015 2014 note 10 goodwill intangible assets net change carrying amount goodwill years ended december 31 2016 2015 segment follows honeywell international inc notes financial statements continued dollars millions except per share amounts intangible assets comprised intangible assets amortization expense 304 million 211 million 257 million 2016 2015 2014 estimated intangible asset amortization expense next five years approximates 394 million 2017 400 million 2018 396 million 2019 353 million 2020 300 million 2021 note 11 accrued liabilities honeywell international inc notes financial statements continued dollars millions except per share amounts note 12 longterm debt credit agreements schedule principal payments longterm debt follows february 2016 company issued €1000 million floating rate senior notes due 2018 €1000 million 065 senior notes due 2020 €1250 million 130 senior notes due 2023 €750 million 225 senior notes due 2028 collectively “euro notes” euro notes senior unsecured unsubordinated obligations honeywell rank equally honeywell’s existing future senior unsecured debt honeywell international inc notes financial statements continued dollars millions except per share amounts senior honeywell’s subordinated debt offering resulted gross proceeds 4438 million offset 23 million discount closing costs related offering october 2016 company issued 1250 million 140 senior notes due 2019 250 million floating rate senior notes due 2019 1500 million 185 senior notes due 2021 1500 million 250 senior notes due 2026 collectively “notes” notes senior unsecured unsubordinated obligations honeywell rank equally honeywell’s existing future senior unsecured debt senior honeywell’s subordinated debt offering resulted gross proceeds 4500 million offset 27 million discount closing costs related offering fourth quarter 2016 company repurchased entire outstanding principal amount 400 million 530 senior notes due 2017 900 million 530 senior notes due 2018 900 million 500 senior notes due 2019 cost related early redemption including “make whole premium” 126 million recorded income expense april 29 2016 company entered amendment 2 amendment amended restated 4 billion credit agreement dated july 10 2015 amended certain amendment 1 dated september 30 2015 amended “credit agreement” syndicate banks credit agreement maintained general corporate purposes commitments credit agreement increased pursuant terms credit agreement aggregate amount exceed 45 billion amendment among things extends credit agreement’s termination date july 10 2020 july 10 2021 april 29 2016 company entered 15 billion 364day credit agreement 364day credit agreement syndicate banks 364day credit agreement maintained general corporate purposes april 29 2016 company terminated commitments 3 billion credit agreement dated september 30 2015 among company lenders party thereto citibank na administrative agent full description credit agreement 364day credit agreement found company’s current report form 8k dated april 29 2016 august 5 2016 company entered 15 billion 364day credit agreement second 364day credit agreement syndicate banks second 364day credit agreement maintained general corporate purposes full description second 364day credit agreement found company’s current report form 8k dated august 5 2016 december 23 2016 company terminated commitments second 364day credit agreement dated august 5 2016 among company lenders party thereto jpmorgan chase bank na administrative agent borrowings credit agreements previously described note 13 lease commitments future minimum lease payments operating leases initial remaining noncancellable lease terms excess one year follows honeywell international inc notes financial statements continued dollars millions except per share amounts rent expense 387 million 390 million 420 million 2016 2015 2014 note 14 financial instruments fair value measures credit market riskfinancial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties derivative transactions substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value cash flows derivative financial instruments considering reasonably possible changes interest rates currency exchange rates restrict use derivative financial instruments hedging activities continually monitor creditworthiness customers grant credit terms normal course business terms conditions credit sales designed mitigate eliminate concentrations credit risk single customer sales materially dependent single customer small group customers foreign currency risk managementwe conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities transactions arising international trade primary objective preserve us dollar value foreign currency denominated cash flows earnings attempt hedge currency exposures natural offsets fullest extent possible opportunities exhausted foreign currency exchange forward option contracts foreign currency exchange contracts third parties hedge monetary assets liabilities denominated nonfunctional currencies prior conversion us dollars assets liabilities remeasured spot exchange rates effect balance sheet date effects changes spot rates recognized earnings included income expense partially hedge forecasted sales purchases occur next twelve months denominated nonfunctional currencies foreign currency exchange contracts changes forecasted nonfunctional currency cash flows due movements exchange rates substantially offset changes fair value foreign currency exchange contracts designated hedges market value gains losses contracts recognized earnings hedged transaction recognized open foreign currency exchange contracts mature next twelve months december 31 2016 2015 contracts notional amounts 9554 million 10538 million exchange foreign currencies principally us dollar euro british pound canadian dollar chinese renminbi indian rupee mexican peso singapore dollar uae dirham swiss franc also designated foreign currency debt hedges portions net investment foreign operations year ended december 31 2016 gains losses effective portion foreign currency debt designated net investment hedge recorded manner foreign currency translation adjustments company ineffectiveness related net investment hedges year ended december 31 2016 honeywell international inc notes financial statements continued dollars millions except per share amounts interest rate risk managementwe use combination financial instruments including longterm mediumterm shortterm financing variablerate commercial paper interest rate swaps manage interest rate mix total debt portfolio related overall cost borrowing december 31 2016 2015 interest rate swap agreements designated fair value hedges effectively changed 1850 million 1100 million fixed rate debt rates 339 400 libor based floating rate debt interest rate swaps mature various dates 2026 fair value financial instrumentsthe fasb’s accounting guidance defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date exit price financial nonfinancial assets liabilities classified entirety based lowest level input significant fair value measurement following table sets forth company’s financial assets liabilities accounted fair value recurring basis december 31 2016 2015 foreign currency exchange contracts interest rate swap agreements valued using broker quotations market transactions either listed overthecounter markets derivative instruments classified within level 2 company also holds investments commercial paper certificates deposits time deposits designated available sale valued using published prices based observable market data investments classified within level 2 carrying value cash equivalents trade accounts notes receivables payables commercial paper shortterm borrowings contained consolidated balance sheet approximates fair value following table sets forth company’s financial assets liabilities carried fair value company determined fair value longterm receivables discounting based upon terms receivable counterparty details including credit quality fair value receivables considered level 2 company determined fair value longterm debt related current maturities utilizing transactions listed markets identical similar liabilities fair value longterm debt related current maturities considered level 2 well interest rate swap agreements designated hedge relationships gains losses derivative recognized interest financial charges offsetting gains losses underlying debt honeywell international inc notes financial statements continued dollars millions except per share amounts hedged losses interest rate swap agreements recognized earnings 71 million 2 million years ended december 31 2016 2015 gains interest rate swap agreements recognized earnings 38 million year ended december 31 2014 gains losses fully offset losses gains underlying debt hedged also economically hedge exposure changes foreign exchange rates principally forward contracts markedtomarket resulting gains losses recognized earnings offsetting gains losses nonfunctional currency denominated monetary assets liabilities hedged recognized 232 million income expense year ended december 31 2016 recognize 86 million 181 million expense income expense years ended december 31 2015 2014 see note 4 income expense details net impact economic foreign currency hedges note 15 liabilities note 16 capital stock authorized issue 2000000000 shares common stock par value 1 common shareowners entitled receive dividends may declared board directors entitled one vote per share entitled event liquidation share ratably assets honeywell available distribution common shareowners common shareowners preemptive conversion rights shares common stock issued outstanding held treasury liable calls assessments restrictions us relative dividends repurchase redemption common stock april 2016 board directors authorized repurchase 5 billion honeywell common stock approximately 41 billion remained available december 31 2016 company’s previous share repurchase plan announced december 2013 board directors authorized repurchase 5 billion honeywell common stock 22 billion remained available december 31 2015 purchased approximately 193 million 188 million shares common stock 2016 2015 2079 million 1884 million authorized issue 40000000 shares preferred stock without par value determine number shares series rights preferences limitations series december 31 2016 preferred stock outstanding honeywell international inc notes financial statements continued dollars millions except per share amounts note 17 accumulated comprehensive income loss changes accumulated comprehensive income loss provided tables comprehensive income loss attributable noncontrolling interest consists predominantly net income components accumulated comprehensive income loss honeywell international inc notes financial statements continued dollars millions except per share amounts changes accumulated comprehensive income loss component reclassifications accumulated comprehensive income loss honeywell international inc notes financial statements continued dollars millions except per share amounts note 18 stockbased compensation plans 2016 stock incentive plan honeywell international inc affiliates 2016 plan 2016 stock plan nonemployee directors honeywell international inc 2016 directors plan approved shareowners annual meeting shareowners effective april 25 2016 following approval plans grant new awards previously existing stockbased compensation plans december 31 2016 46365609 960609 shares honeywell common stock available future grants terms 2016 plan 2016 directors plan respectively stock optionsthe exercise price term conditions applicable option granted stock plans generally determined management development compensation committee board exercise price stock options set grant date may less fair market value per share stock date fair value recognized expense employee’s requisite service period generally vesting period award options generally vest fouryear period expire ten years fair value option award estimated date grant using blackscholes optionpricing model expected volatility based implied volatilities traded options common stock historical volatility common stock used monte carlo simulation model derive expected term represents estimate time options expected remain outstanding model uses historical data estimate option exercise activity postvest termination behavior riskfree rate periods within contractual life option based us treasury yield curve effect time grant compensation cost pretax basis related stock options recognized selling general administrative expenses 2016 2015 2014 87 million 78 million 85 million associated future income tax benefit recognized 2016 2015 2014 29 million 26 million 31 million following table sets forth fair value per share information including related weightedaverage assumptions used determine compensation cost honeywell international inc notes financial statements continued dollars millions except per share amounts 1 estimated date grant using blackscholes optionpricing model following table summarizes information stock option activity three years ended december 31 2016 1 represents sum vested options 155 million expected vest options 116 million expected vest options derived applying prevesting forfeiture rate assumption total outstanding unvested options 134 million following table summarizes information stock options outstanding exercisable december 31 2016 honeywell international inc notes financial statements continued dollars millions except per share amounts 1 average remaining contractual life years 17202377 16019742 options exercisable weighted average exercise prices 5511 4940 december 31 2015 2014 following table summarizes financial statement impact stock options exercised 1 represents amount stock price exceeded exercise price options date exercise december 31 2016 126 million total unrecognized compensation cost related nonvested stock option awards expected recognized weightedaverage period 229 years total fair value options vested 2016 2015 2014 76 million 73 million 72 million restricted stock unitsrestricted stock unit rsu awards entitle holder receive one share common stock unit units vest rsus issued certain key employees directors compensation fair market value date grant rsus typically become fully vested periods ranging three seven years payable honeywell common stock upon vesting following table summarizes information rsu activity three years ended december 31 2016 honeywell international inc notes financial statements continued dollars millions except per share amounts december 31 2016 approximately 193 million total unrecognized compensation cost related nonvested rsus granted stock plans expected recognized weightedaverage period 357 years following table summarizes information income statement impact rsus three years ended december 31 2016 note 19 commitments contingencies environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous substances accordance environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing hazardous substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually jointly potentially responsible parties determine feasibility various remedial techniques policy record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical regulatory legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess honeywell international inc notes financial statements continued dollars millions except per share amounts recorded liabilities expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing remedial investigations feasibility studies timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects remedial techniques utilized agreements parties following table summarizes information concerning recorded liabilities environmental costs environmental liabilities included following balance sheet accounts currently possess sufficient information reasonably estimate amounts environmental liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined although could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position onondaga lake syracuse nyin 2016 largely completed dredgingcapping remedy onondaga lake pursuant consent decree approved united states district court northern district new york january 2007 additional longterm monitoring maintenance activities continue required consent decree honeywell also conducting remedial investigations activities sites syracuse recorded reserves investigations activities appropriate consistent accounting policy described honeywell entered cooperative agreement potential natural resource trustees assess alleged natural resource damages relating site possible predict outcome duration assessment amounts responsibility damages asbestos matters honeywell defendant asbestos related personal injury actions related two predecessor companies ·north american refractories company narco sold 1986 produced refractory products bricks cement used high temperature applications claimants consist largely individuals allege exposure narco asbestoscontaining refractory products occupational setting ·bendix friction materials bendix business sold 2014 manufactured automotive brake parts contained chrysotile asbestos encapsulated form claimants consist largely individuals allege exposure asbestos brakes either performing vicinity individuals performed brake replacements honeywell international inc notes financial statements continued dollars millions except per share amounts following tables summarize information concerning narco bendix asbestos related balances asbestos related liabilities insurance recoveries asbestos related liabilities narco bendix asbestos related balances included following balance sheet accounts narco products connection narco’s emergence bankruptcy april 30 2013 federally authorized 524g trust narco trust established evaluation resolution existing honeywell international inc notes financial statements continued dollars millions except per share amounts future narco asbestos claims honeywell narco protected permanent channeling injunction barring present future individual actions state federal courts requiring asbestos related claims based exposure narco asbestoscontaining products made narco trust narco trust reviews submitted claims determines award amounts accordance established trust distribution procedures approved bankruptcy court set forth criteria claimants must meet qualify compensation including among things exposure medical criteria determine award amount addition honeywell provided continues provide input design control procedures processing narco claims ongoing audit rights review monitor claims processors’ adherence established requirements trust distribution procedures honeywell obligated fund narco asbestos claims submitted narco trust qualify payment trust distribution procedures annual contribution claims subject annual caps 140 million years 2017 2018 145 million year thereafter however initial 100 million claims processed narco trust initial claims amount count annual cap unused portion initial claims amount roll subsequent years fully utilized 2015 honeywell filed suit narco trust bankruptcy court alleging breach certain provisions trust agreement trust distribution procedures parties agreed dismiss proceeding without prejudice pursuant 18 month standstill agreement expires october 2017 claims processing continue period subject defined dispute resolution process december 31 2016 honeywell made payments narco trust annual contribution claims honeywell also responsible payments due claimants pursuant settlement agreements reached pendency narco bankruptcy proceedings provide right submit claims narco trust subject qualification terms settlement agreements trust distribution procedures criteria preestablished unliquidated claims amounts estimated 150 million expected paid initial years trust operations 5 million paid since effective date narco trust payments subject annual cap described consolidated financial statements reflect estimated liability preestablished unliquidated claims 145 million unsettled claims pending time narco filed bankruptcy protection 31 million estimated value future narco asbestos claims expected asserted narco trust 743 million estimate future narco claims based commonly accepted methodology used numerous bankruptcy courts addressing 524g trusts also reflects disputes concerning implementation trust distribution procedures narco trust lack sufficient trust claims processing experience well stay narco asbestos claims remained place throughout narco’s chapter 11 case critical assumptions underlying commonly accepted methodology include claims filing rates disease criteria payment values contained trust distribution procedures estimated approval rates claims submitted narco trust epidemiological studies estimating disease instances estimated value future narco claims originally established time narco chapter 11 filing reflecting claims expected asserted narco fifteen year period projection resulted range estimated liability 743 million 961 million believe amount within range better estimate amount accordingly recorded minimum amount range insurance receivable corresponding estimated liability pending future narco asbestos claims reflects coverage reimburses honeywell portions narcorelated indemnity defense costs provided large number insurance policies written dozens insurance companies domestic insurance market london excess market conduct analyses estimate probable amount insurance recoverable asbestos claims substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries made judgments concerning insurance coverage believe reasonable consistent historical dealings knowledge pertinent solvency issues surrounding insurers projecting future events subject many uncertainties could cause narcorelated asbestos liabilities assets higher lower projected recorded given uncertainties review estimates periodically update based experience relevant factors similarly reevaluate projections concerning probable insurance recoveries light changes projected liability developments may impact insurance recoveries honeywell international inc notes financial statements continued dollars millions except per share amounts bendix productsthe following tables present information regarding bendix related asbestos claims activity honeywell experienced average resolution values per claim excluding legal costs follows possible predict whether resolution values bendixrelated asbestos claims increase decrease stabilize future consolidated financial statements reflect estimated liability resolution pending claims actually filed financial statement date future bendixrelated asbestos claims valued bendix pending future claims using average resolution values previous five years update resolution values used estimate cost bendix pending future claims fourth quarter year liability future claims represents estimated value future asbestos related bodily injury claims expected asserted bendix next five years estimated cost future bendixrelated asbestos claims based historic claims filing experience dismissal rates disease classifications resolution values tort system previous five years light uncertainties inherent making longterm projections well certain factors unique friction product asbestos claims believe reasonable basis estimating asbestos claims beyond next five years methodology used estimate liability future claims similar used estimate liability future narcorelated asbestos claims insurance receivable corresponding liability settlement pending future bendix asbestos claims reflects coverage provided large number insurance policies written dozens insurance companies domestic insurance market london excess market based ongoing analysis probable insurance recovery insurance receivables recorded financial statements simultaneous recording estimated liability underlying asbestos claims determination based analysis underlying insurance policies historical experience insurers ongoing review solvency insurers judicial determinations relevant insurance programs consideration impacts settlements reached insurers honeywell international inc notes financial statements continued dollars millions except per share amounts honeywell believes sufficient insurance coverage reserves cover pending bendixrelated asbestos claims bendixrelated asbestos claims estimated filed within next five years although impossible predict outcome either pending future bendixrelated asbestos claims believe claims would material adverse effect consolidated financial position light insurance coverage prior experience resolving claims rate types claims filed average resolution value claims period time claim settlements paid collectively variable claims factors substantially change honeywell would expect future bendixrelated asbestos claims material adverse effect results operations operating cash flows fiscal year assurances given however variable claims factors change matters subject number lawsuits investigations disputes involve substantial amounts claimed arising conduct business including matters relating commercial transactions government contracts product liability prior acquisitions divestitures employee benefit plans intellectual property environmental health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes matters well potential ranges possible losses taking consideration insurance recoveries based careful analysis matter assistance outside legal counsel applicable experts included matters following honeywell v united auto workers uaw et alin july 2011 honeywell filed action federal court district new jersey uaw former employees retired series master collective bargaining agreements mcbas honeywell uaw seeking declaratory judgment certain express limitations obligation contribute toward healthcare coverage retirees caps set forth mcbas may implemented effective january 1 2012 uaw certain retiree defendants filed mirror suit eastern district michigan alleging mcbas provide caps company’s liability healthcare coverage new jersey action dismissed honeywell subsequently answered uaw’s complaint michigan asserted counterclaims fraudulent inducement negligent misrepresentation breach implied warranty uaw filed motion dismiss counterclaims court dismissed honeywell’s fraudulent inducement negligent misrepresentation claims let stand claim breach implied warranty second quarter 2014 parties agreed stay proceedings respect retirees retired initial inclusions caps 2003 mcba supreme court decided mg polymers usa llc v tackett case ruling january 26 2015 supreme court held retiree health insurance benefits provided collective bargaining agreements carry inference vested guaranteed continue life “vesting” issue must decided pursuant ordinary principles contract law stay proceedings lifted case proceeding based supreme court’s ruling honeywell confident caps upheld liability healthcare coverage premiums respect putative class limited negotiated expressly set forth applicable mcbas event adverse ruling however honeywell’s postretirement benefits pre2003 retirees would increase approximately 129 million reflecting estimated value caps december 2013 uaw certain plaintiffs filed motion partial summary judgment respect retirees retired initial inclusion caps 2003 mcba uaw sought ruling 2003 mcba limit honeywell’s obligation contribute healthcare coverage post2003 retirees motion remains pending honeywell confident court find 2003 mcba fact limit honeywell’s retiree healthcare obligation post2003 retirees event adverse ruling however honeywell’s postretirement benefits post2003 retirees would increase approximately 95 million reflecting estimated value caps joint strike fighter investigation 2013 company received subpoenas department justice requesting information relating primarily parts manufactured united kingdom china used fighter jet company cooperating fully investigation believe honeywell complied relevant us laws regulations regarding manufacture sensors possible honeywell international inc notes financial statements continued dollars millions except per share amounts predict outcome investigation action may result given uncertainty inherent litigation investigations including specific matters referenced believe possible develop estimates reasonably possible loss excess current accruals matters specifically set forth considering past experience existing accruals expect outcome matters either individually aggregate material adverse effect consolidated financial position contingencies resolved long periods time potential liabilities subject change due new developments changes settlement strategy impact evidentiary requirements could cause us pay damage awards settlements become subject equitable remedies could material adverse effect results operations operating cash flows periods recognized paid warranties guarantees normal course business issue product warranties product performance guarantees accrue estimated cost product warranties performance guarantees based contract terms historical experience time sale adjustments initial obligations warranties guarantees made changes obligations become reasonably estimable following table summarizes information concerning recorded obligations product warranties product performance guarantees product warranties product performance guarantees included following balance sheet accounts note 20 pension postretirement benefits sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees pension benefits many us employees provided noncontributory qualified nonqualified defined benefit plans nonunion hourly salaried employees joining honeywell first time december 31 2012 eligible participate honeywell’s us defined benefit pension plans also sponsor defined benefit pension plans cover nonus employees us citizens certain jurisdictions principally uk netherlands germany canada pension plans outside us material company either individually aggregate also sponsor postretirement benefit plans provide health care benefits life insurance coverage mainly us eligible retirees none honeywell’s us employees eligible retiree medical subsidy company addition 80 honeywell’s us retirees either company subsidy fixeddollar subsidy amount significantly limits exposure impact future health care cost increases retiree medical life insurance plans funded claims expenses paid operating cash flow honeywell international inc notes financial statements continued dollars millions except per share amounts following tables summarize balance sheet impact including benefit obligations assets funded status associated significant pension postretirement benefit plans 1 included assets consolidated balance sheet 2 included accrued liabilities consolidated balance sheet 3 included liabilities noncurrent consolidated balance sheet honeywell international inc notes financial statements continued dollars millions except per share amounts recognized accumulated comprehensive income loss associated significant pension postretirement benefit plans december 31 2016 2015 follows components net periodic benefit income cost amounts recognized comprehensive income loss significant pension postretirement benefit plans include following components honeywell international inc notes financial statements continued dollars millions except per share amounts estimated prior service credit pension benefits amortized accumulated comprehensive income loss net periodic benefit income cost 2017 expected 43 million 1 million us nonus pension plans honeywell international inc notes financial statements continued dollars millions except per share amounts estimated net loss prior service credit postretirement benefits amortized accumulated comprehensive income loss net periodic benefit income 2017 expected 14 million 70 million major actuarial assumptions used determining benefit obligations net periodic benefit income cost significant benefit plans presented following table weighted averages honeywell international inc notes financial statements continued dollars millions except per share amounts discount rate us pension postretirement benefits plans reflects current rate associated liabilities could settled measurement date december 31 determine discount rates us pension postretirement benefit plans use modeling process involves matching expected cash outflows benefit plans yield curve constructed portfolio high quality fixedincome debt instruments use single weightedaverage yield hypothetical portfolio discount rate benchmark discount rate used determine postretirement benefit obligation lower principally due shorter expected duration postretirement plan obligations compared pension plan obligations fourth quarter 2015 changed methodology used estimate service interest cost components net periodic benefit income cost significant pension plans previously estimated cost components utilizing single weightedaverage discount rate derived yield curve used measure pension benefit obligation new methodology utilizes full yield curve approach estimation cost components applying specific spot rates along yield curve used determination pension benefit obligation underlying projected cash flows provides precise measurement service interest costs improving correlation projected cash flows corresponding spot rates change affect measurement pension obligation applied prospectively change estimate us pension plans single weighted average spot rates used determine service interest costs 2017 442 349 expected rate return us plan assets 775 longterm rate based historical plan asset returns varying longterm periods combined current market conditions broad asset mix considerations review expected rate return annual basis revise appropriate nonus benefit plans actuarial assumptions reflect economic market factors relevant country pension benefits included aggregate data tables amounts applicable pension plans accumulated benefit obligations exceeding fair value plan assets amounts related plans follows accumulated benefit obligation us defined benefit pension plans 173 billion 169 billion nonus defined benefit pension plans 64 billion 62 billion december 31 2016 2015 asset investment strategy us pension plans focuses maintaining diversified portfolio using various asset classes order achieve longterm investment objectives risk adjusted basis honeywell international inc notes financial statements continued dollars millions except per share amounts actual invested positions various securities change time based short longerterm investment opportunities achieve objectives established longterm target allocations follows 6070 equity securities 1020 fixed income securities cash 515 real estate investments 1020 types investments equity securities include publiclytraded stock companies located inside outside united states fixed income securities include corporate bonds companies diversified industries mortgagebacked securities us treasuries real estate investments include direct investments commercial properties investments real estate funds types investments include investments private equity hedge funds follow several different strategies review assets regular basis ensure within targeted asset allocation ranges necessary asset balances adjusted back within target allocations nonus pension assets typically managed decentralized fiduciary committees honeywell corporate investments group providing funding investment guidance nonus investment policies different country local regulations funding requirements financial tax considerations part funding investment allocation process country accordance asu 201507 “fair value measurement topic 820” certain investments measured fair value using net asset value nav per share equivalent practical expedient classified fair value hierarchy fair value amounts presented following tables intended permit reconciliation fair value hierarchy amounts presented total pension benefits plan assets fair values us nonus pension plans assets asset category follows honeywell international inc notes financial statements continued dollars millions except per share amounts honeywell international inc notes financial statements continued dollars millions except per share amounts following table summarizes changes fair value level 3 assets us nonus plans company enters futures contracts gain exposure certain markets sufficient cash equivalents held pension plans cover notional value futures contracts december 31 2016 2015 us plans contracts notional amounts 3775 million 2613 million december 31 2016 2015 nonus plans contracts notional amounts 55 million 54 million us nonus pension plans notional derivative exposure primarily related outstanding equity futures contracts common stocks preferred stocks real estate investment trusts shortterm investments valued closing price reported active market individual securities traded corporate bonds mortgages assetbacked securities government securities valued either using pricing models bids provided brokers dealers quoted prices securities similar characteristics discounted cash flows include adjustments certain risks may observable credit liquidity risks certain securities held collective trust funds valued using net asset values provided administrators funds investments private equity debt real estate hedge funds direct private investments valued estimated fair value based quarterly financial information received investment advisor andor general partner investments real estate properties valued quarterly basis using income approach valuation estimates periodically supplemented third party appraisals general funding policy qualified defined benefit pension plans contribute amounts least sufficient satisfy regulatory funding standards 2016 2015 2014 required make contributions us pension plans contributions made required make contributions us pension plans 2017 2016 contributions 149 million made nonus pension plans satisfy regulatory funding requirements 2017 expect make contributions cash andor marketable securities approximately 130 million nonus pension plans satisfy regulatory funding standards contributions us nonus pension plans reflect benefits paid directly company assets benefit payments including amounts paid company assets reflecting expected future service appropriate expected paid follows honeywell international inc notes financial statements continued dollars millions except per share amounts postretirement benefits assumed health care cost trend rate significant effect amounts reported onepercentagepoint change assumed health care cost trend rate would following effects note 21 segment financial data globally manage business operations four reportable operating segments segment information consistent management reviews businesses makes investing resource allocation decisions assesses operating performance honeywell’s senior management evaluates segment performance based segment profit segment profit measured business unit income loss taxes excluding general corporate unallocated expense income expense interest financial charges pension postretirement benefits expense stock compensation expense repositioning charges july 2016 company announced realignment business units comprising automation control solutions reporting segment forming two new reportable operating segments home building technologies safety productivity solutions home building technologies includes environmental energy solutions security fire building solutions distribution additionally industrial combustionthermal business previously part environmental energy solutions automation control solutions became part performance materials technologies safety productivity solutions includes honeywell international inc notes financial statements continued dollars millions except per share amounts sensing productivity solutions industrial safety well intelligrated business realigned segment reporting structure company’s reportable operating segments aerospace home building technologies performance materials technologies safety productivity solutions realignments impact company’s historical consolidated financial position results operations cash flows prior period amounts reclassified conform current period segment presentation honeywell international inc notes financial statements continued dollars millions except per share amounts reconciliation segment profit consolidated income continuing operations taxes follows 1 equity income loss affiliated companies included segment profit 2 amounts included cost products services sold selling general administrative expenses note 22 geographic areas financial data 1 sales geographic areas approximate market significant net sales classified according country origin included united states net sales export sales 5290 million 5526 million 5647 million 2016 2015 2014 2 longlived assets comprised property plant equipment net honeywell international inc notes financial statements continued dollars millions except per share amounts note 23 supplemental cash flow information note 24 unaudited quarterly financial information report independent registered public accounting firm board directors shareholders honeywell international inc morris plains new jersey audited accompanying consolidated balance sheets honeywell international inc subsidiaries “company” december 31 2016 2015 related consolidated statements operations comprehensive income cash flows shareowners’ equity years ended also audited company’s internal control financial reporting december 31 2016 based criteria established internal controlintegrated framework 2013 issued committee sponsoring organizations treadway commission company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion consolidated financial statements opinion company’s internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position honeywell international inc subsidiaries december 31 2016 2015 results operations cash flows years ended conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2016 based criteria established internal controlintegrated framework 2013 issued committee sponsoring organizations treadway commission discussed note 1 consolidated financial statements company changed method accounting employee sharebased payments 2016 2015 due adoption financial accounting standards board’s accounting standards update 201609 compensationstock compensation topic 718 improvements employee sharebased payment accounting deloitte touche llp parsippany new jersey february 10 2017 report independent registered public accounting firm board directors shareholders honeywell international inc opinion accompanying consolidated statements income comprehensive income shareholders’ equity cash flows year ended december 31 2014 present fairly material respects results operations cash flows honeywell international inc subsidiaries year ended december 31 2014 conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audit conducted audit financial statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audit provides reasonable basis opinion pricewaterhousecoopers llp florham park nj february 13 2015 except change composition reportable segments discussed note 21 consolidated financial statements date february 10 2017 item 9item 8 financial statements supplementary data honeywell international inc consolidated statement operations notes consolidated financial statements integral part statement honeywell international inc consolidated statement comprehensive income notes consolidated financial statements integral part statement honeywell international inc consolidated balance sheet notes consolidated financial statements integral part statement honeywell international inc consolidated statement cash flows notes consolidated financial statements integral part statement honeywell international inc consolidated statement shareowners’ equity notes consolidated financial statements integral part statement honeywell international inc notes consolidated financial statements dollars millions except per share amounts note 1 summary significant accounting policies accounting principlesthe financial statements accompanying notes prepared accordance accounting principles generally accepted united states america following description honeywell’s significant accounting policies principles consolidationthe consolidated financial statements include accounts honeywell international inc subsidiaries entities controlling interest maintained consolidation policy requires equity investments exercise significant influence control investee primary beneficiary investee’s activities accounted using equity method investments able exercise significant influence investee readily determinable fair values accounted cost method intercompany transactions balances eliminated consolidation property plant equipmentproperty plant equipment recorded cost including asset retirement obligations less accumulated depreciation financial reporting straightline method depreciation used estimated useful lives 10 50 years buildings improvements 2 16 years machinery equipment recognition fair value obligations associated retirement tangible longlived assets required legal obligation incur costs upon initial recognition liability cost capitalized part related longlived asset depreciated corresponding asset’s useful life goodwill indefinitelived intangible assetsgoodwill indefinitelived intangible assets subject impairment testing annually march 31 whenever events changes circumstances indicate carrying amount may fully recoverable testing compares carrying values fair values appropriate carrying value assets reduced fair value completed annual goodwill impairment test march 31 2017 determined impairment date intangible assets determinable livesother intangible assets determinable lives consist customer lists technology patents trademarks intangibles amortized estimated useful lives ranging 2 24 years sales recognitionproduct service sales recognized persuasive evidence arrangement exists product delivery occurred services rendered pricing fixed determinable collection reasonably assured service sales principally representing repair maintenance engineering activities recognized contractual period services rendered sales longterm contracts recorded percentageofcompletion method measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts provisions anticipated losses longterm contracts recorded full losses become evident revenues contracts multiple element arrangements recognized element earned based relative fair value element provided delivered elements value customers standalone basis amounts allocated element based objectively determined fair value sales price product service sold separately competitor prices similar products services environmentalwe accrue costs related environmental matters probable incurred liability related contaminated site amount reasonably estimated additional information see note 19 commitments contingencies asbestos related contingencies insurance recoverieswe recognize liability asbestos related contingency probable occurrence reasonably estimable connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable additional information see note 19 commitments contingencies honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts aerospace sales incentiveswe provide sales incentives commercial aircraft manufacturers airlines connection selection aircraft equipment predominately wheel braking system hardware avionics auxiliary power units installation commercial aircraft incentives consist free deeply discounted products credits future purchases product upfront cash payments costs recognized period incurred cost products sold reduction sales appropriate research developmentresearch development costs companysponsored research development projects expensed incurred costs principally included cost products sold 1835 million 1864 million 1856 million 2017 2016 2015 2016 research development costs previously disclosed revised reflect amounts recorded 2016 consolidated statement operations impact results operations stockbased compensation plansthe principal awards issued stockbased compensation plans described note 18 stockbased compensation plans nonqualified stock options restricted stock units cost awards measured grant date based fair value award value portion award ultimately expected vest recognized expense requisite service periods generally vesting period equity award included selling general administrative expenses forfeitures estimated time grant recognize expense awards expected vest based historical forfeiture rates pension benefitswe recognize net actuarial gains losses excess 10 greater fair value plan assets plans’ projected benefit obligation corridor annually fourth quarter year mtm adjustment applicable quarter interim remeasurement triggered remaining components pension income expense primarily service interest costs assumed return plan assets recognized quarterly basis pension ongoing income expense foreign currency translationassets liabilities subsidiaries operating outside united states functional currency us dollars translated us dollars using yearend exchange rates sales costs expenses translated average exchange rates effect year foreign currency translation gains losses included component accumulated comprehensive income loss subsidiaries operating highly inflationary environments inventories property plant equipment including related expenses remeasured exchange rate effect date assets acquired monetary assets liabilities remeasured yearend exchange rates remeasurement adjustments subsidiaries included earnings derivative financial instrumentswe minimize risks interest foreign currency exchange rate fluctuations normal operating financing activities deemed appropriate use derivative financial instruments derivative financial instruments used manage risk used trading speculative purposes use leveraged derivative financial instruments derivative financial instruments qualify hedge accounting must designated effective hedge identified risk exposure inception contract accordingly changes fair value derivative contract must highly correlated changes fair value underlying hedged item inception hedge life hedge contract derivatives recorded balance sheet assets liabilities measured fair value derivatives designated hedges fair value assets liabilities changes fair values derivatives hedged items recorded current earnings derivatives designated cash flow hedges effective portion changes fair value derivatives recorded accumulated comprehensive income loss subsequently recognized earnings hedged items impact earnings cash flows derivative financial instruments honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts classified consistent underlying hedged item derivative instruments designated qualify net investment hedge effective portion derivative’s gain loss reported component comprehensive income loss recorded accumulated comprehensive income loss gain loss subsequently reclassified net earnings hedged net investment either sold substantially liquidated income taxessignificant judgment required evaluating tax positions establish additional reserves income taxes despite belief tax positions fully supportable remain certain positions meet minimum recognition threshold approach evaluating certain uncertain tax positions defined authoritative guidance determines tax position likely sustained upon examination applicable taxing authority normal course business company subsidiaries examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes continually assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts give rise change estimate become known cash equivalentscash cash equivalents include cash hand highly liquid investments original maturity three months less earnings per sharebasic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding dilutive potential common shares outstanding reclassificationscertain prior year amounts reclassified conform current year presentation recent accounting pronouncementswe consider applicability impact accounting standards updates asus issued financial accounting standards board fasb asus listed assessed determined either applicable expected minimal impact consolidated results operations financial position cash flows consolidated financial statements may 2014 following related amendments fasb issued guidance revenue contracts customers supersedes upon adoption previous revenue recognition guidance including industryspecific guidance underlying principle requires entity recognize revenue transfer goods services customers amount entity expects entitled exchange goods services guidance provides fivestep analysis transactions determine revenue recognized major provisions include capitalization certain contract costs consideration time value money transaction price certain circumstances allowing estimates variable consideration recognized contingencies resolved guidance also requires enhanced disclosures regarding nature amount timing uncertainty revenue cash flows arising entity’s contracts customers company completed evaluation new standard assessed impacts adoption consolidated financial statements disclosures based evaluation current contracts revenue streams revenue recognition mostly consistent previous new standard exception two key revenue streams within aerospace segment described first previous accounting policy costs incurred nonrecurring engineering development activities aerospace products commercial customers generally record expense incurred customer funding received efforts recognized earned reduction cost sales upon adoption new standard customer funding generally classified revenue reduction cost sales revenues deferred honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts subsequently recognized products delivered customers additionally new guidance expenses incurred customer agreed funded amount deferred asset subsequently recognized cost sales products delivered customer result changes deferred costs assets deferred revenue liability increased approximately 1090 million effective january 1 2018 aforementioned change classification within consolidated statement operations timing difference recognition expected minor impact gross margin percentage change gross profit second accounting revenues mechanical service programs aerospace segment impacted previous policy recognize revenue time costs incurred input method upon adoption continue recognize revenue time recognition based series distinct services using output method adoption change results unbilled receivables deferred revenue eliminated retained earnings adopted new standard effective january 1 2018 using modified retrospective transition method cumulative effect recorded opening balance retained earnings impacted revenue streams 75 million disclosures notes consolidated financial statements related revenue recognition significantly expanded new standard specifically around quantitative qualitative information performance obligations changes contract assets liabilities disaggregation revenue february 2016 fasb issued guidance accounting leases requires lessees recognize leases balance sheets rights obligations created leases guidance requires enhanced disclosures regarding amount timing uncertainty cash flows arising leases effective interim annual periods beginning december 15 2018 early adoption permitted expect adopt requirements new standard effective january 1 2019 guidance requires use modified retrospective approach currently evaluating lease portfolio assess overall financial statement impact planning adoption implementation standard continue evaluate adoption impact standard consolidated financial position results operations related notes financial statements october 2016 fasb issued accounting standard update requires entity recognize income tax consequences intraentity transfer asset inventory time entity transfer occurs rather asset ultimately transferred third party required current us gaap guidance intended reduce diversity practice particularly transfers involving intellectual property subsequent 2017 fiscal year adopted accounting standard update january 1 2018 guidance requires application modified retrospective basis adoption guidance increases deferred tax assets approximately 340 million cumulativeeffect adjustment retained earnings amount march 2017 fasb issued guidance presentation net periodic pension cost net periodic postretirement benefit cost new standard requires employer disaggregate service cost component net benefit cost employer required report service cost component line item items statement operations compensation costs arising services rendered pertinent employees period components net benefit cost required presented statement operations separately service cost component income expense guidance effective fiscal years beginning december 15 2017 subsequent 2017 fiscal year adopted accounting standard update january 1 2018 guidance impacts presentation consolidated financial statements current presentation service cost component consistent requirements new standard present components within income expense currently present components within cost products services sold honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts selling general administrative expenses components continue excluded segment profit see note 20 pension postretirement benefits components net period benefit cost august 2017 fasb issued amendments hedge accounting guidance amendments intended better align company’s risk management strategies financial reporting hedging relationships new guidance hedging strategies eligible hedge accounting application hedge accounting simplified addition new guidance amends presentation disclosure requirements guidance effective fiscal years beginning december 15 2018 early adoption permitted including interim periods within years guidance requires use modified retrospective approach currently evaluating whether early adopt new guidance impact amendment consolidated financial position results operations related notes financial statements note 2 acquisitions divestitures 2017 significant acquisitions individually aggregate 2016 acquired businesses aggregate cost net cash debt assumed 2538 million august 2016 company acquired intelligrated leading provider supply chain warehouse automation technologies aggregate value net cash acquired 1488 million intelligrated part safety productivity solutions third quarter 2017 completed evaluation fair value assets liabilities acquired management recorded goodwill intangible assets acquired 1121 million 507 million respectively intelligrated identifiable intangible assets primarily include customer relationships technology trade name amortized estimated lives ranging 1 15 years using straight line accelerated amortization methods goodwill nondeductible tax purposes april 2016 company completed acquisition xtralis international holdings limited “xtralis” leading global provider aspiration smoke detection perimeter security technologies aggregate cost net cash acquired debt assumed 515 million xtralis part home building technologies february 2016 company acquired 100 percent issued outstanding shares com dev international “com dev” leading satellite space components provider aggregate value net cash acquired debt assumed 347 million com dev part aerospace january 2016 company acquired remaining 30 percent noncontrolling interest uop russell llc develops technology manufactures modular equipment process natural gas 240 million uop russell llc part performance materials technologies december 2015 company completed acquisition elster division melrose industries plc “elster” aggregate value net cash acquired 4899 million elster 2015 revenues 1670 million integrated home building technologies honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts performance materials technologies following table summarizes fair value acquired elster assets liabilities elster identifiable intangible assets primarily include customer relationships trade names technology amortized estimated lives ranging 1 20 years using straight line accelerated amortization methods goodwill nondeductible tax purposes october 1 2016 company completed taxfree spinoff resins chemicals business part performance materials technologies standalone publiclytraded company named advansix inc “advansix” honeywell shareowners assets liabilities associated advansix removed company’s consolidated balance sheet results operations advansix included consolidated statement operations effective date spinoff honeywell shareowners record close business september 16 2016 received one share advansix common stock every 25 shares honeywell common stock immediately prior effective date spinoff advansix incurred debt make cash distribution 269 million company time advansix also incurred 38 million borrowings order fund post spinoff working capital 2016 connection spinoff company entered certain agreements advansix effect legal structural separation including transition services agreement advansix provide certain administrative services limited time end 2017 agreements ended september 16 2016 company completed sale honeywell technology solutions inc sale price 300 million company recognized pretax gain 176 million recorded income expense honeywell technology solutions inc business part aerospace honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 3 repositioning charges summary repositioning charges follows following table summarizes pretax distribution total net repositioning charges classification following table summarizes pretax impact total net repositioning charges segment 2017 recognized repositioning charges totaling 507 million including severance costs 305 million related workforce reductions 7096 manufacturing administrative positions across segments workforce reductions primarily related cost savings actions taken connection productivity ongoing functional transformation initiatives site transitions segments costeffective locations repositioning charge included asset impairments 142 million principally corporate segment related writedown legacy properties certain equipment connection planned disposition writedown research development facility connection planned exit facility repositioning charge included exit costs 60 million principally closure obligations associated site transitions segments lease exit obligations corporate segment 2016 recognized repositioning charges totaling 369 million including severance costs 283 million related workforce reductions 6585 manufacturing administrative positions across segments workforce reductions primarily related cost savings actions taken connection productivity ongoing functional transformation initiatives separation honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts former automation control solutions reporting segment two new reporting segments site transitions segments costeffective locations achieving acquisitionrelated synergies repositioning charge included asset impairments 43 million principally related writeoff certain intangible assets connection sale performance materials technologies business repositioning charge included exit costs 43 million principally expenses related spinoff advansix business closure obligations associated site transitions also 109 million previously established accruals primarily severance returned income result higher attrition anticipated prior severance programs resulting lower required severance payments lower expected severance costs certain repositioning actions changes scope previously announced repositioning actions 2015 recognized repositioning charges totaling 216 million including severance costs 197 million related workforce reductions 6405 manufacturing administrative positions across segments workforce reductions primarily related cost savings actions taken connection productivity ongoing functional transformation initiatives also 53 million previously established accruals primarily severance returned income due principally higher attrition anticipated prior severance programs resulting lower required severance payments changes scope previously announced repositioning actions following table summarizes status total repositioning reserves honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts certain repositioning projects reportable operating segments 2017 2016 2015 included exit disposal activities costs related recognized future periods actual liability incurred exit disposal costs significant note 4 income expense refer note 2 acquisitions divestitures note 12 longterm debt credit agreements details transactions recognized 2016 within income expense note 5 income taxes income taxes tax expense benefit honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts effective tax rate increased 506 percentage points 2017 compared 2016 increase primarily attributable provisional impact us tax reform see “the tax cuts jobs act” partially offset increased tax benefits foreign tax credits employee sharebased payments company’s nonus effective tax rate 714 increase approximately 547 percentage points compared 2016 yearoveryear increase nonus effective tax rate primarily driven company’s change assertion regarding foreign unremitted earnings increased expense reserves various jurisdictions increased withholding taxes partially offset higher earnings low tax rate jurisdictions effective tax rate decreased 16 percentage points 2016 compared 2015 decrease primarily attributable excess tax benefits employee sharebased payments arising adoption fasb’s amended guidance related employee sharebased payment accounting partially offset increased tax reserves various jurisdictions lower tax benefits manufacturing incentives company’s nonus effective tax rate 167 decrease approximately 28 percentage points compared 2015 yearoveryear decrease nonus effective tax rate primarily driven higher earnings lower tax rate jurisdictions decrease tax impact restructuring divestitures effective tax rate lower us federal statutory rate 35 primarily due overall nonus earnings taxed lower rates honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts deferred tax assets liabilities tax effects temporary differences tax carryforwards give rise future income tax benefits payables follows discussed “the tax cuts jobs act” company longer intends reinvest historical earnings foreign subsidiaries december 31 2017 recorded provisional deferred tax liability mainly comprised nonus withholding taxes approximately 21 billion gross deferred tax assets include 794 million related nonus operations comprised principally net operating losses capital loss tax credit carryforwards mainly canada france germany luxembourg united kingdom deductible temporary differences maintain valuation allowance 660 million portion nonus gross deferred tax assets change valuation allowance resulted increases 4 million 69 million 114 million income tax expense 2017 2016 2015 event determine able realize net deferred tax assets future reduce amounts increase income tax expense period determination made conversely determine able realize net deferred tax assets excess carrying amounts decrease recorded valuation allowance reduction income tax expense period determination made honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts december 31 2017 net operating loss capital loss tax credit carryforwards follows many jurisdictions impose limitations timing utilization net operating loss tax credit carryforwards instances whereby expected permanent limitation utilization net operating loss tax credit carryforward deferred tax asset amount carryforward reduced december 31 2017 2016 2015 947 million 877 million 765 million unrecognized tax benefits recognized would recorded component tax expense following table summarizes tax years remain subject examination major tax jurisdictions december 31 2017 based outcome examinations result expiration statute limitations specific jurisdictions reasonably possible certain unrecognized tax benefits tax positions taken previously filed tax returns materially change recorded liabilities financial statements addition outcome examinations may impact valuation certain deferred tax assets net operating losses future periods honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts unrecognized tax benefits examinations progress 487 million 398 million 349 million december 31 2017 2016 2015 estimated interest penalties related underpayment income taxes classified component tax expense consolidated statement operations totaled 28 million 18 million 11 million years ended december 31 2017 2016 2015 accrued interest penalties 423 million 395 million 336 million december 31 2017 2016 2015 tax cuts jobs act december 22 2017 us enacted tax cuts jobs act “tax act” instituted fundamental changes taxation multinational corporations tax act includes changes taxation foreign earnings implementing dividend exemption system expansion current antideferral rules minimum tax lowtaxed foreign earnings new measures deter base erosion tax act also includes permanent reduction corporate tax rate 21 repeal corporate alternative minimum tax expensing capital investment limitation deduction interest expense furthermore part transition new tax system onetime transition tax imposed us shareholder’s historical undistributed earnings foreign affiliates although tax act generally effective january 1 2018 gaap requires recognition tax effects new legislation reporting period includes enactment date december 22 2017 result impacts tax act sec provided guidance allows company record provisional amounts impacts requirement accounting completed period exceed one year date enactment december 31 2017 company completed accounting tax effects tax act therefore recorded provisional amounts effects tax act primary impacts tax act relate remeasurement deferred tax assets liabilities resulting change corporate tax rate “corporate tax rate change” onetime mandatory transition tax undistributed earnings foreign affiliates “mandatory transition tax” deferred taxes connection change company’s intent permanently reinvest historical undistributed earnings foreign affiliates “undistributed foreign earnings” corporate tax rate changefor year ended december 31 2017 recorded tax benefit approximately 235 million due decrease corporate tax rate 35 21 date enactment company deferred tax liability excess net book value tax basis us assets liabilities generate future taxable income excess book income due tax act additional taxable income subject tax lower corporate tax rate consequently reducing company’s deferred tax liability date enactment mandatory transition taxfor year ended december 31 2017 recorded provisional tax charge approximately 19 billion due imposition mandatory transition tax “mtt” deemed repatriation undistributed foreign earnings tax act imposes onetime tax undistributed previously untaxed post1986 foreign earnings profits ep determined accordance us tax principles certain foreign corporations owned us shareholders general estimated 20 billion ep related foreign affiliates subject mtt imposed rate 155 extent cash equivalents held foreign affiliates certain testing dates remaining ep taxed rate 80 accordance tax act company elect pay mtt liability period eight years first installment 144 million due 2018 remainder balance recorded liabilities noncurrent december 31 2017 company recorded provisional amount certain information related computation ep readily available testing dates determine taxable amounts yet occurred limited information federal state taxing authorities regarding honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts application interpretation recently enacted legislation company disclose impact provisional amount reporting period accounting completed exceed one year date enactment tax act undistributed foreign earningsfor year ended december 31 2017 recorded provisional tax charge approximately 21 billion due company’s intent longer permanently reinvest historical undistributed earnings foreign affiliates previously considered substantially earnings nonus subsidiaries permanently reinvested accordingly recorded deferred income taxes earnings result fundamental changes taxation multinational corporations created tax act company longer intends permanently reinvest historical undistributed earnings foreign affiliates amounted approximately 20 billion december 31 2017 including current year earnings gaap requires recognition deferred tax liability reporting period intent longer permanently reinvest historical undistributed foreign earnings made although us federal taxes imposed future distributions foreign earnings many cases cash transfer subject foreign withholding local taxes accordingly december 31 2017 company included provisional deferred tax liability mostly related nonus withholding taxes company recorded provisional amount certain information related computation ep distributable reserves foreign exchange gains losses readily available company disclose impact provisional amount reporting period accounting completed exceed one year date enactment tax act provisional amount based company’s current legal ownership structure may change future tax impacts resulting changes legal ownership structure considered changes provisional amount recorded reporting period plan modify legal structure adopted may exceed one year date enactment tax act global intangible low taxed incomein addition changes described tax act imposes us tax global intangible low taxed income “gilti” earned certain foreign affiliates owned us shareholder computation gilti still subject interpretation additional clarifying guidance expected generally intended impose tax earnings foreign corporation deemed exceed certain threshold return relative underlying business investment accordance guidance issued fasb company made policy election treat future taxes related gilti current period expense reporting period tax incurred note 6 earnings per share details earnings per share calculations years ended december 31 2017 2016 2015 follows honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts diluted earnings per share calculations exclude effect stock options’ assumed proceeds exceed average market price common shares period 2017 2016 2015 weighted number stock options excluded computations 28 million 75 million 71 million stock options outstanding end respective periods note 7 accounts receivable trade receivables includes 1853 million 1626 million unbilled balances longterm contracts december 31 2017 december 31 2016 amounts billed accordance terms customer contracts relate note 8 inventories valued lifo amounted 324 million 296 million december 31 2017 2016 lifo inventories valued current costs carrying values would approximately 39 million 65 million higher december 31 2017 2016 honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 9 property plant equipmentnet depreciation expense 717 million 726 million 672 million 2017 2016 2015 note 10 goodwill intangible assetsnet following table summarizes change carrying amount goodwill years ended december 31 2017 2016 segment certain prior period balances recast due business realignment refer note 21 segment financial data intangible assets comprised intangible assets amortization expense 398 million 304 million 211 million 2017 2016 2015 estimated intangible asset amortization expense next five years approximates 403 million 2018 399 million 2019 359 million 2020 319 million 2021 293 million 2022 honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 11 accrued liabilities note 12 longterm debt credit agreements honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts schedule principal payments longterm debt follows november 2017 company issued 445 million 3812 senior notes due 2047 “exchange notes” exchange notes senior unsecured unsubordinated obligations honeywell rank equally honeywell’s existing future senior unsecured debt senior honeywell’s subordinated debt exchange notes issued partial exchange 6625 debentures due 2028 570 notes due 2036 570 notes due 2037 5375 notes due 2041 company paid 133 million bondholders connection partial exchange october 2017 company issued 450 million floating rate senior notes due 2019 750 million 180 senior notes due 2019 collectively “2017 notes” 2017 notes senior unsecured unsubordinated obligations honeywell rank equally honeywell’s existing future senior unsecured debt senior honeywell’s subordinated debt offering resulted gross proceeds 1200 million offset 5 million discount closing costs related offering fourth quarter 2016 company repurchased entire outstanding principal amount 400 million 530 senior notes due 2017 900 million 530 senior notes due 2018 900 million 500 senior notes due 2019 cost related early redemption including “make whole premium” 126 million recorded income expense october 2016 company issued 1250 million 140 senior notes due 2019 250 million floating rate senior notes due 2019 1500 million 185 senior notes due 2021 1500 million 250 senior notes due 2026 collectively “notes” notes senior unsecured unsubordinated obligations honeywell rank equally honeywell’s existing future senior unsecured debt senior honeywell’s subordinated debt offering resulted gross proceeds 4500 million offset 27 million discount closing costs related offering february 2016 company issued €1000 million floating rate senior notes due 2018 €1000 million 065 senior notes due 2020 €1250 million 130 senior notes due 2023 €750 million 225 senior notes due 2028 collectively “euro notes” euro notes senior unsecured unsubordinated obligations honeywell rank equally honeywell’s existing future senior unsecured debt senior honeywell’s subordinated debt offering resulted gross proceeds 4438 million offset 23 million discount closing costs related offering issuances described unless otherwise noted debt issuance costs deferred recognized direct deduction related debt liability amortized interest expense debt term honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts april 28 2017 company entered amendment 3 amendment amended restated 4 billion credit agreement dated july 10 2015 amended amendment 1 dated september 30 2015 amendment 2 dated april 29 2016 amended “credit agreement” syndicate banks credit agreement maintained general corporate purposes commitments credit agreement increased pursuant terms credit agreement aggregate amount exceed 45 billion amendment among things extends credit agreement’s termination date july 10 2021 april 28 2022 april 28 2017 company entered 15 billion 364day credit agreement 364day credit agreement syndicate banks 364day credit agreement maintained general corporate purposes borrowings credit agreements previously described note 13 lease commitments future minimum lease payments operating leases initial remaining noncancellable lease terms excess one year follows rent expense 385 million 387 million 390 million 2017 2016 2015 note 14 financial instruments fair value measures credit market riskfinancial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties derivative transactions substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value cash flows derivative financial instruments considering reasonably possible changes interest rates currency exchange rates restrict use derivative financial instruments hedging activities continually monitor creditworthiness customers grant credit terms normal course business terms conditions credit sales designed mitigate eliminate concentrations credit risk single customer sales materially dependent single customer small group customers foreign currency risk managementwe conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities transactions arising international trade primary objective preserve us dollar value foreign currency denominated cash flows earnings attempt hedge currency exposures natural offsets fullest extent possible honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts opportunities exhausted foreign currency exchange forward option contracts foreign currency exchange contracts third parties hedge monetary assets liabilities denominated nonfunctional currencies prior conversion us dollars assets liabilities remeasured spot exchange rates effect balance sheet date effects changes spot rates recognized earnings included income expense partially hedge forecasted sales purchases occur next twelve months denominated nonfunctional currencies foreign currency exchange contracts changes forecasted nonfunctional currency cash flows due movements exchange rates substantially offset changes fair value foreign currency exchange contracts designated hedges market value gains losses contracts recognized earnings hedged transaction recognized open foreign currency exchange contracts mature next twelve months december 31 2017 2016 contracts notional amounts 9273 million 9554 million exchange foreign currencies principally us dollar euro british pound canadian dollar chinese renminbi indian rupee mexican peso singapore dollar also designated foreign currency debt certain derivative contracts hedges portions net investment foreign operations year ended december 31 2017 gains losses effective portion foreign currency debt designated net investment hedge recorded manner foreign currency translation adjustments company ineffectiveness related net investment hedges year ended december 31 2017 interest rate risk managementwe use combination financial instruments including longterm mediumterm shortterm financing variablerate commercial paper interest rate swaps manage interest rate mix total debt portfolio related overall cost borrowing december 31 2017 2016 interest rate swap agreements designated fair value hedges effectively changed 2600 million 1850 million fixed rate debt rates 293 339 libor based floating rate debt interest rate swaps mature various dates 2026 fair value financial instrumentsthe fasb’s accounting guidance defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date exit price financial nonfinancial assets liabilities classified entirety based lowest level input significant fair value measurement following table sets forth company’s financial assets liabilities accounted fair value recurring basis december 31 2017 2016 foreign currency exchange contracts interest rate swap agreements valued using broker quotations market transactions either listed overthecounter markets derivative instruments classified within level 2 company also holds investments commercial paper certificates deposits time deposits designated available sale valued using published prices based observable market data investments classified within level 2 company also holds available sale investments us honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts government corporate debt securities valued utilizing published prices based quoted market pricing classified within level 1 carrying value cash equivalents trade accounts notes receivables payables commercial paper shortterm borrowings contained consolidated balance sheet approximates fair value following table sets forth company’s financial assets liabilities carried fair value company determined fair value longterm receivables discounting based upon terms receivable counterparty details including credit quality fair value receivables considered level 2 company determined fair value longterm debt related current maturities utilizing transactions listed markets identical similar liabilities fair value longterm debt related current maturities considered level 2 well interest rate swap agreements designated hedge relationships gains losses derivative recognized interest financial charges offsetting gains losses underlying debt hedged losses interest rate swap agreements recognized earnings 29 million 71 million years ended december 31 2017 2016 2 million year ended december 31 2015 gains losses fully offset losses gains underlying debt hedged also economically hedge exposure changes foreign exchange rates principally forward contracts markedtomarket resulting gains losses recognized earnings offsetting gains losses nonfunctional currency denominated monetary assets liabilities hedged recognized 207 million expense 232 million income expense years ended december 31 2017 2016 recognized 86 million expense income expense year ended december 31 2015 see note 4 income expense details net impact economic foreign currency hedges note 15 liabilities honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 16 capital stock authorized issue 2000000000 shares common stock par value 1 common shareowners entitled receive dividends may declared board directors entitled one vote per share entitled event liquidation share ratably assets honeywell available distribution common shareowners common shareowners preemptive conversion rights shares common stock issued outstanding held treasury liable calls assessments restrictions us relative dividends repurchase redemption common stock december 2017 board directors authorized repurchase 8 billion honeywell common stock replaces previously approved share repurchase program approximately 77 billion remained available december 31 2017 authorization included amounts remaining replaced previously approved share repurchase program previous share repurchase plan announced april 2016 board directors authorized repurchase 5 billion honeywell common stock 41 billion remained available december 31 2016 year ended december 31 2017 repurchased approximately 205 million shares common stock 2889 million year ended december 31 2016 repurchased approximately 193 million shares common stock 2079 million authorized issue 40000000 shares preferred stock without par value determine number shares series rights preferences limitations series december 31 2017 preferred stock outstanding note 17 accumulated comprehensive income loss changes accumulated comprehensive income loss provided tables comprehensive income loss attributable noncontrolling interest consists predominantly net income honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts components accumulated comprehensive income loss changes accumulated comprehensive income loss component reclassifications accumulated comprehensive income loss honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 18 stockbased compensation plans 2016 stock incentive plan honeywell international inc affiliates 2016 plan 2016 stock plan nonemployee directors honeywell international inc 2016 directors plan approved shareowners annual meeting shareowners effective april 25 2016 following approval plans grant new awards previously existing stockbased compensation plans december 31 2017 42025990 924694 shares honeywell common stock available future grants terms 2016 plan 2016 directors plan respectively stock optionsthe exercise price term conditions applicable option granted stock plans generally determined management development compensation committee board exercise price stock options set grant date may less fair market value per share stock date fair value recognized expense employee’s requisite service period generally vesting period award options generally vest fouryear period expire ten years fair value option award estimated date grant using blackscholes optionpricing model expected volatility based implied volatilities traded options common stock historical volatility common stock used monte carlo simulation model derive expected term represents estimate time options expected remain outstanding model uses historical data estimate option exercise activity postvest termination behavior riskfree rate periods within contractual life option based us treasury yield curve effect time grant following table summarizes impact consolidated statement operations stock options honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts following table sets forth fair value per share information including related weightedaverage assumptions used determine compensation cost following table summarizes information stock option activity three years ended december 31 2017 1 represents sum vested options 123 million expected vest options 97 million expected vest options derived applying prevesting forfeiture rate assumption total outstanding unvested options 112 million honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts following table summarizes information stock options outstanding exercisable december 31 2017 15536961 17202377 options exercisable weighted average exercise prices 6339 5511 december 31 2016 2015 following table summarizes financial statement impact stock options exercised 1 represents amount stock price exceeded exercise price options date exercise december 31 2017 108 million total unrecognized compensation cost related nonvested stock option awards expected recognized weightedaverage period 232 years total fair value options vested 2017 2016 2015 87 million 76 million 73 million restricted stock unitsrestricted stock unit rsu awards entitle holder receive one share common stock unit units vest rsus issued certain key employees directors compensation fair market value date grant rsus typically become fully vested periods ranging three seven years payable honeywell common stock upon vesting honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts following table summarizes information rsu activity three years ended december 31 2017 december 31 2017 approximately 210 million total unrecognized compensation cost related nonvested rsus granted stock plans expected recognized weightedaverage period 315 years following table summarizes impact consolidated statement operations rsus note 19 commitments contingencies environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous substances accordance environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing hazardous substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually jointly potentially responsible parties determine feasibility various remedial techniques policy record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts progress additional technical regulatory legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing remedial investigations feasibility studies timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects remedial techniques utilized agreements parties following table summarizes information concerning recorded liabilities environmental costs environmental liabilities included following balance sheet accounts currently possess sufficient information reasonably estimate amounts environmental liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined although could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position onondaga lake syracuse nyin 2016 largely completed dredgingcapping remedy onondaga lake pursuant consent decree approved united states district court northern district new york january 2007 additional longterm monitoring maintenance activities continue required consent decree honeywell also conducting remedial investigations activities sites syracuse recorded reserves investigations activities appropriate consistent accounting policy described honeywell federal new york state natural resource trustees submitted consent decree federal court requesting approval negotiated settlement natural resource damages claims site honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts asbestos matters honeywell defendant asbestos related personal injury actions related two predecessor companies • north american refractories company “narco” sold 1986 produced refractory products bricks cement used high temperature applications claimants consist largely individuals allege exposure narco asbestoscontaining refractory products occupational setting • bendix friction materials “bendix” business sold 2014 manufactured automotive brake parts contained chrysotile asbestos encapsulated form claimants consist largely individuals allege exposure asbestos brakes either performing vicinity individuals performed brake replacements following tables summarize information concerning narco bendix asbestos related balances asbestos related liabilities insurance recoveries asbestos related liabilities honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts narco bendix asbestos related balances included following balance sheet accounts narco productsin connection narco’s emergence bankruptcy april 30 2013 federally authorized 524g trust narco trust established evaluation resolution existing future narco asbestos claims honeywell narco protected permanent channeling injunction barring present future individual actions state federal courts requiring asbestos related claims based exposure narco asbestoscontaining products made narco trust narco trust reviews submitted claims determines award amounts accordance established trust distribution procedures approved bankruptcy court set forth criteria claimants must meet qualify compensation including among things exposure medical criteria determine award amount addition honeywell provided continues provide input design control procedures processing narco claims ongoing audit rights review monitor claims processor’s adherence established requirements trust distribution procedures honeywell obligated fund narco asbestos claims submitted narco trust qualify payment trust distribution procedures annual contribution claims subject annual caps 140 million 2018 145 million year thereafter however initial 100 million claims processed narco trust initial claims amount count annual cap unused portion initial claims amount roll subsequent years fully utilized 2015 honeywell filed suit narco trust bankruptcy court alleging breach certain provisions trust agreement trust distribution procedures parties agreed dismiss proceeding without prejudice pursuant 18 month standstill agreement claims processing continued period parties attempted resolve disputed issues standstill agreement expired october 12 2017 notwithstanding expiration claims processing continues honeywell continues negotiate attempt resolve remaining disputed issues instances honeywell believes trust processing claims accordance established trust distribution procedures honeywell reserves right seek judicial intervention negotiations fail prove futile december 31 2017 honeywell made payments narco trust annual contribution claims honeywell also responsible payments due claimants pursuant settlement agreements reached pendency narco bankruptcy proceedings provide right submit claims narco trust subject qualification terms settlement agreements trust distribution procedures criteria preestablished unliquidated claims amounts estimated 150 million expected paid initial years trust operations 5 million paid since effective date narco trust payments subject annual cap described consolidated financial statements reflect estimated liability preestablished unliquidated claims 145 million well unsettled claims pending time narco filed bankruptcy protection operating legal costs related trust collectively 19 million estimated value future narco asbestos claims expected asserted narco trust honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts 743 million estimate future narco claims prepared 2002 year narco filed bankruptcy protection using narco tort system litigation experience based commonly accepted methodology used numerous bankruptcy courts addressing 524g trusts accordingly estimated value future narco asbestos claims prepared data claims filings payment rates narco trust distribution procedures also prepared stay narco asbestos claims effect remained effect narco emerged bankruptcy protection critical assumptions underlying commonly accepted methodology included claims filing rates disease criteria payment values contained trust distribution procedures estimated approval rates claims submitted narco trust epidemiological studies estimating disease instances estimated value future narco liability reflects claims expected asserted narco fifteen year period projection resulted range estimated liability 743 million 961 million believe amount within range better estimate amount accordingly recorded minimum amount range given trust’s lack sufficient claims processing experience since narco emerged bankruptcy protection yet possible reliably estimate future claim costs based actual trust experience insurance receivable corresponding estimated liability pending future narco asbestos claims reflects coverage reimburses honeywell portions narcorelated indemnity defense costs provided large number insurance policies written dozens insurance companies domestic insurance market london excess market conduct analyses estimate probable amount insurance recoverable asbestos claims substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries made judgments concerning insurance coverage believe reasonable consistent historical dealings knowledge pertinent solvency issues surrounding insurers projecting future events subject many uncertainties could cause narcorelated asbestos liabilities assets higher lower projected recorded given uncertainties review estimates periodically update based experience relevant factors similarly reevaluate projections concerning probable insurance recoveries light changes projected liability developments may impact insurance recoveries bendix productsthe following tables present information regarding bendix related asbestos claims activity honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts honeywell experienced average resolution values per claim excluding legal costs follows possible predict whether resolution values bendixrelated asbestos claims increase decrease stabilize future consolidated financial statements reflect estimated liability resolution pending claims actually filed financial statement date future bendixrelated asbestos claims valued bendix pending future claims using average resolution values previous five years update resolution values used estimate cost bendix pending future claims fourth quarter year liability future claims represents estimated value future asbestos related bodily injury claims expected asserted bendix next five years estimated cost future bendixrelated asbestos claims based historic claims filing experience dismissal rates disease classifications resolution values tort system previous five years light uncertainties inherent making longterm projections well certain factors unique friction product asbestos claims believe reasonable basis estimating asbestos claims beyond next five years methodology used estimate liability future claims similar used estimate liability future narcorelated asbestos claims insurance receivable corresponding liability settlement pending future bendix asbestos claims reflects coverage provided large number insurance policies written dozens insurance companies domestic insurance market london excess market based ongoing analysis probable insurance recovery insurance receivables recorded financial statements simultaneous recording estimated liability underlying asbestos claims determination based analysis underlying insurance policies historical experience insurers ongoing review solvency insurers judicial determinations relevant insurance programs consideration impacts settlements reached insurers honeywell believes sufficient insurance coverage reserves cover pending bendixrelated asbestos claims bendixrelated asbestos claims estimated filed within next five years although impossible predict outcome either pending future bendixrelated asbestos claims believe claims would material adverse effect consolidated financial position light insurance coverage prior experience resolving claims rate types claims filed average resolution value claims period time claim settlements paid collectively variable claims factors substantially change honeywell would expect future bendixrelated asbestos claims material adverse effect results operations operating cash flows fiscal year assurances given however variable claims factors change matters subject number lawsuits investigations disputes involve substantial amounts claimed arising conduct business including matters relating commercial transactions government contracts product liability prior acquisitions divestitures employee benefit plans intellectual property environmental health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes matters well honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts potential ranges possible losses taking consideration insurance recoveries based careful analysis matter assistance outside legal counsel applicable experts included matters following honeywell v united auto workers uaw et alin september 2011 uaw certain honeywell retirees filed suit eastern district michigan alleging master collective bargaining agreements mcbas honeywell uaw provide limitations honeywell’s obligation contribute toward healthcare coverage former employees retired mcbas “caps” honeywell subsequently answered uaw’s complaint asserted counterclaims honeywell began enforcing caps former employees retired initial inclusion caps 2003 mcba post2003 retirees january 1 2014 uaw certain plaintiffs filed motion partial summary judgment respect post2003 retirees seeking ruling 2003 mcba limit honeywell’s obligation contribute healthcare coverage retirees motion remains pending honeywell confident district court find 2003 mcba fact limit honeywell’s retiree healthcare obligation post2003 retirees event adverse ruling however honeywell’s postretirement benefits post2003 retirees would increase approximately 79 million reflecting estimated value caps second quarter 2014 parties agreed stay proceedings respect former employees retired initial inclusion caps 2003 mcba pre2003 retirees supreme court decided mg polymers usa llc v tackett supreme court decided case january 26 2015 based ruling honeywell began enforcing caps pre2003 retirees may 1 2015 honeywell confident caps upheld district court liability healthcare coverage premiums respect putative class limited negotiated expressly set forth applicable mcbas event adverse ruling however honeywell’s postretirement benefits pre2003 retirees would increase approximately 103 million reflecting estimated value caps given uncertainty inherent litigation investigations including specific matter referenced believe possible develop estimates reasonably possible loss excess current accruals matters specifically set forth considering past experience existing accruals expect outcome matters either individually aggregate material adverse effect consolidated financial position contingencies resolved long periods time potential liabilities subject change due new developments changes settlement strategy impact evidentiary requirements could cause us pay damage awards settlements become subject equitable remedies could material adverse effect results operations operating cash flows periods recognized paid warranties guarantees normal course business issue product warranties product performance guarantees accrue estimated cost product warranties performance guarantees based contract terms historical experience time sale adjustments initial obligations warranties guarantees made changes obligations become reasonably estimable honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts following table summarizes information concerning recorded obligations product warranties product performance guarantees product warranties product performance guarantees included following balance sheet accounts note 20 pension postretirement benefits sponsor number funded unfunded us nonus defined benefit pension plans pension benefits many us employees provided noncontributory qualified nonqualified defined benefit plans nonunion hourly salaried employees joining honeywell first time december 31 2012 eligible participate honeywell’s us defined benefit pension plans also sponsor defined benefit pension plans cover nonus employees us citizens certain jurisdictions principally uk netherlands germany canada pension plans outside us material company either individually aggregate also sponsor postretirement benefit plans provide health care benefits life insurance coverage mainly us eligible retirees none honeywell’s us employees eligible retiree medical subsidy company addition vast majority honeywell’s us retirees either company subsidy fixeddollar subsidy amount significantly limits exposure impact future health care cost increases retiree medical life insurance plans funded claims expenses paid operating cash flow honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts following tables summarize balance sheet impact including benefit obligations assets funded status associated significant pension postretirement benefit plans honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts recognized accumulated comprehensive income loss associated significant pension postretirement benefit plans december 31 2017 2016 follows honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts components net periodic benefit income cost amounts recognized comprehensive income loss significant pension postretirement benefit plans include following components estimated prior service credit pension benefits amortized accumulated comprehensive income loss net periodic benefit income cost 2018 expected 43 million 1 million us nonus pension plans honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts estimated net loss prior service credit postretirement benefits amortized accumulated comprehensive income loss net periodic benefit income 2018 expected 9 million 52 million major actuarial assumptions used determining benefit obligations net periodic benefit income cost significant benefit plans presented following table weighted averages discount rate us pension postretirement benefits plans reflects current rate associated liabilities could settled measurement date december 31 determine discount rates us pension postretirement benefit plans use modeling process involves matching expected cash outflows benefit plans yield curve constructed portfolio high quality fixedincome debt instruments use single honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts weightedaverage yield hypothetical portfolio discount rate benchmark discount rate used determine postretirement benefit obligation lower principally due shorter expected duration postretirement plan obligations compared pension plan obligations fourth quarter 2015 changed methodology used estimate service interest cost components net periodic benefit income cost significant pension plans previously estimated cost components utilizing single weightedaverage discount rate derived yield curve used measure pension benefit obligation new methodology utilizes full yield curve approach estimation cost components applying specific spot rates along yield curve used determination pension benefit obligation underlying projected cash flows provides precise measurement service interest costs improving correlation projected cash flows corresponding spot rates change affect measurement pension obligation applied prospectively change estimate us pension plans single weighted average spot rates used determine service interest costs 2018 377 327 expected rate return us plan assets 775 longterm rate based historical plan asset returns varying longterm periods combined current market conditions broad asset mix considerations review expected rate return annual basis revise appropriate nonus benefit plans actuarial assumptions reflect economic market factors relevant country pension benefits following amounts relate significant pension plans accumulated benefit obligations exceeding fair value plan assets accumulated benefit obligation us defined benefit pension plans 181 billion 173 billion nonus defined benefit pension plans 69 billion 64 billion december 31 2017 2016 asset investment strategy us pension plans focuses maintaining diversified portfolio using various asset classes order achieve longterm investment objectives risk adjusted basis actual invested positions various securities change time based short longerterm investment opportunities achieve objectives established longterm target allocations follows 6070 equity securities 1020 fixed income securities cash 515 real estate investments 1020 types investments equity securities include publiclytraded stock companies located inside outside united states fixed income securities include corporate bonds companies diversified industries mortgagebacked securities us treasuries real estate investments include direct investments commercial properties investments real estate funds types investments include investments private equity hedge funds follow several different strategies review assets regular basis ensure within targeted asset allocation ranges necessary asset balances adjusted back within target allocations nonus pension assets typically managed decentralized fiduciary committees honeywell corporate investments group providing funding investment guidance nonus honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts investment policies different country local regulations funding requirements financial tax considerations part funding investment allocation process country accordance asu 201507 “fair value measurement topic 820” certain investments measured fair value using net asset value nav per share equivalent practical expedient classified fair value hierarchy fair value amounts presented following tables intended permit reconciliation fair value hierarchy amounts presented total pension benefits plan assets fair values us nonus pension plans assets asset category follows honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts following table summarizes changes fair value level 3 assets us nonus plans company enters futures contracts gain exposure certain markets sufficient cash equivalents held pension plans cover notional value futures contracts december 31 2017 2016 us plans contracts notional amounts 4188 million 3775 million december 31 2017 2016 nonus plans contracts notional amounts 133 million 55 million us nonus pension plans notional derivative exposure primarily related outstanding equity futures contracts common stocks preferred stocks real estate investment trusts shortterm investments valued closing price reported active market individual securities traded corporate bonds mortgages assetbacked securities government securities valued either honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts using pricing models bids provided brokers dealers quoted prices securities similar characteristics discounted cash flows include adjustments certain risks may observable credit liquidity risks certain securities held collective trust funds valued using net asset values provided administrators funds investments private equity debt real estate hedge funds direct private investments valued estimated fair value based quarterly financial information received investment advisor andor general partner investments real estate properties valued quarterly basis using income approach valuation estimates periodically supplemented third party appraisals general funding policy qualified defined benefit pension plans contribute amounts least sufficient satisfy regulatory funding standards 2017 2016 2015 required make contributions us pension plans contributions made required make contributions us pension plans 2018 2017 contributions 136 million made nonus pension plans satisfy regulatory funding requirements 2018 expect make contributions cash andor marketable securities approximately 142 million nonus pension plans satisfy regulatory funding standards contributions us nonus pension plans reflect benefits paid directly company assets benefit payments including amounts paid company assets reflecting expected future service appropriate expected paid follows postretirement benefits assumed health care cost trend rate significant effect amounts reported onepercentagepoint change assumed health care cost trend rate would following effects benefit payments reflecting expected future service appropriate expected paid follows honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 21 segment financial data globally manage business operations four reportable operating segments segment information consistent management reviews businesses makes investing resource allocation decisions assesses operating performance honeywell’s senior management evaluates segment performance based segment profit segment profit measured segment income loss taxes excluding general corporate unallocated expense income expense interest financial charges stock compensation expenses pension postretirement benefits expense stock compensation expense repositioning charges effective october 2017 company realigned smart energy business previously part home building technologies segment process solutions business within performance materials technologies segment effective july 2016 company realigned business units comprising automation control solutions reporting segment forming two new reportable operating segments home building technologies safety productivity solutions realignments impact company’s historical consolidated financial position results operations cash flows prior period amounts reclassified conform current period segment presentation honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts reconciliation segment profit consolidated income continuing operations taxes follows honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts 1 equity income loss affiliated companies included segment profit 2 amounts included cost products services sold selling general administrative expenses note 22 geographic areasfinancial data note 23 supplemental cash flow information honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts noncash operating activities reported within consolidated statement cash flows included noncurrent portion 2017 provisional tax charge 1737 due imposition mandatory transition tax deemed repatriation certain undistributed foreign earnings within deferred income taxes provisional tax charge 2094 related estimated foreign state taxes undistributed earnings foreign affiliates see note 5 income taxes note 24 unaudited quarterly financial information 1 total full year may differ sum individual quarters due requirement use weighted average shares quarter may fluctuate share repurchases share issuances due impact losses quarter 2 due loss quarter ended december 31 2017 incremental shares included effect would antidilutive 3 quarter ended december 31 2017 net income loss attributable honeywell earnings loss per common share basic earnings loss per common share assuming dilution impacted tax cuts jobs act see note 5 income taxes details report independent registered public accounting firm shareowners board directors honeywell international inc opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets honeywell international inc subsidiaries “company” december 31 2017 2016 related consolidated statements operations comprehensive income shareholders’ equity cash flows three years period ended december 31 2017 related notes collectively referred “financial statements” also audited company’s internal control financial reporting december 31 2017 based criteria established internal controlintegrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion financial statements referred present fairly material respects financial position company december 31 2017 2016 results operations cash flows three years period ended december 31 2017 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2017 based criteria established internal controlintegrated framework 2013 issued coso basis opinions company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion financial statements opinion company’s internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits financial statements included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate deloitte touche llp parsippany new jersey february 9 2018 served company’s auditor since 2014 item 9item 8 financial statements supplementary data honeywell international inc consolidated statement operations notes consolidated financial statements integral part statement honeywell international inc consolidated statement comprehensive income notes consolidated financial statements integral part statement honeywell international inc consolidated balance sheet notes consolidated financial statements integral part statement honeywell international inc consolidated statement cash flows notes consolidated financial statements integral part statement honeywell international inc consolidated statement shareowners’ equity notes consolidated financial statements integral part statement honeywell international inc notes consolidated financial statements dollars millions except per share amounts note 1 summary significant accounting policies accounting principlesthe financial statements accompanying notes prepared accordance accounting principles generally accepted united states america following description honeywell’s significant accounting policies principles consolidationthe consolidated financial statements include accounts honeywell international inc subsidiaries entities controlling interest maintained consolidation policy requires equity investments exercise significant influence control investee primary beneficiary investee’s activities accounted using equity method investments able exercise significant influence investee readily determinable fair values accounted cost method intercompany transactions balances eliminated consolidation property plant equipmentproperty plant equipment recorded cost including asset retirement obligations less accumulated depreciation financial reporting straightline method depreciation used estimated useful lives 10 50 years buildings improvements 2 16 years machinery equipment recognition fair value obligations associated retirement tangible longlived assets required legal obligation incur costs upon initial recognition liability cost capitalized part related longlived asset depreciated corresponding asset’s useful life goodwill indefinitelived intangible assetsgoodwill indefinitelived intangible assets subject impairment testing annually march 31 whenever events changes circumstances indicate carrying amount may fully recoverable testing compares carrying values fair values appropriate carrying value assets reduced fair value completed annual goodwill impairment test march 31 2018 determined impairment date intangible assets determinable livesother intangible assets determinable lives consist customer lists technology patents trademarks intangibles amortized estimated useful lives ranging 2 24 years sales recognitionproduct service sales recognized transfer control promised products services customer revenue measured amount consideration expect receive exchange transferring goods providing services service sales principally representing repair maintenance engineering activities recognized contractual period services rendered sales longterm contracts performance obligations satisfied time recognized using either input output method recognize revenue time perform contracts continuous transfer control customer control transferring time revenue recognized based extent progress towards completion performance obligation generally use costtocost input method progress contracts best depicts transfer control customer occurs incur costs costtocost method extent progress towards completion measured based proportion costs incurred date total estimated costs completion performance obligation review cost estimates significant contracts periodic basis circumstances change warrant modification previous estimate cost estimates largely based negotiated estimated purchase contract terms historical performance trends economic projections significant factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements provisions anticipated losses longterm contracts recorded full losses become evident extent required honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts customer funding costs incurred nonrecurring engineering development activities products agreements commercial customers deferred subsequently recognized revenue products delivered customers additionally expenses incurred customer agreed funded amount deferred asset recognized cost sales products delivered customer deferred customer funding costs result recognition deferred costs asset deferred revenue liability consolidated balance sheet revenues mechanical service programs recognized performance obligations satisfied time recognition reflecting series distinct services using output method terms contract historical business practice give rise variable consideration due limited cashbased incentives rebates performance awards credits estimate variable consideration likely amount receive customers include estimated amounts transaction price extent probable significant reversal cumulative revenue recognized transaction occur uncertainty associated variable consideration resolved estimates variable consideration determination whether include estimated amounts transaction price based largely assessment anticipated performance information historical current forecasted reasonably available us years ended 2017 2016 prior adoption revenue recognition standard see note 7 revenue recognition contracts customers product service sales recognized persuasive evidence arrangement existed product delivery occurred services rendered pricing fixed determinable collection reasonably assured service sales principally representing repair maintenance engineering activities recognized contractual period services rendered sales longterm contracts recorded percentageofcompletion method measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts provisions anticipated losses longterm contracts recorded full losses became evident revenues contracts multiple element arrangements recognized element earned based relative fair value element provided delivered elements value customers standalone basis amounts allocated element based objectively determined fair value sales price product service sold separately competitor prices similar products services environmentalwe accrue costs related environmental matters probable incurred liability related contaminated site amount reasonably estimated additional information see note 20 commitments contingencies asbestos related liabilities insurance recoveries indemnification receivableswe recognize liability asbestos related contingency probable occurrence reasonably estimable connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable additionally conjunction garrett spinoff company entered indemnification reimbursement agreement garrett subsidiary pursuant garrett’s subsidiary obligation make cash payments honeywell reimbursement asbestos liabilities accordingly company recorded indemnification receivable monitor recoverability receivable subject terms applicable credit agreements garrett general ability pay additional information see note 20 commitments contingencies aerospace sales incentiveswe provide sales incentives commercial aircraft manufacturers airlines connection selection aircraft equipment predominately wheel braking system hardware avionics auxiliary power units installation commercial aircraft incentives consist free deeply discounted products credits future purchases product upfront cash payments costs generally recognized period incurred cost products sold reduction relevant sales appropriate honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts research developmentresearch development costs companysponsored research development projects expensed incurred costs principally included cost products sold 1809 million 1835 million 1864 million 2018 2017 2016 stockbased compensation plansthe principal awards issued stockbased compensation plans described note 19 stockbased compensation plans nonqualified stock options restricted stock units cost awards measured grant date based fair value award value portion award ultimately expected vest recognized expense requisite service periods generally vesting period equity award included selling general administrative expenses forfeitures estimated time grant recognize expense awards expected vest based historical forfeiture rates pension benefitson january 1 2018 retrospectively adopted new accounting guidance presentation net periodic pension costs guidance requires disaggregate service cost component net benefit costs report costs line item items consolidated statement operations compensation costs arising services rendered pertinent employees period nonservice components net benefit costs required presented separately service cost component following adoption guidance continue record service cost component pension ongoing income expense costs products services sold selling general administrative expenses remaining components net benefit costs within pension ongoing income expense primarily interest costs assumed return plan assets recorded income expense see note 4 income expense amounts reclassified continue recognize net actuarial gains losses excess 10 greater fair value plan assets plans’ projected benefit obligation corridor annually fourth quarter year mtm adjustment mtm adjustment also reported income expense foreign currency translationassets liabilities subsidiaries operating outside united states functional currency us dollars translated us dollars using yearend exchange rates sales costs expenses translated average exchange rates effect year foreign currency translation gains losses included component accumulated comprehensive income loss subsidiaries operating highly inflationary environments inventories property plant equipment including related expenses remeasured exchange rate effect date assets acquired monetary assets liabilities remeasured yearend exchange rates remeasurement adjustments subsidiaries included earnings derivative financial instrumentswe minimize risks interest foreign currency exchange rate fluctuations normal operating financing activities deemed appropriate use derivative financial instruments derivative financial instruments used manage risk used trading speculative purposes use leveraged derivative financial instruments derivative financial instruments qualify hedge accounting must designated effective hedge identified risk exposure inception contract accordingly changes fair value derivative contract must highly correlated changes fair value underlying hedged item inception hedge life hedge contract derivatives recorded balance sheet assets liabilities measured fair value derivatives designated hedges fair value assets liabilities changes fair values derivatives hedged items recorded current earnings derivatives designated cash flow hedges effective portion changes fair value derivatives recorded accumulated comprehensive income loss subsequently recognized earnings hedged items impact earnings cash flows derivative financial instruments honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts classified consistent underlying hedged item elected exclude time value derivatives ie forward points assessment hedge effectiveness recognize initial value excluded component earnings using amortization approach derivative instruments designated qualify net investment hedge effective portion derivative’s gain loss reported component comprehensive income loss recorded accumulated comprehensive income loss gain loss subsequently reclassified net earnings hedged net investment either sold substantially liquidated income taxessignificant judgment required evaluating tax positions establish additional reserves income taxes despite belief tax positions fully supportable remain certain positions meet minimum recognition threshold approach evaluating certain uncertain tax positions defined authoritative guidance determines tax position likely sustained upon examination applicable taxing authority normal course business company subsidiaries examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes continually assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts give rise change estimate become known discussion impacts commonly referred us tax cuts jobs act “us tax reform” see note 5 income taxes cash equivalentscash cash equivalents include cash hand highly liquid investments original maturity three months less earnings per sharebasic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding dilutive potential common shares outstanding reclassificationscertain prior year amounts reclassified conform current year presentation recent accounting pronouncementswe consider applicability impact accounting standards updates asus issued financial accounting standards board fasb asus listed assessed determined either applicable expected minimal impact consolidated results operations financial position cash flows consolidated financial statements february 2016 fasb issued guidance accounting leases requires lessees recognize leases balance sheets rights obligations created leases guidance requires enhanced disclosures regarding amount timing uncertainty cash flows arising leases effective interim annual periods beginning december 15 2018 standard allows modified retrospective transition method entity elect apply transition provisions adoption date recognize cumulativeeffect adjustment opening balance retained earnings period adoption effective january 1 2019 company adopted new lease accounting standard using modified retrospective transition option applying new standard adoption date addition elected package practical expedients permitted transition guidance within new standard among things allowed us carry forward historical lease classification adoption new standard resulted recording additional net lease assets lease liabilities approximately 07 billion adoption standard material impact related existing leases result cumulativeeffect adjustment recorded currently working complete implementation new processes information technology tools honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts assist ongoing lease data collection analysis updating accounting policies internal controls connection adoption new standard october 2016 fasb issued accounting standard update requires entity recognize income tax consequences intraentity transfer asset inventory time entity transfer occurs rather asset ultimately transferred third party required current us gaap guidance intended reduce diversity practice particularly transfers involving intellectual property adopted accounting standard update january 1 2018 guidance requires application modified retrospective basis adoption guidance increases deferred tax assets 339 million cumulativeeffect adjustment retained earnings amount august 2017 fasb issued amendments hedge accounting guidance amendments intended better align risk management strategies financial reporting hedging relationships new guidance hedging strategies eligible hedge accounting application hedge accounting simplified addition new guidance amends presentation disclosure requirements company adopted standard effective january 1 2018 using modified retrospective approach adoption material impact company’s financial position results operations cash flows february 2018 fasb issued guidance allows entity elect reclassify income tax effects items within accumulated comprehensive income resulting us tax reform retained earnings guidance effective fiscal years beginning december 15 2018 early adoption permitted including interim periods within years upon adoption company expect elect reclassify stranded income tax effects us tax reform accumulated comprehensive income retained earnings note 2 acquisitions divestitures 2018 acquired businesses aggregate cost net cash debt assumed approximately 535 million mainly due november 2018 acquisition transnorm global leader highperformance conveyor warehouse solutions transnorm part safety productivity solutions preliminary determination assets liabilities acquired transnorm included consolidated balance sheet december 31 2018 including 338 million allocated goodwill nondeductible tax purposes 2017 significant acquisitions individually aggregate 2016 acquired businesses aggregate cost net cash debt assumed 2538 million august 2016 company acquired intelligrated leading provider supply chain warehouse automation technologies aggregate value net cash acquired 1488 million intelligrated part safety productivity solutions management recorded goodwill intangible assets acquired 1121 million 507 million respectively intelligrated identifiable intangible assets primarily include customer relationships technology trade name amortized estimated lives ranging 1 15 years using straight line accelerated amortization methods goodwill nondeductible tax purposes april 2016 company completed acquisition xtralis international holdings limited “xtralis” leading global provider aspiration smoke detection perimeter security technologies aggregate cost net cash acquired debt assumed 515 million xtralis part honeywell building technologies february 2016 company acquired 100 percent issued outstanding shares com dev international “com dev” leading satellite space components provider aggregate value net cash acquired debt assumed 347 million com dev part aerospace honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts january 2016 company acquired remaining 30 percent noncontrolling interest uop russell llc develops technology manufactures modular equipment process natural gas 240 million uop russell llc part performance materials technologies october 1 2018 company completed taxfree spinoff honeywell shareowners transportation systems business part aerospace standalone publiclytraded company garrett motion inc “garrett” october 29 2018 company completed taxfree spinoff honeywell shareowners homes global distribution business part home building technologies renamed honeywell building technologies following spinoff standalone publiclytraded company resideo technologies inc “resideo” assets approximately 55 billion including approximately 28 billion goodwill net recorded indemnification receivables liabilities approximately 72 billion associated spinoff entities removed retained earnings company’s consolidated balance sheet effective date spinoff results operations cash flows included consolidated statement operations consolidated statement cash flows effective date spinoff income taxes attributable spinoff businesses 04 billion 05 billion 06 billion 2018 2017 2016 honeywell shareowners record close business october 16 2018 received one share resideo common stock every 6 shares honeywell common stock immediately prior effective date spinoff resideo incurred debt 12 billion make cash distribution company honeywell shareowners record close business september 18 2018 received one share garrett common stock every 10 shares honeywell common stock immediately prior effective date spinoff garrett incurred debt 16 billion make cash distribution company 2018 connection spinoff company entered certain agreements resideo garrett effect legal structural separation including transition services agreements provide certain administrative services limited time tax matters indemnity agreements end 2018 agreements still effect october 1 2016 company completed taxfree spinoff honeywell shareowners resins chemicals business part performance materials technologies standalone publiclytraded company named advansix inc “advansix” assets liabilities associated advansix removed company’s consolidated balance sheet effective date spinoff results operations advansix included consolidated statement operations effective date spinoff honeywell shareowners record close business september 16 2016 received one share advansix common stock every 25 shares honeywell common stock immediately prior effective date spinoff advansix incurred debt make cash distribution 269 million company time advansix also incurred 38 million borrowings order fund post spinoff working capital 2016 connection spinoff company entered certain agreements advansix effect legal structural separation including transition services agreement advansix provide certain administrative services limited time end 2018 agreements ended september 16 2016 company completed sale honeywell technology solutions inc sale price 300 million company recognized pretax gain 176 million recorded income expense honeywell technology solutions inc business part aerospace honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 3 repositioning charges summary repositioning charges follows following table summarizes pretax distribution total net repositioning charges classification following table summarizes pretax impact total net repositioning charges segment 2018 recognized repositioning charges totaling 530 million including severance costs 289 million related workforce reductions 6486 manufacturing administrative positions across segments workforce reductions primarily related planned site closures mainly safety productivity solutions performance materials technologies honeywell building technologies transition manufacturing sites costeffective locations workforce reductions also related productivity ongoing functional transformation initiatives repositioning charge included asset impairments 162 million mainly related manufacturing plant equipment associated planned site closures asset impairments also included writedown legacy property corporate connection planned disposition writeoff certain capitalized assets corporate repositioning charge included exit costs 79 million primarily related termination fee associated early cancellation supply agreement certain raw materials performance materials technologies closure obligations associated planned site closures 2017 recognized repositioning charges totaling 507 million including severance costs 305 million related workforce reductions 7096 manufacturing administrative positions across honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts segments workforce reductions primarily related cost savings actions taken connection productivity ongoing functional transformation initiatives site transitions segments costeffective locations repositioning charge included asset impairments 142 million principally corporate segment related writedown legacy properties certain equipment connection planned disposition writedown research development facility connection planned exit facility repositioning charge included exit costs 60 million principally closure obligations associated site transitions segments lease exit obligations corporate segment 2016 recognized repositioning charges totaling 369 million including severance costs 283 million related workforce reductions 6585 manufacturing administrative positions across segments workforce reductions primarily related cost savings actions taken connection productivity ongoing functional transformation initiatives separation former automation control solutions reporting segment two new reporting segments site transitions segments costeffective locations achieving acquisitionrelated synergies repositioning charge included asset impairments 43 million principally related writeoff certain intangible assets connection sale performance materials technologies business repositioning charge included exit costs 43 million principally expenses related spinoff advansix business closure obligations associated site transitions also 109 million previously established accruals primarily severance returned income result higher attrition anticipated prior severance programs resulting lower required severance payments lower expected severance costs certain repositioning actions changes scope previously announced repositioning actions following table summarizes status total repositioning reserves certain repositioning projects recognize exit costs future periods actual liability incurred exit costs incurred 2018 2017 2016 significant 2018 charge 63 million mainly relates reserves taken due required winddown activities iran evaluation potential resolution certain legal matter honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 4 income expense separation costs associated spinoffs homes global distribution business transportation systems business primarily associated third party services year ended december 31 2018 2017 net includes asset impairments corporate related writedown legacy property connection planned disposition see note 3 repositioning charges refer note 2 acquisitions divestitures note 13 longterm debt credit agreements details transactions recognized 2016 within income expense note 5 income taxes income taxes tax expense benefit honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts effective tax rate decreased 684 percentage points 2018 compared 2017 decrease primarily attributable internal restructuring initiatives resulted reduction accrued withholding taxes approximately 11 billion related unremitted foreign earnings addition recorded tax benefit approximately 440 million reduction 2017 provisional estimate impacts us tax reform partially offset 411 million tax costs associated internal restructuring homes global distribution business transportation systems business advance spinoffs company’s nonus effective tax rate 41 decrease approximately 673 percentage points compared 2017 year decrease foreign effective tax rate primarily attributable impact company’s internal restructuring initiatives reduction accrued withholding taxes unremitted foreign earnings partially offset spinoff transactions effective tax rate increased 524 percentage points 2017 compared 2016 increase primarily attributable provisional impact us tax reform partially offset increased tax benefits foreign tax credits employee sharebased payments company’s nonus effective tax rate 714 increase approximately 547 percentage points compared 2016 yearoveryear increase nonus effective tax rate primarily driven company’s change assertion regarding foreign unremitted earnings increased expense reserves various jurisdictions increased withholding taxes partially offset higher earnings low tax rate jurisdictions honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts deferred tax assets liabilities tax effects temporary differences tax carryforwards give rise future income tax benefits payables follows gross deferred tax assets include 794 million related nonus operations comprised principally net operating losses capital loss tax credit carryforwards mainly canada france germany luxembourg united kingdom deductible temporary differences maintain valuation allowance 686 million portion nonus gross deferred tax assets change valuation allowance resulted increases 57 million 4 million 69 million income tax expense 2018 2017 2016 event determine able realize net deferred tax assets future reduce amounts increase income tax expense period determination made conversely determine able realize net deferred tax assets excess carrying amounts decrease recorded valuation allowance reduction income tax expense period determination made december 31 2018 recorded 616 million deferred tax liability unremitted foreign earnings based estimated earnings profits approximately 205 billion balance sheet date december 31 2018 net operating loss capital loss tax credit carryforwards follows honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts many jurisdictions impose limitations timing utilization net operating loss tax credit carryforwards instances whereby expected permanent limitation utilization net operating loss tax credit carryforward deferred tax asset amount carryforward reduced december 31 2018 2017 2016 1089 million 947 million 877 million unrecognized tax benefits recognized would recorded component tax expense following table summarizes tax years remain subject examination major tax jurisdictions december 31 2018 based outcome examinations result expiration statute limitations specific jurisdictions reasonably possible certain unrecognized tax benefits tax positions taken previously filed tax returns materially change recorded liabilities financial statements addition outcome examinations may impact valuation certain deferred tax assets net operating losses future periods unrecognized tax benefits examinations progress 304 million 487 million 398 million december 31 2018 2017 2016 estimated interest penalties related underpayment income taxes classified component tax expense consolidated statement operations totaled 45 million 28 million 18 million years ended december 31 2018 2017 2016 accrued interest penalties 426 million 423 million 395 million december 31 2018 2017 2016 honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts us tax reform quarter ending december 31 2018 company completed accounting tax effects us tax reform amounted total tax charge approximately 35 billion recorded provisional estimate end 2017 2018 reduced provisional estimate approximately 440 million reduction tax expense corporate tax rate changethe company recorded total tax benefit approximately 190 million due decrease corporate statutory tax rate 35 21 includes measurement period adjustment approximately 90 million recorded 2018 reduction tax expense change provisional estimate primarily relates information contained tax returns filed quarter ending december 31 2018 require approval us tax authorities tax benefit change tax rates results company’s deferred tax liability position excess net book value tax basis us assets liabilities generate future taxable income excess book income additional taxable income subject tax lower corporate tax rate consequently reducing company’s deferred tax liability mandatory transition taxthe company recorded total tax charge approximately 1950 million due imposition mandatory transition tax “mtt” deemed repatriation undistributed foreign earnings includes measurement period adjustment approximately 50 million recorded 2018 increase tax expense change provisional estimate primarily relates updated amounts tax returns finalized 2018 computations based 2018 testing dates guidance taxing authorities received year company elected pay mtt liability period eight years undistributed foreign earningsthe company recorded total tax charge approximately 1700 million due company’s intent longer permanently reinvest historical unremitted earnings foreign affiliates existed december 31 2017 includes measurement period adjustment approximately 400 million recorded 2018 reduction tax expense change provisional estimate primarily relates updated amounts tax returns finalized 2018 application foreign tax credits based guidance issued year changes applicable withholding tax rates local jurisdictions 2018 company executed various internal restructuring initiatives reduced taxes unremitted foreign earnings approximately 11 billion recorded reduction tax expense global intangible low taxed incomeus tax reform imposes us tax global intangible low taxed income “gilti” earned certain foreign affiliates owned us shareholder gilti generally intended impose tax earnings foreign corporation deemed exceed certain threshold return relative underlying business investment company made policy election treat future taxes related gilti current period expense reporting period tax incurred note 6 earnings per share details earnings per share calculations years ended december 31 2018 2017 2016 follows honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts diluted earnings per share calculations exclude effect stock options’ assumed proceeds exceed average market price common shares period 2018 2017 2016 weighted number stock options excluded computations 25 million 28 million 75 million stock options outstanding end respective periods note 7 revenue recognition contracts customers adoption january 1 2018 company adopted new guidance revenue contracts customers using modified retrospective method applied contracts completed january 1 2018 results reporting periods beginning january 1 2018 presented new guidance prior period amounts adjusted continue reported accordance previous guidance recorded net decrease opening retained earnings 75 million january 1 2018 cumulative impact adopting new guidance impact primarily related change accounting mechanical service programs change input output method resulting unbilled receivables within accounts receivablenet deferred revenue within accrued liabilities eliminated retained earnings customer funding related costs incurred nonrecurring engineering development activities deferral revenues related incurred costs products delivered customers resulting increases deferred costs assets deferred revenue liability approximately 11 billion adoption honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts modified retrospective method adoption required disclose impact revenues continued follow accounting policies previous revenue recognition guidance estimate impact revenues year ended december 31 2018 would decrease approximately 339 million primarily due net impact classification change deferral impact nonrecurring engineering development activities net impact service programs certain amounts recognized would previously deferred certain amount deferred would previously recognized refer note 1 summary significant accounting policies summary significant policies revenue recognition disaggregated revenue honeywell comprehensive offering products services including software technologies sold variety customers multiple end markets see following table related discussions operating segment details aerospacea global supplier products software services aircraft vehicles products include aircraft propulsion engines auxiliary power units environmental control systems honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts integrated avionics electric power systems hardware engine controls flight safety communications navigation satellite space components aircraft wheels brakes turbochargers thermal systems software includes engine controls flight safety communications navigation radar surveillance systems internet connectivity aircraft instrumentation services provided customers repair overhaul retrofit modification propulsion engines auxiliary power units avionics mechanical systems aircraft wheels brakes honeywell building technologiesa global provider products software solutions technologies products include controls displays heating cooling indoor air quality ventilation humidification combustion lighting home automation sensors switches control systems instruments measuring pressure air flow temperature electrical current access control video surveillance fire detection remote patient monitoring systems installation maintenance upgrades systems keep buildings safe comfortable productive software includes monitoring managing heating cooling indoor air quality ventilation humidification combustion lighting home automation advanced applications homebuilding control optimization video surveillance support remote patient monitoring systems installation maintenance upgrade services products used commercial building applications heating cooling maintaining indoor air quality ventilation humidification combustion lighting video surveillance fire safety performance materials technologiesa global provider products software solutions technologies products include catalysts absorbents equipment highperformance materials devices measurement regulation control metering gases electricity metering communications systems water utilities industries software provided support process technologies supporting automation monitor variety industrial processes used industries oil gas chemicals petrochemicals metals minerals mining industries services provided installation maintenance products safety productivity solutionsa global provider products software solutions products include personal protection equipment footwear gas detection devices mobile computing data collection thermal printing devices automation equipment supply chain warehouse automation customengineered sensors switches controls software solutions provided customers supply chain warehouse automation manage data assets drive productivity computing data collection thermal printing summary disaggregated product services sales segment refer note 22 segment financial data recognize revenue arising performance obligations outlined contracts customers satisfied point time disaggregation revenue based timing recognition follows honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts contract balances progress satisfying performance obligations contracts customers related billings cash collections recorded consolidated balance sheet accounts receivablenet assets current noncurrent portions respectively unbilled receivables contract assets billed receivables accrued liabilities current noncurrent portions respectively customer advances deposits contract liabilities unbilled receivables contract assets arise timing cash collected customers differs timing revenue recognition contract provisions require specific milestones met customer billed assets recognized revenue associated contract recognized prior billing derecognized billed accordance terms contract liabilities recorded customers remit contractual cash payments advance us satisfying performance obligations contractual arrangements including performance obligations satisfied period time contract liabilities derecognized revenue recorded either milestone met triggering contractual right bill performance obligation satisfied contract balances classified assets liabilities contractbycontract basis end reporting period following table summarizes contract assets liabilities balances net change primarily driven receipt advance payments customers exceeding reductions recognition revenue performance obligations satisfied related billings year ended december 31 2018 recognized revenue 1166 million previously included beginning balance contract liabilities contracts modified account changes contract specifications requirements consider whether modification either creates new changes existing enforceable rights obligations contract modifications goods services distinct existing contract due significant integration original good service provided accounted part existing contract effect contract modification transaction price measure progress performance obligation relates recognized adjustment revenue either increase reduction revenue cumulative catchup basis modifications include additional performance obligations distinct relative standalone selling price accounted new contract performance obligation recognized prospectively performance obligations performance obligation promise contract transfer distinct good service customer defined unit account contract’s transaction price allocated distinct performance obligation recognized revenue performance obligation satisfied contracts customers require highly complex integration manufacturing honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts services separately identifiable promises contracts therefore distinct entire contract accounted single performance obligation situations contract includes distinct goods services substantially pattern transfer customer time recognized series distinct goods services contracts multiple performance obligations allocate contract’s transaction price performance obligation based estimated relative standalone selling price distinct good service contract product sales product sold customer typically represents distinct performance obligation cases observable standalone sales used determine stand alone selling price performance obligations satisfied point time performance obligations supported contracts customers providing framework nature distinct goods services bundle goods services timing satisfying performance obligation typically indicated terms contract following table outlines performance obligations disaggregated segment performance obligations recognized december 31 2018 satisfied course future periods disclosure timing satisfying performance obligation based requirements contracts customers however time contracts may subject modifications impacting timing satisfying performance obligations performance obligations expected satisfied within one year greater one year 56 44 timing satisfaction performance obligations significantly vary typical timing payment typical payment terms fixedprice time contracts include progress payments based specified events milestones based project progress contracts may entitled receive advance payment applied practical expedient certain revenue streams exclude value remaining performance obligations contracts original expected term one year less ii contracts recognize revenue proportion amount right invoice services performed note 8 accounts receivable trade receivables includes 1543 million 1853 million unbilled balances longterm contracts december 31 2018 december 31 2017 amounts billed accordance terms customer contracts relate honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 9 inventories valued lifo amounted 294 million 324 million december 31 2018 2017 lifo inventories valued current costs carrying values would approximately 39 million higher december 31 2018 2017 note 10 property plant equipmentnet depreciation expense 721 million 717 million 726 million 2018 2017 2016 note 11 goodwill intangible assetsnet following table summarizes change carrying amount goodwill years ended december 31 2018 2017 segment honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts intangible assets comprised intangible assets amortization expense 395 million 398 million 304 million 2018 2017 2016 estimated intangible asset amortization expense next five years approximates 386 million 2019 349 million 2020 312 million 2021 288 million 2022 251 million 2023 note 12 accrued liabilities honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 13 longterm debt credit agreements schedule principal payments longterm debt follows october 2017 company issued 450 million floating rate senior notes due 2019 750 million 180 senior notes due 2019 collectively “2017 notes” 2017 notes senior unsecured unsubordinated obligations honeywell rank equally honeywell’s existing future senior unsecured debt senior honeywell’s subordinated debt offering resulted gross proceeds 1200 million offset 5 million discount closing costs related offering november 2017 company issued 445 million 3812 senior notes due 2047 “exchange notes” exchange notes senior unsecured unsubordinated obligations honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts honeywell rank equally honeywell’s existing future senior unsecured debt senior honeywell’s subordinated debt exchange notes issued partial exchange 6625 debentures due 2028 570 notes due 2036 570 notes due 2037 5375 notes due 2041 company paid 133 million bondholders connection partial exchange january 29 2018 company completed exchange offer outstanding exchange notes registered securities act 1933 amended “securities act” equal principal amount new 3812 notes due 2047 registered securities act “registered notes” 994 exchange notes exchanged registered notes representing 994 principal amount company’s outstanding 3812 notes due 2047 february 22 2018 company paid two year floating rate euro notes due 2018 issuances described unless otherwise noted debt issuance costs deferred recognized direct deduction related debt liability amortized interest expense debt term connection garrett spinoff wholly owned subsidiaries garrett issued notes entered new credit facilities obligations retained garrett spinoff september 27 2018 company received net proceeds 1604 million borrowings connection resideo spinoff wholly owned subsidiaries resideo issued notes entered new credit facilities obligations retained resideo spinoff october 25 2018 company received net proceeds 1197 million borrowings february 16 2018 company entered 15 billion 364day credit agreement syndicate banks 364day credit agreement maintained general corporate purposes terminated november 9 2018 april 27 2018 company entered 4 billion amended restated five year credit agreement “5year credit agreement” syndicate banks 5year credit agreement maintained general corporate purposes commitments 5year credit agreement increased pursuant terms 5year credit agreement aggregate amount exceed 45 billion 5year credit agreement amends restates previously reported 4 billion five year credit agreement dated july 10 2015 “prior agreement” 5year credit agreement substantially material terms conditions prior agreement april 27 2018 company entered additional 15 billion 364day credit agreement syndicate banks 364day credit agreement maintained general corporate purposes borrowings credit agreements previously described honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 14 lease commitments future minimum lease payments operating leases initial remaining noncancellable lease terms excess one year follows rent expense 360 million 385 million 387 million 2018 2017 2016 note 15 financial instruments fair value measures credit market riskfinancial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties derivative transactions substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value cash flows derivative financial instruments considering reasonably possible changes interest rates currency exchange rates restrict use derivative financial instruments hedging activities continually monitor creditworthiness customers grant credit terms normal course business terms conditions credit sales designed mitigate eliminate concentrations credit risk single customer sales materially dependent single customer small group customers foreign currency risk managementwe conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities transactions arising international trade primary objective preserve us dollar value foreign currency denominated cash flows earnings attempt hedge currency exposures natural offsets fullest extent possible opportunities exhausted foreign currency exchange forward option contracts foreign currency exchange contracts third parties hedge monetary assets liabilities denominated nonfunctional currencies prior conversion us dollars assets liabilities remeasured spot exchange rates effect balance sheet date effects changes spot rates recognized earnings included income expense partially hedge forecasted sales purchases denominated nonfunctional currencies foreign currency exchange contracts changes forecasted nonfunctional currency cash flows due movements exchange rates substantially offset changes fair value foreign currency exchange contracts designated hedges market value gains losses contracts recognized earnings hedged transaction recognized december 31 2018 2017 contracts notional amounts 14995 million 9273 million exchange foreign currencies principally us dollar euro british pound canadian dollar mexican peso swiss franc indian rupee russian ruble chinese renminbi december 31 2018 estimate approximately 90 million net honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts derivative gains related cash flow hedges included accumulated comprehensive income loss reclassified earnings within next 12 months also designated foreign currency debt certain derivative contracts hedges portions net investment foreign operations year ended december 31 2018 gains losses effective portion foreign currency debt designated net investment hedge recorded manner foreign currency translation adjustments company ineffectiveness related net investment hedges year ended december 31 2018 interest rate risk managementwe use combination financial instruments including longterm mediumterm shortterm financing variablerate commercial paper interest rate swaps manage interest rate mix total debt portfolio related overall cost borrowing december 31 2018 2017 interest rate swap agreements designated fair value hedges effectively changed 2600 million fixed rate debt 293 libor based floating rate debt interest rate swaps mature various dates 2026 fair value financial instrumentsthe fasb’s accounting guidance defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date exit price financial nonfinancial assets liabilities classified entirety based lowest level input significant fair value measurement following table sets forth company’s financial assets liabilities accounted fair value recurring basis december 31 2018 2017 foreign currency exchange contracts interest rate swap agreements cross currency swap agreements valued using broker quotations market transactions either listed overthecounter markets derivative instruments classified within level 2 company also holds investments commercial paper certificates deposits time deposits designated available sale valued using published prices based observable market data investments classified within level 2 company also holds available sale investments us government corporate debt securities valued utilizing published prices based quoted market pricing classified within level 1 carrying value cash equivalents trade accounts notes receivables payables commercial paper shortterm borrowings contained consolidated balance sheet approximates fair value following table sets forth company’s financial assets liabilities carried fair value honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts following table sets forth amounts recorded consolidated balance sheet related cumulative basis adjustments fair value hedges company determined fair value longterm receivables discounting based upon terms receivable counterparty details including credit quality fair value receivables considered level 2 company determined fair value longterm debt related current maturities utilizing transactions listed markets identical similar liabilities fair value longterm debt related current maturities considered level 2 interest rate swap agreements designated hedge relationships gains losses derivative recognized interest financial charges offsetting gains losses underlying debt hedged losses interest rate swap agreements recognized earnings 37 million 29 million 71 million years ended december 31 2018 2017 2016 gains losses fully offset losses gains underlying debt hedged economically hedge exposure changes foreign exchange rates principally forward contracts markedtomarket resulting gains losses recognized earnings offsetting gains losses nonfunctional currency denominated monetary assets liabilities hedged recognized 394 million income 207 million expense income expense years ended december 31 2018 2017 recognized 232 million income expense year ended december 31 2016 following tables summarize location impact consolidated statement operations related fair value cash flow hedging relationships honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts following table summarizes amounts gain loss net investment hedges recognized accumulated comprehensive income loss note 16 liabilities note 17 capital stock authorized issue 2000000000 shares common stock par value 1 common shareowners entitled receive dividends may declared board directors entitled one vote per share entitled event liquidation share ratably assets honeywell available distribution common shareowners common shareowners preemptive conversion rights shares common stock issued outstanding held treasury liable calls assessments restrictions us relative dividends repurchase redemption common stock december 2017 board directors authorized repurchase 8 billion honeywell common stock approximately 37 billion 77 billion remained available december 31 2018 december 31 2017 additional share repurchases honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts repurchased approximately 265 million 205 million shares common stock 2018 2017 4000 million 2889 million authorized issue 40000000 shares preferred stock without par value determine number shares series rights preferences limitations series december 31 2018 preferred stock outstanding note 18 accumulated comprehensive income loss changes accumulated comprehensive income loss provided tables comprehensive income loss attributable noncontrolling interest consists predominantly net income components accumulated comprehensive income loss honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts changes accumulated comprehensive income loss component reclassifications accumulated comprehensive income loss honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 19 stockbased compensation plans 2016 stock incentive plan honeywell international inc affiliates 2016 plan 2016 stock plan nonemployee directors honeywell international inc 2016 directors plan approved shareowners annual meeting shareowners effective april 25 2016 following approval plans grant new awards previously existing stockbased compensation plans december 31 2018 40270690 893809 shares honeywell common stock available future grants terms 2016 plan 2016 directors plan respectively stock optionsthe exercise price term conditions applicable option granted stock plans generally determined management development compensation committee board exercise price stock options set grant date may less fair market value per share stock date fair value recognized expense employee’s requisite service period generally vesting period award options generally vest fouryear period expire ten years fair value option award estimated date grant using blackscholes optionpricing model expected volatility based implied volatilities traded options common stock historical volatility common stock used monte carlo simulation model derive expected term represents estimate time options expected remain outstanding model uses historical data estimate option exercise activity postvest termination behavior riskfree rate periods within contractual life option based us treasury yield curve effect time grant following table summarizes impact consolidated statement operations stock options following table sets forth fair value per share information including related weightedaverage assumptions used determine compensation cost honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts following table summarizes information stock option activity three years ended december 31 2018 1 additional options granted offset dilutive impact spinoffs outstanding options 2 represents sum vested options 141 million expected vest options 75 million expected vest options derived applying prevesting forfeiture rate assumption total outstanding unvested options 86 million honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts following table summarizes information stock options outstanding exercisable december 31 2018 12288854 15536961 options exercisable weighted average exercise prices 7835 6339 december 31 2017 2016 following table summarizes financial statement impact stock options exercised 1 represents amount stock price exceeded exercise price options date exercise december 31 2018 89 million total unrecognized compensation cost related nonvested stock option awards expected recognized weightedaverage period 243 years total fair value options vested 2018 2017 2016 73 million 87 million 76 million restricted stock unitsrestricted stock unit rsu awards entitle holder receive one share common stock unit units vest rsus issued certain key employees directors compensation fair market value date grant rsus typically become fully vested periods ranging three seven years payable honeywell common stock upon vesting honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts following table summarizes information rsu activity three years ended december 31 2018 1 additional rsu grants offset dilutive impact spinoffs nonvested rsus december 31 2018 approximately 218 million total unrecognized compensation cost related nonvested rsus granted stock plans expected recognized weightedaverage period 305 years following table summarizes impact consolidated statement operations rsus note 20 commitments contingencies environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous substances accordance environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing hazardous substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually jointly potentially responsible parties determine feasibility various remedial techniques policy record appropriate liabilities environmental matters honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical regulatory legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing remedial investigations feasibility studies timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects remedial techniques utilized agreements parties following table summarizes information concerning recorded liabilities environmental costs environmental liabilities included following balance sheet accounts currently possess sufficient information reasonably estimate amounts environmental liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined although could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position conjunction resideo spinoff company entered indemnification reimbursement agreement resideo subsidiary pursuant resideo’s subsidiary ongoing obligation make cash payments honeywell amounts equal 90 percent honeywell’s annual net spending environmental matters certain sites defined agreement amount payable honeywell given year subject cap 140 million obligation continue earlier december 31 2043 december 31 third consecutive year annual payment obligation less 25 million reimbursements associated indemnification agreement 25 million 2018 offset operating cash outflows incurred company records accruals environmental matters deemed probable reasonably estimable related sites covered indemnification agreement corresponding receivable resideo 90 percent accrual also recorded receivable amount recorded 2018 subsequent spinoff 50 million honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts december 31 2018 current assets includes 140 million 476 million representing shortterm longterm portion receivable amount due resideo indemnification reimbursement agreement asbestos matters honeywell defendant asbestos related personal injury actions related north american refractories company “narco” sold 1986 bendix friction materials “bendix” business sold 2014 third quarter 2018 company revised accounting correct time period associated determination appropriate accruals legacy bendix asbestosrelated liability unasserted claims prior accounting treatment applied fiveyear time horizon revised treatment reflects full term epidemiological projections 2059 previously issued financial statements revised correction following effects company’s revised estimated asbestosrelated liabilities 2610 million december 31 2017 1087 million higher company’s prior estimate company’s insurance recoveries asbestosrelated liabilities estimated 503 million december 31 2017 68 million higher company’s prior estimate december 31 2017 net deferred income taxes impact 245 million decrease liabilities increase assets cumulative impact retained earnings decrease 774 million 2017 2016 cost services sold decreased 48 million 5 million tax expense increased 158 million 2 million net income decreased 110 million 3 million revision followed securities exchange commission sec division corporation finance review annual report form 10k 2017 included review prior accounting liability unasserted bendixrelated asbestos claims september 13 2018 following completion corporation finance’s review sec division enforcement advised opened investigation related matter honeywell intends provide requested information otherwise fully cooperate sec staff october 31 2018 david kanefsky honeywell shareholder filed putative class action complaint alleging violations securities exchange act 1934 rule 10b5 related prior accounting bendix asbestos claims believe complaint merit following tables summarize information concerning narco bendix asbestos related balances asbestos related liabilities honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts insurance recoveries asbestos related liabilities narco bendix asbestos related balances included following balance sheet accounts narco productshoneywell’s predecessor allied corporation owned narco 1979 1986 narco business sold honeywell’s predecessor entered crossindemnity agreement narco included obligation indemnify purchaser asbestos claims arise primarily alleged occupational exposure asbestoscontaining refractory brick mortar hightemperature applications narco ceased manufacturing products 1980 first asbestos claims filed tort system narco 1983 claims filings related costs increased dramatically late 1990s 2001 led narco filing bankruptcy january 2002 narco filed bankruptcy current future narco asbestos claims stayed narco honeywell pending reorganization narco following bankruptcy filing december 2002 honeywell recorded total narco asbestos liability 32 billion comprised three components estimated liability settle prebankruptcy petition narco claims certain postpetition settlements 22 billion referred “prebankruptcy narco liability” ii estimated liability related unasserted narco claims period 2004 2018 950 million referred “narco trust liability” iii narco bankruptcyrelated obligations totaling 73 million narco trust liability 950 million established 2002 methodology estimating potential liability based primarily epidemiological projections future incidence disease period 2004 2018 fifteenyear period b historical claims rates tort system fiveyear period prior bankruptcy filing date c anticipated narco trust payment values set forth current draft narco trust distribution procedures methodology required estimating disease three critical inputs likely number claims asserted narco trust future ii percentage claims likely receive payment iii payment values company utilized outside asbestos liability valuation specialists honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts support preparation narco trust liability estimate based commonly accepted methodology used numerous bankruptcy courts addressing 524g trusts 2002 first established initial liability narco asbestos claims resolution shifted tort system anticipated narco trust framework claims would processed accordance established narco trust distribution procedures including strict medical exposure criteria plaintiff receive compensation believed time narco trust’s claims filing resolution experience narco trust became operational would significantly different prebankruptcy tort system experience light rigorous claims processing requirements narco trust distribution procedures honeywell’s active oversight claims processing approval given anticipated differences believed 15year time period appropriate horizon establishing probable reasonably estimable liability unasserted narco claims represented best estimate time period would take narco trust approved bankruptcy court become fully operational generate sufficiently reliable claims data ie data set statistically representative enable us update narco trust liability narco trust distribution procedures finalized 2006 company updated narco trust liability reflect final terms payment values original 15year period 2004 2018 unasserted claims change asbestos claims filings continued stayed honeywell narco 2006 update resulted range estimated liability unasserted claims 743 million 961 million believed amount within range better estimate amount accordance asc 450contingencies “asc 450” recorded low end range 743 million resulted reduction 207 million narco trust liability narco emerged bankruptcy april 30 2013 time federally authorized 524g trust established evaluation resolution existing future narco asbestos claims honeywell narco protected permanent channeling injunction barring present future individual actions state federal courts requiring asbestos related claims based exposure narco asbestoscontaining products made narco trust narco trust agreement narco trust distribution procedures principal documents setting forth structure narco trust documents establish honeywell’s evergreen funding obligations honeywell obligated fund narco asbestos claims submitted narco trust qualify payment trust distribution procedures annual contribution claims subject annual cap 145 million however initial 100 million claims processed narco trust initial claims amount count annual cap unused portion initial claims amount roll subsequent years fully utilized documents also establish material operating rules narco trust including honeywell audit rights criteria claimants must meet valid claim paid claims payment criteria include providing narco trust adequate medical evidence claimant’s asbestosrelated condition credible evidence exposure specific narco asbestoscontaining product narco trust eligible receive cash dividends harbisonwalker international inc “hwi” reorganized renamed entity emerged fully operational narco bankruptcy narco trust required use funding received hwi pay annual contribution claims funds exhausted point honeywell’s funding obligation trust triggered thus unrelated primary source funding affects honeywell’s funding narco trust liability operational narco trust began receive process pay claims previously stayed pending trust becoming operational narco trust began pay claims 2014 began assert ongoing audit rights review monitor claims processor’s adherence established requirements narco trust distribution procedures honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts identified several issues way trust implementing narco trust distribution procedures 2015 honeywell filed suit narco trust bankruptcy court alleging breach certain provisions narco trust agreement narco trust distribution procedures parties agreed dismiss proceeding without prejudice pursuant 18month standstill agreement expired october 2017 notwithstanding expiration claims processing continues honeywell continues negotiate attempt resolve remaining disputed issues instances honeywell believes narco trust processing claims accordance established narco trust distribution procedures honeywell reserves right seek judicial intervention negotiations fail narco trust became effective 2013 743 million narco trust liability comprised liability unasserted claims ii liability claims asserted narco trust became operational yet paid although know number claims filed narco trust year able determine time portion narco trust liability represents asserted versus unasserted claims due lack sufficiently reliable claims data claims processing issues described previously honeywell maintained 743 million accrual narco trust liability sufficiently reliable claims data history enable us update liability december 31 2018 total narco asbestos liability 891 million reflects prebankruptcy narco liability 148 million narco trust liability 743 million december 31 2018 prebankruptcy narco liability reduced approximately 2 billion since first established 2002 largely related settlement payments remaining prebankruptcy narco liability principally represents estimated amounts owed pursuant settlement agreements reached pendency narco bankruptcy proceedings provide right submit claims narco trust subject qualification terms settlement agreements trust distribution procedures narco bankruptcy obligations paid 2013 liability recorded december 31 2018 honeywell made payments narco trust annual contribution claims annual contribution claims paid since trust became operational funded cash dividends hwi honeywell continues evaluate appropriateness 743 million narco trust liability despite becoming effective 2013 narco trust experienced delays becoming fully operational violations trust distribution procedures resulting disputes challenges standstill pending dispute resolution limited claims payments contributed lack sufficient normalized data based actual claims processing experience trust since became operational result able update narco trust liability 743 million narco trust liability continues appropriate unresolved pending claims trust portion result payouts future new claims continue filed narco trust sufficiently reliable claims data exists update estimate narco trust liability possible material change may need recognized insurance receivable 307 million december 31 2018 corresponding estimated liability asserted unasserted narco asbestos claims reflects coverage reimburses honeywell portions narcorelated indemnity defense costs provided large number insurance policies written dozens insurance companies domestic insurance market london excess market conduct analyses estimate probable amount insurance recoverable asbestos claims substantial majority honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts insurance carriers solvent individual carriers insolvent considered analysis probable recoveries made judgments concerning insurance coverage believe reasonable consistent historical dealings knowledge pertinent solvency issues surrounding insurers bendix productsbendix manufactured automotive brake linings contained chrysotile asbestos encapsulated form claimants consist largely individuals allege exposure asbestos brakes either performing vicinity individuals performed brake replacements following tables present information regarding bendix related asbestos claims activity honeywell experienced average resolution values per claim excluding legal costs follows possible predict whether resolution values bendixrelated asbestos claims increase decrease stabilize future consolidated financial statements reflect estimated liability resolution asserted claims filed financial statement date unasserted bendixrelated asbestos claims excludes company’s legal fees defend asbestos claims continue expensed company incurred valued bendix asserted unasserted claims using average resolution values previous five years update resolution values used estimate cost bendix asserted unasserted claims fourth quarter year honeywell reflects inclusion years epidemiological disease projection 2059 estimating liability unasserted bendixrelated asbestos claims liability unasserted bendixrelated asbestos claims based historic anticipated claims filing experience dismissal rates disease classifications resolution values tort system previous five years insurance receivable corresponding liability settlement asserted unasserted bendix asbestos claims reflects coverage provided large number insurance policies written dozens insurance companies domestic insurance market london excess market based ongoing analysis probable insurance recovery insurance receivables recorded financial statements simultaneous recording estimated liability underlying asbestos claims determination based analysis underlying insurance policies historical experience insurers ongoing review honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts solvency insurers judicial determinations relevant insurance programs consideration impacts settlements reached insurers conjunction garrett spinoff company entered indemnification reimbursement agreement garrett subsidiary pursuant garrett’s subsidiary obligation make cash payments honeywell amounts equal 90 honeywell’s asbestosrelated liability payments primarily related bendix business united states well certain environmentalrelated liability payments accounts payable nonunited states asbestosrelated liability payments case related legacy elements garrett business including legal costs defending resolving liabilities less ii 90 honeywell’s net insurance receipts may applicable certain recoveries associated liabilities amount payable honeywell respect liabilities arising given year subject cap approximately euro 150 million equivalent 175 million time indemnification agreement entered obligation continue earlier december 31 2048 december 31 third consecutive year annual indemnification obligation less euro equivalent fixed exchange rate time indemnification agreement 25 million reimbursements associated indemnification agreement 42 million 2018 company records accruals matters covered indemnification agreement corresponding receivable garrett recorded 90 percent accrual determined terms agreement 2018 subsequent spinoff company recorded reversal receivable 17 million fourth quarter 2018 december 31 2018 current assets includes 171 million 1058 million representing shortterm longterm portion receivable amount due garrett indemnification reimbursement agreement matters subject number lawsuits investigations disputes involve substantial amounts claimed arising conduct business including matters relating commercial transactions government contracts product liability prior acquisitions divestitures employee benefit plans intellectual property environmental health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes matters well potential ranges possible losses taking consideration insurance recoveries based careful analysis matter assistance outside legal counsel applicable experts included matters following honeywell v united auto workers uaw et alin september 2011 uaw certain honeywell retirees plaintiffs filed suit eastern district michigan district court alleging series master collective bargaining agreements mcbas honeywell uaw provided retirees rights lifetime vested healthcare benefits could never changed reduced plaintiffs alleged honeywell violated vested rights implementing express limitations caps amount honeywell contributed toward healthcare coverage retirees honeywell subsequently answered uaw’s complaint asserted counterclaims including breach implied warranty 2014 2015 honeywell began enforcing caps former employees response uaw certain plaintiffs filed motion seeking ruling mcbas limit honeywell’s obligation contribute healthcare coverage retirees march 29 2018 district court issued opinion resolving pending summary judgment motions except honeywell’s counterclaim breach implied warranty since dismissed without prejudice honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts opinion district court held mcbas promise retirees vested lifetime benefits survive expiration mcbas based ruling honeywell terminated retirees healthcare coverage benefits altogether july 31 2018 response uaw filed motion enjoin honeywell completely terminating coverage july 31 2018 arguing caps vested honeywell must continue provide retiree medical benefits capped level july 28 2018 district court denied uaw’s motion entered final judgment consistent march 2018 ruling uaw appealed decision sixth circuit court appeals honeywell believes district court’s ruling upheld march 2018 opinion district court also held honeywell obligated mcbas pay “full premium” retiree healthcare rather capped amount based ruling honeywell would required pay monetary damages retirees past years honeywell paid less “full premium” healthcare coverage damages would limited depending retiree group two threeyear period ending 2016 mcba expired honeywell would ongoing obligation continue funding healthcare coverage subsequent periods honeywell appealed district court’s ruling “full premium” damages issue believes sixth circuit court appeals reverse district court issue event sixth circuit sustain district court’s ruling issue honeywell would liable damages least 12 million given uncertainty inherent litigation investigations including specific matter referenced believe possible develop estimates reasonably possible loss excess current accruals matters specifically set forth considering past experience existing accruals expect outcome matters either individually aggregate material adverse effect consolidated financial position contingencies resolved long periods time potential liabilities subject change due new developments changes settlement strategy impact evidentiary requirements could cause us pay damage awards settlements become subject equitable remedies could material adverse effect results operations operating cash flows periods recognized paid warranties guarantees normal course business issue product warranties product performance guarantees accrue estimated cost product warranties performance guarantees based contract terms historical experience time sale adjustments initial obligations warranties guarantees made changes obligations become reasonably estimable following table summarizes information concerning recorded obligations product warranties product performance guarantees honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts product warranties product performance guarantees included following balance sheet accounts note 21 pension postretirement benefits sponsor number funded unfunded us nonus defined benefit pension plans pension benefits many us employees provided noncontributory qualified nonqualified defined benefit plans nonunion hourly salaried employees joining honeywell first time december 31 2012 eligible participate honeywell’s us defined benefit pension plans also sponsor defined benefit pension plans cover nonus employees us citizens certain jurisdictions principally uk netherlands germany canada pension plans outside us material company either individually aggregate also sponsor postretirement benefit plans provide health care benefits life insurance coverage mainly us eligible retirees none honeywell’s us employees eligible retiree medical subsidy company addition vast majority honeywell’s us retirees either company subsidy fixeddollar subsidy amount significantly limits exposure impact future health care cost increases retiree medical life insurance plans funded claims expenses paid operating cash flow honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts following tables summarize balance sheet impact including benefit obligations assets funded status associated significant pension postretirement benefit plans honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts recognized accumulated comprehensive income loss associated significant pension postretirement benefit plans december 31 2018 2017 follows honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts components net periodic benefit income cost amounts recognized comprehensive income loss significant pension postretirement benefit plans include following components estimated prior service credit pension benefits amortized accumulated comprehensive income loss net periodic benefit income cost 2019 expected 42 million 0 million us nonus pension plans honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts estimated net loss prior service credit postretirement benefits amortized accumulated comprehensive income loss net periodic benefit income cost 2019 expected 0 62 million major actuarial assumptions used determining benefit obligations net periodic benefit income cost significant benefit plans presented following table weighted averages discount rate us pension postretirement benefits plans reflects current rate associated liabilities could settled measurement date december 31 determine discount rates us pension postretirement benefit plans use modeling process involves matching expected cash outflows benefit plans yield curve constructed portfolio high quality fixedincome debt instruments use single weightedaverage yield hypothetical portfolio discount rate benchmark utilize full yield curve approach estimation service interest cost components net periodic pension benefit income significant pension plans approach applies specific spot rates along yield curve used determination pension benefit obligation underlying projected cash flows provides precise measurement service interest costs improving correlation projected cash flows corresponding spot rates us pension plans single weighted average spot rates used determine service interest costs 2019 447 394 discount rate used determine postretirement benefit obligation lower principally due shorter expected duration postretirement plan obligations compared pension plan obligations honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts expected rate return us plan assets 675 december 31 2018 775 december 31 2017 reflecting rebalancing assets fixed income 2018 asset return assumption based historical plan asset returns varying longterm periods combined current market conditions broad asset mix considerations focus longterm trends rather shortterm market conditions review expected rate return annual basis revise appropriate nonus benefit plans actuarial assumptions reflect economic market factors relevant country pension benefits following amounts relate significant pension plans accumulated benefit obligations exceeding fair value plan assets accumulated benefit obligation us defined benefit pension plans 161 billion 181 billion nonus defined benefit pension plans 61 billion 69 billion december 31 2018 2017 asset investment strategy us pension plans focuses maintaining diversified portfolio using various asset classes order achieve longterm investment objectives risk adjusted basis 2018 began employ derisking strategy increases matching characteristics assets relative obligation longterm target allocations follows 4570 fixed income securities cash 3550 equity securities 510 real estate investments 1020 types investments equity securities include publiclytraded stock companies located inside outside united states fixed income securities include corporate bonds companies diversified industries mortgagebacked securities us treasuries real estate investments include direct investments commercial properties investments real estate funds types investments include investments private equity hedge funds follow several different strategies review assets regular basis ensure within targeted asset allocation ranges necessary asset balances adjusted back within target allocations nonus pension assets typically managed decentralized fiduciary committees honeywell corporate investments group providing funding investment guidance nonus investment policies different country local regulations funding requirements financial tax considerations part funding investment allocation process country accordance asu 201507 “fair value measurement topic 820” certain investments measured fair value using net asset value nav per share equivalent practical expedient classified fair value hierarchy fair value amounts presented following tables intended permit reconciliation fair value hierarchy amounts presented total pension benefits plan assets honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts fair values us nonus pension plans assets asset category follows honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts following table summarizes changes fair value level 3 assets us nonus plans company enters futures contracts gain exposure certain markets sufficient cash equivalents held pension plans cover notional value futures contracts december 31 2018 2017 us plans contracts notional amounts 2808 million 4188 million december 31 2018 2017 nonus plans contracts notional amounts 111 million 133 million us nonus pension plans notional derivative exposure related outstanding equity fixed income futures contracts common stocks preferred stocks real estate investment trusts shortterm investments valued closing price reported active market individual securities traded corporate bonds mortgages assetbacked securities government securities valued either using pricing models bids provided brokers dealers quoted prices securities similar characteristics discounted cash flows include adjustments certain risks may observable credit liquidity risks certain securities held collective trust funds valued using net asset values provided administrators funds investments private equity debt real estate hedge funds direct private investments valued estimated fair value based quarterly financial information received investment advisor andor general partner investments real estate properties valued quarterly basis using income approach valuation estimates periodically supplemented third party appraisals funding policy qualified defined benefit pension plans contribute amounts least sufficient satisfy regulatory funding standards 2018 2017 2016 required make contributions us pension plans contributions made required make contributions us pension plans 2019 2018 contributions 115 million made nonus pension plans satisfy regulatory funding requirements 2019 expect make contributions cash andor marketable securities approximately 42 million nonus pension plans satisfy regulatory funding standards contributions us nonus pension plans reflect benefits paid directly company assets honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts benefit payments including amounts paid company assets reflecting expected future service appropriate expected paid follows postretirement benefits assumed health care cost trend rate significant effect amounts reported onepercentagepoint change assumed health care cost trend rate would following effects benefit payments reflecting expected future service appropriate expected paid follows note 22 segment financial data globally manage business operations four reportable operating segments segment information consistent management reviews businesses makes investing resource allocation decisions assesses operating performance honeywell’s senior management evaluates segment performance based segment profit segment profit measured segment income loss taxes excluding general corporate unallocated expense income expense interest financial charges stock compensation expenses pension postretirement benefits expense stock compensation expense repositioning charges honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts reconciliation segment profit consolidated income continuing operations taxes follows 1 amounts included selling general administrative expenses 2 amounts included cost products services sold selling general administrative expenses service costs incomeexpense nonservice cost components 3 amounts included cost products services sold selling general administrative expenses incomeexpense 4 amounts include components incomeexpense included within categories reconciliation equity incomeloss affiliated companies included segment profit note 23 geographic areasfinancial data honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 24 supplemental cash flow information note 25 unaudited quarterly financial information 1 total full year may differ sum individual quarters due requirement use weighted average shares quarter may fluctuate share repurchases share issuances due impact losses quarter 2 due loss quarter ended december 31 2017 incremental shares included effect would antidilutive 3 quarter ended december 31 2017 net income loss attributable honeywell earnings loss per common share basic earnings loss per common share assuming dilution impacted us tax reform 4 earnings per common share net income attributable honeywell revised periods prior sept 30 2018 connection change accounting bendix asbestosrelated liabilities unasserted claims see note 20 commitments contingencies details report independent registered public accounting firm shareowners board directors honeywell international inc opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets honeywell international inc subsidiaries “company” december 31 2018 2017 related consolidated statements operations comprehensive income shareowners’ equity cash flows three years period ended december 31 2018 related notes collectively referred “financial statements” also audited company’s internal control financial reporting december 31 2018 based criteria established internal controlintegrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion financial statements referred present fairly material respects financial position company december 31 2018 2017 results operations cash flows three years period ended december 31 2018 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2018 based criteria established internal controlintegrated framework 2013 issued coso change accounting principle discussed note 1 financial statements accompanying 2017 2016 consolidated statements operations retrospectively adjusted adoption accounting standards update 201707 compensationretirement benefits topic 715 improving presentation net periodic pension cost net periodic postretirement benefit cost basis opinions company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion financial statements opinion company’s internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits financial statements included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate deloitte touche llp parsippany new jersey february 8 2019 served company’s auditor since 2014 item 9item 8 financial statements supplementary data honeywell international inc consolidated statement operations notes consolidated financial statements integral part statement honeywell international inc consolidated statement comprehensive income notes consolidated financial statements integral part statement honeywell international inc consolidated balance sheet notes consolidated financial statements integral part statement honeywell international inc consolidated statement cash flows notes consolidated financial statements integral part statement honeywell international inc consolidated statement shareowners’ equity notes consolidated financial statements integral part statement honeywell international inc notes consolidated financial statements dollars millions except per share amounts note 1 summary significant accounting policies accounting principlesthe financial statements accompanying notes prepared accordance accounting principles generally accepted united states america following description honeywell’s significant accounting policies principles consolidationthe consolidated financial statements include accounts honeywell international inc subsidiaries entities controlling interest maintained consolidation policy requires equity investments exercise significant influence control investee primary beneficiary investee’s activities accounted using equity method investments able exercise significant influence investee readily determinable fair values accounted cost method intercompany transactions balances eliminated consolidation property plant equipmentproperty plant equipment recorded cost including asset retirement obligations less accumulated depreciation financial reporting straightline method depreciation used estimated useful lives 10 50 years buildings improvements 2 16 years machinery equipment recognition fair value obligations associated retirement tangible longlived assets required legal obligation incur costs upon initial recognition liability cost capitalized part related longlived asset depreciated corresponding asset’s useful life goodwill indefinitelived intangible assetsgoodwill indefinitelived intangible assets subject impairment testing annually march 31 whenever events changes circumstances indicate carrying amount may fully recoverable testing compares carrying values fair values appropriate carrying value assets reduced fair value completed annual goodwill impairment test march 31 2019 determined impairment date intangible assets determinable livesother intangible assets determinable lives consist customer lists technology patents trademarks intangibles amortized estimated useful lives ranging 2 24 years sales recognitionproduct service sales recognized company transfers control promised products services customers revenue measured amount consideration expect receive exchange transferring goods providing services service sales principally representing repair maintenance engineering activities recognized contractual period services rendered sales longterm contracts performance obligations satisfied time recognized using either input output method recognize revenue time perform contracts continuous transfer control customer control transferring time revenue recognized based extent progress towards completion performance obligation generally use costtocost input method progress contracts best depicts transfer control customer occurs incur costs costtocost method extent progress towards completion measured based proportion costs incurred date total estimated costs completion performance obligation review cost estimates significant contracts periodic basis circumstances change warrant modification previous estimate cost estimates largely based negotiated estimated purchase contract terms historical performance trends economic projections significant factors influence estimates include inflationary trends technical schedule risk internal subcontractor performance trends business volume assumptions asset utilization anticipated labor agreements provisions anticipated losses longterm contracts recorded full losses become evident extent required customer funding costs incurred nonrecurring engineering development activities products agreements commercial customers deferred subsequently recognized revenue products delivered customers additionally expenses incurred customer agreed funded amount deferred asset recognized cost sales products delivered customer deferred customer funding costs result recognition deferred costs asset deferred revenue liability consolidated balance sheet capitalized contract fulfillment costs approximately 1 billion december 31 2019 2018 amounts recognized cost sales approximately 01 billion years ended december 31 2019 2018 honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts revenues mechanical service programs recognized performance obligations satisfied time recognition reflecting series distinct services using output method terms contract historical business practice give rise variable consideration due limited cashbased incentives rebates performance awards credits estimate variable consideration likely amount receive customers include estimated amounts transaction price extent probable significant reversal cumulative revenue recognized transaction occur uncertainty associated variable consideration resolved estimates variable consideration determination whether include estimated amounts transaction price based largely assessment anticipated performance information historical current forecasted reasonably available us year ended 2017 prior adoption revenue recognition standard see note 7 revenue recognition contracts customers product service sales recognized persuasive evidence arrangement existed product delivery occurred services rendered pricing fixed determinable collection reasonably assured service sales principally representing repair maintenance engineering activities recognized contractual period services rendered sales longterm contracts recorded percentageofcompletion method measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts provisions anticipated losses longterm contracts recorded full losses became evident revenues contracts multiple element arrangements recognized element earned based relative fair value element provided delivered elements value customers standalone basis amounts allocated element based objectively determined fair value sales price product service sold separately competitor prices similar products services environmentalthe company accrues costs related environmental matters probable incurred liability related contaminated site amount reasonably estimated additional information see note 20 commitments contingencies asbestos related liabilities insurance recoveriesthe company recognizes liability asbestos related contingency probable occurrence reasonably estimable connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable additional information see note 20 commitments contingencies reimbursement receivablesin conjunction garrett motion inc “garrett” resideo technologies inc “resideo” spinoffs company entered reimbursement agreements honeywell receives cash payments reimbursement primarily asbestos related liability payments related bendix business us garrett net spending environmental matters certain sites defined agreement resideo accordingly company recorded receivable based estimates underlying reimbursable honeywell spend monitor recoverability receivable subject terms applicable credit agreements general ability pay additional information see note 20 commitments contingencies aerospace sales incentivesthe company provides sales incentives commercial aircraft manufacturers airlines connection selection aircraft equipment predominately wheel braking system hardware avionics auxiliary power units installation commercial aircraft incentives consist free deeply discounted products credits future purchases product upfront cash payments costs generally recognized period incurred cost products sold reduction relevant sales appropriate research developmentresearch development costs companysponsored research development projects expensed incurred costs included cost products services sold 1556 million 1809 million 1835 million 2019 2018 2017 customersponsored research development activities contracts customers included contract cost included cost products services sold revenue contracts recognized customersponsored research development activities amounted additional 1079 million 1069 million 876 million 2019 2018 2017 honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts stockbased compensation plansthe principal awards issued stockbased compensation plans described note 19 stockbased compensation plans nonqualified stock options restricted stock units cost awards measured grant date based fair value award value portion award ultimately expected vest recognized expense requisite service periods generally vesting period equity award included selling general administrative expenses forfeitures estimated time grant recognize expense awards expected vest based historical forfeiture rates pension benefitsthe company presents net periodic pensions costs disaggregating service cost component net benefit costs reports costs line item items consolidated statement operations compensation costs arising services rendered pertinent employees period nonservice components net benefit costs required presented separately service cost component company records service cost component pension ongoing income expense costs products services sold selling general administrative expenses remaining components net benefit costs within pension ongoing income expense primarily interest costs assumed return plan assets recorded income expense recognize net actuarial gains losses excess 10 greater fair value plan assets plans’ projected benefit obligation corridor annually fourth quarter year mtm adjustment mtm adjustment also reported income expense foreign currency translationassets liabilities subsidiaries operating outside united states functional currency us dollars translated us dollars using yearend exchange rates sales costs expenses translated average exchange rates effect year foreign currency translation gains losses included component accumulated comprehensive income loss subsidiaries operating highly inflationary environments inventories property plant equipment including related expenses remeasured exchange rate effect date assets acquired monetary assets liabilities remeasured yearend exchange rates remeasurement adjustments subsidiaries included earnings derivative financial instrumentsthe company reduces risks interest foreign currency exchange rate fluctuations normal operating financing activities deemed appropriate use derivative financial instruments derivative financial instruments used manage risk used trading speculative purposes use leveraged derivative financial instruments derivative financial instruments qualify hedge accounting must designated effective hedge identified risk exposure inception contract accordingly changes fair value derivative contract must highly correlated changes fair value underlying hedged item inception hedge life hedge contract derivatives recorded balance sheet assets liabilities measured fair value derivatives designated hedges fair value assets liabilities changes fair values derivatives hedged items recorded current earnings derivatives designated cash flow hedges changes fair value derivatives recorded accumulated comprehensive income loss subsequently recognized earnings hedged items impact earnings cash flows derivative financial instruments classified consistent underlying hedged item elected exclude time value derivatives ie forward points assessment hedge effectiveness recognize initial value excluded component earnings using amortization approach derivative instruments designated qualify net investment hedge gain loss reported component comprehensive income loss recorded accumulated comprehensive income loss gain loss subsequently reclassified net earnings hedged net investment either sold substantially liquidated honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts income taxessignificant judgment required evaluating tax positions establish reserves income taxes despite belief tax positions fully supportable remain certain positions meet minimum recognition threshold approach evaluating certain uncertain tax positions defined authoritative guidance determines tax position likely sustained upon examination applicable taxing authority normal course business company subsidiaries examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes continually assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts give rise change estimate become known discussion impacts commonly referred us tax cuts jobs act “us tax reform” see note 5 income taxes cash equivalentscash cash equivalents include cash hand highly liquid investments original maturity three months less earnings per sharebasic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding dilutive potential common shares outstanding reclassificationscertain prior year amounts reclassified conform current year presentation leasesat inception contract company assesses whether contract contains lease assessment based 1 whether contract involves use distinct identified asset 2 whether company obtains right substantially economic benefit use asset throughout period 3 whether company right direct use asset significant lease arrangements generally recognized lease commencement operating lease rightofuse “rou” assets lease liabilities recognized commencement rou asset corresponding lease liability recorded leases initial term 12 months less short term leases recognize lease expense leases incurred lease term rou assets represent right use underlying asset reasonably certain lease term lease liabilities represent obligation make lease payments arising lease terms may include options extend terminate lease reasonably certain exercise option operating lease rou assets liabilities recognized commencement date based present value lease payments lease term lease payments may fixed variable however fixed payments insubstance fixed payments included determining lease liability variable lease payments recognized operating expenses period obligation payments incurred operating lease rou asset also includes lease payments related initial direct cost prepayments excludes lease incentives lease expense recognized straightline basis lease term lease agreements lease nonlease components generally accounted separately company primarily uses incremental borrowing rate based information available lease commencement date determining present value lease payments determining borrowing rate consider lease term secured incremental borrowing rate leases denominated currency different us dollar collateralized borrowing rate foreign currency using us dollar foreign currency swap spread available recent accounting pronouncementsthe company considers applicability impact accounting standards updates asus issued financial accounting standards board fasb asus listed assessed determined either applicable expected minimal impact consolidated results operations financial position cash flows consolidated financial statements december 2019 fasb issued accounting standard update simplify accounting income taxes standard’s amendments include changes various subtopics accounting income taxes including limited accounting “hybrid” tax regimes tax basis stepup goodwill obtained transaction business combination intraperiod tax allocation exception incremental approach ownership changes investments interimperiod accounting enacted changes tax law yearto date loss limitation interimperiod tax accounting guidance effective fiscal years beginning december 15 2020 early adoption permitted including honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts interim periods within years currently evaluating impacts amendments consolidated financial position results operations cash flows related notes financial statements february 2018 fasb issued guidance allows entity elect reclassify income tax effects items resulting commonly referred us tax cuts jobs act us tax reform accumulated comprehensive income retained earnings guidance effective fiscal years beginning december 15 2018 early adoption permitted including interim periods within years company elected reclassify stranded income tax effects us tax reform accumulated comprehensive income retained earnings june 2016 fasb issued accounting standard requires companies utilize impairment model current expected credit loss cecl financial assets measured amortized cost certain financial instruments include limited trade receivables accounting standard replace incurred loss model current gaap model reflects expected credit losses requires consideration broader range reasonable supportable information estimate losses effective january 1 2020 company adopted standard adoption standard material impact consolidated financial statements note 2 acquisitions divestitures 2019 significant acquisitions individually aggregate 2018 company acquired businesses aggregate cost net cash debt assumed approximately 535 million mainly due november 2018 acquisition transnorm global leader highperformance conveyor warehouse solutions including approximately 380 million allocated goodwill transnorm part safety productivity solutions goodwill nondeductible tax purposes 2017 significant acquisitions individually aggregate october 1 2018 company completed taxfree spinoff honeywell shareowners transportation systems business part aerospace standalone publiclytraded company garrett motion inc “garrett” october 29 2018 company completed taxfree spinoff honeywell shareowners homes global distribution business part home building technologies renamed honeywell building technologies following spinoff standalone publiclytraded company resideo technologies inc “resideo” assets approximately 55 billion including approximately 28 billion goodwill net recorded receivables liabilities approximately 72 billion associated spinoff entities removed retained earnings company’s consolidated balance sheet effective date spinoff results operations cash flows included consolidated statement operations consolidated statement cash flows effective date spinoff income taxes attributable spinoff businesses 04 billion 05 billion 2018 2017 honeywell shareowners record close business october 16 2018 received one share resideo common stock every 6 shares honeywell common stock immediately prior effective date spinoff resideo incurred debt 12 billion make cash distribution company honeywell shareowners record close business september 18 2018 received one share garrett common stock every 10 shares honeywell common stock immediately prior effective date spinoff garrett incurred debt 16 billion make cash distribution company 2018 connection spinoff company entered certain agreements resideo garrett affect legal structural separation including transition services agreements provide certain administrative services limited time tax matters indemnification reimbursement agreements end 2019 agreements still effect honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 3 repositioning charges summary repositioning charges follows following table summarizes pretax distribution total net repositioning charges classification following table summarizes pretax impact total net repositioning charges segment 2019 company recognized repositioning charges totaling 438 million including severance costs 260 million related workforce reductions 5336 manufacturing administrative positions across segments workforce reductions related costs savings actions taken connection productivity ongoing functional transformation initiatives site transitions mainly honeywell building technologies transition manufacturing costeffective locations repositioning charge included asset impairments 95 million largely related write connection assets held sale repositioning charge included exit costs 83 million primarily related current period exit costs incurred previously approved repositioning projects termination fees associated early cancellation supply agreements certain raw materials performance materials technologies honeywell building technologies closure obligations associated site transitions 2018 company recognized repositioning charges totaling 530 million including severance costs 289 million related workforce reductions 6486 manufacturing administrative positions across segments workforce reductions primarily related planned site closures mainly safety productivity solutions performance materials technologies honeywell building technologies transition manufacturing sites costeffective locations workforce reductions also related productivity ongoing functional honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts transformation initiatives repositioning charge included asset impairments 162 million mainly related manufacturing plant equipment associated planned site closures asset impairments also included writedown legacy property corporate connection planned disposition writeoff certain capitalized assets corporate repositioning charge included exit costs 79 million primarily related termination fee associated early cancellation supply agreement certain raw materials performance materials technologies closure obligations associated planned site closures 2017 company recognized repositioning charges totaling 507 million including severance costs 305 million related workforce reductions 7096 manufacturing administrative positions across segments workforce reductions primarily related cost savings actions taken connection productivity ongoing functional transformation initiatives site transitions segments costeffective locations repositioning charge included asset impairments 142 million principally corporate segment related writedown legacy properties certain equipment connection planned disposition writedown research development facility connection planned exit facility repositioning charge included exit costs 60 million principally closure obligations associated site transitions segments lease exit obligations corporate segment following table summarizes status companys total repositioning reserves certain repositioning projects recognize exit costs future periods actual liability incurred exit costs incurred 2019 2018 2017 significant 2018 charge 63 million mainly relates reserves taken due required winddown companys activities iran evaluation potential resolution certain legal matter honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 4 income expense separation costs associated spinoffs companys homes global distribution business transportation systems business primarily associated third party services year ended december 31 2018 2017 net includes asset impairments corporate related writedown legacy property connection planned disposition see note 3 repositioning charges note 5 income taxes income taxes tax expense benefit honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts 1 net changes valuation allowance 2 includes us taxes nonus earnings effective tax rate increased 88 percentage points 2019 compared 2018 increase primarily attributable lower income tax benefit resulting revised guidance related us tax reform internal restructuring initiatives resulted 281 million reduction accrued withholding taxes related unremitted foreign earnings compared prior year company’s nonus effective tax rate 261 increase approximately 220 percentage points compared 2018 increase foreign effective tax rate primarily attributable lower income tax benefit related company’s internal restructuring initiatives compared prior year effective tax rate decreased 684 percentage points 2018 compared 2017 decrease primarily attributable internal restructuring initiatives resulted reduction accrued withholding taxes approximately 11 billion related unremitted foreign earnings addition recorded tax benefit approximately 440 million reduction 2017 provisional estimate impacts us tax reform partially offset 411 million tax costs associated internal restructuring homes global distribution business transportation systems business advance spinoffs company’s nonus effective tax rate 41 decrease approximately 673 percentage points compared 2017 year decrease foreign effective tax rate primarily attributable impact company’s internal restructuring initiatives reduction accrued withholding taxes unremitted foreign earnings partially offset spinoff transactions honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts deferred tax assets liabilities tax effects temporary differences tax carryforwards give rise future income tax benefits payables follows companys gross deferred tax assets include 767 million related nonus operations comprised principally net operating losses capital loss tax credit carryforwards mainly canada france germany luxembourg united kingdom deductible temporary differences maintain valuation allowance 653 million portion nonus gross deferred tax assets change valuation allowance resulted decrease 23 million increases 57 million 4 million income tax expense 2019 2018 2017 event determine able realize net deferred tax assets future reduce amounts increase income tax expense period determination made conversely determine able realize net deferred tax assets excess carrying amounts decrease recorded valuation allowance reduction income tax expense period determination made december 31 2019 company recorded 419 million deferred tax liability unremitted foreign earnings based estimated earnings profits approximately 167 billion balance sheet date december 31 2019 companys net operating loss capital loss tax credit carryforwards follows honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts many jurisdictions impose limitations timing utilization net operating loss tax credit carryforwards instances whereby expected permanent limitation utilization net operating loss tax credit carryforward deferred tax asset amount carryforward reduced december 31 2019 2018 2017 1164 million 1089 million 947 million unrecognized tax benefits recognized would recorded component tax expense following table summarizes tax years remain subject examination major tax jurisdictions december 31 2019 1 includes provincial similar local jurisdictions applicable based outcome examinations result expiration statute limitations specific jurisdictions reasonably possible certain unrecognized tax benefits tax positions taken previously filed tax returns materially change recorded liabilities financial statements addition outcome examinations may impact valuation certain deferred tax assets net operating losses future periods unrecognized tax benefits examinations progress 413 million 304 million 487 million december 31 2019 2018 2017 estimated interest penalties related underpayment income taxes classified component tax expense consolidated statement operations totaled 73 million 45 million 28 million years ended december 31 2019 2018 2017 accrued interest penalties 487 million 426 million 423 million december 31 2019 2018 2017 honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts us tax reform quarter ending december 31 2018 company completed accounting tax effects us tax reform amounted total tax charge approximately 35 billion recorded provisional estimate end 2017 2018 reduced provisional estimate approximately 440 million reduction tax expense corporate tax rate changeduring years 2018 2017 company recorded total tax benefit approximately 190 million due decrease corporate statutory tax rate 35 21 includes measurement period adjustment approximately 90 million recorded 2018 reduction tax expense change provisional estimate primarily relates information contained tax returns filed quarter ending december 31 2018 require approval us tax authorities tax benefit change tax rates results company’s deferred tax liability position excess net book value tax basis us assets liabilities generate future taxable income excess book income additional taxable income subject tax lower corporate tax rate consequently reducing company’s deferred tax liability mandatory transition taxduring years 2018 2017 company recorded total tax charge approximately 1950 million due imposition mandatory transition tax “mtt” deemed repatriation undistributed foreign earnings includes measurement period adjustment approximately 50 million recorded 2018 increase tax expense change provisional estimate primarily relates updated amounts tax returns finalized 2018 computations based 2018 testing dates guidance taxing authorities received year company elected pay mtt liability period eight years undistributed foreign earningsduring years 2018 2017 company recorded total tax charge approximately 1700 million due company’s intent longer permanently reinvest historical unremitted earnings foreign affiliates existed december 31 2017 includes measurement period adjustment approximately 400 million recorded 2018 reduction tax expense change provisional estimate primarily relates updated amounts tax returns finalized 2018 application foreign tax credits based guidance issued year changes applicable withholding tax rates local jurisdictions company also reduced taxes unremitted foreign earnings 281 million 11 billion 2019 2018 respectively recorded reductions tax expense global intangible low taxed incomeus tax reform imposes us tax global intangible low taxed income “gilti” earned certain foreign affiliates owned us shareholder gilti generally intended impose tax earnings foreign corporation deemed exceed certain threshold return relative underlying business investment company made policy election treat future taxes related gilti current period expense reporting period tax incurred honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 6 earnings per share details earnings per share calculations years ended december 31 2019 2018 2017 follows diluted earnings per share calculations exclude effect stock options’ assumed proceeds exceed average market price common shares period 2019 2018 2017 weighted number stock options excluded computations 25 million 25 million 28 million stock options outstanding end respective periods honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 7 revenue recognition contracts customers company comprehensive offering products services including software technologies sold variety customers multiple end markets see following disaggregated revenue table related discussions operating segment details aerospace global supplier products software services aircraft products include aircraft propulsion engines auxiliary power units environmental control systems integrated avionics electric power systems hardware engine controls flight safety communications navigation satellite space components aircraft wheels brakes thermal systems software includes engine controls flight safety communications navigation radar surveillance systems internet connectivity aircraft instrumentation services provided customers repair overhaul retrofit modification propulsion engines auxiliary power units avionics mechanical systems aircraft wheels brakes additionally aerospace provides honeywell forge aircraft connected solutions software data services designed improve customers’ efficiency enable improved operations honeywell building technologies global provider products software solutions technologies buildings products include controls displays heating cooling indoor air quality ventilation humidification combustion lighting sensors switches control systems instruments measuring pressure air flow temperature electrical current access control video surveillance fire detection installation maintenance upgrades systems keep buildings safe comfortable productive software includes monitoring managing heating cooling indoor air quality ventilation humidification combustion lighting advanced applications honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts building control optimization video surveillance remote patient monitoring systems installation maintenance upgrade services products used commercial building applications heating cooling maintaining indoor air quality ventilation humidification combustion lighting video surveillance fire safety offerings including honeywell forge buildings connected solutions address key energy challenges keep people places safe enhance building occupant experience improve critical infrastructure performance materials technologies global provider products software solutions technologies products include catalysts adsorbents equipment highperformance materials devices measurement regulation control metering gases electricity metering communications systems water utilities industries including honeywell forge connected solutions honeywell forge plant provides seamless integration connectivity within plants facilities provide holistic view operations turning data clear actions honeywell forge cybersecurity helps identify risks act cyberrelated incidents together enabling best operations protecting process people assets software provided support process technologies supporting automation monitor variety industrial processes used industries oil gas chemicals petrochemicals metals minerals mining industries services provided installation maintenance products safety productivity solutions global provider products software honeywell forge workers connected solutions products include personal protection equipment footwear gas detection devices mobile computing data collection thermal printing devices automation equipment supply chain warehouse automation customengineered sensors switches controls software solutions provided customers supply chain warehouse automation manage data assets drive productivity computing data collection thermal printing summary disaggregated product services sales segment refer note 22 segment financial data company recognizes revenue arising performance obligations outlined contracts customers satisfied point time disaggregation revenue based timing recognition follows contract balances progress satisfying performance obligations contracts customers related billings cash collections recorded consolidated balance sheet accounts receivable net assets unbilled receivables contract assets billed receivables accrued liabilities customer advances deposits contract liabilities unbilled receivables contract assets arise timing cash collected customers differs timing revenue recognition contract provisions require specific milestones met customer billed assets recognized revenue associated contract recognized prior billing derecognized billed accordance terms contract liabilities recorded customers remit contractual cash payments advance us satisfying performance obligations contractual arrangements including performance obligations satisfied period time contract liabilities derecognized revenue recorded either milestone met triggering contractual right bill performance obligation satisfied honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts contract balances classified assets liabilities contractbycontract basis end reporting period following table summarizes companys contract assets liabilities balances net change 2019 primarily driven receipt advance payments customers exceeding recognition revenue performance obligations satisfied prior billing net change 2018 primarily driven receipt advance payments customers exceeding reductions recognition revenue performance obligations satisfied related billings year ended december 31 2019 2018 recognized revenue 1543 million 1166 million previously included beginning balance contract liabilities contracts modified account changes contract specifications requirements company considers whether modification either creates new changes existing enforceable rights obligations contract modifications goods services distinct existing contract due significant integration original good service provided accounted part existing contract effect contract modification transaction price measure progress performance obligation relates recognized adjustment revenue either increase reduction revenue cumulative catchup basis modifications include additional performance obligations distinct relative standalone selling price accounted new contract performance obligation recognized prospectively performance obligations performance obligation promise contract transfer distinct good service customer defined unit account contract’s transaction price allocated distinct performance obligation recognized revenue performance obligation satisfied contracts customers require highly complex integration manufacturing services separately identifiable promises contracts therefore distinct entire contract accounted single performance obligation situations contract includes distinct goods services substantially pattern transfer customer time recognized series distinct goods services contracts multiple performance obligations allocate contract’s transaction price performance obligation based estimated relative standalone selling price distinct good service contract product sales product sold customer typically represents distinct performance obligation cases observable standalone sales used determine stand alone selling price performance obligations satisfied point time performance obligations supported contracts customers providing framework nature distinct goods services bundle goods services timing satisfying performance obligation typically indicated terms contract honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts following table outlines companys remaining performance obligations disaggregated segment performance obligations recognized december 31 2019 satisfied course future periods disclosure timing satisfying performance obligation based requirements contracts customers however time contracts may subject modifications impacting timing satisfying performance obligations performance obligations expected satisfied within one year greater one year 57 43 timing satisfaction companys performance obligations significantly vary typical timing payment typical payment terms fixedprice time contracts include progress payments based specified events milestones based project progress contracts may entitled receive advance payment company applied practical expedient certain revenue streams exclude value remaining performance obligations contracts original expected term one year less ii contracts recognize revenue proportion amount right invoice services performed note 8 accounts receivable trade receivables includes 1586 million 1543 million unbilled balances longterm contracts december 31 2019 2018 amounts billed accordance terms customer contracts relate note 9 inventories valued lifo amounted 292 million 294 million december 31 2019 2018 lifo inventories valued current costs carrying values would approximately 45 million 39 million higher december 31 2019 2018 honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 10 property plant equipmentnet depreciation expense 673 million 721 million 717 million 2019 2018 2017 note 11 goodwill intangible assetsnet following table summarizes change carrying amount goodwill years ended december 31 2019 2018 segment intangible assets comprised intangible assets amortization expense 415 million 395 million 398 million 2019 2018 2017 estimated intangible asset amortization expense next five years approximates 355 million 2020 317 million 2021 293 million 2022 256 million 2023 234 million 2024 honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 12 accrued liabilities honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 13 longterm debt credit agreements schedule principal payments longterm debt follows honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts august 8 2019 company issued 600 million 215 senior notes due 2022 600 million floating rate senior notes due 2022 750 million 230 senior notes due 2024 750 million 270 senior notes due 2029 collectively 2019 notes 2019 notes senior unsecured unsubordinated obligations honeywell rank equally honeywells existing future senior unsecured debt senior honeywells subordinated debt offering resulted gross proceeds 2700 million offset 18 million discount closing costs related offering issuances described unless otherwise noted debt issuance costs deferred recognized direct deduction related debt liability amortized interest expense debt term october 30 2019 company paid 140 notes due 2019 three year floating rate notes due 2019 two year floating rate notes due 2019 180 notes due 2019 connection garrett spinoff wholly owned subsidiaries garrett issued notes entered new credit facilities obligations retained garrett spinoff september 27 2018 company received net proceeds 1604 million borrowings connection resideo spinoff wholly owned subsidiaries resideo issued notes entered new credit facilities obligations retained resideo spinoff october 25 2018 company received net proceeds 1197 million borrowings april 26 2019 company entered 40 billion amended restated five year credit agreement “5year credit agreement” syndicate banks 5year credit agreement maintained general corporate purposes commitments 5year credit agreement increased pursuant terms 5year credit agreement aggregate amount exceed 45 billion 5year credit agreement amends restates previously reported 40 billion amended restated fiveyear credit agreement dated april 27 2018 prior agreement 5year credit agreement substantially material terms conditions prior agreement april 26 2019 company entered 15 billion 364day credit agreement syndicate banks 364day credit agreement maintained general corporate purposes borrowings credit agreements previously described note 14 leases adoption effective january 1 2019 company adopted new lease accounting standard using modified retrospective method applying new standard adoption date addition elected package practical expedients permitted transition guidance within new standard allowed us carry forward historical lease classification adoption standard resulted recording net operating lease rightofuse rou assets corresponding operating lease liabilities 07 billion financial position reporting periods beginning january 1 2019 presented new guidance prior periods amounts adjusted continue reported accordance previous guidance significant portion companys operating finance lease portfolio includes corporate offices research development facilities manufacturing sites information technology equipment automobiles majority leases remaining lease terms 1 year 20 years include options extend leases 5 years operating lease rou assets presented within assets current portion operating lease liabilities presented within accrued liabilities noncurrent portion operating lease liabilities presented within liabilities consolidated balance sheet finance lease assets included property plant equipment net finance lease obligations included current maturities longterm debt longterm debt consolidated balance sheet honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts portion companys real estate leases generally subject annual changes consumer price index cpi changes cpi treated variable lease payments recognized period obligation payments incurred addition subset automobile leases considered variable lease payments automobiles leases based actual mileage incurred stated contractual rate recognized period obligation payments incurred supplemental cash flow information related leases follows honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts supplemental balance sheet information related leases follows december 31 2019 maturities lease liabilities follows previously disclosed 2018 annual report form 10k previous lease accounting standard future minimum lease payments operating leases initial remaining noncancellable lease terms excess one year would follows honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 15 financial instruments fair value measures credit market riskfinancial instruments including derivatives expose company counterparty credit risk nonperformance market risk related changes interest currency exchange rates counterparties derivative transactions substantial investment commercial banks significant experience using derivative instruments company continually monitors creditworthiness customers grants credit terms normal course business terms conditions credit sales designed mitigate eliminate concentrations credit risk single customer sales materially dependent single customer small group customers foreign currency risk managementthe company conducts business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities transactions arising international trade primary objective preserve us dollar value foreign currency denominated cash flows earnings monitor collective foreign currency exposure enter foreign currency exchange forward option contracts foreign currency exchange contracts third parties necessary minimize impact changes foreign currency exchange rates company monetary assets liabilities denominated nonfunctional currencies prior conversion us dollars assets liabilities remeasured spot exchange rates effect balance sheet date effects changes spot rates recognized earnings included income expense may purchase enter derivative instruments hedge foreign currency exposure hedge forecasted sales purchases denominated nonfunctional currencies foreign currency exchange contracts changes forecasted nonfunctional currency cash flows due movements exchange rates substantially offset changes fair value foreign currency exchange contracts designated hedges market value gains losses contracts recognized earnings hedged transaction recognized december 31 2019 2018 contracts notional amounts 12746 million 14995 million exchange foreign currencies principally us dollar euro canadian dollar british pound mexican peso chinese renminbi indian rupee malaysian ringgit swiss franc december 31 2019 estimate approximately 52 million net derivative gains related cash flow hedges included accumulated comprehensive income loss reclassified earnings within next 12 months company also designated foreign currency debt certain derivative contracts hedges portions net investment foreign operations year ended december 31 2019 gains losses foreign currency debt derivative contracts designated net investment hedge recorded manner foreign currency translation adjustments interest rate risk managementfinancial instruments including derivatives expose company market risk related changes interest rates company uses combination financial instruments including longterm mediumterm shortterm financing variablerate commercial paper interest rate swaps manage interest rate mix total debt portfolio related overall cost borrowing december 31 2019 2018 interest rate swap agreements designated fair value hedges effectively changed 3950 million 2600 million fixed rate debt 287 293 libor based floating rate debt interest rate swaps mature various dates 2029 honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts fair value financial instrumentsthe accounting guidance fair value measurements disclosures establishes threelevel fair value hierarchy • level 1inputs based quoted prices active markets identical assets liabilities • level 2inputs based observable inputs quoted prices active markets identical similar assets liabilities • level 3one inputs unobservable significant financial nonfinancial assets liabilities classified entirety based lowest level input significant fair value measurement following table sets forth company’s financial assets liabilities accounted fair value recurring basis december 31 2019 2018 foreign currency exchange contracts interest rate swap agreements cross currency swap agreements valued using broker quotations market transactions either listed overthecounter markets derivative instruments classified within level 2 company also holds investments commercial paper certificates deposits time deposits designated available sale valued using published prices based observable market data investments classified within level 2 company also holds available sale investments us government corporate debt securities valued utilizing published prices based quoted market pricing classified within level 1 carrying value cash equivalents trade accounts notes receivables payables commercial paper 3513 million 3583 million euro denominated december 31 2019 2018 shortterm borrowings contained consolidated balance sheet approximates fair value following table sets forth company’s financial assets liabilities carried fair value following table sets forth amounts recorded consolidated balance sheet related cumulative basis adjustments fair value hedges honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts company determined fair value longterm receivables utilizing transactions listed markets identical similar assets fair value receivables considered level 2 company determined fair value longterm debt related current maturities utilizing transactions listed markets identical similar liabilities fair value longterm debt related current maturities considered level 2 interest rate swap agreements designated hedge relationships gains losses derivative recognized interest financial charges offsetting gains losses underlying debt hedged gains losses interest rate swap agreements recognized earnings 70 million income 37 million expense 29 million expense years ended december 31 2019 2018 2017 gains losses fully offset losses gains underlying debt hedged company economically hedges exposure changes foreign exchange rates principally forward contracts markedtomarket resulting gains losses recognized earnings offsetting gains losses nonfunctional currency denominated monetary assets liabilities hedged recognized 106 million income 394 million income 207 million expense income expense years ended december 31 2019 2018 2017 following tables summarize location impact consolidated statement operations related fair value cash flow hedging relationships honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts following table summarizes amounts gain loss net investment hedges recognized accumulated comprehensive income loss note 16 liabilities note 17 capital stock honeywell authorized issue 2000000000 shares common stock par value 1 common shareowners entitled receive dividends may declared board directors entitled one vote per share entitled event liquidation share ratably assets honeywell available distribution common shareowners common shareowners preemptive conversion rights shares common stock issued outstanding held treasury liable calls assessments restrictions us relative dividends repurchase redemption common stock april 29 2019 board directors authorized repurchase total 100 billion honeywell common stock included amounts remaining replaced previously approved share repurchase program approximately 70 billion 37 billion remained available december 31 2019 december 31 2018 additional share repurchases honeywell repurchased approximately 265 million shares common stock 2019 2018 4400 million 4000 million honeywell authorized issue 40000000 shares preferred stock without par value determine number shares series rights preferences limitations series december 31 2019 preferred stock outstanding honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 18 accumulated comprehensive income loss changes accumulated comprehensive income loss provided tables comprehensive income loss attributable noncontrolling interest consists predominantly net income components accumulated comprehensive income loss honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts changes accumulated comprehensive income loss component reclassifications accumulated comprehensive income loss honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 19 stockbased compensation plans 2016 stock incentive plan honeywell international inc affiliates 2016 plan 2016 stock plan nonemployee directors honeywell international inc 2016 directors plan approved shareowners annual meeting shareowners effective april 25 2016 following approval plans grant new awards previously existing stockbased compensation plans december 31 2019 37364854 866273 shares honeywell common stock available future grants terms 2016 plan 2016 directors plan respectively stock optionsthe exercise price term conditions applicable option granted companys stock plans generally determined management development compensation committee board exercise price stock options set grant date may less fair market value per share stock date fair value recognized expense employee’s requisite service period generally vesting period award options generally vest fouryear period expire ten years fair value option award estimated date grant using blackscholes optionpricing model expected volatility based implied volatilities traded options common stock historical volatility common stock used monte carlo simulation model derive expected term represents estimate time options expected remain outstanding model uses historical data estimate option exercise activity postvest termination behavior riskfree rate periods within contractual life option based us treasury yield curve effect time grant following table summarizes impact consolidated statement operations stock options honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts following table sets forth fair value per share information including related weightedaverage assumptions used determine compensation cost 1 estimated date grant using blackscholes optionpricing model following table summarizes information stock option activity three years ended december 31 2019 1 additional options granted offset dilutive impact spinoffs outstanding options 2 represents sum vested options 116 million expected vest options 60 million expected vest options derived applying prevesting forfeiture rate assumption total outstanding unvested options 71 million honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts following table summarizes information stock options outstanding exercisable december 31 2019 1 average remaining contractual life years 14073120 12288854 options exercisable weighted average exercise prices 8342 7835 december 31 2018 2017 following table summarizes financial statement impact stock options exercised 1 represents amount stock price exceeded exercise price options date exercise december 31 2019 88 million total unrecognized compensation cost related nonvested stock option awards expected recognized weightedaverage period 247 years total fair value options vested 2019 2018 2017 61 million 73 million 87 million restricted stock unitsrestricted stock unit rsu awards entitle holder receive one share common stock unit units vest rsus issued certain key employees directors compensation fair market value date grant rsus typically become fully vested periods ranging three six years payable honeywell common stock upon vesting honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts following table summarizes information rsu activity three years ended december 31 2019 1 additional rsu grants offset dilutive impact spinoffs nonvested rsus december 31 2019 approximately 217 million total unrecognized compensation cost related nonvested rsus granted stock plans expected recognized weightedaverage period 286 years following table summarizes impact consolidated statement operations rsus note 20 commitments contingencies environmental matters company subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous substances accordance environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing hazardous substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination company continually conducts studies individually jointly potentially responsible parties determine feasibility various remedial techniques policy record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical regulatory legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing remedial investigations feasibility studies timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects remedial techniques utilized agreements parties following table summarizes information concerning companys recorded liabilities environmental costs environmental liabilities included following balance sheet accounts company currently possess sufficient information reasonably estimate amounts environmental liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined although could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position conjunction resideo spinoff company entered indemnification reimbursement agreement resideo subsidiary pursuant resideo’s subsidiary ongoing obligation make cash payments honeywell amounts equal 90 percent honeywell’s annual net spending environmental matters certain sites defined agreement amount payable honeywell given year subject cap 140 million obligation continue earlier december 31 2043 december 31 third consecutive year annual payment obligation less 25 million reimbursements associated agreement 140 million 25 million 2019 2018 respectively offset operating cash outflows incurred company records accruals environmental matters deemed probable reasonably estimable related sites covered indemnification reimbursement agreement corresponding receivable resideo 90 percent accrual also recorded receivable amount recorded 2019 2018 subsequent spinoff 109 million 50 million december 31 2019 current assets includes 140 million 445 million representing shortterm longterm portion receivable amount due resideo indemnification reimbursement agreement december 31 2018 current assets includes 140 million 476 million representing shortterm longterm portion receivable amount due resideo indemnification reimbursement agreement asbestos matters honeywell named asbestos related personal injury claims related north american refractories company “narco” sold 1986 bendix friction materials “bendix” business sold 2014 honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts following tables summarize information concerning narco bendix asbestos related balances asbestos related liabilities insurance recoveries asbestos related liabilities narco bendix asbestos related balances included following balance sheet accounts narco productshoneywell’s predecessor allied corporation owned narco 1979 1986 narco business sold honeywell’s predecessor entered crossindemnity agreement narco included obligation indemnify purchaser asbestos claims arise primarily alleged occupational exposure asbestoscontaining refractory brick mortar hightemperature applications narco ceased manufacturing products 1980 first asbestos claims filed tort system narco 1983 claims filings related costs increased dramatically late 1990s 2001 led narco filing bankruptcy january 2002 narco filed bankruptcy current future narco asbestos claims stayed narco honeywell pending reorganization narco honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts following bankruptcy filing december 2002 honeywell recorded total narco asbestos liability 32 billion comprised three components estimated liability settle prebankruptcy petition narco claims certain postpetition settlements 22 billion referred “prebankruptcy narco liability” ii estimated liability related unasserted narco claims period 2004 2018 950 million referred “narco trust liability” iii narco bankruptcyrelated obligations totaling 73 million narco trust liability 950 million established 2002 methodology estimating potential liability based primarily epidemiological projections future incidence disease period 2004 2018 fifteenyear period b historical claims rates tort system fiveyear period prior bankruptcy filing date c anticipated narco trust payment values set forth current draft narco trust distribution procedures methodology required estimating disease three critical inputs likely number claims asserted narco trust future ii percentage claims likely receive payment iii payment values company utilized outside asbestos liability valuation specialists support preparation narco trust liability estimate based commonly accepted methodology used numerous bankruptcy courts addressing 524g trusts 2002 company first established initial liability narco asbestos claims resolution shifted tort system anticipated narco trust framework claims would processed accordance established narco trust distribution procedures including strict medical exposure criteria plaintiff receive compensation believed time narco trust’s claims filing resolution experience narco trust became operational would significantly different prebankruptcy tort system experience light rigorous claims processing requirements narco trust distribution procedures honeywell’s active oversight claims processing approval given anticipated differences believed 15year time period appropriate horizon establishing probable reasonably estimable liability unasserted narco claims represented best estimate time period would take narco trust approved bankruptcy court become fully operational generate sufficiently reliable claims data ie data set statistically representative enable us update narco trust liability narco trust distribution procedures finalized 2006 company updated narco trust liability reflect final terms payment values original 15year period 2004 2018 unasserted claims change asbestos claims filings continued stayed honeywell narco 2006 update resulted range estimated liability unasserted claims 743 million 961 million believed amount within range better estimate amount accordance asc 450contingencies “asc 450” recorded low end range 743 million “2006 narco trust liability estimate” resulted reduction 207 million narco trust liability narco emerged bankruptcy april 30 2013 time federally authorized 524g trust established evaluation resolution existing future narco asbestos claims honeywell narco protected permanent channeling injunction barring present future individual actions state federal courts requiring asbestos related claims based exposure narco asbestoscontaining products made narco trust narco trust agreement narco trust distribution procedures principal documents setting forth structure narco trust documents establish honeywell’s evergreen funding obligations honeywell obligated fund narco asbestos claims submitted narco trust qualify payment trust distribution procedures annual contribution claims subject annual cap 145 million however initial 100 million claims processed narco trust initial claims amount count annual cap unused portion initial claims amount roll subsequent years fully utilized documents also establish material operating rules narco trust including honeywell audit rights criteria claimants must meet valid claim paid claims payment criteria include providing narco trust adequate medical evidence claimant’s asbestosrelated condition credible evidence exposure specific narco asbestoscontaining product narco trust eligible receive cash dividends harbisonwalker international inc “hwi” reorganized renamed entity emerged fully operational narco bankruptcy narco trust required use funding received hwi pay annual contribution claims funds exhausted point honeywell’s funding obligation trust triggered thus unrelated primary source funding affects honeywell’s funding narco trust liability honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts operational narco trust began receive process pay claims previously stayed pending trust becoming operational narco trust began pay claims 2014 began assert ongoing audit rights review monitor claims processor’s adherence established requirements narco trust distribution procedures identified several issues way trust implementing narco trust distribution procedures 2015 honeywell filed suit narco trust bankruptcy court alleging breach certain provisions narco trust agreement narco trust distribution procedures parties agreed dismiss proceeding without prejudice pursuant 18month standstill agreement expired october 2017 notwithstanding expiration claims processing continues honeywell continues negotiate attempt resolve remaining disputed issues instances honeywell believes narco trust processing claims accordance established narco trust distribution procedures honeywell reserves right seek judicial intervention negotiations fail narco trust became effective 2013 743 million narco trust liability comprised liability unasserted claims ii liability claims asserted narco trust became operational yet paid although company knows number claims filed narco trust year able determine time portion narco trust liability represents asserted versus unasserted claims due lack sufficiently reliable claims data claims processing issues described previously honeywell continues maintain 2006 narco trust liability 743 million accrual less payments made narco trust annual contribution claims sufficiently reliable claims data history enable company update liability december 31 2019 cash dividends paid narco trust hwi used pay annual contribution claims fourth quarter 2019 honeywell funded 29 million narco trust payment annual contribution claims december 31 2019 companys total narco asbestos liability 858 million reflects prebankruptcy narco liability 144 million narco trust liability 714 million 743 million accrual narco trust liability reduced 29 million payment narco trust fourth quarter 2019 annual contribution claims december 31 2019 prebankruptcy narco liability reduced approximately 2 billion since first established 2002 largely related settlement payments remaining prebankruptcy narco liability principally represents estimated amounts owed pursuant settlement agreements reached pendency narco bankruptcy proceedings provide right submit claims narco trust subject qualification terms settlement agreements trust distribution procedures narco bankruptcy obligations paid 2013 liability recorded honeywell continues evaluate appropriateness 2006 narco trust liability estimate despite becoming effective 2013 narco trust experienced delays becoming fully operational violations trust distribution procedures resulting disputes challenges standstill pending dispute resolution limited claims payments contributed lack sufficient normalized data based actual claims processing experience trust since became operational result able update narco trust liability aside deducting payments narco trust annual contribution claims 2006 million narco trust liability estimate continues appropriate unresolved pending claims trust portion result payouts future new claims continue filed narco trust sufficiently reliable claims data exists update estimate narco trust liability possible material change may need recognized companys insurance receivable 281 million december 31 2019 corresponding estimated liability asserted unasserted narco asbestos claims reflects coverage reimburses honeywell portions narcorelated indemnity defense costs provided large number insurance policies written dozens insurance companies domestic insurance market london excess market conduct analyses estimate probable amount insurance recoverable asbestos claims substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries made judgments concerning insurance coverage believe reasonable consistent historical dealings knowledge pertinent solvency issues surrounding insurers honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts bendix productsbendix manufactured automotive brake linings contained chrysotile asbestos encapsulated form claimants consist largely individuals allege exposure asbestos brakes either performing vicinity individuals performed brake replacements following tables present information regarding bendix related asbestos claims activity honeywell experienced average resolution values per claim excluding legal costs follows possible predict whether resolution values bendixrelated asbestos claims increase decrease stabilize future companys consolidated financial statements reflect estimated liability resolution asserted claims filed financial statement date unasserted bendixrelated asbestos claims excludes company’s legal fees defend asbestos claims continue expensed company incurred valued bendix asserted unasserted claims using average resolution values previous five years update resolution values used estimate cost bendix asserted unasserted claims fourth quarter year honeywell reflects inclusion years epidemiological disease projection 2059 estimating liability unasserted bendixrelated asbestos claims liability unasserted bendixrelated asbestos claims based historic anticipated claims filing experience dismissal rates disease classifications resolution values tort system previous five years insurance receivable corresponding liability settlement asserted unasserted bendix asbestos claims reflects coverage provided large number insurance policies written dozens insurance companies domestic insurance market london excess market based ongoing analysis probable insurance recovery insurance receivables recorded financial statements simultaneous recording estimated liability underlying asbestos claims determination based analysis underlying insurance policies historical experience insurers ongoing review solvency insurers judicial determinations relevant insurance programs consideration impacts settlements reached insurers conjunction garrett spinoff company entered indemnification reimbursement agreement garrett subsidiary pursuant garrett’s subsidiary obligation make cash payments honeywell amounts equal 90 honeywell’s asbestosrelated liability payments primarily related bendix business united states well certain environmentalrelated liability payments accounts payable nonunited states asbestosrelated liability payments case related legacy elements garrett business including legal costs defending resolving liabilities less ii 90 honeywell’s net insurance receipts may applicable certain recoveries associated liabilities amount payable honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts respect liabilities arising given year subject cap approximately euro 150 million equivalent 175 million time indemnification reimbursement agreement entered obligation continue earlier december 31 2048 december 31 third consecutive year annual obligation less euro equivalent fixed exchange rate time indemnification reimbursement agreement entered 25 million reimbursements associated agreement 152 million 42 million 2019 2018 respectively offset operating cash outflows incurred company records accruals matters covered agreement corresponding receivable garrett recorded 90 percent accrual determined terms agreement receivable amount recorded 2019 16 million 2018 subsequent spinoff company recorded reversal receivable 17 million fourth quarter 2018 december 31 2019 current assets includes 115 million 947 million representing shortterm longterm portion receivable amount due garrett indemnification reimbursement agreement december 31 2018 current assets includes 171 million 1058 million representing shortterm longterm portion receivable amount due garrett indemnification reimbursement agreement december 2 2019 garrett motion inc garrett asasco inc filed summons notice commenced lawsuit commercial division supreme court state new york county new york seeking invalidate indemnification reimbursement agreement garrett honeywell garrett seeks damages declaratory judgment based various claims set forth summons notice january 15 2020 garrett filed complaint action asserted claims strongly believe garretts allegations merit material honeywell believe fully complied obligations agreement enforceable september 13 2018 following completion securities exchange commission sec division corporation finance’s review prior accounting liabilities unasserted bendixrelated asbestos claims sec division enforcement advised opened investigation related matter august 28 2019 sec informed company concluded investigation intend recommend enforcement action honeywell october 31 2018 david kanefsky honeywell shareholder filed putative class action complaint us district court district new jersey alleging violations securities exchange act 1934 rule 10b5 related prior accounting bendix asbestos claims may 15 2019 wayne county employees’ retirement system another honeywell shareholder filed putative class action asserting claims relating substantially alleged conduct jurisdiction december 16 2019 court denied wayne county employees retirement systems motion appointed substitute lead plaintiff kanefsky action december 30 2019 lead plaintiff filed amended complaint kanefsky action believe claims related prior accounting bendix asbestos claims merit matters company subject number lawsuits investigations disputes involve substantial amounts claimed arising conduct business including matters relating commercial transactions government contracts product liability prior acquisitions divestitures employee benefit plans intellectual property environmental health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes matters well potential ranges possible losses taking consideration insurance recoveries based careful analysis matter assistance outside legal counsel applicable experts included matters following honeywell v united auto workers uaw et alin september 2011 uaw certain honeywell retirees plaintiffs filed suit eastern district michigan district court alleging series master collective bargaining agreements mcbas honeywell uaw provided retirees rights lifetime vested healthcare benefits could never changed reduced plaintiffs alleged honeywell violated vested rights implementing express limitations caps amount honeywell contributed toward healthcare coverage retirees honeywell subsequently answered uaw’s complaint asserted counterclaims including breach implied warranty 2014 2015 honeywell began enforcing caps former employees response uaw certain plaintiffs filed motion seeking ruling mcbas limit honeywell’s obligation contribute healthcare coverage retirees honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts march 29 2018 district court issued opinion resolving pending summary judgment motions except honeywell’s counterclaim breach implied warranty since dismissed without prejudice opinion district court held mcbas promise retirees vested lifetime benefits survive expiration mcbas based ruling honeywell terminated retirees healthcare coverage benefits altogether july 31 2018 response uaw filed motion enjoin honeywell completely terminating coverage july 31 2018 arguing caps vested honeywell must continue provide retiree medical benefits capped level july 28 2018 district court denied uaw’s motion entered final judgment consistent march 2018 ruling uaw appealed decision sixth circuit court appeals honeywell believes district court’s ruling upheld march 2018 opinion district court also held honeywell obligated mcbas pay “full premium” retiree healthcare rather capped amount based ruling honeywell would required pay monetary damages retirees past years honeywell paid less “full premium” healthcare coverage damages would limited depending retiree group two threeyear period ending 2017 mcba expired honeywell would ongoing obligation continue funding healthcare coverage subsequent periods honeywell appealed district court’s ruling “full premium” damages issue believes sixth circuit court appeals reverse district court issue event sixth circuit sustain district court’s ruling issue honeywell would liable damages least 12 million petrobras unaoilwe cooperating certain investigations us department justice doj sec brazilian authorities relating use third parties previously worked uop business brazil relation petróleo brasileiro sa petrobras investigations focused compliance us foreign corrupt practices act similar brazilian laws involve among things document production interviews former current management employees doj sec also examining matter involving foreign subsidiary’s prior engagement unaoil sam algeria cooperating authorities matters cannot predict outcome matters based facts currently known us anticipate matters material adverse effect financial condition results operations cash flows resideo technologies inc securities litigationon january 7 2020 gabelli asset fund certain related parties filed putative class action complaint resideo honeywell us district court district minnesota alleging violations securities exchange act 1934 rule 10b5 related resideos spinoff honeywell october 2018 january 27 2020 putative class action consolidated certain previouslyfiled actions asserting claims relating substantially matters single class action title resideo technologies inc securities litigation believe allegations honeywell regarding resideo spinoff merit given uncertainty inherent litigation investigations including specific matters referenced believe possible develop estimates reasonably possible loss excess current accruals matters specifically set forth considering past experience existing accruals expect outcome matters either individually aggregate material adverse effect consolidated financial position contingencies resolved long periods time potential liabilities subject change due new developments changes settlement strategy impact evidentiary requirements could cause us pay damage awards settlements become subject equitable remedies could material adverse effect results operations operating cash flows periods recognized paid honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts warranties guarantees normal course business company issues product warranties product performance guarantees accrue estimated cost product warranties performance guarantees based contract terms historical experience time sale adjustments initial obligations warranties guarantees made changes obligations become reasonably estimable following table summarizes information concerning recorded obligations product warranties product performance guarantees product warranties product performance guarantees included following balance sheet accounts note 21 pension postretirement benefits company sponsors number funded unfunded us nonus defined benefit pension plans pension benefits many us employees provided noncontributory qualified nonqualified defined benefit plans nonunion hourly salaried employees joining honeywell first time december 31 2012 eligible participate honeywell’s us defined benefit pension plans also sponsor defined benefit pension plans cover nonus employees us citizens certain jurisdictions principally uk netherlands germany canada pension plans outside us material company either individually aggregate company also sponsors postretirement benefit plans provide health care benefits life insurance coverage mainly us eligible retirees none honeywell’s us employees eligible retiree medical subsidy company addition vast majority honeywell’s us retirees either company subsidy fixeddollar subsidy amount significantly limits exposure impact future health care cost increases retiree medical life insurance plans funded claims expenses paid operating cash flow honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts following tables summarize balance sheet impact including benefit obligations assets funded status associated companys significant pension postretirement benefit plans 1 included assets consolidated balance sheet 2 included accrued liabilities consolidated balance sheet 3 included liabilities consolidated balance sheet honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts 1 excludes nonus plans 41 million 42 million 2019 2018 amounts recognized accumulated comprehensive income loss associated companys significant pension postretirement benefit plans december 31 2019 2018 follows honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts components net periodic benefit income cost amounts recognized comprehensive income loss companys significant pension postretirement benefit plans include following components honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts estimated prior service credit pension benefits amortized accumulated comprehensive income loss net periodic benefit income cost 2020 expected 42 million 0 million us nonus pension plans estimated net gain prior service credit postretirement benefits amortized accumulated comprehensive income loss net periodic benefit income cost 2020 expected 0 63 million honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts major actuarial assumptions used determining benefit obligations net periodic benefit income cost significant benefit plans presented following table weighted averages 1 discount rate 365 112017 2282017 rate changed 360 remainder 2017 due plan remeasurement 312017 discount rate companys us pension postretirement benefits plans reflects current rate associated liabilities could settled measurement date december 31 determine discount rates us pension postretirement benefit plans use modeling process involves matching expected cash outflows benefit plans yield curve constructed portfolio high quality fixedincome debt instruments use single weightedaverage yield hypothetical portfolio discount rate benchmark utilize full yield curve approach estimation service interest cost components net periodic pension benefit income significant pension plans approach applies specific spot rates along yield curve used determination pension benefit obligation underlying projected cash flows provides precise measurement service interest costs improving correlation projected cash flows corresponding spot rates us pension plans single weighted average spot rates used determine service interest costs 2020 333 276 discount rate used determine postretirement benefit obligation lower principally due shorter expected duration postretirement plan obligations compared pension plan obligations honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts company plans use expected rate return us plan assets 615 2020 675 2019 reflecting decline interest rates additional rebalancing assets fixed income asset return assumption based historical plan asset returns varying longterm periods combined current market conditions broad asset mix considerations focus longterm trends rather shortterm market conditions review expected rate return annual basis revise appropriate nonus benefit plans actuarial assumptions reflect economic market factors relevant country pension benefits following amounts relate companys significant pension plans accumulated benefit obligations exceeding fair value plan assets accumulated benefit obligation companys us defined benefit pension plans 172 billion 161 billion nonus defined benefit pension plans 68 billion 61 billion december 31 2019 2018 companys asset investment strategy us pension plans focuses maintaining diversified portfolio using various asset classes order achieve longterm investment objectives risk adjusted basis 2019 continued employ derisking strategy increases matching characteristics assets relative obligation longterm target allocations follows 5570 fixed income securities cash 2540 equity securities 510 real estate investments 1020 types investments equity securities include publiclytraded stock companies located inside outside united states fixed income securities include corporate bonds companies diversified industries mortgagebacked securities us treasuries real estate investments include direct investments commercial properties investments real estate funds types investments include investments private equity hedge funds follow several different strategies review assets regular basis ensure within targeted asset allocation ranges necessary asset balances adjusted back within target allocations companys nonus pension assets typically managed decentralized fiduciary committees honeywell corporate investments group providing funding investment guidance nonus investment policies different country local regulations funding requirements financial tax considerations part funding investment allocation process country accordance asu 201507 “fair value measurement topic 820” certain investments measured fair value using net asset value nav per share equivalent practical expedient classified fair value hierarchy fair value amounts presented following tables intended permit reconciliation fair value hierarchy amounts presented total pension benefits plan assets honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts fair values companys us nonus pension plans assets asset category follows honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts following table summarizes changes fair value level 3 assets us nonus plans company enters futures contracts gain exposure certain markets sufficient cash equivalents held pension plans cover notional value futures contracts december 31 2019 2018 us plans contracts notional amounts 4463 million 2808 million december 31 2019 2018 nonus plans contracts notional amounts 479 million 111 million us nonus pension plans notional derivative exposure related outstanding equity fixed income futures contracts common stocks preferred stocks real estate investment trusts shortterm investments valued closing price reported active market individual securities traded corporate bonds mortgages assetbacked securities government securities valued either using pricing models bids provided brokers honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts dealers quoted prices securities similar characteristics discounted cash flows include adjustments certain risks may observable credit liquidity risks certain securities held collective trust funds valued using net asset values provided administrators funds investments private equity debt real estate hedge funds direct private investments valued estimated fair value based quarterly financial information received investment advisor andor general partner investments real estate properties valued quarterly basis using income approach valuation estimates periodically supplemented third party appraisals companys funding policy qualified defined benefit pension plans contribute amounts least sufficient satisfy regulatory funding standards 2019 2018 2017 required make contributions us pension plans contributions made required make contributions us pension plans 2020 2019 contributions 43 million made nonus pension plans satisfy regulatory funding requirements 2020 expect make contributions cash andor marketable securities approximately 112 million nonus pension plans satisfy regulatory funding standards contributions us nonus pension plans reflect benefits paid directly company assets benefit payments including amounts paid company assets reflecting expected future service appropriate expected paid follows postretirement benefits assumed health care cost trend rate significant effect amounts reported onepercentagepoint change assumed health care cost trend rate would following effects benefit payments reflecting expected future service appropriate expected paid follows honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 22 segment financial data honeywell globally manages business operations four reportable operating segments segment information consistent management reviews businesses makes investing resource allocation decisions assesses operating performance honeywell’s senior management evaluates segment performance based segment profit segment’s profit measured segment income loss taxes excluding general corporate unallocated expense interest financial charges stock compensation expense pension postretirement income expense repositioning charges items within income expense honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts reconciliation segment profit consolidated income continuing operations taxes follows 1 amounts included selling general administrative expenses 2 amounts included cost products services sold selling general administrative expenses service costs incomeexpense nonservice cost components 3 amounts included cost products services sold selling general administrative expenses incomeexpense 4 amounts include components incomeexpense included within categories reconciliation equity incomeloss affiliated companies included segment profit honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 23 geographic areasfinancial data 1 sales geographic areas approximate market significant net sales classified according country origin included united states net sales export sales 5415 million 5293 million 4974 million 2019 2018 2017 2 longlived assets comprised property plant equipment net note 24 supplemental cash flow information honeywell international inc notes consolidated financial statementscontinued dollars millions except per share amounts note 25 unaudited quarterly financial information 1 total full year may differ sum individual quarters due requirement use weighted average shares quarter may fluctuate share repurchases share issuances due impact losses quarter 2 results operations transportation systems business homes global distribution business included consolidated statement operations effective dates respective spinoffs report independent registered public accounting firm shareowners board directors honeywell international inc opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets honeywell international inc subsidiaries company december 31 2019 2018 related consolidated statements operations comprehensive income shareowners’ equity cash flows three years period ended december 31 2019 related notes collectively referred financial statements also audited company’s internal control financial reporting december 31 2019 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion financial statements referred present fairly material respects financial position company december 31 2019 2018 results operations cash flows three years period ended december 31 2019 conformity accounting principles generally accepted united states america generally accepted accounting principles also opinion company maintained material respects effective internal control financial reporting december 31 2019 based criteria established internal control integrated framework 2013 issued coso basis opinions company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinion financial statements opinion company’s internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits financial statements included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate critical audit matters critical audit matters communicated matters arising currentperiod audit financial statements communicated required communicated audit committee 1 relate accounts disclosures material financial statements 2 involved especially challenging subjective complex judgments communication critical audit matters alter way opinion financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate asbestos related liabilities north american refractories company narco trust liability refer note 20 financial statements critical audit matter description company named asbestos related personal injury claims related predecessor company narco claims arise primarily alleged occupational exposure asbestoscontaining refractory brick mortar hightemperature applications since becoming effective 2013 narco trust experienced delays becoming fully operational disputes challenges regarding violations trust distribution procedures expired 18month standstill agreement limited claims payments contributed lack sufficient normalized data based actual claims processing experience narco trust although company knows number claims filed narco trust year able time determine portion narco trust liability represents asserted versus unasserted claims due lack sufficiently reliable claims data maintaining narco trust liability inherently subjective requires management make significant assumptions judgements regarding sufficiency reliability historical claims filing data experience expected future claims filing rates given subjectivity maintaining narco trust liability auditing narco trust liability required high degree auditor judgment critical audit matter addressed audit procedures related narco trust liability included following among others • tested effectiveness internal controls annual thirdparty assessment sufficiency reliability narco trust claims data including controls review management’s assumptions claims data used estimate narco trust liability • made inquiries internal external legal counsel regarding regulatory litigation environments related narco trust liability • assistance internal actuarial specialists evaluated narco trust claims data assess reasonableness management’s conclusion data sufficiently reliable enable company update estimate recorded narco trust liability revenue recognition contracts customers longterm fixed price contracts performance materials technologies pmt refer note 1 note 7 financial statements critical audit matter description company’s pmt segment develops manufactures advanced materials process technologies automation solutions portion pmt’s revenue generated longterm fixed price contracts whereby revenue recognized contract term “over time” work progresses control goods services transferred customer revenue contracts recognized based extent progress toward completion generally measured using costtocost basis input method accounting pmt’s longterm fixed price contracts requires management’s judgment estimating total contract costs contract costs incurred several years largely determined based negotiated estimated purchase contract terms consider factors historical performance technical schedule risk internal subcontractor performance trends anticipated labor agreements given significant judgments necessary estimate costs associated longterm contracts auditing pmt’s longterm fixed price contracts requires high degree auditor judgment critical audit matter addressed audit procedures related pmt’s longterm fixed price contracts included following among others • tested effectiveness internal controls recognition revenue determination estimated contract costs including controls review management’s assumptions key inputs used recognize revenue costs longterm fixed price contracts using costtocost input method • evaluated appropriateness consistency management’s methods assumptions used recognize revenue costs longterm fixed price contracts using costtocost input method recognize revenue time • selected sample longterm fixed price contracts evaluated estimates total cost longterm fixed price contracts ▪ comparing costs incurred date costs management estimated incurred date ▪ evaluating management’s ability achieve estimates total cost performing corroborating inquiries company personnel including project managers comparing estimates documentation management’s work plans contract terms requirements purchase orders suppliers evaluation management’s assumptions included consideration historical current project performance consistency gross margin identified risks related project timing including technical schedule matters status internal thirdparty activities hardware software labor ▪ performing substantive analytical procedure compared estimated costs complete independent estimate costs complete factored information obtained corroborating inquiries documentation obtained management’s work plans contract terms requirements purchase orders suppliers deloitte touche llp charlotte north carolina february 14 2020 served company’s auditor since 2014 item 9item 8 financial statements supplementary data honeywell international inc consolidated statement operations notes financial statements integral part statement honeywell international inc consolidated statement comprehensive income notes financial statements integral part statement honeywell international inc consolidated balance sheet notes financial statements integral part statement honeywell international inc consolidated statement cash flows notes financial statements integral part statement honeywell international inc consolidated statement shareowners’ equity notes financial statements integral part statement honeywell international inc notes financial statements dollars millions except per share amounts note 1summary significant accounting policies accounting principlesthe financial statements accompanying notes prepared accordance accounting principles generally accepted united states america following description honeywell’s significant accounting policies principles consolidationthe consolidated financial statements include accounts honeywell international inc subsidiaries entities controlling interest maintained consolidation policy requires equity investments exercise significant influence control investee primary beneficiary investee’s activities accounted using equity method investments able exercise significant influence investee readily determinable fair values accounted cost method intercompany transactions balances eliminated consolidation consumer products group cpg automotive aftermarket business historically part transportation systems reportable segment accordance generally accepted accounting principles cpg presented discontinued operations periods presented see note 2 acquisitions divestitures details noncontrolling interest included within equity section consolidated balance sheet redeemable noncontrolling interest considered temporary equity therefore reported outside permanent equity company’s consolidated balance sheet greater initial carrying amount adjusted noncontrolling interest’s share net income loss redemption value present amount consolidated net income attributable honeywell noncontrolling interest consolidated statement operations furthermore disclose amount comprehensive income attributable honeywell noncontrolling interest consolidated statement comprehensive income cash equivalentscash cash equivalents include cash hand deposit highly liquid temporary cash investments original maturity three months less inventoriesinventories valued lower cost market using firstin firstout average cost method lastin firstout lifo method certain qualifying domestic inventories investmentsinvestments affiliates significant influence controlling interest accounted using equity method accounting investments carried market value readily determinable cost equity investments periodically reviewed determine declines fair value cost basis otherthantemporary significant sustained decreases quoted market prices series historic projected operating losses investees strong indicators otherthantemporary declines decline fair value determined thantemporary impairment loss recorded investment written new carrying value property plant equipmentproperty plant equipment recorded cost including asset retirement obligations less accumulated depreciation financial reporting straightline method depreciation used estimated useful lives 10 50 years buildings improvements 2 16 years machinery equipment recognition fair value obligations associated retirement tangible longlived assets required legal obligation incur costs upon initial recognition liability cost capitalized part related longlived asset depreciated corresponding asset’s useful life see note 11 property plant equipment net note 17 liabilities notes financial statements additional details goodwill indefinitelived intangible assetsgoodwill represents excess acquisition costs fair value tangible net assets identifiable intangible assets businesses acquired goodwill certain intangible assets deemed indefinite lives honeywell international inc notes financial statementscontinued dollars millions except per share amounts amortized intangible assets determined definite lives amortized useful lives goodwill indefinitelived intangible assets subject impairment testing annually march 31 whenever events changes circumstances indicate carrying amount may fully recoverable testing compares carrying values fair values appropriate carrying value assets reduced fair value completed annual goodwill impairment test march 31 2012 determined impairment date see note 12 additional details goodwill balances intangible assets determinable livesother intangible assets determinable lives consist customer lists technology patents trademarks intangibles amortized estimated useful lives ranging 2 24 years longlived assetswe periodically evaluate recoverability carrying amount longlived assets including property plant equipment intangible assets determinable lives whenever events changes circumstances indicate carrying amount asset may fully recoverable evaluate events changes circumstances based number factors including operating results business plans forecasts general industry trends economic projections anticipated cash flows impairment assessed undiscounted expected future cash flows derived asset less carrying amount impairment losses measured amount carrying value asset exceeds fair value recognized earnings also continually evaluate estimated useful lives longlived assets periodically revise estimates based current events sales recognitionproduct service sales recognized persuasive evidence arrangement exists product delivery occurred services rendered pricing fixed determinable collection reasonably assured service sales principally representing repair maintenance engineering activities aerospace automation control solutions segments recognized contractual period services rendered sales longterm contracts aerospace automation control solutions performance materials technologies segments recorded percentageofcompletion method measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts provisions anticipated losses longterm contracts recorded full losses become evident revenues contracts multiple element arrangements recognized element earned based relative fair value element provided delivered elements value customers standalone basis amounts allocated element based objectively determined fair value sales price product service sold separately competitor prices similar products services allowance doubtful accountswe maintain allowances doubtful accounts estimated losses result customer’s inability make required payments estimate anticipated losses doubtful accounts based days past due measured contractual due date historical collection history incorporate changes economic conditions may reflected historical trends example customers bankruptcy liquidation reorganization receivables writtenoff allowance doubtful accounts determined uncollectible determination includes analysis consideration particular conditions account including time intervals since last collection success outside collection agencies activity solvency customer bankruptcy proceedings environmental expendituresenvironmental expenditures relate current operations expensed capitalized appropriate expenditures relate existing condition caused past operations provide future benefits expensed incurred liabilities recorded environmental remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically honeywell international inc notes financial statementscontinued dollars millions except per share amounts remediation efforts progress additional technical regulatory legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities asbestos related contingencies insurance recoverieshoneywell defendant personal injury actions related products containing asbestos refractory friction products recognize liability asbestos related contingency probable occurrence reasonably estimable regarding north american refractories company narco asbestos related claims accrued pending claims based terms conditions agreements narco former parent company certain asbestos claimants estimate unsettled claims pending time narco filed bankruptcy protection also accrued estimated value future narco asbestos related claims expected asserted narco trust 2018 described note 22 commitments contingencies notes financial statements light inherent uncertainties making long term projections connection initial operation 524g trust well stay narco asbestos claims since january 2002 believe reasonable basis estimating narco asbestos claims beyond 2018 regarding bendix asbestos related claims accrued estimated value pending claims using average resolution values previous five years also accrued estimated value future anticipated claims related bendix next five years based historic claims filing experience dismissal rates disease classifications average resolution values tort system previous five years light uncertainties inherent making longterm projections well certain factors unique friction product asbestos claims believe reasonable basis estimating asbestos claims beyond next five years continue update resolution values used estimate cost pending future bendix claims fourth quarter year additional information see note 22 continually assess likelihood adverse judgments outcomes contingencies well potential ranges probable losses recognize liability contingencies based analysis individual issue assistance outside legal counsel applicable experts connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable assessing probability insurance recovery make judgments concerning insurance coverage believe reasonable consistent historical experience insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs consideration impacts settlements insurers aerospace sales incentiveswe provide sales incentives commercial aircraft manufacturers airlines connection selection aircraft equipment predominately wheel braking system hardware auxiliary power units installation commercial aircraft incentives principally consist free deeply discounted products also include credits future purchases product upfront cash payments costs recognized period incurred cost products sold reduction sales appropriate aircraft manufacturers incentives recorded products delivered airlines incentives recorded associated aircraft delivered aircraft manufacturer airline research developmentresearch development costs companysponsored research development projects expensed incurred costs principally included cost products sold 1847 1799 1450 million 2012 2011 2010 respectively stockbased compensation plansthe principal awards issued stockbased compensation plans described note 20 stockbased compensation plans notes honeywell international inc notes financial statementscontinued dollars millions except per share amounts financial statements include nonqualified stock options restricted stock units rsus cost awards measured grant date based fair value award value portion award ultimately expected vest recognized expense requisite service periods generally vesting period equity award included selling general administrative expense consolidated statement operations forfeitures required estimated time grant order estimate portion award ultimately vest estimate based historical rates forfeiture pension benefitswe sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees recognize net actuarial gains losses excess 10 percent greater marketrelated value plan assets plans’ projected benefit obligation corridor annually fourth quarter year mtm adjustment applicable quarter interim remeasurement triggered remaining components pension expense primarily service interest costs assumed return plan assets recorded quarterly basis pension ongoing incomeexpense foreign currency translationassets liabilities subsidiaries operating outside united states functional currency us dollars translated us dollars using yearend exchange rates sales costs expenses translated average exchange rates effect year foreign currency translation gains losses included component accumulated comprehensive income loss subsidiaries operating highly inflationary environments inventories property plant equipment including related expenses remeasured exchange rate effect date assets acquired monetary assets liabilities remeasured yearend exchange rates remeasurement adjustments subsidiaries included earnings derivative financial instrumentsas result global operating financing activities exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position minimize risks interest foreign currency exchange rate commodity price fluctuations normal operating financing activities deemed appropriate use derivative financial instruments derivative financial instruments used manage risk used trading speculative purposes use leveraged derivative financial instruments derivative financial instruments used hedging purposes must designated effective hedge identified risk exposure inception contract accordingly changes fair value derivative contract must highly correlated changes fair value underlying hedged item inception hedge life hedge contract derivatives recorded balance sheet assets liabilities measured fair value derivatives designated hedges fair value assets liabilities changes fair values derivatives hedged items recorded current earnings derivatives designated cash flow hedges effective portion changes fair value derivatives recorded accumulated comprehensive income loss subsequently recognized earnings hedged items impact earnings cash flows derivative financial instruments classified consistent underlying hedged item transfers financial instrumentssales transfers securitization financial instruments accounted authoritative guidance transfers servicing financial assets extinguishments liabilities sell interests designated pools trade accounts receivables third parties terms trade accounts receivable program permit repurchase receivables third parties discretion result program receivables accounted sale remain consolidated balance sheet corresponding amount recorded shortterm borrowings honeywell international inc notes financial statementscontinued dollars millions except per share amounts times also transfer trade receivables qualify sale thus removed consolidated balance sheet time sold value assigned subordinated interests undivided interests retained receivables sold based relative fair values interests retained sold carrying value retained interests approximates fair value due shortterm nature collection period receivables income taxesdeferred tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established offset deferred tax assets based upon available evidence likely deferred tax assets realized determination amount valuation allowance provided recorded deferred tax assets involves estimates regarding 1 timing amount reversal taxable temporary differences 2 expected future taxable income 3 impact tax planning strategies assessing need valuation allowance consider available positive negative evidence including past operating results projections future taxable income feasibility ongoing tax planning strategies projections future taxable income include number estimates assumptions regarding volume pricing costs additionally valuation allowances related deferred tax assets impacted changes tax laws significant judgment required determining income tax provisions evaluating tax positions establish additional reserves income taxes despite belief tax positions fully supportable remain certain positions meet minimum recognition threshold approach evaluating certain uncertain tax positions defined authoritative guidance determines tax position likely sustained upon examination applicable taxing authority normal course business tax filings company subsidiaries examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes continually assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts give rise change estimate become known earnings per sharebasic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding dilutive potential common shares outstanding use estimatesthe preparation consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts financial statements related disclosures accompanying notes actual results could differ estimates assumptions periodically reviewed effects revisions reflected consolidated financial statements period determined necessary reclassificationscertain prior year amounts reclassified conform current year presentation recent accounting pronouncementschanges accounting principles generally accepted united states america us gaap established financial accounting standards board fasb form accounting standards updates asu’s fasb’s accounting standards codification company considers applicability impact asu’s asu’s listed assessed determined either applicable expected minimal impact consolidated financial position results operations honeywell international inc notes financial statementscontinued dollars millions except per share amounts may 2011 fasb issued amendments disclosure requirements common fair value measurement amendments effective interim annual periods beginning december 15 2011 early adoption prohibited result common definition fair value common requirements measurement disclosure requirements us gaap international financial reporting standards consequently amendments change fair value measurement principles disclosure requirements implementation amended accounting guidance material impact consolidated financial position results operations june 2011 fasb issued amendments disclosure requirements presentation comprehensive income guidance effective retrospectively interim annual periods beginning december 15 2011 early adoption permitted requires presentation total comprehensive income components net income components comprehensive income either single continuous statement comprehensive income two separate consecutive statements december 2011 fasb issued amendment defer presentation face financial statements effects reclassifications accumulated comprehensive income components net income comprehensive income annual interim financial statements implementation amended accounting guidance material impact consolidated financial position results operations february 2013 fasb issued amendments disclosure requirements presentation comprehensive income standard requires presentation either single note parenthetically face financial statements effect significant amounts reclassified component accumulated comprehensive income based source income statement line items affected reclassification component required reclassified net income entirety cross reference related footnote additional information required amendments effective prospectively reporting periods beginning december 15 2012 early adoption permitted implementation amended accounting guidance expected material impact consolidated financial position results operations september 2011 fasb issued amendments goodwill impairment guidance provides option companies use qualitative approach test goodwill impairment certain conditions met amendments effective annual interim goodwill impairment tests performed fiscal years beginning december 15 2011 early adoption permitted implementation amended accounting guidance material impact consolidated financial position results operations july 2012 fasb issued amendments indefinitelived intangible asset impairment guidance provides option companies use qualitative approach test indefinitelived intangible assets impairment certain conditions met amendments effective annual interim indefinitelived intangible asset impairment tests performed fiscal years beginning september 15 2012 early adoption permitted implementation amended accounting guidance expected material impact consolidated financial position results operations note 2acquisitions divestitures acquisitionswe acquired businesses aggregate cost net cash acquired 438 973 1303 million 2012 2011 2010 respectively acquisitions acquired businesses recorded estimated fair values dates acquisition significant acquisitions made years discussed december 2012 company entered definitive agreement acquire intermec inc intermec leading provider mobile computing radio frequency identification solutions rfid bar code label receipt printers use warehousing supply chain field service manufacturing environments 10 per share cash aggregate purchase price honeywell international inc notes financial statementscontinued dollars millions except per share amounts approximately 600 million net cash acquired intermec us public company operates globally reported 2011 revenues approximately 850 million transaction expected close end second quarter 2013 pending intermec shareholder approval following customary regulatory reviews acquisition expected funded available cash issuance commercial paper intermec integrated automation control solutions segment october 22 2012 company acquired 70 percent controlling interest thomas russell co privatelyheld leading provider technology equipment natural gas processing treating approximately 525 million 368 million net cash acquired thomas russell co’s results operations consolidated performance materials technologies segment noncontrolling interest portion reflected net income attributable noncontrolling interest consolidated statement operations calendar year 2016 honeywell right acquire noncontrolling shareholder right sell honeywell remaining 30 percent interest price based multiple thomas russell co’s average annual operating income 2013 2015 subject predetermined cap floor additionally honeywell right acquire remaining 30 percent interest fixed price equivalent cap time december 31 2015 see note 21 redeemable noncontrolling interest aggregate value thomas russell co allocated tangible identifiable intangible assets acquired liabilities assumed based consolidated estimated fair values acquisition date preliminary basis company assigned approximately 215 million identifiable intangible assets intangible assets predominantly backlog technology trademarks intangible assets amortized estimated lives range 2 10 years using straightline accelerated amortization methods excess purchase price estimated fair values net assets acquired approximating 440 million recorded goodwill arises primarily avoidance time costs would required associated risks would encountered enhance product offerings key target markets serve entry new profitable businesses within performance materials technologies segment interest acquired goodwill deductible tax purposes following amounts represent preliminary determination fair value identifiable assets acquired liabilities assumed results acquisition date december 31 2012 included performance materials technologies segment material consolidated financial statements december 31 2012 purchase accounting thomas russell co subject final adjustment primarily determination useful lives intangible assets amounts allocated intangible assets goodwill tax balances december 2011 company acquired king’s safetywear limited ksw leading international provider branded safety footwear aggregate value net cash acquired honeywell international inc notes financial statementscontinued dollars millions except per share amounts approximately 331 million including assumption debt 33 million allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned approximately 167 million identifiable intangible assets predominantly trademarks technology customer relationships definite lived intangible assets amortized estimated lives using straightline accelerated amortization methods value assigned trademarks approximately 84 million classified indefinite lived intangibles excess purchase price estimated fair values net assets acquired approximately 157 million recorded goodwill arises primarily avoidance time costs would required associated risks would encountered enhance product offerings key target markets serve entry new profitable segments expected cost synergies realized consolidation acquired business automation control solutions segment cost synergies expected realized principally areas selling general administrative expenses material sourcing manufacturing goodwill nondeductible tax purposes results acquisition date december 31 2011 included automation control solutions segment material consolidated financial statements august 2011 company acquired 100 percent issued outstanding shares ems technologies inc ems leading provider connectivity solutions mobile networking rugged mobile computers satellite communications ems reported 2010 revenues approximately 355 million aggregate value net cash acquired approximately 513 million allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date company assigned approximately 119 million identifiable intangible assets approximately 89 million approximately 30 million recorded within aerospace automation control segments respectively intangible assets predominantly customer relationships existing technology trademarks intangible assets amortized estimated lives using straightline accelerated amortization methods excess purchase price estimated fair values net assets acquired approximating 314 million recorded goodwill arises primarily avoidance time costs would required associated risks would encountered enhance product offerings key target markets serve entry new profitable segments expected cost synergies realized consolidation acquired business aerospace automation control solutions segments cost synergies expected realized principally areas selling general administrative expenses material sourcing manufacturing goodwill nondeductible tax purposes results acquisition date december 31 2011 included aerospace automation control solutions segments material consolidated financial statements october 2010 completed acquisition issued outstanding shares sperian protection sperian french company operates globally personal protection equipment design manufacturing industry sperian reported 2009 revenues approximately 900 million aggregate value net cash acquired approximately 1475 million including assumption approximately 326 million outstanding debt allocated tangible identifiable intangible assets acquired liabilities assumed based estimated fair values acquisition date following amounts represent final determination fair value identifiable assets acquired liabilities assumed honeywell international inc notes financial statementscontinued dollars millions except per share amounts assigned 539 million intangible assets predominantly customer relationships trade names technology intangible assets amortized estimated lives range 3 20 years using straight line accelerated amortization methods included amount value approximately 246 million assigned trade names intangibles determined indefinite lives excess purchase price estimated fair values net assets acquired approximately 930 million recorded goodwill arises primarily avoidance time costs would required associated risks would encountered develop business product offering customer base comparable sperian expected cost synergies realized consolidation acquired business automations controls solutions segment cost synergies expected realized principally areas selling general administrative expenses material sourcing manufacturing goodwill nondeductible tax purposes results acquisition date december 31 2010 included automation control solutions segment material consolidated financial statements connection acquisitions 2012 2011 2010 amounts recorded transaction costs integrating acquired businesses honeywell material pro forma results 2012 2011 2010 assuming acquisitions made beginning comparable prior year would materially different consolidated reported results divestituresin july 2011 company sold consumer products group business cpg rank group limited sale completed approximately 955 million cash proceeds resulting pretax gain approximately 301 million approximately 178 million net tax gain recorded net income discontinued operations taxes company’s consolidated statement operations year ended december 31 2011 net income attributable noncontrolling interest discontinued operations insignificant sale cpg part transportation systems segment consistent company’s strategic focus portfolio differentiated global technologies honeywell international inc notes financial statementscontinued dollars millions except per share amounts key components income discontinued operations related cpg follows note 3repositioning charges summary repositioning charges follows following table summarizes pretax distribution total net repositioning charges income statement classification following table summarizes pretax impact total net repositioning charges segment honeywell international inc notes financial statementscontinued dollars millions except per share amounts 2012 recognized repositioning charges totaling 119 million including severance costs 91 million related workforce reductions 2204 manufacturing administrative positions across segments workforce reductions primarily related planned shutdown manufacturing facility transportation systems segment exit product line performance materials technologies segment cost savings actions taken connection productivity ongoing functional transformation initiatives repositioning charge also included asset impairments 12 million principally related manufacturing plant equipment associated exit product line performance materials technologies segment repositioning charge also included exit costs 16 million principally related closure obligations associated planned shutdown manufacturing facility transportation systems segment exit product line performance materials technologies segment also 66 million previously established accruals primarily severance automation control solutions aerospace performance materials technologies segments returned income 2012 due primarily fewer employee severance actions caused higher attrition originally planned associated prior severance programs changes scope previously announced repositioning actions 2011 recognized repositioning charges totaling 380 million including severance costs 246 million related workforce reductions 3188 manufacturing administrative positions across segments workforce reductions primarily related planned shutdown manufacturing facility transportation systems segment cost savings actions taken connection ongoing functional transformation productivity initiatives factory transitions connection acquisitionrelated synergies automation control solutions aerospace segments exit andor rationalization certain product lines markets performance materials technologies automation control solutions segments consolidation repair facilities aerospace segment factory consolidations andor rationalizations organizational realignments businesses automation control solutions segment repositioning charges included asset impairments 86 million principally related writeoff certain intangible assets automation control solutions segment due change branding strategy manufacturing plant equipment associated planned shutdown manufacturing facility exit product line factory transition discussed repositioning charges also included exit costs 48 million principally costs terminate contracts related exit market product line factory transition discussed exit costs also included closure obligations associated planned shutdown manufacturing facility exit product line also discussed also 26 million previously established accruals primarily severance aerospace automation control solutions segments returned income 2011 due principally fewer employee separations originally planned associated prior severance programs 2010 recognized repositioning charges totaling 179 million including severance costs 144 million related workforce reductions 2781 manufacturing administrative positions primarily automation control solutions aerospace transportation systems segments workforce reductions primarily related planned shutdown certain manufacturing facilities automation control solutions transportation systems segments cost savings actions taken connection ongoing functional transformation productivity initiatives factory transitions aerospace automation control solutions performance materials technologies segments costeffective locations achieving acquisitionrelated synergies automation control solutions segment exit andor rationalization certain product lines performance materials technologies segment repositioning charge also included asset impairments 21 million principally related manufacturing plant equipment associated exit andor rationalization certain product lines facilities scheduled close also 30 million previously established accruals primarily severance automation control solutions honeywell international inc notes financial statementscontinued dollars millions except per share amounts transportation systems aerospace segments returned income 2010 due fewer employee separations originally planned associated prior severance programs following table summarizes status total repositioning reserves certain repositioning projects aerospace automation control solutions transportation systems segments included exit disposal activities costs related recognized future periods actual liability incurred nature exit disposal costs includes asset setup moving product recertification requalification employee retention training travel following tables summarize segment expected incurred remaining exit disposal costs related 2011 2010 repositioning actions able recognize time actions initiated exit disposal costs related repositioning actions 2012 able recognize time actions initiated significant honeywell international inc notes financial statementscontinued dollars millions except per share amounts 2012 recognized charge 234 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 156 million environmental asbestos matters discussed detail note 22 commitments contingencies notes financial statements 2011 recognized charge 240 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 149 million 2010 recognized charge 212 million environmental liabilities deemed probable reasonably estimable year recognized asbestos related litigation charges net insurance 175 million also recognized charges 62 million connection evaluation potential resolution certain legal matters note 4other income expense gain sale nonstrategic businesses assets 2011 includes 50 million pretax gain 31 million net tax related divestiture automotive onboard sensor products business within automation control solutions segment net 2011 includes loss 29 million resulting early redemption debt first quarter 2011 see note 14 longterm debt credit agreements details net 2010 includes 62 million pretax gain 39 million net tax related consolidation joint venture within performance materials technologies segment company obtained control ability direct activities significant joint venture’s economic performance third quarter resulting consolidation accordingly recognized assets liabilities fair value ii included results operations consolidated financial statements date consolidation iii recognized noted gain representing difference carrying amount fair value previously held equity method investment company assigned 24 million intangibles predominantly joint venture’s customer contracts intangible assets amortized estimated lives using straight line method excess book value estimated fair values net assets consolidated approximating 132 million recorded goodwill non honeywell international inc notes financial statementscontinued dollars millions except per share amounts deductible tax purposes results consolidation date december 31 2010 included performance materials technologies segment material consolidated financial statements note 5interest financial charges weighted average interest rate shortterm borrowings commercial paper outstanding december 31 2012 2011 143 percent 084 percent respectively note 6income taxes income continuing operations taxes tax expense benefit honeywell international inc notes financial statementscontinued dollars millions except per share amounts effective tax rate increased 61 percentage points 2012 compared 2011 primarily due change mix earnings taxed higher rates primarily driven approximate 61 percentage point impact decrease pension marktomarket expense decreased benefit valuation allowances decreased benefit settlement tax audits absence us rd tax credit partially offset decreased expense related tax reserves foreign effective tax rate 170 percent decrease approximately 41 percentage points primarily consisted 100 percent impact related decrease tax reserves partially offset 52 percent impact increased valuation allowances net operating losses primarily due decrease luxembourg french earnings available offset net operating loss carry forwards 14 percent impact tax expense related foreign exchange effective tax rate lower us statutory rate 35 percent primarily due earnings taxed lower foreign rates effective tax rate decreased 98 percentage points 2011 compared 2010 primarily due change mix earnings us foreign sources related higher us pension expense primarily driven approximate 76 percentage point impact resulted increase pension marktomarket expense increased benefit manufacturing incentives increased benefit favorable settlement tax audits increased benefit lower foreign effective tax rate foreign effective tax rate 211 percent decrease approximately 49 percentage points primarily consisted 51 percent impact decreased valuation allowances net operating losses primarily due increase german earnings available offset net operating loss carry forwards ii 24 percent impact tax benefits related foreign exchange investment losses iii 12 percent impact increased benefit tax credits lower statutory tax rates iv 41 percent impact related increase tax reserves effective tax rate lower us statutory rate 35 percent primarily due earnings taxed lower foreign rates honeywell international inc notes financial statementscontinued dollars millions except per share amounts deferred tax assets liabilities deferred income taxes represent future tax effects transactions reported different periods tax financial reporting purposes tax effects temporary differences tax carryforwards give rise future income tax benefits payables follows company state tax net operating loss carryforwards 30 billion december 31 2012 various expiration dates 2030 also foreign net operating capital losses 28 billion available reduce future income tax payments several countries subject varying expiration rules us federal tax credit carryforwards 6 million december 31 2012 various expiration dates 2031 also state tax credit carryforwards 55 million december 31 2012 including carryforwards 33 million various expiration dates 2027 tax credits 22 million subject expiration valuation allowance deferred tax assets increased 7 million 2012 decreased 45 million increased 58 million 2011 2010 respectively 2012 increase valuation allowance primarily due decreased earnings france luxembourg partially offset decrease valuation allowance related purchase accounting various acquisitions audit settlements various countries 2011 decrease valuation allowance primarily due decreased foreign net operating losses related netherlands germany partially offset increase valuation allowance france luxembourg canada 2010 increase valuation allowance primarily due increased foreign net operating losses related france luxembourg netherlands offset reversal valuation allowance related germany 2010 increase valuation allowance also includes adjustments related purchase accounting various acquisitions federal income taxes provided undistributed earnings majority international subsidiaries intention reinvest earnings respective subsidiaries december 31 2012 honeywell provided us federal income foreign withholding taxes approximately 116 billion earnings nonus operations practicable estimate amount tax might payable earnings repatriated amount foreign tax credits would available reduce eliminate resulting us income tax liability 722 million 815 million 757 million unrecognized tax benefits december 31 2012 2011 2010 respectively recognized 722 million would recorded component income tax expense december 31 2012 year ended december 31 2012 company decreased unrecognized tax benefits 93 million due expiration various honeywell international inc notes financial statementscontinued dollars millions except per share amounts statute limitations settlements tax authorities partially offset adjustments related ongoing assessment likelihood amount potential outcomes current future examinations year ended december 31 2011 company increased unrecognized tax benefits 58 million due additional reserves various international us tax audit matters partially offset adjustments related ongoing assessment likelihood amount potential outcomes current future examinations expiration various statute limitations settlements tax authorities following table summarizes activity related unrecognized tax benefits generally uncertain tax positions related tax years remain subject examination relevant tax authorities following table summarizes open tax years major jurisdiction december 31 2012 1 includes federal well state provincial similar local jurisdictions applicable based outcome examinations result expiration statute limitations specific jurisdictions reasonably possible certain unrecognized tax benefits tax positions taken previously filed tax returns materially change recorded liabilities uncertain tax positions financial statements addition outcome examinations may impact valuation certain deferred tax assets net operating losses future periods based number tax years currently audit relevant us federal state foreign tax authorities company anticipates several audits may finalized foreseeable future however based status examinations protocol finalizing audits relevant taxing authorities possibility company might challenge certain audit findings could include formal legal proceedings time possible estimate impact changes previously recorded uncertain tax positions honeywell international inc notes financial statementscontinued dollars millions except per share amounts unrecognized tax benefits examinations progress 443 million 482 million 274 million december 31 2012 2011 2010 respectively decrease 2011 2012 primarily due expiration various statute limitations settlements tax authorities increase 2010 2011 primarily due increase tax examinations estimated interest penalties related underpayment income taxes classified component tax expense consolidated statement operations totaled 37 million 63 million 33 million years ended december 31 2012 2011 2010 respectively accrued interest penalties 284 million 247 million 183 million december 31 2012 2011 2010 respectively note 7earnings per share details earnings per share calculations years ended december 31 2012 2011 2010 follows diluted earnings per share calculations exclude effect stock options’ assumed proceeds exceed average market price common shares period 2012 2011 2010 weighted number stock options excluded computations 125 95 148 million respectively stock options outstanding end respective periods honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 8accounts notes receivables trade receivables includes 1495 1404 million unbilled balances longterm contracts december 31 2012 december 31 2011 respectively amounts billed accordance terms customer contracts relate note 9inventories inventories valued lifo amounted 325 302 million december 31 2012 2011 respectively lifo inventories valued current costs carrying values would approximately 197 169 million higher december 31 2012 2011 respectively note 10investments longterm receivables longterm trade receivables include 31 million 29 million unbilled balances longterm contracts december 31 2012 2011 respectively amounts billed accordance terms customer contracts relate following table summarizes long term trade financing receivables segment including current portions allowances credit losses honeywell international inc notes financial statementscontinued dollars millions except per share amounts allowance credit losses detailed longterm trade financing receivables totaled 4 million 5 million december 31 2012 2011 respectively receivables evaluated recoverability individual basis including consideration credit quality detailed financing receivables predominately commercial governmental counterparties investment grade credit quality note 11property plant equipmentnet depreciation expense 660 699 707 million 2012 2011 2010 respectively note 12goodwill intangible assetsnet change carrying amount goodwill years ended december 31 2012 2011 segment follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts intangible assets amortization expense 266 249 263 million 2012 2011 2010 respectively estimated intangible asset amortization expense next five years approximates 275 million 2013 247 million 2014 206 million 2015 152 million 2016 142 million 2017 note 13accrued liabilities honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 14longterm debt credit agreements schedule principal payments longterm debt follows april 2 2012 company entered 3000 million amended restated five year credit agreement “credit agreement” syndicate banks commitments credit agreement increased pursuant terms credit agreement aggregate amount exceed 3500 million credit agreement contains 700 million sublimit issuance letters credit agreement maintained general corporate purposes amends restates previous 2800 million five year credit agreement dated march 31 2011 “prior agreement” borrowings credit agreement prior agreement credit agreement restrict ability pay dividends contains financial covenants failure comply customary conditions occurrence customary events default contained credit agreement would prevent borrowings would generally require repayment outstanding borrowings credit agreement events default include nonpayment credit agreement debt interest fees b noncompliance terms credit agreement covenants c crossdefault debt certain circumstances bankruptcy e defaults upon obligations employee retirement income security act honeywell international inc notes financial statementscontinued dollars millions except per share amounts additionally banks right terminate commitment lend additional funds issue letters credit agreement person group acquires beneficial ownership 30 percent voting stock 12month period individuals directors honeywell beginning period cease constitute majority board directors credit agreement substantially material terms conditions prior agreement improvement pricing extension maturity loans credit agreement required repaid later april 2 2017 unless date extended pursuant terms credit agreement agreed pay facility fee 008 percent per annum aggregate commitment revolving credit borrowings credit agreement would bear interest honeywell’s option 1 rate equal highest floating base rate publicly announced citibank na b 05 percent federal funds rate c libor plus 100 percent plus 2 margin based honeywell’s credit default swap midrate spread subject floor cap set forth credit agreement “applicable margin” minus 100 percent provided margin shall less zero b rate equal libor plus applicable margin c competitive bidding procedure facility fee letter credit issuance fee subject change based upon grid determined long term debt ratings credit agreement subject termination based upon decrease debt ratings material adverse change february 2011 company issued 800 million 425 percent senior notes due 2021 600 million 5375 percent senior notes due 2041 collectively “notes” notes senior unsecured unsubordinated obligations honeywell rank equally honeywell’s existing future senior unsecured debt senior honeywell’s subordinated debt offering resulted gross proceeds 1400 million offset 19 million discount closing costs related offering first quarter 2011 company repurchased entire outstanding principal amount 400 million 5625 percent notes due 2012 via cash tender offer subsequent optional redemption cost relating early redemption notes including “makewhole premium” 29 million fourth quarter 2011 company repaid 500 million 6125 percent notes repayment funded cash provided operating activities source liquidity sell interests designated pools trade accounts receivables third parties december 31 2012 december 31 2011 none receivables designated pools sold third parties sell receivables overcollateralized retain subordinated interest pool receivables representing overcollateralization well undivided interest balance receivables pools terms trade accounts receivable program permit repurchase receivables third parties discretion providing us additional source revolving credit result program receivables remain company’s balance sheet corresponding amount recorded shortterm borrowings honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 15lease commitments future minimum lease payments operating leases initial remaining noncancellable lease terms excess one year follows entered agreements lease land equipment buildings principally operating leases initial terms 25 years contain renewal options subject customary conditions time terms leases may option purchase leased assets amounts approximate fair value expect commitments lease agreements material adverse effect consolidated results operations financial position liquidity rent expense 390 386 369 million 2012 2011 2010 respectively note 16financial instruments fair value measures credit market riskfinancial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates commodity prices manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties derivative transactions substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value cash flows derivative financial instruments considering reasonably possible changes interest rates currency exchange rates commodity prices restrict use derivative financial instruments hedging activities continually monitor creditworthiness customers grant credit terms normal course business terms conditions credit sales designed mitigate eliminate concentrations credit risk single customer sales materially dependent single customer small group customers foreign currency risk managementwe conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities transactions arising international trade objective preserve economic value nonfunctional currency denominated cash flows attempt hedge transaction exposures natural offsets fullest extent possible opportunities exhausted foreign currency exchange forward option contracts third parties hedge monetary assets liabilities denominated nonfunctional currencies prior conversion us dollars assets liabilities remeasured spot exchange rates effect balance sheet date effects changes spot rates recognized earnings included income expense partially hedge forecasted sales purchases predominantly occur next twelve months denominated nonfunctional currencies honeywell international inc notes financial statementscontinued dollars millions except per share amounts currency forward contracts changes forecasted nonfunctional currency cash flows due movements exchange rates substantially offset changes fair value currency forward contracts designated hedges market value gains losses contracts recognized earnings hedged transaction recognized open foreign currency exchange forward contracts mature predominantly next twelve months december 31 2012 2011 contracts notional amounts 8506 million 7108 million respectively exchange foreign currencies principally us dollar euro british pound canadian dollar chinese renminbi mexican peso indian rupee korean czech koruna hong kong dollar singapore dollar romanian leu swiss franc swedish krona thai baht commodity price risk managementour exposure market risk commodity prices result changes cost production primarily mitigate exposure commodity price risk use longterm fixedprice contracts suppliers formula price agreements suppliers customers also enter forward commodity contracts third parties designated hedges anticipated purchases several commodities forward commodity contracts markedtomarket resulting gains losses recognized earnings hedged transaction recognized december 31 2012 2011 contracts notional amounts 17 million 59 million respectively related forward commodity agreements principally base metals natural gas interest rate risk managementwe use combination financial instruments including longterm mediumterm shortterm financing variablerate commercial paper interest rate swaps manage interest rate mix total debt portfolio related overall cost borrowing december 31 2012 2011 interest rate swap agreements designated fair value hedges effectively changed 1400 million fixed rate debt rate 409 libor based floating rate debt interest rate swaps mature various dates 2021 fair value financial instrumentsthe fasb’s accounting guidance defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date exit price fasb’s guidance classifies inputs used measure fair value following hierarchy level 1 unadjusted quoted prices active markets identical assets liabilities level 2 unadjusted quoted prices active markets similar assets liabilities unadjusted quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability level 3 unobservable inputs asset liability company endeavors utilize best available information measuring fair value financial nonfinancial assets liabilities classified entirety based lowest level input significant fair value measurement following table sets forth company’s financial assets liabilities accounted fair value recurring basis december 31 2012 2011 honeywell international inc notes financial statementscontinued dollars millions except per share amounts foreign currency exchange contracts interest rate swap agreements forward commodity contracts valued using broker quotations market transactions either listed overthecounter markets derivative instruments classified within level 2 company holds investments marketable equity securities designated available sale valued using quoted market prices investments classified within level 1 company also holds investments commercial paper certificates deposits time deposits designated available sale valued using market transactions overthecounter markets investments classified within level 2 carrying value cash equivalents trade accounts notes receivables payables commercial paper shortterm borrowings contained consolidated balance sheet approximates fair value following table sets forth company’s financial assets liabilities carried fair value company determined fair value long term receivables discounting based upon terms receivable counterparty details including credit quality fair value receivables considered level 2 company determined fair value longterm debt related current maturities utilizing transactions listed markets identical similar liabilities fair value longterm debt related current maturities considered level 2 well december 31 2012 2011 company nonfinancial assets specifically property plant equipment software intangible assets net book value 22 million 262 million respectively accounted fair value nonrecurring basis assets tested impairment based fair value assets company recognized losses 22 million 127 million respectively years ended december 31 2012 2011 primarily connection repositioning actions see note 3 repositioning charges company determined fair value measurements nonfinancial assets level 3 fair value hierarchy company utilizes market income cost approaches combination valuation techniques nonrecurring level 3 fair value measures inputs measures include observable market data obtained independent sources broker quotes recent market transactions similar assets company’s policy maximize use observable inputs measurement fair value nonrecurring level 3 measurements extent observable inputs available company utilizes unobservable inputs based upon honeywell international inc notes financial statementscontinued dollars millions except per share amounts assumptions market participants would use valuing asset examples utilized unobservable inputs future cash flows long term growth rates applicable discount rates derivatives utilized risk management purposes detailed included consolidated balance sheet impacted statement operations follows fair value derivatives classified assets consist following fair value derivatives classified liabilities consist following gains losses recognized comprehensive income effective portions consist following gains losses reclassified aoci income consist following ineffective portions commodity derivative instruments designated cash flow hedge relationships insignificant years ended december 31 2012 2011 classified within cost products sold foreign currency exchange contracts cash flow hedge relationships qualify critical matched terms hedge relationships result ineffectiveness interest rate swap agreements designated hedge relationships gains losses derivative recognized interest financial charges offsetting gains losses underlying debt hedged gains interest rate swap agreements recognized earnings 12 112 million years ended december 31 2012 2011 respectively gains losses fully offset losses gains underlying debt hedged honeywell international inc notes financial statementscontinued dollars millions except per share amounts also economically hedge exposure changes foreign exchange rates principally forward contracts markedtomarket resulting gains losses recognized earnings offsetting gains losses nonfunctional currency denominated monetary assets liabilities hedged recognized 20 million 30 million income expense years ended december 31 2012 2011 respectively note 17other liabilities 1 asset retirement obligations primarily relate costs associated future retirement nuclear fuel conversion facilities performance materials technologies segment future retirement facilities automation control solutions segment reconciliation liability asset retirement obligations year ended december 31 2012 follows note 18capital stock authorized issue 2000000000 shares common stock par value 1 common shareowners entitled receive dividends may declared board entitled one vote per share entitled event liquidation share ratably assets honeywell available distribution common shareowners common shareowners preemptive conversion rights shares common stock issued outstanding held treasury liable calls assessments restrictions us relative dividends repurchase redemption common stock board directors authorized repurchase total 30 billion honeywell common stock amount includes 16 billion remained available company’s previously reported share repurchase program purchased total approximately 5 million 203 million shares common stock 2012 2011 317 1085 million respectively authorized issue 40000000 shares preferred stock without par value determine number shares series rights preferences limitations series december 31 2012 preferred stock outstanding honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 19accumulated comprehensive income loss total accumulated comprehensive income loss included consolidated statement shareowners’ equity comprehensive income loss attributable noncontrolling interest consisted predominantly net income changes accumulated comprehensive income loss follows components accumulated comprehensive income loss note 20stockbased compensation plans stockbased compensation plans available grant nonqualified stock options incentive stock options stock appreciation rights restricted units restricted stock key employees 2011 stock incentive plan honeywell international inc affiliates plan approved shareowners annual meeting shareowners effective april 26 2011 following approval plan april 26 2011 grant new awards key employees previously existing stockbased compensation plans 32796373 shares available future grants terms plan december 31 2012 additionally 2006 stock plan nonemployee directors honeywell international inc directors plan 186933 shares honeywell common stock available future grant december 31 2012 stock optionsthe exercise price term conditions applicable option granted stock plans generally determined management development compensation honeywell international inc notes financial statementscontinued dollars millions except per share amounts committee board exercise price stock options set grant date may less fair market value per share stock date fair value recognized expense employee’s requisite service period generally vesting period award options generally vest fouryear period expire ten years fair value option award estimated date grant using blackscholes optionpricing model expected volatility based implied volatilities traded options common stock historical volatility common stock used monte carlo simulation model derive expected term model uses historical data estimate option exercise activity postvest termination behavior expected term represents estimate time options expected remain outstanding riskfree rate periods within contractual life option based us treasury yield curve effect time grant compensation cost pretax basis related stock options recognized operating results included selling general administrative expenses 2012 2011 2010 65 59 55 million respectively associated future income tax benefit recognized 2012 2011 2010 23 19 16 million respectively following table sets forth fair value per share information including related weightedaverage assumptions used determine compensation cost honeywell international inc notes financial statementscontinued dollars millions except per share amounts following table summarizes information stock option activity three years ended december 31 2012 1 represents sum vested options 195 million expected vest options 134 million expected vest options derived applying prevesting forfeiture rate assumption total outstanding unvested options 161 million following table summarizes information stock options outstanding exercisable december 31 2012 21672281 24722493 options exercisable weighted average exercise prices 4071 3943 december 31 2011 2010 respectively total intrinsic value options amount stock price exceeded exercise price options date exercise exercised 2012 2011 2010 202 164 54 million respectively 2012 2011 2010 amount cash received exercise stock options 305 290 181 million respectively associated tax benefit realized 74 54 18 million respectively 2012 2011 2010 classified 56 42 13 million respectively benefit financing cash inflow consolidated statement cash flows balance classified cash operations honeywell international inc notes financial statementscontinued dollars millions except per share amounts december 31 2012 123 million total unrecognized compensation cost related nonvested stock option awards expected recognized weightedaverage period 238 years total fair value options vested 2012 2011 2010 63 52 41 million respectively restricted stock unitsrestricted stock unit rsu awards entitle holder receive one share common stock unit units vest rsus issued certain key employees fair market value date grant compensation rsus typically become fully vested periods ranging three seven years payable honeywell common stock upon vesting following table summarizes information rsu activity three years ended december 31 2012 december 31 2012 approximately 185 million total unrecognized compensation cost related nonvested rsus granted stock plans expected recognized weightedaverage period 20 years compensation expense related rsus 105 109 million 2012 2011 2010 respectively nonemployee directors’ planunder directors’ plan new nonemployee director receives onetime grant 3000 restricted stock units vest fifth anniversary continuous board service 2011 nonemployee director received annual grant purchase 5000 shares common stock fair market value date grant 2012 annual equity grant changed fixed number shares target value 75000 consists 50 percent options 50 percent rsus options become exercisable fouryear period expire ten years rsus generally vest third anniversary date grant note 21redeemable noncontrolling interest discussed note 2 acquisitions divestitures october 22 2012 company acquired 70 percent controlling interest thomas russell co calendar year 2016 honeywell right acquire noncontrolling shareholder right sell honeywell remaining 30 percent interest price based multiple thomas russell co’s average annual operating income 2013 2015 subject predetermined cap floor additionally honeywell right acquire remaining 30 percent interest fixed price equivalent cap time honeywell international inc notes financial statementscontinued dollars millions except per share amounts december 31 2015 noncontrolling interests redemption features arrangement described solely within company’s control considered redeemable noncontrolling interests redeemable noncontrolling interest considered temporary equity therefore reported outside permanent equity company’s consolidated balance sheet greater initial carrying amount adjusted noncontrolling interest’s share net income loss redemption value december 31 2012 redemption value redeemable noncontrolling interest approximated carrying value note 22commitments contingencies environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous substances accordance environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing hazardous substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually jointly potentially responsible parties determine feasibility various remedial techniques policy record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts progress additional technical regulatory legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing remedial investigations feasibility studies timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects remedial techniques utilized agreements parties following table summarizes information concerning recorded liabilities environmental costs honeywell international inc notes financial statementscontinued dollars millions except per share amounts environmental liabilities included following balance sheet accounts although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position new jersey chrome sitesthe excavation offsite disposal approximately one million tons chromium residue present predecessor honeywell site located jersey city new jersey known study area 7 completed january 2010 also implementing related groundwater remedial actions conducting related river sediment work addition remedial investigations related activities underway sites hudson county new jersey allegedly chromium contamination honeywell accepted responsibility whole part provisions made financial statements estimated cost investigations implementation remedies consistent accounting policy described believe matters material adverse impact consolidated results operations financial position operating cash flows onondaga lake syracuse nywe implementing combined dredgingcapping remedy onondaga lake pursuant consent decree approved united states district court northern district new york january 2007 accrued estimated cost remediating onondaga lake based currently available information analysis performed engineering consultants honeywell also conducting remedial investigations activities sites syracuse recorded reserves investigations activities appropriate consistent accounting policy described honeywell entered cooperative agreement potential natural resource trustees assess alleged natural resource damages relating site possible predict outcome duration assessment amounts responsibility damages asbestos matters like many industrial companies honeywell defendant personal injury actions related asbestos mine produce asbestos make sell insulation products construction materials identified primary cause asbestos related disease vast majority claimants honeywell’s predecessors owned north american refractories company narco 1979 1986 narco produced refractory products bricks cement used high temperature applications sold narco business 1986 agreed indemnify narco respect personal injury claims products discontinued prior sale defined sale agreement narco retained liability claims narco andor honeywell defendants asbestos personal injury cases asserting claims based upon alleged exposure narco asbestoscontaining products claimants consist largely individuals allege exposure narco asbestoscontaining refractory products occupational setting claims honeywell international inc notes financial statementscontinued dollars millions except per share amounts filing subsequent claims stayed continuously since january 4 2002 date narco sought bankruptcy protection see discussion honeywell’s bendix friction materials bendix business manufactured automotive brake parts contained chrysotile asbestos encapsulated form claimants consist largely individuals allege exposure asbestos brakes either performing vicinity individuals performed brake replacements following tables summarize information concerning narco bendix asbestos related balances asbestos related liabilities insurance recoveries asbestos related liabilities narco bendix asbestos related balances included following balance sheet accounts honeywell international inc notes financial statementscontinued dollars millions except per share amounts narco productson january 4 2002 narco filed petition reorganization chapter 11 us bankruptcy code connection filing narco’s petition 2002 us bankruptcy court western district pennsylvania “the bankruptcy court” issued injunction staying prosecution narcorelated asbestos claims company stay continuously remained place november 2007 bankruptcy court confirmed narco’s third amended plan reorganization narco plan reorganization challenges narco plan reorganization fully resolved third quarter 2010 narco plan reorganization cannot become effective however plan reorganization certain narco affiliates pending bankruptcy court confirmed affirmed district court possible predict timing outcome bankruptcy district court proceedings affiliates’ case expect stay enjoining litigation narco honeywell remain effect effective date narco plan reorganization connection narco’s bankruptcy filing agreed certain obligations triggered upon effective date narco plan reorganization honeywell provide narco 20 million financing simultaneously forgive indebtedness also pay 40 million narco’s former parent company 16 million certain asbestos claimants whose claims resolved pendency narco bankruptcy proceedings amounts expected paid first year trust operations narco plan reorganization becomes effective connection implementation federally authorized 524g trust “narco trust” established evaluation resolution existing future narco asbestos claims narco trust established honeywell narco entitled permanent channeling injunction barring present future individual actions state federal courts requiring asbestos related claims based exposure narco products made trust narco trust review submitted claims determine award amounts accordance established trust distribution procedures approved bankruptcy court set forth criteria claimants must meet qualify compensation including among things exposure medical criteria determine award amount narco trust established operational honeywell obligated fund narco asbestos claims submitted trust qualify payment trust distribution procedures subject annual caps 150 million year provided however first 100 million claims processed narco trust “initial claims amount” count first year annual cap unused portion initial claims amount roll subsequent years fully utilized narco trust established operational honeywell also responsible following funding obligations subject annual cap described previously approved payments due claimants pursuant settlement agreements reached pendency narco bankruptcy proceedings provide portion settlements paid narco trust amounts estimated 130 million expected paid first year trust operations b payments due claimants pursuant settlement agreements reached pendency narco bankruptcy proceedings provide right submit claims narco trust subject qualification terms settlement agreements trust distribution procedures criteria amounts estimated 150 million expected paid first two years trust operations consolidated financial statements reflect estimated liability amounts discussed unsettled claims pending time narco filed bankruptcy protection estimated value future narco asbestos claims expected asserted narco trust 2018 light uncertainties inherent making longterm projections connection initial operation 524g trust well stay narco asbestos claims since honeywell international inc notes financial statementscontinued dollars millions except per share amounts january 2002 believe reasonable basis estimating narco asbestos claims beyond 2018 absence actual trust experience base estimate honeywell projected probable value including trust claim handling costs asbestos related future liabilities based company specific general asbestos claims filing rates expected rates disease anticipated claim values specifically valuation methodology included analysis population likely exposed asbestos containing products epidemiological studies estimating number people likely develop asbestos related diseases narco asbestos claims filing history general asbestos claims filing rates tort system certain operating asbestos trusts claims experience forums pending inventory narco asbestos claims disease criteria payment values contained trust distribution procedures estimated approval rate claims submitted narco trust methodology used estimate liability future claims commonly accepted numerous bankruptcy courts addressing 524g trusts resulted range estimated liability future claims 743 961 million believe amount within range better estimate amount accordingly recorded minimum amount range insurance receivable corresponding estimated liability pending future narco asbestos claims reflects coverage reimburses honeywell portions narcorelated indemnity defense costs provided large number insurance policies written dozens insurance companies domestic insurance market london excess market december 31 2012 significant portion coverage insurance companies agreements pay full policy limits conduct analyses determine amount insurance estimate probable recovery relation payment current estimated future claims substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries made judgments concerning insurance coverage believe reasonable consistent historical dealings insurers knowledge pertinent solvency issues surrounding insurers various judicial determinations relevant insurance programs 2006 travelers casualty insurance company “travelers” filed declaratory judgment action supreme court new york county new york honeywell insurance carriers provide coverage narco asbestos claims seeking declaration regarding coverage obligations narco asbestos claims high excess insurance coverage issued travelers insurance carriers insurance carriers asserted cross claims honeywell seeking declarations regarding coverage obligations narco asbestos claims high excess insurance coverage issued since company entered settlement agreements resolving narcorelated asbestos coverage issues almost insurance carriers including travelers honeywell believes entitled remaining coverage issue honeywell expects prevail matter adverse outcome expected material impact consolidated results operations financial position operating cash flows projecting future events subject many uncertainties could cause narco related asbestos liabilities assets higher lower projected recorded assurance plan reorganization become final insurance recoveries timely whether narco related asbestos claims beyond 2018 given inherent uncertainty predicting future events review estimates periodically update based experience relevant factors similarly reevaluate projections concerning probable insurance recoveries light changes projected liability developments may impact insurance recoveries honeywell international inc notes financial statementscontinued dollars millions except per share amounts friction productsthe following tables present information regarding bendix related asbestos claims activity honeywell experienced average resolution values per claim excluding legal costs follows possible predict whether resolution values bendix related asbestos claims increase decrease stabilize future consolidated financial statements reflect estimated liability resolution pending claims actually filed financial statement date future bendix related asbestos claims valued bendix pending future claims using average resolution values previous five years update resolution values used estimate cost bendix pending future claims fourth quarter year liability future claims represents estimated value future asbestos related bodily injury claims expected asserted bendix next five years estimated cost future bendix related asbestos claims based historic claims filing experience dismissal rates disease classifications resolution values tort system previous five years light uncertainties inherent making longterm projections well certain factors unique friction product asbestos claims believe reasonable basis estimating asbestos claims beyond next five years methodology used estimate liability future claims similar used estimate future narco related asbestos claims liability insurance receivable corresponding liability settlement pending future bendix asbestos claims reflects coverage provided large number insurance policies written dozens insurance companies domestic insurance market london excess market based ongoing analysis probable insurance recovery insurance receivables recorded financial statements simultaneous recording estimated liability underlying asbestos claims determination based analysis underlying insurance policies honeywell international inc notes financial statementscontinued dollars millions except per share amounts historical experience insurers ongoing review solvency insurers interpretation judicial determinations relevant insurance programs consideration impacts settlements reached insurers insurance receivables also recorded structured insurance settlements provide future fixed payment streams contingent upon future claims events amounts recorded net present value fixed payment stream cumulative historical basis honeywell recorded insurance receivables equal approximately 38 percent value underlying asbestos claims recorded however gaps coverage due insurance company insolvencies certain uninsured periods insurance settlements rate expected decline future bendix related asbestos liabilities may recorded future recoverability rates may also impacted numerous factors future insurance settlements insolvencies judicial determinations relevant coverage program difficult predict assuming continued defense indemnity spending current levels estimate cumulative recoverability rate could decline next five years approximately 31 percent honeywell believes sufficient insurance coverage reserves cover pending bendix related asbestos claims bendix related asbestos claims estimated filed within next five years although impossible predict outcome either pending future bendix related asbestos claims believe claims would material adverse effect consolidated financial position light insurance coverage prior experience resolving claims rate types claims filed average resolution value claims period time claim settlements paid collectively “variable claims factors” substantially change honeywell would expect future bendix related asbestos claims material adverse effect results operations operating cash flows fiscal year assurances given however variable claims factors change matters subject number lawsuits investigations disputes involve substantial amounts claimed arising conduct business including matters relating commercial transactions government contracts product liability prior acquisitions divestitures employee benefit plans intellectual property environmental health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes matters well potential ranges possible losses taking consideration insurance recoveries based careful analysis matter assistance outside legal counsel applicable experts included matters following allen et al v honeywell retirement earnings planpursuant settlement approved us district court district arizona february 2008 18 21 claims alleged plaintiffs class action lawsuit dismissed prejudice exchange approximately 35 million paid company’s pension plan maximum aggregate liability remaining three claims alleging honeywell impermissibly reduced pension benefits certain employees predecessor entity plan amended 1983 failed calculate benefits accordance terms plan capped 500 million october 2009 court granted summary judgment favor honeywell retirement earnings plan respect claim regarding calculation benefits may 2011 parties engaged mediation reached agreement principle settle three remaining claims 238 million also paid company’s pension plan court approved settlement july 20 2012 claims matter fully resolved honeywell international inc notes financial statementscontinued dollars millions except per share amounts quick lubeon march 31 2008 se quick lube filter distributor filed suit us district court district connecticut alleging twelve filter manufacturers including honeywell engaged conspiracy fix prices rig bids allocate us customers aftermarket automotive filters suit purported class action behalf direct purchasers filters defendants parallel purported class actions including behalf indirect purchasers filters filed plaintiffs variety jurisdictions united states canada us cases consolidated single multidistrict litigation northern district illinois june 2011 plaintiff’s principal witness pled guilty felony count made false statements federal investigators march 8 2012 honeywell entered settlement agreement resolve multidistrict litigation class action plaintiffs october 10 2012 november 28 2012 district court northern district illinois issued orders granting final approval us multidistrict litigation settlement plaintiffs previously reported antitrust division department justice notified honeywell january 2010 officially closed investigation possible collusion replacement auto filters industry class action canada still pending expect resolution material impact results operations operating cash flows periods recognized paid honeywell v united auto workers “uaw” et alin july 2011 honeywell filed action federal court district new jersey uaw former employees retired series master collective bargaining agreements “mcbas” honeywell uaw company seeking declaratory judgment certain express limitations obligation contribute toward healthcare coverage retirees “caps” set forth mcbas may implemented effective january 1 2012 september 2011 uaw certain retiree defendants filed motion dismiss new jersey action filed suit eastern district michigan alleging mcbas provide caps company’s liability healthcare coverage uaw retiree plaintiffs subsequently filed motion class certification motion partial summary judgment michigan action seeking ruling retirees retired prior initial inclusion caps 2003 mcba covered caps matter law december 2011 new jersey action dismissed forum grounds honeywell appealed new jersey court’s dismissal united states court appeals third circuit third circuit denied appeal honeywell answered uaw’s complaint michigan asserted counterclaim fraudulent inducement honeywell confident caps upheld liability healthcare coverage premiums respect putative class limited negotiated expressly set forth applicable mcbas event adverse ruling however honeywell’s postretirement benefits pre2003 retirees would increase approximately 175 million reflecting estimated value caps given uncertainty inherent litigation investigations including specific matters referenced believe possible develop estimates reasonably possible loss excess current accruals matters specifically set forth considering past experience existing accruals expect outcome matters either individually aggregate material adverse effect consolidated financial position contingencies resolved long periods time potential liabilities subject change due new developments changes settlement strategy impact evidentiary requirements could cause us pay damage awards settlements become subject equitable remedies could material adverse effect results operations operating cash flows periods recognized paid honeywell international inc notes financial statementscontinued dollars millions except per share amounts warranties guaranteeswe issued party following direct indirect guarantees december 31 2012 expect guarantees material adverse effect consolidated results operations financial position liquidity connection disposition certain businesses facilities indemnified purchasers expected cost remediation environmental contamination existing date disposition expected costs accrued environmental assessments made remedial efforts probable costs reasonably estimated normal course business issue product warranties product performance guarantees accrue estimated cost product warranties performance guarantees based contract terms historical experience time sale adjustments initial obligations warranties guarantees made changes obligations become reasonably estimable following table summarizes information concerning recorded obligations product warranties product performance guarantees product warranties product performance guarantees included following balance sheet accounts honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 23pension postretirement benefits sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees pension benefits substantially us employees provided noncontributory qualified nonqualified defined benefit pension plans us defined benefit pension plans comprise 76 percent projected benefit obligation nonunion hourly salaried employees joining honeywell first time december 31 2012 eligible participate honeywell’s us defined benefit pension plans nonus employees us citizens covered various retirement benefit arrangements considered defined benefit pension plans accounting purposes nonus defined benefit pension plans comprise 24 percent projected benefit obligation also sponsor postretirement benefit plans provide health care benefits life insurance coverage eligible retirees retiree medical plans mainly cover us employees retire pension eligibility prescription drug hospital professional medical services us retiree medical plans require deductibles copayments virtually integrated medicare retiree contributions generally required based coverage type plan medicare eligibility nonunion hourly salaried employees joining honeywell january 1 2000 eligible participate retiree medical life insurance plans less 5 percent honeywell’s us employees eligible retiree medical subsidy company subsidy limited fixeddollar amount addition half honeywell’s current retirees either company subsidy fixeddollar subsidy amount significantly limits exposure impact future health care cost increases retiree medical life insurance plans funded claims expenses paid operating cash flow 2011 connection new collective bargaining agreements reached several union groups honeywell amended us retiree medical plans eliminating subsidy union employees resulted curtailment gains totaling 167 million curtailment gains represented recognition net periodic postretirement benefit cost prior service credits attributable future years service union groups future accrual benefits eliminated 2010 honeywell amended us retiree medical plan longer offer certain postage65 retirees honeywell group coverage facilitate purchase individual plan medicare marketplace plan amendment reduced accumulated postretirement benefit obligation 137 million recognized part net periodic postretirement benefit cost average future service period full eligibility remaining active union employees still eligible retiree medical subsidy also 2010 connection new collective bargaining agreement reached one union groups honeywell amended us retiree medical plan eliminating subsidy union employees retire february 1 2013 plan amendment reduced accumulated postretirement benefit obligation 39 million recognized part net periodic postretirement benefit cost average future service period full eligibility remaining active union employees still eligible retiree medical subsidy plan amendment also resulted curtailment gain 37 million 2010 represented recognition net periodic postretirement benefit cost prior service credits attributable future years service union group future accrual benefits eliminated following tables summarize balance sheet impact including benefit obligations assets funded status associated significant pension postretirement benefit plans december 31 2012 2011 honeywell international inc notes financial statementscontinued dollars millions except per share amounts 1 included assets consolidated balance sheet 2 included liabilities noncurrent consolidated balance sheet honeywell international inc notes financial statementscontinued dollars millions except per share amounts recognized accumulated comprehensive income loss associated significant pension postretirement benefit plans december 31 2012 2011 follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts components net periodic benefit cost amounts recognized comprehensive income loss significant plans years ended december 31 2012 2011 2010 include following components estimated prior service cost pension benefits amortized accumulated comprehensive income loss net periodic benefit cost 2013 expected 23 million 2 million us nonus benefit plans respectively honeywell international inc notes financial statementscontinued dollars millions except per share amounts estimated net loss prior service credit postretirement benefits amortized accumulated comprehensive income loss net periodic benefit cost 2013 expected 41 13 million respectively major actuarial assumptions used determining benefit obligations net periodic benefit cost significant benefit plans presented following table discount rate us pension postretirement benefits plans reflects current rate associated liabilities could settled measurement date december 31 determine discount rates us pension postretirement benefit plans use modeling process involves matching expected cash outflows benefit plans yield curve constructed portfolio high quality fixedincome debt instruments use average yield hypothetical portfolio discount rate benchmark discount rate used determine postretirement benefit obligation lower principally due shorter expected duration postretirement plan obligations compared pension plan obligations honeywell international inc notes financial statementscontinued dollars millions except per share amounts expected rate return us plan assets longterm rate based historical plan asset returns varying longterm periods combined current market conditions broad asset mix considerations use expected rate return us plan assets 775 percent 2013 8 percent 2012 due lower future expected market returns review expected rate return annual basis revise appropriate nonus benefit plans none individually material assumptions reflect economic assumptions applicable country pension benefits included aggregate data tables amounts applicable pension plans accumulated benefit obligations exceeding fair value plan assets amounts related plans follows accumulated benefit obligation us defined benefit pension plans 163 148 billion nonus defined benefit plans 50 44 billion december 31 2012 2011 respectively asset investment strategy us pension plans focuses maintaining diversified portfolio using various asset classes order achieve longterm investment objectives risk adjusted basis actual invested positions various securities change time based short longer term investment opportunities achieve objectives established longterm target allocations follows 6070 percent equity securities 1020 percent fixed income securities cash 515 percent real estate investments 1020 percent types investments equity securities include publiclytraded stock companies located inside outside united states fixed income securities include corporate bonds companies diversified industries mortgagebacked securities us treasuries real estate investments include direct investments commercial properties investments real estate funds types investments include investments private equity hedge funds follow several different strategies review assets regular basis ensure within targeted asset allocation ranges necessary asset balances adjusted back within target allocations nonus pension assets typically managed decentralized fiduciary committees honeywell corporate investments group providing standard funding investment guidance local regulations local funding rules local financial tax considerations part funding investment allocation process country nonus investment policies different country longterm investment objectives generally us pension assets honeywell international inc notes financial statementscontinued dollars millions except per share amounts fair values us nonus pension plans assets december 31 2012 2011 asset category follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts honeywell international inc notes financial statementscontinued dollars millions except per share amounts following tables summarize changes fair value level 3 assets years ended december 31 2012 2011 us pension assets december 31 2012 2011 include 1241 976 million respectively notional derivative exposure primarily related outstanding equity futures contracts nonus pension assets december 31 2012 include 55 million notional derivative exposure primarily related outstanding equity futures contracts company enters futures contracts gain exposure certain markets common stocks preferred stocks real estate investment trusts shortterm investments valued closing price reported active market individual securities traded corporate bonds mortgages assetbacked securities government securities valued either using pricing models bids provided brokers dealers quoted prices securities similar characteristics discounted cash flows include adjustments certain risks may observable credit liquidity risks certain securities held commingled funds valued using net asset values provided administrators funds investments private equity debt real estate hedge funds direct private investments valued estimated fair honeywell international inc notes financial statementscontinued dollars millions except per share amounts value based quarterly financial information received investment advisor andor general partner investments real estate properties valued quarterly basis using income approach valuation estimates periodically supplemented third party appraisals general funding policy qualified pension plans contribute amounts least sufficient satisfy regulatory funding standards 2012 2011 2010 required make contributions us pension plans however made voluntary contributions 792 1650 1000 million respectively primarily improve funded status plans contributions reflect benefits paid directly company assets 2013 expect make cash contributions approximately 150 million 113 million made january 2013 nonus defined benefit pension plans satisfy regulatory funding standards required contributions us defined benefit pension plans 2013 benefit payments including amounts paid company assets reflecting expected future service appropriate expected paid follows postretirement benefits medicare prescription drug improvement modernization act 2003 act provides subsidies employers sponsor postretirement health care plans provide prescription drug coverage least actuarially equivalent offered medicare part march 2010 enactment patient protection affordable care act including modifications made health care education reconciliation act 2010 resulted onetime noncash charge 13 million related income taxes first quarter 2010 charge results change tax treatment medicare part program assumed health care cost trend rate significant effect amounts reported onepercentagepoint change assumed health care cost trend rate would following effects honeywell international inc notes financial statementscontinued dollars millions except per share amounts benefit payments reflecting expected future service appropriate expected paid follows employee savings plans sponsor employee savings plans match form common stock savings plan contributions certain eligible employees shares issued stock match plans 24 26 24 million cost 144 138 105 million 2012 2011 2010 respectively note 24segment financial data globally manage business operations four reportable operating segments serving customers worldwide aerospace products services control sensing security technologies buildings homes industry automotive products chemicals segment information consistent management reviews businesses makes investing resource allocation decisions assesses operating performance four reportable segments follows • aerospace includes air transport regional business general aviation defense space provides products services include auxiliary power units propulsion engines environmental control systems electric power systems engine controls repair overhaul services flight safety communications navigation radar surveillance systems aircraft lighting management technical services logistic services advanced systems instruments aircraft wheels brakes • automation control solutions includes energy safety security controls heating cooling indoor air quality ventilation humidification lighting home automation advanced software applications homebuilding control optimization sensors switches control systems instruments measuring pressure air flow temperature electrical current security fire gas detection personal protection equipment access control video surveillance equipment remote patient monitoring systems automatic identification data collection process solutions provides full range automation control solutions industrial plants offering advanced software automation systems integrate control monitor complex processes many types industrial settings well equipment controls measures analyzes natural gas production transportation building solutions distribution installs distributes maintains upgrades systems keep buildings safe comfortable productive • performance materials technologies includes advanced materials fluorocarbons hydrofluoroolefins caprolactam resins ammonium sulfate fertilizer specialty films waxes additives advanced fibers customized research chemicals intermediates electronic materials chemicals uop process technology products including catalysts absorbents services petroleum refining gas processing petrochemical renewable energy industries honeywell international inc notes financial statementscontinued dollars millions except per share amounts • transportation systems includes turbochargers thermal systems brake hard parts friction materials accounting policies segments described note 1 honeywell’s senior management evaluates segment performance based segment profit segment profit measured business unit income loss taxes excluding general corporate unallocated expense income expense interest financial charges pension postretirement benefits expense stock compensation expense repositioning charges accounting changes honeywell international inc notes financial statementscontinued dollars millions except per share amounts reconciliation segment profit consolidated income continuing operations taxes follows 1 equity incomeloss affiliated companies included segment profit 2 amounts included cost products services sold selling general administrative expenses note 25geographic areasfinancial data honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 26supplemental cash flow information note 27unaudited quarterly financial information honeywell international inc notes financial statementscontinued dollars millions except per share amounts report independent registered public accounting firm board directors shareholders honeywell international inc opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position honeywell international inc subsidiaries december 31 2012 2011 results operations cash flows three years period ended december 31 2012 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2012 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting item 9a responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp florham park new jersey february 15 2013 item 9item 8 financial statements supplementary data honeywell international inc consolidated statement operations notes financial statements integral part statement honeywell international inc consolidated statement comprehensive income notes financial statements integral part statement honeywell international inc consolidated balance sheet notes financial statements integral part statement honeywell international inc consolidated statement cash flows notes financial statements integral part statement honeywell international inc consolidated statement shareowners’ equity notes financial statements integral part statement honeywell international inc notes financial statements dollars millions except per share amounts note 1 summary significant accounting policies accounting principlesthe financial statements accompanying notes prepared accordance accounting principles generally accepted united states america following description honeywell’s significant accounting policies principles consolidationthe consolidated financial statements include accounts honeywell international inc subsidiaries entities controlling interest maintained consolidation policy requires equity investments exercise significant influence control investee primary beneficiary investee’s activities accounted using equity method investments able exercise significant influence investee readily determinable fair values accounted cost method intercompany transactions balances eliminated consolidation redeemable noncontrolling interest considered temporary equity therefore reported outside permanent equity consolidated balance sheet greater initial carrying amount adjusted noncontrolling interest’s share net income loss redemption value property plant equipmentproperty plant equipment recorded cost including asset retirement obligations less accumulated depreciation financial reporting straightline method depreciation used estimated useful lives 10 50 years buildings improvements 2 16 years machinery equipment recognition fair value obligations associated retirement tangible longlived assets required legal obligation incur costs upon initial recognition liability cost capitalized part related longlived asset depreciated corresponding asset’s useful life goodwill indefinitelived intangible assetsgoodwill indefinitelived intangible assets subject impairment testing annually march 31 whenever events changes circumstances indicate carrying amount may fully recoverable testing compares carrying values fair values appropriate carrying value assets reduced fair value completed annual goodwill impairment test march 31 2014 determined impairment date intangible assets determinable livesother intangible assets determinable lives consist customer lists technology patents trademarks intangibles amortized estimated useful lives ranging 2 24 years sales recognitionproduct service sales recognized persuasive evidence arrangement exists product delivery occurred services rendered pricing fixed determinable collection reasonably assured service sales principally representing repair maintenance engineering activities aerospace automation control solutions acs segments recognized contractual period services rendered sales longterm contracts aerospace acs performance materials technologies pmt segments recorded percentageofcompletion method measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts provisions anticipated losses longterm contracts recorded full losses become evident revenues contracts multiple element arrangements recognized element earned based relative fair value element provided delivered elements value customers standalone basis amounts allocated element based objectively determined fair value sales price product service sold separately competitor prices similar products services environmentalwe accrue costs related environmental matters probable incurred liability related contaminated site amount reasonably estimated additional information see note 19 commitments contingencies honeywell international inc notes financial statementscontinued dollars millions except per share amounts asbestos related contingencies insurance recoverieswe recognize liability asbestos related contingency probable occurrence reasonably estimable connection recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable additional information see note 19 commitments contingencies aerospace sales incentiveswe provide sales incentives commercial aircraft manufacturers airlines connection selection aircraft equipment predominately wheel braking system hardware avionics auxiliary power units installation commercial aircraft incentives consist free deeply discounted products credits future purchases product upfront cash payments costs recognized period incurred cost products sold reduction sales appropriate research developmentresearch development costs companysponsored research development projects expensed incurred costs principally included cost products sold 1892 million 1804 million 1847 million 2014 2013 2012 respectively stockbased compensation plansthe principal awards issued stockbased compensation plans described note 18 stockbased compensation plans nonqualified stock options restricted stock units rsus cost awards measured grant date based fair value award value portion award ultimately expected vest recognized expense requisite service periods generally vesting period equity award included selling general administrative expense consolidated statement operations forfeitures estimated time grant recognize expense awards expected vest based historical forfeiture rates pension benefitswe recognize net actuarial gains losses excess 10 greater fair value plan assets plans’ projected benefit obligation corridor annually fourth quarter year mtm adjustment applicable quarter interim remeasurement triggered remaining components pension income expense primarily service interest costs assumed return plan assets recognized quarterly basis pension ongoing income expense foreign currency translationassets liabilities subsidiaries operating outside united states functional currency us dollars translated us dollars using yearend exchange rates sales costs expenses translated average exchange rates effect year foreign currency translation gains losses included component accumulated comprehensive income loss subsidiaries operating highly inflationary environments inventories property plant equipment including related expenses remeasured exchange rate effect date assets acquired monetary assets liabilities remeasured yearend exchange rates remeasurement adjustments subsidiaries included earnings derivative financial instrumentswe minimize risks interest foreign currency exchange rate fluctuations normal operating financing activities deemed appropriate use derivative financial instruments derivative financial instruments used manage risk used trading speculative purposes use leveraged derivative financial instruments derivative financial instruments qualify hedge accounting must designated effective hedge identified risk exposure inception contract accordingly changes fair value derivative contract must highly correlated changes fair value underlying hedged item inception hedge life hedge contract honeywell international inc notes financial statementscontinued dollars millions except per share amounts derivatives recorded balance sheet assets liabilities measured fair value derivatives designated hedges fair value assets liabilities changes fair values derivatives hedged items recorded current earnings derivatives designated cash flow hedges effective portion changes fair value derivatives recorded accumulated comprehensive income loss subsequently recognized earnings hedged items impact earnings cash flows derivative financial instruments classified consistent underlying hedged item income taxessignificant judgment required evaluating tax positions establish additional reserves income taxes despite belief tax positions fully supportable remain certain positions meet minimum recognition threshold approach evaluating certain uncertain tax positions defined authoritative guidance determines tax position likely sustained upon examination applicable taxing authority normal course business company subsidiaries examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes continually assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts give rise change estimate become known earnings per sharebasic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding dilutive potential common shares outstanding reclassificationscertain prior year amounts reclassified conform current year presentation recent accounting pronouncementschanges accounting principles generally accepted united states america us gaap established financial accounting standards board fasb form accounting standards updates asu’s fasb’s accounting standards codification company considers applicability impact asu’s asu’s listed assessed determined either applicable expected minimal impact consolidated financial position results operations may 2014 fasb issued guidance revenue contracts customers supersede current revenue recognition guidance including industryspecific guidance underlying principle entity recognize revenue depict transfer goods services customers amount entity expects entitled exchange goods services guidance provides fivestep analysis transactions determine revenue recognized major provisions include capitalization certain contract costs consideration time value money transaction price allowing estimates variable consideration recognized contingencies resolved certain circumstances guidance also requires enhanced disclosures regarding nature amount timing uncertainty revenue cash flows arising entity’s contracts customers guidance effective interim annual periods beginning december 15 2016 early adoption permitted guidance permits use either retrospective cumulative effect transition method yet selected transition method currently evaluating impact amended guidance consolidated financial position results operations related disclosures note 2 divestiture 2014 company sold friction materials business federal mogul corporation 155 million recognized pretax aftertax loss 33 million 5 million honeywell international inc notes financial statementscontinued dollars millions except per share amounts recognized 2014 sale friction materials part transportation systems business consistent company’s strategic focus portfolio differentiated global technologies following closing sale company announced realignment transportation systems business segment aerospace business segment realigned segment reporting structure company three business segments aerospace automation control solutions performance materials technologies realignment impact company’s historical consolidated financial position results operations cash flows company reported financial performance based inclusion transportation systems aerospace periods presented note 3 repositioning charges summary repositioning charges follows following table summarizes pretax distribution total net repositioning charges income statement classification following table summarizes pretax impact total net repositioning charges segment 2014 recognized repositioning charges totaling 184 million including severance costs 156 million related workforce reductions 2975 manufacturing administrative positions across segments workforce reductions primarily related cost savings actions taken connection productivity ongoing functional transformation initiatives factory transitions acs aerospace segments costeffective locations site consolidations honeywell international inc notes financial statementscontinued dollars millions except per share amounts organizational realignments businesses acs pmt segments also 38 million previously established accruals primarily severance mainly aerospace acs segment returned income 2014 due principally change scope previously announced repositioning action fewer employee severance actions caused higher attrition originally planned associated prior severance programs 2013 recognized repositioning charges totaling 231 million including severance costs 186 million related workforce reductions 3081 manufacturing administrative positions across segments workforce reductions primarily related cost savings actions taken connection productivity ongoing functional transformation initiatives achieving acquisitionrelated synergies acs segment outsourcing noncore components aerospace segment shutdown manufacturing facility pmt segment factory transitions acs segment costeffective locations also 30 million previously established accruals primarily severance acs pmt segments returned income 2013 due changes scope previously announced repositioning actions lower expected costs completing exit product line fewer employee severance actions caused higher attrition originally planned associated prior severance programs 2012 recognized repositioning charges totaling 119 million including severance costs 91 million related workforce reductions 2204 manufacturing administrative positions across segments workforce reductions primarily related planned shutdown manufacturing facility aerospace segment exit product line pmt segment cost savings actions taken connection productivity ongoing functional transformation initiatives also 66 million previously established accruals primarily severance acs aerospace pmt segments returned income 2012 due primarily fewer employee severance actions caused higher attrition originally planned associated prior severance programs changes scope previously announced repositioning actions following table summarizes status total repositioning reserves honeywell international inc notes financial statementscontinued dollars millions except per share amounts certain repositioning projects aerospace acs pmt segments 2014 2013 2012 included exit disposal activities costs related recognized future periods actual liability incurred exit disposal costs significant note 4 income expense gain sale available sale investments 221 million 195 million 2014 2013 respectively due realized gain related sale marketable equity securities aerospace common stock designated available sale obtained conjunction sale consumables solutions business july 2008 note 5 income taxes income continuing operations taxes tax expense benefit honeywell international inc notes financial statementscontinued dollars millions except per share amounts effective tax rate decreased 12 percentage points 2014 compared 2013 decrease primarily attributable lower tax expense resolution audits partially offset impact income jurisdictions higher tax rates additional reserves company’s nonus effective tax rate 2014 213 increase approximately 23 percentage points compared 2013 increase nonus effective tax rate primarily attributable additional reserves impact income jurisdictions higher tax rates partially offset tax impact dispositions effective tax rate lower us federal statutory rate 35 primarily due overall nonus earnings taxed lower rates effective tax rate increased 24 percentage points 2013 compared 2012 increase primarily attributable lower marktomarket pension expense us factors causing increase effective tax rate include higher tax expense related increase tax reserves higher state tax expense increases effective tax rate partially offset tax benefits retroactive law changes us company’s nonus effective tax rate 2013 190 increase approximately 20 percentage points compared 2012 increase nonus effective tax rate primarily attributable higher expense related retroactive tax law changes germany additional reserves various jurisdictions coupled higher earnings higher tax rate jurisdictions effective tax rate lower us federal statutory rate 35 primarily due overall nonus earnings taxed lower rates honeywell international inc notes financial statementscontinued dollars millions except per share amounts deferred tax assets liabilities tax effects temporary differences tax carryforwards give rise future income tax benefits payables follows net deferred tax assets included components current noncurrent deferred income taxes accrued liabilities within consolidated balance sheet net deferred tax asset 863 million consists 305 million related nonus operations comprised principally net deductible temporary differences net operating loss capital loss tax credit carryforwards mainly canada united kingdom maintain valuation allowance 557 million portion nonus gross deferred tax assets valuation allowance decreased 54 million 2014 increased 16 million 2013 increased 7 million 2012 amount change valuation allowance credited income tax expense 2014 10 million amounts charged income tax expense 2013 2012 49 million 18 million respectively event determine able realize net deferred tax assets future reduce amounts charge income period determination made conversely determine able realize net deferred tax assets excess carrying amounts decrease recorded valuation allowance credit income tax expense period determination made december 31 2014 net operating loss capital loss tax credit carryforwards follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts many jurisdictions impose limitations timing utilization net operating loss tax credit carryforwards instances whereby expected permanent limitation utilization net operating loss tax credit carryforward deferred tax asset amount carryforward reduced us federal income taxes provided undistributed earnings vast majority international subsidiaries intention reinvest earnings respective subsidiaries december 31 2014 honeywell provided us federal income nonus withholding taxes approximately 150 billion earnings nonus operations practicable estimate amount tax might payable earnings repatriated amount foreign tax credits would available reduce eliminate resulting us income tax liability december 31 2014 2013 2012 659 million 729 million 722 million unrecognized tax benefits recognized would recorded component income tax expense generally uncertain tax positions related tax years remain subject examination relevant tax authorities following table summarizes open tax years major jurisdiction december 31 2014 based outcome examinations result expiration statute limitations specific jurisdictions reasonably possible certain unrecognized tax benefits tax positions taken previously filed tax returns materially change recorded liabilities uncertain tax positions financial statements addition outcome honeywell international inc notes financial statementscontinued dollars millions except per share amounts examinations may impact valuation certain deferred tax assets net operating losses future periods unrecognized tax benefits examinations progress 403 million 431 million 443 million december 31 2014 2013 2012 respectively estimated interest penalties related underpayment income taxes classified component tax expense consolidated statement operations totaled 24 million 17 million 37 million years ended december 31 2014 2013 2012 respectively accrued interest penalties 325 million 301 million 284 million december 31 2014 2013 2012 respectively note 6 earnings per share details earnings per share calculations years ended december 31 2014 2013 2012 follows diluted earnings per share calculations exclude effect stock options’ assumed proceeds exceed average market price common shares period 2014 2013 2012 weighted number stock options excluded computations 47 million 22 million 125 million respectively stock options outstanding end respective periods note 7 accounts notes receivables trade receivables includes 1636 million 1609 million unbilled balances longterm contracts december 31 2014 december 31 2013 respectively amounts billed accordance terms customer contracts relate honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 8 inventories valued lifo amounted 434 million 405 million december 31 2014 2013 respectively lifo inventories valued current costs carrying values would approximately 168 million 166 million higher december 31 2014 2013 respectively note 9 property plant equipmentnet depreciation expense 667 million 670 million 660 million 2014 2013 2012 respectively note 10 goodwill intangible assetsnet change carrying amount goodwill years ended december 31 2014 2013 segment follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts intangible assets amortization expense 257 million 319 million 266 million 2014 2013 2012 respectively estimated intangible asset amortization expense next five years approximates 208 million 2015 183 million 2016 173 million 2017 157 million 2018 143 million 2019 note 11 accrued liabilities honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 12 longterm debt credit agreements schedule principal payments longterm debt follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 13 lease commitments future minimum lease payments operating leases initial remaining noncancellable lease terms excess one year follows rent expense 420 million 404 million 390 million 2014 2013 2012 respectively note 14 financial instruments fair value measures credit market riskfinancial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates commodity prices manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties derivative transactions substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value cash flows derivative financial instruments considering reasonably possible changes interest rates currency exchange rates restrict use derivative financial instruments hedging activities continually monitor creditworthiness customers grant credit terms normal course business terms conditions credit sales designed mitigate eliminate concentrations credit risk single customer sales materially dependent single customer small group customers foreign currency risk managementwe conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities transactions arising international trade primary objective preserve us dollar value foreign currency denominated cash flows earnings attempt hedge currency exposures natural offsets fullest extent possible opportunities exhausted foreign currency exchange forward option contracts third parties hedge monetary assets liabilities denominated nonfunctional currencies prior conversion us dollars assets liabilities remeasured spot exchange rates effect balance sheet date effects changes spot rates recognized earnings included income expense partially hedge forecasted sales purchases predominantly occur next twelve months denominated nonfunctional currencies currency forward contracts changes forecasted nonfunctional currency cash flows due movements exchange rates substantially offset changes fair value currency forward contracts designated hedges market value gains losses contracts recognized earnings hedged transaction recognized open foreign currency exchange forward contracts mature predominantly next twelve months december 31 2014 2013 contracts notional amounts 7291 million 7298 million respectively exchange honeywell international inc notes financial statementscontinued dollars millions except per share amounts foreign currencies principally euro us dollar canadian dollar mexican peso chinese renminbi indian rupee british pound czech koruna swiss franc interest rate risk managementwe use combination financial instruments including longterm mediumterm shortterm financing variablerate commercial paper interest rate swaps manage interest rate mix total debt portfolio related overall cost borrowing december 31 2014 2013 interest rate swap agreements designated fair value hedges effectively changed 1100 million 1700 million respectively fixed rate debt rates 400 396 respectively libor based floating rate debt interest rate swaps mature various dates 2023 fair value financial instrumentsthe fasb’s accounting guidance defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date exit price fasb’s guidance classifies inputs used measure fair value following hierarchy level 1 unadjusted quoted prices active markets identical assets liabilities level 2 unadjusted quoted prices active markets similar assets liabilities unadjusted quoted prices identical similar assets liabilities markets active inputs quoted prices observable asset liability level 3 unobservable inputs asset liability financial nonfinancial assets liabilities classified entirety based lowest level input significant fair value measurement following table sets forth company’s financial assets liabilities accounted fair value recurring basis december 31 2014 2013 foreign currency exchange contracts interest rate swap agreements valued using broker quotations market transactions either listed overthecounter markets derivative instruments classified within level 2 company holds investments marketable equity securities designated available sale valued using quoted market prices investments classified within level 1 company also holds investments commercial paper certificates deposits time deposits designated available sale valued using market transactions overthecounter markets investments classified within level 2 carrying value cash equivalents trade accounts notes receivables payables commercial paper shortterm borrowings contained consolidated balance sheet honeywell international inc notes financial statementscontinued dollars millions except per share amounts approximates fair value following table sets forth company’s financial assets liabilities carried fair value company determined fair value longterm receivables discounting based upon terms receivable counterparty details including credit quality fair value receivables considered level 2 company determined fair value longterm debt related current maturities utilizing transactions listed markets identical similar liabilities fair value longterm debt related current maturities considered level 2 well enter transactions subject arrangements designed provide netting offsetting obligations event insolvency default counterparty however elected offset multiple contracts single counterparty therefore fair value derivative instruments loss position offset fair value derivative instruments gain position interest rate swap agreements designated hedge relationships gains losses derivative recognized interest financial charges offsetting gains losses underlying debt hedged gains interest rate swap agreements recognized earnings 38 million year ended december 31 2014 losses interest rate swap agreements recognized earnings 91 million year ended 2013 gains losses fully offset losses gains underlying debt hedged also economically hedge exposure changes foreign exchange rates principally forward contracts markedtomarket resulting gains losses recognized earnings offsetting gains losses nonfunctional currency denominated monetary assets liabilities hedged recognized 181 million expense 162 million income expense years ended december 31 2014 2013 respectively see note 4 income expense details net impact economic foreign currency hedges note 15 liabilities honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 16 capital stock authorized issue 2000000000 shares common stock par value 1 common shareowners entitled receive dividends may declared board entitled one vote per share entitled event liquidation share ratably assets honeywell available distribution common shareowners common shareowners preemptive conversion rights shares common stock issued outstanding held treasury liable calls assessments restrictions us relative dividends repurchase redemption common stock december 2013 board directors authorized repurchase 5 billion honeywell common stock 41 billion 5 billion remained available december 31 2014 december 31 2013 additional share repurchases respectively purchased approximately 100 million 135 million shares common stock 2014 2013 924 million 1073 million respectively authorized issue 40000000 shares preferred stock without par value determine number shares series rights preferences limitations series december 31 2014 preferred stock outstanding note 17 accumulated comprehensive income loss total accumulated comprehensive income loss included consolidated statement shareowners’ equity comprehensive income loss attributable noncontrolling interest consisted predominantly net income changes accumulated comprehensive income loss follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts components accumulated comprehensive income loss changes accumulated comprehensive income component honeywell international inc notes financial statementscontinued dollars millions except per share amounts reclassifications accumulated comprehensive income note 18 stockbased compensation plans terms 2011 stock incentive plan honeywell international inc affiliates plan 19752482 shares honeywell common stock available future grants december 31 2014 additionally 2006 stock plan nonemployee directors honeywell international inc directors plan 107995 shares honeywell common stock available future grants december 31 2014 stock optionsthe exercise price term conditions applicable option granted stock plans generally determined management development compensation committee board exercise price stock options set grant date may less fair market value per share stock date fair value recognized expense employee’s requisite service period generally vesting period award options generally vest fouryear period expire ten years honeywell international inc notes financial statementscontinued dollars millions except per share amounts fair value option award estimated date grant using blackscholes optionpricing model expected volatility based implied volatilities traded options common stock historical volatility common stock used monte carlo simulation model derive expected term represents estimate time options expected remain outstanding model uses historical data estimate option exercise activity postvest termination behavior riskfree rate periods within contractual life option based us treasury yield curve effect time grant compensation cost pretax basis related stock options recognized selling general administrative expenses 2014 2013 2012 85 million 70 million 65 million respectively associated future income tax benefit recognized 2014 2013 2012 31 million 24 million 23 million respectively following table sets forth fair value per share information including related weightedaverage assumptions used determine compensation cost following table summarizes information stock option activity three years ended december 31 2014 1 represents sum vested options 160 million expected vest options 120 million expected vest options derived applying prevesting forfeiture rate assumption total outstanding unvested options 280 million honeywell international inc notes financial statementscontinued dollars millions except per share amounts following table summarizes information stock options outstanding exercisable december 31 2014 15594410 19468017 options exercisable weighted average exercise prices 4576 4364 december 31 2013 2012 respectively following table summarizes financial statement impact stock options exercised 1 represents amount stock price exceeded exercise price options date exercise december 31 2014 125 million total unrecognized compensation cost related nonvested stock option awards expected recognized weightedaverage period 245 years total fair value options vested 2014 2013 2012 72 million 67 million 63 million respectively restricted stock unitsrestricted stock unit rsu awards entitle holder receive one share common stock unit units vest rsus issued certain key employees directors fair market value date grant compensation rsus typically become fully vested periods ranging three seven years payable honeywell common stock upon vesting honeywell international inc notes financial statementscontinued dollars millions except per share amounts following table summarizes information rsu activity three years ended december 31 2014 december 31 2014 approximately 195 million total unrecognized compensation cost related nonvested rsus granted stock plans expected recognized weightedaverage period 352 years following table summarizes information income statement impact rsus three years ended december 31 2014 note 19 commitments contingencies environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous substances accordance environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing hazardous substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually jointly potentially responsible parties determine feasibility various remedial techniques policy record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts honeywell international inc notes financial statementscontinued dollars millions except per share amounts progress additional technical regulatory legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing remedial investigations feasibility studies timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects remedial techniques utilized agreements parties following table summarizes information concerning recorded liabilities environmental costs environmental liabilities included following balance sheet accounts currently possess sufficient information reasonably estimate amounts environmental liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined although could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position onondaga lake syracuse nywe implementing combined dredgingcapping remedy onondaga lake pursuant consent decree approved united states district court northern district new york january 2007 accrued estimated cost remediating onondaga lake based currently available information analysis performed engineering consultants honeywell also conducting remedial investigations activities sites syracuse recorded reserves investigations activities appropriate consistent accounting policy described honeywell entered cooperative agreement potential natural resource trustees assess alleged natural resource damages relating site possible predict outcome duration assessment amounts responsibility damages honeywell international inc notes financial statementscontinued dollars millions except per share amounts asbestos matters honeywell defendant asbestos related personal injury actions related two predecessor companies • north american refractories company narco sold 1986 produced refractory products bricks cement used high temperature applications claimants consist largely individuals allege exposure narco asbestoscontaining refractory products occupational setting • bendix friction materials bendix business sold 2014 manufactured automotive brake parts contained chrysotile asbestos encapsulated form claimants consist largely individuals allege exposure asbestos brakes either performing vicinity individuals performed brake replacements following tables summarize information concerning narco bendix asbestos related balances asbestos related liabilities insurance recoveries asbestos related liabilities honeywell international inc notes financial statementscontinued dollars millions except per share amounts narco bendix asbestos related balances included following balance sheet accounts narco productsin connection narco’s emergence bankruptcy april 30 2013 federally authorized 524g trust narco trust established evaluation resolution existing future narco asbestos claims honeywell narco protected permanent channeling injunction barring present future individual actions state federal courts requiring asbestos related claims based exposure narco products made narco trust narco trust reviews submitted claims determines award amounts accordance established trust distribution procedures approved bankruptcy court set forth criteria claimants must meet qualify compensation including among things exposure medical criteria determine award amount addition honeywell provided continues provide input design control procedures processing narco claims ongoing audit rights review monitor claims processors’ adherence established requirements trust distribution procedures honeywell obligated fund narco asbestos claims submitted narco trust qualify payment trust distribution procedures annual contribution claims subject annual caps 140 million years 2015 2018 145 million year thereafter however initial 100 million claims processed narco trust initial claims amount count annual cap unused portion initial claims amount roll subsequent years fully utilized december 31 2014 honeywell made payments narco trust annual contribution claims honeywell also responsible payments due claimants pursuant settlement agreements reached pendency narco bankruptcy proceedings provide right submit claims narco trust subject qualification terms settlement agreements trust distribution procedures criteria preestablished unliquidated claims amounts estimated 150 million expected paid initial years trust operations 3 million paid 2014 payments subject annual cap described consolidated financial statements reflect estimated liability preestablished unliquidated claims 147 million unsettled claims pending time narco filed bankruptcy protection 39 million estimated value future narco asbestos claims expected asserted narco trust 2018 743 million absence actual trust experience base estimate honeywell projected probable value asbestos related future liabilities including trust claim handling costs based commonly accepted methodology used numerous bankruptcy courts addressing 524g trusts critical assumptions underlying methodology include claims filing rates disease criteria payment values contained trust distribution procedures estimated approval rates claims submitted narco trust epidemiological studies estimating disease instances projection resulted range estimated liability 743 million 961 million believe amount within range better estimate amount accordingly recorded minimum amount range light uncertainties inherent making longterm honeywell international inc notes financial statementscontinued dollars millions except per share amounts projections connection recent implementation trust distribution procedures narco trust well stay narco asbestos claims remained place throughout narco’s chapter 11 case believe reasonable basis estimating narco asbestos claims beyond 2018 insurance receivable corresponding estimated liability pending future narco asbestos claims reflects coverage reimburses honeywell portions narcorelated indemnity defense costs provided large number insurance policies written dozens insurance companies domestic insurance market london excess market conduct analyses estimate probable amount insurance recoverable asbestos claims substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries made judgments concerning insurance coverage believe reasonable consistent historical dealings knowledge pertinent solvency issues surrounding insurers projecting future events subject many uncertainties could cause narcorelated asbestos liabilities assets higher lower projected recorded given uncertainties review estimates periodically update based experience relevant factors similarly reevaluate projections concerning probable insurance recoveries light changes projected liability developments may impact insurance recoveries friction productsthe following tables present information regarding bendix related asbestos claims activity honeywell experienced average resolution values per claim excluding legal costs follows possible predict whether resolution values bendixrelated asbestos claims increase decrease stabilize future honeywell international inc notes financial statementscontinued dollars millions except per share amounts consolidated financial statements reflect estimated liability resolution pending claims actually filed financial statement date future bendixrelated asbestos claims valued bendix pending future claims using average resolution values previous five years update resolution values used estimate cost bendix pending future claims fourth quarter year liability future claims represents estimated value future asbestos related bodily injury claims expected asserted bendix next five years estimated cost future bendixrelated asbestos claims based historic claims filing experience dismissal rates disease classifications resolution values tort system previous five years light uncertainties inherent making longterm projections well certain factors unique friction product asbestos claims believe reasonable basis estimating asbestos claims beyond next five years methodology used estimate liability future claims similar used estimate liability future narcorelated asbestos claims insurance receivable corresponding liability settlement pending future bendix asbestos claims reflects coverage provided large number insurance policies written dozens insurance companies domestic insurance market london excess market based ongoing analysis probable insurance recovery insurance receivables recorded financial statements simultaneous recording estimated liability underlying asbestos claims determination based analysis underlying insurance policies historical experience insurers ongoing review solvency insurers judicial determinations relevant insurance programs consideration impacts settlements reached insurers honeywell believes sufficient insurance coverage reserves cover pending bendixrelated asbestos claims bendixrelated asbestos claims estimated filed within next five years although impossible predict outcome either pending future bendixrelated asbestos claims believe claims would material adverse effect consolidated financial position light insurance coverage prior experience resolving claims rate types claims filed average resolution value claims period time claim settlements paid collectively variable claims factors substantially change honeywell would expect future bendixrelated asbestos claims material adverse effect results operations operating cash flows fiscal year assurances given however variable claims factors change matters subject number lawsuits investigations disputes involve substantial amounts claimed arising conduct business including matters relating commercial transactions government contracts product liability prior acquisitions divestitures employee benefit plans intellectual property environmental health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes matters well potential ranges possible losses taking consideration insurance recoveries based careful analysis matter assistance outside legal counsel applicable experts included matters following honeywell v united auto workers uaw et alin july 2011 honeywell filed action federal court district new jersey uaw former employees retired series master collective bargaining agreements mcbas honeywell uaw seeking declaratory judgment certain express limitations obligation contribute toward healthcare coverage retirees caps set forth mcbas may implemented effective january 1 2012 uaw certain retiree defendants filed mirror suit eastern honeywell international inc notes financial statementscontinued dollars millions except per share amounts district michigan alleging mcbas provide caps company’s liability healthcare coverage new jersey action dismissed honeywell subsequently answered uaw’s complaint michigan asserted counterclaims fraudulent inducement negligent misrepresentation breach implied warranty uaw filed motion dismiss counterclaims court dismissed honeywell’s fraudulent inducement negligent misrepresentation claims let stand claim breach implied warranty second quarter 2014 parties agreed stay proceedings respect retirees retired initial inclusions caps 2003 mcba supreme court decided mg polymers usa llc v tackett case tackett case supreme court resolve split us court appeals sixth circuit one hand majority us court appeals hand whether retiree health insurance benefits provided collective bargaining agreements carry inference vested guaranteed continue life agreement silent duration ruling january 26 2015 supreme court held inference vesting appropriate substantially bolstering honeywell’s position litigation honeywell confident caps upheld liability healthcare coverage premiums respect putative class limited negotiated expressly set forth applicable mcbas event adverse ruling however honeywell’s postretirement benefits pre2003 retirees would increase approximately 180 million reflecting estimated value caps december 2013 uaw certain plaintiffs filed motion partial summary judgment respect retirees retired initial inclusion caps 2003 mcba uaw sought ruling 2003 mcba limit honeywell’s obligation contribute healthcare coverage post2003 retirees motion remains pending honeywell confident court find 2003 mcba fact limit honeywell’s retiree healthcare obligation post2003 retirees event adverse ruling however honeywell’s postretirement benefits post 2003 retirees would increase approximately 120 million reflecting estimated value caps joint strike fighter investigationin 2013 company received subpoenas department justice requesting information relating primarily parts manufactured united kingdom china used fighter jet company cooperating fully investigation believe honeywell complied relevant us laws regulations regarding manufacture sensors possible predict outcome investigation action may result given uncertainty inherent litigation investigations including specific matters referenced believe possible develop estimates reasonably possible loss excess current accruals matters specifically set forth considering past experience existing accruals expect outcome matters either individually aggregate material adverse effect consolidated financial position contingencies resolved long periods time potential liabilities subject change due new developments changes settlement strategy impact evidentiary requirements could cause us pay damage awards settlements become subject equitable remedies could material adverse effect results operations operating cash flows periods recognized paid honeywell international inc notes financial statementscontinued dollars millions except per share amounts warranties guarantees normal course business issue product warranties product performance guarantees accrue estimated cost product warranties performance guarantees based contract terms historical experience time sale adjustments initial obligations warranties guarantees made changes obligations become reasonably estimable following table summarizes information concerning recorded obligations product warranties product performance guarantees product warranties product performance guarantees included following balance sheet accounts honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 20 pension postretirement benefits sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees pension benefits substantially us employees provided noncontributory qualified nonqualified defined benefit plans nonunion hourly salaried employees joining honeywell first time december 31 2012 eligible participate honeywell’s us defined benefit pension plans also sponsor defined benefit pension plans cover nonus employees us citizens certain jurisdictions principally uk netherlands germany canada pension plans outside us material company either individually aggregate also sponsor postretirement benefit plans provide health care benefits life insurance coverage mainly us eligible retirees less 1 honeywell’s us employees eligible retiree medical subsidy company subsidy limited fixeddollar amount addition 75 honeywell’s current retirees either company subsidy fixeddollar subsidy amount significantly limits exposure impact future health care cost increases retiree medical life insurance plans funded claims expenses paid operating cash flow honeywell international inc notes financial statementscontinued dollars millions except per share amounts following tables summarize balance sheet impact including benefit obligations assets funded status associated significant pension postretirement benefit plans 1 included assets consolidated balance sheet 2 included accrued liabilities consolidated balance sheet 3 included liabilitiesnoncurrent consolidated balance sheet honeywell international inc notes financial statementscontinued dollars millions except per share amounts 1 elimination retiree medical life insurance coverage certain retirees union employees amount recognized part net postretirement benefit cost expected future lifetime remaining participants plan 2 excludes nonus plans 49 million 53 million 2014 2013 respectively amounts recognized accumulated comprehensive income loss associated significant pension postretirement benefit plans december 31 2014 2013 follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts components net periodic benefit income cost amounts recognized comprehensive income loss significant pension postretirement benefit plans include following components estimated prior service cost credit pension benefits amortized accumulated comprehensive income loss net periodic benefit income cost 2015 expected 23 million 3 million us nonus pension plans respectively 1 curtailment gain 2013 related elimination retiree medical coverage union group connection new collective bargaining agreement honeywell international inc notes financial statementscontinued dollars millions except per share amounts estimated net loss prior service credit postretirement benefits amortized accumulated comprehensive income loss net periodic benefit cost 2015 expected 30 million major actuarial assumptions used determining benefit obligations net periodic benefit income cost significant benefit plans presented following table weighted averages discount rate us pension postretirement benefits plans reflects current rate associated liabilities could settled measurement date december 31 determine discount rates us pension postretirement benefit plans use modeling process involves matching expected cash outflows benefit plans yield curve constructed portfolio high quality fixedincome debt instruments use average yield hypothetical portfolio discount rate benchmark discount rate used determine postretirement benefit obligation lower principally due shorter expected duration postretirement plan obligations compared pension plan obligations honeywell international inc notes financial statementscontinued dollars millions except per share amounts expected rate return us plan assets 775 longterm rate based historical plan asset returns varying longterm periods combined current market conditions broad asset mix considerations review expected rate return annual basis revise appropriate nonus benefit plans actuarial assumptions reflect economic market factors relevant country pension benefits included aggregate data tables amounts applicable pension plans accumulated benefit obligations exceeding fair value plan assets amounts related plans follows accumulated benefit obligation us defined benefit pension plans 172 billion 157 billion nonus defined benefit plans 55 billion 53 billion december 31 2014 2013 respectively asset investment strategy us pension plans focuses maintaining diversified portfolio using various asset classes order achieve longterm investment objectives risk adjusted basis actual invested positions various securities change time based short longer term investment opportunities achieve objectives established longterm target allocations follows 6070 equity securities 1020 fixed income securities cash 515 real estate investments 1020 types investments equity securities include publiclytraded stock companies located inside outside united states fixed income securities include corporate bonds companies diversified industries mortgagebacked securities us treasuries real estate investments include direct investments commercial properties investments real estate funds types investments include investments private equity hedge funds follow several different strategies review assets regular basis ensure within targeted asset allocation ranges necessary asset balances adjusted back within target allocations nonus pension assets typically managed decentralized fiduciary committees honeywell corporate investments group providing standard funding investment guidance local regulations local funding rules local financial tax considerations part funding investment allocation process country nonus investment policies different country longterm investment objectives generally us pension assets honeywell international inc notes financial statementscontinued dollars millions except per share amounts fair values us nonus pension plans assets asset category follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts honeywell international inc notes financial statementscontinued dollars millions except per share amounts following tables summarize changes fair value level 3 assets company enters futures contracts gain exposure certain markets sufficient cash equivalents held pension plans cover notional value futures contracts december 31 2014 2013 us plans contracts notional amounts 2354 million 1938 million respectively december 31 2014 2013 nonus plans contracts notional amounts 65 million 61 million respectively us nonus pension plans notional derivative exposure primarily related outstanding equity futures contracts common stocks preferred stocks real estate investment trusts shortterm investments valued closing price reported active market individual securities traded corporate bonds mortgages assetbacked securities government securities valued either using pricing models bids provided brokers dealers quoted prices securities similar characteristics discounted cash flows include adjustments certain risks may observable credit liquidity risks certain securities held commingled funds valued using net asset values provided administrators funds investments private honeywell international inc notes financial statementscontinued dollars millions except per share amounts equity debt real estate hedge funds direct private investments valued estimated fair value based quarterly financial information received investment advisor andor general partner investments real estate properties valued quarterly basis using income approach valuation estimates periodically supplemented third party appraisals general funding policy qualified defined benefit pension plans contribute amounts least sufficient satisfy regulatory funding standards 2014 2013 2012 required make contributions us pension plans contributions made 2014 2013 2012 made voluntary contributions 792 million us pension plans primarily improve funded status required make contributions us pension plans 2015 2014 contributions 160 million made nonus pension plans satisfy regulatory funding requirements 2015 expect make contributions cash andor marketable securities approximately 140 million nonus pension plans satisfy regulatory funding standards contributions us nonus pension plans reflect benefits paid directly company assets benefit payments including amounts paid company assets reflecting expected future service appropriate expected paid follows postretirement benefits assumed health care cost trend rate significant effect amounts reported onepercentagepoint change assumed health care cost trend rate would following effects benefit payments reflecting expected future service appropriate expected paid follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 21 segment financial data globally manage business operations three reportable operating segments segment information consistent management reviews businesses makes investing resource allocation decisions assesses operating performance honeywell’s senior management evaluates segment performance based segment profit segment profit measured business unit income loss taxes excluding general corporate unallocated expense income expense interest financial charges pension postretirement benefits expense stock compensation expense repositioning charges accounting changes april 2014 company announced realignment honeywell process solutions business automation control solutions performance materials technologies company reported financial performance based inclusion honeywell process solutions performance materials technologies periods presented july 2014 following closing sale friction materials business company announced realignment transportation systems business segment aerospace business segment realigned segment reporting structure company three business segments aerospace automation control solutions performance materials technologies company reported financial performance based inclusion transportation systems aerospace periods presented realignments impact company’s historical consolidated financial position results operations cash flows honeywell international inc notes financial statementscontinued dollars millions except per share amounts reconciliation segment profit consolidated income continuing operations taxes follows 1 equity income loss affiliated companies included segment profit 2 amounts included cost products services sold selling general administrative expenses note 22 geographic areasfinancial data honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 23 supplemental cash flow information note 24 unaudited quarterly financial information report independent registered public accounting firm board directors shareholders honeywell international inc opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position honeywell international inc subsidiaries december 31 2014 2013 results operations cash flows three years period ended december 31 2014 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2014 based criteria established internal controlintegrated framework 2013 issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting item 9a responsibility express opinions financial statements company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp florham park new jersey february 13 2015 item 9item 8 financial statements supplementary data companys consolidated financial statements together report thereon price waterhouse llp dated january 31 1997 appearing pages 26 38 companys 1996 annual report shareowners incorporated herein reference exception aforementioned information incorporated reference items 1 3 5 6 7 1996 annual report shareowners deemed filed part form 10k annual report item 9item 8 financial statements supplementary data honeywell international inc consolidated statement operations notes financial statements integral part statement honeywell international inc consolidated balance sheet notes financial statements integral part statement honeywell international inc consolidated statement cash flows notes financial statements integral part statement honeywell international inc consolidated statement shareowners equity notes financial statements integral part statement honeywell international inc notes financial statements dollars millions except per share amounts note 1 summary significant accounting policies honeywell international inc diversified technology manufacturing company serving customers worldwide aerospace products services control technologies buildings homes industry automotive products specialty chemicals fibers plastics electronic advanced materials described note 2 honeywell international inc formed upon merger alliedsignal inc honeywell inc 1999 following description significant accounting policies honeywell international inc principles consolidation consolidated financial statements include accounts honeywell international inc subsidiaries controlling interest maintained intercompany transactions balances eliminated consolidation inventories valued lower cost market using firstin firstout average cost method lastin firstout lifo method certain qualifying domestic inventories investments affiliates significant influence controlling interest accounted using equity method accounting investments carried market value readily determinable cost equity investments periodically reviewed determine declines fair value cost basis otherthantemporary significant sustained decreases quoted market prices series historic projected operating losses investees considered review decline fair value determined otherthantemporary impairment loss recorded investment written new cost basis property plant equipment property plant equipment recorded cost less accumulated depreciation financial reporting straight line method depreciation used estimated useful lives 10 40 years buildings improvements 3 15 years machinery equipment goodwill represents excess acquisition costs fair value net assets businesses acquired amortized straightline basis appropriate periods 40 years accumulated amortization 1148 974 million december 31 2001 2000 respectively intangible assets intangible assets include investments longterm contracts patents trademarks customer lists items amortized straightline basis expected period benefited future cash inflows 25 years accumulated amortization 548 498 million december 31 2001 2000 respectively longlived assets periodically evaluate recoverability carrying amount longlived assets including property plant equipment goodwill intangible assets whenever events changes circumstances indicate carrying amount asset may fully recoverable impairment assessed undiscounted expected future cash flows derived asset less carrying amount impairment losses measured amount carrying value asset exceeds fair value recognized operating earnings also continually evaluate estimated useful lives longlived assets periodically revise estimates based current events sales recognition product service sales recognized agreement sale exists product delivery occurred services rendered pricing fixed determinable collection reasonably assured sales longterm contracts aerospace automation control solutions segments recorded percentageofcompletion method measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts provisions anticipated losses longterm contracts recorded full losses become evident honeywell international inc notes financial statements continued dollars millions except per share amounts environmental expenditures environmental expenditures relate current operations expensed capitalized appropriate expenditures relate existing condition caused past operations provide future benefits expensed incurred liabilities recorded environmental assessments made remedial efforts probable costs reasonably estimated timing accruals generally later completion feasibility studies liabilities environmental costs recorded accrued liabilities december 31 2001 81 375 million respectively december 31 2000 171 215 million respectively foreign currency translation assets liabilities subsidiaries operating outside united states functional currency us dollars translated us dollars using yearend exchange rates sales costs expenses translated average exchange rates effective year foreign currency translation gains losses included component accumulated nonowner changes subsidiaries operating highly inflationary environments inventories property plant equipment including related expenses remeasured exchange rate effect date assets acquired monetary assets liabilities remeasured yearend exchange rates remeasurement adjustments operations included earnings derivative instruments hedging activities statement financial accounting standards 133 accounting derivative instruments hedging activities amended sfas 133 effective january 1 2001 sfas 133 derivatives recorded balance sheet assets liabilities measured fair value derivatives designated hedges fair value assets liabilities changes fair values derivatives hedged items recorded current earnings derivatives designated cash flow hedges effective portion changes fair value derivatives recorded accumulated nonowner changes subsequently recognized earnings hedged items impact income changes fair value derivatives designated hedges ineffective portion cash flow hedges recorded current earnings adoption sfas 133 january 1 2001 resulted cumulative effect adjustment 1 million income included income expense accounting change impacts pattern timing noncash accounting recognition derivatives significantly impact 2001 operating results transfers financial instruments sales transfers securitization financial instruments accounted statement financial accounting standards 140 accounting transfers servicing financial assets extinguishments liabilities sell interests designated pools trade accounts receivables third party receivables removed consolidated balance sheet time sold value assigned undivided interests retained trade receivables sold based relative fair values interests retained sold carrying value retained interests approximates fair value due shortterm nature receivable collection period income taxes deferred tax liabilities assets reflect temporary differences amounts assets liabilities financial tax reporting amounts adjusted appropriate reflect changes tax rates expected effect temporary differences reverse valuation allowance established deferred tax asset realization likely research development research development costs company sponsored research development projects expensed incurred costs classified part cost goods sold 832 818 909 million 2001 2000 1999 respectively earnings per share basic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number honeywell international inc notes financial statements continued dollars millions except per share amounts common shares outstanding dilutive potential common shares outstanding earnings per share data report reflect earnings per share assuming dilution unless otherwise indicated cash equivalents cash equivalents includes cash hand deposit highly liquid temporary cash investments original maturity three months less use estimates preparation consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts financial statements related disclosures accompanying notes actual results could differ estimates assumptions periodically reviewed effects revisions reflected consolidated financial statements period determined necessary recent accounting pronouncements august 2001 financial accounting standards board fasb issued statement financial accounting standards 144 accounting impairment disposal longlived assets sfas 144 provisions effective us january 1 2002 sfas 144 provides guidance accounting reporting impairment disposal longlived assets adoption provisions sfas 144 material effect consolidated results operations financial position june 2001 fasb issued statement financial accounting standards 143 accounting asset retirement obligations sfas 143 provisions effective us january 1 2003 sfas 143 requires entities recognize fair value liability tangible longlived asset retirement obligations period incurred reasonable estimate fair value made currently evaluating effect adoption provisions sfas 143 consolidated results operations financial position june 2001 fasb issued statement financial accounting standards 141 business combinations sfas 141 statement financial accounting standards 142 goodwill intangible assets sfas 142 sfas 141 requires business combinations initiated june 30 2001 accounted using purchase method certain acquired intangible assets business combination recognized assets apart goodwill adopted sfas 141 2001 material impact consolidated results operations financial condition sfas 142 requires goodwill certain intangible assets indefinite lives longer amortized income instead replaced periodic testing impairment intangible assets determined definite lives continue amortized useful lives amortization nonamortization provisions sfas 142 applied goodwill intangible assets acquired june 30 2001 respect goodwill intangible assets acquired prior july 1 2001 required adopt sfas 142 effective january 1 2002 currently evaluating effect application goodwill impairment provisions sfas 142 consolidated results operations financial condition 2001 amortization expense goodwill intangible assets indefinite lives approximately 196 million tax 024 per share reclassifications certain prior year amounts reclassified conform current year presentation note 2 alliedsignal honeywell merger december 1 1999 alliedsignal inc alliedsignal honeywell inc former honeywell completed merger agreement plan merger agreement dated june 4 1999 merger agreement whollyowned subsidiary alliedsignal merged former honeywell result merger former honeywell became whollyowned honeywell international inc notes financial statements continued dollars millions except per share amounts subsidiary alliedsignal effective time merger alliedsignal renamed honeywell international inc honeywell former honeywell shareowners received 1875 shares honeywell common stock share former honeywell common stock cash paid lieu fractional shares result former honeywell shareowners received approximately 241 million shares honeywell common stock valued approximately 15 billion merger date addition outstanding former honeywell employee stock options converted exchange factor options purchase approximately 10 million shares honeywell common stock merger qualified taxfree reorganization accounted poolingofinterests accounting method accordingly honeywells consolidated financial statements restated periods prior merger include results operations financial position cash flows former honeywell though always part honeywell material transactions alliedsignal former honeywell prior merger material adjustments conform accounting policies combining companies net sales net income previously reported separate companies combined amounts presented accompanying consolidated statement operations follows described note 5 fees expenses related merger costs integrate combined companies expensed fourth quarter 1999 note 3 acquisitions addition poolingofinterests transaction discussed note 2 acquired businesses aggregate cost 122 2646 1314 million 2001 2000 1999 respectively following table presents information significant acquisitions significant acquisitions 2001 footnotes next page honeywell international inc notes financial statements continued dollars millions except per share amounts footnotes previous page 1 pittway corporation designs manufactures distributes security fire systems homes buildings 2 johnson matthey electronics supplies wafer fabrication materials interconnect products electronics telecommunications industries 3 tristar aerospace co distributes fasteners fastening systems related hardware provides customized inventory management services original equipment manufacturers aircraft components commercial airlines aircraft maintenance repair overhaul facilities acquisitions accounted purchase method accounting accordingly assets liabilities acquired businesses recorded estimated fair values dates acquisition excess purchase price estimated fair values net assets acquired 42 1678 678 million 2001 2000 1999 respectively recorded goodwill amortized estimated useful lives connection acquisitions amounts recorded transaction costs integrating acquired businesses honeywell material results operations acquired businesses included consolidated results honeywell respective acquisition dates pro forma results 2001 2000 1999 assuming acquisitions made beginning year would materially different reported results note 4 honeywellgeneral electric merger october 22 2000 honeywell general electric company ge entered agreement plan merger agreement providing business combination honeywell ge july 3 2001 european commission issued decision prohibiting proposed merger approval european commission condition completion merger october 2 2001 honeywell ge terminated merger agreement mutual consent released claims arising merger agreement note 5 merger repositioning charges 2001 recognized repositioning charge 1016 million cost actions designed reduce cost structure improve future profitability actions consisted announced global workforce reductions approximately 20000 manufacturing administrative positions across reportable segments approximately 15000 positions eliminated december 31 2001 actions expected completed september 30 2002 repositioning charge also included asset impairments exit costs related plant closures rationalization manufacturing capacity infrastructure principally specialty materials engines systems services transportation power systems businesses including shutdown turbogenerator product line components charge included severance costs 727 million asset impairments 194 million exit costs 95 million consisting contract cancellations penalties including lease terminations negotiated subject reasonable estimation also 119 million previously established accruals mainly severance returned income 2001 due principally higher expected voluntary employee attrition resulting reduced severance liabilities principally aerospace automation control solutions reportable segments 2000 recognized repositioning charge 239 million related announced global workforce reductions across reportable segments costs close chip package manufacturing plant related workforce reductions asset impairments principally associated completion previously announced plant shutdowns specialty materials honeywell international inc notes financial statements continued dollars millions except per share amounts reportable segment components repositioning charge included severance costs 151 million asset impairments 88 million announced workforce reductions consisted approximately 2800 manufacturing administrative positions complete asset impairments principally related manufacturing plant equipment held sale capable taken service actively marketed period impairment also 46 million previously established accruals principally severance returned income 2000 due higher expected voluntary employee attrition resulting reduced severance liabilities principally automation control solutions aerospace reportable segments also recognized repositioning charge 99 million equity income loss affiliated companies costs close affiliates chemical manufacturing operations components repositioning charge included severance costs 6 million asset impairments 53 million environmental exit costs period expenses 40 million 1999 upon completion merger alliedsignal former honeywell recognized repositioning charge 642 million cost actions designed improve combined competitiveness productivity future profitability mergerrelated actions included elimination redundant corporate offices functional administrative overhead elimination redundant excess facilities workforce combined aerospace businesses adoption six sigma productivity initiatives former honeywell businesses transition global shared services model components repositioning charge included severance costs 342 million asset impairments 108 million exit costs 57 million mergerrelated transaction period expenses 135 million global workforce reductions consisted approximately 6500 administrative manufacturing positions complete asset impairments principally related elimination redundant excess corporate aerospace facilities equipment exit costs related lease terminations contract cancellation losses negotiated subject reasonable estimation yearend mergerrelated transaction period expenses consisted investment banking legal fees former honeywell deferred compensation vested upon change control direct mergerrelated expenses incurred period merger completed mergerrelated actions complete 1999 also recognized repositioning charge 321 million cost actions designed reposition principally alliedsignal businesses improved productivity future profitability repositioning actions included organizational realignment aerospace businesses strengthen market focus simplify business structure elimination unprofitable product line closing wax refinery carbon materials plant rationalization manufacturing capacity infrastructure specialty materials reportable segment reduction infrastructure garrett engine boosting systems business elimination two manufacturing facilities electronic materials business plant closure outsourcing activity automotive consumer products group business related general workforce reductions alliedsignal businesses automation control solutions reportable segment components repositioning charge included severance costs 140 million asset impairments 149 million exit costs 32 million global workforce reductions consisted approximately 5100 manufacturing administrative sales positions complete asset impairments principally related manufacturing plant equipment held sale capable taken service actively marketed period impairment exit costs principally consisted environmental exit costs associated chemical plant shutdowns repositioning actions excluding environmental remediation complete honeywell international inc notes financial statements continued dollars millions except per share amounts following table summarizes status total merger repositioning costs 2001 recognized charges consisting settlement litton systems inc litigation 440 million see note 22 discussion probable reasonably estimable legal environmental claims 408 million see note 22 discussion customer claims settlements contract liabilities 310 million writeoffs principally related asset impairments including receivables inventories 335 million 2001 adopted plan dispose friction materials business held discussions potential acquiror business friction materials business designated held disposal recognized impairment charge 145 million related writedown property plant equipment goodwill identifiable intangible assets fair value less costs sell recognized charges 112 million related temporary decline value equity investment equity investees loss contract 100 million charge writeoff investments including inventory related regional jet engine contract cancellation also recognized 42 million transaction expenses related proposed merger ge redeemed 200 million 5 34 dealer remarketable securities due 2011 resulting loss 6 million 2000 identified certain business units manufacturing facilities noncore business strategy result assessment implemented cost reduction initiatives conducted discussions potential acquirors businesses assets part process evaluated businesses assets possible impairment result analysis recognized impairment charges 2000 245 165 million principally related writedown property plant equipment goodwill identifiable intangible assets friction materials business chemical manufacturing facility respectively recognized charges consisting probable reasonably estimable environmental liabilities 87 million contract claims mergerrelated period expenses contingencies writeoffs tangible assets removed service including inventory totaling 140 million addition recognized charge 37 million costs principally related equity investees customer claims 1999 recognized charges consisting losses aerospace engine maintenance contracts contract cancellation penalty totaling 45 million customer employee claims 69 million contract settlements contingent liabilities 18 million writeoffs principally related tangible intangible assets removed service including inventory 152 million also recognized 36 million charge resulting temporary decline value equity investment due significant deterioration market conditions 4 million charge related equity investees severance action involving approximately 220 employees honeywell international inc notes financial statements continued dollars millions except per share amounts following table summarizes pretax impact total merger repositioning charges reportable business segment following table summarizes pretax distribution total merger repositioning charges income statement classification note 6 gain sale nonstrategic businesses 2001 bendix commercial vehicle systems bcvs designated held disposal january 2002 reached agreement principle knorrbremse ag knorr transfer global interests bcvs knorr transfer expected completed first quarter 2002 december 31 2001 assets bcvs approximately 173 million classified current assets bcvs sales segment profit approximately 375 57 million respectively 2001 2000 result government mandate connection merger alliedsignal former honeywell sold tcas product line former honeywell received approximately 215 million cash resulting pretax gain 112 million tcas product line annual sales approximately 100 million 1999 sold laminate systems business approximately 425 million cash resulting pretax gain 106 million laminate systems business annual sales 400 million note 7 income expense april 1999 reached agreement tyco international ltd tyco amp incorporated amp settling amps claim gain would realize disposition investment amp common stock made payment amp 50 million parties released claims relating amp subsequently converted investment amp honeywell international inc notes financial statements continued dollars millions except per share amounts common stock tyco common stock sold tyco common stock net cash proceeds 12 billion resulting pretax gain 268 million net settlement payment note 8 interest financial charges cash payments interest years 2001 2000 1999 297 573 328 million respectively weighted average interest rate shortterm borrowings commercial paper outstanding december 31 2001 2000 746 660 percent respectively note 9 income taxes income loss taxes tax expense benefit honeywell international inc notes financial statements continued dollars millions except per share amounts deferred income taxes deferred tax assets liabilities amount federal tax net operating losses available carryback carryforward december 31 2001 625 million including 507 million generated 2001 current years loss carried back two years carried forward twenty years also included 118 million loss carryforwards generated certain subsidiaries prior acquisition expiration honeywell international inc notes financial statements continued dollars millions except per share amounts dates 2019 use preacquisition operating losses subject limitations imposed internal revenue code anticipate limitations affect utilization carryforwards prior expiration also foreign net operating losses 807 million available reduce future income tax payments several countries subject varying expiration rules us tax credit carryforwards 167 million december 31 2001 including carryforwards 124 million various expiration dates tax credits 43 million subject expiration increase valuation allowance 47 million 2001 primarily due increase foreign net operating losses attributable specialty materials business expected utilized deferred income taxes provided approximately 20 billion undistributed earnings foreign affiliated companies considered permanently reinvested practicable estimate amount tax might payable eventual remittance earnings cash payments income taxes years 2001 2000 1999 79 442 625 million respectively note 10 earnings loss per share following table sets forth computations basic diluted earnings loss per share result net loss 2001 4269601 dilutive securities issuable connection stock plans excluded diluted loss per share calculation effect would reduce loss per share 2000 1999 diluted earnings per share calculation excludes effect stock options exercise prices exceed average market price common shares period 2000 1999 number stock options included computations 14563673 868631 respectively stock options outstanding end respective years honeywell international inc notes financial statements continued dollars millions except per share amounts note 11 accounts notes receivable sell interests designated pools trade accounts receivables third party sold receivables overcollateralized retain interest pool receivables representing overcollateralization new receivables sold agreement previously sold receivables collected losses recognized interest receivables sold retained interest receivables shown amounts expected collected us carrying value approximates fair value retained interest compensated services collection administration receivables losses sales receivables 22 34 28 million 2001 2000 1999 respectively credit losses incurred years note 12 inventories valued lifo amounted 112 167 million december 31 2001 2000 respectively lifo inventories valued current costs carrying values would approximately 116 129 million higher december 31 2001 2000 respectively honeywell international inc notes financial statements continued dollars millions except per share amounts note 13 investments longterm receivables investments include unrealized holding gains 0 3 million december 31 2001 2000 respectively equity securities classified availableforsale cost basis equity securities 92 95 million december 31 2001 2000 respectively note 14 property plant equipment depreciation expense 723 791 730 million 2001 2000 1999 respectively note 15 accrued liabilities honeywell international inc notes financial statements continued dollars millions except per share amounts note 16 longterm debt credit agreements schedule principal payments longterm debt follows maintain 2 billion bank revolving credit facilities group banks comprised 1 billion fiveyear credit agreement b 1 billion 364day credit agreement credit agreements maintained general corporate purposes including support issuance commercial paper balance outstanding either agreement december 31 2001 neither credit agreements restricts ability pay dividends neither contains financial covenants failure comply customary conditions occurrence customary events default contained credit agreements would prevent borrowings would generally require repayments outstanding borrowings credit agreements events default include nonpayment credit agreement debt interest b noncompliance terms credit agreement covenants c default debt certain circumstances bankruptcy e defaults upon obligations employee retirement income security act additionally banks right terminate commitment lend credit honeywell international inc notes financial statements continued dollars millions except per share amounts agreements person group acquires beneficial ownership 30 percent voting stock 12month period individuals directors honeywell beginning period cease constitute majority board directors board loans fiveyear credit agreement required repaid later december 2 2004 agreed pay facility fee 0065 percent per annum aggregate commitment fiveyear credit agreement interest borrowings fiveyear credit agreement would determined option auction bidding procedure b highest floating base rate agent bank 05 percent average cd rate 05 percent federal funds rate c eurocurrency rate plus 0135 percent applicable margin commitments 364day credit agreement terminate november 28 2002 annually prior agreements anniversary date may request termination date 364day credit agreement extended 364 days agreed pay facility fee 006 percent per annum aggregate commitment 364day credit agreement paid upfront fees 004 percent interest borrowings 364day credit agreement would determined option auction bidding procedure b highest floating base rate agent bank 05 percent average cd rate 05 percent federal funds rate c eurocurrency rate plus 024 percent applicable margin facility fee applicable margin eurocurrency rate fiveyear credit agreement 364day credit agreement subject increase decrease longterm debt ratings change revolving credit facilities subject termination based decrease debt ratings note 17 lease commitments future minimum lease payments operating leases initial remaining noncancellable lease terms excess one year follows entered agreements lease land equipment buildings principally operating leases initial terms 25 years contain renewal options subject customary conditions time terms leases may option purchase leased assets amounts approximate fair value elect purchase assets end lease guaranteed residual values underlying assets principally aircraft equipment buildings land totaling approximately 349 million december 31 2001 expect commitments lease agreements material adverse effect consolidated results operations financial position liquidity rent expense 321 306 291 million 2001 2000 1999 respectively honeywell international inc notes financial statements continued dollars millions except per share amounts note 18 financial instruments result global operating financing activities exposed market risks changes interest foreign currency exchange rates commodity prices may adversely affect operating results financial position minimize risks interest foreign currency exchange rate commodity price fluctuations normal operating financing activities deemed appropriate use derivative financial instruments credit market risk financial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value cash flows derivative financial instruments considering reasonably possible changes interest currency exchange rates restrict use derivative financial instruments hedging activities use derivative financial instruments trading speculative purposes use leveraged derivative financial instruments continually monitor creditworthiness customers grant credit terms normal course business concentrations credit risk associated trade accounts notes receivable considered minimal due diverse customer base significant portion customers commercial aviation industry aircraft manufacturers airlines accounting approximately 19 percent consolidated sales 2001 following abrupt downturn aviation industry terrorist attacks september 11 2001 already weak economy modified terms conditions credit sales mitigate eliminate concentrations credit risk single customer sales materially dependent single customer small group customers foreign currency risk management conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities anticipated transactions arising international trade objective preserve economic value cash flows nonfunctional currencies attempt transaction exposures hedged natural offsets fullest extent possible opportunities exhausted foreign currency forward option agreements third parties principal currency exposures relate euro countries british pound canadian dollar us dollar hedge monetary assets liabilities denominated foreign currencies prior conversion us dollars assets liabilities remeasured spot exchange rates effect balance sheet date effects changes spot rates recognized earnings included income expense hedge exposure changes foreign exchange rates principally forward contracts forward contracts markedtomarket resulting gains losses similarly recognized earnings offsetting gains losses foreign currency denominated monetary assets liabilities hedged partially hedge forecasted 2002 sales purchases denominated foreign currencies currency forward contracts dollar strengthens foreign currencies decline value forecasted foreign currency cash inflows sales outflows purchases partially offset recognition gains sales losses purchases respectively value forward contracts designated hedges conversely dollar weakens foreign currencies increase value forecasted foreign currency cash inflows sales outflows purchases partially offset recognition losses sales gains purchases respectively value forward honeywell international inc notes financial statements continued dollars millions except per share amounts contracts designated hedges market value gains losses contracts recognized earnings hedged transaction recognized deferred gains losses forward contracts used hedge forecasted sales purchases 2 million respectively december 31 2001 deferred gains losses expected reclassified sales cost goods sold within next twelve months open forward contracts mature december 31 2002 december 31 2001 2000 contracts notional amounts 1507 1542 million respectively exchange foreign currencies principally euro countries great britain commodity price risk management exposure market risk commodity prices arises changes cost production mitigate exposure commodity price risk use longterm firmprice contracts suppliers forward commodity purchase agreements third parties hedging anticipated purchases several commodities principally natural gas forward commodity purchase agreements markedtomarket resulting gains losses recognized earnings hedged transaction recognized interest rate risk management use combination financial instruments including mediumterm shortterm financing variablerate commercial paper interest rate swaps manage interest rate mix total debt portfolio related overall cost borrowing december 31 2001 2000 interest rate swap agreements designated fair value hedges effectively changed 1096 1600 million respectively fixed rate debt average rate 655 710 percent respectively libor based floating rate debt interest rate swaps mature 2007 fair value financial instruments carrying value cash equivalents trade accounts notes receivables payables commercial paper shortterm borrowings contained consolidated balance sheet approximates fair value summarized carrying values fair values financial instruments december 31 2001 2000 fair values based quoted market prices issues traded current rates offered us debt remaining maturity characteristics valuation techniques appropriate note 19 capital stock authorized issue 2000000000 shares common stock par value one dollar common shareowners entitled receive dividends may declared board entitled one vote per share entitled event liquidation share ratably assets honeywell available distribution common shareowners common shareowners preemptive conversion rights shares common stock issued honeywell international inc notes financial statements continued dollars millions except per share amounts outstanding held treasury liable calls assessments restrictions us relative dividends repurchase redemption common stock july 21 2000 board authorized share repurchase program purchase 40000000 shares common stock open market privately negotiated transactions depending market conditions factors result proposed merger general electric company see note 4 honeywell rescinded share repurchase program effective october 21 2000 authorized issue 40000000 shares preferred stock without par value determine number shares series rights preferences limitations series december 31 2001 preferred stock outstanding note 20 nonowner changes shareowners equity total nonowner changes shareowners equity included consolidated statement shareowners equity components accumulated nonowner changes follows honeywell international inc notes financial statements continued dollars millions except per share amounts components accumulated nonowner changes follows note 21 stockbased compensation plans stock plans available grant incentive stock options nonqualified stock options stock appreciation rights officers employees fixed stock options exercise price term conditions applicable option granted stock plans generally determined management development compensation committee board options granted price equal stocks fair market value date grant options generally become exercisable threeyear period expire ten years following table summarizes information stock option activity three years ended december 31 2001 honeywell international inc notes financial statements continued dollars millions except per share amounts following table summarizes information stock options outstanding december 31 2001 1 average remaining contractual life years 26998346 30927704 options exercisable weighted average exercise prices 3206 2721 december 31 2000 1999 respectively 9948269 shares available future grants terms stock option plans december 31 2001 statement financial accounting standards 123 accounting stockbased compensation sfas 123 requires cost stockbased compensation measured using fair value based method permitted sfas 123 elected continue account stockbased compensation using intrinsic value based method accounting principles board opinion 25 accounting stock issued employees accordingly compensation cost recognized fixed stock option plans following table sets forth pro forma information including related assumptions compensation cost determined consistent requirements sfas 123 1 estimated date grant using blackscholes optionpricing model restricted stock units restricted stock unit rsu awards entitle holder receive one share common stock unit units vest rsus issued certain key employees compensation incentives tied directly achievement certain performance objectives rsus issued 186500 1374640 1175127 2001 2000 1999 respectively 1580091 2449749 2657561 rsus outstanding weighted average grant date fair value per share 4349 4733 3781 december 31 2001 2000 1999 respectively honeywell international inc notes financial statements continued dollars millions except per share amounts nonemployee directors plan also stock plan nonemployee directors plan restricted shares options granted new director receives onetime grant 3000 shares common stock subject specific restrictions directors plan provides annual grant director options purchase 2000 shares common stock fair market value date grant set aside 450000 shares issuance directors plan options generally become exercisable threeyear period expire ten years employee stock match plans sponsor employee savings plans match form common stock certain eligible us employee savings plan contributions shares issued stock match plans 49 39 26 million 2001 2000 1999 respectively cost 185 161 142 million respectively note 22 commitments contingencies litton litigation march 13 1990 litton systems inc litton filed legal action former honeywell us district court central district california los angeles claims subsequently split two separate cases one alleged patent infringement federal law using ionbeam process coat mirrors incorporated former honeywells ring laser gyroscopes tortious interference state law interfering littons prospective advantage customers contractual relationships inventor company ojai research inc case alleged monopolization attempted monopolization federal antitrust laws former honeywell sale inertial reference systems containing ring laser gyroscopes commercial aircraft market december 21 2001 settled litton legal action 440 million reaching settlement agreement northrop grumman northrop purchased litton earlier 2001 settlement amount included part costs goods sold december 2001 220 million settlement amount paid northrop remaining 220 million due july 1 2002 settlement ends patent infringement antitrust claims litton originally brought former honeywell allows us continue sell ringlasergyroscope based products certain inertial reference systems free claims northrop shareowner litigation honeywell seven current former officers named defendants several purported class action lawsuits filed united states district court district new jersey securities law complaints securities law complaints principally allege defendants violated federal securities laws purportedly making false misleading statements failing disclose material information concerning honeywells financial performance thereby allegedly causing value honeywells stock artificially inflated purported class period damages sought december 20 1999 june 19 2000 january 15 2002 district court dismissed consolidated complaint four honeywells current former officers addition honeywell seven current former officers board named defendants purported shareowner derivative action filed november 27 2000 united states district court district new jersey derivative complaint derivative complaint alleges single claim breach fiduciary duty based nearly identical allegations set forth securities law complaints believe factual legal basis allegations securities law complaints derivative complaint although possible time predict result cases expect prevail however adverse outcome could material consolidated financial position results operations result uncertainty regarding outcome matter provision made financial statements respect contingent liability honeywell international inc notes financial statements continued dollars millions except per share amounts environmental matters subject various federal state local government requirements relating protection employee health safety environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury employees customers handling manufacture use disposal hazardous toxic substances accord environmental laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental matters including past production products containing toxic substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually owned sites jointly member industry groups nonowned sites determine feasibility various remedial techniques address environmental matters respect environmental matters involving production products containing toxic substances believe costs defending resolving matters largely covered insurance subject deductibles exclusions retentions policy limits policy see note 1 record appropriate liabilities environmental matters environmental assessments made remedial efforts damage claim payments probable costs reasonably estimated respect site contamination timing accruals generally later completion feasibility studies expect able fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing litigation settlements personal injury property damage claims insurance recoveries regulatory approval cleanup projects remedial techniques utilized agreements parties although currently possess sufficient information reasonably estimate amounts liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined could material consolidated results operations however considering past experience insurance coverage reserves expect matters material adverse effect consolidated financial position asbestos matters like thousand industrial companies honeywell defendant personal injury actions related asbestos involvement limited mine produce asbestos make sell insulation products construction materials identified primary cause asbestosrelated disease vast majority claimants rather made several products contained small amounts asbestos honeywells bendix friction materials business manufactured automotive brake pads included asbestos encapsulated form limited group potential claimants consisting largely professional brake mechanics twentyyear period 1981 2001 resolved approximately 53000 bendix claims average cost per claim one thousand dollars honeywell outofpocket costs cases since insurance deductible satisfied many years ago currently approximately 47000 claims pending reason believe historic rate dismissal change 2 billion insurance remaining another source claims refractory products high temperature bricks cement sold largely steel industry east midwest north american refractories company narco business owned 1979 1986 less 2 percent narcos products contained asbestos sold narco business 1986 agreed indemnify narco respect personal injury claims products discontinued prior sale defined sale agreement narco retained liability claims narco resolved approximately honeywell international inc notes financial statements continued dollars millions except per share amounts 176000 claims past 18 years average cost per claim two thousand two hundred dollars claims 43 percent dismissed ground insufficient evidence narco responsible claimants asbestos exposure approximately 116000 claims currently pending narco including approximately 7 percent honeywell also named defendant past 18 years honeywell insurers contributed cost narco defense excess 12 billion insurance remaining specifically allocated narcorelated liability january 4 2002 narco filed reorganization chapter 11 us bankruptcy code result claims pending narco automatically stayed pending reorganization narco addition claims pending honeywell necessarily impact liabilities narco insurance policies held honeywell essential successful narco reorganization honeywell offered commit policies reorganization bankruptcy court temporarily enjoined claims honeywell current future related narco connection narcos bankruptcy filing paid narcos parent company 40 million agreed provide narco 20 million financing also agreed pay 20 million narcos parent company upon filing plan reorganization narco acceptable honeywell pay narcos parent company 40 million forgive outstanding narco indebtedness upon confirmation consummation plan believe part narco plan reorganization trust established benefit asbestos claimants current future honeywell intends contribute insurance coverage excess 12 billion trust exchange indemnity obligation narco trust put place approved court fair equitable honeywell well narco entitled permanent channeling injunction barring present future individual actions state federal courts requiring asbestosrelated claims based exposure narco products made federallysupervised trust view existing insurance plus existing narco assets sufficient fund trust assurance stay remain effect plan reorganization proposed confirmed plan confirmed provide relief honeywell although impossible predict outcome pending future claims narco bankruptcy light nature potential exposure experience past 20 years resolving asbestosrelated claims insurance coverage existing reserves narco bankruptcy proceeding believe asbestosrelated claims material adverse effect consolidated results operations financial position matters subject number lawsuits investigations claims involve substantial amounts arising conduct business respect matters including relating commercial transactions government contracts product liability nonenvironmental health safety matters ultimate results lawsuits investigations claims cannot determined expect matters material adverse effect consolidated results operations financial position issued party various direct indirect guarantees debt unconsolidated affiliates third parties 80 million expect guarantees material adverse effect consolidated results operations financial position liquidity note 23 pension postretirement benefits maintain pension plans covering majority employees retirees postretirement benefit plans retirees include health care benefits life insurance coverage pension benefits substantially us employees provided noncontributory defined benefit pension plans employees foreign countries us citizens covered honeywell international inc notes financial statements continued dollars millions except per share amounts various retirement benefit arrangements considered defined benefit pension plans accounting purposes retiree medical plans cover us canadian employees retire pension eligibility hospital professional medical services us retiree medical plans require deductibles copayments virtually integrated medicare retiree contributions generally required based coverage type plan medicare eligibility retiree medical life insurance plans funded claims expenses paid general assets net periodic pension postretirement benefit costs income include following components following table summarizes balance sheet impact including benefit obligations assets funded status actuarial assumptions associated significant pension postretirement benefit plans honeywell international inc notes financial statements continued dollars millions except per share amounts projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 1296 1262 865 million respectively december 31 2001 350 310 44 million respectively december 31 2000 measurement purposes assumed annual healthcare cost trend rate 825 percent covered healthcare benefits 2002 rate assumed decrease gradually 5 percent 2007 remain level thereafter assumed healthcare cost trend rates significant effect amounts reported retiree healthcare plan onepercentagepoint change assumed healthcare cost trend rates would following effects note 24 segment financial data statement financial accounting standards 131 disclosures segments enterprise related information sfas 131 establishes standards reporting information operating segments following information provided accordance requirements sfas 131 consistent business results reported internally management globally manage business operations strategic business units sbus serving customers worldwide aerospace products services control technologies buildings homes industry automotive products chemicals based similar economic operational characteristics sbus aggregated following four reportable segments aerospace includes engines systems services auxiliary power units propulsion engines environmental control systems engine controls repair overhaul services hardware logistics power generation systems aerospace electronic systems flight safety communications navigation radar surveillance systems aircraft airfield lighting management technical services advanced systems instruments aircraft landing systems aircraft wheels brakes automation control solutions includes control products controls heating cooling indoor air quality ventilation humidification home automation advanced software applications homebuilding control optimization sensors switches control systems instruments measuring pressure air flow temperature electrical current service installs maintains upgrades systems keep buildings safe comfortable productive security fire solutions manufactures distributes security fire detection access control video surveillance systems industry solutions provides full range automation control solutions industrial plants offering advanced software honeywell international inc notes financial statements continued dollars millions except per share amounts automation systems integrate control monitor complex processes many types industrial settings specialty materials includes fibers plastic resins specialty films intermediate chemicals fluorinebased products pharmaceutical agricultural chemicals specialty waxes adhesives sealants process technology wafer fabrication materials services advanced circuits amorphous metals transportation power systems includes garrett engine boosting systems turbochargers chargeair coolers bendix commercial vehicle systems air brake antilock braking systems consumer products group car care products including antifreeze filters spark plugs cleaners waxes additives friction materials friction material related brake system components accounting policies segments described note 1 evaluate segment performance based segment profit excludes general corporate unallocated expenses gains sales nonstrategic businesses equity income expense interest financial charges merger repositioning charges intersegment sales approximate market significant reportable segment data follows honeywell international inc notes financial statements continued dollars millions except per share amounts reconciliation segment profit consolidated income loss taxes follows 1 2001 includes cumulative effect adjustment 1 million income related adoption sfas 133 note 25 geographic areas financial data 1 sales geographic areas approximate market significant net sales classified according country origin included united states net sales export sales 3074 3194 3715 million 2001 2000 1999 respectively 2 longlived assets comprised property plant equipment goodwill intangible assets honeywell international inc notes financial statements continued dollars millions except per share amounts note 26 unaudited quarterly financial information 1 includes 495 million provision repositioning charges charge 95 million impairment equity investment equity investees loss contract net provision 5 million consisting 6 million charge related early extinguishment debt 1 million benefit recognized upon adoption sfas 133 total pretax charge 595 million aftertax 374 million 046 per share total pretax charge included gross profit 474 million 2 includes 573 million net provision repositioning charges charge 78 million impairment equity investment total pretax charge 651 million aftertax 400 million 049 per share total pretax charge included gross profit 508 million 3 includes 981 million net provision repositioning charges charge 27 million impairment equity investment total pretax charge 1008 million aftertax 668 million 082 per share total pretax charge included gross profit 916 million 4 includes charge 440 million litton settlement charge 100 million writeoff investments related regional jet engine contract cancellation total pretax charge 540 million included gross profit aftertax 329 million 040 per share 5 includes 96 million provision repositioning charges included gross profit aftertax 59 million 008 per share 6 includes aftertax gain 71 million 009 per share sale tcas product line former honeywell 7 includes 116 million net provision repositioning charges impairment charge 245 million writedown longlived assets friction materials business charge 99 million costs associated closing affiliates operations total pretax charge 460 million aftertax 331 million 041 per share total pretax charge included gross profit 361 million 8 includes 208 million provision repositioning charges impairment charge 165 million writedown longlived assets chemical manufacturing facility charge 37 million costs principally related equity investees customer claims total pretax charge 410 million aftertax 315 million 039 per share total pretax charge included gross profit 373 million 9 dilutive securities issuable connection stock plans excluded calculation loss per share effect would reduce loss per share 10 composite tape stock primarily traded new york stock exchange report independent accountants board directors shareowners honeywell international inc opinion consolidated financial statements listed index appearing item 14a1 page 68 present fairly material respects financial position honeywell international inc subsidiaries december 31 2001 2000 results operations cash flows three years period ended december 31 2001 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 14a2 page 68 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp pricewaterhousecoopers llp florham park new jersey february 7 2002 item 9item 8 financial statements supplementary data honeywell international inc consolidated statement operations notes financial statements integral part statement honeywell international inc consolidated statement comprehensive income notes financial statements integral part statement honeywell international inc consolidated balance sheet notes financial statements integral part statement honeywell international inc consolidated statement cash flows notes financial statements integral part statement honeywell international inc consolidated statement shareowners’ equity notes financial statements integral part statement honeywell international inc notes financial statements dollars millions except per share amounts note 1 summary significant accounting policies accounting principlesthe financial statements accompanying notes prepared accordance accounting principles generally accepted united states america following description honeywell’s significant accounting policies principles consolidationthe consolidated financial statements include accounts honeywell international inc subsidiaries entities controlling interest maintained consolidation policy requires equity investments exercise significant influence control investee primary beneficiary investee’s activities accounted using equity method investments able exercise significant influence investee readily determinable fair values accounted cost method intercompany transactions balances eliminated consolidation redeemable noncontrolling interest considered temporary equity therefore reported outside permanent equity consolidated balance sheet greater initial carrying amount adjusted noncontrolling interest’s share net income loss redemption value property plant equipmentproperty plant equipment recorded cost including asset retirement obligations less accumulated depreciation financial reporting straightline method depreciation used estimated useful lives 10 50 years buildings improvements 2 16 years machinery equipment recognition fair value obligations associated retirement tangible longlived assets required legal obligation incur costs upon initial recognition liability cost capitalized part related longlived asset depreciated corresponding asset’s useful life goodwill indefinitelived intangible assetsgoodwill indefinitelived intangible assets subject impairment testing annually march 31 whenever events changes circumstances indicate carrying amount may fully recoverable testing compares carrying values fair values appropriate carrying value assets reduced fair value completed annual goodwill impairment test march 31 2015 determined impairment date intangible assets determinable livesother intangible assets determinable lives consist customer lists technology patents trademarks intangibles amortized estimated useful lives ranging 2 24 years sales recognitionproduct service sales recognized persuasive evidence arrangement exists product delivery occurred services rendered pricing fixed determinable collection reasonably assured service sales principally representing repair maintenance engineering activities recognized contractual period services rendered sales longterm contracts recorded percentageofcompletion method measured costtocost basis engineeringtype contracts unitsofdelivery basis productiontype contracts provisions anticipated losses longterm contracts recorded full losses become evident revenues contracts multiple element arrangements recognized element earned based relative fair value element provided delivered elements value customers standalone basis amounts allocated element based objectively determined fair value sales price product service sold separately competitor prices similar products services environmentalwe accrue costs related environmental matters probable incurred liability related contaminated site amount reasonably estimated additional information see note 19 commitments contingencies asbestos related contingencies insurance recoverieswe recognize liability asbestos related contingency probable occurrence reasonably estimable connection honeywell international inc notes financial statementscontinued dollars millions except per share amounts recognition liabilities asbestos related matters record asbestos related insurance recoveries deemed probable additional information see note 19 commitments contingencies aerospace sales incentiveswe provide sales incentives commercial aircraft manufacturers airlines connection selection aircraft equipment predominately wheel braking system hardware avionics auxiliary power units installation commercial aircraft incentives consist free deeply discounted products credits future purchases product upfront cash payments costs recognized period incurred cost products sold reduction sales appropriate research developmentresearch development costs companysponsored research development projects expensed incurred costs principally included cost products sold 1856 million 1892 million 1804 million 2015 2014 2013 stockbased compensation plansthe principal awards issued stockbased compensation plans described note 18 stockbased compensation plans nonqualified stock options restricted stock units cost awards measured grant date based fair value award value portion award ultimately expected vest recognized expense requisite service periods generally vesting period equity award included selling general administrative expenses forfeitures estimated time grant recognize expense awards expected vest based historical forfeiture rates pension benefitswe recognize net actuarial gains losses excess 10 greater fair value plan assets plans’ projected benefit obligation corridor annually fourth quarter year mtm adjustment applicable quarter interim remeasurement triggered remaining components pension income expense primarily service interest costs assumed return plan assets recognized quarterly basis pension ongoing income expense foreign currency translationassets liabilities subsidiaries operating outside united states functional currency us dollars translated us dollars using yearend exchange rates sales costs expenses translated average exchange rates effect year foreign currency translation gains losses included component accumulated comprehensive income loss subsidiaries operating highly inflationary environments inventories property plant equipment including related expenses remeasured exchange rate effect date assets acquired monetary assets liabilities remeasured yearend exchange rates remeasurement adjustments subsidiaries included earnings derivative financial instrumentswe minimize risks interest foreign currency exchange rate fluctuations normal operating financing activities deemed appropriate use derivative financial instruments derivative financial instruments used manage risk used trading speculative purposes use leveraged derivative financial instruments derivative financial instruments qualify hedge accounting must designated effective hedge identified risk exposure inception contract accordingly changes fair value derivative contract must highly correlated changes fair value underlying hedged item inception hedge life hedge contract derivatives recorded balance sheet assets liabilities measured fair value derivatives designated hedges fair value assets liabilities changes fair values derivatives hedged items recorded current earnings derivatives honeywell international inc notes financial statementscontinued dollars millions except per share amounts designated cash flow hedges effective portion changes fair value derivatives recorded accumulated comprehensive income loss subsequently recognized earnings hedged items impact earnings cash flows derivative financial instruments classified consistent underlying hedged item income taxessignificant judgment required evaluating tax positions establish additional reserves income taxes despite belief tax positions fully supportable remain certain positions meet minimum recognition threshold approach evaluating certain uncertain tax positions defined authoritative guidance determines tax position likely sustained upon examination applicable taxing authority normal course business company subsidiaries examined various federal state foreign tax authorities regularly assess potential outcomes examinations future examinations current prior years determining adequacy provision income taxes continually assess likelihood amount potential adjustments adjust income tax provision current tax liability deferred taxes period facts give rise change estimate become known earnings per sharebasic earnings per share based weighted average number common shares outstanding diluted earnings per share based weighted average number common shares outstanding dilutive potential common shares outstanding reclassificationscertain prior year amounts reclassified conform current year presentation recent accounting pronouncementswe consider applicability impact accounting standards updates asus listed assessed determined either applicable expected minimal impact consolidated financial position results operations november 2015 financial accounting standards board fasb issued guidance simplify presentation deferred income taxes permitting classification deferred tax assets liabilities noncurrent consolidated balance sheet company elected early adopt guidance prospective basis effective consolidated balance sheet december 31 2015 change company’s historical presentation whereby certain deferred tax assets liabilities classified current remainder classified noncurrent adoption guidance resulted reclassification 662 million current assets 32 million current liabilities within consolidated balance sheet december 31 2015 may 2014 fasb issued guidance revenue contracts customers supersede current revenue recognition guidance including industryspecific guidance underlying principle entity recognize revenue depict transfer goods services customers amount entity expects entitled exchange goods services guidance provides fivestep analysis transactions determine revenue recognized major provisions include capitalization certain contract costs consideration time value money transaction price allowing estimates variable consideration recognized contingencies resolved certain circumstances guidance also requires enhanced disclosures regarding nature amount timing uncertainty revenue cash flows arising entity’s contracts customers effective date deferred one year interim annual periods beginning december 15 2017 early adoption permitted original effective dateinterim annual periods beginning december 15 2016 guidance permits use either retrospective cumulative effect transition method yet selected transition method currently evaluating impact amended guidance consolidated financial position results operations related disclosures honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 2 acquisitions 2015 acquired businesses aggregate cost net cash acquired 5244 million december 29 2015 company completed acquisition elster division melrose industries plc elster leading provider thermal gas solutions commercial industrial residential heating systems gas water electricity meters including smart meters software data analytics solutions aggregate value net cash acquired approximately 4899 million elster 2015 revenues approximately 1670 million primarily integrated acs following amounts represent preliminary determination fair value identifiable assets acquired liabilities assumed included company’s consolidated balance sheet december 31 2015 identifiable intangible assets primarily include customer relationships trade names technology amortized estimated lives ranging 1 20 years using straight line accelerated amortization methods goodwill nondeductible tax purposes results date acquisition december 31 2015 included principally acs material consolidated results operations december 31 2015 purchase accounting elster subject final adjustment primarily valuation useful lives intangible assets amounts allocated intangible assets goodwill tax balances certain preacquisition contingencies january 2016 company acquired remaining 30 percent noncontrolling interest uop russell llc develops technology manufactures modular equipment process natural gas approximately 240 million february 2016 company acquired 100 percent issued outstanding shares com dev international com dev leading satellite space components provider aggregate purchase price approximately 330 million com dev public company canada operates globally reported 2015 revenues approximately 180 million com dev integrated aerospace february 2016 company entered definitive agreement acquire xtralis international holdings limited xtralis leading global provider aspiration smoke detection perimeter security technologies approximately 480 million transaction expected close second quarter 2016 pending regulatory approvals xtralis integrated acs honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 3 repositioning charges summary repositioning charges follows following table summarizes pretax distribution total net repositioning charges income statement classification following table summarizes pretax impact total net repositioning charges segment 2015 recognized repositioning charges totaling 216 million including severance costs 197 million related workforce reductions 6405 manufacturing administrative positions across segments workforce reductions primarily related cost savings actions taken connection productivity ongoing functional transformation initiatives also 53 million previously established accruals primarily severance mainly aerospace acs returned income 2015 due principally higher attrition anticipated prior severance programs resulting lower required severance payments changes scope previously announced repositioning actions 2014 recognized repositioning charges totaling 184 million including severance costs 156 million related workforce reductions 2975 manufacturing administrative positions across segments workforce reductions primarily related cost savings actions taken connection productivity ongoing functional transformation initiatives factory transitions acs aerospace costeffective locations site consolidations organizational realignments businesses acs pmt also 38 million previously established accruals primarily severance mainly aerospace acs returned income 2014 due principally honeywell international inc notes financial statementscontinued dollars millions except per share amounts change scope previously announced repositioning action higher attrition anticipated prior severance programs resulting lower required severance payments 2013 recognized repositioning charges totaling 231 million including severance costs 186 million related workforce reductions 3081 manufacturing administrative positions across segments workforce reductions primarily related cost savings actions taken connection productivity ongoing functional transformation initiatives achieving acquisitionrelated synergies acs outsourcing noncore components aerospace shutdown manufacturing facility pmt factory transitions acs costeffective locations also 30 million previously established accruals primarily severance acs pmt returned income 2013 due changes scope previously announced repositioning actions lower expected costs completing exit product line higher attrition anticipated prior severance programs resulting lower required severance payments following table summarizes status total repositioning reserves certain repositioning projects aerospace acs pmt 2015 2014 2013 included exit disposal activities costs related recognized future periods actual liability incurred exit disposal costs significant honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 4 income expense note 5 income taxes income continuing operations taxes tax expense benefit honeywell international inc notes financial statementscontinued dollars millions except per share amounts effective tax rate increased 08 percentage points 2015 compared 2014 increase primarily attributable decreased tax benefits resolution tax audits partially offset increased tax benefits manufacturing incentives impact income jurisdictions lower tax rates fewer reserves company’s nonus effective tax rate 2015 195 decrease approximately 18 percentage points compared 2014 yearoveryear decrease nonus effective tax rate primarily attributable higher earnings lower tax rate jurisdictions coupled lower expense related reserves various jurisdictions partially offset increase tax impact restructuring dispositions effective tax rate lower us federal statutory rate 35 primarily due overall nonus earnings taxed lower rates effective tax rate decreased 12 percentage points 2014 compared 2013 decrease primarily attributable lower tax expense resolution audits partially offset impact income jurisdictions higher tax rates additional reserves company’s nonus effective tax rate 2014 213 increase approximately 23 percentage points compared 2013 increase nonus effective tax rate primarily attributable additional reserves impact income jurisdictions higher tax rates partially offset tax impact dispositions effective tax rate lower us federal statutory rate 35 primarily due overall nonus earnings taxed lower rates honeywell international inc notes financial statementscontinued dollars millions except per share amounts deferred tax assets liabilities tax effects temporary differences tax carryforwards give rise future income tax benefits payables follows described note 1 summary significant accounting policies company presented deferred income taxes noncurrent december 31 2015 change deferred tax balance primarily attributable deferred tax liabilities intangible assets recorded connection acquisition elster gross deferred tax asset includes 1049 million related nonus operations comprised principally deductible temporary differences net operating loss capital loss tax credit carryforwards mainly canada france luxembourg united kingdom maintain valuation allowance 587 million portion nonus gross deferred tax assets change valuation allowance resulted increase 114 million decrease 10 million increase 49 million income tax expense 2015 2014 2013 event determine able realize net deferred tax assets future reduce amounts increase income tax expense period determination made conversely determine able realize net deferred tax assets excess carrying amounts decrease recorded valuation allowance reduction income tax expense period determination made december 31 2015 net operating loss capital loss tax credit carryforwards follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts many jurisdictions impose limitations timing utilization net operating loss tax credit carryforwards instances whereby expected permanent limitation utilization net operating loss tax credit carryforward deferred tax asset amount carryforward reduced us federal income taxes provided undistributed earnings vast majority international subsidiaries intention reinvest earnings respective subsidiaries december 31 2015 honeywell provided us federal income nonus withholding taxes approximately 166 billion earnings nonus operations practicable estimate amount tax might payable earnings repatriated amount foreign tax credits would available reduce eliminate resulting us income tax liability december 31 2015 2014 2013 765 million 659 million 729 million unrecognized tax benefits recognized would recorded component income tax expense generally unrecognized tax benefits related tax years remain subject examination relevant tax authorities following table summarizes open tax years major jurisdiction december 31 2015 based outcome examinations result expiration statute limitations specific jurisdictions reasonably possible certain unrecognized tax benefits tax positions taken previously filed tax returns materially change recorded honeywell international inc notes financial statementscontinued dollars millions except per share amounts liabilities financial statements addition outcome examinations may impact valuation certain deferred tax assets net operating losses future periods unrecognized tax benefits examinations progress 349 million 403 million 431 million december 31 2015 2014 2013 estimated interest penalties related underpayment income taxes classified component tax expense consolidated statement operations totaled 11 million 24 million 17 million years ended december 31 2015 2014 2013 accrued interest penalties 336 million 325 million 301 million december 31 2015 2014 2013 note 6 earnings per share details earnings per share calculations years ended december 31 2015 2014 2013 follows diluted earnings per share calculations exclude effect stock options’ assumed proceeds exceed average market price common shares period 2015 2014 2013 weighted number stock options excluded computations 71 million 47 million 22 million stock options outstanding end respective periods note 7 accounts notes receivables trade receivables includes 1590 million 1636 million unbilled balances longterm contracts december 31 2015 december 31 2014 amounts billed accordance terms customer contracts relate honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 8 inventories valued lifo amounted 399 million 434 million december 31 2015 2014 lifo inventories valued current costs carrying values would approximately 116 million 168 million higher december 31 2015 2014 note 9 property plant equipmentnet depreciation expense 672 million 667 million 670 million 2015 2014 2013 note 10 goodwill intangible assetsnet change carrying amount goodwill years ended december 31 2015 2014 segment follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts intangible assets comprised intangible assets amortization expense 211 million 257 million 319 million 2015 2014 2013 estimated intangible asset amortization expense next five years approximates 336 million 2016 357 million 2017 356 million 2018 342 million 2019 302 million 2020 note 11 accrued liabilities honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 12 longterm debt credit agreements schedule principal payments longterm debt follows july 10 2015 company entered 4 billion amended restated five year credit agreement credit agreement syndicate banks commitments credit agreement increased pursuant terms credit agreement aggregate amount exceed 45 billion credit agreement amends restates previous 4 billion five year credit agreement substantially material terms conditions full description credit agreement found company’s current report form 8k dated july 10 2015 september 30 2015 company entered 3 billion 364day credit agreement 364day credit agreement syndicate banks 364day credit agreement maintained general corporate purposes including elster acquisition full description 364day credit agreement found company’s current report form 8k dated october 1 2015 honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 13 lease commitments future minimum lease payments operating leases initial remaining noncancellable lease terms excess one year follows rent expense 390 million 420 million 404 million 2015 2014 2013 note 14 financial instruments fair value measures credit market riskfinancial instruments including derivatives expose us counterparty credit risk nonperformance market risk related changes interest currency exchange rates commodity prices manage exposure counterparty credit risk specific minimum credit standards diversification counterparties procedures monitor concentrations credit risk counterparties derivative transactions substantial investment commercial banks significant experience using derivative instruments monitor impact market risk fair value cash flows derivative financial instruments considering reasonably possible changes interest rates currency exchange rates restrict use derivative financial instruments hedging activities continually monitor creditworthiness customers grant credit terms normal course business terms conditions credit sales designed mitigate eliminate concentrations credit risk single customer sales materially dependent single customer small group customers foreign currency risk managementwe conduct business multinational basis wide variety foreign currencies exposure market risk changes foreign currency exchange rates arises international financing activities subsidiaries foreign currency denominated monetary assets liabilities transactions arising international trade primary objective preserve us dollar value foreign currency denominated cash flows earnings attempt hedge currency exposures natural offsets fullest extent possible opportunities exhausted foreign currency exchange forward option contracts third parties hedge monetary assets liabilities denominated nonfunctional currencies prior conversion us dollars assets liabilities remeasured spot exchange rates effect balance sheet date effects changes spot rates recognized earnings included income expense partially hedge forecasted sales purchases predominantly occur next twelve months denominated nonfunctional currencies currency forward contracts changes forecasted nonfunctional currency cash flows due movements exchange rates substantially offset changes fair value currency forward contracts designated hedges market value gains losses contracts recognized earnings hedged transaction recognized open foreign currency exchange forward contracts mature predominantly next twelve months december 31 2015 2014 contracts notional amounts 10538 million 7291 million exchange foreign honeywell international inc notes financial statementscontinued dollars millions except per share amounts currencies principally us dollar euro british pound chinese renminbi indian rupee mexican peso canadian dollar uae dirham singapore dollar also designated foreign currency debt hedges portions net investment foreign operations year ended december 31 2015 gains losses effective portion foreign currency debt designated net investment hedge recorded manner foreign currency translation adjustments company ineffectiveness related net investment hedges year ended december 31 2015 interest rate risk managementwe use combination financial instruments including longterm mediumterm shortterm financing variablerate commercial paper interest rate swaps manage interest rate mix total debt portfolio related overall cost borrowing december 31 2015 2014 interest rate swap agreements designated fair value hedges effectively changed 1100 million fixed rate debt rate 400 libor based floating rate debt interest rate swaps mature various dates 2023 fair value financial instrumentsthe fasb’s accounting guidance defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date exit price financial nonfinancial assets liabilities classified entirety based lowest level input significant fair value measurement following table sets forth company’s financial assets liabilities accounted fair value recurring basis december 31 2015 2014 foreign currency exchange contracts interest rate swap agreements valued using broker quotations market transactions either listed overthecounter markets derivative instruments classified within level 2 company also holds investments commercial paper certificates deposits time deposits designated available sale valued using published prices based observable market data investments classified within level 2 carrying value cash equivalents trade accounts notes receivables payables commercial paper shortterm borrowings contained consolidated balance sheet approximates fair value following table sets forth company’s financial assets liabilities carried fair value company determined fair value longterm receivables discounting based upon terms receivable counterparty details including credit quality fair value receivables considered level 2 company determined fair value longterm debt honeywell international inc notes financial statementscontinued dollars millions except per share amounts related current maturities utilizing transactions listed markets identical similar liabilities fair value longterm debt related current maturities considered level 2 well interest rate swap agreements designated hedge relationships gains losses derivative recognized interest financial charges offsetting gains losses underlying debt hedged losses interest rate swap agreements recognized earnings 2 million year ended december 31 2015 gains interest rate swap agreements recognized earnings 38 million year ended 2014 gains losses fully offset losses gains underlying debt hedged also economically hedge exposure changes foreign exchange rates principally forward contracts markedtomarket resulting gains losses recognized earnings offsetting gains losses nonfunctional currency denominated monetary assets liabilities hedged recognized 86 million 181 million expense income expense years ended december 31 2015 2014 see note 4 income expense details net impact economic foreign currency hedges note 15 liabilities note 16 capital stock authorized issue 2000000000 shares common stock par value 1 common shareowners entitled receive dividends may declared board entitled one vote per share entitled event liquidation share ratably assets honeywell available distribution common shareowners common shareowners preemptive conversion rights shares common stock issued outstanding held treasury liable calls assessments restrictions us relative dividends repurchase redemption common stock december 2013 board directors authorized repurchase 5 billion honeywell common stock 22 billion 41 billion remained available december 31 2015 december 31 2014 additional share repurchases purchased approximately 188 million 100 million shares common stock 2015 2014 1884 million 924 million authorized issue 40000000 shares preferred stock without par value determine number shares series rights preferences limitations series december 31 2015 preferred stock outstanding honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 17 accumulated comprehensive income loss changes accumulated comprehensive income loss provided tables comprehensive income loss attributable noncontrolling interest consisted predominantly net income components accumulated comprehensive income loss honeywell international inc notes financial statementscontinued dollars millions except per share amounts changes accumulated comprehensive income component reclassifications accumulated comprehensive income honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 18 stockbased compensation plans terms 2011 stock incentive plan honeywell international inc affiliates 2011 plan 14050760 shares honeywell common stock available future grants december 31 2015 additionally 2006 stock plan nonemployee directors honeywell international inc 2006 directors plan expires april 24 2016 expected future grants made 2006 directors plan prior expiration 2016 company seeking shareowner approval new employee stock plan nonemployee director plan upon approval additional grants permitted 2011 plan 2006 directors plan stock optionsthe exercise price term conditions applicable option granted stock plans generally determined management development compensation committee board exercise price stock options set grant date may less fair market value per share stock date fair value recognized expense employee’s requisite service period generally vesting period award options generally vest fouryear period expire ten years fair value option award estimated date grant using blackscholes optionpricing model expected volatility based implied volatilities traded options common stock historical volatility common stock used monte carlo simulation model derive expected term represents estimate time options expected remain outstanding model uses historical data estimate option exercise activity postvest termination behavior riskfree rate periods within contractual life option based us treasury yield curve effect time grant compensation cost pretax basis related stock options recognized selling general administrative expenses 2015 2014 2013 78 million 85 million 70 million associated future income tax benefit recognized 2015 2014 2013 26 million 31 million 24 million honeywell international inc notes financial statementscontinued dollars millions except per share amounts following table sets forth fair value per share information including related weightedaverage assumptions used determine compensation cost following table summarizes information stock option activity three years ended december 31 2015 1 represents sum vested options 172 million expected vest options 117 million expected vest options derived applying prevesting forfeiture rate assumption total outstanding unvested options 136 million honeywell international inc notes financial statementscontinued dollars millions except per share amounts following table summarizes information stock options outstanding exercisable december 31 2015 16019742 15594410 options exercisable weighted average exercise prices 4940 4576 december 31 2014 2013 following table summarizes financial statement impact stock options exercised 1 represents amount stock price exceeded exercise price options date exercise december 31 2015 140 million total unrecognized compensation cost related nonvested stock option awards expected recognized weightedaverage period 236 years total fair value options vested 2015 2014 2013 73 million 72 million 67 million restricted stock unitsrestricted stock unit rsu awards entitle holder receive one share common stock unit units vest rsus issued certain key employees directors fair market value date grant compensation rsus typically become fully vested periods ranging three seven years payable honeywell common stock upon vesting honeywell international inc notes financial statementscontinued dollars millions except per share amounts following table summarizes information rsu activity three years ended december 31 2015 december 31 2015 approximately 185 million total unrecognized compensation cost related nonvested rsus granted stock plans expected recognized weightedaverage period 337 years following table summarizes information income statement impact rsus three years ended december 31 2015 note 19 commitments contingencies environmental matters subject various federal state local foreign government requirements relating protection environment believe general matter policies practices procedures properly designed prevent unreasonable risk environmental damage personal injury handling manufacture use disposal hazardous substances accordance environmental safety laws regulations however mainly past operations predecessor companies like companies engaged similar businesses incurred remedial response voluntary cleanup costs site contamination party lawsuits claims associated environmental safety matters including past production products containing hazardous substances additional lawsuits claims costs involving environmental matters likely continue arise future respect environmental matters involving site contamination continually conduct studies individually jointly potentially responsible parties determine feasibility various remedial techniques policy record appropriate liabilities environmental matters remedial efforts damage claim payments probable costs reasonably estimated liabilities based best estimate undiscounted future costs required complete remedial work recorded liabilities adjusted periodically remediation efforts honeywell international inc notes financial statementscontinued dollars millions except per share amounts progress additional technical regulatory legal information becomes available given uncertainties regarding status laws regulations enforcement policies impact potentially responsible parties technology information related individual sites believe possible develop estimate range reasonably possible environmental loss excess recorded liabilities expect fund expenditures matters operating cash flow timing cash expenditures depends number factors including timing remedial investigations feasibility studies timing litigation settlements remediation liability personal injury property damage claims regulatory approval cleanup projects remedial techniques utilized agreements parties following table summarizes information concerning recorded liabilities environmental costs environmental liabilities included following balance sheet accounts currently possess sufficient information reasonably estimate amounts environmental liabilities recorded upon future completion studies litigation settlements neither timing amount ultimate costs associated environmental matters determined although could material consolidated results operations operating cash flows periods recognized paid however considering past experience existing reserves expect environmental matters material adverse effect consolidated financial position onondaga lake syracuse nywe implementing combined dredgingcapping remedy onondaga lake pursuant consent decree approved united states district court northern district new york january 2007 accrued estimated cost remediating onondaga lake based currently available information analysis performed engineering consultants honeywell also conducting remedial investigations activities sites syracuse recorded reserves investigations activities appropriate consistent accounting policy described honeywell entered cooperative agreement potential natural resource trustees assess alleged natural resource damages relating site possible predict outcome duration assessment amounts responsibility damages honeywell international inc notes financial statementscontinued dollars millions except per share amounts asbestos matters honeywell defendant asbestos related personal injury actions related two predecessor companies • north american refractories company narco sold 1986 produced refractory products bricks cement used high temperature applications claimants consist largely individuals allege exposure narco asbestoscontaining refractory products occupational setting • bendix friction materials bendix business sold 2014 manufactured automotive brake parts contained chrysotile asbestos encapsulated form claimants consist largely individuals allege exposure asbestos brakes either performing vicinity individuals performed brake replacements following tables summarize information concerning narco bendix asbestos related balances asbestos related liabilities insurance recoveries asbestos related liabilities honeywell international inc notes financial statementscontinued dollars millions except per share amounts narco bendix asbestos related balances included following balance sheet accounts narco productsin connection narco’s emergence bankruptcy april 30 2013 federally authorized 524g trust narco trust established evaluation resolution existing future narco asbestos claims honeywell narco protected permanent channeling injunction barring present future individual actions state federal courts requiring asbestos related claims based exposure narco asbestoscontaining products made narco trust narco trust reviews submitted claims determines award amounts accordance established trust distribution procedures approved bankruptcy court set forth criteria claimants must meet qualify compensation including among things exposure medical criteria determine award amount addition honeywell provided continues provide input design control procedures processing narco claims ongoing audit rights review monitor claims processors’ adherence established requirements trust distribution procedures honeywell obligated fund narco asbestos claims submitted narco trust qualify payment trust distribution procedures annual contribution claims subject annual caps 140 million years 2016 2018 145 million year thereafter however initial 100 million claims processed narco trust initial claims amount count annual cap unused portion initial claims amount roll subsequent years fully utilized 2015 honeywell filed suit narco trust bankruptcy court alleging breach certain provisions trust agreement trust distribution procedures proceeding ongoing december 31 2015 honeywell made payments narco trust annual contribution claims honeywell also responsible payments due claimants pursuant settlement agreements reached pendency narco bankruptcy proceedings provide right submit claims narco trust subject qualification terms settlement agreements trust distribution procedures criteria preestablished unliquidated claims amounts estimated 150 million expected paid initial years trust operations 5 million paid since effective date narco trust payments subject annual cap described consolidated financial statements reflect estimated liability preestablished unliquidated claims 145 million unsettled claims pending time narco filed bankruptcy protection 33 million estimated value future narco asbestos claims expected asserted narco trust 2018 743 million absence actual trust experience base estimate honeywell projected probable value asbestos related future liabilities including trust claim handling costs based commonly accepted methodology used numerous bankruptcy courts addressing 524g trusts critical assumptions underlying methodology include claims filing rates disease criteria payment values contained trust distribution procedures estimated approval rates claims submitted narco trust epidemiological studies estimating disease instances projection resulted range estimated honeywell international inc notes financial statementscontinued dollars millions except per share amounts liability 743 million 961 million believe amount within range better estimate amount accordingly recorded minimum amount range light uncertainties inherent making longterm projections connection recent implementation trust distribution procedures narco trust well stay narco asbestos claims remained place throughout narco’s chapter 11 case believe reasonable basis estimating narco asbestos claims beyond 2018 insurance receivable corresponding estimated liability pending future narco asbestos claims reflects coverage reimburses honeywell portions narcorelated indemnity defense costs provided large number insurance policies written dozens insurance companies domestic insurance market london excess market conduct analyses estimate probable amount insurance recoverable asbestos claims substantial majority insurance carriers solvent individual carriers insolvent considered analysis probable recoveries made judgments concerning insurance coverage believe reasonable consistent historical dealings knowledge pertinent solvency issues surrounding insurers projecting future events subject many uncertainties could cause narcorelated asbestos liabilities assets higher lower projected recorded given uncertainties review estimates periodically update based experience relevant factors similarly reevaluate projections concerning probable insurance recoveries light changes projected liability developments may impact insurance recoveries friction productsthe following tables present information regarding bendix related asbestos claims activity honeywell experienced average resolution values per claim excluding legal costs follows possible predict whether resolution values bendixrelated asbestos claims increase decrease stabilize future honeywell international inc notes financial statementscontinued dollars millions except per share amounts consolidated financial statements reflect estimated liability resolution pending claims actually filed financial statement date future bendixrelated asbestos claims valued bendix pending future claims using average resolution values previous five years update resolution values used estimate cost bendix pending future claims fourth quarter year liability future claims represents estimated value future asbestos related bodily injury claims expected asserted bendix next five years estimated cost future bendixrelated asbestos claims based historic claims filing experience dismissal rates disease classifications resolution values tort system previous five years light uncertainties inherent making longterm projections well certain factors unique friction product asbestos claims believe reasonable basis estimating asbestos claims beyond next five years methodology used estimate liability future claims similar used estimate liability future narcorelated asbestos claims insurance receivable corresponding liability settlement pending future bendix asbestos claims reflects coverage provided large number insurance policies written dozens insurance companies domestic insurance market london excess market based ongoing analysis probable insurance recovery insurance receivables recorded financial statements simultaneous recording estimated liability underlying asbestos claims determination based analysis underlying insurance policies historical experience insurers ongoing review solvency insurers judicial determinations relevant insurance programs consideration impacts settlements reached insurers honeywell believes sufficient insurance coverage reserves cover pending bendixrelated asbestos claims bendixrelated asbestos claims estimated filed within next five years although impossible predict outcome either pending future bendixrelated asbestos claims believe claims would material adverse effect consolidated financial position light insurance coverage prior experience resolving claims rate types claims filed average resolution value claims period time claim settlements paid collectively variable claims factors substantially change honeywell would expect future bendixrelated asbestos claims material adverse effect results operations operating cash flows fiscal year assurances given however variable claims factors change matters subject number lawsuits investigations disputes involve substantial amounts claimed arising conduct business including matters relating commercial transactions government contracts product liability prior acquisitions divestitures employee benefit plans intellectual property environmental health safety matters recognize liability contingency probable occurrence reasonably estimable continually assess likelihood adverse judgments outcomes matters well potential ranges possible losses taking consideration insurance recoveries based careful analysis matter assistance outside legal counsel applicable experts included matters following honeywell v united auto workers uaw et alin july 2011 honeywell filed action federal court district new jersey uaw former employees retired series master collective bargaining agreements mcbas honeywell uaw seeking declaratory judgment certain express limitations obligation contribute toward healthcare coverage retirees caps set forth mcbas may implemented effective january 1 2012 uaw certain retiree defendants filed mirror suit eastern honeywell international inc notes financial statementscontinued dollars millions except per share amounts district michigan alleging mcbas provide caps company’s liability healthcare coverage new jersey action dismissed honeywell subsequently answered uaw’s complaint michigan asserted counterclaims fraudulent inducement negligent misrepresentation breach implied warranty uaw filed motion dismiss counterclaims court dismissed honeywell’s fraudulent inducement negligent misrepresentation claims let stand claim breach implied warranty second quarter 2014 parties agreed stay proceedings respect retirees retired initial inclusions caps 2003 mcba supreme court decided mg polymers usa llc v tackett case ruling january 26 2015 supreme court held retiree health insurance benefits provided collective bargaining agreements carry inference vested guaranteed continue life “vesting” issue must decided pursuant ordinary principles contract law stay proceedings lifted case proceeding normal course based supreme court’s ruling honeywell confident caps upheld liability healthcare coverage premiums respect putative class limited negotiated expressly set forth applicable mcbas event adverse ruling however honeywell’s postretirement benefits pre2003 retirees would increase approximately 176 million reflecting estimated value caps december 2013 uaw certain plaintiffs filed motion partial summary judgment respect retirees retired initial inclusion caps 2003 mcba uaw sought ruling 2003 mcba limit honeywell’s obligation contribute healthcare coverage post2003 retirees motion remains pending honeywell confident court find 2003 mcba fact limit honeywell’s retiree healthcare obligation post2003 retirees event adverse ruling however honeywell’s postretirement benefits post 2003 retirees would increase approximately 110 million reflecting estimated value caps joint strike fighter investigationin 2013 company received subpoenas department justice requesting information relating primarily parts manufactured united kingdom china used fighter jet company cooperating fully investigation believe honeywell complied relevant us laws regulations regarding manufacture sensors possible predict outcome investigation action may result given uncertainty inherent litigation investigations including specific matters referenced believe possible develop estimates reasonably possible loss excess current accruals matters specifically set forth considering past experience existing accruals expect outcome matters either individually aggregate material adverse effect consolidated financial position contingencies resolved long periods time potential liabilities subject change due new developments changes settlement strategy impact evidentiary requirements could cause us pay damage awards settlements become subject equitable remedies could material adverse effect results operations operating cash flows periods recognized paid warranties guarantees normal course business issue product warranties product performance guarantees accrue estimated cost product warranties performance guarantees based contract terms historical experience time sale adjustments initial obligations warranties guarantees made changes obligations become reasonably estimable honeywell international inc notes financial statementscontinued dollars millions except per share amounts following table summarizes information concerning recorded obligations product warranties product performance guarantees product warranties product performance guarantees included following balance sheet accounts note 20 pension postretirement benefits sponsor funded unfunded us nonus defined benefit pension plans covering majority employees retirees pension benefits substantially us employees provided noncontributory qualified nonqualified defined benefit plans nonunion hourly salaried employees joining honeywell first time december 31 2012 eligible participate honeywell’s us defined benefit pension plans also sponsor defined benefit pension plans cover nonus employees us citizens certain jurisdictions principally uk netherlands germany canada pension plans outside us material company either individually aggregate also sponsor postretirement benefit plans provide health care benefits life insurance coverage mainly us eligible retirees less 1 honeywell’s us employees eligible retiree medical subsidy company subsidy limited fixeddollar amount addition 80 honeywell’s current retirees either company subsidy fixeddollar subsidy amount significantly limits exposure impact future health care cost increases retiree medical life insurance plans funded claims expenses paid operating cash flow honeywell international inc notes financial statementscontinued dollars millions except per share amounts following tables summarize balance sheet impact including benefit obligations assets funded status associated significant pension postretirement benefit plans honeywell international inc notes financial statementscontinued dollars millions except per share amounts recognized accumulated comprehensive income loss associated significant pension postretirement benefit plans december 31 2015 2014 follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts components net periodic benefit income cost amounts recognized comprehensive income loss significant pension postretirement benefit plans include following components estimated prior service credit pension benefits amortized accumulated comprehensive income loss net periodic benefit income cost 2016 expected 44 million 3 million us nonus pension plans 1 curtailment gain 2013 related elimination retiree medical coverage union group connection new collective bargaining agreement honeywell international inc notes financial statementscontinued dollars millions except per share amounts estimated net loss prior service credit postretirement benefits amortized accumulated comprehensive income loss net periodic benefit income 2016 expected 22 million 76 million major actuarial assumptions used determining benefit obligations net periodic benefit income cost significant benefit plans presented following table weighted averages discount rate us pension postretirement benefits plans reflects current rate associated liabilities could settled measurement date december 31 determine discount rates us pension postretirement benefit plans use modeling process involves matching expected cash outflows benefit plans yield curve constructed portfolio high quality fixedincome debt instruments use single weightedaverage yield hypothetical portfolio discount rate benchmark discount rate used determine postretirement benefit obligation lower principally due shorter expected duration postretirement plan obligations compared pension plan obligations honeywell international inc notes financial statementscontinued dollars millions except per share amounts fourth quarter 2015 changed methodology used estimate service interest cost components net periodic benefit income cost significant pension plans previously estimated cost components utilizing single weightedaverage discount rate derived yield curve used measure pension benefit obligation new methodology utilizes full yield curve approach estimation cost components applying specific spot rates along yield curve used determination pension benefit obligation underlying projected cash flows provides precise measurement service interest costs improving correlation projected cash flows corresponding spot rates change affect measurement pension obligation applied prospectively change estimate us pension plans single weightedaverage spot rates used determine service interest costs 2016 469 359 estimate service interest costs us pension plans reduced approximately 150 million 2016 expected rate return us plan assets 775 longterm rate based historical plan asset returns varying longterm periods combined current market conditions broad asset mix considerations review expected rate return annual basis revise appropriate nonus benefit plans actuarial assumptions reflect economic market factors relevant country impact discount rate methodology change service interest costs nonus pension plans material pension benefits included aggregate data tables amounts applicable pension plans accumulated benefit obligations exceeding fair value plan assets amounts related plans follows accumulated benefit obligation us defined benefit pension plans 169 billion 172 billion nonus defined benefit plans 62 billion 55 billion december 31 2015 2014 asset investment strategy us pension plans focuses maintaining diversified portfolio using various asset classes order achieve longterm investment objectives risk adjusted basis actual invested positions various securities change time based short longer term investment opportunities achieve objectives established longterm target allocations follows 6070 equity securities 1020 fixed income securities cash 515 real estate investments 1020 types investments equity securities include publiclytraded stock companies located inside outside united states fixed income securities include corporate bonds companies diversified industries mortgagebacked securities us treasuries real estate investments include direct investments commercial properties investments real estate funds types investments include investments private equity hedge funds follow several different strategies review assets regular basis ensure within targeted asset allocation ranges necessary asset balances adjusted back within target allocations honeywell international inc notes financial statementscontinued dollars millions except per share amounts nonus pension assets typically managed decentralized fiduciary committees honeywell corporate investments group providing standard funding investment guidance nonus investment policies different country local regulations funding rules financial tax considerations part funding investment allocation process country fair values us nonus pension plans assets asset category follows honeywell international inc notes financial statementscontinued dollars millions except per share amounts honeywell international inc notes financial statementscontinued dollars millions except per share amounts following tables summarize changes fair value level 3 assets honeywell international inc notes financial statementscontinued dollars millions except per share amounts company enters futures contracts gain exposure certain markets sufficient cash equivalents held pension plans cover notional value futures contracts december 31 2015 2014 us plans contracts notional amounts 2613 million 2354 million december 31 2015 2014 nonus plans contracts notional amounts 54 million 65 million us nonus pension plans notional derivative exposure primarily related outstanding equity futures contracts common stocks preferred stocks real estate investment trusts shortterm investments valued closing price reported active market individual securities traded corporate bonds mortgages assetbacked securities government securities valued either using pricing models bids provided brokers dealers quoted prices securities similar characteristics discounted cash flows include adjustments certain risks may observable credit liquidity risks certain securities held commingled funds valued using net asset values provided administrators funds investments private equity debt real estate hedge funds direct private investments valued estimated fair value based quarterly financial information received investment advisor andor general partner investments real estate properties valued quarterly basis using income approach valuation estimates periodically supplemented third party appraisals general funding policy qualified defined benefit pension plans contribute amounts least sufficient satisfy regulatory funding standards 2015 2014 2013 required make contributions us pension plans contributions made required make contributions us pension plans 2016 2015 contributions 139 million made nonus pension plans satisfy regulatory funding requirements 2016 expect make contributions cash andor marketable securities approximately 160 million nonus pension plans satisfy regulatory funding standards contributions us nonus pension plans reflect benefits paid directly company assets honeywell international inc notes financial statementscontinued dollars millions except per share amounts benefit payments including amounts paid company assets reflecting expected future service appropriate expected paid follows postretirement benefits assumed health care cost trend rate significant effect amounts reported onepercentagepoint change assumed health care cost trend rate would following effects benefit payments reflecting expected future service appropriate expected paid follows note 21 segment financial data globally manage business operations three reportable operating segments segment information consistent management reviews businesses makes investing resource allocation decisions assesses operating performance honeywell’s senior management evaluates segment performance based segment profit segment profit measured business unit income loss taxes excluding general corporate honeywell international inc notes financial statementscontinued dollars millions except per share amounts unallocated expense income expense interest financial charges pension postretirement benefits expense stock compensation expense repositioning charges honeywell international inc notes financial statementscontinued dollars millions except per share amounts reconciliation segment profit consolidated income continuing operations taxes follows 1 equity income loss affiliated companies included segment profit 2 amounts included cost products services sold selling general administrative expenses note 22 geographic areasfinancial data honeywell international inc notes financial statementscontinued dollars millions except per share amounts note 23 supplemental cash flow information note 24 unaudited quarterly financial information report independent registered public accounting firm board directors shareholders honeywell international inc audited accompanying consolidated balance sheet honeywell international inc subsidiaries “company” december 31 2015 related consolidated statements operations comprehensive income cash flows shareowners’ equity year ended also audited company’s internal control financial reporting december 31 2015 based criteria established internal controlintegrated framework 2013 issued committee sponsoring organizations treadway commission described management’s report internal control financial reporting management excluded assessment internal control financial reporting elster division melrose industries plc “elster” acquired december 29 2015 whose financial statements constitute approximately 18 consolidated total assets de minimis percentage total consolidated net sales year ended december 31 2015 accordingly audit include internal control financial reporting elster company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting including accompanying management’s report internal control financial reporting responsibility express opinion consolidated financial statements opinion company’s internal control financial reporting based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audit financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers persons performing similar functions effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting including possibility collusion improper management override controls material misstatements due error fraud may prevented detected timely basis also projections evaluation effectiveness internal control financial reporting future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion consolidated financial statements referred present fairly material respects financial position company december 31 2015 results operations cash flows year ended conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2015 based criteria established internal controlintegrated framework 2013 issued committee sponsoring organizations treadway commission deloitte touche llp parsippany new jersey february 12 2016 report independent registered public accounting firm board directors shareholders honeywell international inc opinion accompanying consolidated balance sheet december 31 2014 related consolidated statements income comprehensive income shareholders’ equity cash flows two years period ended december 31 2014 present fairly material respects financial position honeywell international inc subsidiaries december 31 2014 results operations cash flows two years period ended december 31 2014 conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp florham park new jersey february 13 2015 item 9 nannannannannannanitem 15 reserved item 16 principal accountant fees services information relating fees paid services performed pricewaterhousecoopers llp 2002 2001 audit committees preapproval policies procedures respect nonaudit services contained proxy statement referred item 10 directors executive officers registrant information incorporated herein reference part iv item 17 exhibits financial statement schedules reports form 8k financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto a3 exhibits see exhibit index pages 22 24 form 10k annual report b reports form 8k three months ended december 31 2002 current report form 8k filed december 30 reporting contribution 700 million stock us pension plans signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report signed behalf undersigned thereunto duly authorized honeywell international inc march 6 2003 john j tus john j tus vice president controller pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated name david cote chairman board chief executive officer director hans w becherer director gordon bethune director marshall n carter director jaime chico pardo director ann fudge director richard f wallman richard f wallman senior vice president chief financial officer principal financial officer richard f wallman richard f wallman attorneyinfact james j howard director bruce karatz director robert p luciano director russell e palmer director ivan g seidenberg director john r stafford director michael w wright director john j tus john j tus vice president controller principal accounting officer march 6 2003 certification pursuant section 302 sarbanesoxley act 2002 david cote chief executive officer certify 1 reviewed annual report form 10k honeywell international inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 6 2003 david cote david cote chief executive officer certification pursuant section 302 sarbanesoxley act 2002 richard f wallman chief financial officer certify 1 reviewed annual report form 10k honeywell international inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 6 2003 richard f wallman richard f wallman chief financial officer exhibit index exhibits identified asterisk management contracts compensatory plans arrangements report independent accountants financial statement schedule board directors shareowners honeywell international inc audits consolidated financial statements referred report dated february 6 2003 appearing 2002 annual report shareowners honeywell international inc report consolidated financial statements incorporated reference annual report form 10k also included audit financial statement schedule listed item 17a2 form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp florham park new jersey february 6 2003 honeywell international inc schedule ii valuation qualifying accounts three years ended december 31 2002 millions 1 represents uncollectible accounts written less recoveries translation adjustments reserves acquired statement differences british pound sterling sign shall expressed l japanese yen sign shall expressed euro sign shall expressed e registered trademark symbol shall expressed r characters normally expressed subscript shall preceded uitem 15 exhibits financial statement schedules reports form 8k financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto a3 exhibits see exhibit index pages 20 22 annual report form 10k b reports form 8k three months ended december 31 2003 current reports form 8k filed october 16 reporting third quarter 2003 financial results november 17 reporting expiration letter intent acquire automotive bendix friction materials business signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report signed behalf undersigned thereunto duly authorized honeywell international inc march 4 2004 john j tus john j tus vice president controller pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated march 4 2004 exhibit index exhibits identified asterisk management contracts compensatory plans arrangements report independent auditors financial statement schedule board directors honeywell international inc audits consolidated financial statements referred report dated february 5 2004 appearing 2003 annual report shareowners honeywell international inc report consolidated financial statements incorporated reference annual report form 10k also included audit financial statement schedule listed item 15a2 form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp florham park new jersey february 5 2004 honeywell international inc schedule ii valuation qualifying accounts three years ended december 31 2003 millions 1 represents uncollectible accounts written less recoveries translation adjustments reserves acquired statement differences registered trademark symbol shall expressed r british pound sterling sign shall expressed l japanese yen sign shall expressed euro sign shall expressed e section symbol shall expressed ss characters normally expressed subscript shall preceded uitem 15 exhibits financial statement schedules financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto a3 exhibits see exhibit index pages 98 100 annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated february 25 2005 exhibit index exhibits identified asterisk management contracts compensatory plans arrangements honeywell international inc schedule iivaluation qualifying accounts three years ended december 31 2004 millions 1 represents uncollectible accounts written less recoveries translation adjustments reserves acquireditem 15 exhibits financial statement schedules financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto a3 exhibits see exhibit index pages 99 101 annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated march 1 2006 exhibit index exhibits identified asterisk management contracts compensatory plans arrangements honeywell international inc schedule iivaluation qualifying accounts three years ended december 31 2005 millions 1 represents uncollectible accounts written less recoveries translation adjustments reserves acquireditem 15 exhibits financial statement schedules financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto a3 exhibits see exhibit index pages 102 106 annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated february 15 2007 exhibit index exhibits identified asterisk management contracts compensatory plans arrangements honeywell international inc schedule iivaluation qualifying accounts three years ended december 31 2006 millions 1 represents uncollectible accounts written less recoveries translation adjustments reserves acquireditem 15 exhibits financial statement schedules financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto a3 exhibits see exhibit index pages 109 112 annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated february 15 2008 exhibit index exhibit description omitted inapplicable 3i restated certificate incorporation honeywell international inc amended april 25 2005 incorporated reference exhibit 3i honeywell’s form 10k year ended december 31 2005 3ii bylaws honeywell amended december 8 2006 incorporated reference exhibit 3ii honeywell’s form 8k filed december 11 2006 honeywell international inc party several longterm debt instruments case total amount securities authorized exceed 10 total assets honeywell subsidiaries consolidated basis pursuant paragraph 4iiia item 601b regulation sk honeywell agrees furnish copy instruments securities exchange commission upon request omitted inapplicable 101 2003 stock incentive plan honeywell international inc affiliates incorporated reference honeywell’s proxy statement dated march 17 2003 filed pursuant rule 14a6 securities exchange act 1934 amended exhibit 101 honeywell’s form 8k filed december 21 2004 exhibit 101 honeywell’s form 10k year ended december 31 2006 102 deferred compensation plan nonemployee directors honeywell international inc amended restated incorporated reference exhibit 102 honeywell’s form 10q quarter ended june 30 2003 amended exhibit 101 honeywell’s form 8k filed december 21 2004 exhibit 102 honeywell’s form 10k year ended december 31 2005 103 stock plan nonemployee directors alliedsignal inc amended incorporated reference exhibit 103 honeywell’s form 10q quarter ended june 30 2003 exhibit 102 honeywell’s form 10q quarter ended june 30 2007 104 1985 stock plan employees alliedsignal inc subsidiaries amended incorporated reference exhibit 193 honeywell’s form 10q quarter ended september 30 1991 105 alliedsignal inc incentive compensation plan executive employees amended incorporated reference exhibit b honeywell’s proxy statement dated march 10 1994 filed pursuant rule 14a6 securities exchange act 1934 amended exhibit 105 honeywell’s form 10q quarter ended june 30 1999 106 supplemental nonqualified savings plan highly compensated employees honeywell international inc subsidiaries amended restated incorporated reference exhibit 106 honeywell’s form 10q quarter ended september 30 2005 exhibit 106 honeywell’s form 10k year ended december 31 2006 107 honeywell international inc severance plan senior executives amended restated incorporated reference exhibit 107 honeywell’s form 10k year ended december 31 2003 amended exhibit 107 honeywell’s form 10q quarter ended june 30 2004 108 salary incentive award deferral plan selected employees honeywell international inc affiliates amended restated incorporated reference exhibit 108 honeywell’s form 10q quarter ended september 30 2005 exhibit 108 honeywell’s form 10k year ended december 31 2006 exhibit description 109 1993 stock plan employees honeywell international inc affiliates amended incorporated reference exhibit honeywell’s proxy statement dated march 10 1994 filed pursuant rule 14a6 securities exchange act 1934 amended exhibit 101 honeywell’s form 8k filed december 21 2004 exhibit 109 honeywell’s form 10k year ended december 31 2006 exhibit 103 honeywell’s form 10q quarter ended june 30 2007 1010 honeywell international inc supplemental pension plan amended restated incorporated reference exhibit 1013 honeywell’s form 10k year ended december 31 2000 amended exhibit 101 honeywell’s form 8k filed december 21 2004 exhibit 102 honeywell’s form 10q quarter ended september 30 2006 1011 employment separation agreement release j kevin gilligan honeywell international inc dated february 10 2004 incorporated reference honeywell’s form 10 k year ended december 31 2003 1012 honeywell international inc supplemental executive retirement plan executives career band 6 incorporated reference exhibit 1014 honeywell’s form 10q quarter ended june 30 2004 amended exhibit 101 honeywell’s form 8k filed december 21 2004 exhibit 102 honeywell’s form 10q quarter ended september 30 2006 1013 honeywell supplemental defined benefit retirement plan amended restated incorporated reference exhibit 1015 honeywell’s form 10q quarter ended june 30 2004 amended exhibit 101 honeywell’s form 8k filed december 21 2004 exhibit 102 honeywell’s form 10q quarter ended september 30 2006 1014 letter david j anderson honeywell international inc dated june 12 2003 incorporated reference exhibit 1026 honeywell’s form 10q quarter ended june 30 2003 1015 employment separation agreement release richard f wallman honeywell international inc dated july 17 2003 incorporated reference exhibit 102 honeywell’s form 10q quarter ended september 30 2003 1016 honeywell international inc severance plan corporate staff employees involuntary termination following change control amended restated incorporated reference exhibit 1019 honeywell’s form 10k year ended december 31 2002 amended attached amendment filed herewith 1017 employment agreement dated february 18 2002 honeywell david cote incorporated reference exhibit 1024 honeywell’s form 8k filed march 4 2002 1018 2003 stock incentive plan employees honeywell international inc affiliates award agreement incorporated reference exhibit 101 honeywell’s form 8k filed february 7 2005 1019 2003 stock incentive plan employees honeywell international inc affiliates restricted unit agreement incorporated reference exhibit 1021 honeywell’s form 10k year ended december 31 2005 1020 2003 stock incentive plan employees honeywell international inc affiliates growth plan agreement incorporated reference exhibit 1022 honeywell’s form 10k year ended december 31 2005 exhibit description 1021 stock plan nonemployee directors honeywell international inc option agreement incorporated reference exhibit 101 form 8k filed april 29 2005 1022 deferred compensation agreement dated august 4 2006 honeywell david cote incorporated reference exhibit 1022 honeywell’s form 10k year ended december 31 2006 1023 letter agreement dated july 27 2001 honeywell larry e kittelberger incorporated reference exhibit 1023 honeywell’s form 10k year ended december 31 2006 1024 honeywell supplemental retirement plan incorporated reference exhibit 1024 honeywell’s form 10k year ended december 31 2006 1025 pittway corporation supplemental executive retirement plan incorporated reference exhibit 1025 honeywell’s form 10k year ended december 31 2006 1026 2006 stock incentive plan honeywell international inc affiliates incorporated reference honeywell’s proxy statement dated march 13 2006 filed pursuant rule 14a6 securities exchange act 1934 exhibit 102 honeywell’s form 10q quarter ended june 30 2006 amended exhibit 1026 honeywell’s form 10 k year ended december 31 2006 1027 2006 stock incentive plan honeywell international inc affiliatesform option award agreement incorporated reference exhibit 1027 honeywell’s form 10k year ended december 31 2006 1028 2006 stock incentive plan honeywell international inc affiliatesform restricted unit agreement filed herewith 1029 2006 stock incentive plan honeywell international inc affiliatesform growth plan agreement incorporated reference exhibit 105 honeywell’s form 10q quarter ended june 30 2006 1030 2006 stock incentive plan honeywell international inc affiliates form performance share agreement incorporated reference exhibit 1030 honeywell’s form 10k year ended december 31 2006 1031 2006 stock plan nonemployee directors honeywell international inc incorporated reference honeywell’s proxy statement dated march 13 2006 filed pursuant rule 14a 6 securities exchange act 1934 exhibit 106 honeywell’s form 10q quarter ended june 30 2006 amended exhibit 1031 honeywell’s form 10k year ended december 31 2006 1032 2006 stock plan nonemployee directors honeywell international incform option agreement incorporated reference exhibit 107 honeywell’s form 10q quarter ended june 30 2006 1033 2006 stock plan nonemployee directors honeywell international incform restricted stock agreement incorporated reference exhibit 108 honeywell’s form 10q quarter ended june 30 2006 1034 2007 honeywell global employee stock plan incorporated reference honeywell’s proxy statement dated march 12 2007 filed pursuant rule 14a6 securities exchange act 1934 1035 letter agreement dated july 20 2007 honeywell roger fradin incorporated reference exhibit 101 honeywell’s form 10q quarter ended september 30 2007 exhibit description 1036 amended restated five year credit agreement dated may 14 2007 among honeywell international inc banks financial institutions institutional lenders parties thereto citicorp usa inc administrative agent citibank international plc swing line agent jpmorgan chase bank na syndication agent bank america na barclays bank plc deutsche bank ag new york branch ubs loan finance llc documentation agents citigroup global markets inc jp morgan securities inc joint lead arrangers cobook managers incorporated reference exhibit 101 honeywell’s 8k filed may 18 2007 1037 purchase sale agreement catalysts adsorbents process systems inc honeywell specialty materials llc dated september 30 2005 incorporated reference exhibit 1023 honeywell’s form 10q quarter ended september 30 2005 1038 stock purchase agreement honeywell international inc mf worldwide corp incorporated reference exhibit 21 honeywell’s form 8k filed november 1 2005 omitted inapplicable statement computation ratio earnings fixed charges filed herewith omitted inapplicable omitted inapplicable subsidiaries registrant filed herewith omitted inapplicable consent pricewaterhousecoopers llp filed herewith powers attorney filed herewith 311 certification principal executive officer pursuant section 302 sarbanesoxley act 2002 filed herewith 312 certification principal financial officer pursuant section 302 sarbanesoxley act 2002 filed herewith 321 certification principal executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith 322 certification principal financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith omitted inapplicable exhibits identified asterisk management contracts compensatory plans arrangements honeywell international inc schedule iivaluation qualifying accounts three years ended december 31 2007 millions allowance doubtful accounts 1 represents uncollectible accounts written less recoveries translation adjustments reserves acquired deferred tax assetsvaluation allowanceitem 15 exhibits financial statement schedules financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto a3 exhibits see exhibit index pages 113 116 annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated david j anderson david j anderson attorneyinfact february 13 2009 exhibit index exhibit description omitted inapplicable 3i amended restated certificate incorporation honeywell international inc amended restated april 28 2008 incorporated reference exhibit 3i honeywell’s form 8k filed may 1 2008 3ii bylaws honeywell international inc amended september 26 2008 incorporated reference exhibit 3ii honeywell’s form 8k filed october 2 2008 honeywell international inc party several longterm debt instruments case total amount securities authorized exceed 10 total assets honeywell subsidiaries consolidated basis pursuant paragraph 4iiia item 601b regulation sk honeywell agrees furnish copy instruments securities exchange commission upon request omitted inapplicable 101 2003 stock incentive plan honeywell international inc affiliates incorporated reference honeywell’s proxy statement dated march 17 2003 filed pursuant rule 14a6 securities exchange act 1934 amended exhibit 101 honeywell’s form 8k filed december 21 2004 exhibit 101 honeywell’s form 10k year ended december 31 2006 attached amendment filed herewith 102 deferred compensation plan nonemployee directors honeywell international inc amended restated incorporated reference exhibit 102 honeywell’s form 10q quarter ended june 30 2003 amended exhibit 101 honeywell’s form 8k filed december 21 2004 exhibit 102 honeywell’s form 10k year ended december 31 2005 103 stock plan nonemployee directors alliedsignal inc amended incorporated reference exhibit 103 honeywell’s form 10q quarter ended june 30 2003 amended exhibit 102 honeywell’s form 10q quarter ended june 30 2007 exhibit 101 honeywell’s form 10q quarter ended september 30 2008 104 1985 stock plan employees alliedsignal inc subsidiaries amended incorporated reference exhibit 193 honeywell’s form 10q quarter ended september 30 1991 105 honeywell international inc incentive compensation plan executive employees amended restated filed herewith 106 supplemental nonqualified savings plan highly compensated employees honeywell international inc subsidiaries amended restated filed herewith 107 honeywell international inc severance plan senior executives amended restated filed herewith 108 salary incentive award deferral plan selected employees honeywell international inc affiliates amended restated filed herewith 109 1993 stock plan employees honeywell international inc affiliates amended incorporated reference exhibit honeywell’s proxy statement dated march 10 1994 filed pursuant rule 14a6 securities exchange act 1934 amended exhibit 101 honeywell’s form 8k filed december 21 2004 exhibit 109 honeywell’s form 10k year ended december 31 2006 exhibit 103 honeywell’s form 10q quarter ended june 30 2007 attached amendment filed herewith exhibit description 1010 honeywell international inc supplemental pension plan amended restated filed herewith 1011 employment separation agreement release j kevin gilligan honeywell international inc dated february 10 2004 incorporated reference honeywell’s form 10k year ended december 31 2003 1012 honeywell international inc supplemental executive retirement plan executives career band 6 amended restated filed herewith 1013 honeywell supplemental defined benefit retirement plan amended restated filed herewith 1014 letter david j anderson honeywell international inc dated june 12 2003 incorporated reference exhibit 1026 honeywell’s form 10q quarter ended june 30 2003 amended attached amendment filed herewith 1015 employment separation agreement release richard f wallman honeywell international inc dated july 17 2003 incorporated reference exhibit 102 honeywell’s form 10q quarter ended september 30 2003 1016 honeywell international inc severance plan corporate staff employees involuntary termination following change control amended restated filed herewith 1017 employment agreement dated february 18 2002 honeywell david cote incorporated reference exhibit 1024 honeywell’s form 8k filed march 4 2002 amended exhibit 103 honeywell’s form 10q quarter ended september 30 2008 attached amendment filed herewith 1018 2003 stock incentive plan employees honeywell international inc affiliates award agreement incorporated reference exhibit 101 honeywell’s form 8k filed february 7 2005 1019 2003 stock incentive plan employees honeywell international inc affiliates restricted unit agreement incorporated reference exhibit 1021 honeywell’s form 10k year ended december 31 2005 1020 2003 stock incentive plan employees honeywell international inc affiliates growth plan agreement incorporated reference exhibit 1022 honeywell’s form 10k year ended december 31 2005 1021 stock plan nonemployee directors honeywell international inc option agreement incorporated reference exhibit 101 form 8k filed april 29 2005 1022 deferred compensation agreement dated august 4 2006 honeywell david cote incorporated reference exhibit 1022 honeywell’s form 10k year ended december 31 2006 1023 letter agreement dated july 27 2001 honeywell larry e kittelberger incorporated reference exhibit 1023 honeywell’s form 10k year ended december 31 2006 amended attached amendment filed herewith 1024 honeywell supplemental retirement plan incorporated reference exhibit 1024 honeywell’s form 10k year ended december 31 2006 1025 pittway corporation supplemental executive retirement plan incorporated reference exhibit 1025 honeywell’s form 10k year ended december 31 2006 amended attached amendment filed herewith exhibit description 1026 2006 stock incentive plan honeywell international inc affiliates amended restated filed herewith 1027 2006 stock incentive plan honeywell international inc affiliatesform option award agreement incorporated reference exhibit 1027 honeywell’s form 10k year ended december 31 2006 1028 2006 stock incentive plan honeywell international inc affiliatesform restricted unit agreement incorporated reference exhibit 1028 honeywell’s form 10k year ended december 31 2007 1029 2006 stock incentive plan honeywell international inc affiliatesform growth plan agreement incorporated reference exhibit 105 honeywell’s form 10q quarter ended june 30 2006 1030 2006 stock incentive plan honeywell international inc affiliates form performance share agreement incorporated reference exhibit 1030 honeywell’s form 10k year ended december 31 2006 1031 2006 stock plan nonemployee directors honeywell international inc amended restated filed herewith 1032 2006 stock plan nonemployee directors honeywell international incform option agreement incorporated reference exhibit 107 honeywell’s form 10q quarter ended june 30 2006 1033 2006 stock plan nonemployee directors honeywell international incform restricted stock agreement incorporated reference exhibit 108 honeywell’s form 10q quarter ended june 30 2006 1034 2006 stock plan nonemployee directors honeywell international incform restricted unit agreement filed herewith 1035 2007 honeywell global employee stock plan incorporated reference honeywell’s proxy statement dated march 12 2007 filed pursuant rule 14a6 securities exchange act 1934 1036 letter agreement dated july 20 2007 honeywell roger fradin incorporated reference exhibit 101 honeywell’s form 10q quarter ended september 30 2007 1037 amended restated five year credit agreement dated may 14 2007 among honeywell international inc banks financial institutions institutional lenders parties thereto citicorp usa inc administrative agent citibank international plc swing line agent jpmorgan chase bank na syndication agent bank america na barclays bank plc deutsche bank ag new york branch ubs loan finance llc documentation agents citigroup global markets inc jp morgan securities inc joint lead arrangers co book managers incorporated reference exhibit 101 honeywell’s 8k filed may 18 2007 1038 purchase sale agreement catalysts adsorbents process systems inc honeywell specialty materials llc dated september 30 2005 incorporated reference exhibit 1023 honeywell’s form 10q quarter ended september 30 2005 1039 stock purchase agreement honeywell international inc mf worldwide corp incorporated reference exhibit 21 honeywell’s form 8k filed november 1 2005 1040 stock purchase agreement dated april 3 2008 among honeywell international inc safety products holdings inc selling shareholders party thereto odyssey investment services llc incorporated reference exhibit 101 honeywell’s form 8k filed april 7 2008 exhibit description 1041 stock asset purchase agreement dated june 9 2008 honeywell international inc aerospace inc incorporated reference exhibit 101 honeywell’s form 8k filed june 11 2008 omitted inapplicable statement computation ratio earnings fixed charges filed herewith omitted inapplicable omitted inapplicable subsidiaries registrant filed herewith omitted inapplicable consent pricewaterhousecoopers llp filed herewith powers attorney filed herewith 311 certification principal executive officer pursuant section 302 sarbanesoxley act 2002 filed herewith 312 certification principal financial officer pursuant section 302 sarbanesoxley act 2002 filed herewith 321 certification principal executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith 322 certification principal financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith omitted inapplicable exhibits identified asterisk management contracts compensatory plans arrangements honeywell international inc schedule iivaluation qualifying accounts three years ended december 31 2008 millions allowance doubtful accounts 1 represents uncollectible accounts written less recoveries translation adjustments reserves acquired deferred tax assetsvaluation allowanceitem 15 exhibits financial statement schedules financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto a3 exhibits see exhibit index pages 111 114 annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated february 12 2010 exhibit index exhibit description 3i amended restated certificate incorporation honeywell international inc amended april 28 2008 incorporated reference exhibit 3i honeywell’s form 8k filed may 1 2008 3ii bylaws honeywell international inc amended september 26 2008 incorporated reference exhibit 3ii honeywell’s form 8k filed october 2 2008 honeywell international inc party several longterm debt instruments case total amount securities authorized exceed 10 total assets honeywell subsidiaries consolidated basis pursuant paragraph 4iiia item 601b regulation sk honeywell agrees furnish copy instruments securities exchange commission upon request 101 2003 stock incentive plan honeywell international inc affiliates incorporated reference honeywell’s proxy statement dated march 17 2003 filed pursuant rule 14a6 securities exchange act 1934 amended exhibit 101 honeywell’s form 8k filed december 21 2004 exhibit 101 honeywell’s form 10k year ended december 31 2006 exhibit 101 honeywell’s form 10k year ended december 31 2008 102 deferred compensation plan nonemployee directors honeywell international inc amended restated incorporated reference exhibit 102 honeywell’s form 10q quarter ended june 30 2003 amended exhibit 101 honeywell’s form 8k filed december 21 2004 exhibit 102 honeywell’s form 10k year ended december 31 2005 103 stock plan nonemployee directors alliedsignal inc amended incorporated reference exhibit 103 honeywell’s form 10q quarter ended june 30 2003 amended exhibit 102 honeywell’s form 10q quarter ended june 30 2007 exhibit 101 honeywell’s form 10q quarter ended september 30 2008 104 1985 stock plan employees alliedsignal inc subsidiaries amended incorporated reference exhibit 193 honeywell’s form 10q quarter ended september 30 1991 105 honeywell international inc incentive compensation plan executive employees amended restated incorporated reference exhibit 105 honeywell’s form 10k year ended december 31 2008 106 supplemental nonqualified savings plan highly compensated employees honeywell international inc subsidiaries amended restated incorporated reference exhibit 106 honeywell’s form 10k year ended december 31 2008 107 honeywell international inc severance plan senior executives amended restated incorporated reference exhibit 107 honeywell’s form 10k year ended december 31 2008 amended attached amendment filed herewith 108 salary incentive award deferral plan selected employees honeywell international inc affiliates amended restated incorporated reference exhibit 108 honeywell’s form 10k year ended december 31 2008 exhibit description 109 1993 stock plan employees honeywell international inc affiliates amended incorporated reference exhibit honeywell’s proxy statement dated march 10 1994 filed pursuant rule 14a6 securities exchange act 1934 amended exhibit 101 honeywell’s form 8k filed december 21 2004 exhibit 109 honeywell’s form 10k year ended december 31 2006 exhibit 103 honeywell’s form 10q quarter ended june 30 2007 exhibit 109 honeywell’s form 10k year ended december 31 2008 1010 honeywell international inc supplemental pension plan amended restated incorporated reference exhibit 1010 honeywell’s form 10k year ended december 31 2008 amended attached amendment filed herewith 1011 employment separation agreement release j kevin gilligan honeywell international inc dated february 10 2004 incorporated reference honeywell’s form 10k year ended december 31 2003 1012 honeywell international inc supplemental executive retirement plan executives career band 6 amended restated incorporated reference exhibit 1012 honeywell’s form 10k year ended december 31 2008 amended attached amendment filed herewith 1013 honeywell supplemental defined benefit retirement plan amended restated incorporated reference exhibit 1013 honeywell’s form 10k year ended december 31 2008 amended attached amendment filed herewith 1014 letter david j anderson honeywell international inc dated june 12 2003 incorporated reference exhibit 1026 honeywell’s form 10q quarter ended june 30 2003 amended exhibit 1014 honeywell’s form 10k year ended december 31 2008 1015 employment separation agreement release richard f wallman honeywell international inc dated july 17 2003 incorporated reference exhibit 102 honeywell’s form 10q quarter ended september 30 2003 1016 honeywell international inc severance plan corporate staff employees involuntary termination following change control amended restated incorporated reference exhibit 1016 honeywell’s form 10k year ended december 31 2008 1017 employment agreement dated february 18 2002 honeywell david cote incorporated reference exhibit 1024 honeywell’s form 8k filed march 4 2002 amended exhibit 103 honeywell’s form 10q quarter ended september 30 2008 exhibit 1017 hoenywell’s form 10k year ended december 31 2008 1018 2003 stock incentive plan employees honeywell international inc affiliates award agreement incorporated reference exhibit 101 honeywell’s form 8k filed february 7 2005 1019 2003 stock incentive plan employees honeywell international inc affiliates restricted unit agreement incorporated reference exhibit 1021 honeywell’s form 10k year ended december 31 2005 1020 2003 stock incentive plan employees honeywell international inc affiliates growth plan agreement incorporated reference exhibit 1022 honeywell’s form 10k year ended december 31 2005 1021 stock plan nonemployee directors honeywell international inc option agreement incorporated reference exhibit 101 form 8k filed april 29 2005 exhibit description 1022 deferred compensation agreement dated august 4 2006 honeywell david cote incorporated reference exhibit 1022 honeywell’s form 10k year ended december 31 2006 amended attached amendment filed herewith 1023 letter agreement dated july 27 2001 honeywell larry e kittelberger incorporated reference exhibit 1023 honeywell’s form 10k year ended december 31 2006 amended exhibit 1023 honeywell’s form 10k year ended december 31 2008 1024 honeywell supplemental retirement plan incorporated reference exhibit 1024 honeywell’s form 10k year ended december 31 2006 1025 pittway corporation supplemental executive retirement plan incorporated reference exhibit 1025 honeywell’s form 10k year ended december 31 2006 amended exhibit 1025 honeywell’s form 10k year ended december 31 2008 amended attached amendment filed herewith 1026 2006 stock incentive plan honeywell international inc affiliates amended restated incorporated reference exhibit 1026 honeywell’s form 10k year ended december 31 2008 1027 2006 stock incentive plan honeywell international inc affiliatesform option award agreement incorporated reference exhibit 102 honeywell’s form 10q quarter ended march 31 2009 1028 2006 stock incentive plan honeywell international inc affiliatesform restricted unit agreement incorporated reference exhibit 101 honeywell’s form 10q quarter ended march 31 2009 1029 2006 stock incentive plan honeywell international inc affiliatesform growth plan agreement incorporated reference exhibit 105 honeywell’s form 10q quarter ended june 30 2006 1030 2006 stock incentive plan honeywell international inc affiliates form performance share agreement incorporated reference exhibit 1030 honeywell’s form 10k year ended december 31 2006 1031 2006 stock plan nonemployee directors honeywell international inc amended restated incorporated reference exhibit 1031 honeywell’s form 10k year ended december 31 2008 1032 2006 stock plan nonemployee directors honeywell international incform option agreement incorporated reference exhibit 107 honeywell’s form10q quarter ended june 30 2006 1033 2006 stock plan nonemployee directors honeywell international incform restricted stock agreement incorporated reference exhibit 108 honeywell’s form 10q quarter ended june 30 2006 1034 2006 stock plan nonemployee directors honeywell international incform restricted unit agreement incorporated reference exhibit 1034 honeywell’s form 10k year ended december 31 2008 1035 2007 honeywell global employee stock plan incorporated reference honeywell’s proxy statement dated march 12 2007 filed pursuant rule 14a6 securities exchange act 1934 1036 letter agreement dated july 20 2007 honeywell roger fradin incorporated reference exhibit 101 honeywell’s form 10q quarter ended september 30 2007 amended attached amendment filed herewith exhibit description 1037 amended restated five year credit agreement dated may 14 2007 among honeywell international inc banks financial institutions institutional lenders parties thereto citicorp usa inc administrative agent citibank international plc swing line agent jpmorgan chase bank na syndication agent bank america na barclays bank plc deutsche bank ag new york branch ubs loan finance llc documentation agents citigroup global markets inc jp morgan securities inc joint lead arrangers co book managers incorporated reference exhibit 101 honeywell’s 8k filed may 18 2007 1038 purchase sale agreement catalysts adsorbents process systems inc honeywell specialty materials llc dated september 30 2005 incorporated reference exhibit 1023 honeywell’s form 10q quarter ended september 30 2005 1039 stock purchase agreement honeywell international inc mf worldwide corp incorporated reference exhibit 21 honeywell’s form 8k filed november 1 2005 1040 stock purchase agreement dated april 3 2008 among honeywell international inc safety products holdings inc selling shareholders party thereto odyssey investment services llc incorporated reference exhibit 101 honeywell’s form 8k filed april 7 2008 1041 stock asset purchase agreement dated june 9 2008 honeywell international inc aerospace inc incorporated reference exhibit 101 honeywell’s form 8k filed june 11 2008 statement computation ratio earnings fixed charges filed herewith subsidiaries registrant filed herewith consent pricewaterhousecoopers llp filed herewith powers attorney filed herewith 311 certification principal executive officer pursuant section 302 sarbanesoxley act 2002 filed herewith 312 certification principal financial officer pursuant section 302 sarbanesoxley act 2002 filed herewith 321 certification principal executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith 322 certification principal financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith 101ins xbrl instance document furnished herewith 101sch xbrl taxonomy extension schema furnished herewith 101cal xbrl taxonomy extension calculation linkbase furnished herewith 101def xbrl taxonomy extension definition linkbase furnished herewith 101lab xbrl taxonomy extension label linkbase furnished herewith 101pre xbrl taxonomy extension presentation linkbase furnished herewith exhibits identified asterisk management contracts compensatory plans arrangements honeywell international inc schedule iivaluation qualifying accounts three years ended december 31 2009 millions allowance doubtful accounts deferred tax assetsvaluation allowanceitem 15 exhibits financial statement schedules signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated name david cote linnet f deily chairman board director chief executive officer director gordon bethune clive r hollick director kevin burke george paz director jaime chico pardo bradley sheares phd director scott davis michael w wright director david j anderson kathleen winters david j anderson kathleen winters senior vice president vice president controller chief financial officer principal accounting officer principal financial officer david j anderson david j anderson attorneyinfact february 11 2011 exhibit index exhibit description 3i amended restated certificate incorporation honeywell international inc amended april 26 2010 incorporated reference exhibit 3i honeywell’s form 8k filed april 27 2010 3ii bylaws honeywell international inc amended april 26 2010 incorporated reference exhibit 3ii honeywell’s form 8k filed april 27 2010 honeywell international inc party several longterm debt instruments case total amount securities authorized exceed 10 total assets honeywell subsidiaries consolidated basis pursuant paragraph 4iiia item 601b regulation sk honeywell agrees furnish copy instruments securities exchange commission upon request 101 stock incentive plan honeywell international inc affiliates incorporated reference honeywell’s proxy statement dated march 17 2003 filed pursuant rule 14a6 securities exchange act 1934 amended exhibit 101 honeywell’s form 8k filed december 21 2004 exhibit 101 honeywell’s form 10k year ended december 31 2006 exhibit 101 honeywell’s form 10k year ended december 31 2008 102 deferred compensation plan nonemployee directors honeywell international inc amended restated incorporated reference exhibit 102 honeywell’s form 10q quarter ended june 30 2003 amended exhibit 101 honeywell’s form 8k filed december 21 2004 exhibit 102 honeywell’s form 10k year ended december 31 103 stock plan nonemployee directors alliedsignal inc amended incorporated reference exhibit 103 honeywell’s form 10q quarter ended june 30 2003 amended exhibit 102 honeywell’s form 10q quarter ended june 30 2007 exhibit 101 honeywell’s form 10q quarter ended september 30 2008 104 honeywell international inc incentive compensation plan executive employees amended restated incorporated reference exhibit 105 honeywell’s form 10k year ended december 31 2008 105 supplemental nonqualified savings plan highly compensated employees honeywell international inc subsidiaries amended restated incorporated reference exhibit 106 honeywell’s form 10k year ended december 31 2008 amended attached amendments filed herewith 106 honeywell international inc severance plan senior executives amended restated incorporated reference exhibit 107 honeywell’s form 10k year ended december 31 2008 amended exhibit 107 honeywell’s form 10k year ended december 31 2009 107 salary incentive award deferral plan selected employees honeywell international inc affiliates amended restated incorporated reference exhibit 108 honeywell’s form 10k year ended december 31 2008 108 stock plan employees honeywell international inc affiliates amended incorporated reference exhibit honeywell’s proxy statement dated march 10 1994 filed pursuant rule 14a6 securities exchange act 1934 amended exhibit 101 honeywell’s form 8k filed december 21 2004 exhibit 109 honeywell’s form 10k year ended december 31 2006 exhibit 103 honeywell’s form 10q quarter ended june 30 2007 exhibit 109 honeywell’s form 10k year ended december 31 2008 109 honeywell international inc supplemental pension plan amended restated incorporated reference exhibit 1010 honeywell’s form 10k year ended december 31 2008 amended exhibit 1010 honeywell’s form 10k year ended december 31 2009 exhibit description 1010 honeywell international inc supplemental executive retirement plan executives career band 6 amended restated incorporated reference exhibit 1012 honeywell’s form 10k year ended december 31 2008 amended exhibit 1012 honeywell’s form 10k year ended december 31 2009 1011 honeywell supplemental defined benefit retirement plan amended restated incorporated reference exhibit 1013 honeywell’s form 10k year ended december 31 2008 amended exhibit 1013 honeywell’s form 10k year ended december 31 2009 1012 letter david j anderson honeywell international inc dated june 12 2003 incorporated reference exhibit 1026 honeywell’s form 10q quarter ended june 30 2003 amended exhibit 1014 honeywell’s form 10k year ended december 31 2008 1013 honeywell international inc severance plan corporate staff employees involuntary termination following change control amended restated incorporated reference exhibit 1016 honeywell’s form 10k year ended december 31 2008 1014 employment agreement dated february 18 2002 honeywell david cote incorporated reference exhibit 1024 honeywell’s form 8k filed march 4 2002 amended exhibit 103 honeywell’s form 10q quarter ended september 30 2008 exhibit 1017 honeywell’s form 10k year ended december 31 2008 1015 2003 stock incentive plan employees honeywell international inc affiliates award agreement incorporated reference exhibit 101 honeywell’s form 8k filed february 7 2005 1016 2003 stock incentive plan employees honeywell international inc affiliates restricted unit agreement incorporated reference exhibit 1021 honeywell’s form 10k year ended december 31 2005 1017 stock plan nonemployee directors honeywell international inc option agreement incorporated reference exhibit 101 form 8k filed april 29 2005 1018 deferred compensation agreement dated august 4 2006 honeywell david cote incorporated reference exhibit 1022 honeywell’s form 10k year ended december 31 2006 amended exhibit 1022 honeywell’s form 10k year ended december 31 2009 1019 letter agreement dated july 27 2001 honeywell larry e kittelberger incorporated reference exhibit 1023 honeywell’s form 10k year ended december 31 2006 amended exhibit 1023 honeywell’s form 10k year ended december 31 2008 1020 honeywell supplemental retirement plan incorporated reference exhibit 1024 honeywell’s form 10k year ended december 31 2006 1021 pittway corporation supplemental executive retirement plan incorporated reference exhibit 1025 honeywell’s form 10k year ended december 31 2006 amended exhibit 1025 honeywell’s form 10k year ended december 31 2008 exhibit 1025 honeywell’s 10k year ended december 31 2009 1022 2006 stock incentive plan honeywell international inc affiliates amended restated incorporated reference exhibit 1026 honeywell’s form 10k year ended december 31 2008 1023 2006 stock incentive plan honeywell international inc affiliatesform option award agreement incorporated reference exhibit 102 honeywell’s form 10q quarter ended march 31 2009 1024 2006 stock incentive plan honeywell international inc affiliatesform restricted unit agreement incorporated reference exhibit 101 honeywell’s form 10q quarter ended march 31 2009 1025 2006 stock incentive plan honeywell international inc affiliatesform growth plan agreement incorporated reference exhibit 101 honeywell’s form 10q quarter ended march 31 2010 exhibit description 1026 2006 stock incentive plan honeywell international inc affiliates form performance share agreement incorporated reference exhibit 1030 honeywell’s form 10k year ended december 31 2006 1027 2006 stock plan nonemployee directors honeywell international inc amended restated incorporated reference exhibit 1031 honeywell’s form 10k year ended december 31 2008 1028 2006 stock plan nonemployee directors honeywell international incform option agreement incorporated reference exhibit 107 honeywell’s form10q quarter ended june 30 2006 1029 2006 stock plan nonemployee directors honeywell international incform restricted stock agreement incorporated reference exhibit 108 honeywell’s form 10q quarter ended june 30 2006 1030 2006 stock plan nonemployee directors honeywell international incform restricted unit agreement incorporated reference exhibit 1034 honeywell’s form 10k year ended december 31 2008 1031 2007 honeywell global employee stock plan incorporated reference honeywell’s proxy statement dated march 12 2007 filed pursuant rule 14a6 securities exchange act 1934 1032 letter agreement dated july 20 2007 honeywell roger fradin incorporated reference exhibit 101 honeywell’s form 10q quarter ended september 30 2007 amended exhibit 1036 honeywell’s form 10k year ended december 31 2009 1033 consulting agreement dated march 24 2010 honeywell larry kittelberger incorporated reference exhibit 102 honeywell’s form 10q quarter ended march 31 2010 1034 letter agreement dated october 6 2010 honeywell roger fradin filed herewith 1035 employee noncompetition agreement dated october 26 2010 andreas kramvis filed herewith 1036 2006 stock incentive plan honeywell international inc affiliates form restricted unit agreement form 2 incorporated reference exhibit 102 honeywell’s form 10q quarter ended june 30 2010 1037 2006 stock incentive plan honeywell international inc affiliatesform option award agreement form 2 filed herewith 1038 letter agreement dated september 3 2009 honeywell timothy mahoney filed herewith 1039 form honeywell international inc noncompete agreement senior executives filed herewith 1040 amended restated five year credit agreement dated may 14 2007 among honeywell international inc banks financial institutions institutional lenders parties thereto citicorp usa inc administrative agent citibank international plc swing line agent jpmorgan chase bank na syndication agent bank america na barclays bank plc deutsche bank ag new york branch ubs loan finance llc documentation agents citigroup global markets inc jp morgan securities inc joint lead arrangers co book managers incorporated reference exhibit 101 honeywell’s 8k filed may 18 2007 1041 purchase sale agreement catalysts adsorbents process systems inc honeywell specialty materials llc dated september 30 2005 incorporated reference exhibit 1023 honeywell’s form 10q quarter ended september 30 2005 1042 stock purchase agreement honeywell international inc mf worldwide corp incorporated reference exhibit 21 honeywell’s form 8k filed november 1 2005 1043 stock purchase agreement dated april 3 2008 among honeywell international inc safety products holdings inc selling shareholders party thereto odyssey investment services llc incorporated reference exhibit 101 honeywell’s form 8k filed april 7 2008 exhibit description 1044 stock asset purchase agreement dated june 9 2008 honeywell international inc aerospace inc incorporated reference exhibit 101 honeywell’s form 8k filed june 11 2008 1045 tender offer agreement dated may 19 2010 among sperian protection sa honeywell international inc honeywell holding france sas incorporated reference exhibit 101 honeywell’s form 10q quarter ended june 30 2010 1046 stock asset purchase agreement among autoparts holdings limited honeywell international inc rank group limited dated january 27 2011 incorporated reference exhibit 101 honeywell’s form 8k filed january 31 2011 statement computation ratio earnings fixed charges filed herewith letter change accounting principles filed herewith subsidiaries registrant filed herewith consent pricewaterhousecoopers llp filed herewith powers attorney filed herewith 311 certification principal executive officer pursuant section 302 sarbanesoxley act 2002 filed herewith 312 certification principal financial officer pursuant section 302 sarbanesoxley act 2002 filed herewith 321 certification principal executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith 322 certification principal financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith 101ins xbrl instance document furnished herewith 101sch xbrl taxonomy extension schema furnished herewith 101cal xbrl taxonomy extension calculation linkbase furnished herewith 101def xbrl taxonomy extension definition linkbase furnished herewith 101lab xbrl taxonomy extension label linkbase furnished herewith 101pre xbrl taxonomy extension presentation linkbase furnished herewith exhibits identified asterisk management contracts compensatory plans arrangements honeywell international inc schedule ii valuation qualifying accounts three years ended december 31 2010 dollars millionsitem 15 exhibits financial statement schedules signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated name david cote linnet f deily chairman board director chief executive officer director gordon bethune clive r hollick director kevin burke george paz director jaime chico pardo bradley sheares phd director scott davis judd gregg director david j anderson kathleen winters david j anderson kathleen winters senior vice president vice president controller chief financial officer principal accounting officer principal financial officer david j anderson david j anderson attorneyinfact february 17 2012 exhibit index exhibit description 3i amended restated certificate incorporation honeywell international inc amended april 26 2010 incorporated reference exhibit 3i honeywell’s form 8k filed april 27 2010 3ii bylaws honeywell international inc amended april 26 2010 incorporated reference exhibit 3ii honeywell’s form 8k filed april 27 2010 honeywell international inc party several longterm debt instruments case total amount securities authorized exceed 10 total assets honeywell subsidiaries consolidated basis pursuant paragraph 4iiia item 601b regulation sk honeywell agrees furnish copy instruments securities exchange commission upon request 101 2003 stock incentive plan honeywell international inc affiliates incorporated reference honeywell’s proxy statement dated march 17 2003 filed pursuant rule 14a6 securities exchange act 1934 amended exhibit 101 honeywell’s form 8k filed december 21 2004 exhibit 101 honeywell’s form 10k year ended december 31 2006 exhibit 101 honeywell’s form 10k year ended december 31 2008 102 deferred compensation plan nonemployee directors honeywell international inc amended restated incorporated reference exhibit 102 honeywell’s form 10q quarter ended june 30 2003 amended exhibit 101 honeywell’s form 8k filed december 21 2004 exhibit 102 honeywell’s form 10k year ended december 31 2005 103 stock plan nonemployee directors alliedsignal inc amended incorporated reference exhibit 103 honeywell’s form 10q quarter ended june 30 2003 amended exhibit 102 honeywell’s form 10q quarter ended june 30 2007 exhibit 101 honeywell’s form 10q quarter ended september 30 2008 104 honeywell international inc incentive compensation plan executive employees amended restated incorporated reference honeywell’s proxy statement dated march 10 2011 filed pursuant rule 14a6 securities exchange act 1934 105 supplemental nonqualified savings plan highly compensated employees honeywell international inc subsidiaries amended restated incorporated reference exhibit 106 honeywell’s form 10k year ended december 31 2008 amended exhibit 105 honeywell’s form 10k year ended december 31 2010 106 honeywell international inc severance plan senior executives amended restated incorporated reference exhibit 107 honeywell’s form 10k year ended december 31 2008 amended exhibit 107 honeywell’s form 10k year ended december 31 2009 107 salary incentive award deferral plan selected employees honeywell international inc affiliates amended restated incorporated reference exhibit 108 honeywell’s form 10k year ended december 31 2008 108 1993 stock plan employees honeywell international inc affiliates amended incorporated reference exhibit honeywell’s proxy statement dated march 10 1994 filed pursuant rule 14a6 securities exchange act 1934 amended exhibit 101 honeywell’s form 8k filed december 21 2004 exhibit 109 honeywell’s form 10k exhibit description year ended december 31 2006 exhibit 103 honeywell’s form 10q quarter ended june 30 2007 exhibit 109 honeywell’s form 10k year ended december 31 2008 109 honeywell international inc supplemental pension plan amended restated incorporated reference exhibit 1010 honeywell’s form 10k year ended december 31 2008 amended exhibit 1010 honeywell’s form 10k year ended december 31 2009 1010 honeywell international inc supplemental executive retirement plan executives career band 6 amended restated incorporated reference exhibit 1012 honeywell’s form 10k year ended december 31 2008 amended exhibit 1012 honeywell’s form 10k year ended december 31 2009 1011 honeywell supplemental defined benefit retirement plan amended restated incorporated reference exhibit 1013 honeywell’s form 10k year ended december 31 2008 amended exhibit 1013 honeywell’s form 10k year ended december 31 2009 1012 letter david j anderson honeywell international inc dated june 12 2003 incorporated reference exhibit 1026 honeywell’s form 10q quarter ended june 30 2003 amended exhibit 1014 honeywell’s form 10k year ended december 31 2008 1013 honeywell international inc severance plan corporate staff employees involuntary termination following change control amended restated incorporated reference exhibit 1016 honeywell’s form 10k year ended december 31 2008 1014 employment agreement dated february 18 2002 honeywell david cote incorporated reference exhibit 1024 honeywell’s form 8k filed march 4 2002 amended exhibit 103 honeywell’s form 10q quarter ended september 30 2008 exhibit 1017 honeywell’s form 10k year ended december 31 2008 1015 2003 stock incentive plan employees honeywell international inc affiliates award agreement incorporated reference exhibit 101 honeywell’s form 8k filed february 7 2005 1016 2003 stock incentive plan employees honeywell international inc affiliates restricted unit agreement incorporated reference exhibit 1021 honeywell’s form 10k year ended december 31 2005 1017 stock plan nonemployee directors honeywell international inc option agreement incorporated reference exhibit 101 form 8k filed april 29 2005 1018 deferred compensation agreement dated august 4 2006 honeywell david cote incorporated reference exhibit 1022 honeywell’s form 10k year ended december 31 2006 amended exhibit 1022 honeywell’s form 10k year ended december 31 2009 1019 letter agreement dated july 27 2001 honeywell larry e kittelberger incorporated reference exhibit 1023 honeywell’s form 10k year ended december 31 2006 amended exhibit 1023 honeywell’s form 10k year ended december 31 1020 honeywell supplemental retirement plan incorporated reference exhibit 1024 honeywell’s form 10k year ended december 31 2006 1021 pittway corporation supplemental executive retirement plan incorporated reference exhibit 1025 honeywell’s form 10k year ended december 31 2006 amended exhibit description 1025 honeywell’s form 10k year ended december 31 2008 exhibit 1025 honeywell’s 10k year ended december 31 2009 1022 2006 stock incentive plan honeywell international inc affiliates amended restated incorporated reference exhibit 1026 honeywell’s form 10k year ended december 31 2008 amended exhibit 101 honeywell’s 10q quarter ended march 31 2011 1023 2006 stock incentive plan honeywell international inc affiliatesform option award agreement incorporated reference exhibit 102 honeywell’s form 10q quarter ended march 31 2009 1024 2006 stock incentive plan honeywell international inc affiliatesform restricted unit agreement incorporated reference exhibit 101 honeywell’s form 10q quarter ended march 31 2009 1025 2006 stock incentive plan honeywell international inc affiliatesform growth plan agreement incorporated reference exhibit 101 honeywell’s form 10q quarter ended march 31 2010 1026 2006 stock incentive plan honeywell international inc affiliates form performance share agreement incorporated reference exhibit 1030 honeywell’s form 10k year ended december 31 2006 1027 2006 stock plan nonemployee directors honeywell international inc amended restated incorporated reference exhibit 1031 honeywell’s form 10k year ended december 31 2008 amended attached amendment filed herewith 1028 2006 stock plan nonemployee directors honeywell international incform option agreement incorporated reference exhibit 107 honeywell’s form10q quarter ended june 30 2006 1029 2006 stock plan nonemployee directors honeywell international incform restricted stock agreement incorporated reference exhibit 108 honeywell’s form 10q quarter ended june 30 2006 1030 2006 stock plan nonemployee directors honeywell international incform restricted unit agreement incorporated reference exhibit 1034 honeywell’s form 10k year ended december 31 2008 1031 2007 honeywell global employee stock plan incorporated reference honeywell’s proxy statement dated march 12 2007 filed pursuant rule 14a6 securities exchange act 1934 1032 letter agreement dated july 20 2007 honeywell roger fradin incorporated reference exhibit 101 honeywell’s form 10q quarter ended september 30 2007 amended exhibit 1036 honeywell’s form 10k year ended december 31 2009 1033 consulting agreement dated march 24 2010 honeywell larry kittelberger incorporated reference exhibit 102 honeywell’s form 10q quarter ended march 31 2010 1034 letter agreement dated october 6 2010 honeywell roger fradin incorporated reference exhibit 1034 honeywell’s form 10k year ended december 31 2010 exhibit description 1035 employee noncompetition agreement dated october 26 2010 andreas kramvis incorporated reference exhibit 1035 honeywell’s form 10k year ended december 31 2010 1036 2006 stock incentive plan honeywell international inc affiliates form restricted unit agreement form 2 incorporated reference exhibit 102 honeywell’s form 10q quarter ended june 30 2010 1037 2006 stock incentive plan honeywell international inc affiliatesform option award agreement form 2 incorporated reference exhibit 1037 honeywell’s form 10k year ended december 31 2010 1038 letter agreement dated september 3 2009 honeywell timothy mahoney incorporated reference exhibit 1038 honeywell’s form 10k year ended december 31 2010 1039 form honeywell international inc noncompete agreement senior executives incorporated reference exhibit 1039 honeywell’s form 10k year ended december 31 2010 1040 2011 stock incentive plan honeywell international inc affiliates incorporated reference honeywell’s proxy statement dated march 10 2011 filed pursuant rule 14a6 securities exchange act 1934 1041 2011 stock incentive plan honeywell international inc affiliatesform restricted unit agreement incorporated reference exhibit 102 honeywell’s form 10q quarter ended june 30 2011 1042 2011 stock incentive plan honeywell international inc affiliatesform option award agreement filed herewith 1043 2011 stock incentive plan honeywell international inc affiliatesform growth plan agreement filed herewith 1044 letter agreement dated august 4 2011 honeywell international inc david cote incorporated reference exhibit 101 honeywell’s form 10q quarter ended september 30 2011 1045 five year credit agreement dated march 31 2011 among honeywell international inc banks financial institutions institutional lenders parties thereto citibank na administrative agent citibank international plc swing line agent jpmorgan chase bank na syndication agent bank america na barclays bank plc deutsche bank ag new york branch goldman sachs bank usa morgan stanley mufg loan partners llc royal bank scotland plc documentation agents citigroup global markets inc jp morgan securities llc joint lead arrangers co book managers incorporated reference exhibit 101 honeywell’s 8k filed april 4 2011 1046 purchase sale agreement catalysts adsorbents process systems inc honeywell specialty materials llc dated september 30 2005 incorporated reference exhibit 1023 honeywell’s form 10q quarter ended september 30 2005 1047 stock purchase agreement honeywell international inc mf worldwide corp incorporated reference exhibit 21 honeywell’s form 8k filed november 1 2005 1048 stock purchase agreement dated april 3 2008 among honeywell international inc safety products holdings inc selling shareholders party thereto odyssey investment services llc incorporated reference exhibit 101 honeywell’s form 8k filed april 7 2008 exhibit description 1049 stock asset purchase agreement dated june 9 2008 honeywell international inc aerospace inc incorporated reference exhibit 101 honeywell’s form 8k filed june 11 2008 1050 tender offer agreement dated may 19 2010 among sperian protection sa honeywell international inc honeywell holding france sas incorporated reference exhibit 101 honeywell’s form 10q quarter ended june 30 2010 1051 stock asset purchase agreement dated january 27 2011 among honeywell international inc rank group limited autoparts holdings limited incorporated reference exhibit 101 honeywell’s form 8k filed january 31 2011 statement computation ratio earnings fixed charges filed herewith subsidiaries registrant filed herewith consent pricewaterhousecoopers llp filed herewith powers attorney filed herewith 311 certification principal executive officer pursuant section 302 sarbanesoxley act 2002 filed herewith 312 certification principal financial officer pursuant section 302 sarbanesoxley act 2002 filed herewith 321 certification principal executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith 322 certification principal financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith 101ins xbrl instance document furnished herewith 101sch xbrl taxonomy extension schema furnished herewith 101cal xbrl taxonomy extension calculation linkbase furnished herewith 101def xbrl taxonomy extension definition linkbase furnished herewith 101lab xbrl taxonomy extension label linkbase furnished herewith 101pre xbrl taxonomy extension presentation linkbase furnished herewith honeywell international inc schedule ii valuation qualifying accounts three years ended december 31 2011 dollars millionsitem 15 exhibits financial statement schedules financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated name david cote chairman board chief executive officer director judd gregg director gordon bethune director clive hollick director kevin burke director grace lieblein director jaime chico pardo director george paz director scott davis director bradley sheares phd director linnet f deily director robin l washington director david j anderson adam matteo david j anderson senior vice president chief financial officer principal financial officer adam matteo vice president controller principal accounting officer david j anderson david j anderson attorneyinfact february 14 2014 exhibit index exhibits identified asterisk management contracts compensatory plans arrangements honeywell international inc schedule iivaluation qualifying accounts three years ended december 31 2013 dollars millionsitem 15 exhibits financial statement schedules page number form 10k a1 consolidated financial statements consolidated statement operations years ended december 31 2016 2015 2014 consolidated statement comprehensive income years ended december 31 2016 2015 2014 consolidated balance sheet december 31 2016 2015 consolidated statement cash flows years ended december 2016 2015 2014 consolidated statement shareowners’ equity years ended december 31 2016 2015 2014 notes financial statements report independent registered public accounting firm page number form 10k a2 exhibits see exhibit index annual report form 10k signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized honeywell international inc date february 10 2017 jennifer h mak jennifer h mak vice president controller behalf registrant’s principal accounting officer pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated exhibit index exhibit description 3i amended restated certificate incorporation honeywell international inc amended april 26 2010 incorporated reference exhibit 3i honeywell’s form 8k filed april 27 2010 3ii bylaws honeywell international inc amended february 12 2016 incorporated reference exhibit 3ii honeywell’s form 8k filed february 12 2016 honeywell international inc party several longterm debt instruments case total amount securities authorized exceed 10 total assets honeywell subsidiaries consolidated basis pursuant paragraph 4iiia item 601b regulation sk honeywell agrees furnish copy instruments securities exchange commission upon request 101 deferred compensation plan nonemployee directors honeywell international inc amended restated incorporated reference exhibit 102 honeywell’s form 10q quarter ended june 30 2003 amended exhibit 101 honeywell’s form 8k filed december 21 2004 exhibit 102 honeywell’s form 10k year ended december 31 2005 102 honeywell international inc incentive compensation plan executive employees amended restated incorporated reference exhibit 104 honeywell’s form 10k year ended december 31 2013 103 supplemental nonqualified savings plan highly compensated employees honeywell international inc subsidiaries amended restated incorporated reference exhibit 106 honeywell’s form 10k year ended december 31 2008 amended exhibit 105 honeywell’s form 10k year ended december 31 2010 exhibit 101 honeywell’s form 10q quarter ended june 30 2012 exhibit 105 honeywell’s form 10k year ended december 31 2013 exhibit 101 honeywell’s form 10q quarter ended june 30 2015 104 honeywell international inc severance plan designated officers amended restated incorporated reference exhibit 106 honeywell’s form 10k year ended december 31 2013 105 salary incentive award deferral plan selected employees honeywell international inc affiliates amended restated incorporated reference exhibit 108 honeywell’s form 10k year ended december 31 2008 amended exhibit 107 honeywell’s form 10k year ended december 31 2013 106 honeywell international inc supplemental pension plan amended restated incorporated reference exhibit 1010 honeywell’s form 10k year ended december 31 2008 amended exhibit 1010 honeywell’s form 10k year ended december 31 2009 exhibit 107 honeywell’s form 10k year ended december 31 2015 107 honeywell international inc supplemental executive retirement plan executives career band 6 amended restated incorporated reference exhibit 1012 honeywell’s form 10k year ended december 31 2008 amended exhibit 1012 honeywell’s form 10k year ended december 31 2009 exhibit 109 honeywell’s form 10k year ended december 31 2013 exhibit 108 honeywell’s form 10k year ended december 31 2015 exhibit description 108 honeywell supplemental defined benefit retirement plan amended restated incorporated reference exhibit 1013 honeywell’s form 10k year ended december 31 2008 amended exhibit 1013 honeywell’s form 10k year ended december 31 2009 exhibit 109 honeywell’s form 10k year ended december 31 2015 109 honeywell international inc severance plan corporate staff employees involuntary termination following change control amended restated incorporated reference exhibit 1012 honeywell’s form 10k year ended december 31 2013 1010 employment agreement dated february 18 2002 honeywell david cote incorporated reference exhibit 1024 honeywell’s form 8k filed march 4 2002 amended exhibit 103 honeywell’s form 10q quarter ended september 30 2008 exhibit 1017 honeywell’s form 10k year ended december 31 2008 exhibit 101 honeywell’s form 10q quarter ended march 31 2013 1011 deferred compensation agreement dated august 4 2006 honeywell david cote incorporated reference exhibit 1022 honeywell’s form 10k year ended december 31 2006 amended exhibit 1022 honeywell’s form 10k year ended december 31 2009 1012 honeywell supplemental retirement plan incorporated reference exhibit 1024 honeywell’s form 10k year ended december 31 2006 1013 pittway corporation supplemental executive retirement plan incorporated reference exhibit 1025 honeywell’s form 10k year ended december 31 2006 amended exhibit 1025 honeywell’s form 10k year ended december 31 2008 exhibit 1025 honeywell’s 10k year ended december 31 2009 amended exhibit 1016 honeywell’s form 10k year ended december 31 2015 1014 2006 stock incentive plan honeywell international inc affiliates amended restated incorporated reference exhibit 1026 honeywell’s form 10k year ended december 31 2008 amended exhibit 101 honeywell’s 10q quarter ended march 31 2011 1015 2006 stock incentive plan honeywell international inc affiliatesform option award agreement incorporated reference exhibit 102 honeywell’s form 10q quarter ended march 31 2009 1016 2006 stock incentive plan honeywell international inc affiliatesform restricted unit agreement incorporated reference exhibit 101 honeywell’s form 10q quarter ended march 31 2009 1017 2006 stock incentive plan honeywell international inc affiliates form performance share agreement incorporated reference exhibit 1030 honeywell’s form 10k year ended december 31 2006 1018 2006 stock plan nonemployee directors honeywell international inc amended restated incorporated reference exhibit 1031 honeywell’s form 10k year ended december 31 2008 amended exhibit 1027 honeywell’s form 10k year ended december 31 2011 exhibit 1024 honeywell’s form 10k year ended december 31 exhibit description 1019 2006 stock plan nonemployee directors honeywell international incform option agreement incorporated reference exhibit 103 honeywell’s form 10q quarter ended march 31 2012 1020 2006 stock plan nonemployee directors honeywell international incform restricted unit agreement incorporated reference exhibit 104 honeywell’s form 10q quarter ended march 31 2012 1021 2007 honeywell global employee stock plan incorporated reference honeywell’s proxy statement dated march 12 2007 filed pursuant rule 14a6 securities exchange act 1934 1022 letter agreement dated july 20 2007 honeywell roger fradin incorporated reference exhibit 101 honeywell’s form 10q quarter ended september 30 2007 amended exhibit 1036 honeywell’s form 10k year ended december 31 2009 1023 letter agreement dated october 6 2010 honeywell roger fradin incorporated reference exhibit 1034 honeywell’s form 10k year ended december 31 2010 amended exhibit 101 honeywell’s form 10q quarter ended september 30 2012 1024 employee noncompetition agreement dated october 26 2010 andreas kramvis incorporated reference exhibit 1035 honeywell’s form 10k year ended december 31 2010 1025 2006 stock incentive plan honeywell international inc affiliates form restricted unit agreement form 2 incorporated reference exhibit 102 honeywell’s form 10q quarter ended june 30 2010 1026 2006 stock incentive plan honeywell international inc affiliatesform option award agreement form 2 incorporated reference exhibit 1037 honeywell’s form 10k year ended december 31 2010 1027 letter agreement dated september 3 2009 honeywell timothy mahoney incorporated reference exhibit 1038 honeywell’s form 10k year ended december 31 2010 1028 form honeywell international inc noncompete agreement senior executives incorporated reference exhibit 1039 honeywell’s form 10k year ended december 31 2010 1029 2011 stock incentive plan honeywell international inc affiliates incorporated reference honeywell’s proxy statement dated march 10 2011 filed pursuant rule 14a6 securities exchange act 1934 amended exhibit 1036 honeywell’s form 10k year ended december 31 2012 exhibit 101 honeywell’s form 10q quarter ended march 31 2014 1030 2011 stock incentive plan honeywell international inc affiliatesform restricted unit agreement incorporated reference exhibit 102 honeywell’s form 10q quarter ended march 31 2014 1031 2011 stock incentive plan honeywell international inc affiliatesform restricted unit agreement form 2 incorporated reference exhibit 103 honeywell’s form 10q quarter ended march 31 2014 1032 2011 stock incentive plan honeywell international inc affiliatesform stock option award agreement incorporated reference exhibit 104 honeywell’s form 10q quarter ended march 31 2014 exhibit description 1033 2011 stock incentive plan honeywell international inc affiliatesform stock option award agreement form 2 incorporated reference exhibit 1039 honeywell’s form 10k year ended december 31 2014 1034 2011 stock incentive plan honeywell international inc affiliatesform growth plan agreement incorporated reference exhibit 105 honeywell’s form 10q quarter ended march 31 2014 1035 letter agreement dated august 4 2011 honeywell international inc david cote incorporated reference exhibit 101 honeywell’s form 10q quarter ended september 30 2011 1036 letter agreement dated april 7 2014 honeywell international inc roger fradin incorporated reference exhibit 108 honeywell’s form 10q quarter ended march 31 2014 1037 letter agreement dated april 7 2014 honeywell international inc andreas kramvis incorporated reference exhibit 109 honeywell’s form 10q quarter ended march 31 2014 1038 letter agreement dated april 7 2014 honeywell international inc thomas szlosek incorporated reference exhibit 1010 honeywell’s form 10q quarter ended march 31 2014 1039 ceo retention agreement approved board directors honeywell international inc october 31 2014 agreed david cote december 11 2014 incorporated reference exhibit 992 honeywell’s form 8k filed december 12 2014 1040 chief executive officer business continuity agreement approved board directors honeywell international inc june 28 2016 incorporated reference exhibit 991 honeywell’s form 8k filed june 28 2016 1041 letter agreement dated february 24 2012 honeywell darius adamczyk incorporated reference exhibit 101 honeywell’s form 10q quarter ended march 31 2016 1042 offer letter dated march 31 2016 honeywell international inc darius adamczyk incorporated reference exhibit 991 honeywell’s form 8k filed april 6 2016 1043 offer letter dated march 11 2013 honeywell international inc krishna mikkilineni filed herewith 1044 2016 stock incentive plan honeywell international inc affiliates incorporated reference honeywell’s proxy statement dated march 10 2016 filed pursuant rule 14a6 securities exchange act 1934 1045 2016 stock incentive plan honeywell international inc affiliatesform restricted unit agreement incorporated reference exhibit 101 honeywell’s form 10q quarter ended june 30 2016 1046 2016 stock incentive plan honeywell international inc affiliatesform restricted unit agreement form 2 incorporated reference exhibit 102 honeywell’s form 10q quarter ended june 30 2016 exhibit description 1047 2016 stock incentive plan honeywell international inc affiliatesform stock option award agreement incorporated reference exhibit 103 honeywell’s form 10q quarter ended june 30 2016 1048 2016 stock incentive plan honeywell international inc affiliatesform growth plan agreement incorporated reference exhibit 104 honeywell’s form 10q quarter ended june 30 2016 1049 2016 stock plan nonemployee directors incorporated reference honeywell’s proxy statement dated march 10 2016 filed pursuant rule 14a6 securities exchange act 1934 1050 2016 stock plan nonemployee directors honeywell international incform stock option award agreement incorporated reference exhibit 105 honeywell’s form 10q quarter ended june 30 2016 1051 2016 stock plan nonemployee directors honeywell international incform restricted unit agreement incorporated reference exhibit 106 honeywell’s form 10q quarter ended june 30 2016 1052 amended restated five year credit agreement dated july 10 2015 among honeywell international inc banks financial institutions institutional lenders parties thereto citibank na administrative agent citibank international limited swing line agent jpmorgan chase bank na syndication agent bank america na barclays bank plc deutsche bank securities inc goldman sachs bank usa morgan stanley mufg loan partners llc wells fargo bank national association documentation agents citigroup global markets inc jp morgan securities llc joint lead arrangers cobook managers incorporated reference exhibit 101 honeywell’s form 8k filed july 10 2015 1053 amendment 1 dated september 30 2015 amended restated five year credit agreement dated july 10 2015 among honeywell international inc banks financial institutions institutional lenders parties thereto citibank na administrative agent citibank international limited swing line agent jpmorgan chase bank na syndication agent bank america na barclays bank plc deutsche bank securities inc goldman sachs bank usa morgan stanley mufg loan partners llc wells fargo bank national association documentation agents citigroup global markets inc jp morgan securities llc joint lead arrangers cobook managers incorporated reference exhibit 101 honeywell’s form 8k filed october 1 2015 1054 amendment 2 dated april 29 2016 amended restated five year credit agreement dated july 10 2015 amended amendment 1 dated september 30 2015 among honeywell international inc banks financial institutions institutional lenders parties thereto citibank na administrative agent citibank international limited swing line agent jpmorgan chase bank na syndication agent bank america na barclays bank plc deutsche bank securities inc goldman sachs bank usa morgan stanley mufg loan partners llc wells fargo bank national association documentation agents citigroup global markets inc jp morgan securities llc joint lead arrangers cobook managers incorporated reference exhibit 102 honeywell’s form 8k filed april 29 2016 exhibit description 1055 364day credit agreement dated april 29 2016 among honeywell international inc banks financial institutions institutional lenders parties thereto citibank na administrative agent jpmorgan chase bank na syndication agent bank america na barclays bank plc deutsche bank securities inc goldman sachs bank usa morgan stanley mufg loan partners llc wells fargo bank national association documentation agents citigroup global markets inc jpmorgan chase bank na joint lead arrangers cobook managers incorporated reference exhibit 101 honeywell’s form 8k filed april 29 2016 statement computation ratio earnings fixed charges filed herewith subsidiaries registrant filed herewith 231 consent deloitte touche llp filed herewith 232 consent pricewaterhousecoopers llc filed herewith powers attorney filed herewith 311 certification principal executive officer pursuant section 302 sarbanesoxley act 2002 filed herewith 312 certification principal financial officer pursuant section 302 sarbanesoxley act 2002 filed herewith 321 certification principal executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith 322 certification principal financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith 101ins xbrl instance document filed herewith 101sch xbrl taxonomy extension schema filed herewith 101cal xbrl taxonomy extension calculation linkbase filed herewith 101def xbrl taxonomy extension definition linkbase filed herewith 101lab xbrl taxonomy extension label linkbase filed herewith 101pre xbrl taxonomy extension presentation linkbase filed herewith exhibits identified asterisk management contracts compensatory plans arrangementsitem 15 exhibits financial statement schedules item 16 form 10k summary none signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated name david cote chairman board judd gregg director darius adamczyk president chief executive officer director principal executive officer clive hollick director william ayer director grace lieblein director kevin burke director george paz director jaime chico pardo director bradley sheares phd director scott davis director robin l washington director linnet f deily director thomas szlosek jennifer h mak thomas szlosek senior vice president chief financial officer principal financial officer jennifer h mak vice president controller principal accounting officer february 9 2018 exhibit index exhibits identified asterisk management contracts compensatory plans arrangementsitem 15 exhibits financial statement schedules item 16 form 10k summary none exhibit index exhibits identified asterisk management contracts compensatory plans arrangements certain schedules similar attachments omitted pursuant item 601b2 regulation sk registrant hereby undertakes furnish copies omitted schedules similar attachments upon request us securities exchange commission signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated name darius adamczyk chairman chief executive officer principal executive officer linnet f deily director duncan b angove director judd gregg director william ayer director clive hollick director kevin burke director grace lieblein director jaime chico pardo director george paz director scott davis director robin l washington director gregory p lewis john j tus gregory p lewis senior vice president chief financial officer principal financial officer john j tus vice president controller principal accounting officer february 8 2019item 15 exhibits financial statement schedules item 16 form 10k summary none exhibit index exhibit description 101ins following financial statements companys annual report form 10k year ended december 31 2019 formatted inline xbrl consolidated statements cash flows ii consolidated statements operations iii consolidated statements comprehensive income iv consolidated balance sheets v notes consolidated financial statements tagged blocks text including detailed tags 101sch xbrl taxonomy extension schema filed herewith 101cal xbrl taxonomy extension calculation linkbase filed herewith 101def xbrl taxonomy extension definition linkbase filed herewith 101lab xbrl taxonomy extension label linkbase filed herewith 101pre xbrl taxonomy extension presentation linkbase filed herewith exhibits identified asterisk management contracts compensatory plans arrangements certain schedules similar attachments omitted pursuant item 601b2 regulation sk registrant hereby undertakes furnish copies omitted schedules similar attachments upon request us securities exchange commission signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized honeywell international inc date february 14 2020 robert mailloux robert mailloux vice president controller behalf registrant’s principal accounting officer pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated name darius adamczyk darius adamczyk chairman chief executive officer principal executive officer linnet f deily director duncan b angove director deborah flint director william ayer director judd gregg director kevin burke director clive hollick director jaime chico pardo director grace lieblein director scott davis director george paz director robin l washington director gregory p lewis robert mailloux gregory p lewis senior vice president chief financial officer principal financial officer robert mailloux vice president controller principal accounting officer gregory p lewis gregory p lewis attorneyinfact february 14 2020item 15 exhibits financial statement schedules financial statement schedules omitted applicable us required information shown consolidated financial statements notes thereto signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated david j anderson david j anderson attorneyinfact february 15 2013 exhibit index exhibit description 101cal xbrl taxonomy extension calculation linkbase filed herewith 101def xbrl taxonomy extension definition linkbase filed herewith 101lab xbrl taxonomy extension label linkbase filed herewith 101pre xbrl taxonomy extension presentation linkbase filed herewith exhibits identified asterisk management contracts compensatory plans arrangements honeywell international inc schedule iivaluation qualifying accounts three years ended december 31 2012 dollars millionsitem 15 exhibits financial statement schedules signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated name david cote chairman board chief executive officer director judd gregg director william ayer director clive hollick director gordon bethune director grace lieblein director kevin burke director george paz director jaime chico pardo director bradley sheares phd director scott davis director robin l washington director linnet f deily director thomas szlosek adam matteo thomas szlosek senior vice president chief financial officer principal financial officer adam matteo vice president controller principal accounting officer thomas szlosek thomas szlosek attorneyinfact february 13 2015 exhibit index exhibits identified asterisk management contracts compensatory plans arrangementsnannanitem 15 exhibits financial statement schedules signatures pursuant requirements securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities date indicated name david cote chairman board chief executive officer director judd gregg director william ayer director clive hollick director gordon bethune director grace lieblein director kevin burke director george paz director jaime chico pardo director bradley sheares phd director scott davis director robin l washington director linnet f deily director thomas szlosek adam matteo thomas szlosek senior vice president chief financial officer principal financial officer adam matteo vice president controller principal accounting officer thomas szlosek thomas szlosek attorneyinfact february 12 2016 exhibit index exhibits identified asterisk management contracts compensatory plans arrangements