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TMCNet:  HONEYWELL INTERNATIONAL INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

[February 15, 2013]

HONEYWELL INTERNATIONAL INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) (Dollars in millions, except per share amounts) The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand the results of operations and financial condition of Honeywell International Inc.



and its consolidated subsidiaries ("Honeywell" or the "Company") for the three years ended December 31, 2012. All references to Notes related to Notes to the Financial Statements in "Item 8-Financial Statements and Supplementary Data".

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

EXECUTIVE SUMMARY For Honeywell, 2012 marked another year of strong growth despite a challenging political and macro-economic environment. The Company continued to manage uncertainty associated with slower than expected economic growth in the United States, recession in the European Union, political unrest in the Middle East, and slowing growth in China and other emerging economies. Despite a modest 2.6 percent growth in World GDP and Industrial Production, Honeywell's 2012 revenues were $37.7 billion representing a 3 percent improvement compared to 2011 revenues of $36.5 billion. Honeywell's 2012 revenue growth was achieved despite significant foreign exchange weakness in the Euro and other non-U.S. dollar currencies which had a negative 2 percent impact on our 2012 revenues. Our segment profit improved by 10 percent, in excess of three times revenue growth, evidencing the Company's continued focus on operational excellence. See Review of Business Segments section of this MD&A for a reconciliation of segment profit to consolidated income from continuing operations before taxes.

The Company's operational excellence and ability to expand profit faster than sales growth is due in part to a consistent, methodical application of several key internal business processes which drive efficiency and service quality, bringing world-class products and services to markets faster and more cost effectively for our customers. Honeywell refers to these processes as the Honeywell Enablers. In 2012, Honeywell continued to strengthen and expand the use of the Honeywell Enablers: • The Honeywell Operating System ("HOS"): HOS drives sustainable improvements in our manufacturing operations to generate exceptional performance in safety, quality, delivery, cost, and inventory management. Approximately 70 percent of our manufacturing cost base has achieved HOS certification.

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

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

• Organizational Efficiency ("OEF"): OEF is, in its simplest form, the cost of labor.

Improvements in OEF represent the success of Honeywell's initiatives to increase labor cost efficiency and employee productivity.

The Company continues to invest for future growth as measured by a number of important metrics: • R&D spending at 4.9 percent of revenues was targeted at such high growth areas as natural gas processing, low global warming refrigerants and blowing agents, and wireless control devices and technologies.

25 --------------------------------------------------------------------------------• Capital expenditures grew 11 percent to $884 million including the construction or expansion of technology centers in India and Saudi Arabia.

• The Company recognized approximately $119 million of restructuring actions to support sustainable productivity in years to come.

• The Company completed $438 million (net of cash acquired) in acquisitions in 2012, including acquisition of a 70 percent ownership interest in Thomas Russell L.L.C. ("Thomas Russell Co."), a leader in technology and equipment for natural gas processing and treating, primarily serving the US market.

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

Operating cash flow grew by 24 percent in 2012 to $3,517 million. This operating cash flow performance enabled us to invest $884 million in capital expenditures, fund the acquisitions discussed above, make $1,039 million in pension contributions, and provide an 11 percent increase in dividends paid (vs. 2011) and repurchase 5 million shares of common stock.

CONSOLIDATED RESULTS OF OPERATIONS Net Sales 2012 2011 2010 Net sales $ 37,665 $ 36,529 $ 32,350 % change compared with prior period 3% 13% The change in net sales compared to the prior year period is attributable to the following: 2012 2011 Versus Versus 2011 2010 Volume 2 % 6 % Price 1 % 2 % Acquisitions/Divestitures 2 % 3 % Foreign Exchange (2 )% 2 % 3 % 13 % A discussion of net sales by segment can be found in the Review of Business Segments section of this MD&A.

Cost of Products and Services Sold 2012 2011 2010 Cost of products and services sold $ 28,291 $ 28,556 $ 24,721 % change compared with prior period (1)% 16% Gross Margin percentage 24.9 % 21.8 % 23.6 % Cost of products and services sold decreased by $265 million or 1 percent in 2012 compared with 2011 principally due to a decrease in pension expense of approximately $800 million (primarily driven by the decrease in the pension mark-to-market adjustment allocated to cost of products and services sold of $780 million) and a decrease in repositioning and other charges of approximately $220 million, partially offset by an estimated increase in direct material costs of approximately $620 million driven substantially by a 3 percent increase in sales as a result of the factors (excluding price) shown above and discussed in the Review of Business Segments section of this MD&A and an increase in other postretirement expense of approximately $135 million due to the absence of 2011 curtailment gains.

Gross margin percentage increased by 3.1 percentage points in 2012 compared with 2011 principally due to lower pension expense (approximately 2.2 percentage point impact primarily driven by the decrease in the pension mark-to-market adjustment allocated to cost of products and services 26 -------------------------------------------------------------------------------- sold), lower repositioning actions (approximately 0.6 percentage point impact) and higher segment gross margin in our Aerospace, Automation and Control Solutions and Performance Materials and Technologies segments (approximately 0.4 percentage point impact collectively), partially offset by higher other postretirement expense (approximately 0.4 percentage point impact).

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

Gross margin percentage decreased by 1.8 percentage points in 2011 compared with 2010, primarily due to higher pension and other postretirement expense (approximate 2.8 percentage point impact primarily driven by an unfavorable 3.3 percentage point impact resulting from the increase in the pension mark-to-market adjustment allocated to cost of products and services sold) and repositioning and other charges (approximate 0.2 percentage point impact), partially offset by higher sales volume driven by each of our business segments (approximate 1.2 percentage point impact).

Selling, General and Administrative Expenses 2012 2011 2010 Selling, general and administrative expense $ 5,218 $ 5,399 $ 4,618 Percent of sales 13.9% 14.8% 14.3% Selling, general and administrative expenses (SG&A) decreased as a percentage of sales by 0.9 percent in 2012 compared to 2011 driven by the impact of higher sales as a result of the factors discussed in the Review of Business Segments section of this MD&A, an estimated $110 million decrease in pension expense (driven by the decrease in the portion of the pension mark-to-market charge allocated to SG&A), $90 million decrease due to foreign exchange and $80 million decrease in repositioning actions, partially offset by the impact an estimated $140 million increase in costs resulting from acquisitions, investment for growth and merit increases (net of other employee related costs).

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

Other (Income) Expense 2012 2011 2010 Equity (income)/loss of affiliated companies $ (45 ) $ (51 ) $ (28 ) Gain on sale of non-strategic businesses and assets (5 ) (61 ) - Interest income (58 ) (58 ) (39 ) Foreign exchange 36 50 12 Other, net 2 36 (42 ) $ (70 ) $ (84 ) $ (97 ) Other income decreased by $14 million in 2012 compared to 2011 due primarily to a $50 million pre-tax gain related to the divestiture of the automotive on-board sensors products business within our Automation and Control Solutions segment in the first quarter of 2011, partially offset by a loss of $29 million resulting from early redemption of debt in 2011 included within "Other, net" and the reduction of approximately $6 million of acquisition related costs compared to 2011 included within "Other, net".

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

Interest and Other Financial Charges 2012 2011 2010 Interest and other financial charges $ 351 $ 376 $ 386 % change compared with prior period (7)% (3)% Interest and other financial charges decreased by 7% percent in 2012 compared with 2011 primarily due to lower borrowing costs, partially offset by higher average debt balances.

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

Tax Expense 2012 2011 2010 Tax expense $ 944 $ 417 $ 765 Effective tax rate 24.4 % 18.3 % 28.1 % The effective tax rate increased by 6.1 percentage points in 2012 compared with 2011 primarily due to a change in the mix of earnings taxed at higher rates (primarily driven by an approximate 6.1 percentage point impact from the decrease in pension mark-to-market expense), a decreased benefit from valuation allowances, a decreased benefit from the settlement of tax audits and the absence of the U.S. R&D tax credit, partially offset by a decreased expense related to tax reserves. The foreign effective tax rate was 17.0 percent, a decrease of approximately 4.1 percentage points which primarily consisted of a 10.0 percent impact related to a decrease in tax reserves, partially offset by a 5.2 percent impact from increased valuation allowances on net operating losses primarily due to a decrease in Luxembourg and France earnings available to be offset by net operating loss carry forwards and a 1.4 percent impact from tax expense related to foreign exchange. The effective tax rate was lower than the U.S. statutory rate of 35 percent primarily due to earnings taxed at lower foreign rates.

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

statutory rate of 35 percent primarily due to earnings taxed at lower foreign rates.

The American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013.

Some of these provisions provide retroactive changes to the 2012 tax year which were not taken into account in determining the Company's effective tax rate for 2012. The impact of these retroactive changes will be 28 -------------------------------------------------------------------------------- recorded in the first quarter of 2013, however, the 2013 effective tax rate could also change based upon the Company's operating results, mix of earnings and the outcome of tax positions taken regarding previously filed tax returns currently under audit by various Federal, State and foreign tax authorities, several of which may be finalized in the foreseeable future. The Company believes that it has adequate reserves for these matters. However, the ultimate outcome of these matters may differ and could materially impact the results of operations and operating cash flows in the period they are resolved.

Net Income Attributable to Honeywell 2012 2011 2010 Amounts attributable to Honeywell Income from continuing operations $ 2,926 $ 1,858 $ 1,944 Income from discontinued operations - 209 78 Net income attributable to Honeywell $ 2,926 $ 2,067 $ 2,022 Earnings per share of common stock-assuming dilution Income from continuing operations $ 3.69 $ 2.35 $ 2.49 Income from discontinued operations - 0.26 0.10 Net income attributable to Honeywell $ 3.69 $ 2.61 $ 2.59 Earnings per share of common stock-assuming dilution increased by $1.08 per share in 2012 compared with 2011 primarily due to lower pension expense (mainly due to a decrease in the pension mark-to-market adjustment), increased segment profit in our Aerospace, Automation and Control Solutions and Performance Materials and Technologies segments, lower repositioning and other charges, partially offset by increased tax expense, decreased income from discontinued operations and higher other postretirement expense.

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

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

BUSINESS OVERVIEW This Business Overview provides a summary of Honeywell and its four reportable operating segments (Aerospace, Automation and Control Solutions, Performance Materials and Technologies and Transportation Systems), including their respective areas of focus for 2013 and the relevant economic and other factors impacting their results, and a discussion of each segment's results for the three years ended December 31, 2012. Each of these segments is comprised of various product and service classes that serve multiple end markets. See Note 24 Segment Financial Data of Notes to the Financial Statements for further information on our reportable segments and our definition of segment profit.

Economic and Other Factors In addition to the factors listed below with respect to each of our operating segments, our consolidated operating results are principally impacted by: • Change in global economic growth rates and industry conditions on demand in our key end markets; • Overall sales mix, in particular the mix of Aerospace original equipment and aftermarket sales and the mix of Automation and Control Solutions (ACS) products, distribution and services sales; 29 --------------------------------------------------------------------------------• The extent to which cost savings from productivity actions are able to offset or exceed the impact of material and non-material inflation; • The impact of the pension discount rate and asset returns on pension expense, including mark-to-market adjustments, and funding requirements; and • The impact of fluctuations in foreign currency exchange rates (in particular the Euro), relative to the U.S. dollar.

Areas of Focus for 2013 The 2013 areas of focus will be supported by the enablers including the Honeywell Operating System, our Velocity Product Development process, and Functional Transformation/ Organizational Efficiency. These areas of focus are generally applicable to each of our operating segments, and include: • Driving profitable growth through R&D, technological excellence and optimized manufacturing capability to deliver innovative products that customers value; • Expanding margins by maintaining and improving the Company's cost structure through manufacturing and administrative process improvements, restructuring, and other actions, which will drive productivity and enhance the flexibility of the business as it works to proactively respond to changes in end market demand; • Proactively managing raw material costs through formula and long-term supply agreements and hedging activities, where feasible and prudent; • Driving strong cash flow conversion through effective working capital management which will enable the Company to undertake strategic actions to benefit the business including capital expenditures, strategic acquisitions, and returning cash to shareholders; • Increasing our sales penetration and expanding our localized footprint in high growth regions, including China, India, Eastern Europe, the Middle East and Latin America; • Aligning and prioritizing investments for long-term growth, while considering short-term demand volatility; • Monitoring both suppliers and customers for signs of liquidity constraints, limiting exposure to any resulting inability to meet delivery commitments or pay amounts due, and identifying alternate sources of supply as necessary; and • Controlling Corporate and other non-operating costs, including costs incurred for asbestos and environmental matters, pension and other post-retirement expenses and tax expense.

30 -------------------------------------------------------------------------------- Review of Business Segments 2012 2011 2010 Net Sales Aerospace Product $ 6,999 $ 6,494 $ 5,868 Service 5,041 4,981 4,815 Total 12,040 11,475 10,683 Automation and Control Solutions Product 13,610 13,328 11,733 Service 2,270 2,207 2,016 Total 15,880 15,535 13,749 Performance Materials and Technologies Product 5,642 5,064 4,449 Service 542 595 277 Total 6,184 5,659 4,726 Transportation Systems Product 3,561 3,859 3,192 Service - - - Total 3,561 3,859 3,192 Corporate Product - - - Service - 1 - Total - 1 - $ 37,665 $ 36,529 $ 32,350 Segment Profit Aerospace $ 2,279 $ 2,023 $ 1,835 Automation and Control Solutions 2,232 2,083 1,770 Performance Materials and Technologies 1,154 1,042 749 Transportation Systems 432 485 353 Corporate (218 ) (276 ) (222 ) $ 5,879 $ 5,357 $ 4,485 A reconciliation of segment profit to consolidated income from continuing operations before taxes are as follows: Years Ended December 31, 2012 2011 2010 Segment Profit $ 5,879 $ 5,357 $ 4,485 Other income/ (expense)(1) 25 33 69 Interest and other financial charges (351 ) (376 ) (386 ) Stock compensation expense(2) (170 ) (168 ) (163 ) Pension ongoing expense(2) (36 ) (105 ) (185 ) Pension mark-to-market expense(2) (957 ) (1,802 ) (471 ) Other postretirement income/(expense)(2) (72 ) 86 (29 ) Repositioning and other charges(2) (443 ) (743 ) (598 ) Income from continuing operations before taxes $ 3,875 $ 2,282 $ 2,722 -------------------------------------------------------------------------------- (1) Equity income/(loss) of affiliated companies is included in Segment Profit.

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

31 -------------------------------------------------------------------------------- % Change 2012 2011 Versus Versus 2012 2011 2010 2011 2010 Aerospace Sales Commercial: Original Equipment Air transport and regional $ 1,601 $ 1,439 $ 1,362 11 % 6 % Business and general aviation 967 723 513 34 % 41 % Aftermarket Air transport and regional 2,947 2,828 2,437 4 % 16 % Business and general aviation 1,417 1,207 976 17 % 24 % Defense and Space 5,108 5,278 5,395 (3 )% (2 )% Total Aerospace Sales 12,040 11,475 10,683 Automation and Control Solutions Sales Energy Safety & Security 8,123 7,977 6,789 2 % 17 % Process Solutions 3,093 3,010 2,678 3 % 12 % Building Solutions & Distribution 4,664 4,548 4,282 3 % 6 % Total Automation and Control Solutions Sales 15,880 15,535 13,749 Performance Materials and Technologies Sales UOP 2,253 1,931 1,556 17 % 24 % Advanced Materials 3,931 3,728 3,170 5 % 18 % Total Performance Materials and Technologies Sales 6,184 5,659 4,726 Transportation Systems Sales Turbo Technologies 3,561 3,859 3,192 (8 )% 21 % Total Transportation Systems Sales 3,561 3,859 3,192 Corporate - 1 - Net Sales $ 37,665 36,529 32,350 Aerospace Overview Aerospace is a leading global supplier of aircraft engines, avionics, and related products and services for aircraft manufacturers, airlines, aircraft operators, military services, and defense and space contractors. Our Aerospace products and services include auxiliary power units, propulsion engines, environmental control systems, electric power systems, engine controls, flight safety, communications, navigation, radar and surveillance systems, aircraft lighting, management and technical services, logistics services, advanced systems and instruments, aircraft wheels and brakes and repair and overhaul services. Aerospace sells its products to original equipment (OE) manufacturers in the air transport, regional, business and general aviation aircraft segments, and provides spare parts and repair and maintenance services for the aftermarket (principally to aircraft operators). The United States Government is a major customer for our defense and space products.

Economic and Other Factors Aerospace operating results are principally impacted by: • New aircraft production rates and delivery schedules set by commercial air transport, regional jet, business and general aviation OE manufacturers, as well as airline profitability, platform mix and retirement of aircraft from service; 32 --------------------------------------------------------------------------------• Global demand for commercial air travel as reflected in global flying hours and utilization rates for corporate and general aviation aircraft, as well as the demand for spare parts and maintenance and repair services for aircraft currently in use; • Level and mix of U.S. and foreign government appropriations for defense and space programs and military activity; • Changes in customer platform development schedules, requirements and demands for new technologies; and • Availability and price variability of raw materials such as nickel, titanium and other metals.

Aerospace 2012 2011 Change 2010 Change Net sales $ 12,040 $ 11,475 5 % $ 10,683 7 % Cost of products and services sold 8,989 8,665 8,099 Selling, general and administrative expenses 619 591 553 Other 153 196 196 Segment profit $ 2,279 $ 2,023 13 % $ 1,835 10 % 2012 vs. 2011 2011 vs. 2010 Segment SegmentFactors Contributing to Year-Over-Year Change Sales Profit Sales Profit Organic growth/ Operational segment profit 3 % 8 % 7 % 9 % Acquisitions and divestitures, net 1 % 1 % - - Other 1 % 4 % - 1 % Total % Change 5 % 13 % 7 % 10 % Aerospace sales by major customer end-markets were as follows: % of Aerospace % Increase (Decrease) Sales in Sales 2012 2011 Versus Versus Customer End-Markets 2012 2011 2010 2011 2010 Commercial original equipment Air transport and regional 13 % 13 % 13 % 11 % 6 % Business and general aviation 8 % 6 % 5 % 34 % 41 % Commercial original equipment 21 % 19 % 18 % 19 % 15 % Commercial aftermarket Air transport and regional 25 % 25 % 23 % 4 % 16 % Business and general aviation 12 % 11 % 9 % 17 % 24 % Commercial aftermarket 37 % 36 % 32 % 8 % 18 % Defense and Space 42 % 45 % 50 % (3 )% (2 )% Total 100 % 100 % 100 % 5 % 7 % 2012 compared with 2011 Aerospace sales increased by 5 percent in 2012 compared with 2011 primarily due to an increase in organic growth of 3 percent primarily due to increased commercial sales volume, a 1 percent increase from acquisitions, net of divestitures, and a 1 percent increase in revenue related to an $88 million reduction in payments to business and general aviation OE manufacturers to partially offset their pre-production costs associated with new aircraft platforms (OEM payments).

Details regarding the changes in sales by customer end-markets are as follows: 33-------------------------------------------------------------------------------- Commercial original equipment (OE) sales increased by 19 percent (12 percent organic) in 2012 compared to 2011.

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

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

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

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

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

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

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

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

Details regarding the increase in sales by customer end-markets are as follows: Commercial OE sales increased by 15 percent (11 percent organic) in 2011 compared with 2010.

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

• Business and general aviation OE sales increased by 41 percent (24 percent organic) in 2011 due to a rebound from near trough levels in 2010 and strong demand in the business jet end market, favorable platform mix, growth from acquisitions and lower OEM Payments during 2011.

Commercial aftermarket sales increased by 18 percent in 2011 compared to 2010.

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

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

Defense and space sales decreased by 2 percent (negative 3 percent organic) in 2011 primarily due to anticipated program ramp downs, partially offset by higher domestic and international 34 -------------------------------------------------------------------------------- aftermarket sales, increased unmanned aerial vehicle (UAV) shipments and the EMS acquisition (refer to Note 2).

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

2013 Areas of Focus Aerospace's primary areas of focus for 2013 include: • Global pursuit of new commercial, defense and space programs; • Driving customer satisfaction through operational excellence (product quality, cycle time reduction, and supplier management); • Aligning research and development and customer support costs with customer requirements and demand for new platforms; • Expanding sales and operations in international locations; • Focusing on cost structure initiatives to maintain profitability in face of economic uncertainty and potential defense and space budget reductions and program specific appropriations; • Continuing to design equipment that enhances the safety, performance and durability of aerospace and defense equipment, while reducing weight and operating costs; and • Continued deployment and optimization of our common enterprise resource planning (ERP) system.

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

Economic and Other Factors ACS's operating results are principally impacted by: • Economic conditions and growth rates in developed (North America, Europe and Australia) and high growth regions; • Industrial production and global commercial construction (including retrofits and upgrades); • Demand for residential security, environmental control retrofits and upgrades and energy efficient products and solutions; • Government and public sector spending; 35 --------------------------------------------------------------------------------• The strength of global capital and operating spending on process (including petrochemical and refining) and building automation; • Inventory levels in distribution channels; and • Changes to energy, fire, security, health care, safety and environmental concerns and regulations.

Automation and Control Solutions 2012 2011 Change 2010 Change Net sales $ 15,880 $ 15,535 2 % $ 13,749 13 % Cost of products and services sold 10,691 10,448 9,312 Selling, general and administrative expenses 2,790 2,819 2,480 Other 167 185 187 Segment profit $ 2,232 $ 2,083 7 % $ 1,770 18 % 2012 vs. 2011 2011 vs. 2010 Segment SegmentFactors Contributing to Year-Over-Year Change Sales Profit Sales Profit Organic growth/ Operational segment profit 3 % 8 % 5 % 9 % Foreign exchange (2 )% (2 )% 2 % 3 % Acquisitions and divestitures, net 1 % 1 % 6 % 6 % Total % Change 2 % 7 % 13 % 18 % 2012 compared with 2011 Automation and Control Solutions ("ACS") sales increased by 2 percent in 2012 compared with 2011, primarily due to a 3 percent increase in organic revenue driven by increased sales volume and 1 percent growth from acquisitions, net of divestitures, partially offset by the unfavorable impact of foreign exchange.

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

• Sales in our Process Solutions business increased 3 percent (6 percent organic) in 2012 principally due to increased conversion to sales from backlog, partially offset by the unfavorable impact of foreign exchange. Project orders decreased in the second half of 2012 compared to the corresponding period in 2011 primarily driven by extension of project timing by customers and higher than typical project orders in the fourth quarter of 2011, which we expect will lead to more moderate growth rates in 2013.

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

36 -------------------------------------------------------------------------------- ACS segment profit increased by 7 percent in 2012 compared with 2011 due to a 8 percent increase in operational segment profit and a 1 percent increase from acquisitions, net of divestitures partially offset by a 2 percent unfavorable impact of foreign exchange. The increase in operational segment profit is primarily the result of the positive impact from price and productivity, net of inflation. Cost of products and services sold totaled $10.7 billion in 2012, an increase of $243 million which is primarily due to higher sales, inflation and acquisitions, net of divestitures partially offset by the favorable impact of foreign exchange and productivity.

2011 compared with 2010 ACS sales increased by 13 percent in 2011 compared with 2010, primarily due to a 6 percent growth from acquisitions, net of divestitures, 5 percent increase in organic revenue driven by increased sales volume and higher prices and 2 percent favorable impact of foreign exchange through the first nine months partially offset by the negative impact of foreign exchange in the fourth quarter.

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

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

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

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

2013 Areas of Focus ACS's primary areas of focus for 2013 include: • Extending technology leadership through continued investment in new product development and introductions which deliver energy efficiency, lowest total installed cost and integrated solutions; • Defending and extending our installed base through customer productivity and globalization; • Sustaining strong brand recognition through our brand and channel management; • Continuing to identify, execute and integrate acquisitions in or adjacent to the markets which we serve; • Continuing to establish and grow presence and capability in high growth regions; • Continued deployment and optimization of our common ERP system; and • Continued proactive cost actions and successful execution of repositioning actions.

37 -------------------------------------------------------------------------------- Performance Materials and Technologies (PMT) Overview Performance Materials and Technologies develops and manufactures high-purity, high-quality and high-performance chemicals and materials for applications in the refining, petrochemical, automotive, healthcare, agricultural, packaging, refrigeration, appliance, housing, semiconductor, wax and adhesives segments.

Performance Materials and Technologies also provides process technology, products, including catalysts and adsorbents, and services for the petroleum refining, gas processing, petrochemical, renewable energy and other industries.

Performance Materials and Technologies' product portfolio includes fluorocarbons, hydrofluoroolefins, caprolactam, resins, ammonium sulfate for fertilizer, phenol, specialty films, waxes, additives, advanced fibers, customized research chemicals and intermediates, electronic materials and chemicals, catalysts, and adsorbents.

Economic and Other Factors Performance Materials and Technologies operating results are principally impacted by: • Level and timing of capital spending and capacity and utilization rates in refining and petrochemical end markets; • Pricing volatility and industry supply conditions for raw materials such as cumene, fluorspar, perchloroethylene, R240, natural gas, sulfur and ethylene; • Impact of environmental and energy efficiency regulations; • Global supply conditions and demand for non-ozone depleting, low global warming refrigerants and blowing agents; • Global supply conditions and demand for caprolactam, nylon resin and ammonium sulfate; • Condition of the U.S. residential housing and non-residential industries and automotive demand; • Extent of change in order rates from global semiconductor customers; and • Demand for new products including renewable energy and biofuels, low global warming products for insulation and refrigeration, additives, and enhanced nylon resin.

Performance Materials and Technologies 2012 2011 Change 2010 Change Net sales $ 6,184 $ 5,659 9 % $ 4,726 20 % Cost of products and services sold 4,543 4,151 3,554 Selling, general and administrative expenses 439 420 345 Other 48 46 78 Segment profit $ 1,154 $ 1,042 11 % $ 749 39 % 2012 vs. 2011 2011 vs. 2010 Segment SegmentFactors Contributing to Year-Over-Year Change Sales Profit Sales Profit Organic growth/ Operational segment profit 4 % 9 % 16 % 38 % Foreign exchange (1 )% (1 )% 1 % 1 % Acquisitions and divestitures, net 6 % 3 % 3 % - Total % Change 9 % 11 % 20 % 39 % 2012 compared with 2011 PMT sales increased by 9 percent in 2012 compared with 2011 due to a 6 percent growth from acquisitions and 4 percent increase in organic growth, partially offset by 1 percent unfavorable impact of foreign exchange.

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

• Advanced Materials sales increased by 5 percent (flat organic) in 2012 compared to 2011 primarily driven by an increase in Resins and Chemicals sales, primarily due to the phenol plant acquisition; offset by lower sales in Fluorine Products primarily due to unfavorable pricing reflecting more challenging global end market conditions and the unfavorable impact of foreign exchange. We expect challenging global end market conditions to continue in the first quarter of 2013.

PMT segment profit increased by 11 percent in 2012 compared with 2011 due to a 9 percent increase in operational segment profit (net of a 10 percent decrease in the fourth quarter due to the factors described below) and a 3 percent increase from acquisitions partially offset by an unfavorable impact of 1 percent in foreign exchange. The increase in operational segment profit is primarily due to higher licensing, catalyst and equipment revenues in UOP and productivity (net of continued investment in growth initiatives) partially offset by unfavorable pricing in Fluorine Products and Resins and Chemicals reflecting more challenging global end market conditions. Cost of products and services sold totaled $4.5 billion in 2012, an increase of $392 million which is primarily due to acquisitions, higher volume and continued investment in growth initiatives partially offset by productivity and the favorable impact of foreign exchange.

In July 2012, the Company announced that it is evaluating a series of upgrades to its Metropolis Works nuclear conversion facility, a Fluorine Products facility, following a U.S. Nuclear Regulatory Commission (NRC) inspection that focused on preparedness for extreme natural disasters such as strong earthquakes and tornados. The NRC inspection was part of a comprehensive assessment of all U.S. nuclear-related facilities following the Fukushima, Japan earthquake in 2011. Production at the Metropolis facility was suspended following the NRC inspection and will not resume until certain seismic-related upgrades have been implemented by the Company and reviewed by the NRC. The scope of these upgrades has been defined in a Confirmatory Order issued by the NRC to Honeywell on October 16, 2012. The Company believes that completion of the upgrades to the facility could be completed by the third quarter of 2013. The continued suspension of operations and the cost of the plant upgrades are not expected to have a material negative impact on Performance Materials and Technologies' 2013 results of operations.

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

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

• Advanced Materials sales increased by 18 percent (12 percent organically) in 2011 compared to 2010 primarily driven by (i) a 33 percent (18 percent organically) increase in Resins and Chemicals sales primarily due to higher prices driven by strong Asia demand, agricultural demand, formula pricing arrangements and increased sales resulting from the acquisition of a phenol plant, partially offset by decreased volumes primarily due to disruptions in phenol supply and weather related events, (ii) a 10 percent increase in our Fluorine Products business due to higher pricing reflecting robust global demand and tight industry supply conditions primarily in the first half of the year, which moderated in the second half of the year due to seasonally weaker demand and increased available capacity in the marketplace, and (iii) a 12 percent increase in Specialty Products sales primarily due to higher sales volume in our armor, additives, and healthcare packaging products, and commercial excellence initiatives. We expect Advanced Materials sales growth to continue to moderate during the first half of 2012 due to 39 -------------------------------------------------------------------------------- slowing global demand and lower prices resulting from increased availability of refrigerants supply.

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

2013 Areas of Focus Performance Materials and Technologies primary areas of focus for 2013 include: • Continuing to develop new processes, products and technologies that address energy efficiency, the environment and security, as well as position the portfolio for higher value; • Commercializing new products and technologies in the petrochemical, gas processing and refining industries and renewable energy sector; • Investing to increase plant capacity and reliability to service backlog and improve productivity and quality through operational excellence; • Driving sales and marketing excellence and expanding local presence in high growth regions; • Managing exposure to raw material price and supply fluctuations through evaluation of alternative sources of supply and contractual arrangements; and • Managing the successful integration of acquisitions related to our gas processing and hydrogen business unit including capacity and geographic expansion to address rapidly growing commercial opportunities and existing backlog.

Transportation Systems Overview Transportation Systems provides automotive products that improve the performance and efficiency of cars, trucks, and other vehicles through state-of-the-art technologies, world class brands and global solutions to customers' needs.

Transportation Systems' products include turbochargers and thermal systems; and friction materials (Bendix(R) and Jurid(R)) and brake hard parts. Transportation Systems sells its products to original equipment ("OE") automotive and truck manufacturers (e.g., BMW, Caterpillar, Daimler, Renault, Ford, and Volkswagen), wholesalers and distributors and through the retail aftermarket.

Economic and Other Factors Transportation Systems operating results are principally impacted by: • Financial strength and stability of automotive OE manufacturers; • Global demand, particularly in Western Europe, for automobile and truck production; • Turbo penetration rates for new engine platforms; • Global consumer preferences, particularly in Western Europe, for boosted diesel passenger cars; • Degree of volatility in raw material prices, including nickel and steel; • New automobile production rates and the impact of inventory levels of automotive OE manufacturers on demand for our products; • Regulations mandating lower emissions and improved fuel economy; 40 --------------------------------------------------------------------------------• Consumers' ability to obtain financing for new vehicle purchases; and • Impact of factors such as consumer confidence on automotive aftermarket demand.

Transportation systems 2012 2011 Change 2010 Change Net sales $ 3,561 $ 3,859 (8 )% $ 3,192 21 % Cost of products and services sold 2,939 3,174 2,641 Selling, general and administrative expenses 159 161 149 Other 31 39 49 Segment profit $ 432 $ 485 (11 )% $ 353 37 % 2012 vs. 2011 2011 vs. 2010 Segment Segment Factors Contributing to Year-Over-Year Change Sales Profit Sales Profit Organic growth/ Operational segment profit (3 )% (4 )% 16 % 32 % Foreign exchange (5 )% (7 )% 5 % 5 % Total % Change (8 )% (11 )% 21 % 37 % 2012 compared with 2011 Transportation Systems sales decreased by 8 percent in 2012 compared with the 2011 primarily due to an unfavorable impact from foreign exchange of 5 percent and a decrease in organic sales of 3 percent. Lower sales were primarily driven by decreased light vehicle production in Europe and lower aftermarket sales partially offset by new platform launches, including higher turbo gas penetration in North America.

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

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

The sales increase in 2011 as compared with 2010 was primarily driven by (i) increased turbocharger sales to both light vehicle and commercial vehicle engine manufacturers primarily due to new platform launches and strong diesel penetration rates in Western Europe and (ii) the favorable impact of foreign exchange.

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

2013 Areas of Focus Transportation Systems primary areas of focus in 2013 include: • Sustaining superior turbocharger technology through successful platform launches; 41 --------------------------------------------------------------------------------• Maintaining the high quality of current products while executing new product introductions; • Increasing global penetration and share of diesel and gasoline turbocharger OEM demand; • Reducing manufacturing costs through increasing plant productivity and an improving global manufacturing footprint; • Aligning cost structure with current economic outlook, and successful execution of repositioning actions; and • Aligning development efforts and costs with new turbo platform launch schedules.

Repositioning and Other Charges See Note 3 Repositioning and Other Charges of Notes to the Financial Statements for a discussion of repositioning and other charges incurred in 2012, 2011, and 2010. Our repositioning actions are expected to generate incremental pretax savings of approximately $150 million in 2013 compared with 2012 principally from planned workforce reductions. Cash expenditures for severance and other exit costs necessary to execute our repositioning actions were $136, $159, and $147 million in 2012, 2011, and 2010, respectively. Such expenditures for severance and other exit costs have been funded principally through operating cash flows. Cash expenditures for severance and other costs necessary to execute the remaining actions are expected to be approximately $175 million in 2013 and will be funded through operating cash flows.

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

Years Ended December 31, 2012 2011 2010 Aerospace Net repositioning charge $ (5 ) $ 29 $ 32 Years Ended December 31, 2012 2011 2010 Automation and Control Solutions Net repositioning charge $ 18 $ 191 $ 79 Years Ended December 31, 2012 2011 2010 Performance Materials and Technologies Net repositioning charge $ 12 $ 41 $ 18 Years Ended December 31, 2012 2011 2010 Transportation Systems Net repositioning charge $ 28 $ 82 $ 20 Asbestos related litigation charges, net of insurance 169 146 158 $ 197 $ 228 $ 178 Years Ended December 31, 2012 2011 2010 Corporate Net repositioning charge $ - $ 11 $ - Asbestos related litigation charges, net of insurance (13 ) 3 17 Probable and reasonably estimable environmental liabilities 234 240 212 Other - - 62 $ 221 $ 254 $ 291 42 -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES The Company continues to manage its businesses to maximize operating cash flows as the primary source of liquidity. In addition to our available cash and operating cash flows, additional sources of liquidity include committed credit lines, short-term debt from the commercial paper market, long-term borrowings, and access to the public debt and equity markets, as well as the ability to sell trade accounts receivables. We continue to balance our cash and financing uses through investment in our existing core businesses, acquisition activity, share repurchases and dividends.

Cash Flow Summary Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows for the years ended 2012, 2011 and 2010, are summarized as follows: 2012 2011 2010 Cash provided by (used for): Operating activities $ 3,517 $ 2,833 $ 4,203 Investing activities (1,428 ) (611 ) (2,269 ) Financing activities (1,206 ) (1,114 ) (2,047 ) Effect of exchange rate changes on cash 53 (60 ) (38 ) Net increase/(decrease) in cash and cash equivalents $ 936 $ 1,048 $ (151 ) 2012 compared with 2011 Cash provided by operating activities increased by $684 million during 2012 compared with 2011 primarily due to reduced cash contributions to our pension plans of $706 million and a $344 million increase of net income before the non-cash pension mark-to-market adjustment, partially offset by higher cash tax payments of approximately $340 million.

Cash used for investing activities increased by $817 million during 2012 compared with 2011 primarily due to (i) a decrease in proceeds from sales of businesses of $1,135 million (most significantly the divestiture of the Consumer Products Group business and the automotive on-board sensor products business within our Automation and Control Solutions segment in 2011), (ii) a net $117 million increase in investments (primarily short-term marketable securities), and (iii) an increase in expenditures for property, plant and equipment of $86 million, partially offset by a decrease in cash paid for acquisitions of $535 million.

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

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

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

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

Liquidity Each of our businesses is focused on implementing strategies to increase operating cash flows through revenue growth, margin expansion and improved working capital turnover. Considering the current economic environment in which each of the businesses operate and their business plans and strategies, including the focus on growth, cost reduction and productivity initiatives, the Company believes that cash balances and operating cash flows are the principal source of liquidity. In addition to the available cash and operating cash flows, additional sources of liquidity include committed credit lines, short term debt from the commercial paper markets, long-term borrowings, and access to the public debt and equity markets, as well as the ability to sell trade accounts receivables. At December 31, 2012, a substantial portion of the Company's cash and cash equivalents were held by foreign subsidiaries. If the amounts held outside of the U.S. were to be repatriated, under current law, they would be subject to U.S. federal income taxes, less applicable foreign tax credits.

However, our intent is to permanently reinvest these funds outside of the U.S.

It is not practicable to estimate the amount of tax that might be payable if some or all of such earnings were to be repatriated, and the amount of foreign tax credits that would be available to reduce or eliminate the resulting U.S.

income tax liability.

A source of liquidity is our ability to issue short-term debt in the commercial paper market. Commercial paper notes are sold at a discount and have a maturity of not more than 365 days from date of issuance. Borrowings under the commercial paper program are available for general corporate purposes as well as for financing potential acquisitions. There was $400 million of commercial paper outstanding at December 31, 2012.

Our ability to access the commercial paper market, and the related cost of these borrowings, is affected by the strength of our credit rating and market conditions. Our credit ratings are periodically reviewed by the major independent debt-rating agencies. As of December 31, 2012, Standard and Poor's (S&P), Fitch, and Moody's have ratings on our long-term debt of A, A and A2 respectively, and short-term debt of A-1, F1 and P1 respectively. S&P, Fitch and Moody's have Honeywell's rating outlook as "stable". To date, the Company has not experienced any limitations in our ability to access these sources of liquidity.

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

As a source of liquidity, we sell interests in designated pools of trade accounts receivables to third parties. As of December 31, 2012 and 2011, none of the receivables in the designated pools had been sold to third parties. When we sell receivables, they are over-collateralized and we retain a subordinated interest in the pool of receivables representing that over-collateralization as well as an undivided interest in the balance of the receivables pools. The terms of the trade accounts receivable program permit the repurchase of receivables from the third parties at our discretion, providing us with an additional source of revolving credit. As a result, program receivables remain on the Company's balance sheet with a corresponding amount recorded as Short-term borrowings.

On April 2, 2012, the Company entered into a $3,000 million Amended and Restated Five Year Credit Agreement ("Credit Agreement") with a syndicate of banks.

Commitments under the Credit Agreement can be increased pursuant to the terms of the Credit Agreement to an aggregate amount not to exceed $3,500 million. The Credit Agreement contains a $700 million sub-limit for the issuance of letters of credit. The Credit Agreement is maintained for general corporate purposes and amends and restates the previous $2,800 million five year credit agreement dated March 31, 2011 ("Prior Agreement"). There have been no borrowings under the Credit Agreement or the Prior Agreement.

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

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

In February 2011, the Board of Directors authorized the repurchase of up to a total of $3 billion of Honeywell common stock. During 2012, the Company repurchased $317 million of outstanding shares to offset the dilutive impact of employee stock based compensation plans, including future option exercises, restricted unit vesting and matching contributions under our savings plans (see Part II, Item 5 for share repurchases in the fourth quarter of 2012).

On October 22, 2012, the Company acquired a 70 percent controlling interest in Thomas Russell Co., a privately-held leading provider of technology and equipment for natural gas processing and treating, for approximately $525 million ($368 million, net of cash). Thomas Russell Co.'s results of operations have been consolidated into the Performance Materials and Technologies segment, with the noncontrolling interest portion reflected in net income attributable to the noncontrolling interest in the Consolidated Statement of Operations. During the calendar year 2016, Honeywell has the right to acquire and the noncontrolling shareholder has the right to sell to Honeywell the remaining 30 percent interest at a price based on a multiple of Thomas Russell Co.'s average annual operating income from 2013 to 2015, subject to a predetermined cap and floor. Additionally, Honeywell has the right to acquire the remaining 30 percent interest for a fixed price equivalent to the cap at any time on or before December 31, 2015. See Note 21 Redeemable Noncontrolling Interest.

In December 2012, the Company entered into a definitive agreement to acquire Intermec, Inc. (Intermec) a leading provider of mobile computing, radio frequency identification solutions (RFID) and bar code, label and receipt printers for use in warehousing, supply chain, field service and manufacturing environments for $10 per share in cash, or an aggregate purchase price of approximately $600 million, net of cash acquired. Intermec is a U.S. public company which operates globally and had reported 2011 revenues of approximately $850 million. The transaction is expected to close by the end of the second quarter of 2013, pending Intermec shareholder approval and following customary regulatory reviews. The acquisition is expected to be funded with available cash and the issuance of commercial paper. Intermec will be integrated into our Automation and Control Solutions segment.

During 2012, the Company made cash contributions of $1,039 million principally to improve the funded status of our pension plans.

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

Specifically, we expect our primary cash requirements in 2013 to be as follows: • Capital expenditures-we expect to spend approximately $1.2 billion for capital expenditures in 2013 primarily for growth, production and capacity expansion, cost reduction, maintenance, and replacement.

• Share repurchases-under the Company's previously reported $3 billion share repurchase program, $1.6 billion remained available as of December 31, 2012 for additional share repurchases. Honeywell presently expects to repurchase outstanding shares from time to time during 2013 to offset the dilutive impact of employee stock based compensation plans, including future option exercises, restricted unit vesting and matching contributions under our savings 45 -------------------------------------------------------------------------------- plans. The amount and timing of future repurchases may vary depending on market conditions and the level of operating, financing and other investing activities.

• Dividends-we expect to pay approximately $1.3 billion in dividends on our common stock in 2013, reflecting the 10 percent increase in the dividend rate effective with the fourth quarter 2012 dividend.

• Asbestos claims-we expect our cash spending for asbestos claims and our cash receipts for related insurance recoveries to be approximately $480 and $44 million, respectively, in 2013.

We believe it is possible that the effective date of the NARCO Plan of Reorganization will occur in 2013 so we have included estimated funding for the NARCO Trust in 2013. See Asbestos Matters in Note 22 to the financial statements for further discussion of possible funding obligations in 2013 related to the NARCO Trust.

• Pension contributions-in 2013, we are not required to make contributions to our U.S. pension plans. We plan to make cash contributions of approximately $150 million ($113 million was made in January 2013) to our non-U.S. plans to satisfy regulatory funding standards. The timing and amount of contributions to both our U.S. and non-U.S. plans may be impacted by a number of factors, including the funded status of the plans.

• Repositioning actions-we expect that cash spending for severance and other exit costs necessary to execute the previously announced repositioning actions will approximate $175 million in 2013.

• Environmental remediation costs-we expect to spend approximately $300 million in 2013 for remedial response and voluntary clean-up costs. See Environmental Matters in Note 22 to the financial statements for additional information.

We continuously assess the relative strength of each business in our portfolio as to strategic fit, market position, profit and cash flow contribution in order to upgrade our combined portfolio and identify business units that will most benefit from increased investment. We identify acquisition candidates that will further our strategic plan and strengthen our existing core businesses. We also identify businesses that do not fit into our long-term strategic plan based on their market position, relative profitability or growth potential. These businesses are considered for potential divestiture, restructuring or other repositioning actions subject to regulatory constraints. In 2012 and 2011, we realized $21 and $1,156 million, respectively, in cash proceeds from sales of non-strategic businesses.

Based on past performance and current expectations, we believe that our operating cash flows will be sufficient to meet our future operating cash needs.

Our available cash, committed credit lines, access to the public debt and equity markets as well as our ability to sell trade accounts receivables, provide additional sources of short-term and long-term liquidity to fund current operations, debt maturities, and future investment opportunities.

46-------------------------------------------------------------------------------- Contractual Obligations and Probable Liability Payments Following is a summary of our significant contractual obligations and probable liability payments at December 31, 2012: Payments by Period 2014- 2016- Total(6) 2013 2015 2017 Thereafter Long-term debt, including capitalized leases(1) $ 7,020 $ 625 $ 711 $ 863 $ 4,821 Interest payments on long-term debt, including capitalized leases 2,798 240 400 357 1,801 Minimum operating lease payments 1,288 305 442 229 312 Purchase obligations(2) 1,783 939 474 223 147 Estimated environmental liability payments(3) 654 304 200 100 50 Asbestos related liability payments(4) 1,772 480 769 438 85 Asbestos insurance recoveries(5) (707 ) (44 ) (147 ) (141 ) (375 ) $ 14,608 $ 2,849 $ 2,849 $ 2,069 $ 6,841 -------------------------------------------------------------------------------- (1) Assumes all long-term debt is outstanding until scheduled maturity.

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

(3) The payment amounts in the table only reflect the environmental liabilities which are probable and reasonably estimable as of December 31, 2012. See Environmental Matters in Note 22 Commitments and Contingencies of Notes to the Financial Statements for additional information.

(4) These amounts are estimates of asbestos related cash payments for NARCO and Bendix based on our asbestos related liabilities which are probable and reasonably estimable as of December 31, 2012. We believe that it is possible that the effective date of the NARCO Plan of Reorganization will occur in 2013 so we have included estimated funding for the NARCO Trust starting in 2013. We have accrued for the estimated value of future NARCO asbestos related claims expected to be asserted against the NARCO trust through 2018. In light of the uncertainties inherent in making long-term projections and in connection with the initial operation of a 524(g) trust, as well as the stay of all NARCO asbestos claims since January 2002, we do not believe that we have a reasonable basis for estimating NARCO asbestos claims beyond 2018. Projecting the timing of NARCO payments is dependent on, among other things, the effective date of the Trust which could cause the timing of payments to be earlier or later than that projected. Projecting future events is subject to many uncertainties that could cause asbestos liabilities to be higher or lower than those projected and recorded.

See Asbestos Matters in Note 22 Commitments and Contingencies of Notes to the Financial Statements for additional information.

(5) These amounts represent our insurance recoveries that are deemed probable for asbestos related liabilities as of December 31, 2012. The timing of insurance recoveries are impacted by the terms of insurance settlement agreements, as well as the documentation, review and collection process required to collect on insurance claims. Where probable insurance recoveries are not subject to definitive settlement agreements with specified payment dates, but instead are covered by insurance policies, we have assumed collection will occur beyond 2017. Projecting the timing of insurance recoveries is subject to many uncertainties that could cause the amounts collected to be higher or lower than those projected and recorded or could cause the timing of collections to be earlier or later than that projected. We reevaluate our projections concerning insurance recoveries in light of any changes or developments that would impact recoveries or the timing thereof. See Asbestos Matters in Note 22 Commitments and Contingencies of Notes to the Financial Statements for additional information.

(6) The table excludes tax effects as well as $722 million of uncertain tax positions. See Note 6 Income Taxes of Notes to the Financial Statements for additional information.

47 -------------------------------------------------------------------------------- The table also excludes our pension and other postretirement benefits (OPEB) obligations. In 2013, we are not required to make contributions to our U.S.

pension plans, however, we plan to make cash contributions of approximately $150 million ($113 million was made in January 2013) to our non-U.S. plans to satisfy regulatory funding standards. The timing and amount of contributions may be impacted by a number of factors, including the funded status of the plans.

Beyond 2013, the actual amounts required to be contributed are dependent upon, among other things, interest rates, underlying asset returns and the impact of legislative or regulatory actions related to pension funding obligations.

Payments due under our OPEB plans are not required to be funded in advance, but are paid as medical costs are incurred by covered retiree populations, and are principally dependent upon the future cost of retiree medical benefits under our plans. We expect our OPEB payments to approximate $149 million in 2013 net of the benefit of approximately $11 million from the Medicare prescription subsidy.

See Note 23 to the financial statements for further discussion of our pension and OPEB plans.

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

Off-Balance Sheet Arrangements Following is a summary of our off-balance sheet arrangements: Guarantees-We have issued or are a party to the following direct and indirect guarantees at December 31, 2012: Maximum Potential Future Payments Operating lease residual values $ 51 Other third parties' financing 5 Unconsolidated affiliates' financing 12 Customer financing 9 $ 77 We do not expect that these guarantees will have a material adverse effect on our consolidated results of operations, financial position or liquidity.

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

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

With respect to environmental matters involving site contamination, we continually conduct studies, individually or jointly, with other potentially responsible parties, to determine the feasibility of various remedial techniques to address environmental matters. It is our policy (see Note 1 to the 48 -------------------------------------------------------------------------------- financial statements) to record appropriate liabilities for environmental matters when remedial efforts or damage claim payments are probable and the costs can be reasonably estimated. Such liabilities are based on our best estimate of the undiscounted future costs required to complete the remedial work. The recorded liabilities are adjusted periodically as remediation efforts progress or as additional technical or legal information becomes available.

Given the uncertainties regarding the status of laws, regulations, enforcement policies, the impact of other potentially responsible parties, technology and information related to individual sites, we do not believe it is possible to develop an estimate of the range of reasonably possible environmental loss in excess of our recorded liabilities. We expect to fund expenditures for these matters from operating cash flow. The timing of cash expenditures depends on a number of factors, including the timing of litigation and settlements of remediation liability, personal injury and property damage claims, regulatory approval of cleanup projects, execution timeframe of projects, remedial techniques to be utilized and agreements with other parties.

Remedial response and voluntary cleanup costs charged against pretax earnings were $234, $240 and $225 million in 2012, 2011 and 2010, respectively. At December 31, 2012 and 2011, the recorded liabilities for environmental matters was $654 and $723 million, respectively. In addition, in 2012 and 2011 we incurred operating costs for ongoing businesses of approximately $84 and $102 million, respectively, relating to compliance with environmental regulations.

Remedial response and voluntary cleanup payments were $320, $270 and $266 million in 2012, 2011 and 2010, respectively, and are currently estimated to be approximately $300 million in 2013. We expect to fund such expenditures from operating cash flow.

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

See Note 22 Commitments and Contingencies of Notes to the Financial Statements for a discussion of our commitments and contingencies, including those related to environmental matters and toxic tort litigation.

Financial Instruments As a result of our global operating and financing activities, we are exposed to market risks from changes in interest and foreign currency exchange rates and commodity prices, which may adversely affect our operating results and financial position. We minimize our risks from interest and foreign currency exchange rate and commodity price fluctuations through our normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. We do not use derivative financial instruments for trading or other speculative purposes and do not use leveraged derivative financial instruments.

A summary of our accounting policies for derivative financial instruments is included in Note 1 Summary of Significant Accounting Policies of Notes to the Financial Statements. We also hold investments in marketable equity securities, which exposes us to market volatility, as discussed in Note 16 Financial Instruments and Fair Value Measures of Notes to the Financial Statements.

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

49 -------------------------------------------------------------------------------- Our exposure to market risk from changes in interest rates relates primarily to our net debt and pension obligations. As described in Note 14 Long-term Debt and Credit Agreements and Note 16 Financial Instruments and Fair Value Measures of Notes to the Financial Statements, we issue both fixed and variable rate debt and use interest rate swaps to manage our exposure to interest rate movements and reduce overall borrowing costs.

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

The following table illustrates the potential change in fair value for interest rate sensitive instruments based on a hypothetical immediate one-percentage-point increase in interest rates across all maturities, the potential change in fair value for foreign exchange rate sensitive instruments based on a 10 percent weakening of the U.S. dollar versus local currency exchange rates across all maturities, and the potential change in fair value of contracts hedging commodity purchases based on a 20 percent decrease in the price of the underlying commodity across all maturities at December 31, 2012 and 2011.

Estimated Increase Face or (Decrease) Notional Carrying Fair in Fair Amount Value(1) Value(1) Value December 31, 2012 Interest Rate Sensitive Instruments Long-term debt (including current maturities) $ 7,020 $ (7,020 ) $ (8,152 ) $ (555 ) Interest rate swap agreements 1,400 146 146 (67 ) Foreign Exchange Rate Sensitive Instruments Foreign currency exchange contracts(2) 8,506 20 20 361 Commodity Price Sensitive Instruments Forward commodity contracts(3) 17 - - (3 ) December 31, 2011 Interest Rate Sensitive Instruments Long-term debt (including current maturities) $ 6,896 $ (6,896 ) $ (7,896 ) $ (578 ) Interest rate swap agreements 1,400 134 134 (74 ) Foreign Exchange Rate Sensitive Instruments Foreign currency exchange contracts(2) 7,108 (26 ) (26 ) 274 Commodity Price Sensitive Instruments Forward commodity contracts(3) 59 (9 ) (9 ) (10 ) -------------------------------------------------------------------------------- (1) Asset or (liability).

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

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

The above discussion of our procedures to monitor market risk and the estimated changes in fair value resulting from our sensitivity analyses are forward-looking statements of market risk assuming certain adverse market conditions occur. Actual results in the future may differ materially from these estimated results due to actual developments in the global financial markets.

The methods used by us to assess and mitigate risk discussed above should not be considered projections of future events.

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

We have discussed the selection, application and disclosure of these critical accounting policies with the Audit Committee of our Board of Directors and our Independent Registered Public Accountants. New accounting standards effective in 2012 which had a material impact on our consolidated financial statements are described in the Recent Accounting Pronouncements section in Note 1 Summary of Significant Accounting Policies of Notes to the Financial Statements.

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

Asbestos Related Contingencies and Insurance Recoveries-We are a defendant in personal injury actions related to products containing asbestos (refractory and friction products). We recognize a liability for any asbestos related contingency that is probable of occurrence and reasonably estimable. Regarding North American Refractories Company (NARCO) asbestos related claims, we accrued for pending claims based on terms and conditions in agreements with NARCO, its former parent company, and certain asbestos claimants, and an estimate of the unsettled claims pending as of the time NARCO filed for bankruptcy protection.

We also accrued for the estimated value of future NARCO asbestos related claims expected to be asserted against the NARCO trust through 2018 as described in Note 22 Commitments and Contingencies of Notes to the Financial Statements. In light of the inherent uncertainties in making long term projections and in connection with the initial operation of a 524(g) trust, as well as the stay of all NARCO asbestos claims since January 2002, we do not believe that we have a reasonable basis for estimating NARCO asbestos claims beyond 2018. Regarding Bendix asbestos related claims, we accrued for the estimated value of pending claims using average resolution values for the previous five years. We also accrued for the estimated value of future anticipated claims related to Bendix for the next five years based on historic claims filing experience and dismissal rates, disease classifications, and average resolution values in the tort system for the previous five years. In light of the uncertainties inherent in making long-term projections, as well as certain factors unique to friction product asbestos claims, we do not believe that we have a reasonable basis for estimating asbestos claims beyond the next five years. We will continue to update the resolution values used to estimate the cost of pending and future Bendix claims during the fourth quarter each year. For additional information see Note 22 Commitments and Contingencies of Notes to the Financial Statements.

We continually assess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential ranges of probable losses and recognize a liability, if any, for 51 -------------------------------------------------------------------------------- these contingencies based on an analysis of each individual issue with the assistance of outside legal counsel and, if applicable, other experts.

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

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

We recognize net actuarial gains or losses in excess of 10 percent of the greater of the market-related value of plan assets or the plans' projected benefit obligation (the corridor) annually in the fourth quarter each year (MTM Adjustment) and, if applicable, in any quarter in which an interim remeasurement is triggered. Net actuarial gains and losses occur when the actual experience differs from any of the various assumptions used to value our pension plans or when assumptions change as they may each year. The primary factors contributing to actuarial gains and losses are changes in the discount rate used to value pension obligations as of the measurement date each year and the differences between expected and actual returns on plan assets. This accounting method also results in the potential for volatile and difficult to forecast MTM Adjustments.

MTM charges were $957, $1,802 and $471 million in 2012, 2011 and 2010, respectively. The remaining components of pension income/expense, primarily service and interest costs and assumed return on plan assets, are recorded on a quarterly basis (Pension Ongoing Income/Expense).

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

The key assumptions used in developing our 2012, 2011 and 2010 net periodic pension expense for our U.S. plans included the following: 2012 2011 2010 Discount rate 4.89 % 5.25 % 5.75 % Assets: Expected rate of return 8 % 8 % 9 % Actual rate of return 13 % - 19 % Actual 10 year average annual compounded rate of return 8 % 6 % 6 % 52 -------------------------------------------------------------------------------- The discount rate can be volatile from year to year because it is determined based upon prevailing interest rates as of the measurement date. We will use a 4.06 percent discount rate in 2013, reflecting the decrease in the market interest rate environment since December 31, 2011. We will use an expected rate of return on plan assets of 7.75 percent for 2013 down from 8 percent in 2012 due to lower future expected market returns.

In addition to the potential for MTM Adjustments, changes in our expected rate of return on plan assets and discount rate resulting from economic events also affects future pension ongoing expense. The following table highlights the sensitivity of our U.S. pension obligations and ongoing expense to changes in these assumptions, assuming all other assumptions remain constant. These estimates exclude any potential MTM Adjustment: Impact on 2013 Pension Ongoing Change in Assumption Expense Impact on PBO0.25 percentage point decrease in Decrease $9 discount rate million Increase $565 million 0.25 percentage point increase in Increase $7 discount rate million Decrease $545 million 0.25 percentage point decrease in Increase $35 expected rate of return on assets million - 0.25 percentage point increase in Decrease $35 expected rate of return on assets million - Pension ongoing income for all of our pension plans is expected to range from $50 to $75 million in 2013 compared with ongoing pension expense of $36 million in 2012. The increase in pension ongoing income in 2013 compared with 2012 results primarily from an increase in the plans' assets at December 31, 2012 compared with December 31, 2011 due to contributions and strong asset returns in 2012. Also, if required, an MTM Adjustment will be recorded in the fourth quarter of 2013 in accordance with our pension accounting method as previously described. It is difficult to reliably forecast or predict whether there will be a MTM Adjustment in 2013, and if one is required what the magnitude of such adjustment will be. MTM Adjustments are primarily driven by events and circumstances beyond the control of the Company such as changes in interest rates and the performance of the financial markets.

In 2012, 2011 and 2010, we were not required to make contributions to satisfy minimum statutory funding requirements in our U.S. pension plans. However, we made voluntary contributions of $792, $1,650 and $1,000 million to our U.S.

pension plans in 2012, 2011 and 2010, respectively, primarily to improve the funded status of our plans which has been adversely impacted by relatively low discount rates and asset losses in 2011 and 2008 resulting from the poor performance of the equity markets. In 2013, we are not required to make contributions to our U.S. pension plans, however, we plan to make cash contributions of approximately $150 million ($113 million was made in January 2013) to our non-U.S. plans to satisfy regulatory funding standards. The timing and amount of contributions to both our U.S. and non-U.S. plans may be impacted by a number of factors, including the funded status of the plans.

Long-Lived Assets (including Tangible and Definite-Lived Intangible Assets)-To conduct our global business operations and execute our business strategy, we acquire tangible and intangible assets, including property, plant and equipment and definite-lived intangible assets. At December 31, 2012, the net carrying amount of these long-lived assets totaled approximately $6.7 billion. The determination of useful lives (for depreciation/amortization purposes) and whether or not these assets are impaired involves the use of accounting estimates and assumptions, changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions. We periodically evaluate the recoverability of the carrying amount of our long-lived assets whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset group may not be fully recoverable. The principal factors we consider in deciding when to perform an impairment review are as follows: • Significant under-performance (i.e., declines in sales, earnings or cash flows) of a business or product line in relation to expectations; • Annual operating plans or five-year strategic plans that indicate an unfavorable trend in operating performance of a business or product line; 53 -------------------------------------------------------------------------------- • Significant negative industry or economic trends; and • Significant changes or planned changes in our use of the assets.

Once it is determined that an impairment review is necessary, recoverability of assets is measured by comparing the carrying amount of the asset grouping to the estimated future undiscounted cash flows. If the carrying amount exceeds the estimated future undiscounted cash flows, the asset grouping is considered to be impaired. The impairment is then measured as the difference between the carrying amount of the asset grouping and its fair value. We endeavor to utilize the best information available to measure fair value, which is usually either market prices (if available), level 1 or level 2 in the fair value hierarchy or an estimate of the future discounted cash flow, level 3 of the fair value hierarchy. The key estimates in our discounted cash flow analysis include expected industry growth rates, our assumptions as to volume, selling prices and costs, and the discount rate selected. As described in more detail in Note 16 to the financial statements, we have recorded impairment charges related to long-lived assets of $22 million and $127 million in 2012 and 2011, respectively, principally related to manufacturing plant and equipment in facilities scheduled to close or be downsized.

Goodwill and Indefinite-Lived Intangible Assets Impairment Testing-Goodwill represents the excess of acquisition costs over the fair value of the net tangible assets and identifiable intangible assets acquired in a business combination. Indefinite-lived intangible assets primarily consist of trademarks acquired in business combinations. Goodwill and indefinite-lived assets are not amortized, but are subject to impairment testing. Our goodwill and indefinite-lived intangible asset balances of $12.4 billion and $725 million, respectively, as of December 31, 2012, are subject to impairment testing annually as of March 31, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. This testing compares carrying values to fair values and, when appropriate, the carrying value is reduced to fair value. In testing goodwill, the fair value of our reporting units is estimated utilizing a discounted cash flow approach utilizing cash flow forecasts in our five year strategic and annual operating plans adjusted for terminal value assumptions. This impairment test involves the use of accounting estimates and assumptions, changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions. To address this uncertainty we perform sensitivity analysis on key estimates and assumptions.

We completed our annual impairment test as of March 31, 2012 and determined that there was no impairment to our goodwill and indefinite-lived intangible assets as of that date. However, significant negative industry or economic trends, disruptions to our business, unexpected significant changes or planned changes in use of the assets, divestitures and market capitalization declines may have a negative effect on the fair values.

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

As of December 31, 2012, we recorded a net deferred tax asset of $2,473 million, less a valuation allowance of $598 million. Net deferred tax assets are primarily comprised of net deductible temporary differences, net operating loss carryforwards and tax credit carryforwards that are available to reduce taxable income in future periods. The determination of the amount of valuation allowance to be provided on recorded deferred tax assets involves estimates regarding (1) the timing and amount of the reversal of taxable temporary differences, (2) expected future taxable income, and (3) the impact of tax planning strategies. A valuation allowance is established to offset any deferred tax assets if, based upon the available evidence it is more likely than not that some or all of the deferred tax asset will not be realized. In assessing the need for a valuation allowance, we consider all available positive and negative evidence, including past operating results, projections of future taxable income and the feasibility of ongoing tax planning strategies. The projections of future taxable income include a number of estimates and assumptions regarding our volume, pricing and costs. Additionally, valuation allowances related to deferred tax assets can be impacted by changes to tax laws.

54 -------------------------------------------------------------------------------- Our net deferred tax asset of $2,473 million consists of $1,422 million related to U.S. operations and $1,051 million related to non-U.S. operations. The U.S.

net deferred tax asset of $1,422 million consists of net deductible temporary differences, tax credit carryforwards, state tax net operating losses which we believe will more likely than not be realized through the generation of future taxable income in the U.S. and tax planning strategies. The non-U.S. net deferred tax asset of $1,051 million consists principally of net operating loss, capital loss and tax credit carryforwards, mainly in Canada, France, Germany, Luxembourg, Netherlands and the United Kingdom. We maintain a valuation allowance of $598 million against these deferred tax assets reflecting our historical experience and lower expectations of taxable income over the applicable carryforward periods. As more fully described in Note 6 to the financial statements, our valuation allowance increased by $7 million in 2012, decreased by $45 million in 2011 and increased by $58 million in 2010, respectively. In the event we determine that we will not be able to realize our net deferred tax assets in the future, we will reduce such amounts through a charge to income in the period such determination is made. Conversely, if we determine that we will be able to realize net deferred tax assets in excess of the carrying amounts, we will decrease the recorded valuation allowance through a credit to income in the period that such determination is made.

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

Sales Recognition on Long-Term Contracts-In 2012, we recognized approximately 16 percent of our total net sales using the percentage-of-completion method for long-term contracts in our Automation and Control Solutions, Aerospace and Performance Materials and Technologies segments. These long- term contracts are measured on the cost-to-cost basis for engineering-type contracts and the units-of-delivery basis for production-type contracts. Accounting for these contracts involves management judgment in estimating total contract revenue and cost. Contract revenues are largely determined by negotiated contract prices and quantities, modified by our assumptions regarding contract options, change orders, incentive and award provisions associated with technical performance and price adjustment clauses (such as inflation or index-based clauses). Contract costs are incurred over a period of time, which can be several years, and the estimation of these costs requires management judgment. Cost estimates are largely based on negotiated or estimated purchase contract terms, historical performance trends and other economic projections. Significant factors that influence these estimates include inflationary trends, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, asset utilization, and anticipated labor agreements. Revenue and cost estimates are regularly monitored and revised based on changes in circumstances. Anticipated losses on long-term contracts are recognized when such losses become evident. We maintain financial controls over the customer qualification, contract pricing and estimation processes to reduce the risk of contract losses.

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

55-------------------------------------------------------------------------------- Recent Accounting Pronouncements See Note 1 to the financial statements for a discussion of recent accounting pronouncements.

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