Honeywell 2004 Annual Report Download - page 21

Our contracts with the U.S. Government are subject to audits. Like many other government contractors, we have received audit
reports that recommend downward price adjustments to certain contracts to comply with various government regulations. We have
made adjustments and paid voluntary refunds in appropriate cases. In addition, we accrue for liabilities associated with these
government contract matters that are probable and can be reasonably estimated.
U.S. Government contracts are subject to termination by the government, either for the convenience of the government or for our
failure to perform under the applicable contract. In the case of a termination for convenience, we are typically entitled to
reimbursement for our allowable costs incurred, plus termination costs and a reasonable profit. If a contract is terminated by the
government for our failure to perform, we could be liable for additional costs incurred by the government in acquiring undelivered
goods or services from another source and any other damages suffered by the government.
We, like other government contractors, are subject to government investigations of business practices and compliance with
government procurement regulations. If Honeywell or one of its businesses were charged with wrongdoing as a result of any such
investigation or other government investigations (including violation of certain environmental or export laws), it could be suspended
from bidding on or receiving awards of new government contracts pending the completion of legal proceedings. The U.S. Government
also reserves the right to debar a contractor from receiving new government contracts for fraudulent, criminal or other egregious
misconduct. Debarment generally does not exceed three years. Although the outcome of pending government investigations cannot be
predicted with certainty, we are not aware of any investigations that we expect will have a material adverse effect on us.
Backlog
Our total backlog at year-end 2004 and 2003 was $8,229 and $7,191 million, respectively. We anticipate that approximately
$6,339 million of the 2004 backlog will be filled in 2005. We believe that backlog is not necessarily a reliable indicator of our future
sales because a substantial portion of the orders constituting this backlog may be canceled at the customer's option.
Competition
We are subject to active competition in substantially all product and service areas. Competition is expected to continue in all
geographic regions. Competitive conditions vary widely among the thousands of products and services provided by us, and vary
country by country. Depending on the particular customer or market involved, our businesses compete on a variety of factors, such as
price, quality, reliability, delivery, customer service, performance, applied technology, product innovation and product recognition.
Brand identity, service to customers and quality are generally important competitive factors for our products and services, and there is
considerable price competition. Other competitive factors for certain products include breadth of product line, research and
development efforts and technical and managerial capability. While our competitive position varies among our products and services,
we believe we are a significant competitor in each of our major product and service classes. However, a number of our products and
services are sold in competition with those of a large number of other companies, some of which have substantial financial resources
and significant technological capabilities. In addition, some of our products compete with the captive component divisions of original
equipment manufacturers.
International Operations
We are engaged in manufacturing, sales, service and research and development mainly in the United States, Europe, Canada, Asia
and Latin America. U.S. exports and foreign manufactured products are significant to our operations. U.S. exports comprised 9 and 10
percent of our total net sales in 2004 and 2003, respectively. Foreign manufactured products and services, mainly in Europe, were 35
and 34 percent of our total net sales in 2004 and 2003, respectively.
Our international operations, including U.S. exports, are potentially subject to a number of unique risks and limitations, including:
fluctuations in currency value; exchange control regulations; wage and price controls; employment regulations; foreign investment
laws; import and trade restrictions, including embargoes; and governmental instability.
Approximately 18 percent of total 2004 net sales of Aerospace-related products and services were exports of U.S. manufactured
products and systems and performance of services such as aircraft
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