Honeywell 2005 Annual Report Download - page 23

impaired. Significant negative industry or economic trends, disruptions to our business, unexpected significant changes or planned
changes in use of the assets, divestitures and market capitalization declines may result in charges to goodwill and other asset
impairments. Future impairment charges could significantly affect our results of operations in the periods recognized. Impairment
charges would also reduce our consolidated net worth and our shareowners' equity and increase our debt-to-total-capitalization ratio,
which could negatively impact our access to the public debt and equity markets.
A change in the level of U.S. Government defense and space funding or the mix of programs to which such funding is allocated
could adversely impact sales of Aerospace's defense and space-related product and services.
Sales of our defense and space-related products and services are largely dependent upon government budgets, particularly the U.S.
defense budget. Sales as a prime contractor and subcontractor to the U. S. Department of Defense comprised approximately 28 and
11 percent of Aerospace and total sales, respectively, for the year ended December 31, 2005. Although U.S. defense spending
increased in 2005 and is expected to increase again in 2006, we cannot predict the extent to which funding for individual programs
will be included, increased or reduced as part of the 2007 and subsequent budgets ultimately approved by Congress, or be included in
the scope of separate supplemental appropriations. We also cannot predict the impact of potential changes in priorities due to military
transformation and planning and/or the nature of war-related activity on existing, follow-on or replacement programs. A shift in
defense spending to programs in which we do not participate and/or reductions in funding for or termination of existing programs
could adversely impact our results of operations.
As a supplier of military and other equipment to the U. S. Government, we are subject to unusual risks, such as the right of the
U.S. Government to terminate contracts for convenience and to conduct audits and investigations of our operations and
performance.
In addition to normal business risks, companies like Honeywell that supply military and other equipment to the U.S. Government
are subject to unusual risks, including dependence on Congressional appropriations and administrative allotment of funds, changes in
governmental procurement legislations and regulations and other policies that reflect military and political developments, significant
changes in contract scheduling, complexity of designs and the rapidity with which they become obsolete, necessity for constant design
improvements, intense competition for U.S. Government business necessitating increases in time and investment for design and
development, difficulty of forecasting costs and schedules when bidding on developmental and highly sophisticated technical work,
and other factors characteristic of the industry. Changes are customary over the life of U.S. Government contracts, particularly
development contracts, and generally result in adjustments of contract prices.
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 and may do so in the future.
U.S. Government contracts are subject to termination by the government, either for the convenience of the government or for our
failure to perform under the applicable contract. In the case of a termination for convenience, we are typically entitled to
reimbursement for our allowable costs incurred, plus termination costs and a reasonable profit. If a contract is terminated by the
government for our failure to perform we could be liable for additional costs incurred by the government in acquiring undelivered
goods or services from any other source and any other damages suffered by the government.
We are also subject to government investigations of business practices and compliance with government procurement regulations.
If Honeywell or one of its businesses were charged with wrongdoing as a result of any such investigation or other government
investigations (including violations of certain environmental or export laws), it could be suspended from bidding on or receiving
awards of new government contracts pending the completion of legal proceedings. The U.S.
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