Honeywell 2007 Annual Report Download - page 21

An increasing percentage of our sales and operations is in non-U.S. jurisdictions and is subject to the
economic, political, regulatory and other risks of international operations.
Our international operations, including U.S. exports, comprise a growing proportion of our operating results
and our strategy calls for increasing sales to and operations in overseas markets, including developing markets
such as China, India and the Middle East. In 2007, 49 percent of our total sales (including products manufactured
in the U.S. and in international locations) were outside of the U.S. including 29 percent in Europe and 11 percent
in Asia. Risks related to international operations include exchange control regulations, wage and price controls,
employment regulations, foreign investment laws, import and trade restrictions (including embargoes), changes in
regulations regarding transactions with state-owned enterprises, nationalization of private enterprises,
government instability and our ability to hire and maintain qualified staff in these regions. The cost of compliance
with increasingly complex and often conflicting regulations worldwide can also impair our flexibility in modifying
product, marketing, pricing or other strategies for growing our businesses, as well as our ability to improve
productivity and maintain acceptable operating margins.
As we continue to grow our businesses internationally, our operating results could be increasingly effected by
the relative strength of the European and Asian economies and the impact of exchange rate fluctuations. We do
have a policy to reduce the risk of volatility through hedging activities, but such activities bear a financial cost and
may not always be available to us and may not be successful in eliminating such volatility.
We may be required to recognize impairment charges for our long-lived assets.
At December 31, 2007, the net carrying value of long-lived assets (property, plant and equipment, goodwill
and other intangible assets) totaled approximately $15.7 billion. In accordance with generally accepted
accounting principles, we periodically assess our long-lived assets to determine if they are impaired. Significant
negative industry or economic trends, disruptions to our business, unexpected significant changes or planned
changes in use of the assets, divestitures and market capitalization declines may result in impairments to
goodwill and other long-lived assets. Future impairment charges could significantly affect our results of
operations in the periods recognized. Impairment charges would also reduce our consolidated shareowners'
equity and increase our debt-to-total-capitalization ratio, which could negatively impact our 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 26 and 9 percent of Aerospace and total sales, respectively, for
the year ended December 31, 2007. Although U.S. defense spending increased in 2007 and is expected to
increase again in 2008, we cannot predict the extent to which funding for individual programs will be included,
increased or reduced as part of the 2009 and subsequent budgets ultimately approved by Congress, or be
included in the scope of separate supplemental appropriations. We also cannot predict the impact of potential
changes in priorities due to military transformation and planning and/or the nature of war-related activity on
existing, follow-on or replacement programs. A shift in defense or space spending to programs in which we do
not participate and/or reductions in funding for or termination of existing programs could adversely impact our
results of operations.
As a supplier of military and other equipment to the U.S. Government, we are subject to unusual risks,
such as the right of the U.S. Government to terminate contracts for convenience and to conduct audits
and investigations of our operations and performance.
In addition to normal business risks, companies like Honeywell that supply military and other equipment to
the U.S. Government are subject to unusual risks, including dependence on
12