Honeywell 2008 Annual Report Download - page 23

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 27 and 9 percent of Aerospace and total sales, respectively, for
the year ended December 31, 2008. Although U.S. defense spending increased in 2008 and is expected to
increase again in 2009, we cannot predict the extent to which total funding and/or funding for individual programs
will be included, increased or reduced as part of the 2010 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 Congressional appropriations and
administrative allotment of funds, changes in governmental procurement legislation 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, such as contract award protests and
delays in the timing of contract approvals. 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, suspended from
contract performance pending the completion of legal proceedings and/or have its export privileges suspended.
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.
14