Honeywell 2012 Annual Report Download - page 25

sale securities may also result in an impairment charge. 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 credit rating and 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 Aerospace’s defense
and space sales and results of operations.
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, 2012. 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 2013 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 requirements, complexity of designs and the rapidity
with which they become obsolete, necessity for frequent 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 to
contract prices and schedules.
Our contracts with the U.S. Government are also subject to various government audits. Like many
other government contractors, we have received audit reports that recommend downward price
adjustments to certain contracts or changes to certain accounting systems or controls to comply with
various government regulations. When appropriate and prudent, we have made adjustments and paid
voluntary refunds in the past 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 consistent with the terms of 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 reprocurement
costs incurred by the government in acquiring undelivered goods or services from another source and
for other damages suffered by the government as permitted under the contract.
We are also subject to government investigations of business practices and compliance with
government procurement regulations. If, as a result of any such investigation or other government
investigations (including violations of certain environmental or export laws), Honeywell or one of its
businesses were found to have violated applicable law, 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
16