The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand the results of operations and financial condition of Honeywell International Inc. and its consolidated subsidiaries ("Honeywell" or the "Company") for the three years ended December 31, 2012. All references to Notes related to Notes to the Financial Statements in "Item 8-Financial Statements and Supplementary Data".

The Consumer Products Group (CPG) automotive aftermarket business had historically been part of the Transportation Systems reportable segment. In accordance with generally accepted accounting principles, CPG results are excluded from continuing operations and are presented as discontinued operations in all periods presented. See Note 2 Acquisitions and Divestitures for further details.

EXECUTIVE SUMMARY

For Honeywell, 2012 marked another year of strong growth despite a challenging political and macro-economic environment. The Company continued to manage uncertainty associated with slower than expected economic growth in the United States, recession in the European Union, political unrest in the Middle East, and slowing growth in China and other emerging economies. Despite a modest 2.6 percent growth in World GDP and Industrial Production, Honeywell's 2012 revenues were $37.7 billion representing a 3 percent improvement compared to 2011 revenues of $36.5 billion. Honeywell's 2012 revenue growth was achieved despite significant foreign exchange weakness in the Euro and other non-U.S. dollar currencies which had a negative 2 percent impact on our 2012 revenues. Our segment profit improved by 10 percent, in excess of three times revenue growth, evidencing the Company's continued focus on operational excellence. See Review of Business Segments section of this MD&A for a reconciliation of segment profit to consolidated income from continuing operations before taxes.

The Company's operational excellence and ability to expand profit faster than sales growth is due in part to a consistent, methodical application of several key internal business processes which drive efficiency and service quality, bringing world-class products and services to markets faster and more cost effectively for our customers. Honeywell refers to these processes as the Honeywell Enablers. In 2012, Honeywell continued to strengthen and expand the use of the Honeywell Enablers:

• The Honeywell Operating System ("HOS"): HOS drives sustainable improvements in our manufacturing operations to generate exceptional performance in safety, quality, delivery, cost, and inventory management. Approximately 70 percent of our manufacturing cost base has achieved HOS certification.

• Velocity Product Development ("VPD"): VPD is a process which brings together all of the functions necessary to successfully launch new products-R&D, manufacturing, marketing and sales-to increase the probability that in commercializing new technologies Honeywell delivers the right products at the right price.

• Functional Transformation ("FT"): Functional Transformation is HOS for our administrative functions-Finance, Legal, HR, IT and Purchasing-standardizing the way we work, which improves service quality and reduces costs.

• Organizational Efficiency ("OEF"): OEF is, in its simplest form, the cost of labor. Improvements in OEF represent the success of Honeywell's initiatives to increase labor cost efficiency and employee productivity.

The Company continues to invest for future growth as measured by a number of important metrics:

• R&D spending at 4.9 percent of revenues was targeted at such high growth areas as natural gas processing, low global warming refrigerants and blowing agents, and wireless control devices and technologies.

• Capital expenditures grew 11 percent to $884 million including the construction or expansion of technology centers in India and Saudi Arabia.

• The Company recognized approximately $119 million of restructuring actions to support sustainable productivity in years to come.

• The Company completed $438 million (net of cash acquired) in acquisitions in 2012, including acquisition of a 70 percent ownership interest in Thomas Russell L.L.C. ("Thomas Russell Co."), a leader in technology and equipment for natural gas processing and treating, primarily serving the US market.

• Expansion of Honeywell's presence and sales in high growth regions and countries such as China, India, Eastern Europe, the Middle-East, and Latin America. Sales to customers outside the United States now account for approximately 55 percent of total revenues.

Operating cash flow grew by 24 percent in 2012 to $3,517 million. This operating cash flow performance enabled us to invest $884 million in capital expenditures, fund the acquisitions discussed above, make $1,039 million in pension contributions, and provide an 11 percent increase in dividends paid (vs. 2011) and repurchase 5 million shares of common stock.

CONSOLIDATED RESULTS OF OPERATIONS

Net Sales


                                           2012              2011              2010
Net sales                               $   37,665        $   36,529        $   32,350
% change compared with prior period         3%                13%

The change in net sales compared to the prior year period is attributable to the following:

                                2012           2011
                               Versus         Versus
                                2011           2010
Volume                            2 %             6 %
Price                             1 %             2 %
Acquisitions/Divestitures         2 %             3 %
Foreign Exchange                 (2 )%            2 %

                                  3 %            13 %

A discussion of net sales by segment can be found in the Review of Business Segments section of this MD&A.

Cost of Products and Services Sold


                                            2012               2011               2010
Cost of products and services sold      $   28,291         $   28,556         $   24,721
% change compared with prior period         (1)%               16%
Gross Margin percentage                       24.9 %             21.8 %             23.6 %

Cost of products and services sold decreased by $265 million or 1 percent in 2012 compared with 2011 principally due to a decrease in pension expense of approximately $800 million (primarily driven by the decrease in the pension mark-to-market adjustment allocated to cost of products and services sold of $780 million) and a decrease in repositioning and other charges of approximately $220 million, partially offset by an estimated increase in direct material costs of approximately $620 million driven substantially by a 3 percent increase in sales as a result of the factors (excluding price) shown above and discussed in the Review of Business Segments section of this MD&A and an increase in other postretirement expense of approximately $135 million due to the absence of 2011 curtailment gains.

Gross margin percentage increased by 3.1 percentage points in 2012 compared with 2011 principally due to lower pension expense (approximately 2.2 percentage point impact primarily driven by the decrease in the pension mark-to-market adjustment allocated to cost of products and services

Cost of products and services sold increased by $3,835 million or 16 percent in 2011 compared with 2010, principally due to an estimated increase in direct material costs, labor costs and indirect costs of approximately $2 billion, $520 million, and $280 million, respectively, driven substantially by a 13 percent increase in sales as a result of the factors (excluding price) shown above and discussed in the Review of Business Segments section of this MD&A, an increase in pension and other postretirement expense of approximately $880 million (primarily driven by the increase in the pension mark-to-market adjustment allocated to cost of products and services sold of $1.1 billion) and an increase in repositioning and other charges of approximately $90 million.

Gross margin percentage decreased by 1.8 percentage points in 2011 compared with 2010, primarily due to higher pension and other postretirement expense (approximate 2.8 percentage point impact primarily driven by an unfavorable 3.3 percentage point impact resulting from the increase in the pension mark-to-market adjustment allocated to cost of products and services sold) and repositioning and other charges (approximate 0.2 percentage point impact), partially offset by higher sales volume driven by each of our business segments (approximate 1.2 percentage point impact).

Selling, General and Administrative Expenses


                                                   2012             2011             2010
Selling, general and administrative expense     $   5,218        $   5,399        $   4,618
Percent of sales                                  13.9%            14.8%            14.3%

Selling, general and administrative expenses (SG&A) decreased as a percentage of sales by 0.9 percent in 2012 compared to 2011 driven by the impact of higher sales as a result of the factors discussed in the Review of Business Segments section of this MD&A, an estimated $110 million decrease in pension expense (driven by the decrease in the portion of the pension mark-to-market charge allocated to SG&A), $90 million decrease due to foreign exchange and $80 million decrease in repositioning actions, partially offset by the impact an estimated $140 million increase in costs resulting from acquisitions, investment for growth and merit increases (net of other employee related costs).

Selling, general and administrative expenses increased as a percentage of sales by 0.5 percent in 2011 compared to 2010 driven by an estimated $430 million increase in labor costs resulting from acquisitions, investment for growth, and merit increases, an estimated increase of $240 million in pension and other postretirement expense (driven primarily by the allocated portion of the pension mark-to-market charge increase of approximately $270 million) and an estimated increase of $60 million in repositioning actions, partially offset by the impact of higher sales volume as a result of the factors discussed in the Review of Business Segments section of this MD&A.

Other (Income) Expense


                                                          2012            2011            2010
Equity (income)/loss of affiliated companies            $   (45 )       $   (51 )       $   (28 )
Gain on sale of non-strategic businesses and assets          (5 )           (61 )             -
Interest income                                             (58 )           (58 )           (39 )
Foreign exchange                                             36              50              12
Other, net                                                    2              36             (42 )

                                                        $   (70 )       $   (84 )       $   (97 )

Other income decreased by $14 million in 2012 compared to 2011 due primarily to a $50 million pre-tax gain related to the divestiture of the automotive on-board sensors products business within our Automation and Control Solutions segment in the first quarter of 2011, partially offset by a loss of $29 million resulting from early redemption of debt in 2011 included within "Other, net" and the reduction of approximately $6 million of acquisition related costs compared to 2011 included within "Other, net".

Interest and Other Financial Charges


                                           2012           2011           2010
Interest and other financial charges     $   351        $   376        $   386
% change compared with prior period        (7)%           (3)%

Interest and other financial charges decreased by 7% percent in 2012 compared with 2011 primarily due to lower borrowing costs, partially offset by higher average debt balances.

Interest and other financial charges decreased by 3% percent in 2011 compared with 2010 primarily due to lower borrowing costs, partially offset by higher debt balances.

Tax Expense


                          2012             2011             2010
Tax expense            $    944         $    417         $    765
Effective tax rate         24.4 %           18.3 %           28.1 %

The effective tax rate increased by 6.1 percentage points in 2012 compared with 2011 primarily due to a change in the mix of earnings taxed at higher rates (primarily driven by an approximate 6.1 percentage point impact from the decrease in pension mark-to-market expense), a decreased benefit from valuation allowances, a decreased benefit from the settlement of tax audits and the absence of the U.S. R&D tax credit, partially offset by a decreased expense related to tax reserves. The foreign effective tax rate was 17.0 percent, a decrease of approximately 4.1 percentage points which primarily consisted of a 10.0 percent impact related to a decrease in tax reserves, partially offset by a 5.2 percent impact from increased valuation allowances on net operating losses primarily due to a decrease in Luxembourg and France earnings available to be offset by net operating loss carry forwards and a 1.4 percent impact from tax expense related to foreign exchange. The effective tax rate was lower than the U.S. statutory rate of 35 percent primarily due to earnings taxed at lower foreign rates.

The effective tax rate decreased by 9.8 percentage points in 2011 compared with 2010 primarily due to a change in the mix of earnings between U.S. and foreign sources related to higher U.S. pension expense (primarily driven by an approximate 7.6 percentage point impact which resulted from the increase in pension mark-to-market expense), an increased benefit from manufacturing incentives, an increased benefit from the favorable settlement of tax audits and an increased benefit from a lower foreign effective tax rate. The foreign effective tax rate was 21.1 percent, a decrease of approximately 4.9 percentage points which primarily consisted of (i) a 5.1 percent impact from decreased valuation allowances on net operating losses primarily due to an increase in German earnings available to be offset by net operating loss carry forwards,
(ii) a 2.4 percent impact from tax benefits related to foreign exchange and investment losses, (iii) a 1.2 percent impact from an increased benefit in tax credits and lower statutory tax rates, and (iv) a 4.1 percent impact related to an increase in tax reserves. The effective tax rate was lower than the U.S. statutory rate of 35 percent primarily due to earnings taxed at lower foreign rates.

The American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013. Some of these provisions provide retroactive changes to the 2012 tax year which were not taken into account in determining the Company's effective tax rate for 2012. The impact of these retroactive changes will be

Net Income Attributable to Honeywell


                                                            2012             2011             2010
Amounts attributable to Honeywell
Income from continuing operations                        $   2,926        $   1,858        $   1,944
Income from discontinued operations                              -              209               78

Net income attributable to Honeywell                     $   2,926        $   2,067        $   2,022

Earnings per share of common stock-assuming dilution
Income from continuing operations                        $    3.69        $    2.35        $    2.49
Income from discontinued operations                              -             0.26             0.10

Net income attributable to Honeywell                     $    3.69        $    2.61        $    2.59

Earnings per share of common stock-assuming dilution increased by $1.08 per share in 2012 compared with 2011 primarily due to lower pension expense (mainly due to a decrease in the pension mark-to-market adjustment), increased segment profit in our Aerospace, Automation and Control Solutions and Performance Materials and Technologies segments, lower repositioning and other charges, partially offset by increased tax expense, decreased income from discontinued operations and higher other postretirement expense.

Earnings per share of common stock-assuming dilution increased by $0.02 per share in 2011 compared with 2010 primarily due to an increase in segment profit in each of our business segments, lower tax expense, the gain on disposal of discontinued operations, and lower other postretirement expense, partially offset by higher pension expense (primarily due to an increase in the pension mark-to-market adjustment) and higher repositioning and other charges.

For further discussion of segment results, see "Review of Business Segments".

BUSINESS OVERVIEW

This Business Overview provides a summary of Honeywell and its four reportable operating segments (Aerospace, Automation and Control Solutions, Performance Materials and Technologies and Transportation Systems), including their respective areas of focus for 2013 and the relevant economic and other factors impacting their results, and a discussion of each segment's results for the three years ended December 31, 2012. Each of these segments is comprised of various product and service classes that serve multiple end markets. See Note 24 Segment Financial Data of Notes to the Financial Statements for further information on our reportable segments and our definition of segment profit.

Economic and Other Factors

In addition to the factors listed below with respect to each of our operating segments, our consolidated operating results are principally impacted by:

• Change in global economic growth rates and industry conditions on demand in our key end markets;

• Overall sales mix, in particular the mix of Aerospace original equipment and aftermarket sales and the mix of Automation and Control Solutions (ACS) products, distribution and services sales;

• The extent to which cost savings from productivity actions are able to offset or exceed the impact of material and non-material inflation;

• The impact of the pension discount rate and asset returns on pension expense, including mark-to-market adjustments, and funding requirements; and

• The impact of fluctuations in foreign currency exchange rates (in particular the Euro), relative to the U.S. dollar.

Areas of Focus for 2013

The 2013 areas of focus will be supported by the enablers including the Honeywell Operating System, our Velocity Product Development process, and Functional Transformation/ Organizational Efficiency. These areas of focus are generally applicable to each of our operating segments, and include:

• Driving profitable growth through R&D, technological excellence and optimized manufacturing capability to deliver innovative products that customers value;

• Expanding margins by maintaining and improving the Company's cost structure through manufacturing and administrative process improvements, restructuring, and other actions, which will drive productivity and enhance the flexibility of the business as it works to proactively respond to changes in end market demand;

• Proactively managing raw material costs through formula and long-term supply agreements and hedging activities, where feasible and prudent;

• Driving strong cash flow conversion through effective working capital management which will enable the Company to undertake strategic actions to benefit the business including capital expenditures, strategic acquisitions, and returning cash to shareholders;

• Increasing our sales penetration and expanding our localized footprint in high growth regions, including China, India, Eastern Europe, the Middle East and Latin America;

• Aligning and prioritizing investments for long-term growth, while considering short-term demand volatility;

• Monitoring both suppliers and customers for signs of liquidity constraints, limiting exposure to any resulting inability to meet delivery commitments or pay amounts due, and identifying alternate sources of supply as necessary; and

• Controlling Corporate and other non-operating costs, including costs incurred for asbestos and environmental matters, pension and other post-retirement expenses and tax expense.

Review of Business Segments


                                               2012               2011               2010
Net Sales
Aerospace
Product                                    $    6,999         $    6,494         $    5,868
Service                                         5,041              4,981              4,815

Total                                          12,040             11,475             10,683
Automation and Control Solutions
Product                                        13,610             13,328             11,733
Service                                         2,270              2,207              2,016

Total                                          15,880             15,535             13,749
Performance Materials and Technologies
Product                                         5,642              5,064              4,449
Service                                           542                595                277

Total                                           6,184              5,659              4,726
Transportation Systems
Product                                         3,561              3,859              3,192
Service                                             -                  -                  -

Total                                           3,561              3,859              3,192
Corporate
Product                                             -                  -                  -
Service                                             -                  1                  -

Total                                               -                  1                  -

                                           $   37,665         $   36,529         $   32,350

Segment Profit
Aerospace                                  $    2,279         $    2,023         $    1,835
Automation and Control Solutions                2,232              2,083              1,770
Performance Materials and Technologies          1,154              1,042                749
Transportation Systems                            432                485                353
Corporate                                        (218 )             (276 )             (222 )

                                           $    5,879         $    5,357         $    4,485

A reconciliation of segment profit to consolidated income from continuing operations before taxes are as follows:

                                                                   Years Ended December 31,
                                                          2012               2011              2010
Segment Profit                                         $   5,879         $    5,357         $   4,485
Other income/ (expense)(1)                                    25                 33                69
Interest and other financial charges                        (351 )             (376 )            (386 )
Stock compensation expense(2)                               (170 )             (168 )            (163 )
Pension ongoing expense(2)                                   (36 )             (105 )            (185 )
Pension mark-to-market expense(2)                           (957 )           (1,802 )            (471 )
Other postretirement income/(expense)(2)                     (72 )               86               (29 )
Repositioning and other charges(2)                          (443 )             (743 )            (598 )

Income from continuing operations before taxes         $   3,875         $    2,282         $   2,722

(1) Equity income/(loss) of affiliated companies is included in Segment Profit.

(2) Amounts included in cost of products and services sold and selling, general and administrative expenses.

                                                                                                        % Change
                                                                                                  2012            2011
. . .