2 0 1 5 ANNU A L REPORT PPD PDF Edits 2/22/16 -2:45pm Shareowners Letter—2016 We had another terrific year in what turned out to be a very slow growth economy. In my letter last year, I said that I expected the economy would be better than economists were forecasting because of the wealth transfer from oil producing nations to oil consuming nations. That newfound wealth would get spent by consumers, resulting in a better economy. Man, was I wrong. Or if I was right, it sure got masked by other negative items. So instead of a breakout economic year, it was slow growth again. And yes, we will plan 2016 based on a slow growth global economy. The Euro weakened considerably during the year (at least I got that one right), ending the year at about $1.08. We hedged 2015 at about $1.25 and 2016 at about $1.10. Clearly 2015 was a good call on Euro hedging. We won’t know about 2016 until we are largely through the year. So given all that, how did we do for the year? You already know the answer… terrific. Largely because while I expected the economy would be better, we planned the company like we always do… conservatively. Reported sales were down 4% driven by core organic growth of 1% more than offset by 4% negative impact of currency translation to a stronger dollar, and 1% negative impact from the sale of our Friction Materials business in 2014. On that 4% decline in reported sales we generated a 10% increase in earnings per share*, with that performance almost entirely coming from operations improvements, not share buyback. Compared with the performance of our industrial competitors, we again performed admirably. Free Cash Flow was up about 11% even as we continued our high return investments in our Performance Materials and Technologies (PMT) plants. Our performance allowed us to again raise our dividend by 15%, fulfilling the promise made in our Five Year Plan to increase our dividend payout ratio. Clearly, all of this led to quite a nice outcome for our investors! Five Year Plan Speaking of the Five Year Plan, we completed the second year of the Plan with double digit EPS growth like we said we would. In fact this marks our sixth consecutive year of double digit earnings* growth. The sales goals set in the Five Year Plan are clearly tougher but the margin goals are being met earlier than expected. Given macro trends globally, we can’t anticipate a stronger economic scenario than what we’ve been seeing, so the sales goals do look sporty. For those concerned about margin rates peaking, rest assured that’s why in that Five Year Plan we also showed by business and Company what we thought was possible. We have a lot of margin rate runway left. We even cut back our five year margin rate commitment because we couldn’t be sure everything would work. Well, it did! And we have done this while continuing the seed planting in R&D, Capex investments, high growth region development, and process improvements that are so necessary to keep growing like we are. We also made great progress deploying about $5.8 billion in cash for acquisitions of Elster ($5.0), ComDev ($.3), Satcom1 ($.1), Datamax ($.2), Sigma ($.1), and Aviaso. Elster will be assigned largely to Automation and Control Solutions (ACS) for its residential and building metering, and the industrial metering and software business will go to PMT. We have great expectations for what the Honeywell- Elster combo does for customers. Aerospace added significantly to their focus on connectivity with the additions of ComDev, Satcom1, and Aviaso. Sigma adds great capability in Research Chemicals for PMT. It turned into a great year for Honeywell M&A, adding real capability in areas we want to grow. As you may know, there has been significant Analyst support over the years for “meaningful” share buyback. To the consternation of several analysts and likely many short-term holders, we took a * EPS, V% exclude pension mark-to-market adjustment different path than many of our peers. We chose instead to keep our powder dry for the day when opportunity and pricing came together, limiting our buyback activity to periods where opportunistic market conditions existed and largely to keep share count flat over the long term. While that same $5.8 billion deployed to share buyback would have yielded higher EPS, I don’t believe it would have made us a better long-term investment. And as it turns out, on top of the $5.8 billion deployed for acquisitions, the market conditions (particularly in the late third and early fourth quarters) presented an opportunity for us to repurchase almost $2 billion of our outstanding shares in 2015, almost twice the amount we have historically done. In the long run, these portfolio additions create an enterprise with a better growth profile, more cash generation, and greater diversity of opportunity to withstand various industry and economic cycles. The nice part is we have plenty more capacity and are still on the lookout for great ideas. Long Term / Short Term We have always tried to do both. We call it doing two seemingly conflicting things at the same time. You see it everywhere… people wanting there to be a choice of one or the other when in reality you need to do both. Examples… do you want low inventory or good customer delivery? Do you want high margin rates or do you want volume? Do you want people empowered or do you want good controls? Do you want good long-term results or good short-term results? In every case, you want both. Fourteen years ago we had an empty pipeline at Honeywell… in everything… people, new products, process, geographies, everything. While financials were good in the early part of those fourteen years, they could have been better with higher margin rates. However, we chose to do the seed planting, the investing, that is important to be a long-term success. It worked, both in the short term and the long term. We will continue to do the seed planting that is so important to Honeywell’s future… developing new products, services, and technologies; expanding in High Growth Regions; R&D and Capex commitments for the future; and process initiatives like Honeywell User Experience, Velocity Product Development, Functional Transformation, and HOS Gold, where we bring it all together. We intend to deliver good results both short term and long term. Software An area in which we continue investing significantly is software capability. Based on composition of our 22,800 engineers (see below) you would say we are already a software company… and you would be right. 22,800 Engineers Mechanical 5,500 (24%) Software Chemical 11,100 (49%) 1,100 (5%) Electrical/ Electronics 5,100 (22%) It’s for that reason about five years ago we embarked on a process to become CMMI (Capability Maturity Model Integrated) Level 5 across the Company. In 2015, Honeywell became the first and only large Western company to state that it is 100% compatible with CMMI Maturity Level 5 across all global operations and in every business. This is huge. CMMI was developed at Carnegie Mellon University with US Government sponsorship as a best practice model to create more robust software from the beginning reliably. It delineates the software process and organizational capability into 5 levels of capability maturity with Level 5 being the best. In a throwback to the Fifties, many in the West maintain Level 3 is high enough and anything more is just bureaucracy. Why a throwback? Because in that era, Western companies said the same thing about the Quality philosophy of W. Edwards Deming. Which of course became the Toyota Production System (TPS)… you know the rest of the story. And as you may know, TPS became the foundation for the Honeywell Operating System. Most CMMI Level 5 companies today are in Japan, China, and India, as an interesting aside. CMMI Level 5 is even more important as we enter the cyber-physical era… the Internet of Things. Historically it has been digital-digital and the downside to a “bug” is not that big and easily fixed. If your plant shuts down, your power goes out, or the plane doesn’t work, that’s a horse of a different color. That cyber-physical world is where we excel, where domain knowledge matters greatly, and everything has to work… right from the beginning and reliably over a long period of time. That’s why operating at CMMI Level 5 maturity is such a huge advantage, as it lays a solid foundation for our long-term evolution as a premier cyber-physical company. And we are the only industrial company in the World to be CMMI Level 5 globally and across every business. Summary You can probably tell we are quite proud of what we have accomplished. While pride is important, it’s not an indicator of future success. What’s more important for the future is hunger. Being hungry to be the best every year. To do a great job for our customer every day. To have investors and employees excited about where we’re going. We do have that hunger. We do have that excitement… and we do have a great future. DAVID M. COTE Chairman and Chief Executive Officer Notes to Shareowners Letter: 1) Reconciliation of Cash Provided by Operating Activities to Free Cash Flow ($M) 2014 2015 Cash Provided by Operating Activities .