Performance 2006 Annual Report Financial Highlights (Dollars and Shares in Millions, Except Per Share Amounts) 2006 2005 2004 Sales· · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · $31,367 $ 27,652 $ 25,593 Sales Net Income· · · · · · · · · · · · · · · · · · · · · · · · · · · · $ 2,083 $ 1,638 $ 1,246 11% CAGR Diluted Earnings Per Common Share· · · · · · $ 2.52 $ 1.92 $ 1.45 $31.4 $27.7 Cash Dividends Per Common Share · · · · · · · $0.9075 $ 0.825 $ 0.75 $25.6 $23.1 Book Value Per Common Share · · · · · · · · · · $ 12.13 $ 12.98 $ 12.68 Total Assets · · · · · · · · · · · · · · · · · · · · · · · · · · · $30,941 $ 31,633 $ 30,570 Cash Flows from Operating Activities · · · · · · $ 3,211 $ 2,442 $ 2,253 Common Shares Outstanding at Year-End · · 801 829 850 2003 2004 2005 2006 Employees at Year-End· · · · · · · · · · · · · · · · · · 118,000 116,000 109,000 (in U.S.$ Billions) Sales by Profits by EPS Business Segment Business Segment 19% CAGR (percent)) (percent) $2.52 Automation and Automation and Control Solutions 35% Control Solutions 29% $1.92 Aerospace 35% Aerospace 44% $1.50 $1.45 2003 2004 2005 2006 Specialty Materials 15% Transportation 14% Transportation Systems Free Cash Flow (1) Systems 15% Specialty Materials 13% 17% CAGR $2.5 $1.8 $1.6 •Great positions in good industries with technologies aligned with $1.5 global mega-trends that matter to customers. •Consistent and sustainable financial performance in sales, margin expansion, earnings per share and free cash flow. •Disciplined and balanced cash deployment that returned more than $2.6 2003 2004 2005 2006 billion to shareowners in 2006 through dividends and share repurchases. •Growth initiatives and common operational processes have improved (in U.S.$ Billions) quality, delivery, value and technology for customers, while (1) We define free cash flow as cash provided strengthening our financial performance. by operating activities, less cash expenditures •A One Honeywell culture that attracts and retains the best and for property, plant and brightest people around the world. equipment. past few years, we’ve worked hard to develop great positions in good indus- tries, create a One Honeywell culture, and reinforce our Five Initiatives and Twelve Behaviors. And it works. We have a wonderful foundation for sustained performance. Great Positions in Good Industries This makes a big difference. Being in good industries provides a tailwind for growth. Having a leader- ship position accelerates that growth because of the critical mass in differentiators like sales coverage and research and development. We have also been active these past few years with acquisitions and divestitures to further improve what was already a very competitive portfolio of businesses. Our acquisi- tion process – standardizing best Performance practices company-wide for identifi- cation, valuation, due diligence, and especially integration – has been Honeywell made great progress this year in executing our growth extremely effective. Our businesses strategy. We reached a new financial performance threshold by are in terrific shape to grow, both surpassing $31 billion in sales, delivering 31% growth in earnings organically and through acquisitions. The aerospace industry should per share, and increasing free cash flow by 41%. Our focus continue to perform well. Commercial on One Honeywell, the Five Initiatives, having great positions in air travel should grow as the world good industries, a customer-first mindset, and value-driven becomes wealthier, allowing business- es to become more global and families technologies have resulted in consistent financial performance more dispersed. Travel is very elastic and a solid track record. with declines in ticket prices leading to greater growth in passenger traffic. The business jet segment is expected to continue to be strong, as evidenced by the annual industry-standard Honeywell Business Aviation Outlook To our Shareowners showing strong demand for at least the Another great year … with more next 10 years. As commercial travel to come! grows and time for everyone becomes Financial performance was terrific more valuable, we expect this trend to with sales up 13% to $31.4 billion, 7% continue. Defense spending is high by organic sales growth, and earnings historical norms, but at the same time per share up 31% to $2.52. Free cash the threats faced by every country are flow (cash flow from operations less high. While growth may moderate or capital expenditures) at $2.5 billion priorities shift, an abrupt and large was also strong, allowing us to increase decline seems unlikely. our dividend by 10%, repurchase 45.4 Our product portfolio in aerospace million shares of stock ($1.9 billion), is terrific and provides lots of and complete three acquisitions for opportunity. We are well positioned approximately $750 million, adding over to meet increasing OEM production $500 million in annualized sales. All in requirements with engines such all, another year of impressive results. as the TFE731-50, HTF7000, and 2003 2004 2005 2006 We expect continued strong the HTF10000 (Honeywell Turbo performance at Honeywell. Over the Fan with 10,000 pounds of thrust). 1 David M. Cote Chairman and 2 Chief Executive Officer Our redesigned auxiliary power (RAAS), which can do the same for our technology advances. The global units and accompanying mainte- airport/runway accidents; and our need for energy expands our process nance service agreements are doing vertical separation Control Display controls business, while the need very well because of the cost and System/Retrofit (CDS/R), allowing for more energy efficiency expands reliability advantage they provide stacked planes to safely operate our building/residential controls and airlines. Avionics should also contin- within shorter distances. energy performance contracting busi- ue to do well as safety requirements Automation and Control nesses. Good industries all around, in crowded airspace become more Solutions (ACS) has grown signifi- and we have leading positions in each. pronounced and software advances cantly both organically and with its The ACS team has excellent cause more intelligence to be put demonstrated capability to execute capabilities in managing sales/distribu- on the plane. With Primus Epic® and integrate acquisitions. Increased tion networks, driving productivity, we have a totally integrated digital security and fire detection needs are developing new products at an cockpit for business jets. We also evident worldwide. We identified gas accelerating rate, and delivering acqui- have the most comprehensive, detection as a logical adjacent space sition synergies. We continue to win advanced suite of safety avionics with great growth potential, and industry awards for our new products. with our Enhanced Ground through our acquisitions of Zellweger Thermostats, building controls, surface Proximity Warning System (EGPWS), in 2005 and First Technology in 2006, acoustic wave sensors (for applications designed to eliminate controlled we are now the industry leader. like tire pressure monitoring), flights into terrain; our Runway Sensors are becoming ubiquitous as Tridium® software allowing different Awareness Advisory System semiconductor costs come down and types of controls to talk to each other, “We expect continued strong performance at Honeywell. Over the past few years, we’ve worked hard to develop great positions in good industries, create a One Honeywell culture, and reinforce our Five Initiatives and Twelve Behaviors. And it works.” 3 Experion® PKS that provides a huge rate on all commercial vehicle plat- advantage in process controls for forms awarded worldwide in 2006. sophisticated process plants, the The retail aftermarket is a slower ability to detect over 100 kinds growth segment but with our FRAM®, of gases, ExitPoint® that allows Autolite®, Prestone®, Bendix®, buildings to be evacuated based on and Holts® brands, we have strong human reactions to sound, advanced positions. This business is being security devices … a lot of great invigorated by new product ideas stuff to grow with! that will advance future growth. Transportation Systems operates Specialty Materials (SM) has in two industries with turbochargers undergone incredible change over the and retail auto aftermarket products. last few years and now makes a big A turbocharger allows an engine contribution. Fluorines look good, that is about a third smaller to pro- especially with our non-ozone- vide the same power as a full-size depleting hydrofluorocarbons (HFCs), engine. That means about 20-25% spray foam insulation that reduces less fuel usage and emissions while home energy usage 20% while still providing consumers with cars improving structural integrity, and that go when they hit the accelerator; the recent announcement of our low a valuable contribution in today’s Global Warming Potential (GWP) HFC. energy conscious world! The biggest In our Resins and Chemicals busi- benefit occurs on diesel engines, ness, caprolactam demand is also on and in Europe half of all new autos the rise. With all the changes made are diesel powered because of these in this business over the past four advantages. It’s an excellent industry years, we’re in a great position. and with our cost and technology Demand for our semiconductor advantage, we recorded a 60% win products, Spectra® fiber (material 10 rate on all passenger vehicle plat- times stronger than steel and it floats!), forms and a greater than 70% win and process additives continue to Senior Management Team