Honeywell 2013 Annual Report Download - page 66

probable losses and recognize a liability, if any, for these contingencies based on an analysis of each
individual issue with the assistance of outside legal counsel and, if applicable, other experts.
In connection with the recognition of liabilities for asbestos related matters, we record asbestos
related insurance recoveries that are deemed probable. In assessing the probability of insurance
recovery, we make judgments concerning insurance coverage that we believe are reasonable and
consistent with our historical dealings and our knowledge of any pertinent solvency issues surrounding
insurers. Our insurance is with both the domestic insurance market and the London excess market.
While the substantial majority of our insurance carriers are solvent, some of our individual carriers are
insolvent, which has been considered in our analysis of probable recoveries. Projecting future events is
subject to various uncertainties that could cause the insurance recovery on asbestos related liabilities
to be higher or lower than that projected and recorded. Given the inherent uncertainty in making future
projections, we reevaluate our projections concerning our probable insurance recoveries in light of any
changes to the projected liability, our recovery experience or other relevant factors that may impact
future insurance recoveries. See Note 22 Commitments and Contingencies of Notes to the Financial
Statements for a discussion of management’s judgments applied in the recognition and measurement
of insurance recoveries for asbestos related liabilities.
Defined Benefit Pension Plans—We sponsor both funded and unfunded U.S. and non-U.S.
defined benefit pension plans covering the majority of our employees and retirees.
We recognize net actuarial gains or losses in excess of 10 percent of the greater of the fair value
of plan assets or the plans’ projected benefit obligation (the corridor) annually in the fourth quarter each
year (MTM Adjustment) and, if applicable, in any quarter in which an interim remeasurement is
triggered. Net actuarial gains and losses occur when the actual experience differs from any of the
various assumptions used to value our pension plans or when assumptions change as they may each
year. The primary factors contributing to actuarial gains and losses are changes in the discount rate
used to value pension obligations as of the measurement date each year and the difference between
expected and actual returns on plan assets. This accounting method results in the potential for volatile
and difficult to forecast MTM Adjustments. MTM charges were $51, $957 and $1,802 million in 2013,
2012 and 2011, respectively. The remaining components of pension income/expense, primarily service
and interest costs and assumed return on plan assets, are recorded on a quarterly basis (Pension
ongoing (income) expense).
For financial reporting purposes, net periodic pension income/expense is calculated based upon a
number of actuarial assumptions, including a discount rate for plan obligations and an expected long-
term rate of return on plan assets. We determine the expected long-term rate of return on plan assets
utilizing historical plan asset returns over varying long-term periods combined with our expectations on
future market conditions and asset mix considerations (see Note 23 Pension and Other Postretirement
Benefits of Notes to the Financial Statements for details on the actual various asset classes and
targeted asset allocation percentages for our pension plans). The discount rate reflects the market rate
on December 31 (measurement date) for high-quality fixed-income investments with maturities
corresponding to our benefit obligations and is subject to change each year. Information on all our
significant actuarial assumptions is included in Note 23 Pension and Other Postretirement Benefits of
Notes to the Financial Statements.
The key assumptions used in developing our 2013, 2012 and 2011 net periodic pension expense
for our U.S. plans included the following:
2013 2012 2011
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.06% 4.89% 5.25%
Assets:
Expected rate of return. . . . . . . . . . . . . . . . . . . . . . . . . . 7.75% 8% 8%
Actual rate of return. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23% 13% —
Actual 10 year average annual compounded rate
of return. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8% 8% 6%
The discount rate can be volatile from year to year as it is determined based upon prevailing
interest rates as of the measurement date. We will use a 4.89 percent discount rate in 2014, reflecting
the increase in the market interest rate environment since December 31, 2012. We plan to continue to
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