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INCOME TAXES
 12 Months Ended
Dec. 31, 2011
Income Taxes [Abstract]  
INCOME TAXES

Note 6. Income Taxes

Income from continuing operations before taxes         
    
   Years Ended December 31, 
   2011  2010  2009 
 United States $318 $1,157 $1,068 
 Foreign  1,964  1,565  896 
  $2,282 $2,722 $1,964 

Tax expense (benefit)         
   Years Ended December 31, 
   2011  2010  2009 
           
 United States$3 $358 $272 
 Foreign 414  407  164 
  $417 $765 $436 
           
   Years Ended December 31, 
   2011  2010  2009 
 Tax Expense consists of         
 Current:         
 United States$171 $(501) $(47) 
 State 13  3  19 
 Foreign 564  385  417 
  $748 $(113) $389 
           
 Deferred:         
 United States$(185) $784 $283 
 State 4  72  17 
 Foreign (150)  22  (253) 
   (331)  878  47 
  $417 $765 $436 

   
 Years Ended December 31,  
 2011  2010  2009   
The U.S. statutory federal income tax rate is reconciled to our effective income tax rate as follows:          
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%  
Taxes on foreign earnings below U.S. tax rate(1)(10.4)  (7.3)  (8.3)   
State income taxes(1)0.7  1.5  1.5   
Manufacturing incentives (1.7)   -  (1.6)   
ESOP dividend tax benefit(1.1)  (0.8)  (1.1)   
Tax credits(2.3)  (1.2)  (1.9)   
Audit settlements(2.0)  0.1  (0.7)   
All other items—net0.1  0.8  (0.7)   
 18.3% 28.1% 22.2%  
           
(1) Net of changes in valuation allowance and tax reserves          
           

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 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 effective tax rate increased by 5.9 percentage points in 2010 compared to 2009 primarily due to a change in the mix of earnings related to lower U.S. pension expense, the impact of an enacted change in the tax treatment of the Medicare Part D program, the absence of manufacturing incentives, a decreased impact from the settlement of audits and an increase in the foreign effective tax rate. The foreign effective tax rate increased by approximately 7 percentage points which primarily consisted of i) a 6 percentage point impact from the absence of tax benefits related to foreign exchange and investment losses and ii) a (0.1) percentage point impact from increased valuation allowances on net operating losses.

Deferred tax assets (liabilities)

Deferred income taxes represent the future tax effects of transactions which are reported in different periods for tax and financial reporting purposes. The tax effects of temporary differences and tax carryforwards which give rise to future income tax benefits and payables are as follows:

 

 December 31, 
 2011 2010 
Property, plant and equipment basis differences……………………………..$ (1,097) $ (1,107) 
Postretirement benefits other than pensions and post employment benefits 571  674 
Investment and other asset basis differences………………………………… (970)  (993) 
Other accrued items……………………………………………………………… 2,852  2,348 
Net operating and capital losses……………………………………………….. 810  873 
Tax credits………………………………………………………………………… 379  249 
Undistributed earnings of subsidiaries…………………………………………. (57)  (40) 
All other items—net………………………………………………………………. (67)  15 
  2,421  2,019 
Valuation allowance……………………………………………………………… (591)  (636) 
 $1,830 $1,383 

There were $3 million of U.S. federal tax net operating losses available for carryforward at December 31, 2011 which have expiration dates through 2029. The Company has state tax net operating loss carryforwards of $3.5 billion at December 31, 2011 with varying expiration dates through 2032. We also have foreign net operating and capital losses of $2.7 billion which are available to reduce future income tax payments in several countries, subject to varying expiration rules.

       We have U.S. federal tax credit carryforwards of $35 million at December 31, 2011, including alternative minimum tax credits which are not subject to expiration. We also have state tax credit carryforwards of $61 million at December 31, 2011, including carryforwards of $38 million with various expiration dates through 2026 and tax credits of $23 million which are not subject to expiration.

The valuation allowance against deferred tax assets decreased by $45 million in 2011 and increased by $58 million and $133 million in 2010 and 2009, respectively. The 2011 decrease in the valuation allowance was primarily due to decreased foreign net operating losses related to the Netherlands and Germany, partially offset by the increase in the valuation allowance of France, Luxembourg and Canada. The 2010 increase in the valuation allowance was primarily due to increased foreign net operating losses related to France, Luxembourg, and the Netherlands offset by the reversal of a valuation allowance related to Germany. The 2010 increase in valuation allowance also includes adjustments related to purchase accounting for various acquisitions. The 2009 increase in the valuation allowance was primarily due to increased foreign net operating losses related to Germany, Luxembourg, and the Netherlands.

Federal income taxes have not been provided on undistributed earnings of the majority of our international subsidiaries as it is our intention to reinvest these earnings into the respective subsidiaries. At December 31, 2011 Honeywell has not provided for U.S. federal income and foreign withholding taxes on approximately $8.1 billion of such earnings of our non-U.S. operations. It is not practicable to estimate the amount of tax that might be payable if some or all of such earnings were to be repatriated, and the amount of foreign tax credits that would be available to reduce or eliminate the resulting U.S. income tax liability.

We had $815 million, $757 million and $720 million of unrecognized tax benefits as of December 31, 2011, 2010, and 2009 respectively. If recognized, $815 million would be recorded as a component of income tax expense as of December 31, 2011. For the years ended December 31, 2011 and 2010, the Company increased its unrecognized tax benefits by $58 million and $37 million, respectively, due to additional reserves for various international and U.S. tax audit matters, partially offset by adjustments related to our ongoing assessments of the likelihood and amount of potential outcomes of current and future examinations, the expiration of various statute of limitations, and settlements with tax authorities. The following table summarizes the activity related to our unrecognized tax benefits:

 

 2011 2010 2009 
Change in unrecognized tax benefits:         
Balance at beginning of year $757 $720 $671 
Gross increases related to current period tax positions 46  37  86 
Gross increases related to prior periods tax positions 327  84  86 
Gross decreases related to prior periods tax positions (56)  (41)  (77) 
Decrease related to settlements with tax authorities (237)  (23)  (44) 
Expiration of the statute of limitations for the assessment of         
taxes (12)  (8)  (8) 
Foreign currency translation (10)  (12)  6 
Balance at end of year$815 $757 $720 

Generally, our uncertain tax positions are related to tax years that remain subject to examination by the relevant tax authorities. The following table summarizes these open tax years by major jurisdiction as of December 31, 2011:

 

 Open Tax Year 
JurisdictionExamination in Examination not yet 
progressinitiated 
United States (1)2001–2009 2005–2011 
United Kingdom N/A 2010-2011 
Canada(1)2006-2010 2011 
Germany(1)2004-2009 2010-2011 
France 2009-2010 2000–2008, 2011 
Netherlands 2007-2009 2010-2011 
Australia N/A 2009-2011 
China 2009-2010 2006-2008, 2011 
India 2000–2009 2010-2011 
     
(1) includes federal as well as state, provincial or similar local jurisdictions, as applicable. 

Based on the outcome of these examinations, or as a result of the expiration of statute of limitations for specific jurisdictions, it is reasonably possible that the related unrecognized tax benefits for tax positions taken regarding previously filed tax returns will materially change from those recorded as liabilities for uncertain tax positions in our financial statements. In addition, the outcome of these examinations may impact the valuation of certain deferred tax assets (such as net operating losses) in future periods. Based on the number of tax years currently under audit by the relevant U.S federal, state and foreign tax authorities, the Company anticipates that several of these audits may be finalized in the foreseeable future. However, based on the status of these examinations, the protocol of finalizing audits by the relevant taxing authorities, and the possibility that the Company might challenge certain audit findings (which could include formal legal proceedings), at this time it is not possible to estimate the impact of any amount of such changes, if any, to previously recorded uncertain tax positions.

Unrecognized tax benefits for examinations in progress were $482 million, $274 million and $261 million, as of December 31, 2011, 2010, and 2009, respectively. These increases are primarily due to an increase in tax examinations. Estimated interest and penalties related to the underpayment of income taxes are classified as a component of Tax Expense in the Consolidated Statement of Operations and totaled $63 million, $33 million and $13 million for the years ended December 31, 2011, 2010, and 2009, respectively. Accrued interest and penalties were $247 million, $183 million and $150 million, as of December 31, 2011, 2010, and 2009, respectively.