Honeywell International (HON)

Q3 2011 Earnings Call

October 21, 2011 9:30 am ET


David James Anderson - Chief Financial Officer and Senior Vice President

Elena Doom -

David M. Cote - Chairman and Chief Executive Officer


Howard A. Rubel - Jefferies & Company, Inc., Research Division

Scott R. Davis - Morgan Stanley, Research Division

C. Stephen Tusa - JP Morgan Chase & Co, Research Division

John G. Inch - BofA Merrill Lynch, Research Division

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division



Good day, ladies and gentlemen, and welcome to the Honeywell Third Quarter 2011 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Elena Doom, Vice President of Investor Relations. Please go ahead.

Elena Doom

Thank you, Stephanie. Good morning, and welcome to Honeywell's Third Quarter 2011 Earnings Conference Call. Here with me today are Chairman and CEO, Dave Cote; and Senior Vice President and CFO, Dave Anderson. This call and webcast, including any non-GAAP reconciliations, are available on our website at Note that elements of today's presentation do contain forward-looking statements that are based on our best view of the world and of our businesses as we see them today. Those elements can change, and we would ask that you interpret them in that light. This morning, we will review our financial results for the third quarter, share with you our expectations for the fourth quarter and remainder of 2011, as well as discuss the framework for 2012.

And of course allow time for your questions.

With that, I'll turn the call over to Dave Cote.

David M. Cote

Thanks, Elena. Good morning, everyone. You might imagine that we're pretty anxious to talk to you about how we did because there's a lot of caveats this quarter. As you saw from our press release, we had another great quarter with better-than-expected operational performance reflecting terrific execution and continued momentum in most of our key end markets, and yielded EPS above the high end of our range.

Now before we get to the financials, we're obviously pleased the progress we made in the quarter on new repositioning actions, smartly redeploying book gains and CPG sale proceeds in the third quarter. Dave will take you through more details in a moment but we utilize both the gain on the sale of CPG, as well as the OPEB curtailment gains to fund substantial business repositioning. That will deliver tangible benefits in 2012 and beyond. So our reported sales were $9.3 billion, up 14% or 8% organic, reflecting continued advancement in our new products, high-growth regions and continued healthy end markets overall.

Segment margins expanded 50 basis points to 14.7% in the quarter, which included a $30 million accrual to prefund a new employee health savings plan design. This new plan design is consistent with our overall benefit strategy to empower employees to take ownership and optimize their benefits by making smarter decisions about their healthcare cost and improving quality outcomes going forward. By implementing this plan design change, we'll see a benefit in our healthcare cost next year.

We generated earnings per share of $1.10, up an impressive 45% over 2010 and you'll all recognize that was a good quarter also. And it's above the high end of our guidance range even when you exclude the favorable $0.04 tax benefit in the quarter, which will be fully offset in the fourth quarter as Dave will explain. Free cash flow was $884 million, reflecting 103% net income conversion. This really reinforces the quality of our earnings performance, volume leverage and continued cost controls, while maintaining our seed planting for the future. Given the strength and continued momentum of our year-to-date financial performance and positive outlook for the fourth quarter, we are again raising our full year guidance.

We now expect pro forma earnings in the range of $4 to $4.05 a share, reflecting a 33% to 35% increase in earnings over the prior year. We think this is top-tier performance amongst our multi-industry peer group. Our early cycle businesses, including Advanced Materials, ACS Products and turbochargers, continue to show a healthy pace of growth although moderating. While our longer cycle businesses like Commercial Aerospace, Process Solutions and UOP are starting to kick in with double-digit growth in the quarter. Further, our investments and focus in emerging regions continue to pay off with sales in Asia overall up approximately 20%.

We had another quarter of robust new product launches and technical certification. So when you look at the commercial and biz jet and general aviation side, we have a number of large platform wins with high content and are driving terrific retrofit upgrades with our latest suite of cockpit enhancements. There are several unannounced business aircrafts scheduled to debut over the next few years where Honeywell has been selected to provide the avionics. In virtually every instance, we were selected based on our advanced technology capabilities. And in some instances, the cockpits are not even put out for bid as our competitors' technology did not meet the OEM's requirements.

Turning to 2012, while we're not denying the potential for another recession, we think the high probability outcome is a slow growth economic environment. We're still in the early stages of our planning. However, we believe we're well positioned for growth across all 4 of our business segments again next year, given what we're seeing in our major end markets, the size of long cycle backlog, the strength of our execution and what we've been able to do with advance repositioning.

Dave will walk you through an updated view by business and market when he discusses the planning framework for 2012. But from an overall Honeywell view, the key drivers will be traction on our key process initiatives, growth investments in new products and services, our acquisitions and our expanding global footprint. Based on all of that, we feel confident in our ability to generate good earnings growth at 2x to 3x sales growth again in 2012.

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