Honeywell International Inc. (HON)

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Honeywell International, Inc. (HON)

Q1 2010 Earnings Call

April 23, 2010 8:00 am ET

Executives

Elena Doom - Vice President, Investor Relations

Dave Cote - Chairman and CEO

Dave Anderson - Senior Vice President and CFO

Analysts

Steven Winoker – Sanford Bernstein

Scott Davis – Morgan Stanley

John Inch – Merrill Lynch

Jeff Sprague – Vertical Research

Nigel Coe – Deutsche Bank

Peter Arment – Broadpoint

Howard Rubel – Jefferies

Chris Glynn – Oppenheimer & Co.

Presentation

Operator

(Operator Instructions) Welcome to the Honeywell First Quarter 2010 Conference Call. At this time I would like to turn conference over to Ms. Elena Doom.

Elena Doom

Welcome to Honeywell’s First Quarter 2010 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 www.Honeywell.com/Investor. Please note that elements of this presentation 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 first quarter as well as our expectations for the second quarter and for the remainder of 2010 and of course allow time for your questions.

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

Dave Cote

We had a great start to 2010 with better than expected improvement in many of our end markets, yielding EPS higher than the guidance provided last month. Sales are $7.8 billion up 3% at the high end of our previously guided range, reflecting stabilization across our businesses, selected growth with new products, geographic expansion, and overall improving conditions.

We generated earnings per share of $0.50 including covering a $0.02 charge related to the elimination of the Medicare Part D subsidy. And excluding pension expense on more of an apple to apples basis our earnings were up 21% in the quarter. Our segment margin rate was 13.3% up 170 basis points from prior year reflecting margin expansion in three out of four businesses.

This really reinforces the quality of our earnings performance and continued strong cost controls, while maintaining our growth investments for the future. Further reflecting earnings quality we generated almost $700 million of free cash flow, up 190% from prior year, primarily driven by higher segment profit, working capital improvement and slightly lower capital spending.

Given the strength of our first quarter financial performance and improving end market conditions, we are raising our full year guidance. We now expect earnings in the range of $2.30 to $2.45 a share and when you exclude pension expense that reflects a 4% to 9% increase in earnings over the prior year. We are also raising our free cash flow estimate to $2.8 to $3.1 billion for the year up from $2.4 to $2.7 billion.

There is clear evidence things are getting better and end markets are stabilized. We’re seeing orders growth across all of our businesses. Our early cycle businesses where we saw the biggest hit are also seeing the biggest improvement, namely turbo, sensing and control, gas detection and safety products. That said, we are continuing to take steps in all of our businesses to ensure we and our suppliers are prepared for the recovery.

The growth we’ve seen in our end markets is being supplemented by the results of our seed planting initiatives. Our investments and focus in emerging regions are really paying off. Sales in Asia/Pacific are up strongly reflecting good growth in China in Transportation and ACS but also growth in Japan and Korea. We continue to build on our platforms for growth as evidenced by the number and caliber of wins in our process solutions business in the quarter.

HVS was selected to control boiler operations and helped drive a 50% increase in production capacity for Thailand’s first super critical power plant. We were also awarded a significant $5 million commitment to supply instrumentation to a Korean ship building for their entire fleet. And R&G secured a $5 million contract from a Chinese gas pipeline distribution company to provide regulators for gas pressure reduction stations.

Also important to note, as you know we’ve been working to win a major role on the C919 the single aisle commercial airliner in China. The commercial aircraft corporation of China, Comac recently announced Honeywell selection to provide our enhanced 131-9 APU bringing significant growth potential with an estimated lifetime value of over $7 billion on a very important platform.

New product introductions continue to make a difference. For example, ACS introduced approximately 115 new products in the quarter including the Honeywell Zephyr the industry’s most accurate air flow sensor for medical and industrial applications. ECC and Life Safety continue to have terrific up take on their recent new product launches including two new fixed gas detectors suited for the mid to high end industrial and oil and gas segments that are selling exceptionally well and are offering important new approvals and protocols in the industry.

Also in the quarter our Fluorine products business launched a new Innovate Pro program which features a new energy efficient foam insulation and sealant. The program is specifically designed to help renovators and contractors offer a broader range of energy efficient solutions to home and building owners.

We continue to invest in our big process initiatives as well as other seed planting across the organization; to Honeywell operating system, velocity product development and functional transformation continue to be huge enablers for growth and productivity this year. With 80% of our manufacturing cost base now within HOS deployment we are expecting an acceleration in broad sight this year which is where we really start seeing transformational results.

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