Honeywell International Inc. (HON)

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Honeywell International, Inc (HON)

Q3 2010 Earnings Call

October 21, 2010 8:30 a.m. ET

Executives

Elena Doom - Vice President, Investor Relations

Dave Cote - Chairman and CEO

Dave Anderson - Senior Vice President and CFO

Analysts

Jeff Sprague – Vertical Research

Steven Winoker – Sanford Bernstein

Scott Davis – Morgan Stanley

John Inch – Merrill Lynch

Nigel Coe – Deutsche Bank

Bob Cornell – Barclays Capital

Nigel Cole – Deutsche Bank

Presentation

Operator

Good day, and welcome to the Honeywell Third Quarter 2010 Conference Call. Just a reminder that today’s call is being recorded. At this time, I would like to turn the conference over to Elena Doom, Vice President, Investor Relations. Ms. Doom, please go ahead. (Operator Instructions)

Elena Doom

Thank you, Lori. Good morning, and welcome to Honeywell Third 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 reconciliation are available on our website at www.honeywell.com/ investor. Note the elements of this presentation contains forward-looking statements that are based on an assessed 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 and our expectations for the remainder of the year, as well as share with a preliminary frame work for 2011. And of course, allow time for your questions.

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

Dave Cote

Thanks, Elena, and good morning everyone. It’s great to report another terrific quarter for Honeywell with revenues, earnings, and cash ahead of expectation, and great execution across our businesses.

Sales rates $8.4 billion, up 9% reported and organic, great sales growth. With continued growth in new products, geographic expansion continues momentum across our businesses. We generated EPS of $0.64 including covering $0.06 higher tax rate year-over-year, $0.03 of Sperian dilution, and $0.18 tension expenses in the quarter.

On an adjusted basis, that is excluding those items, our operating earnings were $0.91, up about 10% in the quarter. Our segment margin rate was 14.2%, up 40 basis points from prior year, reinforcing the quality of our earnings performance and continued cost discipline, more than offsetting the labor related headwinds we had.

Further reflecting earnings quality, we generated exceptional free cash flow of $1.2 billion, representing over 200% free cash flow conversion. Having generated 2.8 billion free cash flow year-to-date, we are very confident in our cash performance and are raising our free cash flow guidance to approximately 3 ½ billion for the full year which includes a planned $600 million voluntary cash pre-funding to our U.S. pension plan in fourth quarter.

You’ll recall we contributed approximately 400 million of stock to the planned year-to-date. Even our strong cash flow and the decline in interest rates was seen throughout the year. We think that doing more pre-funding is smart and we would expect to fund the plan as needed with cash going forward.

So given the strength of our year-to-date financial performance, and continued strong momentum, we are raising our full year guidance. We now expect sales above the high end of our previous range, or 33 billion, and earnings of approximately 2.52 a share above the previous high end of 250.

So despite the temperate economic landscape, we see a continued upward trend in our orders rates across all segments, demonstrating our robust focus on new products and services, our great positions and good industries, and investments in global expansion.

We’ve seen the biggest improvement in our early cycle business, namely Turbo and industrial businesses. We’re not seeing an uptick in Aerospace’s commercial after market. What’s also impressive are the long cycle orders growth rates which we think of as the ACFs solution’s businesses, UOP, and commercial Aero, OE.

Book-to-bill rates are above one and strengthening with strong double-digit increases across the group. Seed planting is something we talk a lot about and the growth we’ve seen in our end market is complimented by the benefits of our seed planting initiatives. We’re excited about the acquisitions we closed in the quarter, Sperian Protection, a leader in personal protection equipment design manufacturing and Emon, the market leader in sub-metering, an important component in commercial energy efficacy program and the Smart Grid.

We continue to make traction with our latest innovation that improve aircraft safety, with our Smart Path Precision Landing System and SmartView’s Synthetic Vision System. Honeywell’s been selected by brazil’s air traffic control to install the Smart Path system, which is the first and only system to receive the FAA’s design approval.

We’re also merging our SmartView’s Synthetic Vision System with enhanced infrared imaging; bring unprecedented situational awareness at night, and in low-visibility conditions. The integration of this blended technology is new, and we are ahead of our competition here, with lots of upgrade opportunities to vastly improve take-off and landing minimums, and increase safety of operations.

Our investments and focus in emerging regions are also really paying off. Sales in Asia-Pacific are up strongly of 21%, collecting good growth across the portfolio in China, up 28. And also growth in India, 34% Japan and Korea. We continue to build on our platforms for growth as evidence by the number of wins in Aerospace and process solutions in the quarter. There were a number of important emerging region wins in the quarter.

Honeywell’s Building Solutions signed an energy savings performance contract, or ESPC, with Dongguan Crystal Textile, to help reduce energy consumption in this manufacturing processes, as well as reduce a significant of greenhouse gas emission over the next five years. This marks both an important win for Honeywell in the region, and supports China’s focus on both energy efficiencies and reducing greenhouse gas emissions by 50% by 2030.

Additionally, process solutions with orders up strongly this year continues to win exciting new products in emerging regions. One in Qatar where the business was selected by Dolphin Energy to upgrade its existing Sperian system in its largest gas processing plant.

HBS also entered into phase 2 of the impressive Shaw Gas Development Project, valued at an additional 78 million. HBS is leveraging its full technology portfolio to help these sites operate safely, reliably, and efficiently.

And we continue to invest in our big process initiatives as well as other seed planting across the organization. Our velocity product development initiative helps to bring new products that customers want to market faster. And the organization is delivering over 450 new products this year so far.

The company is delivering better than expected P&L and cash flow benefits from our accelerated deployment of the Honeywell operating system as reflected by the impressive working capital turns and marketing expansion we’re experiencing this year.

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