Honeywell International Inc. (HON)

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Honeywell International (HON)

Q3 2012 Earnings Call

October 19, 2012 9:30 am ET

Executives

Elena Doom

David M. Cote - Chairman and Chief Executive Officer

David James Anderson - Chief Financial Officer and Senior Vice President

Analysts

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Scott R. Davis - Barclays Capital, Research Division

Jeffrey T. Sprague - Vertical Research Partners Inc.

Nigel Coe - Morgan Stanley, Research Division

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

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Honeywell Third Quarter 2012 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 2012 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 www.honeywell.com/investor. We ask you to note that elements of this 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. We identify the principal risks and uncertainties that affect our performance in our Form 10-K and other SEC filings.

This morning, we will review our financial results for the third quarter of 2012, share with you our outlook for the remainder of the year and provide a framework for how we're thinking about 2013. And finally, we'll leave time for your questions.

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

David M. Cote

Thanks, Elena. Good morning, everyone. As you've seen from our press release this morning, we delivered another strong quarter, and it's driven by the strength of our balanced portfolio mix. We have a relentless focus on new products and geographic expansion and of course, our disciplined cost controls. In a more challenging economic environment, our margins expanded 110 basis points to 15.8% on 2% organic sales growth. We delivered strong earnings growth and margin expansion, while continuing our investments, our seed planting for the future, despite a deceleration of growth across a number of our end markets.

Earnings per share of $1.20 included approximately $0.06 of tax favorability versus our normalized effective tax rate of 26.5%. Excluding the tax benefit, EPS would have been $1.14 near the top end of our previously communicated guidance range. When you compare the $1.20 to last year's $1.10, which had approximately the same tax rate, that's 9% operating growth. Or if both years were normalized at our 26.5% rate, it's an 8% operating growth. So no matter how you slice it, pretty impressive performance considering the terrific growth we had last year and the slow growth environment we're in today.

That increase in margins reflects our continued focus on driving productivity from our key process initiatives, the conservative planning assumptions around cost and our proactive restructuring. The businesses have done a great job controlling their indirect and discretionary spending, and we're also seeing further traction on our key process enablers, such as the Honeywell Operating System, Functional Transformation, Velocity Product Development and Organization Effectiveness or OEF. The upshot is that we're just starting to hit critical mass in some of our business -- biggest businesses and the benefits will continue to provide a tailwind for margin expansion even in a slow growth or no growth environment. And as I mentioned, we did this while also investing in the future, including funding additional R&D and CapEx. From a geographic perspective, we expect more of the same.

In Europe, we expect continued softness in our short cycle businesses namely ACS Products and Transportation Systems, at least through the first half of next year. However, we don't expect to see the magnitude of euro headwinds that we saw in 2012. And our balanced portfolio of short and long cycle businesses is helping to mitigate near-term trends.

Meanwhile, the Americas is holding up well overall, although we saw some deceleration in growth in the short cycle businesses of ACS and PMT as we expected. However, the indicators we're tracking remain positive overall.

The same is true in China as we are seeing lower demand for some of our products in our short cycle businesses, but overall growth, driven by double-digit increases in our long cycle businesses, namely Commercial Aero and UOP. We remain well positioned in China with our focus on East4East and an uptick in second and third tier cities where GDP is still growing faster than the overall country's growth. We feel good about the diversified nature and regional mix of the portfolio and we'll continue to benefit from our Great Positions in Good Industries globally.

With just over 2 months left in the year, we're very confident in our ability to meet our 2012 guidance. As a reminder, we've stuck by our earnings outlook all year and actually raised it slightly at the midpoint in prior quarters to reflect our stronger first half performance.

Today, we'll outline our thoughts on the fourth quarter, which Dave will walk you through in more detail shortly, but at a high level, we're tightening our 2012 outlook by $0.05 each on the low and high ends, taking 2012 estimated earnings per share $4.45 to $4.50, meaning no change at the midpoint of the range.

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