Honeywell International Inc. (HON) released its third quarter 2010 earnings result before the opening bell today, reporting earnings from continuing operations of 64 cents, outperforming the Zacks Consensus Estimate by a cent. The company witnessed particularly strong growth in its short cycle businesses, such as turbochargers and general industrial products.
Revenue
Total revenue in the quarter increased 9% year over year to $8.4 billion, above the Zacks Consensus Estimate of $8.2 billion. Apart from growth in the short cycle businesses, the company also experienced expansion in the commercial aerospace aftermarket. The longer cycle Solutions businesses and UOP also showed good growth.
Segment Details
During the quarter, the Transportation Systems revenue showed the highest rate of growth, up 19% year over year, led by higher Turbo volumes, successful launch of new products and increased demand for European diesel.
Transportation Systems was followed by Specialty Material, which showed growth of 16%. The segments sales benefited from improvement in markets globally and commercial superiority, resulting in increased sales of Resins and Chemicals business in Asiaand new applications and penetration of specialty additives and films. Sales of refrigerants and industrial process aids also increased globally. At UOP there were higher gas processing equipment and new petrochemical catalyst sales.
Automation and Control Solutions revenue increased by 9%, led by growth in all regions, implementation of energy efficiency-related projects, a recover in overall industry, and new product launches.
Increased volumes in commercial OEM and aftermarket led to a 3% growth in Aerospace revenue. This was, however, offset by amounts accounted for payments to Business and General Aviation (BGA) OEM customers to compensate pre-production costs.
Income & Expense
Income before Taxes were $705 million compared with $798 million in the third quarter of 2009. SG&A expenses amounted to $1,177 million compared with $1,034 million.
Segment margin was 17.0% in Aerospace (down 40 bps year over year), 13.6% in Automation and Control Solutions (up 10 bps), 11.7% in Transportation Systems (up 460 bps) and 16.5% in Specialty Material (up 130 bps).
Balance Sheet & Cash Flow
Cash and cash equivalents was $2.6 billion with long-term debt of $6.3 billion and shareowners equity of $10.5 billion.
Cash Flow from operating activities was $1.3 billion in the quarter and expenditures for property, plant and equipment were $166 million, resulting in a free cash flow of $1.2 billion. Superior earnings and strong working capital performance drove the company’s cash flow in the quarter. The company expects to achieve a record free cash flow for the year.
Outlook
Strong results in the quarter led the company to increase the high-end of its previous 2010 earnings and revenue guidance range to $2.52 per share on a reported basis ($3.26, excluding non-cash pension expense) and approximately $33 billion, respectively. Free cash flow guidance for the year is approximately $3.5 billion, above the high-end of Honeywell’s prior guidance. Free cash flow figure includes cash pension contribution of $600 million. Cash flow from operations is expected to be approximately $4.1 billion.
During the quarter, the company closed on the Sperian Protection acquisition. The acquisition strengthens Honeywell’s position in the developing Personal Protection Equipment market.
Honeywell’s attractive collection of businesses has the potential to earn consistently above-average returns. The company’s focus on working capital management, free cash flow generation and balance sheet strength remain positive attributes in the prevailing uncertain market environment. Proactive restructuring initiatives have positioned the company to navigate better than many of its peers, but we have yet to see signs of stabilization in a number of its major end-markets.
The company continues to invest in big process initiatives as well as other activities such as Honeywell Operating System (HOS), Velocity Product Development and Functional Transformation, which continues to be huge enablers of growth and productivity. With 80% of its manufacturing cost base now within HOS deployment, the company expects to see significant acceleration in the current year.
The company remains cautious on the timing and the continued pace of the economic recovery. Honeywell will continue to be disciplined in cost controls and exceedingly careful about adding to infrastructure. This is expected to assist the company with continued strong volume leverage in the second half of the year.
Honeywell International Inc. is a diversified technology and manufacturing company, serving customers worldwide with aerospace products and services, control, sensing and security technologies for buildings, homes and industry, turbochargers, automotive products, specialty chemicals, electronic and advanced materials, process technology for refining and petrochemicals and energy efficient products and solutions for homes, business and transportation. Major competitors of Honeywell are BorgWarner Inc. (BWA), Johnson Controls Inc. (JCI) and United Technologies Corp. (UTX).
We currently have a Neutral recommendation on Honeywell International Inc., with a Zacks #3 Rank (short-term Hold rating).
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