Honeywell Reports Second Quarter 2014 Sales Up 6% To $10.3 Billion; EPS Of $1.38 Per Share; Raising 2014 EPS Guidance

Honeywell (NYSE: HON) today announced its results for the second quarter of 2014:

Total Honeywell
($ Millions, except Earnings Per Share) 2Q 2013 2Q 2014 Change
Sales 9,693 10,253 6%
Segment Margin 16.10% 16.70% 60 bps
Operating Income Margin 14.30% 15.40% 110 bps
Earnings Per Share $1.28 $1.38 8%
Earnings Per Share (At 26.5% Tax Rate) $1.22 $1.37 12%
Cash Flow from Operations 1,256 1,341 7%
Free Cash Flow * 1,060 1,112 5%
* Cash Flow from Operations Less Capital Expenditures

“Honeywell had another terrific quarter and a very good first half of 2014,” said Honeywell Chairman and CEO Dave Cote. “Strong execution across our businesses and continued momentum across the portfolio helped us to deliver stronger than expected earnings. We saw 6% sales growth and margin expansion in every business as our key growth and productivity initiatives continue to make a difference. Our short-cycle businesses, particularly Energy, Safety and Security and Turbo Technologies, are benefiting from improving end markets, new product introductions, and geographic expansion, while our long-cycle businesses are growing robust backlogs supported by favorable macro trends and strong win rates. Our recently announced closing of the sale of Friction Materials was a significant step in our effort to align the Honeywell portfolio around Great Positions in Good Industries. We believe that our portfolio is well positioned for continued growth. As a result of our first half performance, we are raising the low-end of our 2014 proforma EPS guidance by $0.05 with the expectation of improved organic growth and continued margin expansion in the second half of the year.”

The company is updating its full-year 2014 guidance and now expects:

Full-Year Guidance
2014 2014 Change
Prior Guidance Revised Guidance3 vs. 2013
Sales  $40.3 – $40.7B  $40.2 – $40.4B 3% – 4%
Segment Margin 16.6% – 16.9% 16.8% – 17.0% 50 – 70 bps
Operating Income Margin1 15.2% – 15.5% 15.4% – 15.6% 120 – 140 bps
Earnings Per Share1 $5.40 – $5.55 $5.45 – $5.55 10% – 12%
Free Cash Flow2  $3.8 – $4.0B  $3.8 – $4.0B ~15%

1.     Proforma, V% / bps Exclude Pension Mark-to-Market Adjustment

2.     Cash Flow from Operations Less Capital Expenditures

3.     Reflects Absence Of (~$300M) Friction Materials Sales in 2H 2014

On July 14, Honeywell announced that it will realign its Transportation Systems business segment with its Aerospace business segment to better take advantage of the engineering and technology similarities and the shared business models between these two business segments. Under the realigned segment reporting structure, the Company will have three business segments: Aerospace, Automation and Control Solutions, and Performance Materials and Technologies. This realignment has no impact on the Company’s historical consolidated financial position, results of operations or cash flows. Effective with the reporting of third quarter 2014 results, the Company will report its financial performance based on the inclusion of Transportation Systems in Aerospace. To provide historical information on a basis consistent with its new reporting structure, the Company will make available during the third quarter of 2014 certain historical segment results recast to conform to the new reporting structure. The recasted financial information will not represent a restatement of previously issued financial statements.

Second Quarter Segment Performance

($ Millions) 2Q 2013 2Q 2014 % Change
Sales 2,997 2,991 ~Flat
Segment Profit 583 592 2%
Segment Margin 19.50% 19.80% 30 bps

• Sales were approximately flat compared with the second quarter of 2013 driven by 1% Commercial sales growth, offset by a (1%) decline in Defense & Space. Commercial OE sales were approximately flat in the quarter reflecting continued growth in OE build rates, offset by higher BGA OEM payments and engine shipment timing. Commercial Aftermarket growth of 1% was driven by an increase in spares sales, partially offset by fewer maintenance events. Defense & Space sales declined (1%) as a result of lower sales to the U.S. government, partially offset by strong international growth.
• Segment profit was up 2%, and segment margins expanded 30 bps to 19.8%, driven by commercial excellence and productivity net of inflation, partially offset by BGA OEM payments, higher OE mix, and continued investments for growth.

Automation and Control Solutions
($ Millions) 2Q 2013 2Q 2014 % Change
Sales 3,270 3,607 10%
Segment Profit 467 533 14%
Segment Margin 14.30% 14.80% 50 bps

• Sales were up 10% reported, 3% organic, compared with the second quarter of 2013, primarily driven by the favorable impact of acquisitions net of divestitures and growth in Energy, Safety, and Security, particularly Environmental and Combustion Controls and Honeywell Scanning & Mobility. ACS benefitted from strength in U.S. residential end markets and new product introductions, as well as continued growth in fire, gas, and the Americas Distribution business.
• Segment profit was up 14% and segment margins expanded 50 bps to 14.8% driven by commercial excellence, productivity net of inflation, and higher volume, partially offset by the dilutive impact of acquisitions and continued investments for growth.

Performance Materials and Technologies
($ Millions) 2Q 2013 2Q 2014 % Change
Sales 2,479 2,636 6%
Segment Profit 438 475 8%
Segment Margin 17.70% 18.00% 30 bps

• Sales were up 6% compared with the second quarter of 2013, driven by UOP catalyst and gas processing growth and higher sales in Advanced Materials, particularly Fluorine Products.
• Segment profit was up 8% and segment margins increased 30 bps to 18.0%, driven by productivity net of inflation and higher volume, partially offset by price/raw headwinds in Resins & Chemicals, unfavorable UOP catalyst shipment mix versus the prior year, and continued investments for growth.

Transportation Systems
($ Millions) 2Q 2013 2Q 2014 % Change
Sales 947 1,019 8%
Segment Profit 126 167 33%
Segment Margin 13.30% 16.40% 310 bps

• Sales were up 8% reported, 4% organic, compared with the second quarter of 2013, driven by continued growth from new platform launches, higher global automotive production, and increased commercial vehicle demand in Europe.
• Segment profit was up 33% and segment margins increased 310 bps to 16.4% primarily driven by strong Turbo productivity and volume leverage, and operational improvements.