Honeywell Delivers Tepid Earnings

Honeywell (NYSE: HON) today announced first quarter 2010 sales were up 3% to $7.8 billion versus $7.6 billion in 2009 and earnings were $0.50 per share versus $0.54 per share in the prior year. Excluding non-cash pension expense, earnings were up 21% to $0.68 per share compared to $0.56 per share in the prior year. Cash flow from operations was $743 million versus $341 million in the first quarter of 2009 and free cash flow (cash flow from operations less capital expenditures) was up 190% to $673 million compared to $232 million last year.

“Honeywell’s first quarter performance reflects better than expected improvements in many of our end markets, coupled with strong commercial execution and disciplined cost controls,” said Honeywell Chairman and Chief Executive Officer Dave Cote. “Key short cycle businesses, such as turbochargers and general industrial products, saw good organic growth in the quarter reflecting improved market conditions. We’re building a strong backlog of orders and are encouraged by continued penetration of our new products and important contracts won during the quarter. We also continue to benefit from effective execution of our big process initiatives – Honeywell Operating System, Velocity Product Development™, and Functional Transformation – contributing to strong operating leverage and margin expansion.”

“While the timing and shape of the recovery is uncertain and we remain conservative in our planning assumptions, the outlook for Honeywell is bright,” continued Cote. “Our great positions in good industries; links to favorable global macro trends, such as safety, security, and energy efficiency; growth in emerging regions; and strong pipeline of new products and technologies are reflected in our raised outlook for the year and should drive attractive growth over the long-term.”

Honeywell now expects 2010 sales of $31.5-32.3 billion and earnings in the range of $2.30-2.45 per share versus a previous estimate of $2.20-2.40 per share. The company also now expects free cash flow of $2.8-3.1 billion (cash flow from operations of $3.5-3.8 billion) versus a previous estimate of $2.4-2.7 billion.

First Quarter Segment Highlights

Aerospace

• Sales were down 9% compared with the first quarter of 2009, primarily due to lower original equipment sales to regional and business aviation customers and lower airline aftermarket sales, partially offset by growth in defense sales and logistics services.

• Segment profit was down 15% and segment margin decreased 120 bps to 16.5%, primarily due to volume declines, partially offset by cost savings initiatives and benefits from prior repositioning actions.

• Honeywell announced more than $190 million in contracts at the Singapore Air Show for avionics, maintenance, and auxiliary power unit selections with Asia Pacific regional airlines, including China Eastern, Air China, Qantas, and Vietnam Airlines.

• Honeywell won a $51 million, five-year contract with the Naval Air Warfare Center Aircraft Division to provide engineering and integrated logistics support. The company will provide design, development, integration, testing, evaluation, maintenance, and logistics support for the Light Airborne Multi-Purpose System (LAMPS), the shipboard element of a two-way digital data link between a U.S. Navy ship and a SH-60 helicopter.

• Honeywell was selected by Commercial Aircraft Corporation of China, Ltd. (COMAC) to supply our 131-9 Auxiliary Power Unit (APU) and associated equipment for the C919 single-aisle commercial airliner valued at $7.3 billion over the life of the contract. The Honeywell 131-9 APU has more than 51 million hours in commercial service on narrow-body aircraft like the Boeing 737 and the Airbus A320. The 131-9 APU delivers industry-leading reliability with more than 10,000 hours between unscheduled maintenance, which lowers the cost of operations and features the lowest fuel burn and ramp noise available in its class.

Automation and Control Solutions

• Sales were up 4%, compared with the first quarter of 2009, primarily due to the positive impact of foreign exchange, continued growth in emerging regions, new product introductions, and general industrial recovery, partially offset by softness in commercial and residential end markets in developed regions.

• Segment profit was up 24% and segment margin increased 200 bps to 12.4% driven by cost savings initiatives and benefits from prior repositioning actions, partially offset by inflation.

• Automation and Control Solutions introduced approximately 115 new products in the first quarter, including the Dolphin® 9700, a rugged digital assistant, equipped with multi-functional data collection and communications; the Honeywell ZephyrTM, the industry’s most accurate airflow sensor for medical and industrial applications; and the Silent Knight IntelliKnight 5600, a 25-point control panel that provides customers with a more cost-effective, intelligent fire alarm solution with pinpoint identification of a fire source.

• Building Solutions won a General Services Administration (GSA) Region 7 Energy Savings Performance Contract (ESPC) worth $10 million. The GSA sites are primarily border stations, federal office buildings, and courthouses. The project includes both solar and wind power installations, with building automation (lighting, water, and mechanical retrofits) being installed at 22 sites.

• Process Solutions signed a five-year agreement to be a Main Automation Contractor (MAC) for Royal Dutch Shell PLC to design automation and safety systems. In addition, the business announced that its Experion® Process Knowledge System (PKS®) will control operations and help drive a 50% increase in production capacity for Thailand’s first supercritical power plant operated by GHECO-One Ltd; a significant $5 million commitment from a Korean shipbuilder for instrumentation on 100 vessels; and RMG secured a $5 million contract from a Chinese gas pipeline distribution company to provide regulators for gas pressure reduction stations.

Transportation Systems

• Sales were up 33% compared with the first quarter of 2009, due to higher volumes of turbochargers, friction materials, and consumer products globally and the favorable impact of foreign exchange.

• Segment profit was up approximately $100 million and segment margin increased 1,000 bps to 9.6% driven by higher volumes, increased productivity, and benefits from prior restructuring actions.

• Honeywell Turbo Technologies was awarded new platform wins with customers including Volkswagen, Peugeot, and General Motors estimated at more than $1 billion in revenue over the life of the programs. The platforms span the European, Asian, and American markets for both passenger and commercial vehicle applications and are expected to launch beginning in 2012.

• Honeywell launched its latest Euro5 VNT™ (Variable Nozzle Turbine) turbo on the world’s most fuel-efficient five-seater passenger car – the Volkswagen Polo BlueMotion 1.2L diesel. The Polo will deliver 15% better fuel economy and 15% less emissions than its predecessor model.

Specialty Materials

• Sales were up 8% compared with the first quarter of 2009, resulting from higher sales in our Resins and Chemicals, Electronic Materials, and Fluorine Products businesses due to improved global markets and the favorable impact of pass-through raw material price increases, partially offset by lower catalyst sales and project timing in our UOP business.

• Segment profit was up 36% and segment margin increased 300 bps to 14.9% due to higher sales, commercial and plant effectiveness, and cost savings initiatives.

• Honeywell Green Jet Fuel™, produced using Honeywell UOP’s renewable jet fuel process technology, powered a U.S. Navy F/A-18 Super Hornet (the “Green Hornet”) in the first supersonic flight as part of the Navy’s efforts to certify the use of alternative fuels in military aircraft. The fuel was produced under a project for U.S. Defense Energy Support Center (DESC). Honeywell’s UOP is producing approximately 600,000 gallons of fuel for use by the Navy and U.S. Air Force from sustainable, non-food feedstocks, including animal fats, algae, and camelina. Honeywell Green Jet Fuel has already been successfully tested on commercial aircraft in demonstration flights by Air New Zealand, Continental Airlines, Japan Airlines, and KLM. Results from those demonstration flights showed Honeywell Green Jet Fuel in a 50/50 blend with petroleum jet fuel performed as well, if not better, than traditional petroleum-derived jet fuel.

• Honeywell Fluorine Products announced the launch of the Honeywell Enovate™ PRO Contractor Program designed to help contractors expand their business offerings in the area of air sealing and weatherization for home and buildings. The program features new Honeywell products, including energy-efficient foam insulation and sealants, as well as professional development training.

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