Honeywell International Inc. (HON) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Honeywell Second 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.

Thank you, Stephanie, and good morning, and welcome to Honeywell's Second 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 want you to note that elements of today's 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. So this morning, we're going to review our financial results for the second quarter of 2012, as well as share with you our guidance for the remainder of the year. And, of course, we'll allow time for your questions at the end. So with that, I'd like to turn the call over to Dave Cote.

Thanks, Elena. Good morning, everyone. It's great to be able to say again that Honeywell had another terrific quarter, capping off a strong first half. We had a nice earnings increase on modest sales growth and it was driven by solid margin expansion. Margins expanded about 150 basis points or 80 basis points when you exclude the absence of prior year payments to BGA customers, and that gave us a tailwind this year. That increase in margins, though, reflects our continued focus on driving productivity from our key process initiatives, that conservative planning assumptions and the proactive restructuring, all while continuing to invest for the future. Sales were $9.4 billion, representing 4% reported annual organic growth on top of good growth last year. This performance in a more challenging macro environment underscores the value of the diversity of opportunity across our businesses: Short- and long-cycle exposure, our products and services and mix of U.S. and rest of world geographies. As expected, our short-cycle businesses posted slower growth this quarter, with declines in Europe and slower growth in China. However, our long-cycle businesses, namely Commercial Aerospace and UOP, continued with strong performance. Earnings per share of $1.14 was up 12% year-over-year, 14% on a continuing ops basis, that was above the high end of our guidance range. Cash was also strong, having generated over $1 billion of free cash flow prior to pension contributions, and that reflects 115% net income conversion. And as I mentioned earlier, we did this while also investing for the future. We continue to ramp R&D and CapEx investments, which will continue to drive future growth. We also funded approximately $25 million in net restructuring in the quarter or approximately $50 million on a gross basis. That brings gross year-to-date restructuring funded through operations to almost $80 million, adding to the existing opportunity of already committed projects that Dave will take you through further later. As we all know, the macroeconomic landscape is uncertain and that’s at best. However, we continue to expect more of the same. We're going to build on our execution track record, and in Europe, we expect continued softness in our short-cycle businesses, specifically ACS and Transportation Systems. However, with our balanced portfolio of short and long-cycle businesses, that helping to mitigate these near-term trends, as Europe is roughly flat on an organic basis year-to-date. Meanwhile, the Americas is holding up well, and the indicators we're tracking are still positive. The same is true in China with a modest uptick in our short-cycle businesses, helping to drive double-digit growth again in the quarter. Overall, we feel good about the diversified nature and regional mix of the portfolio, benefiting from our Great Positions in Good Industries globally. With all that in mind, we've outlined our second half planning framework, capturing the key variables that comprise the low, mid and high ends of our new guidance range. Dave will walk you through more of the details shortly, but at a high level, we're raising the low end of guidance by $0.05. While keeping the high end unchanged, making our new EPS guidance range $4.40 to $4.55. This is, of course, supported by the strong performance we saw in the first half and a balanced view of the risks and opportunities in the second half. Turning to 2013, who knows what happens on a macroeconomic basis. However, everything out there suggests that continued conservative planning is best. We're positioning ourselves for another tough economic landscape while staying focused on the things that are within our control. That means continuing to execute on our key strategies for growth, sustaining our investments in new products and technologies, controlling our fixed costs through OEF, or organization effectiveness, and making sure we deliver the savings from the roughly $400 million in restructuring projects that are still in process that we funded over the last couple of years. These projects are estimated to deliver over $125 million of incremental savings next year, and of course, we'll continue to be cautious about adding people back globally. And as we highlighted in our March Investor Conference, we've made margin growth a bigger element of how we incentivize our people, so everyone's focused on it and we're delivering on it. Honeywell demonstrated in the last downturn that we're a company that executes well even in a tough macro environment, and we're doing it again this time. Segment margins are expanding more than we initially expected at the beginning of the year despite slower sales growth. For 2012 and '13, we have focused on margin expansion as key to earnings growth as a way to leverage slower sales growth in a tough macro environment. So with sharp execution, benefits from seat planning and productivity initiatives, the tailwinds from proactive restructuring funding and acquisition accretion will work to offset low global growth. And that will contribute to the company's outperformance again in 2013. With that, I'll turn it over to Dave.

Thanks, David, and good morning, everyone. And thanks again for your participation in this morning's call. I'm going to take you through the summary financial results, starting on Slide #4. As you can see, the businesses have done a really nice job of managing things within their control and the results that Dave highlighted and are shown on this slide really reflect that. The revenues of $9.4 billion were up 4% at the lower end of the guidance range, driven in large part by unfavorable foreign exchange in the quarter. Regionally, we saw good organic growth in the Americas of 5% on an organic basis. Europe was roughly flat. China was up 12%. And as everyone knows and has been experiencing, the Europe macro headwinds have been challenging. But Honeywell's balanced mix of long-cycle exposure is clearly contributing to the stability that we're having in Europe again in the second quarter. The segment profits for the company was up an impressive 15%. Segment margins expanded 150 basis points to 15.8%, with expansion in 3 out of our 4 business segments. It represents approximately 55% revenue conversion for the quarter on our reported basis. And if we adjusted for last year's Aero launch contribution and the favorability this year compared to that same event last year, we actually had 43% revenue conversion in the quarter. Tremendous productivity, disciplined cost controls in a slower growth environment. Now below the line in taxes, we're largely as expected, we funded approximately $25 million, as Dave said, in net restructuring projects in the quarter, which is going to benefit us in 2013. And in a few minutes, I'll walk you through an analysis of our proactive restructuring actions that we've taken since 2009. Our earnings per share of $1.14 were above the high end of our guidance, representing a 14% increase on a continuing operations basis. And finally, free cash flow of just over $1 billion, reflecting 115% free cash flow conversion, a solid result for the quarter. Working capital contributed to year-over-year cash growth, which partially offset higher capital spending. So let's now go to Slide 5, start with the businesses with Aerospace. Sales in Aero were up 8%, 4% organic excluding the impact of last year's BGA launch payments. And as expected, we continue to see good growth in the Commercial businesses, partially offset by manageable declines in defense. The Commercial OE sales were up 38% in the quarter, 16% organic if you exclude the EMS acquisition, as well as the OE payments. The increases were particularly strong in BGA at 25% organic, driven by continued healthy demand in the mid to the large cabin aircraft segment, where as you know Honeywell has an outsized share of content. And on the ATR side, we saw the benefits of growth in both Boeing and Airbus deliveries, resulting from the ongoing ramp in production rates. Commercial aftermarket sales in total were up 9%, driven by strong spares growth, as well as growth in the Repair & Overhaul business. And in the quarter, we saw our highest quarterly number of BGA spares volumes with a record number of scheduled engine events. Couple other subpoints relative to the commercial aftermarket. As expected, the ATR aftermarket is beginning to recouple the flight hours, sales growth roughly half the pace of the first quarter and the second quarter, although we still saw more than 2x flight hour growth in our revenue growth in the second quarter. So with slower flight hour growth year-over-year and spares and R&O volumes now above the prior peak, there's clear evidence that the restocking momentum that we experienced over the last year has begun to subside. And in the second half, consistent with what we've told you earlier, we expect the ATR aftermarket sales to recouple the flight hour growth, and that flight hour growth, we expect to be in the range of up 2.5% to 3.5% in the second half. On the BGA side, on the Business and General Aviation side, the aftermarket growth is also expected to moderate from high teens to high single digits to low double digit in the second half, following 10 consecutive quarters of double-digit increases in spares activities and 7 consecutive quarters of double-digit growth for BGA R&O. On the Defense and Space side, sales were down 4% in the quarter. TIGER international sales and the addition of EMS volumes partially offset TIGER program completion and lower T55 engine sales. And again, this is playing out exactly as we communicated to you and as we guided to you. We're now anticipating D&S sales to be down approximately 4% for the year, better than previously expected, as the business continues to execute very well on incremental pursuits both in the U.S. and particularly internationally. Aerospace margins expanded 260 basis points to 18.6% in the second quarter, even when you exclude the impact of the absence of last year's launch payments, margins expanded 50 basis points approximately, driven by commercial volume growth, price and productivity net of inflation, while continuing to ramp investment in R&D to support future growth. So with the highlights of Aero, let's now turn to ACS, Slide #6. Sales for ACS were $4 billion in the quarter, up 2% on a reported basis, 4% organic, driven by volume growth and favorable impact of acquisitions, primarily EMS, partially offset by foreign exchange headwinds. Now the top line performance was largely as expected with good growth in the long-cycle businesses of ACS, offsetting the slower growth in the short-cycle businesses of Energy, Safety and Security, if you will, ESS. Now as a reminder, ACS represents about 50% of Honeywell's total European exposure, and while we've seen some variability month-to-month in the short-cycle, we continue to convert the long-cycle backlog of both Process and Building Solutions, which is resulting in roughly flat organic sales for the segment in the quarter in Europe. Now a little bit of highlights for each of the businesses. ESS, up 1% organic, reflecting continued solid growth in Security and Scanning and Mobility, largely offset by lower sales in ECC, S&C and also our Safety Products, driven by weaker overall end markets in Europe. Now we expect more of the same for ESS in the second half but with the benefit of better comps, given the profile of the second half of 2011. HPS sales were up 8% organically. Solid growth across most regions, particularly the Americas and Middle East. New business activity in HPS was also strong. We saw orders and backlog both up 10% organically in the quarter. For BSD, that is the Building Solutions & Distribution business, sales were up 6% organically. That was driven by strong backlog conversion globally. And also America's fire and security distribution sales, which were partially offset by slower growth in energy and commercial retrofit projects here in the U.S. Now turning to margins. ACS expanded margins 50 basis points in the quarter to 13.3%, 35% sales conversion, driven by productivity improvements, namely benefits from prior period repositioning actions, disciplined cost control, acquisition integration benefits, particularly those acquisition integration benefits driven by EMS. So very good conversion, very good margin expansion for ACS in the quarter in the face of some challenging macros, particularly European short-cycle macros. Now Slide 7, Performance Materials & Technologies. Revenues of $1.5 billion, up 10% recorded, 4% organic, led by UOP and Resins & Chemicals. Record segment profit and margins for PMT, 22.6% operating margin in the quarter. UOP continues to execute against record backlog with favorable industry conditions globally. And as expected, UOP saw more measured growth in the quarter, with sales up 10% year-over-year supported by higher licensing activity, partially offset by lower refining catalysts sales. Further, we continue to see robust orders at UOP. They were up strong double digits in the quarter, providing further foundation for future growth. However, we anticipate, and this is very important and consistent with our prior guidance, that year-over-year sales in the second half for UOP are going to further temper as we lap more difficult comps due to the large catalyst shipments that we had last year that don't repeat this year and, of course, the completion of the Petrobras FEED portion of the contract. And again, as a reminder, UOP revenues in the second half of 2011, up 36% in the third quarter, up 36% in the fourth quarter. So very, very tough comps. Now Advanced Materials for PMT performed very well despite strong competitive pressures globally and the regional economic headwinds, particularly Europe and Asia, offset by strong growth in the U.S. Sales for Advanced Materials were up 10% reported, roughly flat organically in the quarter. Plant execution was strong across the board. R&C benefited from higher ammonium sulfate sales. And also Caprolactam volumes were strong despite softer market conditions in China. Now weaker end demand in Europe and Asia contributed to lower sales in Fluorines, which was partially offset by more favorable sales in the Americas. And overall for the second half, we expect Advanced Materials' year-over-year sales to improve, again, largely here driven by comps, in this case, easier comps in the second half 2011, setting up for a little bit of growth in 2012. So overall, a really great quarter for PMT. Record profit margins despite the headwinds from the phenol plant acquisition and also from R&C pricing. Plant reliability has been very good. PMD has been -- PMT has been actively working on executing high-value growth opportunities as we look to expand capacity and capability across a number of product lines. With that, let's go to Transportation Systems, Slide #8. Now Transportation sales were $900 million in the quarter, down 9% reported, 1% organic, with growth significantly impacted by a lower European -- euro, rather, exchange rate. It represents solid performance for Transportation in the face of challenging European macro headwinds, including EU light vehicle production was -- which was down in the range of 10% in the quarter. And also continued weak automotive sales in aftermarket conditions in that market. Turbo sales were down slightly on an organic basis versus last year. New launches, including higher Turbo gas penetration in North America, allowed us to perform well in what has become a difficult environment for this business. Regionally, Europe was down 7% organic. China was also down again as a result of lower commercial vehicle sales, although we think we've seen the end of the CVD stocking in China. We saw a sequential growth in the second quarter over the first. We also saw good performance in the U.S., up 16% organic, as well as strength in Japan and India. Segment margins for TS were 12.7%, down only 30 basis points, as material and HOS productivity levers more than offset in -- by inflation and the impact of ongoing projects to drive operational improvement in the Friction business. So now let's turn to Slide 9, where we want to give you a minute to just -- to give you an update on our restructuring progress, which was one of the big focus areas, as you know, over the last few years, particularly last year as we deployed the CPG gain. On Slide #9, this is a chart that highlights the over $800 million of restructuring that we've done and funded on a proactive basis since 2009 and provides important insights on the geography and the status of the projects as we plan for the second half of this year and look forward to 2013. Now starting with the regional view on the far left side, you can see Europe has been the recipient of a significant portion of the restructuring dollars over this time period, representing roughly 55% of the funding pool. This has and will continue to better position Honeywell for the current economic situation. It really does put us in a position to significantly improve the cost structure going forward. And as Dave mentioned earlier, we funded an additional roughly $80 million gross in new restructuring projects in the first half of this year. These actions were funded through operations. However, the majority of the actions taken since 2009, as you recall, have been funded via one-time gains. It's also important to point out that a large number of these projects, and that's really the second bar on the graph, are still ongoing, many of which are in Europe and somewhat longer paybacks as a result. So we expect approximately $150 million in incremental restructuring benefits in 2012, no change there. And on a preliminary basis, we see approximately $125 million of incremental savings in 2013 from projects that have already been funded. So a good demonstration of the proactive cost management and fee planning for the future that will help us drive margin expansion and earnings growth over the coming years. With that background on the restructuring, let's turn to Slide 10 and preview our expectations for the upcoming third quarter. In Aerospace, we expect continued good growth in the Commercial OE and aftermarket, partially offset by modest declines in Defense and Space. And we expect the ATR aftermarket to track slightly ahead of utilization rates as we lap more difficult comps in 2011. In ACS, for the third quarter, we expect a modest uptick in ESS driven by a better year-over-year comps coupled with continued good growth in Process Solutions and BSD as they continue to convert on strong backlogs. We expect a sequentially weaker third quarter in PMT, driven by the normal flooring seasonality, lower R&C pricing and as we mentioned earlier, UOP timing. Finally, TS is expected to have another tough quarter, driven by euro exchange headwinds and lower EU light vehicle production declines, partially offset by continued good growth in the Americas, as well as the benefit of new launches. So in total, we're planning for sales in the third quarter for Honeywell to be in the range of $9.4 billion to $9.6 billion, up 1% to 3% reported, up 4% to 6% excluding foreign exchange, so similar to what we saw in terms of our actual results in the second quarter. Turning to Slide 11. What we've shown here is a comparison now of the third quarter 2011 to the third quarter 2012, and we've done this given the complexity of last year's gain and gain deployment geography. So just a little bit of background again on this slide. We want to remind you of these geography challenges today in advance. So as you prepare your analysis of the third quarter and as the reported V% or income from continuing ops and net income are actually reported in October, it's going to give you a better basis to understand those results. So let's go through the highlights of this slide. First of all, you recall that in the third quarter of 2011, we had $177 million gain on an after tax basis related to the gain on the sale of CPG reported, and that was reported in discontinued operations. You can see it down in the chart in the both the first and second columns, in terms of the income from discontinued ops in the first column. And you'll see that deployment of that in the second column. I'll explain that in just a moment. We also had a sizable both have gains in the third quarter of last year, which was reported in continuing ops. So both importantly, we're fully deployed in continuing ops as you can see in the center column. So the repositioning and other actions, which also included a small amount of redeployment in the -- into segment profit, which was related to employee health savings account funding. That was about $30 million. This resulted -- the total of all these actions, the gains and the redeployment, resulted in no impact to EPS in 2011 other than the tax favorability that was generated in the tax rate, which is about $30 million or a $0.04 benefit, which was offset then in the fourth quarter of 2011. So moving to the right, looking at the operating performance in the third column, you can see that the net income of $832 million and EPS of $1.06 on an adjusted operating basis provide the basis for comparison purposes when you look at our reported numbers, our guided numbers and then eventually our reported numbers for 2012. So now our third quarter 2012 EPS range guidance is $1.10 to $1.15, so that reflects 4% to 8% growth in the operating earnings on sales growth of guidance of 1% to 3% reported. And again, the geography challenges presenting today in advance, so you can prepare your analysis. We’re clearly available to talk to you about this and to provide more color, more visibility, more transparency on this if you need it as you prepare your views of the third quarter for Honeywell. Slide #12. Let's now go to the 2012 financial guidance summary. With the first half of the year behind us, we've revised our full year guidance for 2012 on Slide 12, reflecting the strength of our first half results and also what remains for the year. Here's the highlights. While we expect to have continued foreign exchange headwinds in the second half, we'll have some disparity to a normal EPS linearity due to the tax rate differences that we've had quarter-over-quarter this year versus last year, we're raising our earnings per share outlook for the year. Let's review some of the highlights. We now expect sales to be in the range of $37.8 billion to $38.4 billion, up 3% to 5% on a reported basis, 4% to 6% organic. This reflects an adjustment of approximately $200 million attributed to euro foreign exchange headwinds as we've now incorporated lower euro assumption of EUR 1.25 in our outlook at the midpoint. Now despite the adjustment to sales for the full year, we anticipate segment margins in the range of 15.4% to 15.6% above our previous estimate, driven by continued strong sales conversion and disciplined cost controls. And as Dave referenced earlier, we're expecting EPS in the range of $4.40 to $4.55, which reflects an increase of $0.05 on the low end of our previous guidance. So on a continuing ops basis adjusted for CPG, we see earnings up in 2012 full year 10% to 14%. No change to free cash flow planning. We're planning conversion now for -- still for 100% of net income, excluding any pension contributions or NARCO-related payments. We think our guidance demonstrates our confidence and the ability of Honeywell to execute in this environment, as well as it represents, we believe, top-tier performance among our peer group. Not much new relative to our second half assumptions, but for D&S, which is tracking ahead of previous expectations, we now expect that down 4% to 5% in the second half versus down 5% to 7% previously. Let's take a couple of minutes now on Slide 13 to walk through some of the key sensitivities impacting the second half outlook, and therefore, the full year guidance. So what we've set out on Slide 13 is the highlight of some of the second half factors that would cause us to come in above or below the midpoint of our guidance range. We think the midpoint reflects the reality of the environment we're in today, in effect the base case assumptions that we're using. And noting that at the end of the first half, we're clearly at different stages, with some things running ahead of expectations, like UOP, and other things running slightly behind, like Transportation Systems, with harder, tougher-than-expected European macros. So there's no telling exactly how it's going to play out, as Dave said, how we're taking collectively, we think we've given you a relevant framing of the key drivers including the items on the high end where we -- where certainly any one of them is very possible despite the macro environment. So starting with the commercial aftermarket for Aerospace, what we've said is we expect that growth to moderate in the second half as we recouple the flight hours. We've seen some slowing growth in ATR flight hours year-to-date. We're not expecting a further slowing, so the outlook here depends on how fast that recoupling occurs. Further, we've seen strong BGA aftermarket performance, driven by record engine maintenance events year-to-date and RMU sales over the past several quarters. Again, we're expecting growth there to slow in BGA aftermarket based on more difficult comps, although the timing and the rate of that is still unclear. UOP, as you know, is a big needle mover. Performance has been stronger than expected year-to-date. However, we know events can be lumpy with the timing of a few shipments being a significant swing factor. The other area we're watching closely in PMT is Caprolactam pricing, as we've seen pricing come in since the peak last year, driven by softening global demand. This is something that moves -- can move around a bit, so we've included here as a key driver. And finally, as you can see, a pretty wide range for the euro, which we think is prudent, centering on the midpoint of EUR 1.25. But, again, sort of who knows on that, but we think that's a relevant range for planning purposes. So with all the headlines out there, it's easy to look on the downside, but at the same time, we want to be realistic about the strength of execution that we've had and also some of the highlights and strong points that we're seeing in our businesses. So with all the puts and takes considered, we think this represents a balanced view of the remainder of the year, and as Dave mentioned earlier, we'll continue to leverage the cost side but remaining disciplined, as well as overall flexible. So finally, let me just make a couple of summary points before turning it back over to Elena for Q&A. Obviously, a strong start to the year for Honeywell. Second quarter performance again ahead of expectations, adding to our performance track record. However, it's not to say this wasn't challenging, with a number of our short-cycle businesses continuing to be -- to face headwinds, particularly in Europe. And we expect this environment to continue for the remainder of the year and into 2013. The good news, though, is that the Honeywell playbook is clearly working. All of the businesses demonstrated strong operating leverage, outperforming their industries because they were well positioned, having to continue to invest in growth and productivity in both the previous downturn and the subsequent recovery. And clearly, those investments are paying out. We're going to make sure we stay flexible. We're working with our business leaders to ensure we have a plan for both the downside and the upside scenarios. The restructuring actions that I've highlighted are going to continue to be a big theme, addressing the cost side of the equation, and as we showed you with the healthy number of projects that we're still executing on, that will deliver benefits in the second half of 2012 and big benefits in 2013. And again, as Dave said, we're in the process of setting the stage for 2013. Importantly, we've got a forecast backlog for the year end this year of over $15 billion, slightly higher than where we ended 2011 and a book-to-bill ratio of 1.1, which clearly implies another healthy growth year in our long-cycle businesses in 2013. And meanwhile, we continue to plan for a tough macro environment enduring in 2013, with global growth around 2%. However, we're confident with our strong global franchises, our balanced portfolio, our focused cost discipline, we're going to continue to outperform again. So with that, let me turn it over to Elena for Q&A.

Thanks, Dave. Stephanie, if you can open the line, we'll take our first question.

[Operator Instructions] Our first question comes from Shannon O'Callaghan from Nomura.

On the short-cycle Europe component of it, I mean, can you give a little color on how you saw that progress through the quarter month-by-month and maybe into July? I mean, have you seen things get worse in the last month or 2?

I would say it's been pretty consistent, Shannon, in terms of the rate of change there. In Turbo, we saw what I call, Dave, was a fairly just steady erosion of the order rates but in line really with what we expected. So Shannon, I would say really, it's kind of played out as we expected, as we talked to you at the end of the first quarter.

We've -- we never expected much, as you know, Shannon. And fortunately, we planned for it. Unfortunately, it worked just the way we expected.

Okay. And then on the -- one of your low end components of the guidance framework, I mean, you talked about project delays as a risk at UOP. Either there or, I guess, elsewhere, have you seen any evidence as people kind of putting things on hold given the current macro and how was that factored in?

No, not yet. But we certainly don't want to preclude the possibility that it could happen, so we just wanted to factor that into our thinking. But we haven't seen it yet.

We're seeing -- Shannon, just to add to Dave's point, we've seen continued strong activity. I have referenced the strong orders and backlog for UOP. So knock on wood, those projects will be financed, and we'll execute against those. But the overall macros continue to be very favorable in that business.

The new stuff that they've been developing helps also. I mean, you've heard Andreas talk about some of the wins that we've been able to have. I mean, the new technologies are making a big difference here.

Maybe just the build on that, the book-to-bill ratio at the end of the second quarter was 1.6, so record backlog at UOP of $2.1 million.

And you're hosting...

UOP Investor Day.

UOP. Was that August 1 and 2?

Yes.

Good.

And are you seeing sort of similar positive trends in the Process business?

Process backlog is also doing well.

Up 10% from a year-over-year basis organically.

And the orders too look good?

Yes. Orders up 10% as well.

Our next question comes from Jeff Sprague from Research Partners.

Dave, you mentioned that margins are trending better-than-expected. And obviously, a lot of what you've been doing to improve margins has been ongoing for a while, the restructuring, now the comp change. Is there anything in particular, though, that's jumping out to you that's actually driving the better performance? Is it better drop through on restructuring? Is it mix? Is there -- is it just everybody's pulling the orders the same way better than they used to? Is there anything that kind of stands out?

I'd point to 2 things. One is we're doing the stuff that we always did, and a lot of that seed planting finally does come to roost at some point, whether it's the restructuring work that you've done, the new higher margin products that we've invested in. I mean, that all works. But the second thing is, I would say having the -- putting in the growth plan the way we did and making margin rate one of the components of it, that certainly helped to get everybody's attention and focus even more on a lot of that, again making sure that we got the results of all that seed planting that we did. And of course, the important thing to do is make sure that we're still investing for the future, doing that seed planting that's going to make sure that we make not just this year, but next year, the year after, et cetera. So I think all of that together helped to really just kind of take it up a notch.

If I could add, for PMT, I think we did see some favorable mix in UOP driven by some record-level licensing and stronger petrochemical catalyst sales in the quarter, which contributed nicely to the margin upside.

But I would say in terms of the fundamental changes, Jeff, I think the things I was referencing are the overall drivers and why you can continue to expect it.

Right, that's encouraging. Can you elaborate a little bit on the comment on China? Everybody's really kind of reading the tea leaves here for any sign of stabilization in our inflection one way or the other. How convincing was it and -- or important was it in your view and what kind of follow-through are you seeing?

Well, for us, China for us, as you know, has been a focal point for 10 years. And we -- I think we started off from a weaker position, as you know, but we've been accelerating rapidly. And we've got about 12,000 people there now, with the opportunity for it to just continue growing. Starting with the macroeconomic side, yes, they are going through some difficulties now. But at the end of the day, GDP is still growing pretty well and we're able to, given our low shares, I think, continue to just grow very well. And you saw it in the first quarter, second quarter, we expect that'll continue. I'm one of the guys who believes that China is going to continue to make the right decisions. They'll have their ups and downs, of course. They're kind of going through their down now. But overall, we expect that China's going to continue to do well, and that we'll do well within that macroeconomic framework that they're developing. And I think you've got to bet on them. Historically, they've made the right decisions. And I think you'd continue to see them doing that now, whether it's how they talk about the SOEs, what they talk about in banking, what they try to do to manage the real estate inflation that they've seen. I think you should bet on them, not against them.

Just to add a little bit, given the importance of it. Just -- Jeff, just a couple of numbers, which I think help. We had mentioned, David mentioned, the growth that we experienced in the second quarter, 12% organic. It's 14% for the first half. And what we've seen and the theme it’s really been or the underlying factors there have really been continued strength in our long-cycle businesses. So that's again really reflective of those favorable macros and the business positioning that we've done and the investments that we've done, in terms of globalization that we've made. The second thing is that we saw sequential improvement one quarter to second quarter in our short-cycle businesses in nearly every one of our businesses. And we also saw some notable pickup, it's not a trend, but we saw notable pickup in June. And we've seen, and in discussions with our business leaders, they're seeing clear evidence of anywhere -- you could call either stabilization or improvement in terms of what they're seeing in terms of their markets. So we think that we've got it prudently planned for the second half. But to Dave's point, if really viewed more over time, and from a macro standpoint, this is going to be -- continue to be a huge opportunity for Honeywell and becoming the Chinese competitor, executing like we are with our technologies to deal with the macro trends, there are favorable macro trends that'll continue to play out there. I think that's the way you want to look at it.

Our next question comes from Scott Davis from Barclays.

Can you talk a little bit about cash reinvestment here? I think there's been any comments made about M&A, pipeline or buybacks, what you're doing here?

Well, the story really hasn't changed for us, Scott. Same sort of thing, we're going to make sure that we pay a very competitive dividend, recognizing the significance of that to our investors and we're a good cash generator. On the M&A side, same thing. What we always keep a very full pipeline of opportunity, more than we have money for. So we can be very selective about what it is we want to get, because as you know, price makes the difference. The -- you don't have a strategy regardless of price that price makes the difference. So we're going to continue to stay very disciplined in anything we do there. And when it comes to buybacks, same thing. We'll continue to be opportunistic with what we think makes sense.

Okay. Let's move on to PMT, and you've had a few great years there and obviously, Andreas has done a great job. But at what point do you kind of struggle to continue to grow without making some of these bigger investments, like a new Caprolactam plant or Fluorines or putting the multi-hundred million dollar investments in?

Well, actually we're going to be running into some of that over the next 2 or 3 years. And I view this more as opportunity than a problem because the -- what we've been able to do in that business to really build on what was a good portfolio, just unrealized, continues to -- just our possibilities there continue to grow, that's not going to change. However, none of those investments of the sort of thing that are -- break the bank when it comes to how do we think about our cash flow, our cash deployment. I mean, none of this stuff is untoward or creates any kind of cash prices for us.

Okay. I think I get it. Aerospace, I mean, can you give us a ramp either one of the days on -- or give us an idea, at least, of how our D&A ramps the next couple of quarters and then into 2013? Just give a sense of where that spend goes.

Our D&A?

Well, the R&D spend. And what we've guided previously, obviously is higher R&D spend, Scott. This year, as we mentioned, when you look at the second quarter results for Aerospace, it really was favorability in terms of volume favorability, as well as strength in productivity really, offset by -- partially offset by higher R&D.

Yes. We had about $20 million, Scott, in the quarter of higher R&D spend. And that's a level -- starting to level off given what we've seen in previous quarters.

Right.

And that comes down in 2013, is that correct?

I think the absolute level is going to stay high. And I think the rate of the increase is going to continue to moderate. Because we saw the big increase, as you know, 2011 compared to 2010, further growth in 2012 compared to '11. And we'll see some moderation of that growth in 2013. But against the backdrop of a very robust pipeline of wins and successes that we've had, it's an opportunity-rich environment in Aerospace. And we just continue to face significant opportunities.

Our next question comes from Peter Arment from Sterne Agee. Peter J. Arment - Sterne Agee & Leach Inc., Research Division: Question, I guess, following up on Scott's question regarding in the Aerospace margins. You mentioned that you're going to have a much more tempered aftermarket growth. Should we expect to see -- be able to hold these levels in terms of the margin performance in the back half of the year? Just comments or a little more color on the mix there.

Well, we expect Aerospace to continue improving margins just like all the businesses. I don't expect to see a degradation.

Yes, and I think the guidance, just to add to that, Elena, the guidance that we've given for Aerospace in terms of full year margins remains, absolutely.

And actually, I think we have some upside relative to our full year guided range for Aerospace margin.

Very, very good point. Yes, it's a very good point. When you look at -- Peter, at the guidance that we've provided in terms of stronger margin expansion for Honeywell for this year in terms of the guidance that we just went through for 2012, really a lot of that strengthening is attributable net of some other adjustments is attributable to Aerospace. Peter J. Arment - Sterne Agee & Leach Inc., Research Division: Okay, that's helpful. And then just on the Defense and Space, your orders coming in modestly better than expectations, and you said the back half of the year looks like mid-single-digit decline versus what I think you previously expected. What -- can you give us a little more color what you're seeing there? Was it just one particular program or...

It's really a number of things. The way Mike Madsen I think would describe it is a series of singles and doubles. That -- he's just really executing very, very smartly against a set of opportunities, frankly, that really are available to us both again domestically and internationally. There's a lot in the aftermarket. There's a lot in key offshore markets, Peter. And that's really what we're doing. There's nothing we would point to in terms of any major program win or...

Nothing that’s a big needle-mover.

Exactly.

I mean they’re dogs and cats, but...

Yes, a number of items.

A lot of it -- to summarize Dave's point, it's just better execution in an area that we didn't really focus on as much as we could have in the past. Peter J. Arment - Sterne Agee & Leach Inc., Research Division: Okay. And then just related to that, is there expectation that you're going to see another long continuing resolution starting in October? And there's obviously the looming threat of sequestration. I don't think anyone really ultimately believes that will happen, but what is your -- have you done any advanced planning in preparation for that?

Sure. Cause you just can't know. They're -- after what we saw happen with the debt ceiling, you can't assume that reason is going to prevail, so it's important to be able to plan accordingly. The good thing about our situation is it's not really -- none of our businesses are solely focused on Defense generally. It's same products, same services just going into the different sales channel, which gives us a lot more flexibility than others might have. So yes, we're fully prepared in the event that happens.

Our next question comes from Steve Winoker from Sanford Bernstein. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: First question, just on the pension contribution impact from the Orissa and highway funding bill. Can you maybe talk through a little bit of what how in any way does this change what you're planning?

Well, it doesn't really affect our planning, it affects our obligation. So what it does is it reduces the required Orissa-based funding over the next 3 to 5 years. But in terms of what we're planning, we're going to continue to be prudent here, to be out in front of this in a low-interest-rate environment. We think it's smart to be able to do it on that basis. So it's certainly -- it's a favorable event, but we don't see it as changing our basic plan of being prudent and being smart and basically measuring this a quarter at a time.

We’re just doing what's required and what's smart here. We've tried to always stay on the side of what's smart and we'll stay there. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: Okay, all right. And second question, around the currency, the FX impact, I know you've -- clearly, we see the translation side of this, a bit on the transaction side. Maybe talk about at what point, how strong does the dollar have to get before you start to think about a real legitimate competitive impact of this? Or it's just too far away to even bother with?

I don't think it -- you can't -- you got to think about it, but I don't see something here, if you went to $1.10 or something like it used to, I don't see that having a big impact on us competitively around the world because we're everywhere as it is. So it's not something I worry about, let's put it that way. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: Right. Even at $1.10?

No. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: Okay, all right. And then maybe just a question to follow up on that -- on the contingency actions on the ESS range. Contingency actions, how quick can you -- if things start to materialize through the quarter and you talked about implementing these things within the second half, is it really a fourth quarter set of outcomes here or you think you'd actually get third quarter runway on actions?

Well, I think what Dave maybe answer it this way is what Dave has asked each of the business leaders to have, and this is nothing new, is to have in their top right hand desk drawer, this test that they would take in the event of, and fill in the blank in terms of volume decline or assumption change. That's just smart, and we think executed very well and came out stronger as a result of the '08, '09 downturn. And we've put that and enhanced -- put that into our playbook and enhanced our capability and our leadership plan as a result. So I think the fact is we've got the response to be able to do that. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And just lastly, the ESS range seems relatively tight versus everything else. And you mentioned that its comp-based at the low end. Anything else that gives you comfort about on a relative basis sort of just sticking to that 2% to 4% range for Page 13?

Yes. No, I get the point. Yes, I'd say that there's a range of possibilities there, and the 4% is likely as the 2% depending upon how the second half evolves. So it's tough to know. I would say one of the things that we do have, as you know, is last year was a very warm winter. And as result of that, the comp is lower in some of our key product lines. So if it doesn't develop that way this year, that'll make a difference.

Our final question comes from Nigel Coe from Morgan Stanley.

Dave, you've been pretty vocal on the fiscal cliff, you added your bet last week in EFT, you were on CNBC out there talking about these issues. Are you seeing anything in your short-cycle businesses in the U.S. that's prompting you to become incrementally more bearish on the impact of the impasse?

I would say it's tough to know how things are going to evolve in a political environment. But this is -- as you know, I've been very vocal about CEOs need to speak up here because just seeing how the debt ceiling discussion evolved a few months ago, none of us in the business community ever expected that they could be that reckless overall. And as we look at the fiscal cliff, that's an even bigger looming issue. And it's important for all of us to be speaking up now to make sure that politicians get it, that this is not just a political advantage issue they're dealing with, but they're dealing with lives of a lot of people as they kind of to and fro on this stuff. So I think that's one of the things that's contributing to uncertainty amongst all companies when it comes to do you want to hire, do you want to invest. So I think there's a greater chance of an overall slowdown if we don't start to see some thoughtful movement and discussion about what they're actually going to do. So I would say it's less of a specific Honeywell item than it is an overall tone that starts to evolve in the economy if everybody starts thinking they could be reckless again.

Yes. No, that's clear. And then if I just look at your second half buildup by business, I think it's on Slide 10, and you've been pretty -- Slide 12, and you've been, I think, more cautious on -- sorry, Slide 13. You've been more cautious on European LV production than consensus. But you're looking for second half to be flat to down 5%, which I think is a bit more positive than consensus. I'm just wondering, what's driving that more optimistic view?

Well, consensus historically hasn't been all that accurate, as you know. It seems like if global GDP is growing 3% to 4% a year pretty consistently, the forecast are pretty good. When you run into something where it varies one way or the other, they're not very good at handling the, let's say, the variability of something like that. So we find that, second-guessing where it's going to go, is actually been more productive than relying on those consensus forecasts. And it's why in the first half, we've prepared for something that was worse than what everybody was saying, and I think we were right. And in the second half, we think it's reasonable -- one of the reasonable outcomes here is that it could be flat. But we're going to continue to plan for -- think of this as a decline.

Okay. So that's consistent with the original plan. And then just finally, you called out ammonium sulfates and Caprolactam as driving the strength in PMT. Now those are your 2 most levered businesses to the U.S. nat gas price. And I'm wondering how much of a benefit was the low input cost in being compared against some of your global competitors in those businesses.

It's not that big a deal. We already have, as you know, an extremely good cost position in that business. It does get enhanced at some with natural gas pricing being low. But it's going to be -- our cost position globally is the best in the world, and that's not going to change.

It's really, it's really -- Nigel, it's really a function now of the global economy and the demand drivers there. I mean, obviously, on ammonium sulfate, the overall continued growth in terms of agricultural demand, the team there has just done an outstanding job of developing new customers, new markets. So we'll just continue to do that. But as long as those macro factors stay positive, we're, as Dave said, very, very well positioned.

All right. Thank you again for your participation in today's call, and I'd like to just turn it over to Dave Cote for his closing remarks.

Well, as you might expect, we're very happy with how we've performed in this difficult environment. And we expect that difficult environment to continue and think that's the right way to plan. But you can also expect that we'll continue to outperform, and the root cause is the same it's always been. A planning for a difficult environment is, of course, an important element, but just as important is all the seed planting we've done over the years in new products and services, new geographies and process initiatives. And we're going to stick with that game plan. We'll continue to plan conservatively and we'll continue to invest in the seed planting that positions us to perform well in good times and the tough times. So we're pleased of what we've been able to accomplish, and we look forward to a lot more in the future. And for Honeywell, the best is still yet to come. Thanks.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect, and have a wonderful day.