Honeywell International Inc. (HON) Q3 2012 Earnings Report, Transcript and Summary

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.

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.

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. And we continue to build on our Great Positions in Good Industries, making some smart bets in exciting growing spaces like natural gas processing. You saw our recent announcement to acquire a 70% stake in Thomas Russell for $525 million. Natural gas is a trend we're willing to bet on. UOP is already benefiting from the boom in gas production from U.S. shale gas deposits and increasing gas consumption abroad. Thomas Russell has great technology to recover natural gas liquids, and the opportunities to expand beyond the U.S. by way of UOP's global presence and capabilities is substantial. This is a unique transaction given the stage purchase and illustrates our continued disciplined approach to M&A. The overall M&A pipeline is robust, so you may see more, but nothing is a must-have, and we'll remain disciplined in our approach. Turning to 2013, the clarity on the macro side is still murky. There's nothing out there to suggest anything but continued conservative planning is best. And we're expecting another year of strong margin expansion in a slow growth environment. We'll do that by executing on our key strategies for growth, sustaining our investments in new products and technologies, controlling our fixed costs through OEF and making sure we deliver the savings from in-process restructuring projects that we funded over the last couple of years. These projects are now estimated to deliver over $150 million of incremental savings next year. And there's more to come in 2014. There are also a number of known tailwinds like Commercial Aerospace, Turbo and UOP. We have a very healthy backlog with positive order and win rates, which certainly helps increase our confidence. And our seed planting initiatives will enable growth even in a tough economic environment. We'll remain flexible and cautious as always in any event. Honeywell demonstrated in the last downturn 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. So with sharp execution, benefits from seed planting and productivity initiatives, tailwinds from proactive restructuring and acquisition accretion will work to offset low global growth, contributing to the company's outperformance again in 2013. So with that, I'll turn it over to Dave.

Thanks, Dave, and good morning, everyone, and thanks for joining us on the call. Let me start out on Slide #4 entitled Third Quarter Financial Summary and just take you through some of the highlights. Now, as Dave mentioned earlier, sales were up slightly year-over-year. We had 2% organic growth, Acquisitions contributed 1% growth, while currency yielded a 3% headwind in the quarter. And of course, that's been a challenge this year as FX -- and by the way, a point, kind of jumping ahead to 2013 is something Dave, too, that we would add. We don't anticipate the same headwind for foreign currency in 2013, which hopefully will help us in that environment. Sales were lower than expected for the quarter, driven in large part by lower sales in Resins & Chemicals and also the ACS short cycle businesses, and we're going to talk more about each of those in just a moment. Overall, we saw a deceleration in growth rate in nearly every region in the quarter. However, we're continuing to benefit from the strength of our long cycle businesses, namely Commercial Aerospace, the ACS Solutions businesses and also UOP. Now segment profit was up 8% in the quarter. Margins expanded an impressive 110 basis points to 15.8%, matching our quarterly record that we set in the second quarter. Margins expanded in 3 out of our 4 businesses, reflecting strong productivity and also just another demonstration that our playbook of disciplined cost controls is working in this environment. Now as a reminder, in the third quarter of last year, we took an accrual for a change in the active medical benefit design. We took an accrual of $30 million. And by the way, this accrual was fully offset in the third quarter of 2011 by the CPG gain, which was a gain that we took in discontinued operation. Now importantly, that $30 million accrual does not repeat this year. When you look at the total corporate expense line for the quarter, corporate expense was $57 million, and that's really the run rate that we've had. If you look at second quarter, for example, of this year, $58 million, so the total corporate expense really doesn't play into the quarter at all. Below the line was large, as expected, aggregate. In fact, the aggregate of other below-the-line items are basically on the run rate. We had a minor amount of repositioning. I'm going to talk about that in a little bit when we get to the year-to-date numbers as well. Our effective tax rate in the quarter was 22.7%, roughly in line with the 23.2% from last year, but below the 26.5% that we've planned for. So if you apply our normal 26.5% tax rate to the quarter, it brings you to earnings per share of $1.14 versus our guidance of $1.10 to $1.15. Now as you know, tax rates are going to vary from quarter-to-quarter due to timing of a number of items. However, we're still planning to end the year with an ETR of 26.5%. So think about the tax favorability in the third quarter being fully offset with a higher tax rate just a little north of 30% is what we'd anticipate in the fourth quarter, so no net effect for the full year. So again, earnings per share, up 9% to $1.20 and the quality of earnings remaining very high, with free cash flow over $1 billion, representing free cash flow conversion of 100% -- 107% of net income, excluding some planned pension contributions that we made. Let's go to Slide 5 now, talk a little bit about the year-to-date financial summary because I think this is also a very important perspective in terms of viewing Honeywell's performance in 2012. You can see on Slide 5, sales up 4% on both a reported and organic basis for the 9 months with significant foreign exchange headwinds this year being offset by acquisitions. On an organic basis, Aerospace and Performance Materials and Technologies, both up approximately 6% on the top line, including the favorable impact of lower load launch contributions in Aerospace, while ACS up approximately 3% for the 9 months and Transportation Systems roughly flat. Segment profit for the first 9 months, up 12%, roughly 3x the sales growth. Margins expanding 110 basis points to 15.6%. And as I mentioned, we did this while continuing to invest for growth. We funded additional restructuring in the quarter, which, on a gross year-to-date basis, brings restructuring to almost $100 million, adding to the existing pipeline of committed projects. Additionally, RD&E spending is up over $80 million year-over-year across the company and we funded almost $600 million of CapEx, which is a $100 million increase on a year-over-year basis. So overall, earnings up 13% or up 15% if you exclude the operational results that we had from CPG last year. So given that background, let's go to Slide 6, Aerospace. Sales for Aero in the quarter were up 4%. We continue to see good growth in the Commercial businesses of Aero, driven by strong OE demand, as well as aftermarket, we're going to give you some more detail to that, partially offset by modest declines in defense. And of course, that's consistent with what we've been expecting, what we've been guiding. Commercial OE sales in the quarter were up 14%, driven by increased deliveries for both large air transport as well as business jet. We saw the benefits of growth, Boeing and Airbus deliveries, resulting from the ongoing ramp-up in their production rates, and we also saw continued healthy demand in the mid to large cabin business aircraft segment where we continue to outperform. Now the commercial aftermarket sales were up 6%, outpacing overall utilization rate despite tougher year-over-year comp. And a couple more insights on that. In the quarter, ATR aftermarket was up 3% slightly ahead of global flight hours. We saw ATR spares roughly flat, both sequentially and year-over-year. And again, consistent with our expectations, given the already high spares levels that we've been experiencing the last few quarters. Now it's important to point out that while flight hours for ATR have been slowing, the majority of that deceleration is really coming from a decline in regional aircraft hours, which we classify as aircraft of less than 70 seats, where Honeywell has an underweight exposure overall. Now on the business aviation, we continue to see strong growth in the aftermarket, both spares and maintenance events year-over-year. Although roughly flat sequentially, as a result of high engine events and also continued strong uptake of Avionics upgrades or RMUs. Now as a reminder, we expect both the ATR and BGA aftermarket growth to moderate in the fourth quarter where ATR could see a slight decline given the challenging comps in the fourth quarter of 2011. But overall, we expect growth again in 2013 in line with flight hours. We're going to talk about that more in a few minutes. We're going to obviously continue to keep a post [ph] in the macro indicators here. Now continuing with Aerospace. Defense and Space sales were down 1%, 2% organically in the quarter. We've seen program wind-downs, notably the TIGER program, which is, as expected, being partially offset by increased sales to our international customers where we've been benefiting from a number of new contract wins. Now again, just as a reminder, we anticipate Defense and Space sales to be down approximately 4% for the year, so a more significant decline anticipated in the fourth quarter. Segment profit at Aero increased 9%, with margins expanding 90 basis points to 19.1%. Overall, a very strong quarter for Aero. It's hard to believe that we've had EMS for over a year, but we continue to be very excited by that acquisition and the prospects there. As we've highlighted, the comps are going to be tougher in the fourth quarter for Aero, but the significant number of new wins, both commercial and defense, the traction the business has had to maintain and improve their cost position globally will continue to give us runway for profitable growth in the business. Turning now to Slide 7, ACS for the quarter. Sales were roughly $4 billion, up 2% on an organic basis. The top line for ACS was somewhat below expectations, with growth in the long cycle businesses, partially offset by slower growth in the short cycle businesses of ESS. Now ESS or the product pieces of ACS, their sales were basically flat on a constant currency basis in the third quarter, reflecting a softer September. Let's give you a little more color on that. From a regional perspective, ACS saw slower year-over-year growth in the Americas overall, with pockets of weakness in both short cycle businesses in Europe as well as in China. The Energy, Safety and Security sales again were flat on an organic basis. Good growth in security and Scanning & Mobility, driven by new product introductions, but offset by lower sales in Sensing and Control and Safety Products. We also saw lower volumes in ECC due to the challenging commercial markets that ECC has experienced this year globally. We expect the tough marketplace to continue for the next few months, but we also anticipate benefiting in part from new product introductions, geographic expansion, as well as somewhat easier comp as we transition into 2013. Now Process Solutions sales were up 5% organically in the third quarter. Orders declined slightly on an organic basis due to the timing for some large projects, leading to delayed order bookings. However, we've seen a nice uptick in the service bank of HPS and a higher mix of software content for projects, leading the margin expansion for the business in the quarter. Now BSD, or Building Solutions & Distribution, the sales were up 5% organically, so consistent performance with the first half of this year. We continue to see a softening on the energy retrofit market for HPS, which is being offset -- I'm sorry, by -- for HBS, which is probably being offset by growth in their services businesses, along with growth in the security infrastructure projects and also increased volume in fire as well as in security and distribution. Now segment profit for ACS increased 5%, segment margins expanded 60 basis points to 14.4%, so strong conversion in this operating environment. The growth in margin rate was driven in large part by the combination of commercial excellence, strong productivity, including benefits from lower direct materials, as well as some value engineering actions that the business took in -- throughout this year, restructuring benefits and also strong management of indirect expenses, this being then partially offset by continued investments that ACS continues to make for growth in both new products, as well as geographies. Let's now go to Slide 8, give you a summary for Performance Materials and Technologies or PMT. Now for PMT, in the quarter, sales were up 1%, UOP was up 7%, Advanced Materials were down 3%. Segment profit was up 8%, segment margins expanded 130 basis points to 18.6%, offsetting the continued challenging global and market conditions. In UOP, sales were up 7%, in line with the expectations for the quarter. Book-to-bill was again above 1 in the quarter for UOP, and we continue to benefit from record backlog levels in that business. Licensing and equipment sales were strong, partially offset by the ramping down of the Petrobras FEED program, the Front-End Engineering and Design work, again as planned, as guided. And the business is executing well, continuing to win new projects, setting up nicely for another strong year in 2013. And of course, we couldn't be more pleased, as Dave said, about the addition of Thomas Russell to the UOP and PMT portfolio. And we expect to close on Thomas Russell in the fourth quarter. In Advanced Materials, the Fluorine Products and Resins & Chemicals businesses continue to see weak global end-market conditions, which resulted in lower refrigerant sales, as well as lower R&C sales growth, which were below our prior guidance. And let me just give you an example for R&C, specifically, just some insight into that. In Asia, capital pricing was actually down 55% from the same period last year. And while that clearly impacts that decline in price, clearly impacts the top line for R&C and PMT, it's really mitigated at the operating income line by pass-through pricing and also higher volumes. So it partly explains both revenues below expectations and also margins being as strong as they are for PMT in the quarter. Overall, another strong quarter for PMT. It's a business that continues to execute at the very high levels and we're continuing to see smart investments there, which will capitalize on the growth opportunities that lie ahead. Slide #9, Transportation Systems. In the quarter, sales were down, as we said, 10% reported, but only 2% on an organic basis. So despite a tough macro environment, the majority of the declines were driven by foreign exchange. Now transportation has mitigated much of the macro impact by executing flawlessly on a number of Turbo launches in the quarter, as well as a steady increase that we've experienced and benefited from in U.S. gas penetration, which has helped offset European production decline. Now regarding the macro headwind for TS, the European light vehicle production was down 6% in the quarter, while Western European diesel penetration remained essentially flat. However, the relative strength of TS outside of Europe in a number of markets again helps reinforce the importance of our strategy to diversify geographically. Just to give you a little more color, we're growing clearly in the light vehicle gas segment and we expect penetration for that segment to double globally over the next 5 years. We see the fastest growth experienced -- being experienced over the next 5 years in North America and China, where we're also growing off a slower base what will be a meaningful piece of our businesses as we continue to expand the presence in these regions. Now TS segment profit in the quarter was down only 14%, including 11% from foreign exchange despite the 10% sales decline. So productivity gains from HOS, repositioning benefits, both helped offset the impact of lower volumes. And the impact also of ongoing projects that we've been funding to drive operational improvements in the Friction Materials business. As you know, we've continued to invest during this downturn to improve the efficiency and flexibility of TS, which has improved our cost position for both Turbo and Friction and it's expected to drive further productivity benefits in the coming years. So with a background on the businesses for the quarter, let's go to Slide 10 and give you a summary preview for the fourth quarter. So as we close out the year -- but we're expecting sales of $9.4 billion to $9.6 billion, roughly flat to up 1% compared to the same period last year. And by business, just a couple of highlights. In Aerospace, we expect fourth quarter sales to be roughly flat year-over-year, with continued growth in the Commercial side, in Commercial OE, which we expect to be, frankly, up double digit, and also commercial aftermarket growth, recoupling to utilization. This will be offset, as I said earlier, by Defense and Space. We're expecting program-specific declines, again, notably the TIGER program, which will lead to declines of approximately 6% to 8% in the fourth quarter, consistent with our expectations that D&S will be down for the full year by about 4%. In ACS, in the fourth quarter, we expect sales up 1% to 3%, with modest growth across each of the businesses. Now the ESS comps are expected to ease modestly, particularly in ECC, where, as you recall, we essentially had a non-winter the last season. And there's -- clearly, the possibility of a more traditional winter heating season this year. However, we're still expecting our short cycle end markets overall to be somewhat challenged, particularly in Europe. In our long cycle solutions businesses, we're expecting growth to slow modestly, as we've seen some slower conversion of backlog with project delays. In Performance Materials, PMT, for the fourth quarter, we expect sales up 4% to 6%, including the favorable impact of the Thomas Russell acquisition. And consistent with our earlier expectations and what we've communicated to you, we expect UOP growth to be roughly flat organically in the fourth quarter versus, and just put it in perspective, the 19% organic growth that UOP has experienced year-to-date. We expect UOP to see continued growth, however, in 2013, driven by their strong backlog of projects and new wins and just the amount of activity that's taking place in that space. The Advanced Materials piece of PMT in the fourth quarter is expected to be up modestly on an organic basis, as new product introductions will help offset continued weak end markets overall. And finally, we expect Transportation to have another challenging quarter, driven by the impact of lower EU light vehicle production, which we expect to be down about 9% in the quarter, partially offset by increased global Turbo penetration and also new launches. And of course, currency will continue to be a headwind as we're planning at a euro rate of approximately $1.25 versus the $1.35 actual of last year, impacting sales by roughly 5%. So we think it's prudent to being conservative in our top line planning and as we expect to execute, however, on both cost and productivity actions. To put it in perspective, at the midpoint of our guidance, our sales will be approximately 3% higher than our last peak in 2008, but segment profit will be up over 20%. So with that in mind, you can see sales are expected to be flat to up 1% in the fourth quarter. However, pro forma EPS, which excludes any mark-to-market adjustment of about 2% to 7%, and if you'd normalize the effect for the tax rate, and let me just state that again, pro forma EPS, we expect to be up 2% to 7%, but if you normalize the effective tax rate to our usual 26.5% versus again the planned, a little bit over 30%, we would now anticipate in the fourth quarter, EPS in the fourth quarter would be $1.13 to $1.18, up 6% to 10%. So you can see on -- slower sales growth, very good conversion, driving strong earnings growth expected for the fourth quarter. Let's talk now -- this is on Slide #11. This is a slide that we've utilized with you previously. We utilized this in July and we've updated it now for you here in October. We think it gives you helpful insights in terms of how we're thinking about the second half of the year. What we've done here is we've updated each of these elements and shown you any changes in terms of how we're tracking and we've shown those changes in red. As you can see, some things are running slightly ahead of expectations like productivity and sales conversion. And others are running slightly behind like in Transportation Systems, with lower expected European macro, specifically lower European light vehicle production. Now you can see commercial aftermarket, starting at the top of the page, in Aerospace, has held up well, particularly BGA, where growth is significantly outpacing utilization rates. However, not counting on further slowing of ATR flight hour growth, which we saw in the third quarter, driven by weak regional jet traffic. So for the fourth quarter, we're going to expect tougher ATR aftermarket comps, particularly due to the very strong rate of improvement in the fourth quarter of 2011 and moderating BGA aftermarket growth. For ESS, ESS should see a benefit from a slight easing of year-over-year comps, resulting in low organic growth in the fourth quarter, driven by new products, again, and expansion in high growth regions. And in Advanced Materials and R&C, the pricing environment we expect to remain weak, with challenges supply and demand conditions. However, we expect this to be offset by higher volumes. But likely, this continues to be a headwind for us in the fourth quarter, particularly on the revenue side as we talked earlier, I gave you the example earlier. Now the euro came right into the middle of our range and while we're currently above the $1.25, it's still, obviously, very fluid. So it's worth pointing out that we'll see almost, for the year, $700 million of top line foreign currency headwind of 2012. And while we can't be certain what 2013 will bring, at current rates, we would not have, obviously, that degree of headwind. So taken together, we're staying balanced in our framing and importantly, the midpoint of our previous range remains intact, with a tightened full year 2012 EPS range of $4.45 to $4.50. So finally, just before going to Q&A, let's spend a couple of minutes giving you our preliminary thoughts on 2013. Obviously, a lot of uncertainty out there, but still some things are starting to take shape. As always, obviously, we'll provide guidance in mid-December -- specific guidance in mid-December. So looking at Slide 12, on the left side of the chart, you'll see reflected the current full year outlook for sales and segment profit for 2012, assuming the midpoint of guidance for each of our businesses. Now what stands out, of course, is the terrific margin performance in each of the businesses in 2012. And to put that in perspective, we originally planned segment margin for Honeywell for '12 in the range of 15% to 15.3%. We're now looking at margins for the company to be in the range of 15.6% to 15.7% on over $700 million of lower sales. So as Dave mentioned, this performance really underscores our ability to outperform in both the good and the tough economic times. Now again, while we're in the early stages of planning for 2013, we believe we are well positioned given what we're seeing in our major end markets, what we're hearing from customers, the strength that we're carrying in our end -- our long cycle backlog and of course, the continued traction on new products, as well as our geographic expansion. Starting with Aero on the Commercial side, we expect aftermarket growth will be largely tied to flight hours, but OE should see continued strong performance, driven by higher OEM deliveries. We have terrific exposure on several platforms ramping up, which included the 787, the 747-800, the G280, the G650 and the backlogs at these OEMs look strong and stable. Aerospace has won over $20 billion in lifetime value of new, unannounced business. And while many of those remain several years out, we think it speaks to the quality of the long-term outlook for the Aerospace business. For Defense, we expect another year of manageable decline, scenario planning around continuing resolution uncertainty and possible sequestration is ongoing. But consistent with our communications, we think the high probability outcome is to find the floor in Defense given the reset of the U.S. budget in 2013 and returning to modest growth in 2014. And as a reminder, we'll be doing a Defense Investor Day in November, where we'll discuss some of the possible outcomes from our scenario planning. In ACS, we're planning for continued challenging end markets in 2013 despite the possibility for some macro easing, making our focus on new products and expansion in high-growth regions that's much more important for growth. Fortunately, we have good visibility in the Solutions businesses, driven by stable backlogs. Again, though, we're planning for slower growth with some project timing in the Solutions businesses, resulting in delays, which will impact the timing of backlog conversion and new order rate. So in this environment, ACS is going to continue to focus on our productivity levers, the implementation of HOS, continued penetration on SAP/ERP, as well as continuing to execute on previously funded restructuring actions as they continue to focus on profitable growth and good margin expansion. Turning to PMT. UOP is poised for another strong year with record backlog and the addition, the exciting addition of Thomas Russell. Advanced Materials is planning for more of the same in their key end markets and similar to ACS, you going to see growth coming from new products and applications across that portfolio. PMT is making some attractive high return investments in new capacity to support growth and project wins. These investments, we believe, make a lot of sense and are expected to contribute to sales growth and continued margin expansion in PMT in the coming years. For Transportation, for '13, we expect EU light vehicle production to be flat to down slightly. And for planning purposes, we've seen more pronounced headwinds in the production rate in the first half of 2013, while on the other hand, the business is very well positioned with new launches supporting the proliferation of Turbo penetration in both the U.S. and China. Those themes are going to continue. They're going to provide a healthy multiyear tailwind for Transportation, with penetration expecting to double over the next 5 years. And as a reminder, Alex and his team have secured over $2.8 billion in new program wins year-to-date. So new launches are a very meaningful driver of growth for Transportation. So we're still in the process of rolling up our 2013 forecast. And again, our preliminary framework for 2013, we think, has remained appropriately balanced. We're quite positive on the operational side. As we've said in the past, we expect to grow earnings at a multiple of sales in what will likely be a slow growth environment. And this consistency of execution continues to put us on a very credible path to achieve our 2014 target. And again, as a reminder, we'll have the more detailed outlook with you on our Guidance Call on December 17. So now let's just go to Slide 13 for a quick summary before turning it over to Elena for Q&A. So another quarter, obviously, left to go, but we feel very good about how we've performed year-to-date and we -- you know the numbers. There's no question it's been a challenging year. Certainly more so than we expected at the beginning, but Honeywell has delivered against our expectations, continuing to build on our track record of execution in both good and bad times. The playbook, as Dave has said, is clearly working. We've got good traction with HOS in each of our businesses. We're expecting 70% bronze or better in all of our sites by year end. We've increased R&D spending. We've amplified the effectiveness of R&D with VPD. And Functional Transformation is continuing to allow our businesses to improve service at lower cost, achieving 2 seemingly conflicting things at once. Now we're planning for another year of top line slow growth in '13, as we said, but continued strong margin expansion. The results of our seed planting investments are going to provide upside in an overall weak end-market environment. And that said, with any macro easing and a stable foreign currency rate, and I cited the amount of headwind that we've experienced in 2012, nearly $700 million in revenues, equivalent to about $100 million of operating income impact to 2012. We could see earnings growth similar to what we're seeing this year. In any case, we're going to remain flexible, ready for either scenario, with disciplined cost controls, benefits from an improved cost position, allowing us to continue to invest in the future. So we look forward to the dialogue with you on December 17. And with that, Elena, I'll took it over -- turn it over to you for Q&A.

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

[Operator Instructions] Our first question comes from Steven Winoker from Sanford Bernstein. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: Just maybe one detail question, then I'd like to back up for a higher level one. On the detailed side, just how are you thinking, what's your visibility into pension for the fourth quarter? And how you're thinking about that these days?

Well, I think, on the pension side, we're looking at numbers right now, Steve, mid-80s in terms of a funded percent status. That means we're going to be in a pretty healthy mode going into 2013. So on the contribution side, we're just plan to play that by ear. There's no determined amount or required amount of funding in 2013, so we'll play that by ear. From a mark-to-market standpoint, we're going to have some mark-to-market expense undoubtedly at least in terms of where rates are right now. But the fact of the matter is and you've heard us say before, but the reality is we're going to have a rate tailwind at some point. So we're going to play that smartly, continue to look at that as something that we're going to manage very, very carefully, but frankly, we feel very good about the position that we're in overall regarding the funded status and the funding requirements for pension. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And then just backing up, Dave, you talked about starting to hit critical mass in the businesses and we're seeing continued cost control and margin expansion and I'm sure that pricing dynamics are based into -- baked into that, too. But as you sort of look at the quarter in the face of all these headwinds, can you talk a little bit about what you mean by critical mass here and how it affects the margin side of the business a little bit? And in light of the current environment and other dynamics, how you're thinking is evolving or continuing to evolve on the margin expansion side from a kind of peak-to-peak perspective?

Yes, on the -- what I mean by critical mass is -- I mean, you've heard me use this phrase a lot, this goes slow to go fast, so when it came to HOS, we wanted to make sure we got it right and it was more important to get it right so that it was sustainable for a long period of time. So in the beginning, it was kind of slow, as you know, and it took us time to build that up, and in the beginning, actually cost us something, eventually got to neutral, then started to provide some benefit. Now we're starting to see the benefits really come through, because when you start getting to 70% of your manufacturing sites at bronze or better, you really start to see some big benefits from it as we've said before. When it comes to margin expansion, as you know, we've always said that, that was going to happen. We put out the 5-year plan and we felt pretty confident about being able to do that given all the seed planting that we've done, not just on the cost side, but on the growth side also to help mitigate some of the growth headwinds that we see. So between the kind of the growth plan that we've done and the seed planting that we've done on the cost side with the process initiatives, that's what's allowing us to be able to drive these kind of margin rates on slower sales growth and still be investing in the R&D and the CapEx that we need to keep growing. So we actually feel pretty good about that. And I'm sure you recognize that making the change to the growth plan the way we did to focus on margins was very timely given that we expected we were going to be seeing something like this economically and we wanted to provide that assurance externally that we did understand and we were willing to put our compensation on the line to deliver it. So we feel pretty good about it. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: And just the pricing dynamics, a little bit more sort of near term, what you are seeing out there?

From a pricing perspective, it's still okay. As you know, we're not a -- you're never going to see a 7% price increase from us, unless it's driven by raws like in R&C. But by and large, we still expect that it should be -- that it should work out just fine for us.

Our next question comes from Scott Davis from Barclays.

Dave Cote, in your opening remarks, you seemed a little bit more optimistic about the macro picture, the demand picture, than maybe some of your peers and some of the other calls we've had the last week or so. I mean, what are you seeing out there that gives you some confidence that China is, in fact, kind of making a turn and that the U.S. isn't getting worse here? When you cited short cycle businesses, can you be more specific, I guess?

Well, I'd, I guess, divide that into 2 pieces. On the macro side, I don't believe there's a recession coming. But I do believe that there's a slow growth environment most likely to occur just because the world democracies are in gridlock over debt, whether it's Japan, India, the EU, the U.S., we're in gridlock. And I do believe there's the potential in the U.S. and maybe even in the world for a good economic recovery if government would actually do their job here and resolve the fiscal cliff and the debt. By the same token there's a potential disaster if they handle it poorly. All that being said, we're going to look at it as if it's just more of the same and you can't count on these guys doing what they need to. And we need to think about it in terms of, all right, what's the kind of conservative way to plan this? So we're going to plan conservative macros like we normally do. But overall, I still believe global GDP grows next year. When it comes to China, in particular, we grew again in China and we saw it both on the short cycle and the long cycle, more driven by long cycle. At the end of the day, I think we have to factor in this leadership transition that's going to occur. And as you know, there's 2 offices, one in October and the other transition is in the first quarter some time. And I see, in my view, China is making the right kinds of decisions and they recognize what they need to do to make the changes that are economically required. So I don't think it's smart to bet against them on this. And we've done a lot on kind of thinking about how to manage through that. So that's on the global macro side. On say kind of the Honeywell micro side, all the growth initiatives, the seed planting that we've been doing for years, because you don't just turn this on in 3 months, is what causes me to feel that even in a tough global macro environment, we can do pretty well. So we're not counting on booming sales growth next year, but we do believe that there will be growth for us even in that tough environment.

Good. That explains it. Can we move back to cash reinvestment? And I think most would agree the Thomas Russell deal looks pretty interesting. I mean, can -- you talked about having a pipeline, but no real rush to do anything or not. I think the words you used was nothing was needed per se, nice to have not needed to have or something. But I mean, if you had -- on this trajectory, you're going to be sitting on a fair amount of cash at the end of the year on your balance sheet. I mean, at what point do you say, "Hey, the market is not giving us enough credit here for execution. We're going to start buying in our own stock or getting a little bit more aggressive with some of that cash"?

Well, hopefully, you'll be impressed with the consistency of my answer over the last few years. But we're still going to play that on kind of an opportunistic basis. I don't have a number in mind that says, "Okay, this is way too much cash. We need to do something." I also think in uncertain times, it certainly doesn't hurt to have cash. I prefer to have it than not. We're going to continue to focus on how do we pay a good competitive dividend as you know and that's important. It's an important return to shareowners. And when it comes to acquisitions and repurchases, we're going to continue to look at both because to the extent we can do Thomas Russell type acquisitions, man, that is a real value adder for the company and I think you'd want us doing that. So I don't have a particular number in mind. Dave, I don't know if there's anything you can add.

No, I think that's very well said.

Our next question comes from Jeff Sprague from Vertical Research Partners.

Just picking up on that point a little bit, well understood what you said. But it does sound like the pipeline is active and although you don't have must-haves, it sounds like there's a lot of like-to-haves out there. I mean, how would you handicap the likelihood of you repeating a couple of these Thomas Russells over the next 6, 12, 18 months, however you want to frame it?

Well, it's always tough to know, Jeff, because I said we always maintain a good pipeline and it's stuff that we want for the company, so it's not a case of "Hey, look, that's for sale, let's go take a look." This is more stuff that we plan for. You just never know when all the conditions kind of strikes, so that you have a property that make sense and most especially at a price that makes sense. And that's always tough to predict. So I'd have a tough time handicapping that one and I would just say, we're going to keep our eyes open. If something makes sense, we'll do it. If it doesn't, we won't. It's just a tough thing to predict.

And I know you don't want to get too far out over your skis on the 2013 outlook, but I think Dave Anderson said 2013 EPS could look like -- the growth could look like 2012. I mean, what kind of revenue growth is predicated by that statement?

I think we're looking at a low -- clearly, a low single-digits kind of number, Jeff, for 2013 given the...

The sales growth.

The sales growth -- sorry, organic sales growth, the way that we're looking at the exits for -- exit rates for each of our businesses for 2012. So that's the way we're thinking about next year. So it comes back, as Dave said, it really puts the onus on the playbook of operational discipline, continuing to emphasize value adding new products, which give us a lot of leverage in the marketplace and continuing to grow in the highest growth markets. So that's what we're going to do and...

Just to add to that, I'd say in 10 years of doing this, we have never once been bitten by being conservative in our sales outlook. So we'd prefer to be on the conservative side of this. And we'll look at -- okay, global macro is not a big help. FX we don't expect to be a big hit. We've got the geographic, the new product expansion that Dave was referencing, and when we put all of that together, we say, "Okay, the smart thing to do here as you plan your cost profile is to assume low single-digits sales growth," as Dave was saying.

And just part of backing that up, obviously, is the restructuring and just other internal operational execution things you've been working on. It seemed like maybe there was an allusion to some additional restructuring, I don't know if that was the intent. But are there some other things that are potentially in the pipeline the next quarter or 2?

I mean, it's always possible and part of our model is an ongoing active review of restructuring opportunities. We think that's very, very healthy and in best interests of continued margin expansion, earnings growth, value creation. What we've had on a year-to-date basis, Jeff, has been above what we would have expected on a gross basis, and we've been able to do it as a result of strong operating earnings and also as a result of better-than-expected performance on previously funded repositionings. So we've actually had a greater rate of attrition and other benefits that have allowed us to reduce the accruals on previous and take credits on credit for previously reserved restructurings, which have actually helped us fund new restructuring. So we've had -- as you know, we continue to increase our guidance for 2013 in terms of what the incremental repositioning benefit will be. And as I said today, we're now looking at $150 million of incremental operating income lift in 2013 versus '12 as a result of the repositioning pipeline. So that's very -- it's a very good point to bring up and very, very much part of the playbook.

We're looking out for it, Jeff, to Dave's point, but we've got a pile of stuff already funded that we need to -- we're in process of getting done. So there's no need to do anything, but we're certainly always going to be looking for opportunity.

Our next question comes from Nigel Coe from Morgan Stanley.

Yes. I just want to pick on the point on repositioning. So Dave, I think you mentioned $150 million for 2013, the year-over-year benefits. Does that mean that 2012 has gone up similarly to if that was $150 million, where is that now standing for 2012?

I think it's about $175 million, the number for 2012.

Okay. And with the bulk of that in the second half of the year, I would assume?

There's a lot, yes, it increases over the course of the year, Nigel.

Okay. So now we know why your margins are so good.

Well, yes. It's certainly one of the contributors. It's another good point.

Sure, absolutely. And then, if we just switch to 2014. You've been very helpful in 2013 already, but you're already starting to bump up towards the lower end of your 2014 margin targets, and I'm wondering and I know you're not going to change that, but can we now think about the midpoint of the margin range as now the most probable target for 2014?

I would say, Nigel, I know my story and I'm going to stick to it. I'm going to -- the 5-year target is the 5-year target and it's my intent in 2014 to be able to show you, "Look, we did what we said and here's our new 5-year plan," so that hopefully, you all look at it, and go "Wow, it's been almost 15 years of these guys doing exactly what they say. Maybe we should give them the benefit of the doubt this time."

Okay, that's the story. So are you still planning to put out another 5-year plan, Dave?

Yes, when the time comes.

Okay. And then within the plan, I think you've mentioned that you want to get friction back to breakeven by 2014. And I'm wondering, how does -- how is the deterioration in the European auto market impact that plan? And maybe you can just give us some color around that?

Well, it certainly doesn't help, but at the same time, the transformation program we have is very much on track so we feel pretty good about that. And if there's any kind of sales help at all, it will just make it better. But certainly, we're planning to and think we can get to.

Our final question comes from Shannon O'Callaghan from Nomura.

So on PMT margins, we have a lot to choose from this year in terms of what a normal run rate is because you've got 22.6% in the second quarter, going down to 18.6% and then you're implying a significant sort of decline in the fourth quarter to the midpoint of the guidance. Can you give us kind of the sequential dynamics of what you see going on 2Q to 3Q and 3Q to 4Q and then maybe a little flavor on what you're thinking next year there?

Well, just to give you, I guess, a sense for it, is it's a little bouncy between quarters in a year. But as you might imagine, Andreas is definitely planning and thinking about a margin rate increase next year and we all recognize the significance of that star performance. One of the things that is going to help that is that UOP win rate in backlog is just terrific. These guys just keep doing a great job. Ever since we started kind of more of that horizon 3 investing and the geographic reach, man, it's really paid off. So I would expect more goodness to come from that. Dave, I don't know if there's anything you want to add.

Yes, just the one thing I think I would add in terms of just a detailed item and it's something that we've talked about previously, it's just, Shannon, it's just the anticipation from UOP of less para-xylene, particularly catalysts, also some licensing in the fourth quarter. And that's just associated, we've used this term lumpy in the past as we've talked about UOP. It's something that we've anticipated. Therefore, their margins will be a little bit lower than the run rate they've experienced on a year-to-date basis. I've talked about that significant organic growth, that 19% year-to-date revenue organic growth in UOP through the first 9 months. So basically a flat top line and from, if you will, a makeup of their business, some of the less of the more profitable elements of their business in the fourth quarter, so -- but that's going to correct itself. As Dave said, that's all going to -- as we look forward to 2013, we're looking for a very strong start to the year out of PMT and out of UOP.

And you're also, I guess, going to have some -- these Thomas Russell deal costs will also hit in 4Q. Is that part of the 4Q pressure?

Yes, there's a little bit of that in terms of margin diminution that will occur because we'll get some revenues without a lot of earnings or no earnings from Thomas Russell in the fourth quarter. But we're actually looking for Thomas Russell to be accretive in 2013.

Right, okay. And then just -- can you talk maybe a little more color on this slowdown in backlog conversion and the push outs? I mean, are these things that are being tabled for quite a while or just pushed out of quarter and where are you seeing them?

Well, specifically, what we referenced is in the Process Solutions business, as well as in the Building Solutions and for different reasons. It's really, on the Building Solutions, it's really energy and energy retrofit. Some of that has to do with just the regulatory requirements to enable some of the funding on the energy retrofits. That's become more cumbersome, more complex, more time-consuming, so we're seeing some delays. The demand is still there. We feel very, very good about our overall positioning, but it's going to create a slower growth profile for that business in 2013. And on the Process Solutions side, what we're seeing is just some delays in terms of project funding, which is impacting their order rate, which in turn, will cause some near-term slowing in terms of the outlook that we have for them on the revenue side. But again, fundamentals remain very good, very positive. The pipeline of activity is excellent. So it's just that we want to make sure that we're tempering, if you will, some of the top line outlook for both of those businesses as we transition from '12 to '13.

I'd now like to turn the call over to Dave for any final comments.

Yes, thanks, Elena. As you can probably figure out by now, we're quite pleased with our performance in the quarter and I certainly hope all of you are also. And it's our intent to continue outperforming in the future. The reason for all of that is the seed planting that we talk a lot about and that we're going to continue to do. We were able to get this kind of margin performance even while continuing to invest the way that we need to, whether it's geographically or new products. And that seed planting, it's just going to keep on going, whether it's how do we grow or how do we make ourselves more efficient and it continues to pay off over time. We're going to plan on a slow growth environment because we just think that's the prudent thing to do. If we get any kind of macro help at all because, we'll say, the world's democracies actually start dealing intelligently with their debt, this could be even better and we're hopeful that, that will happen, but we're sure as hell not going to count on it. So we're excited about the future of Honeywell and where we're going and what we think we can do and I certainly hope you are also. Thanks for listening.

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