Honeywell profit up 12 percent on solid U.S., cost cuts

Wed Jul 18, 2012 12:35pm EDT

A view of the corporate sign outside the Honeywell International Automation and Control Solutions manufacturing plant in Golden Valley, Minnesota, January 28, 2010. REUTERS/ Eric Miller

A view of the corporate sign outside the Honeywell International Automation and Control Solutions manufacturing plant in Golden Valley, Minnesota, January 28, 2010.

Credit: Reuters/ Eric Miller

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(Reuters) - Honeywell International Inc (HON.N) posted an 11.7 percent rise in profit that topped analysts' forecasts, as solid U.S. demand for chemicals and building control systems and cost cuts offset weakness in Europe.

Shares of the maker of cockpit electronics and automotive turbochargers were up 6.6 percent -- their biggest one-day gain in more than three years -- after Honeywell also raised the low end of its 2012 profit forecast.

"For 2012 and 2013 we have focused on margin expansion as key to earnings growth, to leverage sales in a tough macroeconomic environment," Chief Executive David Cote told analysts on a conference call.

The company is in the midst of restructuring projects that will cut costs by about $150 million this year and another $125 million next year, Cote said, adding, "we'll continue to be cautious about adding people."

Second-quarter earnings rose to $905 million, or $1.14 per share, from $810 million or $1.02 per share a year earlier. Analysts' average forecast was $1.11 per share, according to Thomson Reuters I/B/E/S.

The result, which came despite weaker-than-expected revenue, showed that Honeywell could perform well even in the face of a debt crisis in Europe -- where it generates about 30 percent of its sales -- analysts said.

"Honeywell clearly is not immune to macro headwinds and evidence of that was apparent in second-quarter top line," Vertical Research Partners analyst Jeffrey Sprague wrote in a note to clients, adding that the company is better-positioned than its peers to boost margins due to its practice of steadily tweaking operations to make them more efficient.

Better-than-expected operating margins helped earnings grow faster than the 3.8 percent rise in revenue, with strong sales of aviation equipment offsetting a decline in demand for turbochargers, the result of a European auto slump.

"We were especially encouraged by continued strength in commercial aerospace after market, North America and productivity benefits," said BernsteinResearch analyst Steven Winoker.

Honeywell shares were up 6.6 percent at $58.16 on Wednesday afternoon on the New York Stock Exchange, off an earlier high at $58.49.

CONSTANT RESTRUCTURING

Officials with the Morris Township, New Jersey-based company said they have been engaged in steady rounds of restructuring since 2009, when the last U.S. recession officially ended, with most of their efforts focused on Europe.

Among the changes, Honeywell is shifting some production in its Transportation Systems unit, which makes products including automotive turbochargers, to China from Europe. The aim is both to take advantage of lower costs and to move production into a faster-growing market.

"The demand in Europe has gone down ... but we can build a factory in a market where there is growing demand," said David Anderson, the company's chief financial officer, adding that its China factory would be able to produce not only for European automakers, but for Asian consumers and for Asian automakers selling to Europe.

The company has also combined operations in Europe and elsewhere around the world into fewer buildings, which allows staff to share services and cuts real estate costs, Anderson said. Honeywell this year began tying its employees' compensation to divisional profit margin targets, to encourage workers to focus on cost.

"It's not just about having the change du jour but really thinking strategically about the linkage of performance and shareholder value and people's behaviors," Anderson said.

RAISES FORECAST

The company on Wednesday also raised the low end of its full-year profit forecast by 5 cents, and now anticipates 2012 earnings of $4.40 to $4.55 per share, representing growth of 9 to 12 percent.

The company lowered its full-year sales forecast by $200 million to a range of $37.8 billion to $38.4 billion, reflecting the weakening of the euro. Overall, that still would represent 3 to 5 percent revenue growth, helped by strong demand for specialty chemicals and equipment for aircraft.

Even a modest hike to its forecast was welcomed by Wall Street after smaller industrial peers including conglomerate Dover Corp (DOV.N), engine maker Cummins Inc CMI.M and electronic connector maker TE Connectivity Ltd (TEL.N) cut their projections earlier this month.

"In this environment, we consider this a positive guide," said Nomura Equity Research analyst Shannon O'Callaghan.

Investors will gain a broader sense of the sector's health over the coming week as top U.S. manufacturers including United Technologies Corp (UTX.N), General Electric Co (GE.N), Danaher Corp (DHR.N) and Ingersoll-Rand Co (IR.N) release results.

While most major companies will not begin issuing forecasts for 2013 until the end of this year, Honeywell officials said they are not expecting much of an improvement in demand next year.

"We continue to plan for a tough macro environment enduring through 2013, with global growth around 2 percent," Anderson said.

(Reporting by Scott Malone in Boston; Editing by John Wallace, Maureen Bavdek and Matthew Lewis)

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