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Article by DailyStocks_admin    (09-02-11 01:58 AM)

Description

Honeywell International Inc. Director CHICO /FA PARDO JAIME bought 5000 shares on 08-26-2011 at $ 45.84

BUSINESS OVERVIEW

Honeywell International Inc. (Honeywell) is a diversified technology and manufacturing company, serving customers worldwide with aerospace products and services, control, sensing and security technologies for buildings, homes and industry, turbochargers, automotive products, specialty chemicals, electronic and advanced materials, process technology for refining and petrochemicals, and energy efficient products and solutions for homes, business and transportation. Honeywell was incorporated in Delaware in 1985.

We maintain an internet website at http://www.honeywell.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports, are available free of charge on our website under the heading “Investor Relations” (see “SEC Filings & Reports”) immediately after they are filed with, or furnished to, the Securities and Exchange Commission (SEC). In addition, in this Form 10-K, the Company incorporates by reference certain information from parts of its proxy statement for the 2011 Annual Meeting of Stockholders, which we expect to file with the SEC on or about March 10, 2011, and which will also be available free of charge on our website.

Information relating to corporate governance at Honeywell, including Honeywell’s Code of Business Conduct, Corporate Governance Guidelines and Charters of the Committees of the Board of Directors are also available, free of charge, on our website under the heading “Investor Relations” (see “Corporate Governance”), or by writing to Honeywell, 101 Columbia Road, Morris Township, New Jersey 07962, c/o Vice President and Corporate Secretary. Honeywell’s Code of Business Conduct applies to all Honeywell directors, officers (including the Chief Executive Officer, Chief Financial Officer and Controller) and employees.

Major Businesses

We globally manage our business operations through four businesses that are reported as operating segments: Aerospace, Automation and Control Solutions, Specialty Materials and Transportation Systems. Financial information related to our operating segments is included in Note 23 of Notes to Financial Statements in “Item 8. Financial Statements and Supplementary Data.”

U.S. Government Sales

Sales to the U.S. Government (principally by our Aerospace segment), acting through its various departments and agencies and through prime contractors, amounted to $4,354, $4,288 and $4,240 million in 2010, 2009 and 2008, respectively, which included sales to the U.S. Department of Defense, as a prime contractor and subcontractor, of $3,500, $3,455 and $3,412 million in 2010, 2009 and 2008, respectively. U.S. defense spending increased in 2010. Although we expect a slight decline in our defense and space revenue in 2011 (see Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations), we do not expect to be significantly affected by any proposed changes in 2011 federal spending due principally to the varied mix of the government programs which impact us (OEM production, engineering development programs, aftermarket spares and repairs and overhaul programs). Our contracts with the U.S. Government are subject to audits, investigations, and termination by the government. See “Item 1A. Risk Factors.”

Backlog

Our total backlog at December 31, 2010 and 2009 was $14,616 and $13,182 million, respectively. We anticipate that approximately $10,609 million of the 2010 backlog will be filled in 2011. We believe that backlog is not necessarily a reliable indicator of our future sales because a substantial portion of the orders constituting this backlog may be canceled at the customer’s option.

Competition

We are subject to active competition in substantially all product and service areas. Competition is expected to continue in all geographic regions. Competitive conditions vary widely among the thousands of products and services provided by us, and vary by country. Depending on the particular customer or market involved, our businesses compete on a variety of factors, such as price, quality, reliability, delivery, customer service, performance, applied technology, product innovation and product recognition. Brand identity, service to customers and quality are generally important competitive factors for our products and services, and there is considerable price competition. Other competitive factors for certain products include breadth of product line, research and development efforts and technical and managerial capability. While our competitive position varies among our products and services, we believe we are a significant competitor in each of our major product and service classes. However, a number of our products and services are sold in competition with those of a large number of other companies, some of which have substantial financial resources and significant technological capabilities. In addition, some of our products compete with the captive component divisions of original equipment manufacturers. See Item 1A “Risk Factors” for further discussion.

International Operations

We are engaged in manufacturing, sales, service and research and development mainly in the United States, Europe, Asia, Canada, Middle East and Latin America. U.S. exports and foreign manufactured products are significant to our operations. U.S. exports comprised 11, 12 and 10 percent of our total sales in 2010, 2009 and 2008, respectively. Foreign manufactured products and services, mainly in Europe, were 41, 39 and 39 percent of our total sales in 2010, 2009 and 2008, respectively.

Approximately 17 percent of total 2010 sales of Aerospace-related products and services were exports of U.S. manufactured products and systems and performance of services such as aircraft repair and overhaul. Exports were principally made to Europe, Canada, Asia and Latin America. Foreign manufactured products and systems and performance of services comprised approximately 15 percent of total 2010 Aerospace sales. The principal manufacturing facilities outside the U.S. are in Europe, with less significant operations in Canada and Asia.

Approximately 2 percent of total 2010 sales of Automation and Control Solutions products and services were exports of U.S. manufactured products. Foreign manufactured products and performance of services accounted for 58 percent of total 2010 Automation and Control Solutions sales. The principal manufacturing facilities outside the U.S. are in Europe, with less significant operations in Asia and Canada.

Approximately 30 percent of total 2010 sales of Specialty Materials products and services were exports of U.S. manufactured products. Exports were principally made to Asia and Latin America. Foreign manufactured products and performance of services comprised 27 percent of total 2010 Specialty Materials sales. The principal manufacturing facilities outside the U.S. are in Europe, with less significant operations in Asia and Canada.

Approximately 3 percent of total 2010 sales of Transportation Systems products were exports of U.S. manufactured products. Foreign manufactured products accounted for 70 percent of total 2010 sales of Transportation Systems. The principal manufacturing facilities outside the U.S. are in Europe, with less significant operations in Asia and Latin America.

Financial information including net sales and long-lived assets related to geographic areas is included in Note 24 of Notes to Financial Statements in “Item 8. Financial Statements and Supplementary Data”. Information regarding the economic, political, regulatory and other risks associated with international operations is included in “Item 1A. Risk Factors.”

Raw Materials

The principal raw materials used in our operations are generally readily available. We experienced no significant problems in the purchase of key raw materials and commodities in 2010. We are not dependent on any one supplier for a material amount of our raw materials, except related to phenol, a raw material used in our Specialty Materials segment. We purchase phenol under a supply agreement with one supplier.

The costs of certain key raw materials, including natural gas, benzene (the key component in phenol), ethylene, fluorspar and sulfur in our Specialty Materials business, steel, nickel, other metals and ethylene glycol in our Transportation Systems business, and nickel, titanium and other metals in our Aerospace business, are expected to remain volatile. In addition, in 2010 certain large long-term fixed supplier price agreements expired, primarily relating to components used by our Aerospace business, which in the aggregate, subjected us to higher volatility in certain component costs. We will continue to attempt to offset raw material cost increases with formula or long-term supply agreements, price increases and hedging activities where feasible. We do not presently anticipate that a shortage of raw materials will cause any material adverse impacts during 2011. See “Item 1A. Risk Factors” for further discussion.

We are highly dependent on our suppliers and subcontractors in order to meet commitments to our customers. In addition, many major components and product equipment items are procured or subcontracted on a single-source basis with a number of domestic and foreign companies. We maintain a qualification and performance surveillance process to control risk associated with such reliance on third parties. While we believe that sources of supply for raw materials and components are generally adequate, it is difficult to predict what effects shortages or price increases may have in the future. Furthermore, the inability of these suppliers to meet their quality and/or delivery commitments to us, due to bankruptcy, natural disasters or any other reason, may result in significant costs and delay, including those in connection with the required recertification of parts from new suppliers with our customers or regulatory agencies.

Patents, Trademarks, Licenses and Distribution Rights

Our segments are not dependent upon any single patent or related group of patents, or any licenses or distribution rights. We own, or are licensed under, a large number of patents, patent applications and trademarks acquired over a period of many years, which relate to many of our products or improvements to those products and which are of importance to our business. From time to time, new patents and trademarks are obtained, and patent and trademark licenses and rights are acquired from others. We also have distribution rights of varying terms for a number of products and services produced by other companies. In our judgment, those rights are adequate for the conduct of our business. We believe that, in the aggregate, the rights under our patents, trademarks and licenses are generally important to our operations, but we do not consider any patent, trademark or related group of patents, or any licensing or distribution rights related to a specific process or product, to be of material importance in relation to our total business. See “Item 1A. Risk Factors” for further discussion.

We have registered trademarks for a number of our products and services, including Honeywell, Aclar, Ademco, Autolite, Bendix, Enovate, Fire-Lite, FRAM, Garrett, Hand Held, Holts, Jurid, Metrologic, MK, North, Notifier, Novar, Prestone, Redex, RMG, Simoniz, Spectra, System Sensor and UOP.

Research and Development

Our research activities are directed toward the discovery and development of new products, technologies and processes and the development of new uses for existing products. The Company’s principal research and development activities are in the U.S., Europe, India and China.

Research and development (R&D) expense totaled $1,466, $1,330 and $1,543 million in 2010, 2009 and 2008, respectively. The increase in R&D expense of 10 percent in 2010 compared to 2009 was mainly due to additional product design and development costs in Automation and Control Solutions and increased expenditures on the development of products for new aircraft platforms. The decrease in R&D expense in 2009 compared to 2008 of 14 percent was consistent with our 15 percent decrease in net sales. R&D as a percentage of sales was 4.4, 4.3 and 4.2 percent in 2010, 2009 and 2008, respectively. Customer-sponsored (principally the U.S. Government) R&D activities amounted to an additional $874, $852 and $903 million in 2010, 2009 and 2008, respectively.

Environment

We are subject to various federal, state, local and foreign government requirements regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. It is our policy to comply with these requirements, and we believe that, as a general matter, our policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage, and of resulting financial liability, in connection with our business. Some risk of environmental damage is, however, inherent in some of our operations and products, as it is with other companies engaged in similar businesses.

We are and have been engaged in the handling, manufacture, use and disposal of many substances classified as hazardous by one or more regulatory agencies. We believe that, as a general matter, our policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and personal injury, and that our handling, manufacture, use and disposal of these substances are in accord with environmental and safety laws and regulations. It is possible, however, that future knowledge or other developments, such as improved capability to detect substances in the environment or increasingly strict environmental laws and standards and enforcement policies, could bring into question our current or past handling, manufacture, use or disposal of these substances.

Among other environmental requirements, we are subject to the federal superfund and similar state and foreign laws and regulations, under which we have been designated as a potentially responsible party that may be liable for cleanup costs associated with current and former operating sites and various hazardous waste sites, some of which are on the U.S. Environmental Protection Agency’s Superfund priority list. Although, under some court interpretations of these laws, there is a possibility that a responsible party might have to bear more than its proportional share of the cleanup costs if it is unable to obtain appropriate contribution from other responsible parties, we have not had to bear significantly more than our proportional share in multi-party situations taken as a whole.

We do not believe that existing or pending climate change legislation, regulation, or international treaties or accords are reasonably likely to have a material effect in the foreseeable future on the Company’s business or markets that it serves, nor on its results of operations, capital expenditures or financial position. We will continue to monitor emerging developments in this area.

Further information, including the current status of significant environmental matters and the financial impact incurred for remediation of such environmental matters, if any, is included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Note 21 of Notes to Financial Statements in “Item 8. Financial Statements and Supplementary Data,” and in “Item 1A. Risk Factors.”

CEO BACKGROUND

GORDON M. BETHUNE, Retired Chairman and Chief Executive Officer of Continental Airlines, Inc.

Mr. Bethune is the retired Chairman of the Board and Chief Executive Officer of Continental Airlines, Inc., an international commercial airline company. Mr. Bethune joined Continental Airlines, Inc. in February 1994 as President and Chief Operating Officer. He was elected President and Chief Executive Officer in November 1994 and Chairman of the Board and Chief Executive Officer in 1996, in which positions he served until his retirement in December of 2004. Prior to joining Continental, Mr. Bethune held senior management positions with the Boeing Company, Piedmont Airlines, Western Airlines, Inc. and Braniff Airlines. Additionally, Mr. Bethune served as Vice President/General Manager of the Boeing Renton division where he was responsible for the manufacturing and design of the B757 and B737 aircraft programs. He is licensed as a commercial pilot, type rated on the B757 and B767 airplanes and the DC-3. He is also a licensed airframe and power plant mechanic. Mr. Bethune is also a director of Prudential Financial Inc. and Sprint Nextel Corporation. He previously served as a director of Willis Group Holdings Ltd. (2004—2008). Mr. Bethune was a director of Honeywell Inc. from April 1999 to December 1999.


Areas of Relevant Experience: Commercial airlines, including marketing, branding, cost control and restructuring, international operations and government regulation; aircraft manufacturing, design, maintenance and repair; financial services; insurance.

Director since 1999 Age 69



KEVIN BURKE, Chairman, President and Chief Executive Officer of Consolidated Edison, Inc. (Con Edison)

Mr. Burke joined Con Edison in 1973 and has held positions of increasing responsibility in system planning, engineering, law, nuclear power, construction, and corporate planning. He served as senior vice president, with responsibility for customer service and for Con Edison’s electric transmission and distribution systems. In 1999, Mr. Burke was elected president of Orange & Rockland Utilities, Inc., a subsidiary of Con Edison. He was elected president and chief operating officer of Consolidated Edison Company of New York in 2000 and elected chief executive officer in 2005. Mr. Burke was appointed president and chief executive officer of Con Edison in 2005, and elected chairman in 2006. In addition, Mr. Burke is Chairman of the Board of Trustees of Consolidated Edison of New York and a director of Orange & Rockland Utilities, Inc., both of which are affiliates of Con Edison.

Areas of Relevant Experience: Energy production and distribution; energy efficiency; alternative sources of energy; engineering and construction; development of new service offerings; government regulation.

Director since 2010 Age 60

JAIME CHICO PARDO, President and Chief Executive Officer, ENESA, S.A. de C.V.

Mr. Chico Pardo has been President and Chief Executive Officer of ENESA, S.A. de C.V., a private fund investing in the energy and health care sectors in Mexico since March 2010. He previously served as Co-Chairman of the Board of Telefonos de Mexico, S.A.B. de C.V. (TELMEX), a telecommunications company based in Mexico City, from April 2009 until April 2010 and previously served as Chairman from October 2006 to April 2009 and its Vice Chairman and Chief Executive Officer from 1995 until 2006. Mr. Chico Pardo was Co-Chairman of the Board of IDEAL (Impulsora del Desarrollo y el Empleo en América Latina, S.A. de C.V.), a publicly listed company in Mexico engaged in investment in and management of infrastructure assets in Latin America, from 2006 until 2010. He was also Chairman of Carso Global Telecom, S.A. de C.V. from 1996 until 2010. Prior to joining TELMEX, Mr. Chico Pardo served as President and Chief Executive Officer of Grupo Condumex, S.A. de C.V., a manufacturer of products for the construction, automobile and telecommunications industries, and Euzkadi/General Tire de Mexico, a manufacturer of automotive and truck tires. Mr. Chico Pardo has also spent a number of years in the international and investment banking business. Mr. Chico Pardo is a director of CICSA (Carso Infraestructura y Construcción) where he is not planning to stand for election in 2011, IDEAL and AT&T, Inc. He also serves as a Board member of three mutual funds in the American Funds family of mutual funds. He previously served as a director of Grupo Carso, S.A. de C.V. (1991-2010) and the following of its affiliates: América Móvil, S.A.B. de C.V. (2001—2009); America Telecom, S.A.B. de C.V. (2001—2006); Carso Global Telecom, S.A. de C.V. (1996-2010); Telmex Internacional, S.A.B. de C.V. (2008-2010); and TELMEX (1991-2010). Mr. Chico Pardo was a director of Honeywell Inc. from September 1998 to December 1999.

Areas of Relevant Experience: Telecommunications; automotive; manufacturing; engineering; construction; management of infrastructure assets; international business, operations and finance.

Director since 1999 Age 61



DAVID M. COTE, Chairman and Chief Executive Officer of Honeywell International Inc.

Mr. Cote has been Chairman and Chief Executive Officer since July 2002. He joined Honeywell as President and Chief Executive Officer in February 2002. Prior to joining Honeywell, he served as Chairman, President and Chief Executive Officer of TRW Inc., a provider of products and services for the aerospace, information systems and automotive markets, from August 2001 to February 2002. From February 2001 to July 2001, he served as President and Chief Executive Officer and from November 1999 to January 2001 he served as President and Chief Operating Officer of TRW. Mr. Cote was Senior Vice President of General Electric Company and President and Chief Executive Officer of GE Appliances from June 1996 to November 1999. He is also a director of JPMorgan Chase & Co.

Areas of Relevant Experience: Senior leadership roles in global, multi-industry organizations; ability to drive a consistent One Honeywell approach across a large multi-national organization; detailed knowledge and unique perspective and insights regarding the strategic and operational opportunities and challenges, economic and industry trends, and competitive and financial positioning of the Company and its businesses; significant public policy experience, including service on the bipartisan National Commission on Fiscal Responsibility and Reform and as Co-Chair of the U.S.-India CEO Forum.

Director since 2002 Age 58

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

ACS provides innovative products and solutions that make homes, buildings, industrial sites and infrastructure more efficient, safe and comfortable. Our ACS products and services include controls for heating, cooling, indoor air quality, ventilation, humidification, lighting and home automation; advanced software applications for home/building control and optimization; sensors, switches, control systems and instruments for measuring pressure, air flow, temperature and electrical current; security, fire and gas detection; personal protection equipment; access control; video surveillance; remote patient monitoring systems; products for automatic identification and data collection, installation, maintenance and upgrades of systems that keep buildings safe, comfortable and productive; and automation and control solutions for industrial plants, including advanced software and automation systems that integrate, control and monitor complex processes in many types of industrial settings as well as equipment that controls, measures and analyzes natural gas production and transportation.

Economic and Other Factors

ACS’s operating results are principally driven by:
•Global commercial construction (including retrofits and upgrades);




•Demand for residential security and environmental control retrofits and upgrades;
•Demand for energy efficient products and solutions;

•Industrial production;

•Government and public sector spending;

•Economic conditions and growth rates in developed (U.S. and Europe) and emerging markets;

•
The strength of global capital and operating spending on process (including petrochemical and refining) and building automation;



•Inventory levels in distribution channels; and

•
Changes to energy, fire, security, health care, safety and environmental concerns and regulations.

2010 compared with 2009

Automation and Control Solutions (“ACS”) sales increased by 9 percent in 2010 compared with 2009, primarily due to a 6 percent increase in organic revenue driven by increased sales volume and 3 percent growth from acquisitions.
•
Sales in our Products businesses increased by 11 percent in 2010 primarily reflecting higher sales volumes in our businesses tied to industrial production (environmental and combustion controls, sensing and control, gas detection, personal protective equipment and scanning and mobility products), new product introductions and acquisitions, primarily Sperian.

•
Sales in our Solutions businesses increased by 6 percent in 2010 primarily due to the positive impact of increased volume, acquisitions, net of divestitures (primarily the RMG Group), net of divestitures, higher prices and growth in energy efficiency projects and industrial field solutions driven by orders growth and conversion to sales from order backlog. Orders and backlog increased in 2010 compared to 2009 primarily driven by energy efficiency projects, refining and natural gas infrastructure projects and growth in emerging regions.

ACS segment profit increased by 11 percent in 2010 compared with 2009 due to a 9 percent increase in operational segment profit and 2 percent increase from acquisitions. The increase in operational segment profit is comprised of an approximate 18 percent positive impact from higher sales volume, partially offset by an approximate 9 percent negative impact from inflation, net of price and productivity (including the absence of prior period labor cost actions, partially offset by the benefits of prior repositioning). Cost of goods sold totaled $9.3 billion in 2010, an increase of approximately $750 million which is primarily as a result of the factors discussed above.

2009 compared with 2008

ACS sales decreased by 10 percent in 2009 compared with 2008, primarily due to decreased sales volume (reflecting slower global economic growth) and an unfavorable impact of foreign exchange of 4 percent, partially offset by a 3 percent growth from acquisitions.
•


Sales in our Products businesses decreased by 11 percent, including (i) lower volumes of sales in each of our businesses (excluding the impact of acquisitions) and (ii) the unfavorable impact of foreign exchange. Softness in residential and industrial end-markets was partially offset by the positive impact of acquisitions, most significantly Norcross Safety Products.
•


Sales in our Solutions businesses decreased by 9 percent primarily due to the unfavorable impact of foreign exchange and volume decreases largely due to softening demand as a result of customer

deferral of capital and operating expenditures. Orders decreased while backlog increased in 2009. Decreased orders are primarily due to the unfavorable impact of foreign exchange, softening demand (as noted above) and order timing and delays. Higher backlog is primarily due to longer duration projects. The impact of these factors was partially offset by the positive impact of acquisitions, most significantly the RMG Group.

ACS segment profit decreased by 2 percent in 2009 compared with 2008 principally due to the negative impact of lower sales as a result of the factors discussed above and inflation, partially offset by lower material costs, reduced labor costs (reflecting reduced census, work schedule reductions, benefits from prior repositioning actions and lower incentive compensation) and the positive impact of indirect cost savings initiatives. In the fourth quarter of 2009 these factors more than offset the impact of lower sales described above resulting in a 5 percent increase in segment profit.

2011 Areas of Focus

ACS’s primary areas of focus for 2011 include:

•Products and solutions for energy efficiency and asset management;

•Extending technology leadership: lowest total installed cost and integrated product solutions;

•Defending and extending our installed base through customer productivity and globalization;

•Sustaining strong brand recognition through our brand and channel management;



•Continued centralization and standardization of global software development capabilities;

•Continuing to identify, execute and integrate acquisitions in or adjacent to the markets which we serve;

•Continuing to establish and grow emerging markets presence and capability;

•Continuing to invest in new product development and introductions; and

•Continued deployment of our common ERP system.
Elena Doom

Thank you, Jovan. Good morning and welcome to Honeywell's Second Quarter 2011 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.

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.

This morning, we will review our financial results for the second quarter, as well as share with you our expectations for the third quarter and the remainder of the year and, of course, allow time for your questions.

With that, I'll turn the call over to Dave Cote.

David Cote

Thanks, Elena. Good morning, everyone. As you saw from our press release, we had another outstanding quarter with better-than-expected performance, reflecting terrific execution and continued momentum in our key end markets, yielding EPS above the high end of the range. While there's some accounting geography complexity because of how we are required to account for discontinued ops and launch payments, and Dave will take you through all that, the overall results certainly speak for themselves, with sales up 15%, EPS up 40% and guidance again raised for the year.

Now before we get into the financials, I'm pleased to report on the progress that we've made in the quarter on the CPG divestiture. We have received regulatory clearance and anticipate the sales of Rank Group to close early in the third quarter. Dave will take you through more details in a moment, but we've transitioned to reporting CPG in discontinued ops, and we expect to smartly deploy the book gain and sales proceeds in the third quarter, which will deliver tangible benefit in 2012 and beyond. So our reported sales with the discontinued ops treatment of CPG were $9.1 billion, up 15%, reflecting continued advancement in our new products, high-growth regions, continued strength in end market and growth from acquisitions.

Segment margins expanded 70 basis points to 14.3% in the quarter, including $80 million of payments made to Aero BGA OE customers in the quarter. We had very robust new product launches. So if you look at the commercial and business and general aviation side whether it's Embraer, Gulfstream or Dassault, we have a number of large platform wins with high content.

We generated earnings per share of $1.02, up an impressive 40% over 2010, and free cash flow of nearly $1 billion in the quarter, reflecting 120% net income conversion. This really reinforces the quality of our earnings performance, volume leverage and continued cost controls while maintaining our growth investments and our seed planting for the future.

Given the strength of our first half financial performance and positive outlook for the second half, we are again raising our full year guidance. We now expect earnings in the range of $3.85 to $4 per share, reflecting a 28% to 33% increase in earnings over the prior year. We think this is top-tier performance amongst our multi-industry peer group, and we're confident in our ability to generate strong earnings growth again in 2012.

The momentum we've seen across our end market is being supplemented by the results of our seed planting initiatives throughout the portfolio. Aerospace's commercial aftermarket continues to see a robust recovery, with spares up 30-plus percent and R&O significantly outpacing flight hours. Further, we're seeing the resurgence of the commercial OE cycle, where we're smartly positioning the business to capture new business opportunities. That means having the latest innovative new products and technologies like our recently announced joint development with Safran to provide green electric taxi capabilities for new and existing aircraft, saving airlines millions in fuel costs and slashing carbon and other emissions created during runway taxi operations.

Our short-cycle businesses, including Advanced Materials, ACS Products and turbochargers, continue to show a healthy pace of growth; while our longer-cycle businesses, like Process Solutions and UOP, are starting to kick in with double-digit growth in the quarter. Further, our investments and focus in emerging regions continue to pay off. Sales in China were up over 20%.

Our strong quarterly performance and improved outlook for 2011 reinforce that our strategy is working. Having great positions in good industries, the power of One Honeywell, our consistent focus on improving every year in each of our 5 initiatives, it really makes a difference.

So with that, let me turn the good news over to Dave.

David Anderson

Thanks, Dave. Good morning, everybody, and thank you for joining us this morning. I'm going to start on Slide 4, and I'm going to take you through the summary of the results for the second quarter, first on a pre-disc ops basis, meaning that we would have reported as if CPG were included in our continuing operations and importantly, consistent with the way in which we guided for the quarter.

So as you can see on Slide 4, sales were up -- sales, rather, of $9.3 billion were up 14%, of course, reflects the high end of the guidance that we last communicated to you in early June. It reflects 7% organic growth with greater-than-expected growth in every region. The Americas were up 4% organic, Europe and Africa up 8%, and China, as Dave said, up 20%. Importantly, emerging markets remained very strong, with growth above 20% year-to-date on a constant-currency basis. Acquisitions contributed 3% growth, and currency yielded a tailwind of approximately 4% in the quarter.

Segment profit was up 20%. Segment margins, at 14.2%, reflected margin expansion in every segment when you exclude the Aero OE launch payments that Dave highlighted. And I'm going to take you through some of that detail when we get into Aero just -- but very quickly, in the quarter, Aero realigned milestones to better reflect business aviation -- several business aviation customers' platform development schedules.

Now as a reminder, and this is important when you look at the Honeywell financials, our Aerospace business does not capitalize payments to OE manufacturers to offset preproduction costs. Now as a result of the recognition of these expenses, we recorded about $80 million in the quarter, significantly higher than we guided for Aero this year. And importantly and strategically, it gives the company more capacity for R&D spend at a time when program funding, positive wins, et cetera, are a positive for the Aerospace business and the growth outlook for the commercial aerospace OE cycle.

And as I take you through the business highlights, you'll see that all of the businesses are doing a terrific job executing and delivering on those commitments and while continuing to invest for growth. And we'll take you through each of those business unit highlights in just a moment.

As Dave referenced, earnings per share of $1.02 were up 40%, above the high end of the guidance range. And just to refresh, we've guided on a same basis, $0.94 to $0.98 for the quarter. The upside in the quarter was driven by robust commercial aero aftermarket sales and another outstanding quarter from Specialty Materials.

Now a couple of items to point out. In the quarter, we recognized also $61 million in OPEB curtailment gains. These resulted from the resolution of ongoing labor negotiations and planned amendments in the quarter. We also had $7 million of net repositioning expense, which by the way, brings total repositioning to $51 million year-to-date, mostly covered with gains. And of course, consistent with our strategy to utilize onetime below the line gains, we're expecting to fully deploy the third quarter CPG sale gain with repositioning and other actions. And I'll touch on that a little bit later in our review this morning.

Lastly, on the income statement, the effective tax rate for the quarter was 27.6%, roughly in line with last year. Free cash flow, we were very pleased, $973 million, essentially equal to last year and an impressive 120% conversion of net income. And importantly, we absorbed higher CapEx investments, growth investments in the quarter primarily, as well as higher cash taxes versus the same period last year.

So in summary, another terrific quarter for Honeywell, better-than-expected earnings performance driven by higher commercial aftermarket sales, better conversion, primarily in Specialty Materials. And the below-the-line gains were more than offset by the recognition of the Aero OE payments and the repositioning actions we took in the quarter.

Turning to Slide 5. Now let's look at the same results on a post disc ops basis. Just quickly, we've recast both the second quarters of '10 and '11 to reflect the discontinued ops treatment of CPG. So the net earnings impact of CPG has been included in EPS from discontinued operations. And of course, sales, segment profit margin all reflect the change in both comparable periods. So in 2011, you can see $234 million of revenue from CPG, $22 million of segment profit has been removed and reported as net earnings per share from discontinued operations of $0.02.

CPG contributed roughly the same amount of net earnings in '10 as '11, so there's no change to reported free cash, and there is no change to reported free cash flow. So when you exclude CPG, you can see sales increased 15% year-over-year, 8% organic, and segment margins expanded 70 basis points year-over-year. And of course, going forward, we'll be reporting the financial results for Honeywell with CPG in disc ops and recast prior periods to reflect comparable performance.

So now let's move to each of the businesses, starting on Slide 6 with Aerospace. For the quarter, reported sales for Aerospace were up 6% to $2.8 billion. That would have been 9% in the absence of the increased launch contributions made in the quarter. We saw strong commercial aftermarket growth, partially offset by lower commercial OE sales due to the BGA OE payments I referenced earlier. Now the commercial OE sales decreased by 5%, but were up 11% excluding the OE payments made in the quarter.

We saw good growth from higher air transport, OE build rates and the continued uptake of airline selectables, along with the continued rebound in business aviation aircraft, driven by our strong positions in mid to large cabin classes. Think of that prominently as Gulfstream and Dassault. Going forward, we expect commercial aero OE growth of about 25% in the second half of 2011. Commercial aftermarket sales were up 21% in the quarter, reflecting strong spares figures, higher aircraft utilization rates and also RMUs.

Let me just take you through some of the details on the commercial aftermarket. Air transport regional flight hours were up about 5.7% in the quarter, and we're still expecting flight hours to grow about 5% for the full year, partly a function of robust delivery schedules, as well as the increased utilization of the existing fleets. Spares were particularly strong, up 30% in the quarter following a first quarter increase of 28%. In addition, we're seeing the older aircraft, which need more repair and overall, return to service and to the shop floor. R&O was up 15% in the quarter, more than twice the rate of flight hour growth.

Looking at the entire commercial aftermarket, the first half sales were up 17%. And we expect the second half growth rates to moderate somewhat, but we still expect mid-teens growth for the total commercial aftermarket in the second half of the year.

Defense and Space was up 1% in the quarter, and we're tracking ahead of plan year-to-date for D&S. We saw particularly strong international spares demand, partially offset by program completions, as well as anticipated program ramp downs. We continue to plan for further U.S. defense budgetary pressures in reprogramming, and we reiterate our forecast for low single-digit decline in D&S for 2011.

And again, while segment profit grew 2% in Aero, margins were significantly impacted by the BGA OE payments that I referenced earlier that we recognized. And if you exclude the impact of these payments on a year-over-year basis, margins would have been up 110 basis points to 17.1%. Now again, what that analysis reflects is the difference between launch contributions second quarter 2011 and the same launch contributions in the same period last year.

Let's now turn to Slide #7 and the Automation and Control Solutions, that's ACS. ACS, as you can see, sales were up 20% in the quarter reflecting 5 consecutive quarters of strong organic growth. Acquisitions, mainly Sperian, added 8%. Foreign exchange contributed 6%. The ACS continued to see good emerging market penetration, sales up over 25%, led by China and the Middle East. The ACS products businesses, up 23% reported, 6% organic, reflecting growth across the portfolio despite continued softness in the construction markets.

Now we continue to see good growth in industrial, the PPE business, the personal protection equipment business, gas detection, sensors controls, ECC, environmental controls. Further, the HVAC controls, security and fire products, pieces of ACS, saw meaningful improvements in June with an uptick in retrofit activity, driven primarily by new product introductions, energy efficiency, competitive wins and code requirements.

The Solutions business were up 16% reported, 5% organic, double-digit reported growth in Process Solutions as they execute on their large global project backlog. Building solutions is expected to accelerate to mid- to high-single digit organic growth in the back half of 2011 as some of the large wins from late 2010 we will begin to convert from backlog to revenue. And by the way, the backlog in the total Solutions businesses remained strong, up mid-teens organically in the quarter.

ACS sales conversion was about 15%. Segment margin up 40 basis points to 12.8%, reflecting strong volume increases in productivity, partly offset by inflation and the investment for growth across the portfolio. And significantly, you'll recall the investments that we began to make in this business since we saw the resurgence in the second half of 2010.

Now lapping these investments in the Sperian close last year, the ACS expects higher conversion rates in the back half of the year, however, partially offset by the dilutive impact of the recently announced EMS acquisition. We now expect full year margins for ACS to be up approximately 50 basis points over 2010.

Let's now transition to Slide 8, Transportation Systems. Again, when you look at Slide 8, CPG is no longer being reported within the Transportation Systems segment. In the quarter, TS sales were up 26%, driven by volume increases primarily in turbocharger sales. Turbo sales continue to outperform the industry macros. During the quarter, light vehicle production declined 3%, but importantly, European diesel penetration expanded 3 points compared to last year. However, turbo unit sales were very strong, up high teens in the quarter. This performance reflects the high win rate on both new gas and new turbo diesel platforms globally.

To put it in perspective, about 1/3 of the growth that we saw in the quarter came from favorable industry macros, 2/3 of that came from the benefit of successful new launches. Segment profit for TS was up 45% from last year. Margins expand 160 basis points to 13% due to volume increases in productivity. These were partially offset by higher commodity costs.

Let's now go to Slide 9, Specialty Materials, which obviously saw another terrific quarter. Double-digit growth in both UOP and Advanced Materials and high incremental sales conversion. Sales in the quarter for SM in total were up 12%. Segment margin was again very high at 20%. Now sales at UOP for the second quarter were up 12%. We saw a growth in services related to the ongoing front-end engineering and design work, or FEED, with Petrobras, as well as higher licensing and refining catalyst revenues.

We continued to see the recovery and benefit from the recovery in the global refining, as well as the continued strength in the petrochemical industries. UOP's book-to-bill ratio remains above 1, and we expect to see growth in UOP accelerate in the second half, driving full year growth towards the high teens.

Now Advanced Materials sales in the quarter were up 12%. We saw strong end market demand and tight supply conditions still prevalent in many of our key segments. We saw strong demand for caprolactam resins in Asia. Fluorine products were up 8%, driven by seasonally strong demand for refrigerants and tight industry supply conditions. And Specialty Products is also up an impressive 14% in the quarter with above-market growth led by penetration of new product introductions.

Segment margin for SM continued to be high in the second quarter due to favorable prices over raw material spreads, higher licensing revenues and also continued productivity, partially offset by investments that we're making for growth, as well as the continued investment in plant reliability and upgrades. And while we continue to expect a good year from SM, the margins, as we've said before, we don't believe are sustainable at this rate due to both seasonal factors, as well as supply-demand and commodity inflation factors, which we believe will adjust over the rest of the year.

Additionally, of course as a reminder, the acquisition of the phenol plant from Sunoco, which we expect to close imminently, will be dilutive to margin rates and will add about $250 million of sales to the second half with little to no profit this year.

So as a result of the better-than-expected conversion we again saw in SM, we're now planning SM margins over 18% for the full year, excluding the dilutive impact of the phenol plant acquisition in the third quarter. And again, this represents -- this acquisition represents about 250 basis points of improvement. I'm sorry, the margin rate that we're now forecasting for SM represents about 250 basis points of improvement over 2010 in spite of continued investments for growth and plant reliability.

Now let's go to -- having gone through the 4 segments for the second quarter, let's go to Slide 10, talk about an update for our end markets, what we're seeing and what we're expecting. Now given the pace of the strong second quarter performance and the economic uncertainty that still lingers, obviously, we'd like to take just a few minutes to just give you some more backdrop of how we're thinking for the remainder of the year.

So starting with Aerospace, the commercial spares and R&O continue to gain traction, with total commercial aftermarket up 7% sequentially from the first quarter. Airlines and business jet operators are catching up on deferred maintenance. We've seen a moderate amount of restocking of inventory at the airlines. The commercial OE backlog is robust, and we think will provide a tailwind for growth for 2012 and beyond in spite of the expected declines in defense. We're planning for low-single digit declines there, driven by further defense budget pressures and reprogramming.

For ACS, we continue to see the positive impact of industrial recovery supported by increases in manufacturing production. However, we're seeing growth moderate as we lap tougher comps in several businesses, including S&C, scanning and mobility and ECC, where they're already at or exceeding prerecession highs. The developed market external indicators continue to show softness in the commercial construction end markets for ACS though we've seen some improvement in residential construction, but we're still planning for a soft and slow recovery there. And in the emerging markets, we continue to see a plan for good organic growth.

For the ACS Solutions and UOP businesses, we're executing on large project backlog and obviously, wins to date. And these long-cycle businesses will continue to experience positive multiyear growth cycle, with book-to-bill ratios currently above 1.

And SM's Advanced Materials business is benefiting from a healthy global end market. The growth in profitability, however, as I've said earlier will moderate as supply-demand conditions and price to raw spreads stabilize while volume growth will still be robust.

And lastly, for the global automotive outlook, we see production rate stabilizing after several initial adjustments from the Japan earthquake which affected numbers earlier in the year. However, we expect turbocharger sales growth to continue to outpace the industry macros, given the success of new launches. However, we expect the rate of growth to moderate as production schedules and diesel penetration rates level off.

So with that backdrop, that summary backdrop, let's go to Slide 11 and talk about first half to second half comparison. What we're showing here in the bars are the actual and forecasted first and second half 2011 sales growth rates for each of the major businesses. These are intended to highlight the expected linearity in each of the businesses. We've broken out the estimated impact also, as you can see, from acquisitions as well as foreign exchange. So you can see the organic growth acceleration and deceleration across the portfolio.

And what stands out clearly is -- on the slide, is Defense and Space with the anticipated decline there, the continued strength in commercial Aero, continued good organic growth in ACS Products and Solutions, slowing growth as we talked about in TS in the back half of the year with tough year-over-year comps and finally, very strong growth planned in UOP and Advanced Materials. And you can see for Advanced Materials, we've adjusted that for the phenol plant acquisition in the second half to give comparability on a half-over-half basis.

Let's now go to Slide 12 and talk now about translating that outlook in terms of outlook for financial performance in the second half. So we expect continued good organic growth in the range of 5% to 8% compared to 9% in the first half, and total sales growth in the range of 9% to 12%. We expect a slight tailwind from foreign exchange with the euro in the range of $1.35 to $1.40 and a favorable impact from net M&A.

Now we had strong pricing and productivity in the first half, growing segment margins 90 basis points over 2010 levels. We expect the second half sales conversion will be slightly lower due to tougher year-over-year comps, moderating price to raw spreads in SM and the dilutive impact of acquisitions.

Also it's important to provide you with an update on our tax rate assumptions. You'll recall the first half tax rate was slightly higher than our usual ongoing rate of 26.5%. And there's always obviously variability from quarter-to-quarter, but we're planning for about 26.5% for the full year with the various planning initiatives yielding a slightly more favorable rate in the second half.

And lastly, we're well on our way to achieving our full year target of 795 million weighted average fully diluted shares. During the quarter, we deployed $500 million to share repurchases, and it puts us on track to achieve the roughly $1 billion in share buyback that we're planning for the full year.

So with that framework for the second half, let's go to Slide 13, quickly review our third quarter sales outlook. In total on Slide 13, we're planning for company sales in the range of $9.1 billion to $9.4 billion, up 12% to 15% from the third quarter. We talked about many of the drivers for our businesses, including Aerospace and ACS and SM, those are all consistent themes. One item we're pointing out on this slide is we anticipate third quarter sales in TS to be sequentially lower as a result of seasonal summer shutdowns at the European OEMs, which is consistent with our view also of stabilizing diesel penetration and production rates. And you'll recall last year in the third quarter, we had abnormally high production rates in the third quarter with lower-than-normal seasonal shutdowns at the European OEMs.

Slide 14, the third quarter earnings guidance. Let's take a moment now to review our third quarter EPS guidance, which we've reflected as a [indiscernible] from our strong second quarter operational performance. So we'll start with the $1.02 for the second quarter. Layering on our normal seasonality and the continued growth we're expecting, we're forecasting $0.04 to $0.08 higher operating earnings. And as I mentioned earlier, we're also expecting pricing and seasonal headwinds from Fluorines products and normal summer shutdowns by the European automotive OEs affecting turbo. This translates into sequential, approximately $0.06, headwind.

Depending upon the timing within the quarter, we think the EPS dilution associated with the loss of CPG, as well as the dilutive impact of the EMS acquisition in the third quarter, will be in the range of $0.03 to $0.04 compared to the second quarter. Therefore, we'll arrive at an all-in third quarter guidance range of $0.96 to $1.01.

And now let's go to Slide 15 and now fold in the impact associated with the CPG sale. So consistent with what we've said previously, we'll book a gain of approximately $150 million after tax associated with the CPG sale. Think of that as $0.19. And we expect to fully redeploy that gain with repositioning and other actions in the third quarter. So for reporting purposes, the gain on the sale of CPG will be recognized in discontinued operations, while the redeployment of the gain will be netted in continuing operations. So to ensure there's no confusion, what we've shown you on this slide is both our all-in EPS guidance for the third quarter, as well as our continuing operations EPS guidance, both including and excluding the gain redeployment.

So moving to the right of the page, we're still planning to efficiently and accretively redeploy the proceeds of approximately $950 million. About $400 million will be allocated to the U.S. pension plan, or to the extent it offsets, the cash tax gain on the sale. This will bring our 2011 cash pension contributions to approximately $1.4 billion, and the funded status to approximately 90%, which significantly closes the gap on future funding obligations. The remainder of the proceeds will be directed to buybacks to continue to fund our share repurchase plan of approximately $1 billion for the year. Again, as Dave said at the outset, we're very pleased with the progress we've made on this transaction and expect it to close early in the third quarter.

So let's go now to Slide 16 and talk about the full year financial guidance there and some of the important updates, as well as the kind of the puts and takes, if you will, on that guidance. We've increased our sales outlook for the year importantly to $36.1 billion to $36.7 billion, and again, now assumes discontinued operations treatment for CPG for the entire year. So versus our prior guidance of $36.0 billion to $36.6 billion, we're now excluding roughly $500 million of previously assumed sales from CPG. The revised outlook reflects an increase in core revenues of approximately $600 million at the midpoint. It's an organic increase of about $150 million spread across all of our business segments, about $100 million from favorable foreign exchange relative to our prior guidance. And again, we're using the range of about $1.35 to $1.40, so think of that as the midpoint of that range. And about $350 million from announced acquisitions.

We've also shown the full year split between continuing and discontinued ops, with a gain residing in discontinued ops and the offset in continuing operations. Given the first half performance, the momentum we're seeing in the businesses, we're raising our full year 2011 earnings outlook by $0.05, so the bottom of the range moves from $3.80 to $3.85 and the top of the range moves from $3.95 to $4. It reflects a gross increase of $0.08 on the low end and high end as we're now absorbing approximately $0.03 to $0.04 of dilution from acquisitions that wasn't in our prior guidance. We're also confirming our free cash flow outlook for the year in the range of $3.5 billion to $3.7 billion prior to U.S. pension contributions, cash contributions.

Now in our revised outlook for the year, we think that we've maintained a balanced view given the uncertainties that surround the global macro environment and the volatility in the commodity and foreign exchange markets. While we expect UOP growth to accelerate further in the second half due to the project nature of UOP and the lumpy shipment timing, you could expect there could be some volatility quarter-to-quarter, and project timing could delay. On the other hand, on the positive side, we're encouraged by the rate of improvement and uptick on the commercial aerospace market. And if pricing holds, we believe SM could be even better than we've guided.

So as we sit here today, we feel we have a path to a high end of the outlook range. We're also appropriately covered on the downside should the economy slow and the euro move lower.

So just summarizing then on Slide 17. Obviously, another terrific quarter for Honeywell, reflecting continued positive momentum across the portfolio. The businesses are executing well, they're delivering on their commitments, and they're continuing, very importantly, to invest for future growth. Our order rates remain positive. But as we experience tougher comps in the second half of the year, the organic growth will obviously moderate. The commercial aerospace recovery is clearly underway. And as Dave mentioned earlier, we continue to see exciting new opportunities across the businesses to feed incremental growth. We're also pleased with how the mid to late cycle businesses are firming up, with the growth in UOP and ACS Solutions accelerating into the second half of the year. All in, it's shaping up to be a great year with every segment contributing to top and bottom line. And as a reminder, the third consecutive guidance increase that we've made for the year.

So in closing, just another backdrop to a positive quarter and outlook. We've just finished our strategic planning reviews with each of our businesses. We came energized about the outlook for 2012 and beyond. We saw evidence of sharp execution, the benefits from seed planting, productivity initiatives, tailwinds from the smart redeployment of gains we think will add to that as we redeploy smartly the CPG sale proceeds. And we're encouraged by the quality of the acquisitions that we've been able to complete and the accretion that those set up for us for 2012 and beyond.

So with that, Elena, let's turn over to you for Q&A.

Elena Doom

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

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