Steve Tusa – Analyst, JPMorgan
And then Dave, one last question following up on Scott’s question about buybacks. When you think about kind of the reticence to buy stock back at this stage given the prior experience and just worried about buying closer to peak, I mean how do we think about that in terms of your relative valuation and the relative attractiveness of your stock? Because I mean it doesn’t seem like the stock is holding up as well as it should in these pullbacks, and so does the mindset change if they’re not giving you – even though we’re kind of in a tough economic time if people aren’t giving you the relative credit, does the mindset change?
Dave Cote: No, not really. I would say, going back to what I said before we’re going to stay opportunistic. We have a lot of faith in our ability to continue growing and I think we certainly demonstrated that again this quarter. And when it comes to both repurchases and M&A we’re going to stay opportunistic, and having money gives you opportunities. Once the money’s gone the opportunities aren’t there anymore. So we’re going to continue to drive really strong earnings growth especially versus our peers with or without a buyback. And it’s always an opportunity for us.
Operator: Our next question comes from Nigel Coe of Morgan Stanley.
Nigel Coe – Analyst, Morgan Stanley
Thanks, good morning. It sounds like buybacks are a hot topic this morning. So I won’t go there but I do want to switch to the ’15 framework if you’d like, and thanks for the detail – it’s really helpful. And I guess the top-line beat will be to understand about the macro, but – should we think about your margin expansion and what you can control. And obviously, this year is very strong, with a fairly weak-ish top line year-to-date. But next year, based on the restructuring pipeline, do think you can be in line with the 70 bps long-term framework, or do you think you can do better than that? Or how should we think about the OM next year?
Dave Cote: Well first of all, Nigel, same thing – not even a rose petal?
Nigel Coe – Analyst, Morgan Stanley
No, no, Dave – great quarter.
Dave Cote: Not even a splash of toilet water, something?
Nigel Coe – Analyst, Morgan Stanley
I’m splashing away here.
Dave Cote: Well first off it’s too early for us to declare. We’re in the middle of a planning cycle and we just don’t do that. So in December is when we talk about it, but overall I think you can expect something that’s consistent with our five-year plan because as you recall, in the five-year plan we were pretty conservative on what we expected over five years from the global economy. I guess fortunately and unfortunately – the fortunate side is we planned for it that way so we’re prepared. The unfortunate part is it’s turning out that way. We kind of hoped that there might be a nice surprise at some point. But we’ll talk a lot more about it in December on Tom’s call. What date is that call?
Tom Szlosek: December 16.
Dave Cote: December 16 and we’ll talk about it more then. But you can expect something that’s consistent with our five-year plan where you’ll look at it and go, oh, they’re still on track.
Nigel Coe – Analyst, Morgan Stanley
Okay, that’s fair, thanks Dave. And then one of the real hallmarks of Honeywell over the past decade has been growing top line while keeping fixed costs flat or in some cases down. This year SG&A’s been growing quite a bit ahead of sales and I’m wondering, there’s obviously a lot of moving parts in SG&A and COGS but how much of that increase in SG&A is driven – and I’m thinking here about initiatives like HUE?
Dave Cote: Well quite honestly I don’t really look at the SG&A line all that much. So I should describe it more as how I do look at it. On the sales side we have been adding feet on the street when you look at high-growth regions and that’s one of the reasons that you’re seeing such good performance there, because if you have great products and services and one guy covering a country you’re just not going to sell as much. You’ve got to have somebody who can be out there and represent.
I do know on the G&A side, that’s going down because a lot of that is part of our functional transformation – so you think about Legal, Finance, IT, HR. All that stuff is going down consistent with functional transformation. So all the stuff that we’ve talked about is continuing to happen and I suppose we can get a better SG&A answer for you.
Elena Doom: I’m happy to help out with that.
Nigel Coe – Analyst, Morgan Stanley
Okay, thanks. And just a quick one for Tom perhaps. The hedge on TS for next year, I believe that’s new — I don’t think you’ve hedged in the past so number one, is that new? And second, is there anything we need to think about in terms of hedge accounting and sensitivity to certain rates?
Dave Cote: You are correct, it is new. And I’ll turn it over to Tom to discuss further.
Tom Szlosek: Yeah, I mean it’s at or around current rates now, Nigel. That’s essentially the way to think of it. So if you think about the current exchange rates for TS it essentially locks us in to what you see.
Dave Cote: But there’s no mark-to-market impact.
Tom Szlosek: No, it’s pure hedge accounting. If the mark on the hedge goes to singles translation or goes below the line outside of operating profits it serves to offset that.
Dave Cote: Because at the end of the day the change in the thought process has been, historically I’ve been pretty adamant about never hedging on translation just because I think over the course of twenty years you’re basically out the cost of hedging.
This year I’d say well, there’s always the possibility it could go the other way because these things are unpredictable. The prospects of it going to $1.10, $1.20 I think is very real and we looked at it and said it’s better to say, protect ourselves on half or so of our exposure and forego a bit of that upside just to protect ourselves on the downside in what could be a tougher macro again. And that was the thought process behind it and we were able to do it with a very good understanding of what the impact was month by month. So we were able to avoid having to use that mark-to-market approach.
Operator: Our next question comes from Steven Winoker of Bernstein Research.
Steve Winoker – Analyst, Bernstein Research
Hey, thanks, good morning. And Dave, I’m going to save you the pain of soliciting another compliment and just say good quarter to all the guys inside the SBGs, okay? We’ll leave it there.
Dave Cote: Thank you, Steve. As you’ve probably noticed I’m a very needy person.
Steve Winoker – Analyst, Bernstein Research
I do and as long as that makes you keep delivering I have no problem with that.
Dave Cote: It helps, it helps.
Steve Winoker – Analyst, Bernstein Research
So a few questions here. I guess one, I hate to keep coming back to the capital deployment but I also remember you often talking about telling investors “Now that we’ve gone through the turnaround some years ago what are we going to do with the cash? Don’t worry, we’re not going to blow the cash.” To the extent that you are ramping up M&A and Roger’s out there looking pretty aggressively I’m sure as well, what are kind of the minimum financial hurdles we should still think about for kind of mid- to large-size deals that you’re thinking about in terms of return on capital or otherwise – the stuff that Anne would actually let pass through, for example?
Dave Cote: Our hurdles are not going to change and they’re the same ones that we’ve used for 13 years, and that’s accretive in the second year, IRR clearly above the cost of capital – so think of it in the 11%, 12% range; and ROI above 10% in the fifth year and that’s all-in. So so that includes all the amortization and everything else so it’s a more difficult hurdle than people might think.
And at the end of the day regardless of the size we’ll be able to demonstrate 6% to 8% of sales as cost synergies because I don’t want to count on any sales synergies as you know, and I want to make sure that we stay disciplined as hell in terms of our deployment so we’re never going to panic. And the nice thing about it is we have a terrific organic growth prospect. So it’s not like I have to do M&A in order to deliver and that’s why we construct our five-year plan the way we do, so that you would look at it and go “Geez, these numbers are awfully good whether they do M&A or not.” But I never want to feel panicked and we don’t. So you can expect that whatever we do, whatever we do end up doing – whether it’s a bunch of small stuff, something big, various big things depending on how you want to classify it – it’s all going to meet that criteria.
Steve Winoker – Analyst, Bernstein Research
Okay. And Tom, a little bit about how you’re starting to think about pension. I’m sure you’ll go into more detail in December but given rates, direction and all of that, how should we think about sensitivities in the current accounting structure?
Tom Szlosek: Yeah, good question, Steve. If you drew the line today for pension expense considering even the most recent market developments and the low interest rate environment, we’d be about flat year-over-year for pension expense. As I said right now no foreseeable contributions from a cash perspective in the next couple years. Mark-to-market wise for 2014 as you know, if there is one we would do it in the fourth quarter. Right now again based on the assumptions as we understand them today, at least for our major plans – the US plans – they would not be marked-to-market.
Steve Winoker – Analyst, Bernstein Research
Okay. And if I can just sneak one more in, which is in UOP those CapEx investments, how do you see that continuing to play out through the next year?
Tom Szlosek: Well in terms of the quantity of the CapEx, we peak in 2015 in terms of the expenditure level. But as you know starting in the second half of this year we’ve got some of that capacity coming online this year mostly for the Solstice product portfolio and a little bit in the UOP catalyst. But those plants as we’ve said over and over again have pretty much hit the ground running at full capacity and so when you look at the growth rates you’re seeing in PMT, that 7%, that’s a reflection of being able to put that capacity to work right away.
Dave Cote: And the projects are on track which is always a great place to be when you’ve got full plants.
Operator: Our next question comes from Jeff Sprague of Vertical Research.
Jeff Sprague – Analyst, Vertical Research
Good morning. I’ve been brushing up on my accent – Dave, I think it was a pretty good quarter.
Dave Cote: I think it was wicked good myself.
Jeff Sprague – Analyst, Vertical Research
Just a couple little clean-up things. On UOP can you give us a sense — just following up on that last comment from Tom — what type of top line benefit do you foresee next year as those plants come on? I guess the question is kind of the cumulative revenue weight of that capacity as it turns on.
Dave Cote: I would say it’s still a little too early to declare on any of that – we’ll do more of that in December. I’d say you can expect that UOP’s going to continue to do well.
Elena Doom: And I’d add it’s a big driver for this incremental growth in UOP versus the growth rate we’re seeing in 2014.
Jeff Sprague – Analyst, Vertical Research
And then on international defense where you’re seeing some acceleration it sounds like, can you give a little color on countries or programs where that’s actually happening?
Tom Szlosek: Yeah, Middle East, Israel, Turkey, some of the regions that you might expect to have the funding and where there’s activity, a little bit in India as well.
Related Posts