Honeywell International Inc. (HON) Q4 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
Honeywell's earnings call reveals strong financial performance and optimistic guidance. The company raised its 2025 EPS guidance for the third time, increased organic sales growth guidance, and anticipates margin expansion in 2026. Despite some uncertainties in the Q&A, such as unclear margin improvement specifics and R&D impacts, the overall sentiment remains positive. Notable factors include a strategic realignment, Quantinuum's monetization plans, and a focus on recurring revenue through Forge. These elements, coupled with strong growth projections in Aerospace and Building Automation, suggest a positive stock price movement in the short term.
Key Financial Performance
Orders Orders increased by 23% year-over-year, driving the backlog to over $37 billion. This growth was attributed to strong end-market demand and execution.
Sales Growth Sales grew 6% year-over-year, excluding the impact of the 2024 Bombardier agreement. This growth was driven by portfolio actions and investments in R&D.
Aerospace Sales Aerospace sales grew 11% organically, excluding Bombardier, driven by strong commercial aftermarket and Defense and Space demand. Commercial OE growth also accelerated due to alignment with customer build rates.
Building Automation Sales Building Automation sales grew 8% organically, supported by 9% growth in Solutions and 8% in Products. Growth was led by North America and the Middle East, with Europe also performing strongly.
Industrial Automation Sales Industrial Automation sales grew 1% organically, led by Warehouse and Workflow Solutions and Sensing, with a return to growth in Productivity Solutions and Services.
Energy & Sustainability Solutions Sales Sales declined 7% year-over-year due to lower petrochemical catalyst shipments caused by project deferrals. However, orders in UOP grew over 40%, indicating future recovery.
Adjusted Segment Profit Adjusted segment profit increased 23% year-over-year, or 2% excluding Bombardier, with a segment margin of 22.8%. This was driven by margin expansion in Building Automation and higher volumes in Aerospace.
Adjusted Earnings Per Share (EPS) Adjusted EPS was $2.59, up 17% year-over-year, or down 3% excluding Bombardier. Growth was driven by higher segment profit and a lower share count, despite a $0.24 headwind from taxes.
Free Cash Flow Free cash flow was $2.5 billion, up 48% year-over-year, or 13% excluding Bombardier. Growth was driven by higher operational income and collections, offset by higher cash taxes and interest payments.
Full-Year Sales Full-year sales increased 7% organically, or 6% excluding Bombardier, exceeding the high end of guidance by 2 points. Growth was driven by strong performance across segments.
Full-Year Adjusted Segment Profit Adjusted segment profit grew 11% year-over-year, or 6% excluding Bombardier, with a margin expansion of 40 basis points to 22.5%.
Full-Year Adjusted EPS Adjusted EPS was $9.78, up 12% year-over-year, or 7% excluding Bombardier. Growth was driven by higher segment profit and share repurchases.
Full-Year Free Cash Flow Free cash flow was $5.1 billion, up 20% year-over-year, or 7% excluding Bombardier, representing a 14% margin.
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Operating Highlights
New Product Introductions: Strong organic growth fueled by new product introductions, contributing 4% organic growth in 2025. Majority of growth came from innovation in new markets and offerings rather than upgrades to existing products. Launch of Helios, the world's most accurate commercial quantum computer, nearly doubles qubit count of its predecessor and sets a new standard for quantum computing performance.
Market Expansion: Strong end market demand across aerospace, defense, process and building automation. Growth in data center and healthcare end markets, particularly in North America and Europe. Expansion in refining and petrochemicals projects with over 40% orders growth in UOP.
Operational Efficiencies: Aggressive reduction in stranded costs related to spin-offs, enabling 6% to 9% earnings growth in 2026. Improved volume leverage and pricing execution driving margin expansion. Enhanced working capital efficiency, particularly in aerospace inventory.
Portfolio Simplification: Completion of Solstice Advanced Materials spin-off and planned Aerospace spin-off in Q3 2026. Reorganization into four segments: Aerospace Technologies, Building Automation, Process Automation and Technology, and Industrial Automation. Sale of Productivity Solutions and Services and Warehouse and Workflow Solutions planned for first half of 2026.
Quantum Computing Leadership: Quantinuum raised $840 million at a $10 billion valuation, launched Helios quantum computer, and partnered with NVIDIA to integrate AI supercomputing technology.
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Risk or Challenges
Aerospace Spin-Off: The planned spin-off of the Aerospace division in Q3 2026 presents risks related to execution, potential stranded costs, and the ability to maintain operational efficiency during the transition. There is also a risk of disruption to ongoing operations and customer relationships.
Process Automation Technologies (PA&T): Slower-than-expected growth in petrochemicals and refining markets, coupled with overcapacity and project deferrals, could negatively impact sales and profitability in the first half of 2026. The reliance on a second-half recovery adds uncertainty.
Catalyst Shipments: Delays in catalyst shipments due to project deferrals and overcapacity in the petrochemical market could impact revenue and profitability in the Energy & Sustainability Solutions segment.
Quantinuum Investments: Significant R&D and commercial investments in Quantinuum, while necessary for maintaining leadership in quantum computing, are expected to be a headwind to margins in 2026.
Industrial Automation: The Industrial Automation segment faces challenges from a lack of rebound in underlying end-market demand and headwinds from prior-year comparisons, which could result in flat or declining sales.
Economic and Market Conditions: Economic uncertainties, including inflation and material cost inflation, could impact pricing strategies and profitability across segments.
Supply Chain: While supply chain improvements are noted, any disruptions or delays could impact production rates, particularly in Aerospace and other long-cycle businesses.
Debt Reduction and Capital Allocation: The focus on debt reduction ahead of the Aerospace spin-off may limit flexibility for other strategic investments or acquisitions.
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Guidance & Outlook
2026 Organic Growth: Honeywell expects strong organic growth in 2026, driven by record backlog conversion, disciplined price execution, and momentum in new product introductions. This is expected to result in 6% to 9% earnings growth.
Aerospace Spin-Off: The Aerospace spin-off is expected to be completed in the third quarter of 2026, creating a new independent public company. Investor Day events for Aerospace and Automation are scheduled for June 2026.
Segment Reorganization: Starting in 2026, Honeywell will report four segments: Aerospace Technologies, Building Automation, Process Automation and Technology, and Industrial Automation. This reorganization aims to enhance strategic focus and operational agility.
Quantinuum Developments: Quantinuum launched Helios, a new quantum computer, and announced partnerships with NVIDIA and others to advance quantum computing applications. Significant R&D investments in Quantinuum will continue in 2026.
Building Automation Growth: Building Automation is expected to grow above mid-single digits in 2026, driven by data center and healthcare investments, with margin expansion of over 50 basis points.
Process Automation and Technology (PA&T): PA&T sales are expected to be flat in 2026, with a second-half recovery driven by LNG and refining projects. Margins are expected to remain flat due to material cost inflation.
Industrial Automation Outlook: Industrial Automation sales are expected to be flat or slightly down in 2026, with margin expansion driven by productivity actions and fixed cost reductions.
2026 Financial Guidance: Honeywell projects 2026 sales of $38.8 billion to $39.8 billion, representing 3% to 6% organic growth. Adjusted earnings per share are expected to grow 6% to 9%, reaching $10.35 to $10.65. Free cash flow is projected at $5.3 billion to $5.6 billion, with a 14% margin.
Capital Expenditures: Capital expenditures are expected to increase by $250 million in 2026 to support growth investments, funded by improvements in working capital efficiency.
First Quarter 2026 Guidance: For Q1 2026, Honeywell anticipates 3% to 5% organic sales growth, with adjusted earnings per share growth of 2% to 6%. Segment margins are expected to be flat to up 20 basis points.
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Shareholder Return Plan
Dividends: We deployed $10 billion to capital in 2025, including $3 billion to dividends.
Share Repurchases: We deployed $10 billion to capital in 2025, including $3.8 billion to repurchase 18 million shares.
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Key Q&A
Q:How is the margin progression expected to evolve for the total company in 2026?
A:Margins are expected to expand 20 to 60 basis points overall, with operational margins expanding 50 to 90 basis points. The first quarter will see a 20 basis point expansion, with sequential improvement throughout the year. The second half is expected to perform better than the first half. Honeywell's playbook of price, volume, and productivity will drive this expansion.
Q:What is the outlook for Aerospace margins in 2026?
A:Aerospace margins are expected to expand in 2026, driven by better pricing, abating acquisition integration costs, and improving supply chain conditions. Negotiations with original equipment manufacturers (OEs) are ongoing, and these long-term contracts are expected to positively impact margins in the future.
Q:What is the status of Quantinuum and its financial impact?
A:Quantinuum has filed a confidential S-1 and is progressing towards an IPO. Investment spending is increasing by $100 million year-over-year, totaling $250 million. Quantinuum has sufficient cash, and the company is investing in R&D to launch the next version of its quantum machine by 2027. The business is being prepared to stand alone as an independent company.
Q:What are the trends in process orders and their impact on revenue?
A:Process orders are strong, driven by capital spending in LNG and refining, with backlog up 15%. These long-cycle projects will contribute to revenue in the second half of 2026. However, there is weakness in catalyst demand and petrochemical automation offerings due to excess capacity in the market.
Q:How has Honeywell's pricing strategy evolved?
A:Honeywell has shifted to a more mature pricing strategy, considering persistent inflation drivers like labor costs, electronics prices, and commodity costs. Pricing is tailored by region and product, with a focus on preserving margins and volume. The company expects price growth of 3% to 3.5% in 2026.
Q:What is the vitality index and its role in Honeywell's growth?
A:The vitality index measures the percentage of revenue from new products. In 2025, it was approximately 4%. Honeywell aims to maintain this rate, focusing on ideation and customer collaboration to drive growth through new products.
Q:What is the status of stranded costs and their impact on margins?
A:Stranded costs from Advanced Materials have been neutralized in 2026. For Aerospace, stranded costs will be eliminated within 12 to 18 months, providing a tailwind for margins.
Q:What is the outlook for Building Automation and its growth drivers?
A:Building Automation is expected to grow mid-single digits in 2026, driven by connected assets and recurring revenue from the Forge platform. The penetration of connected assets is still low, providing significant growth potential.
Q:What are the trends in short-cycle orders and their regional performance?
A:Short-cycle orders performed well in the U.S., Meta, and India but were weaker in Europe and China, particularly in Industrial Automation. Overall, short-cycle orders are expected to grow high single digits in 2026.
Q:What is the status of portfolio actions, including the sale of PSS and Warehouse Automation?
A:Honeywell expects to sign deals for the sale of PSS and Warehouse Automation in Q2 2026. These actions simplify the portfolio, focusing on process, buildings, and industrial markets, and position Industrial Automation as a sensing and measurement business.
Q:What is the growth outlook for Aerospace end markets in 2026?
A:Defense and Space are expected to lead with high single-digit to low double-digit growth, followed by high single-digit growth in OE and mid- to high single-digit growth in aftermarket. Overall, Aerospace is expected to grow high single digits in 2026.
Q:What are the R&D investment levels and their expected impact?
A:R&D spending is at 4.8% of sales, considered the optimal level. The cycle time for R&D impact varies from 15-18 months for short-cycle businesses to 3-5 years for long-cycle businesses like Aerospace. Investments are expected to drive long-term growth.
Q:What is the role of Forge in driving recurring revenue?
A:Forge is central to Honeywell's strategy to increase recurring revenue. In Building Automation, it enables connected assets and ontology-based models, driving pull-through of products. Similar strategies are being implemented in Process Automation, with results expected in the near future.
Q:What is the exposure of Building Automation to data centers?
A:Building Automation's revenue from data centers is growing and is expected to exceed 5% of total revenue. This growth is driven by solutions in safety, environmental controls, and security.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the magnitude of margin improvement for Aerospace in 2026, the exact timeline for eliminating stranded costs in Aerospace, and the precise impact of R&D investments on short-cycle businesses. Additionally, they did not disclose the full penetration rate of connected assets in Building Automation or the exact financial impact of Forge on recurring revenue.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI
Aerospace Automation
Automation Investor
Automation Technology
Chair
Helios
Investor Day
Materials result
NVIDIA
PAT
Process Automation
Productivity Solutions
Quantinuum milestone
Services Warehouse
Solutions Products
Solutions Services
Space OE
Warehouse Workflow
Wins
Workflow Solutions
acceleration
backlog increase
cost reduction
count
debt
dynamic
expansion segment
flow agreement
focus
function Honeywell
investment Quantinuum
investment RD
leverage pricing
line level
majority
margin expansion
order backlog
quantum computing
simplification
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Honeywell's earnings call reveals strong financial performance and optimistic guidance. The company raised its 2025 EPS guidance for the third time, increased organic sales growth guidance, and anticipates margin expansion in 2026. Despite some uncertainties in the Q&A, such as unclear margin improvement specifics and R&D impacts, the overall sentiment remains positive. Notable factors include a strategic realignment, Quantinuum's monetization plans, and a focus on recurring revenue through Forge. These elements, coupled with strong growth projections in Aerospace and Building Automation, suggest a positive stock price movement in the short term.
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