Honeywell International Inc. (HON) Earnings

Management highlights

### Portfolio Transformation Completion - Completed the spinoff of Honeywell Aerospace on June 29, 2026, and supported the successful IPO of Continuum (the quantum computing business spun off from Honeywell) in June 2026. Honeywell retains a 47% ownership stake, with plans to provide more details on this stake by early 2027. - Closed the acquisition of Johnson Matthews Catalyst Technology (JMCT) on July 17, 2026, two months ahead of the initial forecast for divestiture closures. The acquisition adds differentiated catalyst and process technology capabilities that expand Honeywell's install base and strengthens its position across refining, petrochemicals, and renewable fuels, with clear commercial and cost synergies identified. - The divestitures of productivity solution and services and warehouse and workforce solution are expected to close by early August 2026, reducing 2026 revenue by ~$400 million while simplifying the IA portfolio and improving focus on core growth. ### Long-Term Strategic Framework - Following the portfolio transformation, Honeywell is now a pure-play automation company focused on two core strategic pillars: growing its global install base, and monetizing the install base through outcome-based services, software, and innovative solutions. - The company is increasing exposure to high-growth verticals including data centers, LNG, renewable fuels, infrastructure, and life sciences, aligned with major industry megatrends. The business is shifting toward higher-margin annual recurring revenue from software and services. - Three-year long-term targets include: 200+ basis points of segment margin expansion from stranded cost removal, portfolio actions, and the aerospace trademark agreement, plus 60 basis points of annual operational margin expansion from pricing, mix, new product innovation, and productivity; reaching ~$12 adjusted EPS by 2029, representing over 10% annual growth; and achieving free cash flow conversion above 90%, with line of sight to 95% in H2 2026. ### Operational Highlights - Organic orders grew 16% overall, with double-digit short-cycle order growth across all segments, driving strong momentum heading into the second half. P&T orders grew 24% organically led by ~50% order growth in process technology, confirming the expected second half growth inflection. - Stranded cost removal from the portfolio transformation is tracking ahead of plan, with $20 million more in costs eliminated already than was forecast at Investor Day 2026. Approximately $60-65 million in remaining stranded costs will be eliminated by early 2027. - In IA, delivery performance has improved from the mid-40% range at the start of 2026 to the high 80% range on track to hit full-year targets, driving improved customer confidence and order growth.

Guidance

- **Full year 2026 organic sales growth guidance**: Raised to 3% to 4%, up from the prior guidance of 2% to 3%. Second half 2026 organic sales growth guidance is raised to 4% to 6%, up from 3% to 5% previously. BA is expected to deliver mid-single-digit-plus full year growth; P&T growth is expected to accelerate to high single digits in the second half; full year growth for both P&T and IA is now guided to low single digits, up from the prior guidance of roughly flat growth. - **Full year 2026 segment margin guidance**: Raised to 250 to 290 basis points of expansion, 25 basis points higher at the midpoint than prior guidance, driven by Q2 outperformance and faster-than-expected stranded cost elimination. Honeywell expects to exit 2026 with a segment margin above 22%. - **Full year 2026 adjusted EPS guidance**: Midpoint raised to $8.20, up from the prior midpoint of $8.00, representing ~27% year-over-year growth. - **Full year 2026 free cash flow guidance**: Maintained at ~$2 billion, with a 95% conversion rate, and the majority of free cash flow expected to be generated in the second half. - Management noted that current order momentum makes 2027 incremental prospects look stronger than they did at the June 2026 Investor Day, with upside potential to current outlooks if current trends continue.

Segment performance

Overall company: Organic sales grew 4% in Q2 2026, organic orders grew 16%, ending backlog increased 9%, and total company book-to-bill was 1.1. Segment profit increased 9% year-over-year, with overall segment margin expanding 100 basis points to 19%. Adjusted EPS was $1.95, up 10% year-over-year. Free cash flow grew year-over-year and sequentially to ~$500 million. 1. Building Automation (BA): Organic sales grew 9% year-over-year, with double-digit growth in both products and solutions, and strong performance across fire and services businesses. All regions delivered growth, led by Asia Pacific, Middle East, and Americas. Segment margin expanded 90 basis points to 27.1%, with volume leverage and pricing offsetting partial inflation headwinds. BA contributed 39% of total organic sales growth for the quarter. 2. Industrial Automation (IA): Organic sales grew 4% year-over-year, exceeding management expectations, driven by strength in solutions. Products grew slightly, with strong momentum in sensing and industrial measurement partially offset by weakness in utilities. Excluding businesses slated for divestiture, core IA grew 2% organically. Organic orders grew 11% year-over-year, with sensing and industrial management orders up over 20%. Segment margin expanded 90 basis points to 17.2%, as pricing and productivity gains more than offset inflation and unfavorable mix. IA contributed 26% of total organic sales growth for the quarter. 3. Process Automation and Technology (P&T): Organic sales declined just 1% year-over-year, materially ahead of original management forecasts. Project sales grew 5% driven by strength in gas, energy, and petrochemicals, offset by a 6% decline in aftermarket due to a tough year-over-year comparison from a large catalyst shipment in Q2 2025. Organic orders grew nearly 25% year-over-year, bringing the segment book-to-bill above 1.2. Segment margin contracted 180 basis points to 22.1%, driven by the expected unfavorable mix from lower catalyst volumes, which was still ahead of original margin outlooks. P&T contributed 35% of total organic sales growth for the quarter.

Risks & headwinds

- Geopolitical conflict in the Middle East has created modest collection headwinds and resulted in some lost revenue in Q1 and Q2 2026, though activity has largely normalized as of Q2 end. Management assumes the current situation will continue with no further escalation or improvement, but the situation remains fluid. - Persistent cost inflation remains a headwind, with ongoing inflation observed in electronics, memory, copper, and labor, requiring ongoing pricing actions to offset cost increases. - Catalyst sales in P&T have inherent quarterly variability driven by customer plant utilization and consumption patterns, which can create quarterly margin volatility even though full-year margins are predictable. - M&A activity is inherently unpredictable, and future acquisition synergies are not included in current long-term financial targets.

Analyst Q&A

• Q: What is the level of risk from Middle East conflict-related disruptions like force majeure, given the existing collection issues? /

  A: Management notes that the conflict caused modest, non-material collection issues concentrated in March and April, which have started to normalize. No major disruptions or material disputes are expected, with Q2 2026 orders growing over 50% in the region driven by large process technology projects. The current 2026 guidance assumes only modest revenue loss from the region, with activity having mostly resumed to normal. Management credits Honeywell's localized footprint (with all local employees remaining on the ground through the conflict) and favorable portfolio exposure to energy and infrastructure investment for the resilient performance. (213 characters) ---

• Q: What is the strategic priority for future M&A across segments, and what is the capacity for large deals in 2026? /

  A: The highest M&A priority is strengthening the industrial automation sensing and measurement portfolio. Second priority is targeted tuck-ins to accelerate growth in the identified high-growth verticals including data centers, semiconductors, and microgrids. Third priority is small tuck-ins for frontier technologies like fire detection and cybersecurity. Management noted that the 2026 priority is retiring debt from recent transactions, so meaningful M&A is expected to be focused on 2027 and beyond. Honeywell's balance sheet has capacity for $1-5 billion enterprise value deals, with Continuum stake monetization expected to provide additional dry powder if needed. No M&A is assumed in the $12 2029 adjusted EPS target. (352 characters) ---

• Q: What is the size and growth opportunity for Honeywell in data centers? /

  A: Beyond building automation's existing penetration in fire detection, security, and building management systems (which already make data centers ~5% of BA revenue), Honeywell sees growing new opportunities. Data center buildout is expanding globally beyond the U.S., benefiting Honeywell's global footprint. New opportunities include process automation for on-site power generation and energy storage, and sensing components for liquid cooling systems, which are increasingly required for high-density AI data center deployments. Management expects data center revenue as a share of Honeywell's overall business to continue growing over time. (301 characters) ---

• Q: What are the synergies from the JMCT acquisition, and how quickly can they be captured? /

  A: The core strategic value of the acquisition is complementary technology: JMCT has unique capabilities in hydrogen, methanol, and ammonia that UOP (Honeywell's existing process technology business) does not, and combining offerings creates a more complete solution for customers. The purchase price of 13x 2027 EBITDA only includes cost synergies, but management expects significant sales synergies from three sources: improved win rates from combined end-to-end customer offerings, cross-selling Honeywell software and services to JMCT's large install base, and new opportunities for Honeywell's process automation business through JMCT's existing customer relationships. (334 characters)