Analysis: HON

Friday before the opening bell, Honeywell (HON) reported a top- and bottom-line beat with its second-quarter earnings results. Revenues of $8.808 billion (+18% YoY and +15% on an organic basis) exceeded expectations of $8.642 billion and adjusted earnings per share of $2.02 (+60% YoY) exceeded expectations of $1.94 per share.

On the release, CEO Darius Adamczyk commented, "Our strong performance in the second quarter took place in a recovering but challenging global environment. We are especially pleased to see a turnaround in several of our key end markets that were hardest hit by the pandemic, with commercial aerospace aftermarket and the UOP business returning to growth in the quarter. We are well positioned to capitalize on improving conditions as they unfold around the world and to execute on near-term growth opportunities across our portfolio, including in the warehouse automation, productivity, building products, and advanced materials markets."

Looking to some other firm-wide metrics, segment margin expanded 190 basis points to 20.4% with margin expansion seen across all operating segments. Meanwhile, free cash flow was $1.468 billion with a strong adjusted conversion rate of 103%.


Aerospace revenues of $2.766 billion (+7% organic sales) came up short versus estimates of $2.812 billion. Although segment margins expanded by 490 bps to 25.7%, driven by higher volumes and sales mix, segment operating profit of $710 million missed the $741 million consensus.

Within the segment, on an organic basis, sales declined 3% in Commercial Aviation Original Equipment, expanded 53% in Commercial Aviation Aftermarket, and contracted 10% in Defense & Space. On the release, management called out double-digit sequential and YoY growth in the commercial aero aftermarket driven by improved flight hours with business aviation flight hours now at 2019 levels. However, we are seeing a slow ramp in original equipment build rates and lower defense volumes.

Honeywell Building Technologies

Honeywell Building Technologies (HBT) came in strong, with revenue of $1.407 billion (+13% YoY organic) "driven by broad-based global strength across the portfolio," topping expectations of $1.353 billion. Meanwhile, segment margins expanded by 120 bps to 22.4% driven by higher sales volumes and segment operating profit of $315 million was higher than the $303 million consensus.

Within the segment, Products delivered 20% organic growth while Building Solutions grew 1%. On the release, management called out robust double-digit products sales and orders growth as well as strong demand for healthy building solutions - the building solutions services backlog was up over 30% YoY "driven by strong bookings in North America and Asia."

Performance Materials & Technologies

Performance Materials & Technologies (PMT) sales of $2.552 billion (+10% organic) outpaced expectations of $2.356 billion. Segment margins expanded by 190 bps to 20.8% and segment operating profit was $530 million, exceeding estimates of $445 million.

Within the segment, organic sales increased 8% YoY at UOP "driven by demand for process solutions products and thermal solutions, higher equipment volumes, licensing, and petrochemical catalyst shipments" as the backlog grew double digits. Honeywell Process Solutions dipped 1% organically on annual basis partly due to lower YoY "global mega projects," however, increased 6% sequentially "driven by strong thermal solutions, products and services demand." Advanced Materials was strong, increasing 30% in the quarter driven by "particularly strong demand for fluorine products."

Safety & Productivity Solutions

Safety & Productivity Solutions (SPS) was a bit light in the quarter with sales of $2.083 billion (+35% organic) missing estimates of $2.119 billion. Segment margins expanded by 20 basis points to 14.0%, with segment profit of $292 million missing estimates of $310 million.

Breaking down that solid 35% organic growth further, Safety and Retail organic sales jumped 25%, while Productivity Solutions and Services sales increased 38% with orders up triple-digits YoY. Warehouse and Workflow Solutions organic growth surged 57%, however, Advanced Sensing Technologies decreased 4% annually, though management noted a sequential demand acceleration in short-cycle gas detection and advanced sensing businesses.

Capital Allocation

On the capital allocation front, the company deployed $1.9 billion to dividends, capital expenditures, and share repurchases in the quarter. Over $1 billion worth of shares were repurchased, reducing the share count to 703 million. Honeywell also said the integration of the life-sciences focused Sparta, which was acquired in late December, is contributing to the company's software growth, with orders up over 30% in the first half of the year. Adamczyk also called out that "Sparta's SaaS customer base has grown double digits since year-end 2020, and Sparta ended the second quarter with a backlog of over $100 million."


Along with the second-quarter beat, management raised its outlook for the full year 2021. Management expects total sales in the range of $34.6 billion to $35.2 billion, representing a slight increase from the previous view of $34.0 billion to $34.8 billion. The organic revenue growth outlook of 3% to 5% was also nudged higher to 4% to 6%. The low end of Segment Margins outlook was bumped up, with management now targeting a range of 20.8% to 21.1%, up from 20.7% to 21.1%.

Regarding adjusted earnings per share, management raised its outlook to $7.95 to $8.10, up from $7.75 to $8.00 per share. At the midpoint, that earnings guidance represents a slight beat versus the $8.01 per share estimate coming into the print. Operating and free cash flow guidance was also bumped up with management now targeting operating cash flow of $5.9 to $6.2 billion (up from $5.8 to $6.1 billion) and free cash flow of $5.3 to $5.6 billion (up from $5.2 to $5.5 billion).

Looking at the drivers behind that 4% to 6% organic growth forecast, management sees a low single-digit decline in Aerospace being more than offset my mid-single digit growth in Honeywell Building Technologies, low single-digit growth in Performance Materials and Technologies, and double-digit growth in Industrial Productivity.

Within Aerospace, in Commercial, management is seeing a "robust business aviation aftermarket recovery" compounded by an accelerating air transport aftermarket recovery. In Space & Defense, lower U.S. and international volumes are being partially offset by growth in space.

In Honeywell Building Technologies, the team is seeing strong demand for products and management systems with 2Q orders up over 45%, momentum for healthy building solutions and a strong projects and services backlog that is driving second half building solutions growth as 2Q orders were up over 25%.

In Performance Materials & Technologies, the team is seeing outperformance across its advanced materials portfolio, strong demand for catalysts with 2Q UOP orders up over 25%, and strength in the company's short-cycle process solutions business with 2Q HPS orders up high single digits.

Lastly, in Safety & Productivity Solutions, the team noted "very strong growth in warehouse and workflow solutions," which are up 69% year-to-date organically, and solid 27% year-to-date organic growth in productivity solutions and services. They also called out a continued acceleration of short-cycle, however, we are seeing a softening of respiratory demand in the second half.

For the third quarter, management expects sales of $8.5 billion to $8.8 billion, which at the $8.65 billion midpoint is higher than estimates of $8.605 billion, with organic sales growth of 7% to 11%. Segment margins are expected to be 20.3% to 20.6%, representing a YoY expansion of 40 to 70 basis points. And earnings per share are expected to be in the range of $1.97 to $2.02, higher than estimates of $1.96 per share.

All in, despite some mixed results under the surface, this was an overall very strong quarter for the company. While shares are down after the release, we attribute this more to profit taking following a strong move into the print as shares of any name trading at all time highs into an earnings release demand perfection and while we did get a beat and raise quarter, it was objectively not perfect.

That said, while the aerospace market remains under pressure (though management does see the commercial aerospace market growing at a 21% compounded annual growth rate through 2024), all key end markets appear to be headed in the right direction and we continue to believe that Honeywell, which has gone through an incredible technological transformation, is the best industrial around. While same argue that the valuations are stretched on a historical basis, we argue the re-rating is well deserved and here to stay as what was once an old school industrial, is now more of a tech powerhouse enabling the digital transformation of its industrial peers.

Between products such as the cloud-based SaaS Honeywell Forge, healthy building solutions, automated warehouse products such as Intelligrated, the ability to offer unmanned aerial systems and urban air mobility vehicles (where Honeywell sees a $7 billion projected cumulative pipeline over the next five years), the optionality to acquire fast growing companies such as Spart that provides a SaaS customer base and exposure to the specialty pharmaceutical market, Honeywell is exposed to strong and rapidly growing end markets. Not to mention an incredibly strong balance sheet, robust free cash flow and growing backlogs that provide visibility and the means for immense R&D in revolutionary fields such as quantum computing.

As a result, we view weakness as buying opportunity and reiterate our One rating. We will of course have more to say on the quarter in today's Daily Rundown, which will be out shortly.