Honeywell Technologies Emerges With 22% Margin Target and Accelerated Stranded Cost Elimination
2026 Guidance Update Call, June 8, 2026
Honeywell provided its first comprehensive outlook for Honeywell Technologies, the RemainCo entity that will remain after the Aerospace spin-off on June 29, revealing an aggressive timeline for stranded cost elimination and a clear path to 22% segment margins by year-end. The company expects to remove 75% of the initial $300 million stranded cost burden by the end of 2026, with full elimination targeted for the first half of 2027, a materially faster timeline than previously anticipated.
Chief Financial Officer Mike Stepniak reaffirmed the company's prior full year outlook for the combined entity while introducing a simplified reporting framework that removes pension income, Quantinuum results, and Aerospace from adjusted earnings. The company now expects Honeywell Technologies to deliver organic sales growth of 2% to 3% for the full year, accelerating to 3% to 5% in the second half, with adjusted earnings per share of $4.05 at the midpoint.
Stranded Costs Coming Out Faster Than Expected
The standout development from the call was Stepniak's disclosure that Honeywell has reduced its day-one stranded cost estimate to less than $300 million and will eliminate roughly 75% of this total by year-end. "The teams and I also have been very focused on the elimination of stranded costs, and I recently shared that we have reduced our estimate of these costs on day 1 to less than $300 million, a roughly $0.38 impact to full year earnings. And I am pleased to share that roughly 75% of this total will be held by year-end, a sharp acceleration from where we began," Stepniak said.
The remaining 25% will be eliminated through broader adoption of shared services and additional simplification efforts beyond just addressing stranded costs. Stepniak emphasized that the majority of the cost reductions are already actioned through repositioning programs, noting that "100% confident we'll be able to eliminate that stranded cost and then some." The company plans to reset performance targets for business teams as these costs are removed.
Building Automation Continues Exceptional Run
Building Automation is delivering its seventh consecutive quarter of high single-digit growth, driven by new product introductions and share gains across all regions. May quarter-to-date orders are running at high single digits, approaching double digits, according to Stepniak. "Building Automation has been introducing new products at a very high rate for the last 2 years. We have a lot of exciting offerings coming into the market. We feel like we're taking share," he said.
The business is seeing strength across Europe, Asia, and China, with momentum in both products and solutions. Stepniak noted this represents the strongest order environment he has witnessed in his six years at Honeywell, attributing the performance to the company's expanding product portfolio and its maturing Forge connected offerings platform. Some customers are pulling orders forward to lock in pricing ahead of announced price increases, though this dynamic provides additional confidence in project pipelines.
Process Automation Backlog Finally Converting
Process Automation & Technology is expected to see a sharp acceleration in the second half as the company's record backlog begins converting to revenue. "This quarter, this backlog is starting to convert. Why do I say that? I start seeing cash, customers are paying us advances, we're mobilizing our people to go work on these projects and start the engineering work," Stepniak explained. The company sees significant pickup in project work coupled with double-digit growth in catalyst demand in the second half.
The catalyst business is showing signs of recovery after quarters of oversupply challenges. Improved crack spreads are driving customers to order more catalyst to improve yields and capture better pricing. Full-year catalyst sales are expected to show low single-digit growth, but the second half should see double-digit increases. Middle East conflict impact has been contained to $50 million to $75 million of revenue, with Stepniak expressing high confidence this headwind moves to zero in the second half absent further escalation.
Industrial Automation Outlook Upgraded on European and Asian Recovery
Honeywell raised its full-year organic growth expectation for Industrial Automation from down low single digits to flat, driven by unexpected recovery in Europe and Asia, regions the company previously expected to be headwinds. The improvement also reflects self-help initiatives under new leadership, including simplification efforts and supply chain improvements that are enabling better pricing and volume capture.
The business is benefiting from reshoring trends and should grow low single digits in the second half, with Stepniak expressing confidence in mid-single digit growth for 2027. The pure-play measurement and sensing focus is driving better operational performance, with the team introducing new products and taking advantage of structural tailwinds.
Portfolio Moves and Accounting Changes Simplify Presentation
The guidance framework removes $0.85 of earnings per share from pension income, which Honeywell is excluding from adjusted results to reduce volatility and improve free cash flow conversion transparency. The company's approximately $5 billion overfunded pension represents real value, and management is actively evaluating monetization options, though Stepniak provided no timeline for action.
Honeywell is also removing Quantinuum from adjusted earnings following its June 4 initial public offering, a change that improves segment profit by approximately $300 million or $0.19 per share. The company will retain its stake for the foreseeable future, with Stepniak noting the business is well-positioned commercially and strategically, with a book value adjustment of more than $5 billion expected from deconsolidation.
The guidance assumes divestitures of Productivity Solutions and Services and Warehouse and Workflow Solutions close October 1, while the Johnson Matthey Catalyst Technologies acquisition is assumed to close July 1. These portfolio moves, combined with stronger underlying performance in Automation, largely offset each other in the second half.
Aerospace Trademark License Provides Partial Stranded Cost Offset
Honeywell Technologies will receive $146 million in segment profit annually from the Aerospace trademark license agreement, translating to $73 million or $0.09 per share for the half-year 2026 impact. The difference between this segment profit benefit and the $225 million cash payment Aerospace disclosed is due to accounting treatment governing license expense and income recognition. On a free cash flow basis, Honeywell Technologies receives $91 million in 2026, representing the $225 million cash payment prorated for half the year and net of tax.
Stepniak clarified the license amount was derived from fair market valuation with extensive third-party adviser input rather than negotiation. "We wanted to leave Aerospace in the best possible shape go forward, and that's just how the fair market value played out for trademark," he said. The trademark income will subside over time but provides near-term support as the company eliminates stranded costs and drives operational margin expansion.
Margin Expansion Path Becomes Clearer
Honeywell Technologies expects full-year segment margin expansion of 220 to 270 basis points on a reported basis, though operational margin expansion will exceed 100 basis points versus the 50 to 90 basis points originally guided at the beginning of the year. The company will exit 2026 at approximately 22% segment margin in the fourth quarter, with third quarter margins around 21% and second half margins averaging 21.3% at the midpoint.
The strong margin progression reflects rapid stranded cost removal, portfolio accretion from the PSS and WWS sales, and operational improvements from pricing, mix, and volume leverage on fixed costs. Stepniak emphasized that margin expansion is structurally driven by simplification efforts and operational frameworks focused on price realization, favorable mix, and fixed cost leverage, with the company implementing a multi-year margin expansion program.
Free Cash Flow Conversion Improving Structurally
Free cash flow guidance of approximately $2 billion for 2026 represents roughly 80% conversion of adjusted net income, with the majority expected in the second half at approximately 95% conversion. The first half was slower due to Middle East conflict impact and timing factors, but the second half should benefit from strong collections as demand materializes and projects convert.
On a pro forma basis, Honeywell Technologies expects to deliver 90%-plus conversion annually, with structural improvements from lower tax rates, aggressive debt paydown reducing interest expense, and improved portfolio composition. Stepniak suggested 100% free cash flow conversion is not out of the realm of possibility but declined to commit given moving pieces. The company is targeting leverage below 3x by year-end and plans to continue debt reduction in 2027.
The company reported first quarter 2026 earnings per share of $0.89 on the new Honeywell Technologies basis. Second half earnings per share is expected in the range of $2.20 to $2.35, up 22% to 31% year-over-year. Guidance does not reflect the planned 1-for-2 reverse stock split approved by shareholders, which will take effect June 29 concurrent with the Aerospace separation.