Honeywell International Inc (NASDAQ: HON) Q3 2025 Earnings Call dated Oct. 23, 2025
Corporate Participants:
Sean Meakim — Investor Relations
Vimal Kapur — Chairman and Chief Executive Officer
Mike Stepniak — Senior Vice President and Chief Financial Officer
Analysts:
Nigel Coe — Analyst
Julian Mitchell — Analyst
Stephen Tusa — Analyst
Scott Davis — Analyst
Amit Mehrotra — Analyst
Sheila Kahyaoglu — Analyst
Deane Dray — Analyst
Chris Snyder — Analyst
Joe Ritchie — Analyst
Andy Kaplowitz — Analyst
Nicole DeBlase — Analyst
Presentation:
Operator
Thank you for standing by, and welcome to the Honeywell Third Quarter 2025 Earnings Conference Call. This time all participants are in a listen-only mode. After the speaker’s presentation there will be a question-and-answer session. Please be advised that today’s call is being recorded. I would now like to hand the call over to Sean Meakim, Vice President of Investor Relations. Please go ahead.
Sean Meakim — Investor Relations
Thank you. Good morning, and welcome to Honeywell’s third quarter 2025 earnings conference call. On the call with me today our Chairman and Chief Executive Officer, Vimal Kapur, and Senior Vice President and Chief Financial Officer Mike Stepniak. This webcast and the presentation materials, including non-GAAP reconciliations are available on our Investor Relations website. From time to time we post new information that may be of interest or material to our investors on this website. Our discussion today includes forward-looking statements that are based on our best view of the world, and of our businesses as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings.
This morning we will review our financial results for the third quarter. Share our Guidance for the fourth quarter, and provide an update on full year 2025. As always, we’ll leave time for your questions at the end. I’ll turn the call over to Chairman and CEO, Vimal Kapur
Vimal Kapur — Chairman and Chief Executive Officer
Thank you Sean, and good morning, everyone. Honeywell continued its strong 2025 performance in third quarter. Growth in organic sales took another step up and finished ahead of expectations driven by our commitment to developing new solutions that solves our customers most challenging problems. Better top line result translated into earnings well above our guided range, while strong orders across the portfolio demonstrate early results of our focus on innovation.
Our excellent third quarter performance is powering another increase in our full year guidance. We are raising our 2025 EPS guide for the third time this year even as we incorporate the impact of impeding spin-off of Solstice Advanced Materials. Barely a year since we announced our intent to separate Advanced Materials today, we are a week out from Solstice first day of trading as an independent company. Our swift progress to this point demonstrate our ability to diligently execute carefully crafted work plans with speed and efficacy. We have the right resources in place to deliver on both our portfolio transformation and our businesses, financial, and operational targets.
We will carry the learnings and momentum from Solstice to next year’s separation of aerospace. As we look to our future as three independent companies in 2026, we are proactively planning to realign the structure of our Automation business at the beginning of next year to reflect how we will operate going forward. This move is another significant step in our simplification of Honeywell, which will provide the strategic focus, organizational agility, and tailored capital allocation to grow faster, and drive value for all our stakeholders.
Please turn to Slide 3 for the latest update of our separation. A couple weeks ago, Solstice held a well attended Investor Day in New York where David Sewell and his new management team presented a compelling vision for the new specialty materials company, and how its rich history and new independent strategy will unleash its growth potential, and unlock long-term stakeholder value.
A week from today, on October 30th, Honeywell shareholders will receive new shares of Solstice, which will begin trading as a separate public company. I want to thank the teams that achieved this important milestone well ahead of the original schedule to complete by early 2026. I’m extremely excited for the opportunities in front of Solstice, and I will be cheering on the success in the years ahead. As of planned separation of aerospace in the second half of 2026 approaches, our board has been intently focused on assembling a Honeywell Aerospace leadership team with the right mix of industry, company, and capital market experiences to maximize value for our customers, partners, employees, and our share owners.
We expect to make an aerospace leadership and headquarter announcements later this year. The separation of Aerospace brings the opportunity to further simplify Honeywell Automation. As a result, we have proactively designed a new, simpler structure aligned to the future of the business, which I will discuss in more detail in the next slide. As we seek to better position the future independent aerospace and automation companies for success. We have opportunistically completed transaction to simplify the legacy liabilities left on our balance sheet. During the third quarter, we entered into an agreement to divest all our Bendix asbestos liability on attractive terms for all parties.
We also terminated an indemnification and reimbursement agreement with residue in exchange for $1.6 billion in cash. In combination, these transaction resulted in net cash inflow and will simplify and de risk our balance sheet, providing the company with fewer administrative burdens and greater financial flexibility to focus on creating value for our core business. On our Slide 4, I will go over segment realignment in more details. We announced yesterday that we are planning to reorganize the Honeywell Automation segments into a simplified structure focused on cohesive synergetic business models. I’m pleased to take this next step in evolving Honeywell’s streamlined portfolio with the aim of unlocking incremental value and driving long term growth and margin expansion.
As such, effective beginning of first quarter of 2026, we plan to report four business segments, Aerospace Technologies, Building Automation, Process Automation and Technology and Industrial Automation. ahead of upcoming Aerospace separation this new structures serve as an elegant way to continue simplifying the RemainCo portfolio and align our external segment to the way we are increasingly driving our operation through consistent business models. Our differentiated approach underscores our ability to grow our install base in two ways, by selling mission critical products through channel and by delivering strategic projects for our customers. We then mine this install base by providing customers with high value outcome based solution with a combination of software and services.
The three RemainCo reporting segments will be organized into six strategic business unit, with each of our businesses aligned to our unified automation strategy, enabling us to solve enterprise level challenges and help our customers achieve new level of optimization with the Honeywell Forge platform, Aerospace reporting is unchanged ahead of separation in the second half of the next year. The new structure will allow us to better prioritize R&D efforts, capital expenditure, and go to market strategy with a growth mindset. Building Automation will continue to be a leading provider of unified Building Automation solution, delivering safer, more sustainable integrated buildings and infrastructure asset, and maintain its products and solution business unit structure.
Process Automation and Technology is combination of core Honeywell Process Solutions and UOP, the global leader in Process Technology. These businesses have developed powerful commercial synergies, enjoy leading position in process market globally with vast installed base, and share very similar business model characteristics. [Indecipherable] will report projects and aftermarket business units. Industrial Automation’s portfolio of products and solutions businesses include mission critical offering with proven reliability and tenured channel relationship positioning us to benefit from ongoing global reassuring thematics.
With this realignment following the separation of Aerospace next year, Honeywell will be a premier pure play automation company leading the future of automation through high ROI, outcome based solution for customers, across a large addressable set of markets. And as we continue our journey of transforming the portfolio, I would like to highlight another lever of value creation with the recently announced Quantinuum capital raise on Slide 5.
Four years ago we formed the world’s most advanced full stack quantum computing company. It has rapidly progressed quantum technology along the path to universal fault tolerant computing, a more than two decade pursuits, then it is soon to be realized. Technological progress has driven fundraising momentum. Less than two years after completing an equity capital raise at a $5 billion pre money valuation, the company announces September a second raise at double the prior valuation. As important as the capital contributions will be to advancing the development of quantum computing at scale, the collaboration with new shareholders such as Quanta and Nvidia in addition to others like J P Morgan, Amgen and Mitsui, may prove even more critical.
Quantinuum’s fundraising efforts have led to new partnership that will support the development of critical applications, for improving drug discovery, government and military, cybersecurity and encryption for large financial institutions. While we are tremendously excited about the future of the business, we recognize we are not the best long term owner, and it will eventually need its own capital structure to fully exploit its growth potential. As a result, Honeywell will seek to begin monetizing its stake in the company at the appropriate time in a manner that will create meaningful value for Honeywell shareowners. The most recent capital raise will sustain Quantinuum through that point in time.
I will now turn the call over to Mike to go through our third quarter results beginning on Slide 6.
Mike Stepniak — Senior Vice President and Chief Financial Officer
Thank you Vimal, and good morning to everyone joining us. Honeywell delivered exceptional third quarter results, again exceeding the high end of organic growth and adjusted earnings per share guidance. As we have done each quarter this year. Organic sales accelerated to 6% year-over-year led by return to double-digit growth in Aerospace and fourth straight quarter of high single-digit growth in Building Automation. Orders grew 22% organically from the previous year to $11.9 billion. While wins for long-cycle aerospace and energy projects led the way. The increase was broad based with order growth accelerating each of our four segments and an overall book to bill above 1.
The results are encouraging and an early demonstration of our focus on growth through innovative new products and the impact of our increased R&D investments. This impressive commercial performance pushed our backlog up to yet another record which positioned us well for future growth. Segment profit increased 5% from the prior year with segment margin meeting the high end of our guidance range led by ongoing margin expansion in Building Automation. Earnings per share in the third quarter was $2.86, up 32% from the prior year. Adjusted earnings per share was $2.82, up 9% year-over-year. A strong segment profit growth and lower effective tax rate more than offset higher interest expense.
You can find additional information on the year-over-year changes in the third quarter adjusted earnings per share in the appendix of our presentation. Third quarter free cash flow was $1.5 billion down 16% from the prior year because of a capital expenditures timing and modestly higher working capital to support our sales growth. We maintained our disciplined capital allocation approach in the quarter, returning $800 million to shareholders while committing $400 million to high return capital projects and completing two technology tuck-in acquisitions. Now let’s move to Slide 7 for a discussion on our third quarter segment performance.
I will provide a brief overview of results with additional commentary included on the right hand side of the slide. Aerospace Technologies grew 12% organically led by strength in both commercial aftermarket and defense and space. Commercial OE returned to growth as expected as our sales recoupled to the delivery rates of our large customers. Orders momentum continued with strong double digit orders growth across all three end markets and book to bill of 1.2 on a year-over-year basis. Segment margin decreased 160 basis points to 26.1% as commercial excellence and volume leverage were more than offset by cost inflation and acquisition related headwinds.
However, sequentially margin improved 60 basis points on strong quarter-over-quarter volume supported by improved supply chain performance. Industrial Automation sales returned to growth in the third quarter increasing 1% organically and exceeding our guidance range led by continued strength in our sensing business. Segment margin in Industrial Automation declined 150 basis points from the prior year to 18.8% as commercial excellence and productivity benefits were more than offset by inflationary pressures.
Building Automation again delivered high single-digit growth for the quarter. Organic sales increased 7% from the previous year driven by strength in both building solutions and building products. Regionally, North America and the Middle East led while Europe grew organically for a fourth consecutive quarter. Margin expanded 80 basis points year-over-year as we leverage our strong volume performance. Energy and Sustainability Solutions performed in line with expectation in the third quarter down 2% organically. Strong refrigerants performance in Advanced Materials was offset by licensing and catalyst delivery delays in UOP. Segment margin was flat versus the prior year at 24.5% as one-time more government reimbursement for past legal cost and the lift from margin, accretive acquisition offset costs and volume headwinds.
Let’s turn now to Slide 8 to discuss our updated outlook for the year. Our guidance for the year now incorporates the impact of Solstice separation from Honeywell at the end of October. The spin is expected to reduce 2025 sales by $700 million, adjusted earnings per share by approximately $0.21 and free cash flow by $200 million. Even with this impact, we’re again raising our 2025 organic sales and adjusted earnings per share guidance as we fully pass-through our strong third quarter segment profit and net income growth into our improved outlook.
On a like-for-like basis our free cash flow expectations for the year remain unchanged. Now I’ll turn to Slide 9 to provide more details on fourth quarter and full year guidance. We’re taking up full year organic sales growth guidance by 150 basis points from the midpoint of our previous range. We now expect growth of approximately 6% for the year, or 5% when excluding the prior year impact from the Bombardier agreement. This new outlook builds upon our strong sales momentum in recent quarters, while maintaining a pragmatic approach in the face of elevated geopolitical tensions and macro uncertainty.
Four year sales are now projected to be $40.7 billion to $40.9 billion. We anticipate a fourth quarter organic sales growth of 8% to 10% or 4% to 6% excluding Bombardier, which translates to sales of $10.1 billion to $10.3 billion. For the full year we now expect our company’s segment margin to be up 30 to 40 basis points or to be down 40 to 30 points excluding Bombardier. We’re anticipating modestly lower margin versus prior guidance, a result of reduced expectations for project licensing, catalyst shipments, and certain short-cycle Industrial Automation products which carry high incremental margins.
We are offsetting most of these headwinds by leveraging our strong volume growth and utilizing our accelerator operating model to implement productivity actions. In the fourth quarter, we expect segment margin to be in the range of 22.5% to 22.8%, up 160 basis points to 190 basis points or down 120 basis points to 90 basis points excluding Bombardier. We now anticipate full year earnings per share of $10.60 to $10.70, up 7% to 8% or up 5% to 6%, excluding the impact of both the 2024 Bombardier agreement and the impending Solstice spin-off.
Earnings per share in the fourth quarter is expected to be $2.52 to $2.62, up 2% to 6% from the prior year, or down 6% to 3% excluding the effects of Bombardier and Solstice. I will give additional details on changes to the full year EPS guidance later in my prepared remarks. We expect free cash flow between $5.2 billion and $5.6 billion, down 2% to up 5% excluding the effects of Bombardier and Solstice. We provide additional information on the changes in the year-over-year free cash flow in the appendix of the presentation. For the first three quarters of the year, we have deployed $9 billion for share repurchases, acquisitions, dividends, and capital projects. Going forward, we will continue to be opportunistic in allocating additional capital beyond debt, already committed to the highest return opportunities
Please turn to Slide 10 for details on our segment level outlook for the year. In Aerospace Technologies we are raising our expectations for full year sales growth to be low double digit range or high single digit when excluding the impact of the 2024 Bombardier agreement. We expect robust defense and space growth to continue as our supply chain is improving, and our global demand is benefiting from ramping national defense budgets. Commercial aftermarket sales should expand at a healthy rate with air transparent growth outpacing business aviation.
We anticipate commercial OE sales growth to accelerate for the remainder of the year as our shipments progressively realign to build schedules. For the fourth quarter we expect Aero organics sales to be up double-digits or high single-digits excluding Bombardier fed by Defense and Space. Commercial aftermarket growth should moderate from third quarter levels towards the longer term trend. Excluding the year-over-year impact of Bombardier commercial OE should grow faster than the prior quarter. We anticipate the second quarter marked the low point of aerospace margins, and fourth quarter margins will be comparable to the third.
For the full year margins are expected to be approximately 26% as volume leverage is more than offset by transitory integration headwinds from the case acquisition and cost inflation from tariff pressures temporarily outpacing pricing. In 2026 as pricing aligns with tariff cost OE shipments of electronic solutions recouple with build rates and integration costs from the case acquisition subside aerospace margins are well positioned to increase from 2025 levels. For Industrial Automation third quarter outperformance is compelling us to raise our full year top-line expectations for a second consecutive quarter from down low to mid single-digits to down only low single-digits.
Positive order growth in the third quarter was encouraging, though it was uneven within both long and short-cycle businesses such that it would not yet be prudent to confirm a sustainable upward trend. As a result of these mixed dynamics and a more challenging prior year comparison, we expect fourth quarter sales to be down low single-digits. Continued momentum in smart energy and steady performance in sensing and warehouse automation should offset modest demand headwinds in Productivity Solutions and Services and short term project pushouts in core process solutions.
We now expect to see margin contraction in Industrial Automation for the full year on increasingly unfavorable mix, with similar margin performance in the fourth quarter. In Building Automation, we continue to anticipate full year organic sales growth in the mid single-digit to high single-digit range supported by strength in the US, Middle East, and India and highlighted by robust demand in data centers, healthcare, and hospitality.
For the fourth quarter we expect sales to be up mid single-digits with momentum from strong order across both products and solutions. We anticipate a fifth consecutive quarter organic growth for products to be broad based across fire, BMS, and security. Solutions should continue to drive solid year-over-year growth in both projects and services. We expect margins for the full year and the fourth quarter to expand meaningfully as tailwinds from volume leverage and productivity actions continue. In Energy and Sustainability Solutions, we will limit our guidance commentary on Advanced Materials, given its pending separation as an independent company.
We are maintaining our full year ESS sales growth guidance of flat to up slightly, and anticipate fourth quarter sales to be down low single-digits year-over-year. A difficult macro backdrop for energy has weighed on our near term guidance, but the long term outlook remains strong. A third quarter increase in UOP orders of 9% is a signal of growing underlying demand from our customers and we have good visibility into projects orders strength continuing. On segment margin, we anticipate a meaningful fourth quarter contraction resulting in a roughly 1 point reduction for the full year. Lower high margin catalysts and licensing sales are offsetting commercial excellence and uplift from the LNG and Sundyne acquisitions. While cost inflation and market headwinds have presented a margin challenge in 2025, we’re taking meaningful steps to address ESS cost structure and expect to return to margin expansion in 2026.
Let’s move to Slide 11 to go through updates on our 2025 EPS work. Our earnings growth attribution comments separate out the year-over-year impact of Solstice spin-off at the end of the month which is anticipated to reduce adjusted earnings per share by $0.21. We now expect segment profit growth, both organic and contribution from acquisitions to add $0.63 to adjusted EPS for the full year. $0.10 better than our previous view as we fully flow-through better than anticipated third quarter operating results.
Third quarter outperformance versus the midpoint of our guidance range benefited from a lower effective tax rate and reduced below the line expenses, which were also benefiting the full year. Fourth quarter segment profit contributions to earnings are in line with our prior expectations as better aerospace growth offsets margin headwinds in Energy and Sustainability Solutions and Industrial Automation as discussed earlier. We anticipate reduced year-over-year below the line headwinds of $0.39 per share as repositioning will be at the low end of our prior range. Additional below the line details are available in the appendix of the presentation.
We now expect our full year effective tax rate to be 19% compared to 20% previously, adding $0.13 to adjusted earnings per share. To summarize, we anticipate 2025 adjusted EPS to grow at a mid single-digit rate when excluding the impact of the Solstice spin and Bombardier agreement.
Now I’ll hand the call back over to Vimal to finish our prepared comments on Slide 12.
Vimal Kapur — Chairman and Chief Executive Officer
Thanks Mike. Honeywell again exceeded its financial commitment in the third quarter as aerospace execution returned that business to double-digit year-over-year growth. With orders increasing in each of our four segments, we are getting good returns from dedicating the right level of resources to creating new solution to sell into our large global customer base. As just one example of our recent commercial success, Gulfstream recently announced that Honeywell’s engines and avionics will power its new super midsize GE300 business jet platform which will offer superior range, efficiency, and safety, to current compatible aircraft. This win is a testament of our abilities to stay at the forefront of leading edge technologies that matter most to our customers.
We are going into the final quarter of 2025 from a position of strength with operating momentum leading us to raise our guidance for the third time this year, even as a shifting micro environment requires a high level of agility to deliver these results. We are pleased by the performance of our acquisition since 2023, which continue to help us shape our portfolio and deliver higher growth and margins. Our commercial and operational momentum are building into 2026, which will be historic one for Honeywell. At the same time, we are operating with the same commitment to operational excellence that has defined Honeywell for decades.
While 2025 was affected by a number of headwinds including heightened economic uncertainty, incremental tariffs, and significant cost inflation, we have already begun taking action to position our aerospace and automation businesses to return to underlying margin expansion in 2026, as we prepare aerospace to begin its journey as a leading independent company next year, we expect to begin 2026 operating under a new structure that aligns to how we will deliver the future of our mission, giving us a running start post separation. Increasingly, customer across end markets face similar structural challenges such as skilled labor shortages, aging infrastructure, operational inefficiencies, and elevated energy and maintenance, as value creation shift towards harnessing the power of data to solve enterprise scale challenges and achieve new level of transformation we are streamlining our business units centered around cohesive business model for addressing these issues.
This segment realignment exemplify the effort to simplify our whole organization to focus on actions that creates the highest value for our stakeholders, reducing distraction from legacy liabilities, reviewing strategic alternative for parts of our portfolio that do not fit our business model, and acquiring complementary technology through bolt-on and tuck-in acquisitions all demonstrate our commitment to optimizing our business for future growth and value creation. And finally, Quantinuum’s recent capital raise and technological leap forward, delivering the promise of quantum computing, which the company will demonstrate in coming weeks, move Honeywell closer to realizing the value of its pioneering investment in the space.
With that, Sean, let’s take questions.
Sean Meakim — Investor Relations
Thank you. Vimal. Vimal and Mike are now available to answer your questions. We ask that you please be mindful of others in the queue by asking only one question and one related follow up. Operator, please open the line for Q&A.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your question.
Nigel Coe
Oh, thanks. Good morning everyone. Just wanted to maybe kick off with the 4Q margin for ESS. And I’m just doing the quick math here. It implies three to four points of decline year-over-year. So, I just want to make sure, number one, that, that math is correct and secondly is the Advanced Materials sources spin losing two months of that, is that having a material impact on that year-over-year?
Vimal Kapur
Good morning, Nigel. So, I would first highlight that within ESS, we see LNG doing extremely well in that business. So that we see really good project activity and that’s progressing well. Orders are up. What we see in the fourth quarter, we see a little bit of transitory, I would say, softness in margins, and that’s predominantly driven by mix. So, we see catalyst pushouts to continue. It’s affecting us in the fourth quarter. But generally I would say that ESS will normalize as we progress through 2026 back to its historical margins. And then on Advanced Materials, Advanced Materials was a little bit, I would say, accretive to the overall portfolio, but we’re working for that as we are setting up for 2026.
Sean Meakim
And Nigel, this is Sean. I would just remind you that the ESS business and UOP in particular typically has a seasonal build and both volume and mix favorability from 1Q through 4Q. If you recall, we had an unusually strong second quarter which we called out at the time. And so really that full year four quarter impact is not that severe. It’s really just a timing factor of where things came in a second quarter versus traditionally it’d be higher in 3Q and 4Q and so I’d emphasize just the timing is more of a factor than anything else.
Nigel Coe
Okay.And that’s actually my follow up question. Number one, did we see these pressures in 3Q and this government service, this government settlements maybe offset that. Just wonder if you maybe quantify that. And then do you think that this we see that mix shift in the back in the first half of next year or do you have that visibility at this point?
Mike Stepniak
So like I said, I think from the order activity standpoint, the order activity on big new projects is quite strong and we’ll continue to see that in the fourth quarter. From a revenue conversion standpoint, given these are big capital projects, they start converting to revenue probably in the second and second quarter and then second half. From a catalyst standpoint based on how customers order and ordering pattern, we see that improving next year as well, but don’t see that volume in the fourth quarter. And like Sean said, we usually see fourth quarter seasonality in the business and we didn’t see it this year because a lot of that volume came to us in the second quarter. So there will be a little bit of a gap in the fourth quarter as far as ESS margins.
Vimal Kapur
But all things said, Nigel, we expect ESS margin to expand in 2026. It’s a transitionary thing. At the end of the day, we are positioning the business for growth. The LNG segment is doing extremely well. Sundyne is doing extremely well. The overall projects as Mike mentioned is performing at orders rate of 8% growth in Q3. We expect solid Q4. So just really the translationary effect on the catalyst volume, and we think that will adjust in 2026 and we should have a more year more on expected lines with expanding our margins in 2026.
Nigel Coe
Okay, thank you very much.
Vimal Kapur
Thank you, Nigel.
Operator
Thank you. Our next question comes from the line of Julian Mitchell with Barclays. Please proceed with your question.
Julian Mitchell
Hi, good morning. Just wanted to start with the IA segment as it seems there’s a lot of different moving parts inside it. You flip to organic growth in Q3, I think for the first time in a couple of years. But it sounds like that will reverse in the fourth quarter. So just trying to understand is that a function of something moving the wrong way again in short-cycle lower or is it more a function of the large project delays in the longer-cycle business? And trying to understand on margins, I think there was the comment on similar margin in Q4.
So does that mean it’s a 19% ish margin and are there any one-time kind of headwinds on that as we’re thinking about next year?
Mike Stepniak
Yeah. So I would say from IA standpoint the orders are looking, I would say they were looking strong in 3Q but as you know, we have a lot of timing variability as far as the larger orders, especially in our warehouse automation business. So we’re monitoring that. But generally I would say vis-a-vis where we started the year, we feel much better about the business and the progression. So, from a margin standpoint, margin should grow sequentially in the fourth quarter. For IA, there aren’t really any one timers and the team is positioned to expand margins in 2026 as well.
So we have good visibility to margin expansion in IA going to 2026, backlog is improving. That’s giving us, I would say a, good leverage from a fixed cost standpoint and we have good visibility to pricing.
Julian Mitchell
That’s helpful. Thank you. And then just my quick follow up on the aerospace division. Maybe give us some update on where we stand on that destocking. Do you think it’s largely behind you now on the commercial aero side? And should we assume that that 26% margin rate again, that’s a good placeholder into next year barring violent swings in mix.
Mike Stepniak
Sure. So, super happy with how the Aero team performing in the first quarter. And I think you will see more good news from aero team as we go to fourth quarter and next year. I would say from a margin standpoint, full Q ’25 was probably the bottom, and you should continue to see sequential improvements on margins going to 2026, and on recoupling I think that’s largely behind us. I think commercial we will sequentially improve growth rates in the fourth quarter as well. And we should have a good print on aero in 4Q and going into 2026 the setup looks really good.
Orders again were extremely high, high double-digits. And our positive backlog, even with us outputting at these rates, continues to hang over $2 billion. So we still have a lot of, I would say to work with going to 2026.
Julian Mitchell
That’s great. Thank you.
Mike Stepniak
Thank you.
Operator
Thank you. Our next question comes from the line of Steve Tusa with J P Morgan. Please proceed with your question.
Stephen Tusa
Hey, good morning.
Vimal Kapur
Good morning Steve.
Stephen Tusa
Can you guys just talk about the trend in the BA margin? It’s been really strong in the last couple quarters. Maybe a tad bit weaker this quarter than we were expecting. What are the moving parts there and how do you feel about that going into ’26
Mike Stepniak
Steve? So super happy with the BA performance and I think as we talked about it before, BA team’s still has a lot of runway. As far as the 3Q, it’s really just a matter of mix between projects and products. Nothing I would say concerning there. And like I said sequentially, BA will continue to expand margins and in 2026 they have a really good, I would say really good setup and plan to continue to expand those margins. So, no concerns on that business?
Vimal Kapur
Yeah. Steve I would say. I was going to reinforce that the BA just reinforces the overarching Honeywell strategy on how we are pivoting our business through higher growth and margin expansion. So they are ahead of the curve on executing that and I’m very confident that other businesses are going to demonstrate the same. So, we do expect 2026 to follow the trend line you have observed in BA in 2025.
Stephen Tusa
And then just lastly on the profile of the income statement you guys made, obviously Solstice is coming out. You guys made these changes around the liabilities. Any thoughts around changing the pension accounting and how you’re reflecting that in your income statement? And is that something that could happen before aerospace goes or, that kind of reevaluation of the earnings format?
Mike Stepniak
So it’s definitely one of our agenda items as we go over, into 2026. We’re actively discussing it. We understand your concern, your thoughts on pension treatment. I would say just based on what you see, we’ll continue to simplify our balance sheet and how we report earnings to make sure you have a better visibility to cash flow conversion and EPS. So it’s definitely on our agenda, but we’re not ready to speak about it today.
Stephen Tusa
Yeah. Totally fair. Thanks a lot.
Vimal Kapur
Thank you.
Mike Stepniak
Thank you.
Operator
Thank you. Our next question comes from the line of Scott Davis with Melius Research. Please proceed with your question.
Scott Davis
Hey, good morning, guys.
Vimal Kapur
Good morning, Scott.
Scott Davis
I can’t. I know this can be a little bit lumpy, but I can’t remember a quarter with 22% order growth. I know you gave some per segment granularity, but was there any kind of discrete projects or anything big that generally moved the needle there or was it more across the board as kind of indicated in your slides?
Vimal Kapur
It’s more across the board, Scott. I mean, I think aero continues to do extremely well and they’re maintaining their momentum of continuing to increase their win rates and backlog. We had a strong orders growth in Building Automation, which flows a lot of that in the revenue stream, which you have seen. ESS orders growth were very good and also in IA.
So I would say that the order growth is across all segments. Long-cycle even stronger than short-cycle. But short-cycle is also growing, and I do expect the trend to continue in Q4. We don’t expect any substantial change in the trajectory. And that’s foundation of the growth oriented Honeywell we have been focusing on, over the last two years, and the effort we have put in in terms of our portfolio revitalization and focusing on the R&D spend on the right set of projects, you can see the early effect of that and I’m confident that things will get better as we go along into 2026.
Scott Davis
Okay, that’s helpful. And then switching gears slightly, you guys have done six pretty meaningful deals in the last two years and I think you previously said that was kind of 1% to 2% tailwind accretion and ’25 I believe somewhere in that ballpark. How does that flow-through on ’26 given what you’re seeing in the deal models? And it sounds like you’re a little ahead of the deal models on that group of transactions overall.
Vimal Kapur
Yes. Overall Scott, I would say the M&A deals are performing very well on an average over these are all the deals we did since I started are 12 times multiple, and we are either on TBA or ahead of TBA in majority of them.
And the foundational strategy we had that they will help us to grow our organic growth rates and margin expansion, they’re really working very well for us. So, I’m really encouraged. Maybe Mike, you want to add some specific feedback further on this?
Mike Stepniak
Sure. So like Vimal said, I think majority of those deals starting actually fourth quarter and going to next year is becoming organic for us from a growth standpoint. And like Vimal said, they’re continue to be accretive and TBAs are ahead of plan both on revenue synergies and on cost synergies. So, we feel really good about these acquisitions and how they fit the portfolio not only financially but also from a technology complementary standpoint.
Scott Davis
Okay, thank you fellows. Best of luck.
Mike Stepniak
Thanks Scott.
Vimal Kapur
Thank you.
Operator
Thank you. Our next question comes from the line of Amit Mehrotra with UBS. Please proceed with your question.
Amit Mehrotra
Thanks operator. Morning everybody. Vimal, I wanted to ask if you can just talk about the pricing strategy across the organization. You made a comment recently around pricing vis-a-vis, wanting to preserve or protect volume. I forgot the exact wording but it was something to that effect. And the question is really in the context If I look this year, revenue expectations are increasing, margin expectations are coming down a little bit. Fully understand there’s mix, there’s acquisition, there’s timing. But just wanted to understand if there’s maybe a pricing opportunity in the future that is not being exploited today either because of the R&D investments you’re making or maybe just more surgical focus on that post the spin-off of the businesses.
Vimal Kapur
So thanks Amit. I would say that fundamentally our strategy has been that we want to preserve our margins, while we keep our volumes to our expectations. So that has been the North Star we have been focusing on, and we have demonstrated that. For the most part, I would say that if I look ahead in 2026, pricing will become a good enabler for 2026 margin expansion. The only headwind we faced in pricing I’ll call out in 2025 was just a lag effect. It just the timing we learning something and we can lag 30 days, 45 days.
We are going to — we are not going to face that event in 2026. So overall I do remain confident that our model of getting our margin expansion through pricing while we protecting our volume is really working. And some of the margin expansion we have seen in this year, the margins have been more flattish. It’s primarily our focus has been growth and there are some transitional issue items which have happened at this point, whether it is tariff related, a cost hitting us in some pockets and M&A impact, etc. I’m very confident those are transitionary, and we’re going to see strong impact in our margin expansion into 2026.
Mike, anything to add?
Mike Stepniak
That’s exactly right. I mean we’ve been now with the teams focusing on 2026 pricing for about month and a half. We have a really good plan and strategy laid out across our segments and regionally, and based on everything I see, pricing will become stronger next year. And a lot of that is really driven just by tariffs stabilizing and that picture on inflation being much more clear, so the teams know what they need to deploy, etc. And then I would say if you just look at segments, aero was behind on price this year, it’s going to be a tailwind for them next year.
And other than that I think teams are generally caught up at this stage on pricing going to next year. So I’m really positive on price being better incrementally next year versus this year.
Amit Mehrotra
Okay, that’s very encouraging, thank you. And just one follow up related to that just on margins. You’re very clear about the trajectory for margin aero next year. If I look at, all the different pieces, they’re all kind of converging. Industrial Automation kind of sticks out a little bit in terms of structurally lower margins and Building Automation and aero. I think Vimal, you’ve talked about maybe some self help opportunity there, but maybe kind of talk about a little bit of the Industrial Automation margin opportunity from kind of the high teens where you see that maybe structurally the opportunity for that.
Vimal Kapur
Amit, I mean, I look at Industrial Automation margin expansion more the normal way. The VR as you have seen our segment announcement last evening. We are going to focus in Industrial Automation on primarily the product businesses, by taking process automation out and reforming a segment of Process Automation and Technology, I think this really positions us extremely well. And on Industrial Automation that simplification now allows us to focus on how we have executed well on a classical product business model and Building Automation. Really playing that playbook in Industrial Automation. So I do expect the pricing is going to play. We talked about it a few minutes back.
On the productivity side we will see positive effect of both fixed cost and variable cost productivity. On the variable side we feel confident on direct materials, and on the fixed side baselining the cost structure of the business aligned to the volume we are seeing, we feel good about that where do we sit today? So overall the setup is good for IA. I think what I’m really focusing upon is getting the business more to the higher growth momentum compared to what we are exhibiting right now. And at the right time we also start looking at the M&A optionality which we can bring to the business to further strengthen our portfolio.
Amit Mehrotra
Okay, very good. Thank you very much.
Vimal Kapur
Thank you.
Operator
Thank you. Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Please proceed with your question.
Sheila Kahyaoglu
Good morning, guys, and thank you for the time. Maybe first question on aerospace and I realize some of it will fall on the next leadership team which you’ll announce later this year. How are you thinking about the biggest opportunities and the implications for margins? As we think about ’25 being a transitory year with some headwinds and just the evolution of OE mix next year.
Vimal Kapur
I mean Sheila, I would say the transition which is occurring, we spoke about that in the last quarter too. We definitely see the OE mix becoming less intense compared to how we started the year. So that certainly is benefit to us. The tariff related pressure which came into the cast under the margin rates of aero would be less of a factor in 2026, and then the case acquisition which was acting as a headwind for our margins in 2025 would not be a factor. In fact, it will be a tailwind. So as I look ahead, all these factors, the confidence that we bottomed out in 25% margins in quarter two and then we are lapping towards 26% and higher. That direction is very clear and we are working hard to demonstrate towards that and better in 26% and beyond.
Sheila Kahyaoglu
Great. And then maybe if I could follow up on the aftermarket. Just nice acceleration there. And you called out, I think some moderation in Q4. What kind of surprised to the upside in the quarter on the commercial aftermarket, whether commercial aviation, business aviation, was it recurring revenue? If you could just talk about that.
Mike Stepniak
So I would say it was on the aftermarket that the growth is really broad based and a lot of that growth is the demand has been very stable. A lot of the growth is also driven by us being able to unlock our supply chain. And I hope that continues. But from a demand standpoint, going to fourth quarter, this business should grow high single-digits on a normalized basis. So demand is still strong across the industry and not really any particular drivers with the exception of supply chain performing much better than it did in the second quarter.
Sheila Kahyaoglu
Great. Thank you.
Mike Stepniak
Thank you.
Operator
Thank you. Our next question comes from the line of Deane Dray with RBC Capital Markets. Please proceed with your question.
Deane Dray
Thank you. Good morning, everyone.
Sean Meakim
Morning, Deane.
Mike Stepniak
Good morning
Deane Dray
Hey first I’d just like to say congrats to the team on getting Solstice to the finish line or the starting line depending on your perspective. We’ve seen multiple spins by companies and we know all the work that goes into it. So congrats.
Vimal Kapur
I appreciate the good words there Deane and may teams have worked really, really hard to get it done ahead of time. Our earlier estimate was Q1 ’26 and we pulled it forward by at least one quarter.
Deane Dray
Great. And then I missed the very beginning. Did you have any update on the process of looking at strategic alternatives for Productivity Solutions and Services and warehouse automation? Any update on potential timing?
Vimal Kapur
We kicked off the process of strategic review. I would say that in the Q1 in 2026 first quarter earning call, we should be able to provide you much more definitive path forward. I think the work is in progress, but I do not have any additional details I can share with you right now. So, we expect to when we are back in about 90 days, we should have a more information for you.
Deane Dray
Got it. And then on Industrial Automation and your comment, it’s more of a product focus. It was interesting to see the call out about sensors being in their fourth quarter of growth and you called out healthcare sensors in particular. So we’re now getting some additional insight into these businesses. Can you comment on the growth opportunity in the sensor business?
Vimal Kapur
Yes. If you look at our Industrial Automation look ahead, depending on what decision we make on our scanning and mobility business and warehouse automation business, the balance IA would be a product oriented business where products are critical, these are related to compliance, these products are certified, and that’s a fundamental model we really working towards. And we also are conscious that IA would also become a pivot towards our US onshoring growth. So all those items are in play as we are thinking ahead about the IA portfolio moving forward. No sensors is one of the biggest business there.
We have position in three verticals in sensors. Aerospace, medical devices, and industrial. And we have good run up to this business in 2025. We expect to maintain that momentum in 2026 and we expect to provide now more segments specific details in IA as we have simplified the segment, and as we have more conversations and discussions in the future I look forward to providing you more details. But fundamentally sensors is one of the key part of the business and we remain very optimistic on how this will perform in the times ahead.
Deane Dray
Thank you.
Operator
Thank you. Our next question comes from line of Chris Snyder with Morgan Stanley. Please proceed with your question.
Chris Snyder
Thank you. I wanted to follow up on the Industrial Automation portfolio and specifically I guess the realignment Slide from 15. I mean I guess it seems like the only, or I guess the only full business line being put into the new Industrial Automation segment is that sensing business, assuming warehouse and TSS get divested. So I guess maybe any color on how much revenue is kind of being maybe pushed out of the process solutions bucket into that new Industrial Automation portfolio. And then more broadly, how do you feel about the scale of this Industrial Automation business and is it an area where you could be looking to add assets? Thank you.
Vimal Kapur
Yeah. So, Chris, what we provided yesterday is more a culmination of our two years of work of simplification. We have been working on our portfolio, the spins work, we have done some of the strategic reviews, etc. I see the definition into three end markets, three verticals is an outcome of all of that. So we are pleased first of all, where we have landed ourselves. Buildings, process and industrial. Clearly buildings and process have higher scale today compared to industrial to your question. And but we are starting from a position from which we want to build upon in industrial from a — on a very product oriented business.
And we’ll continue to see more opportunities on how we strengthen that. So more to come there. This is. I first want to finish the unfinished task of the strategic review of scanning and mobility warehouse automation. We yet to complete that work. We also want to focus on organic growth return of Industrial Automation to its baseline. And I’m confident all that is going to take shape well in 2026. And then we’ll turn our focus into what else we need to add to this portfolio so that it becomes meaningful part of Honeywell.
Chris Snyder
Thank you. I really appreciate that. I guess maybe to follow up on Building Automation and specifically could you provide any color or comments on the data center exposure or opportunity there? Our channel checks we’re hearing more and more about controls needing to be more complex as the facilities get bigger and more complex. I think historically that has not been a big vertical for you guys. But it seems like you’ve done a better job breaking in there over the last year. So can you maybe talk about how you broke in and what is the opportunity? Thank you.
Vimal Kapur
Yeah. So increasingly, Chris, data center is becoming a bigger part of our Building Automation business, certainly not contributing to the growth rate to a certain degree. We are, I would say that our position in safety and security in data center is we are well positioned in that. You’re talking about more like 2% spend of data center is in this space. So spend wise percentages are small, but we have a good position in our fire safety systems, we have a good position in our security system. We are increasingly improving our position in the building management, and we continue to work our way through to gain more share in that market.
So certainly lot of hyperscalers, lot of REITs are becoming our customer. You may have seen a recent announcement also in our partnership with LS Electric on which we want to work more joint solution between electrical system and control system because we see a need for that by our customer. So we continue to improve our strategy, continue to improve our portfolio, and I remain confident that data center end market growth which is occurring will certainly help Building Automation business as additional, as a vector to maintain their growth momentum. It’s a — we were starting from a very low position, but we are certainly gaining more and more momentum there.
Chris Snyder
Thank you, Vimal.
Operator
Thank you. Our next question comes from the line of Joe Ritchie with Goldman Sachs. Please proceed with your question.
Joe Ritchie
Hey, good morning everyone. So look, Vimal, you’ve done a lot from a portfolio perspective. A lot has been announced. I like this new structure. I think it very neatly separates the different businesses. I guess the question is, as we head into the aero spin in the second half of ’26, could you potentially see additional announcements on the portfolio?
Vimal Kapur
I would say that as we mentioned few months back that based on the current portfolio assessment actions we have done, they are completed. But in a company of our size, you never say you are done. I think the portfolio revitalization is a continued activity. So I do expect us to do more additions which are bolt-on to our portfolio, which fits into the core of buildings, process, and industrial.
And I know if your question is there any more exit plan, are we feel good about the portfolio, what we have at the position we are today. These are all mission critical parts of automation. They drive very similar common outcomes like safety, operational excellence, reliability, and they really help us to gain a lot of mining install base through our forge platform. So that commonality we have achieved with lot of effort, and I don’t see that there will be any material change we want to make on what we own, but certainly like to consider adding more on a bolt-on basis or maybe tuck-in sometimes as we finish our spins. And we’ll continue to report to you if you make any progress on that.
Joe Ritchie
Got it. That’s super helpful. I know we’re bumping up on time, so I’ll just keep it to one. Thank you.
Vimal Kapur
Thank you, thank you,
Operator
Thank you. Our next question comes from the line of Andy Kaplowitz with Citigroup. Please proceed with your question.
Andy Kaplowitz
Hey good morning, everyone.
Vimal Kapur
Morning Andy.
Mike Stepniak
Good morning.
Andy Kaplowitz
Vimal maybe just back to the macro. Can you talk about the cadence of orders and revenue in Q3? Did you see any changes in your short-cycle businesses as the quarter shook out and here into Q4? And are there any particular trends you’re seeing by region? I think you mentioned some recovery is continuing in at least BA in Europe and China. But what are you seeing overall for Honeywell?
Vimal Kapur
I mean I would say the biggest change Andy, I saw was that we have growth across all parts of the world, that’s not happened for a while. We have a solid growth in US. Europe is performing more like low single-digit to mid single depending on the business. So Europe is returning to an accept[Phonetic] reasonable growth.
Middle East, India, does always very well for Honeywell. And China is more flattish for Honeywell, less aero. But if you add aero we are growing high single. So, I think that is a distinctive part of what we are observing. I think it’s a diversity of our portfolio in the end markets we serve is certainly helping us and our focus on growth and creating new products, mining install base, all those strategies are coming together, and I do expect I mentioned earlier a good Q4 also for the orders ahead. So it’s not a one time. We do expect to maintain this momentum for rest of the year.
Andy Kaplowitz
It’s helpful. And I know you mentioned lower energy prices have continued to lead to some delays in HPS and UOP. But as you just said, improved orders. Does it give you more confidence that these businesses are going to turn higher in ’26 and maybe what are your customers telling you about their CapEx expectations for ’26?
Vimal Kapur
I mean if you look at our ESS business, Andy, the positives are strong demand in LNG and gas. We certainly have lot of demand and order strength in those. We also see investments made by our customer for more localization of refining and petrochemical capacity. So we see investments made across in India and parts of Africa, parts of Middle East. So those continue there. The only lack of momentum we have seen which we discussed before was catalyst demand. I think it’s partly impacted by the oil price, partly impacted by some overcapacity, and we do expect things to settle as the year progresses in 2026. So long-cycle demand is strong. That is evident in our orders rate of ESS. I think short-cycle demand is more flattish, but we do expect it to recover during course of 2026.
Andy Kaplowitz
Thank you.
Sean Meakim
We’ll take one last question.
Operator
Thank you. Our final question comes from the line of Nicole DeBlase with Deutsche Bank. Please proceed with your question.
Nicole DeBlase
Yeah, thanks. Good morning guys. Thanks for fitting me in.
Vimal Kapur
Good morning, Nicole.
Nicole DeBlase
I guess I’ll just ask one since we’re running over time. I’m curious how short-cycle industrial trends kind of shaped up throughout the quarter. Did things kind of remain stable versus how you exited 2Q or any notable trends that you would highlight? Thank you.
Vimal Kapur
I would say short-cycle trends are actually better in 3Q versus 4Q, and we do expect similar trends as you have seen in our guide. We are not expecting any substantial change quarter-on-quarter. But we always remain prudent in our guide. We don’t know what we don’t know. So, but I think an overarching theme is very similar dynamics in the end markets which Honeywell serves in between quarter three and quarter four.
Nicole DeBlase
Got it. Thanks Vimal.
Vimal Kapur
Thank you.
Operator
Thank you ladies and gentlemen. That concludes our question and answer session. I’ll turn the floor back to Mr. Kapur for any final comments.
Vimal Kapur
Thank you operator. As always, I would like to express my gratitude to our shareholders, our customers, and all the Honeywell future shapers across the world, driving our stellar results in the quarter. And our path ahead is promising, and we look forward to sharing more with everyone in the quarters to come. Thank you all for listening, and please stay safe and healthy.
Operator
[Operator Closing Remarks]