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Why Honeywell’s Performance Materials Segment Margins Declined

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Performance Materials and Technologies in Q3 2018

In Q3 2018, Honeywell International’s (HON) PMT (Performance Materials and Technologies) segment was the second-largest contributor to HON’s total revenue. The segment’s contribution contracted 0.9 percentage points YoY (year-over-year) to 24.5%, from 25.4%. However, PMT’s revenues rose 2.7% YoY to $2.64 billion, from $2.57 billion.

The PMT segment’s revenue growth was primarily driven by continued growth in the demand for Solstice low global warming products. Many countries have made policies to reduce carbon emissions. As a result, companies are shifting to low global warming products to comply with government regulations. Order growth was also seen in the universal oil products and Honeywell process solutions business, building strong backlogs. Growth in process solutions short cycle products also helped the segment’s revenue growth.

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Net income and margins

In Q3 2018, the segment’s net income declined marginally by 0.5% YoY to $560 million, from $563 million, driven by unfavorable foreign currency translations. The segment’s revenue growth and flat net income resulted in the decline of the segment’s net income margin for the above reasons. The segment’s margin contracted 70 basis points YoY to reflect 21.2% compared to 21.9%.

Outlook

The segment’s revenue is expected to grow from the increase of backlogs, driven by new orders from clients. However, unfavorable foreign currency could have an adverse impact on the segment’s revenue, net income, and margin.

For indirect exposure to Honeywell, investors could consider the iShares Global Industrials ETF (EXI), which has invested 2.7% of its portfolio in Honeywell. The fund’s other holdings include Lockheed Martin (LMT), Caterpillar (CAT), and Deere (DE) with weights of 1.9%, 1.9%, and 1.1%, respectively, as of October 19.

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