Honeywell says China growth is slowing, and tariffs are expected to squeeze margins

Key Points
  • Honeywell reported better-than-expected quarterly profit on Friday and lifted its full-year forecasts for cash flow and margins.
  • Results were driven by strong sales of aircraft parts and warehouse automation products.
  • Honeywell is benefiting from a rise in global travel amid expanding economic growth, while its business that makes supply chain and warehouse automation equipment and software is riding an e-commerce boom.
An aircraft engine is being tested at Honeywell Aerospace in Phoenix.
Alwyn Scott | Reuters

Honeywell said on Friday it was seeing slower growth in China and that trade tariffs would squeeze margins and potentially cost it "hundreds of millions" of dollars in 2019.

Like most U.S. industrial companies, Honeywell is taking a hit from the ongoing trade war between Beijing and Washington, while China's economy shows signs of slowing.

Shares of the company, which makes everything from aircraft engines to catalysts used in petroleum refining, rose earlier in the day after better-than-expected quarterly results, but pared most of those gains by midday.

"We grew the Chinese market but not at the double-digit pace that we saw earlier in the year. So that's probably my number one area to watch," said Chief Executive Officer Darius Adamczyk. "As I look into 2019 ... I think the U.S. is going to be a very robust market again."

Honeywell also said it expected to see some pressure on its margins next year when additional tariffs on Chinese exports could go into effect, raising the company's costs in "hundreds of millions" of dollars from "tens of millions" in 2018.

U.S. companies are putting in place measures, ranging from raising prices on products to increasing sourcing from countries other than China, to cushion the blow from escalating trade tensions.

"The hill gets steeper," Honeywell's Chief Financial Officer Greg Lewis said.

Honeywell lifted its full-year forecasts for cash flow and margins as it rode a boom in e-commerce driven warehouse investment and aircraft production.

The company has benefited from a rise in global travel that has driven record orders for jets, leading to robust demand for its avionics, braking systems and other aircraft parts.

Sales at the aviation unit, the company's biggest business, rose 10 percent to $4.03 billion. Margins expanded by 80 basis points to 22.1 percent in the third quarter ended Sept. 30.

The company has also taken advantage of a boom in e-commerce as it supplies warehouse automation equipment and software to customers such as

Sales in safety and productivity solutions unit, which houses the warehouse automation business, climbed 11 percent to $1.58 billion, while margins jumped 150 basis points to 16.6 percent.

Excluding items, Honeywell earned $2.03 per share, beating analysts' average estimate of $1.99 per share, according to Refinitiv data.

The company's revenue rose 6.3 percent to $10.76 billion, topping the consensus of $10.75 billion.

Excluding the divestiture of some businesses, Honeywell said its full-year earnings will be in a range of $7.95 to $8.00 per share.