Segment margins for the fourth quarter are expected to be up approximately 120 basis points with pro forma earnings in the range of $1.37 to $1.42 per share, up 10% to 15% versus the prior year. As a reminder, we’re still planning a full year of 2014 tax rate of 26.5%, so that implies the Q4 tax rate to be approximately 28.8%.
Our Aerospace sales on a reported basis are expected to be down approximately 3% reflecting the year-over-year absence of friction materials in the quarter. On an organic basis sales are expected to be up approximately 2%, and as a reminder, in the fourth quarter of 2013 Aero recognized a significant IP litigation settlement resulting in a royalty gain of $63 million in Defense and Space that was offset by OEM payments in BGA. Both of these items were included and therefore netted out in sales and segment profit at the Aerospace level last year.
In the fourth quarter commercial OE sales are expected to be up mid-teens on a reported basis, and that’s mid-single-digit excluding the year-over-year impact I mentioned from the higher BGA OEM payments. The growth is driven by the favorable trend in demand for high-value business jet platforms where we have significant new engine content.
Commercial aftermarket sales are expected to be up low-single-digit in the quarter with an improvement in airline and business jet repair and overhaul activity as evidenced by the increase we’ve seen in shop receipts. However this strength will be partially offset by more modest spares growth driven by declines in BGA RMU activity that I mentioned earlier. Defense and space sales are expected to be up slightly, excluding the impact of the royalty gain in the fourth quarter of 2013 that I discussed earlier.
In Transportation Systems we’re expecting sales to be approximately flat on an organic basis primarily due to challenging comparisons to prior year.
You’ll recall that in the fourth quarter of 2013 TS was up 15%. We’re expecting Transportation Systems to have good volume growth in the first quarter of 2015 driven primarily by new launches entering the market.
As for Aerospace margins we expect an increase of approximately 200 basis points in the fourth quarter driven by significant productivity improvements across the portfolio and commercial excellence. Continued focus on driving productivity and direct material costs and the benefits from functional transformation are helping us to support the growth investments we’re making in the business as well as to drive the improvement in profitability.
For ACS, sales are expected to be up approximately 4% on an organic basis, excluding an approximate 2% headwind from FX. We expect both ESS and BSD to grow in the low- to mid-single digit range on an organic basis, supported by the trends we’re seeing in our short-cycle order rates. This is also supported by continued growth in our projects backlog and the service bank in Billing Solutions that we mentioned earlier.
ACS margins are expected to be up approximately 60 basis points with continued benefits from productivity net of inflation and commercial excellence, while accelerating investments for growth in new product areas such as connected homes and in high-growth regions.
In PMT, sales are expected to be up approximately 2% on an organic basis. The strong and improving growth rates we have seen throughout the year across the PMT portfolio, including in the fourth quarter are being temporarily offset by the previously signaled decline in UOP sales for the fourth quarter in the range of 8% to 9%. And to remind you we had an exceptionally strong fourth quarter in 2013 for UOP where sales were up 17% organically – needless to say a difficult comparison.
On the other hand, a higher mix of licensing revenue in the fourth quarter will result in a tailwind to UOP and PMT margins.
In HPS, the favorable orders and backlog growth will support Q4 sales acceleration which will also carry into 2015. HPS margin expansion will also continue. In Advanced Materials we anticipate another quarter of broad sales growth. However Resins and Chemicals will continue to face lower margin rates exacerbated by planned plant outages and price raw pressures. Overall PMT margins in the quarter are expected to be up approximately 60 basis points versus 2013 driven by UOP and HPS.
Let me move to Slide 9 where I’d like to refresh everyone on our full-year outlook for 2014.
As you know we take a conservative view on sales expectations. This approach continues to serve us well because it forces us to also be prudent on our cost structure, so if sales grow better than our conservative expectations we tend to do very well. I think 2014 demonstrates this. Our sales are coming in a little better than where we planned whereas we’ve raised our EPS guidance three times during the year.
As Dave indicated we are taking EPS guidance up a third time, this time to a range of $5.50 to $5.55, up 11% to 12% over 2013 – so another year of double-digit earnings growth. This is our planning model and we’ll continue to follow it.
As you see on the page we’ve tightened our sales range to $40.3 billion to $40.4 billion, up approximately 3% to 4% versus the prior year. And as for segment margins we’re expecting the full year to be approximately 17% or up 70 basis points over 2013. Again, this puts us at or above the high end of the sales and margin guidance we shared with you last December.
The full year outlook by individual segment is similar to what we shared in July. Considering the performance year-to-date we continue to feel confident in the segment margins for each business: 19.5% for Aero, 15.0% for ACS and 18.0% for PMT – strong performance across the portfolio with every business contributing to the 70 basis points of segment margin expansion.
While there’s still work to do to ensure we deliver 2014 we have commenced our 2015 planning. On Slides 10 and 11 I’ll walk you through some of our key planning assumptions and initial thoughts by business.
While it’s still early, Slide 10 lays out some of our current views. From a macro perspective we’re not expecting much in terms of macro GDP growth, slightly north of 3%. As I said earlier we continue to be conservative in our planning and 2015 is consistent with that thinking.
Our short-cycle businesses represent about 55% of our sales and we’re expecting continued growth from new products and technologies in the short cycle. Examples include products derived from our Solstice, Molecules and PMT and our new platform launches in Transportation Systems. Our growth in 2015 will also be supported by continued favorable end market trends, the modest improvement in non-residential spending benefiting both the commercial and industrial businesses, and continued flight hour growth.
On the long-cycle side of our business, which represents the remaining 45% of our sales, we have good visibility into growth in 2015 based on one, the strong order rates; two, our robust backlogs; and three, the capacity from our new plant. We will benefit from the increased oil & gas investments globally, particularly in the downstream markets where the build out continues with both UOP and Process Solutions well positioned for growth.
Aero will also contribute to organic sales growth based on our expectations of a ramp up in new BGA OE platforms and the strong trend of international defense wins. In total, our long-cycle orders and service banks are up single digits for the year which will also drive higher sales in 2015.
So from a total of Honeywell perspective the strength in the US dollar will likely be a minor headwind in 2015. Our large exposure to the Euro is in Transportation Systems where we have locked in for 2015 already.
With that to give you a very rough sensitivity: if the Euro were to go to say $1.10 we would expect approximately $0.10 EPS impact for the full year, manageable exposure. And right now we’re at $1.28 but we will keep our eye on it.
Overall below the line items for 2015 remain stable. Even with the recent investment market slide and the continued low interest rate environment we are currently expecting pension income to be roughly neutral next year and continue to not expect a significant required contribution to any of our plans for the foreseeable future.
Finally we anticipate the continued benefits from our proactive restructuring activities to yield $125 million of incremental savings in 2015.
I’m now on Slide 11 which depicts our preliminary growth outlook by business compared to the expected growth in 2014. The colored arrows denote whether we currently see the growth rates improving, remaining steady – so growth similar to 2014 – or receding. Again, this assessment is based on our preliminary assessment of the key macro inputs and variables, our current orders and backlog, and the things we’re in control of from an execution perspective.
As you can see there are a lot of green arrows again driven by our great positions in good industries, new product introductions, high-growth region expansion and confidence in our long-cycle backlog.
In Aerospace on the commercial side, ATR OE growth is expected to be similar to 2014 but with an improvement in the second half of 2015 and into 2016. This is based on the build rate schedules and ramp up in Airbus A-350 and other new platforms.
In BGA OE we expect the continuation of growth to outpace the market with strong shipments of new engines on new business jet platforms like the Bombardier Challenger 350 and Embraer Legacy 500. We are well positioned in the medium- to large-BGA segments which are expected to grow the most in the next five years.
Dave also referenced earlier our excitement around the launch of the new Gulfstream 500 and 600 platforms, with the first flight of the G500 scheduled in 2015 and shipments starting soon thereafter. We have been working with Gulfstream for some time in developing these products so we don’t expect to incur significant R&D-related expenses relative to these platforms that you normally might expect at the rollout of a new commercial platform.
These and other new platforms support the continued growth in our ATR and BGA installed base and service businesses. Of course the growth has to be profitable, so we also continue to focus on the cost side with planned cost productivity in direct materials and functional spending along with process improvements, which will further support further margin expansion in Aerospace.
The commercial aftermarket sales vary based on the quantity of flight hours and maintenance events, inventory levels, and the customers’ buying and inventory patterns. We anticipate that sales will grow slightly better than they have in 2014 with an expected improvement in airline repair and overhaul activity and higher engine maintenance events in BGA.
Defense and Space is expecting a modest sales increase, call it low-single digits, in 2015 based on the strength of the international business which represents about 25% of the portfolio. Our recent win rates support this outlook and we also expect the full sequester to remain in place with the US portion of the business stabilizing.
Finally, Transportation Systems is poised for continued growth in 2015 driven by significant new launches, modestly better European light vehicle production, and the acceleration of gasoline turbo penetration, particularly in the US and China.
For ACS we’re expecting similar growth and ESS to what we’ve seen throughout 2014. This growth will be led by new product introductions, further penetration in high-growth regions and continued non-res recovery. As a reminder, roughly 75% of the ACS portfolio serves commercial and industrial markets where we tend to be tied more so to retrofit activity than to new construction. So our portfolio is well positioned to capitalize on improvements in these areas.
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