Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in tables and graphs in millions)

The following Management Discussion and Analysis is intended to help the reader understand the results of operations and financial condition of Honeywell International Inc. and its consolidated subsidiaries (Honeywell or the Company) for the three months ended March 31, 2022. The financial information as of March 31, 2022, should be read in conjunction with the Consolidated Financial Statements for the year ended December 31, 2021, contained in our 2021 Annual Report on Form 10-K. See Note 3 Acquisitions and Divestitures of Notes to Consolidated Financial Statements for a discussion of acquisition and divestiture activity during the three months ended March 31, 2022.

BUSINESS UPDATE

We continue to monitor several macroeconomic and geopolitical trends, that have impacted our business, including changing conditions from the COVID-19 pandemic, the on-going Russia-Ukraine conflict, inflationary cost pressures, supply chain disruptions, and labor shortages.

COVID-19 UPDATE

The COVID-19 pandemic continues to impact our business operations, and our customers' and suppliers' ability to operate at normal levels. Disruptions in normal operating levels continue to create supply chain disruptions and inflationary cost pressures within our end-markets. We anticipate supply chain constraints, and the inflationary environment will continue during 2022. As such, we implemented short-term and long-term strategies to reduce the impact of current and future effects.

During the first quarter of 2022, governments around the world removed many restrictions on businesses and the general public. We continue to operate our manufacturing sites at normal production levels. As of March 31, 2022, we have returned over 90% of our non-manufacturing employees to the workplace. For our remaining non-manufacturing employees, we continue to utilize our procedures for a phased return of our employees to the workplace.

We continue to actively monitor regional COVID-19 outbreaks, and the related government restrictions and lockdown activities in the areas we operate. To date, the impacts of these actions have not been material.

See the section titled Review of Business Segments for additional information on the impacts of COVID-19, inflationary cost pressures, supply chain disruptions, and labor shortages, to our businesses.

RUSSIA-UKRAINE CONFLICT

In response to the Russian invasion of Ukraine, on March 9, 2022, we suspended substantially all of our sales, distribution, and service activities in Russia and Belarus (the Suspension), any future actions are unknown as we continue to evaluate the situation. During March 2022, we created a Ukraine Relief Fund, allowing employees to make donations to support organizations that are providing direct assistance to Ukrainians and those that are assisting them in the midst of this humanitarian crisis. Through March 31, 2022, employee contributions to this fund, along with the Company match, exceeded $1 million. To further support employees in the impacted region, we accelerated payroll payments to those affected by the conflict and the Suspension of our operations.

Due to the Suspension, sanctions, and deteriorating trade relations, during March 2022, we recorded $183 million of reserves against outstanding accounts receivable, contract assets, and impairments of other assets. The respective impacts to revenues, net income, net assets, cash flow from operations, or our global workforce are not material. For the year ended December 31, 2021, revenues from sales in Russia represented approximately 1% of our global revenues, while assets in Russia represented less than 1% of our total assets. Based on available information to date, the Company’s estimate of potential future impairments on our businesses in Russia would not be material with respect to the Company's consolidated financial position. As the conflict continues to evolve, existing conditions may worsen, or other impacts that are unknown at this time, may arise that could have a material adverse effect on our consolidated financial position.

The Russia-Ukraine conflict caused certain commodity prices to spike, adding to the inflationary pressures in the global economy. We considered the impacts of the conflict on oil and gas prices in our short-term and long-term strategies discussed in the above.

See Item 1A. Risk Factors for additional information on potential risks to our business.

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RESULTS OF OPERATIONS

Consolidated Financial Results

Net Sales by Segment

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Segment Profit by Segment

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CONSOLIDATED OPERATING RESULTS

Net Sales

The change in net sales was attributable to the following:

			Q1 2022 Versus Q1 2021
Volume						(6)		%
Price						7		%
Foreign Currency Translation						(2)		%
						(1)		%

Q1 2022 compared with Q1 2021

Net sales decreased due to the following:

• Lower sales volumes in our Safety and Productivity Solutions segment, and

• The unfavorable impact of foreign currency translation, driven by the strengthening of the U.S. Dollar against the currencies of the majority of our international markets, primarily the Euro, Turkish Lira, Australian Dollar, and British Pound,

• Partially offset by favorable pricing to offset higher direct and indirect material costs and higher labor costs.

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Cost of Products and Services Sold

Q1 2022 compared with Q1 2021

Cost of products and services sold decreased due to the following:

• Lower sales volumes in our Safety and Productivity Solutions business which resulted in lower direct and indirect material costs, and lower labor costs,

• Partially offset by higher direct and indirect material costs and higher labor costs in our other businesses, and higher repositioning and other charges.

Gross Margin

Q1 2022 compared with Q1 2021

Gross margin as a percentage of net sales decreased due to the following:

• Higher repositioning and other charges,

• Partially offset by favorable pricing.

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Selling, General and Administrative Expenses

Q1 2022 compared with Q1 2021

Selling, general and administrative expenses increased due to the following:

• Accrual of reserves against outstanding accounts receivable, contract assets, and impairments of other assets due to the suspension of substantially all of our sales, distribution, and service activities in Russia and Belarus.

Other (Income) Expense

									Three Months Ended March 31,
												2022						2021
Other (Income) Expense																					$	(319)					$	(442)

Q1 2022 compared with Q1 2021

Other income decreased due to the following:

• Prior year gain on sale of the retail footwear business, and

• Lower pension income.

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Tax Expense

Q1 2022 compared with Q1 2021

The effective tax rate increased, and was higher than the U.S. federal statutory rate of 21%, due to the following:

• Accrual of reserves against outstanding accounts receivable, contract assets, and impairments of other assets due to the suspension of substantially all of our sales, distribution, and service activities in Russia and Belarus with no corresponding tax benefit,

• Lower tax benefits for employee share-based compensation, and

• Incremental tax reserves and state taxes,

• Partially offset by the favorable resolution of certain foreign tax matters.

For further discussion of changes in the effective tax rate, see Note 6 Income Taxes of Notes to Consolidated Financial Statements.

Net Income Attributable to Honeywell

Q1 2022 compared to Q1 2021

Earnings per share of common stock–assuming dilution decreased, driven by the following:

• Higher repositioning and other charges, including the accrual of reserves against outstanding accounts receivable, contract assets, and impairments of other assets due to the suspension of substantially all of our sales, distribution, and service activities in Russia and Belarus, and

• Prior year gain on sale of the retail footwear business,

• Partially offset by lower income taxes.

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REVIEW OF BUSINESS SEGMENTS

We globally manage our business operations through four segments: Aerospace, Honeywell Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions.

AEROSPACE

Net Sales

						Three Months Ended March 31,
												2022						2021						% Change
Net sales																								$	2,749					$	2,632					4		%
Cost of products and services sold																								1,759						1,656
Selling, general and administrative and other expenses																								237						214
Segment profit																								$	753					$	762					(1)		%

															2022 vs. 2021
						Three Months Ended March 31,
Factors Contributing to Year-Over-Year Change									Net Sales						Segment Profit
Organic(1)																		5		%				(1)		%
Foreign currency translation																		(1)		%				—		%
Acquisitions, divestitures and other, net																		—		%				—		%
Total % Change																		4		%				(1)		%

(1) Organic sales % change, presented for all of our reportable business segments, is defined as the change in net sales, excluding the impact on sales from foreign currency translation and acquisitions, net of divestitures, for the first 12 months following the transaction date. We believe this non-GAAP measure is useful to investors and management in understanding the ongoing operations and analysis of ongoing operating trends.

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Q1 2022 compared to Q1 2021

Sales increased primarily due to favorable pricing and higher demand from our aftermarket products and services, as flight hours increase from pandemic lows, and commercial OEMs, partially offset by supply chain constraints.

• Commercial Aviation Original Equipment sales increased 11% (increased 11% organic) due to higher demand from air transport, partially offset by lower sales volumes in regional and business aviation.

• Commercial Aviation Aftermarket sales increased 28% (increased 28% organic) due to favorable pricing and higher demand in air transport and regional and business aviation.

• Defense and Space sales decreased 15% (decreased 14% organic) due to lower sales volumes in domestic and international defense.

Cost of products and services sold increased due to higher sales volumes of lower margin products, and higher direct and indirect material costs and higher labor costs.

Segment profit decreased due to higher sales volumes of lower margin products, partially offset by favorable pricing.

HONEYWELL BUILDING TECHNOLOGIES

Net Sales

						Three Months Ended March 31,
												2022						2021						% Change
Net sales																								$	1,429					$	1,358					5		%
Cost of products and services sold																								839						789
Selling, general and administrative and other expenses																								254						264
Segment profit																								$	336					$	305					10		%

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															2022 vs. 2021
						Three Months Ended March 31,
Factors Contributing to Year-Over-Year Change									Net Sales						Segment Profit
Organic																		8		%				14		%
Foreign currency translation																		(3)		%				(4)		%
Acquisitions, divestitures and other, net																		—		%				—		%
Total % Change																		5		%				10		%

Q1 2022 compared to Q1 2021

Sales increased due to favorable pricing, partially offset by the unfavorable impact of foreign currency translation.

• Sales in Products increased 12% (increased 14% organic) due to favorable pricing and higher demand for certain product offerings, partially offset by the unfavorable impact of foreign currency translation.

• Sales in Building Solutions decreased 4% (decreased 1% organic) due to lower sales volumes and the unfavorable impact of foreign currency translation, partially offset by favorable pricing.

Cost of products and services sold increased primarily due to higher direct and indirect material costs and higher labor costs, and lower productivity, partially offset by the favorable impact of foreign currency translation and higher volumes of higher margin products.

Segment profit increased due to favorable pricing and higher demand for certain product offerings, partially offset by higher direct and indirect material costs and higher labor costs, and the unfavorable impact of foreign currency translation.

PERFORMANCE MATERIALS AND TECHNOLOGIES

Net Sales

						Three Months Ended March 31,
												2022						2021						% Change
Net sales																								$	2,453					$	2,346					5		%
Cost of products and services sold																								1,601						1,591
Selling, general and administrative and other expenses																								342						321
Segment profit																								$	510					$	434					18		%

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															2022 vs. 2021
						Three Months Ended March 31,
Factors Contributing to Year-Over-Year Change									Net Sales						Segment Profit
Organic																		6		%				19		%
Foreign currency translation																		(2)		%				(1)		%
Acquisitions, divestitures and other, net																		1		%				—		%
Total % Change																		5		%				18		%

Q1 2022 compared to Q1 2021

Sales increased due to favorable pricing and the acquisition of Sparta Systems, partially offset by lower sales volumes and the unfavorable impact of foreign currency translation.

• UOP sales decreased 9% (decreased 9% organic) due to lower demand for new oil and gas projects.

• Process Solutions sales increased 5% (increased 7% organic) due to favorable pricing, higher demand for certain products and services, and the acquisition of Sparta Systems, partially offset by the unfavorable impact of foreign currency translation and the impact of the Russia-Ukraine conflict.

• Advanced Materials sales increased 14% (increased 16% organic) due to favorable pricing, partially offset by lower demand for fluorine products and the unfavorable impact of foreign currency translation.

Cost of products and services sold increased due to higher direct and indirect material costs and higher labor costs, partially offset by lower sales volumes and the favorable impact of foreign currency translation.

Segment profit increased due to favorable pricing and higher sales of higher margin products, partially offset by higher direct and indirect material costs and higher labor costs.

SAFETY AND PRODUCTIVITY SOLUTIONS

Net Sales

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						Three Months Ended March 31,
												2022						2021						% Change
Net sales																								$	1,744					$	2,118					(18)		%
Cost of products and services sold																								1,218						1,550
Selling, general and administrative and other expenses																								273						265
Segment profit																								$	253					$	303					(17)		%

															2022 vs. 2021
						Three Months Ended March 31,
Factors Contributing to Year-Over-Year Change									Net Sales						Segment Profit
Organic																		(15)		%				(14)		%
Foreign currency translation																		(1)		%				(1)		%
Acquisitions, divestitures and other, net																		(2)		%				(2)		%
Total % Change																		(18)		%				(17)		%

Q1 2022 compared to Q1 2021

Sales decreased due to lower sales volumes, the sale of the retail footwear business, and the unfavorable impact of foreign currency translation, partially offset by favorable pricing.

• Sales in Safety and Retail decreased 31% (decreased 26% organic) due to lower demand of personal protective equipment and the sale of the retail footwear business, partially offset by favorable pricing.

• Sales in Productivity Solutions and Services increased 13% (increased 16% organic) due to favorable pricing and higher demand, partially offset by the unfavorable impact of foreign currency translation.

• Sales in Warehouse and Workflow Solutions decreased 28% (decreased 28% organic) due to lower sales volumes as a result of supply chain constraints and timing of projects.

• Sales in Advanced Sensing Technologies increased 23% (increased 24% organic) due to higher demand and favorable pricing, partially offset by the unfavorable impact of foreign currency translation.

Cost of products and services sold decreased due to lower sales volumes, the divestiture of the retail footwear business, and the favorable impact of foreign currency translation, partially offset by higher direct and indirect material costs and higher labor costs, and lower productivity.

Segment profit decreased primarily due to lower productivity and lower sales volume, partially offset by favorable pricing.

CORPORATE AND ALL OTHER

Corporate and All Other primarily includes unallocated corporate costs, interest expense on holding-company debt, and the controlling majority-owned interest in Quantinuum. Corporate and All Other is not considered a separate reportable business segment as segment reporting criteria is not met for the activities reported with Corporate and All Other. The Company continues to monitor the activities in Corporate and All Other to determine the need for further reportable business segment disaggregation.

REPOSITIONING CHARGES

See Note 5 Repositioning and Other Charges of Notes to Consolidated Financial Statements for a discussion of our repositioning actions and related charges incurred in the three months ended March 31, 2022 and 2021. Cash spending related to our repositioning actions was $69 million in the three months ended March 31, 2022, and was funded through operating cash flows.

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LIQUIDITY AND CAPITAL RESOURCES

(Dollars in tables in millions)

We continue to manage our businesses to maximize operating cash flows as the primary source of liquidity. Each of our businesses is focused on increasing operating cash flows through revenue growth, margin expansion, and improved working capital turnover. Additional sources of liquidity include committed credit lines, short-term debt from the commercial paper market, long-term borrowings, access to the public debt and equity markets, U.S. cash balances, and the ability to access non-U.S. cash balances.

CASH

We monitor the third-party depository institutions that hold our cash and cash equivalents on a daily basis. Our emphasis is primarily safety of principal and secondarily maximizing yield of those funds. We diversify our cash and cash equivalents among counterparties to minimize exposure to any one of these entities. As of March 31, 2022, and December 31, 2021, we held $9.8 billion and $11.5 billion, respectively, of cash and cash equivalents, including our short-term investments.

BORROWINGS

Consolidated total borrowings were $19.4 billion and $19.6 billion as of March 31, 2022, and December 31, 2021.

			March 31, 2022						December 31, 2021
Commercial paper and other short-term borrowings						$	3,526					$	3,542
Variable rate notes						622						622
Fixed rate notes						15,231						15,314
Other						197						332
Debt issuance costs						(207)						(211)
Total borrowings						$	19,369					$	19,599

A source of liquidity is our ability to access the commercial paper market. Commercial paper notes are sold at a discount or premium and have a maturity of not more than 365 days from date of issuance. Borrowings under the commercial paper program are available for general corporate purposes as well as for financing acquisitions.

We also have the following revolving credit agreements:

• A $1.5 billion 364-Day Credit Agreement (the 364-Day Credit Agreement) with a syndicate of banks, dated March 24, 2022. Amounts borrowed under the 364-Day Credit Agreement are required to be repaid no later than March 23, 2023, unless (i) we elect to convert all then outstanding amounts into a term loan, upon which such amounts shall be repaid in full on March 23, 2024, or (ii) the 364-Day Credit Agreement is terminated earlier pursuant to its terms. The 364-Day Credit Agreement replaced the previously reported $1.5 billion 364-day credit agreement dated as of March 31, 2021, which was terminated in accordance with its terms effective March 24, 2022. As of March 31, 2022, there were no outstanding borrowings under our 364-Day Credit Agreement.

• A $4.0 billion Five Year Credit Agreement (the 5-Year Credit Agreement) with a syndicate of banks, dated March 24, 2022. Commitments under the 5-Year Credit Agreement can be increased pursuant to the terms of the 5-Year Credit Agreement to an aggregate amount not to exceed $4.5 billion. The 5-Year Credit Agreement amended and restated the previously reported $4.0 billion amended and restated five year credit agreement dated as of March 31, 2021. As of March 31, 2022, there were no outstanding borrowings under our 5-Year Credit Agreement.

We also have a current shelf registration statement filed with the SEC under which we may issue additional debt securities, common stock, and preferred stock that may be offered in one or more offerings on terms to be determined at the time of the offering. We anticipate that net proceeds of any offering would be used for general corporate purposes, including repayment of existing indebtedness, share repurchases, capital expenditures and acquisitions.

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CREDIT RATINGS

Our ability to access the global debt capital markets and the related cost of these borrowings is affected by the strength of our credit rating and market conditions. Our credit ratings are periodically reviewed by the major independent debt-rating agencies. As of March 31, 2022, S&P Global Inc. (S&P), Fitch Ratings Inc. (Fitch), and Moody’s Investor Service (Moody's) have ratings on our debt set forth in the table below:

			S&P						Fitch						Moody's
Outlook			Stable						Stable						Stable
Short-term			A-1						F1						P1
Long-term			A						A						A2

CASH FLOW SUMMARY

Our cash flows from operating, investing, and financing activities, as reflected in the Consolidated Statement of Cash Flows, are summarized as follows:

			Three Months Ended March 31,
			2022						2021						Variance
Cash and cash equivalents at beginning of period						$	10,959					$	14,275					$	(3,316)
Operating activities
Net income attributable to Honeywell						1,134						1,427						(293)
Noncash adjustments						537						239						298
Changes in working capital						(815)						42						(857)
Other operating activities						(820)						(730)						(90)
Net cash provided by operating activities						36						978						(942)
Net cash provided by (used for) investing activities						(10)						(1,304)						1,294
Net cash used for financing activities						(1,719)						(2,217)						498
Effect of exchange rate changes on cash						15						(14)						29
Net increase (decrease) in cash and cash equivalents						(1,678)						(2,557)						879
Cash and cash equivalents at end of period						$	9,281					$	11,718					$	(2,437)

Cash provided by operating activities decreased due to an unfavorable impact to working capital and a decrease in net income, partially offset by an increase in noncash adjustments, primarily driven by an increase in repositioning and other charges.

Cash used for investing activities decreased by $1,294 million primarily due to a $1,127 million decrease in cash paid for acquisitions, $205 million net increase in investments, and $197 million cash receipts from Garrett Motion Inc. (Garrett), partially offset by $190 million in proceeds from the 2021 sale of the retail footwear business.

Cash used for financing activities decreased by $498 million primarily due to $777 million decrease of proceeds from the issuance of long-term debt, partially offset by $196 million increase in repurchases of common stock and $44 million decrease in proceeds from the issuance of common stock.

CASH REQUIREMENTS AND ASSESSMENT OF CURRENT LIQUIDITY

In addition to our normal operating cash requirements, our principal future cash requirements will be to fund capital expenditures, share repurchases, dividends, strategic acquisitions and debt repayments. On February 12, 2021, the Board of Directors authorized the repurchase of up to a total of $10 billion of Honeywell common stock, which included amounts remaining under, and replaced, the previously approved share repurchase program. During the three months ended March 31, 2022, the Company repurchased common stock of $1,018 million. Refer to the section titled Liquidity and Capital Resources of our 2021 Form 10-K for a discussion of our expected capital expenditures, share repurchases, and dividends for 2022.

We continue to identify opportunities to improve our liquidity and working capital efficiency, which includes the extension of payment terms with our suppliers and sales of our trade receivables to unaffiliated financial institutions without recourse. The impact of these programs is not material to our overall liquidity.

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We continue to assess the relative strength of each business in our portfolio as to strategic fit, market position, profit, and cash flow contribution in order to identify target investment and acquisition opportunities in order to upgrade our combined portfolio. We identify acquisition candidates that will further our strategic plan and strengthen our existing core businesses. We also identify businesses that do not fit into our long-term strategic plan based on their market position, relative profitability, or growth potential. These businesses are considered for potential divestiture, restructuring, or other repositioning actions, subject to regulatory constraints.

Based on past performance and current expectations, we believe that our operating cash flows will be sufficient to meet our future operating cash needs. Our available cash, committed credit lines and access to the public debt and equity markets provide additional sources of short-term and long-term liquidity to fund current operations, debt maturities, and future investment opportunities.

See Note 8 Long-term Debt and Credit Agreements of Notes to Consolidated Financial Statements for additional discussion of items impacting our liquidity.

OTHER MATTERS

LITIGATION

We are subject to a number of lawsuits, investigations, and claims (some of which involve substantial amounts) arising out of the conduct of our business. See Note 14 Commitments and Contingencies of Notes to Consolidated Financial Statements for further discussion of environmental, asbestos and other litigation matters.

CRITICAL ACCOUNTING ESTIMATES

There have been no material changes to our Critical Accounting Estimates presented in our 2021 Annual Report on Form 10-K. For a discussion of the Company’s Critical Accounting Estimates, see the section titled Critical Accounting Estimates in our 2021 Annual Report on Form 10-K.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2 Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for a discussion of recent accounting pronouncements.