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

(Dollars in tables and graphs in millions)

The following Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand the results of operations and financial condition of Honeywell International Inc. and its consolidated subsidiaries (Honeywell, we, us, our, or the Company) for the three months ended March 31, 2023. The financial information as of March 31, 2023, should be read in conjunction with the Consolidated Financial Statements for the year ended December 31, 2022, contained in our 2022 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, 2023.

BUSINESS UPDATE

Historically, we included Company-sponsored costs and costs that relate to contracts with customers for research and development projects as a component of Cost of products and services sold on the Consolidated Statement of Operations. Effective January 1, 2023, we began classifying Company-sponsored costs for research and development projects as a separate financial statement line item, titled Research and development expenses, on the Consolidated Statement of Operations, and recast prior period results for this reclassification. This reclassification had no impact on net income, earnings per share, cash flows, segment reporting, or financial position. We revised historical periods to reflect this change in presentation.

In July 2022, we realigned certain business units within the Safety and Productivity Solutions reportable business segment. The Safety and Retail business unit, which included our gas detection and safety business, combined with the Advanced Sensing Technologies business unit to form the Sensing and Safety Technologies business unit. This realignment provides opportunities to capitalize on shared synergies and core technologies resulting in greater value for our customers and the markets we serve. We recast historical periods to reflect this realignment.

MACROECONOMIC CONDITIONS

We continued to experience supply chain constraints, inflationary cost pressures, and labor shortages throughout 2022. During the first quarter of 2023, material inflation moderated, but we continued to experience supply chain constraints, including labor shortages in the Aerospace supply base, and inflationary cost pressures in manufacturing labor. We continue with the short-term and long-term mitigation strategies implemented during 2022.

Our mitigation strategies include pricing actions, material supply tracking tools, and direct engagement with key suppliers to meet customer demand. Our relationships with primary and secondary suppliers allow us to reliably source key components and raw materials. Where we cannot procure key components or raw materials, we consider altering existing products and develop new products to satisfy customer needs. Alterations to existing products and the development of new products undergo product quality controls and engineering qualification, prior to releasing to our customers. In addition, we assist our suppliers facing manufacturing challenges by committing our own resources to their sites and facilities. We believe these mitigation strategies enable us to reduce supply risk, accelerate new product innovation, and expand our penetration in the markets we serve. Additionally, due to the strenuous quality controls and product qualification we perform on a new or altered product, we do not expect these mitigation strategies to impact product quality or reliability.

The Russia-Ukraine conflict continues to create volatility in global financial and energy markets and contribute to supply chain shortages adding to the inflationary pressures in the global economy. We actively collaborate with our suppliers to minimize impacts of supply shortages on our manufacturing capabilities and implement strategies to reduce our reliance on natural gas at critical sites in Europe.

To date, our strategies successfully mitigated our exposure to these conditions. However, if we are not successful in sustaining these strategies, these macroeconomic conditions could have a material adverse effect on our consolidated results of operations or operating cash flows.

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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 2023 vs. Q1 2022
Volume						2		%
Price						6		%
Foreign currency translation						(2)		%
Total % change in Net sales						6		%

Q1 2023 compared with Q1 2022

A discussion of Net sales by reportable business segment can be found in the Review of Business Segments section of this Management's Discussion and Analysis.

Net sales increased due to the following:

• Increased pricing, and

• Higher sales volumes,

• Partially offset by 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, Chinese Renminbi, British Pound, and Canadian Dollar.

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Cost of Products and Services Sold

Q1 2023 compared with Q1 2022

Cost of products and services sold increased due to higher direct and indirect material costs and higher labor costs.

Gross Margin

Q1 2023 compared with Q1 2022

Gross margin increased by approximately $0.3 billion and gross margin percentage increased 160 basis points to 38.0% compared to 36.4% for the same period of 2022.

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Research and Development Expenses

Q1 2023 compared with Q1 2022

Research and development expenses change was flat.

Selling, General and Administrative Expenses

Q1 2023 compared with Q1 2022

Selling, general and administrative expenses decreased primarily due to prior year charges attributable to suspending substantially all of our sales, distribution, and service activities in Russia (the Suspension) during the first quarter of 2022.

Other (Income) Expense

									Three Months Ended March 31,
												2023						2022
Other (income) expense																					$	(260)					$	(319)

Q1 2023 compared with Q1 2022

Other income decreased due to lower pension and other postretirement income.

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Tax Expense

Q1 2023 compared with Q1 2022

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

• Benefits from taxes on non-U.S. earnings, tax reserves, and the absence of restructuring related expenses, representing a 500 basis-point decrease,

• Partially offset by tax expense from accrued withholding tax related to unremitted foreign earnings and decreased benefits from employee share-based compensation, representing a 130 basis-point increase.

Net Income Attributable to Honeywell

Q1 2023 compared to Q1 2022

Earnings per share of common stock–assuming dilution increased due to the following:

• Lower repositioning and other charges, due to prior year charges attributable to the Suspension of our businesses and operations in Russia, impacted earnings per share by $0.34 after tax, and

• Higher segment profit from all of our reportable business segments impacted earnings per share by $0.21 after tax,

• Partially offset by lower pension income which impacted earnings per share by $0.15 after tax.

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REVIEW OF BUSINESS SEGMENTS

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

AEROSPACE

Net Sales

									Three Months Ended March 31,
															2023						2022						% Change
Net sales																											$	3,111					$	2,749					13		%
Cost of products and services sold																											1,936						1,634
Selling, general and administrative and other expenses																											348						362
Segment profit																											$	827					$	753					10		%

																		2023 vs. 2022
									Three Months Ended March 31,
Factors Contributing to Year-Over-Year Change												Net Sales						Segment Profit
Organic(1)																					14		%				11		%
Foreign currency translation																					(1)		%				(1)		%
Acquisitions, divestitures, and other, net																					—		%				—		%
Total % change																					13		%				10		%

(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 2023 compared to Q1 2022

Sales increased $362 million due to higher organic sales of $262 million in Commercial Aviation Aftermarket primarily driven by higher volumes in air transport due to an increase in flight hours, higher organic sales of $67 million in Commercial Aviation Original Equipment primarily driven by higher volumes in business aviation due to increased shipments, and higher organic sales of $50 million in Defense and Space primarily driven by increased pricing.

Segment profit increased $74 million and segment margin percentage decreased 80 basis points to 26.6% compared to 27.4% for the same period of 2022.

HONEYWELL BUILDING TECHNOLOGIES

Net Sales

									Three Months Ended March 31,
															2023						2022						% Change
Net sales																											$	1,487					$	1,429					4		%
Cost of products and services sold																											792						786
Selling, general and administrative and other expenses																											320						307
Segment profit																											$	375					$	336					12		%

																		2023 vs. 2022
									Three Months Ended March 31,
Factors Contributing to Year-Over-Year Change												Net Sales						Segment Profit
Organic																					9		%				17		%
Foreign currency translation																					(5)		%				(6)		%
Acquisitions, divestitures, and other, net																					—		%				1		%
Total % change																					4		%				12		%

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Q1 2023 compared to Q1 2022

Sales increased $58 million due to higher organic sales of $72 million in Building Solutions primarily driven by higher sales volumes in building projects and services and higher organic sales of $60 million in Products primarily driven by increased pricing, partially offset by the unfavorable impact of foreign currency translation of $75 million.

Segment profit increased $39 million and segment margin percentage increased 170 basis points to 25.2% compared to 23.5% for the same period of 2022.

PERFORMANCE MATERIALS AND TECHNOLOGIES

Net Sales

									Three Months Ended March 31,
															2023						2022						% Change
Net sales																											$	2,749					$	2,453					12		%
Cost of products and services sold																											1,731						1,516
Selling, general and administrative and other expenses																											452						427
Segment profit																											$	566					$	510					11		%

																		2023 vs. 2022
									Three Months Ended March 31,
Factors Contributing to Year-Over-Year Change												Net Sales						Segment Profit
Organic																					15		%				14		%
Foreign currency translation																					(3)		%				(3)		%
Acquisitions, divestitures, and other, net																					—		%				—		%
Total % change																					12		%				11		%

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Q1 2023 compared to Q1 2022

Sales increased $296 million due to higher organic sales of $178 million in Process Solutions primarily driven by increased demand in projects and smart energy, higher organic sales of $97 million in Advanced Materials primarily driven by increased pricing, and higher organic sales of $89 million in UOP primarily driven by growth in refining catalyst shipments, partially offset by the unfavorable impact of foreign currency translation of $68 million.

Segment profit increased $56 million and segment margin percentage decreased 20 basis points to 20.6% compared to 20.8% for the same period of 2022.

SAFETY AND PRODUCTIVITY SOLUTIONS

Net Sales

									Three Months Ended March 31,
															2023						2022						% Change
Net sales																											$	1,515					$	1,744					(13)		%
Cost of products and services sold																											943						1,151
Selling, general and administrative and other expenses																											312						340
Segment profit																											$	260					$	253					3		%

																		2023 vs. 2022
									Three Months Ended March 31,
Factors Contributing to Year-Over-Year Change												Net Sales						Segment Profit
Organic																					(11)		%				6		%
Foreign currency translation																					(2)		%				(3)		%
Acquisitions, divestitures, and other, net																					—		%				—		%
Total % change																					(13)		%				3		%

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Q1 2023 compared to Q1 2022

Sales decreased $229 million due to lower organic sales of $127 million in Warehouse and Workflow Solutions primarily driven by lower demand for projects, lower organic sales of $44 million in Productivity Solutions and Services primarily driven by lower demand, and lower organic sales of $29 million in Sensing and Safety Technologies primarily driven by lower demand for personal protective equipment, and the unfavorable impact of foreign currency translation of $29 million.

Segment profit increased $7 million and segment margin percentage increased 270 basis points to 17.2% compared to 14.5% for the same period in 2022.

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 a separate reportable business segment as segment reporting criteria is not met. 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, 2023, and 2022. Cash spending related to our repositioning actions was $73 million in the three months ended March 31, 2023, and was funded through operating cash flows.

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LIQUIDITY AND CAPITAL RESOURCES

(Dollars in tables in millions)

We 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 counterparty. As of March 31, 2023, and December 31, 2022, we held $7.2 billion and $10.1 billion, respectively, of cash and cash equivalents, including our short-term investments.

As of March 31, 2023, $5.4 billion of the Company’s cash, cash equivalents, and short-term investments were held by non-US subsidiaries. We do not have material amounts related to any jurisdiction subject to currency control restrictions that impact our ability to access and repatriate such amounts. Under current laws, we do not expect taxes on repatriation or restrictions on amounts held outside of the U.S. to have a material effect on our overall liquidity.

BORROWINGS

We leverage a variety of debt instruments to manage our overall borrowing costs. As of March 31, 2023, and December 31, 2022, our total borrowings were $19.2 billion and $19.6 billion, respectively.

			March 31, 2023						December 31, 2022
Commercial paper and other short-term borrowings						$	3,555					$	2,717
Variable rate notes						22						22
Fixed rate notes						15,802						17,086
Other						232						265
Fair value of hedging instruments						(220)						(287)
Debt issuance costs						(229)						(233)
Total borrowings						$	19,162					$	19,570

A primary source of liquidity is our ability to access the corporate bond markets. Through these markets, we issue a variety of long-term fixed rate notes, in a variety of currencies, to manage our overall funding costs.

Another primary 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 as of March 20, 2023. Amounts borrowed under the 364-Day Credit Agreement are required to be repaid no later than March 18, 2024, 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 18, 2025, 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 24, 2022, which was terminated in accordance with its terms effective March 20, 2023. As of March 31, 2023, 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 as of March 20, 2023. 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 24, 2022. As of March 31, 2023, there were no outstanding borrowings under our 5-Year Credit Agreement.

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We also have a current shelf registration statement filed with the Securities and Exchange Commission (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.

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, 2023, 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,
			2023						2022						Variance
Cash and cash equivalents at beginning of period						$	9,627					$	10,959					$	(1,332)
Operating activities
Net income attributable to Honeywell						1,394						1,134						260
Noncash adjustments						572						537						35
Changes in working capital						(546)						(815)						269
Other operating activities						(2,204)						(820)						(1,384)
Net cash provided by (used for) operating activities						(784)						36						(820)
Net cash used for investing activities						(29)						(10)						(19)
Net cash used for financing activities						(1,973)						(1,719)						(254)
Effect of exchange rate changes on cash and cash equivalents						28						15						13
Net decrease in cash and cash equivalents						$	(2,758)					(1,678)						(1,080)
Cash and cash equivalents at end of period						$	6,869					$	9,281					$	(2,412)

Cash related to operating activities decreased by $820 million primarily driven by a decrease in cash from other operating activities, due to the payment pursuant to the North American Refractories Company (NARCO) Amended Buyout Agreement and payment for the settlement of UOP Matters, partially offset by HWI Net Sale Proceeds. The decrease in cash from other operating activities was further offset by the favorable impact of working capital, driven by a $313 million increase in Accounts Payable, primarily due to increased material receipts and lower disbursements. See Note 14 Commitments and Contingencies of Notes to the Consolidated Financial Statements for additional information on the NARCO Amended Buyout Agreement, HWI Net Sale Proceeds, and UOP Matters.

Cash related to investing activities decreased by $19 million primarily due to a $176 million decrease in cash paid for acquisitions and $79 million net decrease in investments, partially offset by $197 million cash receipts from Garrett Motion Inc. (Garrett) in 2022 and $68 million decrease in cash receipts from settlements of derivative contracts.

Cash related to financing activities decreased by $254 million primarily due to a $1,323 million increase in payments of long-term debt, partially offset by an $811 million increase in net proceeds from the issuance of commercial paper and other short-term borrowings and $319 million decrease in repurchases of common stock.

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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 April 24, 2023, the Board of Directors authorized the repurchase of up to $10 billion of Honeywell common stock, including approximately $2.1 billion of remaining availability under the previously announced $10 billion share repurchase authorization. During the three months ended March 31, 2023, we repurchased common stock of $699 million. Refer to the section titled Liquidity and Capital Resources of our 2022 Form 10-K for a discussion of our expected capital expenditures, share repurchases, and dividends for 2023.

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.

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.

In early 2023, we made payments of approximately $1.5 billion in connection with the NARCO Buyout and UOP Matters. During 2023, and pursuant to the NARCO Amended Buyout Agreement, we are entitled to receive approximately $295 million related to the HWI Sale. On March 17, 2023, we received initial proceeds from the HWI Sale in the amount of $256 million. These payments and receipts have not materially impacted our liquidity position.

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 2022 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 2022 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.

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