# HONEYWELL INTERNATIONAL INC (HON) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from HONEYWELL INTERNATIONAL INC's 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/773840/000077384024000014/hon-20231231.htm Accession: 0000773840-24-000014 Filing date: 2024-02-16 Report date: 2023-12-31 Extracted from a later financial-section MD&A body after the formal Item 7 span was a short reference. Confidence: high Company profile: /company/HON/ All MD&A years: /company/HON/mda/ Previous year: /company/HON/mda/fy2022/ (FY 2022) Next year: /company/HON/mda/fy2024/ (FY 2024) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in tables and graphs in millions, except per share amounts) 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 years ended December 31, 2023. All references to Notes relate to Notes to Consolidated Financial Statements in the section titled Financial Statements and Supplementary Data.     A detailed discussion of the prior year 2022 to 2021 year-over-year changes is not included herein and can be found in the Management's Discussion and Analysis of Financial Condition and Results of Operations section in the 2022 Annual Report on Form 10-K filed February 10, 2023. BUSINESS UPDATE MACROECONOMIC CONDITIONS We continue to monitor the impacts of ongoing macroeconomic conditions and geopolitical events. During 2023, material inflation continued to moderate. Slowing global growth relieved pressure on logistics freight and service capacity and provided supply chain redundancy. We continue to leverage short-term and long-term mitigation strategies to reduce the impact of supply chain disruptions, including digital solutions to assist in identifying and managing shortages. Our mitigation strategies include pricing actions, longer term planning for constrained materials, new supplier development, 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. In areas where we cannot procure key components or raw materials, we consider altering existing products and developing 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 certain 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. Global conflicts continue 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. To date, our strategies have successfully mitigated our exposure to these conditions. However, if we are not successful in sustaining or executing these strategies, these macroeconomic conditions could have a material adverse effect on our consolidated results of operations or operating cash flows. See the section titled Review of Business Segments for additional information on the impacts of inflationary cost pressures and labor shortages to our businesses. See the section titled Risk Factors for a discussion of risks associated with the potential adverse effects of inflationary cost pressures, supply chain disruptions, and labor shortages to our businesses. 17    Honeywell International Inc. [[GREPCENT_TABLE]] [["TABLE OF CONTENTS","MANAGEMENT\u2019S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"]] [[/GREPCENT_TABLE]] RESULTS OF OPERATIONS Consolidated Financial Results Net Sales by Segment 18    Honeywell International Inc. [[GREPCENT_TABLE]] [["TABLE OF CONTENTS","MANAGEMENT\u2019S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"]] [[/GREPCENT_TABLE]] Segment Profit by Segment 19    Honeywell International Inc. [[GREPCENT_TABLE]] [["TABLE OF CONTENTS","MANAGEMENT\u2019S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"]] [[/GREPCENT_TABLE]] CONSOLIDATED OPERATING RESULTS Net Sales The change in Net sales was attributable to the following: [[GREPCENT_TABLE]] [["","2023 Versus 2022","2022 Versus 2021"],["Volume","\u2014%","(4)%"],["Price","4%","10%"],["Foreign currency translation","(1)%","(3)%"],["Acquisitions, divestitures, and other, net","\u2014%","\u2014%"],["Total % change in Net sales","3%","3%"]] [[/GREPCENT_TABLE]] A discussion of Net sales by reportable business segment can be found in the Review of Business Segments section of Management's Discussion and Analysis. 2023 compared with 2022 Net sales increased due to the following: •Increased pricing, •Partially offset by the unfavorable impact of foreign currency translation, driven by the strengthening of the U.S. Dollar against the currencies in certain of our international markets, primarily the Chinese Renminbi, Canadian Dollar, Turkish Lira, Egyptian Pound, and Australian Dollar. 20    Honeywell International Inc. [[GREPCENT_TABLE]] [["TABLE OF CONTENTS","MANAGEMENT\u2019S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"]] [[/GREPCENT_TABLE]] Cost of Products and Services Sold 2023 compared with 2022 Cost of products and services sold increased due to the following: •Higher direct and indirect material costs and higher labor costs of approximately $0.8 billion or 4%, •Partially offset by higher productivity of approximately $0.3 billion or 1%. Gross Margin 2023 compared with 2022 Gross margin increased by approximately $0.5 billion and gross margin percentage increased 30 basis points to 37.3% compared to 37.0% for the same period of 2022. 21    Honeywell International Inc. [[GREPCENT_TABLE]] [["TABLE OF CONTENTS","MANAGEMENT\u2019S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"]] [[/GREPCENT_TABLE]] Research and Development Expenses 2023 compared with 2022 Research and development expenses were flat. Selling, General and Administrative Expenses 2023 compared with 2022 Selling, general and administrative expenses were flat due to the following: •Higher productivity of approximately $0.2 billion or 4%, •Partially offset by higher labor costs of approximately $0.2 billion or 4%. 22    Honeywell International Inc. [[GREPCENT_TABLE]] [["TABLE OF CONTENTS","MANAGEMENT\u2019S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"]] [[/GREPCENT_TABLE]] Other (Income) Expense [[GREPCENT_TABLE]] [["","2023","","2022","","2021"],["Other (income) expense","$","(840)","","","$","(366)","","","$","(1,378)"]] [[/GREPCENT_TABLE]] 2023 compared with 2022 Other income increased due to the following: •Reduced net expenses resulting from the North American Refractory Company (NARCO) Amended Buyout Agreement in 2022 of approximately $0.6 billion, which included a charge of $1.325 billion for the Buyout Amount, partially offset by the derecognition of the NARCO asbestos-related liability of $0.7 billion, and •Higher interest income of approximately $0.2 billion, •Partially offset by proceeds from HarbisonWalker International Holdings, Inc. (HWI) Sale of $0.3 billion and lower pension and postretirement income of $0.2 billion. See Note 19 Commitments and Contingencies of Notes to Consolidated Financial Statements for additional information on NARCO Amended Buyout Agreement and HWI Net Sale Proceeds. Tax Expense 2023 compared with U.S. Statutory Rate The effective tax rate for 2023 was lower than the U.S. federal statutory rate of 21% as a result of the following: •Tax benefits on non-U.S. earnings, tax credits, and other accrued tax benefits, representing a 580 basis-point decrease, •Partially offset by incremental tax expense for tax reserves and other accrued tax expenses, representing a 560 basis-point increase. See Note 5 Income Taxes of Notes to Consolidated Financial Statements for further discussion of changes in the effective tax rate. 23    Honeywell International Inc. [[GREPCENT_TABLE]] [["TABLE OF CONTENTS","MANAGEMENT\u2019S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"]] [[/GREPCENT_TABLE]] Net Income Attributable to Honeywell 2023 compared with 2022 Earnings per share of common stock–assuming dilution increased due to the following: •Higher segment profit which impacted earnings per share by $0.70 after tax, •Lower repositioning and other charges, including charges attributable to suspending and winding down our businesses and operations in Russia, which impacted earnings per share by $0.56 after tax, •Higher interest income which impacted earnings per share by $0.21 after tax, and •The favorable impact of lower share count which impacted earnings per share by $0.18 after tax, •Partially offset by higher interest expense which impacted earnings per share by $0.40 after tax. 24    Honeywell International Inc. TABLE OF CONTENTS REVIEW OF BUSINESS SEGMENTS We globally manage our business operations through four reportable business segments: Aerospace, Honeywell Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions. AEROSPACE Net Sales [[GREPCENT_TABLE]] [["","2023","","2022","","Change2023vs.2022","","2021","","Change2022vs.2021"],["Net sales","$","13,624","","","$","11,827","","","15","%","","$","11,026","","","7","%"],["Cost of products and services sold","8,381","","","7,202","","","","","6,665"],["Selling, general and administrative and other expenses","1,502","","","1,397","","","","","1,310"],["Segment profit","$","3,741","","","$","3,228","","","16","%","","$","3,051","","","6","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Factors Contributing to Year-Over-Year Change","2023 vs. 2022","","2022 vs. 2021"],["Net Sales","","Segment Profit","","Net Sales","","Segment Profit"],["Organic1","15","%","","16","%","","8","%","","6","%"],["Foreign currency translation","\u2014","%","","\u2014","%","","(1)","%","","\u2014","%"],["Acquisitions, divestitures, and other, net","\u2014","%","","\u2014","%","","\u2014","%","","\u2014","%"],["Total % change","15","%","","16","%","","7","%","","6","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["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."]] [[/GREPCENT_TABLE]] 2023 compared with 2022 Sales increased $1,797 million due to higher organic sales of $1,148 million in Commercial Aviation Aftermarket driven by higher sales volumes in air transport due to an increase in flight hours, higher organic sales of $361 million in Defense and Space driven by higher sales volumes due to increased shipments, and higher organic sales of $315 million for Commercial Aviation Original Equipment driven by higher sales volumes due to increased shipments. Segment profit increased $513 million and segment margin percentage increased 20 basis points to 27.5% compared to 27.3% for the same period of 2022. 25    Honeywell International Inc. [[GREPCENT_TABLE]] [["TABLE OF CONTENTS","REVIEW OF BUSINESS SEGMENTS"]] [[/GREPCENT_TABLE]] HONEYWELL BUILDING TECHNOLOGIES Net Sales [[GREPCENT_TABLE]] [["","2023","","2022","","Change2023vs.2022","","2021","","Change2022vs.2021"],["Net sales","$","6,031","","","$","6,000","","","1","%","","$","5,539","","","8","%"],["Cost of products and services sold","3,264","","","3,275","","","","","3,045"],["Selling, general and administrative and other expenses","1,262","","","1,286","","","","","1,256"],["Segment profit","$","1,505","","","$","1,439","","","5","%","","$","1,238","","","16","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Factors Contributing to Year-Over-Year Change","2023 vs. 2022","","2022 vs. 2021"],["Net Sales","","Segment Profit","","Net Sales","","Segment Profit"],["Organic","2","%","","5","%","","14","%","","23","%"],["Foreign currency translation","(1)","%","","\u2014","%","","(6)","%","","(7)","%"],["Acquisitions, divestitures, and other, net","\u2014","%","","\u2014","%","","\u2014","%","","\u2014","%"],["Total % change","1","%","","5","%","","8","%","","16","%"]] [[/GREPCENT_TABLE]] 2023 compared with 2022 Sales increased $31 million due to higher organic sales growth of $145 million in Building Solutions driven by increased pricing in building projects and services, partially offset by the unfavorable impact of foreign currency translation of $88 million and lower organic sales of $27 million in Products driven by lower sales volumes. Segment profit increased $66 million and segment margin percentage increased 100 basis points to 25.0% compared to 24.0% for the same period of 2022. 26    Honeywell International Inc. [[GREPCENT_TABLE]] [["TABLE OF CONTENTS","REVIEW OF BUSINESS SEGMENTS"]] [[/GREPCENT_TABLE]] PERFORMANCE MATERIALS AND TECHNOLOGIES Net Sales [[GREPCENT_TABLE]] [["","2023","","2022","","Change2023vs.2022","","2021","","Change2022vs.2021"],["Net sales","$","11,506","","","$","10,727","","","7","%","","$","10,013","","","7","%"],["Cost of products and services sold","7,166","","","6,670","","","","","6,331"],["Selling, general and administrative and other expenses","1,791","","","1,703","","","","","1,562"],["Segment profit","$","2,549","","","$","2,354","","","8","%","","$","2,120","","","11","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Factors Contributing to Year-Over-Year Change","2023 vs. 2022","","2022 vs. 2021"],["Net Sales","","Segment Profit","","Net Sales","","Segment Profit"],["Organic","7","%","","9","%","","11","%","","15","%"],["Foreign currency translation","(1)","%","","(1)","%","","(4)","%","","(4)","%"],["Acquisitions, divestitures, and other, net","1","%","","\u2014","%","","\u2014","%","","\u2014","%"],["Total % change","7","%","","8","%","","7","%","","11","%"]] [[/GREPCENT_TABLE]] 2023 compared with 2022 Sales increased $779 million due to organic sales growth of $491 million in Process Solutions driven by increased demand in projects and lifecycle solutions and services and higher organic sales of $193 million in UOP driven by growth in gas processing and refining catalyst shipments. Segment profit increased $195 million and segment margin percentage increased 30 basis points to 22.2% compared to 21.9% for the same period of 2022. 27    Honeywell International Inc. [[GREPCENT_TABLE]] [["TABLE OF CONTENTS","REVIEW OF BUSINESS SEGMENTS"]] [[/GREPCENT_TABLE]] SAFETY AND PRODUCTIVITY SOLUTIONS Net Sales [[GREPCENT_TABLE]] [["","2023","","2022","","Change2023vs.2022","","2021","","Change2022vs.2021"],["Net sales","$","5,489","","","$","6,907","","","(21)","%","","$","7,814","","","(12)","%"],["Cost of products and services sold","3,409","","","4,506","","","","","5,444"],["Selling, general and administrative and other expenses","1,179","","","1,321","","","","","1,341"],["Segment profit","$","901","","","$","1,080","","","(17)","%","","$","1,029","","","5","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Factors Contributing to Year-Over-Year Change","2023 vs. 2022","","2022 vs. 2021"],["Net Sales","","Segment Profit","","Net Sales","","Segment Profit"],["Organic","(20)","%","","(16)","%","","(9)","%","","9","%"],["Foreign currency translation","(1)","%","","(1)","%","","(3)","%","","(3)","%"],["Acquisitions, divestitures, and other, net","\u2014","%","","\u2014","%","","\u2014","%","","(1)","%"],["Total % change","(21)","%","","(17)","%","","(12)","%","","5","%"]] [[/GREPCENT_TABLE]] 2023 compared with 2022 Sales decreased $1,418 million due to lower organic sales of $866 million in Warehouse and Workflow Solutions driven by lower demand for projects and lower organic sales of $426 million in Productivity Solutions and Services driven by lower demand for products. Segment profit decreased $179 million and segment margin percentage increased 80 basis points to 16.4% compared to 15.6% for the same period in 2022. During the second quarter of 2022, our Productivity Solutions and Services business entered into a license and settlement agreement (the Agreement). Under the Agreement, we will receive up to $360 million, paid in equal quarterly installments over eight quarters, beginning with the second quarter of 2022. The Agreement provides each party a license to its existing patent portfolio for use by the other party’s existing products and resolves all patent-related litigation between the parties. 28    Honeywell International Inc. [[GREPCENT_TABLE]] [["TABLE OF CONTENTS","REVIEW OF BUSINESS SEGMENTS"]] [[/GREPCENT_TABLE]] 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 4 Repositioning and Other Charges of Notes to Consolidated Financial Statements for a discussion of our repositioning actions and related charges incurred in 2023, 2022, and 2021. Cash spending related to our repositioning actions was $294 million, $275 million, and $382 million in 2023, 2022, and 2021, respectively, and was funded through operating cash flows. BUSINESS REALIGNMENT In October 2023, the Company announced a realignment, effective in the first quarter of 2024, of its business units comprising its Performance Materials and Technologies, and Safety and Productivity Solutions reportable business segments by forming two new reportable business segments: Industrial Automation, and Energy and Sustainability Solutions. Industrial Automation will include Sensing and Safety Technologies, Productivity Solutions and Services, and Warehouse and Workflow Solutions, which are currently included in Safety and Productivity Solutions, in addition to Process Solutions, which is currently included in Performance Materials and Technologies. Energy and Sustainability Solutions will include UOP and Advanced Materials, which are currently included in Performance Materials and Technologies. Further, as part of the realignment, the Company will rename its Aerospace and Honeywell Building Technologies reportable business segments to Aerospace Technologies and Building Automation, respectively. Following the realignment, the Company’s reportable business segments will be Aerospace Technologies, Industrial Automation, Building Automation, and Energy and Sustainability Solutions. The realignment will not impact the Company’s historical consolidated financial position, results of operations, or cash flows. The Company expects to report its financial performance based on this realignment effective with the first quarter of 2024. 29    Honeywell International Inc. TABLE OF CONTENTS