Greg Lewis
Senior Vice President and Chief Financial Officer at Honeywell International
Thank you, Vimal, and good morning, everyone. We delivered another strong quarter in a very challenging operating environment. Second quarter sales grew 3% organically, led by double-digit organic sales growth in commercial aerospace, process solutions and UOP, where demand strength continues to support Honeywell's short-term and long-term outlook. PMT grew at a robust 7% pace after four consecutive quarters of double-digit growth. Our long-cycle warehouse automation business is around trough levels as expected, which led to overall volume decline of 1% for the quarter. However, excluding SPS, volumes were up 5% across the remainder of the portfolio. Our backlog remains at a record level, ending the second quarter at $30.5 billion, up 4% year-over-year, driven by strength in Aero and PMT. Supply chain constraints continue to moderate our overall growth rate. However, we continue to record sequential improvements in Aero output, as expected, and are reducing our past due backlog across our short-cycle businesses. Our investments in Honeywell Digital have continued to yield commercial and operating benefits through surgical pricing actions, enabling us to expand segment margin by 150 basis points year-over-year to 22.4% and exceed the high end of our guidance by 20 basis points. three out of four segments expanded margins in the quarter, each by more than 100 basis points, with SPS leading the way as expected.
On cash, we generated $1.1 billion of free cash flow, up 34% year-over-year. This increase was driven by stronger net income as well as improved working capital performance with higher collections and good progress on inventory, where we have improved our demand planning and optimized our production and materials management using our improved end-to-end process and digitalization capabilities. Now let's spend a few minutes on the second quarter performance by business. Aerospace sales for the second quarter were up 16% organically, led by over 20% growth in Commercial Aviation. This marks the fourth consecutive quarter of double-digit Aerospace organic sales growth and over two years of double-digit growth for commercial aviation, supported by strong recovery in both flight hours and higher shipset deliveries. Growth remained strongest in commercial aviation aftermarket, up over 25%, led by over 30% growth in air transport, as increased flight hours resulted in higher spare shipments and repaired overall activity. Commercial original equipment sales also increased double digits, driven by increased build rates. Defense and space grew for the second consecutive quarter as we were able to execute on our strong backlog and increased our sales volumes. The Aero supply chain continued to make progressive improvements as better material availability enabled 20% year-over-year growth in original equipment and spare shipments again in Q2.
Historically high past due backlog increased again in the quarter as orders growth outpaced our backlog burn down. Segment margin in Aerospace expanded 120 basis points year-over-year to 27.7%, due to commercial excellence and higher volume leverage, partially offset by cost inflation. Performance Materials and Technology sales grew 7% organically in the second quarter, with double-digit growth for the third consecutive quarter in both HPS and UOP. Process solutions sales grew 11% organically, driven by strength in our projects business and in lifecycle solutions and services. In UOP, sales also grew 11% organically, led by gas processing and refining catalyst shipments. Sustainable Technology Solutions within UOP had another standout quarter in Q2, with strong triple-digit orders growth and over 30% sales growth. In Advanced Materials, continued demand for fluorine products portfolio was offset by expected macro-driven softness in our electronics and chemicals business, leading to flat organic growth despite challenging year-over-year comps. Segment margin contracted 60 basis points to 21.7% as favorable price cost was more than offset by challenges in advanced materials, including lower volumes and the previously communicated disruption in one of our plants.
Safety and Productivity Solutions sales decreased 21% organically in the quarter. Sales declines are primarily driven by warehouse and workflow solutions and productivity solutions and services. While the projects portion of our Intelligrated business is around trough levels and the current low investment warehouse automation environment, the aftermarket services portion of the business continues to deliver solid double-digit growth. Sensing and Safety Technologies was flattish in the quarter, with ongoing strength in our industrial sensing product portfolio, offset by modestly lower volumes in safety. Segment margin performance for SPS once again led Honeywell, expanding 410 basis points to 16.7% as a result of productivity actions and commercial excellence, partially offset by lower volume leverage and cost inflation. Honeywell Building Technologies sales were flat year-over-year on an organic basis in the second quarter. Building solutions sales grew 2% organically despite expected year-over-year order softness as we continue to execute on our robust backlog, with organic growth in our services business and no change year-over-year in projects. Turning to our Products portfolio.
We continue to see sequential improvements in the supply chain environment, and we're burning down our past due backlog as expected. Building products sales decreased 1% organically as continued growth in our world-class fire products business was offset by declines in security and building management systems. Our continued commercial excellence and productivity actions have allowed us to once again mitigate the effects of elevated inflation, expanding HBT's segment margin by 200 basis points to 25.5%. Honeywell Connected Enterprise's strong software franchise continues to be accretive to overall Honeywell and a powerful differentiator. Overall double-digit organic growth was supported by strength in cyber, industrial, aircraft and buildings. Double-digit orders growth in the quarter is supportive of continued strong performance for HCE. Overall, this was a great result for Honeywell. Our operational efforts enabled us to grow second quarter GAAP earnings per share 21% year-over-year to $2.22 and adjusted earnings per share 6% year-over-year to $2.23, despite a $0.15 headwind from lower noncash income from our overfunded pension. From a year-over-year perspective, segment profit drove $0.21 of the improvement in earnings, the main driver of our EPS growth. A lower adjusted effective tax rate contributed $0.06 of improvement, and reduced share count added an additional $0.05.
Excluding the pension headwind, below-the-line and other created a $0.04 year-over-year headwind due to higher net interest expense for a total EPS, excluding the pension impact, of $2.38, up 13% year-over-year. A bridge for adjusted EPS from 2Q '22 to 2Q '23 can be found in the appendix of this presentation. Finally, as Vimal mentioned earlier, we continue to leverage our strong balance sheet, deploying $2.1 billion in the quarter, bringing the year-to-date total to $3.7 billion as we execute on our capital deployment strategy with meaningful portfolio updates. So overall, disciplined adherence to our best-in-class Honeywell value-creation framework provided us with the operational agility to meet or exceed our guided financial metrics. Now let's turn to slide six to discuss our third quarter and full year outlook. While a number of challenges persist in the current environment, our rigorous operating principles enable us to increase our guided metrics for the full year. Our demand profile remains robust with record backlog levels, particularly in aerospace and PMT, and stabilized sequential short-cycle order rates across much of the portfolio. For our Q3 sales guidance, we expect to be in the range of $9.1 billion to $9.3 billion, up 1% to 4% on an organic basis. We now expect full year sales of $36.7 billion to $37.3 billion, which represents an increase of $200 million on the low end, incorporating our strong second quarter results.
We're raising the low end of our organic growth range, now 4% to 6%, and we continue to expect a greater balance of price and volume versus last year. We've upgraded our full year expectations in PMT, while softening our outlook for SPS to reflect our latest views on the end market's reach. Moving to our segment margin guidance. We expect the third quarter to be in the range of 22.3% to 22.6%, resulting in year-over-year margin expansion of 50 to 80 basis points due to commercial excellence and productivity actions. For full year 2023, we are upgrading our segment margin expectations by 10 basis points on the low end to a new range of 22.4% to 22.6% or 70 to 90 basis points of year-over-year expansion, driven by improvement in HBT, SPS and PMT. Now let's take a moment to walk through the third quarter and full year expectations by business. Looking ahead for aerospace. We continue to be excited about demand across our end markets and expect sequential sales growth throughout the second half, supported by ongoing sequential factory output increases and strong orders. Commercial aftermarket, particularly in air transport, should lead growth in the Aero portfolio as flight hours continue to recover and we see further recovery in the wide-body market from increased international travel. On the commercial original equipment side, we expect build rate strength to drive volume progression in the second half.
In defense and space, we expect sequential and year-over-year growth in the second half and continue to work through our robust backlog. As a result, we expect defense and space to grow at a mid-single-digit rate for the full year 2023. We continue to expect modest sequential improvement in the Aerospace supply chain as growing commitments from our suppliers year-to-date, coupled with a second consecutive quarter of 20% output increases give us continued confidence in our outlook. Given these factors, we still expect Aero organic sales growth in the low double-digit range. For segment margin, we still expect Aero to be flattish for the year as we see modest mix pressure within our OE business, offsetting overall volume leverage. In Performance Materials and Technologies, encouraging fundamentals persist across our end markets, driving favorable growth. For the third quarter, we expect sales to increase year-over-year and sequentially, coupled with a seasonally strong fourth quarter. Growth will be led by smart energy, projects and lifecycle solutions and services within process solutions as the strength of these businesses saw in the first half continues into the second half. In UOP, our growth outlook for the year is supported by robust demand for petrochemical and refining catalysts. The Sustainability Technology Solutions business within UOP will also provide growth as we capitalize on legislation that come in.
For advanced materials, we see ongoing demand for fluorine products, combined with improvements in electronic materials, supportive of sequential growth in the first half. Despite more challenging comps in the second half, these favorable market conditions and our strong execution give us confidence to upgrade our full year sales growth expectations for PMT to high single digits compared to mid-single digits last quarter. For segment margin, we expect sequential improvement throughout the year, including robust expansion in the fourth quarter, resulting in modest year-over-year improvement for overall 2023. Looking ahead for Safety and Productivity Solutions. Our outlook continues to be impacted by the decline in capex for new warehouse capacity. However, our short-cycle businesses appear to be stabilizing as we awaited demand acceleration in the coming quarters. For the third quarter, we expect this to lead to organic sales decline similar to Q2. However, we anticipate another quarter of strong growth in the aftermarket services portion of our Intelligrated business, and Sensing and Safety Technologies should return to growth. With the SPS portfolio bouncing on the bottom of the cycle, we now expect full year sales to be down low double digits in 2023.
However, segment margin continues to be a bright spot for SPS as we implement productivity actions and drive operational improvements, and we still expect strong margin expansion for the full year. In Building Technologies, the macroeconomic environment remains challenging, our team continues to execute well and burn down our past due backlog. For the third quarter, we expect sales to be relatively flat year-over-year as we continue to see more challenging comps and the timing of short-cycle recovery remains uncertain. For the year, we still expect sales in our long-cycle Building Solutions business to outgrow the more short-cycle building products. Our institutional verticals such as airports and education will remain strong as we continue to see stimulus spend come through. The business is well aligned to energy efficiency and sustainability megatrends. Given these dynamics, we still expect HBT sales for the year to grow low single digits organically, and we see potential for growth acceleration as we exit '23. For segment margins, we now expect HBT to lead Honeywell margin expansion as a result of strong inflation management and productivity actions. Turning to our other core guided metrics. Net below-the-line impact, which is the difference between segment profit and income before tax, is expected to be in the range of negative $120 million to negative $170 million in the third quarter and negative $500 million to negative $625 million for the full year. T
His guidance includes a range of repositioning between $40 million and $85 million in the quarter and $225 million to $325 million for the year as we continue to fund attractive restructuring projects and properly position Honeywell for the future. We expect the adjusted effective tax rate to be roughly 23% in the third quarter, two points higher than our full year guide of 21% and two points higher than 2Q, which is unchanged from our previous guidance. That implies a lower 4Q rate due to the timing of discrete items. Importantly, this higher tax rate in Q3 reflects an approximately $0.06 headwind to EPS, but will be offset by a commensurate tailwind in 4Q leaving the full year unchanged. We expect average share count to be around 669 million shares in Q3 and 670 million shares for the full year. As a result of these inputs, our adjusted EPS guidance range is now between $2.15 to $2.25 for the third quarter, which would be down 4% to flat year-over-year. Excluding the pension headwinds, third quarter EPS growth would be up 2% to up 6%.
For full year EPS, we are increasing the midpoint of our guide, upgrading the low end of the range by $0.05 for a new range of $9.05 to $9.25, up 3% to 6%, reflecting our continued confidence that 2023 will be a solid growth year for Honeywell despite the year-over-year pension headwinds. Excluding these headwinds, EPS growth would be 10% to 12% for the year. After a strong first half and continued progress on inventory and receivables management, we expect to meet our original free cash flow guidance of $3.9 billion to $4.3 billion in 2023 or $5.1 billion to $5.5 billion, excluding the net impact of settlements. So to wrap up, our original thesis for '23 remains intact. Robust backlog of $30 billion underpins our strength -- our growth, though the timing of the short-cycle recovery remains uncertain. We're encouraged by the strength of our portfolio and continue to execute on our rigorous operating playbook through a challenging backdrop to deliver outstanding results.
Now let's turn to slide seven, and I'll hand the call back to Vimal for some long-term comments.
