Greg Lewis
Senior Vice President and Chief Financial Officer at Honeywell International
Thank you, Vimal, and good morning, everyone. As Vimal outlined, we delivered another strong quarter in a dynamic macro environment. Third quarter sales grew 2% organically, led by double-digit organic sales growth in Commercial Aviation, Defense and Space and Process Solutions. Commercial success in aerospace, which drove 18% year-over-year growth in the third quarter, was, once again, a bright spot for Honeywell. Our short-cycle businesses continue to show signs of stabilizing sequentially. Encouraging fundamentals persist across most of PMC's end markets, which led to another quarter of 3% year-over-year growth, despite more challenging comps as we enter the second half.
As expected, our long-cycle warehouse automation business remains around trough levels, which led to overall volume decline of 1% for the quarter. However, excluding SPS, volumes were up 6% across the portfolio. Our backlog remains at a record level, ending the third quarter at $31.4 billion, up 8% year-over-year, driven by double-digit orders growth across our long-cycle businesses. Sequential improvements in supply chain constraints led to past due backlog reductions in our short-cycle businesses, while demand continues to outpace output in Aero, a bullish signal of the underlying robustness of that business.
And improving cost position and favorable business mix due to significant growth in our high-margin aerospace business, among others, enabled us to expand segment margins by 80 basis points year-over-year to 22.6% and achieved the high end of our guidance. On cash, we generated $1.6 billion of free cash flow, down 18% year-over-year, due to the timing of cash tax payments and higher net working capital as strong aerospace sales performance drove up our receivables balances year-over-year that we improved collections on our past due balances. Throughout this quarter, we accelerated our share buyback program, more than doubling the amount of shares repurchased compared to the second quarter.
We feel great about the future of Honeywell and believe in our next leg of transformation, and we'll continue to opportunistically buy Honeywell shares at attractive valuations. Now let's spend a few minutes on the third quarter performance by business. Aerospace sales for the third quarter were up 18% organically, with double-digit growth in both Commercial Aviation and Defense and Space, the strongest growth quarter for Aero in over a decade. Commercial Aviation growth was led by strength in the air transport aftermarket, where increased flight activity globally continues to drive demand. Commercial original equipment also grew in the quarter on increased deliveries to both business and general aviation and air transport customers.
Defense and Space sales inflected in 3Q, growing 18% organically. And orders grew over 30% year-over-year for the second consecutive quarter, as we see the impact of increased global focus on national security come through. While the aerospace supply chain remains constrained, we are continuing to see modest sequential improvements, which enabled us to increase our output and convert our record backlog into sales growth. For example, this was the third consecutive quarter with a 20% year-over-year increase in original equipment and spare shipments.
While these gains and outputs are encouraging and leading to sales acceleration, demand continues to outpace supply. This is evidenced by our Aerospace book-to-bill of around 1.3 in the third quarter. Segment margins in Aero were flat year-over-year as increased volume leverage and commercial excellence offset cost inflation and mix pressure in our original equipment, as expected. Performance Materials and Technologies sales grew 3% organically in the third quarter, led by HPS, which saw double-digit growth for the fourth consecutive quarter. Process Solutions sales grew 11% organically, driven by continued strength in our projects business and life cycle solutions and services. In UOP, sales grew 6% organically, led by gas processing solutions and petrochemical catalyst shipments.
We continue to see robust demand in our sustainable technology solutions business within UOP as orders grew triple digits for the third consecutive quarter, and sales grew at strong double-digit rates. In Advanced Materials, sales decreased 8% organically, driven primarily due to the continued expected macro-driven softness in our electronics, chemicals and life science businesses and challenging year-over-year comps. Sequentially, segment margins expanded 40 basis points, while, on a year-on-year basis, segment margins contracted 50 basis points to 22.1% as a result of lower volumes in Advanced Materials. Safety and Productivity Solutions sales decreased 25% organically in the quarter, primarily driven by lower volumes in warehouse and workflow solutions and productivity solutions and services.
The project's portion of our Intelligrated business is around trough levels in the current low investment warehouse automation environment, but our pipeline remains robust. And successful execution of our sales strategies resulted in double-digit year-over-year growth and over 50% sequential growth in orders in the third quarter. Additionally, the aftermarket services portion of the business continues to deliver solid double-digit sales growth. In Productivity Solutions and Services, we are working through the effects of distributor destocking, but believe we are nearing the end of that cycle. Sensing and Safety Technologies was also impacted by short-cycle softness, but this business continues to remain relatively resilient.
Segment margin and SPS contracted 120 basis points to 14.5% as a result of volume deleverage, partially offset by our continued operational improvements and commercial excellence. Turning to Honeywell Building Technologies. Sales were flat year-over-year in the quarter. Our long-cycle Building Solutions business continues to outpace our short-cycle building products. Building Solutions grew 4% organically, led by high single-digit growth in building projects, driven by strong execution, particularly in energy projects. Orders for building projects were also substantial in the quarter, up nearly 20% year-over-year and resulting in a book-to-bill ratio of approximately 1.2.
On the product side, sales decreased modestly as a result of relatively soft demand for security products. Segment profit remained a bright spot for the business, continuing to grow as a result of productivity actions and commercial excellence. All in, HBT's segment margin expanded 110 basis points to 25.2%. Growth across the portfolio continues to be supported by accretive results in Honeywell Connected Enterprise, providing further evidence of Honeywell's strong software franchise across our businesses. Overall organic growth of approximately 20% in the third quarter was supported by strength in connected industrial, connected buildings, cybersecurity and connected aircraft. Orders growth above 20% in the quarter remains a powerful indicator of the continued robust demand for HCE offerings. In October, we held the latest installment of Honeywell Connect, where we conducted 29 technology demonstrations to a group of 200 customers. We launched three new products, featured several product enhancements and showcased advanced intelligence solutions using AI and generative AI technology.
One highlight from the event was the introduction of a suite of cybersecurity solutions, including Honeywell Forge Cybersecurity Plus, Cyber Insights and Cyber Watch, supported by the acquisition of SKADefense in August, leading to new sales opportunities in as early as the fourth quarter. Overall, this was a great result for Honeywell. Our operational execution enabled us to grow third quarter earnings per share to $2.27, up 1% year-over-year on an adjusted basis. Segment profit drove $0.15 of improvement in earnings per share, the main driver of our EPS growth. Excluding the $0.14 pension headwind, EPS was $2.41, up 7% year-over-year. A bridge for adjusted EPS from 3Q '22 to 3Q '23 can be found in the appendix of this presentation with all the details. Finally, as Vimal mentioned earlier, we continue to leverage our healthy balance sheet, deploying $2 billion in the quarter, bringing the year-to-date total to $5.7 billion as we execute on our capital deployment strategy.
So overall, Honeywell's operating playbook continues to deliver strong results, and our best-in-class Honeywell value creation framework will enable us to drive compelling growth in earnings and cash for quarters to come. Now let's turn to Slide five to discuss our fourth quarter and full year guidance. At this stage in the year, and given the incrementally more challenging macro backdrop with geopolitics and interest rate dynamics, we are narrowing our full year guidance ranges for sales and EPS, while increasing the midpoint of our segment margin expectations. Our demand profile remains healthy, with record backlog and favorable orders performance. While we continue to monitor the timing of short-cycle recovery, we are confident in our ability to deliver on our commitments. For the fourth quarter, we anticipate sales to be between $9.6 billion and $9.9 billion, up 3% to 7% organically, driven by continued strength in Commercial Aviation, Defense and Space, Process Solutions and UOP.
We anticipate organic sales growth in Aero, PMT and HPT in the fourth quarter. For the full year, we're raising the low end of our previous sales guidance by $100 million and lowering the high end by $200 million, for a new range of $36.8 billion to $37.1 billion, representing 4% to 5% organic growth for the year. This reflects continued solid execution in our long-cycle business, while we awaited demand acceleration in some of our short-cycle businesses. Turning to segment margin. We anticipate the fourth quarter to be between 22.9% and 23.2%, flat to up 30 basis points year-over-year and up sequentially as we continue to benefit from improving business mix and our productivity actions. For the full year, we are also raising the low end of our segment margin guidance by 10 basis points for a new range of 22.5% to 22.6%, representing 80 to 90 basis points of year-over-year expansion.
This improvement is driven by HBT, SPS and PMT, which are all expected to expand margin. Now let me walk you through the expectations for each segment in a little bit more detail. Looking ahead for aerospace. We're very pleased with the continued improvements in the aero supply chain that are allowing us to capitalize on our record backlog. In 4Q, we anticipate another quarter of strong sales growth, both year-over-year and sequentially in Commercial Aviation and Defense and Space. In Commercial Aviation, we expect most of the sequential growth to come through increased original equipment volumes, though commercial aftermarket will also deliver healthy year-over-year growth, with demand driven by continued improvement in air transport flight hours. In Defense and Space, we are coming off back-to-back quarters of 30%-plus orders growth, which has bolstered our already sizable backlog.
And we see another quarter of double-digit growth to end the year. With our growth momentum from the third quarter tearing over into 4Q, we now expect aerospace sales to be up mid-teens for the year. With much of the incremental sales in this upgrade coming from increased original equipment shipments as we capture a greater installed base, we expect Aero margins to be flat to modestly down for the year. In Performance Materials and Technologies, our strong execution and the encouraging outlook in our end markets will continue to drive favorable growth. For the fourth quarter, we expect our typical solid finish to the year, leading to year-over-year and sequential sales growth. Growth will be led by Process Solutions on strength in projects and aftermarket services.
In UOP, our growth outlook is supported by robust demand for petrochemical and refining catalysts. The Sustainability Technology Solutions business will continue to grow as we capitalize on legislation-backed demand. For Advanced Materials, we expect continued demand for fluorine products, a rebound in life sciences end markets and an improvement in our Electronics and Chemicals business, supportive of sequential growth. For the full year, we continue to expect high single-digit sales growth in PMT. Due to typical catalyst seasonality, we still expect meaningful sequential and year-over-year margin expansion in the fourth quarter, resulting in modest segment margin expansion for the year for PMC.
In Safety and Productivity Solutions, our outlook continues to be impacted by the current low levels of investment in new warehouse capacity and distributor destocking. However, the impact on our financials is declining, creating stabilization and signs of potential return to growth in the coming quarters. For the fourth quarter, we expect these effects to lead to sales that are roughly flat sequentially, down organically, but to a lesser degree than earlier in the year. Orders will grow sequentially and year-over-year in the fourth quarter as we build on momentum from this quarter. While new warehouse investment remains challenged, customers continue to upgrade their existing infrastructure, which will lead to another quarter of double-digit growth for the aftermarket services portion of our Intelligrated business.
For the full year, we now expect sales to be down approximately 20% as the SPS portfolio bounces along the bottom of the cycle. However, the productivity actions and operational improvements we have made this year will still enable us to expand margins solidly for the year. In Building Technologies, we were prudent with our posture at the start of the year as we face unprecedented central bank tightening cycle and uncertain demand environment. While the operating backdrop remains difficult, we are encouraged by the sequential order progression we saw each month throughout 3Q, including double-digit products orders growth in the month of September.
For the fourth quarter, we expect modest sequential sales improvement from our 2Q and 3Q levels, with growth continuing to be led by our long-cycle Building Solutions business. The supply chain is improving each quarter, and we expect to make further progress on converting our past-due backlog into sales. We're also encouraged by the resiliency we are seeing in verticals such as airports, government and education, and expect institutional demand to provide support amid commercial softness. We project HPT sales to be up low single digits for the year, with commercial and operational excellence, enabling HPT to be our largest margin expander in 2023. Now moving on to our other key guidance metrics. We anticipate net below-the-line impact to be between negative $105 million to negative $155 million in the fourth quarter, and between negative $525 million and negative $575 million for the full year.
This guidance includes a range of repositioning between $45 million and $85 million in the fourth quarter and between $260 million and $300 million for the full year as we continue to invest in high-return projects to support our future growth and productivity. We expect the adjusted effective tax rate to be around 19% in the fourth quarter and around 21% for the full year, unchanged from our previous guidance. We anticipate average share count to be around 664 million shares in the fourth quarter and around 669 million shares for the full year as we continue to reduce our share count through opportunistic buybacks.
As a result of these inputs, we anticipate adjusted earnings per share to be between $2.53 and $2.63 for the fourth quarter, flat to up 4% year-over-year. Excluding pension headwinds, fourth quarter EPS growth would be up 6% to 10%. For the full year, we are nearing both ends of our EPS guidance ranges by $0.05, for a new range of $9.10 to $9.20, up 4% to 5% year-over-year, holding the midpoint of our prior guide. Excluding pension headwinds, EPS growth would be up 10% to 11% for the year. On cash, we continue to 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, driven by stronger collections and inventory management.
Higher cash tax outlays in the third quarter will be offset by more favorable cash outlook in the fourth quarter, giving us confidence in our full year guidance. So to summarize, we're narrowing our full year guidance ranges for sales and EPS, while raising the midpoint of our segment margin expectations based on our confidence and the ability to successfully deliver results in a fluid operating environment. Before turning back to Vimal, let's turn to the next page and discuss our preliminary thoughts for 2024. While next year's environment is shaping up to be just as volatile as the last few years, our proven track record of navigating an uncertain macro backdrop should give investors confidence in our ability to execute on our commitments.
We have a unique set of operating principles that enable us to move quickly and decisively to drive growth, protect margins, ensure liquidity and position ourselves well to deliver in any environment. Our end market exposures remain favorable into 2024, particularly in aerospace and energy. We expect continued commercial aviation fleet growth and replenishment, increased domestic and international defense investment amid geopolitical uncertainty, heightened focus on automation due to labor scarcity, increased energy demand and intensifying decarbonization goals, accelerating the need for technologies, enabling the energy transition and increased infrastructure spending.
All of these compelling vertical tailwinds, as well as ongoing customer demand to help enable digitalization, give us confidence that all four of our reconstituted businesses will deliver growth next year. The timing of an eventual recovery in short cycle is less certain and will be a swing variable to our sales outcome. We have a strong setup that will drive growth in sales, margin and earnings in 2024 within our long-term financial framework. We expect organic growth to be led by our long-cycle businesses due to record level demand and backlog in 2023. Additionally, our focus on new product innovation is yielding benefits.
We believe extending our success in delivering new solutions to our existing VAST installed base as well as the commercial efforts driving greater penetration of our current set of technologies to new markets will help enable robust organic growth. That, coupled with our ongoing leadership in high-growth regions and the strength of our software franchise, gives us confidence in the top line. We also expect supply chain to continue to improve gradually in aero throughout next year. So overall, Honeywell 2024 margins will benefit from improving business mix, continued benefits from price cost and productivity actions, including our precision focus on reducing raw material costs as well as implementing AI into our development and production.
We will continue our investments in R&D and growth-oriented capital expenditures and remain keenly focused on creating uniquely innovative, differentiated, recession-proof technologies to address the world's toughest automation, digitalization and sustainability challenges. While we expect our spend on repositioning to be relatively stable year-over-year in '24, we also anticipate modestly higher interest expense and lower pension income next year, both driven by the acceleration in yields across the bond markets we have seen since this summer. That will lead to slightly higher net below-the-line expense.
We will provide more information about the year-over-year magnitude of these changes at year-end when we snapped the line on pension, but we anticipate they'll be more in line with normal historical changes, not last year's outsized impact. As a reminder, pension income is a noncash item, given our overfunded pension status, and will ensure no incremental contributions are needed. This is a great position to be in for our employees, both former and current, and our shareholders. We expect our cash to grow in line or above earnings next year, with improvement assisted by the absence of the onetime settlement from derisking our balance sheet earlier this year, which had an outsized effect on our cash performance.
We're also embarking on a multiyear unwind of the last two years of working capital buildup. We will continue benefiting from improved demand planning and optimize production and materials management using our enhanced end-to-end process and digitalization capabilities through Accelerator. We see several compelling growth capital opportunities and expect to fund high-return projects through disciplined capex spending in the coming years. Our balance sheet strength will continue to give us meaningful capacity for M&A, and we expect an ongoing favorable deal environment going into 2024, which supports our intention to accelerate capital deployment. Now I'm going to pass the call over to Vimal to say a few words about the announcement we made earlier this month on our portfolio and strategic priorities. Over to you, Vimal.
