A N N U a L R E P O R T 2 0
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2 0 1 2 ANNUAL REPORT SHAREOWNER LETTER 2013 It certainly is rewarding to report another year of terrific performance from Honeywell. In a weak global economy, we were able to grow sales 3% to $37.7 billion, earnings per share*(1) by 11% to $4.48, and segment profit margin rate(2) 90 basis points to 15.6%, while also generating $3.7 billion in free cash flow for a 103% conversion rate(3) on net income. That was accomplished while still doing a considerable amount of seed planting in new products and services, global growth, cost competitiveness, and our process initiatives. In other words, the best is yet to come! At our Senior Leadership Meeting this year (where we annually bring together our top 300 business and functional leaders globally), we launched for the third year in a row with the theme “Growing in a Slow Growth Global Economy.” The world’s big democracies (U.S., EU, Japan, India) continue to be unable to grapple government debt problems to the ground, suppressing economies and job growth. While I and many others certainly wish it was different, we have to play with the economic cards dealt, and that’s the environment in which we have to continue our outperformance… and we will. That outperformance has certainly been demonstrated versus the five year plan for sales and margin rate growth we established in 2010. At the time, many comments were along the lines of “nice to see aspirational/ambitious goals, but what do you think you’ll really do,” which, well let’s say, “irritated” me more than a little bit. Our response was that we had done what we had said for the previous seven years and that wasn’t going to change. It hasn’t. While the global GDP and exchange rate assumptions we used were too bullish (GDP growth averaged 3.2% per year vs. assumptions of 3.5% and Euro exchange rate averaged 1.30 versus assumption of 1.35), we are still delivering on those commitments. It’s worth adding that our focus on margin rate in our Growth Plan (our rolling 2 year incentive plan) to grow earnings in a slow growth economy has proved to be very timely. (Billions) Sales Segment Margin Rate $41.0-45.0 16.0-18.0% $37.7 $30.0 15.6% 13.3% 2009 2012 2014 2009 2012 2014 This financial performance has been rewarded in the marketplace a nice validation of what we’re doing! * Proforma, EPS and V% exclude pension mark-to-market adjustment. Honeywell vs S&P 500 75% 19% 20% 240% 16% 36% 9% 99% S&P 500 Honeywell S&P 500 Honeywell S&P 500 Honeywell S&P 500 Honeywell 1 YEAR 3 YEAR 5 YEAR 10 YEAR We’re proud of our historical performance of course, but more importantly we’re excited about the future. I’ve talked in past letters about how evolution will continue in everything we do. We have an incredible opportunity to get better in everything… and we can see it. At the 2014 Investor Conference, we plan to issue a new five-year plan. We won’t be updating the current five-year plan, despite numerous requests, because I don’t want to be dealing with shifting goal posts. It should add to the credibility of the new five year plan when we can show what we accomplished in the previous plan even under tougher conditions. So why have we performed and why is it believable that outperformance will continue? I’d break it into three areas… Portfolio, Culture, and Internal Processes. Great Positions in Good Industries has been a huge driver of our Portfolio development. Over the past ten years we’ve added about $10 billion in sales through acquisitions and divested about $6 billion. Those 125 or so transactions have significantly changed the growth profile of the company. We’ve positioned ourselves well within strong macro-trends like expanding global wealth per capita, energy efficiency, energy generation, safety and security, urbanization, and the need for productivity. Having a good sustainable growth portfolio also is demonstrated in what’s avoided. While we focus on technology differentiation everywhere, we avoid industries where rapid technology change can completely displace you in one product introduction. We also avoid industries heavily reliant on government tax support. “Diversity of Opportunity” significantly enhances our growth prospects because there is never any one product, geography, industry, or business that “makes” our company. By the same token, being wrong about any one of those never kills us either. By having lots of bets in a number of great areas there is always enough going really well to propel us to outperformance. Our Transportation Systems business is a great example. They had a horrible year financially, principally because of European economic troubles, but a great year strategically. Turbos in particular is a wonderful industry and we were able to win about 50% of all worldwide orders on a dollar basis and invest in terrific new technologies for the future. Diversity of Opportunity works. Culture is just as important. As we often say, “the trick is in the doing.” There is a big difference between compliance with words and compliance with intent. The manuals for new product introduction, customer service and management resource reviews probably look pretty much the same from company to company. It’s more a matter of how well you do it. Our One Honeywell culture has evolved rapidly from a base ten years ago of three very different cultures from predecessor companies. We continue to evolve in our Twelve Behaviors capability. We are developing a “thinking company.” Not thinking as in spending days in contemplation or thinking as in anarchy so you don’t have to do what’s requested, but rather thinking as in understanding why we do things. That concept underlies our big process initiatives like Honeywell Operating System (HOS), Velocity Product Development™ (VPD™), and Functional Transformation (FT). We want to be able to do everything right and fast. This outperformance will continue through the evolution of continually improving Internal Processes. In a slow-growth global economy, this becomes especially important for margin rate growth. It starts with conservative sales planning and resourcing areas of the world where growth is stronger (our High Growth Regions focus) and extends to basic cost management like reducing material costs, using less indirect material, and being conservative in our census planning (through our OEF concept—Organizational Efficiency). Then our big company-wide process initiatives keep us on an evolutionary path with constant seed planting. We used this chart at our Senior Leadership Meeting to show how it all comes together. We start at the top with our three Management Systems for Strategic Planning (STRAP), People (Management Resource Review or MRR), and Operations (Annual Operating Plan or AOP), and emphasize that strategy and people are daily activities just like operations. Our Five Initiatives (Growth, Productivity, Cash, People, and Enablers) and Twelve Behaviors provide us with direction for evolution in all our processes. Honeywell Operating Model Management Systems STRAP AOP MRR 5 Initiatives and 12 Behaviors Business Processes Enablers Order to Delivery HOS New Product Introduction VPD Support Processes FT Foundation Six Sigma Cycle Time Innovation GM Owns Leveraging Processes and Enablers to Drive Results From the bottom of the chart, we have foundational tools we use for everything. Six Sigma provides the best process analysis tools out there. We focus a lot on Design for Six Sigma (DFSS) in every process re-look because if we do it right the first time it saves a lot of fix-it time. By definition, if you have a process, it has a Cycle Time. Reducing cycle time makes everything faster. Process mapping is a simple and amazingly effective tool. Innovation is important whether it’s for a new product or a new process. That brings us to our big process initiatives. The first two, Order to Delivery and New Product Introduction are owned by the General Manager. These two processes are the biggest drivers of good customer service. Delivering quality product and projects on time and “wicked great” new products are terrifically valuable to customers. HOS necessarily started as an “inside the four walls” initiative and has expanded to become a total business opportunity. With 70% of our operations now at Bronze level, the growth potential is remarkable. The same is true for VPD. It’s more difficult because it has to allow for the 20% of new product introduction that requires creativity and business judgment but the principle is the same. Rapidly developing new products customers really want, that fulfills both expressed and unexpressed needs, means allowing that creativity and business judgment while standardiz- ing the 80% of the process that should be the same. Software re-use, standard components, and simulation are great examples of the benefits of standardization. FT is really just HOS for staff functions. We think there is another one-and-a-half to two full points of margin expansion available to us through FT. Standardizing and mechanizing our staff processes will yield better service at much lower cost. Our continued evolution in these three key Business Processes will support continued growth in sales, margin rate, income, and cash. I’m frequently asked what “inning” we’re in for this transformation of Honeywell. We’ve been working on it for over ten years, and the more we get done, the more opportunity we can see. It’s an awfully fun ball game we’re still in the midst of playing. So just based on what we can see today, we’re at best in the third inning of where we can go.