What a difference a year makes–and then not so much when it comes to Treasury & Risk's overall winner in the annual Alexander Hamilton Awards for sustained excellence across a broad spectrum of treasury activities. For the second year in a row top honors go to the Morristown, N.J.-based maker of aerospace, automation and control, specialty materials and transportation products and solutions. At the heart of Honeywell's success is the transformation of the finance operation through one common set of global treasury processes and its deep involvement with the business units. Last year Honeywell garnered two gold awards for its cash optimization and automation projects. This year the judges were impressed with its growing global outlook, its ability to integrate new acquisitions and to establish integrity and compliance programs throughout the organization. Its cash management in Europe, the Middle East and Africa (EMEA) takes gold in that category, where its second entry highlights its treasury management activities in India. Honeywell also wins the gold for corporate governance and the bronze award in financial risk management. The numbers were part of the story last year–record sales, record income, record cash flow, one that went from $1.6 billion in 2003 to $3.1 billion in 2007–as well as its 40% increase in share price. This year, as the financial crisis has shaken markets worldwide and swept into every corner of the economy, shares have taken a nosedive, including Honeywell's, off about 50% from its high for the year. In the third quarter, however, the company continued to report strong growth with a 6% increase in sales to $9.3 billion over the same period last year, and a 20% increase in earnings per share to 97 cents compared to $81 cents in the third quarter last year.
"We're looking at free cash flow of approximately $3.2 billion for the year," said CFO Dave Anderson when he and Treasurer John Tus sat down for an interview recently. "We will be a little over 100 percent of our net income. The company continues its performance track record and is expanding globally, particularly in the emerging markets." New product lines, technologies and businesses have been added. "We will have over $2 billion in outflows for acquisitions for the year. The one exception is our stock price–and we're in that boat with everybody. Investors are reacting to the real fear that is out there. Everybody's seeing deteriorating share price."
The greatest challenge posed by the worsening economic climate is to stay the course and stick to basics, Anderson said. "We've had nearly 50 acquisitions, 20 divestitures, during the last five or six years so there's been a strengthening of our portfolio. We've done a good job of managing the cost side of our business. We've been able to expand pretax operating margins on average 60 basis points per year since 2003." Revenue increased from $23 billion in 2003 and is expected to be more than $37 billion this year. He credits improving the quality of the portfolio and the work Tus and his treasury team have done for positioning the company "to do relatively well from an operating standpoint in this tougher economic market."
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Tus said he and his team are clearly focused on understanding all about cash throughout the entire company: where is it; who is it invested with; the sources and uses of cash and how easy is it to move that cash around the globe. "We have worked very hard with our relationship banks globally. We focus on having one key bank relationship per country and we have the structure to be able to move and centralize the cash across Europe and in various countries in Asia." The critical issues are "do we have all the infrastructure in place and does it really enable us to deploy cash where it needs to be, for example, for an acquisition, and to be sure that the cash is held by a highly rated financial institution."
Treasury is an evolving process and in an uncertain market, liquidity is a key area. "We have a refined process to manage liquidity. We look at ratings as an initial point, but go beyond that and look at other issues, taking added steps as a precaution," he said. "We continue to monitor the markets to make sure we have a good level of liquidity. When the markets were stronger and credit was available, we worked hard to establish favorable bank lines. That worked in paying off for us nicely in this tougher environment."
With markets changing rapidly, communication is vital. "We're 24x 7, with people located around the world and in constant dialogue with our tax group and all the business units to make sure we are all moving in the same direction."
Tus and his treasury team are in the forefront of M&A activity, especially in the EMEA region where Honeywell is seeing growth and has made recent acquisitions in the U.K. "John has done an excellent job of creating an up-front blueprint to successfully integrate and ensure we are optimizing performance from day one. In addition to all of the other things we have talked about, this has been really successful in managing the growth of the company," says Anderson.
People are a fundamental factor in the equation for success. "There's a lot of work that takes place," said Anderson. "You can see it in the caliber of his people, their talent and the scope and breadth of their responsibility and their assignments. He has raised the bar again in 2008 because the quality of output keeps going up. We are becoming a bigger, broader, more complex company and John manages with his organization to not only handle the growth but to challenge his people to improve their performance. You can see the enthusiasm and the global mindset they take to their assignments."
Technology cannot be left out of the story. Honeywell has embarked on an enterprise-wide effort to bridge its systems with SAP across the corporation. The $100 million project has been implemented in two of the business lines–transportation and specialty materials– and is 40% to 50% completed in aerospace and 25% in the automation and control solutions lines. "This will tie into the corporate finance tools. We are evaluating the applicability to treasury's system requirements. However, our current treasury workstation and Web-based tools provide us with excellent cash visibility, as well as the ability to manage risk, and efficiently execute transactions," said Tus.
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