A P DF CO MPA N ION TO T HE AU D I OBOOK

CHAPTER TWO

The Magic of Plan forFixed

Holding and Tomorrow
TodayCosts
Constant While Growing Sales

In most businesses, variable margins run somewhere between 30 to

80 percent. For every dollar of sales, between 30 and 80 cents goes to
income, provided you hold fixed costs constant. If you allow fixed costs
to increase, that margin gets chewed up. The chart below illustrates the
impact. Just by holding fixed costs constant, we get 10 percent earnings
The Magic of Holding Fixed Costs
growth instead of zero:
Constant While Growing Sales

FIXED COSTS
In most businesses, variable marginsCONSTANT
run somewhere between 30 to
80 percent. For every dollar of sales, between
Year 1 30 andYear80
2 cents goes to
income, provided
Sales you hold fixed costs constant.
100 If you
103allow fixed costs
to increase, Variable
that margin gets
Margin chewed up.40The chart below
@40% 41 illustrates the
impact. Just Fixed
by holding
Costs fixed costs constant,
30 we get 10 percent
30 earnings
growth instead of zero:Margin
Operating 10 11
10% growth
FIXED COSTS CONSTANT
FIXED COSTS GROWYear 1 SALES
WITH Year 2
Sales 100 1
Year 103 2
Year
Variable Margin @40%
Sales 40
100 41
103
Fixed Costs
Variable Margin @40% 30
40 30
41
Fixed CostsMargin
Operating 30
10 31
11
Operating Margin 10 10
10% growth
0% growth

FIXED COSTS GROW WITH SALES

48 Year 1 Year 2
Sales 100 103
WinningNowWinningLater_3P.indd 33 Variable Margin @40% 40 41 3/26/20 8:42 AM

Fixed Costs 30 31
WinningNowWinningLater_3P.indd 48 3/26/20 8:42 AM
Operating Margin 10 10
0% growth
 CHAPTER THREE

Resolve Serious Threats to the Business

WHAT HAPPENS TO PROBLEMS AND THE

RESOURCES REQUIRED TO ADDRESS THEM OVER TIME

PRO B LE M
CO S T SIZE

Cost

Problem

TI M E

73

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 CHAPTER FOUR

Focus on Process

to their families and proudly talk about what they had accomplished. By giving
employees the chance to engage mentally with their work and to be part of a
team that worked better together, HOS improved both retention and morale.

Identify the
opportunity
Present to Form
stakeholders a team
and leadership

Determine
Implement, The Kaizen the Kaizen
refine, and Event Event
standardize
Process objectives

Schedule
Develop
the event
improvement
Understand and complete
ideas
the current pre-work
state and
determine the
root cause

While visiting Honeywell plants, DeSarla remembered listening to a

presentation about process improvement ideas delivered by a number of
unionized hourly employees. One employee stood before a white board and
described a complex map of a new, more efficient production process, not-
WinningNowWinningLater_3P.indd 81 3/26/20 8:42 AM
ing the improvement had reduced the workforce required by two people. “I
thought that was incredible,” DeSarla said. “It’s not what you usually hear.
The enthusiasm of a unionized hourly work force just reinforced the idea
 HOS Overview – Implementation Framework ONGOING

Phase 1 Phase 2 Phase 3 Phase 4 Phase 5

Organizational Baseline Learning Work Pursuing

Readiness and Through Process Excellence
(Pre-Launch) Planning Observation Improvement

1 Getting ready. Leadership is ready to embark and sustain the journey

2 Baseline analysis and prioritize opportunities. Establish your deployment

3 Begin to execute your changes to create future state organization

4 Implement future state to achieve targeted results

5 Site management operating system in place to drive continuous improvement culture

B Integrating leadership beyond facility walls across all functions with all employees

S Leverage and improve operating system supporting enterprise

G Bringing all best practices/processes into a single focus to grow faster than competition

Structured Approach to Deployment

Our graduated framework for implementing HOS, as it had evolved by 2016

WHAT PROCESSES TRULY ARE VS.

WHAT WE MIGHT THINK OR WISH THEY WERE

What you think96

WinningNowWinningLater_3P.indd the process is What you want the process to be What the process actually is 3/26/20 8:42 AM
 CHAPTER SIX

Get and Keep the Right Leaders—

But Not Too Many of Them

HONEYWELL’S PERFORMANCE IN 2003 VS. 2017

BUSINESS PERFORMANCE
EPS Up
ICP PLAN
Market TEV ($B)
371% Cap ($B)
Up 400%
Up 388% (TOTAL HON)
$7.11 $122
$115

Dividend
Per Share
Sales ($B) ICP
Up 265%
Up 83% Annual Eligible
ICP ($M) Down
$2.74 14% Up 14%
$40.5 Segment
Profit ($B) 740
Up 221% Free Cash $80 639
Flow ($B) $70
Up 227%
$22.1 $7.7
$1.51
$4.9 $20.5 $25
$0.75
$2.4 $1.5
2003 2017 2003 2017 2003 2017 2003 2017 2003 2017 2003 2017 2003 2003 2003 2017 2003 2017

NOTE: Reconciliation, notes, and definitions of non-GAAP financial measures used in the Compensation
Discussion and Analysis section and elsewhere in this proxy statement, other than as part of disclosure of
target levels, can be found on page 30 or in Appendix B.

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 CHAPTER SEVEN

Go Big on Growth

GLOBAL GDP PERCENTAGES FROM 1990–2035

U.S. Other Developed HGR

53%

52%
43%

39%

38%
35%
27% 28%

23%
22%
19%

21%

1990 2010 2017 2035

Source: Global Insight

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 CHAPTER EIGHT

Upgrade Your Portfolio

DISCIPLINED M&A PROCESS

Identification Due Dilligence Valuation Integration

Then: Before Process Overhaul

• Hey, That’s for Sale • Zeal for the Deal • Sales Synergies Incl. • Joes’ Retiring . . .

• Deal is the Strategy • Ignore Findings • Realization Rate Low • Delayed Start

Now: Last 15 Years

• Strategy Comes First • Functional Expertise • Cost Synergies Only • Best People Full-Time

• Constant Screening • Relentless Discipline • Rigorously Scoped • Mgmt. Development

• Deeper Broader Pipe • Price Part of Strategy • Planning Starts at

Due Diligence

Robust Pipeline Kill Bad Deals Never Overpay Great Track Record

Smartly Adding to Great Positions in Good Industries

Honeywell Confidential · C 2016 by Honeywell International Inc. All rights reserved.

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 CHAPTER NINE

Take Control of the Downturns

LIST OF COMMON COST-CUTTING RESPONSES TO RECESSIONS

COST
PRO CONS
CATEGORIES
Direct Material • If you can get price reductions • It’s tough to do, as most companies
(material that goes from suppliers, terrific! have contracts in place with
directly into the suppliers. But you should definitely
manufacture of try.
your products) • The impact of these cuts are
delayed if you have to go through
an inventory account.
Indirect Material/ • This is a great move to make • As long as these cuts don’t impact
Services (payments because by reducing usage, you customers, then they’re fair game.
to suppliers other cut costs immediately.
than material that
goes directly into
the product)
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Temporary • These cuts lower your costs • Make sure it doesn’t affect
or Contract immediately. They work if customers.
Employees you always maintain a small • You have to keep an eye on legal
portion (10–20 percent) of classifications.
your workforce as temporary/
contract while observing
applicable state/federal laws
regarding classification.
Wages/Salaries to Employees
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• Layoffs • These cuts affect only a • The financial returns aren’t great.
small percent (10–20 percent) of • Your organization will accrue a big
the workforce. expense up front, with the potential
 portion (10–20 percent) of
your workforce as temporary/
contract while observing
applicable state/federal laws
regarding classification.
Wages/Salaries to Employees
• Layoffs • These cuts affect only a
small percent (10–20 percent) of
the workforce.
• Furloughs • These are a lot less costly in
financial terms.
• They preserve your industrial
base for recovery.
• When recovery begins,
employees feel better about it.
Benefits • Employees don’t feel the effects
of benefits cuts immediately.
• The cost savings show up
quickly in company financials.
Depreciation/ • As long as it doesn’t affect
Amortization customers, it’s much less
painful.
Bonuses • Employees see bonus reduction
as essential, a sign that “we’re
WinningNowWinningLater_3P.indd 225 all in it together.”
• Cuts in bonuses have an
immediate impact on financials.
Direct Support • Cuts in customer support have
to Customer an immediate financial impact.
(cooperative
advertising, etc.)
classifications.
• The financial returns aren’t great.
• Your organization will accrue a big
expense up front, with the potential
for survivor guilt among remaining
employees.
• Layoffs hurt your industrial base,
compromising your ability to
respond during the coming recovery.
• Furloughs affect 100 percent of the
workforce.
• They are more difficult to
administer because laws vary in
different states and countries.
• Employees won’t like benefits cuts,
but they will recognize that such
cuts are better than more furloughs
or layoffs.
• Difficult to impact because most of
this is driven by past expenditures.
• Leaders feel like they’re working
harder than ever for a lot less.
You can minimize resentment 3/26/20 8:42 AM
by finding a way to help leaders
over time (for instance, by issuing
bonuses in stock).
• Customer impact cuts are a really
bad idea, as they could cause
customers to flee, hurting you over
the long term.
 COMPARISON OF HONEYWELL RECESSION RECOVERIES
W IN NIN G N O W, W IN NIN G L AT E R

(SB) Sales Segment Margin EPS

11% Down Lost 320 bps Lost Money
$25.0 14.5% $2.05
$22.3 11.3%
Last
Recession
-$0.27

2000 2002 2000 2002 2000 2002

15% Down Maintained Rate 30% Down

$36.6
$30.9 13.3% 13.3% $3.82
This
Recession $2.59

2008 2009 2008 2009 2008 2009

*Last recession shown as originally reported; 2008 and 2009 on proforma basis

Source: “Honeywell: Lessons Learned from the Recession of

2008–2009,” Unpublished Honeywell white paper

The pieces were in place for rapid growth. From 2006 to 2012, our earn-
ings per share rose 78 percent, more than doubling the average increase
HONEYWELL’S RECOVERY COMPARED TO THE S&P 500
seen by our investor competitors (the other big industrial companies with
which we compete for investment dollars). As the chart on the next page
HON Vs S&P 500* (1st Jan’03 to 31st Mar’18)
shows, our performance continued to dwarf that of the S&P 500 for the next
HON
+482%
700
decade. Many of the investments we had been making for years in R&D,
600
the Honeywell Operating System, culture, globalization, and safety training
500
began to bear fruit. Although our employees initially chafed against our
400
cost-cutting measures, a number of them contacted me after the recession
300
ended
200
to thank me for choosing furloughs over restructuring. Employee
turnover
100 was only slightly higher in 2009 than in 2008, and the percent
S&P 500
+191%
of—employees who regarded Honeywell favorably only slightly lower.5 Our
leadership corps eventually were made whole in their bonuses, thanks to
03

04

05

06

07

08

09

10

11

12

13

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subsequent rises in our share price. As we grew our business in the years to
come, employees benefited too, in the form of higher salaries, more stable
jobs, and a company people could believe in. We eventually returned our
401(k) match to about where it had been, although exorbitant medical costs
prevented us from reinstating our retiree health benefit.