Lessons from the Titans: What Companies in the New Economy Can Learn from the Great Industrial Giants to Drive Sustainable Success by Scott Davis & Carter Copeland & Rob Wertheimer
Author:Scott Davis & Carter Copeland & Rob Wertheimer [Scott Davis]
Language: eng
Format: epub
Publisher: McGraw-Hill
Published: 2020-07-13T16:00:00+00:00
Step 5: Undertaking a Financial Overhaul
All these fixes depended on Honeywell shoring up its financial position, notably generating far greater cash flow. Early on, Anderson as CFO had committed to investors that Honeywell would raise its cash/net income ratio to 95 percent, up from the historical 80 percent level. Actual results were closer to 100 percent. That cash came from the benefits that accrued from introducing Lean manufacturing, using better pricing strategies, having more value-added products, and holding the line on fixed costs. All of these drove sustainable changes.
To accelerate a decline in liabilities, Cote and Anderson got creative. They believed the company’s stock was deeply undervalued, so they issued new shares and put them in the underfunded pension plan. Investors hated the move because it diluted their ownership stake, but it went a long way to solving the immediate liability crisis. As usual, Cote took the heat and stayed focused. As the stock firmed up over time, the pension did as well. The strategy worked, and the pension has been fully funded for some time now.
On asbestos liabilities, the company had exposure from two separate legacy businesses: Narco and Bendix. Combined, the two exposures scared people; separately they seemed manageable. So Cote and Anderson ring-fenced Narco by getting the claimants’ permission to set up a trust with all liability and associated insurance coverage. The trust freed Honeywell from Narco exposure even if the claim forecasts proved inaccurate. Getting that freedom proved expensive, and Cote received fresh criticism for the hit. But he needed certainty from at least one of the asbestos battles. As for the environmental liabilities, Cote and Anderson likewise created some certainty by settling claims and ring-fencing what they could, all with a high level of transparency and integrity.
The company needed a capital structure for its debt that didn’t make investors nervous. Until cash flow improved a lot, Honeywell had to stay conservative. It had to self-fund all investments, keep fixed costs flat, and sell off weak assets at decent prices. Over time, growth in cash flow was so high that liabilities became an afterthought. In fact, by 2008, investors pushed for greater risk taking, not less.
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