Not So Sweet Times At Honeywell

Take a tour of Honeywell Inc.'s giant factory in Golden Valley, Minn., and you'll see some of the most advanced production technology around. Sophisticated robots assemble parts for the company's home- and building-control systems, each doing work once performed by several people. Yet alongside those robots, high-priced workers assemble small batches of thermometers by hand, laboring over tasks now typically done in low-wage countries. And nearby racks hold copious amounts of inventory--a sight not seen in state-of-the-art factories for years.

Contradictions? You bet. For years, Honeywell has embodied more than its share. The Minneapolis-based company is a world leader in industrial controls, yet technical prowess hasn't translated to the bottom line. Honeywell has been in decline for a decade, and 1994 was no exception (chart). Net income slid 13%, to $279 million, on revenues of $6.06 billion, up 1.7%. Repeated downsizing hasn't helped: 1994's $38 million write-off was Honeywell's sixth restructuring in eight years. Says a frustrated shareholder: "Sometimes I wonder if management knows what it's doing."

HIGH PRESSURE. Now time may be running out. Investors are growing impatient, and the board is upping pressure to show results. If Honeywell doesn't improve, it could end up on the block. Acknowledges CEO Michael R. Bonsignore: "We have to deliver."

Bonsignore--a 25-year Honeywell veteran who won the top spot in 1993--has promised Honeywell will hike profits between 12% and 16% in 1995, with double-digit gains the next two years. And he pledged that 1994's write-off will be the last. But investors, tired of Honeywell's promises that the payoff from restructuring is coming, appear unconvinced. Neither Bonsignore's upbeat tone--nor a $600 million stock buyback--have budged Honeywell's stock from the mid-30s range since 1992. Not even the recent dismissal of a $1.2 billion judgment that Honeywell was to pay to Litton Industries Inc. for patent infringement boosted the stock.

Certainly, there's reason for skepticism: Honeywell hasn't seen double-digit growth for years. Bonsignore argues that the company has done as well as possible, given faltering markets. Space and aviation revenues nosedived from $2.13 billion in 1991 to $1.43 billion last year, largely because of a slump at Boeing Co. Recession also dented Honeywell's home- and building-controls and industrial automation units.

Even so, rivals such as Emerson Electric Co. and Rockwell Intl. Corp. do far better in the same markets. In home and building products, Honeywell's 10% operating margin falls well short of Emerson's 15%, while Honeywell's 7% margin in aerospace is less than half the 15.5% earned by Rockwell.

Critics say that's because Honeywell still hasn't attacked costs aggressively enough. Although it has taken more than $500 million in restructuring charges since 1986 to shrink manufacturing capacity and cut the workforce 28%, to 51,000 employees, the payoff has been slim. Honeywell's sales, general, and administrative expenses ran 18% of sales in 1994, hardly down from 18.2% in 1987.

Critics blame a clubby, paternalistic culture that avoids tough decisions. Complains one shareholder: "They could easily take $500 million out of the company." Honeywell has only slowly moved labor-intensive jobs out of high-wage Minnesota plants, for example. And one former executive adds that many laid-off workers slipped back on the payroll. "There's no discipline," he says.

Honeywell has few outsiders in top management--and those who have come along, including well-known cost-cutters such as Citicorp Vice-Chairman Christopher J. Steffen and William L. Trubeck, Northwest Airlines Inc.'s former CFO, haven't stayed long. Insiders say frustration with the slow pace of change is a key reason they left.

Bonsignore argues that having long-time Honeywell people at the top is a strength. "We know the company and what it is capable ef," he says. As for criticism that he's moving too slowly, he says earlier moves to squeeze overhead and cut costs will soon pay off. And Bonsignore will finally trim Honeywell's top-heavy European unit in 1995.

FAT CONTRACTS. He's also betting on rebounds in the company's major businesses. The end of recession in Europe and a strong replacement market in the U.S. should bring double-digit growth in home- and building controls. Ditto for industrial controls, which has nabbed big contracts in the Far East. Even the slide in aviation may be over.

But that may not be enough to keep Honeywell independent. One source close to the board says a number of outside directors have put senior management on notice. "They have to do well in 1995 or else," he says.

Still, others on the board are backing Bonsignore: "We are confident in his future leadership," says board member James Howard III, the CEO of Northern States Power Co. "There's no need to tear up this company." But without improvement, some large shareholders say they believe Honeywell could be ripe for a takeover, with General Electric, Siemens, and AlliedSignal mentioned as possible suitors. NatWest Securities Corp. analyst Nicholas P. Heymann says Honeywell could bring between $46 and $59 a share. Still, shareholders may have to wait. Takeover talk has surrounded the company since the late 1980s. And two years ago, GE formed a joint venture with Honeywell in industrial controls. One shareholder calls the GE deal "a wonderful poison pill." The logic: Even if GE doesn't want Honeywell, its presence keeps others from risking a bid.

Bonsignore says he fully expects to meet his growth targets. "I won't be satisfied with anything less," he says. And there are some signs of progress. At the Golden Valley facility, the racks of excess inventory will be gone by yearend. And those jobs being done by hand? They'll be moved if they can't be performed economically in Minnesota. But investors have heard this before. This time, Bonsignore knows he had better deliver.

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