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Rockwell Automation Inc. (ROK - Analyst Report) reported second quarter results registering an EPS increase of 48% to $1.14 from 77 cents in the year-earlier quarter, beating the Zacks Estimate of $1.12.

Total revenue as reported by the company amounted to $1,464.1 million versus $1,164.5 million in the year-ago quarter, moving ahead of the Zacks Estimate of $1,405 million. The currency translation contributed 2% to the revenue increase.

Cost and Margins

Cost of sales as reported by the company increased substantially to $887.6 million from $691.4 million in the prior-year quarter. Gross profit as reported by the company also increased to $576.5 million from $473.1 million in the year-ago quarter. However, gross margins decreased 120 basis points year over year to 39.4% in the quarter.

Operating income as reported by the company rose to $244.2 million from $177.3 million in the prior-year quarter; thereby expanding the operating margin by 150 basis points year over year to 16.7% during the quarter.

Segmental Performance

Architecture & Software: Total sales as reported by the segment increased to $624.2 million from $516.2 million in the year-earlier quarter. Operating profit as reported by the segment surged to $152.2 million from $122.6 million in the prior-year quarter. Consequently, the segment’s operating margin also increased 60 basis points year over year to 24.4% in the quarter.

Control Products & Solutions: Total segment sales were $839.9 million compared with $648.3 million in the year-earlier quarter, representing an increase of 30%. Segment’s operating income as reported by the company was $92 million, up from $54.7 million in the year-ago quarter. Consequently, operating margin of the segment increased 260 basis points year over year to 11% in the quarter.

Financial Position

Cash and cash equivalent improved to $1020.3 million as of March 31, 2011 from $813.4 million as of September 30, 2010.

Long-term debt of the company remained at $904.9 million as of March 31, 2011.

Debt-to-capitalization ratio of the company improved to 32.8% as of March 31, 2011 from 57% as of December 31, 2010 and 62% as of September 30, 2010.

During the quarter the company also repurchased 0.7 million shares of common stock for $58.4 million at an average price of $83.4. Rockwell had $393.9 million available as at March 31, 2011 under its $1.0 billion share repurchase authorization.

Free cash flow of the company amounted to $226.2 million during the second quarter, while the return on capital invested was 27.5%.

Outlook

Management expects a robust industrial sector and an increased tailwind from currency as the company moves into the third quarter of fiscal 2011. However, the earthquake in Japan and unrest in Middle East might have a negative impact on the results.

Considering all these factors, management has increased its revenue guidance in the range of $5.8 billion - $5.7 billion for full year and tapered the full year earnings range to $4.40 - $4.60 per share.

Our Take

Rockwell Automation has a strong global market presence. The company focuses on further expanding its global footprint in emerging markets, as it expects automation growth rates in these markets to be higher than growth rates in developed countries. Growth in emerging markets is the company’s key to meeting its target of deriving 60% of revenues from outside the U.S. by 2013.

As it enters new markets, Rockwell intends to broaden its portfolio of products, services and solutions. Successful diversification into emerging markets and expansion of its product portfolio will drive the company’s top-line growth over the long term. We currently have a Zacks #2 Rank (short-term Buy recommendation) on the stock.

Based in Milwaukee, Wisconsin, Rockwell Automation Inc. is an original equipment manufacturer of industrial automation equipment, application specific integrated software and consulting design services. The company is a leading global provider of industrial automation power, control, and information solutions. Rockwell Automation competes with the likes of ABB Ltd. (ABB - Analyst Report), Emerson Electric Co. (EMR - Analyst Report) and Siemens AG .

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