Rockwell Impresses, Ups Guidance

Rockwell Automation Inc. (ROK - Analyst Report) reported fiscal 2011 third quarter results, registering an EPS of $1.22 versus 83 cents in the year-ago quarter, striding ahead of the Zacks Consensus Estimate of $1.19.

Total revenue reported increased 20% year over year to $1.52 billion in the quarter, outshining the Zacks Consensus Estimate of $1.48 billion. Sales improved due to a 6% contribution from currency translation.

Cost and Margins

Cost of sales increased to $909.4 million in the reported quarter from $760.8 million in the year-earlier quarter. Gross profit in the quarter soared to $606.8 million from $507.3 million in the year-earlier quarter. Gross margins were essentially flat at 40% from the year-ago levels.

Selling, general and administrative expenses also increased to $370 million from $333.3 million in the year-ago quarter. Operating profit amounted to $263.3 million in the quarter, up from $198 million in the prior-year quarter, thereby expanding operating margin by 180 basis points year over year to 17.4%.

Segmental Performance

Net sales in Architecture & Software segment soared to $672.9 million in the quarter from $553.9 million in the year-earlier quarter. Currency translation contributed 6% to the sales increase.

Operating profit of the segment was $175.9 million, up from $125.4 million in the year-earlier quarter. Consequently, operating margins increased sharply by 350 basis points year over year to 26.1% in the quarter.

Total revenue of Control Products & Solutions segment rose to $843.3 million in the quarter from $714.2 million in the year-earlier quarter. Currency translation added 5% to the increase, while acquisitions contributed 1%.

The segment’s operating income totaled $87.4 million up from $72.56 million in the prior-year quarter, thereby improving margins by 20 basis points year over year to 10.4%.

Financial Position

Cash and cash equivalents, as of June 30, 2011 rose substantially to $1.02 billion from $813.4 million as of September 30, 2010.

Debt-to-capitalization ratio of the company improved to 32.3% as of June 30, 2011 from 32.8% as of March 31, 2011 and 57.0% as of December 31, 2010.

Cash from operations also improved to $462.5 million at the end of third quarter from $433.4 million at the end of year-earlier period.

Free cash flow was $193.7 million in the third quarter of fiscal 2011, while return on invested capital was 29.3%.

During the reported quarter, Rockwell repurchased 1.35 million shares of its common stock at a cost of $114.3 million. As of June 30, 2011, $280 million still remained available under the $1.0 billion share repurchase authorization.

Outlook

Encouraged by the results and favorable impact from currency translations, the company has raised its full year sales guidance to $5.9 billion and earnings for the full year are projected in the range of $4.55 to $4.65. This represents an approximately 50% increase over last year.

Our Take

One of the driving factors of the company’s revenue was contributions from currency translations, which are expected to drive revenue even in the coming quarters. 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 earning 60% of revenues from outside the U.S. by 2013. We currently have a Zacks #3 Rank (short-term Hold 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 - Snapshot Report), Emerson Electric Co. (EMR - Analyst Report) and Siemens AG (SI - Analyst Report).

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