Rockwell Automation and Siemens AG, two well-regarded rivals in the area of discrete control, announced robust first-quarter results to kick off the new year, indicative of continuing strength in the segment.
Rockwell reported that fiscal 2006 first-quarter net income jumped 9% to $145.7 million on sales of $1.3 billion, which were up 11% (adjusted for currency translation) from the year-earlier period.
The much larger Siemens, whose business comprises not only control and power technologies but also medical, transportation, building, and more, reported a 22% rise in sales year over year to €20.7 billion for its first quarter fiscal 2006, ended Dec. 31, 2005. Net income, however, dropped slightly to €813 million from €1 billion in the year-earlier period, a change that is reflective of ongoing investments and acquisition activity.
In contrast to corporate earnings, profits within Siemens' Automation and Drives business increased 19% from the like period of fiscal 2005 to €354 million, which included contributions from Flender Holding GmbH and Robicon Corp., which were acquired in the fourth quarter of fiscal 2005. In addition, sales and orders climbed to €2.93 billion and €3.63 billion, respectively, fueled by strong demand from customers in China and India.
Those results compared favorably to the year-earlier period, when the Automation and Drives Group reported profit of €298 million on sales of €2.29 billion.
The companies' latest results resonated with Wall Street, as Rockwell's stock, for instance, which opened today at $66.84 a share, was up to $67.22 on the New York Stock Exchange (NYSE) in the afternoon. Siemens, also listed on the NYSE, opened at $90.50 and reached $91.77 by afternoon.
A lot of the optimism has to do with the fact that manufacturers are in vigorous investment mode for industrial automation gear.
"One of the reasons a company's stock price goes up, like Rockwell, which has gone from $16 to $64 over the last several years, is the fact that the financial analysts see there is so much to replace," said Craig Resnick, an industry analyst with ARC Advisory Group (Dedham, MA). "There's so much legacy out there ... and these companies [Rockwell and Siemens] are replacing obsolete products."
Sales of Rockwell's Logix control technology, for example, grew over 25% in the quarter. Logix is a core part of the Control Systems group, which contributed $1.07 billion to Rockwell's first-quarter sales. Much of that growth is a result of new market opportunities as Rockwell moves aggressively into process control industries such as oil & gas, pulp & paper, mining, and cement.
While there are fewer greenfield expansions, and spending is more disciplined and restrained than in past growth cycles, process control manufacturers still require new technology. "In the U.S. and Western Europe, we believe the vast majority of spending is for productivity and cost reduction with a tertiary benefit being added capacity," said Rockwell CEO Keith Nosbusch in an analyst briefing yesterday.
Even where there are plant closings, like in the automotive industry where Rockwell has a strong foothold, there's opportunity. "We believe some of that can be offset with greater investment in flexible manufacturing. Independent of closures, there's a need to continue to drive productivity, and we expect the integrated safety capabilities (in Logix) will drive part of that productivity and growth," Nosbusch said.
While Rockwell spent time earlier in the decade getting its technology and corporate house in order, the company has put together an impressive string of consecutive growth quarters. Siemens, which brought on a new CEO last January, is still in the process of rearranging its internal structure. Results from the last two quarters show the Munich, Germany company is moving in the right direction.
For the past 12 months, Siemens president and CEO Klaus Kleinfeld has visited more than 500 customers, addressed employees worldwide, discussed business developments in detail with analysts and investors, and met with political figures and heads of state in key countries, he said at today's annual shareholders' meeting.
"There were quite a few challenges during the past year," he said in a webcast of the event. "And we still need time to master some of them completely. But the most obvious message is that we made solid progress in many areas."
Specifically, Kleinfeld outlined six areas of success: Outstanding growth, as medium-term targets have already been reached; stabilized profits; solid progress among the business groups, with 11 out of 13 having met their margin targets; a strengthened portfolio through acquisitions in medical, power, and automation; an increased investment in R&D of €5.2 billion or around 7% of sales; and a growing workforce -- the company added 37,000 workers worldwide (Siemens' workforce totaled 461,000 employees at the end of fiscal 2005).
One thing both of these companies have going for them is a strong brand awareness. And at least for Rockwell, it is a matter of executing on its plan to reach into new industries and strengthen relationships.
"To do what we need to do doesn't need a lot of investment," said Rockwell CFO James Gelly in an interview with Managing Automation. "Really it is people working with customers. We are generating a lot of cash and we are in the enviable position to put the cash to work," he said, referring to the company's plan to continue to expand Logix and take care of internal affairs such as contributing the maximum amount to the company pension plan. "It is a great place to be."
That's also reflected in Rockwell's improved outlook for the balance of fiscal 2006. Given its strong fiscal first quarter, the company expects full-year 2006 revenue growth, excluding currency translation, to be approximately 9%, which is at the high end of its previously stated range. The company is also raising guidance by 10 cents to between $3.10 and $3.20 a share, and has adjusted its free cash flow guidance upward by $20 million to $300 million to reflect the higher earnings.
For the fiscal second quarter, as was the case last year, the company said it expects a seasonal slowdown in customer capital spending, which could result in sequentially lower daily sales volume and a less profitable revenue mix compared with first-quarter results.