Third-quarter results released today for Invensys plc showed little overall growth from the previous quarter, but appreciable gains compared with the like period last year, indicating that a measured recovery from losses of past years is still under way.
In the most recent quarter ended Dec. 31, 2005, total revenue for the diversified automation provider ticked up slightly, to £628 million from quarter two's £622 million. Growth was more substantial when compared to the same period a year ago, when Invensys posted revenue of £595 million.
Operating profit for the company came in at £48 million in the third quarter, identical to the amount logged one quarter earlier, and up from £44 million year over year.
Since Ulf Henriksson's induction as CEO last July, Invensys has focused on financial stabilization, tended to the effects of acquisitions that had bruised its balance sheet, and overhauled a management group that was unable to steer the company toward growth. Since his arrival, Henriksson has remained unerringly on message: build a strong team that the company hopes will catalyze the delivery of improved products to customers, and extract inefficiencies from the business wherever they occur.
"We are at the stage of building a foundation," he said on a conference call with analysts to announce the financial results, adding that Invensys has "made good progress with each of our six elements." Those elements include some on which Invensys has executed well in recent quarters: reducing legacy liabilities, improving free cash flow, and divesting businesses for sale. Free cash inflow before legacy items in quarter three reached £47 million, a marked improvement over the total of £6 million in the year-prior period. Similar success has come from the company's effort to reduce legacy liabilities: since 2003, Invensys more than halved its obligations in categories such as taxation, environmental/litigation, and transition costs.
The other prescribed elements, such as improving execution efficiency and bettering the business units' capabilities for growth, remain to be proven, and will likely play an important role in determining the company's future progress.
Of Invensys' five business groups, the Process Systems unit has best exemplified Henriksson's commitment to steady improvement, and in the third quarter continued to lead the way in the company's still-fledgling recovery.
The Process Systems group markets automation technology, including the integrated architecture of ArchestrA and products under the Wonderware and Foxboro brands, for chemical and energy companies. The key verticals covered by this group -- oil & gas and energy -- help determine the fate of the group itself, and the recent upsurge in these sectors has translated to gains at Invensys. Henriksson noted that total orders were up 17% over the same quarter a year ago to £200 million, and that the unit showed increases in each of its operating regions.
Year-over-year, revenue grew 8% to £183 million, while operating profit jumped from £8 million to £22 million. Operating margin, a strong measure of Henriksson's focus on efficiency, came in at a gaudy 12%, up from just 4.9% a year ago. "I must say," Henriksson declared, "our investment in building a strong foundation is now paying off."
While that may be true in the Process Systems group, the same cannot be said -- at least not yet -- for Invensys' Controls unit. Slightly larger than the Process group, Controls, which provides control systems products and services to industrial refrigeration, appliance, and building automation manufacturers, has experienced many of the growing pains that its counterpart has managed to avoid.
In today's announcement, its revenue of £217 million in the quarter compared with £215 million in the same quarter of the last fiscal year, and orders were down 1%.
Henriksson attributed Control's lack of traction in part to pricing pressures in the appliances market, but sounded a hopeful note when discussing upcoming, though unspecified, product launches as well as a strengthened management team within the group.
At the helm of that team is Chan Galbato, who came on as president of Controls in October of last year. Galbato's number-one priority, Henriksson said, is to deliver what the customer wants on time and with superior quality. (Product recall costs in the first nine months of fiscal 2005 set Invensys back £30 million; so far the 2006 balance sheet is clear of any such charges.) Once this process is in place, Henriksson said, the company will be able to ask for more business and better prices.
Cost cutting, he noted, remains a priority within Controls, but is subordinate to the main goal of timely delivery and high-quality products.
The nearly flat performance of the company from the second quarter to the third should be a precursor to strong fourth-quarter results, officials said. After detailing the quarter's numbers, CFO Adrian Hennah noted, "We do, however, continue to expect [operating profit] in the fourth quarter to be materially stronger than in the other quarters."
Hennah has announced that he will be leaving Invensys in June. "I am delighted for him on a personal basis," Henriksson noted. "But I'm also sad that he's leaving us." The search for a new CFO, he said, is under way.
Invensys' overall guidance for this fiscal year, according to Henriksson, remains in line with original estimates, and reflects a climate of optimism that has permeated the automation and control sector, buoyed by recent strong quarterly results from other vendors such as ABB Group, Emerson Electric, Rockwell Automation, Schneider Electric, and Siemens AG.