Automation provider Invensys plc ended its fiscal year 2007 on solid footing, emphasizing that it has finally turned an operational corner that will allow it to invest in core businesses. In announcing its fourth-quarter results today, the company singled out its Process Systems group, which is in the midst of transforming from a product group to software and services, as a growth driver.
For the quarter ended March 31, Invensys reported revenue from continuing operations of £694 million, up less than 2% from £682 million in the year-earlier period. Net profit in the quarter surged to £36 million from £12 million a year earlier.
For the full year, Invensys generated £2.56 billion in revenue from continuing operations, up 4% year over year. The sale of the company's Building Systems units in the United States and Asia-Pacific sent 2007 net profit soaring to £209 million from £22 million in the prior year. Operating cash flow from continuing operations more than kept pace, growing to £266 million from £209 million in 2006.
On a conference call with financial analysts today to discuss the results, company officials noted that they had succeeded in bettering operating margin, which rose to 9.4% in 2007 from 7.8% in 2006.
"The operating margin emphasis is on creating stability," said Ulf Henriksson, Invensys's president and CEO. "It has improved and stabilized, which is important for us because it is leading to execution ... The failure in the past was that we couldn't connect the desire of where we wanted to go with the execution of where the company was heading."
That has particular resonance in the Process Systems group, which remains the recognizable darling of the company and brings in the most revenue among the company's five groups — followed by the Controls group and Rail. Each of these businesses could be in for a struggle in the coming year, officials noted, adding that market conditions can be uncertain in long business cycles characteristic of those investments. In Process Systems, for example, where top key accounts grew 30% over the past two years, business should slow as capital expenditures decline, officials said.
In an attempt to counteract any lulls in the future revenue stream, Invensys is transforming the Process Systems group. "Process Systems is a business on a journey to become much more of a software and services company," Invensys CFO Steve Hare told analysts. "Yes, it has products, and they are important, but over the cycle it will not be a business that consumes a lot of cash; it should generate cash."
Hare said the unit is investing more in engineering and sales and marketing. Under the leadership of Paulett Eberhart, an ex-EDS executive who was appointed president of the Process Systems group earlier this year, the group is moving toward managed services by offering new types of applications, such as energy management, that Invensys can manage for a manufacturing customer.
But the shift also means creating a new sales model that targets the business executive rather than the control engineer, Henriksson said. To that end, the discussions will go beyond simply detailing what a distributed control system (DCS) or safety system can do to include how integration and engineering can boost productivity to new levels. "That will change the relationship with key accounts and many other accounts in the future," he said.
The Process group's transformation will also include the addition of manufacturing execution systems (MES). Earlier this month, Invensys announced that it would acquire CIMNET Inc., in a deal valued at $23.2 million. Pending shareholder approval, the deal is expected to close in July. While Invensys had been building out its MES capabilities via the ArchestrA platform, the CIMNET acquisition would provide an MES application on top of the framework, thereby accelerating adoption of MES and leveraging its capabilities across the Invensys InFusion enterprise control system.
Moving forward, Henriksson said, the company will continue to invest in R&D and is adding more engineers to help fulfill the Process group's mission. He credits a stable balance sheet for allowing the company to pursue these initiatives. For the first time in three years, officials noted, free cash flow was positive, and corporate debt plummeted to £166 million from £757 million a year earlier.
"We've now broken the barrier," Henriksson, said. "We've taken [ourselves] to a position of meeting obligations and generating cash flow."