Setting Records At Rockwell

By Ted Dieck | Recruiter’s View - Benchmark Companies - Market Indicators - Pick | Jun 16, 2012

ROK is projecting another record year.  Controls and Canada are leading the way.  (Are you getting any of this?)

Here’s a quick look at the Q2 financials for Rockwell Automation, reporting on the quarter ending March 31, 2012. (Note, ROK closes their fiscal year on September 30.)

Controls and Solutions

Let’s get right to our industry segment…

Rockwell Automation launched 2012 with bust out sales and fat margins. (Remember, what Rockwell calls the first quarter of 2012 is what everybody else calls the last quarter for 2011.  I think they just want to be first at everything.)

Earnings per share grew an (unsustainable) 22%.

That obscured an abrupt 15% drop in sales for Controls and Solutions, moving from ROK’s 2011 Q4 through 2012 Q1. That was a little strange.

Looking at Controls on a Year Over Year basis, the picture is much cheerier.

CEO Keith D. Nosbusch reported in Q1 that, “Process had a great quarter with 22 percent sales growth.

In Q2, he said, “Process continued to perform well with 23 percent sales growth.”

I hope you got a piece of that.

Regional Sales, Year Over Year

To make serious money on this side of the globe, you probably had to be in Canada, where things are booming, up 23%. U.S. growth was puny at 5%. Latin America actually went negative (-1%.) Meanwhile, Asia-Pacific is hanging in with a nice 11% growth rate.

Working Harder For Less

Rockwell may be straining, some, to maintain good numbers.

Q2 revenues did improve from the hiccup in Q1. But margins tightened, making Gross Profits for Q1 and Q2 nearly identical.

Expenses increased in Q2, so Rockwell effectively worked harder in Q2 to make less than it did in Q1.

Then, the taxes. Income tax payments were significantly higher than a year ago, knocking net income down to 2011 levels during a potential record 2012. (The effective tax rate rose from 19.4% to 22.4%.)

Rockwell’s Remedy: Buy More Stock

It can’t be lost on Rockwell’s leadership that working harder for less money is seriously unsatisfying.

Stashing absurd piles of cash is also dangerous.

Like many cash rich companies, Rockwell is taking the somewhat neutral position of buying back its own stock and increasing its dividend.

It’s safer than investing in new ventures in a high risk world, and the repurchase strategy lends some price and income support to investors willing to stay with the company.

ROK must have quite an appetite for its own stock. Here’s the record…

Recent Stock Repurchases

In Q1, ROK bought 100,000 of its own shares at $80.
In Q2, ROK bought 500,000 of its own shares at $81.

On March 31, 2012, $153.4 million remained available under the $1.0 billion share repurchase authorization.

On June 7, 2012, approximately $53 million was still available. That implies that another $100 million was spent, so…

In Q3, ROK must have bought at least 1,000,000 more of its own shares. (Probably much more.)

$1 Billion More for ROK

On June 8, 2012, Rockwell Automation acknowledged that the billion dollar stock repurchase program was winding down.

So, Rockwell announced a second billion dollar stock repurchase allowance.

And we’re off to the races again.

Reading The Tea Leaves

Rockwell might as well park $2 billion in its own stock. We’re living in strange times, and nothing else looks more rewarding.

ROK stock pays a dividend below 3%, providing a small savings to the company on stock it repurchased. However, investors may not care about the already modest $1.88 per share dividend, if our government crushes that benefit with increased taxes.

The stock that Rockwell just purchased may fall, as a result.

The officers must know this. They unloaded a bunch of their own stock during market highs this year.

Nevertheless, our purpose here is not to write an investment letter.

We’re interested in what Rockwell is telling us about our industry.

The Message From Rockwell

My take on all this…

The controls business is doing nicely – pretty much every place but here.

Sales and profit growth have been strong, but the growth rate is slowing.

And if you go where the action is, you can do very, very well.

We’re due for a Q3 report from Rockwell shortly. I’ll try to follow up with insights from that.

So, what do you say? How does all this compare with your business activity?

Are you seeing anything different?

— TD