NCR Corporation (NYSE:NCR) today reported revenue of $1.61 billion for the quarter ended June 30, 2007.
The 5 percent increase in revenue from the second quarter of 2006 included 2 percentage points of benefit from currency fluctuations.
NCR reported second-quarter net income of $98 million, or $0.54 per diluted share. Earnings reported for the second quarter of 2007 included $21 million or $0.11 per share of net costs from items related to the anticipated spin off of NCR's Teradata Data Warehousing business, a tax adjustment related to prior periods, and the Fox River environmental matter; offset by an update in the estimated costs associated with the company's manufacturing realignment initiative. Excluding these items, non-GAAP earnings were $0.65 per diluted share(1), which compares to $0.42 per diluted share in the second quarter of 2006.
"It's an exciting time at NCR. We delivered our third consecutive quarter of 5 percent revenue growth and improved business results, while continuing to work diligently toward a successful strategic separation of NCR into two separate companies, NCR and Teradata. While pleased with our operational progress, we remain a work-in-process. We are in the midst of growth and operational improvement initiatives that require consistent focus and hard work ahead," said Bill Nuti, president and chief executive officer of NCR.Update on Strategic Separation of Teradata and NCR
In January 2007, NCR announced its intention to separate into two independent, publicly traded companies through the 100 percent spin off of the company's Teradata Data Warehousing business to NCR's shareholders. Upon completion of the spin off, shareholders of NCR will receive shares of Teradata Corporation on a 1-for-1 basis.
During the second quarter of 2007, NCR continued implementing its plan to complete the spin off of Teradata. The company has requested a favorable tax ruling from the Internal Revenue Service regarding the proposed tax-free distribution of NCR's wholly owned subsidiary that will own the assets and liabilities associated with the Teradata business. In addition, Teradata filed and amended its Form 10 registration statement with respect to the spin off with the Securities and Exchange Commission. NCR anticipates the strategic separation should be completed by the end of the third quarter of 2007.Operating Segment Results
Teradata Data Warehousing
NCR's Teradata Data Warehousing segment reported second-quarter revenue of $433 million, a 9 percent increase from the second quarter of 2006. The year-over-year revenue comparison included 1 percentage point of benefit from currency translation.
Operating income of $92 million increased from $86 million in the second quarter of 2006. Teradata's operating income increased as higher revenue more than offset an unfavorable revenue mix of professional services revenues and increased investment in demand creation and engineering.
Financial Self Service (ATMs)
The Financial Self Service segment generated second-quarter revenue of $380 million, an increase of 11 percent from the second quarter of 2006. The second-quarter year-over-year revenue comparison included 4 percentage points of benefit from currency translation.
Operating income of $47 million increased from the $31 million generated in the second quarter of 2006 as higher volume and the benefit of currency translation more than offset an unfavorable shift in geographic revenue mix.
Retail Store Automation
Retail Store Automation reported revenue of $221 million and operating income of $8 million, the same as generated in the second quarter of 2006. Revenue in the second quarter of 2007 included 1 percentage point of benefit from currency translation. Operating income was benefited by an improved mix of revenues from self-service technologies, which was offset by inventory write downs and increased investment in sales, marketing and research and development related to the company's self-service initiatives.
Customer Services revenue of $471 million increased 3 percent from the $457 million recorded in the second quarter of 2006. The second-quarter year-over-year revenue comparison included a 2 percentage point benefit from currency translation. NCR continues to be successful in increasing the mix of revenues from the service of NCR-branded products while reducing lower-margin revenues associated with servicing third-party products. Revenues from the maintenance of ATMs increased 8 percent in the second quarter, while revenues from the maintenance of third-party products declined by 15 percent. Operating income increased to $29 million from $25 million generated in the second quarter of 2006, largely due to higher revenue.
Other Income of $1 million favorably compared to $1 million of Other Expense in the second quarter of 2006. In the current quarter, Other Income included a $7 million net cost associated with the Fox River environmental matter, which was more than offset by higher interest income.
The effective tax rate in the second quarter of 2007 GAAP results was 38 percent. The effective tax rate was higher than expected due to an $18 million net tax adjustment related to prior periods, which increased the effective tax rate by 12 percentage points.(1)
During the second quarter, NCR generated $82 million of cash from operating activities, compared to $134 million in the year-ago period. Capital expenditures in the second quarter of 2007 of $46 million were comparable to $47 million in the year-ago period. NCR generated $36 million of free cash flow (cash from operations less capital expenditures)(3) in the second quarter of 2007, versus generating $87 million in the year-ago period.
Year to date, cash from operating activities was $233 million, an $87 million increase from the prior year. In the first six months of the year, NCR's free cash flow increased to $134 million, compared to $64 million generated in the first half of 2006.(3)
NCR ended the second quarter with $1,139 million in cash and cash equivalents, a $59 million increase from the $1,080 million balance as of March 31, 2007.
As of June 30, 2007, NCR had short- and long-term debt of $307 million, the same as of March 31, 2007.
NCR expects its 2007 GAAP earnings to be $2.21 to $2.31 per share. Excluding $35 million of expense related to the restructuring of NCR's global manufacturing, $14 million of Teradata spin off related expenses incurred through the second quarter, the $18 million tax adjustment, and $7 million of net expense related to the Fox River environmental matter, NCR is increasing its non-GAAP earnings per share outlook by $0.05 to $2.55 to $2.65 for the full-year 2007. (1)
Even though NCR expects to complete the spin off of its Teradata Data Warehousing business in the third quarter of 2007, these earnings forecasts assume NCR operates as one company for the entirety of 2007.
NCR is increasing its expectation for 2007 year-over-year revenue growth to 4 to 5 percent.
(1) NCR's management looks at the company's results excluding certain items to assess the financial performance of the company and believes this information is useful for investors because it provides a more complete understanding of NCR's underlying operational performance, as well as consistency and comparability with past reports of financial results. In addition, management uses earnings per share excluding these items to manage and determine effectiveness of its business managers and as a basis for incentive compensation. These non-GAAP measures should not be considered as substitutes for or superior to results determined in accordance with GAAP.
(2) The operating segment results discussed in this earnings release exclude the impact of $11 million of pension expense in the second quarter of 2007, and $35 million of pension expense in the second quarter of 2006. In addition, the operating segment results for the second quarter of 2007 excluded $1 million of manufacturing realignment and strategic separation costs. When evaluating the year-over-year performance of and making decisions regarding its operating segments, NCR excludes the effect of pension expense/income and certain non-operational items. Schedule B, included in this earnings release, reconciles total income from operations excluding pension expense/income and certain non-operational items for all of the company's operating segments to "Total income from operations" for the company.
(3) NCR defines free cash flow as cash provided/used by operating activities less capital expenditures for property, plant and equipment, and additions to capitalized software. Free cash flow does not have a uniform definition under GAAP and therefore, NCR's definition may differ from other companies' definition of this measure. NCR's management uses free cash flow to assess the financial performance of the company and believes it is useful for investors because it relates the operating cash flow of the company to the capital that is spent to continue and improve business operations. In particular, free cash flow indicates the amount of cash generated after capital expenditures for, among other things, investment in the company's existing businesses, strategic acquisitions, strengthening the company's balance sheet, repurchase of company stock and repayment of the company's debt obligations. Free cash flow does not represent the residual cash flow available for discretionary expenditures since there may be other nondiscretionary expenditures that are not deducted from the measure. This non-GAAP measure should not be considered a substitute for or superior to cash flows from operating activities under GAAP.
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