NCR Q2 profit rises

The 1 percent revenue increase from the second quarter of 2004 was benefited by 2 percentage points from currency fluctuations. Due to the strengthening U.S. dollar, the year-over-year revenue comparison included 2 percentage points less of benefit than NCR anticipated when it provided revenue guidance for the second quarter.

NCR reported second-quarter net income of $127 million, or $0.67 per share. This included the benefit of $64 million from the favorable settlement of prior-year tax audits, $19 million of incremental pension expense associated with a previously announced early-retirement program and the net benefit of $9 million from other non-operational items described below. Excluding these items, NCR generated $70 million of net income, or $0.37 per share.

"We are pleased with NCR's continued operating margin improvement in the quarter. The better-than-expected results were led by higher-than-expected revenue growth and profitability in our Teradata Data Warehousing business, continued improvement in our Customer Services business, as well as NCR's continued success in executing our multiyear profit improvement plan," said James M. Ringler, director and interim chief executive officer of NCR. "Those contributions enabled NCR to exceed earnings expectations despite lower-than- expected results in our Financial Self Service business."

Operating Segment Results

Teradata Data Warehousing

NCR's Teradata Data Warehousing segment reported second-quarter revenue of $361 million, up 9 percent from the second quarter of 2004. The second-quarter year-over-year revenue comparison included a 2 percentage point benefit from currency fluctuations.

Operating income of $76 million increased 27 percent from the prior-year period. Operating margin increased more than 300 basis points to 21 percent. The increase in profitability was due to higher volume and increased profitability from support services.

Financial Self Service (ATMs)

The Financial Self Service segment generated second-quarter revenue of $323 million, down 2 percent from a very strong year-ago period. The second-quarter year-over-year revenue comparison included a 2 percentage point benefit from currency fluctuations. Financial Self Service revenue was lower than expected due to the adverse timing of transactions in Eastern Europe and China as well as less benefit than anticipated from currency translation.

Operating income of $43 million was down from $54 million in the strong second quarter of 2004, primarily due to lower volume, an adverse mix of transactions and the impact of increased pricing pressure.

Retail Store Automation

Retail Store Automation revenue of $211 million was roughly the same as the revenue generated in the second quarter of 2004. The second-quarter year-over-year revenue comparison included a benefit of 1 percentage point from currency fluctuations.

Retail Store Automation improved its operating profit to $6 million largely due to expense reductions and a higher volume of revenues from self-service technologies.

Customer Services

Customer Services revenue was down 4 percent to $456 million due to the company's strategy to reduce revenues associated with third-party products. Although total Customer Services revenues declined as anticipated, ATM maintenance revenues increased 10 percent from the second quarter of 2004. The year-over-year revenue comparison included a benefit of 2 percentage points from currency fluctuations.

NCR's strategic shift to focus on maintenance of NCR-branded products and structural changes being made to optimize the efficiency of its Customer Services business resulted in operating income of $8 million, a $30 million improvement from the second quarter of 2004.

Non-Operating Items

Other Income in the quarter included a $15 million gain from the sale of real estate in Dayton. NCR is using $6 million of the gain from the real estate transaction to provide multiyear funding of NCR's charitable foundation for reinvestment back into its local communities. Excluding these items(1), Other Expense was $3 million in the second quarter of 2005 compared to $2 million of Other Expense in the prior-year period.

The company now expects to lower its tax rate to 22 percent for 2005 primarily due to legal entity restructuring. As a result, NCR's operational tax rate for the second quarter of 2005 was 20 percent, adjusting for the 25 percent tax rate used in the first quarter.

Additionally in the second quarter, the company's GAAP results included the non-cash benefit of $64 million related to the successful resolution of prior-year tax audits.

Cash Flow

NCR's cash from operations increased to $195 million from $81 million in the second quarter of 2004. Capital expenditures in the second quarter of 2005 were $62 million, compared to $67 million of capital expenditures in the year-ago period. NCR generated $133 million of free cash flow (cash from operations less capital expenditures) in the second quarter of 2005 versus $14 million in the year-ago period.

Assuming approximately $250 million of capital expenditures, NCR is increasing its expectation for cash flow from operations less capital expenditures, or free cash flow, to $240 million to $250 million in 2005.

Balance Sheet

NCR ended the second quarter with $724 million in cash, cash equivalents and short-term investments, an increase from the $655 million cash balance on March 31, 2005. NCR's cash balance increased due to free cash flow generation exceeding net cash used for share repurchases.

NCR repurchased approximately 2.8 million shares of NCR common stock for approximately $98 million during the second quarter. The company has $138 million remaining on its current share-repurchase authorization from its board of directors.

As of June 30, 2005, NCR had short- and long-term debt of $308 million, versus $309 million as of March 31, 2005.

Outlook

NCR is adjusting its revenue guidance to reflect the strengthening of the U.S. dollar. As a result, NCR now does not expect any benefit from currency translation in the third-quarter or the full-year revenue comparisons.

For the third quarter, NCR expects total revenue to grow 2 percent to 3 percent from the prior-year period. Earnings per share for the third quarter are expected to be $0.28 to $0.33.

For the full year, total revenue is expected to increase 1 percent to 2 percent. Including the non-operational items described earlier, NCR expects its GAAP earnings per share to be $1.75 to $1.80. Excluding the net benefit of the non-operational items identified and included in NCR's first- and second-quarter results, and using a 22 percent tax rate, NCR is further increasing its guidance for 2005 earnings per share to $1.47 to $1.52 per share.