NCR reports Q4 earnings rise

The 4 percent revenue decline from the fourth quarter of 2004 included the negative impact of 3 percentage points from currency fluctuations. Revenue declined 1 percentage point when compared in constant currency.

NCR reported fourth-quarter net income of $150 million, or $0.81 per share, compared to $129 million of net income, or $0.68 per share, reported in the fourth quarter of 2004. Included in the 2005 fourth-quarter results was $20 million, or $0.11 per share, from favorable tax items. Net income in the fourth quarter of 2004 included the net benefit of $35 million, or $0.18 per share, from non-operational items.

"NCR finished 2005 on a strong note, with better-than-expected profitability and revenue roughly in line with expectations despite headwind from adverse currency fluctuations. Teradata revenue and profitability exceeded our expectations, and Customer Services achieved meaningful profit improvement from the fourth quarter of 2004," said Bill Nuti, president and chief executive officer.

"I want to congratulate our employees on their successful execution and dedication this past year. Going forward, we will continue our actions to improve the operational efficiency of NCR, while making investments in our existing businesses for future growth."

Operating Segment Results

Teradata Data Warehousing

NCR's Teradata Data Warehousing segment reported fourth-quarter revenue of $408 million, down 1 percent from the fourth quarter of 2004. When compared in constant currency dollars, Teradata Data Warehousing revenue increased 1 percent from a very strong fourth quarter of 2004.

Operating income of $89 million increased 24 percent from the fourth quarter of 2004. Operating margin of 22 percent was a 5 percentage point improvement from the prior-year period. The increase in profitability was due to a favorable revenue mix, cost reductions and increased profitability from support services.

Financial Self Service (ATMs)

The Financial Self Service segment generated fourth-quarter revenue of $446 million, down 1 percent from the fourth quarter of 2004. Financial Self Service revenue increased 2 percent from the strong fourth quarter of 2004 when compared in constant currency dollars.

Operating income of $84 million was down slightly from $88 million generated in the fourth quarter of 2004, primarily due to lower revenue and continued competitive pricing pressure.

Retail Store Automation

Retail Store Automation revenue of $258 million was down 4 percent from the fourth quarter of 2004. Retail Store Automation revenue declined 1 percent when compared in constant currency.

Despite lower revenue, Retail Store Automation operating profit of $19 million improved from $18 million in the fourth quarter of 2004, largely due to a favorable revenue mix shift toward self-service technologies.

Customer Services

Customer Services revenue was down 6 percent to $471 million due to the company's strategy to reduce revenues associated with third-party products. Revenue decreased 3 percent from the fourth quarter of 2004 when compared in constant currency dollars.

Operating income of $25 million was up significantly from the $7 million loss experienced in the fourth quarter of 2004. The improvement was driven by continued structural changes designed to optimize efficiency, improved revenue mix, as well as some benefit from lower-than-expected employee benefit costs in 2005.

As part of NCR's continued actions to improve profitability in its Customer Services business, it expects to offer an early retirement program to qualified Customer Service engineers in the first quarter. Depending on the level of participation in this program, the company could see up to a $20 million, non-cash charge to pension expense in the first quarter of 2006. Assuming 50 percent of those eligible do participate, NCR would incur approximately $10 million of additional non-cash pension expense in the first quarter, which should result in annual cost savings of $3 million to $4 million, beginning in late 2006. This program is similar to the early retirement program offered to Customer Service engineers in the second quarter of 2005.

Other Items

Other Expense was $4 million in the fourth quarter of 2005, versus $20 million of Other Income reported in the fourth quarter of 2004. The Other Income reported in the fourth quarter of 2004 included the benefit of $26 million from non-operating items.

The company's tax rate of 10 percent for the fourth quarter of 2005 was lower than the 22 percent effective tax rate estimated at the end of the third quarter of 2005, reflecting the benefit from the favorable settlement of prior-year tax audits, and more of the company's profit being generated in several foreign countries, which have lower effective tax rates. The company's 2005 fourth-quarter net income included approximately $20 million, or $0.11 per share, from these favorable tax items. NCR expects its effective tax rate for 2006 to be 22 percent.

Cash Flow

During the fourth quarter, NCR generated $240 million of cash from operations, an increase of $45 million from the prior-year period. Capital expenditures in the fourth quarter of 2005 were $68 million, compared to $71 million of capital expenditures in the year-ago period. NCR generated $172 million of free cash flow (cash from operations less capital expenditures) in the fourth quarter of 2005 versus $124 million in the year-ago period.

For the full year, NCR generated $608 million of cash from operations. After using $241 million for capital expenditures, NCR generated $367 million of free cash flow, doubling the free cash flow generated in 2004.

Balance Sheet

NCR ended the fourth quarter with $810 million in cash, cash equivalents and short-term investments, a $70 million increase from the $740 million cash balance on Sept. 30, 2005. NCR's cash balance increased due to free cash flow generation and proceeds from employee stock plans exceeding net cash used for share repurchases and small acquisitions.

NCR repurchased 3 million shares of NCR common stock for $95 million during the fourth quarter. During the full year, NCR repurchased 12 million shares for $415 million. The company has approximately $477 million authorized for future share repurchases.

Approximately 800,000 options were exercised during the fourth quarter, with roughly 6 million options being exercised during the course of the year.

As of Dec. 31, 2005, NCR had short- and long-term debt of $307 million, relatively unchanged from Sept. 30, 2005.

Despite better-than-expected asset returns on the company's pension plan assets in 2005, long-term interest rates declined globally, necessitating a reduction in the discount rates used to calculate pension liabilities for NCR's various pension plans worldwide. As a result of these discount rate changes, NCR was required to record a $403 million pre-tax non-cash charge to stockholder's equity on its Balance Sheet for additional minimum liabilities associated with the company's defined benefit pension plans. This charge, which was $269 million on an after-tax basis, did not have any effect on NCR's fourth-quarter earnings, nor is it expected to affect the company's cash flow, debt covenants or otherwise impact the business operations of the company.

Full-Year Performance

For the full year, total revenue increased 1 percent from 2004, with little impact from year-over-year foreign currency fluctuations. Teradata Data Warehousing revenue growth of 9 percent was largely offset by a 5 percent decline in Customer Services revenue as the company is reducing lower margin service contracts associated with some third-party products.

Although net revenue growth was limited, an improving cost structure and a more favorable revenue mix enabled continued operating margin improvement.

2006 Outlook

Including the negative impact of 1 percent to 2 percent from currency fluctuations, 2006 revenue is expected to be roughly the same as generated in 2005.

Continued execution of the company's multiyear profit improvement plan positions NCR to achieve the 2007 earnings target it provided in December 2004, a year ahead of plan. Including approximately $0.10 of incremental stock-based compensation expense, NCR expects GAAP earnings per share to be $1.85 to $1.90 in 2006. Excluding the incremental stock-based compensation expense, NCR expects 2006 earnings per share in the $1.95 to $2.00 range.

NCR anticipates 2006 earnings expansion will be more prevalent later in the year due to increased investment for future growth opportunities, particularly in its enterprise analytics and self-service technologies, and lower ATM revenues earlier in the year. The company will be providing its guidance on an annual basis going forward, reflecting management's belief that annual improvement is the most meaningful measure of the company's performance over the longer term.