The automated teller machine maker NCR Corp. blamed a steep decline in its second-quarter income on one-time gains in the year-earlier quarter.
The Dayton, Ohio, company reported net income of $78 million, or 42 cents per diluted share, down 39% from the year-earlier quarter. Revenue rose 4%, to $1.53 billion.
NCR said Thursday during a conference call with analysts that its second-quarter results included a $64 million benefit from resolving 2004 tax audits, $19 million in noncash incremental pension expense from an early-retirement program, and $9 million from other nonoperational items. Excluding these items, per-share earnings would have been 37 cents, NCR said.
The company’s ATM business took a hit because the European Union imposed restrictions this month on using hazardous materials in electronic equipment.
William R. Nuti, NCR’s president and chief executive, said during the conference call that the restriction on hazardous substance directive forced the company to do added evaluation of its manufacturing. The directive restricts the use of substances such as lead, mercury, and cadmium in electrical and electronic equipment.
“Our significant European presence caused a large portion of our team’s activity to be focused on RoHS compliance, and the continuous supply of parts,” and that diverted attention away from cost-cutting, Mr. Nuti said.
The ATM division’s revenue of $343 million was up a “better-than-expected 6%,” but profits fell 27.9%, to $31 million. NCR was “unable to offset the expected price erosion with sufficient cost reduction,” Mr. Nuti said.
The Asian market in particular has been problematic. Despite “attractive” sales opportunities, profit margins are poor in parts of the region, Mr. Nuti said. “We’re still making choices in where we want to participate,” he said.
NCR’s supply chain needs to be more efficient, Mr. Nuti said. Demand is greatest in Eastern Europe, the Middle East, and Africa, and the company has been ramping up its new Budapest site.
The company did not provide numbers for its North American ATM sales, but Mr. Nuti said the second quarter was “more difficult” than last year’s.
He predicted that demand will increase when banks begin buying check imaging gear for ATMs. Such systems scan checks and convert them into digital images that can be transmitted to a bank’s processing center. Sales of the systems will start to take off by the end of 2007 and will grow significantly in 2008, Mr. Nuti said.
Mr. Nuti also warned that the U.S. economy may be “softening.” That concern and geopolitical conflicts are creating uncertainty at many businesses and could lead to both lower technology spending and “longer sales cycles in the second half of the year,” he said.
Richard Farmer, an analyst with Merrill Lynch, wrote in a research note published Thursday that NCR beat Wall Street’s revenue forecast by 4.5%, and its earnings per share of 42 cents beat the average estimate by 4 cents.
Mr. Farmer had been expecting 34 cents. “We suspect the revenue and EPS upside in the quarter and roughly in-line outlook may provide a modest relief for investors,” he wrote.
Kartik Mehta, an analyst with First Horizon National Corp.’s FTN Midwest Securities Corp., said NCR’s “ATM growth is really good,” but demand is outstripping its manufacturing costs.
NCR plans to get a second production line running in Budapest because of the relatively high operating expenses at its plant in Dundee, Scotland, and because it has to “keep up with some of the demand in Europe,” Mr. Mehta said.
