NCR Corporation Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012; filed March 1, 2013. The filing is for NCR Corporation, not a later NCR Voyix reporting period, and covers the full year rather than Q4 alone. Amounts below are in U.S. dollars; financial statement amounts are generally in millions.
Business context
NCR provided ATMs, point-of-sale systems, kiosks, software, consumables and related services to financial services, retail, hospitality, travel, telecommunications and technology customers. Its four reportable segments were Financial Services, Retail Solutions, Hospitality and Emerging Industries. Management emphasized growing higher-margin software and services, innovation, cost efficiency and customer loyalty.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $5,730 | $5,291 |
| Gross profit / margin | $1,345 / 23.5% | $1,182 / 22.3% |
| Operating income | $232 | $212 |
| Income from continuing operations attributable to NCR common stockholders | $140 | $146 |
| Net income attributable to NCR | $146 | $53 |
| Diluted EPS, continuing operations / total | $0.85 / $0.89 | $0.91 / $0.33 |
| Cash from operating activities | $(180) | $388 |
| Cash and cash equivalents at year-end | $1,069 | $398 |
| Total debt at year-end | $1,963 | $853 |
| Total assets / NCR stockholders’ equity | $6,371 / $1,247 | $5,591 / $785 |
Product revenue was $2,854 million, up 10%; services revenue was $2,876 million, up 7%. Product and services gross margins were 23.7% and 23.2%, respectively. Revenue grew 8% reported and 11% in constant currency; foreign exchange reduced reported growth by approximately 3 percentage points. Operating income included $292 million in pension expense, including a $119 million pension settlement charge, and $65 million of other adjustments, including acquisition costs and amortization.
Free cash flow, a company-defined non-GAAP measure, was $(454) million versus $188 million in 2011. NCR attributed the decline principally to $600 million of discretionary U.S. pension contributions; excluding those contributions, 2012 free cash flow was $146 million. Year-end borrowing capacity under the secured credit facility was approximately $833 million. Management stated that available cash, operating cash flows and financing were expected to meet requirements over the next 12 months.
Changes versus the prior comparable period
- Revenue increased 8% and gross margin expanded 1.2 percentage points. Financial Services and Hospitality improved, while Retail Solutions and Emerging Industries revenue declined.
- Financial Services revenue rose 6% to $3,180 million; Retail Solutions revenue fell 6% to $1,667 million. Hospitality reported $522 million revenue and $85 million segment operating income, but 2011 included only a partial year following the Radiant acquisition. Emerging Industries revenue declined 3% to $361 million.
- Continuing-operations income attributable to common stockholders declined to $140 million from $146 million, despite higher revenue and operating income. Higher interest expense, pension costs and operating expenses were relevant factors.
- Operating cash flow moved from $388 million provided to $180 million used, substantially reflecting pension funding. Cash nevertheless increased to $1,069 million, supported in part by $1.1 billion of senior note issuance.
- Total debt rose to $1.963 billion from $853 million. NCR issued $600 million of 5.00% notes due 2022 to fund pension contributions and $500 million of 4.625% notes due 2021 to help finance Retalix.
- NCR sold its Entertainment business to Redbox for $100 million in June 2012. It signed the Retalix acquisition agreement in November 2012; the approximately $800 million acquisition closed February 6, 2013, after year-end.
Outlook, risks and unusual items
- Outlook: Management forecast 2013 revenue slightly above 2012, continued cost management and investment discipline, and an approximately 26% effective tax rate. It expected approximately $182 million of 2013 pension, postemployment and postretirement contributions; no contribution to the U.S. qualified pension plan was planned, with international and executive pension contributions expected to total approximately $135 million.
- Pension: The year-end underfunded pension obligation was $468 million, improved from $1.346 billion in 2011, mainly after $600 million of discretionary contributions and the lump-sum offer. Funding needs and actuarial assumptions remain sensitive to financial markets and interest rates.
- Fox River environmental matter: The net reserve was approximately $115 million at year-end. Costs, allocation among responsible parties, appeals, insurance and the ability of indemnitors or co-obligors to pay remain uncertain; NCR cautioned that changes could materially affect results or liquidity.
- Kalamazoo River: NCR disputed liability in litigation seeking contribution toward costs stated by plaintiffs to be $79 million to date. The filing reports the trial began in February 2013; subsequent developments should be checked.
- Regulatory matters: NCR reported FCPA and Syria-related allegations and investigations involving the SEC, DOJ and OFAC, said it was cooperating, and stated there was no assurance of avoiding fines or remedial measures. A January 2013 OFAC license permitted winding down Syrian operations; compliance improvements were being implemented.
- Debt and market risks: Debt agreements impose restrictive covenants and financial ratios. Variable-rate borrowings, foreign currency movements, competition and customer capital-spending conditions could affect performance. Approximately 62% of 2012 revenue came from outside the United States.
- Quarterly pattern: Q4 revenue was $1,642 million, but operating loss was $7 million and net loss attributable to NCR was $20 million. The filing identifies the $119 million pension settlement charge as a significant 2012 item. Sales are historically seasonal, with the fourth quarter generally strongest.
Important facts for investors to verify
- Whether 2013 revenue growth and the anticipated tax rate were achieved, and how Retalix affected consolidated growth, margins and debt.
- Whether operating cash flow and free cash flow recover after the exceptional pension contributions, and whether planned benefit payments remain within liquidity expectations.
- Debt repayment schedules, covenant headroom, borrowing availability and the use of proceeds from the 2021 notes and secured facilities.
- Updates to Fox River reserves and recoveries, Kalamazoo River litigation, and FCPA/OFAC investigations or related remediation.
- Segment trends, particularly the Retail Solutions decline, the comparability of Hospitality results after Radiant, and whether software and services growth supports margin expansion.
- The filing states that the independent auditor gave an unqualified opinion and that internal control over financial reporting was effective as of December 31, 2012.