NCR Corporation 2011 Form 10-K Summary
Reporting period and business: This filing is NCR Corporation’s annual report for the fiscal year ended December 31, 2011, not a filing under the NCR Voyix name. NCR provides ATMs, point-of-sale systems, kiosks, software, services and consumables to financial services, retail, hospitality, travel, gaming and other customers. In 2011, it reorganized reporting around five business segments and acquired Radiant Systems, adding Hospitality and Specialty Retail.
Financial performance and liquidity
- Full-year revenue: $5.443 billion, up 13% from $4.810 billion in 2010; foreign exchange contributed a favorable 3%. Product revenue rose 14% and services revenue rose 12%.
- Profit and margins: Gross margin was $1.135 billion, or 20.9% of revenue, versus $964 million, or 20.0%, in 2010. Operating income fell to $65 million from $106 million. Net income attributable to NCR was $53 million versus $134 million; diluted EPS was $0.33 versus $0.83.
- Fourth quarter: Revenue was $1.638 billion versus $1.403 billion in Q4 2010. Gross margin increased to $363 million from $286 million, but the company recorded an operating loss of $10 million and an NCR-attributable net loss of $9 million, compared with operating income of $54 million and net income of $39 million a year earlier. The 2011 quarter included $88 million in impairment charges, primarily related to Entertainment assets.
- Cash flow: Cash from operating activities was $375 million, up from $247 million. Company-defined free cash flow was $188 million versus $37 million. Capital expenditures were $101 million and capitalized software additions were $62 million; the Radiant acquisition used $1.087 billion net of acquired cash.
- Balance sheet and liquidity: Cash was $398 million, down from $496 million; current assets were $2.515 billion and current liabilities $1.565 billion. Total debt was $853 million, compared with $11 million in 2010, primarily reflecting acquisition financing. Management said available cash, operating cash flow and financing were sufficient for expected obligations over the next 12 months.
- Other key obligations: The U.S. pension plans were underfunded by $1.294 billion, versus $903 million in 2010; total pension underfunding was $1.346 billion. NCR expected approximately $282 million of pension, postemployment and postretirement plan contributions in 2012.
Material changes and notable items
- Radiant was acquired in August 2011 for approximately $1.2 billion; its reported segment contributed $141 million revenue and $22 million operating income for the post-acquisition period.
- NCR sold its healthcare solutions business in December 2011 and classified it as discontinued operations. In February 2012, it agreed to sell certain Entertainment assets to Redbox for $100 million cash, subject to closing conditions and regulatory approval.
- Entertainment generated $163 million revenue and a $60 million segment operating loss in 2011. The proposed sale followed an $88 million impairment charge.
- Segment operating income totaled $434 million before corporate pension expense and other adjustments. Financial Services revenue was $2.999 billion; Retail Solutions $1.755 billion; Hospitality and Specialty Retail $141 million; Entertainment $163 million; and Emerging Industries $385 million.
- Revenue growth and improved gross margin were accompanied by higher selling, general and administrative costs, pension expense and acquisition-related costs. Pension expense was $222 million, up from $208 million.
Outlook, risks and contingencies
- Management outlook: NCR forecast 2012 revenue slightly above 2011 and capital spending below 2011, partly due to the expected Entertainment divestiture. It expected 2012 pension expense of approximately $165 million and an effective tax rate of approximately 27%.
- Debt and interest: The secured credit facility had $840 million outstanding at year-end, with variable-rate exposure and restrictive financial and operating covenants. An interest-rate swap covered a portion of borrowings. Management warned that covenant noncompliance or inadequate cash flow could limit operations or require refinancing or other actions.
- Environmental matters: The net Fox River reserve was approximately $160 million at year-end, with litigation, cleanup-cost allocation, natural resource damages and indemnitor/co-obligor performance remaining uncertain. NCR estimated approximately $40 million of Fox River remediation and other payments in 2012; the filing cautions that accelerated or higher costs could materially affect liquidity.
- Other risks: Key exposures include global economic and customer capital-spending conditions, competition and price erosion, foreign exchange, pension funding, tax-asset realization and audits, reliance on single-source suppliers and service partners, product execution, cybersecurity and data privacy, and litigation. The filing also identifies a Kalamazoo River environmental claim that NCR intended to contest.
- Unusual quarterly result: Q4 operating loss reflected the Entertainment impairment. Annual operating results also included acquisition-related costs and other adjustments; reported segment income excludes pension expense and certain significant items.
Investor verification priorities
- Reconcile the Q4 $88 million impairment and its effect on reported operating income, net income and the Entertainment disposal group.
- Assess Radiant’s ongoing contribution, integration costs, acquisition financing and the assumptions supporting expected synergies.
- Review debt covenant headroom, variable-rate exposure, refinancing needs and the funding plan for projected 2012 benefit contributions.
- Track the Fox River litigation, reserve assumptions, expected payment schedule and collectability of indemnification and co-obligor obligations.
- Verify completion terms and proceeds for the proposed Redbox transaction, including regulatory approval and any continuing NCR supply or transition commitments.
- Evaluate the assumptions behind management’s 2012 revenue, capital spending, pension expense and tax-rate outlook.