NCR Corporation Form 10-Q Summary
Filing identity: The filing is for NCR Corporation, not NCR Voyix. It covers the unaudited quarter and six months ended June 30, 2010; comparisons are with the corresponding 2009 periods. Amounts are in U.S. dollars unless noted.
Business context and reporting period
NCR sells self-service, point-of-sale, ATM and related products, software and services. It reports three geographic segments: Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific and Japan (APJ). Management emphasized profitable share growth, expansion into emerging industries, cost reduction, global service capability and innovation.
Financial performance
| Metric | Three months ended June 30, 2010 | Six months ended June 30, 2010 |
|---|---|---|
| Revenue | $1.177 billion, up 5% | $2.206 billion, up 3% |
| Product revenue | $587 million, up 9% | $1.055 billion, up 6% |
| Service revenue | $590 million, up 1% | $1.151 billion, up 1% |
| Gross margin | $241 million; 20.5% of revenue | $432 million; 19.6% of revenue |
| Income from operations | $31 million, versus $39 million | $13 million, versus $29 million |
| Income from continuing operations attributable to NCR | $20 million, versus $20 million | $1 million, versus $2 million |
| Net income attributable to NCR | $31 million, versus $23 million | $12 million, versus $8 million |
| Diluted earnings per share | $0.19, versus $0.14 | $0.07, versus $0.05 |
Quarterly net income included $11 million after tax from discontinued operations, primarily Fox River insurance settlements; the six-month figure also included $11 million. Product gross margin percentage declined, while service gross margin percentage improved. Higher pension expense, entertainment-business losses, incentive compensation and headquarters-relocation costs weighed on results.
For the quarter, product gross margin was $124 million (21.1% of product revenue) and service gross margin was $117 million (19.8%). For the first half, product gross margin was $209 million (19.8%) and service gross margin was $223 million (19.4%). The filing’s segment gross-margin measure excludes pension expense and is not the same as consolidated GAAP gross margin.
Cash flow, liquidity and debt
- Six-month operating cash flow was $109 million, compared with $91 million. Capital spending net of grants was $76 million and capitalized software additions were $28 million; reported free cash flow, a non-GAAP measure defined by NCR, was $5 million versus $4 million.
- Cash and cash equivalents were $447 million at June 30, 2010, compared with $451 million at year-end 2009. Current assets were $2.349 billion and current liabilities were $1.370 billion.
- Long-term debt was $10 million, with no borrowings outstanding under the $500 million revolving credit facility. Availability was reduced by $21 million of letters of credit. NCR reported compliance with the facility’s covenants.
- Net cash used in investing activities was $104 million; net cash used in financing activities was $2 million.
Changes versus prior comparable periods
- Quarterly revenue rose $53 million, but operating income fell $8 million as operating expenses grew faster than gross margin. First-half revenue increased $74 million while operating income declined $16 million.
- For the first half, Americas revenue was $979 million, EMEA $784 million and APJ $443 million. APJ growth was strongest; segment gross-margin rates improved in the Americas but declined in EMEA and APJ.
- First-half pension expense increased to $106 million from $77 million. Interest expense fell to $1 million from $10 million, primarily following repayment of senior unsecured notes in June 2009.
- The 2009 cash-flow comparison included $26 million of cash used in discontinued operations, reclassified from operating activities in the current presentation. The reclassification did not change prior-period net income.
Outlook, risks and unusual items
- NCR expected a 27% effective tax rate for full-year 2010; the first-half reported effective rate was 77%, which management attributed largely to the mix of jurisdictions with income and losses and uncertain tax-position accruals.
- Management expected approximately $171 million of 2010 contributions to pension, postemployment and postretirement plans, and said current cash, operating cash flow and financing were sufficient for expected needs over the next 12 months. No specific revenue or earnings guidance is provided in the supplied filing text.
- The board authorized an additional $210 million share-repurchase authorization on July 28, 2010, after quarter-end. Combined with approximately $40 million remaining under existing programs, total authorization was $250 million. No shares were repurchased under the programs during the first half.
- The Fox River environmental matter remained a significant contingency. The net reserve was approximately $208 million at June 30, versus $202 million at year-end 2009; NCR’s estimated indemnification asset was approximately $102 million. Cleanup costs, natural-resource damages, litigation outcomes, cost overruns and the ability of co-obligors or indemnitors to pay remained uncertain. Cleanup spending was expected to extend through at least approximately 2019, followed by long-term monitoring.
- NCR reported a December 2009 court ruling adverse to NCR and API in Fox River allocation litigation and intended to appeal. Other disclosed matters included a government pricing-disclosure investigation and an appeal of a retiree-benefit ruling that could require approximately $6 million of benefit restoration if affirmed.
- Foreign exchange movements favorably affected second-quarter revenue by 1%; NCR hedged a portion of forecast foreign-currency cash flows for up to 15 months. A 10% U.S. dollar appreciation or depreciation was estimated to change the fair value of the hedge portfolio by $14 million.
- The global realignment initiative was complete and had generated approximately $40 million in annualized savings. NCR also disclosed higher 2010 costs related to relocating its worldwide headquarters.
Important facts for investors to verify
- How much of reported earnings growth depended on Fox River insurance settlements rather than continuing operations.
- Whether operating profitability and free cash flow improve as planned investments and pension costs affect results.
- How Fox River cleanup costs, litigation and indemnification recoveries could change the $208 million net reserve.
- Whether the announced buyback proceeds and how it affects cash available for pension contributions and investment needs.