NCR Corporation (now identified in the request as NCR Voyix Corp.) — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The filing is by NCR Corporation, not NCR Voyix. Financial statements are unaudited; amounts below are in millions of dollars except per-share data.
Business context and results
NCR described a strategy focused on software, recurring services, innovation, and growth in higher-margin opportunities. Its four segments were Financial Services, Retail Solutions, Hospitality, and Emerging Industries. The January 10, 2014 acquisition of Digital Insight, a digital-banking software provider, advanced that strategy and is included in results from the acquisition date.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $1,658 | $1,535 | $3,176 | $2,945 |
| Gross margin | $480; 29.0% | $426; 27.8% | $896; 28.2% | $795; 27.0% |
| Operating income | $169 | $139 | $277 | $224 |
| Net income attributable to NCR | $90 | $86 | $143 | $147 |
| Diluted EPS | $0.53 | $0.51 | $0.84 | $0.87 |
Q2 revenue rose 8% year over year (9% in constant currency); six-month revenue also rose 8% (9% constant currency). Services revenue grew 18% in Q2 and 19% for the half, while product revenue declined 3% and 4%, respectively. Services margin improved to 30.9% in Q2 and 30.1% for the half; product margin was 26.5% and 25.7%, respectively. Management attributed margin improvement principally to favorable mix, including SaaS growth.
Digital Insight contributed $87 of Q2 revenue and $27 of Q2 segment operating income; for the period since acquisition through June 30, it contributed $163 and $50, respectively. Financial Services was the main segment growth driver: Q2 revenue was $900 versus $782 and segment operating income was $137 versus $95. Retail revenue and operating income declined to $503 and $48; Hospitality revenue increased to $170 while operating income fell to $23; Emerging Industries revenue increased to $85 while operating income fell to $2.
Cash flow, debt, and liquidity
- Six-month operating cash flow was $111, versus cash use of $11 in 2013. Capital spending was $66 and capitalized software additions were $73. NCR’s non-GAAP free cash flow was negative $48, compared with negative $44 a year earlier.
- Cash and cash equivalents were $483 at June 30, versus $528 at year-end 2013. Total debt was approximately $3,923, including $83 of short-term borrowings; cash less total debt implies net debt of approximately $3,440.
- Debt increased from $3,354 at year-end 2013. The company cited acquisition-related borrowing; long-term debt on the balance sheet was $3,840. The revolving facility had $315 outstanding and approximately $535 of borrowing capacity.
- Current assets were $3,390 and current liabilities $1,976. Management said it expected available cash, operating cash flows, and financing to cover obligations and operating needs for the next 12 months.
- Interest expense rose to $46 in Q2 from $26 and to $89 for the six months from $47, primarily reflecting interest on senior unsecured notes.
Changes, outlook, risks, and contingencies
- Acquisition and financing: Digital Insight was acquired for approximately $1,648. Preliminary purchase accounting included $1,254 of goodwill and $559 of acquired intangible assets. NCR funded the acquisition using note proceeds and credit-facility borrowings; acquisition-related amortization and costs affected reported results.
- Restructuring announced after quarter-end: On July 29, 2014, NCR announced product rationalization, workforce and management changes, and service-center realignment. It expected pretax charges of $150–$200, approximately $150 in 2014 and the remainder in 2015; cash costs of about $50 in each year; and annualized savings of about $90 by 2016. These are estimates, not reported Q2 results. The plan also implied approximately $50 of incremental postemployment contributions in 2014.
- Environmental exposure: The Fox River net reserve was approximately $95 at June 30, down from $112 at year-end. Cleanup costs were estimated at $825, with potential natural-resource damages ranging from zero to $246; outcomes, cost allocation, and recoveries from other parties remained uncertain. NCR expected approximately $46 of 2014 Fox River remediation and other payments, net of co-obligors. In the Kalamazoo River matter, a court found NCR liable as an arranger, but had not determined its share of liability; a damages trial was scheduled for 2015.
- Other legal and regulatory matters: NCR was cooperating with U.S. authorities on OFAC/Syria and FCPA investigations and said fines or other remedial measures could result. A Brazilian subsidiary appealed a tax assessment of approximately $75, which was not accrued; the company could not estimate a loss range.
- Principal business risks noted: economic conditions and customer capital spending, competition and pricing, currency and geopolitical exposure, product adoption and execution, acquisition integration, indebtedness, pensions, restructuring execution, and environmental, legal, tax, and regulatory matters. No material changes to previously disclosed risk factors were reported. Management provided no clear consolidated revenue or EPS guidance in the supplied filing text.
Most important facts for investors to verify
- How much of reported growth and Financial Services improvement reflects Digital Insight versus underlying organic performance, and whether software and recurring-services mix continues to improve.
- Whether the restructuring’s $150–$200 charge, approximately $90 annualized savings target, and execution timeline are achieved.
- Debt and interest burden, covenant headroom, available revolver capacity, and the company’s ability to convert earnings into positive free cash flow.
- Developments in Fox River and Kalamazoo liability and recoveries, the Brazilian tax appeal, and the OFAC/FCPA investigations.
- Whether lower operating income in Hospitality and Emerging Industries, and declining product revenue, persist.