NCR Corporation — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013, with quarterly results including the fourth quarter. The filing is for NCR Corporation; the supplied company metadata says NCR Voyix Corp, so the entity identification should be verified. Unless otherwise stated, financial amounts are in millions of U.S. dollars.
Business context and reporting period
NCR provided ATMs and financial software, retail and hospitality point-of-sale systems, kiosks, consumables, software, and related services. It reported four segments: Financial Services, Retail Solutions, Hospitality, and Emerging Industries. Management’s strategy emphasized higher-margin software and recurring services, innovation, consultative selling, cost efficiency, and selective acquisitions.
NCR acquired retail software provider Retalix in February 2013 for an aggregate cash purchase price of $791 million. It completed the $1.65 billion Digital Insight online and mobile banking acquisition on January 10, 2014, after year-end; the 2013 balance sheet therefore included $1.114 billion of restricted cash raised for that transaction.
Key financial metrics
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $6,123 | $5,730 |
| Gross profit / gross margin | $1,740 / 28.4% | $1,645 / 28.7% |
| Operating income | $666 | $748 |
| Income from continuing operations attributable to NCR common stockholders | $452 | $475 |
| Net income attributable to NCR | $443 | $481 |
| Diluted EPS, continuing operations / total | $2.67 / $2.62 | $2.90 / $2.94 |
| Cash from operating activities | $281 | $(180) |
| Free cash flow (company-defined, non-GAAP) | $207 | $146 |
| Cash and cash equivalents; restricted cash | $528; $1,114 | $1,069; — |
| Total debt | $3,354 | $1,963 |
Annual revenue rose 7% (9% in constant currency). Product revenue grew 2% to $2,912; services revenue grew 12% to $3,211. Product gross margin increased to 26.1% from 24.9%, while services gross margin declined to 30.5% from 32.5%; total gross margin slipped 0.3 percentage points. Interest expense increased to $103 from $42, principally reflecting debt issued to finance acquisitions. The 2013 effective tax rate was 18%, compared with 32% in 2012.
Fourth quarter: Revenue was $1,670 versus $1,642 in Q4 2012. Gross profit was $530 versus $574; operating income was $297 versus $411; income from continuing operations attributable to NCR was $206 versus $239; and net income attributable to NCR was $198 versus $242. Q4 operating income included $104 of pension actuarial gains, compared with $262 in Q4 2012; without the 2013 accounting-method change, Q4 2013 operating income would have been $124 and attributable net income $82, according to the filing.
Cash from operations improved by $461 year over year. The company-defined free cash flow rose to $207 from $146, incorporating $204 of discretionary pension contributions and settlements, versus $600 in 2012. Capital expenditures were $116 and capitalized software additions were $110 in 2013. The filing reports $828 of secured borrowing capacity at year-end, excluding the incremental facility; management said liquidity was sufficient for expected requirements over the next 12 months.
At year-end, current assets were $4,339 and current liabilities $1,881. Debt included $1,100 of 2013 senior notes issued to help fund Digital Insight; proceeds and accrued interest remained in restricted escrow at year-end. Following the acquisition and additional borrowing on January 10, 2014, NCR reported total debt of $3.92 billion.
Material changes versus prior periods
- Revenue increased by $393, led by Retail Solutions, Hospitality, and Emerging Industries; Financial Services revenue declined 3%.
- Retail Solutions revenue grew 22% and segment operating income rose to $205 from $102, including Retalix’s contribution of $298 revenue and $53 segment operating income. Hospitality revenue increased to $626 from $522. Emerging Industries operating income fell to $56 from $75.
- Services grew faster than products, but total gross margin narrowed. SG&A increased $129 to $871 and R&D increased $48 to $203, reflecting acquisition-related expenses and investment.
- Operating income and net income were lower than in 2012 despite revenue growth. Pension accounting effects materially affect comparability: the company retrospectively adopted faster recognition of pension asset and actuarial changes, recording a $1.297 billion cumulative reduction to retained earnings as of December 31, 2010.
- Total debt rose by $1.391 billion year over year, while year-end cash declined; acquisition financing and the restricted escrow balance are important to interpreting liquidity.
Outlook, commentary, risks, and unusual items
Management forecast 2014 revenue to be higher than 2013, without providing a specific growth or earnings target in the supplied filing text. It planned to continue cost management while investing in areas expected to generate high returns. NCR historically has seasonal sales, with higher revenue in Q4 and variable working-capital needs.
Material risks include substantial indebtedness and restrictive covenants, variable interest rates, competition and price erosion, foreign exchange exposure, acquisition integration and execution, pension funding needs, supplier dependencies, cybersecurity and privacy risks, and uncertain customer capital spending. The company expects approximately $122 of pension, postemployment, and postretirement contributions in 2014.
The Fox River environmental matter remained a significant contingency: the net reserve was approximately $112 at December 31, 2013, and timing, total cleanup costs, allocation among parties, and recovery from co-obligors remained uncertain. The company also faced Kalamazoo River litigation; a court had found NCR liable as an arranger, but its share of liability and damages had not been determined. NCR disclosed ongoing government inquiries concerning FCPA and Syria/OFAC matters, was cooperating, and said fines or other measures could not be ruled out.
Other notable items include a 2013 $16 tax benefit related to tax-law changes, valuation allowance releases, and country earnings mix; $15 of Japan valuation-allowance release recorded in Q4; and $9 loss from discontinued operations, primarily environmental matters. The independent auditor reported that the financial statements were fairly presented under U.S. GAAP and internal control over financial reporting was effective as of year-end.
Important facts for investors to verify
- Confirm the issuer and period: this is NCR Corporation’s 2013 annual filing, not a filing identified in its text as NCR Voyix.
- Reconcile the Q4 pension actuarial gain and retrospective pension-accounting effects when comparing operating income, earnings, and EPS across periods.
- Assess post-acquisition leverage, debt service, covenant headroom, and liquidity after Digital Insight financing; distinguish restricted cash from available cash.
- Review Retalix and Digital Insight integration, purchase-price allocations, and the contribution of acquired businesses to organic growth and margins.
- Monitor Fox River and Kalamazoo River exposure, including reserve assumptions, appeals, co-obligor payments, and potential cash timing; also follow FCPA/OFAC investigations and the derivative-action settlement.
- Evaluate whether services and software growth can sustain margins and cash generation, given lower reported services margin and increased R&D and SG&A.