Business context and reporting period
NCR Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2015, compared with the first quarter of 2014. The filing describes NCR’s financial services, retail, hospitality and emerging-industries technology and services businesses. Although the request identifies NCR Voyix, this filing is for NCR Corporation in 2015.
Key financial metrics
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $1,476 | $1,518 |
| Gross margin | $390; 26.4% | $416; 27.4% |
| Operating income | $95 | $108 |
| Net income attributable to NCR | $40 | $53 |
| Diluted EPS | $0.23 | $0.31 |
| Cash from operating activities | $79 | $31 |
| Free cash flow, company-defined non-GAAP | $24 | $(51) |
At March 31, cash and cash equivalents were $462, total debt was approximately $3.62 billion, and net debt was approximately $3.15 billion. Current assets were $3.10 billion and current liabilities $2.02 billion. Total assets were $8.51 billion.
Material changes versus the prior comparable period
- Revenue declined 3% as reported; currency movements reduced the comparison by approximately 6%. On a constant-currency basis, revenue increased 3%.
- Product revenue fell 5% to $604 million; services revenue fell 1% to $872 million. Product gross margin declined to 20.0% from 24.9%, primarily due to unfavorable mix, while services gross margin improved to 30.8% from 29.2%, including a favorable mix of cloud revenue.
- Operating income decreased 12% and NCR-attributable net income decreased 25%. Lower SG&A and R&D expense partly offset weaker revenue and gross margin and restructuring charges.
- Retail Solutions was the main segment weakness: revenue declined 9% to $445 million and operating income fell to $16 million from $36 million. Financial Services revenue was $798 million and operating income $105 million; Hospitality and Emerging Industries each reported $3 million higher operating income than a year earlier.
- Operating cash flow increased to $79 million from $31 million. Company-defined free cash flow improved to $24 million from negative $51 million, reflecting higher operating cash flow and lower capital spending; it is a non-GAAP measure.
- Cash declined $49 million from year-end 2014. Debt declined modestly from approximately $3.66 billion at December 31, 2014.
Outlook, commentary, risks and unusual items
- Management emphasized shifting toward higher-margin software and recurring services, innovation, customer experience and cost efficiency. Software-related revenue continued to grow, but the filing provides no clear numerical revenue or EPS guidance.
- The July 2014 restructuring is expected to generate approximately $105 million in annualized savings beginning in 2016. NCR expected total charges of approximately $200–$225 million and cash payments of $100–$115 million through 2015; Q1 2015 charges and cash payments were approximately $16 million. Additional opportunities and charges could arise.
- NCR expected 2015 contributions of $35 million to international pension plans, $80 million to postemployment plans and $4 million to the postretirement plan. The U.K. London pension plan was expected to transfer to an insurer in 2015 or early 2016, potentially producing approximately $420 million of pension expense upon settlement.
- Management said existing cash, operating cash flows and financing were sufficient for the next 12 months. Available borrowing capacity was approximately $850 million under the revolving credit facility and $129 million under the receivables facility. The company cited debt service, covenant compliance and cash generation as liquidity considerations.
- Foreign exchange was a significant headwind; NCR operates in approximately 50 functional currencies and its hedging does not eliminate currency exposure. Management also cited customer capital spending, retail investment trends, price competition, product adoption, acquisition integration and restructuring execution as risks.
- The net Fox River environmental reserve was approximately $39 million at quarter-end. Litigation and allocation of cleanup responsibility remained unresolved; the company expected approximately $35 million of 2015 payments for Fox River and Kalamazoo matters, net of co-obligor obligations. A separate Brazilian tax assessment was approximately $52 million, with estimated aggregate risk of zero to approximately $54 million; NCR had not accrued it and was appealing.
- NCR was cooperating with SEC and DOJ inquiries into FCPA allegations and had previously notified OFAC of potential Syria-related violations. The filing states there can be no assurance of no fines or other remedial measures.
Important facts for investors to verify
- Whether software and recurring-services growth can offset product declines, particularly in Retail Solutions, and restore product margins.
- Whether the restructuring achieves its expected savings and stays within the stated charge and cash-payment ranges.
- Actual pension settlement timing and accounting impact, including the potential approximately $420 million expense.
- Debt covenant headroom and liquidity after pension, restructuring and environmental payments; the filing does not provide a clear actual leverage ratio.
- Developments in Fox River and Kalamazoo litigation, the Brazilian tax appeal, and FCPA/OFAC matters, including changes to potential exposure or reserves.