Business context and reporting period
NCR Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. The company sold financial-services, retail, hospitality and emerging-industry technology, software and related services. NCR completed its $1.648 billion acquisition of Digital Insight on January 10, 2014; its results are included from that date. The filing is by NCR Corporation, not under the later NCR Voyix name.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $1.647 billion | $1.508 billion | $4.823 billion | $4.453 billion |
| Gross margin | $404 million; 24.5% | $415 million; 27.5% | $1.300 billion; 27.0% | $1.210 billion; 27.2% |
| Operating income | $41 million | $145 million | $318 million | $369 million |
| Net income attributable to NCR | $15 million | $98 million | $158 million | $245 million |
| Diluted EPS | $0.09 | $0.58 | $0.92 | $1.45 |
Q3 continuing operations broke even: a $19 million pretax loss was offset by a $19 million income-tax benefit. The $15 million of net income included $15 million from discontinued operations. Q3 service revenue rose 15% and product revenue rose 3%; for the nine-month period, services rose 17% while product revenue declined 2%.
For the quarter, Financial Services revenue was $899 million and segment operating income $144 million; Retail Solutions, $489 million and $24 million; Hospitality, $168 million and $27 million; and Emerging Industries, $91 million and $9 million. Digital Insight contributed $93 million of quarterly revenue and $27 million of segment operating income to Financial Services.
Nine-month operating cash flow was $235 million, versus $16 million a year earlier. Capital expenditures were $88 million and capitalized software additions $109 million. NCR’s non-GAAP free cash flow was $84 million, compared with negative $110 million; this measure includes discontinued-operations cash flow and an adjustment for discretionary pension contributions and settlements. Cash was $424 million at September 30, 2014, and total debt was $3.745 billion, including $3.660 billion long-term debt and $85 million short-term borrowings. The company reported approximately $688 million of revolver availability and said it believed liquidity was sufficient for the next 12 months.
Material changes versus prior period
- Q3 revenue grew 9% (10% at constant currency), but operating income fell to $41 million from $145 million and reported gross margin declined 3.0 percentage points. Restructuring inventory charges and acquisition-related amortization weighed on margins.
- Nine-month revenue increased 8%, while operating income decreased $51 million. Results include Digital Insight, which was not in the comparable 2013 results.
- Financial Services was the principal growth contributor; Retail Solutions revenue and operating income declined. Retail segment operating income was $24 million versus $50 million in Q3 2013.
- Debt rose from $3.354 billion at December 31, 2013, principally in connection with financing the Digital Insight acquisition. Goodwill increased to $2.773 billion from $1.534 billion, also largely reflecting the acquisition.
- Operating cash flow improved substantially year over year, while cash declined by $104 million from year-end; acquisition spending was $1.647 billion net of cash acquired.
Outlook, management commentary, risks and unusual items
- Management cited cautious retail customer spending, delayed solution rollouts, difficult global economic conditions and foreign-exchange headwinds. It continued to prioritize higher-margin software and recurring services.
- The July 2014 restructuring generated $130 million of charges through September 30, including employee, inventory, asset and exit costs. NCR estimated total charges of approximately $150–$200 million, about $150 million in 2014 and the remainder in 2015; expected cash impact was about $50 million in each year. Management targeted approximately $90 million of annualized savings beginning in 2016 and said additional opportunities and charges could arise.
- Interest expense rose to $46 million in Q3 from $23 million, and to $135 million for nine months from $70 million, reflecting debt issued and borrowings associated with Digital Insight. The credit facility is secured and includes leverage and interest-coverage covenants.
- Fox River environmental exposure remained uncertain. Following appellate rulings, NCR’s net reserve was approximately $57 million, down from $112 million at year-end; the company said further changes were possible and remediation costs could materially affect results or cash flows. NCR expected approximately $46 million of 2014 Fox River remediation and related payments, net of co-obligors.
- A Brazilian subsidiary appealed a tax assessment of approximately $69 million; NCR recorded no accrual and estimated the aggregate risk at zero to approximately $73 million. The company also continued cooperating with U.S. authorities on FCPA and Syria-related matters and said fines or other remedial measures could not be ruled out.
- Management identified economic conditions, retail-market challenges, currency, competition, product adoption, acquisition integration, indebtedness, pensions, restructuring execution and environmental matters among risks. It reported no material change to previously disclosed risk factors and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether service and software growth—particularly Digital Insight and SaaS—continues and converts into sustainable margins and cash flow.
- Actual restructuring charges, cash payments and savings against management’s estimates, including any additional actions through 2015.
- Debt levels, interest costs, covenant headroom and the availability of revolving credit.
- Developments in Fox River and Kalamazoo River matters, the Brazilian tax appeal, and FCPA/OFAC inquiries, including any changes to reserves or expected payments.
- Acquisition integration performance and the effect of purchase-accounting amortization on reported profitability.