NCR Corporation — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2015. The filing is for NCR Corporation, the company’s name at that time; it is not a 2015 filing by NCR Voyix under that later name. Amounts are in U.S. dollars unless stated otherwise.
Business context and results
NCR reported four segments: Financial Services, Retail Solutions, Hospitality, and Emerging Industries. Management’s strategy emphasized software and recurring services, innovation, customer experience, and restructuring toward higher-growth, higher-margin opportunities.
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $1.604B | $1.658B | $3.080B | $3.176B |
| Gross margin | $146M; 9.1% | $480M; 29.0% | $536M; 17.4% | $896M; 28.2% |
| Operating income (loss) | $(266)M | $169M | $(171)M | $277M |
| Net income (loss) attributable to NCR | $(344)M | $90M | $(304)M | $143M |
| Diluted EPS | $(2.03) | $0.53 | $(1.80) | $0.84 |
Revenue declined 3% year over year in both periods; currency reduced reported revenue comparisons by approximately 7%. On a constant-currency basis, revenue increased 4% in each period. In Q2, product revenue was $703M (down 3%) and services revenue was $901M (down 4%). The reported results include a $427M UK London pension-plan settlement loss; management said there was no tax benefit recorded for that charge. Excluding the settlement, segment operating income was $202M in Q2 versus $210M a year earlier; this is a management segment measure, not GAAP operating income.
Cash flow, balance sheet, and debt
- First-half operating cash flow was $246M, compared with $111M in 2014. The filing attributes a significant cash-flow contribution to employee benefit plans: a $386M source in the first half, versus a $59M use in 2014.
- Non-GAAP free cash flow was $119M, compared with $(48)M. This measure deducts capital expenditures, capitalized software additions, and discontinued-operation cash flows, among other adjustments.
- Cash was $425M at June 30, down from $511M at year-end 2014. Total debt was approximately $3.47B, comprising $59M short-term borrowings and $3.415B long-term debt; net debt was approximately $3.05B.
- Current assets were $3.040B and current liabilities $1.910B. The $850M revolving credit facility and $200M receivables facility had no outstanding balance at quarter-end. Management stated it expected liquidity to cover obligations and operating needs for the next 12 months.
- First-half cash from investing activities was $(113)M and financing activities $(183)M. Capital spending included $31M for property and equipment and $79M for capitalized software.
Material changes, outlook, and risks
- Foreign exchange was a material headwind. Americas revenue grew, while Europe and AMEA revenue declined in reported dollars; management cited currency effects and segment-specific demand and mix factors.
- Segment trends were mixed: Financial Services revenue and operating income declined; Retail Solutions first-half revenue and operating income declined; Hospitality operating income improved; and Emerging Industries operating income rose from a low prior-year base.
- The July 2014 restructuring is expected to generate approximately $105M of annualized savings beginning in 2016. NCR expected total charges of $200M–$225M and cash payments of $100M–$115M through 2015; first-half charges were approximately $24M and cash payments $30M. Further opportunities and charges were possible.
- For 2015, NCR anticipated $35M of international pension contributions, $80M of postemployment contributions, $4M of postretirement contributions, and approximately $35M of net environmental remediation and other payments. These are company estimates, not earnings guidance; the filing provides no clear consolidated revenue or EPS forecast.
- Environmental and legal contingencies remain significant. The net Fox River reserve was approximately $23M, down from $40M at year-end. The Brazilian tax assessment was estimated to involve a possible exposure of zero to approximately $63M; no accrual was recorded. The Kalamazoo River liability allocation remained unresolved, with a trial scheduled for September 2015. NCR reported that SEC staff did not intend to recommend enforcement over the referenced FCPA matters, but OFAC-related outcomes remained uncertain.
- Management identified risks including a stronger U.S. dollar, economic and customer-spending conditions—particularly in Russia, China, and retail—competition and price pressure, execution of the software/services transition, debt management, acquisitions, pensions, restructuring, and litigation or environmental liabilities. Disclosure controls were assessed as effective; no material change in internal control was reported.
Important facts for investors to verify
- How much of the steep gross-margin and earnings decline reflects the one-time UK pension settlement versus ongoing operating performance.
- Whether service margins, segment revenue trends, and constant-currency growth improve, and whether the projected restructuring savings are realized.
- Cash-flow quality and sustainability, including the unusually large employee-benefit-plan cash-flow contribution and future benefit-plan funding.
- Debt covenant headroom, refinancing and interest-rate exposure, and the availability of reported liquidity under facility terms.
- Potential changes in Fox River, Kalamazoo River, Brazilian tax, and OFAC exposures, including costs beyond recorded reserves.