NCR Corporation — Q2 2012 Form 10-Q
Filing identity: The supplied filing is for NCR Corporation, for the quarter ended June 30, 2012; it is not a filing under the name NCR Voyix Corp. Amounts are in U.S. dollars and millions, except per-share data. Results are unaudited.
Business context and reporting period
NCR reported four segments: Financial Services, Retail Solutions, Hospitality, and Emerging Industries. It completed the sale of certain Entertainment business assets to Redbox on June 22, 2012, and presents that business as discontinued operations. The 2011 Radiant Systems acquisition contributed to year-over-year growth, especially in Hospitality. Segment presentation changed in 2012; prior-period segment amounts were not reclassified, which affects comparability.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $1,409 | $1,272 | $2,653 | $2,330 |
| Gross margin | $357; 25.3% | $279; 21.9% | $655; 24.7% | $498; 21.4% |
| Income from operations | $101 | $62 | $150 | $82 |
| Income from continuing operations | $67 | $47 | $106 | $67 |
| Net income attributable to NCR | $80 | $33 | $109 | $46 |
| Diluted EPS | $0.49 | $0.21 | $0.67 | $0.29 |
Q2 product revenue rose 15% and service revenue 7%; reported total revenue grew 11% (15% in constant currency). For the first half, product revenue rose 19%, services 9%, and total revenue 14% (17% in constant currency). Currency movements reduced reported comparisons by 4 percentage points in Q2 and 3 points for the half. Management attributed margin improvement mainly to higher software mix, lower service-delivery costs, cost containment, and lower pension expense.
Q2 segment revenue and operating income were: Financial Services $783 and $85; Retail Solutions $409 and $28; Hospitality $130 and $21; Emerging Industries $87 and $20. Financial Services and Hospitality grew, while Retail Solutions revenue declined 9% and Emerging Industries revenue declined 5%. Segment operating income excludes pension expense and certain other adjustments; it is not the same as GAAP operating income.
Cash flow, debt, and liquidity
- Six-month operating cash flow was $120, unchanged from 2011. Capital expenditures were $31 and capitalized software additions $37. Company-defined free cash flow was $8, versus $4 in 2011; this non-GAAP measure includes discontinued-operations operating cash flow.
- Cash declined to $377 at June 30 from $398 at year-end. Total debt was $740 ($39 short-term and $701 long-term), versus approximately $853 at year-end. The filing reports $656 of borrowing capacity under the credit facilities.
- Current assets were $2,612 and current liabilities $1,645. Cash held by foreign subsidiaries was $365 and may incur additional taxes if repatriated.
- Management said available cash, operating cash flows, and financing were sufficient for expected requirements over the next 12 months. The secured facility has financial covenants and restrictions; the filing does not provide the actual covenant ratios at quarter-end.
Material changes, outlook, and risks
- Entertainment sale: NCR received $100 cash proceeds. The sale generated a $33 pretax gain ($21 after tax), while the Entertainment business had operating losses. Q2 discontinued-operations income was $13, including the sale gain and a $5 benefit from favorable Teradata-related tax changes; first-half discontinued-operations income was $4.
- Taxes and unusual items: Q2 tax expense included a $13 favorable Japan tax settlement. First-half tax benefits also included a $14 favorable Canada settlement. NCR recorded $7 of investment impairment expense in the first half. Acquisition-related integration and intangible amortization costs also affected results.
- Pensions: Management estimated 2012 employee-benefit contributions of approximately $239, including $42 to the U.S. qualified pension plan, $120 to international plans, $60 to postemployment plans, $10 to the executive pension plan, and $7 to postretirement plans. The July 2012 pension law was expected to reduce required U.S. plan contributions, but the impact was not yet estimable. NCR also announced a planned U.S. pension contribution and voluntary lump-sum option, expected to be financed with capital-market borrowings.
- Environmental contingencies: The net Fox River reserve was approximately $148, down from $160 at year-end, and management emphasized significant estimation uncertainty and potential future cash-flow or earnings effects. A court ruling issued July 3, 2012 found for NCR on the Fox River “arranger” liability issue; NCR said it required no reserve increase. The Kalamazoo River matter remained disputed, with a trial scheduled for February 2013.
- Management priorities and outlook: NCR emphasized profitable share growth, expansion in emerging industries, cost reduction, global service capability, innovation, and shifting revenue toward higher-margin software and services. It provided no specific numerical revenue or earnings guidance in the supplied filing text.
- Other risks: Management cited economic and customer spending conditions, competition and pricing, foreign exchange, variable-rate debt and covenant compliance, acquisition integration, pension funding, and execution of cost and growth initiatives. Disclosure controls were assessed as effective; no material change in internal control was reported.
Important facts for investors to verify
- Reconcile reported profit growth with the Entertainment disposal gain and tax settlements; assess underlying continuing-operations performance.
- Review the drivers and durability of improved gross margins, including software mix, pension accounting changes, and service cost savings.
- Check debt-covenant headroom, interest-rate exposure, and the planned pension funding’s effect on borrowing and liquidity.
- Track Fox River reserve assumptions, recovery of amounts from co-obligors and indemnitors, and the outcome of environmental litigation, including Kalamazoo.
- Separate organic growth from Radiant-related and other acquisition contributions, foreign-exchange effects, and the 2012 segment reclassification.