NCR Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise noted. The filing is by NCR Corporation, the registrant named in the 2012 report.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $1,244 million | $1,058 million |
| Gross margin | $298 million; 24.0% | $219 million; 20.7% |
| Income from operations | $49 million | $20 million |
| Income from continuing operations | $39 million | $20 million |
| Net income attributable to NCR | $29 million | $13 million |
| Diluted EPS | $0.18 | $0.08 |
| Cash provided by operating activities | $89 million | $49 million |
| Free cash flow, company-defined non-GAAP | $48 million | $4 million |
Revenue rose 18% (19% on a constant-currency basis); product revenue increased 24% and services revenue 12%. Product gross margin was 21.8% versus 21.6%; services gross margin improved to 25.8% from 20.0%. Operating expenses rose, including higher SG&A ($199 million versus $159 million) and R&D ($50 million versus $40 million). Interest expense was $9 million, compared with none in Q1 2011.
Cash and cash equivalents were $414 million at March 31, 2012, versus $398 million at year-end 2011. Total debt was $827 million, including $18 million short-term and $809 million long-term. Current assets were $2,678 million and current liabilities $1,673 million. Management said available cash, operating cash flow and financing were sufficient for expected needs over the next 12 months.
Segments and material period changes
- Financial Services: Revenue $694 million, up 17%; segment operating income $56 million versus $47 million.
- Retail Solutions: Revenue $347 million, down 9%; segment operating income $2 million versus $8 million.
- Hospitality: Revenue $113 million and segment operating income $19 million. Results include the Radiant acquisition; the segment presentation changed in 2012, so the filing does not provide a comparable 2011 figure.
- Emerging Industries: Revenue $90 million, up 5%; segment operating income $24 million versus $16 million.
- NCR classified its Entertainment business as discontinued operations and assets held for sale. Its Q1 operating loss was $19 million pre-tax, or $12 million net of tax; total net loss from discontinued operations attributable in the consolidated statements was $9 million, reflecting other discontinued-operation items.
The company agreed to sell certain Entertainment assets to Redbox for $100 million in cash, subject to adjustment, and expected the transaction to close in Q2 2012. At March 31, $61 million of related assets were classified as held for sale. NCR also acquired two Brazilian resellers for approximately $1 million plus costs.
Outlook, commentary and risks
- Management highlighted growth, stronger operating cash flow and cost-reduction benefits. Its stated priorities included profitable share growth, expansion into emerging industries, cost efficiency, global service capability, innovation, and shifting revenue toward higher-margin software and services. The filing provides no specific full-year revenue or earnings guidance.
- NCR expected approximately $282 million of pension, postemployment and postretirement contributions in 2012. It anticipated $120 million of international pension contributions, $85 million to the U.S. qualified pension plan, and $60 million to postemployment plans, among other contributions.
- The net Fox River environmental reserve was approximately $149 million, down from $160 million at year-end, primarily due to cleanup payments. The company estimated total site cleanup costs of $852 million and noted significant uncertainty around its ultimate liability, litigation, cost overruns and recovery from co-obligors and indemnitors. A court decision on a government request to compel additional remediation was pending after quarter-end.
- A separate Kalamazoo River pollution contribution suit was set for trial in February 2013. The filing states that potential costs beyond recorded amounts for various legal and environmental matters could affect results, cash flows or financial condition.
- The $700 million term loan and $115 million revolving-credit borrowing were under a secured facility with financial covenants and variable-rate exposure. A 100-basis-point increase in variable rates was estimated to raise annual pre-tax interest expense by approximately $8 million after hedging. Approximately 67% of facility borrowings were effectively fixed-rate.
- Q1 included a $14 million favorable Canada tax settlement benefit; NCR also expected to resolve certain Japan tax matters, with possible reductions of $25–$30 million in unrecognized tax benefits over the following 12 months. An investment impairment charge of $3 million was recorded.
- Subsequent to quarter-end, NCR’s appeal of a commission-arrangement verdict was decided adversely in April 2012. An April ruling in the ATL patent appeal favored NCR’s customers and indemnitees. Management reported disclosure controls were effective and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether the Redbox asset sale closed on the expected terms and how proceeds and transition or manufacturing-services arrangements affected subsequent results.
- Progress and final exposure in the Fox River matter, including the pending remediation injunction, litigation outcomes, reserve assumptions and collectibility of indemnity assets.
- Compliance with secured-credit-facility covenants, debt repayment capacity and sensitivity to interest rates and foreign exchange movements.
- Whether improvement in services margins, cash generation and cost controls continued, and whether Retail Solutions’ revenue and profitability recovered.
- The outcome and financial impact of Japan tax settlements and the adverse commission-arrangement appeal.