NCR Corporation Form 10-Q Summary
Filing and period: Quarterly report for the three and nine months ended September 30, 2011, filed November 4, 2011. The filing is for NCR Corporation; the supplied company label “NCR Voyix Corp” does not match the registrant named in this 2011 filing.
Business context and reporting period
NCR sells hardware, software, and services, including ATMs, retail and hospitality systems, and self-service solutions. Effective January 1, 2011, it reorganized reporting around lines of business. On August 24, it completed its approximately $1.2 billion cash acquisition of Radiant Systems; Radiant’s results are included only from August 25 through September 30. NCR reported five segments: Financial Services, Retail Solutions, Hospitality and Specialty Retail, Entertainment, and Emerging Industries.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $1,403 million | $1,207 million | $3,810 million | $3,412 million |
| Gross margin | $293 million; 20.9% | $246 million; 20.4% | $773 million; 20.3% | $678 million; 19.9% |
| Income from operations | $18 million | $34 million | $71 million | $47 million |
| Income from continuing operations attributable to NCR common stockholders | $16 million | $78 million | $61 million | $79 million |
| Net income attributable to NCR | $16 million | $83 million | $62 million | $95 million |
| Diluted EPS | $0.10 | $0.51 | $0.39 | $0.59 |
Q3 revenue rose 16% year over year, but only 5% excluding favorable currency effects; product revenue increased 20% and services revenue 13%. For the first nine months, revenue rose 12%, or 5% excluding currency effects. Q3 operating margin was approximately 1.3%, versus 2.8% a year earlier; nine-month operating margin was approximately 1.9%, versus 1.4%.
Q3 product gross margin declined to 19.2% from 20.8%, primarily due to unfavorable mix. Services gross margin improved to 22.7% from 19.9%, reflecting lower labor and delivery costs, partly offset by higher pension expense. Nine-month product gross margin fell to 18.9% from 20.2%, while services gross margin increased to 21.6% from 19.6%. Pension expense was $62 million in Q3 and $166 million for the nine months, up from $50 million and $156 million, respectively.
Q3 operating results included $33 million of Radiant-related costs, including transaction, severance, and acquired-intangible amortization costs. Management cited continued cost-reduction efforts. Q3 SG&A increased to $231 million from $173 million. The prior-year quarter included a $45 million tax benefit, primarily from releasing a valuation allowance on Japanese deferred tax assets; this makes the year-over-year net-income comparison unusually favorable to 2010.
Cash flow, debt, and liquidity
For the first nine months, operating cash flow was $101 million, up from $61 million. Capital expenditures and capitalized software additions were $128 million, while discontinued operations used $14 million of cash. NCR’s non-GAAP free cash flow was negative $41 million, compared with negative $106 million in 2010. Investing cash outflow was $1.213 billion, primarily reflecting the Radiant acquisition.
At September 30, cash and cash equivalents were $341 million, compared with $496 million at December 31, 2010. Long-term debt was $1.061 billion, versus $10 million at year-end; the increase primarily reflects acquisition financing. The new five-year secured facility comprised a $700 million term loan and a $700 million revolver; $700 million and $350 million, respectively, were outstanding at quarter-end. The facility has leverage and interest-coverage covenants, and the borrowings are variable-rate. NCR said it expected to have sufficient liquidity for operating needs, debt service, and anticipated benefit-plan and environmental payments over the next 12 months.
Management expected approximately $185 million of pension, postemployment, and postretirement contributions in 2011. The filing’s debt-and-interest payment schedule estimated total payments of $1.170 billion, including $109 million of interest, based on rates as of September 30.
Material changes, outlook, and risks
- Radiant acquisition: Added a new Hospitality and Specialty Retail segment, $803 million of preliminary goodwill, and $319 million of acquired intangible assets. The purchase-price allocation remained preliminary, particularly for deferred taxes and tax contingencies. NCR stated that expected synergies and growth benefits were not assured.
- Segment trends: Q3 Financial Services revenue and operating income increased to $770 million and $81 million. Retail Solutions revenue rose to $461 million, while operating income declined to $22 million. Entertainment revenue grew to $42 million but remained loss-making, with a $13 million operating loss. Radiant contributed $36 million revenue and $5 million operating income for its partial quarter.
- Outlook: NCR provided no specific numerical revenue or earnings guidance in the supplied filing text. Management said it planned to continue strategic initiatives around profitable share growth, emerging industries, cost efficiency, global service capability, innovation, and customer experience.
- Environmental contingency: The net Fox River reserve was approximately $180 million at September 30, down from $199 million at year-end. The company’s estimate depends on cleanup costs, natural-resource damages, allocation among parties, indemnitor/co-obligor performance, and ongoing litigation. NCR warned actual costs could materially affect results, cash flows, or financial condition. It estimated potential reserve exposure could rise by about $19 million if liable for remaining allocation-litigation claims.
- Other legal and regulatory matters: NCR disputed potential liability in the Kalamazoo River contamination litigation; trial was scheduled for February 2013. The Fox River allocation litigation had a trial scheduled for February 2012. A U.S. government investigation involving federal-contract pricing disclosures remained unresolved, and NCR said it could not determine whether liability was probable for that aspect.
- Debt, rates, and operating risks: The secured facility imposes restrictive covenants and financial tests; a breach could trigger acceleration and enforcement against collateral. Variable-rate debt exposes earnings and cash flows to higher rates. Other disclosed risks include economic conditions, customer capital spending, competition and pricing pressure, foreign exchange, pension obligations, and failure to realize Radiant’s expected benefits.
- Subsequent events: On October 4, NCR completed a transaction giving Scopus Industrial a 49% interest in NCR Brasil for approximately $43 million. An interest-rate swap entered into in October fixed the LIBOR rate on a portion of borrowings through August 2016.
Important facts for investors to verify
- How much of reported revenue growth came from underlying demand versus foreign exchange and Radiant’s partial-quarter contribution.
- Whether services-margin gains and cost controls can offset weaker product margins, pension costs, and Entertainment losses.
- Post-acquisition cash generation, debt repayment capacity, covenant headroom, and exposure to variable interest rates.
- Final purchase accounting for Radiant and whether the anticipated synergies and growth benefits are achieved.
- Changes in the Fox River reserve, insurance and indemnity recoveries, and outcomes of the Fox River and Kalamazoo proceedings.
- Tax-audit outcomes and the sustainability of earnings excluding unusual prior-year tax benefits and current acquisition-related costs.