NCR Corporation — Q1 2011 Form 10-Q
Period and context: Unaudited results for the three months ended March 31, 2011, compared with Q1 2010; balance-sheet comparisons are with December 31, 2010. NCR reported four lines of business: Financial Services, Retail and Hospitality, Entertainment, and Emerging Industries. The filing is by NCR Corporation; the supplied metadata names NCR Voyix Corp, so the entity identification should be verified.
Financial performance
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $1,095 million | $1,029 million |
| Gross profit / margin | $210 million / 19.2% | $191 million / 18.6% |
| Operating income (loss) | $6 million | $(18) million |
| Income (loss) attributable to NCR | $13 million | $(19) million |
| Diluted EPS | $0.08 | $(0.12) |
| Operating cash flow | $44 million | $22 million |
| Free cash flow (non-GAAP) | $4 million | $(37) million |
Product revenue grew 6% to $494 million; services revenue grew 7% to $601 million. Product gross margin remained 18.2%; services gross margin improved to 20.0% from 18.9%. SG&A declined to $164 million from $170 million, while R&D was $40 million versus $39 million. Q1 2011 other income of $6 million included patent-sale income and a litigation-settlement benefit.
Revenue increased 6% reported and 4% in constant currency. By segment, Financial Services revenue was $592 million and operating income $47 million; Retail and Hospitality $376 million and $11 million; Entertainment $37 million and a $15 million operating loss; Emerging Industries $90 million and $14 million. Segment operating income excludes pension expense and certain other items; consolidated operating income includes them.
Financial position and liquidity
At March 31, 2011, cash and cash equivalents were $480 million, down from $496 million at year-end. Current assets were $2,568 million and current liabilities $1,504 million. Long-term debt was $10 million, with $1 million of short-term borrowings. NCR had no borrowings under its $500 million revolving credit facility, though letters of credit reduced availability by $21 million; the company reported compliance with its covenants. Pension and indemnity plan liabilities were $1,278 million.
Operating cash flow rose by $22 million year over year, which management attributed to working-capital changes. Capital spending and capitalized software additions totaled $39 million; free cash flow was $4 million after discontinued-operation cash flows. NCR repurchased 1.8 million shares for $35 million.
Material changes and outlook
- Effective January 1, 2011, NCR reorganized reporting from geographic segments to lines of business; prior-period segment data was recast.
- Management cited cost-containment benefits, service-delivery efficiencies, improved mix, and stronger Financial Services and Retail and Hospitality results. Entertainment revenue more than doubled with additional and redeployed kiosks, but its operating loss widened to $15 million from $12 million.
- NCR adopted updated revenue-recognition guidance prospectively. Management reported no material first-quarter financial-statement impact.
- Management expected approximately $185 million of 2011 pension, postemployment, and postretirement contributions. It said available cash, operating cash flow, and financing were sufficient for the next 12 months, including expected benefit contributions, Fox River payments, and operating needs. This is management’s assessment, not earnings guidance.
- The company planned to continue its 2011 initiatives: profitable share gains, expansion into emerging industries, cost reduction, stronger global service capability, innovation, and customer-experience improvements. No quantified revenue or earnings guidance is provided in the filing text.
Risks, contingencies, and unusual items
- Fox River environmental matter: Net reserve was approximately $196 million at March 31, 2011, versus $199 million at year-end, after payments and reserve/indemnification changes. NCR estimated total site cleanup costs at $930 million and natural-resource damages at $76 million, while noting substantial uncertainty, litigation, potential overruns, and possible material effects on earnings, cash flow, capital expenditures, or financial condition. The reserve assumed NCR and API would bear the cleanup work underway and a substantial portion of counterclaims; NCR estimated potential additional reserve exposure of up to $17 million for remaining allocation-litigation claims. Cleanup was expected to extend through at least approximately 2019, with monitoring thereafter.
- Kalamazoo environmental litigation: NCR disputed potential CERCLA liability and said it would contest a contribution suit seeking a “fair portion” of costs represented by plaintiffs as $79 million to date. The filing does not provide a clear estimate of NCR’s potential exposure.
- Other matters include a government investigation involving federal contracting/pricing disclosures, a commission-related jury award of approximately $8 million (recognized in 2010), and patent litigation. NCR reported a favorable summary judgment in one ATM-related case, but appellate review was possible.
- Q1 discontinued operations included a $4 million favorable change in Teradata-related uncertain tax benefits and environmental-related activity; the filing separately describes a $1 million after-tax environmental loss. Tax audits and uncertain tax positions could affect future tax expense and cash flows.
- Foreign exchange exposure spans approximately 50 functional currencies. NCR hedges a portion of forecast transactions for up to 15 months; a 10% U.S. dollar move would change the hedge portfolio’s fair value by approximately $20 million, which management expected to be substantially offset by underlying exposures.
Important facts for investors to verify
- Confirm the filing entity and its relationship, if any, to the company identified in the request metadata.
- Track whether revenue growth and margin improvement persist, particularly in Financial Services and Retail and Hospitality, and whether Entertainment can reduce losses.
- Assess operating cash conversion, working-capital needs, share repurchases, and the ability to fund the approximately $185 million of expected 2011 benefit contributions.
- Monitor Fox River reserve assumptions, court rulings, cleanup costs, indemnity recoveries, and the Kalamazoo matter for changes in exposure.
- Reconcile segment operating results, which exclude pension expense and certain items, with GAAP consolidated results; assess the sustainability of the quarter’s other income and discontinued-operations benefits.