NCR Corporation — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2012; comparisons are with the corresponding 2011 period. The filing is for NCR Corporation, not NCR Voyix Corp. Amounts are in U.S. dollars unless stated otherwise.
Business context and results
NCR sells technology, software and services across financial services, retail, hospitality and emerging industries. The Entertainment business was sold to Redbox in June 2012 and is presented as a discontinued operation. Results include the effects of Radiant Systems, acquired in August 2011, and 2012 segment realignment; these make some segment comparisons less comparable.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $1.435B | $1.360B | $4.088B | $3.690B |
| Gross margin | $358M; 24.9% | $299M; 22.0% | $1.013B; 24.8% | $797M; 21.6% |
| Operating income | $89M | $28M | $239M | $110M |
| Income from continuing operations | $59M | $22M | $165M | $89M |
| Net income attributable to NCR | $57M | $16M | $166M | $62M |
| Diluted EPS, continuing operations | $0.35 | $0.14 | $0.99 | $0.54 |
Q3 revenue grew 6% reported and 9% at constant currency; nine-month revenue grew 11% reported and 14% at constant currency. Product and service revenue grew 5% and 6%, respectively, in Q3, and 14% and 8% over nine months. Management attributed improved margins mainly to higher software mix, lower service delivery costs and cost containment; lower pension expense also contributed.
Segments and material comparisons
- Financial Services: Q3 revenue $791M, up 3%; operating income $80M versus $81M. Nine-month revenue $2.268B, up 8%; operating income $221M versus $205M.
- Retail Solutions: Q3 revenue $421M, down 10%, while operating income rose to $28M from $19M. Nine-month revenue was $1.177B, down 9%, with operating income of $58M versus $46M. Revenue weakness included declines in the Americas and Europe.
- Hospitality: Q3 revenue $129M and operating income $23M, versus $36M and $5M. Nine-month revenue was $372M and operating income $63M, versus $36M and $5M. The comparison is substantially affected by Radiant being included for only part of Q3 2011.
- Emerging Industries: Q3 revenue $94M and operating income $22M, versus $88M and $18M. Nine-month revenue $271M and operating income $66M, versus $266M and $54M.
Consolidated operating income benefited from improved gross margin and lower SG&A, while R&D spending increased. Nine-month SG&A was $619M versus $562M and R&D was $155M versus $125M. Interest expense rose to $24M from $4M for nine months, principally due to borrowings; other expense included a $7M investment impairment. Nine-month tax expense was $43M versus $21M, partly offset by favorable Japan and Canada tax settlements and other tax-position changes. A $5M tax benefit correcting a prior-period calculation error was recorded in Q3; management said it was not material to prior or current-period statements.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was negative $280M, compared with positive $114M. The principal stated driver was a $500M discretionary contribution to the U.S. qualified pension plan.
- Management-defined free cash flow, a non-GAAP measure that also includes discontinued-operations cash flow and subtracts capital spending and capitalized software, was negative $476M versus negative $41M.
- Cash and cash equivalents were $581M at September 30, 2012, up from $398M at year-end 2011. Total debt was $1.462B, up from $853M; short-term borrowings were $54M and long-term debt $1.408B.
- NCR issued $600M of 5.00% senior unsecured notes due 2022. Net proceeds of $592M partly funded the pension contribution. The secured credit facility was expanded by $300M to $1.7B total commitments; the term loan balance was $850M and revolver borrowings were zero. The filing reports approximately $831M of borrowing capacity at quarter-end.
- Current assets were $2.956B and current liabilities $1.730B. The filing states management believes liquidity is sufficient for required benefit contributions, environmental payments, debt service and operating needs over the next 12 months.
Outlook, risks and unusual items
The filing provides no quantified revenue or earnings guidance. Management said it would continue prioritizing profitable share growth, software and services, cost efficiency, acquisitions and service capability. It expected the voluntary pension lump-sum offer to close in Q4 2012 and estimated 2012 employee-benefit contributions of about $739M. NCR expected approximately $86M of Fox River remediation and related payments in 2012, subject to about $40M of reimbursement claims against co-obligors.
- Pension: The $500M contribution was financed in part with the notes offering and materially reduced operating cash flow. The voluntary lump-sum offer and future funding needs remain relevant.
- Environmental contingencies: The net Fox River reserve was approximately $133M, down from $160M at year-end. NCR estimated total site cleanup costs of $852M and natural-resource damages of $76M, with substantial uncertainty. Recovery from API and other parties is subject to disputes and collection timing. A separate Kalamazoo River case was set for trial in February 2013.
- Regulatory matters: Following whistleblower allegations concerning business practices in China, the Middle East and Africa, NCR began an internal investigation. The SEC was investigating and had issued a subpoena related to FCPA matters; NCR said it was cooperating, had ceased commercially insignificant Syria operations and notified OFAC of potential apparent violations. A board Special Committee was also investigating.
- Other legal exposure: The Department of Justice was investigating matters relating to former Teradata federal-contract arrangements and GSA pricing disclosures. NCR said it could not determine whether it had probable liability for the GSA aspect. The Fox River government enforcement action had a December 2012 trial date for an initial phase. In an October 4, 2012 subsequent-event ruling, the court ruled for NCR on remaining state-law counterclaims in the allocation litigation; remaining issues included insurance offsets and final judgment.
- Other risks: NCR cited substantial indebtedness and restrictive covenants, variable-rate exposure, foreign-exchange sensitivity, customer spending and competitive pressures, pension funding, acquisitions, and potential environmental and regulatory costs. Management reported disclosure controls effective and no material changes in internal control during the quarter.
Most important facts for investors to verify
- Whether revenue growth and margin improvement persist, particularly after separating organic growth from Radiant-related and segment-reclassification effects.
- Operating cash generation after the unusually large pension contribution, and the company’s ability to meet ongoing pension and environmental cash requirements.
- Debt levels, available borrowing capacity, interest-rate exposure and continued compliance with credit-facility covenants.
- Developments in the Fox River and Kalamazoo matters, including reserve assumptions, API/BAT reimbursements and the timing of indemnity recoveries.
- Outcomes of the FCPA/OFAC-related inquiries and the DOJ investigations, including any potential financial or operational consequences.
- Progress on the pension lump-sum offer and whether future funding obligations differ from management’s estimates.