NCR Corporation Form 10-Q Summary
Issuer and period: The supplied filing is NCR Corporation’s unaudited quarterly report for the three months ended March 31, 2013—not a filing under the name NCR Voyix. Amounts are in U.S. dollars; financial figures are in millions except per-share data.
Business context and results
NCR sold hardware, software and related services across Financial Services, Retail Solutions, Hospitality and Emerging Industries. Management emphasized shifting toward higher-margin software and services. The Retalix acquisition supported that strategy; its results are included from February 6, 2013.
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $1,410 | $1,244 | +13% (15% constant currency) |
| Product revenue | $667 | $570 | +17% |
| Services revenue | $743 | $674 | +10% |
| Gross profit / margin | $369 / 26.2% | $315 / 25.3% | Margin +0.9 percentage points |
| Operating income | $85 | $78 | +9% |
| Income from continuing operations | $64 | $60 | +7% |
| Net income attributable to NCR | $61 | $50 | +22% |
| Diluted EPS | $0.36 | $0.31 | +$0.05 |
| Operating cash flow | $21 | $89 | Down $68 |
| Free cash flow (company-defined, non-GAAP) | $(23) | $49 | Down $72 |
Product gross margin improved to 24.6% from 21.9%, helped by sales mix and software growth. Services gross margin eased to 27.6% from 28.2%, reflecting investment in service delivery. Operating margin was approximately 6.0% versus 6.3%; the filing does not state these percentages directly. Interest expense rose to $21 from $9, primarily due to senior unsecured notes. The reported tax expense was $2 versus $7.
Segments and material changes
- Financial Services: Revenue $714, up 3%; operating income $57, flat.
- Retail Solutions: Revenue $489, up 41%; operating income $41 versus $2. Retalix contributed $50 revenue and $9 segment operating income after acquisition.
- Hospitality: Revenue $131, up 16%; operating income $21 versus $19.
- Emerging Industries: Revenue $76, down 15%; operating income $10 versus $23.
- Reported revenue growth reflected higher products and services across theaters, partly offset by a 2% unfavorable currency impact. Growth also included Retalix. The company completed three other acquisitions for about $16 in aggregate cash consideration.
Financial position, liquidity and debt
- At March 31, cash and equivalents were $483, down from $1,069 at year-end; total debt was $2,091, up from $1,963. Approximate net debt was $1,608.
- Current assets were $3,013 and current liabilities $1,837, a current ratio of approximately 1.64. The company reported about $688 of borrowing capacity under its term and revolving facilities.
- Operating cash flow of $21 was below the prior-year $89, primarily due to working-capital changes. Free cash flow was negative $23 after $24 of capital expenditures and $21 of capitalized software additions.
- Investing cash outflow was $721, including $681 for acquisitions. Financing provided $119; revolving credit borrowings and repayments were substantial during the quarter.
- Management said it believed cash, operating cash flows and available financing were sufficient for the next 12 months, including debt service, benefit-plan contributions, remediation and operations. This is management’s assessment, not a guarantee.
Outlook, unusual items and risks
- No specific full-year revenue or earnings guidance is provided in the supplied filing. Management described strategic priorities—profitable share growth, software and services mix, efficiency, service capability and strategic acquisitions—and expected to continue these initiatives.
- Expected 2013 employee benefit-plan contributions were approximately $268, including $96 for the executive pension plan, $125 for international pensions, $42 for postemployment benefits and $5 for postretirement benefits. NCR also anticipated about $48 of 2013 Fox River remediation and related payments, net of co-obligors but before potential insurance or indemnity receipts.
- NCR retrospectively changed pension accounting, accelerating recognition of asset-value changes and actuarial gains or losses. It recorded a cumulative $1,050 reduction to retained earnings as of December 31, 2012. Comparative periods were adjusted; reported Q1 2013 and 2012 results therefore reflect the new methodology.
- Q1 included a $16 one-time tax benefit related to the American Taxpayer Relief Act. Pension and separation-plan items included a $10 pension curtailment gain, $13 early-retirement charge, and $13 postemployment curtailment benefit; the separation-plan amendment reduced the postemployment liability by $48. Acquisition-related integration, amortization and purchase-price adjustment items also affected results.
- Environmental contingencies: The Fox River net reserve was approximately $114 at March 31. Costs, liability allocation, indemnitor recoveries and litigation outcomes remain uncertain. A court ruling dated April 30, after quarter-end, found certain Fox River harm indivisible and imposed joint and several compliance obligations on NCR and other parties; the filing said NCR’s future expenditures might decrease if others participate or fund remediation. A Kalamazoo River trial decision was expected in 2013.
- Compliance and litigation: NCR disclosed SEC and DOJ requests concerning FCPA allegations, an OFAC matter involving prior Syria operations, and a shareholder derivative action. NCR said it was cooperating and implementing compliance improvements; it could not assure that investigations would not result in fines or other remedies. Syria operations were being wound down under OFAC licenses.
- Other identified risks included leverage and credit-facility covenants, variable interest rates, foreign exchange, pension funding and market volatility, competition and pricing, acquisition integration, and legal and regulatory matters. Management reported disclosure controls were effective and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer and period: this is NCR Corporation’s Q1 2013 filing, despite the request metadata naming NCR Voyix.
- Assess how much of revenue and Retail Solutions growth was organic versus contributed by Retalix, and monitor integration costs and expected synergies.
- Review cash conversion and liquidity: operating cash flow fell to $21, free cash flow was negative $23, and cash declined by $586 during the quarter.
- Track debt, covenant headroom, interest expense and the sizable expected pension contributions.
- Follow Fox River and Kalamazoo proceedings, reserve assumptions, indemnity recoveries and the post-quarter April 30 Fox River ruling.
- Account for the retrospective pension-accounting change and unusual tax, pension and acquisition items when comparing earnings across periods.