NCR Corporation Form 10-Q Summary
Entity and period: The filing is for NCR Corporation, for the three months ended March 31, 2014; it is not filed under the name NCR Voyix. Financial statements are unaudited. Unless noted, amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $1.518 billion | $1.410 billion |
| Gross profit / margin | $416 million / 27.4% | $369 million / 26.2% |
| Operating income | $108 million | $85 million |
| Interest expense | $43 million | $21 million |
| Net income attributable to NCR | $53 million | $61 million |
| Diluted EPS | $0.31 | $0.36 |
| Operating cash flow | $31 million | $21 million |
| Free cash flow (non-GAAP) | $(51) million | $(23) million |
Services revenue rose 19% to $884 million, while product revenue fell 5% to $634 million. Services gross margin increased to 29.2% from 27.6%; product gross margin was 24.9% versus 24.6%. The filing attributes margin improvement mainly to mix, including higher SaaS revenue. Capital expenditures were $32 million and capitalized software additions were $34 million.
Balance sheet and liquidity
At March 31, 2014, cash and cash equivalents were $515 million, total debt was $3.949 billion, and net debt was approximately $3.434 billion. Cash was $528 million at year-end 2013. Current assets were $3.385 billion and current liabilities were $2.008 billion. The company reported about $510 million of available revolving-credit capacity and stated it expected sufficient liquidity for the next 12 months.
Total debt increased from $3.354 billion at December 31, 2013, including short-term borrowings, largely reflecting financing for the Digital Insight acquisition. Debt includes secured credit-facility borrowings and $2.2 billion of senior notes. The facility is subject to leverage and interest-coverage covenants. Cash held by foreign subsidiaries was $458 million; repatriation could result in additional taxes.
Material changes and business developments
- Revenue increased 8% year over year, or 10% on a constant-currency basis; currency movements reduced reported growth by 2 percentage points.
- NCR completed its $1.648 billion acquisition of Digital Insight on January 10, 2014. It contributed $76 million of quarterly revenue and $23 million of segment operating income. The acquisition expanded NCR’s digital-banking software business and added $1.255 billion of goodwill and $559 million of acquired intangible assets.
- Financial Services revenue rose to $794 million from $714 million and segment operating income to $103 million from $57 million, including Digital Insight. Retail revenue was essentially flat, while Retail segment operating income declined to $36 million from $41 million. Hospitality revenue rose to $149 million from $131 million, but operating income fell to $12 million from $21 million. Emerging Industries revenue increased to $85 million from $76 million, while operating income decreased to $4 million from $10 million.
- Operating income improved, but higher interest expense and other expense contributed to lower net income. The prior-year tax comparison also included an approximately $16 million tax benefit; Q1 2014 included $12 million of discrete tax benefits.
Outlook, risks, and unusual items
No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management’s stated priorities include growing higher-margin software and recurring services, innovation, profitable share gains, service capability, cost efficiency, and strategic acquisitions. Management said it expected to continue these initiatives through 2014 and beyond.
- Management estimated approximately $127 million of 2014 employee-benefit-plan contributions and about $46 million of 2014 Fox River remediation and related payments, net of co-obligor obligations.
- The Fox River environmental matter had a net reserve of approximately $102 million at March 31, 2014. Litigation and remediation costs, allocation of liability, and recovery from other parties remain uncertain. A separate Kalamazoo River case had found NCR liable as an arranger, but NCR’s share and any damages had not been determined; a damages trial was scheduled for 2015.
- NCR was cooperating with SEC and DOJ inquiries concerning FCPA allegations and had voluntarily notified OFAC about potential Syria-related violations. The company said it could not assure that fines or other remedial measures would not result.
- Other execution risks cited include customer capital spending, competition and pricing, adoption of new solutions, integration of acquisitions, indebtedness, foreign exchange, pension obligations, and environmental and regulatory matters. Management reported no material change to previously disclosed risk factors.
- Acquisition-related costs, amortization and purchase-price adjustments affected reported results. Q1 2014 also included $8 million of Digital Insight transaction expenses in SG&A. The Fox River reserve fell from $112 million at year-end, mainly due to cleanup and litigation payments.
Important facts for investors to verify
- Confirm the filing entity and corporate-name relationship: this 2014 report is filed by NCR Corporation.
- Assess how much of revenue and segment improvement came from Digital Insight, and whether software and recurring-services growth can continue.
- Review acquisition integration, purchase-price allocation, amortization, and the added debt burden, including covenant headroom and interest costs.
- Track cash conversion and investment needs: free cash flow was negative $51 million, despite positive operating cash flow.
- Monitor Fox River and Kalamazoo exposures, FCPA/OFAC investigations, and the timing and collectability of indemnity and other-party recoveries.